SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
------------------
FORM 8-K
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Date of report (Date of earliest event reported) - December 5, 1996
as of June 30, 1996
UNITED MERCHANTS AND MANUFACTURERS, INC.
(Exact Name of Registrant as Specified in Charter)
Delaware 1-3185 13-1426280
(State or Other Jurisdiction (Commission (I.R.S. Employer
of Incorporation) File Number) Identification No.)
Two Executive Drive, Fort Lee, N.J. 07024-3308
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code (201) 585-2100
1
<PAGE>
Item 5. Other Events.
As reported in Registrant's Quarterly Report on Form 10-Q for the quarter
ended December 31, 1995 filed February 26, 1996, the Registrant and its
79%-owned subsidiary, Reunited Holdings, Inc. (formerly Victoria
Creations, Inc.), each filed petitions for reorganization relief under
Chapter 11 of the United States Bankruptcy Code on February 22, 1996.
Registrant is continuing to operate its business as debtor-in-possession
while the reorganization case is pending. Registrant and its subsidiary
are in the process of evaluating their businesses and formulating a plan
or plans of reorganization.
Registrant and its subsidiary requested that the Securities and Exchange
Commission allow them to follow a modified reporting procedure in lieu of
the periodic reports required under the Securities Exchange Act of 1934,
as amended. The Commission granted the Registrants' request. Therefore,
the Registrants will file, under cover of Form 8-K, the financial reports
and schedules that are filed with the Bankruptcy Court.
Included herewith, Registrant is filing the cover letter, certificate and
verified financial statements/operating reports for the year ended June
30, 1996 as filed with the Bankruptcy Court. As soon as practical,
Registrant will file the monthly verified financial statements/operating
reports for each of the months of July, August, September, October and
November 1996 and, as due, future monthly reports.
SIGNATURES
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 hereunto duly authorized.
United Merchants and Manufacturers, Inc.
Date December 5, 1996 By/s/Norman R. Forson
Norman R. Forson
Senior Vice President
<PAGE>
UNITED MERCHANTS AND MANUFACTURERS, INC.
2 Executive Drive, Suite 780
Fort Lee NJ 07024
201-585-2100
October 30, 1996
United States Bankruptcy Court
Southern District of New York
Attn: Office of the Clerk
Alexander Hamilton Customs House
One Bowling Green
New York NY 10004-1408
In re: United Merchants and Manufacturers, Inc. and Victoria Creations,
Inc., Debtors, Jointly Administered Chapter 11 Case No. 96 B
40941 (AJG)
Enclosed herewith is a copy of the verified financial statements/operating
reports for the year ended June 30, 1996.
The consolidated reports for the year ended June 30, 1996 and the monthly
reports for July, August and September 1996 will be completed and filed
shortly. They have been delayed due to the time required in preparation
of the enclosed annual statements.
In the meantime, enclosed is a schedule of, and receipts for deposits of,
Federal, state, and local taxes withheld and paid for the months of July,
August and September 1996.
The companies do not make sales subject to sales tax.
All property taxes due and payable have been paid.
All insurance policies, including for workers compensation and disability,
have been paid for the current period.
UNITED MERCHANTS AND MANUFACTURERS, INC., D.I.P.
VICTORIA CREATIONS, INC., D.I.P.
by Norman R. Forson, Senior Vice President
cc: U.S. Department of Justice
Office of the United States Trustee
Southern District of New York
Attn: Goodwin Benjamin, Esquire
80 Broad Street, 3rd Floor
New York NY 10004
Zalkin, Rodin & Goodman LLP
Attn: Andrew D. Gottfried, Esquire
750 Third Avenue
New York NY 10017
Skadden, Arps, Slate, Meagher & Flom
Attn: Michael L. Cook, Esquire
919 Third Avenue
New York NY 10022-3897
<PAGE>
UNITED MERCHANTS AND MANUFACTURERS, INC., D.I.P.
FINANCIAL STATEMENTS
INDEX
Page
Number
Statement of Operations............................................. 2
Balance Sheet....................................................... 3
Statement of Cash Flows............................................. 4
Notes to Financial Statements....................................... 5
1
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UNITED MERCHANTS AND MANUFACTURERS, INC., D.I.P., AND SUBSIDIARY
Consolidated Statement of Operations
The consolidated statement of operations for the year ended June 30, 1996
reflects the consolidated results of operations of the Company and its
79%-owned sudsidiary during the 1996 fiscal year and the sale, as of July
1, 1996, by the subsidiary of most of its operating assets as if the sale
had occurred on June 30, 1996. The pro forma adjustments column deletes
the results of operations for the 1996 fiscal year of the operating assets
sold. The pro forma adjusted column reflects the estimated results of
operations of the design group of the subsidiary, which group was not
included in the operating assets sold, and of the Company.
