SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
------------------
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For quarterly period ended December 31, 1995
Commission File Number 0-15238
VICTORIA CREATIONS, INC.
(Exact name of registrant as specified in its charter)
Rhode Island 05-0301429
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
30 Jefferson Park Rd.
Warwick, Rhode Island 02888
(Address of principal (Zip Code)
executive offices)
Registrant's telephone number, including area code 401-467-7150
Indicate by check mark whether the registrant (1) has filed all documents
and 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 subject to such filing requirements for the past 90 days.
Yes [X]. No [ ].
At February 19, 1996, there were 7,800,000 shares of the registrant's
Common Stock, Par Value $0.01 a share, outstanding.
1
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VICTORIA CREATIONS, INC.
INDEX
Page No.
--------
Part I - Financial Information
Statement of Operations.................................3
Management's Discussion and Analysis of
Financial Condition and Results of Operations.........4
Balance Sheet ..........................................6
Statement of Cash Flows.................................7
Notes to Financial Statements ..........................8
Part II - Other Information ................................10
2
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VICTORIA CREATIONS, INC.
Part I - Financial information
VICTORIA CREATIONS, INC.
Statement of Operations (000 omitted)
THREE MONTHS ENDED SIX MONTHS ENDED
DECEMBER 31 DECEMBER 31
------------------- -------------------
1995 1994 1995 1994
--------- --------- --------- ---------
Net sales..................... $13,261 $12,713 $25,171 $27,457
Cost of goods sold............ 7,087 7,556 13,320 15,186
--------- --------- --------- ---------
Gross Profit $6,174 $5,157 $11,851 $12,271
Selling, general and
administrative expenses..... 4,941 5,057 9,149 10,014
Amortization of goodwill...... 180 180 360 360
--------- --------- --------- ---------
Operating Income (Loss) $1,053 ($80) $2,342 $1,897
Other income (expense):
Interest expense - Note C... (633) (894) (1,125) (1,867)
Royalty income.............. 12 4 20 18
--------- --------- --------- ---------
Earnings (Loss)before
Income Taxes $432 ($970) $1,237 $48
Provision for income taxes.... 7 7 13 13
--------- --------- --------- ---------
Net earnings (Loss) $425 ($977) $1,224 $35
========= ========= ========= =========
Average common shares
outstanding................. 7,800 7,800 7,800 7,800
Net Earnings (Loss) per Share $0.05 ($0.13) $0.16 $0.01
See notes to financial statements.
3
VICTORIA CREATIONS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The Company is a 79% owned subsidiary of United Merchants and
Manufacturers, Inc. ("UM&M" or "Parent Company").
RESULTS OF OPERATIONS
Net sales of the Company increased 4% in the three months but decreased 8%
in the six months ended December 31, 1995 from the net sales for the
comparable periods ended December 31, 1994. The Company's branded label
merchandise, Givenchy, Richelieu and Lagerfeld, were at sales levels below
those of the prior year for the current fiscal year's quarter and six
months as retail sales continued to underperform expectations and prior
year's comparable period sales volume. Sales of the Company's private
label lines increased during both the three and six month periods ended
December 31, 1995 over such sales for equivalent periods last fiscal year
as new private label market channels received initial shipments of
merchandise. The decrease in sales for the six months ended December 31,
1995 is attributed to limitations on borrowings of cash from the Company's
senior secured lender during the five to six-month period prior to August
1995. The limitations on borrowing constrained the Company's ability to
purchase raw materials needed to accept orders for finished goods for
shipment during the first fiscal quarter of the current year. The
limitations were lessened at the end of July 1995 when the Company
renegotiated its long-term debt with its lender (see Note C of Notes to
Financial Statements). Sales of out-of-season merchandise (which is sold
at lower than the Company's normal margin) declined from those of the
prior year's comparable periods as less inventory was available for such
sales. Unit sales, excluding out-of-season merchandise, increased during
both the current quarter and the six month period ended December 31, 1995
compared with the same periods of last fiscal year while average unit
prices declined.
Cost of goods sold, as a percentage of net sales, for the current quarter
decreased six percentage points from that of the same quarter and two
percentage points from that of the same six months last year. The
resulting gross profit increased 20% (versus the 4% increases in net
sales) for the quarter and was down 3% (versus the 8% decline in net
sales) for the six months ended December 31, 1995 compared with those of
the prior year's same quarter and six months.
Selling, general and administrative expenses decreased 2% in the current
year's quarter and 9% in the six months from those of the three and six
months ended December 31, 1994. These decreases were principally the
result of reductions in sales related expenses and to the Company's
continued emphasis on expense control. As a percentage of net sales,
these expenses decreased 2.5 percentage points for the current quarter and
were the same for the current six months from those of the same quarter
and six months last year.
