<PAGE>
United States
Securities and Exchange Commission
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] Quarterly Report Pursuant to Section 13 or 15 (d) of the Securities Exchange
Act of 1934
For the quarterly period ended April 30, 1997.
--------------
or
[_] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the Transition period from _______________ to_____________.
Commission File No. 1-7927
------
HOUSE OF FABRICS, INC.
---------------------
(Exact Name of Registrant as specified in its charter)
Delaware 95-3426136
- - ---------------------------------------- ------------------------------
(State or other jurisdiction) (I.R.S. Employer I.D. Number)
13400 Riverside Drive, Sherman Oaks, CA 91423
- - ---------------------------------------- -----
Post Office Box 9110, Van Nuys, CA 91409
- - ---------------------------------------- -----
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (818) 995-7000
--------------
No Change
________________________________________________________________________________
Former name, former address and former fiscal year,
if changed since last report.
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities & Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the Registrant
was required to file such reports), and (2) has been the subject to such filing
requirements for the past 90 days. Yes X No
---- ----
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS.
Indicate by check mark whether the Registrant has filed all documents and
reports required to be filed by Sections 12, 13, or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court.
Yes X No
--- ---
1
<PAGE>
On November 2, 1994, the Registrant and four (4) of its former subsidiaries
filed separate voluntary petitions for reorganization under Chapter 11 of Title
11 of the United States Bankruptcy Code in the United States Bankruptcy Court of
the Central District of California (the "Bankruptcy Court"). On July 10, 1996,
the Bankruptcy Court confirmed the Third Amended Joint Plan of Reorganization,
(the "Plan"), of the Registrant and its subsidiaries. On July 31, 1996, all
conditions to the effectiveness of the Plan were met, and the Plan became
effective ("Effective Date").
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class Outstanding at June 5, 1997
New Common Stock, 5,326,893 Shares
par value $.01 per share
2
<PAGE>
HOUSE OF FABRICS, INC.
INDEX
-----
<TABLE>
<CAPTION>
Page No.
<S> <C>
Part I. Financial Information
Item 1. Financial Statements
Balance Sheets as of April 30, 1997
and January 31, 1997 4 - 5
Statements of Operations
for the three months ended
April 30, 1997 and 1996 6
Statements of Cash Flows for the three months
ended April 30, 1997 and 1996 7 - 8
Notes to Financial Statements 9 - 11
Item 2. Management's Discussion and Analysis
of Financial Condition and Results of
Operations 12-15
Part II. Other Information 16
Item 6. Exhibits
(a) Exhibits
10. Amendment to Revolving Credit Agreement
27. Financial Data Schedule 18-20
Signature 17
</TABLE>
3
<PAGE>
HOUSE OF FABRICS, INC.
BALANCE SHEETS
(Dollars in Thousands)
<TABLE>
<CAPTION>
____________________________________________________________________________________________
(Unaudited)
ASSETS April 30, 1997 January 31, 1997
<S> <C> <C>
Current Assets:
Cash $ 638 $ 767
Receivables, net 1,682 3,164
Merchandise Inventories, net 109,178 104,576
Prepaid Expenses and Other Current Assets 2,413 3,686
--------- --------
Total Current Assets 113,911 112,193
Property
Land 794 1,011
Buildings 1,381 1,473
Furniture & Fixtures 16,323 16,055
Leasehold Improvements 5,787 5,677
-------- --------
24,285 24,216
Less Accumulated Depreciation and Amortization (3,601) (2,442)
-------- --------
Property Net 20,684 21,774
Other Assets 328 675
Reorganization Value in Excess of Amount Allocated
to Net Assets, net 3,105 3,188
-------- --------
$138,028 $137,830
======== ========
</TABLE>
See accompanying notes to financial statements.
<PAGE>
HOUSE OF FABRICS, INC.
