<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, 1995 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 11, 1995
Common Stock 13,697,107 Shares
<PAGE>
HOUSE OF FABRICS, INC.
INDEX
-----
Page No.
Part I. Financial Information
Item 1. Financial Statements
Consolidated Balance Sheets as of October 31, 1995
and January 31, 1995 2 - 3
Consolidated Statements of Operations
for the three months ended
October 31, 1995 and 1994 4
Consolidated Statements of Operations
for the nine months ended
October 31, 1995 and 1994 5
Consolidated Statements of
Cash Flows for the nine months
ended October 31, 1995 and 1994 6 - 7
Notes to Consolidated Financial Statements 8 - 11
Item 2. Management's Discussion and Analysis
of Financial Condition and Results of
Operations 12-15
Part II. Other Information
Item 6. Exhibits
(a) Exhibits
27. Financial Data Schedule 16
Signature 17
1
<PAGE>
HOUSE OF FABRICS, INC. AND SUBSIDIARIES
(DEBTORS-IN POSSESSION)
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
<TABLE>
<CAPTION>
- - -----------------------------------------------------------------------------------------------------------------------
OCTOBER 31, 1995 JANUARY 31, 1995
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash $ 17,938,000 $ 47,381,000
Receivables, net 7,796,000 12,877,000
Merchandise Inventories, net 159,010,000 132,963,000
Prepaid Expenses and Other Current Assets 7,691,000 35,709,000
Refundable Income Taxes 4,816,000 6,351,000
Deferred Income Taxes 1,655,000 1,655,000
------------ ------------
Total Current Assets 198,906,000 236,936,000
Property
Land 1,729,000 1,729,000
Buildings 15,187,000 15,035,000
Furniture & Fixtures 49,735,000 52,637,000
Leasehold Improvements 21,602,000 24,909,000
------------ ------------
88,253,000 94,310,000
Less Accumulated Depreciation and
Amortization (47,696,000) (47,695,000)
------------ ------------
Property, net 40,557,000 46,615,000
Deferred Income Taxes 2,842,000 2,842,000
Other Assets 1,564,000 2,064,000
Goodwill, net 38,336,000 39,140,000
------------ ------------
$282,205,000 $327,597,000
============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
2
<PAGE>
HOUSE OF FABRICS, INC. AND SUBSIDIARIES
(DEBTORS-IN-POSSESSION)
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
- - --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY OCTOBER 31, 1995 JANUARY 31, 1995
<S> <C> <C>
CURRENT LIABILITIES
Accounts Payable $ 15,014,000 $ 12,806,000
Accrued Liabilities 21,791,000 24,851,000
Restructuring Reserve 12,949,000 19,583,000
------------ ------------
Total Current Liabilities 49,754,000 57,240,000
Deferred Income Taxes 4,497,000 4,497,000
Liabilities Subject to Compromise under
reorganization proceedings 197,468,000 210,836,000
------------ ------------
Total Liabilities 251,719,000 272,573,000
STOCKHOLDERS' EQUITY
Preferred Stock, $.10 Par Value;
Authorized 1,000,000 Shares; Outstanding, None
Common Stock, $.10 Par Value;
Authorized 29,000,000 Shares; 13,697,107 Shares
Issued and Outstanding at October 31, 1995
and January 31, 1995 1,370,000 1,370,000
Paid-In Capital 46,880,000 46,880,000
Retained Earnings (Deficit) (17,764,000) 6,774,000
------------ ------------
Stockholders' Equity 30,486,000 55,024,000
------------ ------------
$282,205,000 $327,597,000
============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
3
<PAGE>
HOUSE OF FABRICS, INC. AND SUBSIDIARIES
(DEBTORS-IN-POSSESSION)
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
- - --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
THREE MONTHS ENDED
OCTOBER 31, 1995 OCTOBER 31, 1994
<S> <C> <C>
Sales $ 92,307,000 $ 90,575,000
Expenses:
Cost of Sales 52,482,000 68,322,000
Selling, General and Administrative 39,973,000 44,480,000
Interest 3,263,000 4,029,000
Restructuring Charge 49,600,000
------------ ------------
Total Expenses 95,718,000 166,431,000
Loss Before Income Taxes (Benefit)
and Reorganization Costs (3,411,000) (75,856,000)
Reorganization Costs 2,054,000
------------ ------------
Loss Before Income Taxes (Benefit) (5,465,000) (75,856,000)
Income Taxes (Benefit) 50,000 (2,655,000)
------------ ------------
Net Loss $ (5,515,000) $(73,201,000)
============ ============
Loss Per Share ($0.40) ($5.34)
Weighted Average Number of
Shares Outstanding 13,697,107 13,697,107
============ ===========
</TABLE>
See accompanying notes to consolidated financial statements.
