UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[ x ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED]
For Fiscal Year Ended February 25, 1996
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the Transition Period from to
Commission File Number: 0-14394
TOWN & COUNTRY CORPORATION
(Exact name of Registrant as specified in its charter)
Massachusetts 04-2384321
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) I.D. Number)
25 Union Street, Chelsea, Massachusetts 02150
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (617) 884-8500
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
Class A Common Stock, $.01 par value American Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The aggregate market value of voting stock, based on the actual price at
which the Class A common stock sold, held by non-affiliates of the Registrant
was $28,541,704 as of June 3, 1996.
On June 3, 1996, the Registrant had outstanding 21,928,303 shares of Class
A Common Stock, $.01 par value and 2,664,941 shares of Class B Common Stock,
$.01 par value.
PART I
Item 1. Business 1
General Business Developments 1
Narrative Description of Business 3
Financial Information about Foreign and
Domestic Operations and Export Sales 10
Item 2. Properties 10
Item 3. Legal Proceedings 11
Item 4. Submission of Matters to a Vote of
Security-Holders 12
PART II
Item 5. Market for the Registrant's Common
Equity and Related Stockholder Matters 13
Item 6. Selected Financial Data 14
Item 7. Management's Discussion and Analysis
of Financial Condition and Results of
Operations 15
Item 8. Financial Statements and Supplementary
Data 22
Item 9. Changes in and Disagreements with
Accountants on Accounting and Financial
Disclosure 22
PART III
Item 10. Directors and Executive Officers of
the Registrant 23
Item 11. Executive Compensation 23
Item 12. Security Ownership of Certain Beneficial
Owners and Management 23
Item 13. Certain Relationships and Related Transactions 23
PART IV
Item 14. Exhibits, Financial Statement Schedules,
and Reports on Form 8-K 24
This Form 10-K contains forward-looking statements within the meaning of Section
27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act
of 1934. The Company's actual results could differ materially from those set
forth in the forward-looking statements. Certain factors that might cause such a
difference are discussed throughout this Form 10-K.
PART I
Item 1. Business
General Business Developments
GENERAL
Town & Country Corporation, a Massachusetts corporation incorporated in 1965,
(collectively with its consolidated subsidiaries unless the context otherwise
requires, the "Company") designs, manufactures, and markets an extensive
collection of fine jewelry, scholastic and sports specialty products in the
United States and internationally. Prior to May 14, 1993, the Company consisted
of seven operating entities: the parent company, Town & Country Corporation
("Town & Country"), headquartered in Chelsea, Massachusetts; its wholly owned
subsidiaries, Anju Jewelry Limited, a Hong Kong company and its subsidiaries
("Anju"); Gold Lance, Inc. ("Gold Lance"), located in Houston, Texas; Verilyte
Gold, Inc. ("Verilyte"), located in Chelsea, Massachusetts and Dallas, Texas;
L.G. Balfour Company, Inc. ("Balfour"), headquartered in North Attleboro,
Massachusetts; and Feature Enterprises, Inc. ("Feature"), located in New York
City, New York; and its majority-owned subsidiary Essex International Public
Company Limited and its affiliates ("Essex"), a Thailand company. As of May 14,
1993, Verilyte and Feature were merged into a new operating entity, Town &
Country Fine Jewelry Group, Inc. ("Fine Jewelry Group").
SUBSEQUENT EVENT
On May 20, 1996, the Company entered into an agreement to sell assets and
liabilities of its Balfour and Gold Lance subsidiaries constituting
substantially all of the operations of Balfour and Gold Lance to Class Rings,
Inc. (CRI), a new company formed by Castle Harlan Partners II, L.P. and the
Company. Separately, CRI entered into an agreement with CJC Holdings, Inc. (CJC)
to acquire its school ring business.
The Company's agreement with CRI is subject to a number of significant
contingencies including approval by the Federal Trade Commission and CRI's
ability to raise sufficient capital to consummate the acquisition of Balfour and
Gold Lance and the acquisition of CJC's school ring business.
Under the Company's agreement with CRI, the Company will receive cash of $55
million, adjustable for the fluctuation in working capital as of the date of
closing, 8% of the common stock of CRI and the cash equivalent to the value of
gold on hand as of the date of closing. In addition, the Company may receive
additional shares of common stock of CRI based on CRI's exceeding certain
defined levels of profitability. Under this contingent earnout arrangement, the
Company can earn up to an additional 10% interest in the common stock of CRI. If
the Company is able to consummate the transaction as contemplated, it is not
expected that the transaction would have an unfavorable impact on the Company's
financial position and operating results.
CAPITALIZATION AND FINANCING
On June 7, 1996, the Company received a commitment letter to enter into a new
credit agreement from Foothill Capital Corporation ("Foothill"). The agreement
would provide senior secured financing consisting of a $40 million revolving
credit facility and a $30 million letter of credit in support of a Gold
Consignment Facility provided by Fleet Precious Metals ("Fleet"); however, the
aggregate amount of the combined facilities which may be outstanding at any date
is $65 million. The agreement would be for a period of two years and provides
Foothill with an option to renew for three additional years. The loans would
bear interest at a rate per annum equal to the greater of (a) 2% above the
reference rate announced by an identified group of major banks selected by
Foothill or (b) 8%. The agreement would contain standard covenants for
facilities of this type including financial covenants relating to interest
coverage, minimum net worth, minimum working capital, debt to net worth and
current ratios and limitations on dividends, distributions and capital
expenditures. Advances under the credit line would be based on eligible accounts
receivables and inventory. Foothill would have first security priority interest
in receivables, inventory and substantially all real estate and fixed assets
owned by the Company and its domestic subsidiaries subject to Fleet's first
position as gold consignor, supported by the letter of credit. The closing of
this agreement is subject to finalization of documentation.
The Company's 13% Senior Subordinated Notes, due May 31, 1998, were issued with
terms providing for the right to issue additional notes in lieu of the first
four semiannual interest payments . As of February 25, 1996, the Company had
exercised these rights; and, therefore, the carrying value of the notes,
including unamortized premium of approximately $4.0 million, is approximately
$72.8 million. The Company makes semi-annual cash interest payments of
approximately $4.5 million. The most recent payment was made May 15, 1996.
On November 23, 1994, holders of approximately 94% of the Company's Exchangeable
Preferred Stock exchanged their shares for shares of Little Switzerland, Inc.
Common Stock on a share-for-share basis. Such an exchange was provided for by
the terms of the Exchangeable Preferred Stock. In addition, the Company issued
to each participant one share of new Convertible Preferred Stock with each share
of Little Switzerland, Inc. Common Stock. The Company retains an investment in
Little Switzerland, Inc. equal to approximately 4% of the outstanding shares.
The Exchangeable Preferred Stock has a liquidation value of $14.59 per share and
accrues cumulative dividends at the rate of 6% of the liquidation value per
annum. Currently, there are 152,217 shares of Exchangeable Preferred Stock
outstanding and, in fiscal 1996, the Company paid cash dividends of $66,625.
Since the carrying value of the Company's investment in Little Switzerland, Inc.
was substantially less than the recorded value of the Exchangeable Preferred
Stock, the transaction resulted in a nonrecurring, noncash gain of approximately
$17 million, net of the estimated fair value of the Convertible Preferred Stock
issued.
Each share of Convertible Preferred Stock is initially convertible, at the
option of the holder, into two shares of Class A Common Stock, subject to
adjustment in certain circumstances and has voting rights as though it had been
converted. The Convertible Preferred Stock has a liquidation value of $6.50 per
share and accrues cumulative dividends at the rate of 6% of the liquidation
value per annum. The Company may pay such dividends in cash or in additional
shares of Convertible Preferred Stock, as defined by the agreement. Currently,
there are 1,977,905 shares of Convertible Preferred Stock outstanding and, in
fiscal 1996, the Company paid dividends of approximately $713,000 through the
issuance of additional shares of stock.
May 14, 1993 RECAPITALIZATION
The Company completed a recapitalization on May 14, 1993. The recapitalization
revised the Company's consolidated capitalization, including debt structure. The
amount of debt outstanding was reduced and a significant portion of old
subordinated debt was exchanged for new debt and shares of Class A Common Stock
and Exchangeable Preferred Stock.
The Company obtained a revolving credit agreement from Foothill to provide
secured financing in an aggregate amount of up to $30 million, which currently
has a seasonal increase up to $35 million, and new gold consignment agreements
from the Company's existing gold suppliers which currently provide an aggregate
gold consignment availability of up to approximately 63,000 troy ounces.
The Company sold $30 million of its 11 1/2% Senior Secured Notes due September
15, 1997. At February 25, 1996, approximately $13 million was outstanding.
The Company issued approximately $61.5 million, including unamortized premium of
approximately $8 million, of 13% Senior Subordinated Notes, due May 31, 1998,
approximately $34.3 million of Exchangeable Preferred Stock, par value $1.00,
and approximately 10 million shares of Class A Common stock valued at
approximately $26.9 million. These securities were issued in exchange for
approximately 93% of the Company's 13% Senior Subordinated Notes due December
15, 1998, and approximately 98% of the Company's 10 1/4% Subordinated Noes due
July 1, 1995. The total carrying value retired, including deferred financing
costs, was approximately $122.7 million.
(See "Management's Discussion and Analysis of Financial Condition and Results of
Operations--Financial Condition" and Note 3 of Notes to Consolidated Financial
Statements).
NARRATIVE DESCRIPTION OF BUSINESS
GENERAL
The Company designs and manufactures an extensive line of fine jewelry which it
markets on a wholesale basis throughout the U.S., and to a lesser extent, in the
international jewelry market. Its products include 10, 14, and 18-karat gold
rings, earrings, pendants, and bracelets, many of which are set with precious
and semi-precious stones. The Company also manufactures scholastic and sports
specialty products.
Town & Country Corporation
(Headquartered in Chelsea, Massachusetts)
Town & Country Gold Lance L.G. Balfour Anju Jewelry Essex
Fine Jewelry Inc. Company, Inc. Limited International
Group, Inc. (Houston, TX) (North Attleboro, (Hong Kong) Public Company
(Chelsea, MA) MA) Limited
(Bangkok,Thailand)
The Company has manufacturing facilities located in Massachusetts, New York,
Texas, Kentucky, and in Thailand. These facilities are located close to
available labor forces and suppliers of necessary raw materials.
PRODUCTION METHODS
The Company utilizes a variety of production methods to produce jewelry.
Principal among these is the "lost wax" method of investment casting. This
manufacturing operation originates with a hand designed original which is then
taken through a reverse molding procedure to create a mold. The mold is infused
with wax, and a series of such wax pieces are then surrounded with plaster of
Paris. The plaster of Paris is placed in a furnace where the wax is eliminated
by subjecting the plaster to high temperatures. Molten gold is then poured into
the areas from which the wax has been eliminated and a rough gold piece is
removed after cooling. The piece produced through the investment casting method
may then be ground, polished, and set with stones.
One of the other production methods used is die striking. This process begins by
tooling a master hub (male impression) from an original design. The hub is used
to create dies (female impression) for machine stamping. Additional tools are
created to trim and shape the final product. Gold or base metal is struck in
hydraulic presses or with pneumatic drop hammers in multiple steps with
alternating annealing steps. The product is then trimmed and rounded. Stamping
dies are custom produced by computer-aided tool cutting machines or are hand
crafted. The rough, stamped pieces are polished and finished. Precious,
semi-precious, or synthetic stones may be set in the individual pieces.
In addition, the Company utilizes the carbide, or swiss-cutting, manufacturing
operation. This method uses ring blanks of various widths and dimensions which
have been cut from tubes of karat gold in a lathing process. The blanks are then
placed on a cutting machine which is set up to cut designs into the ring using
diamond tipped or carbide tipped tools.
Photo-etching technology is used to manufacture precious metal charms and
earrings. The process consists of several stages. First, a graphic image of a
charm or earring is transferred to a photographic tool and is replicated by
computer control in an optimum layout. The tool is then placed on a thin metal
plate and passed through an exposure unit which photographically transfers the
images from the tool onto that plate. Next, the metal plate passes by conveyer
through an etching solution where a chemical milling of the exposed surfaces
takes place. Finally, the etched pieces from the plate are cleaned, shaped, and
polished.
The Company uses foil stamping and embossing, offset printing, die stamp and
engraving presses, and laser technology in the manufacture of graduation
announcements, diplomas, certificates, and other printed products.
MARKETING
There are numerous channels of distribution for fine jewelry, including jewelry
stores (ranging from the independent store with one location to the large
national chains), department stores, catalogue showrooms, warehouse clubs, and
home shopping networks. The Company distributes its products through all of
these channels.
As part of its marketing program, the Company provides a variety of customer
support services designed to meet the varying needs of customers. For some
customers, the Company designs product lines and develops total merchandising
programs including displays and advertising to market these lines. The Company's
sales staff provides quick reaction to customer pricing and design requirements.
The Company utilizes computerized data bases and electronic data interfaces
which assist these customers by providing information that may be used in
marketing, merchandising, and inventory management. For the independent retail
jewelers, the Company has designed promotional flyer programs through which
marketing and merchandising support pertaining to a select group of products at
specific price ranges is provided.
An increasing portion of retail sales in the fine jewelry industry is being made
through discount department stores, warehouse clubs and television shopping
networks. These customers are particularly interested in unique designs, volume
production, price and credit terms.
The Fine Jewelry Group has a single product development organization built
around product category specialists. Each product category is analyzed so that
each category is limited to items providing the maximum return to the Company
and its customers. Utilizing this structure, the Company believes it is able to
be more responsive to trends in the marketplace.
Gold Lance and Balfour are engaged in the production and distribution of high
school and college class rings on a made-to-order basis. Gold Lance distributes
through retail jewelry stores, while Balfour markets directly to students on
campus and at campus book stores. Each customer may choose from a wide variety
of options. These selling methods enable Gold Lance and Balfour to maintain low
levels of inventory in these product lines. Gold Lance and Balfour have
libraries of reusable tools and dies, allowing them to offer a large selection
of styles, including fashion-oriented class rings with intricate designs.
In conjunction with its school ring sales, Balfour also offers a variety of
graphics products, including graduation announcements, diplomas, and memory
books, and novelty items, such as T-shirts, key chains, and pendants.
Balfour markets licensed products, particularly rings and jewelry licensed by
the major professional sports organizations. Customized rings, insignia pins,
and novelty items are also marketed to associations and organizations.
The Company also markets directly from its Bangkok facility where wholesale
buyers are able to select and direct order jewelry from the Company. The
Company's products are also sold internationally by the Company's marketing
groups and are exhibited at the major international jewelry trade fairs.
As of May 26, 1996, the Company had approximately $16 million of orders believed
to be firm, as compared to approximately $19 million at a corresponding date
last year. The Company believes that substantially all of these orders will be
filled during fiscal 1997. The Company believes that comparative open order
information is not necessarily indicative of comparative results due to the high
level of timing sensitivity in the fine jewelry business which depends
significantly on orders from large retailers.
COMPETITION
The Company competes with both domestic and foreign jewelry suppliers, ranging
in size from small regional suppliers to those which have national distribution
capabilities. The principal competitive factors are price, quality, design, and
customer service. Management believes that the Company has a reputation for
providing extensive customer services and delivering a quality product line with
broad customer appeal. The Company tries to achieve relative cost savings as a
result of the large volume of its purchases of diamonds and stones.
The Company historically has competed in all of the channels of distribution
across its price range and is therefore competing directly with the specialists
in each distribution category. It has been most successful with retail jewelry
stores and the department and discount store chains which are also buying the
numerous marketing and credit related support services of the Company.
The Company also competes in the class ring industry which is comprised of a few
national companies and a few regional companies. The industry is made up of two
components, the "in-school" component in which ring orders are taken at the
school by the suppliers, and the "retail" component in which local jewelry
stores display samples and take orders. Historically, the "in-school" component
of this industry has been heavily influenced by the school representative/sales
person relationship. Factors which affect the strength of this relationship
include delivery time, price, quality, design and customer service. Class ring
sales are affected by student demographics and economic conditions. Management
believes that the Company currently is competitive with other distributors with
regard to the factors listed above. Management believes that Jostens, Herff
Jones, Inc. and CJC Holdings, Inc. currently represent major competitors in this
industry.
Management believes that Balfour's name recognition and association with the
class ring business and championship team rings gives it a competitive advantage
in the direct marketing of graphics products, such as diplomas, graduation
announcements, and accessories, and also, general sports insignia products
including those with professional team logos.
SEASONALITY
The Company is impacted by the seasonal demands of its customers. A significant
portion of sales in the fine jewelry industry is concentrated in the fall in
anticipation of the holiday season. Balfour is also impacted by fluctuations in
connection with the scholastic year. Accordingly, the Company's operating
results, and working capital requirements fluctuate considerably during the
year.
The following chart sets forth unaudited quarterly data for fiscal 1996 and
fiscal 1995.
First Second Third Fourth
Quarter Quarter Quarter Quarter
Ended Ended Ended Ended
May 28 August 27 November 26 February 25
Net sales $68,970,983 $48,194,042 $86,395,380 $47,017,411
Gross profit 21,896,424 14,644,996 27,404,915 13,490,170
Net income (loss) (514,424) (4,181,012) 6,636,293 (3,806,971)
Income (loss)
attributable to
common stock-
holders (758,159) (4,468,316) 6,380,973 (4,060,414)
Income (loss)
per common share $ (0.03) $ (0.19) $ 0.27 $ (0.17)
First Second Third Fourth
Quarter Quarter Quarter Quarter
Ended Ended Ended Ended
Fiscal 1995 May 29, August 28, November 27, (1)February 26,
Net sales $70,568,460 $54,799,928 $96,719,682 $66,026,538
Gross profit 24,619,290 14,736,513 28,831,858 19,393,057
Net income (loss) (2,477,963) (7,169,427) 16,424,043 (6,204,735)
Income (loss)
attributable to
common stock-
holders (2,945,159) (7,648,979) 15,944,492 (6,466,455)
Income (loss)
per common share $ (0.13) $ (0.33) $ 0.68 $ (0.28)
(1) Net income in the third quarter of fiscal 1995 includes a gain of
approximately $17 million as a result of the exchange of the Exchangeable
Preferred Stock, see Note 4 of Notes to Consolidated Financial Statements.
