Item 1. Business
General Business Developments
GENERAL
Town & Country Corporation, a Massachusetts corporation incorporated in 1965, (collectively with its consolidated subsidiaries unless the context otherwise requires, the "Company") designs, manufactures, and markets an extensive collection of fine jewelry, scholastic and sports specialty products in the United States and internationally. Prior to May 14, 1993, the Company consisted of seven operating entities: the parent company, Town & Country Corporation ("Town & Country"), headquartered in Chelsea, Massachusetts; its wholly owned subsidiaries, Anju Jewelry Limited, a Hong Kong company and its subsidiaries ("Anju"); Gold Lance, Inc. ("Gold Lance"), located in Houston, Texas; Verilyte Gold, Inc. ("Verilyte"), located in Chelsea, Massachusetts and Dallas, Texas; L.G. Balfour Company, Inc. ("Balfour"), headquartered in North Attleboro, Massachusetts; and Feature Enterprises, Inc. ("Feature"), located in New York City, New York; and its majority-owned subsidiary Essex International Public Company Limited and its affiliates ("Essex"), a Thailand company. As of May 14, 1993, Verilyte and Feature were merged into a new operating entity, Town & Country Fine Jewelry Group, Inc. ("Fine Jewelry Group").
SUBSEQUENT EVENT
On May 20, 1996, the Company entered into an agreement to sell assets and liabilities of its Balfour and Gold Lance subsidiaries constituting substantially all of the operations of Balfour and Gold Lance to Class Rings, Inc. (CRI), a new company formed by Castle Harlan Partners II, L.P. and the Company. Separately, CRI entered into an agreement with CJC Holdings, Inc. (CJC) to acquire its school ring business.
The Company's agreement with CRI is subject to a number of significant contingencies including approval by the Federal Trade Commission and CRI's ability to raise sufficient capital to consummate the acquisition of Balfour and Gold Lance and the acquisition of CJC's school ring business.
Under the Company's agreement with CRI, the Company will receive cash of $55 million, adjustable for the fluctuation in working capital as of the date of closing, 8% of the common stock of CRI and the cash equivalent to the value of gold on hand as of the date of closing. In addition, the Company may receive additional shares of common stock of CRI based on CRI's exceeding certain defined levels of profitability. Under this contingent earnout arrangement, the Company can earn up to an additional 10% interest in the common stock of CRI. If the Company is able to consummate the transaction as contemplated, it is not expected that the transaction would have an unfavorable impact on the Company's financial position and operating results.
CAPITALIZATION AND FINANCING
On June 7, 1996, the Company received a commitment letter to enter into a new credit agreement from Foothill Capital Corporation ("Foothill"). The agreement would provide senior secured financing consisting of a $40 million revolving credit facility and a $30 million letter of credit in support of a Gold Consignment Facility provided by Fleet Precious Metals ("Fleet"); however, the aggregate amount of the combined facilities which may be outstanding at any date is $65 million. The agreement would be for a period of two years and provides Foothill with an option to renew for three additional years. The loans would bear interest at a rate per annum equal to the greater of (a) 2% above the reference rate announced by an identified group of major banks selected by Foothill or (b) 8%. The agreement would contain standard covenants for facilities of this type including financial covenants relating to interest coverage, minimum net worth, minimum working capital, debt to net worth and current ratios and limitations on dividends, distributions and capital expenditures. Advances under the credit line would be based on eligible accounts receivables and inventory. Foothill would have first security priority interest in receivables, inventory and substantially all real estate and fixed assets owned by the Company and its domestic subsidiaries subject to Fleet's first position as gold consignor, supported by the letter of credit. The closing of this agreement is subject to finalization of documentation.
The Company's 13% Senior Subordinated Notes, due May 31, 1998, were issued with terms providing for the right to issue additional notes in lieu of the first four semiannual interest payments . As of February 25, 1996, the Company had exercised these rights; and, therefore, the carrying value of the notes, including unamortized premium of approximately $4.0 million, is approximately $72.8 million. The Company makes semi-annual cash interest payments of approximately $4.5 million. The most recent payment was made May 15, 1996.
On November 23, 1994, holders of approximately 94% of the Company's Exchangeable Preferred Stock exchanged their shares for shares of Little Switzerland, Inc. Common Stock on a share-for-share basis. Such an exchange was provided for by the terms of the Exchangeable Preferred Stock. In addition, the Company issued to each participant one share of new Convertible Preferred Stock with each share of Little Switzerland, Inc. Common Stock. The Company retains an investment in Little Switzerland, Inc. equal to approximately 4% of the outstanding shares. The Exchangeable Preferred Stock has a liquidation value of $14.59 per share and accrues cumulative dividends at the rate of 6% of the liquidation value per annum. Currently, there are 152,217 shares of Exchangeable Preferred Stock outstanding and, in fiscal 1996, the Company paid cash dividends of $66,625.
Since the carrying value of the Company's investment in Little Switzerland, Inc. was substantially less than the recorded value of the Exchangeable Preferred Stock, the transaction resulted in a nonrecurring, noncash gain of approximately $17 million, net of the estimated fair value of the Convertible Preferred Stock issued.
Each share of Convertible Preferred Stock is initially convertible, at the option of the holder, into two shares of Class A Common Stock, subject to adjustment in certain circumstances and has voting rights as though it had been converted. The Convertible Preferred Stock has a liquidation value of $6.50 per share and accrues cumulative dividends at the rate of 6% of the liquidation value per annum. The Company may pay such dividends in cash or in additional shares of Convertible Preferred Stock, as defined by the agreement. Currently, there are 1,977,905 shares of Convertible Preferred Stock outstanding and, in fiscal 1996, the Company paid dividends of approximately $713,000 through the issuance of additional shares of stock.
May 14, 1993 RECAPITALIZATION
The Company completed a recapitalization on May 14, 1993. The recapitalization revised the Company's consolidated capitalization, including debt structure. The amount of debt outstanding was reduced and a significant portion of old subordinated debt was exchanged for new debt and shares of Class A Common Stock and Exchangeable Preferred Stock.
The Company obtained a revolving credit agreement from Foothill to provide secured financing in an aggregate amount of up to $30 million, which currently has a seasonal increase up to $35 million, and new gold consignment agreements from the Company's existing gold suppliers which currently provide an aggregate gold consignment availability of up to approximately 63,000 troy ounces.
The Company sold $30 million of its 11 1/2% Senior Secured Notes due September 15, 1997. At February 25, 1996, approximately $13 million was outstanding.
The Company issued approximately $61.5 million, including unamortized premium of approximately $8 million, of 13% Senior Subordinated Notes, due May 31, 1998, approximately $34.3 million of Exchangeable Preferred Stock, par value $1.00, and approximately 10 million shares of Class A Common stock valued at approximately $26.9 million. These securities were issued in exchange for approximately 93% of the Company's 13% Senior Subordinated Notes due December 15, 1998, and approximately 98% of the Company's 10 1/4% Subordinated Noes due July 1, 1995. The total carrying value retired, including deferred financing costs, was approximately $122.7 million.
(See "Management's Discussion and Analysis of Financial Condition and Results of Operations--Financial Condition" and Note 3 of Notes to Consolidated Financial Statements).
NARRATIVE DESCRIPTION OF BUSINESS
GENERAL
The Company designs and manufactures an extensive line of fine jewelry which it markets on a wholesale basis throughout the U.S., and to a lesser extent, in the international jewelry market. Its products include 10, 14, and 18-karat gold rings, earrings, pendants, and bracelets, many of which are set with precious and semi-precious stones. The Company also manufactures scholastic and sports specialty products.
Town & Country Corporation (Headquartered in Chelsea, Massachusetts)
Town & Country Gold Lance L.G. Balfour Anju Jewelry Essex Fine Jewelry Inc. Company, Inc. Limited International Group, Inc. (Houston, TX) (North Attleboro, (Hong Kong) Public Company (Chelsea, MA) MA) Limited (Bangkok,Thailand)
The Company has manufacturing facilities located in Massachusetts, New York, Texas, Kentucky, and in Thailand. These facilities are located close to available labor forces and suppliers of necessary raw materials.
PRODUCTION METHODS
The Company utilizes a variety of production methods to produce jewelry. Principal among these is the "lost wax" method of investment casting. This manufacturing operation originates with a hand designed original which is then taken through a reverse molding procedure to create a mold. The mold is infused with wax, and a series of such wax pieces are then surrounded with plaster of Paris. The plaster of Paris is placed in a furnace where the wax is eliminated by subjecting the plaster to high temperatures. Molten gold is then poured into the areas from which the wax has been eliminated and a rough gold piece is removed after cooling. The piece produced through the investment casting method may then be ground, polished, and set with stones.
One of the other production methods used is die striking. This process begins by tooling a master hub (male impression) from an original design. The hub is used to create dies (female impression) for machine stamping. Additional tools are created to trim and shape the final product. Gold or base metal is struck in hydraulic presses or with pneumatic drop hammers in multiple steps with alternating annealing steps. The product is then trimmed and rounded. Stamping dies are custom produced by computer-aided tool cutting machines or are hand crafted. The rough, stamped pieces are polished and finished. Precious, semi-precious, or synthetic stones may be set in the individual pieces.
In addition, the Company utilizes the carbide, or swiss-cutting, manufacturing operation. This method uses ring blanks of various widths and dimensions which have been cut from tubes of karat gold in a lathing process. The blanks are then placed on a cutting machine which is set up to cut designs into the ring using diamond tipped or carbide tipped tools.
Photo-etching technology is used to manufacture precious metal charms and earrings. The process consists of several stages. First, a graphic image of a charm or earring is transferred to a photographic tool and is replicated by computer control in an optimum layout. The tool is then placed on a thin metal plate and passed through an exposure unit which photographically transfers the images from the tool onto that plate. Next, the metal plate passes by conveyer through an etching solution where a chemical milling of the exposed surfaces takes place. Finally, the etched pieces from the plate are cleaned, shaped, and polished.
The Company uses foil stamping and embossing, offset printing, die stamp and engraving presses, and laser technology in the manufacture of graduation announcements, diplomas, certificates, and other printed products.
MARKETING
There are numerous channels of distribution for fine jewelry, including jewelry stores (ranging from the independent store with one location to the large national chains), department stores, catalogue showrooms, warehouse clubs, and home shopping networks. The Company distributes its products through all of these channels.
As part of its marketing program, the Company provides a variety of customer support services designed to meet the varying needs of customers. For some customers, the Company designs product lines and develops total merchandising programs including displays and advertising to market these lines. The Company's sales staff provides quick reaction to customer pricing and design requirements. The Company utilizes computerized data bases and electronic data interfaces which assist these customers by providing information that may be used in marketing, merchandising, and inventory management. For the independent retail jewelers, the Company has designed promotional flyer programs through which marketing and merchandising support pertaining to a select group of products at specific price ranges is provided.
An increasing portion of retail sales in the fine jewelry industry is being made through discount department stores, warehouse clubs and television shopping networks. These customers are particularly interested in unique designs, volume production, price and credit terms.
The Fine Jewelry Group has a single product development organization built around product category specialists. Each product category is analyzed so that each category is limited to items providing the maximum return to the Company and its customers. Utilizing this structure, the Company believes it is able to be more responsive to trends in the marketplace.
Gold Lance and Balfour are engaged in the production and distribution of high school and college class rings on a made-to-order basis. Gold Lance distributes through retail jewelry stores, while Balfour markets directly to students on campus and at campus book stores. Each customer may choose from a wide variety of options. These selling methods enable Gold Lance and Balfour to maintain low levels of inventory in these product lines. Gold Lance and Balfour have libraries of reusable tools and dies, allowing them to offer a large selection of styles, including fashion-oriented class rings with intricate designs.