4
<PAGE>
HOUSE OF FABRICS, INC. AND SUBSIDIARIES
(DEBTORS-IN-POSSESSION)
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
- - --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
NINE MONTHS ENDED
OCTOBER 31, 1995 OCTOBER 31, 1994
<S> <C> <C>
Sales $237,975,000 $315,384,000
Expenses:
Cost of Sales 130,413,000 195,274,000
Selling, General and Administrative 113,663,000 149,943,000
Interest 10,788,000 10,483,000
Restructuring Charge 49,600,000
------------ ------------
Total Expenses 254,864,000 405,300,000
Loss Before Income Taxes (Benefit)
and Reorganization Costs (16,889,000) (89,916,000)
Reorganization Costs 7,499,000
------------ ------------
Loss Before Income Taxes (Benefit) (24,388,000) (89,916,000)
Income Taxes (Benefit) 150,000 (3,597,000)
------------ ------------
Net Loss $(24,538,000) $(86,319,000)
============ ============
Loss Per Share $ (1.79) $ (6.30)
============ ============
Weighted Average Number of
Shares Outstanding 13,697,107 13,697,107
============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
5
<PAGE>
HOUSE OF FABRICS, INC. AND SUBSIDIARIES
(DEBTORS-IN-POSSESSION)
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
- - --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
NINE MONTHS ENDED
OCTOBER 31, 1995 OCTOBER 31, 1994
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Loss $(24,538,000) $(86,319,000)
Adjustments to Reconcile Net Loss to Net Cash
Provided by (Used In) Operating Activities:
Depreciation and Amortization 6,099,000 8,073,000
Loss on Disposal of Fixed Assets 521,000 1,011,000
Restructure Charge 0 49,600,000
Changes in Assets and Liabilities
Receivables 5,081,000 (1,404,000)
Merchandise Inventories (26,047,000) 57,504,000
Prepaid Expenses and Other Assets 23,744,000 (8,786,000)
Accounts Payable and Accrued Liabilities (852,000) 14,877,000
Restructuring Reserve (3,152,000) (3,333,000)
Operating Payables subject to compromise
under Reorganization Proceedings (1,779,000)
Refundable Income Taxes 1,535,000 4,543,000
------------ ------------
Total Adjustments 5,150,000 122,085,000
------------ ------------
Net Cash (Used In) Provided by
Operating Activities (19,388,000) 35,766,000
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital Expenditures (3,974,000) (1,168,000)
Proceeds from Sale of Property 734,000 2,843,000
------------ ------------
Net Cash (Used In) Provided by Investing
Activities (3,240,000) 1,675,000
CASH FLOWS FROM FINANCING ACTIVITIES:
Net Repayments Under Line
of Credit Agreements (6,773,000) (16,334,000)
Repayment of Long Term Debt (42,000) (3,271,000)
------------ ------------
Net Cash (Used in) Financing Activities (6,815,000) (19,605,000)
------------ ------------
NET INCREASE (DECREASE) IN CASH (29,443,000) 17,836,000
CASH AT BEGINNING OF PERIOD 47,381,000 9,758,000
------------ ------------
CASH AT END OF PERIOD $ 17,938,000 $ 27,594,000
============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
6
<PAGE>
HOUSE OF FABRICS, INC. AND SUBSIDIARIES
(DEBTORS-IN-POSSESSION)
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
- - --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
NINE MONTHS ENDED
OCTOBER 31, 1995 OCTOBER 31,1994
<S> <C> <C>
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION:
Interest Paid $10,731,000 $9,013,000
Income Taxes Paid (Refunded) $(1,515,000) $ 261,000
</TABLE>
SUPPLEMENTAL DISCLOSURE OF NONCASH FINANCING AND OPERATING ACTIVITIES-
During the nine months ended October 31, 1995, $4,774,000 of prepetition
receivable were offset against prepetition payables. The loss on disposal of
property charged to the restructuring reserve amounted to $3,344,000 and
$226,000, for the nine months ended October 31, 1995 and 1994, respectively.
