<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 [FEE REQUIRED]
For the fiscal year ended January 31, 1997
----------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transition period from ________ to __________.
Commission file number 1-7927
------
HOUSE OF FABRICS, Inc.
----------------------
(Exact name of registrant as specified in its charter)
DELAWARE 95-3426136
------------------------------- --------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) identification no.)
13400 Riverside Drive, Sherman Oaks, California 91423-2598
- - ----------------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (818) 995-7000
--------------
Securities registered pursuant to Name of each
Section 12(b) of the Act: exchange on which
Title of each class registered
New Common stock, $.01 par value NASDAQ Stock Market
Series A Warrants
Securities registered pursuant to Section 12(g) of the Act NONE
----
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past ninety (90) days.
Yes X No
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy of information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
STATE THE AGGREGATE MARKET VALUE OF THE VOTING STOCK HELD BY NON-AFFILIATES OF
THE REGISTRANT, (Estimated solely for purpose of this cover page. Only market
value of shares held by officers, directors and 5% stockholders have been
excluded.)
$18,077,378 AS OF APRIL 21, 1997
<PAGE>
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
--- ---
INDICATE THE NUMBER OF SHARES OUTSTANDING OF EACH OF THE REGISTRANT'S CLASSES OF
COMMON STOCK, AS OF THE LATEST PRACTICABLE DATE.
NEW COMMON STOCK, $.01 PAR VALUE; OUTSTANDING 5,215,718 SHARES AS OF APRIL 21,
1997
DOCUMENTS INCORPORATED BY REFERENCE
Part III incorporates certain information by reference to the Company's Proxy
Statement to be filed with the Commission not later than 120 days after the end
of the registrant's fiscal year.
<PAGE>
HOUSE OF FABRICS, INC.
Index
<TABLE>
<CAPTION>
PAGE NUMBER
INCLUDED
HEREIN
PART I
<C> <S> <C>
Item 1. Business 1
Item 2. Properties 6
Item 3. Legal Proceedings 7
Item 4. Submission of Matters to a Vote of Security Holders 7
PART II
Item 5. Market for the Registrant's Common Stock and Related
Stockholder Matters 7
Item 6. Selected Financial Data 8
Item 7. Management's Discussion and Analysis of Operations and
Financial Condition 9
Item 8. Financial Statements and Supplementary Data 20
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure 20
PART III
Item 10. Directors and Executive Officers of the Registrant 21
Item 11. Executive Compensation 22
Item 12. Security Ownership of Certain Beneficial Owners and Management 22
Item 13. Certain Relationships and Related Transactions 22
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K 23
Signatures 47
</TABLE>
<PAGE>
PART I
ITEM 1. BUSINESS
House of Fabrics, Inc. (the "Company") is one of the largest home sewing/craft
retailers in the United States, operating 261 Company-owned stores in 27 states
selling medium priced fabrics, crafts, notions, and sewing machines. The Company
was incorporated in 1946 and has been in the retail fabric and notions business
since that date.
In the fiscal year ended January 31, 1997 ("fiscal 1997"), the Company's sales
consisted of fabrics, sold by the yard and used principally for clothing, home
decorating and crafts (46.3%), sewing notions and accessories (28.0%), crafts
(20.7%) and sewing machines and related accessories (5.0%). Needlecrafts and
sewing machines are sold in substantially all of the Company's stores.
All of the Company's stores located west of the Rocky Mountains are operated
under the names "House of Fabrics", "Fabricland" or "Fabric King". Its stores in
other states are operated under the name "So-Fro Fabrics" or "House of Fabrics".
The Company operates substantially all of its stores in leased premises,
principally in neighborhood shopping centers or stand-alone locations, and does
not engage in any franchising activity. The Company's stores range in size,
generally between 10,000 and 29,000 square feet.
The Company has historically purchased finished goods directly from mills and
manufacturers and formerly had a facility in South Carolina for processing and
warehousing merchandise for distribution to its stores. The Company sold its
South Carolina facility in November 1996. Processing and warehousing is
currently contracted out to third parties with facilities on the West Coast of
the United States and in the Northeastern part of the United States.
On April 1, 1997, Donald L. Richey joined the Company as its President, Chief
Executive Officer and a member of the Board of Directors. Prior to joining the
Company, he served as Executive Vice President and Chief Operating Officer of
Fabri-Centers of America, Inc., an Ohio based specialty retailer in the fabric
business. He was previously the President of Cloth World, Inc., a 340 store
chain of retail fabric stores headquartered in Missouri. He was Executive Vice
President and Chief Operating Officer of Hancock Fabrics, Inc., in Mississippi.
He has more than 25 years in the retail fabric business.
Don Richey and the Company's other senior executive officers are in the process
of refining the Company's long term business plan and are developing strategies
designed to improve store sales productivity and identify opportunities to
increase the profitability of the Company's business.
The Company has committed a high level of effort, of necessity, to the financial
reorganization over the past 18 months and significant progress has been made.
The Company has a strategic goal of providing efficient information processing
as a foundation for the future business. The Company has converted to an IBM
AS400 based environment that supports modern software packages and is
implementing a sophisticated new merchandise management system which will enable
the planning of merchandise flow to follow seasonal and customer demand patterns
more precisely. The Company has installed PC equipment in all stores, which
supports daily polling of sales and other information. Stores are using hand-
held scan guns to reorder merchandise. The orders are uploaded from the PC to
the corporate office and forwarded to vendors. This has provided significant
time savings in the stores.
The Company is investing heavily in information technology. By the end of
September 1997, all stores in the chain, except 8 Fabric King stores, are
expected to have point of sale scanning equipment. This investment in equipment
and technology should provide the framework for improvements in inventory turns
and reductions of investment in inventory levels. The Company believes that this
information should assist in providing the basis for a better merchandise
assortment and more effective promotional activities.
The Company believes that these strategies will help to build on the existing
strengths of the Company which include a broad merchandise selection, convenient
store locations, strong customer loyalty, and efficient operations.
<PAGE>
The Company's ability to sustain profitability in the future is dependent upon
several factors, including but not limited to, the following:
The Company's future success is largely dependent upon management's ability to
gauge the merchandise tastes of its customer and to provide merchandise that
satisfies customer demand in a timely manner and at sales prices yielding
adequate gross margins to yield operating profits. Unanticipated changes and
misjudgments in customer trends could lead to excess inventories and higher
markdowns, which could have a material adverse effect on the Company's operating
results and financial condition.
The industry in which the Company operates is highly competitive and subject to
substantial cyclical variations. Negative variations can be caused by the
Company's competitors, changing levels of consumer spending and preferences
and/or declines in overall economic conditions on a regional or national level.
The occurrence of a significant negative variation caused by any of the
aforementioned factors could have a material adverse effect on the Company's
operating results and financial condition.
The Company is dependent upon its financing agreement to provide working capital
to support the Company's current operations. As discussed more fully in Note 5,
the Company's financing agreement requires the Company to maintain certain
financial ratios, minimum net worth, and to meet other financial requirements on
a quarterly or annual basis. Based upon the Company's current operating plan
for the year ending January 31, 1998, management projects the Company will
remain in compliance with the financing agreement, as amended, through January
31, 1998. If the Company's financial results are not close to it's operating
plan, the Company's ability to meet the requirements set forth in the financing
agreement may be impaired. The inability of the Company to meet the
requirements set forth in the financing agreement would have a material adverse
effect on the Company's business, operating results, and financial condition.
The company's executive offices are located at 13400 Riverside Drive, Sherman
Oaks, California 91423-2598, and its telephone number is (818) 995-7000.
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").
2
<PAGE>
Under the Plan, the Company has authority to issue approximately 5,136,000
shares of newly reorganized House of Fabrics, Inc. common stock ("New Common
Stock") including shares issuable for resolution of claims. Further authorized
are an additional approximately 1,864,000 shares to satisfy warrants and equity
incentive plans. As of January 31, 1997, 4,201,034 shares have been issued
including 5,785 shares issued upon the exercise of Series A Warrants. As of
April 21, 1997, 5,215,718 shares have been issued, including 75,890 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. Additionally, in
accordance with the Plan, on December 5, 1996, the Company paid $1,157,000 to
satisfy a requirement to bring the aggregate market value of the approximately
257,000 shares up to $2,000,000. (see Note 9 to Financial Statements).
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 will receive remaining balances in 12 equal monthly
installments which commenced on September 1, 1996. Holders of general unsecured
claims that are not covered by insurance will receive a pro rata distribution of
approximately 4,776,000 shares (or 93%) of New Common Stock. A portion of the
approximately 4,776,000 shares of New Common Stock to be issued to holders of
unsecured claims was placed in a claims reserve based on the percentage of
disputed claims to total claims (total claims include both allowed claims and
disputed claims). 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. As of January 31, 1997, there were 251,036 Series A
Warrants outstanding, which expired April 29, 1997, if not exercised.
The Company is currently listed on the NASDAQ stock market. The symbol for the
New Common Stock is HFAB and the symbol for the warrants is HFABW.
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.
3
<PAGE>
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.
In addition, the accumulated deficit of the Company was eliminated and its
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 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 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"). The results
of operations and cash flows for the six months ended January 31, 1997 include
operations subsequent to the Company's emergence from Chapter 11 proceedings and
reflect the effects of Fresh-Start Reporting. As a result, the net income for
the six months ended January 31, 1997 is not comparable with prior periods and
the net income for the year-to-date period ended January 31, 1997 is divided
into Successor Company and Predecessor Company and is also not comparable with
prior periods. In addition, the Balance Sheet as of January 31, 1997 is not
comparable to prior periods for the reasons discussed above.
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.
RETAIL STORES, STORE CLOSURES AND STORE OPERATIONS
RETAIL STORES
The Company locates its stores primarily in cities with populations in excess of
25,000. The Company's stores range in size, generally between 10,000 and 29,000
square feet, and are located principally in neighborhood shopping centers or
stand-alone locations. At January 31, 1997, the Company operated 261 stores in
27 states.
STORE CLOSURES
In order to receive extended Debtors-in-Possession financing and to facilitate
the Company's ability to negotiate exit financing prior to emergence from
Chapter 11, the Company agreed to close 86 underperforming stores and use the
proceeds to permanently reduce the secured debt of the Company's prepetition
bank loan. In January 1996, the Company recorded a charge of $28,725,000 for
the closure of the 86 stores. The liquidation of the 86 stores was completed in
April 1996.
The Company also closed 8 other stores during the year ended January 31, 1997
that did not meet certain profitability requirements.
4
<PAGE>
STORE OPERATIONS
Information with respect to the number of stores operated by the Company for
each of the last three years is set forth below.
<TABLE>
<CAPTION>
YEAR ENDED JANUARY 31, OPENED CLOSED TOTAL
<S> <C> <C> <C>
1997 8 261
1996 164 269
1995 1 213 433
</TABLE>
The terms of the Company's leases range from month-to-month to 20 years. Most
new leases are for a term of 10 to 15 years. Of the current leases, 8 are on
month-to-month leases.
Each store has a manager, an assistant manager and a number of full-time and
part-time personnel, averaging 17 per store. District sales managers are each
responsible for supervising approximately 12 stores and report to one of the
Company's regional sales managers who in turn report to the Executive Vice
President - Store Operations. Almost all district sales managers and regional
sales managers are former store managers.
FABRIC
All stores carry apparel, decorative, craft and basic fabrics. The Company will
continue to focus on its core fabric business with an emphasis on decorator and
craft fabrics. The Company sold its South Carolina processing and warehousing
facility in November 1996. With the sale of the South Carolina facility, the
Company expects that 70% of all basic and apparel fabrics will now be reordered
directly from key resources. The Company now outsources to a small facility on
the West Coast of the United States for processing promotional fabrics, imports
and certain decorating products. Most of the merchandise from this western
facility is processed for direct distribution to stores, with a limited
inventory of decorating product. The Company also uses a distribution facility
in the Northeastern part of the United States.
NOTIONS
The Company's stores carry a full complement of sewing notions and patterns that
are necessary to complete any type of sewing project. The Company expects that
substantially all notions will be shipped directly from major notions resources
and distributors.
CRAFTS
The craft department focuses on floral, seasonal and basic crafts. These product
lines target the decorating market, and combined with decorating fabrics, the
Company offers a strong merchandise selection to attract the home decorating
customer. The Company currently has 18 expanded craft stores. These stores have
been test sites for new concepts and test merchandise. The Company expects that
substantially all craft merchandise will be shipped direct from major craft
resources and distributors. Import crafts will be routed through the Company's
third party distribution facility in Los Angeles.
SEWING MACHINES
The Company's sewing machine department offers two major sewing machine brands,
small appliances and machine service. The Company believes that the sewing
machine department generates higher sales in relation to the selling space used
than its other departments.
5
<PAGE>
PROCESSING AND SUPPLIERS
The Company has historically purchased fabrics directly from mills, principally
in the United States, and processed such fabrics at its facility in Mauldin,
South Carolina (see "Properties"). The Mauldin, S.C. facility was sold in
November 1996. The Company now subcontracts the processing and distribution of
product through two distribution facilities and one processing facility.
Facilities are located on the West Coast of the United States and in the North
East portion of the United States. Substantially all notions sold by the Company
are purchased directly from manufacturers and shipped directly to stores.
The Company has no long-term contracts for the purchase of merchandise and does
not purchases 10% or more of its merchandise from any one supplier.
The Company believes that eliminating the Mauldin facility will have a positive
effect on inventory turnover. By shipping product directly from vendors to
stores, inventory duplication can be eliminated and lead times can be reduced.
Also, the Company believes that planned management information system
enhancements will help to increase inventory turnover and reduce lead times.
COMPETITION
The retail fabric, notion, sewing machine and craft businesses are highly
competitive. In selling fabrics, notions, crafts, and sewing machines, the
Company competes with other national, regional, and the local retail fabric,
craft and department stores. Competition in the fabric, notions, and craft
businesses is based primarily on location, product selection, quality, price and
personal service. Several of the Company's competitors have significantly
greater capital resources than the Company.
EMPLOYEES
As of January 31, 1997, the Company had approximately 5,000 employees, of whom
approximately 4,800 were engaged in retail sales. Approximately 3,900 of these
sales employees worked on a part-time basis. The number of Company employees
increases during peak seasons. The Company has never experienced a work stoppage
and no employees are covered by a collective bargaining agreement.
ITEM 2. PROPERTIES
The Company's executive offices are located in a building in Sherman Oaks,
California formerly owned by the Company. The building was sold in July 1996
with the net proceeds of approximately $5.0 million used to pay secured bank
debt. The Company now leases approximately 29,000 square feet in the building.
House of Fabrics of South Carolina, Inc., now consolidated with the Company and
previously a wholly-owned subsidiary of the Company, formerly owned and leased
parcels of land totaling approximately 28 acres from the County of Greenville,
in Mauldin, South Carolina. The property was sold in November 1996 with the
Company receiving net proceeds (after pay off of property indebtedness) of
approximately $7.7 million. These net proceeds were then used to pay down
amounts owed on the Company's revolving line of credit.
The Company's leases for retail stores are described in leased facilities under
"Business - Retail Stores, Store Closures and Store Operations."
6
<PAGE>
ITEM 3. LEGAL PROCEEDINGS
On November 2, 1994, the Company filed for protection under Chapter 11 of the
Bankruptcy Code. The Company emerged from bankruptcy on July 31, 1996 pursuant
to an approved reorganization plan.
There are no other pending legal proceedings, except for ordinary routine
litigation incidental to the business, which management believes is not material
to its business or financial condition, to which the Company is a party or to
which any of their property is the subject.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted, during the fourth quarter of the fiscal year covered
by this report, to a vote of security holders through the solicitation of
proxies or otherwise.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER
MATTERS
The Company's new common stock is currently traded through the NASDAQ stock
market under the symbol "HFAB". The Series A Warrants are traded under the
symbol "HFABW". At April 21, 1997, there were approximately 4,350 registered
stockholders. The new common stock began trading on August 1, 1996 concurrent
with the emergence of the Company from Chapter 11. Accordingly, prices for the
old common shares are not shown because they are not comparable.
The following table sets forth the high and low per share closing sales prices
of the Company's new common stock since August 1, 1996:
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
JANUARY 31, 1997 JANUARY 31, 1996
---------------- ----------------
HIGH LOW HIGH LOW
<S> <C> <C> <C> <C>
First quarter N/A N/A N/A N/A
Second quarter N/A N/A N/A N/A
Third quarter $5.25 $3.25 N/A N/A
Fourth quarter $6.00 $2.38 N/A N/A
</TABLE>
The Company did not pay any dividends during 1996 or 1997 and is precluded from
paying any future dividends by the CITBC Financing Agreement.
7
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
(Dollars in Thousands)
<TABLE>
<CAPTION>
Six Months Six Months Fiscal Year Ended
Period Ended: 1/31/97 7/31/96 1/31/96 1/31/95 1/31/94 1/31/93
Successor Co. Predecessor Co.
------------------------------------------------------------------------
SUMMARY OF
OPERATIONS:
<S> <C> <C> <C> <C> <C> <C>
Sales $143,324 $111,355 $333,501 $416,276 $546,664 $557,521
Gross profit $ 59,724 $ 49,355 $140,738 $159,893 $222,907 $256,823
Interest expense, net $ 2,412 $ 4,911 $ 14,062 $ 13,983 $ 8,176 $ 5,296
Income taxes
(benefit) $ 682 $ 48 $ (165) $ (2,325) $(15,218) $ 3,750
Income (Loss) before
Extraordinary Item $ 925 $(37,366) $(70,367) $(95,385) $(29,542) $ 5,203
Gain on Debt
Forgiveness $ - $100,959 $ - $ - $ - $ -
Net income
(loss) $ 925 $ 63,593 $(70,367) $(95,385) $(29,542) $ 5,203
Net income
per share (1) $ 0.18 N/A N/A N/A N/A N/A
# of Stores 261 269 269 433 645 695
</TABLE>
<TABLE>
<CAPTION>
As of: 1/31/97 7/31/96 1/31/96 1/31/95 1/31/94 1/31/93
Successor Co. Predecessor Co.
---------------------------------------------------------------------------
YEAR END
POSITION:
<S> <C> <C> <C> <C> <C> <C>
Assets $137,830 $ 143,297 $ 230,554 $ 327,597 $ 393,055 $383,132
Long-term debt $ 931 $ 1,318 $ 80 $ 309 $ 2,862 $ 17,216
Total Liabilities $ 97,443 $ 103,850 $ 245,897 $ 272,573 $ 242,646 $203,540
Stockholders'
Equity (Deficit) $ 40,387 $ 39,446 $ (15,343) $ 55,024 $ 150,409 $179,592
Tangible
Stockholders
Equity (Deficit) $ 37,198 $ 36,091 $ (53,410) $ 15,884 $ 110,197 $138,308
Stockholders'
Equity (Deficit)
Per Share (1) $ 0.18 N/A N/A N/A N/A N/A
Tangible
Stockholders'
Equity (Deficit)
Per Share (1) $ 7.18 N/A N/A N/A N/A N/A
</TABLE>
(1) Per Share amounts are not shown for the Predecessor Company due to non-
comparability.
8
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF OPERATIONS AND FINANCIAL
CONDITION
House of Fabrics, Inc. (the "Company") is one of the largest home sewing/craft
retailers in the United States, operating 261 stores in 27 states as of January
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.
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 authority to issue approximately 5,136,000
shares of newly reorganized House of Fabrics, Inc. common stock ("New Common
Stock") including shares issuable for resolution of claims. Further authorized
are an additional approximately 1,864,000 shares to satisfy warrants and equity
incentive plans. As of January 31, 1997, 4,201,034 shares have been issued
including 5,785 shares issued upon the exercise of Series A Warrants. As of
April 21, 1997, 5,215,718 shares have been issued, including 75,890 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. Additionally, in
accordance with the Plan, on December 5, 1996, the Company paid $1,157,000 to
satisfy a requirement to bring the aggregate market value of the approximately
257,000 shares up to $2,000,000. (see Note 9 to Financial Statements).
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 will receive remaining balances in 12 equal monthly
installments which commenced on September 1, 1996. Holders of general unsecured
claims that are not covered by insurance will receive a pro rata distribution of
approximately 4,776,000 shares (or 93%) of New Common Stock. A portion of the
approximately 4,776,000 shares of New Common Stock to be issued to holders of
unsecured claims was placed in a claims reserve based on the percentage of
disputed claims to total claims (total claims include both allowed claims and
disputed claims). 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. As of January 31, 1997, there were 251,036 Series A
Warrants outstanding, which expired April 29, 1997, if not exercised.
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.
9
<PAGE>
RESULTS OF OPERATIONS
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.
In addition, the accumulated deficit of the Company was eliminated and its
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 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 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
the effects of Fresh-Start Reporting. The results of operations and cash flows
for the six months ended January 31, 1997 include 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 income for the six months ended
January 31, 1997 is not comparable with prior periods and the net income for the
year-to-date period ended January 31, 1997 is divided into Successor Company and
Predecessor Company and is also not comparable with prior periods. In addition,
the Balance Sheet as of January 31, 1997 is not comparable to prior periods for
the reasons discussed above.
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.
10
<PAGE>
The following table sets forth, as a percentage of sales, selected items
appearing in the statements of operations for the six month periods ended July
31, 1996 and January 31, 1997 and the years ended January 31, 1996, and 1995:
<TABLE>
<CAPTION>
Six Months Ended Years Ended
----------------------------------
January 31, July 31, January 31, January 31,
1997 1996 1996 1995
Successor Co. Predecessor Co.
