<PAGE>
United States
Securities and Exchange Commission
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] Quarterly Report Pursuant to Section 13 or 15 (d) of the Securities Exchange
Act of 1934
For the quarterly period ended OCTOBER 31, 1997.
----------------
or
[_] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 For the Transition period from _______________ to
_____________.
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 __
-
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS.
Indicate by check mark whether the Registrant has filed all documents and
reports required to be filed by Sections 12, 13, or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court.
Yes __X___ No_____
<PAGE>
On November 2, 1994, the Registrant and four (4) of its former subsidiaries
filed separate voluntary petitions for reorganization under Chapter 11 of Title
11 of the United States Bankruptcy Code in the United States Bankruptcy Court of
the Central District of California (the "Bankruptcy Court"). On July 10, 1996,
the Bankruptcy Court confirmed the Third Amended Joint Plan of Reorganization,
(the "Plan"), of the Registrant and its subsidiaries. On July 31, 1996, all
conditions to the effectiveness of the Plan were met, and the Plan became
effective ("Effective Date").
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 5, 1997
New Common Stock, par value $.01 per share 5,331,830 Shares
2
<PAGE>
HOUSE OF FABRICS, INC.
INDEX
-----
<TABLE>
<CAPTION>
Page No.
<S> <C> <C>
Part I. Financial Information
Item 1. Financial Statements
Balance Sheets as of October 31, 1997
and January 31, 1997 4 - 5
Statements of Operations
for the three months ended
October 31, 1997 and 1996 6
Statements of Operations 7
for the nine months ended
October 31, 1997 and 1996
Statements of Cash Flows for the nine months
ended October 31, 1997 and 1996 8 - 9
Notes to Financial Statements 10 - 12
Item 2. Management's Discussion and Analysis
of Financial Condition and Results of
Operations 13 - 17
Part II. Other Information 18
Item 6. Exhibits
(a) Exhibits
27. Financial Data Schedule
Signature 19
</TABLE>
3
<PAGE>
HOUSE OF FABRICS, INC.
BALANCE SHEETS
(DOLLARS IN THOUSANDS)
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
(Unaudited)
ASSETS October 31, 1997 January 31, 1997
<S> <C> <C>
Current Assets:
Cash $ 1,653 $ 767
Receivables, net 2,337 3,164
Merchandise Inventories, net 106,972 104,576
Prepaid Expenses and Other Current Assets 3,170 3,686
-------- --------
Total Current Assets 114,132 112,193
Property
Land 794 1,011
Buildings 1,394 1,473
Furniture & Fixtures 19,630 16,055
Leasehold Improvements 6,113 5,677
-------- --------
27,931 24,216
Less Accumulated Depreciation and Amortization (6,043) (2,442)
-------- --------
Property, net 21,888 21,774
Other Assets 588 675
Reorganization Value in Excess of Amounts Allocated
to Net Assets, net 2,937 3,188
-------- --------
$139,545 $137,830
======== ========
</TABLE>
See accompanying notes to financial statements.
4
<PAGE>
HOUSE OF FABRICS, INC.
BALANCE SHEETS (continued)
(Dollars in Thousands)
_______________________________________________________________________________
<TABLE>
<CAPTION>
(Unaudited)
October 31, 1997 January 31, 1997
LIABILITIES AND STOCKHOLDERS' EQUITY
<S> <C> <C>
Current Liabilities:
Accounts payable $ 22,185 $ 18,250
Accrued liabilities 13,892 12,505
Bank loan 49,640 42,621
Current portion of long-term debt 28 28
-------- --------
Total Current Liabilities 85,745 73,404
Deferred income taxes 634 634
Long-term liabilities 22,502 22,502
Long-term debt 551 903
Stockholders' Equity:
New Preferred stock, $.01 par value
authorized 1,000,000 shares; outstanding, none - -
New Common stock, $.01 par value; authorized 7,000,000 shares;
issued and outstanding, 5,331,830 and 4,201,034 shares,
respectively. 53 51
Paid-in capital 39,960 39,411
Retained earnings (deficit) (9,900) 925
-------- --------
Total Stockholders' Equity 30,113 40,387
-------- --------
$139,545 $137,830
======== ========
</TABLE>
See accompanying notes to financial statements.