(000 omitted)
------------------------------------
YEAR ENDED JUNE 30, 1996
--------------------------- YEAR ENDED
PRO FORMA JUNE 30
ADJUST- PROFORMA ------------------
ACTUAL MENTS ADJUSTED 1995 1994
-------- -------- -------- -------- --------
Net sales...................... $50,676 ($50,220) $456 $59,493 $64,934
Cost of goods sold............. (27,316) 27,202 (114) (34,814) (36,988)
-------- -------- -------- -------- --------
Gross Profit $23,360 ($23,018) $342 $24,679 $27,946
Selling, general and
administrative expenses....... (23,576) 18,848 ($4,728) (30,079) (38,540)
Amortization of goodwill....... (720) 720 0 (720) (720)
Loss on termination of operation (513)
-------- -------- -------- -------- --------
Operating Loss ($936) ($3,450) ($4,386) ($6,633)($11,314)
Other income (expense):
Interest expense - other...... (5,766) 2,241 (3,525) (11,007) (12,107)
Gain on sales of assets
not used in operations....... 5,242 5,242
Loss on sale of operation..... (835)
Non-cash gains:
Reduction of liability for
postretirement benefits other
than pensions............... 14,726 14,726
PBGC takeover of pension
liability................... 2,381 2,381
Other income (expense)........ (1,352) (56) (1,408) (25) 369
Minority interest............. 262 262 270 415
Provision for income taxes.... (105) 25 (80) (100) (100)
Reorganization expenses....... (1,655) (1,655)
-------- -------- -------- -------- --------
Earnings (Loss) from
Continuing Operations $12,797 ($1,240) $11,557 ($18,330)($22,737)
Discontinued operations:
Net loss prior to closing..... (532) 1,712
Loss on closing............... (9,080) 2,176
Extraordinary item- gain on
retirement of debt............ 33,400
Cumulative effect of change in
accounting principle for post-
retirement benefits other than
pensions...................... (15,303)
-------- -------- -------- -------- --------
Earnings (Loss) before sale of
Operating Assets by Subsidiary $12,797 ($1,240) $11,557 ($27,942) ($752)
Loss on sale of assets
by subsidiary................. (22,840) 22,840 0
-------- -------- -------- -------- --------
Net Earnings (Loss) ($10,043) $21,600 $11,557 ($27,942) ($752)
Dividends applicable to
Common Stock.................. (4,500) (4,500) (4,500) (4,500)
-------- -------- -------- -------- --------
Net Earnings (Loss) Applicable
to Common shares ($14,543) $21,600 $7,057 ($32,442) ($5,252)
======== ======== ======== ======== ========
Average common shares
outstanding................... 17,845 17,845 17,845 17,845
Earnings (Loss) per share:
Continuing operations......... $0.46 $0.40 ($1.28) ($1.52)
Discontinued operations....... 0.00 0.00 (0.54) 0.22
Extraordinary item............ 0.00 0.00 0.00 1.87
Change in accounting principle 0.00 0.00 0.00 (0.86)
Sale of assets................ (1.28) 0.00 0.00 0.00
-------- -------- -------- --------
Net Earnings (Loss) per share.. ($0.82) $0.40 ($1.82) ($0.29)
======== ======== ======== ========
See notes to financial statements.
2
UNITED MERCHANTS AND MANUFACTURERS, INC.,D.I.P., AND SUBSIDIARY
Consolidated Balance Sheet
The consolidated balance sheet as of June 30, 1996 reflects (1) the
consolidated financial position of the Company and its 79%-owned
subsidiary prior to the sale, as of July 1, 1996, by the subsidiary of
most of its operating assets, (2) the effect on the Company's
consolidated financial position of the sale as if the sale had occurred
on June 30, 1996 and (3) the consolidated financial position of the
Company adjusted for the sale.
(000 omitted)
--------------------------------------------
JUNE 30, 1996
-----------------------------------
ADJUSTMENTS
-----------------
BEFORE ASSETS AFTER JUNE 30
SALE SOLD PROCEEDS SALE 1995
-------- -------- ------- -------- --------
ASSETS
Current Assets:
Cash....................... $2,157 $4,967 $6,140 $965
(984)
Receivables, net .......... 9,004 ($8,895) 109 7,419
Inventories................ 17,214 (17,214) 0 16,430
Other current assets....... 1,533 (1,533) 0 1,113
Net assets of discontinued
operations................ 689
-------- -------- ------- -------- --------
Total Current Assets $29,908 ($27,642) $3,983 $6,249 $26,616
Property, plant
and equipment.............. $7,291 ($5,360) $1,931 $12,565
Less depreciation.......... (5,515) 4,243 (1,272) (7,924)
-------- -------- ------- -------- --------
Net Plant and Equipment $1,776 ($1,117) $0 $659 $4,641
Other Assets:
Goodwill................... $19,941 ($19,941) $0 $20,662
Other...................... 2,314 (520) 1,794 6,509
-------- -------- ------- -------- --------
Total Other Assets $22,255 ($20,461) $0 $1,794 $27,171
-------- -------- ------- -------- --------
Total Assets $53,939 ($49,220) $3,983 $8,702 $58,428
======== ======== ======= ======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable........... $1,996 $1,996 $6,418
Accrued expenses........... 2,513 2,513 11,374
Advance from buyer......... 500 ($500) 0 0
-------- -------- ------- -------- --------
Total Current Liablilties $5,009 $0 ($500) $4,509 $17,792
Liabilities subject to compromise:
Accounts payable........... $4,859 $4,859
Accrued expenses........... 1,108 1,108
Long-term debt............. 55,693 55,693
Other long-term liabilities 8 8
-------- -------- ------- -------- --------
Total Liabilities Subject
to Compromise $61,668 $0 $0 $61,668 $0
Long-term debt.............. 28,119 (19,551) 7,584 81,071
(984)
Other long-term liabilities. 2,431 2,431 18,975
Minority interest........... 1,362 (1,362) 0 1,624
Stockholders' Equity:
Preferred stock, $1 par value;
authorized 10,000,000 shares;
outstanding 450,000 shares $450 $450 $450
Common stock, $1 par value;
authorized 40,000,000 shares;
outstanding 17,845,000
shares (excluding 22,800 shares
held in treasury)......... 17,845 17,845 17,845
Additional paid-in capital. 64,674 64,674 64,674
Retained earnings (deficit)(123,619) (123,619)(136,416)
Notes receivable from stock
purchase agreement........ (4,000) (4,000) (4,000)
Unrealized pension liability (3,587)
Loss on sale............... ($49,220)$26,380 (22,840)
-------- -------- ------- -------- --------
Total Stockholders' Equity ($44,650)($49,220)$26,380 ($67,490)($61,034)
-------- -------- ------- -------- --------
Total Liabilities and Equity $53,939 ($49,220) $3,983 $8,702 $58,428
======== ======== ======= ======== ========
See notes to financial statements.