SIGNIFICANT CUSTOMER
The Company's largest customer for a number of years has been the Zale
Corporation and its affiliated companies. Net sales to Zale were approximately
$22 million or 9% of consolidated net sales in fiscal 1996 compared to $29
million or 10% of consolidated net sales in fiscal 1995 and $33 million or 12%
of consolidated net sales in fiscal 1994. The loss of Zale as a customer of the
Company or a substantial reduction in the amount of sales to Zale would have a
material adverse effect on the Company.
RAW MATERIALS
The principal raw materials purchased by the Company are gold and precious and
semi-precious stones. The Company currently takes delivery of most of its gold
through consignment programs. The Company's intention is that as the gold
selling price for orders is confirmed, the Company purchases the gold
requirements at the then current market prices. The Company attempts to match
the price it pays for gold with the price it charges its customers. The
Company's gold agreements require that the Company own gold under certain
circumstances and it is possible for this required ownership to exceed the
Company's hedging requirements and expose the Company to gold fluctuations. The
Company pays a fee, which is subject to periodic change, for the value of the
gold held by it as a consignee during the period prior to sale. The Company has
consignment arrangements in place with a group of suppliers of gold which
currently provide for carrying on consignment up to approximately 63,000 troy
ounces.
Colored precious and semi-precious stones are purchased by the Company mainly in
Asia and Europe. Diamonds are purchased principally at major diamond markets
throughout the world, including Bombay, Tel Aviv, Antwerp, and New York. The
Company is not dependent on one supplier or a small number of suppliers for the
purchases of these raw materials. Availability and cost of these materials are
affected by market conditions and, when there is a period of volatility in the
market, operating results may be affected.
EMPLOYEES
The Company employs, on average, 2,200 persons, with approximately 26% of these
persons located in the Far East. The number of employees from quarter to quarter
may vary significantly because of the seasonality of the Company's business. See
"Narrative Description of Business--Seasonality." Of these 2,200 employees,
approximately 600 are involved with selling and administrative functions of the
Company, and the remainder are involved in the manufacturing functions of the
Company.
A division of Fine Jewelry Group has collective bargaining contracts covering
its manufacturing employees, who are represented by the Service Employees
International Union, Jewelry Workers Division. The number of employees covered
by collective bargaining contracts is approximately twenty.
The Company considers relations with its employees to be satisfactory.
Management does not believe the Company would experience any significant
difficulties in hiring or training additional employees at any of its
facilities.
INDUSTRY PRACTICES
In the jewelry industry, traditionally the wholesaler has provided considerable
working capital in the form of credit terms, inventory stocking, consignment
transactions, and transactions with a right of return. The Company has
historically provided this working capital, but in today's retail and banking
environment, has become more selective in its commitment of resources. The
Company is scrutinizing customer credit- worthiness more closely and, as a
result, is restricting customer credit and requires security before providing
consignment inventory. The Company also is restricting the availability of
consigned merchandise to items that are actively promoted by the customer.
TRADEMARKS AND COPYRIGHTS
While the Company maintains certain trademarks and copyrights on product styles
and business names and enforces its rights relative to those trademarks and
copyrights, these are not economically material to the Company and while the
Company has licensing agreements with certain major professional sports
organizations, the Company believes that it has no franchises or licenses which
are of a material nature to the Company.
Financial Information about Foreign and Domestic Operations and Export Sales
For information on foreign and domestic operations, see Note 18, "Consolidating
Financial Information and Segment Information," in Notes to Consolidated
Financial Statements.
Item 2. PROPERTIES
The Company occupies facilities in the United States and the Far East as
described below. (1)
Location Use Square Footage Ownership
Chelsea, Executive and administrative 88,000 Leased/
Massachusetts offices, manufacturing, marketing, Owned
and distribution facility.
Dallas, Texas Administrative offices, marketing
and distribution facility. 23,000 Leased
New York,New York Administrative offices, product
development and marketing 90,000 Owned
Attleboro, Massachusetts Manufacturing and distribution 56,000 Owned
facility.
North Attleboro, Administrative offices, 101,000 Leased
Massachusetts manufacturing, marketing,
and distribution facility.
Louisville, Kentucky Manufacturing and distribution 100,000 Leased
facility.
Dallas, Texas Manufacturing and distribution 55,000 Leased/
facility. Owned
Houston, Texas Administrative offices, 31,000 Owned
manufacturing, marketing, and
distribution facility.
Hong Kong Administrative offices, product 8,000 Leased
development, purchasing, and
quality control facility.
Bangkok, Thailand Administrative offices, 36,000 Leased/
manufacturing, marketing, and Owned
distribution facility.
Chiang Mai, Thailand Manufacturing facility. 7,000 Leased
(1) The Company's interests in these properties are security for loans made by
the Company's lenders. See Note 3 of Notes to Consolidated Financial Statements.
The fine jewelry manufacturing and distribution business is seasonal.
Historically, the Company's facilities operate in excess of full capacity during
the peak demand part of the season and are underutilized during the slower
portions of the season (See "Narrative Description of Business--Seasonality").
Additional capacity requirements are satisfied utilizing outside contractors and
seasonal staffing is adjusted accordingly. The school ring business is also
seasonal and its factories are impacted similarly, but the total and peak
demands on the school ring business are not sufficient to stress the capacity
constraints at any time.
During fiscal 1996, the Company leased a portion of its Chelsea, Massachusetts
facility (approximately 39,000 square feet of combined manufacturing and
administrative space) from Carey Realty Trust, a Massachusetts business trust,
which is wholly owned by C. William Carey, the Chairman, President, and a major
stockholder of the Company. The lease, which was revised on March 1, 1996,
expires on August 31, 1998, and provides the Company with three ten-year options
to renew. The current lease provides for an annual rental payment of
approximately $350,000. The Company obtained comparative information from a
third party when negotiating the revised lease and believes that these lease
arrangements are on terms no less favorable to the Company than could be
obtained from unaffiliated third parties.
Management believes that all its facilities are well maintained, in good
condition and adequate for its present business.
Item 3. LEGAL PROCEEDINGS
The Company is not party to any pending legal proceedings, other than ordinary
routine litigation incidental to the business. In the opinion of management,
adverse decisions on those legal proceedings, in the aggregate, would not have a
materially adverse impact on the Company's financial condition or result of
operations.
It is the Company's current understanding that companies which may be considered
predecessors to Balfour have been designated potentially responsible parties by
the Environmental Protection Agency ("EPA") under the Comprehensive
Environmental Response, Compensation and Liability Act of 1980 with respect to
cleanup of hazardous waste in four cases. One of the parties that may be
considered such a predecessor (the "1983 Owner") has, to date, assumed
responsibility for all of these cases in accordance with understandings the 1983
Owner has reached with the party who bought the assets of the predecessor
Balfour Company in 1983 (the "1988 Owner"). In the first of these cases, it is
the Company's understanding that the predecessor 1983 Owner is participating in
the cleanup and has provided financial assurance that it will pay its expected
share of the cleanup expenses (which are currently estimated to be under
$200,000). In the other three cases, it is the Company's understanding that the
1983 Owner has settled its liability as a de minimis waste contributor in each
case and has been given comprehensive releases from further liability for
cleanup costs. The Company acquired the stock of Balfour from the 1988 Owner and
believes that it did not assume responsibility for these cases as a result of
this acquisition. Since its acquisition of Balfour in 1988, the Company has
never paid any amounts with respect to any of these matters and there are no
outstanding claims against the Company or Balfour with respect to any of these
matters. While it is possible that a person or agency could claim that Balfour
as a successor to the 1983 Owner is jointly and severally liable for the cost of
the entire cleanup in these cases, the Company believes that such a claim would
have no merit and would vigorously defend and contest any such claim. Because of
the assumption of responsibility for these cases by the 1983 Owner and the small
waste shares attributed to the 1983 Owner, Management believes that it is
unlikely that the Company will suffer material liability in connection with
these cases.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS
There were no matters submitted to a vote of security-holders during the fourth
quarter of fiscal 1996.
PART II
Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's Class A Common Stock is traded on the American Stock Exchange (the
"AMEX") under the symbol TNC. Set forth below are the high and low sales prices
for the shares of Class A Common Stock as reported by the AMEX.
Class A Common
Stock Price Range
Fiscal Year Ended High Low
February 26, 1995:
First Quarter 3 3/8 2 3/8
Second Quarter 2 7/8 2
Third Quarter 2 7/16 7/8
Fourth Quarter 1 9/16
February 25, 1996:
First Quarter 7/8 9/16
Second Quarter 13/16 9/16
Third Quarter 1 1/8 5/8
Fourth Quarter 7/8 1/2
There is no established public trading market in effect at this time for the
Class B Common Stock. Shares of Class B Common Stock, however, are convertible
on a share for share basis into shares of Class A Common Stock.
On June 3, 1996, there were 970 holders of record of Class A Common Stock and 29
holders of record of the Class B Common Stock. The Company's present policy is
to reinvest its earnings in the business. No cash dividends have been paid
during the last two fiscal years, and the Company has no intention to pay cash
dividends in the foreseeable future.
The Company's ability to pay cash dividends is limited by its financing
agreements and other outstanding indebtedness. As a result of these
restrictions, the Company currently may not pay cash dividends on common stock.
Item 6. SELECTED FINANCIAL DATA
The following table presents certain selected consolidated financial data of the
Company. The information for each of the five years in the period ended February
25, 1996, has been derived from consolidated financial statements audited by
Arthur Andersen LLP, independent public accountants.
Statement of Operations Data:
Fiscal Year Ended
(In thousands, except per share data)
Feb. 25, Feb. 26, Feb. 27, Feb. 28, Feb. 29,
1996 1995(1) 1994 1993 (2) 1992 (3)
Net sales $250,578 $288,115 $277,750 $270,364 $272,194
Net income (loss) (1,866) 572 3,138 (47,296) (19,018)
Income (loss)
attributable to
common stockholders (2,906) (1,116) 1,684 (47,296) (19,018)
Income (loss)
per common
share: (0.12) (0.05) 0.08 (3.80) (1.58)
Balance Sheet Data:
Fiscal Year Ended (In Thousands)
Feb. 25, Feb. 26, Feb. 27, Feb. 28, Feb. 29,
1996 1995 1994 1993(2) 1992 (3)
Total assets $211,129 $206,623 $223,921 $246,858 $262,288
Senior debt 13,653 15,128 22,022 35,688 6,424
Subordinated debt 79,766 77,545 71,285 120,285 119,496
Exchangeable
preferred stock 2,319 2,266 35,785 - -
Stockholders' equity 57,871 59,835 55,334 24,744 70,709
(1) In fiscal 1995, the Company recorded a gain of approximately $17 million as
a result of the exchange of Exchangeable Preferred Stock. See Note 4 of Notes to
Consolidated Financial Statements.
(2) In fiscal 1993, the Company recorded a restructuring charge related to its
New York facility of $5 million, a charge related to the disposal of certain
Balfour assets of approximately $14.5 million, and expenses associated with
recapitalizing the Company of approximately $14.4 million. See Notes 8 and 11 of
Notes to Consolidated Financial Statements.
(3) In fiscal 1992, the Company recorded restructuring and Zale bankruptcy
charges of $44 million and net gains from nonrecurring items of $51 million. See
Note 9 of Notes to Consolidated Financial Statements.
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATION
Results of Operations
FISCAL 1996 COMPARED TO FISCAL 1995
Net sales for the fiscal year ended February 25, 1996, decreased approximately
$37.5 million or 13% from approximately $288.1 million in fiscal 1995 to $250.6
million in fiscal 1996. Sales of fine jewelry decreased approximately $31.1
million from $196.0 million in fiscal 1995 to $164.9 million in fiscal 1996. The
Company believes that current year sales have been affected by a general
softening of demand for colored-stone products and that in the highly
competitive colored-stone and diamond product categories, the Company needs to
improve its ability to meet customer expectations. Also contributing to the
decrease has been management's continuing efforts to manage the credit extended
to certain customers and to eliminate low margin contributors from the sales
mix. Sales of consumer products including licensed sports and other specialty
products decreased $7.8 million from $12.1 million in fiscal 1995 to $4.3
million in fiscal 1996. This decrease is associated with the Company's decision,
in the third quarter of fiscal 1995, to scale back the consumer products
business.
Gross profit for the fiscal year ended February 25, 1996, decreased
approximately $10.2 million or 12% from $87.6 million in fiscal 1995 to $77.4
million in fiscal 1996. Decreases in gross profit are primarily associated with
the lower volume of sales in the consumer products and fine jewelry lines of
business. Gross profit margin increased slightly from 30.4% in fiscal 1995 to
30.9% in fiscal 1996. Improvements in margin in fine jewelry are being offset by
lower margins in the scholastic and consumer products lines of business.
Selling, general and administrative expenses ("SG&A") for fiscal 1996 decreased
approximately $24.4 million, or 27.0% from $90.4 million in fiscal 1995 to $66.0
million in fiscal 1996. As a percentage of net sales, SG&A expenses decreased
from 31.4% in fiscal 1995 to 26.3% in fiscal 1996. The decrease primarily
relates to lower costs associated with the consumer products line of business,
particularly advertising costs and lower provisions for uncollectible accounts.
Also contributing to the decrease are certain non-operating items in the current
year including a $1.5 million benefit associated with the liquidation of
additional Zale claim assets and a $1.6 million benefit from a fiscal 1989
acquisition contingency.
Interest expense for the fiscal year ended February 25, 1996, increased $1.0
million from approximately $12.2 million to $13.2 million in fiscal 1996. The
weighted average interest rate on overall borrowings was approximately 11.24%
for fiscal 1996 compared to 11.08% for fiscal 1995. Average borrowings increased
approximately $7.2 million from approximately $109.9 million in fiscal 1995 to
$117.1 million in fiscal 1996. See Note 3 of Notes to Consolidated Financial
Statements.
The Company has recorded a tax provision for fiscal 1996 of approximately $0.2
million compared with a provision of $1.8 million in fiscal 1995. These tax
provisions are primarily due to state and foreign income taxes.
FISCAL 1995 COMPARED TO FISCAL 1994
On November 23, 1994, holders of approximately 94% of the Company's Exchangeable
Preferred Stock exchanged on a share-for-share basis their shares for shares of
Little Switzerland, Inc. Common Stock held by the Company. Such an exchange was
provided for by the terms of the Exchangeable Preferred Stock. In addition, the
Company issued to each participant one share of new Convertible Preferred Stock
with each share of Little Switzerland, Inc. Common Stock.
Since the carrying value of the Company's investment in Little Switzerland, Inc.
was substantially less than the recorded value of the Exchangeable Preferred
Stock, the transaction resulted in a nonrecurring, noncash gain of approximately
$17 million, net of the estimated fair value of the Convertible Preferred Stock
issued.
Net sales for the fiscal year ended February 26, 1995, increased approximately
$10 million, or 4%, from approximately $278 million in fiscal 1994 to
approximately $288 million in fiscal 1995. Sales of fine jewelry increased
approximately $19 million, or 11%, from approximately $177 million in fiscal
1994 to approximately $196 million in fiscal 1995. This increase was achieved
despite a decline in sales to Zale of approximately $4 million, or 12%, from $33
million in fiscal 1994 to $29 million in fiscal 1995. The sales increase is
generally attributable to increased volume rather than increased prices. Sales
for the Company's direct response distribution business of licensed sports and
other specialty products have decreased approximately $10 million, or 37%, from
$27 million in fiscal 1994 to $17 million in fiscal 1995. The Company expects to
further scale back its direct response distribution business in fiscal 1996.
Gross profit for the fiscal year ended February 26, 1995, decreased
approximately $10 million, or 10%, from $97 million in fiscal 1994 to $87
million in fiscal 1995. Gross profit margin declined from 35% for the fiscal
year ended February 27, 1994, to 30% for the fiscal year ended February 26,
1995. The Company's sales increase has been primarily in the lower margin fine
jewelry product categories. In order to better manage and control inventory, the
Company has also sold, or made provisions to sell, inventory in excess of
current requirements, at less than normal margins. This product mix change and
these sales and provisions negatively impacted margin by approximately 3%.
Production requirements for direct response and other specialty products were
lower this year than last year, resulting in under absorbed fixed overhead which
impacted margin by approximately 2%.
Selling, general and administrative expenses ("SG&A") for fiscal 1995 increased
approximately $10 million, or 13%, from $80 million in fiscal 1994 to $90
million in fiscal 1995. As a percentage of net sales, SG&A expenses increased
from 29% in fiscal 1994 to 31% in fiscal 1995. This increase relates, primarily,
to higher costs, particularly for advertising, associated with the Company's
marketing, through direct response, of merchandise manufactured under licenses
from professional sports organizations. This accelerated advertising effort did
not generate sales of these products at the rate anticipated. Provision for
higher than anticipated uncollectible accounts also contributed to the increase
in SG&A as a percentage of sales. The Company anticipates that SG&A expenses
associated with its direct response business of licensed sports and other
specialty products will decline in fiscal 1996 due to the Company's intentions
to scale back its direct response distribution business.
Interest expense for the fiscal year ended February 26, 1995, declined
approximately $2 million from $14 million in fiscal 1994 to $12 million in
fiscal 1995. The weighted average interest rate on overall borrowings was
approximately 11.08% for fiscal 1995 versus 11.24% for fiscal 1994. Average
borrowings for the fiscal year ended February 26, 1995, declined approximately
$15 million from approximately $125 million in fiscal 1994 to approximately $110
million in fiscal 1995. See Note 3 of Notes to Consolidated Financial
Statements.
The Company has recorded a tax provision for fiscal 1995 of approximately $1.8
million compared with a provision of $1.0 million in fiscal 1994. These tax
provisions are primarily due to state and foreign income taxes.
