UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
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[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED EFFECTIVE
OCTOBER 7, 1996]
For Fiscal Year Ended February 23, 1997
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[ ] 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
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TOWN & COUNTRY CORPORATION
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(Exact name of Registrant as specified in its charter)
Massachusetts 04-2384321
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) I.D. Number)
25 Union Street, Chelsea, Massachusetts 02150
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(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
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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 $6,851,718 as of May 15, 1997.
On May 15, 1997, the Registrant had outstanding 23,694,509 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 1,224,930 shares of Convertible
Preferred Stock, $1 par value, outstanding on May 15, 1997. These shares are
immediately convertible into 2,449,860 shares of Class A Common Stock.
TABLE OF CONTENTS
PART I PAGE
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Item 1 Business 1
General Business Developments 1
Narrative Description of Business 6
Financial Information about Foreign and
and Domestic Operations and Export Sales 11
Item 2 Properties 12
Item 3 Legal Proceedings 13
Item 4 Submission of Matters to a Vote of
Security-Holders 14
PART II
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Item 5 Market for the Registrant's Common
Equity and Related Stockholder Matters 14
Item 6 Selected Financial Data 15
Item 7 Management's Discussion and Analysis
of Financial Condition and Results of
Operations 16
Item 8 Financial Statements and Supplementary
Data 24
Item 9 Changes in and Disagreements with
Accountants on Accounting and Financial
Disclosure 24
PART III
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Item 10 Directors and Executive Officers of
the Registrant 25
Item 11 Executive Compensation 25
Item 12 Security Ownership of Certain Beneficial
Owners and Management 25
Item 13 Certain Relationships and Related
Transactions 25
PART IV
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Item 14 Exhibits, Financial Statement Schedules,
and Reports on Form 8-K 26
PART I
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FORWARD-LOOKING STATEMENTS
Certain statements in this Form 10-K constitute "forward-looking
statements" as that term is defined under the Private Securities Litigation
Reform Act of 1995 (the "Act") and releases issued by the Securities and
Exchange Commission. The words "believe," "expect," "anticipate," "intend,"
"estimate" and other expressions which are predictions of or indicate future
events and trends and which do not relate to historical matters identify
forward-looking statements. Reliance should not be placed on forward-looking
statements because they involve known and unknown risks, uncertainties and other
factors, which may cause the actual results, performance or achievements of the
Company to differ materially from anticipated future results, performance or
achievements expressed or implied by such forward-looking statements. The
Company undertakes no obligation to publicly update or revise any
forward-looking statement, whether as a result of new information, future events
or otherwise.
The Company's ability to achieve its operating results included in its
fiscal 1998 business plan is affected by a number of factors, including the
successful outcome of a revitalization program. While there can be no assurance
that the program will be successful or that operating results including sales
growth and gross margin improvement will be achieved, the Company believes,
based on initiatives to date, that the program is being implemented successfully
and that fiscal 1998 operating objectives are achievable.
While there can be no assurances that the Company's cash and cash
equivalents and funds available under its credit facilities will be sufficient
to fund its on-going operating and investing requirements for fiscal 1998 and it
is possible that the Company could require additional sources of financing as a
result of unanticipated cash needs, or disappointing operating results, the
Company believes that it will have sufficient funds available from its credit
facilities to meet its working capital and investing needs over the next year.
ITEM 1. BUSINESS
General Business Developments
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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 products in the United States and
internationally. During most of fiscal 1997, the Company consisted of five
operating entities: the parent company, Town & Country Corporation ("Town &
Country"), headquartered in Chelsea, Massachusetts; its wholly owned
subsidiaries, Town & Country Fine Jewelry Group, Inc. ("Fine Jewelry Group"),
headquartered in Chelsea, Massachusetts; Anju Jewelry Limited, a Hong Kong
company and its subsidiaries ("Anju"); Gold Lance, Inc. ("Gold Lance"), located
in Houston, Texas; L.G. Balfour Company, Inc. ("Balfour"), headquartered in
North Attleboro, Massachusetts; and its majority-owned
Page 1
subsidiary Essex International Public Company Limited and its affiliates
("Essex"), a Thailand company. On December 16, 1996, the Company sold certain
assets and liabilities constituting substantially all of the operations of its
Balfour subsidiary. Subsequent to year-end, the Company sold certain assets of
its Gold Lance subsidiary.
CAPITALIZATION AND FINANCING
The Company has approximately $89.1 million in principal amount of debt
maturing through December 15, 1998. These debt issues mature as follows:
[bullet] September 15, 1997 $13.3 million Senior Secured Notes
[bullet] May 31, 1998 $68.8 million Senior Subordinated Notes
[bullet] December 15, 1998 $7.0 million Subordinated Notes
The near term maturity of these securities and the material amount of
the principal payments represents a potential liquidity issue for the Company.
The Company, with the assistance of professional advisors, is evaluating
possible alternatives with regard to addressing this situation. It is essential
for the Company to raise additional capital and/or to restructure its debt under
terms which will allow the Company to meet its expected future cash flow
requirements.
In fiscal 1997 and continuing into fiscal 1998, the Company has taken a
number of steps to position itself for the future.
Credit Facility Amendment
On May 30, 1997, the Company completed an amendment (the "Amended
Agreement") to its July 3, 1996 credit agreement (the "Agreement") with Foothill
Capital Corporation ("Foothill") to reflect changes which have taken place in
the Company. The Amended Agreement provides senior secured financing consisting
of a revolving credit facility and a letter of credit in support of a Gold
Consignment Facility provided by Fleet Precious Metals, Inc. ("Fleet"). The
aggregate amount of the combined facilities, which may be outstanding at any
date, is $55 million.
The revolving credit facility has a maximum amount of $40 million from
February through October and $45 million from November through January. The
letter of credit has a maximum amount of $20 million from February through
October and $15 million from November through January. 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 Amended Agreement contains
standard covenants for facilities of this type, including financial covenants
relating to interest coverage ratio, minimum net worth, debt to EBITDA ratio and
limitations on dividends, distributions and capital expenditures, as defined.
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
Page 2
the Company and its domestic subsidiaries subject to Fleet's first position as
gold consignor, supported by the letter of credit.
Amendments to Bond Indentures
During fiscal 1997, the Company obtained modifications to the minimum
net worth covenant in the indentures governing the 11 1/2% Senior Secured Notes
and the 13% Senior Subordinated Notes from a majority of the bondholders of each
of the securities. During fiscal 1998, the Company obtained modifications to
these two indentures from a majority of the bondholders of each of the
securities to allow the Company to repurchase the outstanding shares of Essex
not owned by the Company.
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, less $14 million which was placed
in escrow pending final FTC approval. Additionally, CBI assumed a liability of
$4.9 million representing the value of gold on hand as of the date of closing.
On December 31, 1996, the Company received the $14 million. Approximately $3.7
million of the proceeds were used to pay transaction costs. Approximately $1.5
million in liabilities not assumed in the sale were paid from operations. On
April 25, 1997, a settlement was reached in which the Company paid CBI $1.1
million to finalize the working capital adjustment and resolve certain other
items. The Company recorded a gain in the fourth quarter of fiscal 1997 of
approximately $10.5 million on this sale (See Note 19 of Notes to Consolidated
Financial Statements).
Sale of Gold Lance Assets
On April 18, 1997, the Company sold certain assets of its Gold Lance
subsidiary to Jostens, Inc. Related to the sale, the Company changed the name of
the subsidiary to GL, Inc.
Prior to or at closing, on April 18, 1997, the Company received cash
equal to the purchase price of approximately $10.8 million, less $2.5 million,
the payment of which is contingent on the operating performance of GL, Inc.
during a transition period between April 18, 1997 and July 31, 1997 (the
"Transition Period"). The Company accrued a loss of $5.0 million on this sale in
the fourth quarter of fiscal 1997. (See Note 19 of Notes to Consolidated
Financial Statements).
Page 3
Fine Jewelry Process Restructuring and Reengineering
In fiscal 1997, the Company recorded an approximately $7.2 million
charge consisting of cost associated with the restructuring of the Company's
fine jewelry operations. The Company consolidated its distribution facilities
and has significantly changed its organizational structure, including reducing
the number of senior managers. The new structure is based on the business unit
approach, organized around customer teams, which will be directly responsible
for meeting customer needs. The components of the charge consisted of
approximately $5.3 million of severance costs, $0.8 million in facility closure
costs and approximately $1.1 million of other related costs.
During fiscal 1997, the Company, with the assistance of a management
consulting firm, began reengineering its operational processes. This
reengineering included expanding the Company's product development capabilities
and increasing the pace of product development.
Essex Stock Repurchase and Privatization
During fiscal 1997, the Company began the process of purchasing the
approximately 1.6 million outstanding shares of Essex not owned by the Company.
The Company estimates that the cost to repurchase the shares will be
approximately $3 million and that the process should be completed during the
second quarter of fiscal 1998 (See Note 1 of Notes to Consolidated Financial
Statements).
FISCAL 1997 NONRECURRING OPERATING EVENTS
During fiscal 1997, the Company implemented a program to recycle
inventory to recover gold and diamonds to meet immediate production
requirements. 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'
delivery 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 related to these
actions.
On November 14, 1996, the Company sold its facility in New York city for
a gross sales price of $6.2 million, of which $5.3 million was paid at closing.
The remaining $0.9 million was paid on January 15, 1997. In the interest of
generating cash on the sale as quickly as possible, management accepted an offer
for less than the net book value of the property. As a result, the Company
sustained a loss of approximately $0.8 million on the sale which is reflected in
the accompanying fiscal 1997 consolidated statements of operations.
Included in current year selling, general and administrative expenses
are charges of approximately $5.5 million in unanticipated customer allowances.
Page 4
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 and new
gold consignment agreements from the Company's existing gold suppliers providing
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 23, 1997, 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.
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 23, 1997, the
Company had exercised these rights; and, therefore, the carrying value of the
notes, including unamortized premium of approximately $2.3 million, is
approximately $71.2 million. The Company makes semi-annual cash interest
payments of approximately $4.5 million. The most recent payment was made May 15,
1997.
(See "Management's Discussion and Analysis of Financial Condition and
Results of Operations--Financial Condition" and Note 3 of Notes to Consolidated
Financial Statements).
PREFERRED STOCK
On November 23, 1994, the holders of 2,381,038 shares (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, as an inducement to exercise their exchange rights, 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.
Page 5
Currently, there are 152,217 shares of Exchangeable Preferred Stock outstanding
and, in fiscal 1997, 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 in fiscal 1995 of approximately $17 million, net of the estimated
fair value ($2.25 per share) 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. At February
23, 1997, 1,302,673 shares of Convertible Preferred Stock were outstanding and
in fiscal 1997 and fiscal 1996, the Company paid dividends of approximately
$782,000 and $713,000, respectively, through the issuance of additional shares
of stock.
Narrative Description of Business
General
The Company designs, manufactures and distributes 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. Upon completion of the Transition
Period, the Company will no longer manufacture scholastic products.
Town & Country Corporation
(Headquartered in Chelsea, Massachusetts)
-----------------------------------------
Town & Country GL, Inc. Anju Jewelry Essex
Fine Jewelry (Houston, TX) Limited International
Group, Inc. (Hong Kong) Public Company
(Chelsea, MA) Limited
(Bangkok,
Thailand)
The Company has manufacturing facilities located in Massachusetts, New
York, Texas, and in Thailand. These facilities are located close to available
labor forces and suppliers of necessary raw materials.
Page 6
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.
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
Page 7
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 categories - gold, diamond and colored stones.
Cross-functional development teams were introduced in 1996 to reduce the
timeframe of concept to product. These teams are also responsible for product
maximization across all Town & Country customers. Utilizing this structure, the
Company believes it is able to be more responsive to trends in the marketplace.
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 25, 1997, the Company had approximately $7.3 million of orders
believed to be firm, as compared to approximately $12.1 million at a
corresponding date last year, excluding Balfour orders. The Company believes
that substantially all of these orders will be filled during fiscal 1998. 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 design,
quality, price 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 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.
Page 8
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. 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 1997
and fiscal 1996.
First Second Third Fourth
Quarter Quarter Quarter Quarter
Ended Ended Ended Ended
Fiscal 1997 May 26, August 25,(1) November 24, February 23,(2)
----------- ------------ ------------ ------------ ------------
Net sales $ 58,264,124 $ 43,192,085 $ 80,527,978 $ 27,168,675
Gross profit 20,198,224 (22,644,800) 25,373,366 3,258,730
Net income (loss) (1,854,443) (47,646,753) 1,035,874 (13,812,713)
Income (loss)
attributable to
common stock-
holders (2,077,571) (47,765,785) 802,984 (13,978,336)
Income (loss)
per common share $ (0.09) $ (1.86) $ 0.03 $ (0.54)
============ ============ ============ ============
First Second Third Fourth
Quarter Quarter Quarter Quarter
Ended Ended Ended Ended
Fiscal 1996 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)
============ ============ ============ ============
(1) Net loss in the second quarter of fiscal 1997 includes a charge of
approximately $35.5 million associated with the implementation of a
program to recycle inventory to meet current production requirements
(See Note 4 of Notes to Consolidated Financial Statements).