In conjunction with its school ring sales, Balfour also offers a variety of graphics products, including graduation announcements, diplomas, and memory books, and novelty items, such as T-shirts, key chains, and pendants.
Balfour markets licensed products, particularly rings and jewelry licensed by the major professional sports organizations. Customized rings, insignia pins, and novelty items are also marketed to associations and organizations.
The Company also markets directly from its Bangkok facility where wholesale buyers are able to select and direct order jewelry from the Company. The Company's products are also sold internationally by the Company's marketing groups and are exhibited at the major international jewelry trade fairs.
As of May 26, 1996, the Company had approximately $16 million of orders believed to be firm, as compared to approximately $19 million at a corresponding date last year. The Company believes that substantially all of these orders will be filled during fiscal 1997. The Company believes that comparative open order information is not necessarily indicative of comparative results due to the high level of timing sensitivity in the fine jewelry business which depends significantly on orders from large retailers.
COMPETITION
The Company competes with both domestic and foreign jewelry suppliers, ranging in size from small regional suppliers to those which have national distribution capabilities. The principal competitive factors are price, quality, design, and customer service. Management believes that the Company has a reputation for providing extensive customer services and delivering a quality product line with broad customer appeal. The Company tries to achieve relative cost savings as a result of the large volume of its purchases of diamonds and stones.
The Company historically has competed in all of the channels of distribution across its price range and is therefore competing directly with the specialists in each distribution category. It has been most successful with retail jewelry stores and the department and discount store chains which are also buying the numerous marketing and credit related support services of the Company.
The Company also competes in the class ring industry which is comprised of a few national companies and a few regional companies. The industry is made up of two components, the "in-school" component in which ring orders are taken at the school by the suppliers, and the "retail" component in which local jewelry stores display samples and take orders. Historically, the "in-school" component of this industry has been heavily influenced by the school representative/sales person relationship. Factors which affect the strength of this relationship include delivery time, price, quality, design and customer service. Class ring sales are affected by student demographics and economic conditions. Management believes that the Company currently is competitive with other distributors with regard to the factors listed above. Management believes that Jostens, Herff Jones, Inc. and CJC Holdings, Inc. currently represent major competitors in this industry.
Management believes that Balfour's name recognition and association with the class ring business and championship team rings gives it a competitive advantage in the direct marketing of graphics products, such as diplomas, graduation announcements, and accessories, and also, general sports insignia products including those with professional team logos.
SEASONALITY
The Company is impacted by the seasonal demands of its customers. A significant portion of sales in the fine jewelry industry is concentrated in the fall in anticipation of the holiday season. Balfour is also impacted by fluctuations in connection with the scholastic year. Accordingly, the Company's operating results, and working capital requirements fluctuate considerably during the year.
The following chart sets forth unaudited quarterly data for fiscal 1996 and fiscal 1995.
(1) Net income in the third quarter of fiscal 1995 includes a gain of approximately $17 million as a result of the exchange of the Exchangeable Preferred Stock, see Note 4 of Notes to Consolidated Financial Statements.
SIGNIFICANT CUSTOMER
The Company's largest customer for a number of years has been the Zale Corporation and its affiliated companies. Net sales to Zale were approximately $22 million or 9% of consolidated net sales in fiscal 1996 compared to $29 million or 10% of consolidated net sales in fiscal 1995 and $33 million or 12% of consolidated net sales in fiscal 1994. The loss of Zale as a customer of the Company or a substantial reduction in the amount of sales to Zale would have a material adverse effect on the Company.
RAW MATERIALS
The principal raw materials purchased by the Company are gold and precious and semi-precious stones. The Company currently takes delivery of most of its gold through consignment programs. The Company's intention is that as the gold selling price for orders is confirmed, the Company purchases the gold requirements at the then current market prices. The Company attempts to match the price it pays for gold with the price it charges its customers. The Company's gold agreements require that the Company own gold under certain circumstances and it is possible for this required ownership to exceed the Company's hedging requirements and expose the Company to gold fluctuations. The Company pays a fee, which is subject to periodic change, for the value of the gold held by it as a consignee during the period prior to sale. The Company has consignment arrangements in place with a group of suppliers of gold which currently provide for carrying on consignment up to approximately 63,000 troy ounces.
Colored precious and semi-precious stones are purchased by the Company mainly in Asia and Europe. Diamonds are purchased principally at major diamond markets throughout the world, including Bombay, Tel Aviv, Antwerp, and New York. The Company is not dependent on one supplier or a small number of suppliers for the purchases of these raw materials. Availability and cost of these materials are affected by market conditions and, when there is a period of volatility in the market, operating results may be affected.
EMPLOYEES
The Company employs, on average, 2,200 persons, with approximately 26% of these persons located in the Far East. The number of employees from quarter to quarter may vary significantly because of the seasonality of the Company's business. See "Narrative Description of Business--Seasonality." Of these 2,200 employees, approximately 600 are involved with selling and administrative functions of the Company, and the remainder are involved in the manufacturing functions of the Company.
A division of Fine Jewelry Group has collective bargaining contracts covering its manufacturing employees, who are represented by the Service Employees International Union, Jewelry Workers Division. The number of employees covered by collective bargaining contracts is approximately twenty.
The Company considers relations with its employees to be satisfactory. Management does not believe the Company would experience any significant difficulties in hiring or training additional employees at any of its facilities.
INDUSTRY PRACTICES
In the jewelry industry, traditionally the wholesaler has provided considerable working capital in the form of credit terms, inventory stocking, consignment transactions, and transactions with a right of return. The Company has historically provided this working capital, but in today's retail and banking environment, has become more selective in its commitment of resources. The Company is scrutinizing customer credit- worthiness more closely and, as a result, is restricting customer credit and requires security before providing consignment inventory. The Company also is restricting the availability of consigned merchandise to items that are actively promoted by the customer.
TRADEMARKS AND COPYRIGHTS
While the Company maintains certain trademarks and copyrights on product styles and business names and enforces its rights relative to those trademarks and copyrights, these are not economically material to the Company and while the Company has licensing agreements with certain major professional sports organizations, the Company believes that it has no franchises or licenses which are of a material nature to the Company.
Financial Information about Foreign and Domestic Operations and Export Sales
For information on foreign and domestic operations, see Note 18, "Consolidating Financial Information and Segment Information," in Notes to Consolidated Financial Statements.
Item 2.
Item 2. PROPERTIES
The Company occupies facilities in the United States and the Far East as described below. (1)
The fine jewelry manufacturing and distribution business is seasonal. Historically, the Company's facilities operate in excess of full capacity during the peak demand part of the season and are underutilized during the slower portions of the season (See "Narrative Description of Business--Seasonality"). Additional capacity requirements are satisfied utilizing outside contractors and seasonal staffing is adjusted accordingly. The school ring business is also seasonal and its factories are impacted similarly, but the total and peak demands on the school ring business are not sufficient to stress the capacity constraints at any time.
During fiscal 1996, the Company leased a portion of its Chelsea, Massachusetts facility (approximately 39,000 square feet of combined manufacturing and administrative space) from Carey Realty Trust, a Massachusetts business trust, which is wholly owned by C. William Carey, the Chairman, President, and a major stockholder of the Company. The lease, which was revised on March 1, 1996, expires on August 31, 1998, and provides the Company with three ten-year options to renew. The current lease provides for an annual rental payment of approximately $350,000. The Company obtained comparative information from a third party when negotiating the revised lease and believes that these lease arrangements are on terms no less favorable to the Company than could be obtained from unaffiliated third parties.
Management believes that all its facilities are well maintained, in good condition and adequate for its present business.
Item 3.
Item 3. LEGAL PROCEEDINGS
The Company is not party to any pending legal proceedings, other than ordinary routine litigation incidental to the business. In the opinion of management, adverse decisions on those legal proceedings, in the aggregate, would not have a materially adverse impact on the Company's financial condition or result of operations.
It is the Company's current understanding that companies which may be considered predecessors to Balfour have been designated potentially responsible parties by the Environmental Protection Agency ("EPA") under the Comprehensive Environmental Response, Compensation and Liability Act of 1980 with respect to cleanup of hazardous waste in four cases. One of the parties that may be considered such a predecessor (the "1983 Owner") has, to date, assumed responsibility for all of these cases in accordance with understandings the 1983 Owner has reached with the party who bought the assets of the predecessor Balfour Company in 1983 (the "1988 Owner"). In the first of these cases, it is the Company's understanding that the predecessor 1983 Owner is participating in the cleanup and has provided financial assurance that it will pay its expected share of the cleanup expenses (which are currently estimated to be under $200,000). In the other three cases, it is the Company's understanding that the 1983 Owner has settled its liability as a de minimis waste contributor in each case and has been given comprehensive releases from further liability for cleanup costs. The Company acquired the stock of Balfour from the 1988 Owner and believes that it did not assume responsibility for these cases as a result of this acquisition. Since its acquisition of Balfour in 1988, the Company has never paid any amounts with respect to any of these matters and there are no outstanding claims against the Company or Balfour with respect to any of these matters. While it is possible that a person or agency could claim that Balfour as a successor to the 1983 Owner is jointly and severally liable for the cost of the entire cleanup in these cases, the Company believes that such a claim would have no merit and would vigorously defend and contest any such claim. Because of the assumption of responsibility for these cases by the 1983 Owner and the small waste shares attributed to the 1983 Owner, Management believes that it is unlikely that the Company will suffer material liability in connection with these cases.
Item 4.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS
There were no matters submitted to a vote of security-holders during the fourth quarter of fiscal 1996.
PART II
Item 5.
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.
There is no established public trading market in effect at this time for the Class B Common Stock. Shares of Class B Common Stock, however, are convertible on a share for share basis into shares of Class A Common Stock.
On June 3, 1996, there were 970 holders of record of Class A Common Stock and 29 holders of record of the Class B Common Stock. The Company's present policy is to reinvest its earnings in the business. No cash dividends have been paid during the last two fiscal years, and the Company has no intention to pay cash dividends in the foreseeable future.
The Company's ability to pay cash dividends is limited by its financing agreements and other outstanding indebtedness. As a result of these restrictions, the Company currently may not pay cash dividends on common stock.
Item 6.
Item 6. SELECTED FINANCIAL DATA
The following table presents certain selected consolidated financial data of the Company. The information for each of the five years in the period ended February 25, 1996, has been derived from consolidated financial statements audited by Arthur Andersen LLP, independent public accountants.
Balance Sheet Data: Fiscal Year Ended (In Thousands)
(1) In fiscal 1995, the Company recorded a gain of approximately $17 million as a result of the exchange of Exchangeable Preferred Stock. See Note 4 of Notes to Consolidated Financial Statements.
(2) In fiscal 1993, the Company recorded a restructuring charge related to its New York facility of $5 million, a charge related to the disposal of certain Balfour assets of approximately $14.5 million, and expenses associated with recapitalizing the Company of approximately $14.4 million. See Notes 8 and 11 of Notes to Consolidated Financial Statements.
(3) In fiscal 1992, the Company recorded restructuring and Zale bankruptcy charges of $44 million and net gains from nonrecurring items of $51 million. See Note 9 of Notes to Consolidated Financial Statements.
Item 7.
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION
Results of Operations
FISCAL 1996 COMPARED TO FISCAL 1995
Net sales for the fiscal year ended February 25, 1996, decreased approximately $37.5 million or 13% from approximately $288.1 million in fiscal 1995 to $250.6 million in fiscal 1996. Sales of fine jewelry decreased approximately $31.1 million from $196.0 million in fiscal 1995 to $164.9 million in fiscal 1996. The Company believes that current year sales have been affected by a general softening of demand for colored-stone products and that in the highly competitive colored-stone and diamond product categories, the Company needs to improve its ability to meet customer expectations. Also contributing to the decrease has been management's continuing efforts to manage the credit extended to certain customers and to eliminate low margin contributors from the sales mix. Sales of consumer products including licensed sports and other specialty products decreased $7.8 million from $12.1 million in fiscal 1995 to $4.3 million in fiscal 1996. This decrease is associated with the Company's decision, in the third quarter of fiscal 1995, to scale back the consumer products business.
