FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended October 28, 1995
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 Number 1-10973
VALUE MERCHANTS, INC.
(Exact name of registrant as specified in its charter)
Wisconsin 39-1103185
(State of other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
710 North Plankinton Avenue
Milwaukee, Wisconsin 53203
(Address of principal executive officers, including zip code)
(414) 274-2575
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has
filed all reports to be filed by Section 13 or 15(d) of
the Securities Exchange Act of 1934 during the
preceding twelve 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 No x
Indicate the number of shares outstanding of each of
the issuer's classes of common stock as of the latest
practicable date.
4,357,815 shares of common stock, $.01 par value, were
outstanding at December 8, 1995.
<PAGE>
VALUE MERCHANTS, INC. AND SUBSIDIARY
INDEX
Page
Part I. Financial Information Number
Item 1. Financial Statements: 3
Condensed Consolidated Balance Sheets
as of October 28, 1995, July 1, 1995
(unaudited), and January 28, 1995
(audited) 5
Condensed Consolidated Statements of
Operations for the third quarter and
nine months ended October 28, 1995
and October 29, 1994 (unaudited) 6
Condensed Consolidated Statement of
Shareholders' Investment for the five
months ended July 1, 1995 and four
months ended October 28, 1995 (unaudited) 7
Condensed Consolidated Statements
of Cash Flows for the nine months
ended October 28, 1995 and October
29, 1994 (unaudited) 8
Notes to Condensed Consolidated
Financial Statements (unaudited) 9
Item 2. Management's Discussion and
Analysis of Financial Condition and
Results of Operations 15
Part II. Other Information
Item 6. Exhibits and Reports on Form 8-K
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
The condensed consolidated financial statements
included herein have been included by the Company
pursuant to the rules and regulations of the Securities
and Exchange Commission. Certain information and
footnote disclosures normally included in financial
statements prepared in accordance with generally
accepted accounting principles have been condensed or
omitted pursuant to such rules and regulations,
although the Company believes that the disclosures are
adequate to make the information presented not
misleading. This information is unaudited but includes
all adjustments (consisting only of normal recurring
accruals) which, in the opinion of Company management,
are necessary for a fair presentation of the results
for such periods.
On December 13, 1993, Value Merchants, Inc. ("VMI")
and its wholly-owned subsidiary, Everything's A Dollar,
Inc. (collectively, the "Company") filed petitions for
relief under Chapter 11 of the Federal bankruptcy laws
in the United States Bankruptcy Court for the Easter
District of Wisconsin (the "Court"). The Company filed
its Plan of Reorganization (the "Plan") with the Court
on November 23, 1994. Various revision to this Plan
were submitted to the Court and the Plan was ultimately
approved by the Company's creditors, subsequently
confirmed by the Court on June 15, 1995 and became
effective on June 27, 1995. The Company accounted for
the reorganization as of July 1, 1995 and accordingly
on that date implemented the required accounting for
entities emerging from Chapter 11 in accordance with
the American Institute of Certified Public Accountants'
(AICPA) Statement of Position 90-7, "Financial
Reporting by Entities in Reorganization Under the
Bankruptcy Code" (SOP 90-7). Accordingly, the
financial statements of the Company subsequent to July
1, 1995 are not comparable to any financial statements
prior to July 1, 1995.
The results of operations for interim periods are not
necessarily indicative of the results of operations for
the entire year, particularly in view of the seasonal
nature of the Company's business. It is suggested that
these condensed financial statements be read in
conjunction with the audited financial statements and
the notes thereto for the fiscal year ended January
28, 1995 included in the Company's Form 8-K as of June
15, 1995 and the July 1, 1995 "Fresh Start" balance
sheet included in the Form 8-K as amended, as filed
with the Securities and Exchange Commission.
The accompanying financial statements have been
prepared on a going concern basis which contemplates
the realization of assets and the satisfaction of
liabilities in the normal course of business. As shown
in the accompanying consolidated financial statements,
the Company has incurred losses from operations and
experienced resulting cash flow deficiencies and
liquidity constraints. Accordingly, substantial doubt
exists as to the Company's ability to continue as a
going concern. The accompanying financial statements
do not included any adjustments that might result from
the outcome of these uncertainties. The asset and
liability carrying amounts in the consolidated balance
sheets do not purport to represent realizable or
settlement values.
<PAGE>
<TABLE>
VALUE MERCHANTS, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited)
As of October 28, 1995 and July 1, 1995(Unaudited) and
January 28, 1995 (Audited)
(Dollars in thousands, except per share amounts)
THE ACCOMPANYING BALANCE SHEET AS OF OCTOBER 28,1995 IS NOT
COMPARABLE IN MATERIAL RESPECTS TO SUCH BALANCE SHEET AS OF ANY
DATE PRIOR TO JULY 1,1995, THE DATE THE COMPANY ADIPTED "FRESH
START" ACCOUNTING IN ACCORDANCE WITH THE AMERICAN INSTITUTE OF
CERTIFIED PUBLIC ACCOUNTANTS' (AICPA STATEMENT OF POSITION 90-7.