5
<PAGE>
HOUSE OF FABRICS, INC.
STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS AND SHARES)
(Unaudited)
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
THREE MONTHS ENDED
October 31, 1997 October 31, 1996
Successor Co. Successor Co.
<S> <C> <C>
Sales $ 61,495 $ 69,953
Expenses:
Cost of Sales 33,675 40,200
Selling, General and Administrative 26,643 27,536
Interest 1,634 1,319
---------- ----------
Total Expenses 61,952 69,055
---------- ----------
Income (Loss)Before Income Taxes (457) 898
Income Taxes 24 378
---------- ----------
Net Income (Loss) $ (481) $ 520
========== ==========
Net Income (Loss) Per Share $ (0.09) $ 0.10
========== ==========
Weighted Average Number of
Shares Outstanding 5,331,843 5,136,415
========== ==========
</TABLE>
See accompanying notes to financial statements.
6
<PAGE>
HOUSE OF FABRICS, INC.
STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS AND SHARES)
(Unaudited)
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Nine Months Three Months Six Months
Ended Ended Ended
October 31, 1997 October 31, 1996 July 31, 1996
Successor Co. Successor Co. Predecessor Co.
<S> <C> <C> <C>
Sales $ 165,806 $ 69,953 $ 111,355
Expenses:
Cost of Sales 93,311 40,200 62,000
Selling, General and Administrative 78,896 27,536 53,952
Interest 4,352 1,319 4,911
---------- ---------- ---------
Total Expenses 176,559 69,055 120,863
---------- ---------- ---------
Income (Loss) Before Income Taxes,
Reorganization, and Extraordinary Item (10,753) 898 (9,508)
Reorganization Items:
Fresh-Start adjustments (a) - - 26,370
Reorganization Costs - - 1,440
---------- ---------- ---------
Income (Loss) Before Income Taxes
and Extraordinary Item (10,753) 898 (37,318)
Income Taxes 72 378 48
---------- ---------- ---------
Income (Loss) Before Extraordinary Item (10,825) 520 (37,366)
Extraordinary Item:
Gain on Forgiveness of Debt (a) - - (100,959)
---------- ---------- --------
Net Income (Loss) $ (10,825) $ 520 $ 63,593
========== ========== ========
Net Income (Loss) Per Share (b) $ (2.05) $ 0.10 N/A
========== ========== ========
Weighted Average Number of
Shares Outstanding (b) 5,287,355 5,136,415 N/A
========== ========== ========
</TABLE>
(a) These adjustments are the result of the adoption of Fresh-Start Reporting
upon the emergence from Chapter 11 proceedings. All assets and liabilities were
restated and the accumulated deficit of $74,589,000 was eliminated.
(b) The net income per common share and the weighted average number of common
shares for the Predecessor Company have not been presented because, due to the
Reorganization and implementation of Fresh-Start Reporting, they are not
comparable to the current period.
See accompanying notes to financial statements.
7
<PAGE>
HOUSE OF FABRICS, INC.
STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Nine Months Three Months Six Months
Ended Ended Ended
October 31, 1997 October 31, 1996 July 31, 1996
Successor Co. Successor Co. Predecessor Co.
