<PAGE>
Form 10-Q
Securities and Exchange Commission
Washington, D.C. 20549
Quarterly Report Under Section 13 or 15 (d)
of the Securities Exchange Act of 1934
______________________
For Quarter Ended October 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) (I.R.S. Employer I.D. Number)
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 December 16, 1994
Common Stock 13,697,107 Shares
________________________ _______________________________
<PAGE>
HOUSE OF FABRICS, INC.
INDEX
<TABLE>
<CAPTION>
PAGE NO.
--------
<S> <C>
Part I. Financial Information
Item 1. Financial Statements
Consolidated Balance Sheet October 31, 1994 2
Consolidated Balance Sheet January 31, 1994 3
Consolidated Statements of Operations -
for the three months ended
October 31, 1994 and 1993 4
Consolidated Statements of Operations-
for the nine months ended
October 31, 1994 and 1993 5
Consolidated Statements of
Cash Flows - for the nine months
ended October 31, 1994 and 1993 6
Notes to Consolidated Financial Statements 7-10
Item 2. Management's Discussion and Analysis
of Financial Condition and Results of
Operations 10-14
Part II. Other Information
Item 6. Exhibits 15
Signature 16
</TABLE>
<PAGE>
HOUSE OF FABRICS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
OCTOBER 31, 1994
(Unaudited)
ASSETS
<TABLE>
<S> <C>
CURRENT ASSETS
Cash $ 27,594,000
Receivables 11,169,000
Merchandise Inventories 185,647,000
Prepaid Expenses & Other Current Assets 14,597,000
Refundable Income Taxes 6,195,000
Deferred Income Taxes 4,538,000
------------
Total Current Assets 249,740,000
------------
PROPERTY
Land 1,285,000
Buildings 14,531,000
Furniture and Fixtures 67,130,000
Leasehold Improvements 34,187,000
------------
Total 117,133,000
Less Accumulated Deprec. & Amort. 59,421,000
------------
Property - Net 57,712,000
------------
OTHER ASSETS 752,000
------------
GOODWILL -NET 39,408,000
------------
TOTAL ASSETS 347,612,000
============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts Payable $ 72,534,000
Notes Payable to Banks 126,666,000
Accrued Liabilities 79,658,000
Current Portion of Long-Term Debt 1,091,000
------------
Total Current Liabilities 279,949,000
------------
DEFFERED INCOME TAXES 3,110,000
------------
LONG TERM DEBT, Net of Current Portion 463,000
------------
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; 1,370,000
Paid-In Capital 46,880,000
Retained Earnings 15,840,000
------------
Total Stockholders' Equity 64,090,000
------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $347,612,000
============
</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 OCTOBER 31, 1994 AND 1993
(Unaudited)
<TABLE>
<CAPTION>
1994 1993
------------ ------------
<S> <C> <C>
SALES $ 90,575,000 $141,798,000
EXPENSES
Cost of Sales 68,322,000 102,540,000
Store & Operating 35,689,000 53,342,000
General & Administrative 8,426,000 9,555,000
Interest Expense 4,029,000 2,175,000
Goodwill Amortization 365,000 351,000
Restructuring Charge 49,600,000 12,909,000
------------ ------------
Total 166,431,000 180,872,000
------------ ------------
LOSS BEFORE INCOME TAXES (75,856,000) (39,074,000)
INCOME TAX BENEFIT (2,655,000) (14,045,000)
------------ ------------
NET LOSS $(73,201,000) $(25,029,000)
============ ============
NET LOSS PER SHARE * $(5.34) $(1.82)
====== =====
</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
13,744,558 shares in 1993).
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
-4-
<PAGE>
HOUSE OF FABRICS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE NINE MONTHS ENDED OCTOBER 31, 1994 AND 1993
(Unaudited)
<TABLE>
<CAPTION>
1994 1993
------------ ------------
<S> <C> <C>
SALES $315,384,000 $399,019,000
EXPENSES
Cost of Sales 195,274,000 241,507,000
Store & Operating 125,100,000 157,181,000
General & Administrative 23,747,000 27,131,000
Interest Expense 10,483,000 5,069,000
Goodwill Amortization 1,096,000 998,000
Restructuring Charge 49,600,000 12,909,000
------------ ------------
Total 405,300,000 444,795,000
------------ ------------
LOSS BEFORE INCOME TAXES (89,916,000) (45,776,000)
INCOME TAX BENEFIT (3,597,000) (16,022,000)
------------ ------------
NET LOSS $(86,319,000) $(29,754,000)
============ ============
NET LOSS PER SHARE * $(6.30) $(2.15)
===== =====
</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
13,828,202 shares in 1993).