BALANCE SHEETS (CONTINUED)
(DOLLARS IN THOUSANDS)
- - -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
(UNAUDITED)
APRIL 30, 1997 JANUARY 31, 1997
LIABILITIES AND STOCKHOLDERS' EQUITY
<S> <C> <C>
Current Liabilities:
Accounts payable $ 15,734 $ 18,250
Accrued liabilities 13,021 12,505
Bank loan 48,979 42,621
Current portion of long-term debt 28 28
-------- --------
Total Current Liabilities 77,762 73,404
Deferred income taxes 634 634
Long-term liabilities 22,502 22,502
Long-term debt 572 903
Stockholders' Equity:
New Preferred stock, $.01 par value
authorized 1,000,000 shares; outstanding, none - -
New Common stock, $.01 par value; authorized 7,000,000 shares;
issued and outstanding, 5,326,893 and 4,201,034 shares, respectively, 53 51
Paid-in capital 39,960 39,411
Retained earnings (deficit) (3,455) 925
-------- --------
Total Stockholders' Equity 36,558 40,387
-------- --------
$138,028 $137,830
======== ========
</TABLE>
See accompanying notes to financial statements.
<PAGE>
HOUSE OF FABRICS, INC.
STATEMENTS OF OPERATIONS
(UNAUDITED) (DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS AND SHARES)
- - --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
THREE MONTHS ENDED
APRIL 30, 1997 APRIL 30, 1996
SUCCESSOR CO. PREDECESSOR CO.
<S> <C> <C>
Sales $ 54,073 $ 56,515
Expenses:
Cost of Sales 30,626 31,174
Selling, General and Administrative 26,635 26,881
Interest 1,168 2,509
---------- ----------
Total Expenses 58,429 60,564
Loss Before Income Taxes
and Reorganization Costs (4,356) (4,049)
Reorganization Costs - 1,898
---------- ----------
Loss Before Income Taxes (4,356) (5,947)
Income Taxes 24 24
---------- ----------
Net Loss $ (4,380) $ (5,971)
========== ==========
Net Loss Per Share (a) $ (0.84) N/A
========== ==========
Weighted Average Number of
Shares Outstanding (a) 5,196,895 N/A
========== ==========
</TABLE>
(A) The net income per common share and the weighed average number of common
shares for the Predecessor Company have not been presented because, due to the
Reorganization and implementation of Fresh-Start accounting, they are not
comparable to the current period.
See accompanying notes to financial statements.
<PAGE>
HOUSE OF FABRICS, INC.
STATEMENTS OF CASH FLOWS
(Unaudited)(Dollars in Thousands)
<TABLE>
<CAPTION>
- - -------------------------------------------------------------------------------------------------
THREE MONTHS ENDED
APRIL 30, 1997 APRIL 30, 1996
SUCCESSOR CO. PREDECESSOR CO.
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Loss $(4,380) $ (5,971)
Adjustment to Reconcile Net Loss to Net Cash
Provided by (Used In) Operating Activities:
Depreciation and Amortization 1,272 1,453
Loss on Disposal of Fixed Assets 14 -
Changes in Assets and Liabilities:
Receivables 1,482 16,973
Merchandise Inventories (4,602) 2,744
Prepaid Expenses and Other Assets 1,620 (7)
Accounts Payable and Accrued Liabilities (2,000) 5,001
Operating Payable subject to compromise
under reorganization proceedings - (38)
------- --------
Total Adjustments (2,214) 26,126
------- --------
Net Cash Provided by (Used In) Operating Activities (6,594) 20,155
------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital Expenditures (438) (1,284)
Proceeds from Sale of Property 325 -
------- --------
Net Cash Used In Investing Activities (113) (1,284)
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings under D.I.P. Line of Credit - 6,000
Net Repayments Under Line of Credit Agreements - (22,348)
Borrowings and Repayments Under Revolving Line, net 6,358
Repayment of Long-Term Debt (331)
Exercise of Series A Warrants 551 -
------- --------
Net Cash Provided by (Used in) Financing Activities 6,578 (16,348)
------- --------
NET INCREASE (DECREASE) IN CASH (129) 2,523
CASH AT BEGINNING OF PERIOD 767 16,634
------- --------
CASH AT END OF PERIOD $ 638 $ 19,157
======= ========
</TABLE>
See accompanying notes to financial statements.