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income (Loss) $(10,825) $ 520 $ 63,593
Adjustments to Reconcile Net Income (Loss) to Net
Cash Provided by (Used In) Operating
Activities:
Fresh-Start adjustments - - 26,370
Extraordinary item - Gain on Forgiveness of Debt - - (100,959)
Depreciation and Amortization 3,907 1,131 2,895
Loss (Gain) on Disposal of Fixed Assets 106 - (3,191)
Changes in Assets and Liabilities:
Receivables 827 (1,342) 15,246
Merchandise Inventories (2,396) (15,568) 12,287
Prepaid Expenses and Other Assets 603 1,752 (1,008)
Accounts Payable and Accrued Liabilities 5,282 7,206 (4,719)
Operating Payables subject to compromise under
reorganization proceedings - - 843
Refundable Income Taxes - 377 -
Long Term Liabilities - 1,343 21,513
-------- -------- ---------
Total Adjustments 8,329 (5,101) (30,723)
-------- -------- ---------
Net Cash Provided by (Used In) Operating Activities (2,496) (4,581) 32,870
-------- -------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital Expenditures (4,166) (1,264) (2,687)
Proceeds from Sale of Property 330 - 5,050
-------- -------- ---------
Net Cash Provided by (Used In) Investing Activities (3,836) (1,264) 2,363
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayments Under Line of Credit Agreements, net - - (45,945)
Borrowings Under Revolving Line, net 7,019 6,988 -
Settlement of Administrative and Priority Claims, net - (3,968) -
Repayment of Long-Term Debt (352) - -
Exercise of Series A Warrants 551 - -
-------- -------- ---------
Net Cash Provided by (Used in) Financing Activities 7,218 3,020 (45,945)
-------- -------- ---------
NET INCREASE (DECREASE) IN CASH 886 (2,825) (10,712)
CASH AT BEGINNING OF PERIOD 767 5,922 16,634
-------- -------- ---------
CASH AT END OF PERIOD $ 1,653 $ 3,097 $ 5,922
======== ======== =========
</TABLE>
See accompanying notes to financial statements.
8
<PAGE>
HOUSE OF FABRICS, INC.
STATEMENTS OF CASH FLOWS (CONTINUED)
(DOLLARS IN THOUSANDS)
(UNAUDITED)
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Nine Months Three Months Six Months
Ended Ended Ended
October 31, 1997 October 31, 1996 July 31, 1996
Successor Co. Successor Co. Predecessor Co.
<S> <C> <C> <C>
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Interest Paid $ 3,694 $ 1,241 $ 4,933
Income Taxes Paid (Refunded) $ 10 $(1,432) $(21,285)
</TABLE>
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:
During the nine months ended October 31, 1996, loss on disposal of property
charged to accrued reserves amounted to $5,222.
See accompanying notes to financial statements.
9
<PAGE>
HOUSE OF FABRICS, INC.
NOTES TO FINANCIAL STATEMENTS (Unaudited)
- -------------------------------------------------------------------------------
NOTE 1: REORGANIZATION AND BASIS OF REPORTING
House of Fabrics, Inc. (the "Company") is one of the largest home sewing/craft
retailers in the United States, operating 262 stores in 27 states as of October
31, 1997. 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.
On November 2, 1994 (the "Petition Date"), the Company and four (4) of its then
existing subsidiaries filed separate voluntary petitions for reorganization
under Chapter 11 of the United States Bankruptcy Code ("Chapter 11") in the
United States Bankruptcy Court for the Central District of California (the
"Bankruptcy Court"). On July 10, 1996, the Bankruptcy Court confirmed the Third
Amended Joint Plan of Reorganization, (the "Plan"), of the Company and its
subsidiaries. On July 31, 1996, all conditions required for the effectiveness
of the Plan were met, and the Plan became effective ("Effective Date").
Under the Plan, the Company has issued approximately 5,332,000 shares of newly
reorganized House of Fabrics, Inc. common stock ("New Common Stock") including
shares issuable upon resolution of claims. As of October 31 1997, 5,331,830
shares were issued, including 188,079 shares issued upon the exercise of Series
A Warrants. The secured bank group received $76,500,000 (discounted based on
debt outstanding as of May 1, 1996) plus approximately 257,000 shares (or 5%) of
New Common Stock and an additional $1,157,000 to satisfy a requirement to bring
the aggregate market value of the approximately 257,000 shares up to $2,000,000.
Generally, defaults under other secured obligations were cured and the
maturities reinstated or converted to longer term obligations at market rates of
interest. Reclamation claims received 25% in cash shortly after the effective
date of the Plan and received the balance in installments. Holders of general
unsecured claims that were not covered by insurance received a pro-rata
distribution of approximately 4,776,000 shares (or 93%) of New Common Stock.
Holders of existing House of Fabrics, Inc., common stock received a pro-rata
distribution of approximately 103,000 shares (or 2%) of New Common Stock
(subject to dilution) plus warrants to purchase additional shares of New Common
Stock. A total of 188,079 Series A Warrants were exercised by the deadline of
April 29, 1997, out of 257,381 issued. Each warrant exercised was converted to
one share of New Common Stock for a price of $3.02 per share and entitles the
holder to a Series B Warrant which may be exercised at a later date for a
different price. Warrants not exercised have no further rights.
