FORM 10-Q
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
[ x ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended August 24, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________________ to __________________
Commission File Number: 0-14394
TOWN & COUNTRY CORPORATION
(Exact name of Registrant as specified in its charter)
Massachusetts 04-2384321
(State or other jurisdiction of incorporation (I.R.S. Employer Identification
or organization) Number)
25 Union Street, Chelsea, Massachusetts 02150
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (617) 884-8500
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
On September 17, 1997, the Registrant had outstanding 23,683,647 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 1,263,741 shares of Convertible
Preferred Stock, $1 par value, outstanding on September 17, 1997. These shares
are immediately convertible into 2,527,482 shares of Class A Common Stock.
Town & Country Corporation Form 10-Q
Page 2
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
CONSOLIDATED BALANCE SHEETS
August 24, February 23,
1997 1997
------------ ------------
ASSETS (Unaudited)
CURRENT ASSETS:
Cash and cash equivalents $1,110,602 $10,431,911
Restricted cash (Note 3) 113,508 107,090
Accounts receivable--
Less allowances for doubtful
accounts of $1,532,000 and $1,243,000 at
August 24, 1997 and February 23, 1997
respectively 22,549,517 22,247,826
Inventories (Note 5) 49,206,724 42,752,801
Prepaid expenses and other
current assets 2,817,329 1,956,587
------------ ------------
Total current assets 75,797,680 77,496,215
------------ ------------
PROPERTY, PLANT & EQUIPMENT, at cost 41,179,367 56,215,045
Less - Accumulated depreciation 25,344,949 33,242,256
------------ ------------
15,834,418 22,972,789
------------ ------------
INVESTMENT IN SOLOMON BROTHERS, LIMITED 13,734,000 13,734,000
------------ ------------
OTHER ASSETS 4,404,124 7,109,012
------------ ------------
$109,770,222 $121,312,016
============ ============
The accompanying notes are an integral part of these
consolidated financial statements.
Town & Country Corporation Form 10-Q
Page 3
CONSOLIDATED BALANCE SHEETS (Continued)
August 24, August 25,
1997 1996
----------- -----------
LIABILITIES AND STOCKHOLDERS' EQUITY (Deficit) (Unaudited)
CURRENT LIABILITIES:
Notes payable to banks (Note 3) $ 8,118,779 $ --
Current portion of long-term debt (Note 3) 83,506,257 13,254,000
Accounts payable 13,063,713 9,537,829
Accrued expenses 9,350,402 16,934,445
Accrued taxes 575,254 614,202
------------ ------------
Total current liabilities 114,614,405 40,340,476
------------ ------------
LONG-TERM DEBT, less current portion
(Note 3) 6,941,472 78,090,054
------------ ------------
Total liabilities 121,555,877 118,430,530
------------ ------------
COMMITMENTS AND CONTINGENCIES
MINORITY INTEREST (Note 7) 209,819 4,996,770
------------ ------------
EXCHANGEABLE PREFERRED STOCK, $1.00
par value--$14.59 preference value-
Authorized--200,000 shares
Issued and outstanding--152,217 shares 2,367,182 2,373,654
------------ ------------
STOCKHOLDERS' EQUITY (DEFICIT)
Preferred stock, $1.00 par value--
Authorized and unissued--800,000 shares -- --
Convertible preferred stock, $1.00 par
value, $6.50 preference value
Authorized--4,000,000 shares
Issued and outstanding--1,263,741 shares and
1,302,673 shares, respectively 1,263,741 1,302,673
Class A Common Stock, $.01 par value--
Authorized--40,000,000 shares
Issued and outstanding--23,683,647
and 23,508,096 shares, respectively 236,836 235,081
Class B Common Stock, $.01 par value--
Authorized--8,000,000 shares
Issued and outstanding--2,664,927 shares 26,649 26,649
Additional paid-in capital 76,090,472 75,797,457
Retained deficit (91,980,354) (81,850,798)
------------ ------------
Total stockholders' equity (deficit) (14,362,656) (4,488,938)
------------ ------------
$109,770,222 $121,312,016
============ ============
The accompanying notes are an integral part of these
consolidated financial statements.