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
-5-
<PAGE>
HOUSE OF FABRICS, INC. AND SUBSIDIARIES
STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED OCTOBER 31, 1994 AND 1993
(Unaudited)
<TABLE>
<CAPTION>
1994 1993
---- ----
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net (Loss) $(86,319,000) $(29,754,000)
------------ ------------
Adjustments to Reconcile Net
(Loss) to Net Cash Provided by (Used In)
Operating Activities:
Depreciation and Amortization 8,073,000 8,395,000
Loss on Disposal of Fixed Assets 1,011,000 1,344,000
Restructure Charge 49,600,000 12,909,000
Deferred Taxes -0- (5,540,000)
Changes in Operating Assets & Liabilities
Receivables (1,404,000)
Inventories 57,504,000 (13,249,000)
Prepaid Expenses & Other Assets (8,786,000) (6,266,000)
Accounts Payable and
Accrued Liabilities 14,877,000 2,985,000
Reserve for Restructure (3,333,000)
Refundable Income Taxes 4,543,000 (11,538,000)
----------- ----------
Total Adjustments 122,085,000 (10,960,000)
----------- ----------
Net Cash Provided by (Used in)
Operating Activities 35,766,000 (40,714,000)
----------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital Expenditures (1,168,000) (10,913,000)
Proceeds from Sale of Property 2,843,000 982,000
----------- ----------
Net Cash Provided by (Used in)
Investment Activities 1,675,000 (9,931,000)
----------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Change in Net Borrowings Under Lines
of Credit Agreements (16,334,000) 59,308,000
Repayment of Long Term Debt (3,271,000) (1,040,000)
Proceeds from Stock Issuance -0- 322,000
----------- ----------
Net Cash Provided by (Used in)
Financing Activities (19,605,000) 58,590,000
----------- ----------
Net Increase in Cash 17,836,000 7,945,000
Cash at Beginning of Year 9,758,000 2,214,000
----------- ----------
Cash at End of Period $27,594,000 $10,159,000
=========== ==========
Cash Paid During the Period for:
Interest $9,013,000 $4,905,000
Taxes $ 261,000 $ 199,000
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
-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 normal
recurring adjustments and charges for restructuring and
inventory markdowns) necessary to present fairly the Company's
financial position as of October 31, 1994 and the results of
its operations and its cash flows for the periods ended October
31, 1994 and 1993.
2. CHAPTER 11 PROCEEDINGS
On November 2, 1994 House of Fabrics, Inc. and subsidiaries
(the "Company") filed a voluntary Petition with the United
States Bankruptcy Court in the Central District of California
(the "Bankruptcy Court") for relief under Chapter 11 of Title
11 of the United States Bankruptcy Code ("Chapter 11"). The
Company continues to conduct its normal business operations as
Debtors-in-Possession subject to the jurisdiction of the
Bankruptcy Court.
Under Chapter 11, substantially all prepetition liabilities of
the Debtors are subject to settlement under a Plan of
Reorganization. The Company is currently working on a proposed
Plan of Reorganization to be filed with the Bankruptcy Court.
The Company has been granted use of Cash Collateral by the
Bankruptcy Court. The Cash Collateral Order stipulates that
$10,500,000 of the proceeds from the liquidation of stores (see
Note 4. Restructuring Plans) be segregated in an interest
bearing account with Bank of America. This money will be
available for use only by permission of the Bankruptcy Court.
The Bankruptcy Court has scheduled January 31, 1995 to
reconsider the use of Cash Collateral by the Company.
Liabilities of the Debtor prior to the Chapter 11 filing date
of November 2, 1994 are subject to settlement under
reorganization proceedings. Liabilities subject to settlement
under reorganization proceedings cannot be paid or restructured
prior to the conclusion of the Chapter 11 proceedings or
approval of the Bankruptcy Court. The bankruptcy petition
suspends default remedies, and eventual payment of the
liabilities will be contingent upon the Plan of Reorganization
as ultimately confirmed by the Bankruptcy Court. The Company
is continuing to pay interest on secured debt although
principal payments have been suspended. Liabilities subject to
settlement under reorganization proceedings are currently being
quantified.