Gross profit for the fiscal year ended February 25, 1996, decreased approximately $10.2 million or 12% from $87.6 million in fiscal 1995 to $77.4 million in fiscal 1996. Decreases in gross profit are primarily associated with the lower volume of sales in the consumer products and fine jewelry lines of business. Gross profit margin increased slightly from 30.4% in fiscal 1995 to 30.9% in fiscal 1996. Improvements in margin in fine jewelry are being offset by lower margins in the scholastic and consumer products lines of business.
Selling, general and administrative expenses ("SG&A") for fiscal 1996 decreased approximately $24.4 million, or 27.0% from $90.4 million in fiscal 1995 to $66.0 million in fiscal 1996. As a percentage of net sales, SG&A expenses decreased from 31.4% in fiscal 1995 to 26.3% in fiscal 1996. The decrease primarily relates to lower costs associated with the consumer products line of business, particularly advertising costs and lower provisions for uncollectible accounts. Also contributing to the decrease are certain non-operating items in the current year including a $1.5 million benefit associated with the liquidation of additional Zale claim assets and a $1.6 million benefit from a fiscal 1989 acquisition contingency.
Interest expense for the fiscal year ended February 25, 1996, increased $1.0 million from approximately $12.2 million to $13.2 million in fiscal 1996. The weighted average interest rate on overall borrowings was approximately 11.24% for fiscal 1996 compared to 11.08% for fiscal 1995. Average borrowings increased approximately $7.2 million from approximately $109.9 million in fiscal 1995 to $117.1 million in fiscal 1996. See Note 3 of Notes to Consolidated Financial Statements.
The Company has recorded a tax provision for fiscal 1996 of approximately $0.2 million compared with a provision of $1.8 million in fiscal 1995. These tax provisions are primarily due to state and foreign income taxes.
FISCAL 1995 COMPARED TO FISCAL 1994
On November 23, 1994, holders of approximately 94% of the Company's Exchangeable Preferred Stock exchanged on a share-for-share basis their shares for shares of Little Switzerland, Inc. Common Stock held by the Company. Such an exchange was provided for by the terms of the Exchangeable Preferred Stock. In addition, the Company issued to each participant one share of new Convertible Preferred Stock with each share of Little Switzerland, Inc. Common Stock.
Since the carrying value of the Company's investment in Little Switzerland, Inc. was substantially less than the recorded value of the Exchangeable Preferred Stock, the transaction resulted in a nonrecurring, noncash gain of approximately $17 million, net of the estimated fair value of the Convertible Preferred Stock issued.
Net sales for the fiscal year ended February 26, 1995, increased approximately $10 million, or 4%, from approximately $278 million in fiscal 1994 to approximately $288 million in fiscal 1995. Sales of fine jewelry increased approximately $19 million, or 11%, from approximately $177 million in fiscal 1994 to approximately $196 million in fiscal 1995. This increase was achieved despite a decline in sales to Zale of approximately $4 million, or 12%, from $33 million in fiscal 1994 to $29 million in fiscal 1995. The sales increase is generally attributable to increased volume rather than increased prices. Sales for the Company's direct response distribution business of licensed sports and other specialty products have decreased approximately $10 million, or 37%, from $27 million in fiscal 1994 to $17 million in fiscal 1995. The Company expects to further scale back its direct response distribution business in fiscal 1996.
Gross profit for the fiscal year ended February 26, 1995, decreased approximately $10 million, or 10%, from $97 million in fiscal 1994 to $87 million in fiscal 1995. Gross profit margin declined from 35% for the fiscal year ended February 27, 1994, to 30% for the fiscal year ended February 26, 1995. The Company's sales increase has been primarily in the lower margin fine jewelry product categories. In order to better manage and control inventory, the Company has also sold, or made provisions to sell, inventory in excess of current requirements, at less than normal margins. This product mix change and these sales and provisions negatively impacted margin by approximately 3%. Production requirements for direct response and other specialty products were lower this year than last year, resulting in under absorbed fixed overhead which impacted margin by approximately 2%.
Selling, general and administrative expenses ("SG&A") for fiscal 1995 increased approximately $10 million, or 13%, from $80 million in fiscal 1994 to $90 million in fiscal 1995. As a percentage of net sales, SG&A expenses increased from 29% in fiscal 1994 to 31% in fiscal 1995. This increase relates, primarily, to higher costs, particularly for advertising, associated with the Company's marketing, through direct response, of merchandise manufactured under licenses from professional sports organizations. This accelerated advertising effort did not generate sales of these products at the rate anticipated. Provision for higher than anticipated uncollectible accounts also contributed to the increase in SG&A as a percentage of sales. The Company anticipates that SG&A expenses associated with its direct response business of licensed sports and other specialty products will decline in fiscal 1996 due to the Company's intentions to scale back its direct response distribution business.
Interest expense for the fiscal year ended February 26, 1995, declined approximately $2 million from $14 million in fiscal 1994 to $12 million in fiscal 1995. The weighted average interest rate on overall borrowings was approximately 11.08% for fiscal 1995 versus 11.24% for fiscal 1994. Average borrowings for the fiscal year ended February 26, 1995, declined approximately $15 million from approximately $125 million in fiscal 1994 to approximately $110 million in fiscal 1995. See Note 3 of Notes to Consolidated Financial Statements.
The Company has recorded a tax provision for fiscal 1995 of approximately $1.8 million compared with a provision of $1.0 million in fiscal 1994. These tax provisions are primarily due to state and foreign income taxes.
FISCAL 1994 COMPARED TO FISCAL 1993
Net sales for the fiscal year ended February 27, 1994, increased approximately $8 million or 3% from approximately $270 million in fiscal 1993 to approximately $278 million in fiscal 1994. Sales of fine jewelry increased approximately $8 million or 5%, from approximately $169 million in fiscal 1993 to approximately $177 million in fiscal 1994. This increase was achieved despite a decline in sales to Zale of approximately $5 million or 13% from $38 million in fiscal 1993 to $33 million in fiscal 1994. The sales increase is attributable to increased volume rather than increased prices. Product costs have remained relatively stable while competitive pressure on margin has continued to intensify.
Gross profit for the fiscal year ended February 27, 1994, increased approximately $6 million, or 7%, from $91 million in fiscal 1993 to $97 million in fiscal 1994. Gross profit margin improved from 33% for the fiscal year ended February 28, 1993, to 35% for the fiscal year ended February 27, 1994. Benefits from elimination of low-margin recognition products and entry into higher-margin sports specialty marketing were offset to some extent by continuing margin pressure in the fine jewelry business. Gross profit also benefited from the $1.3 million liquidation of the Company's remaining LIFO based inventory.
Selling, general and administrative expenses for fiscal 1994 declined approximately $5 million, or 6%, from $85 million in fiscal 1993 to $80 million in fiscal 1994. As a percentage of net sales, selling, general and administrative expenses declined from 32% in fiscal 1993 to 29% in fiscal 1994. This decline results from consolidations related to the restructuring of the fine jewelry business.
Interest expense for the fiscal year ended February 27, 1994, declined approximately $6 million from $20 million in fiscal 1993 to $14 million in fiscal 1994. The weighted average interest rate was approximately 11.24% for fiscal 1994 versus 12.3% for fiscal 1993. Average borrowings for the fiscal year ended February 27, 1994, declined approximately $38 million from approximately $163 million in fiscal 1993 to approximately $125 million in fiscal 1994 due to the recapitalization completed on May 14, 1993. See Note 3 of Notes to Consolidated Financial Statements.
During the fiscal year ended February 27, 1994, the Company had equity income of approximately $1.1 million from its ownership of Little Switzerland, Inc. stock and approximately $156,000 from its ownership of Solomon Brothers, Limited stock. This compares to approximately $1.9 million and approximately $800,000, respectively, for the same period in fiscal 1993. Both companies are dependent, to different extents, on tourist travel and spending patterns. The general level of tourist activity has not met expectations, and the commitments for inventory and overhead have negatively impacted Little Switzerland, Inc.'s and Solomon Brothers, Limited's results of operations.
The Company has recorded a tax provision for fiscal 1994 of approximately $1 million. The tax provision was primarily due to state and foreign income taxes.
ZALE BANKRUPTCY
The Company's largest customer for a number of years has been the Zale Corporation and its affiliated companies.
The Company's Consolidated Financial Statements at February 28, 1992, originally reflected a net valuation, related to Zale Corporation's bankruptcy filing under Chapter 11 of the United States Bankruptcy Code, of approximately $13 million, which was classified as Other Assets in the Consolidated Balance Sheets, due to the uncertainty of the timing of a final settlement. The Company has subsequently received proceeds from Zale and from liquidation of claim assets of approximately $14.5 million and recognized benefits of approximately $1.5 million in fiscal 1996.
The Company continues to conduct business with Zale.
LIQUIDITY
Cash provided by operations during fiscal 1996 was approximately $1.6 million compared with cash used in operations of $0.8 million in fiscal 1995. During fiscal 1996, the Company paid approximately $4.5 million of interest, on its 13% Senior Subordinated Notes, in cash. The semi-annual payments required in fiscal 1995 were paid with the issuance of additional notes.
In fiscal 1995, cash flow from operations included proceeds from the Zale bankruptcy claim of approximately $6.3 million versus $1.5 million during fiscal 1996. The Company is required to escrow net proceeds from the Zale bankruptcy claim and Solomon investment for repayment of Senior Secured Notes. During fiscal 1995 and fiscal 1996, $6.3 million and $0.7 million, respectively of Senior Secured Notes were redeemed with such proceeds.
Cash used in investing activities was $1.7 million in fiscal 1996 compared to a use of $2.7 million in fiscal 1995. The improvement is primarily the result of proceeds received from the sale of a facility in the current fiscal year.
The Company's operations are primarily funded through its revolving credit facility which was a net source of cash of approximately $4.1 million in fiscal 1996. These funds were used to make required debt payments of $1.9 million as well as to meet the Company's operating and investing cash requirements.
On March 29, 1994, March 20, 1995, and April 4, 1996, as required by the covenants of its Senior Secured Notes, the Company gave written notice to Solomon Brothers, Limited of the Company's intention to redeem 70,000, 55,000 and 55,000 of its shares of nonvoting redeemable cumulative participating preferred Class B stock, respectively. Solomon Brothers, Limited informed the Company that it would not be able to redeem the 70,000, 55,000 and 55,000 share requests when due as a result of constraints imposed by its banking facilities. The Company currently believes that Solomon Brothers, Limited will be able to meet its obligation and that the Company's investment is realizable, but it is unable to estimate the timing of future redemption payments. The Company is monitoring Solomon Brothers, Limited's operations and financial position and if it determines in the future that carrying value is no longer reflective of fair value, appropriate adjustments will be made.