7
<PAGE>
HOUSE OF FABRICS, INC.
STATEMENTS OF CASH FLOWS (CONTINUED)
(UNAUDITED) (DOLLARS IN THOUSANDS)
________________________________________________________________________________
<TABLE>
<CAPTION>
THREE MONTHS ENDED
APRIL 30, 1997 APRIL 30, 1996
SUCCESSOR CO. PREDECESSOR CO.
<S> <C> <C>
SUPPLEMENTAL DISCLOSURES OF
CASH FLOW INFORMATION:
Interest Paid $1,126 $ 2,503
Income Taxes Paid (Refunded) $ - $(9,363)
</TABLE>
See accompanying notes to financial statements.
8
<PAGE>
HOUSE OF FABRICS, INC.
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
________________________________________________________________________________
NOTE 1: REORGANIZATION AND BASIS OF REPORTING
House of Fabrics, Inc. (the "Company") is one of the largest home sewing/craft
retailers in the United States, operating 261 stores in 27 states as of April
30, 1997. The Company's stores are located throughout the United States and
operate under the names "House of Fabrics," "So-Fro Fabrics," "Fabricland" or
"Fabric King." The Company operates most of its stores in leased premises
principally in neighborhood shopping centers or stand-alone locations.
On November 2, 1994 (the "Petition Date"), the Company and four (4) of its then
existing subsidiaries filed separate voluntary petitions for reorganization
under Chapter 11 of the United States Bankruptcy Code ("Chapter 11") in the
United States Bankruptcy Court for the Central District of California (the
"Bankruptcy Court"). On July 10, 1996, the Bankruptcy Court confirmed the Third
Amended Joint Plan of Reorganization, (the "Plan"), of the Company and its
subsidiaries. On July 31, 1996, all conditions required for the effectiveness
of the Plan were met, and the Plan became effective ("Effective Date").
Under the Plan, the Company has issued approximately 5,136,000 shares of newly
reorganized House of Fabrics, Inc. common stock ("New Common Stock") including
shares issuable upon resolution of claims. Further authorized are an additional
approximately 1,864,000 shares to be issued, as necessary, to satisfy warrants
and equity incentive plans. As of April 30 1997, 5,326,893 shares were
issued, including 188,079 shares issued upon the exercise of Series A Warrants.
The secured bank group received $76,500,000 (discounted based on debt
outstanding as of May 1, 1996) plus approximately 257,000 shares (or 5%) of New
Common Stock and an additional $1,157,000 to satisfy a requirement to bring the
aggregate market value of the approximately 257,000 shares up to $2,000,000.
Generally, defaults under other secured obligations were cured and the
maturities reinstated or converted to longer term obligations at market rates of
interest. Reclamation claims received 25% in cash shortly after the effective
date of the Plan and will receive the balance in 12 equal monthly installments.
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. A total of 188,079 Series A
Warrants were exercised by the deadline of April 29, 1997, out of 257,381
issued. Each warrant exercised was converted to one share of New Common Stock
for a price of $3.02 per share and entitles the holder to a Series B Warrant
which may be exercised at a later date for a different price. Warrants not
exercised have no further rights.
On July 31, 1996, and effective August 1, 1996, the Company restructured its
corporate organization by merging Fabricland, Inc., So-Fro Fabrics, Inc., House
of Fabrics of South Carolina, Inc., and Metrolina Express, Inc. into House of
Fabrics, Inc.
9
<PAGE>
The reorganization value of the Company's common equity of $39,446,000 was
determined after consideration of several factors and by reliance on independent
financial specialists using various valuation methods, including discounted
projected cash flows, price/earnings ratios, and other applicable ratios and
economic and industry information relevant to the operations of the Company. The
reorganization value of the Company has been allocated to specific asset
categories pursuant to Fresh-Start Reporting. Reorganization Value in Excess of
Amounts Allocated to Net Assets reflects the difference in the Company's stock
valuation and the Company's net assets.
