FORM 10Q
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.20549
[ x ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended November 24, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number: 0-14394
TOWN & COUNTRY CORPORATION
(Exact name of Registrant as specified in its charter
Massachusetts 04-2384321
(State or other jurisdiction (I.R.S. Employer
of incorporation Identification
or organization) Number)
25 Union Street,
Chelsea, Massachusetts 02150
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (617) 884-8500
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
On December 16, 1996, the Registrant had outstanding 23,313,212 shares of
Class A Common Stock, $.01 par value and 2,664,927 shares of Class B Common
Stock, $.01 par value. The Registrant also had 1,401,351 shares of Convertible
Preferred Stock, $1 par value, outstanding on December 16, 1996. These shares
are immediately convertible into 2,802,702 shares of Class A Common Stock.
This Form 10-Q contains forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended. 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 include the effects on
continuing operations of the Balfour sale, the inability of the Company to
amend its Working Capital Facility as a result of the Balfour transaction and
the Company's inability to sell or sublease its real estate located in
Attleboro and North Attleboro, Massachusetts.
TOWN & COUNTRY CORPORATION Form 10-Q
Page 2
PART 1 - FINANCIAL INFORMATION
Item 1. Financial Statements
CONSOLIDATED BALANCE SHEETS
November 24, February 25,
1996 1996
ASSETS (Unaudited)
CURRENT ASSETS:
Cash and cash equivalents $ 739,773 $ 5,151,929
Restricted cash 105,305 102,012
Accounts receivable--
Less allowances for doubtful
accounts of $3,659,000 at
11/24/96 and $2,120,000 at
2/25/96 69,533,940 51,294,879
Inventories (Note 4) 45,929,148 90,138,403
Prepaid expenses and other
current assets 6,857,776 1,956,537
Total current assets $ 123,165,942 $ 148,643,760
PROPERTY, PLANT & EQUIPMENT, at cost $ 75,012,025 $ 84,073,513
Less - Accumulated depreciation 43,541,372 43,814,604
$ 31,470,653 $ 40,258,909
INVESTMENT IN AFFILIATES $ 17,246,585 $ 15,765,482
OTHER ASSETS $ 5,873,035 $ 6,461,345
$ 177,756,215 $ 211,129,496
The accompanying notes are an integral part of these
consolidated financial statements.
TOWN & COUNTRY CORPORATION Form 10-Q
Page 3
CONSOLIDATED BALANCE SHEETS (Continued)
November 24, February 25,
1996 1996
LIABILITIES AND STOCKHOLDERS' EQUITY (Unaudited)
CURRENT LIABILITIES:
Notes payable to banks (Note 3) $ 31,547,641 $ 15,193,176
Current portion of long-term debt (Note 3) 13,441,325 244,928
Accounts payable 22,710,933 20,237,262
Accrued expenses 13,004,900 15,078,569
Accrued taxes 646,098 659,744
Total current liabilities $ 81,350,897 $ 51,413,679
LONG-TERM DEBT, less current portion
(Note 3) $ 78,528,150 $ 93,174,432
OTHER LONG-TERM LIABILITIES $ 1,063,094 $ 1,122,625
Total liabilities $ 160,942,141 $ 145,710,736
COMMITMENTS AND CONTINGENCIES
MINORITY INTEREST $ 5,114,636 $ 5,228,363
EXCHANGEABLE PREFERRED STOCK, $1.00
par value--$14.59 preference value-
Authorized--200,000 shares
Issued and outstanding--152,217 shares $ 2,343,534 $ 2,319,476
STOCKHOLDERS' EQUITY:
Preferred stock, $1.00 par value-
Authorized and unissued--800,000 and
2,266,745 shares, respectively $ -- $ --
Convertible Preferred Stock, $1.00 par
value, $6.50 preference value
Authorized--4,000,000 and
2,533,255 shares, respectively
Issued and outstanding--1,407,361 and
2,288,567 shares, respectively 1,407,361 2,288,567
Class A Common Stock, $ .01 par value-
Authorized--40,000,000 shares
Issued and outstanding--23,301,192
and 21,235,246 shares, respectively 233,012 212,352
Class B Common Stock, $.01 par value-
Authorized--8,000,000 shares
Issued and outstanding--2,664,927 shares 26,649 26,649
Additional paid-in capital 75,561,343 74,175,437
Retained deficit (67,872,461) (18,832,084)
Total stockholders' equity $ 9,355,904 $ 57,870,921
$ 177,756,215 $ 211,129,496
The accompanying notes are an integral part of these
consolidated financial statements.