FINANCIAL CONDITION
The Company currently has a revolving credit agreement from Foothill Capital Corporation (Foothill) to provide secured financing in an aggregate amount of up to $30 million, which currently has a seasonal increase up to $35 million, (approximately $15 million outstanding at February 25, 1996), and gold consignment agreements from the Company's existing gold suppliers which currently provide an aggregate gold consignment availability of up to approximately 63,000 troy ounces (approximately 63,000 troy ounces outstanding at February 25, 1996). As of February 25, 1996, the Company was not in compliance with certain covenants under its revolving credit and gold agreements and such events of noncompliance have been waived. Subsequent to year end, the Company received a commitment letter to enter into a new credit agreement from Foothill. The agreement would provide senior secured financing consisting of a $40 million revolving credit facility and a $30 million letter of credit in support of a Gold Consignment Facility provided by Fleet Precious Metals ("Fleet"); however, the aggregate amount of the combined facilities which may be outstanding at any date is $65 million. The agreement would be for a period of two years and provides Foothill with an option to renew for three additional years. The loans would bear interest at a rate per annum equal to the greater of (a) 2% above the reference rate announced by an identified group of major banks selected by Foothill or (b) 8%. The agreement would contain standard covenants for facilities of this type including financial covenants relating to interest coverage, minimum net worth, minimum working capital, debt to net worth and current ratios and limitations on dividends, distributions and capital expenditures. Advances under the credit line would be based on eligible accounts receivables and inventory. Foothill would have first security priority interest in receivables, inventory and substantially all real estate and fixed assets owned by the Company and its domestic subsidiaries subject to Fleet's first position as gold consignor, supported by the letter of credit. The Company believes that it can meet its working capital needs over the next year through cash flows from operations and the use of funds available under this new credit agreement. The closing of this agreement is subject to finalization of documentation.
The Company currently has approximately $13 million outstanding of its 11 1/2% Senior Secured Notes which will come due September 15, 1997.
The Company's 13% Senior Subordinated Notes, due May 31, 1998, were issued with terms providing for the right to issue additional notes in lieu of the first four semiannual interest payments. As of February 25, 1996, the Company had exercised these rights and; therefore, the carrying value of the notes, including unamortized premium of approximately $4.0 million, is approximately $72.8 million. The Company makes semi-annual cash interest payments of approximately $4.5 million. The most recent payment was made May 15, 1996.
The Company also has a second series of 13% Senior Subordinated Notes due December 15, 1998, which has a principle balance of approximately $7.0 million.
The Company makes cash dividend payments on the outstanding Exchangeable Preferred Stock; payments amounted to $66,625 in fiscal 1996. The Company, to date, has met its dividend requirements for its Convertible Preferred Stock by issuing additional shares of stock as provided by the terms of the stock.
A subsidiary of the Company has available credit line facilities with two banks in Thailand to provide aggregate commercial financing of up to approximately $13.3 million. The subsidiary had no balance outstanding under these lines at February 25, 1996, and February 26, 1995, respectively. This subsidiary also has an agreement with a gold supplier to provide secured gold consignment availability of up to approximately 4,800 troy ounces. This agreement runs through December 10, 1996, and is secured by a standby letter of credit for $3.4 million under one of the subsidiary's credit facilities. There were approximately 3,100 ounces on consignment under this gold agreement at February 25, 1996.
On May 20, 1996, the Company entered into an agreement to sell assets and liabilities of its Balfour and Gold Lance subsidiaries constituting substantially all of the operations of Balfour and Gold Lance to Class Rings, Inc. (CRI), a new company formed by Castle Harlan Partners II, L.P. and the Company. Separately, CRI entered into an agreement with CJC Holdings, Inc. (CJC) to acquire its school ring business.
The Company's agreement with CRI is subject to a number of significant contingencies including approval by the Federal Trade Commission and CRI's ability to raise sufficient capital to consummate the acquisition of Balfour and Gold Lance and the acquisition of CJC's school ring business.
Under the Company's agreement with CRI, the Company will receive cash of $55 million, adjustable for the fluctuation in working capital as of the date of closing, 8% of the common stock of CRI and the cash equivalent to the value of gold on hand as of the date of closing. In addition, the Company may receive additional shares of common stock of CRI based on CRI's exceeding certain defined levels of profitability. Under this contingent earnout arrangement, the Company can earn up to an additional 10% interest in the common stock of CRI. If the Company is able to consummate the transaction as contemplated, it is not expected that the transaction would have an unfavorable impact on the Company's financial position and operating results.
INFLATION
The Company's operating expenses are directly affected by inflation, resulting in an increased cost of doing business. Because the cost of sales depends on the price of raw materials bought in markets located throughout the world, the Company is influenced by inflation on an international basis. In addition, gold prices are affected by political factors, by changing perceptions of the value of gold relative to currencies and by inflationary pressures.
The Company believes that inflation does not currently have a material effect on the Company's operating expenses, although current rates of inflation are not necessarily indicative of future effects of inflation on the Company, and thus, inflation could have a material effect on the Company's operating expenses in the future.
Item 8.
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
Consolidated Balance Sheets - February 25, 1996 and February 26, 1995
Consolidated Statements of Operations - Years Ended February 25, 1996, February 26, 1995, and February 27, 1994
Consolidated Statements of Stockholders' Equity Years Ended February 25, 1996, February 26, 1995, and February 27, 1994
Consolidated Statements of Cash Flows - Years Ended February 25, 1996, February 26, 1995, and February 27, 1994
Notes to Consolidated Financial Statements
Item 9.
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS AND ACCOUNTING AND FINANCIAL DISCLOSURE
None
PART III
Item 10.
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.
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.
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.
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information related to certain transactions with directors of the Registrant is set forth under the caption "Certain Transactions and Business Relationships" in the Proxy Statement and is incorporated herein by reference.
PART IV
Item 14.
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
Consolidated Balance Sheets - February 25, 1996 and February 26, 1995
Consolidated Statements of Operations - Years Ended February 25, 1996, February 26, 1995, and February 27, 1994
Consolidated Statements of Stockholders' Equity - Years Ended February 25, 1996, February 26, 1995, and February 27, 1994
Consolidated Statements of Cash Flows - Years Ended February 25, 1996, February 26, 1995, and February 27, 1994
Notes to Consolidated Financial Statements
2. Financial Statement Schedules
Report of Independent Public Accountants
Schedules:
II Valuation Accounts
Schedules other than those listed above are omitted because of the absence of the condition under which they are required or because the required information is reflected in the financial statements or notes thereto.
3. Exhibits
Page
3.1 Restated Articles of Organization, as amended. *6*(3.1)
3.2 By-Laws, as amended. *2*(3.2)
4.1 Amended and Restated Indenture governing *6*(4.1) 13% Senior Subordinated Notes due 12/15/98, (the "Old 13% Notes), dated as of 5/14/93, from Town & Country Corporation to State Street Bank and Trust Company, as Trustee.
4.2 Supplemental Indenture relating to the Old *6*(4.4) 13% Notes, dated as of 5/14/93, from Town & Country Corporation to State Street Bank and Trust Company, as Trustee.
4.3 Indenture governing 11 1/2% Senior Secured *6*(4.5) Notes due 9/15/97, dated as of 5/14/93, from Town & Country Corporation to Shawmut Bank, N.A., as Trustee.
4.4 Indenture governing 13% Senior Subordinated *6*(4.6) Notes due 5/31/98, dated as of 5/14/93, from Town & Country Corporation to Bankers Trust Company, as Trustee.
4.5 Certificate of Vote of Directors *6*(4.7) Establishing the Exchangeable Preferred Stock, par value $1.00 per share, dated as of 5/14/93.
4.7 Certificate of Vote of Directors *7*(4.8) Establishing the Convertible Preferred Stock, par value $1.00 per share, dated as of November 23, 1994.
Material Contracts:
10.1 1989 Employee Stock Purchase Plan of the .#1#(10.21) Registrant.
10.2 1995 Stock Option Plan &1&(B)
10.3 1994 Non-Employee Directors' Nonqualified *7*(10.44) Stock Option Plan
10.4 Assignment, Consolidation, Amendment, and Filed Herewith Restatement to the Lease Agreement between the Registrant, Fine Jewelry Group, Inc. and Carey Realty Trust dated 3/1/96
10.5 Lease Agreement between L.G. Balfour Company, *7*(10.9) Inc. and C.L.C. North Attleboro Trust dated March 14, 1994.
10.6 Letter-Agreement dated April 4, 1994, to Lease *7*(10.10) between L. G. Balfour Company, Inc. and C.L.C. North Attleboro Trust dated March 14, 1994.
10.7 Amended and Restated Consignment Agreement by *6*(10.9) and between Town & Country Corporation, L.G. Balfour Company, Inc., Gold Lance, Inc., and Town & Country Fine Jewelry Group, Inc. and Fleet Precious Metals, Inc. dated as of 5/14/93.
10.8 First Amendment to Amended and Restated *7*(10.12) Consignment Agreement dated 10/20/93 by and between Town & Country Corporation, L.G. Balfour Company, Inc., Gold Lance, Inc., and Town & Country Fine Jewelry Group, Inc. and Fleet Precious Metals, Inc. dated as of 5/14/93.
10.9 Second Amendment to Amended and Restated *7*(10.13) Consignment Agreement dated 12/1/93 by and between Town & Country Corporation, L.G. Balfour Company, Inc., Gold Lance, Inc., and Town & Country Fine Jewelry Group, Inc. and Fleet Precious Metals, Inc. dated as of 5/14/93.
10.10 Third Amendment to Amended and Restated *7*(10.14) Consignment Agreement dated July 1994 by and between Town & Country Corporation, L.G. Balfour Company, Inc., Gold Lance, Inc., and Town & Country Fine Jewelry Group, Inc. and Fleet Precious Metals, Inc. dated as of 5/14/93.
10.11 Fourth Amendment to Amended and Restated *7*(10.15) Consignment Agreement dated 8/31/94 by and between Town & Country Corporation, L.G. Balfour Company, Inc., Gold Lance, Inc., and Town & Country Fine Jewelry Group, Inc. and Fleet Precious Metals, Inc. dated as of 5/14/93.
10.12 Fifth Amendment to Amended and Restated *7*(10.16) Consignment Agreement dated 11/17/94 by and between Town & Country Corporation, L.G. Balfour Company, Inc., Gold Lance, Inc., and Town & Country Fine Jewelry Group, Inc. and Fleet Precious Metals, Inc. dated as of 5/14/93.
10.13 Amended and Restated Consignment Agreement by *6*(10.10) and between Town & Country Corporation, L.G. Balfour Company, Inc., Gold Lance, Inc., and Town & Country Fine Jewelry Group, Inc. and Rhode Island Hospital Trust National Bank dated as of 5/14/93.
10.14 First Amendment to Amended and Restated *7*(10.18) Consignment Agreement dated 12/1/93 by and between Town & Country Corporation, L.G. Balfour Company, Inc., Gold Lance, Inc., and Town & Country Fine Jewelry Group, Inc. and Rhode Island Hospital Trust National Bank dated as of 5/14/93.
10.15 Second Amendment to Amended and Restated *7*(10.19) Consignment Agreement dated 7/13/94 by and between Town & Country Corporation, L.G. Balfour Company, Inc., Gold Lance, Inc., and Town & Country Fine Jewelry Group, Inc. and Rhode Island Hospital Trust National Bank dated as of 5/14/93.
10.16 Third Amendment to Amended and Restated *7*(10.20) Consignment Agreement dated 11/15/94 by and between Town & Country Corporation, L.G. Balfour Company, Inc., Gold Lance, Inc., and Town & Country Fine Jewelry Group, Inc. and Rhode Island Hospital Trust National Bank dated as of 5/14/93.
10.17 Fourth Amendment to Amended and Restated *8*(10.1) Consignment Agreement dated by and between Town & Country Corporation, L.G. Balfour Company, Inc., Gold Lance, Inc., and Town & Country Fine Jewelry Group, Inc. and Rhode Island Hospital Trust National Bank
10.18 Amended and Restated Consignment Agreement by *6*(10.11) and between Town & Country Corporation, L.G. Balfour Company, Inc., Gold Lance, Inc., and Town & Country Fine Jewelry Group, Inc. and ABN Amro Bank, N.V. dated as of 5/14/93.
10.19 First Amendment to Amended and Restated *7*(10.22) Consignment Agreement dated 12/1/93 by and between Town & Country Corporation, L.G. Balfour Company, Inc., Gold Lance, Inc., and Town & Country Fine Jewelry Group, Inc. and ABN Amro Bank, N.V. dated as of 5/14/93.