Town & Country Corporation Form 10-Q
Page 4
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
For the Three Months Ended For the Six Months Ended
August 24, August 25, August 24, August 25,
1997 1996 1997 1996
----------- ----------- ----------- ------------
NET SALES $22,701,548 $43,192,085 $55,737,610 $101,456,209
COST OF SALES 19,614,979 30,315,885 44,878,505 68,381,785
INVENTORY CHARGE (Note 4) -- 35,521,000 -- 35,521,000
----------- ----------- ----------- ------------
Gross profit (loss) $3,086,569 $(22,644,800) $10,859,105 $(2,446,576)
SELLING, GENERAL &
ADMINISTRATIVE EXPENSES 6,915,864 21,147,152 15,129,903 39,472,804
----------- ----------- ----------- ------------
Loss from operations $(3,829,295) $(43,791,952) $(4,270,798) $(41,919,380)
INTEREST EXPENSE, net (2,886,815) (3,907,076) (5,588,713) (7,583,101)
GAIN ON SALE OF REAL ESTATE -- -- 185,867 --
INVESTMENT LOSS (36,641) -- (77,591) --
MINORITY INTEREST 39,536 112,275 59,833 141,310
----------- ----------- ----------- ------------
Loss before income taxes $(6,713,215) $(47,586,753) $(9,691,402) $(49,361,171)
PROVISION FOR INCOME TAXES 63,000 60,000 126,000 140,025
----------- ----------- ----------- ------------
Net loss $(6,776,215) $(47,646,753) $(9,817,402) $(49,501,196)
----------- ----------- ----------- ------------
ACCRETION OF DISCOUNT AND
DIVIDEND ON PREFERRED STOCKS 154,533 119,032 312,153 342,160
----------- ----------- ----------- ------------
Loss attributable to common
stockholders $(6,930,748) $(47,765,785) $(10,129,555) $(49,843,356)
----------- ----------- ----------- ------------
LOSS PER COMMON SHARE (Note 6): $(0.26) $(1.86) $(0.38) $(1.99)
=========== =========== =========== ============
WEIGHTED AVERAGE COMMON
SHARES OUTSTANDING (Note 6): 26,348,574 25,706,935 26,306,219 25,012,072
=========== =========== =========== ============
The accompanying notes are an integral part of these
consolidated financial statements.
Town & Country Corporation Form 10-Q
Page 5
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
For the Six Months Ended
------------------------------
August 24, August 25,
1997 1996
---------- ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(9,817,402) $(49,501,196)
Adjustments to reconcile net loss
to net cash used in operating activities-
Depreciation and amortization 619,516 1,438,352
Undistributed earnings of affiliates,
net of minority interest 17,759 (141,310)
Gain on sale of fixed assets (185,867) --
Inventory charge -- 35,521,000
Receivable charge -- 5,471,000
Change in assets and liabilities--
Decrease (increase) in accounts
receivable (1,966,059) 1,904,546
Decrease (increase) in inventory (6,920,853) 4,521,310
Decrease (increase) in prepaid
expenses and other current assets (914,128) (1,451,452)
Decrease (increase) in other assets 427,959 333,132
Increase (decrease) in accounts
payable 3,525,884 (1,587,741)
Increase (decrease) in accrued
expenses (5,006,299) (6,563,687)
Increase (decrease) in accrued taxes (38,948) (174,911)
Increase (decrease) in other
liabilities -- (67,271)
---------- -----------
Net cash used in operating
activities (20,258,438) (10,298,228)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (1,560,243) (1,537,885)
Proceeds from sale of certain assets
of subsidiary 7,683,667 --
Investment in affiliates (3,445,993) --
Proceeds from sale of fixed assets 210,124 26,001
----------- -----------
Net cash provided by (used in) investing
activities $2,887,555 $(1,511,884)
----------- -----------
The accompanying notes are an integral part of these
consolidated financial statements.