"FINANCIAL REPORTING BY ENTITIES IN REORGANIZATIONS UNDER THE
BANKRUPTCY CODE" (SOP 90-7). IT IS SUGGESTED THAT THIS BALANCE
SHEET BE READ IN CONJUNCTION WITH THE JULY 1, 1995 BALANCE SHEET
FILED WITH THE COMPANY'S FORM 8-K AS AMENDED.
<CAPTION>
October 28, July 1,| January 28,
1995 1995| 1995
<S> <C> <C> | <C>
ASSETS |
Current assets: |
Cash and cash equivalents |
$1,796 $1,420| $8,393
|
Accounts receivable, trade and other, less
allowance for doubtful accounts of $109, 113 and
125, respectively |
103 82| 438
|
Inventories 34,945 29,150| 34,377
|
Prepaid expenses and other current assets
1,488 3,994| 2,953
|
Refundable income taxes |
- -| 114
Total current assets |
38,332 34,646| 46,275
|
Leasehold improvements, furniture and equipment:
Leasehold improvements|
14,874 14,832| 19,552
|
Furniture and equipment |
7,558 7,570| 26,231
22,432 22,402| 45,783
|
Less:Accumulated depreciation and amortization
(1,515) -| (19,218)
|
Net leasehold improvements, furniture and equipment
20,917 22,402| 26,565
|
Other assets 545 400| 965
|
$59,794 $57,448| $73,805
|
LIABILITIES AND SHAREHOLDERS' INVESTMENT (DEFICIT)
|
Current liabilities: |
Short-term borrowings |
$ - $ -| $19,951
|
Current maturities, long-term debt
16,210 6,743| -
|
Accounts payable |
8,095 5,692| 3,602
|
Accrued liabilities |
5,255 4,990| 8,253
|
Reorganization expenses payable |
2,278 6,898| 4,061
|
Total current liabilities |
31,838 24,323| 35,867
|
Long-term debt, net of current maturities
27,728 26,379| -
|
Deferred credits |
233 246| 4,387
|
Liabilities subject to compromise
- -| 141,156
|
Shareholders' investment (deficit): |
|
Cumulative preferred stock, par value $.10 per
share, 2,000,000 shares authorized, none issued
- -| -
|
Common stock, par value $.01 per share, 15,000,000
shares authorized, 4,235,295 and 8,092,994
shares issued and outstanding, respectively
42 42| 81
|
Additional paid-in-capital |
6,523 6,458| 53,349
|
Retained earnings (deficit) |
(6,570) -| (160,922)
|
Unamortized value of restricted stock
- -| (113)
|
Total shareholders' investment (deficit)
(5) 6,500| (107,605)
|
$59,794 $57,448| $73,805
<FN>
<FN1>
The accompanying notes to the consolidated financial
statements are an integral part of these balance sheets.
</FN>
</TABLE>
<PAGE>
<TABLE>
VALUE MERCHANTS, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
For the third quarter and nine months ended October 28,
1995 and October 29, 1994
(Dollars in thousands, except per share amounts)
<CAPTION>
THIRD QUARTER NINE MONTHS
_________________ ___________________________
1995 1994 1995 1994
________ ________ ________ ________ ________
13 WEEKS 13 WEEKS 17 WEEKS 22 WEEKS 39 WEEKS
ENDED ENDED ENDED ENDED ENDED
Oct. 28, Oct. 29, Oct. 28, July 1, Oct. 29,
1995 1994 1995 1995 1994
________ ________ ________ ________ ________
<C> <C> <C> <C> <C>
<S> | |
Net sales | |
$29,048 | $39,393 $37,026 | $43,344 $113,955
| |
Cost of sales, including warehouse expenses
17,816 | 24,222 22,724 | 26,392 69,004
| |
Gross profit | |
11,232 | 15,171 14,302 | 16,952 44,951
| |
Operating expenses:| |
| |
Selling and store expenses |
13,067 | 17,185 17,077 | 20,796 50,300
| |
General and administrative expenses |
2,187 | 2,947 2,932 | 4,399 9,909
| |
Total operating expenses |
15,254 | 20,132 20,009 | 25,195 60,209
| |
Income (loss) from operations |
(4,022)| (4,961) (5,707)| (8,243) (15,258)
| |
Reorganization items |
(522)| 2,206 (522)| (17) 4,423
| |
Interest expense, net |
1,096 | 945 1,385 | 1,150 2,932
| |
Loss before benefit from income taxes, extraordinary item
| |
(4,596)| (8,112) (6,570)| (9,376) (22,613)
| |
Benefit from income taxes |
- | - - | - -
| |
| |
Loss before extraordinary item |
$(4,596)| $(8,112) $(6,570)| $(9,376) $(22,613)
| |
Extraordinary gains| |
- | - - | (113,397) -
| |
Net income (loss) | |
$(4,596)| $(8,112) $(6,570)| $104,021 $(22,613)
| |
Income (loss) per share: |
| |
Loss before extraordinary item |
$(1.08)| $(1.00) $(1.55)| $(1.16) $(2.81)
| |
Extraordinary gains| |
0.00 | - - | 14.01 -
| |
Net income (loss) | |
$(1.08)| $(1.00) $(1.55)| $12.85 $(2.81)
| |
Weighted average common shares outstanding
4,256,858 |8,093,000 4,251,791| 8,093,000 8,049,000
<FN>
<FN1>
The accompanying notes to the consolidated financial statements
are an integral part of these statements.