7
<PAGE>
HOUSE OF FABRICS, INC. AND SUBSIDIARIES
(DEBTORS-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
- - --------------------------------------------------------------------------------
NOTE 1: REORGANIZATION, BASIS OF REPORTING AND RESTRUCTURING PLANS
REORGANIZATION AND BASIS OF REPORTING:
House of Fabrics, Inc. and subsidiaries (Debtors-in-Possession) (the "Company")
is one of the largest home sewing/craft retailers in the United States,
operating 361 stores in 34 states as of October 31, 1995. The Company's stores
are located throughout the United States and operate under the names "House of
Fabrics," "So-Fro Fabrics," "Fabricland" or "Fabric King." The Company operates
most of its stores in leased premises principally in neighborhood shopping
centers or stand-alone locations.
As a result of certain events in fiscal 1995, the Company filed for protection
under Chapter 11 of the United States Bankruptcy Code (Chapter 11) on November
2, 1994. The Company continues to conduct normal business operations as Debtors-
in-Possession subject to the jurisdiction of the Bankruptcy Court. As Debtors-
in-Possession, the Company may not engage in transactions outside the ordinary
course of business without approval of the Bankruptcy Court, after notice and
hearing.
Under Chapter 11, actions to enforce claims against the Company are stayed if
the claims arose, or are based on events that occurred, on or before the
petition date of November 2, 1994, and such claims cannot be paid or
restructured prior to the conclusion of the Chapter 11 proceedings or approval
of the Bankruptcy Court. Other liabilities may arise or be subject to compromise
as a result of rejection of executory contracts, including leases, or the
Bankruptcy Court's resolution of claims for contingencies and other disputed
amounts. Liabilities subject to compromise (see Note 2) in the accompanying
consolidated balance sheet represent the Company's estimates of liabilities as
of October 31, 1995 and January 31, 1995, subject to adjustment in the
reorganization process. The Company is continuing to pay interest on secured
debt although principal payments have generally been suspended.
On August 31, 1995 the company filed a plan of reorganization with the
Bankruptcy Court. Under the terms of the plan the company would convert $120
million of notes payable to a 10 year term obligation. (See Note 2) In
addition, the plan provides that unsecured creditors would receive 98% of the
common stock initially issued by the reorganized company in satisfaction of
their claims. The current shareholders would receive 2% of the common stock of
the reorganized company, as well as warrants to purchase an additional 8% of the
reorganized company's common stock on a fully diluted basis. The discussions are
continuing between the banks, creditor and shareholder groups to agree on a plan
of reorganization, which would be subject to approval by the Bankruptcy Court.
The final plan may differ significantly from the plan currently filed with the
court. The Disclosure hearing date set by the Bankruptcy Court is scheduled for
January 11, 1996.
The Company has been approached by unrelated third parties interested in
potentially purchasing the Company. The Company has retained the investment
banking firm of Houlihan, Lokey, Zukin, and Howard to evaluate offers from the
outside parties and also to evaluate the Company's stand alone plan.
In October 1995, the compensation committee of the Board of Directors approved a
plan to pay amounts to certain executives in the event of change of control of
the Company.
The accompanying consolidated financial statements have been prepared in
conformity with principles of accounting applicable to a going concern, which
contemplates the realization of assets and the satisfaction of liabilities in
the normal course of business. As a result of the Chapter 11 filing and
circumstances relating to this event, realization of assets and satisfaction of
liabilities are subject to uncertainty. The plan of reorganization could
materially change the amounts reported in the accompanying consolidated
financial statements, which do not give effect to adjustments to the carrying
values of assets and liabilities which may be necessary as a consequence of a
plan of reorganization. The Company's ability to continue as a going concern is
contingent upon, among other things, the confirmation of a plan of
reorganization by the Bankruptcy Court, the ability to achieve satisfactory
levels of profitability and cash flow from operations, maintain compliance with
the Debtors-in-Possession financing agreement (see Note 3) and obtain financing
sources to meet future obligations.