On July 31, 1996, and effective August 1, 1996, the Company restructured its
corporate organization by merging Fabricland, Inc., So-Fro Fabrics, Inc., House
of Fabrics of South Carolina, Inc., and Metrolina Express, Inc. into House of
Fabrics, Inc..
10
<PAGE>
The reorganization value of the Company's common equity of $39,446,000 was
determined after consideration of several factors and by reliance on independent
financial specialists using various valuation methods, including discounted
projected cash flows, price/earnings ratios, and other applicable ratios and
economic and industry information relevant to the operations of the Company. The
reorganization value of the Company has been allocated to specific asset
categories pursuant to Fresh-Start Reporting. Reorganization Value in Excess of
Amounts Allocated to Net Assets reflects the difference in the Company's stock
valuation and the Company's net assets.
Upon emergence from its Chapter 11 proceedings, the Company (referred to as
"Successor Company" when compared to periods prior to August 1, 1996) adopted
the provisions of Statement of Position No. 90-7, "Financial Reporting by
Entities in Reorganization Under the Bankruptcy Code" ("Fresh-Start Reporting")
as promulgated by the American Institute of Certified Public Accountants.
Accordingly, all assets and liabilities have been restated to reflect their
reorganization value, which approximates their fair value at the Effective Date.
The adjustment to eliminate the accumulated deficit totaled $74,589,000 of which
$100,959,000 was forgiveness of debt reduced by $26,370,000 of Fresh-Start
adjustments. The capital structure was recast in conformity with the Plan, and
as such, the Company has recorded the effects of the Plan and Fresh-Start
Reporting as of August 1, 1996. The results of operations and cash flows for
the six months ended July 31, 1996 include operations prior to the Company's
emergence from Chapter 11 proceedings (referred to as "Predecessor Company") and
prior to the effects of Fresh-Start Reporting. The results of operations and
cash flows for the three months ended October 31, 1996 and nine months ended
October 31, 1997 are for operations subsequent to the Company's emergence from
Chapter 11 proceedings and reflect the on-going effects of Fresh-Start
Reporting. As a result, the net loss for the nine month period ended October
31, 1997 is not comparable with the prior period.
The financial statements included herein do not include all the information and
footnote disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principles, although the Company
believes that disclosures are adequate to make the information not misleading.
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 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.
NOTE 2: NET INCOME (LOSS) PER SHARE
Net income (loss) per share is computed based on the weighted average number of
outstanding common and common equivalent shares, if dilutive, during the period.
As of October 31, 1997, 5,331,830 shares were issued, including 188,079 shares
issued upon exercise of Series A Warrants. Per share data for periods prior to
August 1, 1996 have been omitted as these amounts do not reflect the current
capital structure. In February 1997, the Financial Accounting Standards Board
issued Statement of Financial Accounting Standards No. 128, "Earnings Per Share"
("SFAS No. 128") which is effective for financial statements issued for periods
ending after December 15, 1997. SFAS No. 128 requires the disclosure of basic
and diluted earnings per share. For the three and nine month periods ended
October 31, 1997, the amounts reported as net loss per common and common
equivalent share are not materially different from that which would have been
reported for basic and diluted earnings per share in accordance with SFAS No.
128.
NOTE 3: FINANCING
At July 31, 1996, the Company entered into a Financing Agreement with CIT
Group/Business Credit, Inc. ("CITBC"), to provide a $65,000,000 line of credit,
as amended, having a term of 3 years, with automatic annual renewals unless 90
days written notice is provided prior to the anniversary date of the agreement.
Cash borrowings bear interest at prime (based on the Chase Manhattan Bank Rate)
plus 1% or Libor plus 3 1/4% and a commitment fee of .5% per annum on unused
availability. Fees for letters of credit are generally 1 1/2% per annum based on
the amount of letters of credit issued. The Financing Agreement provides for a
combination of
11
<PAGE>
cash borrowings and the issuance of up to $20,000,000 in letters of credit. The
Financing Agreement is collateralized by a first priority lien on generally all
assets of the Company, as defined, excluding up to $10,000,000 for Point of Sale
equipment which may be secured by the purchased Point of Sale equipment. Loan
availability is determined by an advance rate on eligible inventory as defined.