</FN>
</TABLE>
<PAGE>
<TABLE>
VALUE MERCHANTS, INC. AND SUBSIDIARY (Debtors-in-Possession)
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' INVESTMENT
(DEFICIT)(Unaudited)
For the five months ended July 1, 1995 and four months ended
October 28, 1995
(Dollars in thousands, except share amounts)
<CAPTION>
Addit- Unamortized
ional Value of
Common Stock Paid-in Retained Restricted
Shares Amount Capital Earnings Stock Total
_________ _______ _______ ________ ________ _______
<S>
BALANCE, January 28, 1995
<C> <C> <C> <C> <C> <C>
$8,092,994 $81 $53,349 $(160,922) $(113) $(107,605)
Net income 104,021 104,021
Issuance of new equity interests in
connection with emergence from Chapter 11:
Creditors
4,023,556 40 10,019 10,059
Previous Shareholders
211,765 2 527 529
Cancellation of the former equity interests
interests under the plan of reorganization
(8,092,994) (81) (57,437) 56,901 113 (504)
_______________________________________________________________
BALANCE, July 1, 1995
4,235,321 42 6,458 0 0 6,500
Net loss (6,570) (6,570)
Issuance of common stock in connection
with amendment of revolving credit
agreement
122,494 1 64 65
BALANCE, October 28, 1995
4,357,815 $43 $6,522 $(6,570) $0 $(5)
<FN>
<FN1>
The accompanying notes to the consolidated financial statements
are an integral part of these statements.
</FN>
</TABLE>
<PAGE>
<TABLE>
VALUE MERCHANTS, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
For the nine months ended October 28, 1995 and October 29, 1994
(Dollars in thousands)
<CAPTION>
Nine Months
____________________________________
1995 1994
____________________________________
17 WEEKS 22 WEEKS 39 WEEKS
ENDED ENDED ENDED
October 28, July 1, October 29,
1995 1995 1994
___________ _________ _________
<S> |
Cash Flows from Operating Activities
Net income (loss) |
<C> | <C> <C>
$(6,570)| $104,021 $(22,613)
|
Adjustments to reconcile net income to net cash used
in operating activities-|
Depreciation and amortization
1,574 | 2,633 6,045
|
Reorganization items |
(522)| (17) 2,957
|
Extraordinary gain |
- | (113,397) -
|
Change in operating assets and liabilities-
(Increase) decrease in accounts receivable
(21)| 356 571
|
(Increase) decrease in refundable income taxes
- | 114 3,482
|
(Increase) decrease in inventories
(5,795)| 5,227 (8,718)
|
(Increase) decrease in prepaid expenses and
other current assets
2,506 | (1,191) 1,595
|
Increase (decrease) in accounts payable and
accrued liabilities
2,668 | 917 (1,092)
|
Change in assets of discontinued operations
- | - 3,392
|
|
Net cash used in operating activities
(6,160)| (1,337) (14,381)
|
|
Cash flows from investing activities:
Sale of toy operations |
- | - 13,100
|
Capital expenditures |
(98)| (55) (520)
|
Other, net |
68 | - -
|
Net cash provided by (used for) investing
activities |
(30)| (55) 12,580
|
Cash flows from financing activities:
Increase (decrease) in net short-term borrowings
- | (5,081) 20,976
|
Issuance of common stock|
65 | - -
|
Payment of loan fees |
(217)| - (83)
|
Payment of long-term debt
(50)| - -
|
Proceeds from long-term debt
10,866 | 4,937 -
|
Net cash provided by (used for) financing
activities |
10,664 | (144) 20,893
|
Cash flow effect of reorganization activities:
Change in liabilities subject to compromise, net of
non-cash transactions |
- | (1,921) (2,635)
Reorganization expenses |
(4,098)| (3,516) (12,217)
|
Net cash used for reorganization activities
(4,098)| (5,437) (14,852)
|
Net increase (decrease) in cash and cash equivalent
376 | (6,973) 4,240
|
Cash and cash equivalents, beginning of period
1,420 | 8,393 4,162
|
Cash and cash equivalents, end of period
$1,796 | $1,420 $8,402
|
Additional cash flow information:
Cash paid for - |
Interest $1,273 | $1,028 $1,255
Income taxes - | - -
<FN>
<FN1>
The accompanying notes to the consolidated financial statements
are an integral part of these statements.
</FN>
</TABLE>
<PAGE>
VALUE MERCHANTS, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENT
(Unaudited)
(Dollars in thousands)
October 28, 1995
1. Reorganization and Emergence from Chapter 11:
On December 13, 1993, Value Merchants, Inc. ("VMI") and
its wholly-owned subsidiary, Everything's A Dollar,
Inc. ("EAD" and with VMI collectively, the "Company")
filed petitions for relief under Chapter 11 of the
Federal bankruptcy laws in the United States Bankruptcy
Court for the Eastern District of Wisconsin (the
"Court").
A substantial amount of liabilities are subject to
settlement under the plan of reorganization agreed to
by the Company's creditors and confirmed by the Court.
