As filed with the Securities and Exchange Commission on July 26, 1994
Registration No. 33-49028
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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POST-EFFECTIVE
AMENDMENT NO. 2
to
FORM S-2
REGISTRATION STATEMENT
UNDER THE SECURITIES ACT OF 1933
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TOWN & COUNTRY CORPORATION
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(Exact name of registrant as specified in its charter)
Massachusetts 04-2384321
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
Subsidiary Registrants
L.G. Balfour Company, Inc. Delaware 51-0267024
Gold Lance, Inc. Massachusetts 04-2920414
Town & Country Fine Jewelry Massachusetts 04-3137348
Group, Inc.
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(Exact name of registrant (State or other (I.R.S.
as specified in its charter) jurisdiction of Employer
incorporation Identification
or organization) Number)
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C. WILLIAM CAREY
President
Town & Country Corporation
25 Union Street 25 Union Street
Chelsea, Massachusetts 02150 Chelsea, Massachusetts 02150
(617) 884-8500 (617) 884-8500
- ------------------------------- ----------------------------
(Address, including zip code, (Name, address, including
and telephone number, including zip code, and telephone,
area code, of registrants' including area code, of
principal executive offices) agent for service)
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<PAGE>
Copies to:
RICHARD E. FLOOR, ESQ.
Goodwin, Procter & Hoar
Exchange Place
Boston, MA 02109
(617) 570-1000
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Approximate date of commencement of proposed sale to the public: As soon as
practicable after this Post-Effective Amendment to the Registration Statement
becomes effective.
If any of the securities being registered on this form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. /X/
If the registrant elects to deliver its latest annual report to security
holders, or a complete and legible facsimile thereof, pursuant to Item 11(a)(1)
of this form, check the following box. / /
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<PAGE>
TOWN & COUNTRY CORPORATION
CROSS REFERENCE SHEET
Pursuant to Item 501(b) of Regulation S-K
Showing Location in Prospectus and Proxy Statement
of Information Required by Items of Form S-2
Form S-2 Item Number and Caption Prospectus Caption or Location
- -------------------------------- ------------------------------
A. INFORMATION ABOUT THE TRANSACTION
1. Forepart of Registration Statement
and Outside Front Cover Page of
Prospectus....................... Outside Front Cover Page
2. Inside Front and Outside Back
Cover Pages of Prospectus........ Available Information; Inside
Front and Outside Back Cover
Pages of Prospectus; Table of
Contents
3. Summary Information, Risk Factors
and Ratio of Earnings to Fixed
Charges.......................... Risk Factors; Pro Forma
Condensed Consolidated Financial
Data; Selected Historical and
Supplemental Consolidated
Financial Data
4. Use of Proceeds................... Selling Securityholders
5. Determination of Offering Price... *
6. Dilution.......................... *
7. Selling Security Holders.......... Selling Securityholders
8. Plan of Distribution.............. Plan of Distribution
9. Description of Securities to be
Registered....................... The Secured Debt Offering;
Description of the New
Securities; Description of
Capital Stock
10. Interests of Named Experts and
Counsel.......................... Legal Opinions; Experts
11. Information With Respect to the
Registrant....................... The Company
<PAGE>
Form S-2 Item Number and Caption Prospectus Caption or Location
- -------------------------------- ------------------------------
12. Incorporation of Certain
Information by Reference......... Incorporation of Certain
Documents by Reference
13. Disclosure of Commission Position
on Indemnification for Securities
Act Liabilities.................. *
- ------------
* Omitted since the Item is not applicable.
<PAGE>
Subject to Completion Dated July 26, 1994
PROSPECTUS
Town & Country Corporation
--------------------------
$25,959,966 of 13% Senior Subordinated Notes due May 31, 1998,
727,885 Shares of Exchangeable Preferred Stock
5,026,151 Shares of Class A Common Stock
and
$3,742,000 of 11 1/2% Senior Secured Notes due September 15, 1997
--------
Because certain funds managed by Fidelity Management and Research Company
and Fidelity Management Trust Company (the "Fidelity Funds") may be deemed
underwriters of New Senior Secured Notes (as defined below) or affiliates of
Town & Country Corporation (the "Company"), this Prospectus relates to any
reoffers or resales by the Fidelity Funds of (i) up to $3,742,000 of the
Company's 11 1/2% Senior Secured Notes due September 15, 1997 (the "New Senior
Secured Notes"); (ii) up to $25,959,966 of the Company's 13% Senior Subordinated
Notes due May 31, 1998 (the "New Senior Subordinated Notes"); (iii) up to
727,885 shares of the Company's exchangeable preferred stock, par value $1.00
per share (the "Exchangeable Preferred Stock," and together with the New Senior
Subordinated Notes, the "New Securities"); and (iv) up to 5,026,151 shares of
the Company's Class A Common Stock, par value $0.01 per share (the "Class A
Common Stock" and, together with the New Senior Subordinated Notes and the
Exchangeable Preferred Stock, the "Exchange Securities"). The New Senior Secured
Notes were sold to the Fidelity Funds and the holders of the Company's 13%
Senior Subordinated Notes due December 15, 1998 (the "Old 13% Notes"), and the
Company's 10 1/4% Subordinated Notes due July 1, 1995 (the "Old 10 1/4% Notes,"
and together with the Old 13% Notes, the "Old Notes"), for $30,000,000 in cash
as part of the Company's recapitalization (the "Recapitalization"). The Exchange
Securities were issued to the Fidelity Funds and the other holders of Old Notes
who agreed to exchange their Old Notes for the Exchange Securities pursuant to
the Company's exchange offers which were also part of the Recapitalization.
The holders of indebtedness of the Company and certain of the Company's
consolidated subsidiaries, Town & Country Fine Jewelry Group, Inc. ("T&C Fine
Jewelry"), L.G. Balfour Company, Inc. ("Balfour") and Gold Lance, Inc. ("Gold
Lance," and collectively, the "Borrowers") have different rights in collateral
securing such indebtedness. As described in "Allocation of Security Interests"
on the front cover of the Prospectus, although the indebtedness of the Borrowers
is secured by liens in substantially all of the assets of the Borrowers, such
liens are not of equal priority and, as a result, are not of equal value. In
addition, pursuant to intercreditor arrangements, the rights of the holders of
such indebtedness to exercise rights of foreclosure with respect to collateral
in which they hold junior liens and security interests is limited. Therefore, to
the extent that any such holders hold fewer (or no) first priority liens in
collateral, such holders' rights in such collateral are adversely affected. In
addition, pursuant to the intercreditor arrangements, the holders of the New
Senior Subordinated Notes are subject to a permanent standstill as to
enforcement of junior liens and security interests in collateral. See "Ranking
of Indebtedness; Rights in Collateral; Collateral Agency and Intercreditor
Agreement."
--------
THE SECURITIES OFFERED HEREBY INVOLVE A HIGH DEGREE OF RISK. SEE "RISK FACTORS."
(Cover continued on next page)
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THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
--------
The date of this Prospectus is July 26, 1994
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The Recapitalization
As a result of financial difficulties which the Company experienced during
fiscal 1992 and fiscal 1993, the Company proposed the Recapitalization which was
consummated on May 14, 1993. The Recapitalization consisted of the following
components: (i) the execution of a new revolving credit agreement with Foothill
Capital Corporation ("Foothill") which provides the Company with senior secured
financing in an amount of up to $30,000,000 (the "New Credit Agreement"); (ii)
the execution of new gold consignment agreements (the "New Gold Agreements,"
together with the New Credit Agreement, the "Revised Debt Agreements") with its
gold suppliers (the "Gold Suppliers") which provide the Company with an
aggregate gold consignment availability of up to 100,000 troy ounces; (iii) the
sale of $30 million principal amount of the New Senior Secured Notes for cash to
holders of the Old 13% Notes and the Old 10 1/4% Notes (the "Secured Debt
Offering"); (iv) the offer to exchange (a) $478.96 principal amount of the New
Senior Subordinated Notes, $331.00 of the Company's Exchangeable Preferred
Stock, and 89.49 shares of the Company's Class A Common Stock, for each $1,000
principal amount of outstanding Old 13% Notes and (b) $408.11 principal amount
of New Senior Subordinated Notes, $282.04 of Exchangeable Preferred Stock and
76.25 shares of Class A Common Stock for each $1,000 principal amount of
outstanding Old 10 1/4% Notes (the "Exchange Offers"); (v) the solicitation of
consents (the "Consent Solicitations"), to amend certain terms of the indentures
pursuant to which the Old 13% Notes and the Old 10 1/4% Notes were issued (the
"Indenture Amendments"); (vi) the amendment of certain provisions of the
Industrial Revenue Bonds (the "IRBs") related to the Company's manufacturing
facility in New York, New York (the "IRB Amendments") and (vii) the approval by
the Company's stockholders of (a) an amendment to the Company's Articles of
Organization to increase the number of authorized shares of Class A Common Stock
from 20,000,000 to 40,000,000 (the "Charter Amendment"), (b) pursuant to the
requirements of the American Stock Exchange (the "AMEX") on which the Class A
Common Stock is listed, the issuance of up to 11,399,905 shares of Class A
Common Stock as part of the Recapitalization (the "AMEX Approval") and (c) the
issuance by the Company of options to purchase an aggregate of 1,500,000 shares
of Class A Common Stock at an exercise price of $2.75 per share to members of
senior management in connection with the consummation of the Recapitalization as
required by the AMEX rules (the "Management Options," together with the Charter
Amendment and the AMEX Approval, the "Stockholder Approvals"). Holders of
$89,590,000 or 92.8% of the aggregate principal amount of Old 13% Notes and
holders of $25,905,000 or 98.3% of the aggregate principal amount of Old 10 1/4%
Notes tendered their notes pursuant to the Exchange Offers. Thus, in connection
with the Exchange Offers, the Company issued $53,480,900 of New Senior
Subordinated Notes, $36,960,190.45 (2,533,255 shares) of Exchangeable Preferred
Stock and 9,992,648 shares of Class A Common Stock to holders of Old Notes.
The New Senior Secured Notes
Pursuant to the Recapitalization, the Company sold $30,000,000 of New Senior
Secured Notes for cash to holders of Old Notes. The proceeds of the Secured Debt
Offering were used to repay indebtedness outstanding under the Company's prior
revolving credit agreement (the "Old Credit Agreement"). Pursuant to an
agreement with the Company, the Fidelity Funds purchased $27,000,000 of the New
Senior Secured Notes which were not purchased by other holders of Old Notes. In
exchange for their commitment to purchase
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iii
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all of the New Senior Secured Notes which were not purchased by other holders of
Old Notes, the Company issued 750,000 shares of Class A Common Stock to the
Fidelity Funds upon the consummation of the Recapitalization.
The New Senior Secured Notes mature on September 15, 1997, and bear interest
commencing from May 14, 1993 (the "Issuance Date"), at the rate of 11 1/2% per
annum. Interest on the New Senior Secured Notes is payable monthly on the last
day of each month except with respect to the last interest payment, which will
be made on September 15, 1997.
The New Senior Secured Notes are fully and unconditionally guaranteed,
jointly and severally, by certain of the Company's subsidiaries (T&C Fine
Jewelry, Balfour and Gold Lance). Each guaranty issued by such subsidiaries (a
"Subsidiary Guarantor") in respect of the New Senior Secured Notes ranks pari
passu in right of payment with the guarantees issued by each such Subsidiary
Guarantor in respect of the New Credit Agreement, the New Gold Agreements and
the IRBs, and ranks senior to the guaranty issued by such Subsidiary Guarantor
in respect of the New Senior Subordinated Notes. Each guaranty issued by a
Subsidiary Guarantor is secured by the assets of the Subsidiary Guarantor in the
same manner and with the same ranking as the assets of the Company securing the
Company's obligations under the New Credit Agreement, the New Gold Agreements,
the IRBs, the New Senior Secured Notes and the New Senior Subordinated Notes.
Subject to the respective rights in collateral of the holders of New Senior
Secured Notes and the IRBs and the holders of indebtedness under the Revised
Debt Agreements, the New Senior Secured Notes rank pari passu in right of
payment with the indebtedness under the Revised Debt Agreements (which provide
the Company with a loan commitment of up to $35,000,000 and an aggregate gold
consignment availability of up to 100,000 troy ounces), the IRBs, and the
indebtedness to trade creditors of the Company and rank senior to the New Senior
Subordinated Notes and the Old Notes. For a discussion of the meaning of "pari
passu" and its interrelationship with the collateral securing the Revised Debt
Agreements, the IRBs, the New Senior Secured Notes and the New Senior
Subordinated Notes, see "Ranking of Indebtedness; Rights in Collateral" on the
cover of this Prospectus. See also "Ranking of Indebtedness; Rights in
Collateral; Collateral Agency and Intercreditor Agreement." For certain
information concerning the assets of the Company securing the New Senior Secured
Notes, see "--Allocation of Security Interests" and "The Secured Debt
Offering--Subordination; Ranking; Collateral." As of May 29, 1994, approximately
$7.4 million and approximately $60.7 million aggregate principal amount of Old
Notes and New Senior Subordinated Notes, respectively, were outstanding. At May
29, 1994, the aggregate amount of all other outstanding indebtedness of the
Company (excluding the New Senior Secured Notes and indebtedness under the
Credit Agreement and the Gold Agreements) was approximately $17.9 million. See
"The Secured Debt Offering--Subordination; Ranking; Collateral."
An Event of Default with respect to the New Senior Secured Notes is defined
in the indenture for the New Senior Secured Notes (the "New Senior Secured Note
Indenture") as: (a) default for 10 days in the payment of interest on the New
Senior Secured Notes; (b) default in the payment of principal or premium on the
New Senior Secured Notes when due, whether at maturity, upon redemption, or
otherwise; (c) failure of the Company or a Subsidiary Guarantor to comply with
the merger and consolidation provisions of the New Senior Secured Note
Indenture; (d) failure by the Company for 30 days and after notice to comply
with any of its agreements in the New Senior Secured Note Indenture or the New
Senior Secured Notes; (e) default by the Company or a Subsidiary (as defined)
under, or acceleration prior to maturity of, or the failure to pay at maturity,
any Indebtedness (as defined) of the Company or a Subsidiary aggregating in
excess of $1,000,000; (f) judgments aggregating in excess of $1,500,000
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iv
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(excluding amounts covered by insurance as to which the insurer has not denied
liability) rendered against the Company or any Subsidiary, and either (A) an
enforcement action is commenced against the Company or the applicable Subsidiary
or (B) such judgment is not discharged or waived within 60 days and such default
continues for 10 days after notice to the Company; (g) certain events of
bankruptcy or insolvency; (h) any lien securing the New Senior Secured Notes
shall fail to be in full force and effect or entitled to the applicable priority
relating thereto and such default continues for 10 days after notice to the
Company; (i) any guaranty supporting the New Senior Secured Notes shall cease to
be in full force and effect and such default continues for 10 days after notice
to the Company; and (j) any representation or warranty made by the Company or
any Subsidiary shall prove to be untrue in any material respect as of the date
made. See "The Secured Debt Offering--Events of Default and Remedies."
The New Senior Secured Notes are redeemable in whole at any time or in part
from time to time, at the option of the Company, at a redemption price equal to
100% of the principal amount thereof plus accrued interest, if any. Following
receipt by the Company of cash payments or other non-cash proceeds from the
Company's investment in stock of Solomon Brothers, Limited ("Solomon Brothers")
or from the Zale Corporation (together with its subsidiaries and affiliates, the
"Zale Companies") relating to prepetition trade accounts receivable and
consignment inventory (the "Zale Bankruptcy Claim"), the Company is required to
redeem New Senior Secured Notes. The Company also is required to use a certain
percentage of its annual Excess Cash Flow (as defined) to redeem New Senior
Secured Notes. In the event that the Company's Consolidated Net Worth (as
defined) declines below a certain amount, or upon the occurrence of a Change of
Control of the Company (as defined), or upon the consummation of certain Asset
Dispositions (as defined) or Sale/Leaseback Transactions (as defined), the
Company will be required to make an offer to redeem New Senior Secured Notes.
The Revised Debt Agreements restrict the Company's ability to redeem or
otherwise purchase New Senior Secured Notes in the instances described in the
preceding sentence. See "The Secured Debt Offering--Redemption" and "--Offer to
Purchase Upon Change of Control." As of June 30, 1994, $13,403,000 principal
amount of New Senior Secured Notes have been redeemed.
The New Senior Subordinated Notes
The New Senior Subordinated Notes are senior subordinated obligations of the
Company, mature on May 31, 1998, and bear interest commencing from May 14, 1993
(the "Issuance Date"), at the rate of 13% per annum. Interest on the New Senior
Subordinated Notes is payable semiannually on each six-month and twelve-month
anniversary of the Issuance Date. At the Company's option, any of the first four
semiannual installments of interest on the New Senior Subordinated Notes may be
paid through the issuance of additional New Senior Subordinated Notes valued at
100% of their principal amount, dated and accruing interest from the applicable
interest payment date, and otherwise generally having the same terms as the New
Senior Subordinated Notes issued on the Issuance Date. As of May 29, 1994, the
Company has paid the first two semiannual installments of interest on the New
Senior Subordinated Notes through the issuance of approximately $7.2 million of
additional New Senior Subordinated Notes.
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The New Senior Subordinated Notes are fully and unconditionally guaranteed,
jointly and severally, by Balfour, T&C Fine Jewelry and Gold Lance. Each
guaranty issued by any such Subsidiary Guarantor in respect of the New Senior
Subordinated Notes is subordinated in right of payment to the guarantees issued
by such Subsidiary Guarantor in respect of the New Credit Agreement, the New
Gold Agreements, the IRBs and the New Senior Secured Notes. Each guaranty issued
by a Subsidiary Guarantor is secured by the assets of the Subsidiary Guarantor
in the same manner and with the same ranking as the assets of the Company
securing the Company's obligations under the New Credit Agreement, the New Gold
Agreements, the IRBs, the New Senior Secured Notes and the New Senior
Subordinated Notes. See "Description of the New Securities--Description of the
New Senior Subordinated Notes--Limited Security Guarantees." For certain
information concerning the assets of the Company securing the New Senior
Subordinated Notes, see "--Allocation of Security Interests" and "Description of
the New Securities--Description of the New Senior Subordinated
Notes--Collateral." See also "Ranking of Indebtedness; Rights in Collateral" on
the cover of this Prospectus, and "Ranking of Indebtedness; Rights in
Collateral; Collateral Agency and Intercreditor Agreement."
If, upon the repayment of the New Senior Secured Notes in full, (i) the
Company's Consolidated Fixed Charge Ratio (as defined) has been equal to or
greater than 1.5 to 1 on a pro forma basis and (ii) no Default or Event of
Default (as defined) has occurred and continues to exist, the New Senior
Subordinated Notes will become unsecured obligations of the Company.
The payment of the principal and premium, if any, and interest on the New
Senior Subordinated Notes is subordinated in right of payment, as set forth in
the indenture relating to the New Senior Subordinated Notes (the "New Senior
Subordinated Note Indenture"), to the prior payment when due of the principal
and premium, if any, and interest on all Senior Indebtedness (as defined) of the
Company, including all indebtedness which is created, incurred, assumed, or
guaranteed under the Revised Debt Agreements, the IRBs or the New Senior Secured
Notes, and in each such case, any renewal, refinancing, refunding, replacement
or extension of any such Senior Indebtedness which is permitted under the New
Senior Subordinated Note Indenture, and is pari passu in right of payment with
all other indebtedness of the Company, including indebtedness to trade
creditors, other than the Old Notes. The New Senior Subordinated Notes will be
senior in right of payment to the Old Notes. At May 29, 1994, approximately
$18.3 million was outstanding under the New Senior Secured Note Indenture and
the IRBs, and approximately $8.3 million and approximately 63,000 troy ounces
was outstanding under the New Credit Agreement and the New Gold Agreements,
respectively. As of May 29, 1994, the amount of indebtedness to trade creditors
outstanding was approximately $16.3 million. As of May 29, 1994, approximately
$7.4 million principal amount of Old Notes was outstanding. See "Description of
the New Securities--Description of the New Senior Subordinated
Notes--Subordination; Ranking" and"--Collateral."
An Event of Default with respect to the New Senior Subordinated Notes is
defined in the New Senior Subordinated Note Indenture as: (a) default for 30
days in payment of interest on the New Senior Subordinated Notes; (b) default in
payment when due of principal of or premium on the New Senior Subordinated
Notes; (c) failure of the Company or a Subsidiary Guarantor to comply with the
merger and consolidation provisions of the New Senior Subordinated Note
Indenture; (d) failure by the Company for 45 days and after notice to comply
with any of its agreements in the New Senior Subordinated Note Indenture or the
New Senior Subordinated Notes; (e) acceleration prior to maturity of, or the
failure to pay at maturity of, any indebtedness of the Company or any Subsidiary
aggregating in excess of $2,000,000; (f) judgments aggregating in excess of
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$2,000,000 (excluding amounts covered by insurance as to which the insurer has
not denied liability) rendered against the Company or any Subsidiary, and either
(A) an enforcement action is commenced against the Company or the applicable
Subsidiary, or (B) such judgment is not discharged or waived within 60 days and
such default continues for 20 days after notice to the Company; (g) certain
events of bankruptcy or insolvency relating to the Company and the Subsidiaries;
(h) any lien securing the New Senior Subordinated Notes shall fail to be in full
force and effect or entitled to the applicable priority relating thereto and
such default continues for 20 days after notice to the Company; and (i) any
guaranty supporting the New Senior Subordinated Notes shall cease to be in full
force and effect and such default continues for 20 days after notice to the
Company. A "Default" means any event which is, or with the giving of notice or
passage of time (or both) would be, an Event of Default. See "Description of the
New Securities--Description of the New Senior Subordinated Notes--Events of
Default and Remedies."
In the event that the Company's Consolidated Net Worth (as defined) declines
below a specified amount, and subject to the Company's obligation to offer to
redeem a specified amount of New Senior Secured Notes, the Company is required
to offer to redeem New Senior Subordinated Notes. See "Description of the New
Securities--Description of the New Senior Subordinated Notes--Special Mandatory
Redemption." The Company may redeem the New Senior Subordinated Notes, in whole
at any time or in part from time to time, after the third anniversary of the
Issuance Date at a price equal to 106% of principal amount, if redeemed during
the twelve month period beginning on the third anniversary of the Issuance Date,
and thereafter at prices declining annually to 100% of principal amount on or
after the fifth anniversary of the Issuance Date, plus accrued interest to the
date of redemption. See "Description of the New Securities--Description of the
New Senior Subordinated Notes--Optional Redemption." Upon the occurrence of a
Change of Control of the Company (as defined), or upon the consummation of
certain Asset Dispositions (as defined) or Sale/Leaseback Transactions (as
defined), and subject to the Company's obligation to offer to prepay all
indebtedness under the Revised Debt Agreements, the IRBs and the New Senior
Secured Notes, the Company is required to make an offer to purchase all
outstanding New Senior Subordinated Notes. The Revised Debt Agreements, the IRBs
and the New Senior Secured Note Indenture place restrictions on the Company's
ability to redeem or otherwise purchase New Senior Subordinated Notes. See
"Description of the New Securities--Description of the New Senior Subordinated
Notes--Offer to Purchase Upon Change of Control."
The New Senior Subordinated Notes have been deemed issued with original
issue discount for federal income tax purposes, with the result that the holders
of the New Senior Subordinated Notes may be required to include substantial
amounts in gross income prior to receiving the cash payments corresponding
thereto. See "Material Federal Income Tax Consequences."
The Exchangeable Preferred Stock
Pursuant to the certificate of vote of directors establishing the
Exchangeable Preferred Stock (the "Certificate of Designation"), the Board of
Directors of the Company is authorized to issue up to 2,700,000 shares of
Exchangeable Preferred Stock. Each share of Exchangeable Preferred Stock has a
liquidation preference of $14.59, plus accrued and unpaid dividends (the
"Liquidation Value"), as adjusted to reflect subdivisions, combinations,
reclassifications, stock dividends, stock splits or similar events relating to
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the Exchangeable Preferred Stock. The Exchangeable Preferred Stock is senior to
all Junior Stock (as defined) including Class A Common Stock and the Company's
Class B Common Stock, par value $0.01 per share (the "Class B Common Stock") and
is subordinate in right of payment to all indebtedness of the Company. As of May
29, 1994, the Exchangeable Preferred Stock was subordinate to approximately
$86.4 million of indebtedness of the Company (excluding indebtedness to trade
creditors). As of May 29, 1994, the amount of such outstanding indebtedness to
trade creditors was approximately $16.3 million. The Exchangeable Preferred
Stock also is subordinate to additional indebtedness of up to $35,000,000 under
the New Credit Agreement and of up to 100,000 troy ounces under the New Gold
Agreements. As of May 29, 1994, the amount of indebtedness outstanding under the
New Credit Agreement and New Gold Agreements was approximately $8.3 million and
approximately 63,000 troy ounces, respectively. See "Description of the New
Securities--Description of the Exchangeable Preferred Stock--Ranking."