The Financing Agreement includes certain restrictive covenants, which have been
amended, including net worth, a fixed charge covenant which is computed
quarterly, and others which are computed annually (operating leases, and capital
expenditures). As of October 31, 1997, the Company had direct borrowings of
$49,640,000 and letters of credit of $791,000 outstanding with additional credit
available of approximately $10,669,000.
As of October 31, 1997, the Company was in compliance with all terms of the
amended Financing Agreement.
In March 1995, the Company entered into, with Bankruptcy Court approval, an
agreement with Bank of America NT & SA, acting as agent bank, to provide
Debtors-in-Possession financing in the form of a $20,000,000 line of credit (The
"D.I.P. Financing") that expired on January 31, 1996 and was extended through
April 30, 1996, with Bankruptcy Court approval. On May 1, 1996, the amended and
restated D.I.P. Financing agreement was reduced to $17,300,000 and extended
through June 28, 1996, and subsequently through July 31, 1996, when the Company
retired the D.I.P. Financing agreement and replaced it with a new Financing
Agreement with CITBC as explained above.
NOTE 4: REORGANIZATION COSTS
Prior to emergence from bankruptcy, professional fees and expenditures directly
related to the Chapter 11 filing were classified as reorganization costs and
expensed as incurred. There were no reorganization costs for the nine months
ended October 31, 1997, as the Company emerged from bankruptcy on August 1,
1996. Reorganization costs with respect to the six months ended July 31, 1996
consisted primarily of professional fees and lease termination expenses offset
by the gain on the sale of the Sherman Oaks, California office building.
NOTE 5: STOCK OPTIONS
During the nine months ended October 31, 1997, the Company granted 267,000 new
stock options to newly employed officers. Also during the period 155,356 options
were canceled. The new options have a term of ten years and vest 33 1/3% after
12 months, an additional 33 1/3% after 24 months, and the final 33 1/3% after 36
months. The exercise prices range from $3.625 to $3.6875 with various grant
dates.
NOTE 6: INCOME TAXES
During the year ended January 31, 1997, the Company received $22,502,000
pursuant to carrybacks of certain net operating losses on claims for refund
filed with the Internal Revenue Service on Forms 1139. The Company's claims for
refund are currently being examined by the Internal Revenue Service. Although
the Company believes that the positions taken on the claims for refund are
supportable, it is uncertain at this time as to their ultimate resolution.
Therefore, the Company has recorded reserves on its balance sheet as of January
31, 1997 equal to the refunds received. To the extent that the Internal Revenue
Service disallows the claims for refund in whole or part and ultimately prevails
with respect to the disallowance, the Company will be required to repay the
Internal Revenue Service the refund attributable to the disallowance. As set
forth in the Plan of Reorganization, a deficiency notice issued by the Internal
Revenue Service requesting repayment of the refund is allowed to be treated as a
Priority Tax Claim, as defined in the Plan. Subject to exhaustion of the
Company's right to contest, the claim would become payable in quarterly
installments of principal and interest over six years. A future demand by the
Internal Revenue Service for repayment would adversely impact the Company's
liquidity.
12
<PAGE>
HOUSE OF FABRICS, INC.
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 262 stores in 27 states as of October 31, 1997. The following
discussion explains material changes in the results of operations for the second
quarter of fiscal years 1998 and 1997 and significant developments affecting
financial condition since the end of fiscal 1997.
CHAPTER 11 REORGANIZATION
- -------------------------
On November 2, 1994 (the "Petition Date"), the Company and four (4) of its
former subsidiaries filed separate voluntary petitions for reorganization under
Chapter 11 of the United States Bankruptcy Code ("Chapter 11") in the United
States Bankruptcy Court for the Central District of California (the "Bankruptcy
Court"). On July 10, 1996, the Bankruptcy Court confirmed the Third Amended
Joint Plan of Reorganization, (the "Plan"), of the Company and its subsidiaries.
On July 31, 1996, all conditions required for the effectiveness of the Plan were
achieved, and the Plan became effective ("Effective Date").