Town & Country Corporation Form 10-Q
Page 6
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
(Unaudited)
For the Six Months Ended
------------------------------
August 24, August 25,
1997 1996
---------- ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments on revolving credit facilities $(57,765,607) $(99,482,302)
Proceeds from borrowings under
revolving credit facilities 65,884,386 109,145,959
Payments on long-term debt -- (135,610)
Proceeds from the issuance of common stock 3,838 40,994
Payment of dividend (66,625) (131,039)
Decrease (increase) in restricted cash (6,418) (1,501)
----------- -----------
Net cash provided by financing activities $8,049,574 $9,436,501
----------- -----------
NET INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS $(9,321,309) $(2,373,611)
CASH AND CASH EQUIVALENTS AT
BEGINNING OF PERIOD 10,431,911 5,151,929
----------- -----------
CASH AND CASH EQUIVALENTS AT
END OF PERIOD $1,110,602 $2,778,318
=========== ===========
SUPPLEMENTAL CASH FLOW DATA:
Cash paid during the period for:
Interest $5,908,446 $7,164,987
Income taxes 174,332 210,006
PART I - FINANCIAL INFORMATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AUGUST 24, 1997
(1) Liquidity
The Company has approximately $89.1 million in principal amount of debt maturing
through December 15, 1998. These debt issues mature as follows:
* February 15, 1998 $13.3 million Senior Secured Notes
* May 31, 1998 $68.8 million Senior Subordinated Notes
* 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 meets its expected future cash flow
requirements.
(2) Significant Accounting Policies
The unaudited consolidated financial statements presented herein have been
prepared by the Company and contain all adjustments (consisting of only normal
recurring adjustments) necessary to present fairly and on a basis consistent
with the consolidated financial statements for the year ended February 23, 1997,
the Company's financial position as of August 24, 1997, and the results of its
operations for the three and six-month periods ended August 24, 1997, and August
25, 1996, and cash flows for the six-month periods ended August 24, 1997, and
August 25, 1996.
On December 16, 1996, the Company sold certain assets and liabilities of its
Balfour subsidiary. On April 18, 1997, the Company sold certain assets of its
Gold Lance subsidiary. The comparability of the accompanying financial
statements is affected by these transactions as described in Note 8.
The results of operations for the six months ended August 24, 1997, are not
necessarily indicative of the results to be expected for the year due to the
seasonal nature of the Company's operations.
The significant accounting policies followed by the Company are set forth in
Note (2) of the Company's consolidated financial statements for the year ended
February 23, 1997, which have been included in the Annual Report on Form 10-K,
Commission File Number 0-14394, for the fiscal year ended February 23, 1997.
Except as disclosed below, the Company has made no change in these policies
during the six months ended August 24, 1997.
Certain reclassifications have been made to the prior period's financial
statement to conform with the presentation of the fiscal 1998 financial
statements.
(3) Loan Arrangements
At maturity on September 15, 1997, the Company repaid the $13.3 million of
11 1/2% Senior Secured Notes. This debt was repaid with the issuance of new
Senior Secured Notes ("New Notes") which pay interest monthly at 15% and have
a maturity date of February 15, 1998. The New Notes have essentially the same
terms as the 11 1/2% Senior Secured Notes. The Company's loan agreement with
Foothill Capital Corporation ("Foothill") and Collateral Agency and
Intercreditor Agreement with Foothill, Fleet Precious Metals, Inc. ("Fleet"),
Bankers Trust and the Collateral Agent were amended on September 15, 1997,
provide for the New Notes.
On June 4, 1997, the Company obtained a modification to the minimum net worth
covenant in the indenture governing the 13% Senior Subordinated Notes from a
majority of the bondholders. According to the modification, in the event that
the Company's consolidated stockholders' deficit exceeds $15 million for two
consecutive quarters, the Company is required to make an offer to redeem 7.5% of
the outstanding Senior Subordinated Notes semiannually and to continue to do so
as long as the condition persists.
On May 30, 1997, the Company completed an amendment (the "Amended Agreement") to
its July 3, 1996 credit agreement (the "Agreement") with 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. 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's results of operations created potential violations of certain
financial covenants in its working capital facility. The Company has received
waivers of these financial covenants from Foothill.
As of August 24, 1997, approximately $8.1 million was outstanding under the
Company's revolving credit agreement with Foothill and approximately 39,080
ounces of gold, valued at approximately $12.7 million, were on consignment under
the Company's domestic gold consignment facility.
