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 March 31, 1996
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 May 13, 1996, there were 7,800,000 shares of the registrant's Common
Stock, Par Value $0.01 a share, outstanding.
1
<PAGE>
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 ................................11
2
<PAGE>
VICTORIA CREATIONS, INC.
Part I - Financial information
VICTORIA CREATIONS, INC.
Statement of Operations (000 omitted)
THREE MONTHS ENDED NINE MONTHS ENDED
MARCH 31 MARCH 31
------------------- -------------------
1996 1995 1996 1995
--------- --------- --------- ---------
Net sales..................... $12,280 $11,204 $37,451 $38,661
Cost of goods sold............ 6,627 6,388 19,947 21,574
--------- --------- --------- ---------
Gross Profit $5,653 $4,816 $17,504 $17,087
Selling, general and
administrative expenses..... 4,949 4,654 14,098 14,668
Amortization of goodwill...... 180 180 540 540
--------- --------- --------- ---------
Operating Income (Loss) $524 ($18) $2,866 $1,879
Other income (expense):
Interest expense............ (565) (759) (1,690) (2,626)
Royalty income.............. 0 18 20 36
--------- --------- --------- ---------
Earnings (Loss)before
Income Taxes ($41) ($759) $1,196 ($711)
Provision for income taxes.... 6 7 19 20
--------- --------- --------- ---------
Net Earnings (Loss) ($47) ($766) $1,177 ($731)
========= ========= ========= =========
Average common shares
outstanding................. 7,800 7,800 7,800 7,800
Net Earnings (Loss) per Share ($0.01) ($0.10) $0.15 ($0.09)
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 10% in the three months but decreased
3% in the nine months ended March 31, 1996 from the net sales for the
comparable periods ended March 31, 1995. The increase for the quarter is
attributable to new program launches, strong international sales and
recovering retail sales in the domestic markets. The decrease in net
sales for the nine months ended March 31, 1996 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 and the Company was able to recover somewhat during the balance of
the Fall season. However, as the planning for the Spring season began,
the Company's senior secured lender refused to make funds available for
the seasonal inventory build up and also refused to allow the Company to
arrange for an alternative funding source. Without this additional
funding, the Company believes its ability to service its customers'
requirements would have been constrained which could have irreparably
harmed its ongoing business relations with these customers; therefore, the
Company filed a petition for reorganization under Chapter 11 of the
Bankruptcy Code (see below and Note B 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 nine month period ended March 31, 1996 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
and nine months each decreased three percentage points from that of the
same quarter and nine months last year. The resulting gross profit
increased 17% (versus the 10% increase in net sales) for the quarter and
2% (versus the 3% decline in net sales) for the nine months ended March
31, 1996 compared with those of the prior year's same quarter and nine
months.
Selling, general and administrative expenses increased 6% in the current
year's quarter over those of the same quarter last year primarily
reflecting increased expenses associated with the increase in net sales
discussed above. As a percentage of net sales, such expenses declined
more than one percentage point from those of the prior comparable period.
For the nine months ended March 31, 1996, such expenses decreased 4% from
those of the nine months ended March 31, 1995. The decrease was
4
<PAGE>
principally the result of reductions in sales related expenses and the
Company's continued emphasis on expense control. As a percentage of net
sales, these expenses approximated those of the same nine months last
year.
As a result of the increased sales in the current fiscal year's third
quarter, combined with lesser increases in both cost of goods sold and
selling, general and administrative expenses, operating income increased
to income of $524,000 from a loss of $18,000 in the prior year's
quarter. For the nine months ended March 31, 1996, 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 $2.9 million compared to operating income of $1.9 million in the prior
year's nine months.
Although average borrowings, other than from the Parent Company, were
higher during the current quarter and nine months, interest expense
decreased $194,000 for the three months and $936,000 for the nine months
ended March 31, 1996 from that of the prior year's same quarter and nine
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 D of Notes to
Financial Statements.