The accompanying consolidated financial statements have been
prepared in conformity with principles of accounting applicable
to a going concern. The Company incurred net losses for the
-7-
<PAGE>
nine months ended October 31, 1994 of $86,319,000 and for the
year ended January 31, 1994 of $29,542,000. At October 31,
1994 the Company has stockholder's equity of $64,090,000. The
Company's continuation as a going concern is dependent upon,
among other things, development and negotiation of an
acceptable Plan of Reorganization with creditors and claimants
and confirmation of such Plan of Reorganization by the
Bankruptcy Court (which may result in adjustments to the
amounts reflected in the accompanying financial statements),
the Company's ability to attain satisfactory levels of future
cash flows and profitable operations, and the Company's ability
to restructure its financing agreements. If the preceding
items do not occur, adjustments will be necessary to the
amounts reflected in the financial statements.
3. 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
September 1, 1994. Borrowings during the quarter ended October
31, 1994, under the Credit Agreement bear interest at rates
equal to the "Base Rate" (which is generally based on the
reference rate announced by the Bank of America) 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 by an additional 2% over the Base
Rate plus the normal add on rate.
As of September 1, 1994, the Credit Agreement provided for
maximum borrowings of $129,860,431 which will be reduced by
$10,000,000 on January 31, 1995 and which also may be reduced
by certain repayments of borrowings that may be permitted or
required under the Credit Agreement. Borrowings are also
limited to 60 percent of eligible inventory through January 31,
1995 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 October 31, 1994 is
zero. As of October 31, 1994, $126,665,982 was outstanding
under the Credit Agreement.
Borrowings under the Credit Agreement are collateralized 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 the Company has experienced
for the nine months ended October 31, 1994, the Company was
unable to remain in compliance with certain of its financial
covenants. On September 13, 1994, the Credit Agreement was
-8-
<PAGE>
amended to provide a limited waiver of covenant defaults
existing as of September 1, 1994 and also provided relief from
other potential defaults through November 11, 1994. However,
on November 2, 1994 the Company filed for relief under Chapter
11 of the United States Bankruptcy Code as described in the
preceding note. All defaults and penalties are suspended along
with any required repayments of principal under the bankruptcy
filing. Normal interest payments are continuing as scheduled
in the loan agreement and amendments.
4. RESTRUCTURING PLAN
Effective September 1, 1993 the Company's Board of Directors
approved a plan of restructuring (the "1993 Plan") for the
closure of its 110 then remaining mall stores and the
implementation of a new merchandising strategy that focuses on
everyday value pricing.
At October 31, 1994, a total of 62 stores have been closed
under the 1993 Plan. The Company expects that 38 of the
remaining mall stores will be closed by April 30, 1995 and has
canceled the plan closure of 10 mall stores due to better than
expected performance.
Under the 1993 Plan, all operations of the mall stores are
excluded from operating results. During the nine months ended
October 31, 1994, mall store sales of $21,118,000 and operating
losses of $2,780,000 were excluded from operating results and
charged to the restructuring reserve. In accordance with the
1993 Plan 41 mall stores were closed during the nine months
ended October 31, 1994.
Effective August 26, 1994, the Company's Board of Directors
approved a Plan of restructuring (the "1994 Plan") to close 125
underperforming super stores. This plan was subsequently
amended to include an additional 63 super stores bringing the
total number of super stores slated for closure to 188. The
1994 Plan covers two groups of stores. The first group
consists of 132 super stores which have been turned over to a
liquidation company to conduct the liquidation of store
inventories. The liquidation sales began on September 17, 1994
and are expected to be completed by the end of January 1995.
The second group of 56 super stores is scheduled to begin
liquidation in January 1995 and be completed by April 30, 1995.