The Company makes semiannual cash interest payments of approximately $4.5
million including a payment on May 15, 1997, on the 13% Senior Subordinated
Notes, due May 31, 1998.
A foreign subsidiary of the Company has an agreement with a gold supplier to
provide secured gold consignment availability of approximately 4,800 troy
ounces. As of August 24, 1997, approximately 3,300 ounces of gold, valued at
approximately $1.1 million, were on consignment under this gold consignment
facility.
(4) Inventory Charge
During the second quarter of fiscal 1997, the Company implemented a program to
recycle approximately $44 million of inventory to recover gold and diamonds to
meet immediate production requirements. The Company also sold, for approximately
$2 million, inventory with an original cost basis of approximately $5 million.
The Company charged second quarter operations approximately $35.5 million. Of
this amount only approximately $2.5 million was incurred in the second quarter.
The remaining approximately $33.0 million represents third quarter activity.
These actions were taken when access to cash and gold under the Company's
working capital facility and gold leasing agreement became constrained near the
end of the second quarter and on a more pronounced basis in the third quarter,
and also because of the Company's commitment to meet its customers' shipping
requirements.
(5) Inventories
Inventories consisted of the following at August 24, 1997, and February 23,
1997:
August 24, February 23,
1997 1997
----------- -----------
Raw Materials $ 9,472,312 $ 8,547,459
Work-in-Process 5,743,417 5,643,042
Finished Goods 33,990,995 28,562,300
----------- -----------
$49,206,724 $42,752,801
=========== ===========
(6) Loss Per Common Share
Loss per common share is computed by adjusting the Company's net loss for the
accretion of discount and dividends on preferred stocks and dividing by the
weighted average number of common shares outstanding during each period.
(7) Essex Privatization
During fiscal 1997, the Company began the process of purchasing the
approximately 1.6 million outstanding shares of its Essex subsidiary. The cost
to repurchase these shares was approximately $3.4 million and the process was
completed during the second quarter of fiscal 1998. The repurchase resulted in
the elimination of approximately $4.7 million in Minority Interest liability
creating a deferred benefit of $1.3 million. On a preliminary basis, this
deferred benefit is being accounted for as a reduction in the basis of Essex's
Property, Plant and Equipment. The Company continues to analyze the valuation of
Essex's long-term assets and will finalize the accounting of this deferred
benefit by the end of fiscal 1998.
(8) 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").
On April 24, 1997, a settlement was reached in which the Company paid CBI $1.1
million to resolve certain items and finalize the purchase price (the "Purchase
Price Adjustment"). Such amount was included in accrued expenses in the
accompanying consolidated balance sheet as of February 23, 1997, and was
included as a component of the net gain of approximately $10.5 million recorded
in the fourth quarter of fiscal 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 in the fourth quarter of fiscal 1997 and
reduced the carrying value of the facility included in property, plant and
equipment in the accompanying consolidated balance sheets as of February 23,
1997, and August 24, 1997. The Company leased the facility to CBI on a temporary
basis until June 7, 1997. The Company continues to search for a buyer. 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; 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. On April 24, 1997, 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 until July 31, 1999, 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 sheets as of February 23, 1997, and August 24,
1997.
The accompanying consolidated balance sheets as of February 23, 1997, and August
24, 1997, include assets of Balfour consisting primarily of real estate and
their associated liabilities discussed above. The Purchase Price Adjustment was
included in accrued expenses as of February 23, 1997, and was paid in the first
quarter of fiscal 1998. Other remaining assets and liabilities are not material
to the financial position of the Company as of February 23, 1997, and August 24,
1997.
The accompanying consolidated statement of operations for the six months ended
August 25, 1996, includes the following amounts associated with Balfour:
Net sales $35,986,092
Cost of sales 18,259,569
-----------
Gross profit 17,726,523
Selling, general and
administrative expenses 17,149,236
-----------
Income from operations $ 577,287
===========
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 was 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 fiscal 1997 of $5.0 million on the Gold Lance Sale. To
date, the Company has not been paid the contingent purchase price and is in
discussions with Jostens, Inc. concerning its reasons for non-payment.