-------------------------------------------------------
<S> <C> <C> <C> <C>
Sales 100.0% 100.0 % 100.0 % 100.0 %
Expenses:
Cost of sales 58.3 55.7 57.8 61.6
Store and operating 33.6 40.5 39.7 40.4
General and administrative 5.7 8.0 5.9 6.9
Interest, net 1.7 4.4 4.2 3.4
Restructuring charge 10.4
Reorganization items (0.4) 25.0 13.5 0.8
--- ---- ---- ----
Income (Loss) before income taxes
and Extraordinary Item 1.1 (33.6) (21.1) (23.5)
Extraordinary Item 90.7
Income tax expense (benefit) 0.5 0.0 0.0 (0.6)
--- ---- ----- ------
Net Income (Loss) 0.6% 57.1% (21.1)% (22.9)%
=== ===== ====== ======
</TABLE>
In fiscal 1995, the Company implemented a restructuring plan that involved the
closing of a significant number of stores and significant revisions to the
Company's marketing and merchandising strategies. In fiscal 1997 and 1996, the
Company closed stores pursuant to its Debtors-in-Possession financing agreement
and to facilitate its ability to negotiate exit financing prior to emerging from
Chapter 11.
STORE CLOSURES
In order to receive extended Debtors-in-Possession financing and to facilitate
the Company's ability to negotiate exit financing prior to emergence from
Chapter 11, the Company agreed to close 86 underperforming stores and use the
proceeds to permanently reduce the secured debt of the Company's prepetition
bank loan.
In January 1996, with approval of the Bankruptcy Court, the Company entered into
an Agency agreement with an unrelated partnership (the Partnership) formed to
liquidate the 86 stores. The partnership assumed control of the 86 stores and
assumed substantially all of the expenses of operating the stores through
liquidation. Accordingly, the Company recorded a charge of $28,725,000 for the
closure of the 86 stores for the fiscal year ended January 31, 1996. The
liquidation of the 86 stores was completed in April 1996.
The Company closed 8 other underperforming stores during the year ended January
31, 1997.
11
<PAGE>
SALES
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 fiscal year ended January 31, 1997.
SIX MONTH PERIOD ENDED JANUARY 31, 1997
Sales for the period decreased 23.7% to $143,324,000, from $187,833,000 in the
prior comparable period. The decrease in sales of $44,509,000 consisted of a
reduction in sales of $38,378,000 due to the reduction in the number of stores
that were open in the period compared to the prior same period and a store for
store decrease of 4.2%. The decrease in store-for-store sales was primarily
caused by lower advertising and fewer highly promotional events as the Company
moves toward a more stable pricing model, and a lack of vendor credit
immediately after emergence from bankruptcy.
FISCAL YEAR ENDED JANUARY 31, 1997 AND 1996.
Sales for the year ended January 31, 1997 decreased 23.6% to $254,679,000 from
$333,501,000 in the prior fiscal year. The decrease in sales of $78,822,000
consisted of $72,199,000 in sales decrease due to closed stores and a 2.6%
decrease in store for store sales as a result of merchandise shortages in the
first half of the year caused by the lack of vendor credit due to concern over
the Company's ability to exit bankruptcy.
FISCAL YEAR ENDED JANUARY 31, 1996 AND 1995
Sales for the year ended January 31, 1996 decreased 19.9% to $333,501,000, from
$416,276,000 in the prior fiscal year. The decrease in sales of $82,775,000
consisted of lower sales due to the reduction in the number of stores that were
open in fiscal 1996 compared to fiscal 1995 and a 3.2% decrease in store for
store sales. Sales in fiscal 1996 and 1995 for stores closed under the 1994
Plan were charged to the restructuring reserve and totaled $12,712,000 and
$59,375,000, respectively. The decrease in store-for-store sales resulted
primarily because the Company was still in the process of restocking stores in
the fiscal 1996 spring and summer selling seasons. The stores were understocked
because of liquidity issues that had forced the Company into Chapter 11. The
decrease in store-for-store sales also resulted in part from competitive
pressure in the fabric retailing industry.
12
<PAGE>
COST OF SALES
SIX MONTHS PERIOD ENDED JANUARY 31, 1997
Gross profit as a percentage of sales increased to 41.7% for the period ended
January 31, 1997 from 38.9% in the prior comparable period. Gross profit as a
percentage of sales increased because of the closing of 86 underperforming
stores and more effective seasonal buying, which resulted in better sell through
and fewer markdowns.
FISCAL YEAR ENDED JANUARY 31, 1997 AND 1996.
Gross profit as a percentage of sales increased to 42.8% for the year ended
January 31, 1997 from 42.2% in the prior fiscal year. Gross profit as a
percentage of sales increased due to stronger second half performance driven by
the closing of underperforming stores and more effective buying strategies.
FISCAL YEAR ENDED JANUARY 31, 1996 AND 1995
Gross profit as a percentage of sales increased to 42.2% for the year ended
January 31, 1996 from 38.4% in the prior fiscal year. Gross profit as a
percentage of sales increased during fiscal 1996 primarily because of the
$19,000,000 charge in the previous fiscal year to aggressively mark down and
liquidate certain inventories that no longer fit into the Company's
merchandising model. In addition, the Company continues to operate in a highly
promotional and competitive environment.
STORE AND OPERATING EXPENSES
SIX MONTHS PERIOD ENDED JANUARY 31, 1997
Store and operating expenses for the period ended January 31, 1997 decreased
$21,004,000 to $48,146,000 from $69,150,000 for the prior comparable period. As
a percent of sales, these expenses decreased to 33.6% for the period ended
January 31, 1997 from 36.8% for the prior period. Expenses decreased due to
stronger control of payroll , negotiated reductions in occupancy costs, and a
less costly advertising program.
FISCAL YEAR ENDED JANUARY 31, 1997 AND 1996.
Store and operating expenses for the year ended January 31, 1997 decreased
$39,262,000 to $93,207,000 from $132,469,000 for the prior fiscal year. As a
percent of sales, these expenses decreased to 36.6% for the year ended January
31, 1997 from 39.7% for the prior fiscal year primarily due to stronger control
of payroll, negotiated reductions in occupancy costs in the second half, and a
less costly advertising program.
FISCAL YEAR ENDED JANUARY 31, 1996 AND 1995
Store and operating expenses for the year ended January 31, 1996 decreased
$35,652,000 to $132,469,000 from $168,121,000 for the prior fiscal year. As a
percent of sales, these expenses decreased to 39.7% for the year ended January
31, 1996 from 40.4% for the prior fiscal year primarily due to a reduction in
store rent and rent-related expenses offset by an increase in advertising. The
lower rent and related expense as a percentage of sales reflect the closure of
lower volume stores that had a higher cost per sales dollar as well as the
Company's effort to renegotiate rent levels throughout the chain.
13
<PAGE>
GENERAL AND ADMINISTRATIVE
SIX MONTHS PERIOD ENDED JANUARY 31, 1997
General and administrative expenses for the period ended January 31, 1997
decreased $1,291,000 to $8,162,000 from $9,453,000 for the comparable period.
General and administrative expenses as a percent of sales increased to 5.7% for
the period ended January 31, 1997 from 5.0% for the prior period. The dollar
decrease in expenses is due to expense reduction programs. The increase as a
percent of sales is due to reduced sales levels in the current year.
FISCAL YEAR ENDED JANUARY 31, 1997 AND 1996.
General and administrative expenses for the year ended January 31, 1997
decreased $2,771,000 to $17,053,000 from $19,824,000 for the prior fiscal year.
General and administrative expenses as a percent of sales increased to 6.7% for
the year ended January 31, 1997 from 5.9% for the prior fiscal year. The dollar
decrease in expenses is due to expense reduction programs. The increase as a
percent of sales is due to reduced sales levels in the current year.
FISCAL YEAR ENDED JANUARY 31, 1996 AND 1995.
General and administrative expenses for the year ended January 31, 1996
decreased $8,759,000 to $19,824,000 from $28,583,000 for the prior fiscal year.
General and administrative expenses as a percent of sales decreased to 5.9% for
the year ended January 31, 1996 from 6.9% for the prior fiscal year primarily as
a result of savings in the Company's worker's compensation insurance, medical
insurance and general insurance programs. The Company has renegotiated its
insurance policies and in some cases changed insurance carriers in an effort to
reduce the overall insurance expenses. In general, most expenses were reduced as
a result of store closures with the exception of management information systems
costs associated with the upgrading of the Company's computer systems.
INTEREST
SIX MONTHS PERIOD ENDED JANUARY 31, 1997
Interest expense for the period ended January 31, 1997 decreased $4,076,000 to
$2,461,000 compared to $6,537,000 for the prior comparable period. The Company's
average effective borrowing rates and average loan balance decreased with the
change to the CITBC Financing Agreement concurrent with the emergence from
bankruptcy on July 31, 1996. (See Liquidity and Capital Resources below).
FISCAL YEAR ENDED JANUARY 31, 1997 AND 1996.
Interest expense for the year ended January 31, 1997 decreased $6,690,000 to
$7,372,000 compared to $14,062,000 for the prior fiscal year. The Company's
average effective borrowing rates decreased with the change to the CITBC
Financing Agreement concurrent with the emergence from bankruptcy on July 31,
1996. (See Liquidity and Capital Resources below). The average loan balance was
also reduced by paydowns on the Bank of America loan balance.
FISCAL YEAR ENDED JANUARY 31, 1996 AND 1995
Interest expense for the year ended January 31, 1996 increased $79,000 to
$14,062,000 from $13,983,000 for the prior fiscal year. The Company's average
effective borrowing rates increased as a result of market rate increases, but
was offset by a reduction in the Company's average loan balance.
14
<PAGE>
REORGANIZATION COSTS
SIX MONTHS PERIOD ENDED JANUARY 31, 1997
There were no reorganization costs for the period 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 $39,470,000 consisting mainly of store closure costs and professional
fees.
FISCAL YEAR ENDED JANUARY 31, 1997 AND 1996.
Costs associated with the Company's Chapter 11 filing amounted to $1,440,000 for
the year ended January 31, 1997, which was composed primarily of professional
fees offset by the gain on the sale of the Sherman Oaks Corporate office
building. All of these costs were incurred in the first six months of the year
prior to the emergence from bankruptcy.
FISCAL YEAR ENDED JANUARY 31, 1996 AND 1995.
Costs associated with the Company's Chapter 11 filing amounted to $44,915,000
for the year ended January 31, 1996, which was composed primarily of store
closure costs and professional fees. The Company closed 86 stores pursuant to
covenants in the Amended and Restated Debtor-in-Possession financing agreement
dated January 29, 1996. In order to receive extended financing and to
facilitate the Company's ability to negotiate exit financing prior to emergence
from Chapter 11, the Company agreed to close these underperforming stores and
use the proceeds to permanently reduce notes payable under the Company's credit
agreement with the bank. Costs associated with the Company's Chapter 11 filing
amounted to $3,416,000 for the year ended January 31, 1995, which were composed
primarily of professional fees.
15
<PAGE>
INCOME TAXES
SIX MONTHS PERIOD ENDED JANUARY 31, 1997
A provision for income taxes of $682,000 was made for the period ended January
31, 1997 as the Company returned to profitability following the emergence from
Chapter 11 proceedings effective August 1, 1996.
As a result of the Company's emergence from Chapter 11 and the adoption of
Fresh-Start Reporting, the Company is required by generally accepted accounting
principles to provide for income taxes on earnings for the period ended January
31, 1997 (Successor Company), notwithstanding the possible availability of pre-
exit net operating losses (Predecessor Company).
FISCAL YEAR ENDED JANUARY 31, 1997 AND 1996.
An income tax provision of $730,000 was provided for in the year ended January
31, 1997 compared to a benefit of $165,000 for the prior year. The tax
provision was for minimum state taxes during the first six months and for
federal and state taxes on net income reported for the last six months after
emergence from bankruptcy.
FISCAL YEAR ENDED JANUARY 31, 1996 AND 1995
Income tax benefit decreased to $165,000 for the year ended January 31, 1996,
compared to $2,325,000 in the prior fiscal year and $15,218,000 in fiscal 1994.
As a percentage of loss before income tax benefit, the income tax benefit for
the year ended January 31, 1996 decreased to 0.2% from 2.4% in the prior fiscal
year and 34.0% in fiscal 1994.
The Company generated a net operating loss for the year ended January 31, 1996,
for which no carryback benefit was available. The net realizable balance of
deferred income tax assets at January 31, 1996 and 1995 was determined based on
the extent that they can be offset by future reversals of deferred income tax
liabilities. The Company has developed certain tax strategies that may enable
it to accelerate the benefit for certain net operating loss carryforwards.
However, no reasonable estimate can be made of the range of amount of benefits
that are reasonably possible in the near term; accordingly, no benefit was
recorded. The Company has continuing obligations for minimum state income taxes
in years when taxable losses are generated. Such obligations were offset in the
year ended January 31, 1996 by benefits from certain state amended returns and
carryback claims.
16
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
Upon emergence from Chapter 11 bankruptcy proceedings 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. (See Item 1.
Business).
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 on September 11, 1996, 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 the prime
rate (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 of Point of Sale and M.I.S.
equipment, which may be separately secured by that equipment. Loan availability
is determined by an advance rate on eligible inventory as defined. The Financing
Agreement includes certain restrictive covenants, which are computed quarterly
(fixed charge coverage) and others which are computed annually (net worth,
operating leases and capital expenditures). As of January 31, 1997, the Company
had direct borrowings of $42,621,000 and letters of credit of $912,000
outstanding with additional credit available of approximately $14,302,000. In
addition, on November 19, 1996 proceeds for the sale of the previously closed
Mauldin, S.C. distribution facility were used to pay down amounts borrowed under
the Financing Agreement (see Note 5 to Financial Statements).
As of January 31, 1997, the Company was in compliance with all terms of the
amended Financing Agreement.
In March 1995, the Company entered into an agreement with Bank of America NT &
SA, acting as agent bank, to provide Debtors-in-Possession financing (The
"D.I.P. Financing Agreement") in the form of a $20,000,000 line of credit,
including a provision for up to $10,000,000 in letters of credit, that expired
on January 31, 1996. This agreement was collateralized by a first priority lien
on generally all assets of the Company, as defined. There were no borrowings
against this line as of January 31, 1996. On January 29, 1996, the D.I.P.
Financing Agreement was amended and restated, requiring the closure of 86 stores
with the proceeds therefrom to be used to permanently reduce the prepetition
secured bank loan, the credit line was reduced to $17,300,000 and the term
extended through April 30, 1996. This agreement was subsequently extended
through June 28, 1996 and then through July 31, 1996, when it was replaced with
a new Financing Agreement with CITBC.
During July 1996, the Sherman Oaks corporate headquarters was sold to a third
party for approximately $5,050,000 and the proceeds were paid to the bank group
as partial satisfaction of the pre-petition bank group debt. The Company
continues to lease space in the building for its corporate headquarters.
No new stores were opened in fiscal 1997 or 1996. Capital expenditures, for the
year ended January 31, 1997 and 1996 related primarily to upgrading of the
computer systems, and for the year ended January 1995 related primarily to new
store openings, were $4,592,000, $5,093,000, and $1,523,000 respectively.
Currently, the Company anticipates that total capital expenditures for fiscal
1998 will approximate $8,000,000 primarily for Point of Sale equipment and
necessary store and related property expenditures.
17
<PAGE>
The Company finances its operations from internally generated cash flow and
short-term borrowings. The Company's primary capital requirements have been the
financing of inventory and MIS systems.
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 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.
Adjusting for Fresh-Start Reporting (see Note 1 to Financial Statements), the
Company's working capital was approximately $38,789,000 as of January 31, 1997,
and its current ratio was approximately 1.5 to 1.
Net cash used by operating activities was approximately $4,248,000 for the six
months ended January 31, 1997. The decrease was primarily attributable to a
seasonal increase in merchandise inventories. Net cash used by financing
activities was approximately $7,194,000 for the six months ended January 31,
1997. The reduction is primarily attributable to the application of
approximately $7,728,000 of proceeds from the sale of the Mauldin distribution
facility in November 1996 against the CITBC loan.
During January 1997, holders of the Series A Warrants became eligible to
exercise their warrants at $3.02 per share. Exercise of the warrants entitles
the purchaser to 1 share of new common stock and a Series B Warrant,
exerciseable in the future for additional shares as specified in the Plan.
Warrants not exercised by April 29, 1997 will expire with no further rights due.
As of April 21, 1997, 75,890 warrants had been exercised.
The Company believes that cash flow from ongoing operations and the CITBC
Financing Agreement should enable the Company to meet liquidity requirements for
the foreseeable future.
18
<PAGE>
NEW ACCOUNTING PRONOUNCEMENTS
In February 1997, the Financial Accounting Standards Board ("FASB") 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 year ended January 31, 1997, the amount
reported as net income per common and common equivalent shares is not materially
different than that which would have been reported for basic and diluted
earnings per share in accordance with SFAS No. 128.
In October 1995, the FASB issued Statement of Financial Accounting Standards No.
123, "Accounting for Stock-Based Compensation" which requires adoption of the
disclosure provisions no later than years beginning after December 15, 1995 and
adoption of the recognition and measurement provisions for nonemployee
transactions no later than after December 15, 1995. The new standard defines a
fair value method of accounting for stock options and other equity instruments.
Under the fair value method, compensation cost is measured at the grant date
based on the fair value of the award and is recognized over the service period
which is usually the vesting period. The Company will continue to apply APB
Opinion No. 25 to its stock-based compensation awards to employees and will
disclose the required pro forma effect on net income and earnings per share in
its financial statements.
In March 1995, the FASB issued Statement No. 121, "Accounting for the Impairment
of Long-Lived Assets and Long-Lived Assets to Be Disposed Of" ("SFAS No. 121").
SFAS No. 121 established accounting standards for the impairment of long-lived
assets, certain identifiable intangibles and goodwill related to those assets to
be held and used and long-lived assets and certain identifiable intangibles to
be disposed of. The Company adopted SFAS No. 121 in the first interim period of
fiscal 1997 and such adoption did not impact its financial position or results
of operations.
INFLATION
The Company does not believe that inflation has had a material effect on the
results of operations in the recent past. There can be no assurance that the
Company's business will not be affected by inflation in the future.
FORWARD LOOKING STATEMENTS
The preceding "Business" and Management Discussion and Analysis contains certain
forward-looking statements within the meaning of Section 27A of the Securities
Act of 1933 (the "Securities Act") and Section 21E of the Securities Exchange
Act of 1934 (the "Exchange Act"), and the Company intends that such forward-
looking statements be subject to the safe harbors created thereby. These
forward-looking statements include the plans and objectives of management for
future operations, including plans and objectives relating to the future
economic performance of the Company. The forward-looking statements and
associated risks set forth in this document may include or relate to: (i) by the
end of September 1997, all stores in the chain, except 8 Fabric King stores, are
expected to have point of sale scanning equipment; (ii) the investment in
equipment and technology should provide the framework for improvements in
inventory turns and reductions of investment in inventory levels; (iii) the
Company believes that this information should assist in providing a better
merchandise assortment and more effective promotional activities; (iv)
currently, the Company anticipates that total capital expenditures for fiscal
1998 will approximate $8,000,000 primarily for Point of Sale equipment and
necessary store expenditures; (v) the Company believes that cash flow from
ongoing operations and the CITBC Financing Agreement should enable the Company
to meet liquidity requirements for the foreseeable future; (vi) the Company
believes eliminating the Mauldin facility will have a positive effect on
inventory turnover; (vii) the Company believes that planned management
information system enhancements will further increase inventory turnover and
reduce lead times.
19
<PAGE>
The forward-looking 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, the following: (i) the
ability of the Company to gauge the fashion tastes of its customers and provide
merchandise that satisfies customer demand; (ii) a decline in demand for the
merchandise offered by the Company; (iii) the ability of the Company to locate
and obtain favorable store sites, negotiate acceptable lease terms, and hire and
train employees; (iv) the unavailability of merchandise from the Company's
vendors and private brand sources; (v) the effect of economic conditions; (vi)
the effect of severe weather or natural disasters; (vii) the effect of
competitive pressures from other retailers; and (viii) a disruption of trade
with the countries in which the Company's import manufacturers are located.
Results actually achieved thus may differ materially from expected results in
these statements. In addition, as disclosed above, the business and operations
of the Company are subject to substantial risks which increase the uncertainty
inherent in such forward-looking statements. Any of the other factors disclosed
above could cause the Company's net income or growth in net income to differ
materially from prior results.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Financial Statements of the Company, together with the report thereon of
Deloitte & Touche LLP, independent auditors, are included herein in Item 14. on
pages 23 to 47.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
20
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information regarding directors is included on pages 2 through 6 of the
Company's 1997 Proxy Statement to be filed with the Commission not later than
120 days after the end of the registrant's fiscal year and is incorporated by
reference herein.
EXECUTIVE OFFICERS AND KEY EMPLOYEES OF REGISTRANT
<TABLE>
<CAPTION>
NAME AGE POSITION AND OFFICE
<S> <C> <C>
Donald L. Richey 53 President and Chief Executive Officer and
Director since April 1997. Prior to this
he was the Executive Vice President and
Chief Operating Officer of Fabri-Centers
of America, Inc. from 1994 to 1995. From
1990-1994, he was President of Cloth
World, Inc., which was acquired by Fabri-
Centers in 1994.