Accordingly, in the third quarter of fiscal 1995, the company
recorded a pretax restructuring charge of $49,600,000, which
includes the following components:
<TABLE>
<S> <C>
Leases and Occupancy Costs $17,600,000
Operating losses through scheduled
store closings, including
inventory liquidations 14,700,000
Fixtures and Leasehold Write-off 14,100,000
Professional Fees 2,800,000
Other store closing costs 400,000
-----------
Total Charge for 1994 Plan $49,600,000
===========
</TABLE>
-9-
<PAGE>
5. MERCHANDISE INVENTORIES
In the quarter ended October 31, 1994, the Company implemented
a new marketing and merchandising strategy that is designed to
increase inventory turnover and attract a wider and more
diverse customer base. Integral to this strategy, the Company
plans to narrow its fabric offerings, concentrating on fewer
sku's that will allow it to achieve targeted turnover rates in
excess of industry average. In addition, the Company is
shifting its merchandising mix to place more emphasis on craft
and home decorating products.
As a result of this new marketing and merchandising strategy
the Company has recorded a provision of $19,000,000 to
aggressively markdown and liquidate certain inventories that
no longer fit into its merchandising model.
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 October 31, 1994, decreased 36.1%
to $90,575,000 from $141,798,000 for the quarter ended October
31, 1993. The decrease in sales of $51,223,000 was primarily
due to the exclusion of sales from operating results for super
stores totaling $24,842,000 under the 1994 Plan and a 19.4%
decrease in store-for-store sales. During the quarter ended
October 31, 1994, the Company opened 1 new super store and
closed 10 super stores and 32 mall stores.
One of the major factors affecting the store-for-store
decrease was the lack of product in the stores for both basics
and for the fall selling season. The company experienced
severe liquidity issues that prevented it from being able to
acquire the proper level of goods necessary to stock its
stores adequately. In addition, the Company began
liquidation of underperforming super stores on September 17,
1994, along with the liquidation of the remaining mall stores.
Many of these liquidation stores were in direct competition
with the Company's continuing store base and negatively
affected the continuing store sales. The decrease in
store-for-store sales resulted in part from 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 under
the 1994 Plan in addition to mall stores under the 1993 Plan
as described above through April 30, 1995.
-10-
<PAGE>
Gross profit as a percentage of sales decreased to 24.6% for
the quarter ended October 31, 1994 from 27.7% for the quarter
ended October 31, 1993. Gross Profit was decreased in the
quarter ended October 31, 1994 by $19,000,000, to aggressively
markdown and liquidate certain inventories that no longer fit
into the Company's merchandising model. In the quarter ended
October 31, 1993 a charge of $21,825,000 was recorded to
implement the Company's repricing strategy for certain
fabric, notion and craft inventories.
Store and operating expense as a percent of sales increased to
39.4% for the quarter ended October 31, 1994 from 37.6% for
the quarter ended October 31, 1993. This increase was mainly
due to an increase in rent partially offset by a decrease in
payroll and advertising expense. General and administrative
expense as a percent of sales increased to 9.3% from 6.7% in
the same period in the prior year. The actual General and
Administrative expense decreased during this time period due
to restructuring of costs. Interest expense for the quarter
ended October 31, 1994 increased $1,854,000 over the quarter
ended October 31, 1993 primarily as a result of an increase in
average borrowings during the period of $9,587,000 and by an
increase in Company's average effective borrowing rate from
4.7% in the quarter ended October 31, 1993 to 10.5% in the
quarter ended October 31, 1994.
NINE MONTHS ENDED
Sales for the nine months ended October 31, 1994, decreased
21.0% to $315,384,000 from $399,019,000 for the nine months
ended October 31, 1993. The decrease in sales of $83,635,000
was primarily due to the exclusion of sales from the operating
results of the mall stores totaling $21,188,000 under the 1993
Plan and for the 188 super stores totaling $24,842,000 under
the 1994 Plan and a 8.9% decrease in store-for-store sales.
During the nine months ended October 31, 1994, the Company
opened 1 new super store and closed 18 super stores and 41
mall stores.
The decrease in store-for-store sales for the first nine
months of the fiscal year was affected by the lack of product
in the stores for both basics and for the fall selling season.
The Company experienced severe liquidity issues that prevented
it from being able to acquire the proper level of goods
necessary to stock its stores adequately. In addition, the
Company began the liquidation of underperforming super stores
on September 17, 1994, along with the liquidation of the
remaining mall stores. Many of these liquidation stores were
in direct competition with the Company's continuing store base
and negatively affected the continuing store sales. The
decrease in store-for-store sales also resulted in part from
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 under the 1994 Plan in addition to
mall stores under the 1993 Plan as described above through
April 30, 1995.