FISCAL 1994 COMPARED TO FISCAL 1993
Net sales for the fiscal year ended February 27, 1994, increased approximately
$8 million or 3% from approximately $270 million in fiscal 1993 to approximately
$278 million in fiscal 1994. Sales of fine jewelry increased approximately $8
million or 5%, from approximately $169 million in fiscal 1993 to approximately
$177 million in fiscal 1994. This increase was achieved despite a decline in
sales to Zale of approximately $5 million or 13% from $38 million in fiscal 1993
to $33 million in fiscal 1994. The sales increase is attributable to increased
volume rather than increased prices. Product costs have remained relatively
stable while competitive pressure on margin has continued to intensify.
Gross profit for the fiscal year ended February 27, 1994, increased
approximately $6 million, or 7%, from $91 million in fiscal 1993 to $97 million
in fiscal 1994. Gross profit margin improved from 33% for the fiscal year ended
February 28, 1993, to 35% for the fiscal year ended February 27, 1994. Benefits
from elimination of low-margin recognition products and entry into higher-margin
sports specialty marketing were offset to some extent by continuing margin
pressure in the fine jewelry business. Gross profit also benefited from the $1.3
million liquidation of the Company's remaining LIFO based inventory.
Selling, general and administrative expenses for fiscal 1994 declined
approximately $5 million, or 6%, from $85 million in fiscal 1993 to $80 million
in fiscal 1994. As a percentage of net sales, selling, general and
administrative expenses declined from 32% in fiscal 1993 to 29% in fiscal 1994.
This decline results from consolidations related to the restructuring of the
fine jewelry business.
Interest expense for the fiscal year ended February 27, 1994, declined
approximately $6 million from $20 million in fiscal 1993 to $14 million in
fiscal 1994. The weighted average interest rate was approximately 11.24% for
fiscal 1994 versus 12.3% for fiscal 1993. Average borrowings for the fiscal year
ended February 27, 1994, declined approximately $38 million from approximately
$163 million in fiscal 1993 to approximately $125 million in fiscal 1994 due to
the recapitalization completed on May 14, 1993. See Note 3 of Notes to
Consolidated Financial Statements.
During the fiscal year ended February 27, 1994, the Company had equity income of
approximately $1.1 million from its ownership of Little Switzerland, Inc. stock
and approximately $156,000 from its ownership of Solomon Brothers, Limited
stock. This compares to approximately $1.9 million and approximately $800,000,
respectively, for the same period in fiscal 1993. Both companies are dependent,
to different extents, on tourist travel and spending patterns. The general level
of tourist activity has not met expectations, and the commitments for inventory
and overhead have negatively impacted Little Switzerland, Inc.'s and Solomon
Brothers, Limited's results of operations.
The Company has recorded a tax provision for fiscal 1994 of approximately $1
million. The tax provision was primarily due to state and foreign income taxes.
ZALE BANKRUPTCY
The Company's largest customer for a number of years has been the Zale
Corporation and its affiliated companies.
The Company's Consolidated Financial Statements at February 28, 1992, originally
reflected a net valuation, related to Zale Corporation's bankruptcy filing under
Chapter 11 of the United States Bankruptcy Code, of approximately $13 million,
which was classified as Other Assets in the Consolidated Balance Sheets, due to
the uncertainty of the timing of a final settlement. The Company has
subsequently received proceeds from Zale and from liquidation of claim assets of
approximately $14.5 million and recognized benefits of approximately $1.5
million in fiscal 1996.
The Company continues to conduct business with Zale.
LIQUIDITY
Cash provided by operations during fiscal 1996 was approximately $1.6 million
compared with cash used in operations of $0.8 million in fiscal 1995. During
fiscal 1996, the Company paid approximately $4.5 million of interest, on its 13%
Senior Subordinated Notes, in cash. The semi-annual payments required in fiscal
1995 were paid with the issuance of additional notes.
In fiscal 1995, cash flow from operations included proceeds from the Zale
bankruptcy claim of approximately $6.3 million versus $1.5 million during fiscal
1996. The Company is required to escrow net proceeds from the Zale bankruptcy
claim and Solomon investment for repayment of Senior Secured Notes. During
fiscal 1995 and fiscal 1996, $6.3 million and $0.7 million, respectively of
Senior Secured Notes were redeemed with such proceeds.
Cash used in investing activities was $1.7 million in fiscal 1996 compared to a
use of $2.7 million in fiscal 1995. The improvement is primarily the result of
proceeds received from the sale of a facility in the current fiscal year.
The Company's operations are primarily funded through its revolving credit
facility which was a net source of cash of approximately $4.1 million in fiscal
1996. These funds were used to make required debt payments of $1.9 million as
well as to meet the Company's operating and investing cash requirements.
On March 29, 1994, March 20, 1995, and April 4, 1996, as required by the
covenants of its Senior Secured Notes, the Company gave written notice to
Solomon Brothers, Limited of the Company's intention to redeem 70,000, 55,000
and 55,000 of its shares of nonvoting redeemable cumulative participating
preferred Class B stock, respectively. Solomon Brothers, Limited informed the
Company that it would not be able to redeem the 70,000, 55,000 and 55,000 share
requests when due as a result of constraints imposed by its banking facilities.
The Company currently believes that Solomon Brothers, Limited will be able to
meet its obligation and that the Company's investment is realizable, but it is
unable to estimate the timing of future redemption payments. The Company is
monitoring Solomon Brothers, Limited's operations and financial position and if
it determines in the future that carrying value is no longer reflective of fair
value, appropriate adjustments will be made.
FINANCIAL CONDITION
The Company currently has a revolving credit agreement from Foothill Capital
Corporation (Foothill) to provide secured financing in an aggregate amount of up
to $30 million, which currently has a seasonal increase up to $35 million,
(approximately $15 million outstanding at February 25, 1996), and gold
consignment agreements from the Company's existing gold suppliers which
currently provide an aggregate gold consignment availability of up to
approximately 63,000 troy ounces (approximately 63,000 troy ounces outstanding
at February 25, 1996). As of February 25, 1996, the Company was not in
compliance with certain covenants under its revolving credit and gold agreements
and such events of noncompliance have been waived. Subsequent to year end, the
Company received a commitment letter to enter into a new credit agreement from
Foothill. The agreement would provide senior secured financing consisting of a
$40 million revolving credit facility and a $30 million letter of credit in
support of a Gold Consignment Facility provided by Fleet Precious Metals
("Fleet"); however, the aggregate amount of the combined facilities which may be
outstanding at any date is $65 million. The agreement would be for a period of
two years and provides Foothill with an option to renew for three additional
years. The loans would bear interest at a rate per annum equal to the greater of
(a) 2% above the reference rate announced by an identified group of major banks
selected by Foothill or (b) 8%. The agreement would contain standard covenants
for facilities of this type including financial covenants relating to interest
coverage, minimum net worth, minimum working capital, debt to net worth and
current ratios and limitations on dividends, distributions and capital
expenditures. Advances under the credit line would be based on eligible accounts
receivables and inventory. Foothill would have first security priority interest
in receivables, inventory and substantially all real estate and fixed assets
owned by the Company and its domestic subsidiaries subject to Fleet's first
position as gold consignor, supported by the letter of credit. The Company
believes that it can meet its working capital needs over the next year through
cash flows from operations and the use of funds available under this new credit
agreement. The closing of this agreement is subject to finalization of
documentation.
The Company currently has approximately $13 million outstanding of its 11 1/2%
Senior Secured Notes which will come due September 15, 1997.
The Company's 13% Senior Subordinated Notes, due May 31, 1998, were issued with
terms providing for the right to issue additional notes in lieu of the first
four semiannual interest payments. As of February 25, 1996, the Company had
exercised these rights and; therefore, the carrying value of the notes,
including unamortized premium of approximately $4.0 million, is approximately
$72.8 million. The Company makes semi-annual cash interest payments of
approximately $4.5 million. The most recent payment was made May 15, 1996.
The Company also has a second series of 13% Senior Subordinated Notes due
December 15, 1998, which has a principle balance of approximately $7.0 million.
The Company makes cash dividend payments on the outstanding Exchangeable
Preferred Stock; payments amounted to $66,625 in fiscal 1996. The Company, to
date, has met its dividend requirements for its Convertible Preferred Stock by
issuing additional shares of stock as provided by the terms of the stock.
A subsidiary of the Company has available credit line facilities with two banks
in Thailand to provide aggregate commercial financing of up to approximately
$13.3 million. The subsidiary had no balance outstanding under these lines at
February 25, 1996, and February 26, 1995, respectively. This subsidiary also has
an agreement with a gold supplier to provide secured gold consignment
availability of up to approximately 4,800 troy ounces. This agreement runs
through December 10, 1996, and is secured by a standby letter of credit for $3.4
million under one of the subsidiary's credit facilities. There were
approximately 3,100 ounces on consignment under this gold agreement at February
25, 1996.
On May 20, 1996, the Company entered into an agreement to sell assets and
liabilities of its Balfour and Gold Lance subsidiaries constituting
substantially all of the operations of Balfour and Gold Lance to Class Rings,
Inc. (CRI), a new company formed by Castle Harlan Partners II, L.P. and the
Company. Separately, CRI entered into an agreement with CJC Holdings, Inc. (CJC)
to acquire its school ring business.
The Company's agreement with CRI is subject to a number of significant
contingencies including approval by the Federal Trade Commission and CRI's
ability to raise sufficient capital to consummate the acquisition of Balfour and
Gold Lance and the acquisition of CJC's school ring business.
Under the Company's agreement with CRI, the Company will receive cash of $55
million, adjustable for the fluctuation in working capital as of the date of
closing, 8% of the common stock of CRI and the cash equivalent to the value of
gold on hand as of the date of closing. In addition, the Company may receive
additional shares of common stock of CRI based on CRI's exceeding certain
defined levels of profitability. Under this contingent earnout arrangement, the
Company can earn up to an additional 10% interest in the common stock of CRI. If
the Company is able to consummate the transaction as contemplated, it is not
expected that the transaction would have an unfavorable impact on the Company's
financial position and operating results.
INFLATION
The Company's operating expenses are directly affected by inflation, resulting
in an increased cost of doing business. Because the cost of sales depends on the
price of raw materials bought in markets located throughout the world, the
Company is influenced by inflation on an international basis. In addition, gold
prices are affected by political factors, by changing perceptions of the value
of gold relative to currencies and by inflationary pressures.
The Company believes that inflation does not currently have a material effect on
the Company's operating expenses, although current rates of inflation are not
necessarily indicative of future effects of inflation on the Company, and thus,
inflation could have a material effect on the Company's operating expenses in
the future.
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The following consolidated financial statements of Town & Country Corporation
and subsidiaries are included as part of this Form 10-K:
Report of Independent Public Accountants F-3
Consolidated Balance Sheets - February 25, 1996
and February 26, 1995 F-4
Consolidated Statements of Operations - Years
Ended February 25, 1996, February 26, 1995,
and February 27, 1994 F-6
Consolidated Statements of Stockholders' Equity
Years Ended February 25, 1996, February 26, 1995,
and February 27, 1994 F-7
Consolidated Statements of Cash Flows - Years
Ended February 25, 1996, February 26, 1995,
and February 27, 1994 F-9
Notes to Consolidated Financial Statements F-11
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS AND ACCOUNTING AND
FINANCIAL DISCLOSURE
None
PART III
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information concerning the age and principal occupation of each director and
executive officer is set forth under the captions "Election of Directors,"
"Executive Officers," and "Executive Compensation" in the Proxy Statement and is
incorporated herein by reference.
Item 11. EXECUTIVE COMPENSATION
Information concerning compensation of directors and executive officers of the
Registrant is set forth under the captions "Board Meetings, Committees,
Attendance and Fees," "Executive Officers," and "Executive Compensation" in the
Proxy Statement and is incorporated herein by reference.
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Security ownership of executive officers and directors is set forth under the
caption "Election of Directors" and "Security Ownership of Principal
Stockholders and Management" in the Proxy Statement and is incorporated herein
by reference.
Solely for the purpose of calculating the aggregate market value of the voting
stock held by non-affiliates of the Registrant as set forth on the cover of this
report, it has been assumed that directors and executive officers of the
Registrant are affiliates.
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information related to certain transactions with directors of the Registrant
is set forth under the caption "Certain Transactions and Business Relationships"
in the Proxy Statement and is incorporated herein by reference.
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(A) DOCUMENT LIST
1. Financial Statements
The following consolidated financial statements of Town & Country Corporation
and Subsidiaries are included in Item 8:
Page
Report of Independent Public Accountants F-3
Consolidated Balance Sheets - February 25, 1996 F-4
and February 26, 1995
Consolidated Statements of Operations - Years F-6
Ended February 25, 1996, February 26, 1995,
and February 27, 1994
Consolidated Statements of Stockholders' Equity - F-7
Years Ended February 25, 1996, February 26, 1995,
and February 27, 1994
Consolidated Statements of Cash Flows - Years F-9
Ended February 25, 1996, February 26, 1995,
and February 27, 1994
Notes to Consolidated Financial Statements F-11
2. Financial Statement Schedules
Report of Independent Public Accountants F-48
Schedules:
II Valuation Accounts F-49
Schedules other than those listed above are omitted because of the absence of
the condition under which they are required or because the required information
is reflected in the financial statements or notes thereto.
3. Exhibits
Page
3.1 Restated Articles of Organization,
as amended. *6*(3.1)
3.2 By-Laws, as amended. *2*(3.2)
4.1 Amended and Restated Indenture governing *6*(4.1)
13% Senior Subordinated Notes due 12/15/98,
(the "Old 13% Notes), dated as of 5/14/93,
from Town & Country Corporation to State
Street Bank and Trust Company, as Trustee.
4.2 Supplemental Indenture relating to the Old *6*(4.4)
13% Notes, dated as of 5/14/93, from
Town & Country Corporation to State Street
Bank and Trust Company, as Trustee.
4.3 Indenture governing 11 1/2% Senior Secured *6*(4.5)
Notes due 9/15/97, dated as of 5/14/93,
from Town & Country Corporation to Shawmut
Bank, N.A., as Trustee.
4.4 Indenture governing 13% Senior Subordinated *6*(4.6)
Notes due 5/31/98, dated as of 5/14/93,
from Town & Country Corporation to
Bankers Trust Company, as Trustee.
4.5 Certificate of Vote of Directors *6*(4.7)
Establishing the Exchangeable
Preferred Stock, par value $1.00
per share, dated as of 5/14/93.
4.7 Certificate of Vote of Directors *7*(4.8)
Establishing the Convertible Preferred
Stock, par value $1.00 per share, dated as
of November 23, 1994.
Material Contracts:
10.1 1989 Employee Stock Purchase Plan of the .#1#(10.21)
Registrant.
10.2 1995 Stock Option Plan &1&(B)
10.3 1994 Non-Employee Directors' Nonqualified *7*(10.44)
Stock Option Plan
10.4 Assignment, Consolidation, Amendment, and Filed Herewith
Restatement to the Lease Agreement between
the Registrant, Fine Jewelry Group, Inc.
and Carey Realty Trust dated 3/1/96
10.5 Lease Agreement between L.G. Balfour Company, *7*(10.9)
Inc. and C.L.C. North Attleboro Trust dated
March 14, 1994.
10.6 Letter-Agreement dated April 4, 1994, to Lease *7*(10.10)
between L. G. Balfour Company, Inc. and C.L.C.
North Attleboro Trust dated March 14, 1994.
10.7 Amended and Restated Consignment Agreement by *6*(10.9)
and between Town & Country Corporation, L.G.
Balfour Company, Inc., Gold Lance, Inc., and
Town & Country Fine Jewelry Group, Inc. and
Fleet Precious Metals, Inc. dated as of
5/14/93.
10.8 First Amendment to Amended and Restated *7*(10.12)
Consignment Agreement dated 10/20/93 by
and between Town & Country Corporation,
L.G. Balfour Company, Inc., Gold Lance, Inc.,
and Town & Country Fine Jewelry Group, Inc.
and Fleet Precious Metals, Inc. dated as of
5/14/93.
10.9 Second Amendment to Amended and Restated *7*(10.13)
Consignment Agreement dated 12/1/93 by and
between Town & Country Corporation, L.G.
Balfour Company, Inc., Gold Lance, Inc., and
Town & Country Fine Jewelry Group, Inc. and
Fleet Precious Metals, Inc. dated as of
5/14/93.
10.10 Third Amendment to Amended and Restated *7*(10.14)
Consignment Agreement dated July 1994 by
and between Town & Country Corporation,
L.G. Balfour Company, Inc., Gold Lance, Inc.,
and Town & Country Fine Jewelry Group, Inc.
and Fleet Precious Metals, Inc. dated as of
5/14/93.
10.11 Fourth Amendment to Amended and Restated *7*(10.15)
Consignment Agreement dated 8/31/94 by and
between Town & Country Corporation, L.G.
Balfour Company, Inc., Gold Lance, Inc., and
Town & Country Fine Jewelry Group, Inc. and
Fleet Precious Metals, Inc. dated as of
5/14/93.
10.12 Fifth Amendment to Amended and Restated *7*(10.16)
Consignment Agreement dated 11/17/94 by and
between Town & Country Corporation, L.G.
Balfour Company, Inc., Gold Lance, Inc., and
Town & Country Fine Jewelry Group, Inc. and
Fleet Precious Metals, Inc. dated as of
5/14/93.
10.13 Amended and Restated Consignment Agreement by *6*(10.10)
and between Town & Country Corporation, L.G.
Balfour Company, Inc., Gold Lance, Inc., and
Town & Country Fine Jewelry Group, Inc. and
Rhode Island Hospital Trust National Bank
dated as of 5/14/93.
10.14 First Amendment to Amended and Restated *7*(10.18)
Consignment Agreement dated 12/1/93 by and
between Town & Country Corporation, L.G.
Balfour Company, Inc., Gold Lance, Inc., and
Town & Country Fine Jewelry Group, Inc. and
Rhode Island Hospital Trust National Bank
dated as of 5/14/93.