John E. Labbett 46 Executive Vice President and Chief
Financial Officer since October 1995 and
a Director since August 1996. Prior to
that he was the Vice President/Chief
Financial Officer for the Petfood Giant,
Inc. from 1994 to 1995. From 1987 to 1993
he was Executive Vice President - Chief
Financial Officer for Herman's Sporting
Goods, Inc.
William E. Rapp 56 Executive Vice President - Merchandise and
Buying since May 1995. General
Merchandise Manager for Northwest Fabrics
from 1988 to 1995.
Michael E. Brown 39 Executive Vice President - Store
Operations since September 1994. From
June 1994 to September 1994 he was Vice
President - Retail Sales; January 1993 to
May 1994, Regional Sales Manager;
September, 1991 to December 1992,
District Sales Manager; August 1991 to
November 1991, Store Manager.
Kim D. Robbins 51 Executive Vice President - General
Merchandise Manager since August 1996.
From 1995 to 1996, she was Senior Vice
President - Merchandising at Sport
Chalet. Prior to that she was Senior Vice
President - Merchandising at Carter
Hawley Hale Stores, Inc.
Marvin S. Maltzman 60 Sr. Vice President - Administration,
Secretary and General Counsel since 1993;
Vice President, Secretary and General
Counsel from 1980 to 1993, and a Director
from 1991 to 1996.
James C. Webb 53 Sr. Vice President - Real Estate since
1993. Prior to that he was Vice President-
Real Estate.
</TABLE>
21
<PAGE>
EXECUTIVE OFFICERS AND KEY EMPLOYEES OF REGISTRANT (CONTINUED)
<TABLE>
<CAPTION>
NAME AGE POSITION AND OFFICE
<S> <C> <C>
L. Jay Bowen 50 Vice President - Merchandise Support since
September 1994. Served the Company in
Various Capacities since 1968, including
Vice President-Notions.
Mary A. Deaver 32 Vice President - Home Merchandise since
September 1994. From June 1994 to August
1994 she was a Craft Merchandise Manager;
from 1991 to 1994 she was a Craft Buyer.
Prior to 1991 she was a Buyer for
Michael's Incorporated
Lawrence R. Heavrin 51 Vice President - Logistics since August,
1996. He was a Consultant at Logistics
Solutions from 1995 to 1996; Manager,
Transportation and Logistics at Toyota
Motor Sales from 1993 to 1995 and
Director of Logistics at Club Link from
1992 to 1993
Gregory E. Lewis 47 Controller since July, 1996. He served as
Assistant Controller from 1995 to 1996.
He was Director of Retail Accounting at
The Vons Companies from 1988 to 1995.
Carlos Menendez 47 Chief Information Officer since August
1995. Prior to that, he was Director of
MIS for Aaron Brothers from 1988 to 1995.
</TABLE>
DISCLOSURE OF DELINQUENT FILERS, PURSUANT TO ITEM 405 OF REGULATION S-K,
The information is included on page 9 of the Company's 1997 Proxy Statement to
be filed with the Commission not later than 120 days after the end of the
registrant's fiscal year and is incorporated by reference herein.
ITEM 11. EXECUTIVE COMPENSATION
The information is included on pages 5, 6, and 7 of the Company's 1997 Proxy
Statement to be filed with the Commission not later than 120 days after the end
of the registrant's fiscal year and is incorporated by reference herein.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information is included on pages 2, 5, and 6 of the Company's 1997 Proxy
Statement to be filed with the Commission not later than 120 days after the end
of the registrant's fiscal year and is incorporated by reference herein.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information is included on pages 6 and 7 of the Company's 1997 Proxy
Statement to be filed with the Commission not later than 120 days after the end
of the registrant's fiscal year and is incorporated by reference herein.
22
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) The following documents are filed as a part of this report:
PAGE
Financial statements;
24 Independent Auditors' Report
25-26 Balance Sheets as of January 31, 1997 and 1996
27 Statements of Operations
28 Statements of Stockholders' Equity (Deficit)
29-30 Statements of Cash Flows
31-47 Notes to Financial Statements
(b) Reports on Form 8-K
None.
(c) Exhibits (Attached to Complete Copies)
Exhibit 10 Non-Standardized 401(k) Plan
Exhibit 21 Subsidiaries of the registrant
Exhibit 23.1 Independent Auditors' Consent
Exhibit 27 Financial Data Schedule
Exhibit 99 Undertakings
23
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Stockholders and Board of Directors of House of Fabrics, Inc.
We have audited the accompanying balance sheets of House of Fabrics, Inc. (the
Company) as of January 31, 1997 (Successor Company) and January 31, 1996
(Predecessor Company) and the related statements of operations, stockholders'
equity (deficit), and cash flows for the six months ended January 31, 1997
(Successor Company), the six months ended July 31, 1996 and the years ended
January 31, 1996 and 1995 (Predecessor Company). These financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
As discussed in Note 1 to the financial statements, on July 10,1996, the
Bankruptcy Court entered an order confirming the Plan of Reorganization which
became effective after the close of business on July 31, 1996. Accordingly, the
accompanying financial statements have been prepared in conformity with AICPA
Statement of Position 90-7, "Financial Reporting for Entities in Reorganization
Under the Bankruptcy Code," for the Successor Company as a new entity with
assets, liabilities, and a capital structure having carrying values not
comparable with prior periods as described in Note 1.
In our opinion, the Successor Company financial statements present fairly, in
all material respects, the financial position of House of Fabrics, Inc. as of
January 31, 1997 and the results of its operations and its cash flows for the
six months ended January 31, 1997 in conformity with generally accepted
accounting principles. Further, in our opinion, the Predecessor Company
financial statements referred to above present fairly, in all material respects,
the financial position of the Predecessor Company as of January 31, 1996, and
the results of its operations and its cash flows for the six months ended July
31, 1996 and the years ended January 31, 1996 and 1995 in conformity with
generally accepted accounting principles.
DELOITTE & TOUCHE LLP
Costa Mesa, California
April 23, 1997
24
<PAGE>
HOUSE OF FABRICS, INC.
BALANCE SHEETS
AS OF JANUARY 31, 1997 AND 1996
- - -------------------------------------------------------------------------------
(Dollars in Thousands)
<TABLE>
<CAPTION>
Successor Predecessor
Company Company
1997 1996
ASSETS
<S> <C> <C>
Current assets:
Cash $ 767 $ 16,634
Receivables, net 3,164 24,322
Merchandise inventories, net 104,576 107,140
Prepaid expenses and other current assets 3,686 5,651
Refundable income taxes, net - 377
Deferred income taxes - 25
-------- --------
Total current assets 112,193 154,149
Property:
Land 1,011 1,011
Buildings 1,473 1,707
Furniture and fixtures 16,055 39,333
Leasehold improvements 5,677 21,255
-------- --------
24,216 63,306
Less accumulated depreciation and amortization (2,442) (36,198)
-------- --------
Property, net 21,774 27,108
Deferred income taxes - 254
Property held for sale - 9,590
Other assets 675 1,386
Goodwill, net - 38,067
Reorganization Value in Excess of Amounts
Allocated to Net Assets, net 3,188 -
-------- --------
$137,830 $230,554
======== ========
</TABLE>
See accompanying notes to financial statements
25
<PAGE>
HOUSE OF FABRICS, INC.
BALANCE SHEETS
AS OF JANUARY 31, 1997 AND 1996 (CONTINUED)
- - -------------------------------------------------------------------------------
(Dollars in Thousands)
<TABLE>
<CAPTION>
Successor Predecessor
Company Company
1997 1996
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
<S> <C> <C>
Current liabilities:
Accounts payable $ 18,250 $ 9,754
Accrued liabilities 12,505 32,297
Bank Loan 42,621 -
Current portion of long-term debt 28 -
Restructuring reserve - 12,949
-------- --------
Total current liabilities 73,404 55,000
Deferred income taxes 634 279
Long Term Liabilities 22,502 -
Long Term Debt 903 -
Liabilities subject to compromise under reorganization proceedings - 190,618
COMMITMENTS AND CONTINGENCIES
Stockholders' equity (deficit):
Preferred stock, $.10 par value (Old); $.01 par value (New)
authorized 1,000,000 shares; outstanding, none - -
Old Common stock, $.10 par value; authorized 29,000,000 shares;
13,697,107 shares issued and outstanding at January 31, 1996. - 1,370
New Common stock, $.01 par value; authorized 7,000,000 shares;
4,201,034 shares issued and outstanding at January 31, 1997 51 -
Paid in capital 39,411 46,880
Retained earnings (deficit) 925 (63,593)
-------- --------
Total stockholders' equity (deficit) 40,387 (15,343)
-------- --------
$137,830 $230,554
======== ========
</TABLE>
See accompanying notes to financial statements
26
<PAGE>
HOUSE OF FABRICS, INC.
STATEMENTS OF OPERATIONS
- - -------------------------------------------------------------------------------
(Dollars in Thousands)
<TABLE>
<CAPTION>
Six Months Ended
-------------------------------------- Year Ended January 31,
January 31, July 31, --------------------------
1997 1996 1996 1995
Successor Co. Predecessor Co.
------------------------------------------------
<S> <C> <C> <C> <C>
Sales $143,324 $111,355 $333,501 $416,276
Expenses:
Cost of sales 83,600 62,000 192,763 256,383
Store and operating 48,146 45,061 132,469 168,121
General and administrative 8,162 8,891 19,824 28,583
Interest Expense 2,461 4,911 14,062 13,983
Interest Income (49)
Restructuring charge - - - 43,500
-------- -------- -------- --------
Total expenses 142,320 120,863 359,118 510,570
-------- -------- -------- --------
Income (Loss) before Income Taxes
Reorganization and Extraordinary Items 1,004 (9,508) (25,617) (94,294)
Reorganization Items:
Fresh-Start adjustments 26,370
Reorganization costs 1,440 44,915 3,416
Gain on Sale of Assets (603) - - -
-------- -------- -------- --------
Income (Loss) before Income taxes 1,607 (37,318) (70,532) (97,710)
Income tax expense (benefit) 682 48 (165) (2,325)
-------- -------- -------- --------
Net Income (Loss)
Before Extraordinary Item 925 (37,366) (70,367) (95,385)
Extraordinary Item:
Gain on Forgiveness of Debt - (100,959) - -
-------- -------- -------- --------
Net Income (Loss) $ 925 $ 63,593 $(70,367) $(95,385)
======== ======== ======== ========
Net income per share $ 0.18 N/A N/A N/A
======== ======== ======== ========
</TABLE>
See accompanying notes to financial statements
27
<PAGE>
HOUSE OF FABRICS, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
- - -------------------------------------------------------------------------------
(Dollars in Thousands)
<TABLE>
<CAPTION>
Retained
Common Stock Paid-in (deficit)
Shares Amount capital earnings
<S> <C> <C> <C> <C>
BALANCE, February 1, 1994 13,697,107 $ 1,370 $46,880 $102,159
Net loss (95,385)
------------ ------- ------- --------
BALANCE, January 31, 1995 13,697,107 1,370 46,880 6,774
Net loss (70,367)
------------ ------- ------- --------
BALANCE, January 31, 1996 13,697,107 1,370 46,880 (63,593)
Net Loss (Six Months - Predecessor Company) (10,996)
------------ ------- ------- --------
Predecessor Company Balance at July 31, 1996 13,697,107 1,370 46,880 (74,589)
Recapitalization and Fresh-Start Adjustments
Cancel Old Common Shares (13,697,107) (1,370)
Issue New Common Shares 5,136,415 51
Fresh-Start Adjustments - (7,485) 74,589
------------ ------- ------- --------
Successor Company Balance at August 1, 1996 5,136,415 51 39,395 0
Net Income (Six Months - Successor Company) 925
Exercise of Series A Warrants 5,785 16
------------ ------- ------- --------
Successor Company Balance at January 31, 1997 5,142,200 $ 51 $39,411 $ 925
============ ======= ======= ========
</TABLE>
See accompanying notes to financial statements
28
<PAGE>
HOUSE OF FABRICS, INC.
STATEMENTS OF CASH FLOWS
- - -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Six Months Year Ended January 31,
--------------------------------
Jan. 31, 1997 July 31, 1996 1996 1995
Successor Co. Predecessor Co.
-------------------------------------
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income (Loss) $ 925 $ 63,593 $(70,367) $(95,385)
Adjustments to reconcile net income (loss) to net cash (used in)
provided by operating activities:
Fresh-Start adjustments 26,370
Extraordinary item - Gain on Forgiveness of Debt (100,959)
Depreciation and amortization 2,654 2,895 8,151 10,329
(Gain) Loss on disposal of fixed assets (603) (3,191) 3,306 1,035
Deferred income taxes 634 1,428
Restructuring and inventory valuation charges 62,500
Changes in assets and liabilities:
Receivables 1,177 15,246 (11,445) (3,112)
Merchandise inventories (9,125) 12,287 25,823 91,188
Prepaid expenses, refundable income taxes and other assets 3,611 (1,008) 36,710 (26,823)
Accounts payable and accrued and other liabilities (4,510) (4,719) 4,394 (42,921)
Restructuring reserve - - (3,157) (25,390)
Long Term Liabilities 989 21,513 0 0
Liabilities subject to compromise under reorganization proceedings - 843 4,057 82,625
------- --------- -------- --------
Net cash (used in) provided by operating activities (4,248) 32,870 (2,528) 55,474
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (1,905) (2,687) (5,093) (1,523)
Proceeds from sale of property 8,192 5,050 774 3,286
------- --------- -------- --------
Net cash (used in) provided by investing activities 6,287 2,363 (4,319) 1,763
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of long-term debt (387) (57) (3,280)
Settlement of Administrative and Priority Claims, net (2,144)
Exercise of Series A Warrants 16
Net (repayments) under revolving line (4,679)
Net (repayments) under line of credit agreements - (45,945) (23,843) (16,334)
------- --------- -------- --------
Net cash (used in) provided by financing activities (7,194) (45,945) (23,900) (19,614)
------- --------- -------- --------
NET INCREASE (DECREASE) IN CASH (5,155) (10,712) (30,747) 37,623
CASH, beginning of period 5,922 16,634 47,381 9,758
------- --------- -------- --------
CASH, end of period $ 767 $ 5,922 $ 16,634 $ 47,381
======= ========= ======== ========
</TABLE>
See accompanying notes to financial statements
29
<PAGE>
HOUSE OF FABRICS, INC.
<TABLE>
<CAPTION>
Six Months Ended Year Ended
January 31, July 31, January 31,
1997 1996 1996 1995
<S> <C> <C> <C> <C>
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Interest paid $2,462 $ 4,933 $14,041 $14,275
Income taxes refunded $1,338 $21,285 $ 6,329 $ 7,876
</TABLE>
SUPPLEMENTAL DISCLOSURES OF NONCASH INVESTING AND FINANCING ACTIVITIES -
During the six months ended July 31, 1996, loss on disposal of property charged
to accrued reserves amounted to $5,222.
During the years ended January 31, 1996 and 1995, loss on disposal of property
charged to the restructuring reserve amounted to $3,343 and $8,417,
respectively.
See accompanying notes to financial statements
30
<PAGE>
HOUSE OF FABRICS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTES TO FINANCIAL STATEMENTS
- - --------------------------------------------------------------------------------
1. REORGANIZATION AND BASIS OF REPORTING
REORGANIZATION
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 authority to issue approximately 5,136,000
shares of newly reorganized House of Fabrics, Inc. common stock ("New Common
Stock") including shares issuable for resolution of claims. Further
authorized are an additional approximately 1,864,000 shares to satisfy
warrants and equity incentive plans. As of January 31, 1997, 4,201,034
shares have been issued, including 5,785 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. Additionally, in accordance with the
Plan, on December 5, 1996, the Company paid $1,157,000 to satisfy a
requirement to bring the aggregate market value of the approximately 257,000
shares up to $2,000,000. (see Note 9 to Financial Statements). 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 will receive remaining balances in 12 equal
monthly installments which commenced on September 1, 1996. Holders of
general unsecured claims that are not covered by insurance will receive a
pro rata distribution of approximately 4,776,000 shares (or 93%) of New
Common Stock. A portion of the approximately 4,776,000 shares of New Common
Stock to be issued to holders of unsecured claims was placed in a claims
reserve based on the percentage of disputed claims to total claims (total
claims include both allowed claims and disputed claims). 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.
As of January 31, 1997, there were 251,036 Series A Warrants outstanding
which expired April 29, 1997, if not exercised.
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.
31
<PAGE>
HOUSE OF FABRICS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
BASIS OF REPORTING
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. In addition, the accumulated deficit of
the Company was eliminated and its 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 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 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 the
effects of Fresh-Start Reporting. The results of operations and cash flows
for the six months ended January 31, 1997 include 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 income for the six
months ended January 31, 1997 is not comparable with prior periods and the
net income for the year-to-date period ended January 31, 1997 is divided
into Successor Company and Predecessor Company and is also not comparable
with prior periods. In addition, the Balance Sheet as of January 31, 1997 is
not comparable to prior periods for the reasons discussed above.
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.
32
<PAGE>
HOUSE OF FABRICS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DEBT DISCHARGE AND FRESH-START REPORTING
The effect of the Plan on the Company's unaudited balance sheet at August 1,
1996 is as follows:
(Dollars in thousands)
<TABLE>
<CAPTION>
DEBT FRESH-START REORGANIZED
JULY 31, 1996 DISCHARGE ENTRIES BALANCE SHEET
<S> <C> <C> <C> <C>
ASSETS
CURRENT ASSETS
Cash $ 5,922 (3,968) $ 1,954
Receivables, net 9,076 (4,735) 4,341
Merchandise Inventories, net 94,853 598 95,451
Prepaid Expenses and Other Current Assets 6,831 (325) 6,506
Refundable Income Taxes 377 377
Deferred Income Taxes 25 25
---------------------------------------------------------
Total Current Assets 117,084 (8,430) 108,654
Property, Plant and Equipment 59,182 (36,107) 23,075
Less Accumulated Depreciation and Amortization (36,107) 36,107 -
---------------------------------------------------------
Property, net 23,075 23,075
Deferred Income Taxes 254 254
Property Held for Sale 6,870 6,870
Other Assets 1,214 (125) 1,089
Reorganization Value in Excess of Amounts
Allocated to Net Assets 3,355 3,355
Goodwill, net 37,531 (37,531) -
---------------------------------------------------------
$186,028 $(8,555) $(34,176) $143,297
=========================================================
</TABLE>
33
<PAGE>
HOUSE OF FABRICS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
JULY 31, 1996 DEBT FRESH START REORGANIZED
DISCHARGE ENTRIES BALANCE SHEET
-----------------------------------------------------------------
<S> <C> <C> <C> <C>
LIABILITIES AND STOCKHOLDERS EQUITY
CURRENT LIABILITIES
Accounts Payable $ 12,370 12,370
Notes Payable to Bank 47,300 47,300
Accrued Liabilities 19,740 1,331 21,071
Current Portion of Long-Term Debt 401 401
Restructuring Reserve 12,949 (12,949) -
-------------------------------------------------------------
Total Current Liabilities 92,359 (11,217) - 81,142
Deferrred Income Taxes 279 279
Long-Term Liabilities 21,513 21,513
Notes Payable 917 917
Liabilities Subject to Compromise under -
reorganization proceedings 98,216 (98,216) -
-------------------------------------------------------------
Total Liabilities 212,367 (108,516) - 103,851
STOCKHOLDERS' EQUITY
Common Stock, $.10 Par Value 1,370 (1,319) 51
Paid-In-Capital 46,880 321 (7,806) 39,395
Retained Earnings (Deficit) (74,589) 100,959 (26,370) -
-------------------------------------------------------------
Stockholders' Equity (Deficit) (26,339) 99,961 (34,176) 39,446
-------------------------------------------------------------
$186,028 $ (8,555) $(34,176) $143,297
-------------------------------------------------------------
</TABLE>
34
<PAGE>
HOUSE OF FABRICS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
2. SIGNIFICANT RISKS AND MANAGEMENT'S PLANS
Prior to its emergence from Chapter 11 proceedings on July 31, 1996 (See
Note 1), the Company had incurred significant losses from operations. These
losses stemmed primarily from costs associated with restructuring the
Company's operations, closing unprofitable stores and liquidating certain
inventory. Management believes that the restructuring initiatives completed
through July 31, 1996 together with initiatives since that date played an
important role in preparing the Company for the future and in allowing the
Company to return to profitability during the six months ended January 31,
1997. The Company's ability to sustain profitability in the future is
dependent upon several factors, including but not limited to, the following:
MANAGEMENT'S ABILITY TO GAUGE THE MERCHANDISE TASTES AND DEMANDS OF ITS
CUSTOMERS
The Company's future success is largely dependent upon management's ability
to gauge the merchandise tastes of its customer and to provide merchandise
that satisfies customer demand in a timely manner and at sales prices
yielding adequate gross margins to yield operating profits. Unanticipated
changes and misjudgments in customer trends could lead to excess inventories
and higher markdowns, which could have a material adverse effect on the
Company's operating results and financial condition.