-11-
<PAGE>
Gross profit as a percentage of sales decreased to 38.1% for
the nine months ended October 31, 1994 from 39.4% for the nine
months ended October 31, 1993. Gross Profit was decreased in
the nine months ended October 31, 1994 by $19,000,000 to
aggressively markdown and liquidate certain inventories that
no longer fit into the Company's merchandising model. In the
nine months ended October 31, 1993 a charge of $21,825,000 was
recorded to implement the Company's repricing strategy for
certain fabric, notion and craft inventories. There was also
a decrease due to a reduction in the opening markup for the
nine months ended October 31, 1994 compared to the nine months
ended October 31, 1993.
Store and operating expense as a percent of sales increased to
39.7% for the nine months ended October 31, 1994 from 39.4%
for the nine months ended October 31, 1993. This increase was
due mainly to an increase in rent offset by a decrease in payroll
expenses. General and administrative expense as a percent of sales also
increased to 7.5% during the nine months ended October 31, 1994 from
6.8% during the nine months ended October 31, 1993. The actual General
and Administrative expense decreased during this time period due to the
restructuring of costs. Interest expense for the nine months ended
October 31, 1994 increased $5,414,000 over the nine months ended
October 31, 1993 primarily as a result of an increase in average short-
term borrowings during the period of $38,066,000 and by an increase in
the Company's average effective borrowing rate from 4.6% in the nine
months ended October 31, 1993 to 8.5% in the nine months ended October
31, 1994.
FINANCIAL CONDITION
During the nine months ended October 31, 1994, short-term
borrowings ranged from $126,665,982 to $149,000,000 with
average borrowings of $137,890,000. Borrowings in the nine
months ended October 31, 1993 ranged from $94,404,000 to
$153,264,000 with average short-term borrowings of
$99,824,000. Increased borrowing levels in the nine months
ended October 31, 1994 over the same period last year were due
primarily to reduced trade financing, the conversion of
certain long-term debt to short-term borrowings, and funds
needed to fund operating losses generated during the nine
months.
Cash at October 31, 1994 was $27,594,000, up significantly
from $9,758,000 at January 31, 1994. Net cash provided by
operating activities of $35,766,000 for the nine months ended
October 31, 1994 is a change of $76,480,000 compared to net
cash used in operating activities of $40,714,000 for the nine
months ended October 31, 1993. The major reason for the
change was the decrease in inventories, as the Company
continued to liquidate inventories for the mall stores under
the 1993 Plan and super stores under the 1994 Plan. The
Company was required to segregate the proceeds of the store
liquidation in an account that was controlled by Bank of
-12-
<PAGE>
America NT & SA pending the reconciliation and settlement of
inventory reductions under the loan agreement. Also, the
Company used $1,168,000 for capital expenditures.
The Company's October 31, 1994 ending inventory of
$185,647,000 (net of the current inventory markdown of
$19,000,000 - see Note 5. Merchandise Inventories) decreased
from $267,511,000 at October 31, 1993. During the nine months
ended October 31, 1994, the average inventory balance was
$225,906,000 compared to $284,592,000 in the same period last
year. Average inventory turnover during the nine months ended
October 31, 1994 was 1.34 times, compared to 1.13 times during
the nine months ended October 31, 1993.
The Company's amended and restated credit agreement prohibits
the payment of dividends.
RESTRUCTURING PLANS
Effective September 1, 1993 the Company's Board of Directors
approved a plan of restructuring (the "1993 Plan") for the
closure of its 110 then remaining mall stores and the
implementation of a new merchandising strategy that focuses on
everyday value pricing.
At October 31, 1994, a total of 62 stores have been closed
under the 1993 Plan. The Company expects that 38 of the
remaining mall stores will be closed by April 30, 1995 and has
canceled the planned closure of 10 mall stores due to better
than expected performance.
Under the 1993 Plan, all operations of the mall stores are
excluded from operating results. During the nine months ended
October 31, 1994, mall store sales of $21,118,000 and
operating losses of $2,780,000 were excluded from operating
results and charged to the restructuring reserve. In
accordance with the 1993 Plan 41 mall stores were closed
during the nine months ended October 31, 1994.