(2) Net loss in the fourth quarter of fiscal 1997 includes a restructuring
charge of approximately $7.2 million, a loss on the sale of certain
assets of the GL, Inc. subsidiary of $5.0 million and a gain on the sale
of certain assets and liabilities of the Balfour subsidiary of
approximately $10.5 million. (See Notes 5 and 19 of Notes to
Consolidated Financial Statements).
Page 9
Significant Customers
The Company had net sales to its largest customer in fiscal 1997 of
approximately $19.4 million or 9% of consolidated net sales in fiscal 1997
compared to $16.0 million or 6% of consolidated net sales in fiscal 1996 and
$12.5 million or 4% of total consolidated net sales in fiscal 1995. Net sales to
this customer were approximately 13% of consolidated net sales excluding fiscal
1997 Balfour sales.
Net sales to the Company's second largest customer were approximately
$14.5 million or 7% of consolidated net sales in fiscal 1997 compared to $22
million or 9% of consolidated net sales in fiscal 1996 and $29 million or 10% of
consolidated net sales in fiscal 1995. Net sales to this customer were 10% of
consolidated net sales excluding fiscal 1997 Balfour sales.
The loss of either or both of these customers or a substantial reduction
in the amount of sales to either or both of these customers 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 a consignment arrangement in place with a
supplier of gold which currently provides for carrying on consignment up to
approximately 53,000 troy ounces (approximately 41,000 troy ounces November
through January). A foreign subsidiary of the Company has a separate consignment
agreement in place with a supplier of gold which currently provides for carrying
on consignment up to approximately 4,800 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, if there is a period of volatility in the
market, operating results could be affected.
Page 10
Employees
The Company employs, on average, 1,300 persons, with approximately 37%
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 1,300
employees, approximately 400 are involved with selling and administrative
functions of the Company, and the remainder are involved in the manufacturing
functions of the Company. Approximately 160 of these persons are employed at GL,
Inc.
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 seventeen.
The Company considers relations with its employees to be satisfactory.
Management believes the Company would not 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.
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.
Financial Information about Foreign and Domestic Operations and Export Sales
- ----------------------------------------------------------------------------
For information on foreign and domestic operations, see Note 20,
"Consolidating Financial Information and Segment Information," in Notes to
Consolidated Financial Statements.
Page 11
ITEM 2. PROPERTIES
The Company occupies facilities in the United States and the
Far East as described below. (1)(3)
- --------------------------------------------------------------------------------
Square
Location Use Footage Ownership
- -------- --- ------- ---------
Chelsea, Massachusetts Executive and 88,000 Leased/
administrative offices, Owned
manufacturing,
marketing, and
distribution facility.
- --------------------------------------------------------------------------------
Chelsea, Massachusetts Warehouse facility. 22,000 Leased
- --------------------------------------------------------------------------------
Dallas, Texas Administrative offices 23,000 Leased
and marketing.
- --------------------------------------------------------------------------------
New York, New York Administrative offices, 10,000 Leased
product development and
marketing.
- --------------------------------------------------------------------------------
Houston, Texas(2) Administrative offices, 31,000 Owned
manufacturing,
marketing, and
distribution facility.
- --------------------------------------------------------------------------------
Hong Kong Administrative offices, 8,000 Leased
product development,
purchasing, and quality
control facility.
- --------------------------------------------------------------------------------
Bangkok, Thailand Administrative offices, 36,000 Leased/
manufacturing, Owned
marketing, and
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).
(2) This facility is used by GL, Inc. certain assets of which were sold
subsequent to fiscal 1997, and the Company anticipates selling this
facility as soon as possible after the Transition Period is completed
(See Note 19 of Notes to Consolidated Financial Statements).
(3) The Company has additional properties which, as a result of the Balfour
transaction, it not longer occupies. An owned facility of approximately
56,000 square feet is available for sale.
- --------------------------------------------------------------------------------
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.
Page 12
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 former Chairman
and 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.
Page 13
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 1997.
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 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
February 23, 1997:
First Quarter 1 1/8 9/16
Second Quarter 1 7/16 11/16
Third Quarter 1 1/4
Fourth Quarter 1/2 1/4
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 May 15, 1997, there were 957 holders of record of Class A Common
Stock and 28 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.
Page 14
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.
Recent Sales of Unregistered Securities - Convertible Preferred Stock
On November 23, 1994, the holders of 2,381,038 shares (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, as an inducement to exercise their exchange rights, 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 in fiscal 1995 of approximately $17 million, net of the estimated
fair value ($2.25 per share) of the Convertible Preferred Stock issued. The
securities were exempt from registration under Section 4(2) of the Securities
Act of 1933.
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 23, 1997, 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. 23, Feb. 25, Feb. 26, Feb. 27, Feb. 28,
1997(1)(2) 1996 1995(3) 1994 1993 (4)
--------- --------- --------- --------- ---------
Net sales $ 209,153 $ 250,578 $ 288,115 $ 277,750 $ 270,364
Net income (loss) (62,278) (1,866) 572 3,138 (47,296)
Income (loss)
attributable to
common stockholders (63,019) (2,906) (1,116) 1,684 (47,296)
Income (loss)
per common
share: (2.47) (0.12) (0.05) 0.08 (3.80)
Page 15
Balance Sheet Data:
Fiscal Year Ended
(In Thousands)
Feb. 23, Feb. 25, Feb. 26, Feb. 27, Feb. 28,
1997(2) 1996 1995(3) 1994 1993(4)
--------- --------- --------- --------- ---------
Total assets $ 121,312 $ 211,129 $ 206,623 $ 223,921 $ 246,858
Senior debt 13,254 13,653 15,128 22,022 35,688
Subordinated debt 78,090 79,766 77,545 71,285 120,285
Exchangeable
preferred stock 2,374 2,319 2,266 35,785 --
Stockholders' equity (deficit) (4,489) 57,871 59,835 55,334 24,744
(1) In fiscal 1997, the Company recorded an approximately $35.5 million
charge relating to the implementation of a program to recycle inventory
to meet current production requirements (See Note 4 of Notes to
Consolidated Financial Statements). The Company recorded a restructuring
charge of approximately $7.2 million related to its fine jewelry
business (See Note 5 of Notes to Consolidated Financial Statements). The
Company recorded a gain of approximately $10.5 million related to the
sale of certain assets and liabilities of its Balfour subsidiary and a
loss of $5.0 million related to the sale of certain assets of its Gold
Lance subsidiary (See Note 19 of Notes to Consolidated Financial
Statements).
(2) The fiscal 1997 statement of operations includes the operations of the
Company's Balfour subsidiary through December 16, 1996, the date of the
sale of Balfour. The fiscal 1997 balance sheet includes only those
assets and liabilities of Balfour not included in the sale and not
liquidated by year-end (See Note 19 of Notes to Consolidated Financial
Statements).
(3) In fiscal 1995, the Company recorded a gain of approximately $17.3
million as a result of the exchange of Exchangeable Preferred Stock (See
Note 6 of Notes to Consolidated Financial Statements).
(4) 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 10 and 12 of Notes to Consolidated Financial
Statements).
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Forward-Looking Statements
Certain statements in the Form 10-K constitute "forward-looking
statements" as that term is defined under the Private Securities Litigation
Reform Act of 1995 (the "Act") and releases issued by the Securities and
Exchange Commission. The words "believe," "expect," "anticipate," "intend,"
"estimate" and other expressions which are predictions of or indicate
Page 16
future events and trends and which do not relate to historical matters identify
forward-looking statements. Reliance should not be placed on forward-looking
statements because they involve known and unknown risks, uncertainties and other
factors, which may cause the actual results, performance or achievements of the
Company to differ materially from anticipated future results, performance or
achievements expressed or implied by such forward-looking statements. The
Company undertakes no obligation to publicly update or revise any
forward-looking statement, whether as a result of new information, future events
or otherwise.
The Company's ability to achieve its operating results included in its
fiscal 1998 business plan is affected by a number of factors, including the
successful outcome of a revitalization program. While there can be no assurance
that the program will be successful or that operating results including sales
growth and gross margin improvement will be achieved, the Company believes,
based on initiatives to date, that the program is being implemented successfully
and that fiscal 1998 operating objectives are achievable.
While there can be no assurances that the Company's cash and cash
equivalents and funds available under its credit facilities will be sufficient
to fund its on-going operating and investing requirements for fiscal 1998 and it
is possible that the Company could require additional sources of financing as a
result of unanticipated cash needs, or disappointing operating results, the
Company believes that it will have sufficient funds available from its credit
facilities to meet its working capital and investing needs over the next year.
LIQUIDITY
The Company has approximately $89.1 million in principal amount of debt
maturing through December 15, 1998. These debt issues mature as follows:
[bullet] September 15, 1997 $13.3 million Senior Secured Notes
[bullet] May 31, 1998 $68.8 million Senior Subordinated Notes
[bullet] December 15, 1998 $7.0 million Subordinated Notes
The near term maturity of these securities and the material amount of
the principal payments represents a potential liquidity issue for the Company.
The Company, with the assistance of professional advisors, is evaluating
possible alternatives with regard to addressing this situation. It is essential
for the Company to raise additional capital and/or to restructure its debt under
terms which will allow the Company to meet its expected future cash flow
requirements.
FINANCIAL CONDITION
On May 30, 1997, the Company completed an amendment (the "Amended
Agreement") to its July 3, 1996 credit agreement (the "Agreement") with Foothill
Capital Corporation ("Foothill") to reflect changes which have taken place in
the Company. The Amended Agreement provides senior secured financing consisting
of a revolving credit facility and a letter of credit in support of a Gold
Consignment Facility provided by Fleet Precious Metals, Inc. ("Fleet"). The
aggregate amount of the combined facilities, which may be outstanding at any
date, is $55 million.
Page 17
The revolving credit facility has a maximum amount of $40 million from
February through October and $45 million from November through January. The
letter of credit has a maximum amount of $20 million from February through
October and $15 million from November through January. 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 Amended Agreement contains
standard covenants for facilities of this type including financial covenants
relating to interest coverage ratio, minimum net worth, debt to EBITDA ratio 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 believes that it can meet its
working capital and investing needs over the next year through cash flows from
operations and the use of funds available under the Amended Agreement.
The Company had no outstanding balance under its revolving credit
facility at February 23, 1997 and $10.1 million available for borrowing under
the facility. The Company had approximately 33,000 ounces, valued at
approximately $11.5 million, outstanding under its gold agreement and
approximately 20,000 additional ounces available under this agreement at
February 23, 1997. At April 27, 1997 the Company had no outstanding balance on
its revolving credit facilty and approximately 34,000 ounces valued at
approximately $11.7 million outstanding under its gold agreement.
During fiscal 1997, the Company obtained modifications to the minimum
net worth covenant in the indentures governing the 11 1/2% Senior Secured Notes
and the 13% Senior Subordinated Notes from a majority of the bondholders of each
of the securities. During fiscal 1998, the Company obtained modifications to
these two indentures from a majority of the bondholders of each of the
securities to allow the Company to repurchase the outstanding shares of Essex
not owned by the Company.
Essex has available credit facilities with two banks in Thailand to
provide aggregate commercial financing of up to approximately $11.6 million. The
subsidiary had no balance outstanding under these lines at February 23, 1997 and
February 25, 1996, respectively. Essex 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 4, 1997, and is secured
by a standby letter of credit for $1.9 million under one of the subsidiary's
credit facilities. There were approximately 2,800 ounces, valued at
approximately $1.0 million, on consignment under this gold agreement at February
23, 1997. Subsequent to year-end, this subsidiary's credit facility was reduced
to approximately $8.9 million from one bank.
Cash used in operating activities for the year ended February 23, 1997
was approximately $23.0 million, compared with a source of approximately $2.0
million for the corresponding period of fiscal 1996. The additional cash
requirements are the result of the
Page 18
operating loss and the requirement to make both interest payments on the 13%
Senior Subordinated Notes in cash in fiscal 1997.
Cash provided by investing activities for the year ended February 23,
1997, was approximately $44.0 million versus a use of approximately $2.1 million
for the corresponding period in fiscal 1996. In the current year, the Company
has received net proceeds from sales of assets, primarily a building in New
York, of approximately $6.8 million, compared with proceeds from sales of assets
in fiscal 1996 of approximately $1.0 million. In the current year, the Company
also benefited from the proceeds related to its sale of certain assets and
liabilities of its Balfour subsidiary of approximately $41.9 million.
Investments in affiliates resulted in a use of approximately $1.5 million of
cash in fiscal 1997 versus $0.4 million in fiscal 1996.
The Company has $2.3 million in an escrow account to pay for the
acquisition of Essex shares held by the minority shareholders.
Cash used in financing activities was approximately $15.7 million for
the year ended February 23, 1997, compared with cash provided by financing
activities of $1.9 million for the year ended February 25, 1996. Proceeds from
the sale of certain assets and liabilities of the Balfour subsidiary and sales
of other fixed assets were used to repay the outstanding amount on the Company's
revolving credit facility and to purchase gold to reduce the Company's gold
facility. Operations are funded with cash borrowed under these facilities.