As a result of the improved operating income and lesser interest expense,
net loss for the quarter ended March 31, 1996 was $47,000 compared with a
net loss for the same quarter last year of $766,000. For the current nine
months, net earnings increased to $1.2 million from the net loss of
$731,000 reported for the nine months ended March 31, 1995.
LIQUIDITY AND CAPITAL RESOURCES
As mentioned above, on February 22, 1996, the Company and its Parent
Company filed petitions for reorganization relief under Chapter 11 of the
Bankruptcy Code. The filings became necessary because the Company's
secured lender refused to extend necessary funding for the Company's
current operations and the Parent Company guarantees the Company's debt to
the lender. Consequently, the Company and its Parent Company were unable
to meet their immediate financial commitments. After a thorough review of
all alternatives, the Company and its Parent Company each were compelled
to take this action to preserve their assets, provide for continuing
operations and protect the interests of their stockholders, creditors,
customers, employees and suppliers.
Pursuant to the Bankruptcy Code, the Company is continuing to operate its
business as debtor-in-possession while the reorganization case is
pending. The Company is allowed to use, and is using, its cash and other
resources at the operating level in the ordinary course of business.
See Note B of Notes to Financial Statements for further discussion of
regarding the filing.
See Note F of Notes to Financial Statements regarding negotiations of the
Company to sell most of its operating assets.
5
<PAGE>
VICTORIA CREATIONS, INC.
Balance Sheet (000 omitted)
-------------------
MARCH 31 JUNE 30
1996 1995
--------- ---------
ASSETS
Current Assets:
Cash............................................... $759 $638
Receivables, net of allowances of $3,724,000 at
March 31, 1996 and $2,415,000 at June 30, 1995.... 8,704 7,242
Inventories........................................ 17,392 16,430
Other current assets............................... 1,335 958
--------- ---------
Total Current Assets $28,190 $25,268
Plant and Equipment:
Machinery and equipment............................ $3,387 $3,233
Leasehold improvements............................. 1,919 1,913
--------- ---------
$5,306 $5,146
Less accumulated depreciation...................... 4,190 4,035
--------- ---------
Net Plant and Equipment $1,116 $1,111
Other Assets:
Goodwill........................................... $20,168 $20,709
Other.............................................. 780 863
--------- ---------
Total Other Assets $20,948 $21,572
--------- ---------
$50,254 $47,951
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable................................... $424 $4,284
Accrued expenses and other liabilities............. 1,425 1,084
--------- ---------
Total Current Liablilties $1,849 $5,368
Liabilities subject to compromise:
Accounts payable................................... $4,487
Due to Parent Company.............................. 14,966
---------
Total Liabilities Subject to Compromise $19,453
Secured long-term debt.............................. 19,743 11,090
Due to Parent Company............................... 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)........................ (23,847) (25,024)
--------- ---------
Total Stockholders' Equity $9,209 $8,032
--------- ---------
$50,254 $47,951
========= =========
See notes to financial statements.
6
VICTORIA CREATIONS, INC.
Statement of Cash Flows - (000 omitted)
NINE MONTHS ENDED
MARCH 31
--------------------
1996 1995
--------- ---------
Cash Flows from Operating Activities:
Net earnings (loss)............................... $1,177 ($731)
Add back items not requiring cash in the
current period:
Depreciation and amortization................. 696 750
Decrease (increase) in assets:
Accounts receivable............................. (1,462) 468
Inventories..................................... (962) 665
Other current assets............................ (377) (44)
Other assets.................................... 83 (330)
Increase (decrease) in current liabilities:
Accounts payable................................ 627 868
Accrued expenses and other liabilities.......... 341 586
--------- ---------
Net Cash Provided by Operating Activities $123 $2,232
Cash Flows from Investing Activities:
Additions to plant and equipment.................. ($160) ($99)
Cash Flows from Financing Activities:
Secured long-term debt............................ $8,653 ($885)
Due to Parent Company............................. (8,495) (278)
--------- ---------
Net Cash Provided by (Used for) Financing Activities $158 ($1,163)
--------- ---------
Net Increase in Cash $121 $970
Cash at beginning of period......................... 638 72
--------- ---------
Cash at End of Period $759 $1,042
========= =========
----------
Supplemental disclosure:
Cash payments for:
Interest........................................ $1,690 $2,626
Income taxes.................................... 19 20
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 accompanying financial statements have been prepared in conformity
with generally accepted 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.