Effective August 26, 1994, the Company's Board of Directors
approved a Plan of restructuring (the "1994 Plan") to close
125 underperforming super stores. This plan was subsequently
amended to include an additional 63 super stores bringing the
total number of super stores slated for closure to 188. The
1994 Plan covers two groups of stores. The first group
consists of 132 super stores which have been turned over to a
liquidation company to conduct the liquidation of store
inventories. The liquidation sales began on September 17,
1994 and are expected to be completed by the end of January
1995. The second group of 56 super stores is scheduled to
begin in January 1995 and be completed by April 30, 1995.
Accordingly, in the third quarter of fiscal 1995, the company
recorded a pretax restructuring charge of $49,600,000, which
includes the following components:
-13-
<PAGE>
<TABLE>
<S> <C>
Leases and Occupancy Costs $17,600,000
Operating losses through scheduled
store closings, including
inventory liquidations 14,700,000
Fixtures and Leasehold Write-offs 14,100,000
Professional Fees 2,800,000
Other store closing costs 400,000
-----------
Total Charge of 1994 Plan $49,600,000
===========
</TABLE>
Under the 1994 Plan, all operations of the 188 super stores are
excluded from operating results for the period from September 1,
1994 through October 31, 1994. During the two months ended
October 31, 1994, super store sales of $24,842,000 and operating
income of $95,000 were excluded from operating results and
charged to the restructuring reserve. In accordance with the
1994 Plan 10 super stores were closed during the two months ended
October 31, 1994.
MERCHANDISE INVENTORIES
In the quarter ended October 31, 1994, the Company implemented a
new marketing and merchandising strategy that is designed to
increase inventory turnover and attract a wider and more diverse
customer base. Integral to this strategy, the Company plans to
narrow its fabric offerings, concentrating on fewer sku's that
will allow it to achieve targeted turnover rates in excess of
industry average. In addition, the Company is shifting its
merchandising mix to place more emphasis on craft and home
decorating products.
As a result of this new marketing and merchandising strategy the
Company has recorded a provision of $19,000,000 to aggressively
markdown and liquidate certain inventories that no longer fit into its
merchandising model.
BANKRUPTCY COSTS
On November 2, 1994 the Company filed for relief under Chapter 11
in the United States Bankruptcy Court. The Company expects to
incur substantial costs for professional fees and other costs
related to the Chapter 11 proceedings. These costs have not been
reflected in the financial results of the Company through the
period ending October 31, 1994. The costs of Chapter 11 will be
included in the quarter ending January 31, 1995. These
costs are presently being quantified.
MANAGEMENT
In the quarter ended October 31, 1994, the Company restructured its top
management. Certain changes were made including naming Michael Brown as
the Senior Vice President - Store Operations and Doyle Parker as
Executive Vice President - Buying and Merchandising to reflect the new
merchandising and marketing strategy of the Company and to reduce the
number of officers in the Company. Additionally, David T. Allen,
formerly of Buccino and Associates (a national turnaround management
consulting firm), was hired as the Company's Chief Financial Officer on
October 3, 1994. Mr. Allen has considerable experience in turnaround
situations and is expected to provide leadership through the Chapter 11
restructuring.
-14-
<PAGE>
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS
(a) Exhibits.
27. Financial Data Schedule
-15-
<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: December 20, 1994 /s/ Norman L. Salvesen
--------------------------------
Norman L. Salvesen
Vice President-Controller
-16-
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JAN-31-1995
<PERIOD-START> FEB-1-1994
<PERIOD-END> OCT-31-1994
<CASH> 27,594
<SECURITIES> 0
<RECEIVABLES> 11,169
<ALLOWANCES> 0
<INVENTORY> 185,647
<CURRENT-ASSETS> 249,740
<PP&E> 117,133
<DEPRECIATION> 59,421
<TOTAL-ASSETS> 347,612
<CURRENT-LIABILITIES> 279,949
<BONDS> 0
<COMMON> 1,370
0
0
<OTHER-SE> 62,720
<TOTAL-LIABILITY-AND-EQUITY> 347,612
<SALES> 315,384
<TOTAL-REVENUES> 315,384
<CGS> 195,274
<TOTAL-COSTS> 195,274
<OTHER-EXPENSES> 199,543
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 10,483
<INCOME-PRETAX> (89,916)
<INCOME-TAX> (3,597)
<INCOME-CONTINUING> (86,319)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (86,319)
<EPS-PRIMARY> (6.30)
<EPS-DILUTED> (6.30)
</TABLE>