8
<PAGE>
The consolidated financial statements included herein do not include all the
information and footnote disclosures normally included in consolidated financial
statements prepared in accordance with generally accepted accounting
principles, although the Company believes that disclosures are adequate to make
the information not misleading. Certain reclassifications have been made to
prior year amounts to conform to the current years reporting classification.
Refer to the Notes to Consolidated Financial Statements contained in the
Company's 1995 Annual Report.
In the opinion of management, all adjustments, consisting of normal recurring
accruals, considered necessary for a fair presentation for the interim periods
have been included in the consolidated financial statements. The results of
operations for the interim periods presented, are not necessarily indicative of
the operating results to be expected for the full fiscal year.
RESTRUCTURING PLANS:
In both fiscal 1994 and fiscal 1995, the Company implemented restructuring plans
that involve the closing of a significant number of stores and significant
revisions to the Company's marketing and merchandising strategies.
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 focused on
everyday value pricing. Prior to the beginning of the quarter ended October 31,
1995, 99 stores were closed under the 1993 Plan. The Company canceled the
planned closure of 11 mall stores during fiscal 1995 due to better than expected
performance and reversed the related portion of the restructuring charge. During
the three months ended October 31, 1995, there were no sales or operating losses
from mall stores excluded from operating results and charged to the
restructuring reserve. During the nine months ended October 31, 1995, mall store
sales of $1,224,000 and operating losses of $199,000 were excluded from
operating results and charged to the restructuring reserve.
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. Prior to the
beginning of the quarter ended October 31, 1995, 176 stores were closed under
the 1994 Plan. The Company canceled the planned closure of 12 super stores
during fiscal 1995 due to better than expected performance and reversed the
related portion of the restructuring charge. During the three months ended
October 31, 1995, there were no sales or operating losses excluded from
operating results and charged to the restructuring reserve. During the nine
months ended October 31, 1995, super store sales of $12,712,000 and operating
losses of $2,908,000 were excluded from operating results and charged to the
restructuring reserve.
The restructuring reserve balance as of October 31, 1995 represents additional
amounts to be paid to landlords as settlement of their claims related to
rejected leases from the 1993 Plan and the 1994 Plan store closures. These
claims will be settled as part of the bankruptcy process.
The company closed additional stores not covered by the 1993 Plan and the 1994
Plan as described above ("non-plan" stores). During the quarter ended October
31, 1995, the company closed 2 non-plan stores. During the nine months ended
October 31, 1995 the company closed 72 stores, including 50 stores from the 1994
Plan, 6 stores from the 1993 Plan, and 16 non-plan stores.
9
<PAGE>
NOTE 2: LIABILITIES SUBJECT TO COMPROMISE
Liabilities subject to compromise consist of the following as of October 31,
1995 and January 31, 1995:
<TABLE>
<CAPTION>
OCTOBER 31, 1995 JANUARY 31, 1995
---------------- ----------------
<S> <C> <C>
Secured Liabilities:
Notes payable to banks $119,893,000 $126,666,000
Long term debt 1,358,000 1,400,000
Unsecured Liabilities:
Accounts payable, trade 71,288,000 76,875,000
Other payables and accrued expenses 4,784,000 5,750,000
Other 145,000 145,000
------------ ------------
$197,468,000 $210,836,000
============ ============
</TABLE>
A plan of reorganization ultimately approved by the Company's impaired
prepetition creditors and stockholders and confirmed by the Bankruptcy Court may
materially change the amounts and terms of these prepetition liabilities. Such
amounts were estimated as of October 31, 1995 and January 31, 1995, and the
Company anticipates that claims filed with the Bankruptcy Court by the Company's
creditors will be reconciled to the Company's financial records. The additional
liability arising from this reconciliation process, if any, is not subject to
reasonable estimation, and accordingly, no provision has been recorded for these
possible claims. The termination of other contractual obligations and the
settlement of disputed claims may create additional prepetition liabilities.