3
UNITED MERCHANTS AND MANUFACTURERS, INC., D.I.P., AND SUBSIDIARY
Consolidated Statement of Cash Flows
The following consolidated statement of cash flows for the year ended June
30, 1996 reflects (1) the cash flows of the Company and its 79%-owned
subsidiary prior to the sale, as of July 1, 1996, by the subsidiary of most
of its operating assets and (2) the cash flows adjusted for the sale as if
the sale had occurred on June 30, 1996.
(000 omitted)
------------------------------------
YEAR ENDED
JUNE 30, 1996 YEAR ENDED
------------------ JUNE 30
BEFORE AFTER ------------------
SALE SALE 1995 1994
-------- -------- -------- --------
Cash Flows from Operating Activities:
Net earnings (loss).................... $12,797 ($10,043)($27,942) ($752)
Add back items not requiring cash in
the current period:
Extraordinary item - gain on
retirement of debt.................. (33,400)
Change in accounting principle....... 15,303
Depreciation and amortization........ 1,170 1,170 1,468 1,723
Minority interest.................... (262) (1,624) (270) (415)
Amortization of bond discount........ 792 792 1,044 790
Gain from reduction of liability
for postretirement benefits other
than pensions....................... (14,726) (14,726)
Gain on PBGC takeover of pension
liability........................... (2,381) (2,381)
Gain on sales of non-operating assets (5,242) (5,242)
(Gain) loss on sale of divisions..... 835 (2,176)
Loss on shutdown of operation........ 9,080
Cash portion of loss on shutdown..... (2,704)
Decrease (increase) in assets:
Accounts receivable................... (1,585) 7,310 2,338 (644)
Inventories........................... (784) 16,430 3,924 1,033
Other current assets.................. (420) 1,113 343 (284)
Goodwill.............................. 19,941
Other assets.......................... 4,195 4,715 1,884 3,588
Increase (decrease) in liabilities:
Accounts payable...................... 437 437 1,991 (1,597)
Accrued expenses and other liabilities (556) (556) 3,265 273
Other long-term liabilities........... (2,196) (2,196) (7,244) 714
Advance from buyer.................... 500
Other - net........................... 1,047 (3,687)
-------- -------- -------- --------
Net Cash Provided (used) by
Operating Activities ($8,261) $15,140 ($10,941)($19,531)
Cash Flows from Investing Activities:
Additions to plant and equipment....... ($254) ($254) ($354) ($328)
Dispositions of plant and equipment.... 1,117 165 80
Net change in assets of discontinued
operations prior to sale or closing... 689 689 1,415 11,138
Proceeds from sale of non-operating
assets................................ 7,069 7,069
Sales of divisions:
Proceeds from sale or closing......... 10,550 29,981
Non-cash proceeds - receivables....... (363)
-------- -------- -------- --------
Net Cash provided by
Investing Activities $7,504 $8,621 $11,776 $40,508
Cash Flows from Financing Activities:
Increase in long-term debt............. $1,949 $1,949 $28,316
Decrease in long-term debt.............. (20,535) (532) (49,639)
-------- -------- -------- --------
Net Cash Provided (used) by
Financing Activities $1,949 ($18,586) ($532)($21,323)
-------- -------- -------- --------
Net Increase in Cash $1,192 $5,175 $303 ($346)
Cash at beginning of period............. 965 965 662 1,008
-------- -------- -------- --------
Cash at End of Period $2,157 $6,140 $965 $662
======== ======== ======== ========
----------
Supplemental disclosure:
Cash payments for:
Interest.............................. $3,878 $3,878 $9,963 11,317
Income taxes.......................... 105 105 100 100
See notes to financial statements.