TOWN & COUNTRY CORPORATION Form 10-Q
Page 4
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
For the Three Months Ended For the Nine Months Ended
November 24, November 26, November 24, November 26,
1996 1995 1996 1995
NET SALES $ 80,527,978 $ 86,395,380 $ 181,984,187 $ 203,560,405
COST OF SALES 55,154,612 58,990,465 123,536,397 139,614,070
INVENTORY CHARGE (Note 1) -- -- 35,521,000 --
Gross profit $ 25,373,366 $ 27,404,915 $ 22,926,790 $ 63,946,335
SELLING, GENERAL &
ADMINISTRATIVE
EXPENSES 20,425,922 17,753,273 61,330,299 52,303,005
Income (loss) from
operations $ 4,947,444 $ 9,651,642 $ (38,403,509)$ 11,643,330
INTEREST EXPENSE, net (3,017,241) (3,257,106) (9,168,769) (9,306,077)
MINORITY INTEREST (91,999) (306,465) 49,311 (641,116)
GAINS/LOSSES ON SALES OF
REAL ESTATE (Note 7) (742,330) 417,220 (742,330) 417,220
The accompanying notes are an integral part of these
consolidated financial statements.
TOWN & COUNTRY CORPORATION Form 10-Q
Page 5
CONSOLIDATED STATEMENTS OF OPERATIONS (Continued)
(Unaudited)
For the Three Months Ended For the Nine Months Ended
November 24, November 26, November 24, November 26,
1996 1995 1996 1995
INCOME (LOSS) BEFORE
INCOME TAXES $ 1,095,874 $ 6,505,291 $ (48,265,297)$ 2,113,357
PROVISION (BENEFIT)
FOR INCOME TAXES 60,000 (131,002) 200,025 172,500
NET INCOME (LOSS) $ 1,035,874 $ 6,636,293 $ (48,465,322)$ 1,940,857
ACCRETION OF DISCOUNT
AND DIVIDENDS ON
PREFERRED STOCKS 232,890 255,320 575,050 786,359
INCOME (LOSS)
ATTRIBUTABLE TO
COMMON STOCKHOLDERS $ 802,984 $ 6,380,973 $ (49,040,372)$ 1,154,498
INCOME (LOSS)PER COMMON
SHARE (Note 5): $ 0.03 $ 0.27 $ (1.94) $ 0.05
WEIGHTED AVERAGE
COMMON SHARES
OUTSTANDING
(Note 5): 25,966,119 23,834,596 25,330,088 23,728,355
The accompanying notes are an integral part of these
consolidated financial statements.
TOWN & COUNTRY CORPORATION Form 10-Q
Page 6
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
For the Nine Months Ended
November 24, November 26,
1996 1995
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ (48,465,322) $ 1,940,857
Adjustments to reconcile net income (loss)
to net cash used in operating activities-
Depreciation and amortization 2,428,956 3,158,261
Loss (gain) on disposal of certain
assets 742,330 (417,220)
Undistributed earnings of affiliates,
net of minority interest (49,311) 641,116
Interest paid with issuance of debt -- 4,200,569
Change in assets and liabilities--
Decrease (increase) in accounts
receivable (18,239,061) (29,916,289)
Decrease (increase) in inventory 44,209,255 (7,168,729)
Decrease (increase) in prepaid
expenses and other current assets (3,148,465) (1,508,121)
Decrease (increase) in other assets 385,629 (565,989)
Increase (decrease) in accounts
payable 2,473,671 12,285,254
Increase (decrease) in accrued
expenses (2,073,669) (2,487,790)
Increase (decrease) in accrued taxes (13,646) (634,678)
Increase (decrease) in other
liabilities (59,531) (121,007)
Net cash used in operating
activities (21,809,164) (20,593,766)
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (2,307,208) (1,964,608)
Investment in affiliate (1,481,103) (380,000)
Proceeds from sale of certain assets 5,135,955 950,772
Net cash provided by (used in) investing
activities 1,347,644 (1,393,836)
The accompanying notes are an integral part of these
consolidated financial statements.
TOWN & COUNTRY CORPORATION Form 10-Q
Page 7
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
(Unaudited)
For the Nine Months Ended
November 24, November 26,
1996 1995
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments on revolving credit facilities $ (160,742,252) $ (170,254,833)
Proceeds from borrowings under
revolving credit facilities 177,096,717 193,562,171
Payments on long-term debt (211,755) (1,535,039)
Proceeds from the issuance of common stock 40,989 12,072
Decrease (increase) in restricted cash (3,293) (37,624)
Payment of dividends (131,042) (128,359)
Net cash provided by
financing activities $ 16,049,364 $ 21,618,388
NET INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS $ (4,412,156) $ (369,214)
CASH AND CASH EQUIVALENTS AT
BEGINNING OF PERIOD 5,151,929 3,336,921
CASH AND CASH EQUIVALENTS AT
END OF PERIOD $ 739,773 $ 2,967,707
SUPPLEMENTAL CASH FLOW DATA:
Cash paid during the period for:
Interest $ 12,572,804 $ 8,033,387
Income taxes 258,600 810,265
Supplemental Disclosure of Noncash Investing and Financing Activities (Note 6)
The accompanying notes are an integral part of these
consolidated financial statements.