Such amounts, if any, will be recognized in the consolidated balance sheet as
they are identified and become subject to reasonable estimation.
The Company has a credit agreement (Credit Agreement) for which Bank of America
NT & SA acts as agent bank. As a result of the Chapter 11 filing, all required
repayments of principal on the notes payable under the Credit Agreement have
been suspended, except for certain principal repayments that have been approved
by the Bankruptcy Court and are required by the Company's Debtors-in-Possession
financing agreement (see Note 3). Under such agreement, up to a total of
$28,000,000 of permanent principal reductions may be required based on a
preapproved formula through January 31, 1996, of which $6,773,000 was repaid
through October 31, 1995, and an additional $7,102,000 was repaid on December
11, 1995 (See Note 5). The Company has continued to accrue and pay interest at
the contractual rate on these notes and has classified these notes as subject to
compromise in the accompanying consolidated balance sheets.
By authorization of the Bankruptcy Court, the Company has continued to pay
interest at the contractual rate on certain long term debt. Such obligations
have been classified as subject to compromise in the accompanying consolidated
balance sheets.
NOTE 3: DEBTORS-IN-POSSESSION FINANCING
During the first quarter of 1995, the Company entered into, and the Bankruptcy
Court approved, an agreement with Bank of America NT & SA, acting as agent bank,
to provide Debtors-in-Possession financing in the form of a $20 million line of
credit (The "D.I.P. Financing"). The D.I.P. Financing agreement provides for a
combination of cash borrowings and the issuance of up to $10 million in letters
of credit. Interest and fees are payable monthly. Cash borrowings bear interest
at the bank reference rate plus 1.5% per annum, and a commitment fee of .5% per
annum on unused availability. Fees for letters of credit are generally .25%
per annum. This agreement is collateralized by a first priority lien on
generally all assets of the Company, as defined. The Company is required to
follow a formula for sequestration of excess cash, as defined in the D.I.P.
Financing agreement, for permanent principal reductions of notes payable under
the Credit Agreement. Subsequent to October 31, 1995 principal reductions of
$7,102,000
10
<PAGE>
were made in accordance with this formula (See Note 5). The Company is also
required to permanently reduce all or a portion of the borrowings under the
D.I.P. Financing agreement by an amount equal to the net proceeds from asset
dispositions which occur outside the normal course of business and, under
certain circumstances, a portion of the funds derived from store liquidations.
The agreement will terminate on the earlier of January 31, 1996, or the
effective date of a plan of reorganization confirmed by the Bankruptcy Court.
The Company is in discussions with the bank to extend the expiration of the
D.I.P. Financing agreement through April 30, 1996.
The D.I.P. Financing agreement includes certain other restrictive covenants that
are computed monthly and related to, among other things, cash and inventory
level requirements in comparison to planned levels. As of October 31, 1995, the
Company had drawn letters of credit in the total amount of $2,045,000 against
the line leaving credit available of $17,955,000 of which $7,955,000 was
available for letters of credit under the agreement.
During the quarter ended October 31, 1995 the Company borrowed and repaid $6.0
million against the credit line and there are currently no borrowings under the
D.I.P. Financing agreement.
The Company was in compliance with all financial covenants as of October 31,
1995.
NOTE 4: REORGANIZATION COSTS
Professional fees and expenditures directly related to the Chapter 11 filing are
classified as reorganization costs and are expensed as incurred. Reorganization
costs during the six months ended October 31, 1995, consisted primarily of
professional fees. Cash paid for reorganization costs during the nine months
ended October 31, 1995 amounted to $5,914,000.
NOTE 5: SUBSEQUENT EVENTS
On December 11, 1995, the company repaid $7,102,000 in principal amounts on
notes payable under the Credit Agreement, based on a formula as defined in the
D.I.P Financing agreement (See Notes 2 and 3).