ECONOMIC CONDITIONS, CONSUMER SPENDING AND COMPETITION
The industry in which the Company operates is highly competitive and subject
to substantial cyclical variations. Negative variations can be caused by the
Company's competitors, changing levels of consumer spending and preferences
and/or declines in overall economic conditions on a regional or national
level. The occurrence of a significant negative variation caused by any of
the aforementioned factors could have a material adverse effect on the
Company's operating results and financial condition.
ABILITY TO REMAIN IN COMPLIANCE WITH FINANCING AGREEMENT
The Company is dependent upon its financing agreement to provide working
capital to support the Company's current operations. As discussed more fully
in Note 5, the Company's financing agreement requires the Company to
maintain certain financial ratios, minimum net worth, and to meet other
financial requirements on a quarterly or annual basis. Based upon the
Company's current operating plan for the year ending January 31, 1998,
management projects the Company will remain in compliance with the financing
agreement, as amended, through January 31, 1998. If the Company's financial
results are not close to it's operating plan, the Company's ability to meet
the requirements set forth in the financing agreement may be impaired. The
inability of the Company to meet the requirements set forth in the financing
agreement would have a material adverse effect on the Company's business,
operating results, and financial condition.
35
<PAGE>
HOUSE OF FABRICS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Use of Estimates - The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions. Such estimates and assumptions affect the
reported amounts of assets and liabilities and the disclosure of contingent
assets and liabilities at the date of the financial statements, and the
reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Merchandise Inventories - Merchandise inventories are stated at the lower of
cost or market, cost being determined on the retail method. The Company's
valuation of inventories under the retail method involves significant
estimates which include estimated future retail prices, future markdowns and
length of time required to sell merchandise. These estimates were developed
under the assumptions of an orderly retail sale of merchandise and the
continuation of the Company's current turnover rates. It is reasonably
possible that a change in the current merchandising strategy could have a
significant adverse effect on the Company's future operating results.
Property - Property is stated at cost less accumulated depreciation and
amortization. Depreciation is computed using the straight-line method at
rates based on the estimated lives of the assets. Leasehold improvements are
amortized over the estimated life of the improvement or the term of the
lease, whichever is shorter.
Reorganization Value in Excess of Amounts Allocated to Net Assets -
Reorganization Value in Excess of Amounts Allocated to Net Assets arose from
the adoption of Fresh-Start Reporting (See Note 1) and is being amortized on
a straight line basis over 10 years. The Company evaluates the
recoverability of this intangible asset at each balance sheet date. The
recoverability of this intangible is determined by comparing the carrying
value of the intangible to the estimated operating income of the related
entity on an undiscounted cash flow basis. Any impairment is recorded at the
date of determination.
Property Held for Sale - Property held for sale is valued at the lower of
cost or market and was comprised of a distribution facility in Mauldin,
South Carolina and a corporate headquarters facility in Sherman Oaks,
California at January 31, 1996. There was no property held for sale as of
January 31, 1997(see Note 13).
Income Taxes - Deferred tax assets and liabilities are recognized based on
enacted tax laws for the estimated future tax effects of events that have
been recognized in the Company's financial statements or tax returns.
However, deferred tax assets are recognized only to the extent that it is
more likely than not that they will be realized.
36
<PAGE>
HOUSE OF FABRICS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
Net Income Per Share - Net Income per share is computed based on the
weighted average number of outstanding common and common equivalent shares
during the period, including dilutive stock options, warrants, and all
additional shares of common stock expected to be issued in accordance with
the Plan. As of January 31, 1997, 4,201,034 shares were issued, including
5,785 shares issued upon exercise of Series A Warrants. As of April 21,
1997, 5,215,718 shares were issued including 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 year ended January 31, 1997, the amount
reported as net income per common and common equivalent share is not
materially different than that which would have been reported for basic and
diluted earnings per share in accordance with SFAS No. 128.
Fair Value of Financial Instruments - Management believes the carrying
amounts of receivables and accounts payable represent fair values due to the
short maturities of these instruments. The carrying amounts of the Company's
various debt instruments approximate fair value because their interest rates
are based on variable rates of interest.
Stock Based Compensation - In October 1995, the Financial Accounting
Standards Board issued Statement of Financial Accounting Standards No. 123,
Accounting for Stock Based Compensation. The Company has determined that it
will not change to the fair value method and will continue to use Accounting
Principals Board Opinion No. 25 for measurement and recognition of employee
based stock transactions.
Reclassifications - Certain amounts in prior fiscal year financial
statements have been reclassified to correspond to current year
classifications.
4. STORE CLOSURES AND RESTRUCTURING CHARGES
STORE CLOSURES
In anticipation of the Company filing the Plan of Reorganization to exit
Chapter 11 with the Bankruptcy Court and to facilitate the Company's ability
to negotiate exit financing prior to emergence from Chapter 11, the Company
agreed to close 86 underperforming stores and use the proceeds to
permanently reduce the secured debt of the Company's prepetition bank loan.
In January 1996, with approval of the Bankruptcy Court, the Company entered
into an agency agreement with an unrelated partnership formed to liquidate
the 86 stores. The partnership assumed control of the 86 stores and assumed
substantially all of the expenses of operating the stores through
liquidation. Accordingly, in January 1996, the Company recorded a charge of
$28,725,000 for the closure of the 86 stores. The liquidation was completed
in April 1996. In addition, during the six months ended January 31, 1997,
the Company approved the closure of an additional 8 stores that did not meet
certain profitability requirements.
RESTRUCTURING CHARGES
Effective August 26, 1994, the Company's Board of Directors approved a plan
of restructuring to close 125 underperforming stores. This plan was
subsequently amended to include an additional 63 stores bringing the total
number of stores slated for closure to 188. Accordingly, in fiscal 1995, the
Company recorded a pretax restructuring charge of $43,500,000, after
adjustments for cancellation of the planned closure of 12 of these stores
due to better than expected performance. During the years ended January 31,
1996 and 1995, sales of $12,712,000 and $59,375,000, respectively, and
operating losses of $2,908,000 and $18,539,000, respectively, were excluded
from operating results and charged to the restructuring reserve.
37
<PAGE>
HOUSE OF FABRICS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
5. 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 on September 11, 1996, 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 the
prime rate (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 and M.I.S. equipment, which may be secured
separately by that equipment. Loan availability is determined by an advance
rate on eligible inventory as defined. The Financing Agreement includes
certain restrictive covenants, some of which are computed quarterly (fixed
charge coverage) with others computed annually (net worth, operating leases
and capital expenditures). As of January 31, 1997, the Company had direct
borrowings of $42,621,000 and letters of credit of $912,000 outstanding with
additional credit available of approximately $14,302,000.
As of January 31, 1997, the Company was in compliance with all terms of the
amended Financing Agreement.
Prior to the Company's Chapter 11 filing in November 1994, the Company had a
credit agreement (Credit Agreement) for which Bank of America NT & SA acted
as agent bank for a bank group ("bank group"). The Credit Agreement
provided for maximum borrowings of $102,823,000 and had an interest rate of
11.0% as of January 31, 1996.
As a result of the Company's Chapter 11 filing , all required repayments of
principal on the notes payable under the Credit Agreement were suspended,
except for certain principal repayments that were approved by the Bankruptcy
Court and were required by the Company's Debtors-in-Possession financing
agreement. Under such agreement, up to a total of $23,843,000 of permanent
principal reductions were made based on a preapproved formula through
January 31, 1996. Upon emergence from Chapter 11 protection the bank group
received $76,500,000 (discounted based on debt outstanding as of May 1,
1996) plus approximately 257,000 shares of New Common Stock. In accordance
with the Plan, on December 5, 1996, the Company paid $1,157,000 to satisfy a
requirement to bring the aggregate market value of the approximately 257,000
shares up to $2,000,000. The bank group forgave debt of $9,578,000.
During Chapter 11 proceedings the Company continued to accrue and pay
interest at the contractual rate on these notes and had classified them as
subject to compromise in the accompanying balance sheets (see Note 9).
38
<PAGE>
HOUSE OF FABRICS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
In March 1995, the Company entered into an agreement with Bank of America NT
& SA, acting as agent bank, to provide Debtors-in-Possession financing (The
"D.I.P. Financing Agreement") in the form of a $20,000,000 line of credit,
including a provision for up to $10,000,000 in letters of credit, that
expired on January 31, 1996. This agreement was collateralized by a first
priority lien on generally all assets of the Company, as defined. There were
no borrowings against this line as of January 31, 1996. On January 29, 1996,
the D.I.P. Financing Agreement was amended and restated, requiring the
closure of 86 stores with the proceeds therefrom to be used to permanently
reduce the prepetition secured bank loan, the credit line was reduced to
$17,300,000 and the term extended through April 30, 1996. This agreement was
subsequently extended through June 28, 1996 and then through July 31, 1996,
when it was replaced with a new Financing Agreement with CITBC.
6. REORGANIZATION COSTS
Prior to emergence from bankruptcy, professional fees and expenditures
directly related to the Chapter 11 filing were classified as reorganization
costs and were expensed as incurred. There were no reorganization costs for
the six months ended January 31, 1997.
Reorganization costs consisted of the following at January 31, except as
noted:
<TABLE>
<CAPTION>
SIX MONTHS
ENDED YEAR ENDED JANUARY 31,
JULY 31, 1996 1996 1995
<S> <C> <C> <C>
Professional fees $ 4,631,000 $ 9,818,000 $3,416,000
Costs associated with store closures (Note 4) 30,646,000
Costs (income) associated with sale of
facilities (Note 13) (3,191,000) 3,812,000
Other 639,000
----------- ----------- ----------
$ 1,440,000 $44,915,000 $3,416,000
=========== =========== ==========
</TABLE>
39
<PAGE>
HOUSE OF FABRICS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
7. INCOME TAXES
Income tax expense (benefit) consists of the following in thousands:
<TABLE>
<CAPTION>
Six Months Ended Year Ended January 31,
--------------------------------------
Jan. 31, 1997 July 31, 1996 1996 1995
<S> <C> <C> <C> <C>
Current:
Federal $ - $ - $ - $(4,003)
State 48 48 (165) 250
---- ---- ----- -------
48 48 (165) (3,753)
Deferred:
Federal 603 1,434
State 31 (6)
---- ---- ----- -------
634 1,428
---- ---- ----- -------
Income tax expense (benefit) $682 $ 48 $(165) $(2,325)
==== ==== ===== =======
</TABLE>
A reconciliation to the statutory federal income tax rate is as follows:
<TABLE>
<CAPTION>
Predecessor Company
-----------------------------------------------------------------------
Successor Company Six Months Ended
For the fiscal year Six Months Ended ------------------- ----------------------- -------------------
ended January 31, January 31, 1997 July 31, 1996 1996 1995
except as noted: --------------------- ------------------- ----------------------- -------------------
Effective Effective Effective Effective
Amount Rate Amount Rate Amount Rate Amount Rate
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Federal income taxes at
the statutory rate $546 34.0% $(12,688) (34.0)% $(24,685) (35.0)% $(34,199) (35.0)%
Increase in valuation
allowance 11,132 29.8 % 21,391 30.3 28,355 29.0
Nondeductible
reorganization costs 1,374 3.7 % 3,061 4.4
State taxes, net of
federal benefit 71 4.4% 48 0.1 % (107) (0.1) 163 0.2
Amortization of
intangibles 65 4.0% 182 0.5 % 375 0.5 375 0.4
Other - - - - (200) (0.3) 2,981 3.0
---- ----- ------- ---- -------- ----- -------- ----
Income tax exp (benefit) $682 42.4% $ 48 0.1 % $ (165) (0.2)% $ (2,325) (2.4)%
==== ===== ======= ==== ======== ===== ======== ====
</TABLE>
40
<PAGE>
HOUSE OF FABRICS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
The Company's taxable income for the six months ended January 31, 1997 was
offset by a portion of the Company's taxable loss for the six months ended
July 31, 1996. The Company's remaining taxable loss for the six months ended
July 31, 1996 and the Company's net operating loss carryforwards from the
years ended January 31, 1995 and 1996 were offset entirely by income from
discharge of indebtedness that arose upon its emergence from Chapter 11 on
July 31, 1996. In addition, the Company has carried back net operating
losses of approximately $22,780,000 to prior years on amended returns. The
Company has not received the refunds due with respect to these amended
returns and they are currently being examined by the Internal Revenue
Service. The net realizable balance of deferred income taxes at January 31,
1996 was determined based on the extent to which it could be offset by
future reversals of deferred income tax liabilities. The Company did not
recognize any additional deferred tax assets as part of adopting Fresh-Start
accounting during the year ended January 31, 1997. As such, deferred tax
assets at January 31, 1997 are fully offset by a valuation allowance.
Deferred income tax assets and liabilities consist of the following at
January 31:
<TABLE>
<CAPTION>
1997 1996
<S> <C> <C>
Net operating loss carryback/carryforward $9,944,000 $35,933,000
Restructuring reserve 0 8,381,000
Inventory reserve 2,409,000 1,241,000
Medical claims reserve 354,000 596,000
Vacation pay reserve 375,000 451,000
Rent reserve 846,000 678,000
Other reserves 299,000 2,585,000
Other 124,000 219,000
Valuation allowance (14,351,000) (49,746,000)
----------- ----------
Total deferred tax assets $ 0 $ 338,000
=========== ==========
Depreciation and other property differences $ 516,000 $ 279,000
Other 118,000 59,000
----------- ----------
Total deferred tax liabilities $ 634,000 $ 338,000
=========== ==========
</TABLE>
41
<PAGE>
HOUSE OF FABRICS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
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 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.
42
<PAGE>
HOUSE OF FABRICS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
8. NOTES PAYABLE AND LONG-TERM DEBT
Long-term debt consists of the following at January 31:
<TABLE>
<CAPTION>
1997 1996
<S> <C> <C>
Note payable to bank $852,000 $ 861,000
Other notes payable 79,000 80,000
-------- ---------
931,000 941,000
Less amounts contractually due within one year (28,000) (861,000)
-------- ---------
Total long-term debt $903,000 $ 80,000
======== =========
</TABLE>
Note payable to bank is collateralized by certain real property and bears
interest at prime plus .5% per annum (9.0% at January 31, 1996). With
Bankruptcy Court approval, the Company continued to pay interest at the
contractual rate on the note payable to bank during Chapter 11 proceedings.
Such note was classified as subject to compromise in the accompanying
January 31, 1996 balance sheet and was considered in default as a result of
the Chapter 11 filing (see Note 9).
In accordance with the Plan, the Note payable to bank was resolved through
the replacement of the principal amount as of the Petition Date with a term
note. The term note matures five years after the Effective Date, is payable
in monthly installments amortized over 15 years and bears interest at the
Treasury Constant Maturities Rate plus 4.5% per annum (11.2% at January 31,
1997).
9. LIABILITIES SUBJECT TO COMPROMISE
Liabilities subject to compromise consist of the following as of January 31,
1996:
<TABLE>
<S> <C>
Secured liabilities:
Notes payable to banks (Note 5) $102,823,000
Notes payable and long-term debt (Note 8) 941,000
Unsecured liabilities:
Accounts payable, trade 71,309,000
Other payables and accrued expenses 15,400,000
Other 145,000
------------
$190,618,000
============
</TABLE>
In accordance with the Plan, these liabilities subject to compromise were
resolved on the Effective Date, including forgiveness of debt by the bank
group of $9,578,000.
43
<PAGE>
HOUSE OF FABRICS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
10. CAPITAL STOCK
COMMON STOCK
As of January 31, 1997, there are 7,000,000 shares of new common stock
authorized at $.01 par value.
As more fully described in Note 1, as part of the Plan, the Company has
authority to issue approximately 5,136,000 shares of new common stock to
satisfy certain obligations at July 31, 1996. All previously issued common
stock was canceled. As of January 31, 1997, 4,201,034 shares had been issued
in conjunction with the Plan, including 5,785 shares issued upon the
exercise of Series A Warrants. Additionally, the Company issued 256,821
Series A warrants to purchase one share of stock for $3.02 per share.
Exercise of a Series A warrant also entitles the buyer to Series B warrants
which can be exercised at a later date for a different price. The Series A
warrants expire April 29, 1997. Warrants not exercised have no further
rights. At January 31, 1997, there were 251,036 Series A warrants
outstanding.
PREFERRED STOCK
As of January 31, 1997, there are 1,000,000 shares of new preferred stock
authorized at $.01 par value. There are no shares outstanding.
STOCK OPTION PLAN
Since emergence from Chapter 11 reorganization on August 1, 1996, the
Company has granted 601,736 new stock options (new options) to officers,
directors, and key employees under two new option plans. All options
previously granted under old plans have been canceled.
The new option plans allow officers, directors, and employees to purchase
shares of the Company's new common stock at fair market value on the date of
grant. The options have a term of ten years and vest 25% after 18 months, an
additional 50% after 24 months and the final 25% after 36 months. Stock
option grants of 601,736 have been issued as of January 31, 1997 at an
exercise price of $4.00. Total options available for future grant at January
31, 1997 are 66,139.
Effective February 1, 1996, the Company adopted the disclosure-only option
under SFAS 123, "Accounting for Stock-Based Compensation." The Company
continues to apply the intrinsic value method in accordance with APB Opinion
25 for its stock plans. Accordingly, no compensation expense has been
recognized for its stock option plans.
Pro forma information regarding net income and earnings per share is
required by SFAS 123, and has been calculated as if the Company had
accounted for its stock plans under the fair value method of SFAS 123. The
fair value of stock options was estimated at the date of grant using the
Black-Scholes option pricing model with the following weighted average
assumptions: risk-free interest rate of 6.71%, a volatility factor for the
Company's new common stock of 76%, a weighted average expected life of the
option of 5 years, and no dividends during the expected term.
For purposes of the pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting period. The
Company's pro forma net income for the six months ended January 31, 1997 is
$719,000 and $.14 per share. (Successor Company only).
44
<PAGE>
HOUSE OF FABRICS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
Changes in stock options for the six months ended January 31, 1997
(Successor Company) are as follows: Outstanding as of August 1, 1996: None;
Granted at $4.00 per share: 601,736; Exercised: None; Canceled: None;
Outstanding as of January 31, 1997: 601,736; Exerciseable as of January 31,
1997: None.
11. COMMITMENTS AND CONTINGENCIES
Operating Leases - Total rental expense, including real estate taxes and
insurance, for the six months ended January 31, 1997 and July 31, 1996 and
for the years ended January 31, 1996 and 1995 was $13,972,000 and
$14,531,000, $39,290,000, AND $51,395,000, respectively. Contingent rentals
based on sales are not significant. Most of the store leases require the
Company to pay real estate taxes and certain other expenses, and some
contain renewal options for various periods. Certain stores were closed as
part of the Company's plan to exit Chapter 11. Lease termination costs for
these stores were included in reorganization costs in the statement of
operations, and the related liabilities were classified as subject to
compromise in the accompanying balance sheet as of January 31, 1996.
Minimum future rentals under noncancelable operating leases at January 31,
1997 are summarized as follows: 1998, $24,035,000; 1999, $23,259,000; 2000,
$21,397,000; 2001, $18,108,000; 2002, $14,085,000; 2003-2014, $30,330,000
for a total of $131,214,000.
Litigation - The Company is involved in incidental litigation in the normal
course of business. Management believes that the outcome of such litigation
will not have a material adverse effect on the Company's financial position
or results of operations.
12. EMPLOYEE BENEFIT PLANS
The Company has a profit sharing and savings plan with a 401(k) feature that
covers employees who have reached age 21 and completed one year of service.
Employees may contribute up to a maximum of 16% of monthly earnings. The
Company, subject to profitability, may match 1% for each year of employment
up to a maximum of 6%. The Company also has a separate plan for highly
compensated officers and employees. There were no expenses recognized under
these plans for the years ended January 31, 1997, 1996 and 1995,
respectively.
45
<PAGE>
HOUSE OF FABRICS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
13. SALE OF FACILITIES
In December 1995, the Board of Directors approved a plan to sell the
Company's distribution center in Mauldin, South Carolina and its corporate
headquarters in Sherman Oaks, California. Accordingly, the book values of
assets and liabilities of these facilities were included in the accompanying
1996 balance sheet as property held for sale and consist of net property,
plant, and equipment of $9,965,000 offset by long term debt of $375,000 for
a total of $9,590,000.
The Sherman Oaks corporate headquarters was sold in July 1996 and the
Mauldin, S. C. distribution facility was sold in November 1996. There were
no properties held for sale as of January 31, 1997.
For fiscal year 1996, in connection with the sale of these facilities, the
Company recorded a provision of $3,812,000, comprised primarily of severance
and plant closing costs ($1,464,000) and the write-off of obsolete
management information systems ($2,348,000).
14. QUARTERLY FINANCIAL DATA FOR THE YEARS ENDED JANUARY 31, 1997 AND 1996
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
Predecessor Company Successor Company
---------------------------------------------------------------
(Unaudited) 1997 April 30 July 31 October 31 January 31
<S> <C> <C> <C> <C>
Sales $ 56,515 $ 54,840 $ 69,953 $ 73,371
Gross profit $ 25,341 $ 24,014 $ 29,753 $ 29,971
Net Income (Loss) $ ( 5,971) $ 63,593 $ 520 $ 405
Net Income per share N/A N/A $ 0.10 $ 0.08
</TABLE>
<TABLE>
<CAPTION>
(Unaudited) 1996 Predecessor Company
---------------------------------------------------------------
<S> <C> <C> <C> <C>
Sales $ 73,759 $ 71,909 $ 92,307 $ 95,526
Gross profit $ 36,884 $ 30,853 $ 39,825 $ 33,176
Net loss $ ( 7,984) $ (11,039) $ (5,515) $ (45,829)
Net loss per share N/A N/A N/A N/A
</TABLE>
(1) Includes a provision of $28,725,000 for the closure of 86 stores. See
Note 4.