PART I - FINANCIAL INFORMATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOVEMBER 24, 1996
(1) Inventory Charge
During the period from late August up to and including the issuance of this
report, the Company implemented a program to recycle approximately $44 million
of inventory to recover gold and diamonds to meet immediate production
requirements. The Company also sold, for approximately $2 million, inventory
with an original cost basis of approximately $5 million. The Company charged
second quarter operations approximately $35.5 million. Of this amount
approximately $2.5 million was incurred in the second quarter. The remaining
approximately $33.0 million represents third quarter activity. Final valuation
of recovered diamonds and stones and inventory reconciliations are currently
expected to be completed during the fourth quarter of fiscal 1997.
These actions were taken when access to cash and gold under the Company's
working capital facility and gold leasing agreement became constrained near the
end of the second quarter and on a more pronounced basis in the third quarter,
and also because of the Company's commitment to meet its customers' shipping
requirements.
(2) Significant Accounting Policies
The unaudited consolidated financial statements presented herein have been
prepared by the Company and contain all adjustments (consisting of only normal
recurring adjustments) necessary to present fairly and on a basis consistent
with the consolidated financial statements for the year ended February 25, 1996,
the Company's financial position as of November 24, 1996, and the results of its
operations for the three- and nine-month periods ended November 24, 1996, and
November 26, 1995, and cash flows for the nine-month periods ended November 24,
1996, and November 26, 1995.
The results of operations for the nine months ended November 24, 1996 are
not necessarily indicative of the results to be expected for the year due to the
seasonal nature of the Company's operations and the significant inventory charge
taken in the quarter ended August 25, 1996.
The significant accounting policies followed by the Company are set forth
in Note (2) of the Company's consolidated financial statements for the year
ended February 25, 1996, which have been included in the Annual Report on Form
10-K, Commission File Number 0-14394, for the fiscal year ended February 25,
1996. Except as disclosed below, the Company has made no change in these
policies during the nine months ended November 24, 1996.
Certain reclassifications have been made to the fiscal 1996 financial
statements to conform with presentation of the fiscal 1997 financial statements.
Long-Lived Assets
On February 26, 1996, the Company adopted Financial Accounting Standard
Board's Statement of Financial Accounting Standards (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 based on their fair market values. The Company's financial condition and
results of operations were not materially impacted as a result of adopting SFAS
No. 121.
Stock Options
On February 26, 1996, the Company adopted SFAS No. 123 "Accounting for
Stock-Based Compensation". The Company intends to continue accounting for its
stock based compensation plans for employees in accordance with Accounting
Principles Board Opinion (APB) No. 25. Under SFAS No. 123, companies choosing to
continue to use APB No. 25 to account for stock based compensation plans for
employees, must make footnote disclosure of the effects that use of the
valuation methods described in SFAS No. 123 would have on their earnings per
share. The Company will disclose this information in the notes to its
consolidated financial statements for the fiscal year ended February 23, 1997.
The Company accounts for non-employee stock based compensation under SFAS No.
123.
(3) Loan Arrangements
On July 3, 1996, the Company entered into a new credit agreement with
Foothill Capital Corporation ("Foothill"). The agreement provides 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 is
for a period of two years and provides Foothill with an option to renew for
three additional years. The loans 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 contains 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 are based on eligible accounts
receivables and inventory. Foothill has first priority security 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's results of operations created a potential violation of a
financial covenant in its working capital facility. The Company has received a
waiver of this financial covenant from Foothill. The working capital facility,
pursuant to its terms, is expected to be amended following completion of the
Balfour sale (Note 8), to reflect such sale.
During the first quarter of fiscal 1996, the Company used its final PIK to
make the semiannual interest payment due May 13, 1995, on the 13% Senior
Subordinated Notes, due May 31, 1998, with approximately $4.2 million of
additional notes. The Company is obligated to make semiannual cash interest
payments of approximately $4.5 million. Such payments were made on May 15, 1996
and on November 14, 1996, in accordance with the loan agreement.
In charging the second quarter with the inventory charge, the Company
reduced its net worth below a covenant threshold established in the Senior
Secured Notes and Senior Subordinated Notes. The Company has amended the
indentures to the Senior Secured Notes and the Senior Subordinated Notes. Such
amendments, among other things, reduced the covenant threshold referred to above
to a level that is below the Company's net worth as of November 24, 1996.
The Company's domestic gold facility provides secured gold consignment
availability of approximately 70,000 troy ounces. A subsidiary of the Company
has an agreement with a gold supplier to provide secured gold consignment
availability of approximately 4,800 troy ounces. As of November 24, 1996,
approximately 64,000 ounces of gold valued at approximately $24.0 million were
on consignment under the Company's gold consignment facilities.
(4) Inventories
Inventories consisted of the following at November 24, 1996, and February
25, 1996:
November 24, 1996 February 25, 1996
Raw Materials $14,321,815 $14,820,768
Work-in-Process 12,868,462 9,947,057
Finished Goods 18,738,871 65,370,578
$45,929,148 $90,138,403
(5) Income (Loss) Per Common Share
Income (loss) per common share is computed by adjusting the Company's net
income (loss) for the accretion of discount and dividends on preferred stocks
and dividing by the weighted average number of common and common equivalent,
where dilutive, shares outstanding during each period.