As a part of the Bankruptcy restructuring, the Company is considering the
additional closing of a siginificant number of stores that have not met the
Company's profitability requirements. The store closings would begin during the
fourth quarter of fiscal 1996 and continue through the first quarter of fiscal
1997. A plan for store closings would require the approval of the Company's
Board of Directors and the Bankruptcy Court. The Company will quantify the
effects of a plan, if adopted, in the fourth quarter.
11
<PAGE>
HOUSE OF FABRICS, INC. AND SUBSIDIARIES
(DEBTORS-IN-POSSESSION)
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
- - --------------------------------------------------------------------------------
The Company is one of the largest home sewing/craft retailers in the United
States, operating 361 stores in 34 states as of October 31, 1995. The
following discussion explains material changes in the results of operations for
the third quarter of fiscal years 1996 and 1995 and significant developments
affecting financial condition since the end of fiscal 1995.
CHAPTER 11 REORGANIZATION
- - -------------------------
On November 2, 1994, the Company and subsidiaries filed voluntary petitions for
relief under Chapter 11 of Title 11 of the United States Code in the United
States Bankruptcy Court.
On August 31, 1995 the company filed a plan of reorganization with the
Bankruptcy Court. Under the terms of the plan the company would convert $120
million of notes payable to a 10 year term obligation. In addition, the plan
provides that unsecured creditors would receive 98% of the common stock
initially issued by the reorganized company in satisfaction of their claims. The
current shareholders would receive 2% of the common stock of the reorganized
company, as well as warrants to purchase an additional 8% of the reorganized
company's common stock on a fully diluted basis. The discussions are continuing
between the banks, creditor and shareholder groups to agree on a plan of
reorganization, which would be subject to approval by the Bankruptcy Court. The
final plan may differ significantly from the plan currently filed with the
court. The Disclosure hearing date set by the Bankruptcy Court is scheduled for
January 11, 1996.
The consolidated financial statements have been presented on the basis that the
Company will continue as a going concern, which contemplates the realization of
assets and the satisfaction of liabilities in the normal course of business. As
a result of the Chapter 11 filing and circumstances relating to this event,
realization of assets and satisfaction of liabilities is subject to uncertainty.
The plan of reorganization could materially change the amounts reported in the
accompanying consolidated financial statements, which do not reflect all
adjustments to the carrying values of assets and liabilities which may be
necessary as a consequence of a plan of reorganization. The ability of the
Company to continue as a going concern is dependent on, among other things, the
confirmation of a final plan of reorganization by the Bankruptcy Court, the
ability to achieve satisfactory levels of profitability and cash flow from
operations, maintain compliance with the Debtors-in-Possession Financing
agreement and obtain financing sources to meet future obligations.
In both fiscal 1994 and fiscal 1995, the Company implemented restructuring plans
that involve the closing of a significant number of stores and significant
revisions to the Company's marketing and merchandising strategies.
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 focused on
everyday value pricing. Prior to the beginning of the quarter ended October 31,
1995, 99 stores were closed under the 1993 Plan. The Company canceled the
planned closure of 11 mall stores during fiscal 1995 due to better than expected
performance and reversed the related portion of the restructuring charge. During
the three months ended October 31, 1995, there were no mall store sales or
operating losses excluded from operating results and charged to the
restructuring reserve.
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 included an additional 63 super stores,
bringing the total number of super stores slated for closure to 188. Prior to
the beginning of the quarter ended October 31, 1995, 176 stores were closed
under the 1994 Plan.
12
<PAGE>
closed to 176. The Company canceled the planned closure of 12 super stores
during fiscal 1995 due to better than expected performance and reversed the
related portion of the restructuring charge. During the three months ended
October 31, 1995, there were no sales or operating losses excluded from
operating results and charged to the restructuring reserve.
RESULTS OF OPERATIONS
- - ---------------------
THREE MONTHS ENDED
------------------
Sales for the quarter ended October 31, 1995 increased 1.9% to $92,307,000 from
$90,575,000 for the quarter ended October 31, 1994. The increase in sales of
$1,732,000 was primarily due to a 12.4% increase in store for store sales
resulting from the improvements in the company's merchandising and store
operations activities in the current quarter and merchandise shortages that
depressed sales in the third quarter of fiscal 1995. During the quarter ended
October 31, 1995, the company closed 2 non-plan stores.