The Company filed its Plan of Reorganization (the
"Plan") with the Court on November 23, 1994. Various
revision to this Plan were submitted to the Court and
the Plan was ultimately approved by the Company's
creditors, subsequently confirmed by the Court on June
15, 1995, and became effective on June 27, 1995. The
Company accounted for the reorganization as of July 1,
1995.
The Plan called for the settlement of both VMI and EAD
unsecured claims through the issuance of common stock
representing 85% of the outstanding shares of the
Company and payment of $2.0 million to unsecured
creditors of VMI in June 2000. Under the Plan, certain
secured creditors received new secured notes in the
amount of $8.8 million payable over eight years. Tax
claims of $4.5 million will be paid in full over four
years. The Plan provided for payment of administrative
expense claims such as ordinary course payables, wages
and salaries, taxes, insurance and professional fees.
The Plan also provided that the participants in the
Company's Debtor-in-possession revolving credit loan
agreement received $4.9 million in cash, $5.3 million
in principal amount of subordinated notes due June 1997
and 1998, and shares of common stock. Lastly, the Plan
provided that the previously existing shareholders
retained 5% ownership in the outstanding common stock
of the reorganized company.
2. Basis of Presentation:
The consolidated financial statements include the
accounts of the Company and EAD. All significant
intercompany balances and transactions have been
eliminated in consolidation.
The Company has implemented the required accounting for
entities emerging from Chapter 11 in accordance with
the American Institute of Certified Public Accountants'
(AICPA) Statement of Position 90-7, "Financial
Reporting by Entities in Reorganization Under the
Bankruptcy Code" (SOP 90-7), and is reflecting the
effects of such adoption in the July 1, 1995 "Fresh
Start" balance sheet included in the Company's Form 8-K
as amended. Accordingly, the financial statements of
the Company subsequent to July 1, 1995 are not
comparable to any financial statements of the Company
prior to July 1, 1995.
Notwithstanding the confirmation of the Plan, the Court
continues to have jurisdiction to, among other things,
resolve disputed pre-petition claims against the
Company and resolve other matters that may arise in
connection with or relate to the Plan.
The accompanying consolidated financial statements have
been prepared on a going concern basis that
contemplates the realization of assets and liabilities
in the normal course of business. The asset and
liability carrying amounts do not purport to represent
realizable of settlement values.
As shown in the accompanying consolidated financial
statements, the Company has incurred losses from
operations and experienced resulting cash flow
deficiencies and liquidity constraints. These factors
raise substantial doubt about the Company's ability to
continue as a going concern. See Item 2, "Management's
Discussion and Analysis of Financial Condition and
Results of Operations" for further discussion on
liquidity and capital resources.
3. Description of Business:
The Company's operations included the purchase and sale
of quality close-out merchandise and is sold through
Company-owned retail stores under the name
"Everything's $1.00."
4. Fiscal Year:
The Company's fiscal year ends on the Saturday closest
to January 31 and the fiscal year is identified
according the calendar year in which it begins. Both
the third quarter and nine month periods for fiscal
1994 and 1995 consist of 13 weeks and 39 weeks
respectively.
5. Inventories:
The Company's inventories are comprised solely of
salable merchandise and are stated at the lower of FIFO
(first in, first out) cost or market. Under the
Company's inventory valuation method, cost includes
certain direct warehouse expenses.
6. Income (loss) per Share:
Income (loss) per share is computed using the weighted
average number of common shares outstanding. There are
no common equivalent shares subsequent to July 1, 1995
and no dilutive common share equivalents for the five
month and nine month periods July 1, 1995 and October
29, 1994, respectively.
7. Outstanding checks:
At October 28, 1995 and at January 28, 1995, $2,297 and
$1,327, respectively, of checks issued which had not
yet cleared the Company's banks were included in
accounts payable in the consolidated balance sheets.
8. Reorganization Items:
Reorganization items relate to the Company's Chapter 11
proceedings and the related reorganization activities.
The total charge against earnings is comprised of the
following:
13 & 17 weeks 13 weeks 22 weeks 39 weeks
ended ended ended ended
10/28/95 10/29/94 7/01/95 10/29/94
Write-off of
nonrecoverable
fixed assets
- - 1,219 -
Write-off of
unamortized
loan fees
- - 733 -
Write-off of
deferred credits
- - (3,985) -
Professional fees
and expenses
- 2,206 1,450 4,423
Miscellaneous
reorganization
related expenses
net of claim
adjustments
- - 566 -
Professional fees
discount (see
note 11)
(522) - - -
_____ _____ ____ _____
(522) 2,206 (17) 4,423
9. Extraordinary Gains:
Extraordinary gains include $6.0 million of forgiveness
of debt and $107.4 million of forgiveness of unsecured
claims as part of the Company's plan of reorganization.
The forgiveness of debt represents the debt disallowed
as being in excess of the related collateral value.
The forgiveness of unsecured claims represents the
amount of approved and remaining disputed claims in
excess of the value of 3,600,000 shares of common stock
issued to the unsecured creditors. The value of the
common stock was established at $2.50 per share which
represents the negotiated value between the Company and
its senior lenders in connection with the settlement of
certain short-term debt and approximates the average of
the bid and ask price at the date the shares were
issued.