Under the Plan, the Company has issued approximately 5,332,000 shares of newly
reorganized House of Fabrics, Inc. common stock ("New Common Stock") including
shares issued upon resolution of claims. As of October 31, 1997, 5,331,830
shares were issued, including 188,079 shares issued upon the exercise of Series
A Warrants. The secured bank group received $76,500,000 (discounted based on
debt outstanding as of May 1, 1996) plus approximately 257,000 shares (or 5%) of
New Common Stock and an additional $1,157,000 to satisfy a requirement to bring
the aggregate market value of the approximately 257,000 shares up to $2,000,000.
Generally, defaults under other secured obligations were cured and the
maturities reinstated or converted to longer term obligations at market rates of
interest. Reclamation claims received 25% in cash shortly after the effective
date of the Plan and received the balance in monthly installments. Holders of
general unsecured claims that were not covered by insurance received a pro-rata
distribution of approximately 4,776,000 shares (or 93%) of New Common Stock.
Holders of existing House of Fabrics, Inc., common stock received a pro-rata
distribution of approximately 103,000 shares (or 2%) of New Common Stock
(subject to dilution) plus warrants to purchase additional shares of New Common
Stock. A total of 188,079 Series A Warrants were exercised by the deadline of
April 29, 1997 out of 257,381 issued. Each warrant exercised was converted to
one share of New Common Stock for a price of $3.02 per share and entitles the
holder to a Series B Warrant which may be exercised at a later date for a
different price. Warrants not exercised have no further rights.
On July 31, 1996, and effective August 1, 1996, the Company restructured its
corporate organization by merging Fabricland, Inc., So-Fro Fabrics, Inc., House
of Fabrics of South Carolina, Inc., and Metrolina Express, Inc. into House of
Fabrics, Inc..
STORE OPENINGS AND CLOSURES:
The Company opened 1 store during the nine month period for fiscal 1998 and none
for fiscal 1997. No stores were closed during the nine month period ended
October 31, 1997 compared to 2 stores which were closed for the period ended
October 31, 1996.
13
<PAGE>
RESULTS OF OPERATIONS
- ---------------------
THREE MONTHS ENDED
------------------
Sales for the quarter ended October 31, 1997 decreased 12.1% to $61,495,000 from
$69,953,000 for the comparable quarter. Of the $8,458,000 sales decrease,
$1,648,000 was primarily due to the closing of underperforming stores. Store for
store sales decreased by 10.0%. This decrease stems from the Company's move away
from deep store-wide discounting towards selective category and item
merchandising and value pricing as part of the realignment of its product mix.
Gross profit as a percentage of sales increased to 45.2% for the quarter ended
October 31, 1997 from 42.5% for the quarter ended October 31, 1996. The
increase is primarily due to less emphasis on storewide markdowns and more focus
on selective promotion of certain product categories and clearance items.
Selling, general and administrative expenses as a percent of sales increased to
43.3% for the quarter ended October 31, 1997 from 39.4% for the quarter ended
October 31, 1996. As a continuation of improved cost controls, including
additional reductions in head count and other expenses, the Company achieved a
decrease of $893,000 in expenses from the prior year, however, expenses as a
percent of sales increased due to lower sales volume.
Interest expense for the quarter ended October 31, 1997 increased by $315,000
from $1,319,000 for the quarter ended October 31, 1996, to $1,634,000. The
decrease in interest expense attributable to a lower average loan balance in
fiscal 1998 as compared to fiscal 1997 was more than offset by the amortization
of fees paid to CITBC related to prior amendments to the Financing Agreement.
The Company recorded a tax expense of $24,000 for the three months ended October
31, 1997 compared to $378,000 for the comparable period ended October 31, 1996.
The tax expense for the current period was for minimum state income taxes, while
the previous period tax expense is for federal and state income taxes on net
income for the quarter ended October 31, 1996.
14
<PAGE>
RESULTS OF OPERATIONS
- ---------------------
NINE MONTHS ENDED
-----------------
Although the adoption of Fresh-Start Reporting significantly affected
comparability, certain Pre- and Post-reorganization period income and expense
items remain comparable and are addressed in the following analysis of results
of operations for the nine months ended October 31, 1997.