No dividends will be paid on the Exchangeable Preferred Stock until after
May 14, 1995 (the "Second Anniversary Date"). Thereafter, holders of the shares
of Exchangeable Preferred Stock are entitled to receive, when and as declared by
the Board of Directors of the Company, cumulative cash dividends at the rate of
6% per annum of the Liquidation Value thereof. Dividends on the Exchangeable
Preferred Stock are payable semiannually on each November 15th and May 15th
after the Second Anniversary Date. The amount of accrued and unpaid dividends is
added to the Liquidation Value. If and whenever two semi-annual dividend
payments on the Exchangeable Preferred Stock are in arrears, then during the
period commencing with such time and ending when all arrearages in dividends on
the Exchangeable Preferred Stock shall have been paid (hereinafter called the
"Class Voting Period"), the holders of the Exchangeable Preferred Stock, voting
together as a separate class, are entitled to elect one or more additional
directors equal to 30% of the entire Board of Directors of the Company and each
share of Exchangeable Preferred Stock is entitled to one vote in each election
of such directors. The term of any director so elected shall expire at the end
of the Class Voting Period. See "Description of the New Securities--Description
of the Exchangeable Preferred Stock--Dividends" and "--Voting Rights." The
ability of the Company to pay dividends on the Exchangeable Preferred Stock is
limited in certain respects by the terms of the Revised Debt Agreements, the New
Senior Secured Notes and the New Senior Subordinated Notes. See "The Revised
Debt Agreements," "The Secured Debt Offering--Certain Covenants" and
"Description of the New Securities--Description of the New Senior Subordinated
Notes--Certain Covenants."
Except as set forth below, the Company may not redeem the Exchangeable
Preferred Stock until the Second Anniversary Date. Thereafter, the Company may
redeem the Exchangeable Preferred Stock, in whole at any time or in part from
time to time, at a price equal to 106% of Liquidation Value, if redeemed during
the twelve month period beginning on the Second Anniversary Date, and thereafter
at prices declining annually to 100% of principal amount on or after May 15,
1998. The Company is required to redeem the Exchangeable Preferred Stock on
December 31, 2000, at a price per share equal to the Liquidation Value thereof
(the "Mandatory Redemption"). Notwithstanding the foregoing, in the event that,
until the Second Anniversary Date, the Closing Sales Price (as defined) for a
share of common stock of Little Switzerland, Inc. ("Little Switzerland") equals
or exceeds $18.75 per share for 30 consecutive trading days, the Company may
redeem the Exchangeable Preferred Stock in whole at a price per share equal to
100% of the Liquidation Value (a "Company Optional Redemption"). In the case of
a Mandatory Redemption, the Company may pay any redemption price by delivering
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cash, shares of common stock of Little Switzerland (the "Little Switzerland
Common Stock"), other Exchange Property (as defined), or any combination
thereof. In all other cases, the Company shall pay the redemption price by
delivering cash. The Revised Debt Agreements, the New Senior Secured Note
Indenture and the New Senior Subordinated Note Indenture place restrictions on
the Company's ability to redeem shares of Exchangeable Preferred Stock. See
"Description of the New Securities-- Description of the Exchangeable Preferred
Stock--Redemption."
At any time after March 1, 1994, each holder of a share of Exchangeable
Preferred Stock may exchange such share for one share of common stock of Little
Switzerland (the "Exchange Rate"). The shares of Little Switzerland Common Stock
into which shares of Exchangeable Preferred Stock are exchangeable have been
registered under the Securities Act of 1933, as amended (the "Securities Act")
pursuant to a registration statement on Form S-3 (File No. 33-69924). A copy of
the prospectus included in such registration statement is being delivered
herewith. Upon a Change of Control of the Company, each holder of Exchangeable
Preferred Stock will have the right to require the Company to purchase all or
any part, at such holder's option, of such holder's Exchangeable Preferred Stock
at a purchase price in cash equal to the Liquidation Value thereof. The Revised
Debt Agreements, the IRBs, the New Senior Secured Note Indenture and the New
Senior Subordinated Note Indenture place restrictions on the Company's ability
to purchase shares of Exchangeable Preferred Stock in the event of a change of
control. See "Description of the New Securities--Description of the Exchangeable
Preferred Stock--Offer to Purchase Upon Change of Control" and "--Exchange
Rights."
Holding Company Structure
The New Senior Secured Notes, the New Senior Subordinated Notes and the
Exchangeable Preferred Stock are obligations of the Company. Because a
significant portion of the operations of the Company are, and in the future are
likely to be, conducted through subsidiaries, the cash flow and the consequent
ability to service debt of the Company, including the New Senior Secured Notes,
the New Senior Subordinated Notes and the Exchangeable Preferred Stock, will be
dependent upon the earnings of the Company or the payment of dividends to the
Company by its subsidiaries. The payment of dividends and the making of loans
and advances to the Company by its subsidiaries may be subject to statutory or
contractual restrictions, are contingent upon the earnings of those subsidiaries
and are subject to various business considerations.
Although the Company's obligations under the New Senior Secured Notes and
the New Senior Subordinated Notes are guaranteed by the Subsidiary Guarantors, a
guaranty of a Subsidiary Guarantor may not be enforceable or may be only
partially enforceable under certain circumstances. To the extent that a guaranty
of a Subsidiary Guarantor is not enforceable, the New Senior Secured Notes and
New Senior Subordinated Notes will be effectively subordinated to such
Subsidiary Guarantor's indebtedness to all of its creditors. At May 29, 1994,
the aggregate amount of such indebtedness of the Subsidiary Guarantors was
approximately $15.7 million (excluding guarantees by such Subsidiary Guarantors
of indebtedness under the Credit Agreement and the Gold Agreements). See "Risk
Factors--Holding Company Structure; Guarantees."
(Cover continued on next page)
ix
<PAGE>
Ranking of Indebtedness; Rights in Collateral
Pursuant to the terms of the Revised Debt Agreements, the IRBs and the New
Senior Secured Notes (collectively, the "Senior Recapitalization Facilities"),
the Senior Recapitalization Facilities each rank pari passu in right of payment
with each other, and the New Senior Subordinated Notes are subordinate and
junior in right of payment to all indebtedness under the Senior Recapitalization
Facilities. Therefore, (i) the holders of the Senior Recapitalization Facilities
each have equal rights to bring an action to collect their respective
indebtedness from the Borrowers and to obtain a judgment against the Borrowers
in respect of such indebtedness, (ii) the Borrowers have not contractually
agreed to pay their indebtedness under any of the Senior Recapitalization
Facilities ahead of or after their indebtedness under any of the other Senior
Recapitalization Facilities, and (iii) the rights of the holders of the New
Senior Subordinated Notes to enforce such Notes and to receive payments
thereunder are limited as and to the extent provided by the subordination
provisions of the New Senior Subordinated Note Indenture. See "Description of
the New Securities--Description of the New Senior Subordinated
Notes--Subordination; Ranking."
Notwithstanding the foregoing, the holders of indebtedness under the Revised
Debt Agreements, the IRBs, the New Senior Secured Notes and the New Senior
Subordinated Notes have different rights in collateral securing such
indebtedness. See "Allocation of Security Interests" on the front cover of the
Prospectus for a discussion of the collateral securing such obligations and the
priority of the liens in such collateral to be granted to such holders. As
described in "Allocation of Security Interests" on the front cover of the
Prospectus, although the obligations of the Borrowers in respect of the Revised
Debt Agreements, the IRBs, the New Senior Secured Notes and the New Senior
Subordinated Notes are secured by liens in substantially all of the assets of
the Company and its domestic subsidiaries, such liens are not of equal priority
and, as a result, are not of equal value. In addition, pursuant to the
intercreditor arrangements which govern the Revised Debt Agreements, the IRBs,
the New Senior Secured Notes and the New Senior Subordinated Notes, the rights
of the holders of such indebtedness to exercise rights of foreclosure with
respect to collateral in which they hold junior liens is limited. Therefore, to
the extent that any such holders hold fewer (or no) first priority liens in
collateral, such holders' rights in such collateral are adversely affected.
Allocation of Security Interests
The chart below summarizes the security positions in respect of the New
Credit Agreement, the New Gold Agreements, the IRBs, the New Senior Secured
Notes and the New Senior Subordinated Notes. For a more detailed description of
the expected security positions, see "The Revised Debt Agreements--New Credit
Agreement," "--IRB Amendments," "--New Gold Agreements," "The Secured Debt
Offering--Subordination; Ranking; Collateral," "Description of the New
Securities--Description of the New Senior Subordinated Notes--Collateral." For a
discussion of the intercreditor arrangements which govern the New Credit
Agreement, the New Gold Agreements, the IRBs, the New Senior Secured Notes and
the New Senior Subordinated Notes, see "Ranking of Indebtedness; Rights in
Collateral; Collateral Agency and Intercreditor Agreement." Terms contained in
this chart and not previously defined are defined in the appendix below. Except
with respect to the right to exchange Exchangeable Preferred Stock for Little
(Cover continued on next page)
x
<PAGE>
Switzerland Common Stock, the Exchangeable Preferred Stock is subordinate in all
respects (including upon any voluntary or involuntary bankruptcy, liquidation,
dissolution, or winding up of the Company) to all existing and future
indebtedness of the Company. See "Description of the New Securities--Description
of the Exchangeable Preferred Stock--Ranking" and "--Collateral."
<TABLE>
<CAPTION>
New
New New New Senior
Credit Gold Senior Sub-
Agree- Agree- Secured ordinated
ment ments IRBs Notes Notes
------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
Gold Inventory ................................................................. 2nd 1st 3rd 4th 5th
Mixed Inventory ................................................................ 1st(1) 1st(2) 3rd 4th 5th
2nd(2) 2nd(1)
Non-Gold Inventory ............................................................. 1st 2nd 3rd 4th 5th
Accounts Receivable ............................................................ 1st 2nd 3rd 4th 5th
Property, Plant and Equipment ("PP&E") ......................................... 1st 2nd 3rd 4th 5th
Feature Facility ............................................................... -- -- 1st -- --
Feature Leasehold .............................................................. 1st 2nd -- 3rd 4th
Foreign Subsidiaries' Stock (including
Anju and Essex) ...................................................... 3rd(3) 3rd(3) 5th(3) 1st(3) 2nd(3)
Domestic Subsidiaries' Stock ................................................... 1st 2nd 3rd 4th 5th
Zale Bankruptcy Claim .......................................................... 3rd 3rd 5th 1st 2nd
Solomon Brothers Stock ......................................................... 3rd 3rd 5th 1st 2nd
<FN>
- --------
(1) In the non-precious metals component of such inventory.
(2) In the precious metals component of such inventory.
(3) In 65% of such stock.
</FN>
</TABLE>
(Cover continued on next page)
xi
<PAGE>
Appendix to Allocation of Security Interests Chart
Gold Inventory: The Company's inventory, other than
inventory comprising a portion of the
Zale Bankruptcy Claim, consisting of
owned or consigned precious metals.
Mixed Inventory: The Company's inventory, other than
inventory comprising a portion of the
Zale Bankruptcy Claim, consisting of
both precious metals and other materials
such as precious and semi-precious
stones.
Non-Gold Inventory: The Company's non-precious metals
inventory, other than inventory
comprising a portion of the Zale
Bankruptcy Claim.
Accounts Receivable: The Company's accounts receivable.
Property, Plant and
Equipment ("PP&E"): The real estate and fixtures owned by
the Company and its domestic
subsidiaries and the machinery,
equipment, documents, instruments,
general intangibles and other personal
property of the Company and its domestic
subsidiaries, other than (A) the Zale
Bankruptcy Claim, (B) the shares of
stock in Little Switzerland transferred
to the Little Switzerland Trustee (as
defined) and Solomon Brothers owned by
the Company, (C) the Feature Facility,
and (D) the Foreign Subsidiaries' Stock
and the Domestic Subsidiaries' Stock.
Feature Facility: The real estate and fixtures related to
the manufacturing facility of the
Company's subsidiary, Town & Country
Fine Jewelry Group, Inc., located in New
York, New York.
Feature Leasehold: The leasehold interest of Town & Country
Fine Jewelry Group, Inc. in the Feature
Facility.
Foreign Subsidiaries' Stock: The shares of capital stock of the
Company's foreign subsidiaries owned by
the Company.
Domestic Subsidiaries' Stock: The shares of capital stock of the
Company's domestic subsidiaries.
Solomon Brothers Stock: The shares of stock in Solomon Brothers
owned by the Company.
(End of cover page)
xii
<PAGE>
AVAILABLE INFORMATION
The Company has filed a Registration Statement on Form S-2 (the
"Registration Statement") with the Securities and Exchange Commission (the
"Commission") under the Securities Act of 1933, as amended (the "Securities
Act"), with respect to the securities offered hereby. As permitted by the rules
and regulations of the Commission, this Prospectus which constitutes part of the
Registration Statement, omits certain information, exhibits and undertakings
contained (or to be contained) in the Registration Statement. Such additional
information, exhibits and undertakings can be inspected at and obtained from the
Commission in the manner set forth below. For further information with respect
to the securities offered hereby and the Company, reference is made to the
Registration Statement, and the financial schedules and exhibits filed as a part
thereof. Statements contained in this Prospectus as to the terms of any contract
or other document are not necessarily complete, and, in each case, reference is
made to the copy of each such contract or other document that has been filed as
an exhibit to the Registration Statement, each such statement being qualified in
all respects by such reference.
The Company is subject to the informational and reporting requirements of
the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and, in
accordance therewith, files periodic reports, proxy and information statements
and other information with the Commission. Such reports, proxy and information
statements and other information filed with the Commission, as well as the
Registration Statement, and the exhibits thereto, can be inspected and copied at
the public reference facilities maintained by the Commission at 450 Fifth
Street, N.W., Room 1024, Washington, D.C. 20549, and at the Commission's
regional offices located at Northwestern Atrium Center, 500 West Madison Street,
Suite 1400, Chicago, Illinois 60661, and 7 World Trade Center, New York, New
York 10048. Copies of such material also can be obtained from the Public
Reference Section of the Commission at Room 1024, 450 Fifth Street, N.W.,
Washington, D.C. 20549 at prescribed rates. The shares of the Company's Class A
Common Stock are listed and traded on the American Stock Exchange. Thus, such
reports, proxy and information statements and other information concerning the
Company also can be inspected at the American Stock Exchange offices at 86
Trinity Place, New York, NY 10006-1881. Such reports, proxy and information
statements, and other information may also be obtained from the Company, 25
Union Street, Chelsea, Massachusetts 02150, telephone number (617) 884-8500;
Attention: Manager of Corporate Communications.
2
<PAGE>
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The Company's Annual Report on Form 10-K for the fiscal year ended February
27, 1994, the Company's Quarterly Report on Form 10-Q for the fiscal quarter
ended May 29, 1994, and all other reports filed by the Company pursuant to
Section 13(a) or 15(d) of the Exchange Act since February 27, 1994, are hereby
incorporated by reference into this Prospectus.
Any statement contained in a document incorporated or deemed to be
incorporated by reference herein shall be deemed to be modified or superseded
for purposes of this Prospectus to the extent that a statement contained herein
or in any other subsequently filed document which is incorporated by reference
herein modifies or supersedes such statement. Any such statement so modified or
superseded shall not be deemed, except as so modified or superseded, to
constitute a part of this Prospectus.
The Company will provide without charge to each person to whom a copy of
this Prospectus is delivered, upon the written or oral request of any such
person, a copy of any or all of the documents referred to above which have been
incorporated into this Prospectus by reference (other than exhibits to such
documents). Requests for such copies should be directed to the Company, 25 Union
Street, Chelsea, Massachusetts 02150, Attention: Manager of Corporate
Communications, telephone number (617) 884-8500.
3
<PAGE>
TABLE OF CONTENTS
Page
----
The Company ............................................................... 7
Risk Factors .............................................................. 10
Financial Considerations ............................................. 10
Certain Bankruptcy Law Considerations ................................ 11
Material Federal Income Tax Consequences Of The Recapitalization
To The Company .................................................. 12
Lack Of Established Market ........................................... 13
Reduction Or Restriction Of The Company's Net Operating Losses ....... 13
Little Switzerland Shareholder Rights Agreement ...................... 14
Dividend Restrictions ................................................ 15
Material Tax Consequences ............................................ 15
Ranking Of New Securities ............................................ 15
Holding Company Structure; Guarantees ................................ 16
Fraudulent Conveyance Considerations ................................. 17
Ranking Of Indebtedness; Rights In Collateral; Collateral Agency
And Intercreditor Agreement ..................................... 19
Pro Forma Condensed Consolidated Financial Data ........................... 21
Pro Forma Condensed Consolidated Balance Sheet At
February 27, 1994 ............................................... 22
Pro Forma Condensed Consolidated Statements Of Operations
For The Fiscal Year Ended February 27, 1994 ..................... 24
Notes To Pro Forma Financial Statements .............................. 26
Selected Historical And Supplemental Consolidated Financial Data .......... 29
Notes To Selected Historical And Supplemental Consolidated
Financial Data ....................................................... 33
The Revised Debt Agreements ............................................... 34
New Credit Agreement ................................................. 34
New Gold Agreements .................................................. 35
IRB Amendments ....................................................... 37
The Secured Debt Offering ................................................. 39
General .............................................................. 39
Maturity; Interest ................................................... 40
Redemption ........................................................... 40
Offer To Purchase Upon Change Of Control ............................. 45
Offer To Purchase Upon Asset Disposition Or Sale/Leaseback
Transaction ..................................................... 46
Certain Bankruptcy Limitations ....................................... 47
Subordination; Ranking; Collateral ................................... 47
Guarantees ........................................................... 48
Certain Covenants .................................................... 48
Events Of Default And Remedies ....................................... 53
Satisfaction And Discharge Of The New Senior Secured Note
Indenture ....................................................... 54
Amendment, Supplement, And Waiver .................................... 55
The New Senior Secured Note Trustee .................................. 55
Reports To Holders Of New Senior Secured Notes ....................... 56
The Exchange Offers ....................................................... 57
Description Of The New Securities ......................................... 58
Description Of The New Senior Subordinated Notes ..................... 58
General ......................................................... 58
Maturity; Interest .............................................. 59
Special Mandatory Redemption .................................... 59
Optional Redemption ............................................. 61
Offer To Purchase Upon Change Of Control ........................ 62
4
<PAGE>
Page
----
Offer To Purchase Upon Asset Disposition Or Sale/Leaseback
Transaction ............................................... 64
Certain Bankruptcy Limitations ................................. 65
Subordination; Ranking ......................................... 65
Collateral ..................................................... 67
Limited Security Guarantees .................................... 69
Certain Covenants .............................................. 69
Events Of Default And Remedies ................................. 71
Satisfaction And Discharge Of The New Senior Subordinated
Note Indenture ............................................ 73
Amendment, Supplement, And Waiver .............................. 73
The New Senior Subordinated Note Trustee ....................... 74
Reports To Holders Of New Senior Subordinated Notes ............ 74
Description Of The Exchangeable Preferred Stock .......................... 74
General ................................................... 74
Ranking ................................................... 75
Collateral ................................................ 76
Certain Bankruptcy Limitations ............................ 76
Dividends ................................................. 76
Liquidation Rights ........................................ 77
Redemption ................................................ 77
Exchange Rights ........................................... 78
Little Switzerland Shareholder Rights Agreement ........... 80
Offer To Purchase Upon Change Of Control .................. 82
Trust Arrangements ........................................ 84
Voting Of Little Switzerland Common Stock And Other Matters 85
Consolidation, Merger, And Sale Of Assets ................. 85
Voting Rights ............................................. 85
Other Miscellaneous Matters ............................... 86
Selling Securityholders .................................................. 87
Plan Of Distribution ..................................................... 89
Ranking Of Indebtedness; Rights In Collateral; Collateral Agency
And Intercreditor Agreement ......................................... 90
Description Of Capital Stock ............................................. 94
Preferred Stock ..................................................... 94
Common Stock ........................................................ 94
Registration Rights ................................................. 95
Massachusetts Anti-Takeover Laws And Certain Provisions Of The
Articles And By-Laws ........................................... 96
Indemnification; Limitation Of Liability ............................ 97
Material Federal Income Tax Consequences ................................. 98
General ............................................................. 98
Tax Treatment Of The New Senior Secured Notes And New Senior
Subordinated Notes ............................................. 99
Tax Consequences Of Holding Stock ................................... 107
Backup Withholding .................................................. 108
Tax Consequences Of The Recapitalization To The Company ............. 108
Certain Bankruptcy And Insolvency Considerations ......................... 113
General ............................................................. 113
Amount Of Claim ..................................................... 113
Fraudulent Conveyance Or Transfer ................................... 114
Voidable Preference ................................................. 116
Exchange ............................................................ 116
Legal Opinions ........................................................... 118
Experts .................................................................. 119
5
<PAGE>
------------
No person is authorized to give any information or to make any
representation in connection with the Recapitalization other than those
contained in this Prospectus and, if given or made, such information or
representation must not be relied upon. This Prospectus does not constitute an
offer to sell or an offer to exchange or a solicitation of an offer to sell or
exchange any securities, other than the securities covered by this Prospectus,
by the Company or any other person or any offer to sell, or an offer to exchange
or solicitation of an offer to sell or exchange such securities, or the
solicitation of any consent, in any jurisdiction to or from any person to whom
it is unlawful to make such offer or solicitation. Neither the delivery of this
Prospectus nor any sale or exchange made hereunder shall, under any
circumstances, create an implication that there has been no change in the
affairs of the Company or in the information set forth herein since the date
hereof.
6
<PAGE>
THE COMPANY
Town & Country Corporation, a Massachusetts corporation (collectively with
its consolidated subsidiaries unless the context otherwise requires, the
"Company") designs, manufactures, and markets an extensive collection of fine
jewelry and recognition products in the United States and internationally. The
Company consists of six operating entities: the parent company, Town & Country
Corporation, headquartered in Chelsea, Massachusetts; its majority-owned
subsidiary Essex International Company Limited, a Thailand company, and its
affiliates ("Essex"); and the Company's wholly-owned subsidiaries, Anju Jewelry
Limited, a Hong Kong company and its subsidiaries ("Anju"); Gold Lance, Inc.
("Gold Lance"), located in Houston, Texas; L.G. Balfour Company, Inc.
("Balfour"), headquartered in Attleboro, Massachusetts; and Town & Country Fine
Jewelry Group, Inc. ("T&C Fine Jewelry"), located in Chelsea, Massachusetts. The
Company was incorporated under the laws of the Commonwealth of Massachusetts in
1965 and has been a public company since l985. Its principal executive offices
are located at 25 Union Street, Chelsea, Massachusetts 02150, and its telephone
number at that location is (617) 884-8500.
Additional information with respect to the Company, including audited
financial statements for the fiscal year ended February 27, 1994, may be found
in the Company's Annual Report on Form 10-K for the fiscal year ended February
27, 1994, and the Company's Quarterly Report on Form 10-Q for the fiscal quarter
ended May 29, 1994, copies of which are being delivered herewith.
Commencing in the fiscal year ended February 28, 1991 ("fiscal 1991"), the
operations and financial results of the Company were materially and adversely
affected by factors influencing the jewelry industry in general and the Company
in particular. The decline in the Company's net sales from fiscal 1991 through
the fiscal year ended February 28, 1993 ("fiscal 1993"), was due primarily to
the economic recession, which had a negative impact on the retail sector of the
jewelry industry that the Company supplies. During that period, several of the
Company's important customers experienced financial difficulties, including the
Company's largest customer, Zale Corporation (together with its subsidiaries and
affiliates, the "Zale Companies"), which filed for bankruptcy in January 1992.
As a result of the foregoing factors, the Company experienced declining net
sales and operating results during fiscal 1991, fiscal 1992, and fiscal 1993. In
this regard, the Company experienced a net loss of approximately $19 million for
the fiscal year ended February 29, 1992 ("fiscal 1992"), and a net loss of
approximately $47 million for fiscal 1993.
The Company's financial performance for fiscal 1992 and fiscal 1993 and the
requirement to reclassify and revalue its exposure to the Zale Companies as a
result of the Zale Companies' bankruptcy caused the Company to be in default
under its then existing revolving credit agreement (the "Old Credit Agreement")
and its then existing gold consignment agreements (the "Old Gold Agreements").
In addition, as a result of its financial difficulties, the Company did not make
the interest payments due on December 15, 1992 on its 13% Senior Subordinated
Notes due December 15, 1998 (the "Old 13% Notes") and on January 1, 1993 on its
10 1/4% Subordinated Notes due July 1, 1995 (the "Old 10 1/4% Notes," together
with the Old 13% Notes, the "Old Notes"), and was thus in default under the
indentures for the Old Notes.