10. Income Taxes:
Effective January 31, 1993 the Company adopted
Statements of Financial Accounting Standards (SFAS) No.
109 "Accounting for Income Taxes." Under the liability
method prescribed by SFAS 109, deferred taxes are
provided based upon enacted tax laws and rates
applicable to the periods in which the taxes become
payable.
The adoption of this statement did not have a material
effect on the financial statements.
A valuation allowance has been established against the
deferred tax assets due to uncertainties related to
their realization. These uncertainties arise from
significant losses in recent years and the substantial
doubt that exists related to the Company's ability to
continue as a going concern and thus, generate future
taxable income.
As of January 28, 1995, the Company had available for
federal income tax purposes operating losses in excess
of $125,000 (N.O.L.'s) which are available to be
applied against operating profits the Company may
generate in future years. In addition, net operating
losses are available for state income tax purposes in
varying amounts in the majority of the states in which
the Company operates. The Company also has alternative
minimum tax (AMT) loss carryforwards in excess of
$100,000 which, until fully utilized, will limit AMT to
2% of any future alternative minimum taxable income.
Based on the form and structure of the Plan of
Reorganization it is anticipated that the N.O.L."s will
be reduced approximately $44,000 related to the
forgiveness of debt.
11. Long-Term Debt:
On October 16, 1995, the Company's revolving credit
facility agreement was amended to increase the maximum
credit from $15 million to $20 million. In addition,
the amounts available for borrowing increased from a
range of 40% to 50% of eligible inventory to 55% of
eligible inventory.
The Company also received proceeds of $1.5 million on
October 16, 1995 increasing the secured subordinated
notes payable from $12,260 to $13,760. These proceeds
were used to pay certain Chapter 11 administrative
professional fees after a negotiated discount of $522.
This discount was included in the accompanying income
statements as a reorganization item.
The following is a summary of long-term debt at October
28, 1995:
Effective
Interest
Description: Rate Amount
Revolving Credit Facility of
$20,000 due October 28, 1997,
interest rate at 14% on the
first $5,000 and prime plus 2%
on balances in excess of
$5,000, secured by a first
lien on substantially all
assets except for a second
lien on store fixtures and
other equipment securing the
equipment notes payable. 11.9% $14,260
Subordinated Notes secured by
a second lien on substantially
all assets except for a third
lien on store fixtures and
other equipment securing the
equipment notes payable. Two
of the Subordinated Notes, in
the aggregate principal amount
of $4,760 due December 31, 1995
(the "1995 Notes"). A third
Subordinated Note, in the
principal amount of $9,000 is
due $500 on December 29, 1995,
$1,000 on April 30, 1996, and
$7,500 on June 26, 1998. 12.3% 13,760
Equipment notes payable, secured
by store, warehouse and office
fixtures and equipment, quarterly
payments commencing September
29, 1995, interest only for the
first year and principal and
interest thereafter, sufficient
to amortize principal through
June 30, 2003, interest rate at
G.E. commercial paper rate plus
1-1/2%, adjusted first business
day of each quarter. 7.2% 7,647
Obligation for tax claims
secured by certain inventory
and fixtures, principal and
interest payable in four equal
annual installments commencing
June 27, 1996, with the last
three installments payable in
four quarterly payments. 10% 190
Obligation for tax claims,
unsecured, principal and
interest payable in four equal
annual installments commencing
June 26, 1996. 10% 4,256
Obligation for claims of
Unsecured Creditors of VMI, non-
interest bearing due June 27,
2000, less unamortized discount
of $800. 11% 1,200
Capital leases, $406 payable in
36 equal monthly installments
of principal and interest, $503
payable on same terms as
equipment notes payable, above. 7.2% 909
Subordinated Note payable to
bank unsecured, $515 payable on
December 31, 1995, $1,076
payable on June 27, 1997,
interest rate at prime rate
plus 1%. 9.8% 1,551
Other 7.2% 165
Total long-term debt 43,938
Less: Current maturities
included in current liabilities 16,210
_______
$27,728
Payment of the Subordinated 1995 Notes (other than from
the proceeds of a new debt or equity offering) are
prohibited by the Subordination Agreement until
December 31, 1996 unless the Revolving Credit Facility
Loan has been paid and terminated or has been purchased
by the holder of the Subordinated Notes. Non-payment
of these notes requires payment of a $100 standstill
fee to the holder of the 1995 Notes. The Company does
not anticipate making the required principal payments
on the 1995 Notes in December 1995 and intends to pay
the $100 standstill fee. Non-payment of the 1995 Notes
on December 31 1995 will give the holders of the
Subordinated Notes the right to increase interest rates
to (i) prime plus 4% on $3,000 in principal amount of
the Subordinated Notes, (ii) prime plus 8% on $1,760 in
principal amount of the Subordinated Notes, (iii) prime
plus 9% on $7,500 in principal amount of the
Subordinated Notes, and (iv) prime plus 3% on $1,551 in
principal amount of other Subordinated Notes, although
Subordination Agreements between the holder of the
Subordinated Notes and the lender of the Revolving
Credit Facility prohibit payment of the increase in
interest before December 31, 1996.