Sales for the nine months ended October 31, 1997 decreased 8.6% to $165,806,000
for the Successor Company from $181,308,000 for the combined Successor (3
months) and Predecessor (6 months) Companies for the previous year. Of the
$15,502,000 sales decrease, $3,717,000 was due primarily to the closing of
underperforming stores. Store for store sales decreased by 6.6%. This decrease
stems from the Company's move away from deep store-wide discounting with more
focus towards category and item merchandising and value pricing.
Gross profit as a percentage of sales increased to 43.7% for the nine months
ended October 31, 1997 from 43.6% for the comparable period ended October 31,
1996. The increase is primarily due to less store-wide discounting and more
focus on merchandising in certain product categories and clearance items.
Selling, general and administrative expenses as a percent of sales increased to
47.6% for the nine months ended October 31, 1997 from 44.9% for the nine months
ended October 31, 1996. The continuing effect of improved cost controls,
including reduced head count and expense reductions, has achieved a decrease of
$2,592,000 in expenses from the prior year, however, expenses as a percent of
sales increased due to lower sales volume.
Interest expense for the nine months ended October 31, 1997 decreased by
$1,878,000 from $6,230,000 for the nine months ended October 31, 1996, to
$4,352,000, primarily as a result of a decrease in the Company's average loan
balance and a decrease in the Company's average effective borrowing rate. This
decrease was partially offset by fees paid to CITBC for amendments to the
Financing Agreement during fiscal 1998.
There were no reorganization costs for the nine months ended October 31, 1997,
as the Company had emerged from Chapter 11 bankruptcy protection effective
August 1, 1996. While still in the bankruptcy process in the prior comparable
period, there were reorganization costs of $1,440,000, which were primarily for
professional fees and lease termination costs partially offset by the gain on
the sale of the Sherman Oaks, California office building. In addition, for the
six months ended July 31, 1996, there were adjustments due to Fresh-Start
Reporting of $26,370,000 related to the emergence from Chapter 11 proceedings.
The Company recorded a tax expense of $72,000 for the nine months ended October
31, 1997 and $426,000 for the same period in 1996. The tax expense for the nine
months ended October 31, 1997 was for minimum state income taxes while the tax
expense for the same period ended October 31, 1996 is primarily for federal and
state income taxes on net income for the quarter ended October 31, 1996.
An extraordinary item resulting in a gain of $100,959,000 was recognized for the
nine months ended October 31, 1996. This was a gain due to the forgiveness of
debt upon emergence from Chapter 11 proceedings.
15
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
Upon emergence from Chapter 11 bankruptcy proceedings in August 1996, the DIP
Financing Agreement with Bank of America was paid off (see following). In
addition, new common stock was issued, pre-petition bank group debt was settled
and settlement of all other pre-petition claims was commenced.
To replace the DIP Financing agreement and provide for longer term financing as
of July 31, 1996, the Company entered into a Financing Agreement with CIT
Group/Business Credit, Inc. ("CITBC"), to provide a $65,000,000 line of credit,
as amended, having a term of 3 years, with automatic annual renewals unless 90
days written notice is provided prior to the anniversary date of the agreement.
Cash borrowings bear interest at prime (based on the Chase Manhattan Bank Rate)
plus 1% or Libor plus 3 1/4% and a commitment fee of .5% per annum on unused
availability. Fees for letters of credit are generally 1 1/2% per annum based on
the amount of letters of credit issued. The Financing Agreement provides for a
combination of cash borrowings and the issuance of up to $20,000,000 in letters
of credit. The Financing Agreement is collateralized by a first priority lien on
generally all assets of the Company, as defined, excluding up to $10,000,000 for
Point of Sale equipment which may be secured by the purchased Point of Sale
equipment. Loan availability is determined by an advance rate on eligible
inventory as defined. The Financing Agreement includes certain restrictive
covenants, which have been amended, including maintenance of minimum net worth
($30 million), a fixed charge covenant which is computed quarterly, and others
which are computed annually (operating leases and capital expenditures). As of
October 31, 1997, the Company had direct borrowings of $49,640,000 and letters
of credit of $791,000 outstanding with additional credit available of
approximately $10,669,000.
As of October 31, 1997, the Company was in compliance with all terms of the
amended Financing Agreement.
During the quarter, the Company retained the services of F.M. Roberts & Company,
an investment banker, to advise it on financing alternatives and enhancing
shareholder value.