Upon emergence from its Chapter 11 proceedings, the Company (referred to as
"Successor Company" when compared to periods prior to August 1, 1996) adopted
the provisions of Statement of Position No. 90-7, "Financial Reporting by
Entities in Reorganization Under the Bankruptcy Code" ("Fresh-Start Reporting")
as promulgated by the American Institute of Certified Public Accountants.
Accordingly, all assets and liabilities have been restated to reflect their
reorganization value, which approximates their fair value at the Effective Date.
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 results of operations and cash flows for the three months
ended April 30, 1996 include operations prior to the Company's emergence from
Chapter 11 proceedings (referred to as "Predecessor Company") and prior to the
effects of Fresh-Start Reporting. The results of operations and cash flows for
the three months ended April 30, 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 loss for the three months ended
April 30, 1997 is not comparable with prior periods.
The financial statements included herein do not include all the information and
footnote disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principles, although the Company
believes that disclosures are adequate to make the information not misleading.
In the opinion of management, all adjustments, consisting of normal recurring
accruals, considered necessary for a fair presentation for the interim periods
have been included in the financial statements.
The results of operations for the interim periods presented, are not
necessarily indicative of the operating results to be expected for the full
fiscal year.
NOTE 2: NET LOSS PER SHARE
Net loss per share is computed based on the weighted average number of
outstanding common and common equivalent shares, if dilutive, during the
period. As of April 30, 1997, 5,326,893 shares were issued, including 188,079
shares issued upon exercise of Series A Warrants. As of June 5, 1997, 5,326,893
shares were issued including 188,079 shares issued upon exercise of Series A
Warrants. Per share data for periods prior to August 1, 1996 have been omitted
as these amounts do not reflect the current capital structure. In February 1997,
the Financial Accounting Standards Board issued Statement of Financial
Accounting Standards No. 128, "Earnings Per Share" ("SFAS No. 128") which is
effective for financial statements issued for periods ending after December 15,
1997. SFAS No. 128 requires the disclosure of basic and diluted earnings per
share. For the three months ended April 30, 1997, the amount reported as net
loss per common and common equivalent share is not materially different from
that which would have been reported for basic and diluted earnings per share in
accordance with SFAS No. 128.
NOTE 3: FINANCING
At July 31, 1996, the Company entered into a Financing Agreement with CIT
Group/Business Credit, Inc. ("CITBC"), to provide a $65,000,000 line of credit,
as amended 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 prime (based
on the Chase Manhattan Bank Rate) plus 1% or Libor plus 3 1/4% and a commitment
fee of .5% per annum on unused availability. Fees for letters of credit are
generally
10
<PAGE>
1 1/2% per annum based on the amount of letters of credit issued. The
Financing Agreement provides for a combination of cash borrowings and the
issuance of up to $20,000,000 in letters of credit. The Financing Agreement is
collateralized by a first priority lien on generally all assets of the Company,
as defined, excluding up to $10,000,000 for Point of Sale equipment which may be
secured by the purchased Point of Sale equipment. Loan availability is
determined by an advance rate on eligible inventory as defined. The Financing
Agreement includes certain restrictive covenants, which are computed quarterly
(fixed charge coverage) and others which are computed annually (net worth,
operating leases, and capital expenditures). As of April 30, 1997, the Company
had direct borrowings of $48,979,000 and letters of credit of $953,000
outstanding with additional credit available of approximately $10,800,000.
As of April 30, 1997, the Company was in compliance with all terms of the
amended Financing Agreement.