(6) Supplemental Disclosure of Noncash Investing and Financing Activities
On May 15, 1995, the Company issued approximately $4.2 million in new 13%
Senior Subordinated Notes due May 31, 1998, as payment of the semiannual
interest installment. Approximately $2.5 million of this amount was classified
as accrued expense in the February 26, 1995, Consolidated Balance Sheet.
During the third quarter of fiscal 1997, the Company sold two properties on
which it accepted notes totaling approximately $0.9 million as payment of
portions of the sales prices.
(7) Sale of Real Estate
On November 14, the Company sold its building in New York City for a gross
sale price of $6.2 million, of which $5.3 million was paid in cash. The Company
has a note receivable for the remaining $0.9 million which bears interest at 9%
per annum and is due on January 15, 1997. In the interest of generating cash on
the sale of the property as quickly as possible, management accepted an offer
for less than the carrying value of the property. As a result, the Company
sustained a loss of approximately $0.8 million on the sale.
(8) Sale of Balfour
Assets On December 16, 1996, the Company sold certain assets of its Balfour
subsidiary constituting substantially all of the operations of Balfour to
Commemorative Brands, Inc. (CBI) a new company formed by Castle Harlan Partners
II, L.P. CBI also assumed certain liabilities of Balfour.
In October 1996, the Federal Trade Commission (FTC), which had been
reviewing the transaction since May 1996, gave preliminary approval to a
modified agreement between the Company and CBI. Final FTC approval was received
on December 26, 1996.
At closing, on December 16, 1996, the Company received cash equal to the
purchase price of $44 million, plus $2.7 million in working capital adjustment
from January 28, 1996 to the date of closing, plus $4.9 million representing the
value of gold on hand as of the date of closing less $14 million which was
placed in escrow pending final FTC approval. On December 31, 1996, the Company
received the $14 million. Approximately $6 million of the proceeds will be used
to pay transaction costs and liabilities not assumed in the sale. The actual
determination of net proceeds available, if any, in excess of the working
capital facility balance, is pending the determination of the final working
capital adjustments. The working capital and gold values are contingent upon
pending reconciliations to be completed within 45 days from date of closing for
working capital and 90 days for gold.
The following pro forma condensed consolidated balance sheet and condensed
consolidated statements of operations of the Company present the effects of the
sale, as if, for balance sheet purposes, the transaction had taken place on
November 24, 1996, and for statement of operations purposes, the transaction had
taken place February 27, 1995 for the year ended February 25, 1996 and February
26, 1996 for the nine month period ended November 24, 1996. The pro forma
statements do not purport to represent what the Company's financial position or
results of operations would actually have been if such transaction in fact had
occurred on such date or at the beginning of the periods indicated or to project
the Company's financial position or results of operations for any future date or
periods.
The pro forma condensed consolidated balance sheet and statements of
operations and accompanying notes should be read in conjunction with the
Company's Consolidated Financial Statements and related notes thereto for the
year ended February 25, 1996 included in the Company's annual report on Form
10-K and in conjunction with the Company's Consolidated Financial Statements and
related notes thereto included in the Company's quarterly report on Form 10-Q of
which this footnote is a component.
In the Pro Forma Condensed Consolidated Statements of Operations, the
Balfour subsidiary's results of operations are being deducted from the Company's
consolidated results. In addition, adjustments are included for the benefit
derived from the use of proceeds and the cost associated with continuing
exposure on the leased property.
In the Pro Forma Condensed Consolidated Balance Sheet, the Balfour column
represents the sale of certain Balfour assets and assumption of certain Balfour
liabilities while the adjustments represent the pro forma use of proceeds,
change in the carrying value of the real estate and recording of a potential
liability associated with leased property.