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 sheets reflects such impairment as of February 23, 1997, and May 25,
1997. The Company operated the property during the Transition Period. 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 are included in accrued expenses of which
approximately $1.3 million relates to financial advisor, legal and other
transaction costs associated with the sale. As of August 24, 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 six months ended
August 24, 1997, and August 25, 1996, include the following amounts associated
with Gold Lance:
For the six months ended
August 24, August 25,
1997 1996
---------- ----------
Net sales $5,150,217 $5,969,720
Cost of sales 3,486,574 4,067,295
---------- ----------
Gross profit 1,663,643 1,902,425
Selling, general and
administrative expenses 2,139,847 2,575,850
---------- ----------
Income from operations $ (476,204) $ (673,425)
========== ==========
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Forward-Looking Statements
Certain statements in this Form 10-Q 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.
LIQUIDITY
The Company has approximately $89.1 million in principal amount of debt maturing
through December 15, 1998. These debt issues mature as follows:
* February 15, 1998 $13.3 million Senior Secured Notes
* May 31, 1998 $68.8 million Senior Subordinated Notes
* 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 meets its expected future cash flow
requirements.
FINANCIAL CONDITION
At maturity on September 15, 1997, the Company repaid the $13.3 million of
11 1/2% Senior Secured Notes. This debt was repaid with the issuance of new
Senior Secured Notes ("New Notes") which pay interest monthly at 15% and have
a maturity date of February 15, 1998. The New Notes have essentially the same
terms as the 11 1/2% Senior Secured Notes. The Company's loan agreement with
Foothill Capital Corporation ("Foothill") and Collateral Agency and Inter
Creditor Agreement with Foothill, Fleet Precious Metals, Inc. ("Fleet"), Bankers
Trust and the Collateral Agent were amended on September 15, 1997, provide for
the New Notes.
On May 30, 1997, the Company completed an amendment (the "Amended Agreement") to
its July 3, 1996 credit agreement (the "Agreement") with 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 Gold Consignment Facility provided by 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 the 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.
Results of Operations for the Six Months Ended August 24, 1997 Compared to the
Six Months Ended August 25, 1996
Gross profit and Selling, General and Administrative ("SG&A") expense
comparisons exclude the effect of the $35.5 million inventory charge and $5.5
million accounts receivable charge recorded in the second quarter of fiscal
1997.
Consolidated net sales for the six months ended August 24, 1997, decreased $45.8
million or 45.1% from $101.5 million for the six months ended August 25, 1996,
to $55.7 million for the six months ended August 24, 1997. Consolidated gross
profit for the six months ended August 24, 1997, was $10.9 million compared with
$33.1 million for the six months ended August 25, 1996. Consolidated gross
profit margin decreased from 32.6% for the six months ended August 25, 1996 to
19.5% for the six months ended August 24,1997. Consolidated SG&A expenses
decreased from $34.0 million for the six months ended August 25, 1996, to $15.1
million for the six months ended August 24, 1997. As a percentage of
consolidated net sales, consolidated SG&A expenses decreased from 33.5% for the
six months ended August 25, 1996, to 27.1% for the six months ended August 24,
1997.
On December 16, 1996, the Company sold certain assets and liabilities of its
Balfour subsidiary. The accompanying consolidated statement of operations for
the six months ended August 25, 1996, includes net sales of $36.0 million, gross
profit of $18.3 million and SG&A expenses of $17.1 million associated with
Balfour.
On April 18, 1997, the Company sold certain assets of its Gold Lance subsidiary.
The accompanying consolidated statement of operations for the six months ended
August 24, 1997, includes net sales of $5.2 million, gross profit of $1.7
million and SG&A expenses of $2.1 million associated with Gold Lance. The
accompanying consolidated statement of operations for the six months ended
August 25, 1996 includes net sales of $6.0 million, gross profit of $1.9 million
and SG&A expenses of $2.6 million.
Comparison of operating results for the Company's on-going business (the "Fine
Jewelry" business) for the first six months of fiscal 1998 to the first six
months of fiscal 1997 follows.
Sales of Fine Jewelry decreased $8.9 million or 14.9% from $59.5 million for the
six months ended August 25, 1996, to $50.6 million for the six months ended
August 24, 1997. The decrease is primarily attributable to relative softness in
the wholesale jewelry marketplace and some perceived impact of the Company's
financial difficulties.