The Company's net cash position increased from approximately $5.3
million at February 25, 1996, to approximately $10.4 million at February 23,
1997.
Results of Operations
- ---------------------
FISCAL 1997 COMPARED TO FISCAL 1996
During fiscal 1997, the Company implemented a program to recycle
inventory to recover gold and diamonds to meet immediate production
requirements. 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 customer's
delivery requirements. The Company also sold, for approximately $2 million,
inventory with an original cost basis of approximately $5 million. The Company
charged approximately $35.5 million related to these actions to second quarter
fiscal 1997 operations. Of this amount, approximately $2.5 million was incurred
in the second quarter. The remaining approximately $33 million represents third
quarter activity.
Net sales for the fiscal year ended February 23, 1997, decreased $41.4
million or 16.5% from $250.6 million in fiscal 1996 to $209.2 million in fiscal
1997. Current year sales of fine jewelry have decreased approximately $29.5
million or 17.9% over the corresponding period in fiscal 1996. The Company is
concentrating on improving new product design, cycle time to market, customer
service and on upgrading the performance level of manufacturing to reduce cost
and improve product quality.
Page 19
Cost of goods sold for the fiscal year ended February 23, 1997,
decreased approximately $25.7 million from $173.1 million in fiscal 1996 to
$147.4 million in fiscal 1997, excluding the impact of the inventory charge
discussed above. Margin on sales decreased 1.4% from 30.9% in fiscal 1996 to
29.5% in fiscal 1997. The sale of the operations of the Balfour subsidiary on
December 16, 1996, had a negative effect on overall gross profit margin as
scholastic product has a higher gross profit margin than fine jewelry product
margin. Margin on fine jewelry decreased from 22.5% to 19.5%. This decline is
due to pressure on the absorption of relatively fixed production costs as a
result of the decrease in sales. The sales mix also was weighted toward lower
margin gold product and not higher margin bridal and color product.
In fiscal 1997, the Company recorded an approximately $7.2 million
charge consisting of costs associated with the restructuring of the Company's
fine jewelry operations. The Company consolidated its distribution facilities
and significantly changed its organizational structure including reducing the
number of senior managers. The new structure is based on the business unit
approach, organized around customer teams which will be directly responsible for
meeting customer needs. The components of the charge consisted of approximately
$5.3 million of severance related costs, $0.8 million in facility closure costs
and $1.1 million of other related costs.
Selling, general, and administrative expenses increased approximately
$7.4 million from $66.4 million in fiscal 1996 to $73.8 million in fiscal 1997.
As a percentage of net sales, selling, general, and administrative expenses were
approximately 8.8% higher in the current year than for the year ended February
25, 1996. Included in the current year are charges of approximately $5.5 million
in unanticipated customer allowances. Also contributing to the increase are
certain non-recurring, non-operating items in fiscal 1996, 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 fiscal 1997, decreased approximately $0.4 million
relative to fiscal 1996. This improvement is the result of the Company's ability
to repay the balance on its working capital facility with the proceeds of the
Balfour sale in the fourth quarter of fiscal 1997. The weighted average interest
rate on overall borrowings was approximately 11.20% for fiscal 1997 compared
with 11.24% for fiscal 1996. Average borrowings decreased approximately $3.6
million from approximately $117.1 million in fiscal 1996 to $113.5 million in
fiscal 1997.
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 net book value of the
property. As a result, the Company sustained a loss of approximately $0.8
million on the sale.
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.
Page 20
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, less $14 million which was placed
in escrow pending final FTC approval. Additionally, CBI assumed a liability of
$4.9 million representing the value of gold on hand as of the date of closing.
On December 31, 1996, the Company received the $14 million. Approximately $3.7
million of the proceeds were used to pay transaction costs. Approximately $1.5
million in liabilities not assumed in the sale were paid from operations. On
April 25, 1997, a settlement was reached in which the Company paid CBI $1.1
million to finalize the working capital adjustment and resolve certain other
items. The Company recorded a gain in the fourth quarter of approximately $10.5
million on the sale.
Although the Company had a taxable loss in fiscal 1997, a tax provision
of approximately $260,000 was recorded. These tax provisions are primarily due
to state and foreign income taxes.
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 $24.0 million, or 26.5% from $90.4 million in fiscal
1995 to $66.4 million in fiscal 1996. As a percentage of net sales, SG&A
expenses decreased from 31.4% in fiscal 1995 to 26.5% 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.
Page 21
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 in fiscal 1995 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%.
Page 22
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.
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.
Page 23
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 23, 1997
and February 25, 1996 .............................................F-4
Consolidated Statements of Operations - Years
Ended February 23, 1997, February 25, 1996,
and February 26, 1995 .............................................F-6
Consolidated Statements of Stockholders' Equity (Deficit) -
Years Ended February 23, 1997, February 25, 1996,
and February 26, 1995 .............................................F-7
Consolidated Statements of Cash Flows - Years
Ended February 23, 1997, February 25, 1996,
and February 26, 1995 .............................................F-9
Notes to Consolidated Financial Statements .......................F-11
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None
Page 24
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.
Page 25
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 23, 1997 and
February 25, 1996 .................................................F-4
Consolidated Statements of Operations - Years
Ended February 23, 1997, February 25, 1996 and
February 26, 1995 .................................................F-6
Consolidated Statements of Stockholders' Equity (Deficit) -
Years Ended February 23, 1997, February 25, 1996 and
February 26, 1995 .................................................F-7
Consolidated Statements of Cash Flows - Years
Ended February 23, 1997, February 25, 1996 and
February 26, 1995 .................................................F-9
Notes to Consolidated Financial Statements .......................F-11
2. Financial Statement Schedules
-----------------------------
Report of Independent Public Accountants on Schedules ............F-53
Schedules:
II Valuation Accounts .......................................F-54
Page 26
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 13% .........*6*(4.2)
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 13% .......*6*(4.4)
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 Notes *6*(4.5)
due 9/15/97, dated as of 5/14/93, from Town &
Country Corporation to Shawmut Bank, N.A., as
Trustee.
4.4 First Supplemental Indenture governing 11-1/2% ...Filed Herewith
Senior Secured Notes due 9/15/97 from Town &
Country Corporation to Fleet National Bank, as
Trustee.
4.5 Second Supplemental Indenture governing 11-1/2% ......*11*(4.1)
Senior Secured Notes due 9/15/97 from Town &
Country Corporation to Fleet National Bank, as
Trustee.
4.6 Third Supplemental Indenture governing 11-1/2% ...Filed Herewith
Senior Secured Notes due 9/15/97 from Town &
Country Corporation to Fleet National Bank, as
Trustee, dated as of March 4, 1997.
Page 27
4.7 Indenture governing 13% Senior Subordinated Notes .....*6*(4.6)
due 5/31/98, dated as of 5/14/93, from Town &
Country Corporation to Bankers Trust Company,
as Trustee.
4.8 First Supplemental Indenture governing 13% Senior ....*11*(4.2)
Subordinated Notes due 5/31/98 from Town &
Country Corporation to Bankers Trust Company,
as Trustee.
4.9 Second Supplemental Indenture governing 13% ......Filed Herewith
Senior Subordinated Notes due 5/31/98 from Town
& Country Corporation to Bankers Trust Company,
as Trustee, dated as of March 4, 1997.
4.10 Certificate of Vote of Directors Establishing the .....*6*(4.7)
Exchangeable Preferred Stock, par value $1.00
per share, dated as of 5/14/93.
4.11 Certificate of Vote of Directors Establishing the .....*7*(4.8)
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 ............*9*(10.4)
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.
Page 28
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 Amendment number one to the lease between ........Filed Herewith
L.G. Balfour Company, Inc. and C.L.C. North
Attleboro Trust, dated April 24, 1997.
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)
Amended and Restated.
10.34 Form of Executive Employment Agreement between ...Filed Herewith
Town & Country Corporation and Francis X. Correra
effective as of July 15, 1996.
10.35 Trust Agreement dated as of 5/14/93, between .........*6*(10.22)
Town & Country Corporation and Baybank, as
Trustee.
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.
10.40 Loan Agreement among Town & Country ..................*10*(10.1)
Corporation, Town & Country Fine Jewelry
Group, Inc., Gold Lance, Inc., L.G. Balfour
Company, Inc. and Foothill Capital Corporation
dated July 3, 1996.
Page 29
10.41 First Amendment to the agreement by and between ......*11*(10.1)
Town & Country Corporation, Fine Jewelry
Group, Inc., L.G. Balfour, Inc., Gold Lance,
Inc. and Foothill Capital Corporation dated as of
October 30, 1996.
10.42 Amendment number two to the agreement by and .....Filed Herewith
between Town & Country Corporation, Fine Jewelry
Group, Inc., L.G. Balfour, Inc., Gold Lance, Inc., and
Foothill Capital Corporation dated as of May 30, 1997.
10.43 Creditor Agreement by and between Foothill Capital ...*10*(10.3)
Corporation and Fleet Precious Metals, Inc. dated
July 3, 1996.
10.44 Amended and Restated Asset Purchase Agreement .........*11*(2.1)
by and among Commemorative Brands, Inc. and
Town & Country Corporation dated November 21, 1996
Schedules to the exhibit have not been filed.
The Company will furnish supplementally a
copy of any schedule to the Commission
upon request
10.46 Second Amended and Restated Consignment ..............*10*(10.2)
Agreement by and between Fleet Precious
Metals Inc. and Town & Country Corporation,
Town & Country Fine Jewelry Group, Inc., L.G. Balfour
Company and Gold Lance, Inc. dated July 3, 1996
10.47 Asset Purchase Agreement by and among .................*12*(2.1)
Jostens, Inc., Gold Lance, Inc. and Town &
Country Corporation dated as of April 18, 1997.
10.48 Transition Agreement by and among Jostens, Inc., ......*12*(2.2)
Gold Lance, Inc. and Town & Country Corporation
dated as of April 18, 1997.
10.50 Termination and Settlement Agreement between .....Filed Herewith
Town & Country Corporation and C. William Carey
dated as of January 3, 1997.
10.51 Voting Agreement between Town & Country ..........Filed Herewith
Corporation and C. William Carey dated as of
January 3, 1997.
10.52 Consulting Agreement between Town & Country ......Filed Herewith
Corporation and C. William Carey dated as of
January 3, 1997.
Page 30
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
*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.
*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.
*9* Incorporated by reference to the designated exhibit in the Annual Report
on Form 10-K, Commission File Number 0-14394 filed June 13, 1996
*10* Incorporated by reference to the designated exhibit in the Quarterly
Report on Form 10-Q, Commission File Number 0-14394 filed July 9, 1996.
*11* Incorporated by reference to the designated exhibit in the Quarterly
Report on Form 10-Q, Commission File Number 0-14394 filed December 21,
1996.
*12* Incorporated by reference to the designated exhibit in the Current Report
on Form 8-K, Commission File Number 0-14394 filed May 5, 1997.
#1# Incorporated by reference to the designated exhibit of the Registration
Statement on Form S-2 No. 33-25092 filed October 20, 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.
#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
23, 1997.
Page 31
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: June 10, 1997 By: /s/ William Schawbel
------------------ -----------------------------------------
William Schawbel, Chief Executive Officer
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/ William Schawbel Chief Executive Officer
- -----------------------------------
William Schawbel
Principal Financial and Accounting Officer:
/s/ Veronica Zsolcsak Chief Financial Officer
- -----------------------------------
Veronica Zsolcsak
/s/ Charles Hill Director
- -----------------------------------
Charles Hill
/s/ Richard E. Floor Director
- -----------------------------------
Richard E. Floor
/s/ Marcia Morris Director
- -----------------------------------
Marcia Morris
Page 32
[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 23, 1997 and February 25, 1996, and the related consolidated statements
of operations, stockholders' equity (deficit) and cash flows for each of the
three years in the period ended February 23, 1997. 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 consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Town &
Country Corporation and subsidiaries as of February 23, 1997 and February 25,
1996, and the results of its operations and its cash flows for each of the three
years in the period ended February 23, 1997, in conformity with generally
accepted accounting principles.
The accompanying consolidated financial statements have been prepared
assuming that the Company will continue as a going concern. As discussed in Note
1 to the consolidated financial statements, the Company has suffered recurring
losses and has a net capital deficiency that raises substantial doubt about its
ability to continue as a going concern. Management's plans in regard to these
matters are also described in Note 1. The consolidated financial statements do
not include any adjustments that might result from the outcome of this
uncertainty.
Arthur Andersen LLP
Boston, Massachusetts
April 23, 1997
(Except for the matters discussed in
Notes 1 and 3 and Note 19, for which the dates are
May 30, 1997 and April 25, 1997, respectively).