7
<PAGE>
As a result of the financial difficulties which the Company experienced
during fiscal 1992 and fiscal 1993, the Company proposed the recapitalization
(the "Recapitalization") which was consummated on May 14, 1993. The
Recapitalization consisted of the following components: (i) the execution of a
new revolving credit agreement with Foothill Capital Corporation ("Foothill")
which provided the Company with senior secured financing in an amount of up to
$30,000,000 (the "New Credit Agreement"); (ii) the execution of new gold
consignment agreements (the "New Gold Agreements," together with the New Credit
Agreement, the "Revised Debt Agreements") with its gold consignors (the "Gold
Suppliers") which provide the Company with an aggregate gold consignment
availability of up to 100,000 troy ounces; (iii) the sale of $30 million
principal amount of the Company's 11 1/2% Senior Secured Notes due September 15,
1997 (the "New Senior Secured Notes") for cash to holders of Old Notes (the
"Secured Debt Offering"); (iv) the offer to exchange (a) $478.96 principal
amount of the Company's 13% Senior Subordinated Notes due May 31, 1998 (the "New
Senior Subordinated Notes"), $331.00 of the Company's Exchangeable Preferred
Stock, par value $1.00 per share (the "Exchangeable Preferred Stock," together
with the New Senior Subordinated Notes, the "New Securities"), and 89.49 shares
of the Company's Class A Common Stock, par value $0.01 per share (the "Class A
Common Stock," together with the New Securities, the "Exchange Securities"), for
each $1,000 principal amount of outstanding Old 13% Notes and (b) $408.11
principal amount of New Senior Subordinated Notes, $282.04 of Exchangeable
Preferred Stock and 76.25 shares of Class A Common Stock for each $1,000
principal amount of outstanding Old 10 1/4% Notes (the "Exchange Offers"); (v)
the solicitation of consents (the "Consent Solicitations") to amend certain
terms of the indentures pursuant to which the Old 13% Notes and the Old 10 1/4%
Notes were issued (the "Indenture Amendments"); (vi) the amendment (the "IRB
Amendments") of certain provisions of the Industrial Revenue Bonds (the "IRBs")
related to the Company's manufacturing facility in New York, New York (the
"Feature Facility"); and (vii) the approval by the Company's stockholders of (a)
an amendment to the Company's Articles of Organization to increase the number of
authorized shares of Class A Common Stock from 20,000,000 to 40,000,000 (the
"Charter Amendment"), (b) pursuant to the requirements of the American Stock
Exchange (the "AMEX") on which the Class A Common Stock is listed, the issuance
of up to 11,399,905 shares of Class A Common Stock as part of the
Recapitalization, and (c) the issuance by the Company of options to purchase an
aggregate of 1,500,000 shares of Class A Common Stock at an exercise price of
$2.75 per share to members of senior management in connection with the
consummation of the Recapitalization as required by the AMEX rules. Holders of
$89,590,000 or 92.8% of the aggregate principal amount of Old 13% Notes and
holders of $25,905,000 or 98.3% of the aggregate principal amount of Old 10 1/4%
Notes tendered their notes pursuant to the Exchange Offers. Thus, in connection
with the Exchange Offers, the Company issued $53,480,900 of New Senior
Subordinated Notes, $36,960,190.45 (2,533,255 shares) of Exchangeable Preferred
Stock, and 9,992,648 shares of Class A Common Stock to holders of Old Notes.
To address seasonality needs, the Company recently entered into an amendment
to the New Credit Agreement to increase the maximum amount available under the
New Credit Agreement from $30,000,000 to $35,000,000 during the months of August
through December. Based upon its results of operations for the quarter ended May
29, 1994, and its anticipated results of operations for the quarter ending
August 28, 1994, the Company also entered into an amendment to the New Credit
Agreement and the New Gold Agreements to modify the consolidated tangible net
worth covenant contained in those agreements. This covenant previously provided
that the Company was required to maintain consolidated tangible net worth of
8
<PAGE>
$38,000,000 through February 27, 1994, and $43,000,000 thereafter. As amended,
the covenant provides that the Company will maintain consolidated tangible net
worth of $40,000,000 from July 1, 1994 through November 26, 1994, and
$43,000,000 thereafter. Finally, the Company has entered into an agreement with
one of the Gold Suppliers to reduce such Gold Supplier's consignment obligation
by 10,000 ounces. This modification is consistent with the Company's expected
business requirements.
9
<PAGE>
RISK FACTORS
The purchase of Exchange Securities and the New Senior Secured Notes is
subject to a number of material risks, including those enumerated below. Before
purchasing any of the Exchange Securities or the New Senior Secured Notes, a
person should carefully consider the following risk factors, together with all
of the other information set forth in this Prospectus.
Financial Considerations
Changing Industry
In recent years, the jewelry industry has undergone numerous changes. The
number of traditional retail jewelry outlets, such as mall-based stores, is
being reduced as alternative distribution channels (e.g., television shopping
networks, warehouse clubs, and discount department stores) have gained market
share. In addition, the jewelry industry is sensitive to general economic
conditions and has been materially and adversely affected by the recent economic
recession. This recession has led to a decrease in consumer spending for jewelry
and reduced purchases by large jewelry retailers and other customers of the
Company. Several of the Company's important customers have experienced severe
financial difficulties due to the economic recession and have sought to reduce
inventory purchases in an effort to conserve cash. In addition, a significant
portion of the Company's business is with companies with high debt to equity
ratios. These factors have adversely affected the Company's business and results
of operations during recent years and may continue to do so in the future.
Declining Operating Results
The Company's net sales were $277 million in fiscal 1994, $270 million in
fiscal 1993, and $272 million in fiscal 1992. The Company's income from
operations was $17 million in fiscal 1994, $280,000 in fiscal 1993, and a loss
from operations of $49 million in fiscal 1992. This operating loss for fiscal
1992 included restructuring expenses and a Zale bankruptcy charge totaling $44
million, consisting of a charge-off of $13 million associated with the Company's
receivable and consigned merchandise exposure to the Zale Companies and charges
of $31 million associated with the restructuring of the Company's operations.
For fiscal 1993, the Company had a net loss of $47 million as a result of a $5
million charge related to the New York facility, a $14.5 million charge related
to the disposal of certain assets, and a $14.4 million charge related to the
recapitalization. Net income in fiscal 1992 included a net gain on nonrecurring
items of $51 million.
Zale Bankruptcy
The Company's largest customer for a number of years has been the Zale
Corporation and its affiliated companies, including Gordon Jewelry Corporation.
Sales to the Zale Companies were approximately $33 million or 12% of
consolidated sales in fiscal 1994 compared to $38 million or 14% of consolidated
sales in fiscal 1993 and $44 million or 16% of consolidated
10
<PAGE>
sales in fiscal 1992. On July 30, 1993, this group of companies completed a
reorganization under Chapter 11 of the United States Bankruptcy Code in the
United States Bankruptcy Court and emerged from bankruptcy as Zale Delaware,
Inc. ("Zale").
The Company has reached agreement on most issues with the new Zale
concerning the Company's claim of approximately $40 million, filed with the
Bankruptcy Court, representing the net outstanding balance of trade accounts
receivable and the wholesale value of the consignment inventory as of the date
of Zale's bankruptcy petition.
The Company's Consolidated Financial Statements at February 28, 1992,
originally reflected a net valuation for the claim 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 $10.6 million. The Consolidated Financial Statements at May 29,
1994, reflect a net valuation of approximately $2.4 million, representing
management's estimate of the value of the remaining claim related assets.
The Company continues to conduct business with Zale.
Certain Bankruptcy Law Considerations
If the Company were to seek protection or become the subject of a filing of
an involuntary petition for relief under the Bankruptcy Code, the ability of the
holders of New Senior Secured Notes, New Senior Subordinated Notes, and
Exchangeable Preferred Stock to recover their investment could be significantly
impaired. Given the risks inherent in the bankruptcy process, including the
potential deterioration of the business of a company during a bankruptcy case
and the additional administrative expenses associated with a bankruptcy case, it
is not possible to determine what percentage, if any, of their investment
holders of the various securities would be likely to recover in a bankruptcy
case. Ultimate recovery would depend, among other things, on whether the Company
is reorganized or liquidated, the impact of a bankruptcy case upon the business
of the Company, the treatment of the debt and preferred stock in a plan of
reorganization, and the length of time necessary to complete the reorganization
process or the liquidation. Set forth below is a discussion of certain rights of
the various security holders of the Company in a bankruptcy.
The Exchangeable Preferred Stock, as with all other classes and series of
capital stock of the Company, is subordinate with respect to the distribution of
assets of the Company upon any voluntary or involuntary bankruptcy, liquidation,
dissolution or winding up of the Company, to all existing and future
indebtedness of the Company, and its subsidiaries, including indebtedness under
the Revised Debt Agreements, the IRBs, the New Senior Secured Notes, the New
Senior Subordinated Notes, and the Old Notes. In the event that holders of
Exchangeable Preferred Stock do not receive shares of Little Switzerland Common
Stock upon the exercise of their exchange rights in the event of a bankruptcy of
the Company, such holders would have recourse only after satisfaction of all
allowable debt claims. The rights of holders of Exchangeable Preferred Stock to
exchange their preferred stock for shares of Little Switzerland Common Stock
could be adversely affected in the event of the bankruptcy, liquidation,
dissolution or winding up of the Company. The timing of such exchange could be
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<PAGE>
delayed for a substantial period of time by virtue of the application of the
automatic stay or the exercise by the court of its equitable powers. The right
to make the exchange could be challenged as an improper redemption, executory
contract or on other grounds. If such challenge were successful, the Little
Switzerland Common Stock or other Exchange Property (as defined) held by the
Little Switzerland Trustee in the Little Switzerland Trust could become subject
to the claims of general creditors of the Company.
The claims of the holders of New Senior Subordinated Notes are subordinate
to those arising under the Revised Debt Agreements, the IRBs, and the New Senior
Secured Notes. In a bankruptcy case, the holders of New Senior Subordinated
Notes will have recourse only to those assets remaining after satisfaction of
the claims of all Senior Indebtedness (as defined), including any indebtedness
which is created, incurred, assumed or guaranteed under the Revised Debt
Agreements, the IRBs, and the New Senior Secured Notes and in each such case,
any permitted renewal, refinancing, refunding, replacement, or extension of any
such Senior Indebtedness. In addition, the amount of the claim of holders of New
Senior Secured Notes allowed in bankruptcy proceedings may be substantially less
than the face amount of the New Senior Subordinated Notes at such time.
Accordingly, holders of New Senior Subordinated Notes may under such
circumstances, even if sufficient funds are available, receive a lesser amount
than they would be entitled to under the express terms of the applicable
indenture, which amount might be less than the amount calculated for federal
income tax purposes. Furthermore, except in certain very limited circumstances,
unmatured interest (which generally includes original issue discount) is not
allowable as a claim under the Bankruptcy Code, and there is considerable
uncertainty as to the amount of the claims of holders of New Senior Subordinated
Notes that would be allowed by a bankruptcy court. Under certain circumstances,
a bankruptcy trustee (or the Company as debtor-in-possession) could seek to
recover any payments of principal or interest on the New Senior Subordinated
Notes or the Old Notes on the grounds that such payments were preferential
transfers. For a more complete discussion of certain bankruptcy and insolvency
considerations in connection with the Recapitalization, see "Certain Bankruptcy
and Insolvency Considerations."
Material Federal Income Tax Consequences of the Recapitalization to the Company
As a result of the Recapitalization, the Company incurred certain adverse
federal income tax consequences. The Company could suffer additional adverse
federal income tax consequences if certain anticipated positions of the Company
concerning the tax consequences of the Recapitalization were challenged by the
Internal Revenue Service. See "Material Federal Income Tax Consequences."
As a result of the Recapitalization, the Company recognized taxable income
from discharge of indebtedness of approximately $8,800,000. See "Material
Federal Income Tax Consequences--Tax Consequences of the Recapitalization to the
Company--Amount of Potential COD Income." In addition, the Recapitalization
resulted in a change in ownership of the Company sufficient to subject the
Company to certain limitations on the Company's ability to offset taxable income
with its net operating loss carryforwards and losses incurred prior to the
Recapitalization ("NOLs"). At February 28, 1993, the Company had net operating
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<PAGE>
loss carryforwards for tax purposes of approximately $24 million. The Company
has obtained a ruling from the Internal Revenue Service to the effect that for
federal income tax purposes the Company will be able to use NOLs to offset the
income from the discharge of indebtedness that resulted from the
Recapitalization. However, if any of the Old Notes or the New Senior
Subordinated Notes were considered to have been "traded on an established
securities market" within the meaning of the provisions of the Internal Revenue
Code governing the calculation of "original issue discount" for federal income
tax purposes, then the amount of income from the discharge of indebtedness
resulting from the Recapitalization could have exceeded the Company's NOLs. See
"Material Federal Income Tax Consequences."
Lack of Established Market
The New Securities and the New Senior Secured Notes are not listed on any
securities exchange, and there can be no assurance that a market will develop
for the New Securities or New Senior Secured Notes or, if a market develops,
that such market will be liquid. To the knowledge of the Company, no person
intends to make a market in the New Securities or the New Senior Secured Notes.
In addition, no person is obligated to do so, and any person who does so may
discontinue such activity at any time without notice. Accordingly, no assurance
can be given that a holder of the New Securities or the New Senior Secured Notes
will be able to sell such securities in the future or as to the price at which
such sale may occur. Moreover, to the extent that they trade at all, the New
Senior Secured Notes, the New Senior Subordinated Notes, and the Exchangeable
Preferred Stock may trade at a substantial discount from their stated principal
or liquidation value, as the case may be. The extent to which the New Senior
Secured Notes, the New Senior Subordinated Notes and/or the Exchangeable
Preferred Stock trade at a discount from their stated principal or liquidation
value, as the case may be, will depend on, among other things, the financial
performance of the Company. In addition, because the Exchangeable Preferred
Stock is exchangeable under certain circumstances for shares of Little
Switzerland Common Stock, the prices at which the Exchangeable Preferred stock
may trade in the market, if they trade at all, is likely to be affected by the
market price from time to time of Little Switzerland Common Stock.
Reduction or Restriction of the Company's Net Operating Losses
As a result of the Recapitalization, the Company's existing net operating
loss carryforwards have been reduced to the extent used to offset income from
discharge of indebtedness resulting from the Recapitalization, and any remaining
net operating loss carryforwards and current operating losses incurred prior to
the Recapitalization are available only to a limited extent to offset any annual
net income recognized by the Company in the future. See "Material Federal Income
Tax Consequences--Consequences of the Recapitalization to the Company."
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Little Switzerland Shareholder Rights Agreement
In its public filings with the Commission, Little Switzerland has disclosed
that it has adopted a shareholder rights agreement (the "Little Switzerland
Shareholder Rights Agreement"). Pursuant to the terms of the Little Switzerland
Shareholder Rights Agreement, the Board of Directors of Little Switzerland has
declared a dividend distribution of one preferred stock purchase right (a
"Right") for each outstanding share of Little Switzerland Common Stock. Each
Right entitles the registered holder to purchase from Little Switzerland a unit
consisting of one one-hundredth of a share (a "Unit") of Series A Preferred
Stock at the exercise price of $50.00 per Unit. Each one one-hundredth of a
share is designed to approximate the value of a share of Little Switzerland
Common Stock. Initially, the Rights are not exercisable and are attached to all
outstanding shares of Little Switzerland Common Stock. However, in the event
that a person becomes the "beneficial owner" (as defined in the Little
Switzerland Shareholder Rights Agreement) of 15% or more of the outstanding
shares of Little Switzerland Common Stock (an "Acquiring Person") or is the
beneficial owner of 10% or more of the outstanding shares of Little Switzerland
Common Stock and is declared an "Adverse Person" (as defined in the Little
Switzerland Shareholder Rights Agreement) by the Board of Directors of Little
Switzerland, each holder of a Right (other than an Acquiring Person or Adverse
Person, as the case may be, and their associates and affiliates) will have the
right to receive upon exercise a number of Units of Series A Preferred Stock
having a market value of two times the exercise price of the Right. For example,
assuming that a person exceeded this 15% ownership threshold or is declared an
Adverse Person and that the market value of a share of Little Switzerland Common
Stock was $12.50, each Right would entitle each holder of a Right (other than an
Acquiring Person or Adverse Person, as the case may be, and their affiliates and
associates) to purchase eight shares of the common-equivalent preferred stock
worth $100 for the $50 exercise price. This would result in substantial dilution
to the Acquiring Person or Adverse Person, as the case may be.
Because the Exchangeable Preferred Stock is exchangeable for shares of
Little Switzerland Common Stock, it is likely that a holder of Exchangeable
Preferred Stock will, for purposes of the Little Switzerland Shareholder Rights
Agreement, be deemed to beneficially own the shares of Little Switzerland Common
Stock for which such preferred stock may be exchanged. Thus, based on the most
recent public disclosure of the number of outstanding shares of Little
Switzerland Common Stock, if a person becomes the beneficial owner of 1,266,286
or more shares of Exchangeable Preferred Stock or beneficially owns shares of
Exchangeable Preferred Stock, which together with shares of Little Switzerland
Common Stock which it beneficially owns, results in it being deemed the
beneficial owner of 15% or more of the outstanding shares of Little Switzerland
Common Stock, such person will "trigger" the provisions of the Little
Switzerland Shareholder Rights Agreement described above. For a more complete
description of the terms of the Little Switzerland Shareholder Rights Agreement,
see "Description of the New Securities--Description of the Exchangeable
Preferred Stock--Little Switzerland Shareholder Rights Agreement."
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Dividend Restrictions
The payment of dividends on the Common Stock is prohibited by the Revised
Debt Agreements, the New Senior Secured Note Indenture, the New Senior
Subordinated Note Indenture, the IRB Amendments, and the Certificate of
Designation. See "The Revised Debt Agreements," "The Secured Debt
Offering--Certain Covenants," "Description of the New Securities-- Description
of the New Senior Subordinated Notes--Certain Covenants" and "--Description of
the Exchangeable Preferred Stock--Dividends." No dividends have ever been
declared on shares of Common Stock, and as a result of the foregoing
restrictions and the Company's financial condition, the Company does not
anticipate paying cash dividends on shares of Common Stock in the foreseeable
future.
Material Tax Consequences
The holder of a New Senior Subordinated Note generally is required to
include in income for federal income tax purposes the interest on such note as
it accrues, regardless of the holder's normal method of tax accounting because
for federal income tax purposes such notes were considered to be issued with
"original issue discount." Thus, a holder of a New Senior Subordinated Note
generally will have to accrue interest income currently in excess of cash
interest payments received to the extent that the Company elects to pay interest
on the New Senior Subordinated Notes in the form of New Senior Subordinated
Interest Notes. The amount of original issue discount that a holder of New
Senior Subordinated Notes has to accrue currently could increase if the Old
Notes or New Senior Subordinated Notes were considered to be "traded on an
established securities market" (at the time of the Recapitalization or shortly
before or after such time) within the meaning of the provisions of the Internal
Revenue Code governing the calculation of original issue discount or if the
issuance of New Senior Subordinated Notes were subject to certain provisions
concerning "potentially abusive situations." A holder of a New Senior Secured
Note is generally required to include interest thereon in income for federal
income tax purposes in accordance with the holder's normal method of tax
accounting, because such notes were not issued with "original issue discount"
for federal income tax purposes. The amount of income recognized by a holder of
a New Senior Subordinated Note or a New Senior Secured Note with respect to such
note may vary from the stated interest thereon pursuant to certain provisions of
the Internal Revenue Code discussed below. See "Material Federal Income Tax
Consequences."
Ranking of New Securities
The payment of the principal and premium, if any, and interest on the New
Senior Subordinated Notes is subordinated in right of payment to the prior
payment when due of the principal and premium, if any, and interest on all
"Senior Indebtedness." "Senior Indebtedness" is defined in the New Senior
Subordinated Note Indenture as (i) all indebtedness of or guaranteed by the
Company or any of the Subsidiary Guarantors which is created, assumed, or
guaranteed under the Revised Debt Agreements, the IRBs or the New Senior Secured
Notes, including in each case, interest thereon occurring at the contract rate,
whether or not such interest is allowable as a claim under the Bankruptcy Code
("Post Petition Interest"), and all renewals, refinancings, replacements,
extensions, refundings, modifications, or amendments of any such indebtedness,
to the extent, in each case, that such indebtedness is permitted under the terms
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<PAGE>
of the New Senior Subordinated Note Indenture, and (ii) any other indebtedness
of the Company or any such Subsidiary Guarantor except indebtedness of or
guaranteed by the Company or any Subsidiary Guarantor which is expressly not
senior or superior in right of payment to the New Senior Subordinated Notes;
provided, however, that Senior Indebtedness shall not include Post Petition
Interest on any indebtedness incurred to refinance indebtedness outstanding on
the Issuance Date unless allowed by the bankruptcy court presiding over the
applicable case. As of May 29, 1994, approximately $18.3 million was outstanding
under the New Senior Secured Note Indenture and the IRBs, and approximately $8.3
million and approximately 63,000 troy ounces was outstanding under the New
Credit Agreement and the New Gold Agreements, respectively. See "Description of
the New Securities--Description of the New Senior Subordinated
Notes--Subordination; Ranking."
Except for the right to exchange shares of Exchangeable Preferred Stock for
shares of Little Switzerland Common Stock, the Exchangeable Preferred Stock is
subordinate to the prior payment when due of the principal and premium, if any,
and interest on all future and existing indebtedness of the Company. The
Exchangeable Preferred Stock is subordinate to approximately $86.4 million of
indebtedness (excluding indebtedness to trade creditors) of the Company. As of
May 29, 1994, the amount of indebtedness to trade creditors outstanding was
approximately $16.3 million. The Exchangeable Preferred Stock also is
subordinate to additional indebtedness of up to $35,000,000 and of up to
approximately 100,000 troy ounces under the New Credit Agreement and the New
Gold Agreements, respectively. See "Description of the New Securities--
Description of the Exchangeable Preferred Stock--Ranking."
Upon any bankruptcy, liquidation, dissolution, or winding up of the Company,
the holders of Senior Indebtedness (in the case of New Senior Subordinated
Notes) or the holders of any indebtedness (in the case of Exchangeable Preferred
Stock) are entitled to receive payment in full of all amounts due before the
holders of New Senior Subordinated Notes or Exchangeable Preferred Stock, as the
case may be, are entitled to receive any payment. In such circumstances, by
reason of such subordination, holders of New Senior Subordinated Notes and
Exchangeable Preferred Stock may receive substantially less than the face amount
of their securities. See "Certain Bankruptcy and Insolvency Considerations."
Holding Company Structure; Guarantees
The New Securities and the New Senior Secured Notes are obligations of the
Company. Because a significant portion of the operations of the Company are, and
in the future are likely to be, conducted through subsidiaries, the cash flow
and the consequent ability to service debt of the Company, including the New
Securities and the New Senior Secured Notes, will be dependent upon the earnings
of the Company or the payment of dividends to the Company by its subsidiaries.
The payment of dividends and the making of loans and advances to the Company by
its subsidiaries may be subject to statutory or contractual restrictions, are
contingent upon the earnings of those subsidiaries and are subject to various
business considerations.
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Each guaranty issued by a Subsidiary Guarantor in respect of the New Senior
Secured Notes is a full and unconditional secured obligation of each such
Subsidiary Guarantor that ranks pari passu in right of payment with each such
Subsidiary Guarantor's guarantees issued in respect of the New Credit Agreement,
the New Gold Agreements, and the IRBs, and ranks senior in right of payment to
each such Subsidiary Guarantor's guaranty issued in respect of the New Senior
Subordinated Notes. Each guaranty issued by a Subsidiary Guarantor in respect of
the New Senior Subordinated Notes is a full and unconditional secured obligation
of each such Subsidiary Guarantor that is subordinated in right of payment to
each such Subsidiary Guarantor's guarantees issued in respect of the New Credit
Agreement, the New Gold Agreements, the IRBs, and the New Senior Secured Notes
(collectively, the "Senior Guarantees"). Each guaranty issued by a Subsidiary
Guarantor is secured by the assets of the Subsidiary Guarantor in the same
manner and with the same ranking as the assets of the Company securing the
Company's obligations under the New Credit Agreement, the New Gold Agreements,
the IRBs, the New Senior Secured Notes, and the New Senior Subordinated Notes.
As a result, although the guarantees issued in respect of the New Senior
Subordinated Notes are secured by the assets of each Subsidiary Guarantor,
pursuant to the Intercreditor Agreement the holders of the New Senior
Subordinated Notes are subject to a permanent standstill as to enforcement of
junior liens in such collateral. Therefore, holders of the New Senior
Subordinated Notes, unlike the holders of indebtedness under the New Credit
Agreement, the New Gold Agreements, the New Senior Secured Notes, and the IRBs,
may not exercise rights of foreclosure with respect to junior liens in
collateral securing the guarantees issued in respect of the New Senior
Subordinated Notes, but will have to rely on holders of prior liens in such
collateral to exercise such rights. Moreover, in the event of the bankruptcy,
liquidation, dissolution or winding up, or similar proceeding relating to a
Subsidiary Guarantor, a holder of New Senior Subordinated Notes will not be able
to realize upon such Subsidiary Guarantor's guaranty issued in respect of the
New Senior Subordinated Notes until such Subsidiary Guarantor's obligations
under the Senior Guarantees have been paid to the extent of the value of the
collateral securing such Senior Guarantees or have been paid in full.