10.20 Second Amendment to Amended and Restated *7*(10.23) Consignment Agreement dated August 1994 by and between Town & Country Corporation, L.G. Balfour Company, Inc., Gold Lance, Inc., and Town & Country Fine Jewelry Group, Inc. and ABN Amro Bank, N.V. dated as of 5/14/93.
10.21 Amended and Restated Consignment Agreement by *6*(10.12) and between Town & Country Corporation, L.G. Balfour Company, Inc., Gold Lance, Inc., and Town & Country Fine Jewelry Group, Inc. and Republic National Bank of New York dated as of 5/14/93.
10.22 First Amendment to Amended and Restated *7*(10.25) Consignment Agreement dated 12/1/93 by and between Town & Country Corporation, L.G. Balfour Company, Inc., Gold Lance, Inc., and Town & Country Fine Jewelry Group, Inc. and Republic National Bank of New York dated as of 5/14/93.
10.23 Second Amendment to Amended and Restated *7*(10.26) Consignment Agreement dated July 1994 by and between Town & Country Corporation, L.G. Balfour Company, Inc., Gold Lance, Inc., and Town & Country Fine Jewelry Group, Inc. and Republic National Bank of New York dated as of 5/14/93.
10.24 Letter Agreement to Amended and Restated *7*(10.27) Collateral Sharing Agreement dated November 1994 by and among Fleet Precious Metals Inc. and various consignors and the Consignment Agreements as of May 14, 1993.
10.25 Loan Agreement dated as of 5/14/93, by and among *6*(10.15) Town & Country Corporation, L.G. Balfour Company, Inc., Gold Lance, Inc., and Town & Country Fine Jewelry Group, Inc. and Foothill Capital Corporation.
10.26 First Amendment to Loan Agreement dated 9/28/93 *7*(10.31) by and among Town & Country Corporation, L.G. Balfour Company, Inc., Gold Lance, Inc., and Town & Country Fine Jewelry Group, Inc. and Foothill Capital Corporation dated as of 5/14/93.
10.27 Amendment Number Two to Loan Agreement dated *7*(10.32) 6/24/94 by and among Town & Country Corporation, L.G. Balfour Company, Inc., Gold Lance, Inc., and Town & Country Fine Jewelry Group, Inc. and Foothill Capital Corporation dated as of 5/14/93.
10.28 Amendment Number Three to Loan Agreement dated *7*(10.33) 7/11/94 by and among Town & Country Corporation, L.G. Balfour Company, Inc., Gold Lance, Inc., and Town & Country Fine Jewelry Group, Inc. and Foothill Capital Corporation dated as of 5/14/93.
10.29 Amendment Number Four to Loan Agreement dated *7*(10.34) 7/25/94 by and among Town & Country Corporation, L.G. Balfour Company, Inc., Gold Lance, Inc., and Town & Country Fine Jewelry Group, Inc. and Foothill Capital Corporation dated as of 5/14/93.
10.30 Amendment Number Five to Loan Agreement dated *8*(10.2) by and between Town & Country Corporation, L.G. Balfour Company, Inc., Gold Lance, Inc., and Town & Country Fine Jewelry Group, Inc. and Foothill Capital Corporation dated as of 11/1/95.
10.31 Collateral Agency and Intercreditor Agreement *6*(10.16) dated as of 5/14/93, by and among Town & Country Corporation, L.G. Balfour Company, Inc., Gold Lance, Inc., and Town & Country Fine Jewelry Group, Inc. and Foothill Capital Corporation, Fleet Precious Metals, Inc., Rhode Island Hospital Trust National Bank, Republic National Bank, ABN Amro Bank N.V., Bankers Trust Company, Shawmut Bank, N.A., and Chemical Bank.
10.32 Form of 1993 Management Stock Option. #3#(10.23)
10.33 Form of Executive Employment Agreement between #4#(10.20) Town & Country Corporation and C. William Carey effective as of February 28, 1994.
10.34 Form of Executive Employment Agreement between #4#(10.21) Town & Country Corporation and Francis X. Correra effective as of February 28, 1994.
10.35 Trust Agreement dated as of 5/14/93, between *6*(10.22) Town & Country Corporation and Baybank, as Trustee.
10.36 Registration Effectiveness Agreement dated *6*(10.23) as of 5/14/93, between Town & Country Corporation and Certain Funds managed by Fidelity Management & Research Company.
10.37 Form of letter dated as of November 4, 1994, to #5#(10.21) Certain Holders of Town & Country Exchangeable Preferred Stock from Town & Country relating to the offer by Town & Country to issue shares of Convertible Preferred Stock.
10.38 Form of Registration Rights Agreement dated #5#(10.22) as of November 23, 1994, between Town & Country Corporation and the holders of Town & Country Convertible Preferred Stock signatory thereto.
10.39 Letter Agreement dated as of November 15, #5#(10.23) 1994, by and among Town & Country Corporation, L.G. Balfour Company, Inc. Gold Lance, Inc., and Town & Country Fine Jewelry Group, Inc. and Fleet Precious Metals, Inc., Rhode Island Hospital Trust National Bank, ABN-AMRO Bank, N.V., and Republic National Bank of New York.
11 Earnings per Share Computations Filed Herewith
22 Subsidiaries of the Registrant Filed Herewith
24.1 Consent of Arthur Andersen LLP Filed Herewith
27 Financial Data Schedule Filed Herewith
*1* Incorporated by reference to the designated exhibit of the Registration Statement on Form S-1 No. 2-97557 filed June 21, 1985.
*2* Incorporated by reference to the designated exhibit in the Annual Report on Form 10-K, Commission File number 0-14394 filed May 26, 1987.
*3* Incorporated by reference to the designated exhibit in the Annual Report on Form 10-K, Commission File number 0-14394 filed May 18, 1988.
*4* Incorporated by reference to the designated exhibit in the Annual Report on Form 10-K, Commission File number 0-14394 filed May 25, 1990.
*5* Incorporated by reference to the designated exhibit in the Annual Report on Form 10-K, Commission File number 0-14394 filed July 6, 1992.
*6* Incorporated by reference to the designated exhibit in the Annual Report on Form 10-K, Commission File number 0-14394 filed May 27, 1993.
*7* Incorporated by reference to the designated exhibit in the Annual Report on Form 10-K, Commission File Number 0-14394 filed May 24, 1995.
*8* Incorporated by reference to the designated exhibit in the Quarterly Report on Form 10-Q, Commission File Number 0-14394 filed January 11, 1995.
#1# Incorporated by reference to the designated exhibit of the Registration Statement on Form S-2 No. 33-25092 filed October 20, 1988.
#2# Incorporated by reference to the designated exhibit of Amendment No. 2 to the Registration Statement on Form S-2 No. 33-25437 filed December 12, 1988.
#3# Incorporated by reference to the designated exhibit of Amendment No. 6 to the Registration Statement on Form S-4 No. 33-49028 filed March 12, 1993.
#4# Incorporated by reference to the designated exhibit of Post-Effective Amendment No. 2 to the Registration Statement on Form S-2 No. 33-49028 filed July 26, 1994.
#5# Incorporated by reference to the designated exhibit of the Registration Statement on Form S-2 No. 33-57407 filed January 23, 1995.
&1& Incorporated by reference to the designated exhibit of the Annual Proxy on Form 14-A, Commission file number 0-014394 filed June 26, 1995.
(B) REPORTS ON FORM 8-K
No Form 8-K was issued by the Registrant during the quarter ended February 25, 1996.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, this Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
TOWN & COUNTRY CORPORATION (Registrant)
Date: By: /s/ C. William Carey C. William Carey, President
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been duly signed below by the following persons on behalf of the Registrant and in the capacities and on the date set forth above.
Signature Title
Principal Executive Officer:
/s/ C. William Carey President, Treasurer, and C. William Carey Director
Principal Financial and Accounting Officer:
/s/ Francis X. Correra Senior Vice President and Francis X. Correra Chief Financial Officer
/s/ Richard E. Floor Director Richard E. Floor
/s/ William Schawbel Director William Schawbel
/s/ Charles Hill Director Charles Hill
/s/ Marcia Morris Director Marcia Morris
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TOWN & COUNTRY CORPORATION AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
TOGETHER WITH AUDITORS' REPORT
Report of Independent Public Accountants
To Town & Country Corporation:
We have audited the accompanying consolidated balance sheets of TOWN & COUNTRY CORPORATION (a Massachusetts corporation) and subsidiaries as of February 25, 1996, and February 26, 1995, and the related consolidated statements of operations, stockholders' equity and cash flows for each of the three years in the period ended February 25, 1996. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Town & Country Corporation and subsidiaries as of February 25, 1996, and February 26, 1995, and the results of their operations and their cash flows for each of the three years in the period ended February 25, 1996, in conformity with generally accepted accounting principles.
Arthur Andersen LLP Boston, Massachusetts May 17, 1996
[Except for the matter discussed in Note 1 and Note 17 for which the date is June 7, 1996 and May 20, 1996, respectively]
TOWN & COUNTRY CORPORATION & SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
The accompanying notes are an integral part of these consolidated financial statements.
Page
TOWN & COUNTRY CORPORATION & SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (Continued)
The accompanying notes are an integral part of these consolidated financial statements. Page
TOWN & COUNTRY CORPORATION & SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
The accompanying notes are an integral part of these consolidated financial statements. Page
TOWN & COUNTRY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED FEBRUARY 25, 1996, FEBRUARY 26, 1995, AND FEBRUARY 27, 1994
(Continued on Next Page) Page
The accompanying notes are an integral part of these consolidated financial statements. Page
TOWN & COUNTRY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
The accompanying notes are an integral part of these consolidated financial statements.
Page
TOWN & COUNTRY CORPORATION & SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
The accompanying notes are an integral part of these consolidated financial statements. Page
TOWN & COUNTRY CORPORATION & SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FEBRUARY 25, 1996
(1) REFINANCING
On June 7, 1996, the Company received a commitment letter to enter into a new credit agreement from Foothill Capital Corporation ("Foothill"). The agreement would provide senior secured financing consisting of a $40 million revolving credit facility and a $30 million letter of creditin support of a Gold Consignment Facility provided by Fleet Precious Metals ("Fleet"); however, the aggregate amount of the combined facilities which may be outstanding at any date is $65 million. The agreement would be for a period of two years and provides Foothill with an option to renew for three additional years. The loans will bear interest at a rate per annum equal to the greater of (a) 2% above the reference rate announced by an identified group of major banks selected by Foothill or (b) 8%. The agreement will contain standard covenants for facilities of this type including financial covenants relating to interest coverage, minimum net worth, minimum working capital, debt to net worth and current ratios and limitations on dividends, distributions and capital expenditures. Advances under the credit line will be based on eligible accounts receivables and inventory. Foothill will have first security priority interest in receivables, inventory and substantially all real estate and fixed assets owned by the Company and its domestic subsidiaries subject to Fleet's first position as gold consignor supported by the letter of credit. The Company believes that it can meet its working capital needs over the next year through cash flow from operations and the use of funds available under this new credit facility. The closing of this agreement is subject to finalization of documentation.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of the Company and its controlled domestic and foreign subsidiaries. All significant intercompany transactions have been eliminated.
Reclassifications
Certain reclassifications have been made to the prior years' financial statements to conform with the presentation of the fiscal 1996 financial statements.
Cash and Cash Equivalents
Cash equivalents include highly liquid investments with original maturities of three months or less.
Investments
On March 1, 1994, the Company adopted the Financial Accounting Standard Board's Statement of Financial Accounting Standards (SFAS) No. 115, "Accounting for Certain Investments in Debt and Equity Securities." SFAS No. 115 addresses the accounting and reporting for investments in equity securities that have readily determinable fair market values and for all investments in debt securities. The Company's financial condition and results of operations were not materially impacted in fiscal 1995 as a result of adopting SFAS No. 115.