10.15 Second Amendment to Amended and Restated *7*(10.19)
Consignment Agreement dated 7/13/94 by and
between Town & Country Corporation, L.G.
Balfour Company, Inc., Gold Lance, Inc., and
Town & Country Fine Jewelry Group, Inc. and
Rhode Island Hospital Trust National Bank
dated as of 5/14/93.
10.16 Third Amendment to Amended and Restated *7*(10.20)
Consignment Agreement dated 11/15/94 by
and between Town & Country Corporation, L.G.
Balfour Company, Inc., Gold Lance, Inc., and
Town & Country Fine Jewelry Group, Inc. and
Rhode Island Hospital Trust National Bank
dated as of 5/14/93.
10.17 Fourth Amendment to Amended and Restated *8*(10.1)
Consignment Agreement dated by and
between Town & Country Corporation, L.G.
Balfour Company, Inc., Gold Lance, Inc., and
Town & Country Fine Jewelry Group, Inc. and
Rhode Island Hospital Trust National Bank
10.18 Amended and Restated Consignment Agreement by *6*(10.11)
and between Town & Country Corporation, L.G.
Balfour Company, Inc., Gold Lance, Inc., and
Town & Country Fine Jewelry Group, Inc. and
ABN Amro Bank, N.V. dated as of 5/14/93.
10.19 First Amendment to Amended and Restated *7*(10.22)
Consignment Agreement dated 12/1/93 by and
between Town & Country Corporation, L.G.
Balfour Company, Inc., Gold Lance, Inc., and
Town & Country Fine Jewelry Group, Inc. and
ABN Amro Bank, N.V. dated as of 5/14/93.
10.20 Second Amendment to Amended and Restated *7*(10.23)
Consignment Agreement dated August 1994 by
and between Town & Country Corporation, L.G.
Balfour Company, Inc., Gold Lance, Inc., and
Town & Country Fine Jewelry Group, Inc. and
ABN Amro Bank, N.V. dated as of 5/14/93.
10.21 Amended and Restated Consignment Agreement by *6*(10.12)
and between Town & Country Corporation, L.G.
Balfour Company, Inc., Gold Lance, Inc., and
Town & Country Fine Jewelry Group, Inc. and
Republic National Bank of New York dated as
of 5/14/93.
10.22 First Amendment to Amended and Restated *7*(10.25)
Consignment Agreement dated 12/1/93 by and
between Town & Country Corporation, L.G.
Balfour Company, Inc., Gold Lance, Inc., and
Town & Country Fine Jewelry Group, Inc. and
Republic National Bank of New York dated as
of 5/14/93.
10.23 Second Amendment to Amended and Restated *7*(10.26)
Consignment Agreement dated July 1994 by and
between Town & Country Corporation, L.G.
Balfour Company, Inc., Gold Lance, Inc., and
Town & Country Fine Jewelry Group, Inc. and
Republic National Bank of New York dated as
of 5/14/93.
10.24 Letter Agreement to Amended and Restated *7*(10.27)
Collateral Sharing Agreement dated November
1994 by and among Fleet Precious Metals Inc.
and various consignors and the Consignment
Agreements as of May 14, 1993.
10.25 Loan Agreement dated as of 5/14/93, by and among *6*(10.15)
Town & Country Corporation, L.G. Balfour Company,
Inc., Gold Lance, Inc., and Town & Country Fine
Jewelry Group, Inc. and Foothill Capital
Corporation.
10.26 First Amendment to Loan Agreement dated 9/28/93 *7*(10.31)
by and among Town & Country Corporation,
L.G. Balfour Company, Inc., Gold Lance, Inc., and
Town & Country Fine Jewelry Group, Inc. and
Foothill Capital Corporation dated as of 5/14/93.
10.27 Amendment Number Two to Loan Agreement dated *7*(10.32)
6/24/94 by and among Town & Country
Corporation, L.G. Balfour Company, Inc.,
Gold Lance, Inc., and Town & Country Fine
Jewelry Group, Inc. and Foothill Capital
Corporation dated as of 5/14/93.
10.28 Amendment Number Three to Loan Agreement dated *7*(10.33)
7/11/94 by and among Town & Country Corporation,
L.G. Balfour Company, Inc., Gold Lance, Inc., and
Town & Country Fine Jewelry Group, Inc. and
Foothill Capital Corporation dated as of 5/14/93.
10.29 Amendment Number Four to Loan Agreement dated *7*(10.34)
7/25/94 by and among Town & Country
Corporation, L.G. Balfour Company, Inc.,
Gold Lance, Inc., and Town & Country Fine
Jewelry Group, Inc. and Foothill Capital
Corporation dated as of 5/14/93.
10.30 Amendment Number Five to Loan Agreement dated *8*(10.2)
by and between Town & Country Corporation,
L.G. Balfour Company, Inc., Gold Lance,
Inc., and Town & Country Fine Jewelry
Group, Inc. and Foothill Capital
Corporation dated as of 11/1/95.
10.31 Collateral Agency and Intercreditor Agreement *6*(10.16)
dated as of 5/14/93, by and among Town & Country
Corporation, L.G. Balfour Company, Inc., Gold
Lance, Inc., and Town & Country Fine Jewelry
Group, Inc. and Foothill Capital Corporation,
Fleet Precious Metals, Inc., Rhode Island Hospital
Trust National Bank, Republic National Bank, ABN
Amro Bank N.V., Bankers Trust Company, Shawmut
Bank, N.A., and Chemical Bank.
10.32 Form of 1993 Management Stock Option. #3#(10.23)
10.33 Form of Executive Employment Agreement between #4#(10.20)
Town & Country Corporation and C. William Carey
effective as of February 28, 1994.
10.34 Form of Executive Employment Agreement between #4#(10.21)
Town & Country Corporation and Francis X. Correra
effective as of February 28, 1994.
10.35 Trust Agreement dated as of 5/14/93, between *6*(10.22)
Town & Country Corporation and Baybank, as
Trustee.
10.36 Registration Effectiveness Agreement dated *6*(10.23)
as of 5/14/93, between Town & Country
Corporation and Certain Funds managed by
Fidelity Management & Research Company.
10.37 Form of letter dated as of November 4, 1994, to #5#(10.21)
Certain Holders of Town & Country Exchangeable
Preferred Stock from Town & Country relating to
the offer by Town & Country to issue shares
of Convertible Preferred Stock.
10.38 Form of Registration Rights Agreement dated #5#(10.22)
as of November 23, 1994, between Town & Country
Corporation and the holders of Town & Country
Convertible Preferred Stock signatory thereto.
10.39 Letter Agreement dated as of November 15, #5#(10.23)
1994, by and among Town & Country
Corporation, L.G. Balfour Company, Inc.
Gold Lance, Inc., and Town & Country
Fine Jewelry Group, Inc. and Fleet Precious
Metals, Inc., Rhode Island Hospital Trust
National Bank, ABN-AMRO Bank, N.V., and
Republic National Bank of New York.
11 Earnings per Share Computations Filed Herewith
22 Subsidiaries of the Registrant Filed Herewith
24.1 Consent of Arthur Andersen LLP Filed Herewith
27 Financial Data Schedule Filed Herewith
*1* Incorporated by reference to the designated exhibit of the Registration
Statement on Form S-1 No. 2-97557 filed June 21, 1985.
*2* Incorporated by reference to the designated exhibit in the Annual Report on
Form 10-K, Commission File number 0-14394 filed May 26, 1987.
*3* Incorporated by reference to the designated exhibit in the Annual Report on
Form 10-K, Commission File number 0-14394 filed May 18, 1988.
*4* Incorporated by reference to the designated exhibit in the Annual Report on
Form 10-K, Commission File number 0-14394 filed May 25, 1990.
*5* Incorporated by reference to the designated exhibit in the Annual Report on
Form 10-K, Commission File number 0-14394 filed July 6, 1992.
*6* Incorporated by reference to the designated exhibit in the Annual Report on
Form 10-K, Commission File number 0-14394 filed May 27, 1993.
*7* Incorporated by reference to the designated exhibit in the Annual Report on
Form 10-K, Commission File Number 0-14394 filed May 24, 1995.
*8* Incorporated by reference to the designated exhibit in the Quarterly Report
on Form 10-Q, Commission File Number 0-14394 filed January 11, 1995.
#1# Incorporated by reference to the designated exhibit of the Registration
Statement on Form S-2 No. 33-25092 filed October 20, 1988.
#2# Incorporated by reference to the designated exhibit of Amendment No. 2 to
the Registration Statement on Form S-2 No. 33-25437 filed December 12, 1988.
#3# Incorporated by reference to the designated exhibit of Amendment No. 6 to
the Registration Statement on Form S-4 No. 33-49028 filed March 12, 1993.
#4# Incorporated by reference to the designated exhibit of Post-Effective
Amendment No. 2 to the Registration Statement on Form S-2 No. 33-49028 filed
July 26, 1994.
#5# Incorporated by reference to the designated exhibit of the Registration
Statement on Form S-2 No. 33-57407 filed January 23, 1995.
&1& Incorporated by reference to the designated exhibit of the Annual Proxy on
Form 14-A, Commission file number 0-014394 filed June 26, 1995.
(B) REPORTS ON FORM 8-K
No Form 8-K was issued by the Registrant during the quarter ended
February 25, 1996.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, this Registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
TOWN & COUNTRY CORPORATION
(Registrant)
Date: By: /s/ C. William Carey
C. William Carey, President
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been duly signed below by the following persons on behalf of the
Registrant and in the capacities and on the date set forth above.
Signature Title
Principal Executive Officer:
/s/ C. William Carey President, Treasurer, and
C. William Carey Director
Principal Financial and Accounting Officer:
/s/ Francis X. Correra Senior Vice President and
Francis X. Correra Chief Financial Officer
/s/ Richard E. Floor Director
Richard E. Floor
/s/ William Schawbel Director
William Schawbel
/s/ Charles Hill Director
Charles Hill
/s/ Marcia Morris Director
Marcia Morris
[This Page Intentionally Left Blank]
TOWN & COUNTRY CORPORATION AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
TOGETHER WITH AUDITORS' REPORT
Report of Independent Public Accountants
To Town & Country Corporation:
We have audited the accompanying consolidated balance sheets of TOWN &
COUNTRY CORPORATION (a Massachusetts corporation) and subsidiaries as of
February 25, 1996, and February 26, 1995, and the related consolidated
statements of operations, stockholders' equity and cash flows for each of the
three years in the period ended February 25, 1996. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Town & Country Corporation
and subsidiaries as of February 25, 1996, and February 26, 1995, and the results
of their operations and their cash flows for each of the three years in the
period ended February 25, 1996, in conformity with generally accepted accounting
principles.
Arthur Andersen LLP
Boston, Massachusetts
May 17, 1996
[Except for the matter discussed in Note 1 and Note 17 for which the date is
June 7, 1996 and May 20, 1996, respectively]
TOWN & COUNTRY CORPORATION & SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
February 25, February 26,
1996 1995
ASSETS
CURRENT ASSETS:
Cash and cash equivalents (Note 2) $ 5,151,929 $ 3,336,921
Restricted cash (Note 2) 102,012 1,889
Accounts receivable, less allowances for
doubtful accounts of $2,120,000 and
$7,780,000 at February 25, 1996 and
February 26, 1995, respectively 51,294,879 57,472,122
Inventories (Note 2) 90,138,403 80,349,412
Prepaid expenses and other current assets 1,956,537 573,611
Total current assets 148,643,760 141,733,955
PROPERTY, PLANT AND EQUIPMENT, at
cost (Note 2) 84,073,513 82,254,863
Less-Accumulated depreciation 43,814,604 39,018,645
40,258,909 43,236,218
INVESTMENT IN LITTLE SWITZERLAND, INC.
(Note 5) 1,651,482 1,651,482
INVESTMENT IN SOLOMON BROTHERS,
LIMITED (Note 6) 13,734,000 13,734,000
OTHER ASSETS (Note 2) 6,841,345 6,267,801
$211,129,496 $206,623,456
The accompanying notes are an integral part of these consolidated financial
statements.
Page F-4
TOWN & COUNTRY CORPORATION & SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (Continued)
February 25, February 26,
1996 1995
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Notes payable to banks (Note 3) $ 15,193,176 $ 11,117,827
Current portion of long-term debt
(Note 3) 244,928 1,235,477
Accounts payable 20,237,262 17,809,025
Accrued expenses (Note 2) 15,078,569 15,458,912
Accrued taxes (Notes 2 and 7) 659,744 1,352,523
Total current liabilities 51,413,679 46,973,764
LONG-TERM DEBT, less current portion
(Note 3) 93,174,432 91,437,975
OTHER LONG-TERM LIABILITIES 1,122,625 1,494,524
COMMITMENTS AND CONTINGENCIES (Note 13)
MINORITY INTEREST 5,228,363 4,617,018
EXCHANGEABLE PREFERRED STOCK,
$1.00 par value, $14.59 preference value-
Authorized--200,000 shares
Issued and outstanding--152,217
shares (Notes 3 and 4) 2,319,476 2,265,522
STOCKHOLDERS' EQUITY (Notes 3, 4, 12, 14, and 15):
Preferred stock, $1.00 par value-
Authorized and unissued--2,266,745
shares - -
Convertible Preferred Stock, $1.00 par value,
$6.50 preference value-
Authorized--2,533,255
Issued and outstanding--2,288,567 and 2,381,038
shares, respectively 2,288,567 2,381,038
Class A Common Stock, $ .01 par value-
Authorized--40,000,000 shares
Issued and outstanding--21,235,246 and 20,784,768
shares, respectively 212,352 207,848
Class B Common Stock, $.01 par value-
Authorized--8,000,000 shares
Issued and outstanding--2,664,941 shares 26,649 26,649
Additional paid-in capital 74,175,437 73,145,286
Retained deficit (18,832,084) (15,926,168)
Total stockholders' equity 57,870,921 59,834,653
$211,129,496 $206,623,456
The accompanying notes are an integral part of these consolidated financial
statements.
Page F-5
TOWN & COUNTRY CORPORATION & SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Year Ended
February 25, February 26, February 27,
1996 1995 1994
NET SALES $ 250,577,816 $ 288,114,608 $ 277,750,162
COST OF SALES 173,141,311 200,533,890 180,356,292
Gross profit $ 77,436,505 $ 87,580,718 $ 97,393,870
SELLING, GENERAL, AND
ADMINISTRATIVE EXPENSES 65,990,264 90,407,855 80,221,216
Income (loss) from operations $ 11,446,241 $ (2,827,137)$ 17,172,654
INTEREST EXPENSE (13,153,660) (12,169,615) (14,044,933)
INTEREST AND OTHER INCOME, net 678,251 234,933 698,829
GAIN ON LITTLE SWITZERLAND, INC.
EXCHANGE (Note 4) - 17,277,988 -
INCOME FROM AFFILIATES (Notes 5 and 6) - 587,814 1,262,347
MINORITY INTEREST (Note 2) (673,079) (773,901) (941,341)
Income (loss) before provision for
income taxes $ (1,702,247)$ 2,330,082 $ 4,147,556
PROVISION FOR INCOME TAXES
(Notes 2 and 7) 163,867 1,758,164 1,010,000
Net income (loss) $ (1,866,114)$ 571,918 $ 3,137,556
ACCRETION OF DISCOUNT AND DIVIDENDS
ON PREFERRED STOCKS (Notes 3 and 4) 1,039,802 1,688,019 1,453,511
Income (loss) attributable to common
stockholders $ (2,905,916)$ (1,116,101)$ 1,684,045
INCOME (LOSS) PER COMMON SHARE
(Note 2) $ (0.12)$ (0.05)$ 0.08
WEIGHTED AVERAGE COMMON SHARES
OUTSTANDING (Note 2) 23,769,323 23,433,173 21,205,949
The accompanying notes are an integral part of these consolidated financial
statements.
Page F-6
TOWN & COUNTRY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED FEBRUARY 25, 1996, FEBRUARY 26, 1995, AND FEBRUARY 27, 1994
Class A
Convertible Preferred Stock Common Stock
Number of Number of Par Value
Shares Par Value $1 Shares $.01
BALANCE, February 28, 1993 - $ - 10,000,309 $ 100,003
Share issuance related to
exchange offer - - 9,992,648 99,927
Share issuance related to purchase
commitment on senior secured notes - - 750,000 7,500
Accretion of discount on
exchangeable preferred stock (Note 3) - - - -
Net proceeds from the exercise of
options to purchase common stock
(Notes 14 and 15) - - 12,944 129
Net income - - - -
BALANCE, February 27, 1994 - $ - 20,755,901 $ 207,559
Share issuance related to Little
Switzerland, Inc. exchange 2,381,038 2,381,038 - -
Conversion of Class B Common Stock
into Class A Common Stock - - 5,752 58
Net proceeds from the exercise of
options to purchase common stock
(Notes 14 and 15) - - 23,115 231
Accretion of discount and dividends on
preferred stocks (Notes 3 and 4) - - - -
Net income - - - -
BALANCE, February 26, 1995 2,381,038 $ 2,381,038 20,784,768 $ 207,848
Conversion of Convertible Preferred Stock
into Class A Common Stock (202,277) (202,277) 404,554 4,045
Net proceeds from the exercise of
options to purchase common stock
(Notes 14 and 15) - - 45,924 459
Issuance of Convertible Preferred Stock as
payment of dividend 109,806 109,806 - -
Accretion of discount and dividends on
preferred stocks (Notes 3 and 4) - - - -
Net loss - - - -
BALANCE, February 25, 1996 2,288,567 $ 2,288,567 21,235,246 $ 212,352
(Continued on Next Page)
Page F-7
Class B
Common Stock
Additional Retained Total
Number of Par Value Paid-in Earnings Stockholders'
Shares $.01 Capital (Deficit) Equity
2,670,693 $ 26,707 $ 41,111,259 $ (16,494,113)$ 24,743,856
- - 26,755,361 - 26,855,288
- - 2,008,125 - 2,015,625
- - - (1,453,511) (1,453,511)
- - 34,740 - 34,869
- - - 3,137,556 3,137,556
2,670,693 $ 26,707 $ 69,909,485 $ (14,810,068)$ 55,333,683
- - 2,976,297 - 5,357,335
(5,752) (58) - - -
- - 27,352 - 27,583
- - 232,152 (1,688,018) (1,455,866)
- - - 571,918 571,918
2,664,941 $ 26,649 $ 73,145,286 $ (15,926,168)$ 59,834,653
- - 198,232 - -
- - 22,502 - 22,961
- - (109,806) - -
- 919,223 (1,039,802) (120,579)
- - - (1,866,114) (1,866,114)
2,664,941 $ 26,649 $ 74,175,437 $ (18,832,084)$ 57,870,921
The accompanying notes are an integral part of these consolidated financial
statements.