As described below under "Fraudulent Conveyance Considerations," a guaranty
of a Subsidiary Guarantor may not be enforceable or may be only partially
enforceable under certain circumstances. To the extent that a guaranty of a
Subsidiary Guarantor is not enforceable, the New Senior Secured Notes and New
Senior Subordinated Notes will be effectively subordinated to such Subsidiary
Guarantor's indebtedness to all of its creditors. At February 27, 1994, the
aggregate amount of such indebtedness of the Subsidiary Guarantors was
approximately $15.7 million (excluding guarantees by such Subsidiary Guarantors
of indebtedness under the New Credit Agreement and the New Gold Agreements).
Fraudulent Conveyance Considerations
The issuance by the Subsidiary Guarantors of the New Senior Secured Note
Guarantees and the New Senior Subordinated Note Guarantees and the consummation
of the Exchange Offers could be challenged under state and federal fraudulent
conveyance laws.
Existing or future creditors of a Subsidiary Guarantor could, under state
and federal fraudulent conveyance laws, avoid or subordinate the guarantees
issued by a Subsidiary Guarantor if they were successful in establishing that
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<PAGE>
(i) such guaranty was incurred with intent to hinder, delay, or defraud any
present or future creditor or such Subsidiary Guarantor contemplated insolvency
with a design to prefer one or more creditors to the exclusion in whole or in
part of others or (ii) such Subsidiary Guarantor did not receive fair
consideration for issuing its guarantees and that it (A) was insolvent at the
time of such issuance, or (B) was rendered insolvent by reason of such issuance,
or (C) was engaged in a business or transaction for which its assets constituted
unreasonably small capital to carry on its business, or (D) intended to incur,
or believed that it would incur, debts beyond its ability to pay such debts as
they matured. A determination of whether a Subsidiary Guarantor received fair
consideration for issuing a guaranty involves a factual analysis of the benefits
received by such Subsidiary Guarantor. While some courts have considered
indirect benefits such as the improvement of the financial position of the
consolidated entity, many courts have restricted benefits to the amount of funds
received by the subsidiary. If it were determined that a Subsidiary Guarantor
did not receive fair consideration and was insolvent at the time it issued its
guarantees (or was rendered insolvent as a result thereof), then such guarantees
may not be enforceable. Even if the guarantees are not set aside under state or
federal fraudulent conveyance law, the guarantees may be enforceable only to the
extent, if any, of the value of the benefits received by such Subsidiary
Guarantor from the Recapitalization.
Existing or future creditors of the Company also could, under state and
federal fraudulent conveyance laws, avoid the Exchange Offers as a fraudulent
transfer if they were successful in establishing that (i) the Exchange Offers
were consummated with intent to hinder, delay or defraud any present or future
creditor or the Company contemplated insolvency with a design to prefer one or
more creditors to the exclusion in whole or in part of other creditors or (ii)
the Company did not receive fair consideration for issuing the Exchange
Securities and the Company (A) was insolvent at the time of the issuance of the
Exchange Securities, or (B) was rendered insolvent by reason of such issuance,
or (C) was engaged in a business or transaction for which its assets constituted
unreasonably small capital to carry out its business, or (D) intended to incur,
or believed it would incur, debts beyond its ability to pay such debts as they
matured. A determination of whether the Company received fair consideration for
the Exchange Offers involves a factual analysis of the benefits received by the
Company from the issuance of the Exchange Securities. If it were determined that
the Company did not receive fair consideration and was insolvent at the time
such securities were issued (or was rendered insolvent as a result thereof), a
court could reinstate, in full and without modification, the rights and claims
evidenced by the Old Notes, and/or order holders of Exchange Securities to
return to the Company or to a fund for the benefit of its creditors an amount
equal to any value that they received in excess of the value of the Old Notes.
A determination of whether a Subsidiary Guarantor was insolvent at the time
a guaranty was issued or whether the Company was insolvent at the time of the
issuance of Exchange Securities will vary depending upon the law applied in any
such proceeding. Generally, however, a Subsidiary Guarantor or the Company, as
the case may be, will be considered insolvent if the sum of its liabilities,
including contingent liabilities, are greater than the fair marketable value of
all of its assets at a fair valuation. Courts have differed in their approach to
valuing contingent obligations such as guarantees, for purposes of measuring
insolvency, particularly with respect
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to whether the liability represented by the face amount of the guarantee is to
be reduced by rights of subrogation and contribution against co-guarantors
and/or discounted based on its contingent nature.
Ranking of Indebtedness; Rights in Collateral; Collateral Agency and
Intercreditor Agreement
Pursuant to the terms of the Revised Debt Agreements, the IRBs, and the New
Senior Secured Notes (collectively, the "Senior Recapitalization Facilities"),
the Senior Recapitalization Facilities each rank pari passu in right of payment
with each other, and the New Senior Subordinated Notes are subordinate and
junior in right of payment to all indebtedness under the Senior Recapitalization
Facilities. Therefore, (i) the holders of the Senior Recapitalization Facilities
each have equal rights to bring an action to collect their respective
indebtedness from the Borrowers and to obtain a judgment against the Borrowers
in respect of such indebtedness, (ii) the Borrowers have not contractually
agreed to pay their indebtedness under any of the Senior Recapitalization
Facilities ahead of or after their indebtedness under any of the other Senior
Recapitalization Facilities, and (iii) the rights of the holders of the New
Senior Subordinated Notes to enforce such Notes and to receive payments
thereunder are limited as and to the extent provided by the subordination
provisions of the New Senior Subordinated Note Indenture. See "Description of
the New Securities--Description of the New Senior Subordinated
Notes--Subordination; Ranking."
Notwithstanding the foregoing, the holders of indebtedness under the Revised
Debt Agreements, the IRBs, the New Senior Secured Notes, and the New Senior
Subordinated Notes have different rights in collateral securing such
indebtedness. See "Allocation of Security Interests" on the front cover of the
Prospectus for a discussion of the collateral securing such obligations and the
priority of the liens in such collateral granted to such holders. As described
in "Allocation of Security Interests" on the front cover of the Prospectus,
although the obligations of the Borrowers in respect of the Revised Debt
Agreements, the IRBs, the New Senior Secured Notes, and the New Senior
Subordinated Notes are secured by liens in substantially all of the assets of
the Company and its domestic subsidiaries, such liens are not of equal priority
and, as a result, are not of equal value. In addition, pursuant to the
intercreditor arrangements which govern the Revised Debt Agreements, the IRBs,
the New Senior Secured Notes, and the New Senior Subordinated Notes, the rights
of the holders of such indebtedness to exercise rights of foreclosure with
respect to collateral in which they hold junior liens is limited. Therefore, to
the extent that any such holders hold fewer (or no) first priority liens in
collateral, such holders' rights in such collateral are adversely affected.
The Borrowers, Foothill, the Gold Suppliers, Chemical, the New Senior
Secured Note Trustee, the New Senior Subordinated Note Trustee and Foothill, as
Collateral Agent, have entered into a Collateral Agency and Intercreditor
Agreement (the "Intercreditor Agreement") which governs the respective rights in
collateral of the holders of indebtedness under the New Credit Agreement, the
New Gold Agreements, the IRBs, the New Senior Secured Notes, and the New Senior
Subordinated Notes. Pursuant to the Intercreditor Agreement, any collections
with respect to the liquidation of collateral shall be distributed among the
parties secured in such collateral in accordance with their respective
priorities therein, with no distribution to a lower level of priority until all
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claims of the holders of higher levels of priority in such collateral are
satisfied. Generally, under the Intercreditor Agreement the holder of a first
priority lien in an item of collateral is entitled to exercise rights of
foreclosure with respect to such collateral. To the extent that such party does
not foreclose on such collateral, after the expiration of a one year standstill
period the holders of junior liens in such collateral, other than the holders of
the New Senior Subordinated Notes, may exercise such rights of foreclosure.
Pursuant to the Intercreditor Agreement, the holders of the New Senior
Subordinated Notes shall be subject to a permanent standstill as to enforcement
of junior liens in collateral. Therefore, holders of the New Senior Subordinated
Notes, unlike the other parties to the Intercreditor Agreement, are not able to
exercise rights of foreclosure with respect to junior liens in collateral
securing the New Senior Subordinated Notes and the New Senior Subordinated Note
Limited Security Guarantees but will have to rely on holders of prior liens in
such collateral to exercise such rights. Moreover, holders of New Senior
Subordinated Notes are only entitled to receive proceeds of collateral after
payment in full of all Senior Indebtedness, including, without limitation, the
Revised Debt Agreements, the IRBs, the New Senior Secured Notes, and permitted
refinancings thereof. See "Ranking of Indebtedness; Rights in Collateral;
Collateral Agency and Intercreditor Agreement."
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PRO FORMA CONDENSED CONSOLIDATED FINANCIAL DATA
The following pro forma condensed consolidated balance sheets and condensed
consolidated statements of operations of the Company present the effects of the
Recapitalization based on (i) the sale of $30,000,000 of New Senior Secured
Notes and (ii) the issuance of $53,481,000 of New Senior Subordinated Notes,
$36,960,000 (2,533,000 shares) of Exchangeable Preferred Stock, and 9,992,700
shares of Class A Common Stock to holders of Old 13% Notes and holders of Old 10
1/4% Notes who tendered their Old Notes in the Exchange Offers and the potential
exchange of the shares of Exchangeable Preferred Stock for approximately
2,533,000 shares of common stock of Little Switzerland (the "Little Switzerland
Exchange"), as if those transactions had occurred on March 1, 1993, for
statement of operations purposes and as if the potential exchange of the shares
of common stock of Little Switzerland had occurred on February 27, 1994, for
balance sheet purposes. The Pro Forma Statements do not purport to represent
what the Company's financial position or results of operations would actually
have been if such transactions in fact had occurred on such dates or at the
beginning of the period indicated or to project the Company's financial position
or results of operations for any future date or period.
The pro forma condensed consolidated balance sheets and statements of
operations and accompanying notes should be read in conjunction with the
"Material Federal Income Tax Consequences" included elsewhere in this Prospectus
and the Company's Consolidated Financial Statements and related notes thereto
included in the Company's Annual Report on Form 10-K delivered herewith.
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TOWN & COUNTRY CORPORATION AND SUBSIDIARIES
PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
AT FEBRUARY 27, 1994
(In thousands, except per share amounts)
Pro Forma
Little for the
Switzerland Little
Exchange Switzerland
Actual Adjustments Exchange
------ ----------- ------------
ASSETS
CURRENT ASSETS:
Cash and cash
equivalents ................. $ 3,274 $ -- $ 3,274
Restricted cash ............... 38 -- 38
Accounts receivable ........... 55,623 -- 55,623
Inventories ................... 75,029 -- 75,029
Prepaid expenses and
other current assets ........ 3,992 -- 3,992
--------- --------- ---------
Total current assets ........ 137,956 -- 137,956
--------- --------- ---------
PROPERTY, PLANT AND
EQUIPMENT, net ................ 45,705 -- 45,705
INVESTMENTS IN AFFILIATES ....... 27,038 (12,482)(1) 14,556
OTHER ASSETS .................... 13,221 -- 13,221
--------- --------- ---------
Total assets ................ $ 223,920 $ (12,482) $ 211,438
========= ========= =========
LIABILITIES AND STOCK-
HOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of long-
term debt ................... $ 1,480 $ -- $ 1,480
Accounts payable .............. 12,727 -- 12,727
Accrued expenses .............. 19,956 -- 19,956
Accrued and currently
deferred income taxes ....... 874 3,500(1) 4,374
--------- --------- ---------
Total current
liabilities ............... 35,037 3,500 38,537
--------- --------- ---------
LONG-TERM DEBT:
Senior debt ................... 20,542 -- 20,542
New Senior Sub-
ordinated Notes ............. 56,977 -- 56,977
Unamortized interest on
New Senior Sub-
ordinated 13% Notes ......... 6,971 -- 6,971
Old 13% Notes ................. 6,903 -- 6,903
Old 10 1/4% Notes ............. 434 -- 434
--------- --------- ---------
Total long-term debt ........ 91,827 -- 91,827
--------- --------- ---------
22
<PAGE>
Pro Forma
Little for the
Switzerland Little
Exchange Switzerland
Actual Adjustments Exchange
------ ----------- ------------
LONG-TERM DEFERRED INCOME
TAXES AND OTHER
LIABILITIES ................... $ 2,094 $ -- $ 2,094
MINORITY INTEREST ............... 3,843 -- 3,843
Total liabilities and
minority interest ......... 132,801 3,500 136,301
--------- --------- ---------
EXCHANGEABLE PREFERRED
STOCK, $1.00 par value;
Authorized--2,700,000
shares; issued and
outstanding--2,533,255
shares ........................ 35,785 (35,785)(1) --
--------- --------- ---------
STOCKHOLDERS' EQUITY:
Preferred Stock, $1.00
par value; authorized
and unissued--
2,300,000 shares ............ -- -- --
Class A Common Stock,
$.01 par value;
authorized--40,000,000
shares; issued and
outstanding--20,755,901
shares ...................... 208 -- 208
Class B Common Stock,
$.01 par value;
authorized--8,000,000
shares; issued and
outstanding--2,670,693
shares ...................... 27 -- 27
Additional paid-in
capital ..................... 69,909 -- 69,909
Retained earnings
(deficit) ................... (14,810) 19,803(1) 4,993
--------- --------- ---------
Total stockholders'
equity .................... 55,334 19,803 75,137
Total liabilities and
stockholders'
equity .................... $ 223,920 $ (12,482) $ 211,438
========= ========= =========
BOOK VALUE PER COMMON
SHARE(2) ...................... $ 2.36 $ 3.21
========== =========
23
<PAGE>
<TABLE>
<CAPTION>
TOWN & COUNTRY CORPORATION AND SUBSIDIARIES
PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE FISCAL YEAR ENDED FEBRUARY 27, 1994
(In thousands, except per share amounts, ratios, and percentages)
Pro Forma
Pro Forma Little for the
Recapital- for the Switzerland Little
ization Recapital- Exchange Switzerland
Actual Adjustments ization Adjustments Exchange
----------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Net sales ................................ $277,750 $ -- $277,750 $ -- $277,750
Cost of sales ............................ 180,356 -- 180,356 -- 180,356
-------- -------- -------- -------- --------
Gross profit ......................... 97,394 -- 97,394 -- 97,394
Selling, general and
administrative expenses ................ 80,221 -- 80,221 -- 80,221
-------- -------- -------- -------- --------
Income from
operations ......................... 17,173 -- 17,173 -- 17,173
Interest expense ......................... (14,045) 1,505 (3) (12,540) -- (12,540)
Interest and other income ................ 699 -- 699 -- 699
Equity and investment
income, net ............................ 1,262 -- 1,262 (1,106)(5) 156
Minority interest ........................ (941) -- (941) -- (941)
-------- -------- -------- -------- --------
Income (loss) before
income taxes ....................... 4,148 1,505 5,653 1,106 4,547
Provision for income taxes ............... 1,010 -- 1,010 -- 1,010
-------- -------- -------- -------- --------
Net income (loss) .................... 3,138 1,505 4,643 (1,106) 3,537
Accretion of discount on
Exchangeable Preferred
Stock .................................. 1,454 410 (4) 1,864 1,864 (4) --
-------- -------- -------- -------- --------
Net income attributable
to common stockholders ................. $ 1,684 $ 1,095 $ 2,779 $ 758 $ 3,537
======== ======== ======== ======== ========
Net income per common
share(6) ............................... $ 0.08 $ 0.12 $ 0.15
Weighted average common
shares outstanding(6) .................. 21,206 23,419 23,419
======== ======== ========
Ratio of earnings to fixed
charges(7) ............................. 1.21x 1.35x 1.35x
======== ======== ========
Ratio of earnings to fixed
charges and exchangeable
preferred stock dividends
and accretion(8) ....................... 1.11x 1.18x
======== ========
</TABLE>
24
<PAGE>
<TABLE>
<CAPTION>
Pro Forma
Pro Forma Little for the
Recapital- for the Switzerland Little
ization Recapital- Exchange Switzerland
Actual Adjustments ization Adjustments Exchange
----------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Other Data:
Ratio of EBITDA to
interest expense(9) .................... 1.67x 1.87x 1.87x
Ratio of EBITDA to cash
interest expense(9) .................... 3.85x 3.75x 3.75x
Depreciation and
amortization ........................... $ 5,628 $ (201) $ 5,427 $ -- $ 5,427
Capital expenditures ..................... $ 4,056 -- $ 4,056 $ -- $ 4,056
Long-term debt as a
percentage of capital-
ization, excluding
unamortized interest on
new senior subordinated
notes(10) .............................. 61% 61% 53%
</TABLE>
25
<PAGE>
TOWN & COUNTRY CORPORATION AND SUBSIDIARIES
NOTES TO PRO FORMA FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts, ratios, and percentages)
(1) Reflects the liquidation of approximately 94% of the Company's
investment in Little Switzerland Common Stock as a result of the
Little Switzerland Exchange, including the net gain realized on
the exchange of the Exchangeable Preferred Stock into shares of
Little Switzerland Common Stock, and the tax provision that
results from the gain, as outlined in the following table:
Exchange of Exchangeable Little
Preferred Stock for 94% of Switzerland
Little Switzerland Common Stock Actual Exchange
------------------------------- ---------- ----------
Exchangeable Preferred Stock ... $ 35,785 $ 35,785
Investment in Little Switzerland (13,304) (12,482)
--------
Gain on the exchange for Little
Switzerland Common Stock ..... 23,303
Tax provision .................. (3,500)
--------
Net impact on retained earnings $ 19,803
========
The Company has provided taxes of $3,500 on the assumed gain
associated with the Exchangeable Preferred Stock. Approximately
$14.5 million representing a portion of the Company's pretax net
loss for the twelve months ended February 27, 1994, not
previously tax benefited, has been offset against the assumed
gain in determining the tax provision. The Company believes that
its assumptions reflect reasonable interpretations of existing
tax law. However, there can be no assurance that the Internal
Revenue Service will not take a contrary view. See "Material
Federal Income Tax Consequences."
The assumed gain of approximately $23 million and the related tax
provision of $3.5 million have not been included in the pro forma
statement of operations as it is a nonrecurring gain.
(2) Historical and pro forma book value per common share are
calculated by dividing the outstanding shares of Class A Common
Stock and Class B Common Stock as of February 27, 1994, into
stockholders' equity as of February 27, 1994.
These calculations do not include the potential effect of
outstanding stock options for 2,348,400 shares of Class A Common
Stock as of February 27, 1994, or stock options for 1,500,000
shares of Class A Common Stock issued to senior management of the
Company in connection with the Recapitalization. The calculations
also exclude warrants to purchase 125,000 shares of Class A
Common Stock issued to the Financial Advisors in connection with
the Recapitalization. The pro forma book value per share
calculations include the effects of the issuance to the Fidelity
Funds of 750,000 shares of Class A Common Stock as a commitment
26
<PAGE>
fee in connection with the Secured Debt Offering and the issuance
to the holders of Old Notes of approximately 9,992,700 shares of
Class A Common Stock in connection with the Exchange Offers.
(3) Reflects the reduction in interest expense as a result of the
Recapitalization taking place March 1, 1993, rather than May 14,
1993. The Old 13% Notes and the Old 10 1/4% Notes have effective
interest rates of approximately 14% and 15%, respectively, versus
an assumed effective interest rate of approximately 12% for the
New Senior Subordinated Notes. The interest savings on other debt
reflects the assumed reduction in senior debt as a result of the
lower assumed cash interest/dividend payments on the New
Securities.
Interest savings were allocated as follows:
Year Ended
February 27, 1994
-----------------
Savings on Old 13% Notes .................. $ 2,475
Savings on Old 10 1/4% Notes .............. 718
Interest on New Senior Subordinated Notes . (1,525)
Interest on New Senior Debt ............... (854)
Savings on Senior Debt .................... 691
-------
Total Interest Savings .................... $ 1,505
=======
(4) Reflects the accretion at an effective rate of approximately 7%
of the discount and dividend associated with the Exchangeable
Preferred Stock.
(5) Reflects the effect of reducing investment income by the amount
of equity income related to the Little Switzerland investment
which would be eliminated upon exchange. Does not reflect the
nonrecurring gain related to the exchange of the Exchangeable
Preferred Stock for Little Switzerland Common Stock and the
related tax provision of $23,303 and $3,500, respectively.
(6) The pro forma weighted average shares used in the calculation of
net income per common share assume that the (i) 750,000 shares of
Class A Common Stock issued to the Fidelity Funds in payment of
the commitment fee in connection with the Secured Debt Offering
and (ii) approximately 9,992,700 shares of Class A Common Stock
issued to the holders of Old Notes in connection with the
Exchange Offers were issued on March 1, 1993. The pro forma
weighted average shares excludes options to purchase 1,500,000
shares of Class A Common Stock which were issued to senior
management of the Company and warrants for 125,000 shares of
Class A Common Stock which were issued to the Financial Advisors
in connection with the Recapitalization, as they are both assumed
to be antidilutive.
(7) Earnings used in computing the historical and pro forma ratio of
earnings to fixed charges consist of income (loss) before income
taxes and extraordinary gains plus fixed charges. Fixed charges
are defined as interest expense plus amortization of deferred
financing costs plus one third of operating lease rental expense.
27
<PAGE>
(8) Earnings used in the computation of the pro forma ratio of
earnings to fixed charges and Exchangeable Preferred Stock
dividends consist of income (loss) before income taxes and
extraordinary gains plus fixed charges. Fixed charges are defined
as interest expense plus amortization of deferred financing costs
plus one third of operating lease rental expense plus accretion
of discount and dividends on Exchangeable Preferred Stock. For
the quarters ended May 30, 1993 and May 29, 1994, the Company's
earnings before fixed charges were insufficient to cover fixed
charges by approximately $0.8 million and $2.4 million,
respectively.
(9) The ratios of earnings before interest, taxes, depreciation, and
amortization ("EBITDA") to interest expense and cash interest
expense are computed by dividing EBITDA by interest expense and
cash interest expense, respectively. EBITDA is defined as income
from operations before recapitalization and other charges plus
depreciation and amortization, excluding amortization of original
issue discount and deferred financing costs. The pro forma ratios
of EBITDA to cash interest expense assume that all interest on
the New Senior Subordinated Notes for the periods presented is
paid via the issuance of New Senior Subordinated Interest Notes.
(10) Long-term debt as a percentage of capitalization, excluding
unamortized interest on New Senior Subordinated Notes, is
computed by dividing total long-term debt (including current
portion) less unamortized interest on New Senior Subordinated
Notes, by total long-term debt (including current portion), less
unamortized interest on the New Senior Subordinated Notes plus
stockholders' equity. The Exchangeable Preferred Stock is not
included in this ratio computation.
28
<PAGE>
SELECTED HISTORICAL AND SUPPLEMENTAL CONSOLIDATED FINANCIAL DATA
The selected historical summary consolidated financial information presented
below for each of the five years in the period ended February 27, 1994, has been
derived from the Company's consolidated financial statements which have been
audited by Arthur Andersen & Co., independent public accountants. The historical
information includes the consolidated results of the Company as reported in the
audited financial statements.