In March 1995, the Company entered into, with Bankruptcy Court approval, an
agreement with Bank of America NT & SA, acting as agent bank, to provide
Debtors-in-Possession financing in the form of a $20,000,000 line of credit (The
"D.I.P. Financing") that expired on January 31, 1996 and was extended through
April 30, 1996, with Bankruptcy Court approval. The amended and restated D.I.P.
agreement was reduced to a $17,300,000 line of credit with a provision for up to
$10,000,000 in letters of credit and any unused portion of the loan available
for cash borrowings. The amended and restated D.I.P. Financing agreement
required the closure of at least 86 stores with the proceeds therefrom to be
used to permanently reduce the prepetition secured bank loan. On May 1, 1996,
the amended and restated D.I.P. Financing agreement was extended through June
28, 1996 and subsequently through July 31, 1996 when the Company retired the
D.I.P. Financing agreement and replaced it with a new Financing Agreement with
CITBC as explained above.
NOTE 4: REORGANIZATION COSTS
Prior to emergence from bankruptcy, professional fees and expenditures directly
related to the Chapter 11 filing were classified as reorganization costs and
expensed as incurred. There were no reorganization costs for the three months
ended April 30, 1997. Reorganization costs with respect to the three months
ended April 30, 1996 consisted primarily of professional fees.
NOTE 5: STOCK OPTIONS
During the quarter, the Company granted 256,000 new stock options to new
officers. 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. Exercise
prices range from $3.50 to $4.00 with various grant dates.
NOTE 6: INCOME TAXES
During the year ended January 31, 1997, the Company received $22,502,000
pursuant to carrybacks of certain net operating losses on claims for refund
filed with the Internal Revenue Service on Forms 1139. The Company's claims for
refund are currently being examined by the Internal Revenue Service. Although
the Company believes that the positions taken on the claims for refund are
supportable, it is uncertain at this time as to their ultimate resolution.
Therefore, the Company has recorded reserves on its balance sheet as of January
31, 1997 equal to the refunds received. To the extent that the Internal Revenue
Service disallows the claims for refund in whole or part and ultimately prevails
with respect to the disallowance, the Company will be required to repay the
Internal Revenue Service the refund attributable to the disallowance. As set
forth in the Plan of Reorganization, a deficiency notice issued by the Internal
Revenue Service requesting repayment of the refund is allowed to be treated as a
Priority Tax Claim, as defined in the Plan. Subject to exhaustion of the
Company's right to contest, the claim would become payable in quarterly
installments of principal and interest over six years. A future demand by the
Internal Revenue Service for repayment would adversely impact the Company's
liquidity.
11
<PAGE>
HOUSE OF FABRICS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
________________________________________________________________________________
The Company is one of the largest home sewing/craft retailers in the United
States, operating 261 stores in 27 states as of April 30, 1997. The following
discussion explains material changes in the results of operations for the first
quarter of fiscal years 1998 and 1997 and significant developments affecting
financial condition since the end of fiscal 1997.
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.
CHAPTER 11 REORGANIZATION
- - -------------------------
On November 2, 1994 (the "Petition Date"), the Company and four (4) of its
former subsidiaries filed separate voluntary petitions for reorganization under
Chapter 11 of the United States Bankruptcy Code ("Chapter 11") in the United
States Bankruptcy Court for the Central District of California (the "Bankruptcy
Court"). On July 10, 1996, the Bankruptcy Court confirmed the Third Amended
Joint Plan of Reorganization, (the "Plan"), of the Company and its subsidiaries.
On July 31, 1996, all conditions required for the effectiveness of the Plan were
achieved, and the Plan became effective ("Effective Date").
Under the Plan, the Company has issued approximately 5,136,000 shares of newly
reorganized House of Fabrics, Inc. common stock ("New Common Stock") including
shares issued upon resolution of claims. Further authorized are an additional
approximately 1,864,000 shares to be issued, as necessary, to satisfy the
warrants and equity incentive plans. As of April 30, 1997, 5,326,893 shares were
issued, including 188,079 shares issued upon the exercise of Series A Warrants.
The secured bank group received $76,500,000 (discounted based on debt
outstanding as of May 1, 1996) plus approximately 257,000 shares (or 5%) of New
Common Stock and an additional $1,157,000 to satisfy a requirement to bring the
aggregate market value of the approximately 257,000 shares up to $2,000,000.