Long-Lived Assets
For the fiscal year beginning on February 26, 1996, the Company is required to adopt SFAS No. 121 "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed of" . SFAS No. 121 addresses accounting and reporting requirements for long-term assets bas on their fair market values. The Company has not evaluated the impact on its financial condition and results of operations as a result of adopting SFAS No. 121.
Stock Options
For the fiscal year beginning on February 26, 1996, the Company is required to adopt SFAS No. 123 "Accounting for Stock-Based Compensation" . SFAS No. 123 addresses accounting and reporting requirements for stock options and other equity instruments issued or granted based on their fair market values. The Company has not evaluated the impact on its financial condition and results of operations as a result of adopting SFAS No. 123.
Restricted Cash
Restricted cash includes cash payments from the Company's investment in Solomon Brothers, Limited and cash proceeds with respect to the Zale bankruptcy claim. These funds are escrowed for the benefit of the holders of the Senior Secured Notes. During fiscal 1996 and fiscal 1995, approximately $0.7 million and $6.3 million, respectively, of Senior Secured Notes were redeemed with such proceeds.
Foreign Currency
The Company is subject to fluctuating foreign currency exchange rates which are reflected currently in the consolidated statements of operations. Transaction and exchange gains and losses have not been material to the consolidated financial position or results of operations for the three years ended February 25, 1996.
Inventories
Inventories, which include materials, labor and manufacturing overhead, are stated at the lower of cost or market using the first-in, first-out (FIFO) method.
Inventories consisted of the following at February 25, 1996, and February 26, 1995:
The effects of gold price fluctuations are mitigated by the use of a consignment program with bullion dealers. The Company's intention is that as the gold selling price for orders is confirmed, the Company purchases the gold requirements at the then current market prices; any additional requirements for gold are held as consignee. The Company attempts to match the price it pays for gold with the price it charges its customers. The Company pays a fee, which is subject to periodic change, for the value of the gold it holds on consignment during the period prior to sale. For the years ended February 25, 1996, February 26, 1995, and February 27, 1994, these fees totaled approximately $1.4 million, $1.4 million, and $1.5 million, respectively.
The Company does not include the value of consigned gold in inventory or the corresponding liability in borrowings for financial statement purposes. As of February 25, 1996, and February 26, 1995, the Company held approximately 63,000 ounces, valued at $24.9 million, and 67,000 ounces, valued at $25.4 million, respectively, of gold on consignment under its domestic gold agreements. A foreign subsidiary of the Company held an additional 3,100 ounces, valued at $1.2 million, and 5,000 ounces, valued at $1.8 million, outstanding at February 25, 1996, and February 26, 1995, respectively, under a separate consignment agreement (Note 3).
Advertising
The Company expenses the costs of advertising as incurred, except for certain direct-response advertising costs, which are capitalized and amortized over their expected period of future benefits.
At February 25, 1996, February 26, 1995, and February 27, 1994, advertising expense was approximately $5.8 million, $14.2 million and $11.0 million, respectively. At February 25, 1996 and February 26, 1995, no advertising costs were capitalized.
Property, Plant and Equipment
The Company provides for depreciation, principally on the straight-line method, at rates adequate to depreciate the applicable assets over their estimated useful lives which range from 3 to 40 years. Certain equipment is depreciated using the declining balance method.
Property and equipment consisted of the following at February 25, 1996, and February 26, 1995:
Accrued Expenses
The principal components of accrued expenses at February 25, 1996, and February 26, 1995, are as follows:
Income Taxes
Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.
Use of Estimates
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Income (Loss) Per Common Share
Income (loss) per common share is computed based on the weighted average number of common and common equivalent shares, where dilutive, outstanding during each period. Common equivalent shares result from the assumed exercise of stock options and warrants.
Long-term Intangible Assets
The excess of purchase price over the values assigned to net assets acquired is being amortized using the straight-line method over periods ranging from 30 to 40 years. The Company continually evaluates whether events and circumstances have occurred that indicate that the remaining estimated useful life of goodwill may warrant revision or that the remaining balance of goodwill may not be recoverable. When factors indicate that goodwill should be evaluated for possible impairment, the Company uses an estimate of the related business segments' undiscounted operating income over the remaining life of the goodwill in measuring whether the goodwill is recoverable. Accumulated amortization was approximately $3,286,000 and $3,103,000 at February 25, 1996, and February 26, 1995, respectively.
Minority Interest
Minority interest is determined based on the percent ownership of the equity by other investors of the related consolidated subsidiary.
Subsidiary Sale of Stock
At the time a subsidiary sells its stock to unrelated parties at a price in excess of its book value, the Company's net investment in that subsidiary increases. The Company records the increase as a gain in the consolidated statement of operations.
Supplemental Disclosures of Noncash Investing and Financing Activities
In fiscal 1994, as payment for the commitment to purchase up to 100% of the Company's Senior Secured Notes, an investor received 750,000 shares of the Company's Class A common stock with a value of $2,015,625 at the time of issuance.
The Company completed a recapitalization on May 14, 1993 (See Note 3).
During fiscal 1995, the Company had fixed asset additions of approximately $.7 million funded by increases in capital lease obligations.
On November 23, 1994, holders of approximately 94% of the Company's Exchangeable Preferred Stock exchanged their shares for shares of Little Switzerland, Inc. common stock held by the Company and shares of the Company's Convertible Preferred Stock (See Note 4).
Financial Instruments
Cash and Cash Equivalents
The carrying amount of cash and cash equivalents approximates fair value because of the short-term maturity of the instruments.
Restricted Cash
The Company's restricted cash is invested in short-term, highly-liquid investments. The carrying amount approximates fair value because of the short-term maturity of these investments.
Investment in Little Switzerland, Inc.
The Company owns 318,962 shares of Little Switzerland, Inc. Common Stock as of February 25, 1996. Of these shares, 152,217 are held by a trustee for the benefit of the holders of the Company's Exchangeable Preferred Stock and are considered held-to-maturity. The remaining shares owned by the Company are considered available-for-sale. The Company believes that the carrying value approximates the fair value of these securities.
Investment in Solomon Brothers, Limited
The fair value of the Company's investment in Solomon Brothers, Limited is considered to be equal to its carrying value as of February 25, 1996, based on the valuation method agreed upon for the redemption of shares as discussed in Note 6 and the estimated fair value of the underlying net assets.
Long-Term Subordinated Debt and Exchangeable Preferred Stock
The Company believes that the fair value of the Company's long-term subordinated debt and Exchangeable Preferred Stock approximates its carrying value as of February 25, 1996, based on the valuation methodology required for the recapitalization.
Long-Term Secured Debt
The fair value of the Company's various long-term secured debt, which are secured by various assets, are considered to approximate their carrying value as of February 25, 1996. This conclusion is based on the relationship of carrying value to the value of the related security and the relatively short-term maturities of the related debt.
(3) LONG-TERM DEBT AND CREDIT ARRANGEMENTS
Long-term debt at February 25, 1996, and February 26, 1995, consists of the following:
On May 14, 1993, the Company completed a recapitalization. The recapitalization was accounted for as a "troubled debt restructuring" under Statement of Financial Accounting Standards No. 15, "Accounting by Debtors and Creditors for Troubled Debt Restructurings," whereby the net carrying value of the old debt was allocated to the new securities, issued in the recapitalization, based on their estimated, relative, fair market values, and no gain or loss was recognized. Recapitalization costs were expensed as incurred.
As a result of this transaction, long-term debt with a carrying value of $122,673,945, including deferred financing costs, was retired. New debt with a carrying value of $61,486,762, exchangeable preferred stock valued at $34,331,895, and common stock valued at $26,855,288 were issued in exchange for these redemptions.
On May 14, 1993, the Company entered into a revolving credit facility with Foothill Capital Corporation ("Foothill") providing senior secured financing in an aggregate amount of up to $30 million. The line of credit matured on May 14, 1996, and was automatically renewed for a two year period. The loans bear interest at a rate per annum equal to the greater of (a) 2% above the reference rate (the highest "prime rate" or "reference rate" announced by an identified group of major banks) selected by Foothill or (b) 8%. The agreement contains the standard covenants for facilities of this type including, without limitation, financial covenants relating to interest coverage, minimum net worth, minimum working capital, debt to net worth and current ratios, and limitations on dividends and distributions, dispositions of assets and capital expenditures. Advances under the credit facility are based on eligible receivables and inventory. Foothill has a first priority security interest in receivables, certain inventory, primarily stones and diamonds, and substantially all real estate and fixed assets owned by the Company and its domestic subsidiaries. The Company had $15 million outstanding under its revolving credit agreement, at an effective interest rate of 11.6% at February 25, 1996. The Company had $15 million of additional borrowings available under its revolving credit agreement as of February 25, 1996.
On May 14, 1993, the Company entered into gold agreements with its gold suppliers providing secured gold consignment availability of up to approximately 100,000 troy ounces. The agreements are terminable upon thirty days' written notice and contain the standard covenants for facilities of this type including, without limitation, financial covenants relating to interest coverage, minimum net worth, minimum working capital, debt to net worth and current ratios, and limitations on dividends and distributions and first priority security interest in the precious metal content of inventory. During fiscal 1995, the Company agreed to reduce its gold consignment facilities to approximately 73,000 ounces, and during fiscal 1996, further agreed to reduce its gold consignment facility to approximately 67,000 ounces. The Company had approximately 63,000 troy ounces on consignment at February 25, 1996. In connection with these reductions, some modifications were made to the financial covenants in the gold consignment agreements with the Company's gold suppliers. Subsequent to year-end, the Company agreed to reduce its gold facility to approximately 63,000 ounces.
During the second quarter of fiscal 1995, modifications to the consolidated tangible net worth covenant were made in the revolving credit and gold agreements. The covenant previously provided that the Company was required to maintain consolidated tangible net worth of $38,000,000 through February 27, 1994, and $43,000,000 thereafter. As amended, the covenant provides that the Company maintain consolidated tangible net worth of $40,000,000 from July 1, 1994, through November 26, 1994, and $43,000,000 thereafter.
As of February 25, 1996, the Company was not in compliance with certain covenants under its revolving credit and gold agreements and such events of noncompliance have been waived. Subsequent to year end, the Company received a commitment letter from Foothill as described in Note 1.
On May 14, 1993, the Company issued $30 million of Senior Secured Notes due September 15, 1997. Following receipt, by the Company, of cash payments from the Company's investment in Solomon Brothers, Limited and/or cash or other payments from the Zale Companies with respect to the Zale bankruptcy claim, net of certain expenses, the Company is required to redeem an amount of the notes equal to the amount of such net proceeds at a redemption price equal to 100% of the principal amount thereof plus accrued interest, if any. During fiscal 1996 and fiscal 1995, the Company redeemed $0.7 million and $6.3 million, respectively, of Senior Secured notes with such proceeds. In the event that the Company's consolidated net worth declines below a defined minimum (75% of net worth at May 31, 1993, plus 37.5% of net income for each fiscal year thereafter) for two consecutive quarters, the Company is required to make an offer to redeem 7.5% of the outstanding notes semiannually and to continue to do so as long as the condition persists.