4
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As a result of the increased sales, combined with the decreases in both
cost of goods sold and selling, general and administrative expenses,
operating income increased to income of $1.1 million from a loss of
$80,000 in the prior year's quarter. For the six months ended December
31, 1995, the decrease in net sales was more than offset by the decreases
in cost of goods sold and selling, general and administrative expenses to
result in operating income of $2.3 million compared to operating income of
$1.9 million in the prior year's six months.
Although average borrowings, other than from the Parent Company, were
higher during the current quarter and six months, interest expense
decreased $261,000 for the three months and $742,000 for the six months
ended December 31, 1995 from that of the prior year's same quarter and six
months. The decreases were due to the decreased interest rate during the
current periods on the secured loans renegotiated as mentioned above. The
Parent Company waived the interest on the amount due to it for all the
periods shown in the financial statements. See Note C of Notes to
Financial Statements.
As a result of the improved operating income and lesser interest expense,
net earnings for the quarter ended December 31, 1995 were $425,000
compared with a net loss for the same quarter last year of $977,000. For
the current six months, net earnings increased to $1.2 million from the
$35,000 reported for the six months ended December 31, 1994.
LIQUIDITY AND CAPITAL RESOURCES
The Company has generally met its capital requirements from internally
generated funds and borrowings from its Parent Company and, until June 30,
1994, from its factor. On June 30, 1994, the Company repaid its
indebtedness to its factor by borrowing from another lender and its Parent
Company. Effective July 31, 1995, the Company renegotiated its borrowing
arrangements with its current senior secured lender. See Note C of Notes
to Financial Statements.
Short term needs for working capital will be borrowed under a revolving
loan from the new lender. The Company does not anticipate increased needs
for long-term borrowings other than to repay the current lender.
Working capital amounts to $20.6 million at December 31, 1995 and was
$19.9 million at June 30, 1995, an increase of $0.7 million.
See Note E - Subsequent Event regarding the Company and its Parent Company
filing petitions for reorganization relief under Chapter 11 of the U. S.
Bankruptcy Code.
5
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VICTORIA CREATIONS, INC.
Balance Sheet (000 omitted)
-------------------
DEC 31 JUNE 30
1995 1995
--------- ---------
ASSETS
Current Assets:
Cash............................................... $25 $638
Receivables, net of allowances of $2,863,000 at
December 31, 1995 and $2,415,000 at June 30, 1995. 6,279 7,242
Inventories........................................ 17,678 16,430
Other current assets............................... 1,637 958
--------- ---------
Total Current Assets $25,619 $25,268
Plant and Equipment:
Machinery and equipment............................ $3,301 $3,233
Leasehold improvements............................. 1,914 1,913
--------- ---------
$5,215 $5,146
Less accumulated depreciation...................... 4,139 4,035
--------- ---------
Net Plant and Equipment $1,076 $1,111
Other Assets:
Goodwill........................................... $20,348 $20,709
Other.............................................. 772 863
--------- ---------
Total Other Assets $21,120 $21,572
--------- ---------
$47,815 $47,951
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable................................... $3,494 $4,284
Accrued expenses and other liabilities............. 1,505 1,084
--------- ---------
Total Current Liablilties $4,999 $5,368
Long-term debt...................................... 18,006 11,090
Due to Parent Company............................... 15,554 23,461
Stockholders' Equity:
Common stock, $0.01 par value,
authorized 10 million shares,
outstanding 7.8 million shares.................... $58 $58
Additional paid-in capital......................... 32,998 32,998
Retained earnings (deficit)........................ (23,800) (25,024)
--------- ---------
Total Stockholders' Equity $9,256 $8,032
--------- ---------
$47,815 $47,951
========= =========
See notes to financial statements.
6
VICTORIA CREATIONS, INC.
Statement of Cash Flows - (000 omitted)
SIX MONTHS ENDED
DECEMBER 31
--------------------
1995 1994
--------- ---------
Cash Flows from Operating Activities:
Net earnings...................................... $1,224 $35
Add back items not requiring cash in the
current period:
Depreciation and amortization................. 465 500
Decrease (increase) in assets:
Accounts receivable............................. 963 2,180
Inventories..................................... (1,248) (36)
Other current assets............................ (679) (6)
Other assets.................................... 91 (345)
Increase (decrease) in current liabilities:
Accounts payable................................ (790) 50
Accrued expenses and other liabilities.......... 421 375
--------- ---------
Net Cash Provided by Operating Activities $447 $2,753
Cash Flows from Investing Activities:
Additions to plant and equipment.................. ($69) ($69)
Cash Flows from Financing Activities:
Long-term debt.................................... $6,916 ($1,420)
Due to Parent Company............................. (7,907) (426)
--------- ---------
Net Cash Used for Financing Activities ($991) ($1,846)
--------- ---------
Net Increase (Decrease) in Cash ($613) $838
Cash at beginning of period......................... 638 72
--------- ---------
Cash at End of Period $25 $910
========= =========
----------
Supplemental disclosure:
Cash payments for:
Interest........................................ $1,125 $1,867
Income taxes.................................... 13 13
See notes to financial statements.