Page F-8
TOWN & COUNTRY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Year Ended
February 25, February 26, February 27,
1996 1995 1994
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ (1,866,114)$ 571,918 $ 3,137,556
Adjustments to reconcile net income (loss)
to net cash provided by (used in)
operating activities--
Depreciation and amortization 3,929,246 4,846,300 5,628,451
Loss (gain) on disposal of fixed assets (423,600) 73,773 (113,162)
Gain on Little Switzerland, Inc. exchange - (17,277,988) -
Undistributed earnings of affiliates, net
of minority interest 673,080 186,087 (227,894)
Interest paid with issuance of debt
(Note 3) 4,200,569 7,647,666 3,495,571
Ordinary dividends received from affiliate - - 2,045,532
Change in assets and liabilities--
(Increase) decrease in accounts
receivable 6,177,243 (1,848,704) (4,004,014)
(Increase) decrease in inventories (9,788,991) (5,320,015) (1,595,015)
(Increase) decrease in prepaid
expenses and other current assets (1,382,926) 3,418,272 2,467,636
(Increase) decrease in other assets (892,991) 6,542,404 3,722,423
Increase (decrease) in accounts payable 2,428,237 5,081,668 1,904,443
Increase (decrease) in accrued expenses (380,343) (4,597,420) 2,190,050
Increase (decrease) in accrued and
deferred taxes (692,779) 478,270 488,181
Increase (decrease) in other liabilities (371,899) (599,231) (1,162,891)
Net cash provided by (used in)
operating activities $ 1,608,732 $ (797,000)$ 17,976,867
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of fixed assets $ 996,610 $ 45,331 $ 222,746
Capital expenditures (2,734,122) (2,759,204) (4,056,307)
Proceeds from sale of investments - - 3,486,000
Net cash used in
investing activities $ (1,737,512)$ (2,713,873)$ (347,561)
The accompanying notes are an integral part of these consolidated financial
statements.
Page F-9
TOWN & COUNTRY CORPORATION & SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
For the Year Ended
February 25, February 26, February 27,
1996 1995 1994
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments on revolving credit facilities $ (257,779,581)$ (279,990,373)$ (206,869,004)
Proceeds from borrowings under
revolving credit facilities 261,854,934 291,108,200 206,869,004
Decrease (increase) in restricted cash (100,123) 36,082 (37,971)
Payments to retire credit facility - - (37,250,000)
Proceeds from senior secured notes - - 30,000,000
Payments on other debt (1,926,044) (7,607,575) (13,666,180)
Payment of dividends (128,359) - (534,617)
Proceeds from the issuance of common stock 22,961 27,584 34,869
Payments for recapitalization expenses - - (8,254,790)
Net cash provided by (used in)
financing activities $ 1,943,788 $ 3,573,918 $ (29,708,689)
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS $ 1,815,008 $ 63,045 $ (12,079,383)
CASH AND CASH EQUIVALENTS AT
BEGINNING OF YEAR 3,336,921 3,273,876 15,353,259
CASH AND CASH EQUIVALENTS AT END
OF YEAR $ 5,151,929 $ 3,336,921 $ 3,273,876
SUPPLEMENTAL CASH FLOW DATA:
CASH PAID DURING THE YEAR FOR:
Interest $ 9,758,857 $ 4,908,642 $ 6,104,397
Income taxes $ 806,463 $ 1,119,864 $ 589,730
SUPPLEMENTAL DISCLOSURES OF NONCASH INVESTING AND FINANCING ACTIVITIES (Note 2)
The accompanying notes are an integral part of these consolidated financial
statements.
Page F-10
TOWN & COUNTRY CORPORATION & SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FEBRUARY 25, 1996
(1) REFINANCING
On June 7, 1996, the Company received a commitment letter to enter into a new
credit agreement from Foothill Capital Corporation ("Foothill"). The agreement
would provide senior secured financing consisting of a $40 million revolving
credit facility and a $30 million letter of creditin support of a Gold
Consignment Facility provided by Fleet Precious Metals ("Fleet"); however, the
aggregate amount of the combined facilities which may be outstanding at any date
is $65 million. The agreement would be for a period of two years and provides
Foothill with an option to renew for three additional years. The loans will bear
interest at a rate per annum equal to the greater of (a) 2% above the reference
rate announced by an identified group of major banks selected by Foothill or (b)
8%. The agreement will contain standard covenants for facilities of this type
including financial covenants relating to interest coverage, minimum net worth,
minimum working capital, debt to net worth and current ratios and limitations on
dividends, distributions and capital expenditures. Advances under the credit
line will be based on eligible accounts receivables and inventory. Foothill will
have first security priority interest in receivables, inventory and
substantially all real estate and fixed assets owned by the Company and its
domestic subsidiaries subject to Fleet's first position as gold consignor
supported by the letter of credit. The Company believes that it can meet its
working capital needs over the next year through cash flow from operations and
the use of funds available under this new credit facility. The closing of this
agreement is subject to finalization of documentation.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of the
Company and its controlled domestic and foreign subsidiaries. All significant
intercompany transactions have been eliminated.
Reclassifications
Certain reclassifications have been made to the prior years' financial
statements to conform with the presentation of the fiscal 1996 financial
statements.
Cash and Cash Equivalents
Cash equivalents include highly liquid investments with original maturities of
three months or less.
Investments
On March 1, 1994, the Company adopted the Financial Accounting Standard Board's
Statement of Financial Accounting Standards (SFAS) No. 115, "Accounting for
Certain Investments in Debt and Equity Securities." SFAS No. 115 addresses the
accounting and reporting for investments in equity securities that have readily
determinable fair market values and for all investments in debt securities. The
Company's financial condition and results of operations were not materially
impacted in fiscal 1995 as a result of adopting SFAS No. 115.
Long-Lived Assets
For the fiscal year beginning on February 26, 1996, the Company is required to
adopt SFAS No. 121 "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed of" . SFAS No. 121 addresses accounting and
reporting requirements for long-term assets bas on their fair market values. The
Company has not evaluated the impact on its financial condition and results of
operations as a result of adopting SFAS No. 121.
Stock Options
For the fiscal year beginning on February 26, 1996, the Company is required to
adopt SFAS No. 123 "Accounting for Stock-Based Compensation" . SFAS No. 123
addresses accounting and reporting requirements for stock options and other
equity instruments issued or granted based on their fair market values. The
Company has not evaluated the impact on its financial condition and results of
operations as a result of adopting SFAS No. 123.
Restricted Cash
Restricted cash includes cash payments from the Company's investment in Solomon
Brothers, Limited and cash proceeds with respect to the Zale bankruptcy claim.
These funds are escrowed for the benefit of the holders of the Senior Secured
Notes. During fiscal 1996 and fiscal 1995, approximately $0.7 million and $6.3
million, respectively, of Senior Secured Notes were redeemed with such proceeds.
Foreign Currency
The Company is subject to fluctuating foreign currency exchange rates which are
reflected currently in the consolidated statements of operations. Transaction
and exchange gains and losses have not been material to the consolidated
financial position or results of operations for the three years ended February
25, 1996.
Inventories
Inventories, which include materials, labor and manufacturing overhead, are
stated at the lower of cost or market using the first-in, first-out (FIFO)
method.
Inventories consisted of the following at February 25, 1996, and February 26,
1995:
1996 1995
Raw materials $14,820,768 $16,932,724
Work-in-process 9,947,057 8,266,255
Finished goods 65,370,578 55,150,433
$90,138,403 $80,349,412
The effects of gold price fluctuations are mitigated by the use of a consignment
program with bullion dealers. The Company's intention is that as the gold
selling price for orders is confirmed, the Company purchases the gold
requirements at the then current market prices; any additional requirements for
gold are held as consignee. The Company attempts to match the price it pays for
gold with the price it charges its customers. The Company pays a fee, which is
subject to periodic change, for the value of the gold it holds on consignment
during the period prior to sale. For the years ended February 25, 1996, February
26, 1995, and February 27, 1994, these fees totaled approximately $1.4 million,
$1.4 million, and $1.5 million, respectively.
The Company does not include the value of consigned gold in inventory or the
corresponding liability in borrowings for financial statement purposes. As of
February 25, 1996, and February 26, 1995, the Company held approximately 63,000
ounces, valued at $24.9 million, and 67,000 ounces, valued at $25.4 million,
respectively, of gold on consignment under its domestic gold agreements. A
foreign subsidiary of the Company held an additional 3,100 ounces, valued at
$1.2 million, and 5,000 ounces, valued at $1.8 million, outstanding at February
25, 1996, and February 26, 1995, respectively, under a separate consignment
agreement (Note 3).
Advertising
The Company expenses the costs of advertising as incurred, except for certain
direct-response advertising costs, which are capitalized and amortized over
their expected period of future benefits.
At February 25, 1996, February 26, 1995, and February 27, 1994, advertising
expense was approximately $5.8 million, $14.2 million and $11.0 million,
respectively. At February 25, 1996 and February 26, 1995, no advertising costs
were capitalized.
Property, Plant and Equipment
The Company provides for depreciation, principally on the straight-line method,
at rates adequate to depreciate the applicable assets over their estimated
useful lives which range from 3 to 40 years. Certain equipment is depreciated
using the declining balance method.
Property and equipment consisted of the following at February 25, 1996, and
February 26, 1995:
Useful Life
Ranges 1996 1995
Real estate 10 - 40 Years $28,991,637 $29,746,327
Furniture and fixtures 3 - 7 Years 3,754,091 3,564,753
Equipment 3 - 20 Years 46,161,078 44,358,277
Leasehold improvements 4 - 20 Years 4,795,245 4,450,876
Construction-in-progress 371,462 134,630
$84,073,513 $82,254,863
Accrued Expenses
The principal components of accrued expenses at February 25, 1996, and February
26, 1995, are as follows:
1996 1995
Compensation and related costs $4,721,395 $5,458,037
Customer deposits 4,824,697 4,130,663
Interest 3,088,712 2,940,499
Commissions 517,606 545,659
Other 1,926,159 2,384,054
$15,078,569 $15,458,912
Income Taxes
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases. Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. The effect on deferred tax
assets and liabilities of a change in tax rates is recognized in income in the
period that includes the enactment date.
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Income (Loss) Per Common Share
Income (loss) per common share is computed based on the weighted average number
of common and common equivalent shares, where dilutive, outstanding during each
period. Common equivalent shares result from the assumed exercise of stock
options and warrants.
Long-term Intangible Assets
The excess of purchase price over the values assigned to net assets acquired is
being amortized using the straight-line method over periods ranging from 30 to
40 years. The Company continually evaluates whether events and circumstances
have occurred that indicate that the remaining estimated useful life of goodwill
may warrant revision or that the remaining balance of goodwill may not be
recoverable. When factors indicate that goodwill should be evaluated for
possible impairment, the Company uses an estimate of the related business
segments' undiscounted operating income over the remaining life of the goodwill
in measuring whether the goodwill is recoverable. Accumulated amortization was
approximately $3,286,000 and $3,103,000 at February 25, 1996, and February 26,
1995, respectively.
Minority Interest
Minority interest is determined based on the percent ownership of the equity by
other investors of the related consolidated subsidiary.
Subsidiary Sale of Stock
At the time a subsidiary sells its stock to unrelated parties at a price in
excess of its book value, the Company's net investment in that subsidiary
increases. The Company records the increase as a gain in the consolidated
statement of operations.
Supplemental Disclosures of Noncash Investing and Financing Activities
In fiscal 1994, as payment for the commitment to purchase up to 100% of the
Company's Senior Secured Notes, an investor received 750,000 shares of the
Company's Class A common stock with a value of $2,015,625 at the time of
issuance.
The Company completed a recapitalization on May 14, 1993 (See Note 3).
During fiscal 1995, the Company had fixed asset additions of approximately $.7
million funded by increases in capital lease obligations.
On November 23, 1994, holders of approximately 94% of the Company's Exchangeable
Preferred Stock exchanged their shares for shares of Little Switzerland, Inc.
common stock held by the Company and shares of the Company's Convertible
Preferred Stock (See Note 4).
Financial Instruments
Cash and Cash Equivalents
The carrying amount of cash and cash equivalents approximates fair value because
of the short-term maturity of the instruments.
Restricted Cash
The Company's restricted cash is invested in short-term, highly-liquid
investments. The carrying amount approximates fair value because of the
short-term maturity of these investments.
Investment in Little Switzerland, Inc.
The Company owns 318,962 shares of Little Switzerland, Inc. Common Stock as of
February 25, 1996. Of these shares, 152,217 are held by a trustee for the
benefit of the holders of the Company's Exchangeable Preferred Stock and are
considered held-to-maturity. The remaining shares owned by the Company are
considered available-for-sale. The Company believes that the carrying value
approximates the fair value of these securities.
Investment in Solomon Brothers, Limited
The fair value of the Company's investment in Solomon Brothers, Limited is
considered to be equal to its carrying value as of February 25, 1996, based on
the valuation method agreed upon for the redemption of shares as discussed in
Note 6 and the estimated fair value of the underlying net assets.
Long-Term Subordinated Debt and Exchangeable Preferred Stock
The Company believes that the fair value of the Company's long-term subordinated
debt and Exchangeable Preferred Stock approximates its carrying value as of
February 25, 1996, based on the valuation methodology required for the
recapitalization.
Long-Term Secured Debt
The fair value of the Company's various long-term secured debt, which are
secured by various assets, are considered to approximate their carrying value as
of February 25, 1996. This conclusion is based on the relationship of carrying
value to the value of the related security and the relatively short-term
maturities of the related debt.
(3) LONG-TERM DEBT AND CREDIT ARRANGEMENTS
Long-term debt at February 25, 1996, and February 26, 1995, consists of the
following:
Town & Country Corporation 1996 1995
Senior Subordinated Notes due 1998
with interest payable semiannually at
13%, including unamortized premium
of $4.0 million and $5.6 million in
1996 and 1995, respectively. The first
four interest payments were made with
issuance of additional notes of
approximately $15.3 million. $72,843,528 $70,185,718
Senior Secured Notes due 1997 with
interest payable monthly at 11.5%.
Payments required prior to maturity for
proceeds received by the Company related
to the Company's investment in Solomon
Brothers, Limited and/or settlement of
the Zale bankruptcy claim and certain
other limited conditions. 13,254,000 13,947,000
Senior Subordinated Notes due 1998 with
interest payable semiannually at 13%,
net of unamortized discount of $37,248
and $47,868 in 1996 and 1995,
respectively. 6,922,752 6,912,132
Subordinated Notes due 1995 with
interest payable semiannually at
10 1/4%, net of unamortized original
issue discount of $3,519 in 1995. $ - $ 447,481
Subsidiaries
Obligation under New York City
Industrial Development Agency
industrial revenue bond. Quarterly
interest determined at 75% above
Chemical Bank's "reference" rate
(9% at February 26, 1995). - 383,358
Obligation under New York City
Industrial Development Agency
industrial revenue bond. Quarterly
interest determined at 1.25% above
Chemical Bank's "reference" rate
(9% at February 26, 1995). - 164,682
Lease obligation for office furniture
and equipment payable in monthly
installments with interest at 9.67% 399,080 621,524
Other notes - 11,557
$93,419,360 $92,673,452
Less-Current portion 244,928 1,235,477
$93,174,432 $91,437,975
On May 14, 1993, the Company completed a recapitalization. The recapitalization
was accounted for as a "troubled debt restructuring" under Statement of
Financial Accounting Standards No. 15, "Accounting by Debtors and Creditors for
Troubled Debt Restructurings," whereby the net carrying value of the old debt
was allocated to the new securities, issued in the recapitalization, based on
their estimated, relative, fair market values, and no gain or loss was
recognized. Recapitalization costs were expensed as incurred.
As a result of this transaction, long-term debt with a carrying value of
$122,673,945, including deferred financing costs, was retired. New debt with a
carrying value of $61,486,762, exchangeable preferred stock valued at
$34,331,895, and common stock valued at $26,855,288 were issued in exchange for
these redemptions.
On May 14, 1993, the Company entered into a revolving credit facility with
Foothill Capital Corporation ("Foothill") providing senior secured financing in
an aggregate amount of up to $30 million. The line of credit matured on May 14,
1996, and was automatically renewed for a two year period. The loans bear
interest at a rate per annum equal to the greater of (a) 2% above the reference
rate (the highest "prime rate" or "reference rate" announced by an identified
group of major banks) selected by Foothill or (b) 8%. The agreement contains the
standard covenants for facilities of this type including, without limitation,
financial covenants relating to interest coverage, minimum net worth, minimum
working capital, debt to net worth and current ratios, and limitations on
dividends and distributions, dispositions of assets and capital expenditures.
Advances under the credit facility are based on eligible receivables and
inventory. Foothill has a first priority security interest in receivables,
certain inventory, primarily stones and diamonds, and substantially all real
estate and fixed assets owned by the Company and its domestic subsidiaries. The
Company had $15 million outstanding under its revolving credit agreement, at an
effective interest rate of 11.6% at February 25, 1996. The Company had $15
million of additional borrowings available under its revolving credit agreement
as of February 25, 1996.