46
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
April 30, 1997 By /s/ R. N. Hankin
----------------------------------
R. N. Hankin
Chairman of the Board
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE CAPACITY
<S> <C> <C>
/s/ R. N. Hankin Chairman of the Board & Director April 30, 1997
- - ---------------------------
R. N. Hankin
/s/ Donald L. Richey President, Chief Executive Officer April 30, 1997
- - --------------------------- & Director
Donald L. Richey
/s/ John E. Labbett Executive Vice President - Chief April 30, 1997
- - --------------------------- Financial Officer & Director
John E. Labbett
/s/ Carl C. Gregory, III Director April 30, 1997
- - ---------------------------
Carl C. Gregory, III
/s/ H. Michael Hecht Director April 30, 1997
- - ---------------------------
H. Michael Hecht
/s/ Mitchell G. Lynn Director April 30, 1997
- - ---------------------------
Mitchell G. Lynn
/s/ Alison L. May Director April 30, 1997
- - ---------------------------
Alison L. May
</TABLE>
47
<PAGE>
EXHIBIT 10
DEAN WITTER VIP PLUS ADOPTION AGREEMENT #009
NON-STANDARDIZED 401(k) PLAN (Pages 1 to 18) (PAIRED PROFIT SHARING PLAN)
- - --------------------------------------------------------------------------------
The undersigned, House of Fabrics, Inc. ("Employer"), by executing this
----------------------
Adoption Agreement, elects to become a participating Employer in the Dean Witter
Versatile Investment Program Defined Contribution Master Plan (basic plan
document #01) by adopting the accompanying Plan and Trust in full as if the
Employer were a signatory to that Agreement. The Employer makes the following
elections granted under the provisions of the Master Plan.
ARTICLE I
DEFINITIONS
1.02 TRUSTEE. The Trustee executing this Adoption Agreement is: [Choose (a)
-------
or (b)]
[ ] (a) A discretionary Trustee. See Section 10.03(A) of the Plan.
[X] (b) A nondiscretionary Trustee. See Section 10.03(B) of the Plan.
[Note: The Employer may not elect Option (b) if a Custodian executes
the Adoption Agreement.]
1.03 PLAN. The name of the Plan as adopted by the Employer is House of
---- ---------
Fabrics 401(k) Plan
- - -------------------
1.07 EMPLOYEE. The following Employees are not eligible to participate in
--------
the Plan: [Choose (a) or at least one of (b) through (g)]
[ ] (a) No exclusions.
[X] (b) Collective bargaining employees (as defined in Section 1.07 of the
Plan). [Note: If the Employer excludes union employees from the Plan,
the Employer must be able to provide evidence that retirement benefits
were the subject of good faith bargaining.]
[ ] (c) Nonresident aliens who do not receive any earned income [as defined in
Code (S)911(d)(2)] from the Employer which constitutes United States
source income [as defined in Code (S)861(a)(3)].
[ ] (d) Commission Salesmen.
[ ] (e) Any Employee compensated on a salaried basis.
[ ] (f) Any Employee compensated on an hourly basis.
[ ] (g) (Specify)
-----------------------------------------------------------
.
--------------------------------------------------------------------
LEASED EMPLOYEES. Any Leased Employee treated as an Employee under Section 1.31
of the Plan, is: [Choose (h) or (i)]
[X] (h) Not eligible to participate in the Plan.
[ ] (i) Eligible to participate in the Plan, unless excluded by reason of an
exclusion classification elected under this Adoption Agreement
Section 1.07.
RELATED EMPLOYERS. If any member of the Employer's related group (as defined in
- - -----------------
Section 1.30 of the Plan) executes a Participation Agreement to this Adoption
Agreement, such member's Employees are eligible to participate in this Plan,
unless excluded by reason of an exclusion classification elected under this
Adoption Agreement Section 1.07. In addition:
[Choose (j) or (k)]
[X] (j) No other related group member's Employees are eligible to participate
in the Plan.
[ ] (k) The following nonparticipating related group member's Employees are
eligible to participate in the Plan unless excluded by reason of an
exclusion classification elected under this Adoption Agreement Section
1.07:
----------------------------------------------------------------
.
-----------------------------------------
1.12 COMPENSATION.
------------
Treatment of elective contributions. [Choose (a) or (b)]
[X] (a) "Compensation" includes elective contributions made by the Employer on
the Employee's behalf.
[ ] (b) "Compensation" does not include elective contributions.
MODIFICATIONS TO COMPENSATION DEFINITION. [Choose (c) or at least one of (d)
through (j)]
[X] (c) No modifications other than as elected under Options (a) or (b).
[ ] (d) The Plan excludes Compensation in excess of $
------------------------
---------------------------------------------------------------------
[ ] (e) In lieu of the definition in Section 1.12 of the Plan, Compensation
means any earnings reportable as W-2 wages for Federal income tax
withholding purposes, subject to any other election under this
Adoption Agreement Section 1.12.
[ ] (f) The Plan excludes bonuses.
[ ] (g) The Plan excludes overtime.
[ ] (h) The Plan excludes Commissions.
[ ] (i) Compensation will not include Compensation from a related employer (as
defined in Section 1.30 of the Plan) that has not executed a
Participation Agreement in this Plan unless, pursuant to Adoption
Agreement Section 1.07, the Employees of that related employer are
eligible to participate in this Plan.
[ ] (j) (Specify)
------------------------------------------------------------
.
---------------------------------------------------------------------
If, for any Plan Year, the Plan uses permitted disparity in the
contribution or allocation formula elected under Article III, any
election of Options (f), (g), (h) or (j) is ineffective for such Plan
Year with respect to any Non highly Compensated Employee.
SPECIAL DEFINITION FOR MATCHING CONTRIBUTIONS. "Compensation" for purposes of
any matching contribution formula under Article III means: [Choose (k) or (l)
only if applicable]
[X] (k) Compensation as defined in this Adoption Agreement Section 1.12.
[ ] (l) (Specify)
--------------------------------------------------------------
.
---------------------------------------------------------------------
Special definition for salary reduction contributions. An Employee's salary
reduction agreement applies to his Compensation determined
-1-
<PAGE>
prior to the reduction authorized by that salary reduction agreement, with the
following exceptions: [Choose (m) or at least one of (n) or (o), if applicable]
[X] (m) No exceptions.
[ ] (n) If the Employee makes elective contributions to another plan maintained
by the Employer, the Advisory Committee will determine the amount of the
Employee's salary reduction contribution for the withholding period:
[Choose (1) or (2)]
[ ] (1) After the reduction for such period of elective contributions to the
other plan(s).
[ ] (2) Prior to the reduction for such period of elective contributions to
the other plan(s).
[ ] (o) (Specify)
--------------------------------------------------------------
.
--------------------------------------------------------
1.17 PLAN YEAR/LIMITATION YEAR.
-------------------------
PLAN YEAR. Plan Year means: [Choose (a) or (b)]
[X] (a) The 12 consecutive month period ending every 1/31
----
[ ] (b) (Specify) ____________________________________________________________
.
___________________________________________
LIMITATION YEAR. The Limitation Year is: [Choose (c) or (d)]
[X] (c) The Plan Year.
[ ] (d) The 12 consecutive month period ending every
---------------------------
-----------------------------------------------.
1.18 EFFECTIVE DATE.
--------------
NEW PLAN. The "Effective Date" of the Plan is
---------------------------------.
RESTATED PLAN. The restated Effective Date is 11/1/96. This Plan is a
-------
substitution and amendment of an existing retirement plan{s} originally
established 9/75 [Note: See the Effective Date Addendum.]
-------------
1.27 HOUR OF SERVICE. The crediting method for Hours of Service is: [Choose
---------------
(a) or (b)]
[X] (a) The actual method.
[ ] (b) The equivalency method,
----------------------------
except:
[ ] (1) No exceptions.
[ ] (2) The actual method applies for purposes of:
(Choose at least one)
[ ] (i) Participation under Article II.
[ ] (ii) Vesting under Article V.
[ ] (iii) Accrual of benefits under Section 3.06.
[Note: On the blank line, insert "daily," "weekly," "semi-monthly payroll
periods" or "monthly."]
1.29 SERVICE FOR PREDECESSOR EMPLOYER. In addition to the predecessor
--------------------------------
service the Plan must credit by reason of Section 1.29 of the Plan, the Plan
credits Service with the following predecessor employer(s): N/A
------------------
- - --------------------. Service with the designated predecessor employer(s)
applies:
[Choose at least one of (a) or (b); (c) is available only in addition to (a) or
(b)]
[ ] (a) For purposes of participation under Article II.
[ ] (b} For purposes of vesting under Article V.
[ ] (c} Except the following Service:
------------------------------------------
----------------------------------------.
[Note: If the Plan does not credit any predecessor service under this provision,
insert "N/A" in the first blank line. The Employer may attach a schedule to this
Adoption Agreement, in the same format as this Section 1.29, designating
additional predecessor employers and the applicable service crediting
elections.]
1.31 LEASED EMPLOYEES. If a Leased Employee is a Participant in the Plan
----------------
and also participates in a plan maintained by the leasing organization: [Choose
(a) or (b)]
[ ] (a) The Advisory Committee will determine the Leased Employee's allocation
of Employer contributions under Article III without taking into account
the Leased Employee's allocation, if any, under the leasing
organization's plan.
[X] (b) The Advisory Committee will reduce a Leased Employee's allocation of
Employer nonelective contributions (other than designated qualified
nonelective contributions) under this Plan by the Leased Employee's
allocation under the leasing organization's plan, but only to the
extent that allocation is attributable to the Leased Employee's service
provided to the Employer. The leasing organization's plan:
[X] (1) Must be a money purchase plan which would satisfy the definition
under Section 1.31 of a safe harbor plan, irrespective of whether
the safe harbor exception applies.
[ ] (2) Must satisfy the features and, if a defined benefit plan, the-
method of reduction described in an addendum to this Adoption
Agreement, numbered 1.31.
ARTICLE II
EMPLOYEE PARTICIPANTS
2.01 ELIGIBILITY.
-----------
Eligibility conditions. To become a Participant in the Plan, an Employee must
satisfy the following eligibility conditions: [Choose (a) or (b) or both: (c) is
optional as an additional election]
[X] (a) Attainment of age 21 (specify age, not exceeding 21).
------
[X] (b) Service requirement. [Choose one of (1) through (3)/
[X] (1) One Year of Service.
[ ] (2) months (not exceeding (12) following the
------------------------
Employee's Employment Commencement Date.
[ ] (3) One Hour of Service.
[ ] (c) Special requirements for non-401(k) portion of plan. [Make elections
under (1) and under (2)]
NON-STANDARDIZED 401(k) PLAN
-2-
<PAGE>
(1) The requirements of this Option (c) apply to participation in: [Choose
at least one of (i) through (iii)]
[ ] (i) The allocation of Employer nonelective contributions and
Participant forfeitures.
[ ] (ii) The allocation of Employer matching contributions
(including forfeitures allocated as matching
contributions).
[ ] (iii) The allocation of Employer qualified nonelective
contributions.
(2) For participation in the allocations described in (1), the eligibility
conditions are: [Choose at least one of (i) through (iv)]
[ ] (i) _____________ (one or two) Year(s) of Service, without an
intervening Break in Service (as described in Section
2.03(A) of the Plan) if the requirement is two Years of
Service.
[ ] (ii) __________ months (not exceeding 24) following the
Employee's Employment Commencement Date.
[ ] (iii) One Hour of Service.
[ ] (iv) Attachment of age ______________ (Specify age, not
exceeding 21).
PLAN ENTRY DATE. "Plan Entry Date" means the Effective Date and: [Choose (d),
(e) or (f)]
[ ] (d) Semi-annual Entry Dates. The first day of the Plan Year and the first
day of the seventh month of the Plan Year.
[ ] (e) The first day of the Plan Year.
[X ] (f) (Specify entry dates): As of the first pay period following the first
----------------------------------------------
day of the plan year and 2/1, 5/1, 8/1 and 11/1.
-----------------------------------------------
TIME OF PARTICIPATION. An Employee will become a Participant [and, if
applicable, will participate in the allocations described in Option (c)(1)],
unless excluded under Adoption Agreement Section 1.07, on the Plan Entry Date
(if employed on that date): [Choose (g), (h) or (i)]
[X ] (g) immediately following
[ ] (h) immediately preceding
[ ] (i) nearest
the date the Employee completes the eligibility conditions described in Options
(a) and (b) [or in Option (c)(2) if applicable] of this Adoption Agreement
Section 2.01.
[Note: The Employer must coordinate the selection of (g), (h) or (i) with the
"Plan Entry Date" selection in (d), (e) or (f). Unless otherwise excluded under
Section 1.07, the Employee must become a Participant by the earlier of: (1) the
first day of the Plan Year beginning after the date the Employee completes the
age and service requirements of Code (S)410(a); or (2) 6 months after the date
the Employee completes those requirements.]
DUAL ELIGIBILITY. The eligibility conditions of this Section 2.01 apply to:
[Choose (j) or (k)]
[X ] (j) All Employees of the Employer, except: [Choose (1) or (2)]
[X ] (1) No exceptions.
[ ] (2) Employees who are Participants in the Plan as of the Effective
Date.
[ ] (k) Solely to an Employee employed by the Employer after
____________________. If the Employee was employed by the Employer on
or before the specified date, the Employee will become a Participant:
[Choose (1), (2) or (3)]
[ ] (1) On the latest of the Effective Date, his Employment Commencement
Date or the date he attains age _____________________ (not to exceed
21).
[ ] (2) Under the eligibility conditions in effect under the Plan prior to
the restated Effective Date. If the restated Plan required more than
one Year of Service to participate, the eligibility condition under
this Option (2) for participation in the Code (S)401(k) arrangement
under this Plan is one Year of Service for Plan Years beginning after
December 31, 1988. (For restated plans only.)
[ ] (3) (Specify) ________________________________________________________
_________________________.
2.02 YEAR OF SERVICE - PARTICIPATION.
-------------------------------
HOURS OF SERVICE. An Employee must complete: [Choose (a) or (b)]
[X ] (a) 1,000 Hours of Service.
[ ] (b) ________________________ Hours of Service during an eligibility
computation period to receive credit for a Year of Service.
[Note: The Hours of Service requirement may not exceed 1,000.]
Eligibility computation period. After the initial eligibility computation period
described in Section 2.02 of the Plan, the Plan measures the eligibility
computations period as: [Choose (c) or (d)]
[X ] (c) The 12 consecutive month period beginning with each anniversary of an
Employee's Employment Commencement Date.
[ ] (d) The Plan Year, beginning with the Plan Year which includes the first
anniversary of the Employee's Employment Commencement Date.
2.03 BREAK IN SERVICE - PARTICIPATION. The Break in Service rule described
--------------------------------
in Section 2.03(B) of the Plan: [Choose (a) or (b)]
[X ] (a) Does not apply to the Employer's Plan.
[ ] (b) Applies to the Employer's Plan.
2.06 ELECTION NOT TO PARTICIPATE. The Plan: [Choose (a) or (b)]
---------------------------
[X ] (a) Does not permit an eligible Employee or a Participant to elect not to
participate.
[ ] (b) Does permit an eligible Employee or a Participant to elect not to
participate in accordance with Section 2.06 and with the following
rules: [Complete (1), (2), (3) and (4)]
<PAGE>
(1) An election is effective for a Plan Year if filed no later than
-------------------------------------------------------------------.
(2) An election not to participate must be effective for at least
Plan Year(s).
------------------------
(3) Following a reelection to participate, the Employee or Participant:
[ ](i) May not again elect not to participate for any subsequent
Plan Year.
[ ](ii) May again elect not to participate, but not earlier than
following the Plan Year in which the reelection
-----------
first was effective.
(4) (Specify)
-----------------------------------------------------------
--------------------------------------------------------------------
------------------------------------------.
(Insert "N/A" if no other rules apply.)
ARTICLE III
EMPLOYER CONTRIBUTIONS AND FORFEITURES
3.01 AMOUNT.
------
Part I. [Options (a) through (g)] Amount of Employer's contribution. The
Employer's annual contribution to the Trust will equal the total amount of
deferral contributions, matching contributions, qualified nonelective
contributions and nonelective contributions, as determined under this Section
3.01.
[Choose any combination of (a), (b), (c) and (d), or choose (e)]
[X](a) Deferral contributions (Code (S)401(k) arrangement). [Choose (1) or (2)
or both]
[X](1) Salary reduction arrangement. The Employer must contribute the
amount by which the Participants have reduced their Compensation for
the Plan Year, pursuant to their salary reduction agreements on file
with the Advisory Committee. A reference in the Plan to salary
reduction contributions is a reference to these amounts.
[ ](2) Cash or deferred arrangement. The Employer will contribute on behalf
of each Participant the portion of the Participant's proportionate
share of the cash or deferred contribution which he has not elected
to receive in cash. See Section 14.02 of the Plan. The Employer's
cash or deferred contribution is the amount the Employer may from
time to time deem advisable which the Employer designates as a cash
or deferred contribution prior to making that contribution to the
Trust.
[X](b) Matching contributions. The Employer will make matching contributions in
accordance with the formula(s) elected in Part II of this Adoption
Agreement Section 3.01.
[X](c) Designated qualified nonelective contributions. The Employer, in its
sole discretion, may contribute an amount which it designates as a
qualified nonelective contribution.
[ ](d) Nonelective contributions.
[Choose any combination of (1) through (4)]
[ ](1) Discretionary contribution. The amount (or additional amount) the
Employer may from time to time deem advisable.
[ ](2) The amount (or additional amount) the Employer may from time to time
deem advisable, separately determined for each of the following
classifications of Participants: [Choose (i) or (ii)]
[ ](i) Nonhighly Compensated Employees and Highly Compensated
Employees.
[ ](ii) (Specify classifications)
----------------------------------
-----------------------------------------------------------
--------------------------------------.
Under this Option (2), the Advisory Committee will allocate the amount
contributed for each Participant classification in accordance with Part II of
Adoption Agreement Section 3.04, as if the Participants in that classification
were the only Participants in the Plan.
[ ](3) % of the Compensation of all Participants under the
----------------
Plan, determined for the Employer's taxable year for which it makes
the contribution.
[Note: The percentage selected may not exceed 15%.]
[ ](4) % of Net Profits but not more than $ .
---------------- ---------------
[ ](e) Frozen Plan. This Plan is a frozen Plan effective .
----------- -----------------------
The Employer will not contribute to the Plan with respect to any period
following the stated date.
Net Profits. The Employer: [Choose (f) or (g)]
[X](f) Need not have Net Profits to make its annual contribution under this
Plan.
[ ](g) Must have current or accumulated Net Profits exceeding $
-----------------
to make the following contributions:
(Choose at least one)
[ ](1) Cash or deferred contributions described in Option (a)(2).
[ ](2) Matching contributions described in Option (b), except:
--------------------------------------------------------------------
--------------------------------------.
[ ](3) Qualified nonelective contributions described in Option (c).
[ ](4) Nonelective contributions described in Option (d).
The term "Net Profits" means the Employer's net income or profits for any
taxable year determined by the Employer upon the basis of its books of account
in accordance with generally accepted accounting practices consistently applied
without any deductions for Federal and state taxes upon income or for
contributions made by the Employer under this Plan or under any other employee
benefit plan the Employer maintains. The term "Net Profits" specifically
excludes N/A .
--------
[Note: Enter "N/A" if no exclusions apply.]
NON-STANDARIZED 401(k) PLAN
-4-
<PAGE>
If the Employer requires Net Profits for matching contributions and the Employer
does not have sufficient Net Profits under Option (g), it will reduce the
matching contribution under a fixed formula on a prorata basis for all
Participants. A Participant's share of the reduced contribution will bear the
same ratio as the matching contribution the Participant would have received if
Net Profits were sufficient bears to the total matching contribution all
Participants would have received if Net Profits were sufficient. If more than
one member of a related group (as defined in Section 1.30) execute this Adoption
Agreement, each participating member will determine Net Profits separately but
will not apply this reduction unless, after combining the separately determined
Net Profits, the aggregate Net Profits are insufficient to satisfy the matching
contribution liability. "Net Profits" includes both current and accumulated Net
Profits.
Part II. [Options (h) through (j)] Matching contribution formula. [Note: If the
Employer elected Option (b), complete Options (h), (i) and (j).]
[X] (h) Amount of matching contributions. For each Plan Year, the Employer's
matching contribution is:
[Choose any combination of (1), (2), (3), (4) and (5)]
[ ] (1) An amount equal to % of each Participant's
----------------------
eligible contributions for the Plan Year.
[ ] (2) An amount equal to % of each Participant's
----------------------
first tier of eligible contributions for the Plan Year, plus the
following matching percentage(s) for the following subsequent tiers
of eligible contributions for the Plan Year:
-----------------------
---------------------------------------------.
[X] (3) Discretionary formula.
[X] (i) An amount (or additional amount) equal to a matching
percentage the Employer from time to time may deem
advisable of the Participant's eligible contributions for
the Plan Year.
[ ] (ii) An amount (or additional amount) equal to a matching
percentage the Employer from time to time may deem
advisable of each tier of the Participant's eligible
contributions for the Plan Year.