4
UNITED MERCHANTS AND MANUFACTURERS, INC., D.I.P.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE A - BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation - The accompanying consolidated financial statements
of United Merchants and Manufacturers, Inc. ("UM&M" or the "Company") and
its 79%-owned subsidiary as of and for the years ended June 30, 1996, 1995
and 1994 are unaudited. The financial information for the years ended
June 30, 1995 and 1994 is taken from audited financial statements. The
financial statements have been prepared in accordance with generally
accepted accounting principles and, in the opinion of management, all
adjustments (consisting of normal recurring accruals) considered necessary
for a fair presentation have been included. The financial statements for
the year ended June 30, 1996 reflect the consolidated financial position
and results of operations and cash flows of the Company and its subsidiary
(1) before the loss from the sale by the subsidiary of most of its
operating assets on July 1, 1996, (2) adjustments to reflect the sale as
if it had occurred on June 30, 1996 and (3) the consolidated financial
position and results of operations and cash flows of the Company and its
subsidiary after the sale.
The financial statements for the year ended June 30, 1996 have been
prepared in conformity with generally accepted accounting principles
applicable to a going concern which contemplate the realization of assets
and the liquidation of liabilities in the normal course of business. In
the event that a plan of reorganization (see Note B below) is not
consummated, certain adjustments may be required to the stated amounts and
classification of assets and liabilities.
Goodwill - Goodwill arose as the result of the purchase price paid by the
Company to acquire its subsidiary in excess of the fair value of the
subsidiary's net assets at the date of acquisition. Goodwill is being
amortized by the straight-line method over 40 years. In evaluating the
recoverability of goodwill, management gives consideration to a number of
factors, including brand recognition, market share, operating systems and
the creative and technical skills of the Company as a whole. Accumulated
amortization of goodwill amounted to $8,025,000 and $7,305,000 at June 30,
1996 and 1995, respectively.
Inventories - Inventories are stated at the lower of cost (first-in,
first-out method) or market values.
Property, Plant and Equipment - Property, plant and equipment are carried
at cost. Depreciation and amortization are computed using the
straight-line method over the estimated useful lives of the assets,
generally 15 years for buildings and 3 to 20 years for machinery,
equipment and other.
5
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NOTE B - PETITION FOR REORGANIZATION UNDER CHAPTER 11
Effective February 22, 1996, the Company and its 79%-owned subsidiary,
Reunited Holdings, Inc. (formerly Victoria Creations, Inc.), filed
petitions for reorganization relief under Chapter 11 of the Bankruptcy
Code in the United States Court for the Southern District of New York.
The filing became necessary because the Company's secured lender refused
to extend necessary funding for the subsidiary's then current operations
and the Company had guaranteed the subsidiary's debt to the lender.
Consequently, the Company and the subsidiary were unable to meet their
immediate financial commitments.
Pursuant to the Bankruptcy Code, the Company and its subsidiary are each
continuing to operate its businesses as debtor-in-possession while the
reorganization case is pending. Each company is allowed to use, and is
using, its cash and other resources at the operating level in the ordinary
course of business.
Under Chapter 11, the presentation and collection of certain prepetition
claims against the Company and its subsidiary are stayed. These claims
are reflected in the June 30, 1996 balance sheet as "Liabilities Subject
to Compromise".
Additional claims (liabilities subject to compromise) may arise subsequent
to the filing date resulting from rejection of executory contracts,
including leases, and may be determined by the court (or agreed to by the
parties in interest) for contingencies and other disputed amounts.
Creditors holding claims secured by the companies' assets are also stayed,
although such claimants may move the court for relief from the stay.
Secured claims are secured by liens on substantially all of the Companies'
assets.
Liabilities subject to compromise are stated at the Companies' carrying
value and not at the amounts for which the claims may be settled.
The Bankruptcy Court authorized the Companies to pay or otherwise honor
certain prepetition obligations, including employee wages and benefit
plans.
The statement of cash flows reflects changes in applicable liabilities
before the reclassification of such amounts to Liabilities Subject to
Compromise.
The Company anticipates that it will not be required to pay postpetition
interest on certain of its prepetition debt obligations and, accordingly,
effective with the filing, discontinued accruing interest on those debt
obligations included in Liabilities Subject to Compromise. Contractual
interest not accrued and not reflected in the statement of operations with
respect to those obligations during the period February 23, 1996 through
June 30, 1996 amounted to $1,294,000.
6
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NOTE C - BENEFITS
Termination of Pension Plan:
The discussion in the following paragraph relates to the United Merchants
and Manufacturers, Inc. pension plan. The Retirement Savings Plan of the
Company's 79%-owned subsidiary is not affected.