On May 14, 1993, the Company entered into gold agreements with its gold
suppliers providing secured gold consignment availability of up to approximately
100,000 troy ounces. The agreements are terminable upon thirty days' written
notice and contain the standard covenants for facilities of this type including,
without limitation, financial covenants relating to interest coverage, minimum
net worth, minimum working capital, debt to net worth and current ratios, and
limitations on dividends and distributions and first priority security interest
in the precious metal content of inventory. During fiscal 1995, the Company
agreed to reduce its gold consignment facilities to approximately 73,000 ounces,
and during fiscal 1996, further agreed to reduce its gold consignment facility
to approximately 67,000 ounces. The Company had approximately 63,000 troy ounces
on consignment at February 25, 1996. In connection with these reductions, some
modifications were made to the financial covenants in the gold consignment
agreements with the Company's gold suppliers. Subsequent to year-end, the
Company agreed to reduce its gold facility to approximately 63,000 ounces.
During the second quarter of fiscal 1995, modifications to the consolidated
tangible net worth covenant were made in the revolving credit and gold
agreements. The covenant previously provided that the Company was required to
maintain consolidated tangible net worth of $38,000,000 through February 27,
1994, and $43,000,000 thereafter. As amended, the covenant provides that the
Company maintain consolidated tangible net worth of $40,000,000 from July 1,
1994, through November 26, 1994, and $43,000,000 thereafter.
As of February 25, 1996, the Company was not in compliance with certain
covenants under its revolving credit and gold agreements and such events of
noncompliance have been waived. Subsequent to year end, the Company received a
commitment letter from Foothill as described in Note 1.
On May 14, 1993, the Company issued $30 million of Senior Secured Notes due
September 15, 1997. Following receipt, by the Company, of cash payments from the
Company's investment in Solomon Brothers, Limited and/or cash or other payments
from the Zale Companies with respect to the Zale bankruptcy claim, net of
certain expenses, the Company is required to redeem an amount of the notes equal
to the amount of such net proceeds at a redemption price equal to 100% of the
principal amount thereof plus accrued interest, if any. During fiscal 1996 and
fiscal 1995, the Company redeemed $0.7 million and $6.3 million, respectively,
of Senior Secured notes with such proceeds. In the event that the Company's
consolidated net worth declines below a defined minimum (75% of net worth at May
31, 1993, plus 37.5% of net income for each fiscal year thereafter) for two
consecutive quarters, the Company is required to make an offer to redeem 7.5% of
the outstanding notes semiannually and to continue to do so as long as the
condition persists.
On May 14, 1993, the Company issued approximately 2,533,000 shares of
Exchangeable Preferred Stock, the outstanding shares of which will be redeemed
by the Company on December 31, 2000, for $14.59 per share plus accrued and
unpaid dividends payable in cash or shares of Little Switzerland, Inc. common
stock. No dividends will be paid until after the second anniversary of the date
of issuance of the stock. Thereafter, holders will be entitled to receive
cumulative cash dividends at a rate of 6% per annum based on $14.59 per share.
Dividends will be payable semiannually on each six-month and twelve-month
anniversary of the issuance date. During fiscal 1996, $66,625 of dividends were
paid. At any time after March 1, 1994, each share of Exchangeable Preferred
Stock may be exchanged by the holder for a share of Little Switzerland, Inc.
common stock held by the Company or redeemed by the Company, for cash, at a
declining premium through 1998 (See Note 4). At February 25, 1996, cumulative
unpaid dividends amounted to $38,865. For the years ended February 25, 1996, and
February 26, 1995, accretion of dividends and discount on Exchangeable Preferred
Stock amounted to $120,579 and $1,455,866, respectively.
A subsidiary of the Company has available credit line facilities with two banks
in Thailand to provide aggregate commercial financing of up to approximately
$13.3 million. The subsidiary had no balance outstanding under these lines at
February 25, 1996, and February 26, 1995, respectively. This subsidiary also has
an agreement with a gold supplier to provide secured gold consignment
availability of up to approximately 4,800 troy ounces. This agreement runs
through December 10, 1996, and is secured by a standby letter of credit for $3.4
million under one of the subsidiary's credit facilities. There were
approximately 3,100 ounces on consignment under this gold agreement at February
25, 1996.
On April 3, 1995, the Company repaid approximately $181,000 of its obligation
under the New York City Industrial Revenue Development Agency industrial revenue
bonds ("IRB"). On April 3, 1995, the remaining obligation, approximately
$367,000, was purchased by Foothill. As a result of this transaction, the
Company was required to make quarterly payments on the IRB to Foothill.
Additionally, the interest rate for the outstanding bonds was modified to be the
same as that on the Company's revolving line of credit. On February 22, 1996,
the Company repaid its remaining obligation under the IRB, approximately
$317,000, to Foothill.
Aggregate maturities of long-term debt for each of the next five years are
approximately $245,000, $13,408,000, $75,785,000, $0 and $0, respectively.
(4) EXCHANGE OF STOCK
On November 23, 1994, holders of approximately 94% of the Company's Exchangeable
Preferred Stock exchanged their shares for shares of Little Switzerland, Inc.
Common Stock held by the Company on a share-for-share basis. Such an exchange
was provided for by the terms of the Exchangeable Preferred Stock. In addition,
the Company issued to each participant one share of new Convertible Preferred
Stock with each share of Little Switzerland, Inc. Common Stock.
Since the carrying value of the Company's investment in Little Switzerland, Inc.
was substantially less than the recorded value of the Exchangeable Preferred
Stock, the transaction resulted in a nonrecurring, noncash gain of approximately
$17 million, net of the estimated fair value of the Convertible Preferred Stock
issued.
Convertible Preferred Stock
Each share of Convertible Preferred Stock is initially convertible, at the
option of the holder, into two shares of Class A Common Stock, subject to
adjustment in certain circumstances. In the event the market price of a share of
Class A Common Stock equals or exceeds $3.25 for 30 consecutive trading days,
the Company may require the holders of Convertible Preferred Stock to convert
such stock into shares of Class A Common Stock at the then-applicable conversion
rate. Beginning on November 23, 1995, the Company may redeem, in whole or in
part, shares of Convertible Preferred Stock at a price equal to 104% of the
liquidation value and thereafter at prices declining annually to 100% of the
liquidation value on or after November 23, 1997. The Convertible Preferred Stock
has a liquidation value of $6.50 per share and accrues cumulative dividends at
the rate of 6% of the liquidation value per annum. Dividends are payable in cash
or in additional shares of Convertible Preferred Stock as defined by the
agreement. During fiscal 1996, dividends of approximately $713,000 were paid
with the issuance of approximately 110,000 new shares of Convertible Preferred
Stock. At February 25, 1996, and February 26, 1995, cumulative unpaid dividends
amounted to $438,129 and $232,152, respectively.
The Convertible Preferred Stock is subordinate on liquidation and with respect
to dividend payments to the outstanding shares of Exchangeable Preferred Stock
but senior to the Class A Common Stock and the Class B Common Stock. Holders of
shares of Convertible Preferred Stock are entitled to vote on all matters on
which the holders of Class A Common Stock are entitled to vote. Each share of
Convertible Preferred Stock entitles the holder to the number of votes per share
equal to the number of shares of Class A Common Stock into which each share of
Convertible Preferred Stock is then convertible.
The Company has agreed with the holders of the Convertible Preferred Stock to
register such stock (and the Class A Common Stock into which it is convertible)
under the Securities Act and to keep such registration effective until the
earlier of (i) the date on which such holders no longer own any of such
securities or (ii) the date on which each of the holders has notified the
Company that such holder may dispose of all of its securities pursuant to Rule
144(k) under the Securities Act. The effectiveness of the registration statement
covering these shares was suspended by the Company on March 28, 1996.
(5) INVESTMENT IN LITTLE SWITZERLAND, INC.
The sale of approximately 68% of Little Switzerland, Inc.'s common stock by a
subsidiary of the Company resulted in the deconsolidation of Little Switzerland,
Inc. in the fiscal 1992 consolidated financial statements of the Company. The
continuing investment in Little Switzerland, Inc. is now classified as a
long-term asset in the accompanying consolidated balance sheets.
As a result of the exchange discussed in Note 4, the Company's investment in
Little Switzerland, Inc., as of November 23, 1994, was reduced to 318,962 shares
or approximately 4%. Due to the decrease in ownership, the Company has changed
its method of accounting for this investment from the equity method to the cost
method.
(6) INVESTMENT IN SOLOMON BROTHERS, LIMITED
On May 27, 1988, the Company purchased 410,000 shares of nonvoting, redeemable,
cumulative, Participating Preferred Class B Stock of Solomon Brothers, Limited
("Solomon Brothers"), a Bahamian company, for a total purchase price of
$17,220,020.
The Company is entitled, as holder, to a fixed, cumulative, preferred dividend
equal to 1% of the purchase price annually. The Company is also entitled to a
cumulative, ordinary dividend equal to the change in net book value per ordinary
share of Solomon Brothers, calculated as if the Company was a holder of ordinary
shares, less the preferred dividend and to a fee determined as a percent of
cumulative, accrued, unpaid ordinary dividends. The combined dividend rate for
the periods ended February 25, 1996, February 26, 1995, and February 27, 1994,
was approximately 0%, 0% and 1.1%, respectively. The Company received
distributions of $2,045,532 of previously accrued but unpaid ordinary dividends
during fiscal 1994. On May 31, 1993, the Company redeemed 83,000 of the
Company's shares for approximately $3.5 million. On March 29, 1994, March 20,
1995, and April 4, 1996, as required by the covenants of its Senior Secured
Notes, the Company gave written notice to Solomon Brothers of the Company's
intention to redeem 70,000, 55,000 and 55,000 additional shares, respectively.
Solomon Brothers informed the Company that it would not be able to redeem the
March, 1994, March, 1995, and April, 1996, share requests when due, as a result
of constraints imposed by its banking facilities. The Company believes its
investment is realizable, but it is unable to estimate the timing of future
redemption payments. The Company is monitoring Solomon Brothers' operations and
financial position and if it determines in the future that carrying value is no
longer reflective of fair value, appropriate adjustments will be made.
Presented below is summarized financial information for Solomon Brothers as of
and for the years ended October 27, 1995, October 28, 1994 and October 29, 1993,
prepared on a basis substantially in accordance with generally accepted
accounting principles (GAAP) (Bahamian Dollars, $000s):
1995 1994 1993
Working capital $13,556 $15,094
Total assets 64,165 73,378
Total shareholders' equity 24,101 27,828
Sales $69,952 $63,657 $87,709
Net income (loss) (3,728) 54 (15,539)
Cash flows from operating
activities 3,946 (2,346) 3,856
Solomon Brothers' fiscal 1994 information has been restated for consistency
purposes for operations which were discontinued in fiscal 1995. Restated
information was not available for fiscal 1993.
(7) INCOME TAXES
The domestic and foreign components of income (loss) before provision for income
taxes for the years ended February 25, 1996, February 26, 1995 and February 27,
1994, are as follows:
1996 1995 1994
Domestic $(2,859,405) $(1,014,997) $ 221,748
Foreign 1,157,158 3,345,079 3,925,808
$(1,702,247) $ 2,330,082 $4,147,556
The components of the provision for income taxes for the years ended February
25, 1996, February 26, 1995 and February 27, 1994, are as follows:
1996 1995 1994
Current--
Federal $ - $ - $ -
State - 700,000 636,449
Foreign 163,867 1,058,164 373,551
Total provision $163,867 $1,758,164 $1,010,000
The Company's effective tax rate differs from the federal statutory rate of 35%
in fiscal 1996, 1995 and 1994 due to the following:
1996 1995 1994
Computed tax provision
(benefit) at statutory rate $(595,786) $815,529 $1,451,645
Increases (reductions)
resulting from--
Difference between U.S.
and foreign tax rates 221,023 1,061,886 378,940
State taxes - 700,000 636,449
Tax basis differences related to
Little Switzerland, Inc.
common stock exchange - (2,110,946) -
Items not deductible for
income tax purposes 92,488 92,488 65,378
(Utilization) deferral of net
operating losses 446,142 1,199,207 (1,522,412)
163,867 $1,758,164 $1,010,000
DEFERRED TAX ASSETS (in 000's) 1996 1995
Restructuring and recapitalization cost accruals $ 2,287 $4,227
Accounts receivable reserves 2,617 4,120
Accrual for loss on assets held for sale or disposal 561 742
Inventories 1,815 1,265
Other 1,945 1,640
Net operating loss carryforwards 19,666 14,810
Total gross deferred tax assets 28,891 26,804
Less--valuation allowance (17,885)(14,782)
Net deferred tax assets $11,006 $12,022
DEFERRED TAX LIABILITIES (in 000's) 1996 1995
Property, plant and equipment, principally due to
differences in depreciation $ 5,629 $6,121
Investments in affiliated companies, principally
due to undistributed income 4,971 5,479
Other 406 422
Total deferred tax liabilities 11,006 12,022
Net deferred tax asset (liability) $ - $ -
The valuation allowance relates to uncertainty surrounding the realizability of
the deferred tax assets in excess of the deferred tax liabilities, principally
the net operating loss carryforwards.
For tax reporting purposes, the Company has a U.S. net operating loss
carryforward of approximately $49 million, subject to Internal Revenue Service
review and approval. In addition, net operating loss carryforwards of
approximately $1,500,000 were generated by a U.S. subsidiary prior to its
acquisition by the Company. Utilization of the subsidiary's net operating loss
carryforward is contingent on the subsidiary's ability to generate income in
future years. The net operating loss carryforwards will expire from 2009 to 2010
if not utilized.
(8) LOSS ON ASSETS HELD FOR SALE OR DISPOSAL
In fiscal 1993, the Company's management decided to make changes with respect to
certain of the operations of its Balfour subsidiary. As a result of this
decision, the Company recognized a pretax charge of $14.5 million in the fourth
quarter of fiscal 1993 to reserve for the losses associated with the disposal of
certain inventory and fixed assets, including property, plant, and equipment of
approximately $12.9 million and intangible assets of approximately $1.6 million,
no longer considered necessary to its modified business. At February 25, 1996,
the disposals have been substantially completed and the remaining reserve, of
approximately $1.4 million, represents the expected loss associated with the
disposition of the plant site which is being prepared for sale to the Town of
Attleboro.
(9) ZALE CORPORATION AND AFFILIATES
The Company's largest customer for a number of years has been the Zale
Corporation and its affiliated companies. Sales to the Zale Companies were
approximately $22 million or 9% of consolidated sales in fiscal 1996 compared to
approximately $29 million or 10% of consolidated sales in fiscal 1995 and
compared to $33 million or 12% of consolidated sales in fiscal 1994.
The Company's Consolidated Financial Statements at February 28, 1992, originally
reflected a net valuation, related to Zale Corporation's bankruptcy filing under
Chapter 11 of the United States Bankruptcy Code, of approximately $13 million,
which was classified as Other Assets in the Consolidated Balance Sheets, due to
the uncertainty of the timing of a final settlement. The Company subsequently
received proceeds from Zale and from liquidation of claim assets of
approximately $14.5 million and has recognized benefits in selling, general and
administrative expenses in the accompanying statement of operations, of
approximately $1.5 million in fiscal 1996.
(10) CONCENTRATION OF CREDIT RISK
A significant portion of the Company's business activity is with large jewelry
retailers and department store chains, many of which are not only subject to the
risks associated with economic impacts on retailers of discretionary, consumer
goods but also are companies with high debt-to-equity ratios.
(11) NONRECURRING EVENTS
Based on the success of its operational restructuring during fiscal 1993, the
Company concluded that the Feature facility in New York will not be required as
a long-term manufacturing site. The Company expects to maintain a continuing
presence in New York in the form of sales and marketing functions, product
development, and manufacturing support services, including a repair function and
subcontractor control operations. These functions will remain in the Feature
facility until the Company is able to sell the facility at a price which it
considers acceptable. As a result of its decision to dispose of the facility,
the Company adjusted the carrying value of the Feature facility by approximately
$5 million, which was recorded as a restructuring charge during the fourth
quarter of fiscal 1993. As of February 25, 1996, the Company has not sold this
facility.
(12) CAPITALIZATION
Each share of Class B Common Stock entitles the holder to ten votes, each share
of Class A Common Stock entitles the holder to one vote, and each share of
Convertible Preferred Stock entitles the holder to the number of votes per share
equal to the number of shares of Class A Common Stock into which each share of
Convertible Preferred Stock is then convertible, on matters submitted to
stockholders. The Class B Common Stock is convertible at any time, at the option
of the holder, into Class A Common Stock on a share-for-share basis. The
Convertible Preferred Stock is initially convertible, at the option of the
holder, into two shares of Class A Common Stock, subject to adjustment in
certain circumstances. As part of the recapitalization, the Company issued to
its financial advisors warrants to purchase 125,000 shares of Class A Common
Stock, with an exercise price of $2.685 per share and a final maturity of five
years from the date of issuance of the warrants.
The Company's ability to pay cash dividends is limited by its financing and
other outstanding indebtedness. As a result of these restrictions, the Company
currently may not pay cash dividends.
(13) COMMITMENTS AND CONTINGENCIES
The Company leases a portion of its Chelsea, Massachusetts, facility comprised
of approximately 39,000 square feet of combined manufacturing and administrative
space from Carey Realty Trust, a Massachusetts business trust (the "Trust"),
which is wholly owned by C. William Carey, the Chairman, President and a major
stockholder of the Company. The lease which was revised on March 1, 1996,
expires on August 31, 1998, and provides the Company with three ten-year options
to renew. The current lease provides for an annual rental payment of
approximately $350,000. The Company obtained comparative information from a
third party when negotiating the revised lease and believes that these lease
arrangements are on terms no less favorable to the Company than could be
obtained from unaffiliated third parties.
Certain other Company facilities and equipment are leased under agreements
expiring at various dates through 2009. The Company's commitments under the
noncancelable portion of all operating leases for the next five years and in
total thereafter at February 25, 1996, are approximately as follows:
Year Total Commitment
1997 $1,908,000
1998 1,771,000
1999 1,453,000
2000 1,208,000
2001 1,119,000
Thereafter 7,579,000
Lease and rental expense included in the accompanying consolidated statements of
operations amounted to approximately $1,919,000, $1,414,000 and $1,090,000 for
the years ended February 25, 1996, February 26, 1995 and February 27, 1994,
respectively.