TOWN & COUNTRY CORPORATION
Pro Forma Condensed Consolidated Statement of Operations
For the Year Ended February 25, 1996 (1) (3)
Total Consolidate
Total Consolidate Balfour Adjustments Excluding Balfour
NET SALES $ 250,577,816 $ (71,300,472)$ 0 $ 179,277,344
COST OF SALES 173,141,311 (35,598,485) 0 137,542,826
Gross Profit 77,436,505 (35,701,987) 0 41,734,518
SELLING, GENERAL AND
ADMINISTRATIVE EXPENSES 66,407,484 (33,495,663) (1,492,489)(2) 31,419,332
Income (loss) from operations 11,029,021 (2,206,324) 1,492,489 10,315,186
INTEREST EXPENSE, net (12,475,409) 582,941 2,034,738 (2) (10,010,660)
(152,930)(4)
GAIN (LOSS) ON SALE OF REAL ESTATE 417,220 (417,220) 0 0
MINORITY INTEREST (673,079) 0 0 (673,079)
Income (loss) before provision for (1,702,247) (2,040,603) 3,374,297 (368,553)
income taxes
PROVISION FOR INCOME TAXES 163,867 0 0 163,867
Net income (loss) (1,866,114) (2,040,603) 3,374,297 (532,420)
ACCRETION OF DISCOUNT AND DIVIDENDS
ON PREFERRED STOCKS 1,039,802 0 0 1,039,802
Income (loss) attributable to co$ (2,905,916)$ (2,040,603)$ 3,374,297 $ (1,572,222)
stockholders
INCOME (LOSS) PER COMMON SHARE $ (0.12) $ (0.07)
WEIGHTED AVERAGE COMMON SHARES
OUTSTANDING 23,769,323 23,769,323
TOWN & COUNTRY CORPORATION
Pro Forma Condensed Consolidated Statement of Operations
For the Nine Months Ended November 24, 1996 (1) (3)
Total Consolidated
Total Consolidated Balfour Adjustments Excluding Balfour
NET SALES $ 181,984,187 $ (55,520,590)$ 0 $ 126,463,597
COST OF SALES 123,536,397 (27,021,311) 0 96,515,086
INVENTORY CHARGE 35,521,000 0 0 35,521,000
Gross Profit 22,926,790 (28,499,279) 0 (5,572,489)
SELLING, GENERAL AND
ADMINISTRATIVE EXPENSES 61,330,299 (27,844,318) (1,183,471)(2 32,302,510
Income (loss) from operations (38,403,509) (654,961) 1,183,471 (37,874,999)
INTEREST EXPENSE, net (9,168,769) 431,082 1,427,419 (2 (7,424,965)
(114,697)(4)
GAIN (LOSS) ON SALES OF REAL ESTATE (742,330) (32,135) 0 (774,465)
MINORITY INTEREST 49,311 0 0 49,311
Income (loss) before provision for (48,265,297) (256,014) 2,496,193 (46,025,118)
income taxes
PROVISION FOR INCOME TAXES 200,025 (91,000) 0 109,025
Net income (loss) (48,465,322) (165,014) 2,496,193 (46,134,143)
ACCRETION OF DISCOUNT AND DIVIDENDS
ON PREFERRED STOCKS 575,050 0 0 575,050
Income (loss) attributable to co$ (49,040,372)$ (165,014)$ 2,496,193 $ (46,709,193)
stockholders
INCOME (LOSS) PER COMMON SHARE $ (1.94) $ (1.84)
WEIGHTED AVERAGE COMMON SHARES
OUTSTANDING 25,330,088 25,330,088
Notes to Pro Forma Condensed Consolidated Statements of Operations
(1) The Statements of Operations assume that the entire purchase price was
received on the closing date and excludes any impact from the escrow period.
(2) The negotiations which ultimately arrived at a purchase price of $44
million for the Balfour business were based on the financial position of Balfour
in the January-February 1996 time period and, therefore, for the purposes of
determining pro forma interest savings, no working capital adjustment was
assumed.
For the purpose of determining pro forma interest and gold consignment fee
savings, the effective rate of the debt and consigned gold being reduced, is
applied for the period being presented.
Twelve Months
Effective Debt Ended
($ in 000's) Interest Rate Reduction February 25, 1996
Notes payable to banks
(working capital facility) 11.67% $11,118 $1,298
Senior Secured Notes 11.50% 6,411 737
Total Pro Forma Interest
Savings $2,035
Pro Forma Gold Consignment
Fee Savings 7.1% $21,021 $1,492
Nine Months
Effective Debt Ended
Interest Rate Reduction November 24, 1996
Notes payable to banks
(working capital facility) 11.67% $15,193 $1,330
Senior Secured Notes 11.50% 1,132 97
Total Pro Forma Interest
Savings $1,427
Pro Forma Gold Consignment
Fee Savings 7.10% $22,225 $1,183
Debt reduction assumptions are based on a closing at the February 27, 1995
and February 26, 1996 for the twelve month and nine month pro forma statements
of operations, respectively, hich approximate the seasonal low point in the
balance of the working capital facility, and on the application of all available
proceeds to first reduce the working capital facility, next the gold consignment
facility and then outstanding debt. The actual close took place at approximately
the seasonal high point of the working capital facility. The actual
determination of net proceeds available, if any, in excess of the working
capital facility balance, depends also on the timing of the release of the
escrowed funds and the determination of the final working capital and gold
adjustments.
(3) The sale did not include any real property. The prime component of real
property is a facility in Attleboro, Massachusetts with a net book value of
approximately $2.3 million and a fair value of approximately $1.4 million. A
$1.1 million impairment of the carrying value of the facility has been
recognized in association with this transaction. Such amount is reflected as an
adjustment to the Pro Forma Condensed Consolidated Balance Sheet and excluded
from the Pro Form Statements of Operations due to its nonrecurring nature. The
Company is leasing the property to CBI on a temporary basis for approximately
eight months. The Company has begun searching for a buyer. It is possible that
the Company will be required to hold the facility for an unspecified amount of
time after CBI vacates the facility before being able to complete a sale. The
Company has estimated a one year time to sell and has included an estimate of
the carrying costs, approximately $128,000, in determining the nonrecurring
charge.