Gross profit as a percentage of sales increased to 43.1% for the quarter ended
October 31, 1995 from 24.6% for the quarter ended October 31, 1994. Gross profit
was decreased by $19,000,000 in the quarter ended October 31, 1994 to markdown
and liquidate inventories that no longer fit the Company's merchandising model.
Selling, general and administrative expenses were reduced by $4,507,000 from the
prior year, and as a percent of sales decreased to 43.3% for the quarter ended
October 31, 1995 from 49.1% for the quarter ended October 31, 1994, primarily as
a result of general and administrative expense reduction programs.
Interest expense for the quarter ended October 31, 1995 decreased $766,000 from
the quarter ended October 31, 1994 primarily as a result of a decrease in the
amounts borrowed, offset by an increase in the Company's average effective
borrowing rate to 11.3% in the quarter ended October 31, 1995, from 10.5% in
the quarter ended October 31, 1994.
Reorganization costs associated with the Company's Chapter 11 filing amounted to
$2,054,000 for the quarter ended October 31, 1995, which include primarily
professional fees. The Company anticipates that additional reorganization costs
will be incurred throughout the Chapter 11 reorganization process.
The Company recorded a tax expense of $50,000 for the three months ended October
31, 1995, for minimum state income taxes compared to a $2,655,000 benefit for
the quarter ended October 31, 1994. No tax benefit was recognized for the net
operating loss generated in the three months ended October 31, 1995. The net
loss incurred during the quarter increased the net operating loss carryforward
that existed as of January 31, 1995.
13
<PAGE>
RESULTS OF OPERATIONS
- - ---------------------
NINE MONTHS ENDED
-----------------
Sales for the nine months ended October 31, 1995 decreased 24.5% to $237,975,000
from $315,384,000 for the nine months ended October 31, 1994. The decrease in
sales of $77,409,000 was primarily due to $62,000,000 in sales for stores closed
and a 6.1% decrease in store for store sales. The decrease in store for store
sales is primarily due to loss of customers early in the year resulting from
merchandise shortages in the third and fourth quarters of fiscal 1995, the full
chain-wide implementation of everyday value pricing in the current fiscal year,
and highly competitive market conditions. During the nine months ended October
31, 1995, the Company closed 72 stores, including 50 stores from the 1994 Plan,
6 stores from the 1993 Plan, and 16 non-plan stores.
Gross profit as a percentage of sales increased to 45.2% for the nine months
ended October 31, 1995 from 38.1% for the nine months ended October 31, 1994.
The increase is primarily due to a $19,000,000 charge in the nine months ended
October 1994 to markdown and liquidate inventories that no longer fit the
Company's merchandising model and the change from a highly promotional sales
strategy to the full chain wide implementation of everyday value pricing.
Selling, general and administrative expenses were reduced by $36,280,000 from
the prior year, and as a percent of sales were essentially flat at 47.8% for
the nine months ended October 31, 1995 from 47.5% for the nine months ended
October 31, 1994. The expense reduction programs implemented to reduce total
costs are showing improvement in the third quarter, however the fixed cost
components of payroll and rent represent a higher percent of sales in the
earlier part of the nine months ended October 31, 1995.
Interest expense for the nine months ended October 31, 1995 increased $305,000
over the nine months ended October 31, 1994, primarily as a result of an
increase in the Company's average effective borrowing rate to 11.5% in the nine
months ended October 31, 1995 from 8.5% in the nine months ended October 31,
1994, partially offset by lower borrowing amounts.
Reorganization costs associated with the Company's Chapter 11 filing amounted to
$7,499,000 for the nine months ending October 31, 1995, which include primarily
professional fees. The Company anticipates that additional reorganization costs
will be incurred throughout the Chapter 11 reorganization.
The Company recorded a tax expense of $150,000 for the nine months ended October
31, 1995, for minimum state income taxes compared to a $3,597,000 benefit for
the nine months ended October 31, 1994. No tax benefit was recognized for the
net operating loss generated in the nine months ended October 31, 1995. The net
loss incurred during the nine months increased the net operating loss
carryforward that existed as of January 31, 1995.