In March 1995, the Company entered into, with Bankruptcy Court approval, an
agreement with Bank of America NT & SA, acting as agent bank, to provide
Debtors-in-Possession financing in the form of a $20,000,000 line of credit (The
"D.I.P. Financing") that expired on January 31, 1996 and was extended through
April 30, 1996, with Bankruptcy Court approval. On May 1, 1996, the amended and
restated D.I.P. Financing agreement was reduced to $17,300,000 and extended
through June 28, 1996 and subsequently through July 31, 1996 when the Company
retired the D.I.P. Financing agreement and replaced it with a new Financing
Agreement with CITBC as explained above.
One new store was opened during the nine months ended October 31, 1997 compared
to none for the same period of 1996. Capital expenditures were $4,166,000 for
the nine months ended October 31, 1997 compared to $3,951,000 for the prior
comparable period and were primarily for POS systems in the stores and other MIS
equipment.
The Company finances its operations from short-term borrowings and internally
generated cash flow. The Company's primary capital requirements have been the
financing of inventory and MIS systems.
The Company's working capital was approximately $28,387,000 as of October 31,
1997, and its current ratio was approximately 1.3 to 1.
Net cash used in operating activities was approximately $2,496,000 for the nine
months ended October 31, 1997. The decrease in cash was primarily attributable
to the operating loss and higher seasonal inventory levels partially offset by
lower accounts payable and accrued liabilities.
Net cash provided by financing activities was approximately $7,218,000 for the
nine months ended October 31, 1997. The increase in cash was primarily
attributable to borrowings under the Company's Revolving Line.
16
<PAGE>
The Company's liquidity requirements continue to be funded through its CITBC
Financing Agreement. As discussed above, this Financing Agreement contains
certain covenants, all of which have been met through the third quarter. Should
the Company continue to incur net losses, it might have difficulty in satisfying
these covenants in the future. The Company is considering the options of an
equity infusion and/or renegotiating covenants with CITBC, which should mitigate
this potential problem. On December 11, 1997, the Company entered into a
Commitment Letter with Chiplease, Inc. which provides for Chiplease to make a
$10 million investment in the Company through the purchase of common stock,
preferred stock, and warrants. The closing of the transaction is subject to
completion of due diligence, execution of a definitive agreement, and
shareholder approval. However, there can be no assurance at this time that the
Company will be successful in completing the Chiplease transaction or in re-
negotiation its covenants.
NEW ACCOUNTING PRONOUNCEMENTS
- -----------------------------
In February 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 128, "Earnings Per Share" ("SFAS No. 128")
which is effective for financial statements issued for periods ending after
December 15, 1997. SFAS No. 128 requires the disclosure of basic and diluted
earnings per share. For the three and nine months ended October 31, 1997, the
amount reported as net loss per common and common equivalent share is not
materially different from that which would have been reported for basic and
diluted earnings per share in accordance with SFAS No. 128.
STATEMENT REGARDING FORWARD LOOKING DISCLOSURE
- ----------------------------------------------
The preceding Management's Discussion and Analysis contains various "forward
looking statements" within the meaning of Section 27A of the Securities Act of
1933, as amended, and Section 21E of the Securities and Exchange Act of 1934, as
amended, which represent the Company's expectations or beliefs concerning future
events. The Company cautions that these statements are further qualified by
important factors that could cause actual results to differ materially from
those in the forward looking statements, including without limitation, those
associated with the ability of Company to reduce the current expense levels and
increase the sales volumes. In addition, these statements are further qualified
by important factors that could cause actual results to differ materially from
those in the forward looking statements, including without limitation, decline
in demand for the merchandise offered by the Company, the ability of the Company
to obtain adequate merchandise supply and hire and train employees, management's
ability to manage the Company's return to profitability and the effect of
economic conditions.
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 1997 Annual Report.
17
<PAGE>
Part II. OTHER INFORMATION
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
27. Financial Data Schedule
(b) No reports on Form 8-K were filed during the quarter ended October
31, 1997.
18
<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
/s/ John E. Labbett
-------------------
Date: December 12, 1997 John E. Labbett
Executive Vice President-Chief
Financial Officer
19
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