TOWN & COUNTRY CORPORATION & SUBSIDIARIES
- -----------------------------------------
CONSOLIDATED BALANCE SHEETS
- ---------------------------
February 23, February 25,
1997 1996
------------ ------------
ASSETS
------
CURRENT ASSETS:
Cash and cash equivalents (Note 2) $ 10,431,911 $ 5,151,929
Restricted cash (Note 2) 107,090 102,012
Accounts receivable, less allowances for
doubtful accounts of $1,243,000 and
$2,120,000 at February 23, 1997 and
February 25, 1996, respectively 22,247,826 51,294,879
Inventories (Note 2) 42,752,801 90,138,403
Prepaid expenses and other current assets 1,956,587 1,956,537
------------ ------------
Total current assets 77,496,215 148,643,760
------------ ------------
PROPERTY, PLANT AND EQUIPMENT, at
cost (Note 2) 56,215,045 84,073,513
Less-Accumulated depreciation 33,242,256 43,814,604
------------ ------------
22,972,789 40,258,909
------------ ------------
INVESTMENT IN SOLOMON BROTHERS,
LIMITED (Note 8) 13,734,000 13,734,000
------------ ------------
OTHER ASSETS (Note 2 and 7) 7,109,012 8,492,827
------------ ------------
$121,312,016 $211,129,496
============ ============
The accompanying notes are an integral part of these
consolidated financial statements.
TOWN & COUNTRY CORPORATION & SUBSIDIARIES
- -----------------------------------------
CONSOLIDATED BALANCE SHEETS (Continued)
- ---------------------------------------
February 23, February 25,
1997 1996
------------ ------------
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
----------------------------------------------
CURRENT LIABILITIES:
Notes payable to banks (Note 3) $ -- $ 15,193,176
Current portion of long-term debt
(Note 3) 13,254,000 244,928
Accounts payable 9,537,829 20,237,262
Accrued expenses (Note 2) 16,934,445 15,078,569
Accrued taxes (Notes 2 and 9) 614,202 659,744
------------- -------------
Total current liabilities 40,340,476 51,413,679
------------- -------------
LONG TERM DEBT, less current portion
(Note 3) 78,090,054 93,174,432
------------- -------------
OTHER LONG-TERM LIABILITIES -- 1,122,625
------------- -------------
COMMITMENTS AND CONTINGENCIES (Note 14)
MINORITY INTEREST 4,996,770 5,228,363
------------- -------------
EXCHANGEABLE PREFERRED STOCK,
$1.00 par value, $14.59 preference value-
Authorized--200,000 shares
Issued and outstanding--152,217
shares (Notes 3 and 6) 2,373,654 2,319,476
------------- -------------
STOCKHOLDERS' EQUITY (DEFICIT) (Notes 3, 6, 13, 15, and 16):
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--1,302,673 and 2,288,567
shares, respectively 1,302,673 2,288,567
Class A Common Stock, $.01 par value-
Authorized--40,000,000 shares
Issued and outstanding--23,508,082 and 21,235,246
shares, respectively 235,081 212,352
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 75,797,457 74,175,437
Accumulated deficit (81,850,798) (18,832,084)
------------- -------------
Total stockholders' equity (deficit) (4,488,938) 57,870,921
------------- -------------
$ 121,312,016 $ 211,129,496
============= =============
The accompanying notes are an integral part of these
consolidated financial statements.
TOWN & COUNTRY CORPORATION & SUBSIDIARIES
- -----------------------------------------
CONSOLIDATED STATEMENTS OF OPERATIONS
- -------------------------------------
For the Year Ended
--------------------------------------------------------
February 23, February 25, February 26,
1997 1996 1995
------------ ------------ ------------
NET SALES $ 209,152,862 $ 250,577,816 $ 288,114,608
INVENTORY CHARGE (Note 4) 35,521,000 -- --
COST OF SALES 147,446,342 173,141,311 200,533,890
------------- ------------- -------------
Gross profit $ 26,185,520 $ 77,436,505 $ 87,580,718
SELLING, GENERAL, AND
ADMINISTRATIVE EXPENSES 73,759,927 66,407,484 90,407,855
RESTRUCTURING CHARGE (Note 5) 7,207,694 -- --
------------- ------------- -------------
Income (loss) from operations $ (54,782,101) $ 11,029,021 $ (2,827,137)
INTEREST EXPENSE (12,722,915) (13,153,660) (12,169,615)
INTEREST AND OTHER INCOME, NET 428,715 678,251 234,933
GAIN ON SALE OF ASSETS AND
LIABILITIES OF BALFOUR (Note 19) 10,546,886 -- --
LOSS ON SALE OF ASSETS OF GOLD LANCE
(Note 19) (5,000,000) -- --
NET GAIN (LOSS) ON SALES OF REAL ESTATE (599,921) 417,220 --
GAIN ON LITTLE SWITZERLAND, INC.
EXCHANGE (Note 6) -- -- 17,277,988
INCOME (LOSS) FROM AFFILIATES (55,114) -- 587,814
(Notes 7 and 8)
MINORITY INTEREST (Note 2) 167,177 (673,079) (773,901)
------------- ------------- -------------
Income (loss) before provision for
income taxes $ (62,017,273) $ (1,702,247) $ 2,330,082
PROVISION FOR INCOME TAXES
(Notes 2 and 9) 260,762 163,867 1,758,164
------------- ------------- -------------
Net income (loss) $ (62,278,035) $ (1,866,114) $ 571,918
ACCRETION OF DISCOUNT AND DIVIDENDS
ON PREFERRED STOCKS (Notes 3 and 6) 740,679 1,039,802 1,688,019
------------- ------------- -------------
Income (loss) attributable to common
stockholders $ (63,018,714) $ (2,905,916) $ (1,116,101)
============= ============= =============
INCOME (LOSS) PER COMMON SHARE
(Note 2) $ (2.47) $ (0.12) $ (0.05)
============= ============= =============
WEIGHTED AVERAGE COMMON SHARES
OUTSTANDING (Note 2) 25,504,218 23,769,323 23,433,173
============= ============= =============
The accompanying notes are an integral part of these
consolidated financial statements.
TOWN & COUNTRY CORPORATION AND SUBSIDIARIES
- -------------------------------------------
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
- ---------------------------------------------------------
FOR THE YEARS ENDED FEBRUARY 23, 1997, FEBRUARY 25, 1996, AND FEBRUARY 26, 1995
- -------------------------------------- ----------------------------------------
Class A
Convertible Preferred Stock Common Stock
----------------------------- ----------------------------
Number of Number of Par Value
Shares Par Value $1 Shares $.01
--------- ------------ --------- ---------
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 15 and 16) -- -- 23,115 231
Accretion of discount and dividends on
preferred stocks (Notes 3 and 6) -- -- -- --
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 15 and 16) -- -- 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 6) -- -- -- --
Net loss -- -- -- --
--------- ----------- ---------- ----------
BALANCE, February 25, 1996 2,288,567 $ 2,288,567 21,235,246 $ 212,352
Conversion of Convertible Preferred Stock
into Class A Common Stock (1,106,159) (1,106,159) 2,212,317 22,124
Net proceeds from the exercise of
options to purchase common stock
(Notes 15 and 16) -- -- 60,519 605
Issuance of Convertible Preferred Stock as
payment of dividend 120,265 120,265 -- --
Accretion of discount and dividends on
preferred stocks (Notes 3 and 6) -- -- -- --
Net loss -- -- -- --
--------- ----------- ---------- ----------
BALANCE, February 23, 1997 1,302,673 $ 1,302,673 23,508,082 $ 235,081
========= =========== ========== ==========
(Continued on Next Page)
TOWN & COUNTRY CORPORATION AND SUBSIDIARIES
- -------------------------------------------
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
- ---------------------------------------------------------
FOR THE YEARS ENDED FEBRUARY 23, 1997, FEBRUARY 25, 1996, AND FEBRUARY 26, 1995
- -------------------------------------- ----------------------------------------
Class B
Common Stock
----------------------------
Additional Total
Number of Par Value Paid-in Accumulated Stockholders'
Shares $.01 Capital Deficit Equity (Deficit)
--------- --------- ---------- ----------- ----------------
BALANCE, February 27, 1994 2,670,693 $ 26,707 $ 69,909,485 $ (14,810,068) $ 55,333,683
Share issuance related to Little
Switzerland, Inc. exchange -- -- 2,976,297 -- 5,357,335
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 15 and 16) -- -- 27,352 -- 27,583
Accretion of discount and dividends on
preferred stocks (Notes 3 and 6) -- -- 232,152 (1,688,018) (1,455,866)
Net income -- -- -- 571,918 571,918
--------- --------- ------------ -------------- ------------
BALANCE, February 26, 1995 2,664,941 $ 26,649 $ 73,145,286 $ (15,926,168) $ 59,834,653
Conversion of Convertible Preferred Stock
into Class A Common Stock -- -- 198,232 -- --
Net proceeds from the exercise of
options to purchase common stock
(Notes 15 and 16) -- -- 22,502 -- 22,961
Issuance of Convertible Preferred Stock as
payment of dividend -- -- (109,806) -- --
Accretion of discount and dividends on
preferred stocks (Notes 3 and 6) -- -- 919,223 (1,039,802) (120,579)
Net loss -- -- -- (1,866,114) (1,866,114)
--------- --------- ------------ -------------- ------------
BALANCE, February 25, 1996 2,664,941 $ 26,649 $ 74,175,437 $ (18,832,084) $ 57,870,921
Conversion of Convertible Preferred Stock
into Class A Common Stock -- -- 1,084,035 -- --
Net proceeds from the exercise of
options to purchase common stock
(Notes 15 and 16) -- -- 38,376 -- 38,981
Issuance of Convertible Preferred Stock as
payment of dividend -- -- (120,265) -- --
Accretion of discount and dividends on
preferred stocks (Notes 3 and 6) -- -- 619,874 (740,679) (120,805)
Net loss -- -- -- (62,278,035) (62,278,035)
--------- --------- ------------ -------------- ------------
BALANCE, February 23, 1997 2,664,941 $ 26,649 $ 75,797,457 $ (81,850,798) $ (4,488,938)
========= ========= ============ ============== ============
The accompanying notes are an integral part of these
consolidated financial statements.
TOWN & COUNTRY CORPORATION AND SUBSIDIARIES
- -------------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
- -------------------------------------
For the Year Ended
--------------------------------------------------
February 23, February 25, February 26,
1997 1996 1995
------------ ------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $(62,278,035) $ (1,866,114) $ 571,918
Adjustments to reconcile net income (loss)
to net cash provided by (used in)
operating activities--
Depreciation and amortization 3,013,312 3,929,246 4,846,300
Loss/(gain) on disposal of fixed assets, net 599,921 (423,600) 73,773
Loss/(gain) on sales of assets and liabilities
of subsidiaries, net (Note 19) (5,546,886) -- --
Gain on Little Switzerland, Inc. exchange
(Note 6) -- -- (17,277,988)
Undistributed earnings of affiliates, net
of minority interest (112,063) 673,080 186,087
Interest paid with issuance of debt
(Note 3) -- 4,200,569 7,647,666
Change in assets and liabilities--
(Increase) decrease in accounts
receivable 7,775,439 6,177,243 (1,848,704)
(Increase) decrease in inventories 38,517,105 (9,788,991) (5,320,015)
(Increase) decrease in prepaid
expenses and other current assets 175,088 (1,382,926) 3,418,272
(Increase) decrease in other assets (273,803) (512,991) 6,542,404
Increase (decrease) in accounts payable (8,365,256) 2,428,237 5,081,668
Increase (decrease) in accrued expenses 3,438,070 (380,343) (4,597,420)
Increase (decrease) in accrued taxes (45,542) (692,779) 478,270
Increase (decrease) in other liabilities 53,217 (371,899) (599,231)
------------ ------------ ------------
Net cash provided by (used in)
operating activities $(23,049,433) $ 1,988,732 $ (797,000)
------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of fixed assets $ 6,842,719 $ 996,610 $ 45,331
Capital expenditures (3,238,322) (2,734,122) (2,759,204)
Proceeds from sale of assets and liabilities of
subsidiary (Note 19) 41,914,418 -- --
Investment in affiliates (1,489,884) (380,000) --
------------ ------------ ------------
Net cash provided by (used in)
investing activities $ 44,028,931 $ (2,117,512) $ (2,713,873)
------------ ------------ ------------
The accompanying notes are an integral part of these
consolidated financial statements.
TOWN & COUNTRY CORPORATION & SUBSIDIARIES
- -----------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
- -------------------------------------------------
For the Year Ended
-----------------------------------------------------------------
February 23, February 25, February 26,
1997 1996 1995
------------ ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments on revolving credit facility $(261,017,868) $(257,779,581) $(279,990,373)
Proceeds from borrowings under
revolving credit facility 245,824,692 261,854,934 291,108,200
Decrease (increase) in restricted cash (5,078) (100,123) 36,082
Payments on other debt (399,080) (1,926,044) (7,607,575)
Payment of dividends (141,163) (128,359) --
Proceeds from the issuance of common stock 38,981 22,961 27,584
------------- ------------- -------------
Net cash provided by (used in)
financing activities $ (15,699,516) $ 1,943,788 $ 3,573,918
------------- ------------- -------------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS $ 5,279,982 $ 1,815,008 $ 63,045
CASH AND CASH EQUIVALENTS AT
BEGINNING OF YEAR 5,151,929 3,336,921 3,273,876
------------- ------------- -------------
CASH AND CASH EQUIVALENTS AT END
OF YEAR $ 10,431,911 $ 5,151,929 $ 3,336,921
============= ============= =============
SUPPLEMENTAL CASH FLOW DATA:
CASH PAID DURING THE YEAR FOR:
Interest $ 14,010,558 $ 9,758,857 $ 4,908,642
============= ============= =============
Income taxes $ 420,448 $ 806,463 $ 1,119,864
============= ============= =============
SUPPLEMENTAL DISCLOSURES OF NONCASH INVESTING AND FINANCING ACTIVITIES (Note 2)
The accompanying notes are an integral part of these
consolidated financial statements.