<TABLE>
<CAPTION>
Fiscal Year Ended
-----------------------------------------------------------------
Feb. 28, Feb. 28, Feb. 29 Feb. 28 Feb. 27
1990 1991 1992 (1) 1993 1994
--------- --------- --------- --------- ---------
(In thousands, except per share data,
ratios, and percentages)
<S> <C> <C> <C> <C> <C>
Statement of Operations Data:
Net sales ................................ $ 423,939 $ 410,402 $ 272,194 $ 270,364 $ 277,750
Cost of sales ............................ 275,520 267,801 185,446 179,834 180,356
--------- --------- --------- --------- ---------
Gross profit ......................... 148,419 142,601 86,748 90,530 97,394
Selling, general and
administrative expenses ................ 114,491 115,168 92,456 85,250 80,221
Restructuring and Zale
Bankruptcy charges(2) .................. -- -- 43,619 5,000 --
--------- --------- --------- --------- ---------
Income (loss) from
operations ............................. 33,928 27,433 (49,327) 280 17,173
Interest expense, net .................... (25,991) (27,498) (21,810) (19,412) (13,346)
Loss on assets held for
sale or disposal(10) ................... -- -- -- (14,500) --
Recapitalization costs(6) ................ -- -- -- (14,440) --
Net gain on nonrecurring
items(3) ............................... -- -- 50,872 -- --
Equity and investment income,
net .................................... 1,510 1,220 3,773 1,732 321
--------- --------- --------- --------- ---------
Income (loss) before income
taxes and extraordinary
gain ................................... 9,447 1,155 (16,492) (46,340) 4,148
Provision for income taxes ............... 2,834 1,791 3,252 956 1,010
--------- --------- --------- --------- ---------
Income (loss) before extra-
ordinary gain .......................... 6,613 (636) (19,744) (47,296) 3,138
Extraordinary gain from
debt extinguishment .................... -- 1,885 726 -- --
--------- --------- --------- --------- ---------
Net income (loss) ........................ $ 6,613 $ 1,249 $ (19,018) $ (47,296) $ 3,138
Accretion of discount and
dividends on exchangeable
preferred stock ........................ -- -- -- -- 1,454
Net income (loss) attributable
to common stock ........................ $ 6,613 $ 1,249 $ (19,018) $ (47,296) $ 1,684
========= ========= ========= ========= =========
Net income (loss) per common
share(4) ............................... $ 0.56 $ 0.10 $ (1.58) $ (3.80) $ 0.08
Weighted average shares
outstanding(4) ......................... 11,849 11,909 12,006 12,450 21,206
Ratio of earnings to fixed
charges(5) ............................. 1.34x 1.04x -- -- 1.21x
</TABLE>
29
<PAGE>
<TABLE>
<CAPTION>
Fiscal Year Ended
------------------------------------------------------------------------------------
Feb. 28, Feb. 28, Feb. 29 Feb. 28 Feb. 27
1990 1991 1992 (1) 1993 1994
--------- --------- --------- --------- ---------
(In thousands, except per share data,
ratios, and percentages)
<S> <C> <C> <C> <C> <C>
Balance Sheet Data:
Working capital .......................... $ 152,876 $ 188,628 $ 87,602 $ 84,646 $ 102,919
Total assets ............................. 327,780 397,804 262,288 246,858 223,921
Current portion of long-
term debt(6) ........................... 1,020 1,017 737 3,668 1,480
Notes payable to banks(6) ................ -- 42,810 17,000 7,250 --
Long-term debt(6):
Senior ................................. 50,006 86,659 5,687 32,021 20,542
Subordinated--
New 13% Notes .......................... -- -- -- -- 63,948
Old 13% Notes .......................... 103,662 97,882 95,516 95,633 6,903
Old 10 1/4% Notes ...................... 24,137 23,395 23,981 24,652 434
--------- --------- --------- --------- ---------
Total subordinated debt ................ 127,799 121,277 119,497 120,285 71,285
--------- --------- --------- --------- ---------
Total long-term debt,
less current portion ................. 177,805 207,936 125,184 152,306 91,827
Stockholders' equity ..................... $ 87,933 $ 89,456 $ 70,709 $ 24,744 $ 55,334
Book value per common
share(7) ............................... $ 7.40 $ 7.48 $ 5.87 $ 1.95 $ 2.36
Other Data:
Ratio of EBITDA to interest
expense(8) ............................. 1.65x 1.28x .16x .63x 1.67x
Ratio of EBITDA to cash
interest expense(8) .................... 1.71x 1.33x .17x 1.44x 3.85x
Depreciation and
amortization ........................... $ 10,952 $ 10,302 $ 10,936 $ 8,668 $ 5,628
Capital expenditures ..................... $ 12,736 $ 8,660 $ 3,053 $ 3,519 $ 4,056
Long-term debt as a
percentage of
capitalization(9) ...................... 67% 70% 64% 86% 61%
</TABLE>
30
<PAGE>
On July 25, 1991, a subsidiary of the Company sold approximately 68% of the
shares of Little Switzerland, a wholly-owned subsidiary of the Company, in a
public offering. The sale of this stock resulted in the deconsolidation of
Little Switzerland in the Company's fiscal 1992 financial statements. Financial
statements for prior years have not been retroactively adjusted. However, for
comparative analysis purposes, the unaudited supplemental selected financial
data below reflects Little Switzerland accounted for on the equity method for
all years.
<TABLE>
<CAPTION>
Fiscal Year Ended
-----------------------------------------------------------------------------
Feb. 28, Feb. 28, Feb. 29, Feb. 28, Feb. 27,
1990 1991 1992 (1) 1993 1994
--------- --------- --------- --------- ---------
(In thousands, except per share data)
(Unaudited)
<S> <C> <C> <C> <C> <C>
Statement of Operations Data:
Net sales ................................. $ 375,156 $ 356,564 $ 272,194 $ 270,364 $ 277,750
Cost of sales ............................. 248,439 238,587 185,446 179,834 180,356
--------- --------- --------- --------- ---------
Gross profit .......................... $ 126,717 $ 117,977 $ 86,748 $ 90,530 $ 97,394
Selling, general and
administrative expenses ................. 95,599 98,257 92,456 85,250 80,221
Restructuring and Zale
Bankruptcy charges(2) ................... -- -- 43,619 5,000 --
--------- --------- --------- --------- ---------
Income (loss) from
operations .............................. $ 31,118 $ 19,720 $ (49,327) $ 280 $ 17,173
Interest expense, net ..................... (25,782) (27,309) (21,810) (19,412) 13,346
Loss on assets held for
sale or disposal(10) .................... -- -- -- (14,500) --
Recapitalization costs(6) ................. -- -- -- (14,440) --
Net gain on nonrecurring
items(3) ................................ -- -- 50,872 -- --
Equity and investment income,
net ..................................... 3,338 7,062 3,773 1,732 321
--------- --------- --------- --------- ---------
Income (loss) before income
taxes and extraordinary
gain .................................... $ 8,674 $ (527) $ (16,492) $ (46,340) $ 4,148
Provision for income taxes ................ 2,061 109 3,252 956 1,010
--------- --------- --------- --------- ---------
Income (loss) before extra-
ordinary gain ........................... $ 6,613 $ (636) $ (19,744) $ (47,296) $ 3,138
Extraordinary gain from
debt extinguishment ..................... -- 1,885 726 -- --
--------- --------- --------- --------- ---------
Net income (loss) ......................... $ 6,613 $ 1,249 $ (19,018) $ (47,296) $ 3,138
Accretion of discount and
dividends on exchangeable
preferred stock ......................... $ -- $ -- $ -- $ -- $ 1,454
Net income (loss) per common
share(4) ................................ $ 0.56 $ 0.10 $ (1.58) $ (3.80) $ 0.08
</TABLE>
31
<PAGE>
<TABLE>
<CAPTION>
Fiscal Year Ended
-----------------------------------------------------------------------------
Feb. 28, Feb. 28, Feb. 29, Feb. 28, Feb. 27,
1990 1991 1992 (1) 1993 1994
--------- --------- --------- --------- ---------
(In thousands, except per share data)
(Unaudited)
<S> <C> <C> <C> <C> <C>
Balance Sheet Data:
Working capital ........................... $ 135,137 $ 176,667 $ 87,602 $ 84,646 $ 102,919
Total assets .............................. 314,935 386,455 262,288 246,858 223,921
Current portion of long-
term debt(6) ............................ 1,020 1,017 737 3,668 1,480
Notes payable to banks(6) ................. -- 38,300 17,000 7,250 --
Long-term debt(6):
Senior .................................. 46,546 86,659 5,687 32,021 20,542
Subordinated ............................ 127,799 121,277 119,497 120,285 71,285
Stockholders' equity ...................... 87,933 89,456 70,709 24,744 55,334
Book value per share(7) ................... $ 7.40 $ 7.48 $ 5.87 $ 1.95 $ 2.36
Other Data:
Depreciation and
amortization ............................ $ 9,090 $ 8,935 $ 10,936 $ 8,668 $ 5,628
Capital expenditures ...................... $ 8,438 $ 8,227 $ 3,053 $ 3,519 $ 4,056
</TABLE>
32
<PAGE>
NOTES TO SELECTED HISTORICAL AND SUPPLEMENTAL
CONSOLIDATED FINANCIAL DATA
(1) See Note 5 to Consolidated Financial Statements for information
regarding the Company's recapitalization and see Note 1 to
Consolidated Financial Statements for a discussion regarding the
deconsolidation of Little Switzerland.
(2) See Notes 3 and 6 to Consolidated Financial Statements.
(3) See Note 6 to Consolidated Financial Statements.
(4) Net income (loss) per common share is computed based on the
weighted average number of common and common equivalent shares
outstanding, where dilutive, during each period. See Notes 7 and
10 to Consolidated Financial Statements.
(5) Earnings used in the computation of the ratio of earnings to
fixed charges consist of income (loss) before income taxes and
extraordinary gains plus fixed charges. Fixed charges are defined
as interest expense plus amortization of deferred financing costs
plus one third of operating lease rental expense. For the
quarters ended May 30, 1993 and May 29, 1994, the Company's
earnings before fixed charges were insufficient to cover fixed
charges by approximately $0.8 million and $2.4 million,
respectively.
(6) See Note 5 to Consolidated Financial Statements.
(7) Historical and supplemental book value per share were computed
based on total consolidated stockholders' equity at the end of
each period divided by the total shares of Common Stock
outstanding at the end of each period. The computation does not
include the potential effect of outstanding stock options or
warrants for any of the periods presented. As of February 27,
1994, the Company had outstanding stock options for 2,348,400
shares of Class A Common Stock and outstanding warrants for
125,000 shares of Class A Common Stock.
(8) The ratios of earnings before interest, taxes, depreciation, and
amortization ("EBITDA") to interest expense and cash interest
expense are computed by dividing EBITDA by interest expense and
cash interest expense, respectively. EBITDA is defined as income
(loss) from operations before recapitalization and other charges
plus depreciation, and amortization, excluding amortization of
original issue discount and deferred financing costs. EBITDA for
fiscal 1992 excludes the nonrecurring restructuring and Zale
bankruptcy charges of approximately $44 million. EBITDA to cash
interest expense for the twelve months ended February 28, 1993,
excludes approximately $10.0 million of interest expense related
to the Old Notes that will not be paid due to the fact that such
interest has been included as part of the consideration in the
Recapitalization.
(9) Long-term debt as a percentage of capitalization is computed by
dividing total long-term debt (including current portion), by
total long-term debt (including current portion) plus
stockholders' equity.
(10) See Note 2 to Consolidated Financial Statements.
33
<PAGE>
THE REVISED DEBT AGREEMENTS
New Credit Agreement
In connection with the Recapitalization, the Company entered into a New
Credit Agreement with Foothill which provided senior secured financing in an
aggregate amount of up to $30,000,000. To address seasonality needs, the Company
recently entered into an amendment to the New Credit Agreement to increase the
maximum amount available under the New Credit Agreement from $30,000,000 to
$35,000,000 during the months of August through December. This credit facility
consists of revolving lines of credit to the Borrowers based upon the value of
the Borrowers' aggregate accounts receivable and inventory. The revolving lines
of credit mature on May 14, 1996, and shall be automatically renewed for
successive two (2) year renewal periods thereafter, unless terminated by the
Company or Foothill. The loans bear interest at a rate per annum equal to the
greater of (a) two percent above the reference rate announced from time to time
by major money center banks selected by Foothill, or (b) 8%. The New Credit
Agreement contains standard covenants for facilities of this type including,
without limitation, financial covenants relating to minimum net worth, minimum
working capital, debt to net worth, and current ratios and limitations on
indebtedness, liens, dividends and distributions, dispositions of assets,
transactions with affiliates, and capital expenditures. Based upon its results
of operations for the quarter ended May 29, 1994, and its anticipated results of
operations for the quarter ending August 28, 1994, the Company entered into an
amendment to the New Credit Agreement to modify the consolidated tangible net
worth covenant contained in that agreement. This 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 will maintain tangible net worth of
$40,000,000 from July 1, 1994 through November 26, 1994, and $43,000,000
thereafter. The Company believes that the New Credit Agreement, together with
the New Gold Agreements, provides the Company with the working capital necessary
to operate its business.
The New Credit Agreement is secured by the following assets of each of the
Borrowers: (i) first priority security interests in accounts receivable (the
"Accounts Receivable"), the non-precious metals inventory, other than inventory
comprising a portion of the Zale Bankruptcy Claim (the "Non-Gold Inventory"),
the non-precious metals component of inventory consisting of both precious
metals and other materials such as precious and semi-precious stones, other than
inventory comprising a portion of the Zale Bankruptcy Claim (the "Mixed
Inventory"), and the capital stock of the Company's domestic subsidiaries (the
"Domestic Subsidiaries' Stock"); (ii) first priority security interests and, as
applicable, first priority mortgages in substantially all of the real estate and
fixtures owned by the Company and its domestic subsidiaries and in all
machinery, equipment, documents, instruments, general intangibles, and other
personal property of the Company and its domestic subsidiaries, other than (A)
the Zale Bankruptcy Claim, (B) the shares of stock in Little Switzerland which
have been transferred to the Little Switzerland Trust and Solomon Brothers owned
by the Company, (C) the Feature Facility, and (D) the capital stock of the
Company's foreign and domestic subsidiaries which is owned by the Company
(collectively, "Property, Plant and Equipment" ("PP&E")); (iii) second priority
security interests in inventory, other than inventory comprising a portion of
the Zale Bankruptcy Claim, consisting of owned or consigned
34
<PAGE>
precious metals (the "Gold Inventory") and the precious metals component of
Mixed Inventory; (iv) a first priority mortgage on the Feature Leasehold; and
(v) shared third priority security interests with the Gold Suppliers in 65% of
the Foreign Subsidiaries' Stock, the Zale Bankruptcy Claim and the Solomon
Brothers Stock. See "Allocation of Security Interests" on the cover of this
Prospectus. For a discussion of the intercreditor arrangements which govern the
New Credit Agreement, the New Gold Agreements, the IRBs, the New Senior Secured
Notes, and the New Senior Subordinated Notes, see "Ranking of Indebtedness;
Rights in Collateral; Collateral Agency and Intercreditor Agreement."
Upon any bankruptcy, liquidation, dissolution or winding up of the Company,
the holders of indebtedness under the New Credit Agreement will receive payments
consistent with the priority of their security interests in the assets of the
Company securing the New Credit Agreement. In the event that the proceeds of
such collateral are insufficient to satisfy the obligations owed to the holders
of indebtedness under the New Credit Agreement, such holders will share in the
distribution of the balance of available assets of the Company pari passu with
the holders of indebtedness under the New Gold Agreements, the holders of the
IRBs, the holders of the New Senior Secured Notes, the holders of any other
indebtedness of the Company which is not subordinated to the New Credit
Agreement, and the trade creditors of the Company. The holders of indebtedness
under the New Credit Agreement is senior in right of payment to the New Senior
Subordinated Notes, the Old Notes, and the Exchangeable Preferred Stock.
The obligations of the Borrowers, including the Company, in respect of the
New Credit Agreement are fully and unconditionally and jointly and severally
guaranteed by each of the other Borrowers. Each guaranty issued by a Borrower in
respect of the New Credit Agreement is a secured obligation of such Borrower
that ranks pari passu in right of payment with the guarantees issued by such
Borrower in respect of the New Gold Agreements, the IRBs, and the New Senior
Secured Notes, and ranks senior to the guaranty issued by such Borrower in
respect of the New Senior Subordinated Notes and any other guarantees issued by
such Borrower. Each guaranty issued by a Borrower is secured by the assets of
the Borrower in the same manner and with the same ranking as the assets of the
Company securing the Company's obligations under the New Credit Agreement, the
New Gold Agreements, the IRBs, the New Senior Secured Notes, and the New Senior
Subordinated Notes. For a discussion of the meaning of "pari passu" and its
interrelationship with collateral securing the guarantees issued in respect of
the Revised Debt Agreements, the IRBs, the New Senior Secured Notes, and the New
Senior Subordinated Notes, see "Ranking of Indebtedness; Rights in Collateral"
on the cover of this Prospectus. See also "Ranking of Indebtedness; Rights in
Collateral; Collateral Agency and Intercreditor Agreement."
New Gold Agreements
In connection with the consummation of the Recapitalization, the Company
also entered into New Gold Agreements with its Gold Suppliers which provide the
Company with an aggregate gold consignment availability of up to approximately
100,000 troy ounces. The Company recently entered into an agreement with one of
the Gold Suppliers to reduce such Gold Supplier's consignment obligation by
10,000 ounces. This modification is consistent
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with the Company's expected business requirements. The Company believes that the
New Gold Agreements, together with the New Credit Agreement, will provide the
Company with the working capital necessary to operate its business.
The New Gold Agreements are terminable by the Gold Suppliers or the Company
upon thirty days' written notice, and contain standard covenants for facilities
of this type including, without limitation, financial covenants relating to
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. Based upon its results of operations for the quarter
ended May 29, 1994, and its anticipated results of operations for the quarter
ending August 28, 1994, the Company entered into an amendment to the New Gold
Agreements to modify the consolidated tangible net worth covenant contained in
those agreements. This 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 will maintain consolidated tangible net worth of $40,000,000
from July 1, 1994 through November 26, 1994, and $43,000,000 thereafter. The New
Gold Agreements are secured by the following assets of each of the Borrowers:
(i) first priority security interests in the Gold Inventory and the precious
metals component of Mixed Inventory; (ii) second priority security interests in
the non-precious metals component of Mixed Inventory, Accounts Receivable, the
Non-Gold Inventory and the Domestic Subsidiaries' Stock; (iii) second priority
security interests and, as applicable, second priority mortgages in PP&E; (iv) a
second priority mortgage on the Feature Leasehold; and (v) shared third priority
security interests with the holders of the indebtedness under New Credit
Agreement in 65% of the Foreign Subsidiaries' Stock, the Zale Bankruptcy Claim
and the Solomon Brothers Stock. See "Allocation of Security Interests" on the
cover of this Prospectus. For a discussion of the intercreditor arrangements
which govern the New Credit Agreement, the New Gold Agreements, the IRBs, the
New Senior Secured Notes, and the New Senior Subordinated Notes, see "Ranking of
Indebtedness; Rights in Collateral; Collateral Agency and Intercreditor
Agreement."
Upon any bankruptcy, liquidation, dissolution or winding up of the Company,
the holders of indebtedness under the New Gold Agreements will receive payments
consistent with the priority of their security interests in the assets of the
Company securing the New Gold Agreements. In the event that the proceeds of such
collateral are insufficient to satisfy the obligations owed to the holders of
indebtedness under the New Gold Agreements, such holders will share in the
distribution of the balance of available assets of the Company pari passu with
the holders of indebtedness under the New Credit Agreement, the holders of the
IRBs, the holders of the New Senior Secured Notes, the holders of any other
indebtedness of the Company which is not subordinated to the New Gold
Agreements, and the trade creditors of the Company. The indebtedness under the
New Gold Agreements is senior in right of payment to the New Senior Subordinated
Notes, the Old Notes, and the Exchangeable Preferred Stock.
The obligations of the Borrowers, including the Company, in respect of the
New Gold Agreements are fully and unconditionally and jointly and severally
guaranteed by each of the other Borrowers. Each guaranty issued by a Borrower in
respect of the New Gold Agreements is a secured obligation of such Borrower that
ranks pari passu in right of payment with the guarantees issued by such Borrower
in respect of the New Credit Agreement,
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the IRBs, and the New Senior Secured Notes, and ranks senior to the guaranty
issued by such Borrower in respect of the New Senior Subordinated Notes and any
other guarantees issued by such Borrower. Each guaranty issued by a Borrower is
secured by the assets of the Borrower in the same manner and with the same
ranking as the assets of the Company securing the Company's obligations under
the New Credit Agreement, the New Gold Agreements, the IRBs, the New Senior
Secured Notes, and the New Senior Subordinated Notes. For a discussion of the
meaning of "pari passu" and its interrelationship with collateral securing the
guarantees issued in respect of the Revised Debt Agreements, the IRBs, the New
Senior Secured Notes, and the New Senior Subordinated Notes, see "Ranking of
Indebtedness; Rights in Collateral" on the cover of this Prospectus. See also
"Ranking of Indebtedness; Rights in Collateral; Collateral Agency and
Intercreditor Agreement."
IRB Amendments
In connection with the Recapitalization, the Company also entered into the
IRB Amendments with Chemical. Pursuant to the IRB Amendments, Chemical released
certain collateral securing the IRBs and subordinated liens on certain other
collateral securing the IRBs to liens securing the New Gold Agreements. In
consideration for such actions, all obligations of Feature in respect of the
IRBs and the lease of the Feature Facility have been expressly assumed by T&C
Fine Jewelry, and the amortization schedule relating to the Series B Bonds has
been accelerated. Pursuant to the revised Series B Bond amortization schedule,
the Company is required to pay quarterly installments of principal each in the
amount of approximately $350,000. In addition, the Company made payments on the
Series B Bonds in the amount of $1,250,000 upon consummation of the
Recapitalization and $1,133,000 on January 1, 1994. The final installment of
principal on the Series B Bonds is due on April 1, 1995. On or before the making
of such final payment, T&C Fine Jewelry is required to deposit with and pledge
in favor of the holder of the Series A Bonds on or before April 1, 1994, tax
free municipal bonds (the "Pledged Bonds") in an amount not less than 110% of
the then outstanding principal balance of the Series A Bonds (the "Outstanding
Amount") from the date of the pledge of the Pledged Bonds to August 1, 1994, and
thereafter in an amount not less than 105% of the Outstanding Amount. Pursuant
to the IRB Amendments, the documents relating to the IRBs have been amended to
provide (i) for certain affirmative and negative covenants, including, without
limitation, limitations on dispositions of assets, indebtedness and fundamental
changes, and certain financial covenants, including, without limitation, minimum
net worth, ratios of total liabilities to tangible net worth and liquidity, and
limitations on capital expenditures, (ii) that upon the occurrence of a Change
of Control of the Company or upon consummation of certain Asset Dispositions or
Sale/Leaseback Transactions (as such terms are defined in the New Senior Secured
Note Indenture, and the New Senior Subordinated Note Indenture), the holders of
the IRBs have the right to require the Company to purchase all or any part, at
such holders' option, of the IRBs at a purchase price in cash equal to 100% of
the principal amount thereof, together with accrued interest thereon, and (iii)
that an event of default occurs under the IRBs upon the occurrence of an event
of default under the New Credit Agreement, the New Gold Agreements, the New
Senior Secured Note Indenture or the New Senior Subordinated Note Indenture.
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The IRBs are fully and unconditionally guaranteed by the Subsidiary
Guarantors, and continue to be secured by the first mortgage on the Feature
Facility and a first priority security interest in fixtures located thereon. The
IRBs also are secured by the following: (i) third priority security interests
and, as applicable, third priority mortgages in PP&E; (ii) third priority
security interests in Accounts Receivable, the Domestic Subsidiaries' Stock, the
Non-Gold Inventory, Mixed Inventory, and the Gold Inventory; and (iii) a fifth
priority security interest in 65% of the Foreign Subsidiaries' Stock, the Zale
Bankruptcy Claim and the Solomon Brothers Stock. See "Allocation of Security
Interests" on the cover of this Prospectus. For a discussion of the
intercreditor arrangements which govern the New Credit Agreement, the New Gold
Agreements, the IRBs, the New Senior Secured Notes, and the New Senior
Subordinated Notes, see "Ranking of Indebtedness; Rights in Collateral;
Collateral Agency and Intercreditor Agreement."
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THE SECURED DEBT OFFERING
General
In connection with the consummation of the Recapitalization, the Company
sold $30,000,000 of New Senior Secured Notes to holders of Old Notes for cash.
These funds were used to repay indebtedness under the Old Credit Agreement.
Pursuant to an agreement with the Company, the Fidelity Funds purchased all of
the New Senior Secured Notes which were not purchased by holders of Old Notes
($27,000,000). In exchange for their commitment to purchase all of the New
Senior Secured Notes which were not purchased by other holders of Old Notes, the
Company issued 750,000 shares of Class A Common Stock to the Fidelity Funds upon
the consummation of the Recapitalization. At June 30, 1994, approximately $16.6
million of New Senior Secured Notes in aggregate principal amount were
outstanding, of which $3,742,000 were owned by the Fidelity Funds. See
"--Mandatory Redemption."
The New Senior Secured Notes are senior secured obligations of the Company
issued pursuant to the indenture governing the New Senior Secured Notes (the
"New Senior Secured Note Indenture") between the Company and Shawmut Bank, N.A.,
as the trustee for the New Senior Secured Notes (the "New Senior Secured Note
Trustee"). The terms of the New Senior Secured Notes include those stated in the
New Senior Secured Note Indenture and those made part of the New Senior Secured
Note Indenture by reference to the Trust Indenture Act of 1939, as amended (the
"TIA"), as in effect on the date of execution of the New Senior Secured Note
Indenture. The New Senior Secured Notes are subject to all such terms, and
holders of the New Senior Secured Notes are referred to the New Senior Secured
Note Indenture and the TIA for a statement thereof. The following statements
relating to the New Senior Secured Notes and the New Senior Secured Note
Indenture are summaries and do not purport to be complete. Such summaries make
use of certain terms defined in the New Senior Secured Note Indenture and are
qualified in their entirety by reference to the forms of New Senior Secured
Notes and New Senior Secured Note Indenture, copies of which have been filed as
exhibits to the Registration Statement of which this Prospectus forms a part.
Capitalized terms used in this section and not otherwise defined herein have the
meanings given to them in the New Senior Secured Note Indenture, and such
definitions are incorporated herein by reference. Copies of the New Senior
Secured Note Indenture may be obtained from the Company, 25 Union Street,
Chelsea, Massachusetts 02150, telephone number (617) 884-8500; Attention:
Manager of Corporate Communications.