(4) The sale did not include the assumption of a lease of a facility in
North Attleboro, Massachusetts. The Company is subleasing the property to CBI on
a temporary basis for approximately eight months. The Company has begun a search
for a permanent sublessee(s). However, it is possible that the Company will be
required to hold the property for an unspecified amount of time after CBI
vacates the facility before being able to find replacement tenants, or that the
Company may be required to lease the property at lower rent payments than the
Company is currently obligated to pay.
The Company's future lease obligation for this facility is for
approximately twelve years at an average annual cost of approximately $664,000.
Minimum annual operating cost is assumed to be approximately $110,000.
For the purpose of determining the pro forma potential effect of this
liability on continuing operations of the Company, it was assumed that the
property remains vacant for one year after CBI vacates and then is leased for
the remainder of the term at 80% of the Company's contractual liability plus
100% of the operating costs. The net cash flow of this scenario, discounted at
11.1%, has been included as a nonrecurring charge in the Pro Forma Condensed
Consolidated Balance Sheet and the future first year interest, also at 11.1%,
has been included in the Pro Forma Condensed Consolidated Statements of
Operations.
The Company expects to evaluate the sublease environment in greater depth
during the next few months and will be including the result of this evaluation
in the determination of the liability to be recorded in its fiscal 1997 year end
financial statements on Form 10-K.
TOWN & COUNTRY CORPORATION
Pro Forma Condensed Consolidated Balance Sheet
As of November 24, 1996 (1) (3)
Total Consolidated
Total Consolidated Balfour Adjustments Excluding Balfour
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 739,773 $ 47,057,133 $ (47,057,133)(4) 739,773
Restricted cash 105,305 0 0 105,305
Accounts receivable, less allowances for 0
doubtful accounts 69,533,940 (20,244,869) 0 49,289,071
Inventories 45,929,148 (9,525,832) 10,068,584 (4) 46,471,900
Prepaid expenses and other current asse 6,857,776 (721,939) 0 6,135,837
Total current assets 123,165,942 16,564,493 (36,988,549) 102,741,886
PROPERTY, PLANT AND EQUIPMENT, net 31,470,653 (5,608,030) (1,100,000)(2) 24,762,623
INVESTMENT IN AFFILIATES 17,246,585 0 0 17,246,585
OTHER ASSETS 5,873,035 (2,757,100) 0 3,115,935
$ 177,756,215 $ 8,199,363 $ (38,088,549) $ 147,867,029
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Notes payable to banks $ 31,547,641 $ 0 $ (31,547,641)(4) 0
Current portion of long-term debt 13,441,325 0 0 13,441,325
Accounts payable 22,710,933 (2,201,606) 0 20,509,327
Accrued expenses 13,004,900 (5,349,125) (1,390,908)(4) 6,979,867
715,000 (5)
Accrued taxes 646,098 0 0 646,098
Total current liabilities 81,350,897 (7,550,731) (32,223,549) 41,576,617
LONG-TERM DEBT, less current portion 78,528,150 0 0 78,528,150
OTHER LONG-TERM LIABILITIES 1,063,094 (1,170,084) 662,749 (5) 555,759
COMMITMENTS AND CONTINGENCIES
MINORITY INTEREST 5,114,636 0 0 5,114,636
EXCHANGEABLE PREFERRED STOCK, 2,343,534 0 0 2,343,534
STOCKHOLDERS' EQUITY
Preferred Stock, $1.00 par value - 0 0 0 0
Convertible Preferred Stock, $1.00 par v 1,407,361 0 0 1,407,361
Class A Common Stock, $.01 par value - 259,661 0 0 259,661
Class B Common Stock, $.01 par value - 0 0 0 0
Additional paid-in capital 75,561,343 0 0 75,561,343
Retained deficit (67,872,461) 16,920,178 (4,050,000)(4) (57,480,032)
(1,100,000)(2)
(1,377,749)(5)
Total stockholders' equity 9,355,904 16,920,178 (6,527,749) 19,748,333
$ 177,756,215 $ 8,199,363 $ (38,088,549) $ 147,867,029
Notes to Pro Forma Condensed Consolidated Balance Sheet
(1) As a component of this transaction, CBI also paid approximately $4.9
million for the gold content of the inventory, all of which was on consignment
at the closing date. This gold inventory is not reflected on the consolidated
balance sheet and the proceeds are used to reduce the consignment liability with
the gold supplier which also is not reflected on the consolidated balance sheet.
(2) The sale did not include any real property. The prime component of real
property is a facility in Attleboro, Massachusetts, with a net book value of
approximately $2.3 million and a fair value of $1.4 million. An $1.1 million
impairment in the carrying value of the facility has been recognized in
association with the transaction.
(3) The sale included assumption by CBI of a liability related to post
retirement medical benefit obligations, including an unamortized accumulated
post-retirement medical benefit obligation of approximately $5.2 million. This
liability does not appear on the balance sheet as the Company has been
recognizing it on the delayed recognition method.
(4) Use of proceeds as of November 24, 1996:
Gross proceeds (a) $47,057,133
Less transaction costs(b) 4,050,000
Less liabilities not assumed in the sale (c) 1,390,908
Proceeds available for debt repayment $41,616,225
Notes payable to banks
(working capital facility) 31,547,641
Gold consignment facility 10,068,584
$ 0
(a) Assumes that the entire purchase price was received on the closing date
and excludes any impact of escrow period.