TOWN & COUNTRY CORPORATION & SUBSIDIARIES
-----------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
FEBRUARY 23, 1997
-----------------
(1) MANAGEMENT'S PLANS
------------------
Town & Country Corporation and subsidiaries ("the Company") incurred a
substantial loss during fiscal 1997, primarily as a result of the following:
[bullet] The disposal of inventory which resulted in a $35.5 million charge in
the second quarter (See Note 4).
[bullet] The incurrence of an operating loss in the fine jewelry business
resulting primarily from declining sales and gross margins as compared
to fiscal 1996. Additionally, the Company recognized $5.5 million in
unanticipated customer allowances in the second quarter.
[bullet] The incurrence of a $7.2 million restructuring charge in the fourth
quarter to recognize costs associated with reorganizing the fine
jewelry business, primarily related to severance costs (See Note 5).
As a result of the declining performance of the fine jewelry business, the
Company developed a revitalization plan. The major three components of the plan
are (1) disposal of non-core assets, (2) reengineering of company-wide processes
and (3) further expansion internationally.
In order to focus and fund the core business of the Company, a project was
undertaken to dispose of non-core businesses and properties. In December 1996
the Company was successful in selling certain assets and liabilities of its
Balfour subsidiary. In April 1997, the Company announced the sale of certain
assets of its Gold Lance subsidiary. The Company sold real estate not related to
its core business and currently has on the market the remaining real estate and
machinery related to Balfour and Gold Lance. These transactions generated
sufficient cash to allow the Company to repay all amounts outstanding on its
revolving credit facility as of February 23, 1997 (See Note 3).
Town & Country began a reengineering project with the assistance of a management
consulting firm. The Company focused on company-wide processes that needed
streamlining. In November 1996, cross-functional product development teams were
introduced to assist in the effort to reduce the time from concept to product.
These teams review new products in process for marketability, manufacturability
and profitablilty. Products have been eliminated and/or modified. Product lines
were reviewed for completeness and new designs have been introduced based on
specific customer requirements. The Company organized its sales and support
functions around its customers and their business requirements by creating
customer teams. These teams are intended to operate as fully operational
businesses with profit and loss responsibility and accountability.
The changes in the Company included certain management changes. Mr. William
Schawbel, was appointed co-chairman of the Board of Directors and acting CEO
upon the resignation of C. William Carey, the founder, president and Chairman
effective January 3, 1997. Mr.
Schawbel, a director for three years and founder and CEO of his own company, was
an executive of the Gillette Company for 19 years. During process reengineering
there have also been additional fine jewelry senior management who have left the
Company. The Company believes that the current management structure is in line
with its current needs.
In the international area, the Company began the process of privatizing its
Essex subsidiary in fiscal 1997 (See Note 18). The Company believes that 100%
ownership of Essex will allow the Company to better integrate and utilize its
manufacturing facilities worldwide and achieve cost efficiencies in a more
timely manner. The privatization is scheduled to be completed by the end of July
1997. The Company has also begun designing product specifically for the European
and Asian markets. The Company hopes to take advantage of emerging business in
these parts of the world and is expanding its offshore marketing and sales with
this intent.
The Company has received amendments to the terms of its Senior Secured Notes and
Senior Subordinated Notes for the purposes of: (1) using approximately $3.0
million to reacquire 100% ownership of its Essex subsidiary, and (2) modifying
the net worth financial covenant as a result of the second quarter fiscal 1997
loss.
On May 30, 1997, Town & Country Corporation and its working capital lender,
Foothill Capital Corporation ("Foothill") signed an amendment to its July 1996
revolving credit agreement, which was specifically structured between the
parties to meet the requirements of the Company's business plan for fiscal 1998
(See Note 3).
The fiscal 1997 loss created a net capital deficiency of approximately $4.5
million. The Company also has $13.3 million of Senior Secured Notes maturing
September 15, 1997.
In addition, the Company has approximately $75.8 million in principal amount of
debt maturing in fiscal 1999. These debt issues mature as follows:
[bullet] May 31, 1998 $68.8 million Senior Subordinated Notes
[bullet] December 15, 1998 $ 7.0 million Subordinated Notes
The near term maturity of these securities and the material amount of the
principal payments represents a potential liquidity issue for the Company. The
Company, with the assistance of professional advisors, is evaluating possible
alternatives with regard to addressing this situation. It is essential for the
Company to raise additional capital and/or restructure its debt under terms
which will allow the Company to meet its expected future cash flow requirements.
There can be no assurances that the Company will be able to raise additional
capital and/or restructure its debt.
The Company's ability to achieve its operating results included in its fiscal
1998 business plan is affected by a number of factors, including the successful
outcome of the revitalization program discussed above. There can be no assurance
that the program will be successful or that the operating results, including
anticipated sales growth and gross margin percentage improvements, will be
achieved.
The accompanying consolidated financial statements have been prepared
assuming that the Company will continue as a going concern and, accordingly, the
consolidated financial statements do not include any adjustments relating to
recoverability and classification of assets carrying amounts or the amount and
classification of liabilities that might result should the Company be unable to
continue as a going concern.
(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.
Organization
------------
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 products in the United States and
internationally. The Company consisted of five operating entities: the parent
company, Town & Country Corporation ("Town & Country"), headquartered in
Chelsea, Massachusetts; its wholly owned subsidiaries, Town & Country Fine
Jewelry Group, Inc. ("Fine Jewelry Group"), headquartered in Chelsea,
Massachusetts; Anju Jewelry Limited, a Hong Kong company and its subsidiaries
("Anju"); Gold Lance, Inc. ("Gold Lance"), located in Houston, Texas; L.G.
Balfour Company, Inc. ("Balfour"), headquartered in North Attleboro,
Massachusetts; and its majority-owned subsidiary Essex International Public
Company Limited and its affiliates ("Essex"), a Thailand company. On
December 16, 1996, the Company sold certain assets and liabilities constituting
substantially all of the operations of its Balfour subsidiary. Subsequent to
year-end, the Company sold certain assets of its Gold Lance subsidiary and
related to the sale changed the name of the subsidiary to GL, Inc. (See Note
19).
Reclassifications
-----------------
Certain reclassifications have been made to the prior years' financial
statements to conform with the presentation of the fiscal 1997 financial
statements.
Comparability
-------------
The accompanying consolidated statements of operations include the
operations of the Company's Balfour subsidiary through December 16, 1996, the
date of the sale of Balfour. The accompanying consolidated balance sheet as of
February 23, 1997 includes only those assets and liabilities of Balfour not
included in the sale and not liquidated by February 23, 1997.
Revenue Recognition
-------------------
The Company generally recognizes revenue upon shipment of its products
to customers. Revenue on consignment product shipped to customers is recognized
from reporting by the customer that the product has been sold to the end user.
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
-----------------
On February 26, 1996, the Company adopted 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. Adoption of SFAS No. 121 did not have a material impact on the
Company's financial condition and results of operation.
Stock Options
-------------
On February 26, 1996, the Company adopted 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 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 pro forma effects on earnings
per share had the principles in SFAS No. 123 been applied (See
Note 15).
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.
In March 1997, the Financial Accounting Standards Board issued SFAS No.
128. Earnings per Share, which supersedes Accounting Principles Board Opinion
No. 15, the existing authoritative guidance. SFAS No. 128 is designed to improve
the earnings per share information provided in the financial statements by
simplifying the existing computational guidelines, revising the disclosure
requirements and increasing the comparability of earnings per share on an
international basis. SFAS No. 128 is effective for financial statements for both
interim and annual periods ending after December 15, 1997, and requires
restatement of all prior-period earnings per share data presented. The new
statement modifies the calculations of primary and fully diluted earnings per
share and replaces them with basic and diluted earnings per share. Basic
earnings per share includes no dilution and is calculated by dividing net income
(loss) by the weighted average number of common shares outstanding for the
period. Diluted earnings per share reflects the potential dilution of stock
options that could share in the earnings of an entity, similar to fully diluted
earnings per share. Earnings per share in these financial statements would not
be affected under the new pronouncement.
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 1997 and fiscal 1996, approximately $0 and $0.7
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 in
the period ended February 23, 1997.
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 23, 1997, and
February 25, 1996:
1997 1996
----------- -----------
Raw materials $ 8,547,459 $14,820,768
Work-in-process 5,643,042 9,947,057
Finished goods 28,562,300 65,370,578
----------- -----------
$42,752,801 $90,138,403
=========== ===========
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 23, 1997, February
25, 1996 and February 26, 1995, these fees totaled approximately $1.5 million,
$1.4 million and $1.4 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 23, 1997 and February 25, 1996, the Company held approximately
33,000 ounces, valued at $11.5 million, and 63,000 ounces, valued at $24.9
million, respectively, of gold on consignment under its domestic gold
agreements. A foreign subsidiary of the Company held an additional 2,800 ounces,
valued at $1.0 million, and 3,100 ounces, valued at $1.2 million, outstanding at
February 23, 1997, and February 25, 1996, respectively, under a separate
consignment agreement (See Note 3).
Advertising
-----------
The Company expenses the costs of advertising as incurred.
At February 23, 1997, February 25, 1996 and February 26, 1995,
advertising expense was approximately $5.7 million, $5.8 million and $14.2
million.
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 23, 1997,
and February 25, 1996:
Useful Life
Ranges 1997 1996
------------------------------- -----------
Real estate 10 - 40 Years $15,616,919 $28,991,637
Furniture and fixtures 3 - 7 Years 3,101,232 3,754,091
Equipment 3 - 20 Years 33,288,626 46,161,078
Leasehold improvements 4 - 20 Years 4,175,809 4,795,245
Construction-in-progress 32,459 371,462
----------- -----------
$56,215,045 $84,073,513
=========== ===========
Accrued Expenses
----------------
The principal components of accrued expenses at February 23, 1997, and
February 25, 1996, are as follows:
1997 1996
----------- -----------
Compensation and related costs $ 3,188,756 $ 4,721,395
Customer deposits -- 4,824,697
Interest 2,954,777 3,088,712
Commissions 567,895 517,606
Restructuring costs (Note 5) 1,704,735 --
Loss on sale of assets of Gold Lance
(Note 19) 4,200,000 --
Balfour purchase price settlement
(Note 19) 1,100,000 --
Other 3,218,282 1,926,159
----------- -----------
$16,934,445 $15,078,569
=========== ===========
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 periods. Actual results could differ from those estimates.
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 cash flows over the
remaining life of the goodwill in measuring whether the goodwill is recoverable.
Goodwill included in other assets in the accompanying consolidated balance
sheets is approximately $1,148,000 and $3,885,000 at February 23, 1997 and
February 25, 1996, respectively. Included in operating expenses in the
accompanying consolidated statements of operations is amortization of
approximately $144,000, $183,000 and $183,000 in fiscal 1997, 1996 and 1995,
respectively. Goodwill associated with Balfour was realized as part of the sale
of certain assets and liabilities of Balfour as described in Note 19. Goodwill
remaining at February 23, 1997, relates to Gold Lance, the assets of which were
sold subsequent to year-end in the transaction described in Note 19.
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
----------------------------------------------------------------------
As part of the sale of certain assets and liabilities of the Company's
Balfour subsidiary on December 16, 1996, Commemorative Brands, Inc. took
possession of approximately $4.9 million of consigned gold and assumed the
corresponding gold loan liability.
During fiscal 1995, the Company had fixed asset additions of
approximately $0.7 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 6).
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 owned 318,962 shares of Little Switzerland, Inc. Common
Stock as of February 23, 1997 and 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
based on the publicly traded market price of the Little Switzerland, Inc. Common
Stock.
Investment in Solomon Brothers, Limited
The fair value of the Company's investment in Solomon Brothers, Limited
is considered to be no less than its carrying value as of February 23, 1997, and
February 25, 1996, based on the valuation method agreed upon for the redemption
of shares as discussed in Note 8 and the estimated fair value of the underlying
net assets.
Long-Term Subordinated Debt and Exchangeable Preferred Stock
The Company's management believes that estimating the fair value of the
Company's long-term subordinated debt and Exchangeable Preferred Stock as of
February 23, 1997, and February 25, 1996, is not practicable due to the lack of
an established market or comparable securities.