The New Senior Secured Notes are limited to $30,000,000 in aggregate
original principal amount. The New Senior Secured Notes are available only in
registered form, without coupons, and generally are issued only in denominations
of $1,000 and integral multiples thereof. To the knowledge of the Company, no
person presently intends to make a market in the New Senior Secured Notes. No
person is obligated to make a market in the New Senior Secured Notes and any
market making activity undertaken by any person may be discontinued at any time.
There can be no assurance that a market for the New Senior Secured Notes will
develop and continue. See "Risk Factors--Lack of Established Market."
Principal and interest on the New Senior Secured Notes is payable at the
offices of the Company or its agent maintained for such purposes; provided that
payment of interest may, at the option of a holder, be made
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by check mailed to a holder at its registered address or in the case of payments
in an aggregate amount in excess of $250,000, by federal funds wire transfer to
a bank account designated by such holder.
Maturity; Interest
The New Senior Secured Notes mature on September 15, 1997, and bear interest
from May 14, 1993 (the "Issuance Date"), to maturity at the rate of 11 1/2% per
annum. Interest is payable monthly on the last day of each month except that the
last interest payment will be made on September 15, 1997 (each such date being
hereinafter referred to as an "Interest Payment Date"), commencing on the first
such Interest Payment Date after the Issuance Date, to holders of record at the
close of business on the date which occurs 15 days prior to any Interest Payment
Date. Interest is computed on the basis of a 360-day year of twelve 30-day
months and the actual number of days elapsed. The Company shall pay interest on
overdue principal and, to the extent permitted by applicable law, on overdue
interest at a rate per annum equal to 200 basis points in excess of the rate of
interest otherwise payable from time to time on the New Senior Secured Notes.
Redemption
Optional Redemption
The New Senior Secured Notes may be redeemed at the option of the Company,
in whole at any time or in part from time to time, at a redemption price of 100%
of the principal amount thereof, together with accrued interest thereon.
Mandatory Redemption
Proceeds of Solomon Brothers Investment and Zale Bankruptcy
Claim. Following receipt by the Company of (i) cash payments from
the Company's investment in Solomon Brothers, including cash
payments relating to the disposition of such investment or relating
to the redemption of the shares of stock of Solomon Brothers owned
by the Company, and/or (ii) cash and other payments from the Zale
Companies with respect to the Zale Bankruptcy Claim, the Company is
required to redeem an amount of the New Senior Secured Notes equal
to the amount of such cash payments at a redemption price equal to
100% of the principal amount thereof plus accrued interest, if any.
In the event of the receipt by the Company of securities of the
Zale Companies in connection with the Zale Bankruptcy Claim or any
other non-cash proceeds relating to the Company's investment in
Solomon Brothers or the Zale Bankruptcy Claim, including the return
of inventory consigned by the Company to the Zale Companies which
has a fair market value in excess of $500,000 (the "Returned
Inventory"), such securities or non-cash proceeds will be held for
the benefit of holders of New Senior Secured Notes, but the Company
shall have exclusive control over the disposition of such
securities or non-cash proceeds. Any Returned Inventory shall be
segregated from the Company's other inventory and will be held in
trust for the holders of the New Senior Secured Notes. The Company
is required to use its commercially
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reasonable best efforts to sell such securities and non-cash
proceeds for cash within six months of receipt, except with respect
to Returned Inventory as to which the Company shall have nine
months to liquidate such Returned Inventory. Upon receipt, such
cash proceeds will be used to redeem New Senior Secured Notes at a
redemption price equal to 100% of the principal amount thereof plus
accrued interest, if any. Redemptions of New Senior Secured Notes
with proceeds from the Company's investment in Solomon Brothers and
the Zale Bankruptcy Claim generally shall be made on a semiannual
basis; provided, however, that such redemptions shall only be made
if the amount of the cash proceeds received by the Company, if any,
since the date of the last mandatory redemption equals at least
$1,000,000 in the aggregate. On March 29, 1994, the Company gave
written notice to Solomon Brothers of the Company's intention to
redeem 70,000 additional shares. It is doubtful that Solomon
Brothers will be able to make this payment when it becomes due and
the Company is unable to estimate the timing of future redemption
payments from Solomon Brothers. As of June 30, 1994, the Company
has redeemed approximately $13.4 million in principal amount of New
Senior Secured Notes.
Excess Cash Flow. Within 75 days after the end of each fiscal
year of the Company, commencing with the fiscal year ending
February 27, 1994, (an "Annual Redemption Date"), the Company is
required to use its Excess Cash Flow (as defined) to fund
redemptions of New Senior Secured Notes at a redemption price equal
to 100% of the principal amount thereof plus accrued interest, if
any. The Company is required to apply 100% of its annual Excess
Cash Flow to fund such redemptions until the aggregate principal
balance of New Senior Secured Notes outstanding on the applicable
Annual Redemption Date set forth below is less than the amount set
forth opposite such date, and thereafter the Company shall only be
required to apply 50% of its annual Excess Cash Flow to fund such
redemptions:
Aggregate Principal Balance
Fiscal Year Ending of New Senior Secured Notes
------------------- ---------------------------
February 28, 1995............ $15,000,000
February 29, 1996............ 8,000,000
February 28, 1997............ 3,000,000
"Excess Cash Flow" means, for any fiscal year of the Company,
an amount equal to Consolidated Net Income (as defined) for such
fiscal year, increased by the sum (on a consolidated basis and
without duplication) of the following: (a) to the extent deducted
as an expense in determining Consolidated Net Income, consolidated
total depreciation and amortization expense related to assets and
liabilities of the Company and the Subsidiaries (as defined), plus
(b) minority interest expense, plus (c) any decrease in Working
Capital (as defined) for such fiscal year, plus (d) any decrease in
assets classified as "other" on the consolidated balance sheet of
the Company
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for such fiscal year, plus (e) the increase, if any, of the
outstanding principal balance under the New Credit Agreement from
the last day of the immediately preceding fiscal year to the last
day of the then ended fiscal year, plus (f) any increases in long
term Indebtedness (as defined), long term deferred taxes, and
liabilities classified as "other" on the consolidated balance sheet
of the Company for such fiscal year, plus (g) to the extent
deducted as an expense in determining Consolidated Net Income, the
non-cash portion of interest and dividend expense, plus (h) any
collateral proceeds received by the Company and the Subsidiaries
during such fiscal year not already included in determining
Consolidated Net Income, plus (i) any cash proceeds received from
the sale or other disposition of property, plant, equipment or the
capital stock of a Subsidiary, plus (j) any cash proceeds received
by the Company or the Subsidiaries from the issuance of capital
stock; and decreased by the sum (on a consolidated basis and
without duplication) of the following: (1) all cash dividends paid
to the holders of Exchangeable Preferred Stock during such fiscal
year, plus (2) all capital expenditures made during such fiscal
year, plus (3) any increase in Working Capital for such fiscal
year, plus (4) any increase in assets classified as "other" on the
consolidated balance sheet of the Company for such fiscal year,
plus (5) the decrease, if any, of the outstanding principal balance
under the New Credit Agreement from the last day of the immediately
preceding fiscal year to the last day of the then ended fiscal
year, plus (6) any decreases in long term Indebtedness, long term
deferred taxes, and liabilities classified as "other" on the
consolidated balance sheet of the Company for such fiscal year,
plus (7) all cash dividends paid to minority shareholders of
Subsidiaries during such fiscal year, plus (8) all cash payments of
principal on or redemptions of Indebtedness of the Company and the
Subsidiaries in respect of Funded Indebtedness (as defined)
permitted under the New Senior Secured Note Indenture (other than
Indebtedness under the New Credit Agreement), plus (9) to the
extent included in Consolidated Net Income, the non-cash portion of
interest and dividend expense, plus (10) the aggregate amount of
collateral proceeds received by the Company and the Subsidiaries
not required to be applied to redeem the New Senior Secured Notes
pursuant to the New Senior Secured Note Indenture, plus (11) the
outstanding principal balance under the New Credit Agreement, if
any, as of the last day of such fiscal year, plus (12) all cash and
cash equivalents held by any foreign Subsidiary as of the last day
of such fiscal year, plus (13) the sum of $2,000,000.
"Subsidiary" means at any given time any corporation, of which
more than 50% of the total voting power of shares entitled to vote
in the election of directors shall at such time be owned by the
Company or by one or more Subsidiaries or by the Company and one or
more Subsidiaries.
"Working Capital" means, as of the date of any determination
thereof, the excess of (i) all assets of the Company and the
Subsidiaries which are classified as current assets in accordance
with generally accepted accounting principles ("GAAP"), other than
cash and cash equivalents, after eliminating all intercompany
items, over (ii) all liabilities of the Company and the
Subsidiaries maturing on demand or within one year from the date as
of which such liabilities are determined and such other liabilities
(including taxes accrued or estimated, other than deferred taxes)
as may properly be classified as current liabilities in accordance
with GAAP (but not including any current liability associated with
the New Credit Agreement), after eliminating intercompany items.
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"Indebtedness" of any person means, without duplication, (i)
all obligations, unconditional or contingent, of such person for
money borrowed (whether or not recourse is to the whole of the
assets of such person or a portion thereof or evidenced by notes,
debentures, bonds or other similar instruments for the payment of
which such person is responsible or liable); (ii) all capital lease
obligations of such person; (iii) all obligations of such person
issued or assumed as the deferred purchase price of property or
services, all conditional sale obligations of such person and all
obligations of such person under any title retention agreement (but
excluding trade accounts payable and obligations in respect of the
consignment of goods arising in the ordinary course of business);
(iv) all obligations of such person for the reimbursement of any
obligor of any letter of credit, banker's acceptance or similar
credit transaction (other than obligations with respect to letters
of credit securing obligations (other than obligations described in
clauses (i) through (iii) above) entered into in the ordinary
course of business of such person to the extent such letters of
credit are not drawn upon or, if and to the extent drawn upon, such
drawing is reimbursed no later than the third business day
following receipt by such person of a demand for reimbursement
following payment on the letter of credit); (v) all obligations of
the type referred to in clauses (i) through (iv) above of other
persons and all dividends of other persons for the payment of
which, in either case, such person is responsible or liable as
obligor, guarantor or otherwise; and (vi) all obligations of the
type referred to in clauses (i) through (v) above of other persons
secured by any lien on any property or asset of such person
(whether or not such obligation is assumed by such person), the
amount of such obligations being deemed to be the lesser of the
value of such property or asset or the amount of the obligations so
secured.
"Consolidated Net Income" for any defined period means the
consolidated net income (loss) of the Company and its Subsidiaries
determined in accordance with GAAP; provided, however, that there
shall not be included in such Consolidated Net Income: (a) any net
loss of (i) any person if such person is not a Subsidiary, or (ii)
any Subsidiary which is subject to restrictions on the payment of
dividends or the making of distributions, loans or advances to the
Company; (b) any net income of (i) any person if such person is not
a Subsidiary, or (ii) any Subsidiary which is subject to
restrictions on the payment of dividends or the making of
distributions, loans or advances to the Company, except to the
extent of the aggregate amount of cash received by the Company or
any Subsidiary as a dividend or distribution from such person or
Subsidiary; (c) any net income or loss realized upon a sale or
other disposition of any property, plant or equipment of the
Company or any Subsidiary which is sold or disposed of outside of
the ordinary course of business; (d) any gain or loss realized upon
the sale of any capital stock of any Subsidiary; and (e) the
cumulative effect of a change in accounting principles.
"Funded Indebtedness" means any Indebtedness of the Company
which is due and payable in more than one year from the date of
determination or which may be extended beyond such one-year period
without the consent of the party which is lending the funds.
Maintenance of Net Worth; Special Mandatory Redemption. In the
event that the Company's Consolidated Net Worth (as defined)
declines below the Minimum Net Worth (as defined), as at the end of
each of two
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consecutive fiscal quarters, the Company is required to make an
offer to redeem an amount (the "Redemption Amount") of New Senior
Secured Notes equal to 7.5% of the aggregate principal balance of
the then outstanding New Senior Subordinated Notes and New Senior
Secured Notes, at a redemption price equal to 100% of the principal
amount thereof plus accrued interest, if any (a "Net Worth
Redemption Offer"). The Company shall continue to make such Net
Worth Redemption Offers semiannually thereafter; provided, however,
that if the Company's Consolidated Net Worth as at the end of any
subsequent fiscal quarter is greater than or equal to the Minimum
Net Worth, the Company's obligation to make such Net Worth
Redemption Offers shall terminate; and provided, further, however,
that if the Company's Consolidated Net Worth shall thereafter again
decline below the Minimum Net Worth, the Company's obligation to
make Net Worth Redemption Offers shall be reinstated.
"Consolidated Net Worth" means the sum, on a consolidated
basis, of the shareholders' equity of the Company and its
subsidiaries, determined in accordance with generally accepted
accounting principles as in effect as of February 29, 1992, after
eliminating all intercompany items, less all amounts representing
the write-up in the book value of assets after the Issuance Date,
other than adjustments resulting from foreign exchange rates and
the increase in value, if any, of marketable securities.
"Minimum Net Worth" means, as of any date, an amount equal to
the sum of (i) 75% of the Company's Consolidated Net Worth as of
May 31, 1993, plus (ii) 37.5% of the aggregate Consolidated Net
Income (not taking into account any Consolidated Net Income that is
negative) for each fiscal year thereafter; provided, however, that
Minimum Net Worth shall only be increased on May 31 of each year on
the basis of the Consolidated Net Income for the previous fiscal
year (or, in the case of the first fiscal year ending after the
Issuance Date, for the fiscal period from the first day of the
first fiscal quarter commencing after the Issuance Date to February
27, 1994).
If, in the case of any redemption, less than all of the New
Senior Secured Notes are to be redeemed, New Senior Secured Notes
will be redeemed on a pro rata basis based on the principal amount
of New Senior Secured Notes tendered. Notices of redemption will be
mailed not less than 15 days nor more than 60 days prior to the
date of redemption to each holder of record of New Senior Secured
Notes to be redeemed at its registered address. Each notice of
redemption will specify, among other things, the date of redemption
and the redemption price.
In the event that New Senior Secured Notes in an aggregate
principal amount in excess of the Redemption Amount are tendered
and not withdrawn, the Company shall purchase New Senior Secured
Notes on a pro rata basis based on the principal amount of New
Senior Secured Notes tendered.
From and after any redemption date, the New Senior Secured
Notes redeemed will cease to bear interest, and the only right of
the holders of such notes will be to receive payment of the
redemption price and all interest accrued to such redemption date.
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Offer to Purchase Upon Change of Control
Upon the occurrence of a Change of Control of the Company (as defined), each
holder of New Senior Secured Notes will have the right to require the Company to
purchase all or any part, at such holder's option, of such holder's New Senior
Secured Notes at a purchase price in cash equal to 100% of the principal amount
thereof, together with accrued interest thereon. It is unlikely that the "Change
of Control" option will become exercisable in the foreseeable future.
Within 30 days after any Change of Control, the Company shall mail a notice
to each holder of New Senior Secured Notes stating: (i) that a Change of Control
has occurred, and that such holder has the right to require the Company to
purchase such holder's New Senior Secured Notes, in whole or in part, at a
purchase price in cash equal to 100% of the principal amount of the New Senior
Secured Notes, plus accrued interest, if any, to the date of purchase; (ii) the
circumstances and relevant facts regarding such Change of Control; (iii) the
date on which the Company will purchase New Senior Secured Notes from electing
holders (which date shall be no earlier than 15 days nor later than 60 days from
the date such notice is mailed); (iv) the date until which holders of New Senior
Secured Notes may elect to have their New Senior Secured Notes purchased; (v)
the date until which electing holders of New Senior Secured Notes may withdraw
their election to have their New Senior Secured Notes purchased; and (vi)
instructions for tendering New Senior Secured Notes. The Company also will
comply with all applicable tender offer rules, including Rule 14e-1 under the
Exchange Act, in connection with any offer by the Company to purchase New Senior
Secured Notes upon a Change of Control.
The source of funds for any such purchase will be the Company's available
cash or cash generated from operations or other sources, including borrowing,
sales of assets or sales of equity. However, there can be no assurance that
sufficient funds will be available at the time of any Change of Control to make
any required purchases. In addition, the Revised Debt Agreements may place
restrictions on the Company's ability to purchase the New Senior Secured Notes
prior to their maturity. Moreover, the exercise by the holders of their right to
require the Company to purchase New Senior Secured Notes could cause a default
under the Revised Debt Agreements even if the Change of Control itself does not,
due to the financial effect of such purchases on the Company.
A "Change of Control of the Company" shall occur when (i) all or
substantially all of the Company's assets are sold as an entirety to any person
or related group of persons other than an affiliate or affiliates of the
Company, (ii) the Company engages in any merger, consolidation, sale of capital
stock, or any other transaction with any other person, with the effect that the
stockholders of the Company immediately prior thereto own, directly or
indirectly, in the aggregate less than 50% of the voting stock of (x) the
Company if the Company is the surviving entity, or (y) the surviving or
resulting entity if the Company is not the surviving entity, in each such case
immediately after such transaction, or (iii) any person or persons acting
together which would constitute a "group" for purposes of Section 13(d) of the
Exchange Act (other than (A) C. William Carey, (B) any relative or spouse of C.
William Carey who has the same principal residence as C. William Carey, or any
relative of such spouse who has the same principal residence as C. William
Carey, or (C) any trust or other estate in which (x) C. William Carey, (y) any
relative or spouse of C. William Carey who has the same principal residence as
C. William Carey, or
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(z) any relative of such spouse who has the same principal residence as C.
William Carey, has a substantial beneficial interest or as to which he or she,
as the case may be, serves as trustee or in a similar fiduciary capacity)
becomes the beneficial owner of 50% or more of the voting stock of the Company;
or (iv) the Company or any significant Subsidiary (as defined in Rule 1.02 of
Regulation S-X under the Securities Act) is liquidated, dissolved, or adopts a
plan of liquidation pursuant to any bankruptcy laws. There is no established
meaning of what constitutes a sale of "all or substantially all" of a company's
assets. This uncertainty may make it difficult for a holder to determine whether
or not a Change of Control has occurred and, thus, whether it is entitled to
require the Company to purchase its New Senior Secured Notes. The Company could,
in the future, enter into certain transactions, including certain leveraged
transactions, including, without limitation, leveraged transactions initiated or
supported by the Company, the Company's management, or an affiliate of the
Company or the Company's management, that would not constitute a Change of
Control.
Certain provisions of the Company's Articles and By-Laws, as well as certain
sections of the Massachusetts General Laws, the Company's two classes of Common
Stock, which have unequal voting rights, and the ability of the Board of
Directors to issue shares of Preferred Stock and to set the voting rights,
preferences and other terms thereof, may, in certain circumstances, be deemed to
have an anti-takeover effect and may discourage takeover attempts not first
approved by the Board of Directors (including takeovers which certain
stockholders may deem to be in their best interests). The Board of Directors of
the Company believes that these provisions are appropriate to protect the
interests of the Company and all of its stockholders. However, to the extent
takeover attempts are discouraged, this will decrease the likelihood that a
Change of Control of the Company will occur and that the Company will offer to
purchase the holder's New Senior Secured Notes pursuant to these provisions. See
"Description of Capital Stock--Massachusetts Anti-takeover Laws and Provisions
of the Articles and By-Laws."
The Change in Control purchase feature of the New Senior Secured Notes may
in certain circumstances be deemed to have an anti-takeover effect and may
discourage takeover attempts not first approved by the Board of Directors. The
Change of Control purchase feature, however, is not the result of management's
knowledge of any specific effort to accumulate shares of the Company's Common
Stock or to obtain control of the Company by means of a merger, tender offer,
solicitation or otherwise, or part of a plan by management to adopt a series of
anti-takeover provisions. Instead, the Change of Control purchase feature is the
result of negotiations between the Company and certain bondholders.
Offer to Purchase Upon Asset Disposition or Sale/Leaseback Transaction
In certain instances, upon the consummation of an Asset Disposition (as
defined) or Sale/Leaseback Transaction (as defined) the Company shall be
obligated to apply the Net Cash Proceeds (as defined) or Attributable Debt (as
defined) to redeem New Senior Secured Notes at a redemption price equal to 100%
of the principal amount thereof, together with accrued interest thereon;
provided, however, that the Company's obligation to redeem New Senior Secured
Notes is subject to the Company's obligations to
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repay indebtedness secured by senior liens and security interests in the
collateral giving rise to such Asset Disposition or Sale/Leaseback Transaction.
If less than all of the New Senior Secured Notes are to be redeemed, New
Senior Secured Notes will be redeemed on a pro rata basis based on the principal
amount of the New Senior Secured Notes tendered. Notices of redemption will be
mailed not less than 3 business days nor more than 30 days prior to the date of
redemption to each holder of record of New Senior Secured Notes to be redeemed
at its registered address. From and after any redemption date, the New Senior
Secured Notes redeemed will cease to bear interest, and the only right of the
holders of such New Senior Secured Notes will be to receive payment of the
redemption price and all interest accrued to such redemption date.
Certain Bankruptcy Limitations
For a discussion of circumstances under which the claim of a holder of New
Senior Secured Notes could be limited to less than the principal amount thereof
and certain other bankruptcy considerations, see "Risk Factors--Certain
Bankruptcy Law Considerations" and "Certain Bankruptcy and Insolvency
Considerations."
Subordination; Ranking; Collateral
The New Senior Secured Notes are secured by the following assets of each of
the Borrowers: (i) first priority security interests in the Company's shares of
stock of Solomon Brothers, the Zale Bankruptcy Claim, and 65% of the Foreign
Subsidiaries' Stock; (ii) fourth priority security interests and, as applicable,
fourth priority mortgages in PP&E; (iii) fourth priority security interests in
Accounts Receivable, the Non-Gold Inventory, the Gold Inventory, the Mixed
Inventory, and the Domestic Subsidiaries' Stock; and (iv) a third priority
Mortgage on the Feature Leasehold. See "Allocation of Security Interests" on the
cover of this Prospectus. For a discussion of the intercreditor arrangements
which govern the New Credit Agreement, the New Gold Agreements, the IRBs, the
New Senior Secured Notes, and the New Senior Subordinated Notes, see "Ranking of
Indebtedness; Rights in Collateral; Collateral Agency and Intercreditor
Agreement."
In the event of a bankruptcy of the Company, the holders of New Senior
Secured Notes will receive payments consistent with the priority of their
security interests in the assets of the Company securing the New Senior Secured
Notes. In the event that the proceeds of such collateral are insufficient to
satisfy the obligations owed to the holders of New Senior Secured Notes, such
holders will share in the distribution of the balance of available assets of the
Company pari passu in right of payment with the holders of indebtedness under
the Revised Debt Agreements, the holders of the IRBs, and the trade creditors of
the Company. The New Senior Secured Notes are senior in right of payment to the
New Senior Subordinated Notes and the Old Notes. As of May 29, 1994,
approximately $7.4 million and $60.7 million aggregate principal amount of Old
Notes and New Senior Subordinated Notes, respectively, was outstanding. At May
29, 1994, the aggregate amount of all other outstanding indebtedness of the
Company (excluding the New Senior Secured Notes and indebtedness under the New
Credit Agreement and the New Gold Agreements) was approximately $17.9 million.
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The New Senior Secured Notes are obligations of the Company. Because a
significant portion of the operations of the Company are or may in the future be
conducted through subsidiaries, the Company's cash flow and its consequent
ability to service its indebtedness, including the New Senior Secured Notes,
will be dependent upon the earnings of its subsidiaries and the distribution of
those earnings to the Company or upon loans or other payments by those
subsidiaries to the Company. The payment of dividends and the making of loans
and advances to the Company by its subsidiaries may be subject to statutory or
contractual restrictions, are contingent upon the earnings of those subsidiaries
and are subject to various business considerations. In the event that the
guarantees issued by the Subsidiary Guarantors in respect of the New Senior
Secured Notes are unenforceable, the New Senior Secured Notes will be
effectively subordinated to all indebtedness and other liabilities, including
current liabilities and commitments under leases, if any, of the Company's
subsidiaries. At May 29, 1994, the aggregate amount of such indebtedness of the
Company's subsidiaries (excluding the guarantees issued by such subsidiaries in
respect of the New Credit Agreement and the New Gold Agreements) was
approximately $32.5 million. See "Risk Factors--Holding Company Structure;
Guarantees" and "--Fraudulent Conveyance Considerations."
Guarantees
The obligations of the Company under the New Senior Secured Notes are fully
and unconditionally and jointly and severally guaranteed by each of the
Subsidiary Guarantors. Each guaranty issued by a Subsidiary Guarantor in respect
of the New Senior Secured Notes ranks pari passu in right of payment with the
guarantees issued by such Subsidiary Guarantor in respect of the New Credit
Agreement, the New Gold Agreements, and the IRBs, and ranks senior to the
guaranty issued by such Subsidiary Guarantor in respect of the New Senior
Subordinated Notes. Each guaranty issued by a Subsidiary Guarantor is secured by
the assets of the Subsidiary Guarantor in the same manner and with the same
ranking as the assets of the Company securing the Company's obligations under
the New Credit Agreement, the New Gold Agreements, the IRBs, the New Senior
Secured Notes, and the New Senior Subordinated Notes. For a discussion of the
meaning of "pari passu" and its interrelationship with collateral securing the
guarantees issued in respect of the Revised Debt Agreements, the IRBs, the New
Senior Secured Notes, and the New Senior Subordinated Notes, see "Ranking of
Indebtedness; Rights in Collateral" on the cover of this Prospectus. See also
"Ranking of Indebtedness; Rights in Collateral; Collateral Agency and
Intercreditor Agreement."