(b) Expenses:
Financial advisor fees $1,750,000
Legal fees 1,500,000
Executive bonuses 800,000
$4,050,000
(c) Short-term accruals primarily related to payroll.
(5) See Note 4 to Notes to Pro Forma Condensed Consolidated Statements of
Operations.
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
This Form 10-Q contains forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended. 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 include the effects on
continuing operations of the Balfour sale, the inability of the Company to amend
its Working Capital Facility as a result of the Balfour transaction and the
Company's inability to sell or sublease its real estate located in Attleboro and
North Attleboro, Massachusetts.
Results of Operations for the Nine Months Ended November 24, 1996 Compared
to the Nine Months Ended November 26,1995
During the period from late August up to and including the issuance of this
report, the Company implemented a program to recycle approximately $44 million
of inventory to recover gold and diamonds to meet immediate production
requirements. The Company also sold, for approximately $2 million, inventory
with an original cost basis of approximately $5 million. The Company charged
second quarter operations approximately $35.5 million. Of this amount
approximately $2.5 million was incurred in the second quarter. The remaining
approximately $33.0 million represents third quarter activity. Final valuation
of recovered diamonds and stones and inventory reconciliations are currently
expected to be completed during the fourth quarter of fiscal 1997.
These actions were taken when access to cash and gold under the Company's
working capital facility and gold leasing agreement became constrained near the
end of the second quarter and on a more pronounced basis in the third quarter,
and also because of the Company's commitment to meet its customers' shipping
requirements.
Net sales for the nine months ended November 24, 1996, decreased $21.6
million or 10.6% from $203.6 million in fiscal 1996 to $182.0 million in fiscal
1997. Current year sales of fine jewelry have decreased approximately $23.0
million or 16.5% over the corresponding period in fiscal 1996. The Company is
concentrating on improving new product design and cycle time to market; and on
upgrading the performance level of its manufacturing subcontractors to reduce
cost and improve product quality and customer service.
Cost of goods sold for the nine months ended November 24, 1996, decreased
approximately $16.1 million from $139.6 million in fiscal 1996 to $123.5 million
in fiscal 1997, excluding the impact of the inventory charge discussed above.
Margin on sales increased 0.7% from 31.4% in fiscal 1996 to 32.1% in fiscal
1997. Gross profit margin has benefited from the higher mix of Balfour sales to
total sales where scholastic product margin is higher than fine jewelry.
Selling, general, and administrative expenses for the nine month period
increased approximately $9.0 million from $52.3 million in fiscal 1996 to $61.3
million in fiscal 1997. As a percentage of net sales, selling, general, and
administrative expenses were approximately 8.0% higher in the current year than
for the nine months ended November 26, 1995. Included in the nine-month period
are charges of approximately $5.5 million in excess of expected costs to resolve
disputed items with customers. Selling, general, and administrative expenses for
the quarter were approximately $2.7 million higher than during the corresponding
quarter of fiscal 1996. The primary contributor to this increase was higher
commission expenses associated with increased sales at Balfour.
Net interest expense for the nine months ended November 24, 1996, increased
approximately $0.1 million relative to the corresponding period in fiscal 1996.
On November 14, 1996, the Company sold its building in New York City. In
the interest of generating cash on the sale of the property as quickly as
possible, management accepted an offer for less than the carrying value of the
property. As a result, the Company sustained a loss of approximately $0.8
million on the sale.
Although the Company had a taxable loss for the nine months ended November
24, 1996, a tax provision of approximately $200,000 was recorded. The tax
provision was primarily due to the Company's inability to fully recognize the
tax benefits of operating losses in certain jurisdictions, as well as state and
foreign income taxes.
Liquidity and Working Capital
The Company's results of operations created a potential violation of a
financial covenant in its working capital facility. The Company has received a
waiver of this financial covenant from Foothill. The working capital facility,
pursuant to its terms, is expected to be amended following completion of the
Balfour sale (Note 8), to reflect such sale.
In charging the second quarter with the inventory charge, the Company
reduced its net worth below a covenant threshold established in the Senior
Secured Notes and Senior Subordinated Notes. The Company has amended the
indentures to the Senior Secured Notes and the Senior Subordinated Notes. Such
amendments, among other things, reduced the covenant threshold referred to above
to a level that is below the Company's net worth as of November 24, 1996.
Interest payments of approximately $4.5 million on the Senior Subordinated
Notes were made on May 15, 1996 and November 14, 1996 in accordance with the
loan agreement.
On December 16, 1996, the Company sold certain assets of its Balfour
subsidiary constituting substantially all of the operations of Balfour to
Commemorative Brands, Inc. (CBI) a new company formed by Castle Harlan Partners
II, L.P. CBI also assumed certain liabilities of Balfour.
In October 1996, the Federal Trade Commission (FTC), which had been
reviewing the transaction since May 1996, gave preliminary approval to a
modified agreement between the Company and CBI. Final FTC approval was received
on December 26, 1996.