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 23, 1997 and 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 23, 1997, and February 25, 1996, consists of
the following:
1997 1996
------------ ------------
Senior Subordinated Notes due 1998
with interest payable semiannually at
13%, including unamortized premium of
$2.3 million and $4.0 million in 1997
and 1996, respectively. The first four
interest payments were made with
issuance of additional notes of
approximately $15.3 million. $ 71,155,227 $ 72,843,528
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 13,254,000
Senior Subordinated Notes due 1998
with interest payable semiannually at
13%, net of unamortized discount of
$25,173 and $37,248 in 1997 and 1996,
respectively. 6,934,827 6,922,752
Lease obligation for office furniture
and equipment payable in monthly
installments with interest at 9.67% -- 399,080
------------ ------------
$ 91,344,054 $ 93,419,360
Less-Current portion 13,254,000 244,928
------------ ------------
$ 78,090,054 $ 93,174,432
============ ============
On May 30, 1997 the Company completed an amendment (the "Amended
Agreement") to its July 3, 1996 credit agreement (the "Agreement") with Foothill
Capital Corporation ("Foothill") to reflect changes which have taken place in
the Company. The Amended Agreement provides senior secured financing consisting
of a revolving credit facility and a letter of credit in support of a Gold
Consignment Facility provided by Fleet Precious Metals, Inc. ("Fleet"). The
aggregate amount of the combined facilities, which may be outstanding at any
date, is $55 million.
The revolving credit facility has a maximum amount of $40 million from
February through October and $45 million from November through January. The
letter of credit has a maximum amount of $20 million from February through
October and $15 million from November through January. 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 Amended Agreement contains
standard covenants for facilities of this type including financial covenants
relating to interest coverage ratio, minimum net worth, debt to EBITDA ratio and
limitations on dividends, distributions and capital expenditures, as defined.
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 had no outstanding balance under its revolving credit
facility at February 23, 1997 and $10.1 million available for borrowing under
the facility. The Company had approximately 33,000 ounces outstanding under its
gold agreement and approximately 20,000 additional ounces available under this
agreement at February 23, 1997 (See Note 2). The weighted average interest rate
on overall borrowings under the credit facility was approximately 11.4% for
fiscal 1997 compared to 11.7% for fiscal 1996.
During fiscal 1997, the Company obtained modifications to the minimum
net worth covenant in the indentures governing the 11 1/2% Senior Secured Notes
and the 13% Senior Subordinated Notes from a majority of the bondholders of each
of the securities. During fiscal 1998, the Company obtained modifications to
these two indentures from a majority of the bondholders of each of the
securities to allow the Company to repurchase the outstanding shares of its Thai
subsidiary.
A subsidiary of the Company had available credit facilities with two
banks in Thailand to provide aggregate commercial financing of up to
approximately $11.6 million. The subsidiary had no balance outstanding under
these lines at February 23, 1997 and February 25, 1996, 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 4, 1997, and is secured by a standby letter of
credit for $1.9 million under one of the subsidiary's credit facilities. There
were approximately 2,800 and 3,100 ounces on consignment under this gold
agreement at February 23, 1997 and February 25, 1996, respectively (See Note 2).
Subsequent to year-end, this subsidiary's credit facility was reduced to
approximately $8.9 million from one bank.
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 1997
and fiscal 1996, the Company redeemed $0 and $0.7 million, respectively, of
Senior Secured Notes with such proceeds.
In the event that the Company's consolidated stockholders' deficit
exceeds a defined maximum for two consecutive quarters, $7,500,000 as of
February 23, 1997, the Company is required to make an offer to redeem 7.5% of
the outstanding Senior Subordinated Notes due 1998 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. As of February 23, 1997 there are 152,217 shares outstanding. 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 1997 and fiscal 1996,
approximately $67,000 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 6).
Cumulative unpaid dividends amounted to approximately $105, 000 and
approximately $39,000 at February 23, 1997 and February 25, 1996, respectively.
For the years ended February 23, 1997, February 25, 1996 and February 26, 1995,
accretion of dividends and discount on Exchangeable Preferred Stock amounted to
approximately $121,000, $121,000 and $1,456,000, respectively.
Aggregate maturities of long-term debt and Exchangeable Preferred Stock
for each of the next five years are approximately $13,254,000, $75,785,000, $0,
$2,221,000 and $0, respectively.
(4) INVENTORY CHARGE
----------------
During fiscal 1997, the Company implemented a program to recycle
inventory to recover gold and diamonds to meet immediate production
requirements. 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'
delivery 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 related to these
actions.
(5) RESTRUCTURING
-------------
In fiscal 1997, the Company recorded an approximately $7.2 million
charge consisting of costs associated with the restructuring of the Company's
fine jewelry operations. The Company consolidated its distribution facilities
and significantly changed its organizational structure including reducing the
number of senior managers. The new structure is based on the business unit
approach, organized around customer teams which will be directly
responsible for meeting customer needs. The components of the charge consisted
of approximately $5.3 million of severance related costs, $0.8 million in
facility closure costs and $1.1 million of other related costs (See Note 2).
(6) 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 in fiscal 1995 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 1997 and fiscal 1996, dividends of approximately
$782,000 and $713,000, respectively, were paid with the issuance of
approximately 120,000 and 110,000, respectively, of new shares of Convertible
Preferred Stock. At February 23, 1997, and February 25, 1996, cumulative unpaid
dividends amounted to approximately $336,000 and $438,000, respectively.
The Convertible Preferred Stock is subordinate with respect to
liquidation preference 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.
(7) INVESTMENT IN AFFILIATES
------------------------
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.
As a result of the exchange discussed in Note 6, 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 in fiscal
1995, the Company changed its method of accounting for this investment from the
equity method to the cost method. The continuing investment in Little
Switzerland, Inc. of approximately $1,651,000 is included in other assets in the
accompanying consolidated balance sheets as of February 23, 1997 and February
25, 1996.
A subsidiary of the Company has investments in two companies totaling
approximately $1.8 million which are included in other assets in the
accompanying consolidated balance sheet as of February 23, 1997. Both
investments are accounted for under the equity method of accounting.
(8) 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. 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, April 4, 1996 and March 3, 1997, 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,
55,000 and 55,000 additional shares, respectively. The Company currently expects
to give notice of intention to redeem additional shares annually until all
outstanding shares have been noticed. Solomon Brothers informed the Company that
it would not be able to redeem the March, 1994, March, 1995, April, 1996 and
March, 1997, 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, adjustments will be made at that time.
This type of investment, by its terms, and by the nature of Solomon
Brothers, a Bahamian closely held company, is not a highly liquid investment.
The intention of the investment was for the Company to be a long term
beneficiary of Solomon Brothers' growth and success. If the investment were sold
in a distress situation rather than redeemed through
the cash flows or liquidated through a winding up of Solomon Brothers, the price
which the Company may receive in such a sale might be substantially less than
carrying value.
Presented below is summarized financial information for Solomon Brothers
as of and for the years ended October 25, 1996, October 27, 1995 and October 28,
1994, prepared on a basis substantially in accordance with generally accepted
accounting principles (GAAP) (Bahamian Dollars, $000s):
1996 1995 1994
-------- -------- --------
Working capital $ 15,741 $ 14,363 $ 15,094
Total assets 64,324 64,165 73,378
Total shareholders' equity 24,605 23,955 27,828
Sales $ 74,446 $ 69,952 $ 63,657
Net income (loss) 506 (3,874) 54
Cash flows from operating activities 2,445 3,499 (2,346)
Solomon Brothers' prior years' information has been restated for
consistency purposes for operations which were discontinued.
(9) INCOME TAXES
------------
The domestic and foreign components of income (loss) before provision
for income taxes for the years ended February 23, 1997, February 25, 1996 and
February 26, 1995 are as follows:
1997 1996 1995
------------ ------------ ------------
Domestic $(62,818,733) $ (2,859,405) $ (1,014,997)
Foreign 801,460 1,157,158 3,345,079
------------ ------------ ------------
$(62,017,273) $ (1,702,247) $ 2,330,082
============ ============ ============
The components of the provision for income taxes for the years ended
February 23, 1997, February 25, 1996 and February 26, 1995 are as follows:
1997 1996 1995
---------- ---------- ----------
Current--
Federal $ -- $ -- $ --
State 240,000 -- 700,000
Foreign 20,762 163,867 1,058,164
---------- ---------- ----------
Total provision $ 260,762 $ 163,867 $1,758,164
========== ========== ==========
The Company's effective tax rate differs from the federal statutory rate
of 35% in fiscal 1997, 1996 and 1995 due to the following:
1997 1996 1995
------------ ------------ ------------
Computed tax provision
(benefit) at statutory rate $(21,706,045) $ (595,786) $ 815,529
Increases (reductions)
resulting from--
Repatriation of foreign earnings
and difference between
U.S. and foreign tax rates 167,999 221,023 1,061,886
State taxes 240,000 -- 700,000
Tax basis differences related to
Little Switzerland, Inc.
common stock exchange -- -- (2,110,946)
Items not deductible for
income tax purposes 1,053,576 92,488 92,488
Deferral of net
operating losses 20,505,232 446,142 1,199,207
------------ ------------ ------------
$ 260,762 $ 163,867 $ 1,758,164
============ ============ ============
DEFERRED TAX ASSETS (in 000's) 1997 1996
-------- --------
Restructuring and recapitalization cost accruals $ 2,952 $ 2,287
Accounts receivable reserves 3,782 2,617
Accrual for loss on assets held for sale or disposal -- 561
Inventory reserves 1,831 1,815
Other 534 1,945
Net operating loss carryforwards 39,338 19,666
-------- --------
Total gross deferred tax assets 48,437 28,891
Less--valuation allowance (41,022) (17,885)
-------- --------
Net deferred tax assets $ 7,415 $ 11,006
-------- --------
DEFERRED TAX LIABILITIES (in 000's) 1997 1996
-------- --------
Property, plant and equipment, principally due to
differences in depreciation $ 1,773 $ 5,629
Investments in affiliated companies, principally
due to undistributed income 5,132 4,971
Other 510 406
-------- --------
Total deferred tax liabilities 7,415 11,006
-------- --------
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 $98 million, subject to Internal Revenue Service
review and approval. Utilization of the net operating loss carryforward is
contingent on the Company's ability to generate income in future years. The net
operating loss carryforwards will expire from 2009 to 2012 if not utilized.
(10) 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 had been substantially completed and the
remaining reserve of approximately $1.4 million, represented the expected loss
associated with the disposition of a plant site being prepared for sale to the
Town of Attleboro. During fiscal 1997, the sale was completed with no material
impact to results of operation. No reserve remains at February 23, 1997.
(11) 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.
The Company had net sales to its largest customer in fiscal 1997 of
approximately $19.4 million or 9% of consolidated net sales in fiscal 1997
compared to $16.0 million or 6% of consolidated net sales in fiscal 1996 and
$12.5 million or 4% of total consolidated net sales in fiscal 1995. Net sales to
this customer were approximately 13% of consolidated net sales excluding fiscal
1997 Balfour sales.
Net sales to the Company's second largest customer were approximately
$14.5 million or 7% of consolidated net sales in fiscal 1997 compared to $22
million or 9% of consolidated net sales in fiscal 1996 and $29 million or 10% of
consolidated net sales in fiscal 1995. Net sales to this customer were 10% of
consolidated net sales excluding fiscal 1997 Balfour sales.
The loss of either or both of these customers or a substantial reduction
in the amount of sales to either or both of these customers would have a
material adverse effect on the Company.
(12) NONRECURRING EVENTS
-------------------
Based on the success of its operational restructuring during fiscal
1993, the Company concluded that the Feature facility in New York would not be
required as a long-term manufacturing site. 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.
On November 14, 1996, the Company sold this facility for a gross sale
price of $6.2 million, of which $5.3 million was paid at closing. The remaining
$0.9 million was paid 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 net book value of the property. As a result, the Company
sustained a loss of approximately $0.8 million on the sale which is reflected in
the accompanying fiscal 1997 consolidated statement of operations.
(13) 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 May, 1993, 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 on common stock is limited
by its financing and other outstanding indebtedness. As a result of these
restrictions, the Company currently may not pay cash dividends on its common
stock.
(14) 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 former Chairman
and 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 23, 1997, are approximately as follows:
------------------------------
Year Total Commitment
------------------------------
1998 $745,000
1999 565,000
2000 356,000
2001 222,000
2002 173,000
Thereafter 912,000
------------------------------
Lease and rental expense included in the accompanying consolidated
statements of operations amounted to approximately $1.8 million, $1.9 million
and $1.4 million for the years ended February 23, 1997, February 25, 1996 and
February 26, 1995, respectively.
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.
(15) 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. In general, the grants made under this plan had a vesting
schedule of 20% per year for five years and had a term of ten years. 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 option grants which have been made
under this plan have a vesting schedule of 15% when granted and an additional
17% per year for five years and have a term of ten years. On September 19, 1995,
the Company made restricted stock awards of 50,000 shares of Class A Common
Stock which vest on the same schedule as options granted under the plan.
The Company also has a stock plan for non-employee directors, the 1994
Non-Employee Directors' Non-qualified 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 Company has also granted options not under any plan to consultants
and various individuals to purchase up to 2,126,545 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.