Certain Covenants
Limitations on Certain Payments
The New Senior Secured Note Indenture provides that neither the Company nor
any of its Subsidiaries will (i) declare or pay any dividend or make any
distribution on its capital stock or to its stockholders (other than (A)
dividends or distributions payable in capital stock of the Company or the
applicable Subsidiary other than Disqualified Stock (as defined), (B) dividends
or distributions payable to the Company or any Subsidiary, or (C) so long as the
Consolidated Fixed Charge Ratio (as defined) at the time of any such dividend is
greater than 1.25 to 1.0, regularly scheduled dividends payable on the
Exchangeable Preferred Stock); (ii) purchase,
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redeem or otherwise acquire or retire for value any capital stock of the Company
or the applicable Subsidiary; (iii) make any principal payment on, or purchase,
redeem or otherwise acquire for value, any indebtedness which is subordinated to
the New Senior Secured Notes (other than redemptions of the New Senior
Subordinated Notes required under the terms of the New Senior Subordinated Note
Indenture, subject to the prior rights of the holders of New Senior Secured
Notes with respect to Net Worth Redemption Offers and to the subordination
provisions relating to the New Senior Subordinated Notes); (iv) make any cash
payments to holders of Exchangeable Preferred Stock in lieu of delivering shares
of Little Switzerland Common Stock upon an exchange of any shares of
Exchangeable Preferred Stock; (v) so long as at least $15,000,000 aggregate
principal amount of New Senior Secured Notes is outstanding, make any cash
payment of interest to the holders of New Senior Subordinated Notes during the
two year period commencing on the Issuance Date; or (vi) make any investment,
other than certain permitted investments. Notwithstanding the foregoing, these
provisions will not prevent (a) the payment of any dividend within 60 days after
the date of declaration when the payment would have complied with the foregoing
provisions on the date of declaration, or (b) the purchase or retirement of any
shares of the Company's capital stock by exchange for, or out of proceeds of the
substantially concurrent sale of, other shares of its non-redeemable capital
stock, or (c) the exchange of shares of Exchangeable Preferred Stock into shares
of Little Switzerland Common Stock, as required pursuant to the terms of the
Exchangeable Preferred Stock, or (d) payments by the Company to the holders of
the Exchangeable Preferred Stock in respect of extraordinary dividends on the
Little Switzerland Common Stock, or (e) Illiquidity Payments (as defined)
pursuant to the Registration Effectiveness Agreement (as defined).
"Consolidated Fixed Charge Ratio" means, as of any date, the ratio of
Consolidated EBIT (as defined) for the Reference Period (as defined) to
Consolidated Fixed Charges (as defined) for the Reference Period.
"Consolidated EBIT" for any defined period means Consolidated Net Income for
such period increased (to the extent already deducted therefrom) by the sum, on
a consolidated basis, of (i) all income taxes paid or accrued by the Company and
its Subsidiaries during such period and (ii) all Consolidated Fixed Charges
during such period, all as determined in accordance with GAAP.
"Consolidated Fixed Charges" means the sum of (a) the aggregate amount of
interest (other than interest on the New Senior Subordinated Notes which is paid
in the form of additional New Senior Subordinated Notes) required to be paid on
Indebtedness (other than Indebtedness incurred for the acquisition from any
bank, financial institution or gold or other precious metal supplier of gold or
other precious metals pursuant to any consignment or provisional sale
arrangement) of the Company and its Subsidiaries, plus (b) the imputed portion
of rental expense representing the interest factor of lease payments of the
Company and its Subsidiaries, plus (c) the aggregate amount of distributions
required to be paid under the terms of any Disqualified Stock (as defined) of
the Company including the Exchangeable Preferred Stock, that may not be deferred
at the option of the Company, plus (d) the net interest expense and consignment
fees associated with the New Gold Agreements, plus (e) the net interest expense
and consignment fees associated with the consignment to foreign subsidiaries of
gold or other precious metals and precious and semi-precious stones.
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"Disqualified Stock" means any capital stock which by its terms or upon the
happening of any event (a) matures or is subject to mandatory redemption; (b) is
convertible or exchangeable for indebtedness or Disqualified Stock; or (c) is
redeemable at the option of the holder thereof, in whole or in part, in each
case on or prior to the date one year after the date the New Senior Secured
Notes are originally issued.
"Reference Period" means, as of any date, the four fiscal quarters ending at
least 45 days prior to the date of determination.
Plan of Liquidation
The Company shall not adopt any plan of liquidation (other than a plan of
liquidation incident to a permitted merger, consolidation, sale of assets or
other transaction) which provides for, contemplates or the effectuation of which
is preceded by, (i) the sale, lease, conveyance or other disposition of all or
substantially all of the assets of the Company otherwise than substantially as
an entirety and (ii) the distribution of all the proceeds of such sale, lease,
conveyance or other disposition unless the Company makes provisions for
satisfaction of the Company's obligation to any principal and interest on the
New Senior Secured Notes.
Limitation on Creation of Indebtedness and Issuance of Disqualified Stock
The Company shall not create, incur or assume, and will not permit any
Subsidiary to create, incur or assume any indebtedness or issue any Disqualified
Stock if, after giving effect thereto and the application of the proceeds
thereof, the Consolidated Fixed Charge Ratio would have been greater than or
equal to 1.8 to 1, determined on a pro forma basis. Notwithstanding such
provision, the Company and the Subsidiaries may create, incur or assume or issue
the following Indebtedness or Disqualified Stock: (a) the New Senior Secured
Notes; (b) Indebtedness under the Revised Debt Agreements, the IRBs, and the New
Senior Subordinated Notes (including unfunded portions under the New Credit
Agreement and the New Gold Agreements and additional New Senior Subordinated
Notes issued in lieu of the payment of cash interest on the New Senior
Subordinated Notes); (c) Indebtedness or Disqualified Stock outstanding on the
Issuance Date; (d) certain Indebtedness or Disqualified Stock of a Subsidiary
which was outstanding prior to the date such Subsidiary was acquired by the
Company; (e) the Exchangeable Preferred Stock outstanding on the Issuance Date,
together with accrued but unpaid dividends thereon; (f) certain interest rate
protection agreements acquired by the Company or any Subsidiary; (g) obligations
in respect of capitalized leases relating to additional equipment in an
aggregate outstanding amount of $1,500,000; (h) Indebtedness arising under
appeal or reimbursement obligations entered into in respect of any judgment, in
an aggregate amount not exceeding $1,500,000; (i) Indebtedness incurred to
refinance Indebtedness or Disqualified Stock otherwise permitted under the New
Senior Secured Note Indenture, provided that (A) the principal amount of such
Indebtedness or Disqualified Stock does not exceed the amount of indebtedness so
refinanced, and (B) such Indebtedness or Disqualified Stock does not require
principal payment, mandatory redemption, amortization or sinking fund payment in
an amount greater than or at a time prior to the amounts and times required
under the indebtedness or Disqualified Stock so refinanced; (j) unsecured
Indebtedness of the Company held by any
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Subsidiary which is subordinated to the New Senior Secured Notes; (k)
Indebtedness or Disqualified Stock of any Subsidiary held by the Company (l)
Indebtedness incurred directly as a result of the renewal, extension or
renegotiation of any lease of equipment or real estate of the Company or any
Subsidiary, or any Indebtedness to acquire leased equipment or real estate on
the expiration at the applicable lease; (m) Indebtedness that does not
constitute Funded Indebtedness in an aggregate principal amount not to exceed
$5,000,000; (n) purchase money Indebtedness incurred in connection with the
acquisition of property in the ordinary course of business, in an aggregate
amount not to exceed $2,500,000; (o) Indebtedness of foreign subsidiaries
incurred for working capital purposes in an aggregate principal amount not to
exceed $4,000,000; and (p) Indebtedness of Essex not to exceed $5,000,000 which
is incurred in connection with the construction of a new manufacturing facility
located in Thailand.
Merger, Consolidation
The Company may not consolidate or merge with or into, or sell, lease,
convey or otherwise dispose of all or substantially all of its assets to,
another corporation, person or entity unless (i) the Company is the surviving
person or the successor or transferee is a corporation organized under the laws
of the United States, any state thereof or the District of Columbia, (ii) the
successor expressly assumes all of the obligations of the Company under the New
Senior Secured Notes and the New Senior Secured Note Indenture, (iii)
immediately after such transaction, no Event of Default or event which with the
giving of notice, the passage of time, or both, would constitute an Event of
Default, under the New Senior Secured Note Indenture exists (See "The Secured
Debt Offering--Events of Default and Remedies"), and (iv) immediately after such
transaction the successor or surviving corporation shall have a Consolidated
Fixed Charge Ratio of greater than or equal to 1.8 to 1, determined on a pro
forma basis after giving effect to such merger or consolidation.
Maintenance of Consolidated Net Worth
The Company's Consolidated Net Worth at the end of each fiscal year of the
Company shall not be less than the sum of (i) 50% of the Consolidated Net Worth
as of the end of the first fiscal quarter after the Issuance Date and (ii) 75%
of the Company's cumulative Consolidated Net Income from the first day of the
first fiscal quarter commencing after the Issuance Date to the end of the most
recent fiscal year (excluding any Consolidated Net Income that is negative).
Ranking
The indebtedness represented by the New Senior Secured Notes shall at all
times be senior in right of payment to (a) the Old Notes; (b) the New Senior
Subordinated Notes; (c) the Exchangeable Preferred Stock; (d) Indebtedness of
the Company owed to or held by a Subsidiary; (e) Indebtedness of any Subsidiary
issued to or held by the Company or any Subsidiary; and (f) Indebtedness which
pursuant to its terms is expressly subordinated to the New Senior Secured Notes.
The New Senior Secured Notes shall at all times be senior or pari passu in right
of payment to all other indebtedness of the Company.
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Limitation of Asset Sales
Except for the sales of assets in the ordinary course of business, the
disposition of obsolete property and dispositions relating to the Zale
Bankruptcy Claim and the Company's investment in Solomon Brothers, the Company
and its Subsidiaries may not sell or otherwise dispose of assets (including the
capital stock of Subsidiaries) having a fair market value in excess of $175,000,
unless the Company or the applicable Subsidiary shall sell such assets for fair
market value. The proceeds of any such asset sales shall either be reinvested by
the Company or the applicable Subsidiary in assets related to the current lines
of business of the Company and the Subsidiaries, or be applied by the Company to
reduce indebtedness in respect of the Revised Debt Agreements, the New Senior
Secured Notes, the IRBs, and the New Senior Subordinated Notes in the order of
priority relating to the applicable collateral set forth in the Intercreditor
Agreement (as defined). See "Ranking of Indebtedness; Rights in Collateral;
Collateral Agency and Intercreditor Agreement."
Limitation on Transactions with Affiliates
With certain exceptions, neither the Company nor any Subsidiary will enter
into any transaction with an Affiliate (as defined), except in good faith and on
terms that are set forth in writing and that are no less favorable to the
Company or the applicable Subsidiary than those that could have been obtained in
a comparable transaction conducted on the arms length basis with a party not an
Affiliate.
"Affiliate" means, with respect to any person, any other person directly or
indirectly controlling or controlled by or under direct or indirect common
control with such person. For the purpose of this definition, "control" when
used with respect to any person means the power to direct the management and
policies of such person, directly or indirectly, whether through the ownership
of voting securities, by contract or otherwise, and the terms "controlling" and
"controlled" have meanings correlative to the foregoing. Notwithstanding the
foregoing, for the purpose of this definition, in no event shall the holder of
New Senior Secured Notes or any of their Affiliates be deemed an Affiliate of
the Company or of any of the Subsidiaries.
Limitation on Restrictions on Distributions from Subsidiaries
Neither the Company nor any Subsidiary shall permit to exist or become
effective any consensual restriction on the ability of any Subsidiary to (i) pay
dividends on its stock or pay indebtedness owed to the Company, (ii) make any
loans or advances to the Company, or (iii) transfer any of its property to the
Company, except for the following: (a) restrictions provided by the Revised Debt
Agreements, the IRBs, the New Senior Subordinated Notes or any other agreement
in effect on the Issuance Date; (b) restrictions in agreements effecting a
refinancing of indebtedness permitted under the New Senior Secured Note
Indenture, provided such restrictions are not more restrictive than those
replaced; (c) restrictions relating to foreign Subsidiaries imposed by the
country under whose laws such Subsidiary is organized; and (d) certain other
permitted restrictions.
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After Acquired Real Estate
The Company and its Subsidiaries shall notify the trustee under the New
Senior Secured Note Indenture of the acquisition, whether by ownership or lease,
of any real property after the Issuance Date (other than leased real property
having aggregate annual rentals of less than $100,000) and, subject to the
rights of the holders of indebtedness under the Revised Debt Agreements, the
IRBs, and the New Senior Subordinated Notes under the Intercreditor Agreement,
shall take all such actions reasonably required by the holders of New Senior
Secured Notes to grant to such holders a perfected lien on such property.
Home Office Payment Agreements
Payments of interest on, and all or any portion of the principal of, New
Senior Secured Notes, in a minimum amount of $250,000, shall be made by the New
Senior Secured Note Trustee directly to the holder of such New Senior Secured
Notes by federal funds wire transfer if the Company has filed with the New
Senior Secured Note Trustee a copy of an agreement between the Company and such
holder providing for such method of payment. The Company will indemnify the New
Senior Secured Note Trustee from any liability in connection with such
agreement.
Events of Default and Remedies
An Event of Default with respect to the New Senior Secured Notes is defined
in the New Senior Secured Note Indenture as: (a) default for ten days in the
payment of interest on the New Senior Secured Notes; (b) default in the payment
of principal or premium on the New Senior Secured Notes, when due, whether at
maturity, upon redemption, or otherwise; (c) failure of the Company or a
Subsidiary Guarantor to comply with the merger and consolidation provisions of
the New Senior Secured Note Indenture; (d) failure by the Company for 30 days
and after notice to comply with any of its agreements in the New Senior Secured
Note Indenture or the New Senior Secured Notes; (e) default by the Company or a
Subsidiary under, or acceleration prior to maturity of, or the failure to pay at
maturity, any Indebtedness of the Company or a Subsidiary aggregating in excess
of $1,000,000; (f) judgments aggregating in excess of $1,500,000 (excluding
amounts covered by insurance as to which the insurer has not denied liability)
rendered against the Company or any Subsidiary, and either (A) an enforcement
action is commenced against the Company or the applicable Subsidiary, or (B)
such judgment is not discharged or waived within 60 days and such default
continues for 10 days after notice to the Company; (g) certain events of
bankruptcy or insolvency relating to the Company and the Subsidiaries; (h) any
lien securing the New Senior Secured Notes shall fail to be in full force and
effect or entitled to the applicable priority relating thereto and such default
continues for 10 days after notice to the Company; (i) any guaranty supporting
the New Senior Secured Notes shall cease to be in full force and effect and such
default continues for 10 days after notice to the Company; and (j) any
representation or warranty made by the Company or any Subsidiary shall prove to
be untrue in any material respect as of the date made. A "Default" means any
event which is, or with the giving of notice or passage of time (or both) would
be, an Event of Default.
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If any Event of Default occurs and is continuing with respect to the New
Senior Secured Notes, the New Senior Secured Note Trustee or the holders of at
least 25% in principal amount of the then outstanding New Senior Secured Notes
of such series may declare all the New Senior Secured Notes to be due and
payable immediately; except that in the case of an Event of Default with respect
to the New Senior Secured Notes arising from certain events of bankruptcy or
insolvency, all outstanding New Senior Secured Notes shall become due and
payable without any action or notice by the New Senior Secured Note Trustee or
any holder of a New Senior Secured Note. Holders of New Senior Secured Notes may
not enforce the New Senior Secured Note Indenture or the New Senior Secured
Notes except as provided in the New Senior Secured Note Indenture and the TIA.
Subject to certain limitations, holders of a majority in principal amount of the
then outstanding New Senior Secured Notes may direct the New Senior Secured Note
Trustee in its exercise of any power. The New Senior Secured Note Trustee may
withhold from holders of the New Senior Secured Notes notice of any continuing
Default or Event of Default (except a Default or Event of Default in payment of
principal or interest) if the New Senior Secured Note Trustee determines that
withholding notice is in such holders' interest.
The holders of a majority in aggregate principal amount of the New Senior
Secured Notes then outstanding may on behalf of the holders of all of the New
Senior Secured Notes waive any past Default or Event of Default under the New
Senior Secured Note Indenture, and the consequences of such Default or Event of
Default, except a Default or Event of Default in the payment of the principal or
interest of the New Senior Secured Notes.
The Company is required to deliver quarterly to the New Senior Secured Note
Trustee a statement regarding compliance with the New Senior Secured Note
Indenture and, upon becoming aware of any Default or Event of Default, a
statement specifying such Default or Event of Default.
A Director, officer, employee or stockholder, as such, of the Company shall
not have any liability for any obligations of the Company under the New Senior
Secured Notes or the New Senior Secured Note Indenture or for any claim based
on, in respect of, or by reason of, such obligations or their creation. Each
holder of the New Senior Secured Notes by accepting New Senior Secured Notes
waives and releases all such liability. The waiver and release are part of the
consideration for issuance of the New Senior Secured Notes.
Satisfaction and Discharge of the New Senior Secured Note Indenture
The Company may terminate its obligations under the New Senior Secured Note
Indenture at any time by delivering all outstanding New Senior Secured Notes to
the New Senior Secured Note Trustee for cancellation. After all the New Senior
Secured Notes have been called for redemption, the Company may terminate all of
its obligations under the New Senior Secured Note Indenture (with certain
exceptions), at any time, by depositing with the New Senior Secured Note Trustee
money or non-callable U.S. Government obligations sufficient to pay all
remaining indebtedness on the New Senior Secured Notes. Provided that a Default
has not occurred and continues to exist on the date of such deposit, or would
occur after giving effect to such deposit, the obligations of the Company under
the New Senior Secured Indenture terminate 367 days after such deposit.
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Amendment, Supplement, and Waiver
Subject to certain exceptions, the New Senior Secured Note Indenture may be
amended or supplemented with the consent of the holders of at least a majority
in principal amount of the New Senior Secured Notes then outstanding, and any
existing Default may be waived with the consent of the holders of a majority in
principal amount of the then outstanding New Senior Secured Notes without notice
to any other holder of New Senior Secured Notes. Without the consent of any
holder of the New Senior Secured Notes, the Company and the New Senior Secured
Note Trustee may amend or supplement the New Senior Secured Note Indenture or
the New Senior Secured Notes to cure any ambiguity, defect or inconsistency, to
provide for uncertificated New Senior Secured Notes in addition to or in place
of the certificated New Senior Secured Notes, to provide for the assumption of
the Company's obligations to holders of the New Senior Secured Notes in the case
of a merger or acquisition, or to make any change that does not materially
adversely affect the legal rights of any holder of the New Senior Secured Notes.
Without the consent of each holder affected thereby, the Company may not reduce
the amount of New Senior Secured Notes whose holders must consent to an
amendment, reduce the rate of interest or change the interest payment time of
any New Senior Secured Notes; reduce the principal of or change the fixed
maturity of any New Senior Secured Notes; change the time at which any New
Senior Secured Note may or shall be redeemed; make any New Senior Secured Notes
payable in money other than that stated in the respective New Senior Secured
Notes; make any change in the provisions concerning waiver of Defaults or Events
of Default by holders of the New Senior Secured Notes or rights of holders to
receive payment of principal or interest; or reduce the percentage of holders
necessary to approve such modification.
The New Senior Secured Note Trustee
Shawmut Bank, N.A. is the New Senior Secured Note Trustee under the New
Senior Secured Note Indenture.
The New Senior Secured Note Indenture contains certain limitations on the
rights of the New Senior Secured Note Trustee, should it become a creditor of
the Company, to obtain payment of claims in certain cases, or to realize on
certain property received in respect of any such claim as security or otherwise.
The New Senior Secured Note Trustee will be permitted to engage in other
transactions; however, if the New Senior Secured Note Trustee acquires any
conflicting interest, such New Senior Secured Note Trustee must eliminate such
conflict or resign.
The holders of a majority in principal amount of the New Senior Secured
Notes then outstanding have the right to direct the time, method and place of
conducting any proceeding for exercising any remedy available to the New Senior
Secured Note Trustee. The New Senior Secured Note Indenture provides that, in
case an Event of Default with respect to the New Senior Secured Notes issued
thereunder shall occur (which shall not be cured), the New Senior Secured Note
Trustee thereunder will be required, in the exercise of its power, to use the
degree of care of a prudent man in the conduct of his own affairs. Subject to
such provisions, the New Senior Secured Note Trustee is under no obligation to
exercise any of its rights or powers under the New Senior Secured Note Indenture
at the request of any
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of the holders of any New Senior Secured Notes, unless such holders shall have
offered to such New Senior Secured Note Trustee security and indemnity
satisfactory to such New Senior Secured Note Trustee.
Reports to Holders of New Senior Secured Notes
The Company will furnish to holders of the New Senior Secured Notes all
quarterly and annual reports which it furnishes to holders of its Class A Common
Stock.
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THE EXCHANGE OFFERS
Pursuant to the Exchange Offers, the Company offered to exchange (i) $478.96
principal amount of New Senior Subordinated Notes, $331.00 of Exchangeable
Preferred Stock, and 89.49 shares of Class A Common Stock for each outstanding
$1,000 principal amount of outstanding Old 13% Notes and (ii) $408.11 principal
amount of New Senior Subordinated Notes, $282.04 of Exchangeable Preferred Stock
and 76.25 shares of Class A Common Stock for each $1,000 principal amount of
outstanding Old 10 1/4% Notes. Holders of $89,590,000 or 92.8% of the aggregate
principal amount of Old 13% Notes and holders of $25,905,000 or 98.3% of the
aggregate principal amount of Old 10 1/4% Notes tendered their notes pursuant to
the Exchange Offers. Thus, in connection with the Exchange Offers, the Company
issued $53,480,900 of New Senior Subordinated Notes, $36,960,190.45 (2,533,255
shares) of Exchangeable Preferred Stock and 9,992,648 shares of Class A Common
Stock to holders of Old Notes. For a description of the assets of the Company
securing the New Senior Subordinated Notes, see "Allocation of Security
Interests" on the cover of this Prospectus and "Description of the New
Securities--Description of the New Senior Subordinated Notes--Collateral." For a
description of the security position of the Exchangeable Preferred Stock, see
"Allocation of Security Interests" on the cover of this Prospectus and
"Description of the New Securities--Description of the Exchangeable Preferred
Stock--Ranking" and "--Collateral."
For financial reporting purposes, the Company has accounted for the Exchange
Offers using the accounting principles prescribed by Statement of Financial
Accounting Standards No. 15 "Accounting by Debtors and Creditors for Troubled
Debt Recapitalizations" (SFAS 15). For a more detailed description of the
accounting treatment for the Exchange Offers, see Note 5 to Consolidated
Financial Statements.
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DESCRIPTION OF THE NEW SECURITIES
Description of the New Senior Subordinated Notes
General
The New Senior Subordinated Notes are senior subordinated obligations of the
Company issued pursuant to the New Senior Subordinated Note Indenture between
the Company and Bankers Trust Company as the New Senior Subordinated Note
Trustee. The terms of the New Senior Subordinated Notes include those stated in
the New Senior Subordinated Note Indenture and those made part of the New Senior
Subordinated Note Indenture by reference to the TIA, as in effect on the date of
the New Senior Subordinated Note Indenture. The New Senior Subordinated Notes
are subject to all such terms, and holders of the New Senior Subordinated Notes
are referred to the proposed form of New Senior Subordinated Note Indenture and
the TIA for a statement thereof. The following statements relating to the New
Senior Subordinated Notes and the proposed form of New Senior Subordinated Note
Indenture are summaries and do not purport to be complete. Such summaries are
qualified in their entirety by reference to the forms of New Senior Subordinated
Notes and New Senior Subordinated Note Indenture, copies of which have been
filed as exhibits to the Registration Statement, of which this Prospectus forms
a part. Capitalized terms used in this section and not otherwise defined herein
are used as defined in the proposed form of New Senior Subordinated Note
Indenture and such definitions are incorporated herein by reference. Copies of
the proposed form of New Senior Subordinated Note Indenture may be obtained from
the Company, 25 Union Street, Chelsea, Massachusetts 02150, telephone number
(617) 884-8500; Attention: Manager of Corporate Communications.