[ ] (4) An amount equal to the following percentage of each Participant's
eligible contributions for the Plan Year, based on the Participant's
Years of Service:
Number of Years of Service Matching Percentage
- - --------------- ----------------
- - --------------- ----------------
- - --------------- ----------------
- - --------------- ----------------
The Advisory Committee will apply this formula by determining Years of Service
as follows:
-------------------------------------------------------------------
- - ------------------------------------------------------------------------------
- - -----------------------------------------.
[ ] (5) A Participant's matching contributions may not:
[Choose (i) or (ii)]
[ ] (i) Exceed
-------------------------------------------------
--------------------------------------.
[ ] (ii) Be less than
--------------------------------------------
--------------------------------------.
Related Employers. If two or more related employers (as defined in Section 1.30)
contribute to this Plan, the related employers may elect different matching
contribution formulas by attaching to the Adoption Agreement a separately
completed copy of this Part II. [Note: Separate matching contribution formulas
create separate current benefit structures that must satisfy the minimum
participation test of Code (S)401(a)(26).]
[X](i) Definition of eligible contributions. Subject to the requirements of
Option (j), the term "eligible contributions" means:
[Choose any combination of (1) through (3)]
[X](1) Salary reduction contributions.
[ ](2) Cash or deferred contributions (including any part of the
Participant's proportionate share of the cash or deferred
contribution which the Employer defers without the Participant's
election).
[ ](3) Participant mandatory contributions, as designated in Adoption
Agreement Section 4.01. See Section 14.04 of the Plan.
[X](j) Amount of eligible contributions taken into account. When determining a
Participant's eligible contributions taken into account under the
matching contributions formula(s), the following rules apply: [Choose any
combination of (1) through (4)]
[ ](1) The Advisory Committee will take into account all eligible
contributions credited for the Plan Year.
[ ](2) The Advisory Committee will disregard eligible contributions
exceeding
---------------------------------------------------------
-----------------------------------------.
[ ](3) The Advisory Committee will treat as the first tier of eligible
contributions, an amount not exceeding:
-------------------------
The subsequent tiers of eligible
-------------------------------
contributions are:
-----------------------------------------------
-----------------------------------------------------------------
------------------.
[X](4) (Specify) The Advisory Committee will take into account 1%
------------------------------------------------
of salary deferral for each year of service, up to a maximum of 6
-----------------------------------------------------------------
years.
-----
Part III. [Options (k) and (l)]. Special rules for Code (S)401(k) Arrangement.
[Choose (k) or (l), or both, as applicable]
[X](k) Salary Reduction Agreements. The following rules and restrictions
apply to an Employee's salary reduction agreement: [Make a selection
under (1), (2), (3) and (4)]
(1) Limitation on amount. The Employee's salary reduction
contributions:
[Choose (i) or at least one of (ii) or (iii]
NON-STANDARDIZED 401(k) PLAN
-5-
<PAGE>
[ ] (i) No maximum limitation other than as provided in the Plan.
[X] (ii) May not exceed 16% of Compensation for the Plan
---------------------
Year, subject to the annual additions limitation described in
Part 2 of Article III and the 402(g) limitation described
in Section 14.07 of the Plan.
[ ] (iii) Based on percentages of Compensation must equal at least -------
--------------------------------------------------------------------.
(2) An Employee may revoke, on a prospective basis, a salary reduction
agreement:
[Choose (i), (ii), (iii) or (iv)]
[ ] (i) Once during any Plan Year but not later than of the
-----------
Plan Year.
[ ] (ii) As of any Plan Entry Date.
[ ] (iii) As of the first day of any month.
[X] (iv) (Specify, but must be at least once per Plan Year)
As of any pay period with 15 days prior notice.
----------------------------------------------
----------------------.
(3) An Employee who revokes his salary reduction agreement may file a new
salary reduction agreement with an effective date:
[Choose (i), (ii), (iii) or (iv)]
[ ] (i) No earlier than the first day of the next Plan Year.
[X] (ii) As of any subsequent Plan Entry Date.
[ ] (iii) As of the first day of any month subsequent to the month in which
he revoked an Agreement.
[ ] (iv) (Specify, but must be at least once per Plan Year following the
Plan Year of revocation)
--------------------------------------
-----------------------------------------.
(4) A Participant may increase or may decrease, on a prospective basis, his
salary reduction percentage or dollar amount: [Choose (i), (ii) or
(iii) or (iv)]
[ ] (i) As of the beginning of each payroll period.
[ ] (ii) As of the first day of each month.
[ ] (iii) As of any Plan Entry Date.
[X] (iv) (Specify, but must permit an increase or a decrease at least
once per Plan Year)
Once per fiscal year quarter.
------------------------------------------------------------
------------------------------------------------------------
---------------------------------------.
[ ] (1) Cash or deferred contributions. For each Plan Year for which the
Employer makes a designated cash or deferred contribution, a Participant
may elect to receive directly in cash not more than the following
portion [or, if less, the 402(g) limitation described in Section 14.07
of the Plan] of his proportionate share of that cash or deferred
contribution:
[Choose (1) or (2)]
[ ] (1) All of any portion.
[ ] (2)
-----------------------%.
3.04 CONTRIBUTION ALLOCATION. The Advisory Committee will allocate deferral
-----------------------
contributions, matching contributions, qualified nonelective contributions
and nonelective contributions in accordance with Section 14.06 and the
elections under this Adoption Agreement Section 3.04.
Part I. [Options (a) through (d)]. Special Accounting Elections. (Choose
whichever elections are applicable to the Employer's Plan)
[X] (a) Matching Contributions Account. The Advisory Committee will
allocate matching contributions to a Participant's:
[Choose (1) or (2); (3) is available only in addition to (1)]
[X] (1) Regular Matching Contributions Account.
[ ] (2) Qualified Matching Contributions Account.
[ ] (3) Except, matching contributions under Option(s)
---------------
------------------------of Adoption Agreement Section 3.01 are
allocable to the Qualified Matching Contributions Account.
[X] (b) Special Allocation Dates for Salary Reduction Contributions. The
Advisory Committee will allocate salary reduction contributions as
of the Accounting Date and as of the following additional
allocation dates: monthly
----------------------------------------------
-----------------------------------------------------------------.
[X] (c) Special Allocation Dates for Matching Contributions. The Advisory
Committee will allocate matching contributions as of the
Accounting Date and as of the following additional allocation
dates:
-----------------------------------------------------------------
-----------------------------------------------------------------.
[X] (d) Designated Qualified Nonelective Contributions - Definition of
Participant. For purposes of allocating the designated qualified
nonelective contribution. "Participant" means:
[Choose (1), (2) or (3)]
[ ] (1) All Participants.
[X] (2) Participants who are Nonhighly Compensated Employees for the Plan
Year.
[ ] (3) (Specify)
-------------------------------------------------------
------------------------------------------.
Part II. Method of Allocation - Nonelective Contribution. Subject to any
restoration allocation required under Section 5.04, the Advisory Committee
will allocate and credit each annual nonelective contribution (and
Participant forfeitures treated as nonelective contributions) to the
Employer Contributions Account of each Participant who satisfies the
conditions of Section 3.06, in accordance with the allocation method
selected under this Section 3.04. If the Employer elects Option (e)(2),
Option (g)(2) or Option (h), for the first 3% of Compensation allocated to
all Participants. "Compensation" does not include any exclusions elected
under Adoption Agreement Section 1.12 (other than the exclusion of
elective contributions), and the Advisory Committee must take into account
the Participant's Compensation for the entire Plan Year.
[Choose an allocation method under (e), (f), (g) or (h); (i) is mandatory
if the Employer elects (f), (g) or (h); (j) is optional in addition to any
other election.]
[ ] (e) Non-integrated Allocation Formula. [Choose (1) or (2)]
NON-STANDARDIZED 401(k) PLAN
-6-
<PAGE>
[ ] (1) The Advisory Committee will allocate the annual nonelective
contributions in the same ratio that each Participant's Compensation
for the Plan Year bears to the total Compensation of all
Participants for the Plan Year.
[ ] (2) The Advisory Committee will allocate the annual nonelective
contributions in the same ratio that each Participant's Compensation
for the Plan Year bears to the total Compensation of all
Participants for the Plan Year. For purposes of this Option (2),
"Participant" means, in addition to a Participant who satisfies the
requirements of Section 3.06 for the Plan Year, any other
Participant entitled to a top heavy minimum allocation under Section
3.04(B), but such Participant's allocation will not exceed 3% of his
Compensation for the Plan Year.
[ ] (f) TWO-TIERED INTEGRATED ALLOCATION FORMULA - MAXIMUM DISPARITY. First,
the Advisory Committee will allocate the annual Employer nonelective
contributions in the same ratio that each Participant's Compensation
plus Excess Compensation for the Plan Year bears to the total
Compensation plus Excess Compensation of all Participants for the Plan
Year. The allocation under this paragraph, as a percentage of each
Participant's Compensation plus Excess Compensation, must not exceed
the applicable percentage (5.7%, 5.4%, or 4.3%) listed under the
Maximum Disparity Table following Option (i).
The Advisory Committee then will allocate any remaining nonelective
contributions in the same ratio that each Participant's Compensation
for the Plan Year bears to the total Compensation of all Participants
for the Plan Year.
[ ] (g) THREE-TIERED INTEGRATED ALLOCATION FORMULA. First, the Advisory
Committee will allocate the annual Employer nonelective contributions
in the same ratio that each Participant's Compensation for the Plan
Year bears to the total Compensation of all Participants for the Plan
Year. The allocation under this paragraph, as a percentage of each
Participant's Compensation may not exceed the applicable percentage
(5.7%, 5.4%, or 4.3%) listed under the Maximum Disparity Table
following Option (i). Solely for purposes of the allocation in this
first paragraph, "Participant" means, in addition to a Participant who
satisfies the requirements of Section 3.06 for the Plan Year: [Choose
(1) or (2)]
[ ] (1) No other Participant.
[ ] (2) Any other Participant entitled to a top heavy minimum allocation
under Section 3.04(B), but such Participant's allocation under this
Option (g) will not exceed 3% of his Compensation for the Plan
Year.
As a second tier allocation, the Advisory Committee will allocate the
nonelective contributions in the same ratio that each Participant's Excess
Compensation for the Plan Year bears to the total Excess Compensation of all
Participants for the Plan Year. The allocation under this paragraph, as a
percentage of each Participant's Excess Compensation, may not exceed the
allocation percentage in the first paragraph.
Finally, the Advisory Committee will allocate any remaining nonelective
contributions in the same ratio that each Participant's Compensation for the
Plan Year bears to the total Compensation of all Participants for the Plan Year.
[ ] (h) FOUR-TIERED INTEGRATED ALLOCATION FORMULA. First, the Advisory
Committee will allocate the annual Employer nonelective contributions
in the same ratio that each Participant's Compensation for the Plan
Year bears to the total Compensation of all Participants for the Plan
Year, but not exceeding 3% of each Participant's Compensation. Solely
for purposes for this first tier allocation, a "Participant" means, in
addition to any Participant who satisfies the requirements of Section
3.06 for the Plan Year, any other Participant entitled to a top heavy
minimum allocation under Section 3.04(B) of the Plan.
As a second tier allocation, the Advisory Committee will allocate the
nonelective contributions in the same ratio that each Participant's Excess
Compensation for the Plan Year bears to the total Excess Compensation of all
Participants for the Plan Year, but not exceeding 3% of each Participant's
Excess Compensation.
As a third tier allocation, the Advisory Committee will allocate the annual
Employer contributions in the same ratio that each Participant's Compensation
plus Excess Compensation for the Plan Year bears to the total Compensation plus
Excess Compensation of all Participants for the Plan Year. The allocation under
this paragraph, as a percentage of each Participant's Compensation plus Excess
Compensation, must not exceed the applicable percentage (2.7%, 2.4% or 1.3%)
listed under the Maximum Disparity Table following Option (i).
The Advisory Committee then will allocate any remaining nonelective
contributions in the same ratio that each Participant's Compensation for the
Plan Year bears to the total Compensation of all Participants for the Plan Year.
[ ] (i) Excess Compensation. For purposes of Option (f), (g) or (h), "Excess
Compensation" means Compensation in excess of the following Integration
Level:
[Choose (1) or (2)]
[ ] (1) % (not exceeding 100%) of the taxable wage
-------------------------
base, as determined under Section 230 of the Social Security Act, in
effect on the first day of the Plan Year: [Choose any combination of
(i) and (ii) or choose (iii)]
[ ] (i) Rounded to (but not exceeding the
-------------------
taxable wage base).
[ ] (ii) But not greater than $
---------------------.
[ ] (iii) Without any further adjustment or limitation.
[ ] (2) $
-----------------------------
[Note: Not exceeding the taxable wage base for the Plan Year in
which this Adoption Agreement first is effective.]
NON-STANDARDIZED 401(k) PLAN
<PAGE>
MAXIMUM DISPARITY TABLE. For purposes of Options (f), (g) and (h), the
applicable percentage is:
Integration Level Applicable Percentages Applicable
(as percentage of for Option (f) Percentages
taxable wage base) or Option (g) for Option (h)
- - ------------------ -------------- --------------
100% 5.7% 2.7%
More than 80%
but less than 100% 5.4% 2.4%
More than 20%
(but not less than
$10,001) and not
more than 80% 4.3% 1.3%
20% (or $10,000,
if greater) 5.7% 2.7%
or less
[_] (j) Allocation offset. The Advisory Committee will reduce a Participant's
allocation otherwise made under Part II of this Section 3.04 by the
Participant's allocation under the following qualified plan(s)
maintained by the Employer:
----------------------------------------------------------------------
---------------------------------------------------.
The Advisory Committee will determine this allocation reduction:
[Choose (1) or (2)]
[_] (1) By treating the term "nonelective contribution" as including all
amounts paid or accrued by the Employer during the Plan Year to the
qualified plan(s) referenced under this Option (j). If a
Participant under this Plan also participates in that other plan,
the Advisory Committee will treat the amount the Employer
contributes for or during a Plan Year on behalf of a particular
Participant under such other plan as an amount allocated under this
Plan to that Participant's Account for that Plan Year. The Advisory
Committee will make the computation of allocation required under
the immediately preceding sentence before making any allocation of
nonelective contributions under this Section 3.04.
[_] (2) In accordance with the formula provided in an addendum to this
Adoption Agreement, numbered 3.04(j).
TOP HEAVY MINIMUM ALLOCATION - METHOD OF COMPLIANCE. If a Participant's
allocation under this Section 3.04 is less than the top heavy minimum allocation
to which he is entitled under Section 3.04(B): [Choose (k) or (l)]
[X] (k) The Employer will make any necessary additional contribution to the
Participant's Account, as described in Section 3.04(B)(7)(a) of the
Plan.
[_] (l) The Employer will satisfy the top heavy minimum allocation under the
following plan(s) it maintains:
--------------------------------------------------------------------
------------------------------------.
However, the Employer will make any necessary additional contribution
to satisfy the top heavy minimum allocation for an employee covered
only under this Plan and not under the other plan(s) designated in this
Option (l). See Section 3.04(B)(7)(b) of the Plan.
If the Employer maintains another plan, the Employer may provide in an addendum
to this Adoption Agreement, numbered Section 3.04, any modifications to the Plan
necessary to satisfy the top heavy requirements under Code (S)416.
RELATED EMPLOYERS. If two or more related employers (as defined in Section
1.30) contribute to this Plan, the Advisory Committee must allocate all Employer
nonelective contributions (and forfeitures treated as nonelective contributions)
to each Participant in the Plan, in accordance with the elections in this
Adoption Agreement Section 3.04: [Choose (m) or (n)]
[_] (m) Without regard to which contributing related group member employs the
Participant.
[X] (n) Only to the Participants directly employed by the contributing
Employer. If a Participant receives Compensation from more than one
contributing Employer, the Advisory Committee will determine the
allocations under this Adoption Agreement Section 3.04 by prorating
among the participating Employers the Participant's Compensation and,
if applicable, the Participant's Integration Level under Option (i).
3.05 FORFEITURE ALLOCATION. Subject to any restoration allocation required
under Sections 5.04 or 9.14, the Advisory Committee will allocate a Participant
forfeiture in accordance with Section 3.04:
[Choose (a) or (b); (c) and (d) are optional in addition to (a) or (b)]
[_] (a) As an Employer nonelective contribution for the Plan Year in which the
forfeiture occurs, as if the Participant forfeiture were an additional
nonelective contribution for that Plan Year.
[X] (b) To reduce the Employer matching contributions and nonelective
contributions for the Plan Year: [Choose (1) or (2)]
[ ] (1) in which the forfeiture occurs.
[X] (2) immediately following the Plan Year in which the forfeiture occurs.
[X] (c) To the extent attributable to matching contributions: [Choose (1), (2)
or (3)]
[ ] (1) In the manner elected under Options (a) or (b).
[X] (2) First to reduce Employer matching contributions for the Plan Year
[Choose (i) or (ii)]
[ ] (i) in which the forfeiture occurs.
[X] (ii) immediately following the Plan Year in which the
forfeiture occurs, then as elected in Options (a) or (b).
[ ] (3) As a discretionary matching contribution for the Plan Year in which
the forfeiture occurs, in lieu of the manner elected under Options
(a) or (b).
[ ] (d) First to reduce the Plan's ordinary and necessary administrative
expenses for the Plan Year and then will allocate any remaining
forfeitures in the manner described in Options (a), (b) or (c),
whichever applies.
NON-STANDARDIZED 401(k) PLAN
<PAGE>
If the Employer elects Option (c), the forfeitures used to reduce Plan expenses:
[Choose (1) or (2)]
[ ] (1) relate proportionately to forfeitures described in Option (c) and
to forfeitures described in Options (a) or (b).
[ ] (2) relate first to forfeitures described in Option __________________
____________________________.
Allocation of forfeited excess aggregate contributions. The Advisory Committee
will allocate any forfeited excess aggregate contributions (as described in
Section 14.09):
[Choose (e), (f) or (g)]
[X] (e) To reduce Employer matching contributions for the Plan Year: [Choose (1)
or (2)]
[ ] (1) in which the forfeiture occurs.
[X] (2) immediately following the Plan Year in which the forfeiture occurs.
[ ] (f) As Employer discretionary matching contributions for the Plan Year in
which forfeited, except the Advisory Committee will not allocate these
forfeitures to the Highly Compensated Employees who incurred the
forfeitures.
[ ] (g) In accordance with Options (a) through (d), whichever applies, except
the Advisory Committee will not allocate these forfeitures under Option
(a) or under Option (c)(3) to the Highly Compensated Employees who
incurred the forfeitures.
3.06 ACCRUAL OF BENEFIT.
------------------
Compensation taken into account. For the Plan Year in which the Employee first
becomes a Participant, the Advisory Committee will determine the allocation of
any cash or deferred contribution, designated qualified nonelective contribution
or nonelective contribution by taking into account:
[Choose (a) or (b)]
[ ] (a) The Employee's Compensation for the entire Plan Year.
[X] (b) The Employee's Compensation for the portion of the Plan Year in which
the Employee actually is a Participant in the Plan.
Accrual Requirements. Subject to the suspension of accrual requirements of
Section 3.06(E) of the Plan, to receive an allocation of cash or deferred
contributions, matching contributions, designated qualified nonelective
contributions, nonelective contributions and Participant forfeitures, if any,
for the Plan Year, a Participant must satisfy the conditions described in the
following elections:
[Choose (c) or at least one of (d) through (f)]
[X] (c) Safe harbor rule. If the Participant is employed by the Employer on the
last day of the Plan Year, the Participant must complete at least one
Hour of Service for that Plan Year. If the Participant is not employed
by the Employer on the last day of the Plan Year, the Participant must
complete at least 501 Hours of Service during the Plan Year.
[ ] (d) Hours of Service condition. The Participant must complete the following
minimum number of Hours of Service during the Plan Year:
[Choose at least one of (1) through (5)]
[ ] (1) 1,000 Hours of Service.
[ ] (2) (Specify, but the number of Hours of Service may not exceed 1,000)
____________________________________.
[ ] (3) No Hour of Service requirement if the participant terminates
employment during the Plan Year on account of: [Choose (i), (ii) or
(iii)]
[ ] (i) Death.
[ ] (ii) Disability.
[ ] (iii) Attainment of Normal Retirement Age in the current Plan
Year or in a prior Plan Year.
[ ] (4) _______________________________ Hours of Service (not exceeding
1,000) if the Participant terminates employment with the Employer
during the Plan Year, subject to any election in Option (3).
[ ] (5) No Hour of Service requirement for an allocation of the following
contributions: ___________________________________________________
_______________
[ ] (e) Employment condition. The Participant must be employed by the Employer
on the last day of the Plan Year, irrespective of whether he satisfies
any Hours of Service condition under Option (d), with the following
exceptions:
[Choose (1) or at least one of (2) through (5)]
[ ] (1) No exceptions.
[ ] (2) Termination of employment because of death.
[ ] (3) Termination of employment because of disability.
[ ] (4) Termination of employment following attainment of Normal Retirement
Age.
[ ] (5) No employment condition for the following contributions:
_______________________________________
[ ] (f) (Specify other conditions, if applicable): ____________________________
_________________________
Suspension of Accrual Requirements. The suspension of accrual requirements of
Section 3.06(E) of the Plan:
[Choose (g), (h) or (i)]
[X] (g) Applies to the Employer's Plan.