LIQUIDITY AND CAPITAL RESOURCES
- - -------------------------------
The Company's working capital was approximately $149.1 million as of October 31,
1995, and its current ratio was 4.0 to 1. Net cash used in operating
activities was approximately $19,388,000 for the nine months ended October 31,
1995, compared to net cash provided by operating activities of approximately
$35,766,000 for the nine months ended October 31, 1994. The increase in net
cash used in operating activities is due primarily to the liquidation of
merchandise inventories during store closings in the nine months ended October
31, 1994 that did not recur during the current year, and the increase in
accounts payable and accrued liabilities in the nine months ended October 31,
1994 that did not recur in the current year. This was offset in part by a
decrease in the net loss in the nine months ended October 31, 1995 compared to
the net loss in the nine months ended October 31, 1994, which was offset by the
noncash restructure charge, and the prepayment of merchandise inventories during
the three months ended January 31, 1995 that allowed the Company to restock its
stores during the nine months ended October 31, 1995 without a net expenditure
of cash.
During the first quarter of 1995, the Company entered into, and the Bankruptcy
Court approved, an agreement with Bank of America NT & SA, acting as agent bank,
to provide Debtors-in-Possession financing in the form of a $20 million line of
credit (The "D.I.P. Financing"). The D.I.P. Financing agreement provides for a
combination of cash borrowings and the issuance of up to $10 million in letters
of credit. Interest and fees are payable monthly. Cash
14
<PAGE>
borrowings bear interest at the bank reference rate plus 1.5% per annum, and a
commitment fee of .5% per annum on unused availability. Fees for letters of
credit are generally .25% per annum. This agreement is collateralized by a first
priority lien on generally all assets of the Company, as defined. The Company is
required to follow a formula for sequestration of excess cash, as defined in the
D.I.P. Financing agreement, for permanent principal reductions of notes payable
under the Credit Agreement. Subsequent to October 31, 1995 the company repaid
$7,102,000 in principal amounts under this formula. The Company is also required
to permanently reduce all or a portion of the borrowings under the D.I.P.
Financing agreement by an amount equal to the net proceeds from asset
dispositions which occur outside the normal course of business and, under
certain circumstances, a portion of the funds derived from store liquidations.
The agreement will terminate, generally, on January 31, 1996, or the effective
date of a plan of reorganization confirmed by the Bankruptcy Court. Negotiations
are necessary with the bank to provide an extension to this agreement.
The D.I.P. Financing agreement includes certain other restrictive covenants that
are computed monthly and related to, among other things, cash and inventory
level requirements in comparison to planned levels. As of October 31, 1995, the
Company had drawn letters of credit in the total amount of $2,045,000 against
the line leaving credit available of $17,955,000 of which $7,955,000 was
available for letters of credit under the agreement. During the quarter, the
Company borrowed and repaid a total of $6.0 million under the D.I.P. Financing
Agreement.
The Company believes that its ongoing operating cash flow, the D.I.P. Financing
agreement, and the refund of income taxes should enable the Company to meet
liquidity requirements in fiscal 1996. However, notwithstanding all of the
events and circumstances described above, there is substantial uncertainty with
respect to the Company's liquidity. The Company's ability to meet its
obligations as they come due and successfully emerge from Chapter 11 is
contingent upon, among other things, the confirmation of a final plan of
reorganization that will be confirmed by the Bankruptcy Court, the ability to
achieve satisfactory levels of profitability and cash flow from operations,
maintain compliance with the Debtors-in-Possession financing agreement and
obtain financing sources to meet future obligations.
The foregoing discussion is designed to comply with interim reporting standards
and should be read in conjunction with the more detailed discussion in the
Company's 1995 Annual Report.
15
<PAGE>
Part II. OTHER INFORMATION
Item 6. EXHIBITS
(a) Exhibits.
27. Financial Data Schedule
16
<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 13, 1995 John E. Labbett
Executive Vice President
and Chief Financial Officer
17
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<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JAN-31-1995
<PERIOD-END> OCT-31-1995
<CASH> 14,539
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0
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