Gross profit on Fine Jewelry sales decreased from $13.4 million for the six
months ended August 25, 1996, to $9.2 million for the six months ended August
24, 1997. Gross profit margin on Fine Jewelry sales decreased from 22.5% for the
six months ended August 25, 1996, to 18.2% for the six months ended August 24,
1997. These decreases are primarily the result of the underabsorption of fixed
costs due to lower sales volume.
Fine Jewelry SG&A expenses decreased from $14.2 million for the first six months
of fiscal 1997 to $13.0 million the first six months of fiscal 1998. Fine
Jewelry SG&A expenses as a percentage of Fine Jewelry net sales increased from
23.9% for the six months ended August 25, 1996 to 25.7% for the six months ended
August 24, 1997. The percentage increase is the result of the decrease in sales.
Net interest expense decreased $2.0 million from $7.6 for the six months ended
August 25, 1996, to $5.6 million for the six months ended August 24, 1997. The
Company's average borrowings for the six months ended August 24, 1997, decreased
$21.8 million from $115.0 million for the six month ended August 25, 1996, to
$93.2 million for the six months ended August 24, 1997. The weighted average
interest rate was approximately 11.2% for the first six months of fiscal 1997
and approximately 10.9% for the first six months of fiscal 1998. Net interest
expense includes bank and gold fees of $1.4 million for the first six months of
fiscal 1997 and $0.8 million for the first six months of fiscal 1998.
Although the Company had a taxable loss for the six months ended August 24,
1997, the Company recorded a tax provision of approximately $126,000. The tax
provision was primarily due to the Company's inability to fully recognize the
tax benefits of operating losses in certain jurisdictions as well as state and
foreign income taxes.
Liquidity and Working Capital
Cash used in operating activities during the six months ended August 24, 1997,
was $20.3 million compared with $10.3 million for the six months ended August
25, 1996. The increase is primarily a result of the relative change in inventory
from year to year.
Cash provided by investing activities for the six months ended August 24, 1997,
was $2.9 million compared to a use of $1.5 million for the six months ended
August 25, 1996. In the current year, the Company benefited from the net
proceeds related to the sale of certain assets of its Gold Lance subsidiary of
$7.7 million. During the period, the Company paid approximately $3.4 million to
acquire the shares of its Essex subsidiary which had been owned by minority
shareholders.
Cash provided by financing activities was approximately $8.0 million for the six
months ended August 24, 1997, compared with the $9.4 million for the six months
ended August 25, 1996. The change in cash provided by financing activities is
the result of lower net borrowings on the Company's revolving credit facility.
The Company's net cash position decreased from $10.4 million at February 23,
1997, to $1.1 million at August 24, 1997.
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security-Holders
On July 17, 1997, the Company held its Annual Meeting of Stockholders. At this
meeting, one matter was submitted for a vote of the stockholders: election of
one Class A director and one general director. The following votes were cast on
the foregoing matter:
BROKER
FOR WITHHELD NON-VOTES
--- -------- ---------
Election of William Schawbel 21,275,727 385,191 5,954,950
Election of Marcia Morris 18,510,972 489,591 5,950,378
Directors Charles Hill and Richard E. Floor continue their terms of office.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
99 Waivers of Events of Default with respect to the Non-Compliance Items
11 Earnings Per Share Computations
27 Financial Data Schedule
10.1 Indenture to 15% Senior Secured Notes due February 15, 1998.
10.2 Amendment Number Three to Loan Agreement between the Company
and Foothill Capital Corporation.
10.3 Amendment One to Collateral Agency and Intercreditor Agreement
between the Company, Foothill, Fleet, Bankers Trust and the
Collateral Agent.
(b) Reports on Form 8-K
There were no Form 8-K filings during the second quarter ended
August 24, 1997.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this Report to be signed on its behalf by the
undersigned thereunto duly authorized.
TOWN & COUNTRY CORPORATION
(Registrant)
Date: October 8, 1997 /s/ Veronica M. Zsolcsak
---------------------------------
Veronica M. Zsolcsak
Chief Financial Officer and
Treasurer