Generally, defaults under other secured obligations were cured and the
maturities reinstated or converted to longer term obligations at market rates of
interest. Reclamation claims received 25% in cash shortly after the effective
date of the Plan and are receiving the balance in 12 equal monthly installments.
Holders of general unsecured claims that are not covered by insurance received 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. A total of 188,079 Series A Warrants were
exercised by the deadline of April 29, 1997 out of 257,381 issued. Each warrant
exercised was converted to one share of New Common Stock for a price of $3.02
per share and entitles the holder to a Series B Warrant which may be exercised
at a later date for a different price. Warrants not exercised have no further
rights.
12
<PAGE>
On July 31, 1996, and effective August 1, 1996, the Company restructured its
corporate organization by merging Fabricland, Inc., So-Fro Fabrics, Inc., House
of Fabrics of South Carolina, Inc., and Metrolina Express, Inc. into House of
Fabrics, Inc.
STORE CLOSURES:
In anticipation of the Company's exit from Chapter 11, the liquidation of 86
underperforming stores was completed in April 1996. The Company also closed 8
other underperforming stores during fiscal 1997.
RESULTS OF OPERATIONS
- - ---------------------
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 quarter ended April 30, 1997.
Sales for the quarter ended April 30, 1997 decreased 4.3% to $54,073,000 for the
Successor Company from $56,515,000 for the Predecessor Company. Of the
$2,442,000 sales decrease, $432,000 was due to the closing of underperforming
stores. Store for store sales decreased by 3.6% due to continued weakness in
certain markets and competitive pressures in major population centers.
Gross profit as a percentage of sales decreased to 43.4% for the quarter ended
April 30, 1997 from 44.8% for the quarter ended April 31, 1996. The decease is
primarily due to aggressive markdowns in certain product categories.
Selling, general and administrative expenses as a percent of sales increased to
49.3% for the quarter ended April 30, 1997 from 47.6% for the quarter ended
April 30, 1996. The total dollar amounts decreased $246,000 from the prior year.
Expenses as a percent of sales increased primarily due to lower sales volume and
to additional costs associated with severance compensation for former
executives.
Interest expense for the quarter ended April 30, 1997 decreased by $1,341,000
from $2,509,000 for the quarter ended April 30, 1996, to $1,168,000 for the
quarter ended April 30, 1997, primarily as a result of a decrease in the
Company's average loan balance and a decrease in the Company's average effective
borrowing rate from 11.0% in the quarter ended April 30, 1996 to 9.5% in the
quarter ended April 30, 1997.
There were no reorganization costs for the quarter ended April 30, 1997, as the
Company had emerged from Chapter 11 bankruptcy protection effective August 1,
1996. While still in the bankruptcy process in the prior comparable period,
there were reorganization costs of $1,898,000, which consisted primarily of
professional fees.
The Company recorded a tax expense of $24,000 for the three months ended April
30, 1997 and 1996, for minimum state income taxes.
13
<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.
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 prime (based
on the Chase Manhattan Bank Rate) plus 1% or Libor plus 3 1/4% and a commitment
fee of .5% per annum on unused availability. Fees for letters of credit are
generally 1 1/2% per annum based on the amount of letters of credit issued. The
Financing Agreement provides for a combination of cash borrowings and the
issuance of up to $20,000,000 in letters of credit. The Financing Agreement is
collateralized by a first priority lien on generally all assets of the Company,
as defined, excluding up to $10,000,000 for Point of Sale equipment which may be
secured by the purchased Point of Sale equipment. Loan availability is
determined by an advance rate on eligible inventory as defined. The Financing
Agreement includes certain restrictive covenants, which are computed quarterly
(fixed charge coverage) and others which are computed annually (net worth,
operating leases, and capital expenditures). As of April 30, 1997, the Company
had direct borrowings of $48,979,000 and letters of credit of $953,000
outstanding with additional credit available of approximately $10,800,000.