[ ] (h) Does not apply to the Employer's Plan.
[ ] (i) Applies in modified form to the Employer's Plan, as described in an
addendum to this Adoption Agreement, numbered Section 3.06(E).
Special accrual requirements for matching contributions. If the Plan allocates
matching contributions on two or more allocation dates for a Plan Year, the
Advisory Committee, unless otherwise specified in Option (1), will apply any
Hours of Service condition by dividing the required Hours of Service on a
prorata basis to the allocation periods included in that Plan Year. Furthermore,
a Participant who satisfies the conditions described in this Adoption Agreement
Section 3.06 will receive an allocation of matching contributions (and
NON-STANDARDIZED 401(k) PLAN
-9-
<PAGE>
forfeitures treated as matching contributions) only if the Participant satisfies
the following additional condition(s):
[Choose (j) or at least one of (k) or (l)]
[X](j) No additional conditions.
[_](k) The Participant is not a Highly Compensated Employee for the Plan Year.
This Option (k) applies to:
[Choose (1) or (2)]
[_](1) All matching contributions.
[_](2) Matching contributions described in Option(s) _____________________
_______________ of Adoption Agreement Section 3.01.
[_](1) (Specify)______________________________________________________________
____________________________________________________.
3.15 MORE THAN ONE PLAN LIMITATION. If the provisions of Section 3.15 apply,
-----------------------------
the Excess Amount attributed to this Plan equals: [Choose (a), (b) or
(c)]
[_](a) The product of:
(i) the total Excess Amount allocated as of such date (including any
amount which the Advisory Committee would have allocated but for the
limitations of Code (S)415), times
(ii) the ratio of (1) the amount allocated to the Participant as of such
date under this Plan divided by (2) the total amount allocated as of
such date under all qualified defined contribution plans (determined
without regard to the limitations of Code (S)415).
[_](b) The total Excess Amount.
[X}(c) None of the Excess Amount.
3.18 DEFINED BENEFIT PLAN LIMITATION.
-------------------------------
Application of limitation. The limitation under Section 3.18 of the Plan:
[Choose (a) or (b)]
[X](a) Does not apply to the Employer's Plan because the Employer does not
maintain and never has maintained a defined benefit plan covering any
Participant in this Plan.
[_](b) Applies to the Employer's Plan. To the extent necessary to satisfy the
limitation under Section 3.18, the Employer will reduce:
[Choose (1) or (2)]
[_](1) The Participant's projected annual benefit under the defined benefit
plan under which the Participant participates.
[_](2) Its contribution or allocation on behalf of the Participant to the
defined contribution plan under which the Participant participates
and then, if necessary, the Participant's projected annual benefit
under the defined benefit plan under which the Participant
participates.
[Note: If the Employer selects (a), the remaining options in this Section 3.18
do not apply to the Employer's Plan.]
Coordination with top heavy minimum allocation. The Advisory Committee will
apply the top heavy minimum allocation provisions of Section 3.04(B) of the Plan
with the following modifications: [Choose (c) or at least one of (d) or (e)]
[_](c) No modifications.
[_](d) For Non-Key Employees participating only in this Plan, the top heavy
minimum allocation is the minimum allocation described in Section 3.04(B)
determined by substituting % (not less than 4%) for "3%," except:
[Choose (i) or (ii)]
[_](i) No exceptions.
[_](ii) Plan Years in which the top heavy ratio exceeds 90%.
[_](e) For Non-Key Employees also participating in the defined benefit plan, the
top heavy minimum is: [Choose (1) or (2)]
[_](1) 5% of Compensation (as determined under Section 3.04(B) of the Plan)
irrespective of the contribution rate of any Key Employee, except:
[Choose (i) or (ii)]
[_](i) No exceptions.
[_](ii) Substituting "7 1/2%" for "5%" if the top heavy ratio does not
exceed 90%.
[_](2) 0%.[Note: The Employer may not select this Option (2) unless the
defined benefit plan satisfies the top heavy minimum benefit
requirements of Code (S)416 for these Non-Key Employees.]
Actuarial Assumptions for Top Heavy Calculation. To determine the top heavy
ratio, the Advisory Committee will use the following interest rate and mortality
assumptions to value accrued benefits under a defined benefit plan: ___________
_______________________________________________________________________________
__________________________.
If the elections under this Section 3.18 are not appropriate to satisfy the
limitations of Section 3.18, or the top heavy requirements under Code (S)416,
the Employer must provide the appropriate provision in an addendum to this
Adoption Agreement.
ARTICLE IV
PARTICIPANT CONTRIBUTIONS
4.01 PARTICIPANT NONDEDUCTIBLE CONTRIBUTIONS.
---------------------------------------
The Plan:
[Choose (a) or (b): (c) is available only with (b)]
[_](a) Does not permit Participant nondeductible contributions.
[X](b) Permits Participant nondeductible contributions, pursuant to Section
14.04 of the Plan.
[_](c) The following portion of the Participant's nondeductible contributions
for the Plan Year are mandatory contributions under Option (i)(3) of
Adoption Agreement Section 3.01: [Choose (1) or (2)]
[_](1) The amount which is not less than:___________________________________
________________________________________________________________.
[_](2) The amount which is not greater than:________________________________
________________________________________________________________.
NON-STANDARDIZED 401(k) PLAN
-10-
<PAGE>
Allocation dates. The Advisory Committee will allocate
nondeductible contributions for each Plan Year as of the Accounting
Date and the following additional allocation dates: [Choose (d) or
(e)]
[X] (d) No other allocation dates.
[ ] (e) (Specify)__________________________________________________
___________________________________________________________
As of an allocation date, the Advisory Committee will credit all
nondeductible contributions made for the relevant allocation period.
Unless otherwise specified in (e), a nondeductible contribution
relates to an allocation period only if actually made to the Trust no
later than 30 days after that allocation period ends.
4.05 PARTICIPANT CONTRIBUTION-
-------------------------
WITHDRAWAL/DISTRIBUTION. Subject to the restrictions of
Article VI, the following distribution options apply to a Participant's
Mandatory Contributions Account, if any, prior to his Separation
from Service:
[Choose (a) or at least one of (b) through (d)]
[ ] (a) No distribution options prior to Separation from Service.
[ ] (b) The same distribution options applicable to the Deferral
Contributions Account prior to the Participant's Separation
from Service, as elected in Adoption Agreement Section
6.03.
[ ] (c) Until he retires, the Participant has a continuing election
to receive all or any portion of his Mandatory
Contributions Account if:
[Choose (1) or at least one of (2) through (4)
[ ] (1) No conditions.
[ ] (2) The mandatory contributions have accumulated for at
least________________ Plan Years since the Plan Year
for which contributed.
[ ] (3) The Participant suspends making nondeductible
contributions for a period of________________
months.
[ ] (4) (Specify) ___________________________________________
______________________________________.
[X] (d) (Specify) Any time for after-tax contributions.
-----------------------------------------------
______________________.
ARTICLE V
TERMINATION OF SERVICE - PARTICIPANT VESTING
5.01 NORMAL RETIREMENT. Normal Retirement Age under
-----------------
the Plan is: [Choose (a) or (b)]
[X] (a) 65 (State age, but may not exceed age 65).
--------------------
[ ] (b) The later of the date the Participant attains_____________
years of age or the_________anniversary of the first day of
the Plan Year in which the Participant commenced
participation in the Plan. (The age selected may not exceed
age 65 and the anniversary selected may not exceed the
5th.)
5.02 PARTICIPANT DEATH OR DISABILITY. The 100%
-------------------------------
vesting rule under Section 5.02 of the Plan:
[Choose (a) or choose one or both of (b) and (c)]
[ ] (a) Does not apply.
[X] (b) Applies to death.
[X] (c) Applies to disability.
5.03 VESTING SCHEDULE
----------------
Deferral Contributions Account/Qualified Matching
Contributions Account/Qualified Nonelective Contributions
Account/Mandatory Contributions Account. A Participant has a
100% Nonforfeitable interest at all times in his Deferral
Contributions Account, his Qualified Matching Contributions
Account, his Qualified Nonelective Contributions Account and in
his Mandatory Contributions Account.
Regular Matching Contributions Account/Employer
Contributions Account. With respect to a Participant's Regular
Matching Contributions Account and Employer Contributions
Account, the Employer elects the following vesting schedule:
[Choose (a) or (b); (c) and (d) are available only as additional
option)]
[ ] (a) Immediate vesting. 100% Nonforfeitable at all times.
[Note: The Employer must elect Option (a) if the eligibility
conditions under Adoption Agreement Section 2.01 (c)
require 2 years of service or more than 12 months of
employment.]
[X] (b) Graduated Vesting Schedules.
Top Heavy Schedule
(Mandatory)
Years of Nonforfeitable
Service Percentage
- - -------- --------------
Less than 1 ______0_______
1 ______0_______
2 _____20_______
3 _____40_______
4 _____60_______
5 _____80_______
6 or more 100%
Non Top Heavy Schedule
(Optional)
Years of Nonforfeitable
Service Percentage
________ --------------
Less than 1 ______0_______
1 ______0_______
2 ______0_______
3 _____20_______
4 _____40_______
5 _____60_______
6 _____80_______
7 or more 100%
[ ] (c) Special vesting election for Regular Matching Contributions Account. In
lieu of the election under Options (a) or (b), the Employer elects the
following vesting schedule for a
NON-STANDARDIZED 401(k) PLAN
-11-
<PAGE>
Participant's Regular Matching Contributions Account: [Choose (1) or (2)]
[ ] (1) 100% Nonforfeitable at all times.
[ ] (2) In accordance with the vesting schedule described in the addendum to
this Adoption Agreement, numbered 5.03(c). [Note: If the Employer
elects this Option (c)(2), the addendum must designate the
applicable vesting schedule(s) using the same format as used in
Option (b).]
[Note: Under Options (b) and (c)(2), the Employer must complete a Top Heavy
Schedule which satisfies Code (S)416. The Employer, at its option, may complete
a Non Top Heavy Schedule. The Non Top Heavy Schedule must satisfy Code
(S)411(a)(2). Also see Section 7.05 of the Plan.]
[X] (d) The Top Heavy Schedule under Option (b) [and, if applicable, under
Option (c)(2)] applies:
[Choose (1) or (2)]
[X] (1) Only in a Plan Year for which the Plan is top heavy.
[ ] (2) In the Plan Year for which the Plan first is top heavy and then in
all subsequent Plan Years.
[Note: The Employer may not elect Option (d) unless it has completed
a Non Top Heavy Schedule.]
MINIMUM VESTING. [Choose (e) or (f)]
[ ] (e) The Plan does not apply a minimum vesting rule.
[X] (f) A Participant's Nonforfeitable Accrued Benefit will never be less
than the lesser of $25 or his entire Accrued Benefit, even if the
application of a graduated vesting schedule under Options (b) or (c)
would result in a smaller Nonforfeitable Accrued Benefit.
LIFE INSURANCE INVESTMENTS. The Participant's Accrued Benefit attributable to
insurance contracts purchased on his behalf under Article XI is: [Choose (g) or
(h)]
[X] (g) Subject to the vesting election under Options (a), (b) or (c).
[ ] (h) 100% Nonforfeitable at all times, irrespective of the vesting
election under Options (b) or (c)(2).
5.04 CASH-OUT DISTRIBUTIONS TO PARTIALLY-VESTED PARTICIPANTS/ RESTORATION
--------------------------------------------------------------------
OF FORFEITED ACCRUED BENEFIT. The deemed cash-out rule described in Section
- - ----------------------------
5.04(C) of the Plan: [Choose (a) or (b)]
[ ] (a) Does not apply.
[X] (b) Will apply to determine the timing of forfeitures for 0% vested
Participants. A Participant is not a 0% vested Participant if he has
a Deferral Contributions Account.
5.06 YEAR OF SERVICE - VESTING.
-------------------------
Vesting computation period. The Plan measures a Year of Service on the basis of
the following 12 consecutive month periods:
[Choose (a) or (b)]
[ ] (a) Plan Years.
[X] (b) Employment Years. An Employment Year is the 12 consecutive month
----------------
period measured from the Employee's Employment Commencement Date and
each successive 12 consecutive month period measured from each
anniversary of that Employment Commencement Date.
HOURS OF SERVICE. The minimum number of Hours of Service an Employee must
complete during a vesting computation period to receive credit for a Year of
Service is: [Choose (c) or (d)]
[X] (c) 1,000 Hours of Service.
[ ] (d) Hours of Service.
---------------------
[Note: The Hours of Service requirement may not exceed 1,000.]
5.08 INCLUDED YEARS OF SERVICE - VESTING. The Employer specifically
-----------------------------------
excludes the following Years of Service: [Choose (a) or at least one of (b)
through (e)]
[X] (a) None other than as specified in Section 5.08(a) of the Plan.
[ ] (b) Any Year of Service before the Participant attained the age of
------------------------.
[Note: The age selected may not exceed age 18.]
[ ] (c) Any Year of Service during the period the Employer did not maintain
this Plan or a predecessor plan.
[ ] (d) Any Year of Service before a Break in Service if the number of
consecutive Breaks in Service equals or exceeds the greater of 5 or
the aggregate number of the Years of Service prior to the Break. This
exception applies only if the Participant is 0% vested in his Accrued
Benefit derived from Employer contributions at the time he has a
Break in Service. Furthermore, the aggregate number of Years of
Service before a Break in Service do not include any Years of
Service not required to be taken into account under this exception
by reason of any prior Break in Service.
[ ] (e) Any Year of Service earned prior to the effective date of ERISA if
the Plan would have disregarded that Year of Service on account of
an Employee's Separation from Service under a Plan provision in
effect and adopted before January 1, 1974.
ARTICLE VI
TIME AND METHOD OF PAYMENTS OF BENEFITS
Code (S)411(d)(6) PROTECTED BENEFITS. The elections under this Article VI may
not eliminate Code (S)411(d)(6) protected benefits. To the extent the elections
would eliminate a Code (S)411(d)(6) protected benefit, see Section 13.02 of the
Plan. Furthermore, if the elections liberalize the optional forms of benefit
under the Plan, the more liberal options apply on the later of the adoption date
or the Effective Date of this Adoption Agreement.
6.01 TIME OF PAYMENT OF ACCRUED BENEFIT.
----------------------------------
Distribution Date. A distribution date under the Plan means
-----------------
the first day of each month of the Plan Year.
- - ----------------------------------------------------------------------------
- - ----------------------------------------------------------------------------
- - ------------------.
[Note: The Employer must specify the appropriate date(s). The specified
distribution dates primarily establish annuity starting dates and the notice and
consent periods prescribed by the Plan. The Plan allows the Trustee an
administratively practicable period of time to make the actual distribution
relating to a particular distribution date.]
NON-STANDARDIZED 401(k) PLAN
<PAGE>
Nonforfeitable Accrued Benefit Not Exceeding $3,500. Subject to
the limitations of Section 6.01(A)(1), the distribution date for
distribution of a Nonforfeitable Accrued Benefit not exceeding $3,500
is: [Choose (a), (b), (c), (d) or (e)]
[ ] (a) _______________________________of the_________________Plan
Year beginning after the Participant's Separation from
Service.
[ ] (b) _______________________________following the Participant's
Separation from Service.
[ ] (c) _______________________________of the Plan Year after the
Participant incurs______________________________Break(s)
in Service (as defined in Article V).
[ ] (d) _______________________________following the Participant's
attainment of Normal Retirement Age, but not earlier than
__________________days following his Separation from
Service.
[X] (e) (Specify) The first administratively practicable distribution
---------------------------------------------------
date after the end of the quarter in which the participant
-------------------------------------------------------------
separates from service.
-------------------------------------------------------------
Nonforfeitable Accrued Benefit Exceeds $3,500. See the elections
under Section 6.03.
Disability. The distribution date, subject to Section 6.01(A)(3), is:
[Choose (f), (g) or (h)]
[ ] (f) _____________________________after the Participant terminates
employment because of disability.
[X] (g) The same as if the Participant had terminated employment
without disability.
[ ] (h) (Specify)____________________________________________________
_____________________________________________________________.
Hardship. [Choose (i) or (j)]
[X] (i) The Plan does not permit a hardship distribution to a
Participant who has separated from Service.
[ ] (j) The Plan permits a hardship distribution to a Participant who
has separated from Service in accordance with the hardship
distribution policy stated in:
[Choose (1), (2) or (3)]
[ ] (1) Section 6.01(A)(4) of the Plan.
[ ] (2) Section 14.11 of the Plan.
[ ] (3) The addendum to this Adoption Agreement, numbered
Section 6.01.
Default on a Loan. If a Participant or Beneficiary defaults on a loan
made pursuant to a loan policy adopted by the Advisory Committee
pursuant to Section 9.04, the Plan:
[Choose (k), (l) or (m)]
[X] (k) Treats the default as a distributable event. The Trustee, at
the time of the default, will reduce the Participant's
Nonforfeitable Accrued Benefit by the lesser of the amount
in default (plus accrued interest) or the Plan's security
interest in that Nonforfeitable Accrued Benefit. To the extent
the loan is attributable to the Participant's Deferral
Contributions Account, Qualified Matching Contributions
Account or Qualified Nonelective Contributions Account,
the Trustee will not reduce the Participant's Nonforfeitable
Accrued Benefit unless the Participant has separated from
Service or unless the Participant has attained age 59 1/2.
[ ] (1) Does not treat the default as a distributable event. When an
otherwise distributable event first occurs pursuant to Section
6.01 or Section 6.03 of the Plan, the Trustee will reduce the
Participant's Nonforfeitable Accrued Benefit by the lesser of
the amount in default (plus accrued interest) or the Plan's
security interest in that Nonforfeitable Accrued Benefit.
[ ] (m) (Specify)_____________________________________________________
______________________________________________________________.
6.02 METHOD OF PAYMENT OF ACCRUED BENEFIT. The
------------------------------------
Advisory Committee will apply Section 6.02 of the Plan with the
following modifications:
[Choose (a) or at least one of (b), (c), (d) and (e)]
[X] (a) No modifications.
[ ] (b) Except as required under Section 6.01 of the Plan, a lump
sum distribution is not available:_______________________
_________________________________________________________
__________________________________.
[ ] (c) An installment distribution:
[Choose (1) or at least one of (2) or (3)]
[ ] (1) Is not available under the Plan.
[ ] (2) May not exceed the lesser of_______________________years
or the maximum period permitted under Section 6.02.
[ ] (3) (Specify)______________________________________________
_______________________________________________________.
[ ] (d) The Plan permits the following annuity options:___________
______________________________________________.
Any Participant who elects a life annuity option is subject to the
requirements of Sections 6.04(A), (B), (C) and (D) of the Plan. See
Section 6.04(E).
[Note: The Employer may specify additional annuity options in an
addendum to this Adoption Agreement, numbered 6.02(d).]
[ ] (e) If the Plan invests in qualifying Employer securities, as
described in Section 10.03(F), a Participant eligible to elect
distribution under Section 6.03 may elect to receive that
distribution in Employer securities only in accordance with
the provisions of the addendum to this Adoption Agreement,
numbered 6.02(e).
6.03 BENEFIT PAYMENT ELECTIONS.
-------------------------
Participant Elections After Separation from Service. A Participant
who is eligible to make distribution elections under Section 6.03 of the
Plan may elect to commence distribution of his Nonforfeitable Accrued
Benefit:
[Choose at least one of (a) through (c)]
[ ] (a) As of any distribution date, but not earlier that_______of
the_________________________Plan Year beginning after the
Participant's Separation from Service.
[X] (b) As of the following date(s):
[Choose at least one of Options (1) through (6)]
[ ] (1) Any distribution date after the close of the Plan Year in
which the Participant attains Normal Retirement Age.
NON-STANDARDIZED 401(k) PLAN
-13-
<PAGE>
[ ] (2) Any distribution date following his Separation from
Service with the Employer.
[ ] (3) Any distribution date in the___________________Plan
Year(s) beginning after his Separation from Service.
[ ] (4) Any distribution date in the Plan Year after the
Participant incurs______________Break(s) in Service
(as defined in Article V).
[ ] (5) Any distribution date following attainment of
age________and completion of at least______________
Years of Service (as defined in Article V).
[X] (6) (Specify) As of any distribution date, but not earlier than
-------------------------------------------------
the first administratively practicable distribution date
--------------------------------------------------------
occurring after the end of the quarter in which the
---------------------------------------------------
participant separates from service.
----------------------------------
[ ] (c) (Specify)_____________________________________________________
_________________________________________________________.
The distribution events described in the election(s) made under Options
(a), (b) or (c) apply equally to all Accounts maintained for the
Participant unless otherwise specified in Option (c).
PARTICIPANT ELECTIONS PRIOR TO SEPARATION FROM SERVICE - REGULAR MATCHING
CONTRIBUTIONS ACCOUNT AND EMPLOYER CONTRIBUTIONS ACCOUNT. Subject to the
restrictions of Article VI, the following distribution options apply to a
Participant's Regular Matching Contributions Account and Employer Contributions
Account prior to his Separation from Service:
[Choose (d) or at least one of (e) through (h)]
[X] (d) No distribution options prior to Separation from Service.
[ ] (e) Attainment of Specified Age. Until he retires, the Participant
has a continuing election to receive all or any portion of his
Nonforfeitable interest in these Accounts after he attains:
[Choose (1) or (2)]
[ ] (1) Normal Retirement Age.