Pro Forma Stock-Based Compensation Expense
In October 1995, the Financial Accounting Standards Board issued SFAS
No. 123, Accounting for Stock-Based Compensation, which sets forth a
fair-valued-based method of recognizing stock-based compensation expense. As
permitted by SFAS No. 123, the Company has elected to continue to apply APB No.
25 to account for its stock-based compensation plans. Had compensation cost for
awards granted in fiscal 1997 and fiscal 1996 under the Company's stock-based
compensation plans been determined based on the fair value at the grant dates
consistent with the method set forth under SFAS No. 123, the effect on the
Company's net loss and loss per common share would have been as follows:
1997 1996
Net Loss
As reported $(62,278,035) $ (1,866,114)
Pro forma $(62,517,467) $ (2,268,844)
Loss per common share
As reported $ (2.47) $ (0.12)
Pro forma $ (2.48) $ (0.14)
Compensation expense for options is reflected over the vesting period;
therefore, future compensation expense may be greater as additional options are
granted.
The fair value of each option grant was estimated on the grant date
using the Black-Scholes option pricing model with the following weighted average
assumptions:
1997 1996
Volatility 56% 56%
Risk-free interest rate 6.2% 5.1%
Expected life of options 5.8 years 7.0 years
The Black-Scholes option pricing model was developed for use in estimating the
fair value of traded options, which have no vesting restrictions and are fully
transferable. In addition, option pricing models require the input of highly
subjective assumptions, including expected stock price volatility. Because the
Company's stock options have characteristics significantly different from those
of traded options and because changes in the subjective input assumptions can
materially affect the fair value estimate, in management's opinion, the existing
models do not necessarily provide a reliable single measure of the fair value of
its stock options.
Stock Option Activity
A summary of the Company's stock option activity is as follows:
1997 1996 1995
-----------------------------------------------------------------------------
Number of Weighted Number of Weighted Number of Weighted
Shares Average Shares Average Shares Average
Exercise Exercise Exercise
Price Price Price
Options outstanding,
beginning of year 4,673,700 $ 0.86 2,494,150 $ 2.80 2,348,400 $ 1.75-8.00
Granted 566,545 0.65 4,543,700 0.81 658,500 1.88-8.00
Exercised -- -- -- -- -- --
Forfeited 2,162,350 0.81 2,315,700 2.83 482,750 2.38-8.00
Expired 20,000 4.94 48,450 3.00 30,000 6.25
--------- ---- --------- ---- --------- ---------
Options outstanding
end of year 3,057,895 0.83 4,673,700 0.86 2,494,150 1.75-6.88
========= ==== ========= ==== ========= =========
Options exercisable 2,516,795 0.80 1,919,900 0.89 1,080,800 1.75-6.88
========= ==== ========= ==== ========= =========
Options available for
grant 1,437,500 470,000 651,400
========= ========= =======
Weighted average
fair value per share
of options granted
during year $ 0.38 $ 0.38
======== =========
- ---------------------------------------------------------------------------------------------------------
A summary of the status of the Company's stock options at February 23, 1997 is
as follows:
Range of Number of Weighted Weighted
Exercise Prices Shares Average Average
Remaining Exercise
Contractual Price
Life
- --------------------------------------------------------------------------------
$0.63-2.06 3,057,895 6.0 years $0.83
- --------------------------------------------------------------------------------
(16) 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
23, 1997, 12,991 shares were issued at $0.25 per share. 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. At February 23, 1997, there were 247,622 shares reserved for
issuance under the Stock Purchase Plan.
(17) EMPLOYEE BENEFIT PLANS
----------------------
(a) Postemployment Medical Benefits
-------------------------------
The Company's Balfour subsidiary provided 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 was 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. As part of the sale of certain assets and liabilities of Balfour on
December 16, 1996, the Company was relieved of its obligation to fund such post
employment medical benefits. (See Note 19)
Included in the February 25, 1996 consolidated balance sheet is an
accrual of approximately $0.6 million associated with this plan. The
consolidated statements of operations for fiscal 1997, 1996 and 1995 include
approximately $599,000, $767,000 and $797,000, respectively, of net periodic
post retirement benefit cost.
(18) ESSEX PRIVATIZATION
-------------------
During fiscal 1997, the Company began the process of purchasing the
approximately 1.6 million outstanding shares in its majority owned Thai
subsidiary. The Company estimates that the cost to repurchase the shares will be
approximately $3 million and that the process should be completed during the
second quarter of fiscal 1998.
(19) SALES OF ASSETS
---------------
L.G. Balfour Company, Inc.
On December 16, 1996, the Company sold certain assets and liabilities 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. (the "Balfour Sale").
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, less $14 million which was placed
in escrow pending final FTC approval. Additionally, CBI assumed a liability of
$4.9 million representing the value of gold on hand as of the date of closing.
All of the $4.9 million in gold value acquired by CBI was on consignment at the
closing date and was neither reflected as an asset or a liability on the
Company's consolidated balance sheet. On December 31, 1996, the Company received
the $14 million in escrowed funds. Approximately $3.7 million of the proceeds
were used to pay transaction costs. Approximately $1.5 million in liabilities
not assumed in the sale were paid from operations. On April 25, 1997, a
settlement was reached in which the Company paid CBI $1.1 million to finalize
the working capital adjustment and resolve certain other items and such amount
is included in accrued expenses in the accompanying consolidated balance sheet
as of February 23, 1997 (See Note 2). The Company recorded a gain in the fourth
quarter of approximately $10.5 million on the Balfour Sale which is included in
the accompanying consolidated statement of operations for the year ended
February 23, 1997.
The Balfour Sale did not include any real property. The prime component of real
property is a facility in Attleboro, Massachusetts which had 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 and is included as a component
of the gain recognized on the sale and reduced the carrying value of the
facility included in property, plant and equipment in the accompanying
consolidated balance sheet as of February 23, 1997. The Company is leasing the
facility 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, therefore, the
Company estimated a one year period to sell the facility and included an
estimate of the carrying costs of approximately $0.2 million in the $1.1 million
impairment recorded.
The Balfour Sale did not include the assumption of a lease facility in
North Attleboro, Massachusetts. In fiscal 1998 the lease was amended, reducing
the amount of space and the period of time for which the Company is obligated.
The Company's future lease obligation for this facility is for approximately
eighteen months at an annual cost of approximately $0.2 million.
The Company is subleasing the remaining space to CBI on a temporary basis,
however, it is possible that the Company will be required to hold the property
for a period 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 has assumed that the facility would remain vacant after CBI vacates for
the remainder of the lease term and accrued approximately $0.4 million which is
included in accrued expenses in the accompanying consolidated balance sheet as
of February 23, 1997.
The Balfour Sale included the assumption by CBI of a liability related
to postretirement medical benefit obligations, including an unamortized
accumulated postretirement medical benefit obligation of approximately $5.2
million. This liability did not appear on the Company's consolidated balance
sheet in the past, as the Company had been recognizing it on the delayed
recognition method allowed by FASB No. 106, Employers' Accounting for
Postretirement Benefits Other Than Pensions (See Note 17).
The accompanying consolidated balance sheet as of February 23, 1997
includes assets of Balfour consisting primarily of the real estate and their
associated liabilities, as well as, the accrual of the final working capital
settlement discussed above. Other remaining assets and liabilities are not
material to the financial position of the Company as of February 23, 1997.
The accompanying consolidated statements of operations for the years
ended February 23, 1997, February 25, 1996 and February 26, 1995 include the
following amounts associated with Balfour.
1997(1) 1996 1995
Net sales $ 60,232,527 $ 71,300,472 $ 77,490,988
Cost of sales 29,350,036 35,598,485 35,405,942
------------ ------------ ------------
Gross profit 30,882,491 35,701,987 42,085,046
Selling, general and
administrative expenses 31,019,538 33,496,669 51,169,673
------------ ------------ ------------
Income (loss) from operations $ (137,047) $ 2,205,318 $ (9,084,627)
============ ============ ============
(1) Represents the period from February 26, 1996 to December 16, 1996.
Gold Lance, Inc.
On April 18, 1997, the Company sold certain assets of its Gold Lance
subsidiary to Jostens, Inc. ("the Gold Lance Sale"). Prior to or at closing, on
April 18, 1997, the Company received cash equal to the purchase price of
approximately $10.8 million, less $2.5 million, the payment of which is
contingent on the operating performance of Gold Lance during a transition period
between April 18, 1997 and July 31, 1997 ("the Transition Period"). The Company
recorded a loss in the fourth quarter of $5.0 million on the Gold Lance Sale
which is included in the accompanying consolidated statement of operations for
the year ended February 23, 1997.
The Gold Lance Sale did not include any real property. The prime
component of real property is a facility in Houston, Texas which had a net book
value of approximately $1.5 million and a fair value of approximately $0.7
million. A $0.8 million impairment of the carrying value of the facility has
been recognized in association with this sale and is included as a component of
the $5.0 million loss recognized on the sale. The carrying value of the facility
included in property, plant and equipment in the accompanying consolidated
balance sheet reflects such impairment as of February 23, 1997. The Company will
continue to operate the property on a temporary basis for approximately four
months. It is possible that the Company will be required to hold the facility
for an unspecified amount of time before being able to complete a sale.
The accompanying consolidated balance sheet as of February 23, 1997
includes the assets and liabilities of Gold Lance. The assets consist primarily
of approximately $2.1 million in accounts receivable, $6.9 million of property,
plant and equipment, net and $2.1 million in other assets primarily related to
goodwill and samples. The liabilities consist primarily of $0.5 million in
accounts payable and $4.5 million in accruals. Approximately $4.2 million of
losses accrued as part of the sale is included in accruals (See Note 2) of which
approximately $1.3 million relates to financial advisor, legal and other
transaction costs associated with the sale. Subsequent to February 23, 1997,
significant remaining assets and liabilities of Gold Lance consist primarily of
the real estate discussed above, extinguishment of transaction costs, accounts
payable and the accrued liabilities in the ordinary course and contingencies
associated with the Transition Period.