As of April 30, 1997, the Company was in compliance with all terms of the
amended Financing Agreement.
In March 1995, the Company entered into, with Bankruptcy Court approval, an
agreement with Bank of America NT & SA, acting as agent bank, to provide
Debtors-in-Possession financing in the form of a $20,000,000 line of credit (The
"D.I.P. Financing") that expired on January 31, 1996 and was extended through
April 30, 1996, with Bankruptcy Court approval. The amended and restated D.I.P.
agreement was reduced to a $17,3000,000 line of credit with a provision for up
to $10,000,000 in letters of credit and any unused portion of the loan available
for cash borrowings. The amended and restated D.I.P. Financing agreement
required the closure of at least 86 stores with the proceeds therefrom to be
used to permanently reduce the prepetition secured bank loan. On May 1, 1996,
the amended and restated D.I.P. Financing agreement was extended through June
28, 1996 and subsequently through July 31, 1996 when the Company retired the
D.I.P. Financing agreement and replaced it with a new Financing Agreement with
CITBC as explained above.
No new stores were opened during the three months ended April 30, 1997 or 1996.
Capital expenditures were $438,000 for the period ended April 30, 1997 compared
to $1,284,000 for the prior comparable period and were primarily for POS systems
in the stores and other MIS equipment.
The Company finances its operations from short-term borrowings and internally
generated cash flow. The Company's primary capital requirements have been the
financing of inventory and MIS systems.
The Company's working capital was approximately $36,149,000 as of April 30,
1997, and its current ratio was approximately 1.5 to 1.
Net cash used by operating activities was approximately $6,594,000 for the three
months ended April 30, 1997. The decrease was primarily attributable to a
seasonal increase in merchandise inventories and lower accounts payable
balances.
Net cash provided by financing activities was approximately $6,578,000 for the
three months ended April 30, 1997. The increase is primarily attributable to
borrowings under the Company's Revolving Line and the exercise of Series A
Warrants partially offset by the repayment of Long-Term Debt related to the sale
of store property.
14
<PAGE>
The Company believes that its ongoing operating cash flow and the CITBC
Financing agreement should enable the Company to meet liquidity requirements for
the reasonably foreseeable future.
NEW ACCOUNTING PRONOUNCEMENTS
- - -----------------------------
In February 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 128, "Earnings Per Share" ("SFAS No. 128")
which is effective for financial statements issued for periods ending after
December 15, 1997. SFAS No. 128 requires the disclosure of basic and diluted
earnings per share. For the three months ended April 30, 1997, the amount
reported as net loss per common and common equivalent share is not materially
different from that which would have been reported for basic and diluted
earnings per share in accordance with SFAS No. 128.
STATEMENT REGARDING FORWARD LOOKING DISCLOSURE
- - ----------------------------------------------
The preceding Management's Discussion and Analysis contains various "forward
looking statements" within the meaning of Section 27A of the Securities Act of
1933, as amended, and Section 21E of the Securities and Exchange Act of 1934, as
amended, which represent the Company's expectations or beliefs concerning future
events. The Company cautions that these statements are further qualified by
important factors that could cause actual results to differ materially from
those in the forward looking statements, including without limitation, those
associated with the ability of Company to reduce the current expense levels and
increase the sales volumes. In addition, these statements are further qualified
by important factors that could cause actual results to differ materially from
those in the forward looking statements, including without limitation, decline
in demand for the merchandise offered by the Company, the ability of the Company
to obtain adequate merchandise supply and hire and train employees, management's
ability to manage the Company's return to profitability and the effect of
economic conditions.
The foregoing discussion is designed to comply with interim reporting standards
and should be read in conjunction with the more detailed discussion in the
Company's 1997 Annual Report.
15
<PAGE>
Part II. OTHER INFORMATION
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
10. Amendment to Revolving Credit Agreement
27. Financial Data Schedule
(b) No reports on Form 8-K were filed during the quarter ended April
30, 1997.