Amounts available for borrowing under the two-year
Revolving Credit Agreement entered into on June 27,
1995 are limited to a certain percentage of eligible
inventory, as defined in the Revolving Credit
Agreement, net of certain seasonal and sales tax
reserves. Non-payment of the 1995 Notes also provides
the lender of the Revolving Credit Facility remedies,
including accelerating the payment of outstanding
principal and accrued interest and increasing the
interest rate by 2% per annum. Accordingly, the
amounts outstanding under the Revolving Credit
Agreement as of July 1, 1995 are included in current
maturities of long-term debt. In addition, letters of
credit of $2,200 were outstanding under the Credit
Facility as of October 28, 1995.
The $100 standstill fee was reflected in accrued
liabilities as of July 1, 1995 and $4,760 of
Subordinated Notes due December 31, 1995 are classified
as long-term debt.
Following are maturities of long-term debt (including
current maturities) for the current and future fiscal
years:
1995 (Three months ending February 3, 1996) $14,811
1996 6,432
1997 3,190
1998 11,246
1999 2,241
After 1999 6,018
_______
$43,938
<PAGE>
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations
Liquidity and Capital Resources
On October 16, 1995 the Company's revolving credit
facility agreement was amended to increase the maximum
credit from $15 million to $20 million. In addition,
the amounts available for borrowing increased from a
range of 40% to 50% of eligible inventory to 55% of
eligible inventory. Also, on October 16, 1995 the
Company received proceeds of $1.5 million which
increased its secured subordinated debt from $12,260 to
$13,760. The proceeds were used to pay certain Chapter
11 administrative professional fees after a negotiated
discount of $522. Both the $5 million increase in the
revolving credit facility and the additional $1.5
million of subordinated notes bear interest at 14%.
As of October 28, 1995, the Company's borrowings under
a two-year revolving credit facility were $14.3
million. In addition, the Company had at that date
issued $2.2 million of stand-by letters of credit under
this facility primarily for workers' compensation and
general liability insurance and the Company is required
to maintain a sales tax reserve against the credit
facility of $500.
Payment of $4.76 million of Subordinated Notes due
December 31, 1995 (other than from the proceeds of a
new debt or equity offering) are prohibited by the
Subordination Agreement until December 31, 1996 unless
the Revolving Credit Facility Loan has been paid and
terminated or has been purchased by the holder of the
Subordinated Notes. Non-payment of these Notes
requires payment of a $100 standstill fee to the holder
of the Notes. The Company does not anticipate making
the required principal payments on these Notes in
December 1995 and intends to pay the $100 standstill
fee. Non-payment of the 1995 Notes on December 31,
1995 will give the holders of the Subordinated Notes
the right to increase interest rates to (i) prime plus
4% on $3,000 in principal amount of the Subordinated
Notes, (ii) prime plus 8% on $1,760 in principal amount
of the Subordinated Notes, (iii) prime plus 9% on
$7,500 in principal amount of the Subordinated Notes,
and (iv) prime plus 3% on $1,551 in principal amount of
other Subordinated Notes, although Subordination
Agreements between the holder of the Subordinated Notes
and the lender of the Revolving Credit Facility
prohibit payment of the increase in interest before
December 31, 1996. Non-payment of these Notes also
provides the lender of the Revolving Credit Facility
remedies, including accelerating the payment of
outstanding principal and accrued interest and
increasing the interest rate by 2% per annum.
As shown in the accompanying financial statement, the
Company has incurred losses from operations and has
experienced cash flow deficiencies and liquidity
constraints. The Company currently anticipates
additional capital requirements of approximately $7 to
$12 million to fund its 1996 working capital including
continued operating losses and payment of certain
scheduled debt obligations of approximately $10.3
million. The Company intends to negotiate
restructuring certain scheduled debt obligations,
and/or seek additional capital to meet its 1996
liquidity needs.
If the Company is unsuccessful in deferring these
obligations and/or obtaining additional capital, the
Company would likely seek to sell all or substantially
all of its store locations or seek relief pursuant to
Federal Bankruptcy laws.
<TABLE>
Results of Operations
The following table sets forth, for the fiscal periods indicated,
certain items from the Company's income statement data expressed
as a percentage of net sales.
<CAPTION>
Third Quarter Ended Nine Months Ended
October 28 October 29 October 28 October 29
1995 1994 1995 1994
<S> <C> <C> <C> <C>
Net Sales 100.0% 100.0% 100.0% 100.0%
Cost of sales,
including warehouse
expenses 61.3 61.5 61.1 60.6
Gross Profit 38.7 38.5 38.9 39.4
Selling and store
expenses 45.0 43.6 47.1 44.1
General and
administrative
expenses 7.5 7.5 9.1 8.7
Income (loss) from
operations (13.8) (12.6) (17.3) (13.4)
Reorganization items (1.8) 5.6 (.7) 3.9
Interest expense, net 3.8 2.4 3.2 2.5
Income (loss) before
income taxed,
discontinued operations,
and extraordinary item (15.8) (20.6) (19.8) (19.8)
<FN>
<FN1>
Nine Months Ended October 28, 1995 Compared to Nine Months Ended
October 29, 1994
</FN>
</TABLE>
<PAGE>
Net sales for the nine months ended October 28, 1995
decreased by $33,585 or 29.5% compared to sales for the
nine months ended October 29, 1994. This reflects a
decrease in the number of stores from 268 in fiscal
1994 to 215 stores in fiscal 1995, as well as a
decrease in comparable store sales of 13.9%. The
decrease in the number of stores is a result of closing
under performing stores. The decrease in comparable
store sales is primarily due to more severe liquidity
restraints in fiscal 1995 compared to fiscal 1994,
resulting in a reduction in new merchandise flowing to
the stores. Sales were also negatively impacted by
overall lower customer traffic.