At closing on December 16, 1996, the Company received cash equal to the
purchase price of $44 million, plus $2.7 million in working capital adjustment
from January 28, 1996 to the date of closing, plus $4.9 million representing the
value of gold on hand as of the date of closing less $14 million which was
placed in escrow pending final FTC approval. On December 31, 1996, the Company
received the $14 million. Approximately $6 million of the proceeds will be used
to pay transaction costs and liabilities not assumed in the sale. The actual
determination of net proceeds available, if any, in excess of the working
capital facility balance, is pending the determination of the final working
capital adjustments. The working capital and gold values are contingent upon
pending reconciliations to be completed within 45 days from date of closing for
working capital and 90 days for gold.
On November 14, 1996, the Company sold its building in New York City for a
gross sale price of $6.2 million, of which $5.3 million was paid in cash. The
Company has a note receivable for the remaining $0.9 million which bears
interest at 9% per annum and is due on January 15, 1997. In the interest of
generating cash on the sale of the property as quickly as possible, management
accepted an offer for less than the carrying value of the property. As a result,
the Company sustained a loss of approximately $0.8 million on the sale.
Cash used in operating activities for the nine months ended November 24,
1996 was approximately $21.8 million, compared with a use of approximately $20.6
million for the corresponding period of fiscal 1996. The additional cash
requirements are the result of the earnings deterioration and the requirement to
make cash interest payments on the 13% Senior Subordinated Notes.
Cash provided by investing activities for the nine months ended November
24, 1996 was approximately $1.3 million versus a use of approximately $1.4
million for the corresponding period in fiscal 1996. This is primarily the
result of the Company's sale of certain assets for which it received net
proceeds of approximately $5.1 million, compared with proceeds from sales of
certain assets in fiscal 1996 of approximately $1.0 million. Additionally,
investments in affiliate resulted in a use of approximately $1.5 million of cash
in fiscal 1997 versus $0.4 million in fiscal 1996.
Cash provided by financing activities was approximately $16.0 million for
the nine months ended November 24, 1996, compared with cash provided by
financing activities of $21.6 million for the nine months ended November 26,
1995. Cash generated from financing activities was primarily used to fund
operations during both periods. The Company was able to finance a portion of its
current-year operating cash requirements with cash available at foreign
subsidiaries.
The Company's net cash position decreased from approximately $5.2 million
at February 25, 1996, to approximately $0.7 million at November 24, 1996.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
2.1 Amended and Restated Asset Purchase Agreement
Schedules to the exhibit have not been filed. The Company
will furnish supplementally a copy of any schedule to the
Commission upon request.
4.1 Second Supplemental Indenture governing 11-1/2% Senior Secured
Notes due 9/15/97 from Town & Country Corporation to
Fleet National Bank, as Trustee
4.2 First Supplemental Indenture governing 13% Senior Subordinated
Notes due 5/31/98 from Town & Country Corporation to
Bankers Trust Company, as Trustee
10.1 Amendment to the agreement by and between Town & Country
Corporation, Fine Jewelry Group, Inc., L. G. Balfour, Inc.,
Gold Lance,Inc., and Foothill Capital Corporation
11 Earnings Per Share Computations
. 27 Financial Data Schedule
99 Waiver of Event of Default with respect to the
Non-Compliance Item
(b) Reports on Form 8-K
There were no Form 8-K filings during the third quarter ended
November 24,1996.
SIGNATURES
- -----------------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this Report to be signed on its behalf by the
undersigned thereunto duly authorized.
TOWN & COUNTRY CORPORATION
(Registrant)
Date: December 31 , 1996 /s/ Francis X. Correra
Francis X. Correra
Senior Vice President and
Chief Financial Officer
TOWN & COUNTRY CORPORATION EXHIBIT 11
Earnings Per Share Computations
(Unaudited)
For the Three Months Ended For the Nine Months Ended
November 24, November 26, November 24, November 26,
1996 1995 1996 1995
PRIMARY EPS:
Net income (loss) $ 1,035,874 $ 6,636,293 $ (48,465,322)$ 1,940,857
Accretion of discount and dividends
on preferred stocks 232,890 255,320 575,050 786,359
Income (loss) attributable to common
stockholders $ 802,984 $ 6,380,973 $ (49,040,372)$ 1,154,498
Weighted average common
shares outstanding 25,966,119 23,834,596 25,330,088 23,728,355
Weighted shares issued
from exercise and
assumed execise of:
warrants -- -- -- --
options -- -- -- --
Shares for EPS
calculation 25,966,119 23,834,596 25,330,088 23,728,355
REPORTED EPS:
Net income (loss) $ 0.04 $ 0.28 $ (1.92)$ 0.08
Accretion of discount and dividends
on preferred stocks (0.01) (0.01) (0.02) (0.03)
Income (loss) per common sha$ 0.03 $ 0.27 $ (1.94) $ 0.05
FULLY DILUTED EPS:
For the periods presented in this exhibit, there is no dilution from Primary EPS.