[ ] (2) _________________years of age and is at least_____________%
vested in these Accounts.
[Note: If the percentage is less than 100%, see the special
vesting formula in Section 5.03.]
[ ] (f) After a Participant has participated in the Plan for a period
of not less than______________________years and he is 100%
vested in these Accounts, until he retires, the Participant has
a continuing election to receive all or any portion of the
Accounts.
[Note: The number in the blank space may not be less than
5.]
[ ] (g) Hardship. A Participant may elect a hardship distribution
prior to his Separation from Service in accordance with the
hardship distribution policy:
[Choose (1), (2) or (3); (4) is available only as an additional
option]
[ ] (1) Under Section 6.01(A)(4) of the Plan.
[ ] (2) Under Section 14.11 of the Plan.
[ ] (3) Provided in the addendum to this Adoption Agreement,
numbered Section 6.03.
[ ] (4) In no event may a Participant receive a hardship
distribution before he is at least_____% vested in
these Accounts.
[Note: If the percentage in the blank is less than 100%,
see the special vesting formula in Section 5.03.]
[ ] (h) (Specify)___________________________________________________
______________________________________________.
[Note: The Employer may use an addendum, numbered 6.03, to provide additional
language authorized by Options (b)(6), (c), (g)(3) or (h) of this Adoption
Agreement Section 6.03.]
PARTICIPANT ELECTIONS PRIOR TO SEPARATION FROM SERVICE-DEFERRAL CONTRIBUTIONS
ACCOUNT, QUALIFIED MATCHING CONTRIBUTIONS ACCOUNT AND QUALIFIED NONELECTIVE
CONTRIBUTIONS ACCOUNT. Subject to the restrictions of Article VI, the following
distribution options apply to a Participant's Deferral Contributions Account,
Qualified Matching Contributions Account and Qualified Nonelective Contributions
Account prior to his Separation from Service: [Choose (i) or at least one of (j)
through (l)]
[ ] (i) No distribution options prior to Separation from Service.
[X] (j) Until he retires, the Participant has a continuing election to
receive all or any portion of these Accounts after he attains:
[Choose (1) or (2)]
[ ] (1) The later of Normal Retirement Age or age 59 1/2.
[X] (2) Age 59 1/2 (at least 59 1/2).
------------
[X] (k) HARDSHIP. A Participant, prior to this Separation from
Service, may elect a hardship distribution from his Deferral
Contributions Account in accordance with the hardship
distribution policy under Section 14.11 of the Plan.
[ ] (l) (Specify)___________________________________________________
____________________________________________________________
[Note: Option (l) may not permit in service distributions
prior to age 59 1/2 (other than hardship) and may not modify
the hardship policy described in Section 14.11.]
SALE OF TRADE OR BUSINESS/SUBSIDIARY. If the Employer sells substantially all of
the assets [within the meaning of Code (S)409(d)(2)] used in a trade or business
or sells a subsidiary [within the meaning of Code (S)409(d)(3)], a Participant
who continues employment with the acquiring corporation is eligible for
distribution from his Deferral Contributions Account. Qualified Matching
Contributions Account and Qualified Nonelective Contributions Account: [Choose
(m) or (n)]
[X] (m) Only as described in this Adoption Agreement Section 6.03
for distributions prior to Separation from Service.
[ ] (n) As if he has a Separation from Service. After March 31, 1988, a
distribution authorized solely by reason of this Option (n) must
constitute a lump sum distribution, determined in a manner consistent
with Code (S)401(k)(10) and the applicable Treasury regulations.
6.04 ANNUITY DISTRIBUTIONS TO PARTICIPANTS AND SURVIVING SPOUSES.
-----------------------------------------------------------
The annuity distribution requirements of Section 6.04: [Choose (a) or (b)]
[X] (a) Apply only to a Participant described in Section 6.04(E) of
the Plan (relating to the profit sharing exception to the joint
and survivor requirements).
[ ] (b) Apply to all Participants.
-14- NON-STANDARDIZED 401(k) PLAN
<PAGE>
ARTICLE IX
ADVISORY COMMITTEE - DUTIES WITH RESPECT TO
PARTICIPANTS' ACCOUNTS
9.10 VALUE OF PARTICIPANT'S ACCRUED BENEFIT. If a distribution (other than a
--------------------------------------
distribution from a segregated Account and other than a corrective distribution
described in Sections 14.07, 14.08, 14.09 or 14.10 of the Plan) occurs more than
90 days after the most recent valuation date, the distribution will include
interest at:[Choose (a), (b) or (c)]
[X] (a) 0 % per annum.
____
[Note: The percentage may equal 0%.]
[ ] (b) The 90 day Treasury bill rate in effect at the beginning of the current
valuation period.
[ ] (c) (Specify) __________________________________________________________.
9.11 ALLOCATION AND DISTRIBUTION OF NET INCOME GAIN OR LOSS. Pursuant to
______________________________________________________
Section 14.12, to determine the allocation of net income, gain or loss:
(Complete only those items, if any, which are applicable to the Employer's Plan)
[X] (a) For salary reduction contributions, the Advisory Committee will: [Choose
(1), (2), (3), (4) or (5)]
[X] (1) Apply Section 9.11 without modification.
[ ] (2) Use the segregated account approach described in Section 14.12.
[ ] (3) Use the weighted average method described in Section 14.12, based on a
_________ weighting period.
[ ] (4) Treat as part of the relevant Account at the beginning of the
valuation period _____% of the salary reduction contributions: [Choose
(i) or (ii)]
[ ] (i) made during that valuation period.
[ ] (ii) made by the following specified time:______________________.
[ ] (5) Apply the allocation method described in the addendum to this Adoption
Agreement numbered 9.11(a).
[X] (b) For matching contributions, the Advisory Committee will: [choose (1),
(2), (3) or (4)]
[X] (1) Apply Section 9.11 without modification.
[ ] (2) Use the weighted average method described in Section 14.12, based on a
________________ weighting period.
[ ] (3) Treat as part of the relevant Account at the beginning of the
valuation period ____________% of the matching contributions allocated
during the valuation period.
[ ] (4) Apply the allocation method described in the addendum to this Adoption
Agreement numbered 9.11(b).
[X] (c) For Participant nondeductible contributions, the Advisory Committee
will: [Choose (1), (2), (3), (4) or (5)]
[X] (1) Apply Section 9.11 without modification.
[ ] (2) Use the segregated account approach described in Section 14.12.
[ ] (3) Use the weighted average method described in Section 14.12, based on
a _________ weighting period.
[ ] (4) Treat as part of the relevant Account at the beginning of the
valuation period _________% of the Participant nondeductible
contributions:
[choose (i) or (ii)]
[ ] (i) made during that valuation period.
[ ] (ii) made by the following specified time: ____________________.
[ ] (5) Apply the allocation method described in the addendum to this
Adoption Agreement numbered 9.11(c).
ARTICLE X
TRUSTEE AND CUSTODIAN, POWERS AND DUTIES
10.03 INVESTMENT POWERS. Pursuant to Section 10.03[F] of the Plan, the
__________________
aggregate investments in qualifying Employer securities and in qualifying
Employer real property:
[Choose (a) or (b)]
[X] (a) May not exceed 10% of Plan assets.
[ ] (b) May not exceed % of Plan assets. [Note: the percentage may not
___
exceed 100%.]
10.14 VALUATION OF TRUST. In addition to each Accounting Date, the Trustee
__________________
must value the Trust Fund on the following valuation date(s): [Choose (a) or
(b)]
[ ] (a) No other mandatory valuation dates.
[X] (b) (Specify) 4/30, 7/31, and 10/31.
______________________
NON-STANDARDIZED 401(k) PLAN
-15-
<PAGE>
EFFECTIVE DATE ADDENDUM
(Restated Plans Only)
The Employer must complete this addendum only if the restated Effective
Date specified in Adoption Agreement Section 1.18 is different than the restated
effective date for at least one of the provisions listed in this addendum. In
lieu of the restated Effective Date in Adoption Agreement Section 1.18, the
following special effective dates apply: (Choose whichever elections apply)
[ ] (a) Compensation definition. The Compensation definition of Section 1.12
(other than the $200,000 limitation) is effective for Plan Years
beginning after ____________________.
[Note: May not be effective later than the first day of the first Plan
Year beginning after the Employer executes this Adoption Agreement to
restate the Plan for the Tax Reform Act of 1986, if applicable.]
[ ] (b) Eligibility conditions. The eligibility conditions specified in
Adoption Agreement Section 2.01 are effective for Plan Years beginning
after _______________________.
[ ] (c) Suspension of Years of Service. The suspension of Years of Service rule
elected under Adoption Agreement Section 2.03 is effective for Plan
Years beginning after ____________________.
[ ] (d) Contribution/allocation formula. The contribution formula elected under
Adoption Agreement Section 3.01 and the method of allocation elected
under Adoption Agreement Section 3.04 is effective for Plan Years
beginning after ____________________.
[ ] (e) Accrual requirements. The accrual requirements of Section 3.06 are
effective for Plan Years beginning after ______________________.
[ ] (f) Employment condition. The employment condition of Section 3.06 is
effective for Plan Years beginning after ________________________.
[ ] (g) Elimination of Net Profits. The requirement for the Employer not to
have net profits to contribute to this Plan is effective for Plan Years
beginning after ____________________.
[Note: The date specified may not be earlier than December 31, 1985.]
[ ] (h) Vesting Schedule. The vesting schedule elected under Adoption Agreement
Section 5.03 is effective for Plan Years beginning after _____________.
[ ] (i) Allocation of Earnings. The special allocation provisions elected under
Adoption Agreement Section 9.11 are effective for Plan Years beginning
after ________________________.
[ ] (j) (Specify) ___________________________.
For Plan Years prior to the special Effective Date, the terms of the Plan
prior to its restatement under this Adoption Agreement will control for purposes
of the designated provisions. A special Effective Date may not result in the
delay of a Plan provision beyond the permissible Effective Date under any
applicable law requirements.
-16- NON-STANDARDIZED 401(k) PLAN
<PAGE>
EXECUTION PAGE
--------------
The Trustee (and Custodian, if applicable), by executing this Adoption
Agreement, accepts its position and agrees to all of the obligations,
responsibilities and duties imposed upon the Trustee (or Custodian) under the
Master Plan and Trust. The Employer hereby agrees to the provisions of this Plan
and Trust, and in witness of its agreement, the Employer by its duly authorized
officers, has executed this Adoption Agreement, and the Trustee (and Custodian,
if applicable) signified its acceptance, on this 28th day of October, 1996.
---- -------- -----
Name and EIN of Employer: House of Fabrics, Inc.
---------------------
EIN 95-3426136
--------------
Signed:/s/ Marvin S. Maltzman
-------------------------------------------------------------------------
Marvin S. Maltzman, Sr. Vice President
Name(s) of Trustee: DEAN WITTER TRUST COMPANY
Signed: /s/ John Van Heuvelen
------------------------------------------------------------------------
Name of Custodian:
-------------------------------------------------------------
Signed:
-------------------------------------------------------------------------
[Note: A Trustee is mandatory, but a Custodian is optional. See Section 10.03 of
the Plan.]
PLAN NUMBER. The 3-digit plan number the Employer assigns to this Plan for ERISA
reporting purposes (Form 5500 Series) is: 001.
---
USE OF ADOPTION AGREEMENT. Failure to complete properly the elections in this
Adoption Agreement may result in disqualification of the Employer's Plan. The
3-digit number assigned to this Adoption Agreement is solely for the Master Plan
Sponsor's recordkeeping purposes and does not necessarily correspond to the
plan number the Employer designated in the prior paragraph.
MASTER PLAN SPONSOR. The Master Plan Sponsor identified on the first page of the
basic plan document will notify all adopting employers of any amendment of this
Master Plan or of any abandonment or discontinuance by the Master Plan Sponsor
of its maintenance of this Master Plan. For inquiries regarding the adoption of
the Master Plan, the Master Plan Sponsor's intended meaning of any plan
provisions or the effect of the opinion letter issued to the Master Plan
Sponsor, please contact the Master Plan Sponsor at the following address and
telephone number: Dean Witter, 5 World Trade Center, NYC, NY 10048 - (213) 392-
2222.
RELIANCE ON OPINION LETTER. The Employer may not rely on the Master Plan
Sponsor's opinion letter covering this Adoption Agreement. For reliance on the
Plan's qualification, the Employer must obtain a determination letter from the
applicable IRS Key District office.
- - ----------------------------------------------------
(Plan Administrator's Dean Witter VIP Account Number)
NON-STANDARDIZED 401(k) PLAN
-17-
<PAGE>
CERTIFICATE OF SECRETARY
OF
HOUSE OF FABRICS, INC.
I, MARVIN S. MALTZMAN, do hereby certify that I am the Secretary of House
of Fabrics, Inc., a corporation duly organized and existing under and by virtue
of the laws of the State of Delaware, and that the following resolutions are
true and exact copies of the resolutions duly adopted by the Board of Directors
on October 16, 1996, and that said resolutions have not been amended or revoked:
RESOLVED: That the Company is hereby authorized to amend the House of
Fabrics, Inc. Profit Sharing Thrift Plan to a 401(k) Plan, and to
terminate BNY Western Trust Company as the Trustee for the Profit
Sharing Thrift Plan:
FURTHER RESOLVED: That the House of Fabrics' 401(k) Plan (the "Plan")
and related Trust be, and they hereby are, approved and adopted in the
form presented, effective as of November 1, 1996.
FURTHER RESOLVED: That Dean Witter Trust Company be, and it hereby
is, appointed as Trustee under the Plan; and
FURTHER RESOLVED: That the President, Executive Vice President - Chief
Financial Officer, Comptroller and Secretary of the Corporation be,
and each one hereby is authorized and directed to execute such
documents and to perform such acts as they, in their judgment, deem,
or as counsel advise, necessary or desirable to effectuate the intent
of the foregoing resolutions and the implementation of the Plan and
Trust.
<PAGE>
FURTHER RESOLVED: That the Secretary is hereby
authorized to execute and deliver to Dean Witter
Trust an Incumbency Certificate certifying the
officers and employees who are necessary and
appropriate to effectuate the on-going administration
of the Plan and its related Trust.
IN WITNESS WHEREOF, I have executed this Certificate this 28th day of
October, 1996.
/s/ Marvin S. Maltzman
-----------------------------
Marvin S. Maltzman, Secretary
<PAGE>
INCUMBENCY CERTIFICATE
The undersigned certifies that he is the Secretary of the House of
Fabrics, Inc., a Delaware Corporation ("Company"), and that, as such, he is
authorized to execute this Certificate on behalf of the Company, and further
certifies that the following persons now are duly elected, qualified and acting
Officers of the Company, that each holds the office or the title in the Company
set forth opposite their name, that the signature of such persons appearing
opposite their name is their true and correct signature and that each Officer is
also a Member of the House of Fabrics 401(k) Committee.
NAME OFFICE SIGNATURE
---- ------ ---------
Gary L. Larkins President, CEO and Member of /s/ Gary L. Larkins
Committee
John E. Labbett Executive Vice President, /s/ John E. Labbett
Chief Financial Officer and
Member of Committee
Gregory E. Lewis Controller, Member of /s/ Gregory E. Lewis
Committee and Plan
Administrator
Marvin S. Maltzman Sr. Vice President, /s/ Marvin S. Maltzman
Secretary, General Counsel
and Chair of the Committee
That the appointment and authorization of the foregoing individuals
shall be of a continuing nature and shall be in full force and effect until
revoked by a new Incumbency Certificate.
That the Plan Administrator and/or Secretary of House of Fabrics, Inc.
shall immediately notify Dean Witter Trust Company of any additions to or
deletions from the foregoing list of authorized individuals and provide a new
Incumbency Certificate authorizing any such change and sample signatures of any
individuals are added to such list.
IN WITNESS WHEREOF, I have executed this Certificate on the 28th day of
October, 1996.
HOUSE OF FABRICS, INC.
By: Marvin S. Maltzman
------------------
Marvin S. Maltzman
Secretary
<PAGE>
EXHIBIT 21
HOUSE OF FABRICS, INC.
SUBSIDIARIES OF THE REGISTRANT
None as of January 31, 1997.
<PAGE>
EXHIBIT 23.1
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in Registration Statement Nos. 333-
12649 and 333-12659 of House of Fabrics, Inc. on Form S-8 of our report dated
April 23, 1997, appearing in the Annual Report on Form 10-K of House of Fabrics,
Inc. for the year ended January 31, 1997.
DELOITTE & TOUCHE LLP
Costa Mesa, California
April 29, 1997
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JAN-31-1997
<PERIOD-START> JUL-31-1996
<PERIOD-END> JAN-31-1997
<CASH> 767,000
<SECURITIES> 0
<RECEIVABLES> 3,164,000
<ALLOWANCES> 0
<INVENTORY> 104,576,000
<CURRENT-ASSETS> 112,193,000
<PP&E> 24,216,000
<DEPRECIATION> 2,442,000
<TOTAL-ASSETS> 137,830,000
<CURRENT-LIABILITIES> 73,404,000
<BONDS> 0
0
0
<COMMON> 51,000
<OTHER-SE> 39,411,000
<TOTAL-LIABILITY-AND-EQUITY> 137,830,000
<SALES> 143,324,000
<TOTAL-REVENUES> 143,324,000
<CGS> 83,600,000
<TOTAL-COSTS> 83,600,000
<OTHER-EXPENSES> 56,308,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2,461,000
<INCOME-PRETAX> 1,607,000
<INCOME-TAX> 682,000
<INCOME-CONTINUING> 925,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 925,000
<EPS-PRIMARY> 0.18
<EPS-DILUTED> 0.18
</TABLE>
<PAGE>
EXHIBIT 99
UNDERTAKINGS
(a) The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made, a
post-effective amendment to this registration statement:
(i) To include any prospectus required by section 10(a)(3) of the
Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising after the
effective date of the registration statement (or the most recent
post-effective amendment thereof) which, individually or in the
aggregate, represents a fundamental change in the information set
forth in the registration statement;
(iii) To include any material information with respect to the plan of
distribution not previously disclosed in the registration
statement or any material change to such information in the
registration statement;
Provided, however, that paragraphs (a)(1)(i) and (a)(1)(ii) do not
apply if the registration statement is on Form S-3 or Form S-8 and
the information required to be included in a post-effective
amendment by those paragraphs is contained in periodic reports
filed by the registrant pursuant to section 13 or section 15(d) of
the Securities Exchange Act of 1934 that are incorporated by
reference in the registration statement.
(2) That, for the purpose of determining any liability under the Securities
Act of 1933, each such post-effective amendment shall be deemed to be a
new registration statement relating to the securities offered therein,
and the offering of such securities at that time shall be deemed to be
the initial bona fide offering thereof.
(3) To remove from registration by means of a post-effective amendment any
of the securities being registered which remain unsold at the
termination of the offering.
(b) The undersigned registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act of 1933, each filing of
the registrant's annual report pursuant to section 13(a) or section 15(d) of
the Securities Exchange Act of 1934 (and, where applicable, each filing of
an employee benefit plan's annual report pursuant to section 15(d) of the
Securities Exchange Act of 1934) that is incorporated by reference in the
registration statement shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of such
securities at that time shall be deemed to be the initial bona fide offering
thereof.
<PAGE>
EXHIBIT 99 (CONTINUED)
(f) Employee plans on Form S-8.
(1) The undersigned registrant hereby undertakes to deliver or cause to be
delivered with the prospectus to each employee to whom the prospectus
is sent or given a copy of the registrant's annual report to
stockholders for its last fiscal year, unless such employee otherwise
has received a copy of such report, in which case the registrant shall
state in the prospectus that it will promptly furnish, without charge,
a copy of such report on written request of the employee. If the last
fiscal year of the registrant has ended within 120 days prior to the
use of the prospectus, the annual report of the registrant for the
preceding fiscal year may be so delivered, but within such 120 day
period the annual report for the last fiscal year will be furnished to
each such employee.
(2) The undersigned registrant hereby undertakes to transmit or cause to be
transmitted to all employees participating in the plan who do not
otherwise receive such material as stockholders of the registrant, at
the time and in the manner such material is sent to its stockholders,
copies of all reports, proxy statements and other communications
distributed to its stockholders generally.
(3) Where interests in a plan are registered herewith, the undersigned
registrant and plan hereby undertake to transmit or cause to be
transmitted promptly, without charge, to any participant in the plan
who makes a written request, a copy of the then latest annual report of
the plan filed pursuant to section 15(d) of the Securities Exchange Act
of 1934 (Form 11-K). If such report is filed separately on Form 11-K,
such form shall be delivered upon written request. If such report is
filed as a part of the registrant's annual report on Form 10-K, that
entire report (excluding exhibits) shall be delivered upon written
request. If such report is filed as a part of the registrant's annual
report to stockholders delivered pursuant to paragraph (1) or (2) of
this undertaking, additional delivery shall not be required.
(i) Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers and
controlling persons of the registrant pursuant to the foregoing
provisions, or otherwise, the registrant has been advised that in
the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Act
and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by
the registrant of expenses incurred or paid by a director, officer
or controlling person of the registrant in the successful defense
of any action, suit or proceeding) is asserted by such director,
officer or controlling person in connection with the securities
being registered, the registrant will, unless in the opinion of its
counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in
the Act and will be governed by the final adjudication of such
issue.