The UM&M pension plan covers approximately 8,800 persons, of whom 12 were
employees as of June 30, 1996. At present, of the 8,800 who have vested
benefits in the plan, 4,500 are receiving pension payments; the others
will receive payments beginning when they become 65 years of age. As set
forth in the Notes to Consolidated Financial Statements in the Company's
Annual Report on Form 10-K for the year ended June 30, 1995, the Company's
obligation for benefits, as projected by actuaries, of $68.8 million
exceeded the assets held in the pension plan trust fund of $ 62.9 million
by $5.9 million or 9%. This underfunding was due in large part to the
performance of the investment markets during the calendar year 1994. As a
result of this underfunded position, the Company was scheduled to make
minimum funding payments of approximately $730,000 each quarter to its
pension plan trust fund beginning October 15, 1995. In addition, the
Company was scheduled to make a payment of approximately $2.9 million to
its pension plan trust fund on March 15, 1996. The Company was unable to
and did not make the payments. Effective November 28, 1995, the Company
determined that it could not make the contributions necessary to fund its
pension plan. At that time, the Company filed with the Pension Benefit
Guarantee Corporation ("PBGC") a Distress Termination - Notice of Intent
to Terminate form. On June 20, 1996, the PBGC announced that it would
take over the pension plan. As of June 30, 1996, the Company recorded in
its financial statements the takeover of the Company's pension liabilities
by the PBGC. The takeover resulted in a one-time, non-cash gain of $2.4
million. The effective date of the termination of the plan was January
31, 1996. Subsequent to that date, the Company did not make any
contributions to the pension plan and the Company's employees did not earn
additional benefits under the pension plan. The PBGC announced that the
plan participants generally will receive the same benefits they are now
receiving, or would be entitled to when they retire, up to the PBGC
maximum for pension plans that close in 1996, which is $2,642.05 monthly
(approximately $31,704 annually) for persons retiring at age 65 or later.
The maximum is lower for those who retire early or have survivors benefits.
The Internal Revenue Code provides for a tax of 10 percent on the amount
of the accumulated funding deficiency determined as of the end of the plan
year. If such tax is imposed, and the applicable accumulated funding
deficiency is not paid within the taxable period, the Internal Revenue
Service may impose a tax equal to 100 percent of the funding deficiency.
Subsequent to June 30, 1996, the Internal Revenue Service filed a claim
for a substantial amount. The Company is studying the claim.
Postretirement Benefits Other Than Pensions:
Effective July 1, 1993, the Company adopted Statement of Financial
Accounting Standards No. 106, "Employers' Accounting for Postretirement
Benefits Other Than Pensions". The statement requires accrual of the cost
7
<PAGE>
of providing postretirement benefits, including medical and life insurance
coverage, during the active service period of the employee rather than the
pay-as-you-go (cash) basis which the company used prior to adoption. The
company elected to immediately recognize the accumulated postretirement
benefit obligation equal to the discounted present value of expected
future benefit payments attributed to employees' service rendered prior to
July 1, 1993. This resulted in a one-time, non-cash charge against
earnings of $15.3 million as of July 1, 1993.
Effective August 31, 1995, the Company discontinued the Company-sponsored
medical plan and, effective March 1, 1996, discontinued the
Company-sponsored life insurance coverage for its employees (other than
those of its 79%-owned subsidiary) and its retirees. The discontinuances
resulted in non-cash gains of $10.7 million and $4.0 million,
respectively, from the reduction of the Company's liability for
postretirement benefits other than pension. The discontinuances reduced
the Company's ongoing cash expenses by more than $1.3 million a year.
NOTE D - DISPOSITIONS OF CERTAIN OPERATIONS
See Note O - Subsequent Events - Sale of Assets regarding the sale by the
Company's subsidiary of most of its operating assets as of July 1, 1996.
Sale of Retail Outlet Store Operations:
In January 1995, the Company sold its retail outlet store operations for
cash and the assumption by the buyer of certain of the operation's
liabilities. The financial statements presented herein include the
results of the retail outlet store operations through December 31, 1994.
During the quarter ended December 31, 1994, the Company recognized a loss
of $1.3 million for the sale and the loss from operations from December
31, 1994 to date of sale. Net sales for the years ended June 30, 1995 and
1994 include net sales of $9.8 million and $23.3 million, respectively,
and operating loss includes losses of $1.7 million and $2.7 million,
respectively, from these operations.
Discontinued Operations:
In December 1994, the Company announced that it would close its Buffalo
Mill division, which was its Apparel Textiles segment. The Company made a
provision for losses of $9.1 million for the closing and ongoing costs of
the division.
During the quarter ended June 30, 1994, the Company sold substantially all
of the assets (other than accounts receivable) and business, as a going
concern, of its Clarkesville Mill operations. The sale resulted in a gain
of approximately $3.2 million. Also, during the quarter, the Company
determined that non-cash proceeds from the sale of two operations in
fiscal 1993 were uncollectible and, therefore, recognized a loss on sale
of those operations of $5.1 million.
During the quarter ended March 31, 1994, the Company sold substantially
all of the assets (other than accounts receivable) and business, as a
going concern, of the Uniblend operation. The sale resulted in a gain of
approximately $5.1 million.
8
<PAGE>
The proceeds from the above transactions, along with the collection of the
accounts receivable of the operations, were used to reduce the Company's
indebtedness.
The financial statements and notes thereto presented herein have been
restated to reflect the above mentioned discontinued operations as such.
Net sales and operating losses for the years ended June 30, 1995 and 1994
of the discontinued operations prior to disposition were sales of $17.0
million and $87.4 million and operating income (losses) of ($3.8) million
and $0.7 million, respectively.
All gain (loss) amounts set forth above are before any related income tax
provision. The Company used available operating losses and net operating
loss carryforwards to eliminate the liability for such income taxes.