The accompanying consolidated statements of operations for the years
ended February 23, 1997, February 25, 1996 and February 26, 1995 include the
following amounts associated with Gold Lance:
1997 1996 1995
Net sales $ 13,505,851 $ 14,352,950 $ 14,627,643
Cost of sales 9,145,533 9,778,055 9,417,540
------------ ------------ ------------
Gross profit 4,360,318 4,574,895 5,210,103
Selling, general and
administrative expenses 5,525,107 5,506,073 4,687,760
------------ ------------ ------------
Income (loss) from operations $ (1,164,789) $ (931,178) $ 522,343
============ ============ ============
(20) CONSOLIDATING FINANCIAL INFORMATION AND SEGMENT INFORMATION
The Company's long term debt instruments, including current portion, 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 23, 1997, February 25, 1996 and February 26, 1995, (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 23, 1997 (000's)
------------------------------------------------------------------
ASSETS Parent Domestic Foreign
Company Subsidiaries Subsidiaries Eliminations Consolidated
------- ------------ ------------ ------------ ------------
CURRENT ASSETS:
Cash and cash equivalent $ 7,743 $ 89 $ 2,600 $ - $ 10,432
Restricted cash 107 - - - 107
Accounts receivable, net 21 20,999 2,657 (1,429) 22,248
Inventories 1,307 37,716 3,730 - 42,753
Prepaid expenses and other
current assets (6) 1,307 655 - 1,956
---------- -------- ------- ------- ---------
Total current assets 9,172 60,111 9,642 (1,429) 77,496
---------- -------- ------- ------- ---------
PROPERTY, PLANT AND
EQUIPMENT, at cost 259 48,072 7,884 - 56,215
Less--Accumulated
depreciation 256 29,211 3,775 - 33,242
---------- -------- ------- ------- ---------
3 18,861 4,109 - 22,973
---------- -------- ------- ------- ---------
INTERCOMPANY LOANS 9,122 (15,445) 6,323 - -
---------- -------- ------- ------- ---------
INVESTMENT IN SUBSIDIARIES 69,487 - - (69,487) -
---------- -------- ------- ------- ---------
INVESTMENT IN SOLOMON
BROTHERS, LIMITED 13,734 - - - 13,734
---------- -------- ------- ------- ---------
OTHER ASSETS 1,771 2,993 2,345 - 7,109
---------- -------- ------- ------- ---------
$ 103,289 $ 66,520 $22,419 $(70,916) $121,312
=========== ======== ======= ======== ========
February 23, 1997 (000's)
------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' Parent Domestic Foreign
EQUITY (DEFICIT) Company Subsidiaries Subsidiaries Eliminations Consolidated
------- ------------ ------------ ------------ ------------
CURRENT LIABILITIES:
Notes payable $ 2,873 $ (2,873) $ - $ - $ -
Current portion of long-
term debt 13,254 - - - 13,254
Accounts payable 519 9,210 1,238 (1,429) 9,538
Accrued expenses 6,467 9,199 1,268 - 16,934
Accrued income taxes 373 240 1 - 614
-------- -------- ------- -------- --------
Total current liabilities 23,486 15,776 2,507 (1,429) 40,340
-------- -------- ------- -------- --------
LONG-TERM DEBT, less
current portion 78,090 - - - 78,090
-------- -------- ------- -------- -------
OTHER LONG-TERM LIABILITIES - - - - -
-------- -------- ------- -------- --------
MINORITY INTEREST - - - 4,997 4,997
-------- -------- ------- -------- --------
EXCHANGEABLE PREFERRED
STOCK 2,374 - - - 2,374
-------- -------- ------- -------- --------
STOCKHOLDERS' EQUITY (DEFICIT):
Convertible preferred stock 1,303 - - - 1,303
Common stock 262 5 2,109 (2,114) 262
Additional paid-in capital 75,797 232,774 8,439 (241,213) 75,797
Accumulated earnings (deficit) (78,023) (182,035) 9,364 168,843 (81,851)
-------- -------- ------- -------- -------
Total stockholders'
equity (deficit) (661) 50,744 19,912 (74,484) (4,489)
-------- -------- ------- -------- --------
$103,289 $ 66,520 $22,419 $(70,916) $121,312
======== ======== ======= ======== ========
February 23, 1997 (000's)
------------------------------------------------------------------
CONSOLIDATING STATEMENT Parent Domestic Foreign
OF OPERATIONS Company Subsidiaries Subsidiaries Eliminations Consolidated
------- ------------ ------------ ------------ ------------
NET SALES $ -- $ 199,119 $ 19,938 $ (9,904) $ 209,153
INVENTORY CHARGE -- 35,521 -- -- 35,521
COST OF SALES -- 140,744 17,597 (10,895) 147,446
------ --------- --------- --------- ---------
Gross profit $ -- $ 22,854 $ 2,341 $ 991 $ 26,186
SELLING, GENERAL &
ADMINISTRATIVE EXPENSES 426 70,432 2,902 -- 73,760
RESTRUCTURING CHARGE -- 7,208 -- -- 7,208
------ --------- --------- --------- ---------
Income (loss) from operations $ (426) $ (54,786) $ (561) $ 991 $ (54,782)
INTEREST EXPENSE, net 5,700 (18,254) 260 -- (12,294)
INCOME FROM AFFILIATES -- -- (55) -- (55)
LOSS ON SALES OF REAL ESTATE, net -- (600) -- -- (600)
GAIN ON SALES OF ASSETS, net -- 5,547 -- -- 5,547
MINORITY INTEREST -- -- -- 167 167
------ --------- --------- --------- ---------
Income (loss) before
income taxes $5,274 $ (68,093 $ (356) $ 1,158 $ (62,017)
PROVISION FOR INCOME TAXES 20 240 1 -- 261
------ --------- --------- --------- ---------
Net income (loss) $5,254 $ (68,333) $ (357) $ 1,158 $ (62,278)
ACCRETION OF DISCOUNT AND
DIVIDENDS ON PREFERRED
STOCKS 740 -- -- -- 740
------ --------- --------- --------- ---------
Income (loss) attributable
to common stockholders $4,514 $ (68,333) $ (357) $ 1,158 $ (63,018)
====== ========= ========= ========= =========
February 23, 1997 (000's)
------------------------------------------------------------------
CONSOLIDATING STATEMENT Parent Domestic Foreign
OF CASH FLOWS Company Subsidiaries Subsidiaries Eliminations Consolidated
------- ------------ ------------ ------------ ------------
CASH FLOWS FROM OPERATING
ACTIVITIES:
Net income (loss) $ 5,254 $(68,333) $ (357) $ 1,158 $(62,278)
Adjustments to reconcile net income
(loss) to net cash provided by
(used in) operating activities--
Depreciation and amortization (1,619) 3,927 705 -- 3,013
Loss on disposal of fixed as -- -- -- -- --
Gain on sales of assets and
liabilities of subsidiaries, net -- (5,547) -- -- (5,547)
Losses on sales of real estate, net -- 600 -- -- 600
Undistributed earnings of
affiliates net of minority
interest 587 -- 55 (754) (112)
Change in assets and liabilities--
(Increase) decrease in accounts
receivable (47) 8,175 (774) 422 7,776
(Increase) decrease in
inventories (13,494) 53,511 (509) (991) 38,517
(Increase) decrease in prepaid
expenses and other current
assets 702 (341) (186) -- 175
(Increase) decrease in other
assets (11) (95) (168) -- (274)
Increase (decrease) in accounts
payable (1,130) (6,996) 183 (422) (8,365)
Increase (decrease) in accrued
expenses 2,694 211 533 -- 3,438
Increase (decrease) in accrued
income taxes (183) 240 (102) -- (45)
Increase (decrease) in other
liabilities -- 53 -- -- 53
-------- -------- -------- -------- --------
Net cash provided by
(used in) operating
activities $ (7,247) $(14,595) $ (620) $ (587) $(23,049)
-------- -------- -------- -------- --------
February 23, 1997 (000's)
------------------------------------------------------------------
CONSOLIDATING STATEMENT Parent Domestic Foreign
OF CASH FLOWS (Continued) Company Subsidiaries Subsidiaries Eliminations Consolidated
------- ------------ ------------ ------------ ------------
CASH FLOWS FROM INVESTING
ACTIVITIES:
Proceeds from sale of fixed assets $ -- $ 6,835 $ 8 $ -- $ 6,843
Investments in affiliates -- -- (1,490) -- (1,490)
Proceeds from sales of
subsidiary assets -- 41,914 -- -- 41,914
Capital expenditures -- (2,718) (520) -- (3,238)
--------- --------- --------- -------- ---------
Net cash provided by (used in)
investing activities $ -- $ 46,031 $ (2,002) $ -- $ 44,029
--------- --------- --------- -------- ---------
CASH FLOWS FROM FINANCING
ACTIVITIES:
Payments on revolving credit
facility $(260,476) $ (542) $ -- $ -- $(261,018)
Proceeds from borrowings under
revolving credit facility 245,825 -- -- -- 245,825
(Increase) decrease in restricted
cash (5) -- -- -- (5)
Change in intercompany notes
payable 29,767 (30,406) 639 -- --
Payments on other debt -- (399) -- -- (399)
Payment of dividends (275) -- (454) 587 (142)
Proceeds from the issuance of
common stock 39 -- -- -- 39
--------- --------- --------- -------- ---------
Net cash provided by
(used in) financing
activities $ 14,875 $ (31,347) $ 185 $ 587 $ (15,700)
--------- --------- --------- -------- ---------
NET INCREASE (DECREASE) IN
CASH AND CASH EQUIVALENTS $ 7,628 $ 89 $ (2,437) $ -- $ 5,280
CASH AND CASH EQUIVALENTS AT
BEGINNING OF YEAR 115 -- 5,037 -- 5,152
--------- --------- --------- -------- ---------
CASH AND CASH EQUIVALENTS AT
END OF YEAR $ 7,743 $ 89 $ 2,600 $- $ 10,432
========= ========= ========= ======== =========
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 (29,753) 6,962 -- --
--------- --------- --------- --------- ---------
INVESTMENT IN SUBSIDIARIES 138,556 -- -- (138,556) --
--------- --------- --------- --------- ---------
INVESTMENT IN SOLOMON
BROTHERS, LIMITED 13,734 -- -- -- 13,734
--------- --------- --------- --------- ---------
OTHER ASSETS 1,806 5,917 769 -- 8,492
--------- --------- --------- --------- ---------
$ 181,215 $ 147,811 $ 22,641 $(140,538) $ 211,129
========= ========= ========= ========= =========
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 3,290 11,053 736 -- 15,079
Accrued income taxes 558 -- 102 -- 660
--------- --------- --------- --------- ---------
Total current liabilities 23,020 27,457 1,928 (991) 51,414
--------- --------- --------- --------- ---------
LONG-TERM DEBT, less
current portion 93,020 154 -- -- 93,174
--------- --------- --------- --------- ---------
OTHER LONG-TERM 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) (13,847) (113,702) 10,165 98,551 (18,833)
--------- --------- --------- --------- ---------
Total stockholders' equity 62,856 119,077 20,713 (144,775) 57,871
--------- --------- --------- --------- ---------
$ 181,215 $ 147,811 $ 22,641 $(140,538) $ 211,129
========= ========= ========= ========= =========
February 25, 1996 (000's)
-------------------------------------------------------------------------
CONSOLIDATING STATEMENT Parent Domestic Foreign
OF OPERATIONS Company Subsidiaries Subsidiaries Eliminations Consolidate
------- ------------ ------------ ------------ -----------
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 118 63,081 3,962 (754) 66,407
--------- --------- --------- --------- ---------
Income (loss) from operations $ (118) $ 10,930 $ 1,209 $ (991) $ 11,030
INTEREST INCOME (EXPENSE), net 9,427 (22,536) 633 -- (12,476)
GAIN (LOSS) ON SALES OF REAL ESTATE -- 417 -- -- 417
MINORITY INTEREST -- -- -- (673) (673)
--------- --------- --------- --------- ---------
Income (loss) before income taxes $ 9,309 $ (11,189) $ 1,842 $ (1,664) $ (1,702)
PROVISION (BENEFIT)
FOR INCOME TAXES (147) 147 164 -- 164
--------- --------- --------- --------- ---------
Net income (loss) $ 9,456 $ (11,336) $ 1,678 $ (1,664) $ (1,866)
ACCRETION OF DISCOUNT AND
DIVIDENDS ON PREFERRED 1,040 -- -- -- 1,040
STOCKS --------- --------- --------- --------- ---------
Income (loss) attributable
to common stockholders $ 8,416 $ (11,336) $ 1,678 $ (1,664) $ (2,906)
========= ========= ========= ========= =========
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) $ 9,456 $(11,336) $ 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 4,201 -- -- -- 4,201
Undistributed earnings of
affiliates, net of minorit 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 (1,868) 1,031 457 -- (380)
Increase (decrease) in accrued
income taxes (266) -- (427) -- (693)
Increase (decrease) in other
liabilities -- (371) (1) -- (372)
-------- -------- -------- -------- --------
Net cash provided by
(used in) operating
activities $ 6,762 $ (9,365) $ 4,499 $ (287) $ 1,609
-------- -------- -------- -------- --------
February 25, 1996 (000's)
CONSOLIDATING STATEMENT OF -------------------------------------------------------------------------
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 (1,144) (782) -- -- (1,926)
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 $ (6,687) $ 10,730 $ (3,848) $ 1,749 $ 1,944
--------- --------- --------- --------- ---------
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
========= ========= ========= ========= =========
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 (18,653) 3,463 1,462 --
--------- --------- --------- --------- ---------
INVESTMENT IN SUBSIDIARIES 148,501 -- -- (148,501) --
--------- --------- --------- --------- ---------
INVESTMENT IN SOLOMON
BROTHERS, LIMITED 13,734 -- -- -- 13,734
--------- --------- --------- --------- ---------
OTHER ASSETS 1,862 5,687 370 -- 7,919
--------- --------- --------- --------- ---------
$ 175,513 $ 159,861 $ 21,836 $(150,587) $ 206,623
========= ========= ========= ========= =========
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 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 91,045 393 -- -- 91,438
--------- --------- --------- --------- ---------
LONG-TERM DEFERRED
OTHER LONG-TERM 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 $ 159,861 $ 21,836 $(150,587) $ 206,623
========= ========= ========= ========= =========
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)
========= ========= ========= ========= =========
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 498 (275) 266 (11) 478
income taxes
Increase (decrease) in other
liabilities -- (599) -- -- (599)
-------- -------- -------- -------- --------
Net cash provided by
(used in) operating
activities $ 3,657 $ (6,557) $ 2,103 $ -- $ (797)
-------- -------- -------- -------- --------
February 26, 1995 (000's)
CONSOLIDATING STATEMENT OF ---------------------------------------------------------------------------
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 other 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
========= ========= ========= ========= =========
Report of Independent Public Accountants
On Schedule
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 April 23, 1997 (except for the matters discussed in Notes 1 and 3 and Note
19, for which the dates are May 30, 1997 and April 25, 1997, respectively). Our
audit was made for the purpose of forming an opinion on the basic consolidated
financial statements taken as a whole. The schedule listed in Item 14 (A) (2) is
the responsibility of the Company's management and is presented for purposes of
complying with the Securities and Exchange Commission's rules and is not part of
the basic consolidated financial statements. This schedule has been subjected to
the auditing procedures applied in the audit of the basic consolidated financial
statements and, in our opinion, fairly states, 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.
Arthur Andersen LLP
Boston, Massachusetts
April 23, 1997
SCHEDULE II
Valuation Accounts
Balance Write-offs, Balance
Beginning Net of End of
Description of year Provision Recoveries Year
----------- -------- --------- ----------- -------
Allowance for Doubtful
Accounts:
February 23, 1997 $2,120,000 $5,008,000 $(5,885,000) $1,243,000
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
EXHIBITS
TOWN & COUNTRY CORPORATION AND SUBSIDIARIES
Exhibits, other than Exhibits 4.4, 4.6, 4.9, 10.7, 10.34, 10.42,
10.50, 10.51, 10.52, 11, 22, 24.1, and 27, have been omitted.
The Company will supply, upon written request, copies of any exhibit from the
Document list.