16
<PAGE>
SIGNATURE
---------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
House of Fabrics, Inc.
----------------------
Registrant
/s/ John E. Labbett
-------------------------------
Date: June 11, 1997 John E. Labbett
Executive Vice President-Chief
Financial Officer
17
<PAGE>
THE CIT GROUP EXHIBIT 10
April 25, 1997
House of Fabrics, Inc.
13400 Riverside Drive
Sherman Oaks, CA 91423
Gentlemen:
Reference is made to the Financing Agreement, dated July 23, 1996, between House
of Fabrics, Inc. (the "Company") and The CIT Group/Business Credit, Inc.
("CIT/BC") as Agent and Lender, as the same may be amended from time to time
(the "Financing Agreement"). Capitalized terms not otherwise defined herein
shall have the meaning ascribed thereto in the Financing Agreement.
The Company has requested and CIT/BC, as Agent and Lender, hereby agrees to
amend the Financing Agreement as follows:
1. Effective the date of this Letter Agreement, paragraph 10 of Section 6
of the Financing Agreement is hereby amended by deleting the amount of
$7,500,000 set forth in such paragraph solely as it relates to the July
31, 1997 calculation date, and inserting in lieu thereof the amount of
$3,000,000. Effective with the October 31, 1997 and all subsequent
calculation dates, the original amount of $7,500,000 shall be
applicable.
2. In consideration of the Letter Agreement you hereby agree to pay the
Agent on behalf of the Lenders a $50,000 facility fee, due upon
execution of this Letter Agreement. You hereby authorize the Agent to
charge your Revolving Loan Account with the Agent for such facility
fee.
Except as set forth herein no other change in the terms or provisions of the
Financing Agreement is intended or implied. If the foregoing is in accordance
with your understanding of our agreement, please so indicated by signing and
returning to us the enclosed copy of this Letter Agreement. It is agreed with
respect to this Letter Amendment that signed faxed copies shall be deemed of the
same force and effect as an original manually signed
<PAGE>
copy, provided further that the Company hereby confirms that it shall promptly
deliver original signature pages to the undersigned.
Very truly yours,
THE CIT GROUP/BUSINESS CREDIT, INC.,
(as Agent and Lender)
By: /s/ Frank Brown
---------------
Title: Assistant Vice President
WELLS FARGO BANK, N.A., (As Lender)
By: /s/ Steven A. Curtis
--------------------
Title: Vice President
LA SALLE BUSINESS CREDIT, INC., (As Lender)
By: /s/ Larry Magkamit
------------------
Title: Assistant Vice President
FINOVA CAPITAL CORPORATION, (As Lender)
By: /s/ Pete Martinez
-----------------
Title: Vice President
FREMONT FINANCIAL CORPORATION, (As Lender)
By: /s/ Cheri Rittan
----------------
Title: Vice President
Read and Agreed to:
HOUSE OF FABRICS, INC.
By: /s/ John E. Labbett
-------------------
Title: EVP/CFO
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<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JAN-31-1997
<PERIOD-END> APR-30-1997
<CASH> 638
<SECURITIES> 0
<RECEIVABLES> 1,682
<ALLOWANCES> 0
<INVENTORY> 109,178
<CURRENT-ASSETS> 113,911
<PP&E> 24,285
<DEPRECIATION> 3,601
<TOTAL-ASSETS> 138,028
<CURRENT-LIABILITIES> 77,762
<BONDS> 572
0
0
<COMMON> 53
<OTHER-SE> 36,505
<TOTAL-LIABILITY-AND-EQUITY> 138,028
<SALES> 54,073
<TOTAL-REVENUES> 54,073
<CGS> 30,626
<TOTAL-COSTS> 30,626
<OTHER-EXPENSES> 26,635
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,168
<INCOME-PRETAX> (4,356)
<INCOME-TAX> 24
<INCOME-CONTINUING> (4,380)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (4,380)
<EPS-PRIMARY> (.84)
<EPS-DILUTED> (.84)
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