NOTE E - LONG-TERM DEBT
On June 30, 1994, the Company reduced its indebtedness to its then senior
secured lender to the target amount established in an agreement with that
lender. At that time, in accordance with the agreement, the lender
accepted, in full satisfaction of the balance (approximately $63.4
million) of the Company's indebtedness to the lender, a 5% subordinated
contingent income note due June 30, 2019 in the principal amount of $30
million.
The satisfaction of this indebtedness by the Company was accounted for as
a "troubled debt restructuring" and resulted in an extraordinary, non-cash
gain from retirement of debt of $33.4 million which was reported in the
year ended June 30, 1994.
The Company reduced its indebtedness to the targeted amount through the
sale of two of the Company's operating divisions, sales of certain other
assets and a borrowing of approximately $29 million from another lender.
Effective July 31, 1996, the Company and its subsidiary each renegotiated
its borrowing arrangements with its current lender (see below for terms).
Selected information with regard to the senior secured long-term debt for
the years ended June 30, 1996, 1995 and 1994 is as follows:
(000 omitted)
----------------------------
Year Ended June 30
----------------------------
1996 1995 1994
-------- -------- --------
Maximum amount outstanding (at any
month end)............................... $ 37,816 $ 36,314 $115,669
Average amount outstanding during period.. 27,566 31,865 107,223
Interest expense.......................... 3,304 7,675 8,783
Weighted average interest rate during
period (Interest expense divided by
average amount outstanding).............. 12.0% 24.0 % 8.19%
9
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Long-term debt consists of the following:
(000 omitted)
------------------
June 30
------------------
1996 1995
-------- --------
Senior secured debt............................... $ 28,119 $ 27,784
The following are classified as "Liabilities
Subject to Compromise" at June 30, 1996:
3 1/2% Senior Subordinated Debentures due 2009
(net of unamortized discount of $46,211,000
and $46,908,000 at June 30, 1996 and 1995,
respectively).................................. $ 22,931 $ 22,234
5% Subordinated Notes due 2019:
Issued to former senior lender (see above)..... 30,000 30,000
Issued in settlement of lawsuit (net of unamortized
discount of $20,852,000 and $20,947,000 at
June 30, 1996 and 1995, respectively)......... 1,148 1,053
Other........................................... 1,614
-------- --------
Total Long-term Debt Subject to Compromise $ 55,693 $ 53,287
-------- --------
Total Long-term Debt $ 83,812 $ 81,071
======== ========
The Company's portion of the senior secured debt at June 30, 1996
($7,584,000) is a term loan secured by substantially all of the Company's
assets, matures July 31, 2000 and bears interest at the rate of 12% a
year. Under terms of this loan, proceeds from collections of certain
accounts receivable and sales of inventory other than those of the
Company's subsidiary and a portion of proceeds of sales of the Company's
other assets, primarily real property, have been and will be used to repay
the loan.
The subsidiary's portion of the senior secured debt at June 30, 1996,
prior to the sale of most of the subsidiary's operating assets, consisted
of a term loan ($4,400,000 at June 30, 1996) and a revolving loan based on
the subsidiary's eligible accounts receivable and inventories. These
loans were secured by substantially all of the subsidiary's assets and
bore interest at the rate of 3 1/2% over prime rate.
Subsequent to the filing of the petition for reorganization, the Company
and its subsidiary accrued interest on this debt but did not pay such
interest in cash. Such interest with respect to the subsidiary was
included in the debt assumed and paid at the time of the sale of the
subsidiary's assets.
Effective July 1, 1996, the subsidiary sold most of its operating assets.
See Note O below. The buyer assumed $19.55 million of the secured
long-term debt and the subsidiary simultaneously used a portion of the
cash proceeds of the sale to payoff the balance ($985,000) of this debt.
10
<PAGE>
The 3 1/2% Debentures are subordinate to "Senior Indebtedness", as defined
in the trust agreement, which at June 30, 1996 includes primarily the
senior secured debt. The 3 1/2% Debentures are secured, secondarily to
Senior Indebtedness, by substantially all of the Company's assets, other
than accounts receivable. Subsequent to the filing of the petition for
reorganization, the Company has not accrued interest on this debt nor
amortized the related debt discount.
Interest on the 5% Subordinated Notes due 2019 is contingent and
non-cumulative. Interest will accrue and be payable only to the extent
net earnings of the Company (as defined in the notes) exceed $7.5 million
in a fiscal year. No payments on principal are required before maturity
date, June 30, 2019, unless net earnings (as defined in the notes) exceed
$7.5 million plus the interest payment on these notes in a fiscal year.
In such case, one-half of such excess will be paid to reduce the
outstanding principal of the notes. Subsequent to the filing of the
petition for reorganization, the Company has not amortized the related
debt discount.