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.
Note B - Petition for Reorganization under Chapter 11
On 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. 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 were unable
to meet their immediate financial commitments. After a thorough review of
all alternatives, the Company and its Parent Company were compelled to
take this action to preserve their assets, provide for continuing
operation and protect the interests of their stockholders, creditors,
customers, employees and suppliers.
Pursuant to the Bankruptcy Code, the Company is continuing to operate its
business as debtor-in-possession while the reorganization case is
pending. The 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 are stayed. These claims are reflected in the
March 31, 1996 balance sheet as "Liabilities Subject to Compromise".
Additional claims (liabilities subject to compromise) may arise subsequent
8
<PAGE>
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. The
creditor holding a claim secured by the Company's assets is also stayed.
The Bankruptcy Court has authorized the Company to pay or otherwise honor
certain of its prepetition obligations, including employee wages and
benefit plans.
The statement of cash flows reflects changes in the liabilities "Accounts
Payable" and "Due to Parent Company" before their reclassification to
liabilities subject to compromise.
Note C - Inventories
Inventories consist of:
(000 omitted)
----------------
Mar 31 June 30
1996 1995
------- -------
Raw materials ........................................ $ 5,067 $ 5,120
Work in process ...................................... 659 484
Finished goods ....................................... 11,666 10,826
------- -------
$17,392 $16,430
======= =======
Note D - Secured 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 arrangement consists of a term
loan ($4,580,000 at March 31, 1996) 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. These loans are secured by substantially all of the Company's
assets.
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 nine month periods ended March 31, 1996 and 1995. If the Parent
Company had not waived the interest due to it, interest expense would have
been approximately $405,000 and $647,000 greater for the three months and
$1,306,000 and $1,806,000 greater for the nine months ended March 31, 1996
and 1995, respectively, than that reflected in the statement of
operations.
9
<PAGE>
Note E - Income Taxes
The provision for income taxes for the three and nine month periods ended
March 31, 1996 and 1995 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 F - Negotiations Regarding Sale of the Company's Assets
Under order of the Bankruptcy Court, the Company is negotiating to sell
most of its operating assets, subject to certain liabilities, as a "going
concern". At present, two interested parties are reviewing and examining
the Company's assets, liabilities, operations and books and records.
Certain other parties have requested preliminary information which the
Company has supplied.
10
<PAGE>
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: May 22, 1996 by /S/ Norman R. Forson
Norman R. Forson
Senior Vice President
and Treasurer
11
<PAGE>
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 March 31,
1996 is filed herewith.
E-1
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0000796812
<NAME> VICTORIA CREATIONS, INC.
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JUN-30-1996
<PERIOD-END> MAR-31-1996
<CASH> 759
<SECURITIES> 0
<RECEIVABLES> 12428
<ALLOWANCES> 3724
<INVENTORY> 17392
<CURRENT-ASSETS> 28190
<PP&E> 5306
<DEPRECIATION> 4190
<TOTAL-ASSETS> 50254
<CURRENT-LIABILITIES> 1849
<BONDS> 34709
0
0
<COMMON> 58
<OTHER-SE> 9151
<TOTAL-LIABILITY-AND-EQUITY> 50254
<SALES> 37451
<TOTAL-REVENUES> 37451
<CGS> 19947
<TOTAL-COSTS> 19947
<OTHER-EXPENSES> 540
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1690
<INCOME-PRETAX> 1196
<INCOME-TAX> 19
<INCOME-CONTINUING> 1177
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1177
<EPS-PRIMARY> 0.15
<EPS-DILUTED> 0.15
</TABLE>