A subsidiary of the Company is a party to certain contracts with some of its
sales representatives whereby the representative has purchased the right to sell
the subsidiary's products, in a territory, from his predecessor. The contracts
generally provide that the value of these rights is primarily determined by the
amount of business achieved by a successor sales representative and is therefore
not determinable in advance of performance by the successor sales
representative.
The Company is not party to any pending legal proceedings, other than ordinary
routine litigation incidental to the business. In management's opinion, adverse
decisions on those legal proceedings, in the aggregate, would not have a
materially adverse impact on the Company's consolidated results of operations or
financial position.
(14) STOCK OPTION PLAN
The Company has three active stock option plans.
An aggregate of 1,500,000 shares of Class A Common Stock were registered for
issuance under the 1985 Amended and Restated Stock Option Plan (the "1985
Plan"). Both incentive stock options and nonstatutory stock options were granted
under the 1985 Plan. All options outstanding were issued at fair market value at
the date of grant. On September 19, 1995, options under the 1985 Plan were
repriced at $0.8125, the market price on that date. Granting of options under
this plan expired in April, 1995.
An aggregate of 2,000,000 shares of Class A Common Stock were registered for
issuance under the 1995 Stock Option and Incentive Plan (together with the 1985
Plan, the "Employee Plans"). Stock options, stock appreciation rights,
restricted stock, performance shares, unrestricted stock and dividend equivalent
rights may be granted under this plan.
The Company also has a stock plan for non-employee directors, the 1994
Non-Employee Directors' Nonqualified Stock Option Plan (the Directors' Plan).
Each Director received a one-time grant of 20,000 shares of common stock on
October 1, 1994. New directors elected after that date receive 20,000 shares
upon their election. Each non-employee director who is a director on the last
day of the Company's fiscal year which is more than four full years after the
date of their initial grant date will be granted an option to purchase 4,000
additional shares of Class A Common Stock. All such options are immediately
exercisable at the fair market value of Class A Common Stock on the date of
issuance. The Company has set aside 200,000 shares of stock for issuance under
the Directors' Plan.
The following table summarizes the stock option transactions under the Company's
option plans for the three years ended February 25, 1996:
Employee Directors' Price Range
Plans Plan Per Share
Options Outstanding at
February 28, 1993 758,500 - $2.38 - $8.00
Options granted 50,000 - 2.63
Options canceled (70,100) - 3.00 - 5.63
Options exercised - -
Options Outstanding at
February 27, 1994 738,400 - $2.38 - $8.00
Options granted 598,500 60,000 2.31 - 2.38
Options canceled (482,750) - 2.38 - 8.00
Options exercised - -
Options Outstanding at
February 26, 1995 854,150 60,000 $2.31 - $6.88
Options granted 1,680,000 20,000 0.01 - 0.81
Options canceled (170,450) - 0.81 - 2.38
Options exercised - -
Options Outstanding at
February 25, 1996 2,363,700 80,000 $0.01 - $0.81
Options Excercisable at
February 25, 1996 542,400 80,000
At February 25, 1996, there were 350,000 shares reserved for future grants under
the 1995 Employee Plan and 120,000 shares reserved for grant under the
Directors' Plan.
The Company has also granted options not under any plan to consultants and
various individuals to purchase up to 2,580,000 of Class A Common Stock at
prices ranging from $0.81 to $6.75 per share. On September 19, 1995, non-plan
options granted to employees of the Company were repriced at $0.8125, the market
price on that date.
(15) EMPLOYEE STOCK PURCHASE PLAN
On January 25, 1988, the Board of Directors adopted the 1988 Employee Stock
Purchase Plan (the "Stock Purchase Plan") for 500,000 shares of the Class A
Common Stock. Under the Stock Purchase Plan, each eligible participating
employee is deemed to have been granted an option to purchase shares of the
Company's Class A Common Stock on a semiannual basis at a price equal to 90% of
the market value on the last day of the period. During the year ended February
25, 1996, 24,146 shares were issued at $0.50 per share and 21,778 shares were
issued at $0.50 per share. During the year ended February 26, 1995, 5,855 shares
were issued at $2.50 per share and 17,260 shares were issued at $0.75 per share.
During the year ended February 27, 1994, 7,926 shares were issued at $2.50 per
share and 5,018 shares were issued at $3.00 per share. At February 25, 1996,
there were 260,613 shares reserved for issuance under the Stock Purchase Plan.
(16) EMPLOYEE BENEFIT PLANS
(a) Postemployment Medical Benefits
A subsidiary of the Company provides certain health care and life insurance
benefits for employees who retired prior to December 31, 1990. The Company
adopted SFAS No. 106, "Employers' Accounting for Postretirement Benefits Other
Than Pensions," in fiscal 1994 and is recognizing the actuarial present value of
the accumulated postretirement benefit obligation (APBO) of approximately $6.1
million on the delayed recognition method over a period of 20 years.
The following table sets forth the plan status as of February 25, 1996, and
February 26, 1995.
1996 1995
Accumulated postretirement benefit
obligation (in 000's)
Retired employees $(5,710) $(6,088)
Active employees - -
Total (5,710) (6,088)
Plan assets at fair value - -
Unfunded accumulated benefit
obligation in excess of plan assets (5,710) (6,088)
Unrecognized net gain (336) (73)
Unrecognized prior service cost - -
Unrecognized transition obligation 5,487 5,810
Accrued postretirement medical
benefit cost $ (559) $ (351)
The net periodic postretirement benefit costs for fiscal 1996 and fiscal 1995
included the following components:
1996 1995 1994
Service cost -- benefits attributed to
service during the period (in 000's) $ - $ - $ -
Interest cost 444 474 494
Actual return on assets - - -
Amortization of unrecognized transition
obligation 323 323 324
Net periodic postretirement benefit cost $767 $797 $818
For measurement purposes, a 9% annual rate of increase in the per-capita cost of
covered health care benefits is assumed for fiscal 1996; the rate was assumed to
decrease gradually down to 6% for fiscal 2000 and remain at that level
thereafter. The health care cost trend rate assumption has a significant effect
on the amounts reported. To illustrate, increasing the assumed health care cost
trend rate one percentage point in each year would increase the accumulated
postretirement benefit obligation as of February 25, 1996, by approximately
$380,000 or by 7%, and the aggregate of the service and interest cost components
of the net periodic postretirement benefit cost for fiscal 1996 by approximately
$30,000 or by 7%.
The weighted average discount rate used in determining the accumulated
postretirement benefit obligation was 8.0% in fiscal 1996 and 1995.
(b) Pension Plans
Certain subsidiaries of the Company participate in multiemployer pension plans.
The plans provide for defined benefits for substantially all unionized
employees. The amounts charged for pension contributions were approximately
$21,000, $20,000 and $62,000, for the years ended February 25, 1996, February
26, 1995 and February 27, 1994, respectively.
(c) Deferred Compensation
A subsidiary of the Company has deferred compensation agreements with certain
sales representatives and executives which provide for payments upon retirement
or death based on the value of life insurance policies or mutual fund shares at
the retirement date. The cost of the subsidiary's liability under these
compensation agreements has been charged to selling, general and administrative
expense. The deferred compensation expense for the years ended February 25,
1996, February 26, 1995 and February 27, 1994, was approximately $57,000,
$156,000 and $156,000, respectively.
(17) SUBSEQUENT EVENT
On May 20, 1996, the Company entered into an agreement to sell assets and
liabilities of its Balfour and Gold Lance subsidiaries constituting
substantially all of the operations of Balfour and Gold Lance to Class Rings,
Inc. (CRI), a new company formed by Castle Harlan Partners II, L.P. and the
Company. Separately, CRI entered into an agreement with CJC Holdings, Inc. (CJC)
to acquire its school ring business.
The Company's agreement with CRI is subject to a number of significant
contingencies including approval by the Federal Trade Commission and CRI's
ability to raise sufficient capital to consummate the acquisition of Balfour and
Gold Lance and the acquisition of CJC's school ring business.
Under the Company's agreement with CRI, the Company will receive cash of $55
million, adjustable for the fluctuation in working capital as of the date of
closing, 8% of the common stock of CRI and the cash equivalent to the value of
gold on hand as of the date of closing. In addition, the Company may receive
additional shares of common stock of CRI based on CRI's exceeding certain
defined levels of profitability. Under this contingent earnout arrangement, the
Company can earn up to an additional 10% interest in the common stock of CRI. If
the Company is able to consummate the transaction as contemplated, it is not
expected that the transaction would have an unfavorable impact on the Company's
financial position and operating results.
(18) CONSOLIDATING FINANCIAL INFORMATION AND SEGMENT INFORMATION
The securities issued by the Company in connection with the Company's
recapitalization, discussed in Note 3, are guaranteed by its domestic
subsidiaries. These guarantees are full, unconditional, and joint and several.
As a result, the Company has included condensed consolidating financial
statements on a domestic and foreign basis for the Company, the domestic
subsidiaries, and the foreign subsidiaries for the years ended February 25,
1996, February 26, 1995 and February 27, 1994, (in 000's). Foreign gross profit
includes gross profit attributable to sales from foreign subsidiaries to
domestic subsidiaries, which is not included in the eliminations column as the
impact is included in cost of sales of the domestic subsidiaries.
February 25, 1996 (000's)
ASSETS Parent Domestic Foreign
Company Subsidiaries Subsidiaries Eliminations Consolidated
CURRENT ASSETS:
Cash and cash equivalent $ 115 $ - $ 5,037 $ - $ 5,152
Restricted cash 102 - - - 102
Accounts receivable, net 55 50,313 1,918 (991) 51,295
Inventories 3,345 84,563 3,221 (991) 90,138
Prepaid expenses and other
current assets 696 792 469 - 1,957
Total current assets 4,313 135,668 10,645 (1,982) 148,644
PROPERTY, PLANT AND
EQUIPMENT, at cost 297 75,649 8,128 - 84,074
Less--Accumulated
depreciation 282 39,670 3,863 - 43,815
15 35,979 4,265 40,259
INTERCOMPANY LOANS 22,791 - 6,962 (29,753) -
INVESTMENT IN SUBSIDIARIES 138,894 - - (138,894) -
INVESTMENT IN LITTLE
SWITZERLAND, INC. 1,651 - - - 1,651
INVESTMENT IN SOLOMON
BROTHERS, LIMITED 13,734 - - - 13,734
OTHER ASSETS 155 5,917 769 - 6,841
$ 181,553 $ 177,564 $ 22,641 $ (170,629)$ 211,129
Page F-33
February 25, 1996 (000's)
LIABILITIES AND STOCKHOLDERS' Parent Domestic Foreign
EQUITY Company Subsidiaries Subsidiaries Eliminations Consolidated
CURRENT LIABILITIES:
Notes payable $ 17,524 $ (2,331)$ - $ - $ 15,193
Current portion of long-
term debt - 245 - - 245
Accounts payable 1,648 18,490 1,090 (991) 20,237
Accrued expenses 3,624 10,719 736 - 15,079
Accrued and currently
deferred income taxes 558 - 102 - 660
Total current liabilities 23,354 27,123 1,928 (991) 51,414
LONG-TERM DEBT, less
current portion 93,020 29,907 - (29,753) 93,174
LONG-TERM DEFERRED
INCOME TAXES AND
OTHER LIABILITIES - 1,123 - - 1,123
MINORITY INTEREST - - - 5,228 5,228
EXCHANGEABLE PREFERRED STOCK 2,319 - - - 2,319
STOCKHOLDERS' EQUITY:
Convertible Preferred Stock 2,289 - - - 2,289
Common stock 239 5 2,109 (2,114) 239
Additional paid-in capital 74,175 232,774 8,439 (241,212) 74,176
Retained earnings (deficit) (13,843) (113,368) 10,165 98,213 (18,833)
Total stockholders' equity 62,860 119,411 20,713 (145,113) 57,871
$ 181,553 $ 177,564 $ 22,641 $ (170,629)$ 211,129
Page F-34
February 25, 1996 (000's)
CONSOLIDATING STATEMENT Parent Domestic Foreign
OF OPERATIONS Company Subsidiaries Subsidiaries Eliminations Consolidated
NET SALES $ - $ 236,559 $ 28,353 $ (14,334)$ 250,578
COST OF SALES - 162,548 23,182 (12,589) 173,141
Gross profit $ - $ 74,011 $ 5,171 $ (1,745)$ 77,437
SELLING, GENERAL &
ADMINISTRATIVE EXPENSES 454 62,328 3,962 (754) 65,990
Income (loss) from operations $ (454)$ 11,683 $ 1,209 $ (991)$ 11,447
INTEREST EXPENSE, net 9,427 (22,536) 633 - (12,476)
MINORITY INTEREST - - - (673) (673)
Income (loss) before income taxes $ 8,973 $ (10,853)$ 1,842 $ (1,664)$ (1,702)
PROVISION (BENEFIT)
FOR INCOME TAXES (147) 147 164 - 164
Net income (loss) $ 9,120 $ (11,000)$ 1,678 $ (1,664)$ (1,866)
Page F-35
February 25, 1996 (000's)
CONSOLIDATING STATEMENT Parent Domestic Foreign
OF CASH FLOWS Company Subsidiaries Subsidiaries Eliminations Consolidated
CASH FLOWS FROM OPERATING
ACTIVITIES:
Net income (loss) $ 9,120 $ (11,000)$ 1,678 $ (1,664)$ (1,866)
Adjustments to reconcile net income
(loss) to net cash provided by
(used in) operating activities--
Depreciation and amortization (1,461) 4,766 624 - 3,929
Loss (gain) on disposal of
fixed assets - (417) - (6) (423)
Interest paid by issuance of debt 4,201 - - - 4,201
Undistributed earnings of
affiliates net of minority interest 287 - - 386 673
Change in assets and liabilities--
(Increase) decrease in accounts
receivable 19 5,140 2,113 (1,095) 6,177
(Increase) decrease in
inventories (2,632) (9,309) 1,161 991 (9,789)
(Increase) decrease in prepaid
expenses and other current
assets (1,057) (260) (66) - (1,383)
(Increase) decrease in other
assets 16 (429) (480) - (893)
Increase (decrease) in accounts
payable 67 1,820 (554) 1,095 2,428
Increase (decrease) in accrued
expenses (1,532) 695 457 - (380)
Increase (decrease) in accrued
and deferred taxes (266) - (427) - (693)
Increase (decrease) in other
liabilities - (371) (1) - (372)
Net cash provided by
(used in) operating
activities $ 6,762 $ (9,365)$ 4,505 $ (293)$ 1,609
Page F-36
CONSOLIDATING STATEMENT OF February 25, 1996 (000's)
CASH FLOWS (Continued) Parent Domestic Foreign
Company Subsidiaries Subsidiaries Eliminations Consolidated
CASH FLOWS FROM INVESTING
ACTIVITIES:
Proceeds from sale of fixed
assets $ - $ 961 $ 35 $ - $ 996
Capital expenditures (1) (2,326) (407) - (2,734)
Net cash provided by
(used in) investing
activities $ (1)$ (1,365)$ (372)$ - $ (1,738)
CASH FLOWS FROM FINANCING
ACTIVITIES:
Payments on revolving credit
facility $ (259,532)$ 1,752 $ - $ - $ (257,780)
Proceeds from borrowings under
revolving credit facility 261,855 - - - 261,855
(Increase) decrease in restricted
cash (100) - - - (100)
Change in intercompany notes
payable (7,722) 9,760 (3,653) 1,615 -
Payments on debt (1,150) (782) - - (1,932)
Payment of dividends (67) - (272) 211 (128)
Proceeds from the issuance of
common stock 23 - 77 (77) 23
Net cash provided by
(used in) financing
activities $ (6,693)$ 10,730 $ (3,848)$ 1,749 $ 1,938
NET INCREASE (DECREASE) IN
CASH AND CASH EQUIVALENTS $ 74 $ - $ 279 $ 1,462 $ 1,815
CASH AND CASH EQUIVALENTS AT
BEGINNING OF YEAR 41 - 4,758 (1,462) 3,337
CASH AND CASH EQUIVALENTS AT
END OF YEAR $ 115 $ - $ 5,037 $ - $ 5,152
Page F-37
February 26, 1995 (000's)
ASSETS Parent Domestic Foreign
Company Subsidiaries Subsidiaries Eliminations Consolidated
CURRENT ASSETS:
Cash and cash equivalent $ 41 $ - $ 4,758 $ (1,462)$ 3,337
Restricted cash 2 - - - 2
Accounts receivable, net 74 55,453 4,031 (2,086) 57,472
Inventories (2,109) 78,076 4,382 - 80,349
Prepaid expenses and other
current assets (361) 532 403 - 574
Total current assets (2,353) 134,061 13,574 (3,548) 141,734
PROPERTY, PLANT AND
EQUIPMENT, at cost 296 74,210 7,749 - 82,255
Less--Accumulated
depreciation 255 35,444 3,320 - 39,019
41 38,766 4,429 - 43,236
INTERCOMPANY LOANS 13,728 2,008 3,463 (19,199) -
INVESTMENT IN SUBSIDIARIES 148,501 - - (148,501) -
INVESTMENT IN LITTLE
SWITZERLAND, INC. 1,651 - - - 1,651
INVESTMENT IN SOLOMON
BROTHERS, LIMITED 13,734 - - - 13,734
OTHER ASSETS 211 5,687 370 - 6,268
$ 175,513 $ 180,522 $ 21,836 $ (171,248)$ 206,623
Page F-38
February 26, 1995 (000's)
LIABILITIES AND STOCKHOLDERS' Parent Domestic Foreign
EQUITY Company Subsidiaries Subsidiaries Eliminations Consolidated
CURRENT LIABILITIES:
Notes payable $ 15,201 $ (4,083)$ - $ - $ 11,118
Current portion of long-
term debt 447 788 - - 1,235
Accounts payable 1,581 16,670 1,644 (2,086) 17,809
Accrued expenses 994 14,186 279 - 15,459
Accrued and currently
deferred income taxes 824 - 529 - 1,353
Total current liabilities 19,047 27,561 2,452 (2,086) 46,974
LONG-TERM DEBT, less
current portion 91,045 21,054 - (20,661) 91,438
LONG-TERM DEFERRED
INCOME TAXES AND
OTHER LIABILITIES - 1,494 1 - 1,495
MINORITY INTEREST - - - 4,617 4,617
EXCHANGEABLE PREFERRED
STOCK 2,266 - - - 2,266
STOCKHOLDERS' EQUITY:
Convertible preferred stock 2,381 - - - 2,381
Common stock 234 5 2,109 (2,114) 234
Additional paid-in capital 73,145 232,774 8,515 (241,289) 73,145
Retained earnings (deficit) (12,605) (102,366) 8,759 90,285 (15,927)
Total stockholders' equity 63,155 130,413 19,383 (153,118) 59,833
$ 175,513 $ 180,522 $ 21,836 $ (171,248)$ 206,623
Page F-39
February 26, 1995 (000's)
CONSOLIDATING STATEMENT Parent Domestic Foreign
OF OPERATIONS Company Subsidiaries Subsidiaries Eliminations Consolidated
NET SALES $ - $ 271,294 $ 37,822 $ (21,001)$ 288,115
COST OF SALES (1,050) 192,766 30,178 (21,360) 200,534
Gross profit $ 1,050 $ 78,528 $ 7,644 $ 359 $ 87,581
SELLING, GENERAL &
ADMINISTRATIVE EXPENSES 1,058 85,391 3,959 - 90,408
Income (loss) from operations $ (8)$ (6,863)$ 3,685 $ 359 $ (2,827)
INTEREST EXPENSE, net (1,288) (10,730) 83 - (11,935)
INCOME FROM AFFILIATES 588 - - - 588
GAIN ON LITTLE SWITZERLAND,
INC. EXCHANGE 17,278 - - - 17,278
MINORITY INTEREST - - - (774) (774)
Income (loss) before income taxes $ 16,570 $ (17,593)$ 3,768 $ (415)$ 2,330
PROVISION FOR INCOME TAXES 195 435 1,058 70 1,758
Net income (loss) $ 16,375 $ (18,028)$ 2,710 $ (485)$ 572
ACCRETION OF DISCOUNT AND
DIVIDENDS ON PREFERRED 1,688 - - - 1,688
STOCKS
Income (loss) attributable
to common stockholders $ 14,687 $ (18,028)$ 2,710 $ (485)$ (1,116)
Page F-40
February 26, 1995 (000's)
CONSOLIDATING STATEMENT Parent Domestic Foreign
OF CASH FLOWS Company Subsidiaries Subsidiaries Eliminations Consolidated
CASH FLOWS FROM OPERATING
ACTIVITIES:
Net income (loss) $ 16,375 $ (18,028)$ 2,710 $ (485)$ 572
Adjustments to reconcile net income
(loss) to net cash provided by
(used in) operating activities--
Depreciation and amortization (1,302) 5,513 635 - 4,846
Loss on disposal of fixed assets - 70 4 - 74
Gain on Little Switzerland, Inc.