On May 14, 1993, the Company issued approximately 2,533,000 shares of Exchangeable Preferred Stock, the outstanding shares of which will be redeemed by the Company on December 31, 2000, for $14.59 per share plus accrued and unpaid dividends payable in cash or shares of Little Switzerland, Inc. common stock. No dividends will be paid until after the second anniversary of the date of issuance of the stock. Thereafter, holders will be entitled to receive cumulative cash dividends at a rate of 6% per annum based on $14.59 per share. Dividends will be payable semiannually on each six-month and twelve-month anniversary of the issuance date. During fiscal 1996, $66,625 of dividends were paid. At any time after March 1, 1994, each share of Exchangeable Preferred Stock may be exchanged by the holder for a share of Little Switzerland, Inc. common stock held by the Company or redeemed by the Company, for cash, at a declining premium through 1998 (See Note 4). At February 25, 1996, cumulative unpaid dividends amounted to $38,865. For the years ended February 25, 1996, and February 26, 1995, accretion of dividends and discount on Exchangeable Preferred Stock amounted to $120,579 and $1,455,866, respectively.
A subsidiary of the Company has available credit line facilities with two banks in Thailand to provide aggregate commercial financing of up to approximately $13.3 million. The subsidiary had no balance outstanding under these lines at February 25, 1996, and February 26, 1995, respectively. This subsidiary also has an agreement with a gold supplier to provide secured gold consignment availability of up to approximately 4,800 troy ounces. This agreement runs through December 10, 1996, and is secured by a standby letter of credit for $3.4 million under one of the subsidiary's credit facilities. There were approximately 3,100 ounces on consignment under this gold agreement at February 25, 1996.
On April 3, 1995, the Company repaid approximately $181,000 of its obligation under the New York City Industrial Revenue Development Agency industrial revenue bonds ("IRB"). On April 3, 1995, the remaining obligation, approximately $367,000, was purchased by Foothill. As a result of this transaction, the Company was required to make quarterly payments on the IRB to Foothill. Additionally, the interest rate for the outstanding bonds was modified to be the same as that on the Company's revolving line of credit. On February 22, 1996, the Company repaid its remaining obligation under the IRB, approximately $317,000, to Foothill.
Aggregate maturities of long-term debt for each of the next five years are approximately $245,000, $13,408,000, $75,785,000, $0 and $0, respectively.
(4) EXCHANGE OF STOCK
On November 23, 1994, holders of approximately 94% of the Company's Exchangeable Preferred Stock exchanged their shares for shares of Little Switzerland, Inc. Common Stock held by the Company on a share-for-share basis. Such an exchange was provided for by the terms of the Exchangeable Preferred Stock. In addition, the Company issued to each participant one share of new Convertible Preferred Stock with each share of Little Switzerland, Inc. Common Stock.
Since the carrying value of the Company's investment in Little Switzerland, Inc. was substantially less than the recorded value of the Exchangeable Preferred Stock, the transaction resulted in a nonrecurring, noncash gain of approximately $17 million, net of the estimated fair value of the Convertible Preferred Stock issued.
Convertible Preferred Stock
Each share of Convertible Preferred Stock is initially convertible, at the option of the holder, into two shares of Class A Common Stock, subject to adjustment in certain circumstances. In the event the market price of a share of Class A Common Stock equals or exceeds $3.25 for 30 consecutive trading days, the Company may require the holders of Convertible Preferred Stock to convert such stock into shares of Class A Common Stock at the then-applicable conversion rate. Beginning on November 23, 1995, the Company may redeem, in whole or in part, shares of Convertible Preferred Stock at a price equal to 104% of the liquidation value and thereafter at prices declining annually to 100% of the liquidation value on or after November 23, 1997. The Convertible Preferred Stock has a liquidation value of $6.50 per share and accrues cumulative dividends at the rate of 6% of the liquidation value per annum. Dividends are payable in cash or in additional shares of Convertible Preferred Stock as defined by the agreement. During fiscal 1996, dividends of approximately $713,000 were paid with the issuance of approximately 110,000 new shares of Convertible Preferred Stock. At February 25, 1996, and February 26, 1995, cumulative unpaid dividends amounted to $438,129 and $232,152, respectively.
The Convertible Preferred Stock is subordinate on liquidation and with respect to dividend payments to the outstanding shares of Exchangeable Preferred Stock but senior to the Class A Common Stock and the Class B Common Stock. Holders of shares of Convertible Preferred Stock are entitled to vote on all matters on which the holders of Class A Common Stock are entitled to vote. Each share of Convertible Preferred Stock entitles the holder to the number of votes per share equal to the number of shares of Class A Common Stock into which each share of Convertible Preferred Stock is then convertible.
The Company has agreed with the holders of the Convertible Preferred Stock to register such stock (and the Class A Common Stock into which it is convertible) under the Securities Act and to keep such registration effective until the earlier of (i) the date on which such holders no longer own any of such securities or (ii) the date on which each of the holders has notified the Company that such holder may dispose of all of its securities pursuant to Rule 144(k) under the Securities Act. The effectiveness of the registration statement covering these shares was suspended by the Company on March 28, 1996.
(5) INVESTMENT IN LITTLE SWITZERLAND, INC.
The sale of approximately 68% of Little Switzerland, Inc.'s common stock by a subsidiary of the Company resulted in the deconsolidation of Little Switzerland, Inc. in the fiscal 1992 consolidated financial statements of the Company. The continuing investment in Little Switzerland, Inc. is now classified as a long-term asset in the accompanying consolidated balance sheets.
As a result of the exchange discussed in Note 4, the Company's investment in Little Switzerland, Inc., as of November 23, 1994, was reduced to 318,962 shares or approximately 4%. Due to the decrease in ownership, the Company has changed its method of accounting for this investment from the equity method to the cost method.
(6) INVESTMENT IN SOLOMON BROTHERS, LIMITED
On May 27, 1988, the Company purchased 410,000 shares of nonvoting, redeemable, cumulative, Participating Preferred Class B Stock of Solomon Brothers, Limited ("Solomon Brothers"), a Bahamian company, for a total purchase price of $17,220,020.
The Company is entitled, as holder, to a fixed, cumulative, preferred dividend equal to 1% of the purchase price annually. The Company is also entitled to a cumulative, ordinary dividend equal to the change in net book value per ordinary share of Solomon Brothers, calculated as if the Company was a holder of ordinary shares, less the preferred dividend and to a fee determined as a percent of cumulative, accrued, unpaid ordinary dividends. The combined dividend rate for the periods ended February 25, 1996, February 26, 1995, and February 27, 1994, was approximately 0%, 0% and 1.1%, respectively. The Company received distributions of $2,045,532 of previously accrued but unpaid ordinary dividends during fiscal 1994. On May 31, 1993, the Company redeemed 83,000 of the Company's shares for approximately $3.5 million. On March 29, 1994, March 20, 1995, and April 4, 1996, as required by the covenants of its Senior Secured Notes, the Company gave written notice to Solomon Brothers of the Company's intention to redeem 70,000, 55,000 and 55,000 additional shares, respectively. Solomon Brothers informed the Company that it would not be able to redeem the March, 1994, March, 1995, and April, 1996, share requests when due, as a result of constraints imposed by its banking facilities. The Company believes its investment is realizable, but it is unable to estimate the timing of future redemption payments. The Company is monitoring Solomon Brothers' operations and financial position and if it determines in the future that carrying value is no longer reflective of fair value, appropriate adjustments will be made.
Presented below is summarized financial information for Solomon Brothers as of and for the years ended October 27, 1995, October 28, 1994 and October 29, 1993, prepared on a basis substantially in accordance with generally accepted accounting principles (GAAP) (Bahamian Dollars, $000s):
Solomon Brothers' fiscal 1994 information has been restated for consistency purposes for operations which were discontinued in fiscal 1995. Restated information was not available for fiscal 1993.
(7) INCOME TAXES
The domestic and foreign components of income (loss) before provision for income taxes for the years ended February 25, 1996, February 26, 1995 and February 27, 1994, are as follows:
The components of the provision for income taxes for the years ended February 25, 1996, February 26, 1995 and February 27, 1994, are as follows:
The Company's effective tax rate differs from the federal statutory rate of 35% in fiscal 1996, 1995 and 1994 due to the following:
The valuation allowance relates to uncertainty surrounding the realizability of the deferred tax assets in excess of the deferred tax liabilities, principally the net operating loss carryforwards.
For tax reporting purposes, the Company has a U.S. net operating loss carryforward of approximately $49 million, subject to Internal Revenue Service review and approval. In addition, net operating loss carryforwards of approximately $1,500,000 were generated by a U.S. subsidiary prior to its acquisition by the Company. Utilization of the subsidiary's net operating loss carryforward is contingent on the subsidiary's ability to generate income in future years. The net operating loss carryforwards will expire from 2009 to 2010 if not utilized.
(8) LOSS ON ASSETS HELD FOR SALE OR DISPOSAL
In fiscal 1993, the Company's management decided to make changes with respect to certain of the operations of its Balfour subsidiary. As a result of this decision, the Company recognized a pretax charge of $14.5 million in the fourth quarter of fiscal 1993 to reserve for the losses associated with the disposal of certain inventory and fixed assets, including property, plant, and equipment of approximately $12.9 million and intangible assets of approximately $1.6 million, no longer considered necessary to its modified business. At February 25, 1996, the disposals have been substantially completed and the remaining reserve, of approximately $1.4 million, represents the expected loss associated with the disposition of the plant site which is being prepared for sale to the Town of Attleboro.
(9) ZALE CORPORATION AND AFFILIATES
The Company's largest customer for a number of years has been the Zale Corporation and its affiliated companies. Sales to the Zale Companies were approximately $22 million or 9% of consolidated sales in fiscal 1996 compared to approximately $29 million or 10% of consolidated sales in fiscal 1995 and compared to $33 million or 12% of consolidated sales in fiscal 1994.
The Company's Consolidated Financial Statements at February 28, 1992, originally reflected a net valuation, related to Zale Corporation's bankruptcy filing under Chapter 11 of the United States Bankruptcy Code, of approximately $13 million, which was classified as Other Assets in the Consolidated Balance Sheets, due to the uncertainty of the timing of a final settlement. The Company subsequently received proceeds from Zale and from liquidation of claim assets of approximately $14.5 million and has recognized benefits in selling, general and administrative expenses in the accompanying statement of operations, of approximately $1.5 million in fiscal 1996.
(10) CONCENTRATION OF CREDIT RISK
A significant portion of the Company's business activity is with large jewelry retailers and department store chains, many of which are not only subject to the risks associated with economic impacts on retailers of discretionary, consumer goods but also are companies with high debt-to-equity ratios.
(11) NONRECURRING EVENTS
Based on the success of its operational restructuring during fiscal 1993, the Company concluded that the Feature facility in New York will not be required as a long-term manufacturing site. The Company expects to maintain a continuing presence in New York in the form of sales and marketing functions, product development, and manufacturing support services, including a repair function and subcontractor control operations. These functions will remain in the Feature facility until the Company is able to sell the facility at a price which it considers acceptable. As a result of its decision to dispose of the facility, the Company adjusted the carrying value of the Feature facility by approximately $5 million, which was recorded as a restructuring charge during the fourth quarter of fiscal 1993. As of February 25, 1996, the Company has not sold this facility.
(12) CAPITALIZATION
Each share of Class B Common Stock entitles the holder to ten votes, each share of Class A Common Stock entitles the holder to one vote, and each share of Convertible Preferred Stock entitles the holder to the number of votes per share equal to the number of shares of Class A Common Stock into which each share of Convertible Preferred Stock is then convertible, on matters submitted to stockholders. The Class B Common Stock is convertible at any time, at the option of the holder, into Class A Common Stock on a share-for-share basis. The Convertible Preferred Stock is initially convertible, at the option of the holder, into two shares of Class A Common Stock, subject to adjustment in certain circumstances. As part of the recapitalization, the Company issued to its financial advisors warrants to purchase 125,000 shares of Class A Common Stock, with an exercise price of $2.685 per share and a final maturity of five years from the date of issuance of the warrants.
The Company's ability to pay cash dividends is limited by its financing and other outstanding indebtedness. As a result of these restrictions, the Company currently may not pay cash dividends.