7
VICTORIA CREATIONS, INC.
Notes to Financial Statements
Note A - Basis of Presentation
The accompanying financial statements of Victoria Creations, Inc.
(Company) have been prepared in accordance with generally accepted
accounting principles for interim financial information and with the
instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly,
they do not include all of the information and footnotes required by
generally accepted accounting principles for complete financial
statements. In the opinion of management, all adjustments (consisting of
normal recurring accruals) considered necessary for a fair presentation
have been included. The results of operations of any interim period are
subject to year-end audit and adjustments, and are not necessarily
indicative of the results of operations for the fiscal year. For further
information, refer to the financial statements and footnotes thereto
included in the Company's Annual Report on Form 10-K for the year ended
June 30, 1995.
The Company is a 79% owned subsidiary of United Merchants and
Manufacturers, Inc. (UM&M or Parent Company). UM&M is a publicly held
company whose stock is traded on the New York Stock Exchange.
Note B - Inventories
Inventories consist of:
(000 omitted)
----------------
Dec 31 June 30
1995 1995
------- -------
Raw materials ........................................ $ 5,034 $ 5,120
Work in process ...................................... 575 484
Finished goods ....................................... 12,069 10,826
------- -------
$17,678 $16,430
======= =======
Note C - Long-Term Debt and Interest Expense
Effective July 31, 1995, the Company renegotiated its borrowing
arrangements with its current lender. Under the terms of the amended
agreements, the lender loaned to the Company additional funds of
approximately $8.3 million, increasing the Company's total indebtedness to
the lender to approximately $17.9 million, and reduced the interest rate
paid on the Company's indebtedness to the lender from 24% to prime rate
plus 3 1/2%, or currently 12% a year. Of the additional borrowing, $2.0
million was used to meet working capital needs and the remainder was used
to reduce the Company's indebtedness to its Parent Company to
approximately $16.7 million. The current arrangements consist of a
8
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VICTORIA CREATIONS, INC.
Notes to Financial Statements (continued)
term loan ($4,760,000 at December 31, 1995) payable $60,000 a month with
the balance due June 15, 2000 and a revolving loan, based on the Company's
eligible accounts receivable and inventories, having a term ending on June
15, 1998. The revolving loan will be renewed automatically for successive
one year periods thereafter unless terminated by either party upon thirty
days notice.
Interest expense includes interest on amounts due on long-term debt. The
Parent Company waived interest on the amount due to it for each of the
three and six month periods ended December 31, 1995 and 1994. If the
Parent Company had not waived the interest due to it, interest expense
would have been approximately $496,000 and $600,000 greater for the three
months and $900,000 and $1,159,000 greater for the six months ended
December 31, 1995 and 1994, respectively, than that reflected in the
statement of operations.
Note D - Income Taxes
The provision for income taxes for the three and six month periods ended
December 31, 1995 and 1994 varied from the expected relationship to
earnings (loss) before income taxes (and amortization of goodwill, which
is not deductible for income tax purposes) since the Company had net
operating loss carryforwards to offset earnings and therefore, no
provision for Federal income taxes was required. The amounts shown as
provision for income taxes for the periods are for state and local taxes.
Note E - Subsequent Event
Effective February 22, 1996, the Company and its Parent Company, United
Merchants and Manufacturers, 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 filings became necessary because the Company's secured lender refused
to extend necessary funding for its current operations and the Parent
Company guarantees the Company's debt to the lender. Consequently, the
Company and its Parent Company are unable to meet their immediate
financial commitments. After a thorough review of all alternatives, the
Company was compelled to take this action to preserve its assets, provide
for continuing operation and protect the interests of its stockholders,
creditors, customers, employees and suppliers.
Subject to bankruptcy court approval of post-petition financing, the
Company and its Parent Company plan to continue to operate their
businesses as debtors-in-possession while the reorganization is pending.
If post-petition financing is not ordered by the court, it is likely that
the Company will be liquidated.
9
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VICTORIA CREATIONS, INC.
Part II - Other Information
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
(27) Financial Data Schedule - filed herewith.
(b) Reports on Form 8-K during quarter for which this report is
filed- None
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, thereunto duly authorized.
VICTORIA CREATIONS, INC.
Date: February 23, 1996 by /S/ Norman R. Forson
Norman R. Forson
Senior Vice President
and Treasurer
10
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VICTORIA CREATIONS, INC.
FORM 10-Q
INDEX TO EXHIBIT
The following exhibit is being filed herewith:
Exhibit No.
(27) Financial Data Schedule as of and for the quarter ended December
31, 1995 is filed herewith.
E-1
<PAGE>
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