NOTE F - STOCKHOLDERS' EQUITY
A summary of the changes in the components of stockholders' equity is as
follows:
(000 omitted)
-------------------------------
Year Ended June 30
-------------------------------
1996 1996
before after
sale sale 1995
--------- --------- ---------
Preferred Stock:
Beginning and ending balance.......... $ 450 $ 450 $ 450
========= ========= =========
Common Stock:
Beginning and ending balance *........ $ 17,845 $ 17,845 $ 17,845
========= ========= =========
Capital in Excess of Par Value:
Beginning and ending balance.......... $ 64,674 $ 64,674 $ 64,674
========= ========= =========
Retained Earnings (Deficit):
Beginning balance..................... $(136,416) $(136,416) $(108,474)
Net earnings (loss)................... 12,797 (10,043) (27,942)
--------- --------- ---------
Ending balance $(123,619) $(146,459) $(136,416)
========= ========= =========
Unrealized Pension Plan Adjustments:
Beginning balance..................... $ (3,587) $ (3,587) $ (4,634)
Unrealized pension liability adjustment 3,587 3,587 1,047
--------- --------- ---------
Ending balance $ 0 $ 0 $ (3,587)
========= ========= =========
Notes Receivable - Stock Purchase Agreement
Beginning and ending balance.......... $ (4,000) $ (4,000) $ (4,000)
========= ========= =========
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(000 omitted)
-------------------------------
Year Ended June 30
-------------------------------
1996 1996
before after
sale sale 1995
--------- --------- ---------
Total Stockholders' Equity (Deficit):
Beginning balance..................... $ (61,034) $ (61,034) $ (34,139)
Unrealized pension liability adjustment 3,587 3,587 1,047
Net earnings (loss)................... . 12,797 (10,043) (27,942)
--------- --------- ---------
Ending balance $ (44,650) $ (67,490) $ (61,034)
========= ========= =========
* - Excludes treasury stock
The preferred stock is designated 10% Cumulative Preferred Stock, Series
1. There are 450,000 shares of this series authorized. Holders of the
stock are entitled to receive dividends at the annual rate of $10 a share.
The first dividend payment date was scheduled to be July 15, 1992, the
second July 15, 1993 and thereafter, semi-annually; the Company has not
declared or paid these dividends. There are no mandatory redemption
provisions for this stock. The preferred stock has no general voting
rights; however, since scheduled dividends continue unpaid after six
months past the scheduled date, the number of directors constituting the
board of directors of the Company could be increased by two and the
holders of the preferred stock could elect the two additional directors.
No such change has been made as of June 30, 1996. For financial statement
purposes, preferred dividends which accrued during the period are deducted
from the results of operations in determining earnings (loss) applicable
to common shares whether or not such dividends are paid or declared.
Liquidation value of this series of preferred stock during the first year
after issuance was $35.26 a share and will increase over a 10 year period
to $100 a share.
Pursuant to the terms of the stock purchase agreement dated August 18,
1982, as amended, between the Company and a corporation wholly-owned by
the President of the Company, the Company agreed to sell 1,000,000 shares
of its Common Stock in four annual installments of 250,000 shares each at
a purchase price of $5.00 per share, the closing price of Common Stock of
the Company on the New York Stock Exchange on August 17, 1982. The final
installment was purchased on March 10, 1986. The aggregate purchase price
of $5,000,000 was paid $1,000,000 in cash and $4,000,000 in notes due, as
amended, fifteen years after issuance. The notes are secured by the
shares of stock purchased, with shares to be released from pledge to the
extent that a note is paid. It is not expected that Monzoral's net worth
will materially exceed the value of the shares purchased. The notes bear
interest on principal only. The Company had accrued interest on the notes
through June 30, 1996; however, since as stated, the notes are secured
only by the shares of stock purchased and the value of the stock is less
than the notes, the Company determined to provide in its financial
statements for non-collection of the interest by reversing interest
accrued during fiscal 1996 and recording an "Other Expense" of $1.9
million for non-collection of interest previously accrued. The notes are
shown in the Company's balance sheet as a reduction of stockholders'
equity (deficit) and not as an asset of the Company.
12
<PAGE>
NOTE G - INCOME TAXES
The provision for income taxes for each of the three years ended June 30,
1996 consists of state and local taxes. Certain gains in the 1996 fiscal
year are not recognizable for income tax purposes, therefore, no provision
for Federal income taxes for the year was required. A reconciliation of
the United States statutory Federal corporate income tax rate to the
effective rate of the provision for income taxes is as follows:
(000 omitted)
--------------------------------------
Year Ended June 30
--------------------------------------
1996 1996
Before After
Sale Sale 1995 1994
-------- -------- -------- --------
Statutory rate (benefit).......... 34.0 % (34.0)% (34.0)% (34.0)%
Increase (decrease) from effect of:
State and local income taxes.... 0.5 0.9 0.2 6.2
Goodwill........................ 1.7 3.1 0.9 22.9
Gains not taxable............... (44.3) (82.0) 0 0
Losses not resulting in tax
benefits 8.8 113.3 33.3 14.2
-------- -------- -------- --------
Effective rate.................... 0.7 % 1.3 % 0.4 % 9.4 %
======== ======== ======== ========
At June 30, 1996, the Company and its subsidiary had unused Federal net
operating loss carryforwards of approximately $306 million, of which $22
million expires in 1997; $12 million in 1998; $35 million in 2000; $14
million in 2002; $11 million in 2003; $64 million in 2005; $42 million in
2006; $37 million in 2007; $31 million in 2008; $1 million in 2009; $33
million in 2010 and $4 million in 2011. In addition, the Company has
available investment tax credit carryforwards of approximately $2 million,
expiring in various amounts each year from 1997 through 2000.