Gross profit margin decreased from 39.4% for the nine
months ended October 29, 1994 to 38.9% for the nine
months ended October 28, 1995. This decrease is
attributable to slightly higher cost of merchandise due
to a lower mix of import merchandise which carry higher
margins than domestic merchandise, less use of
discounts for inventory purchases for cash, and higher
markdowns and shrink in 1995. These cost increases
were partially offset by lower warehousing expenses.
The Company has implemented a "flow through" policy
wherein merchandise received is immediately shipped to
the stores thereby reducing warehouse labor costs and
required warehouse space.
Selling and store expenses as a percentage of net sales
increased to 47.1% for the nine months ended October
28, 1995 from 44.1% for the nine months ended October
29, 1994. This increase is entirely attributable to
the decrease in comparable store sales of 13.9% for the
nine months ended October 28, 1995. Selling and store
expenses for comparable stores decreased by $2.1
million, from $39.9 million for the nine months ended
October 29, 1994 to $37.8 million for the nine months
ended October 28, 1995 because of labor saving measures
and lower variable costs due to lower sales. However,
as a percentage of sales selling and store expenses for
comparable stores increased from 43.2% for the nine
months ended October 29, 1994 to 47.5% for the nine
months ended October 28, 1995 reflecting the current
low level of sales. The closing of under performing
stores which carried a higher selling and store
expenses as a percentage of sales than the comparable
stores partially offset the percentage increase of the
comparable stores.
General and administrative expenses decreased from $9.9
million for the nine months ended October 29, 1994 to
$7.3 million for the nine months ended October 28,
1995. This decrease is due to the reduction in the
size of business and primarily represents reductions in
merchandising, operations management and central
support staff. The increase in general and
administrative expenses as a percentage of sales from
8.7% for the nine months ended October 29, 1994 to 9.1%
for the nine months ended October 28, 1995 reflects the
decrease in sales.
Interest expense decreased by $0.4 million from $2.9
million for the nine months ended October 29, 1994 to
$2.5 million for the nine months ended October 28,
1995. The amounts for both nine month periods exclude
interest on certain obligations for which interest
ceased to accrue after filing for relief under Chapter
11 of the United States Bankruptcy Code. The decrease
is due to lower borrowings under the Company's
revolving credit facility as a result of the sale of
the Toy operations in May 1994 and the closing of 217
Everything's $1.00 stores in 1994 and 1995 offset by
interest expenses on pre-petition obligations settled
through issuance of new long-term debt obligations as
of June 27, 1995. In addition, the Bankruptcy Court
approved the reduction in the interest rates for a
portion of the working capital loan for the period of
October 1, 1994 through April 30, 1995.
Reorganization items include $4.4 million for the nine
months ended October 29, 1994 and $2.0 million for the
nine months ended October 28, 1995 of professional fees
and other items directly associated with the bankruptcy
case. In addition, the amount for the nine months
ended October 28, 1995 includes a net credit of $2.5
million representing "Fresh Start" accounting
adjustments for the write-off of deferred credits of
$3.9 million which were partially offset by the write-
off of $1.2 million of nonrecoverable fixed assets and
$0.7 million of unamortized loan fees, and a negotiated
discount on Chapter 11 professional fees of $.5
million.
Income tax benefits have been recognized in prior
periods to the extent that net operating losses could
be carried back against prior year earnings and result
in a refund. Any tax benefits recognized by the
Company related to net operating losses in fiscal 1994
and fiscal 1995 have been fully reserved for with a
valuation allowance due to uncertainties related to
their realization. These uncertainties arise from
significant losses in recent years, and the substantial
doubt that exists related to the Company's ability to
continue as a going concern and thus, generate future
taxable income.
Extraordinary gains include $6.0 million of forgiveness
of debt and $107.4 million of forgiveness of unsecured
claims as part of the Company's plan of reorganization.
The forgiveness of debt represents the debt disallowed
as being in excess of the related collateral value.
The forgiveness of unsecured claims represents the
amount of approved and remaining disputed claims in
excess of the value of 3,600,000 shares of common stock
issued to the unsecured creditors. The value of the
common stock was established at $2.50 per share which
represents the negotiated value between the Company and
its senior lenders in connection with the settlement of
certain short-term debt and approximates the average of
the bid and ask price at the date the shares were
issued.
Three Months Ended October 28, 1995 Compared to Three
Months Ended October 29, 1994
Net sales for the three months ended October 28, 1995
decreased by $10,345 or 26.3% compared to sales for the
three months ended October 29, 1994. This reflects a
decrease in the number of stores from 268 in fiscal
1994 to 215 stores in fiscal 1995, as well as a
decrease in comparable store sales of 10.9%. The
decrease in the number of stores is a result of closing
under performing stores. The decrease in comparable
store sales is primarily due to overall lower customer
traffic. In addition, comparable store sales for the
first month of the quarter decreased 15.7%, reflecting
the impact of more severe liquidity restraints in
fiscal 1995 compared to fiscal 1994 prior to the
establishment of the new revolving credit facility on
June 27, 1995 resulting in a reduction in new
merchandise flowing to the stores.