exchange (17,278) - - - (17,278)
Interest paid by debt issuance 7,648 - - - 7,648
Undistributed earnings of
affiliates net of minority
interest (588) - - 774 186
Change in assets and liabilities--
(Increase) decrease in accounts
receivable 1,522 (339) (1,449) (1,583) (1,849)
(Increase) decrease in
inventories 210 (5,003) (168) (359) (5,320)
(Increase) decrease in prepaid
expenses and other current
assets 594 2,798 (55) 81 3,418
(Increase) decrease in other
assets 56 6,340 146 - 6,542
Increase (decrease) in accounts
payable (248) 3,157 590 1,583 5,082
Increase (decrease) in accrued
expenses (3,830) (191) (576) - (4,597)
Increase (decrease) in accrued
and deferred taxes 498 (275) 266 (11) 478
Increase (decrease) in other
liabilities - (599) - - (599)
Net cash provided by
(used in) operating
activities $ 3,657 $ (6,557)$ 2,103 $ - $ (797)
Page F-41
CONSOLIDATING STATEMENT OF February 26, 1995 (000's)
CASH FLOWS (Continued) Parent Domestic Foreign
Company Subsidiaries Subsidiaries Eliminations Consolidated
CASH FLOWS FROM INVESTING
ACTIVITIES:
Proceeds from sale of fixed
assets $ - $ 43 $ 2 $ - $ 45
Capital expenditures (7) (2,210) (542) - (2,759)
Net cash used in
investing activities $ (7)$ (2,167)$ (540)$ - $ (2,714)
CASH FLOWS FROM FINANCING
ACTIVITIES:
Payments on revolving credit
facility $ (277,887)$ (2,103)$ - $ - $ (279,990)
Proceeds from borrowings under
revolving credit facility 291,108 - - - 291,108
(Increase) decrease in restricted
cash 36 - - - 36
Change in intercompany notes
payable (11,005) 12,343 (1,930) 592 -
Payments on debt (6,034) (1,574) - - (7,608)
Proceeds from the issuance of
common stock 28 - - - 28
Net cash provided by
(used in) financing
activities $ (3,754)$ 8,666 $ (1,930)$ 592 $ 3,574
NET INCREASE (DECREASE) IN
CASH AND CASH EQUIVALENTS $ (104)$ (58)$ (367)$ 592 $ 63
CASH AND CASH EQUIVALENTS AT
BEGINNING OF YEAR 145 58 5,125 (2,054) 3,274
CASH AND CASH EQUIVALENTS AT
END OF YEAR $ 41 $ - $ 4,758 $ (1,462)$ 3,337
Page F-42
February 27, 1994 (000's)
ASSETS Parent Domestic Foreign
Company Subsidiaries Subsidiaries Eliminations Consolidated
CURRENT ASSETS:
Cash and cash equivalent $ 145 $ 58 $ 5,125 $ (2,054)$ 3,274
Restricted cash 38 - - - 38
Accounts receivable, net 1,596 54,678 2,684 (3,334) 55,624
Inventories (1,899) 73,073 4,214 (359) 75,029
Prepaid expenses and other
current assets 233 3,329 349 81 3,992
Total current assets 113 131,138 12,372 (5,666) 137,957
PROPERTY, PLANT AND
EQUIPMENT, at cost 290 71,832 7,219 - 79,341
Less--Accumulated
depreciation 208 30,666 2,762 - 33,636
82 41,166 4,457 - 45,705
INTERCOMPANY LOANS 1,098 957 1,534 (3,589) -
INVESTMENT IN SUBSIDIARIES 163,819 - - (163,819) -
INVESTMENT IN LITTLE
SWITZERLAND, INC. 13,304 - - - 13,304
INVESTMENT IN SOLOMON
BROTHERS, LIMITED 13,734 - - - 13,734
OTHER ASSETS 303 12,331 587 - 13,221
$ 192,453 $ 185,592 $ 18,950 $ (173,074)$ 223,921
Page F-43
February 27, 1994 (000's)
LIABILITIES AND STOCKHOLDERS' Parent Domestic Foreign
EQUITY Company Subsidiaries Subsidiaries Eliminations Consolidated
CURRENT LIABILITIES:
Notes payable $ 1,980 $ (1,980)$ - $ - $ -
Current portion of long-
term debt - 1,480 - - 1,480
Accounts payable 205 14,702 1,155 (3,334) 12,728
Accrued expenses 4,725 14,377 854 - 19,956
Accrued and currently
deferred income taxes 324 275 264 11 874
Total current liabilities 7,234 28,854 2,273 (3,323) 35,038
LONG-TERM DEBT, less
current portion 91,265 6,205 - (5,643) 91,827
LONG-TERM DEFERRED
INCOME TAXES AND
OTHER LIABILITIES - 2,093 1 - 2,094
MINORITY INTEREST - - - 3,843 3,843
EXCHANGEABLE PREFERRED
STOCK 35,785 - - - 35,785
STOCKHOLDERS' EQUITY:
Common stock 234 37,175 2,109 (39,284) 234
Additional paid-in capital 69,909 200,599 8,515 (209,114) 69,909
Retained earnings (deficit) (11,974) (89,334) 6,052 80,447 (14,809)
Total stockholders' equity 58,169 148,440 16,676 (167,951) 55,334
$ 192,453 $ 185,592 $ 18,950 $ (173,074)$ 223,921
Page F-44
February 27, 1994 (000's)
CONSOLIDATING STATEMENT Parent Domestic Foreign
OF OPERATIONS Company Subsidiaries Subsidiaries Eliminations Consolidated
NET SALES $ 200 $ 258,898 $ 38,406 $ (19,754)$ 277,750
COST OF SALES (925) 170,785 30,250 (19,754) 180,356
Gross profit $ 1,125 $ 88,113 $ 8,156 $ - $ 97,394
SELLING, GENERAL &
ADMINISTRATIVE EXPENSES 960 75,824 3,437 - 80,221
Income from operations $ 165 $ 12,289 $ 4,719 $ - $ 17,173
INTEREST EXPENSE, net (3,589) (9,918) 161 - (13,346)
INCOME FROM AFFILIATES 1,262 - - - 1,262
MINORITY INTEREST - - - (941) (941)
Income (loss) before income taxes $ (2,162)$ 2,371 $ 4,880 $ (941)$ 4,148
PROVISION FOR INCOME TAXES (1,218) 1,946 282 - 1,010
Net income (loss) $ (944)$ 425 $ 4,598 $ (941)$ 3,138
ACCRETION OF DISCOUNT ON
EXCHANGEABLE PREFERRED 1,454 - - - 1,454
STOCK
Income (loss) attributable
to common stockholders $ (2,398)$ 425 $ 4,598 $ (941)$ 1,684
Page F-45
February 27, 1994 (000's)
CONSOLIDATING STATEMENT Parent Domestic Foreign
OF CASH FLOWS Company Subsidiaries Subsidiaries Eliminations Consolidated
CASH FLOWS FROM OPERATING
ACTIVITIES:
Net income (loss) $ (944)$ 425 $ 4,598 $ (941)$ 3,138
Adjustments to reconcile net income
(loss) to net cash provided by
(used in) operating activities--
Depreciation and amortization (613) 5,646 595 - 5,628
Loss (gain) on disposal of
fixed assets - 25 (138) - (113)
Ordinary dividends received
from affiliate 3,274 - - (1,228) 2,046
Interest paid by debt issuance 3,496 - - - 3,496
Undistributed earnings of
affiliates net of minority
interest (1,169) - - 941 (228)
Change in assets and liabilities--
(Increase) decrease in accounts
receivable (1,380) (3,766) 887 255 (4,004)
(Increase) decrease in
inventories (925) (3,137) 2,467 - (1,595)
(Increase) decrease in prepaid
expenses and other current
assets 225 1,446 (86) 883 2,468
(Increase) decrease in other
assets (79) 3,557 244 - 3,722
Increase (decrease) in accounts
payable (1,471) 4,402 (772) (255) 1,904
Increase (decrease) in accrued
expenses 6,375 (3,557) (628) - 2,190
Increase (decrease) in accrued
and deferred taxes (776) 1,947 201 (883) 489
Increase (decrease) in other
liabilities - (1,086) (77) - (1,163)
Net cash provided by
(used in) operating
activities $ 6,013 $ 5,902 $ 7,291 $ (1,228)$ 17,978
Page F-46
CONSOLIDATING STATEMENT OF February 27, 1994 (000's)
CASH FLOWS (Continued) Parent Domestic Foreign
Company Subsidiaries Subsidiaries Eliminations Consolidated
CASH FLOWS FROM INVESTING
ACTIVITIES:
Proceeds from sale of fixed
assets $ - $ 13 $ 210 $ - $ 223
Proceeds from sale of investments 3,486 - - - 3,486
Capital expenditures (207) (1,721) (2,129) - (4,057)
Net cash provided by
(used in) investing
activities $ 3,279 $ (1,708)$ (1,919)$ - $ (348)
CASH FLOWS FROM FINANCING
ACTIVITIES:
Payments on revolving credit
facility $ (204,889)$ (1,980)$ - $ - $ (206,869)
Proceeds from borrowings under
revolving credit facility 206,869 - - - 206,869
(Increase) decrease in restricted
cash (38) - - - (38)
Payments to retire credit facility (37,250) - - - (37,250)
Proceeds from senior secured notes 30,000 - - - 30,000
Change in intercompany notes
payable (701) 4,686 (1,931) (2,054) -
Payments for recapitalization
expenses (8,255) - - - (8,255)
Payments on debt (10,020) (3,646) - - (13,666)
Payment of dividends 6,800 - (8,563) 1,228 (535)
Proceeds from the issuance of
common stock 35 - - - 35
Net cash used in
financing activities $ (17,449)$ (940)$ (10,494)$ (826)$ (29,709)
NET INCREASE (DECREASE) IN
CASH AND CASH EQUIVALENTS $ (8,157)$ 3,254 $ (5,122)$ (2,054)$ (12,079)
CASH AND CASH EQUIVALENTS AT
BEGINNING OF YEAR 8,302 (3,196) 10,247 - 15,353
CASH AND CASH EQUIVALENTS AT
END OF YEAR $ 145 $ 58 $ 5,125 $ (2,054)$ 3,274
Page F-47
Report of Independent Public Accountants
On Schedules
To Town & Country Corporation:
We have audited, in accordance with generally accepted auditing standards, the
consolidated financial statements of Town & Country Corporation and subsidiaries
included in this Form 10-K and have issued our report thereon dated May 17, 1996
(except for the matter discussed in Note 1 and Note 17 for which the date is
June 7, 1996 and May 20, 1996, respectively). Our audit was made for the purpose
of forming an opinion on the basic consolidated financial statements taken as a
whole. The schedules listed in Item 14 (a) (2) are the responsibility of the
Company's management and are presented for purposes of complying with the
Securities and Exchange Commission's rules and are not part of the basic
consolidated financial statements. These schedules have been subjected to the
auditing procedures applied in the audit of the basic consolidated financial
statements and, in our opinion, fairly state, in all material respects, the
financial data required to be set forth therein, in relation to the basic
consolidated financial statements taken as a whole.
Boston, Massachusetts Arthur Andersen LLP
May 17, 1996
SCHEDULE II
Valuation Accounts
Balance Write-offs, Balance
Beginning Net of End of
Description of year Provision Recoveries Year
Allowance for Doubtful
Accounts:
For the Year Ended:
February 25, 1996 $ 7,780,000 $ 464,000 $ (6,124,000)$ 2,120,000
February 26, 1995 5,510,000 5,473,000 (3,203,000) 7,780,000
February 27, 1994 4,910,000 2,550,000 (1,950,000) 5,510,000
Page F-49
EXHIBITS
TOWN & COUNTRY CORPORATION AND SUBSIDIARIES
Exhibits, other than Exhibits 10.4, 11, 22, 24.1, and 27, have been omitted.
The Company will supply, upon written request, copies of any exhibit from the
Document list.
EXHIBIT 11
Earnings Per Share Computations
Five Years Ended
(Unaudited)
February 25, February 26, February 27, February 28, February 29
1996 1995 1994 1993 1992
PRIMARY EPS:
Net income (loss) $ (1,866,114)$ 571,918 $ 3,137,556 $(47,295,592)$(19,018,207)
Accretion of discount and
dividends on preferred
stocks (1,039,802) (1,688,019) (1,453,511) - -
Net income (loss)
attributable to
common stock $ (2,905,916)$ (1,116,101)$ 1,684,045 $(47,295,592) $(19,018,207)
Weighted average common
shares outstanding 23,769,323 23,433,173 21,205,949 12,450,290 12,005,752
Weighted shares issued from
exercise and assumed
exercise of:
warrants - - - - -
options - - - - -
Shares for EPS
calculation 23,769,323 23,433,173 21,205,949 12,450,290 12,005,752
Reported EPS:
Income (loss) before
extraordinary gain
and accretion of discount
and dividends on
preferred stocks $ (0.08)$ 0.02 $ 0.15 $ (3.80)$ (1.64)
Extraordinary gain - - - - 0.06
Accretion of discount and
dividends on preferred
stocks (0.04) (0.07) (0.07) - -
Net income (loss)
per common share $ (0.12)$ (0.05)$ 0.08 $ (3.80)$ (1.58)
Fully Diluted EPS:
For the five years presented in this exhibit, there is no dilution from Primary
EPS.
This exhibit should be reviewed in conjunction with Note 2 of Notes to
Consolidated Financial Statements.
EXHIBIT 22
TOWN & COUNTRY CORPORATION AND SUBSIDIARIES
Subsidiaries of the registrant
Set forth below is a list of the Registrant's subsidiaries (1) as of February
25, 1996, with their state or other jurisdiction of incorporation, names under
which they do business, and the percentage of their voting securities owned by
the Registrant as of such date:
Percent
Name Incorporation and Date Ownership
Essex International Public Company Limited Thailand, 1984 70%
Gold Lance, Inc. Massachusetts, 1986 100%
L.G. Balfour Company, Inc. Delaware, 1982 100%
Anju Jewelry Limited Hong Kong, 1973 100%
Town & Country Fine Jewelry Group, Inc. (2) Massachusetts, 1991 100%
-----------------------
(1) Excluded are the names of particular subsidiaries, which, when considered in
the aggregate as a single subsidiary, would not constitute a significant
subsidiary as of February 25, 1996.
(2) Verilyte Gold, Inc. and Feature Enterprises, Inc. were merged into Town &
Country Fine Jewelry Group, Inc. as of May 14, 1993.
EXHIBIT 24.1
TOWN & COUNTRY CORPORATION AND SUBSIDIARIES
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation of our
reports included in this Form 10-K, into the Company's previously filed
Registration Statements on Form S-2, File No. 33-49028, on Form S-8, File No.
33-23860, and Form S-2, File No. 33-57407.
Arthur Andersen LLP
Boston, Massachusetts
May 17, 1996