(13) COMMITMENTS AND CONTINGENCIES
The Company leases a portion of its Chelsea, Massachusetts, facility comprised of approximately 39,000 square feet of combined manufacturing and administrative space from Carey Realty Trust, a Massachusetts business trust (the "Trust"), which is wholly owned by C. William Carey, the Chairman, President and a major stockholder of the Company. The lease which was revised on March 1, 1996, expires on August 31, 1998, and provides the Company with three ten-year options to renew. The current lease provides for an annual rental payment of approximately $350,000. The Company obtained comparative information from a third party when negotiating the revised lease and believes that these lease arrangements are on terms no less favorable to the Company than could be obtained from unaffiliated third parties.
Certain other Company facilities and equipment are leased under agreements expiring at various dates through 2009. The Company's commitments under the noncancelable portion of all operating leases for the next five years and in total thereafter at February 25, 1996, are approximately as follows:
Lease and rental expense included in the accompanying consolidated statements of operations amounted to approximately $1,919,000, $1,414,000 and $1,090,000 for the years ended February 25, 1996, February 26, 1995 and February 27, 1994, respectively.
A subsidiary of the Company is a party to certain contracts with some of its sales representatives whereby the representative has purchased the right to sell the subsidiary's products, in a territory, from his predecessor. The contracts generally provide that the value of these rights is primarily determined by the amount of business achieved by a successor sales representative and is therefore not determinable in advance of performance by the successor sales representative.
The Company is not party to any pending legal proceedings, other than ordinary routine litigation incidental to the business. In management's opinion, adverse decisions on those legal proceedings, in the aggregate, would not have a materially adverse impact on the Company's consolidated results of operations or financial position.
(14) STOCK OPTION PLAN
The Company has three active stock option plans.
An aggregate of 1,500,000 shares of Class A Common Stock were registered for issuance under the 1985 Amended and Restated Stock Option Plan (the "1985 Plan"). Both incentive stock options and nonstatutory stock options were granted under the 1985 Plan. All options outstanding were issued at fair market value at the date of grant. On September 19, 1995, options under the 1985 Plan were repriced at $0.8125, the market price on that date. Granting of options under this plan expired in April, 1995.
An aggregate of 2,000,000 shares of Class A Common Stock were registered for issuance under the 1995 Stock Option and Incentive Plan (together with the 1985 Plan, the "Employee Plans"). Stock options, stock appreciation rights, restricted stock, performance shares, unrestricted stock and dividend equivalent rights may be granted under this plan.
The Company also has a stock plan for non-employee directors, the 1994 Non-Employee Directors' Nonqualified Stock Option Plan (the Directors' Plan). Each Director received a one-time grant of 20,000 shares of common stock on October 1, 1994. New directors elected after that date receive 20,000 shares upon their election. Each non-employee director who is a director on the last day of the Company's fiscal year which is more than four full years after the date of their initial grant date will be granted an option to purchase 4,000 additional shares of Class A Common Stock. All such options are immediately exercisable at the fair market value of Class A Common Stock on the date of issuance. The Company has set aside 200,000 shares of stock for issuance under the Directors' Plan.
The following table summarizes the stock option transactions under the Company's option plans for the three years ended February 25, 1996:
At February 25, 1996, there were 350,000 shares reserved for future grants under the 1995 Employee Plan and 120,000 shares reserved for grant under the Directors' Plan.
The Company has also granted options not under any plan to consultants and various individuals to purchase up to 2,580,000 of Class A Common Stock at prices ranging from $0.81 to $6.75 per share. On September 19, 1995, non-plan options granted to employees of the Company were repriced at $0.8125, the market price on that date.
(15) EMPLOYEE STOCK PURCHASE PLAN
On January 25, 1988, the Board of Directors adopted the 1988 Employee Stock Purchase Plan (the "Stock Purchase Plan") for 500,000 shares of the Class A Common Stock. Under the Stock Purchase Plan, each eligible participating employee is deemed to have been granted an option to purchase shares of the Company's Class A Common Stock on a semiannual basis at a price equal to 90% of the market value on the last day of the period. During the year ended February 25, 1996, 24,146 shares were issued at $0.50 per share and 21,778 shares were issued at $0.50 per share. During the year ended February 26, 1995, 5,855 shares were issued at $2.50 per share and 17,260 shares were issued at $0.75 per share. During the year ended February 27, 1994, 7,926 shares were issued at $2.50 per share and 5,018 shares were issued at $3.00 per share. At February 25, 1996, there were 260,613 shares reserved for issuance under the Stock Purchase Plan.
(16) EMPLOYEE BENEFIT PLANS
(a) Postemployment Medical Benefits
A subsidiary of the Company provides certain health care and life insurance benefits for employees who retired prior to December 31, 1990. The Company adopted SFAS No. 106, "Employers' Accounting for Postretirement Benefits Other Than Pensions," in fiscal 1994 and is recognizing the actuarial present value of the accumulated postretirement benefit obligation (APBO) of approximately $6.1 million on the delayed recognition method over a period of 20 years.
The following table sets forth the plan status as of February 25, 1996, and February 26, 1995.
The net periodic postretirement benefit costs for fiscal 1996 and fiscal 1995 included the following components:
For measurement purposes, a 9% annual rate of increase in the per-capita cost of covered health care benefits is assumed for fiscal 1996; the rate was assumed to decrease gradually down to 6% for fiscal 2000 and remain at that level thereafter. The health care cost trend rate assumption has a significant effect on the amounts reported. To illustrate, increasing the assumed health care cost trend rate one percentage point in each year would increase the accumulated postretirement benefit obligation as of February 25, 1996, by approximately $380,000 or by 7%, and the aggregate of the service and interest cost components of the net periodic postretirement benefit cost for fiscal 1996 by approximately $30,000 or by 7%.
The weighted average discount rate used in determining the accumulated postretirement benefit obligation was 8.0% in fiscal 1996 and 1995.
(b) Pension Plans
Certain subsidiaries of the Company participate in multiemployer pension plans. The plans provide for defined benefits for substantially all unionized employees. The amounts charged for pension contributions were approximately $21,000, $20,000 and $62,000, for the years ended February 25, 1996, February 26, 1995 and February 27, 1994, respectively.
(c) Deferred Compensation
A subsidiary of the Company has deferred compensation agreements with certain sales representatives and executives which provide for payments upon retirement or death based on the value of life insurance policies or mutual fund shares at the retirement date. The cost of the subsidiary's liability under these compensation agreements has been charged to selling, general and administrative expense. The deferred compensation expense for the years ended February 25, 1996, February 26, 1995 and February 27, 1994, was approximately $57,000, $156,000 and $156,000, respectively.
(17) SUBSEQUENT EVENT
On May 20, 1996, the Company entered into an agreement to sell assets and liabilities of its Balfour and Gold Lance subsidiaries constituting substantially all of the operations of Balfour and Gold Lance to Class Rings, Inc. (CRI), a new company formed by Castle Harlan Partners II, L.P. and the Company. Separately, CRI entered into an agreement with CJC Holdings, Inc. (CJC) to acquire its school ring business.
The Company's agreement with CRI is subject to a number of significant contingencies including approval by the Federal Trade Commission and CRI's ability to raise sufficient capital to consummate the acquisition of Balfour and Gold Lance and the acquisition of CJC's school ring business.
Under the Company's agreement with CRI, the Company will receive cash of $55 million, adjustable for the fluctuation in working capital as of the date of closing, 8% of the common stock of CRI and the cash equivalent to the value of gold on hand as of the date of closing. In addition, the Company may receive additional shares of common stock of CRI based on CRI's exceeding certain defined levels of profitability. Under this contingent earnout arrangement, the Company can earn up to an additional 10% interest in the common stock of CRI. If the Company is able to consummate the transaction as contemplated, it is not expected that the transaction would have an unfavorable impact on the Company's financial position and operating results.
(18) CONSOLIDATING FINANCIAL INFORMATION AND SEGMENT INFORMATION
The securities issued by the Company in connection with the Company's recapitalization, discussed in Note 3, are guaranteed by its domestic subsidiaries. These guarantees are full, unconditional, and joint and several. As a result, the Company has included condensed consolidating financial statements on a domestic and foreign basis for the Company, the domestic subsidiaries, and the foreign subsidiaries for the years ended February 25, 1996, February 26, 1995 and February 27, 1994, (in 000's). Foreign gross profit includes gross profit attributable to sales from foreign subsidiaries to domestic subsidiaries, which is not included in the eliminations column as the impact is included in cost of sales of the domestic subsidiaries.
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Report of Independent Public Accountants On Schedules
To Town & Country Corporation:
We have audited, in accordance with generally accepted auditing standards, the consolidated financial statements of Town & Country Corporation and subsidiaries included in this Form 10-K and have issued our report thereon dated May 17, 1996 (except for the matter discussed in Note 1 and Note 17 for which the date is June 7, 1996 and May 20, 1996, respectively). Our audit was made for the purpose of forming an opinion on the basic consolidated financial statements taken as a whole. The schedules listed in Item 14 (a) (2) are the responsibility of the Company's management and are presented for purposes of complying with the Securities and Exchange Commission's rules and are not part of the basic consolidated financial statements. These schedules have been subjected to the auditing procedures applied in the audit of the basic consolidated financial statements and, in our opinion, fairly state, in all material respects, the financial data required to be set forth therein, in relation to the basic consolidated financial statements taken as a whole.
Boston, Massachusetts Arthur Andersen LLP May 17, 1996
SCHEDULE II
Valuation Accounts
Balance Write-offs, Balance Beginning Net of End of Description of year Provision Recoveries Year
Allowance for Doubtful Accounts:
For the Year Ended:
February 25, 1996 $ 7,780,000 $ 464,000 $ (6,124,000)$ 2,120,000 February 26, 1995 5,510,000 5,473,000 (3,203,000) 7,780,000 February 27, 1994 4,910,000 2,550,000 (1,950,000) 5,510,000
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EXHIBITS
TOWN & COUNTRY CORPORATION AND SUBSIDIARIES
Exhibits, other than Exhibits 10.4, 11, 22, 24.1, and 27, have been omitted.
The Company will supply, upon written request, copies of any exhibit from the Document list.
EXHIBIT 11
Earnings Per Share Computations Five Years Ended (Unaudited)
Fully Diluted EPS:
For the five years presented in this exhibit, there is no dilution from Primary EPS.
This exhibit should be reviewed in conjunction with Note 2 of Notes to Consolidated Financial Statements.
EXHIBIT 22
TOWN & COUNTRY CORPORATION AND SUBSIDIARIES
Subsidiaries of the registrant
Set forth below is a list of the Registrant's subsidiaries (1) as of February 25, 1996, with their state or other jurisdiction of incorporation, names under which they do business, and the percentage of their voting securities owned by the Registrant as of such date:
Percent Name Incorporation and Date Ownership Essex International Public Company Limited Thailand, 1984 70% Gold Lance, Inc. Massachusetts, 1986 100% L.G. Balfour Company, Inc. Delaware, 1982 100% Anju Jewelry Limited Hong Kong, 1973 100% Town & Country Fine Jewelry Group, Inc. (2) Massachusetts, 1991 100%
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(1) Excluded are the names of particular subsidiaries, which, when considered in the aggregate as a single subsidiary, would not constitute a significant subsidiary as of February 25, 1996.
(2) Verilyte Gold, Inc. and Feature Enterprises, Inc. were merged into Town & Country Fine Jewelry Group, Inc. as of May 14, 1993.
EXHIBIT 24.1
TOWN & COUNTRY CORPORATION AND SUBSIDIARIES
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation of our reports included in this Form 10-K, into the Company's previously filed Registration Statements on Form S-2, File No. 33-49028, on Form S-8, File No. 33-23860, and Form S-2, File No. 33-57407.
Arthur Andersen LLP Boston, Massachusetts May 17, 1996