Gross profit margin increased from 38.5% for the three
months ended October 29, 1994 to 38.7% for the three
months ended October 28, 1995. This increase is
attributable to lower markdowns, shrink, freight costs
and warehouse costs in the third quarter of 1995
compared to the same period in 1995, offset by a higher
cost of merchandise due to a lower mix of import
merchandise which carry higher margins than domestic
merchandise and less use of discounts for inventory
purchases for cash.
Selling and store expenses as a percentage of net sales
increased to 45.0% for the three months ended October
28, 1995 from 43.6% for the three months ended October
29, 1994. This increase is entirely attributable to
the decrease in comparable store sales of 10.9% for the
three months ended October 28, 1995. Selling and store
expenses for comparable stores decreased by $.7
million, from $13.7 million for the three months ended
October 29, 1994 to $13.0 million for the three months
ended October 28, 1995 because of labor saving measures
and lower variable costs due to lower sales. However,
as a percentage of sales, selling and store expenses
increased from 43.3% for the three months ended October
29, 1994 to 46.2% for the three months ended October
28, 1995 reflecting the current low level of sales.
The closing of under performing stores which carried a
higher selling and store expenses as a percentage of
sales than the comparable stores partially offset the
percentage increase of the comparable stores.
General and administrative expenses decreased from $2.9
million for the three months ended October 29, 1994 to
$2.2 million for the three months ended October 28,
1995. This decrease is due to the reduction in the
size of business and primarily represents reductions in
merchandising, operations management and central
support staff.
Interest expense increased by $0.2 million from $0.9
million for the three months ended October 29, 1994 to
$1.1 million for the three months ended October 28,
1995. The amounts for the 1994 period exclude interest
on certain obligations for which interest ceased to
accrue after filing for relief under Chapter 11 of the
United States Bankruptcy Code. The increase is due to
interest expense on pre-petition obligations settled
through issuance of new long term debt obligations as
of June 27, 1995 offset by lower borrowings under the
Company's revolving credit facility as a result of the
sale of the Toy operations in May 1994 and the closing
of 217 Everything's $1.00 stores in 1994 and 1995.
Reorganization items include a charge of $2.2 million
for the three months ended October 29, 1994 for
professional fees and other items directly associated
with the bankruptcy case. The $.5 credit in
reorganization items for the three months ended October
28, 1995 represents a negotiated discount on the
Chapter 11 professional fees.
Seasonality
The Company's business is highly seasonal, reflecting
increased consumer buying during the Christmas season.
The Company's quarterly retail sales, as a percentage
of its annual retail sales, are lowest in the first
quarter and highest in the fourth quarter. The first
quarter revenues and operating profit or loss are
lowest due to factors common to retailers: mall and
store traffic is significantly lower during this
period, while overhead costs of management and
warehousing are generally fixed. The Company expects
this historical pattern to continue.
Impact of New Accounting Standards
In November of 1992, the Financial Accounting Standards
Board issued statement No. 112, "Employers' Accounting
for Postemployment Benefits," which requires companies
to accrue the cost of certain postemployment costs
during the service lives of employees. The Company
does not anticipate that the adoption of this Statement
will have a material effect on the Company's results of
operations.
In May of 1993, the Financial Accounting Standards
Board issued statement No. 115, "Accounting for Certain
Investments in Debt and Equity Securities," which
requires companies to value certain investments in debt
and equity securities at their fair value. The Company
does not anticipate that the adoption of this Statement
will have a material effect of the Company's results of
operations.
In October of 1994, the Financial Accounting Standards
Board issued statement No. 119, "Disclosures About
Derivative Financial Instruments and Fair Value of
Financial Instruments,"
which requires companies to disclose certain
information regarding the amounts, nature and terms of
any derivative financial instruments. The Company does
not anticipate that the adoption of this Statement will
have a material effect of the Company's results of
operations.
<PAGE>
Part II Other Information
Item 6. Exhibits and Reports on Form 8-K
a) None
b) Reports on Form 8-K
For the three months ended October 28, 1995, the
Company filed the following reports on Form 8-K:
Date of report: October 2, 1995
Item: 5 and 7
Description: Letter of Intent from Secured
Subordinated Lender to the Company
dated October 2, 1995.
Date of report: October 16, 1996
Item: 5 and 7
Description: First Amended and Restated Loan
Agreement and Security Agreement
dated June 27, 1995 between
Everything's A Dollar, Inc. and
Congress Financial Corp. (Central);
First Amended and Restated
Guarantee and Waiver dated
June 27, 1995.
<PAGE>
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.
VALUE MERCHANTS, INC.
Date: December 12, 1995 By_/s/ Steven J. Appel
Steven J. Appel,
Chairman of the Board and
Chief Executive Officer
Date: December 12, 1995 By_/s/ James L. Ford
James L. Ford,
Vice President and Chief
Financial Officer