The Company's ability to use its net operating loss carryforwards depends
upon many complex, technical aspects of Federal and state tax law.
NOTE H - SUPPLEMENTAL BALANCE SHEET INFORMATION
(000 omitted)
------------------
JUNE 30
------------------
1996 1995
-------- --------
Other assets and deferred charges:
Assets held for sale................................ $ 1,659 $ 3,260
Interest receivable - sale of stock................. 0 1,873
Deferred Royalty Expenses........................... 0 350
Deposits............................................ 69 291
Other............................................... 66 735
-------- --------
$ 1,794 $ 6,509
======== ========
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(000 omitted)
------------------
JUNE 30
------------------
1996 1995
-------- --------
Other long-term liabilities:
Deferred shutdown costs............................. 1,337 $ 3,732
Accrued workers compensation........................ 1,094 1,094
Postretirement benefits other than pension.......... 0 13,355
Pension liability................................... 0 794
-------- --------
$ 2,431 $ 18,975
======== ========
NOTE I - SUPPLEMENTAL STATEMENT OF OPERATIONS INFORMATION:
(000 Omitted)
----------------------------
Year Ended June 30
----------------------------
1996 1995 1994
-------- -------- --------
Other Income (Expense):
Provision for non-collection of interest
on notes receivable from sale of stock... $ (1,873)
Other - net 521 $ (25) $ 369
-------- -------- --------
$ (1,352) $ (25) $ 369
======== ======== ========
Advertising expense....................... $ 2,465 $ 2,914 $ 2,733
Rent expense - net........................ 1,511 1,987 3,302
Royalty expense........................... 1,572 1,540 1,304
NOTE J - COMMITMENTS AND CONTINGENCIES
In connection with the sale of substantially all of the subsidiary's
operating assets effective July 1, 1996 (See Note O below), the buyer
assumed the subsidiary's minimum rental commitments under non-cancellable
operating leases and the subsidiary's obligations to pay royalties based
on sales of certain product lines with minimum royalty payments.
NOTE K - LEGAL PROCEEDINGS
See Note B above regarding petition of reorganization under Chapter 11 of
the U. S. Bankruptcy Code.
The Company is a defendant in various lawsuits. It is not expected that
these suits will result in judgements which in the aggregate would have a
material adverse effect on the Company's financial position.
14
<PAGE>
NOTE L - SEGMENT INFORMATION
The Company consists of one business segment, the design, manufacture and
distribution of costume jewelry.
Note M - MAJOR CUSTOMER
During the years ended June 30, 1996, 1995 and 1994, one of the Company's
customer's purchases amounted to 33%, 26% and 20%, respectively, of the
Company's consolidated sales net of returns.
NOTE N - SELECTED QUARTERLY FINANCIAL INFORMATION
(000 omitted)
--------------------------------------------
Quarter Ended
----------------------------------
Sep 30 Dec 31 Mar 31 June 30 Total
------- ------- ------- ------- --------
Year ended June 30, 1996:
Net sales................ $11,910 $13,417 $12,280 $13,069 $50,676
Gross profit............. 5,879 6,294 5,653 5,534 23,360
Earnings from continuing
operations.............. 8,826 3,536 1,769 (1,334) 12,797
Loss on sale of assets... (22,840) (22,840)
Net earnings (loss)...... 8,826 3,536 1,769 (24,174) (10,043)
Earnings (loss) per
common share:
Continuing operations.. 0.43 0.14 0.04 (0.15) 0.46
Loss on sale of assets. (1.28) (1.28)
Net earnings (loss)
per common share...... 0.43 0.14 0.04 (1.43) (0.82)
Year ended June 30, 1995:
Net sales................ $20,119 $16,975 $11,197 $11,202 $59,493
Gross profit............. 9,007 6,369 4,698 4,605 24,679
Loss from continuing
operations.............. (3,514) (6,453) (4,368) (3,995) (18,330)
Net loss................. (4,089) (14,310) (4,368) (5,175) (27,942)
Loss per common share:
Continuing operations... (0.26) (0.42) (0.31) (0.29) (1.28)
Net loss per common share (0.29) (0.86) (0.31) (0.36) (1.82)
- ----------
See Note D above for gains (losses) from disposition of divisions which
affected the results of operations for certain of the quarters shown above.
NOTE O - SUBSEQUENT EVENT - SALE OF ASSETS
Under order of the Bankruptcy Court, effective July 1, 1996, the
subsidiary of the Company sold most of its operating assets as a "going
concern" for proceeds of approximately $5.5 million in cash and the
assumption by the buyer of $19.55 million of the subsidiary's liability to
its senior secured lender. The subsidiary simultaneously used a portion
of the cash proceeds to payoff the balance owed to the senior secured
lender. The sale resulted in a non-cash loss on a consolidated basis of
approximately $23 million and has been reflected in the financial
statements as if the sale had occurred on June 30, 1996.
15
<PAGE>