In connection with the consummation of the Recapitalization, the Company
issued $53,480,900 in aggregate principal amount of New Senior Subordinated
Notes to holders of Old Notes who tendered their Old Notes pursuant to the
Exchange Offers. At the Company's option, any of the first four semiannual
installments of interest on the New Senior Subordinated Notes may be paid
through the issuance of additional New Senior Subordinated Notes valued at 100%
of their principal amount, dated and accruing interest from the applicable
interest payment date, and otherwise generally having the same terms as the New
Senior Subordinated Notes issued on the Issuance Date (the "New Senior
Subordinated Interest Notes"). In November 1993 and May 1994, the Company issued
$3,495,571 and $3,703,470, respectively, in principal amount of New Senior
Subordinated Interest Notes. An additional $8.1 million in aggregate principal
amount at maturity may be issued by the Company in the form of New Senior
Subordinated Interest Notes. The New Senior Subordinated Notes are available
only in registered form, without coupons, and the New Senior Subordinated Notes
issued on the Issuance Date were issued in denominations of $50 and integral
multiples thereof.
To the knowledge of the Company, no person presently makes a market in the
New Senior Subordinated Notes. No person will be obligated to make a market in
the New Senior Subordinated Notes and any market making activity undertaken by
any person may be discontinued at any time. There can be no assurance that an
active public market for the New Senior Subordinated Notes will develop and
continue. See "Risk Factors--Lack of Established Market."
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Principal and interest on the New Senior Subordinated Notes is payable at
the offices of the Company or its agent maintained for such purposes; provided
that payment of interest may, at the option of the holder, be made by check
mailed to a holder at its registered address or, in the case of payments in an
aggregate amount in excess of $500,000, by Federal Funds wire transfer to a bank
account designated by such holder.
Maturity; Interest
The New Senior Subordinated Notes mature on May 31, 1998, and bear interest
from the Issuance Date to maturity at the rate of 13% per annum. Interest is
payable semiannually on each six-month and twelve-month anniversary of the
Issuance Date (each such six- or twelve-month anniversary date being hereinafter
referred to as an "Interest Payment Date"), commencing on the first such
Interest Payment Date after the Issuance Date, to holders of record at the close
of business on the date which occurs 15 days prior to any Interest Payment Date.
Interest is computed on the basis of a 360-day year of twelve 30-day months. At
the Company's option, any of the first four semiannual installments of interest
on the New Senior Subordinated Notes may be paid through the issuance of
additional New Senior Subordinated Notes in an original principal amount equal
to such interest, dated and accruing interest from the applicable Interest
Payment Date, and otherwise generally having the same terms as the New Senior
Subordinated Notes issued on the Issuance Date. The Company currently intends to
pay the first four semiannual installments of interest on the New Senior
Subordinated Notes through the issuance of such additional New Senior
Subordinated Notes. Such New Senior Subordinated Interest Notes may be issued in
denominations of $.01 and integral multiples thereof. Amounts less than $.01
will be rounded to the nearest cent. Unless otherwise stated or the context
requires, all references herein to the New Senior Subordinated Notes include the
New Senior Subordinated Interest Notes. The Company shall pay interest on
overdue principal and, to the extent permitted by applicable law, on overdue
interest at a rate equal to 200 basis points in excess of the rate of interest
otherwise payable from time to time on the New Senior Subordinated Notes.
Special Mandatory Redemption
In the event that the Company's Consolidated Net Worth (as defined) declines
below the Minimum Net Worth (as defined), as at the end of each of two
consecutive fiscal quarters, the Company is required to make an offer to redeem
an aggregate principal amount (the "Redemption Amount") of New Senior
Subordinated Notes equal to the sum of (i) 7.5% of the aggregate principal
amount of the then outstanding New Senior Secured Notes and New Senior
Subordinated Notes, minus (ii) the aggregate principal amount of New Senior
Secured Notes redeemed by the Company as a result of such decline in
Consolidated Net Worth pursuant to the terms of the New Senior Secured Note
Indenture, at a redemption price equal to 100% of the principal amount thereof
plus accrued interest, if any (a "Net Worth Redemption Offer"). Subject to the
rights of holders of New Senior Secured Notes to accept offers to purchase New
Senior Secured Notes made as a result of such decline in Consolidated Net Worth,
the Company shall continue to make such Net Worth Redemption Offers semiannually
thereafter; provided, however, that if the Company's Consolidated Net Worth as
at the end of any
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subsequent fiscal quarter is greater than or equal to the Minimum Net Worth, the
Company's obligation to make such Net Worth Redemption Offers shall terminate;
provided, further, however, that if the Company's Consolidated Net Worth shall
thereafter be less than the Minimum Net Worth as at the last day of each of two
consecutive subsequent fiscal quarters, the Company's obligation to make Net
Worth Redemption Offers shall be reinstated.
"Consolidated Net Worth" means the sum, on a consolidated basis, of the
shareholders' equity of the Company and its subsidiaries, determined in
accordance with generally accepted accounting principles as in effect as of
February 29, 1992, after eliminating all intercompany items, less all amounts
representing the write-up in the book value of assets after the Issuance Date,
other than adjustments resulting from foreign exchange rates and the increase in
value, if any, of marketable securities.
"Consolidated Net Income" for any defined period means the consolidated net
income (loss) of the Company and its Subsidiaries determined in accordance with
generally accepted accounting principles; provided, however, that there shall
not be included in such Consolidated Net Income: (a) any net loss of (i) any
person if such person is not a Subsidiary, or (ii) any Subsidiary which is
subject to restrictions on the payment of dividends or the making of
distributions, loans or advances to the Company; (b) any net income of (i) any
person if such person is not a Subsidiary, or (ii) any Subsidiary which is
subject to restrictions on the payment of dividends or the making of
distributions, loans or advances to the Company, except to the extent of the
aggregate amount of cash received by the Company on any Subsidiary as a dividend
or distribution from such person or Subsidiary; (c) any net income or loss
realized upon a sale or other disposition of any property, plant or equipment of
the Company or any Subsidiary which is sold or disposed of outside of the
ordinary course of business; (d) any gain or loss realized upon the sale of any
capital stock of any Subsidiary; and (e) the cumulative effect of a change in
accounting principles.
"Minimum Net Worth" means, as of any date, an amount equal to the sum of (i)
75% of the Company's Consolidated Net Worth as of May 31, 1993, plus (ii) 37.5%
of the aggregate Consolidated Net Income (not taking into account any
Consolidated Net Income that is negative) for each fiscal year thereafter;
provided, however, that Minimum Net Worth shall only be increased on May 31, of
each year on the basis of the Consolidated Net Income for the previous fiscal
year (or, in the case of the first fiscal year ending after the Issuance Date,
for the fiscal period from the first day of the first fiscal quarter commencing
after the Issuance Date to February 28, 1994).
"Subsidiary" means at any given time any corporation, of which more than 50%
of the total voting power of shares entitled to vote in the election of
directors shall at such time be owned by the Company or by one or more
Subsidiaries or by the Company and one or more Subsidiaries.
If, in the case of any redemption, less than all of the New Senior
Subordinated Notes are to be redeemed, New Senior Subordinated Notes will be
redeemed on a pro rata basis based on the principal amount of New Senior
Subordinated Notes tendered. Notices of redemption will be mailed no later than
the date on which the Company makes the Net Worth Redemption Offer to
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each holder of record of New Senior Subordinated Notes to be redeemed at its
registered address. Each notice of redemption will specify, among other things,
the date of redemption and the redemption price.
In the event that New Senior Subordinated Notes in an aggregate principal
amount in excess of the Redemption Amount are tendered and not withdrawn, the
Company shall purchase New Senior Subordinated Notes on a pro rata basis based
on the principal amount of New Senior Subordinated Notes tendered.
From and after any redemption date, the New Senior Subordinated Notes
redeemed will cease to bear interest, and the only right of the holders of such
notes will be to receive payment of the redemption price and all interest
accrued to such redemption date.
The Revised Debt Agreements and the New Senior Secured Note Indenture place
restrictions on the Company's ability to redeem the New Senior Subordinated
Notes prior to their maturity.
Optional Redemption
The New Senior Subordinated Notes are redeemable after the third anniversary
of the Issuance Date at the option of the Company, in whole at any time or in
part from time to time, at the following prices (expressed as percentages of the
principal amount of the New Senior Subordinated Notes), if redeemed during the
twelve months beginning on May 14 of the year indicated below, in each case
together with accrued interest to the redemption date (the "Applicable
Redemption Price"):
Year Percentage
--------------------- ----------
1996................. 106.0%
1997................. 103.0
1998 and thereafter.. 100.0
Notices of redemption will be mailed not less than 30 days nor more than 60
days prior to the date of redemption to each holder of record of New Senior
Subordinated Notes to be redeemed at its registered address. Each notice of
redemption will specify, among other things, the date of redemption and the
redemption price. If less than all of the New Senior Subordinated Notes are to
be redeemed, the New Senior Subordinated Note Trustee will select the New Senior
Subordinated Notes, or portions thereof, for redemption by lot or by other
method that complies with the requirements of any exchange on which the New
Senior Subordinated Notes are listed that the New Senior Subordinated Note
Trustee considers fair and appropriate.
From and after any date of redemption, the New Senior Subordinated Notes
redeemed will cease to bear interest and the only right of the holders of such
notes will be to receive payment of the redemption price and all interest
accrued to such redemption date.
The Revised Debt Agreements and the New Senior Secured Note Indenture place
restrictions on the Company's ability to redeem the New Senior Subordinated
Notes prior to their maturity.
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Offer to Purchase Upon Change of Control
Upon the occurrence of a Change of Control of the Company (as defined) and
subject to compliance by the Company with its requirements under the Revised
Debt Agreements, the IRBs and New Senior Secured Note Indenture, each holder of
New Senior Subordinated Notes will have the right to require the Company to
purchase all or any part, at such holder's option, of such holder's New Senior
Subordinated Notes at a purchase price in cash equal to 100% of the principal
amount thereof, together with accrued interest thereon. It is unlikely that the
"Change of Control" option will become exercisable in the foreseeable future.
A "Change of Control of the Company" shall occur when (i) all or
substantially all of the Company's assets are sold as an entirety to any person
or related group of persons other than an affiliate or affiliates of the
Company, (ii) the Company engages in any merger, consolidation, sale of capital
stock, or any other transaction with any other person, with the effect that the
stockholders of the Company immediately prior thereto own, directly or
indirectly, in the aggregate less than 50% of the voting stock of (x) the
Company if the Company is the surviving entity, or (y) the surviving or
resulting entity if the Company is not the surviving entity, in each such case
immediately after such transaction, or (iii) any person or persons acting
together which would constitute a "group" for purposes of Section 13(d) of the
Exchange Act (other than (A) C. William Carey, (B) any relative or spouse of C.
William Carey who has the same principal residence as C. William Carey, or any
relative of such spouse who has the same principal residence as C. William
Carey, or (C) any trust or other estate in which C. William Carey or any
relative or spouse of C. William Carey who has the same principal residence as
C. William Carey or any relative of such spouse who has the same principal
residence as C. William Carey, has a substantial beneficial interest or as to
which he or she, as the case may be, serves as trustee or in a similar fiduciary
capacity) becomes the beneficial owner of 50% or more of the voting stock of the
Company; or (iv) the Company or any significant Subsidiary (as defined in Rule
1.02 of Regulation S-X under the Securities Act) is liquidated, dissolved, or
adopts a plan of liquidation pursuant to any bankruptcy laws. There is no
established meaning of what constitutes a sale of "all or substantially all" of
a company's assets. This uncertainty may make it difficult for a holder to
determine whether or not a Change of Control has occurred, and thus, whether it
is entitled to require the Company to purchase its New Senior Subordinated
Notes. The Company could, in the future, enter into certain transactions,
including certain leveraged transactions, including, without limitation,
leveraged transactions initiated or supported by the Company, the Company's
management, or an affiliate of the Company or the Company's management, that
would not constitute a Change in Control.
Within 30 days after any Change of Control and after compliance with the
conditions set forth in the next paragraph, the Company shall mail a notice to
each holder of New Senior Subordinated Notes stating: (i) that a Change of
Control has occurred, and that such holder has the right to require the Company
to purchase such holder's New Senior Subordinated Notes, in whole or in part, at
a purchase price in cash equal to 100% of the principal amount of the New Senior
Subordinated Notes, plus accrued interest, if any, to the date of purchase; (ii)
the circumstances and relevant facts regarding such Change of Control; (iii) the
date on which the Company will purchase New Senior Subordinated Notes from
electing holders (which shall be the 30th day after compliance by the Company
with
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the conditions set forth in the next paragraph); (iv) the date until which
holders of New Senior Subordinated Notes may elect to have their New Senior
Subordinated Notes purchased; (v) the date until which electing holders of New
Senior Subordinated Notes may withdraw their election to have their New Senior
Subordinated Notes purchased; and (vi) instructions for tendering New Senior
Subordinated Notes. The Company also will comply with all applicable tender
offer rules, including the provisions of Rule 14e-1 under the Exchange Act, in
connection with any offer by the Company to purchase New Senior Subordinated
Notes upon a Change of Control.
Prior to mailing the notice set forth in the preceding paragraph, one of the
following events must have occurred: (i) the Company shall have made an offer to
repay in full all monetary obligations under and in respect of Revised Debt
Agreement Indebtedness (as defined), the IRBs, and the New Senior Secured Notes,
and either (A) 30 days elapse after the date of such offer and no bank, gold
supplier or holder of New Senior Secured Notes or the IRBs accepts the offer, or
(B) one or more banks, gold suppliers or holders of New Senior Secured Notes or
the IRBs accept the offer within 30 days after the date of such offer and the
Company repays in full all monetary obligations under and in respect of all
banks, gold suppliers and the holders of the New Senior Secured Notes or the
IRBs who have accepted the offer, and 91 days elapse after the date of such
repayment in full, or (ii) the Company shall not have made an offer to repay the
Revised Debt Agreement Indebtedness and the New Senior Secured Notes or the
IRBs, but obtains the requisite consents under the Revised Debt Agreements, the
New Senior Secured Notes and the IRBs to permit the purchase of the New Senior
Subordinated Notes. The right of holders of New Senior Subordinated Notes to
have their notes purchased at their option upon the occurrence of a Change of
Control will be subject to the Company's compliance with the requirements of the
preceding sentence and if the Company defaults in its obligation to purchase any
New Senior Subordinated Notes at the holder's option, an acceleration of the
maturity of the New Senior Subordinated Notes based on such default will not be
effective until one of the events set forth above has occurred.
"Revised Debt Agreement Indebtedness" means (i) all indebtedness and other
monetary obligations owing now or hereafter by the Company under the Revised
Debt Agreements, and the Company's guarantee of any indebtedness or other
monetary obligations of any of its Subsidiaries under the Revised Debt
Agreements, (ii) indebtedness the proceeds of which are used to refinance
indebtedness under the Revised Debt Agreements or any successor or replacement
facility, and (iii) any other indebtedness owing now or hereafter by the Company
to one or more of the banks or gold suppliers; provided, however, that "Revised
Debt Agreement Indebtedness" shall not include indebtedness incurred in
violation of the restrictions set forth under "Certain Covenants--Limitation on
Creation of Indebtedness" below, unless either (x) prior to the incurrence of
any such indebtedness, Foothill or the Gold Suppliers obtained an Officers'
Certificate of the Company to the effect that incurrence of such indebtedness
was permitted by the New Senior Subordinated Note Indenture, or (y) the Company
gave notice in writing to the New Senior Subordinated Note Trustee at least 30
days prior to the date of incurrence of such indebtedness, which notice set
forth all relevant information in respect to such proposed incurrence and stated
that the Company has refused or was otherwise unable to deliver the Officers'
Certificate provided in clause (x) above and that the incurrence of such
indebtedness would be a violation of the New Senior Subordinated Note Indenture.
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The Revised Debt Agreements, the IRBs, and the New Senior Secured Note
Indenture place restrictions on the Company's ability to purchase the New Senior
Subordinated Notes upon a Change of Control of the Company. The Company's
obligation to purchase the New Senior Subordinated Notes is also subject to the
"Subordination" provisions of the New Senior Subordinated Note Indenture and
accordingly such purchase may be prohibited or delayed under certain
circumstances. See "--Subordination; Ranking." In addition, the source of funds
for any such purchases will be the Company's available cash or cash generated
from operations or other sources, including borrowings, sales of assets or sales
of equity. There can be no assurances, however, that sufficient funds will be
available at the time of any Change of Control to make any purchases of New
Senior Subordinated Notes.
Certain provisions of the Company's Articles and By-Laws, as well as certain
sections of the Massachusetts General Laws, the Company's two classes of Common
Stock, which have unequal voting rights, and the ability of the Board of
Directors to issue shares of Preferred Stock and to set the voting rights,
preferences, and other terms thereof, may be deemed to have an anti-takeover
effect and may discourage takeover attempts not first approved by the Board of
Directors (including takeovers which certain stockholders may deem to be in
their best interests). The Board of Directors of the Company believes that these
provisions are appropriate to protect the interests of the Company and all of
its stockholders. However, to the extent takeover attempts are discouraged, this
will decrease the likelihood that a Change of Control of the Company will occur
and that the Company will offer to purchase the holder's New Senior Subordinated
Notes pursuant to these provisions. See "Description of Capital Stock--
Massachusetts Anti-takeover Laws and Provisions of the Articles and By-Laws."
The Change of Control purchase feature of the New Senior Subordinated Notes
may in certain circumstances be deemed to have an anti-takeover effect and may
discourage takeover attempts not first approved by the Board of Directors. The
Change of Control purchase feature, however, is not the result of management's
knowledge of any specific effort to accumulate shares of the Company's Common
Stock or to obtain control of the Company by means of a merger, tender offer,
solicitation or otherwise, or part of a plan by management to adopt a series of
anti-takeover provisions. The Change of Control purchase feature is the result
of negotiations between the Company and certain bondholders.
Offer to Purchase Upon Asset Disposition or Sale/Leaseback Transaction
In certain instances, upon the consummation of an Asset Disposition (as
defined) or Sale/Leaseback Transaction (as defined) the Company shall be
obligated to apply the Net Cash Proceeds (as defined) or Attributable Debt (as
defined) to redeem New Senior Subordinated Notes at a redemption price equal to
the Applicable Redemption Price, together with accrued interest thereon;
provided, however that the Company's obligation to redeem New Senior
Subordinated Notes is subject to the Company's obligations to repay indebtedness
secured by senior liens and security interests in the collateral giving rise to
such Asset Disposition or Sale/Leaseback Transaction.
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Notices of redemption will be mailed not less than 3 days nor more than 30
days prior to the date of redemption to each holder of record of New Senior
Subordinated Notes to be redeemed at its registered address. Each notice of
redemption will specify, among other things, the date of redemption and the
redemption price. If less than all of the New Senior Subordinated Notes are to
be redeemed, the New Senior Subordinated Note Trustee will select the New Senior
Subordinated Notes, or portions thereof, for redemption by lot or by other
method that complies with the requirements of any exchange on which the New
Senior Subordinated Notes are listed that the New Senior Subordinated Note
Trustee considers fair and appropriate.
From and after any date of redemption, the New Senior Subordinated Notes
redeemed will cease to bear interest and the only right of the holders of such
notes will be to receive payment of the redemption price and all interest
accrued to such redemption date.
The Revised Debt Agreements and the New Senior Secured Note Indenture place
restrictions on the Company's ability to redeem the New Senior Subordinated
Notes prior to their maturity.
Certain Bankruptcy Limitations
For a discussion of circumstances under which the claim of a holder of New
Senior Subordinated Notes could be limited to less than the principal amount
thereof and certain other bankruptcy considerations, see "Risk Factors--Certain
Bankruptcy Law Considerations" and "Certain Bankruptcy and Insolvency
Considerations."
Subordination; Ranking
The New Senior Subordinated Notes are subordinate in right of payment to
all Senior Indebtedness (as defined) whether outstanding on the date of the New
Senior Subordinated Note Indenture or thereafter created, incurred, assumed, or
guaranteed. Upon satisfaction of such Senior Indebtedness, the New Senior
Subordinated Notes are pari passu in right of payment to all other indebtedness
of the Company, including indebtedness to trade creditors. For a discussion of
the meaning of "pari passu" and its interrelationship with collateral securing
the Revised Debt Agreements, the IRBs, the New Senior Secured Notes, and the New
Senior Subordinated Notes, see "Ranking of Indebtedness; Rights in Collateral"
on the cover of this Prospectus. See also "Ranking of Indebtedness; Rights in
Collateral; Collateral Agency and Intercreditor Agreement." As of May 29, 1994,
the amount of such indebtedness to trade creditors outstanding was approximately
$16.3 million. The New Senior Subordinated Notes will be senior in right of
payment to the Old Notes. As of May 29, 1994, approximately $7.4 million
principal amount of Old Notes was outstanding. Upon (i) the maturity of Senior
Indebtedness, including by lapse of time, acceleration or otherwise, or (ii) any
distribution of the assets of the Company upon any dissolution, winding-up,
liquidation or reorganization of the Company, the holders of Senior Indebtedness
are entitled to receive payment in full of all amounts due before the holders of
New Senior Subordinated Notes are entitled to receive any payment. No payment
may be made on the New Senior Subordinated Notes during the continuance of any
default in payment on any Senior Indebtedness, provided that payments on the New
Senior Subordinated Notes may be resumed after 180 days unless the maturity of
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such Senior Indebtedness has been accelerated or is the subject of judicial
proceedings. Upon acceleration of the New Senior Subordinated Notes, the Company
must give notice thereof to holders of Senior Indebtedness. As of May 29, 1994,
approximately $18.3 million was outstanding under the New Senior Secured Note
Indenture and the IRBs, and approximately $8.3 million and approximately 63,000
troy ounces was outstanding under the New Credit Agreement and under the New
Gold Agreements, respectively.
"Senior Indebtedness" is defined in the New Senior Subordinated Note
Indenture as (i) Indebtedness (as defined) of the Company or any Subsidiary
Guarantor (whether as a direct obligor or as a guarantor of the obligations of
another person) under the New Credit Agreement, the New Senior Secured Notes,
and the IRBs, and obligations of the Company and the Subsidiary Guarantors under
the New Gold Agreements, including, in each case, interest thereon accruing at
the contract rate, whether or not an allowed claim in a case under bankruptcy
law (such interest accruing after the commencement of a case under bankruptcy
law being referred to as "Post Petition Interest"), and all obligations and
indemnities owing thereunder, and any replacements, renewals, extensions,
refinancings, refundings, modifications, and amendments thereof, in each case to
the extent such Indebtedness or obligations are permitted under the terms of the
New Senior Subordinated Note Indenture and (ii) any other Indebtedness of the
Company or any Subsidiary Guarantor (whether as a direct obligor or as a
guarantor of the obligations of another person) for money borrowed entered into
in compliance with the New Senior Subordinated Note Indenture (other than the
Old Notes), unless the instrument under which such Indebtedness is created,
incurred, assumed or guaranteed expressly provides that such Indebtedness is not
senior or superior in right of payment to the New Senior Subordinated Notes or
is junior or subordinate in right of payment to the New Senior Subordinated
Notes; provided, however, that Senior Indebtedness does not include Post
Petition Interest on Indebtedness incurred to refinance Indebtedness outstanding
on the Issuance Date.
"Indebtedness" as defined in the New Senior Subordinated Note Indenture
with respect to any person means (i) all obligations, unconditional or
contingent, of such person for money borrowed (whether or not recourse is to the
whole of the assets of such person or a portion thereof or evidenced by notes,
debentures, bonds or other similar instruments for the payment of which such
person is responsible or liable); (ii) all capital lease obligations of such
person; (iii) all obligations of such person issued or assumed as the deferred
purchase price of property or services, all conditional sale obligations of such
person and all obligations of such person under any title retention agreement
(but excluding trade accounts payable and obligations in respect of consignment
of goods arising in the ordinary course of business); (iv) all obligations of
such person for the reimbursement of any obligor on any letter of credit,
banker's acceptance or similar credit transaction (other than obligations with
respect to letters of credit securing obligations (other than obligations
described in clauses (i) through (iii) above) entered into in the ordinary
course of business of such person to the extent such letters of credit are not
drawn upon or, if and to the extent drawn upon, such drawing is reimbursed no
later than the third business day following receipt by such person of a demand
for reimbursement following payment on the letter of credit); (v) all
obligations of the type referred to in clauses (i) through (iv) above of other
persons and all dividends of other persons for the payment of which, in either
case, such person is responsible or liable as obligor, guarantor or otherwise;
(vi) all obligations of such person for consignment fees and indebtedness
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incurred from any bank, financial institution or other supplier of gold or other
precious metals or precious or semi-precious stones pursuant to any consignment
or provisional sale arrangement; and (vii) all obligations of the type referred
to in clauses (i) through (vi) above of other persons secured by any lien on any
property or asset of such person (whether or not such obligation is assumed by
such person), the amount of such obligations being deemed to be the lesser of
the value of such property or asset or the amount of the obligations so secured.
"Funded Indebtedness" means any Indebtedness of the Company which is due
and payable in more than one year from the date of determination or which may be
extended beyond such one-year period without the consent of the party which is
lending the funds.
The New Senior Subordinated Notes are obligations of the Company. Because a
significant portion of the operations of the Company are or may in the future be
conducted through subsidiaries, the cash flow and the consequent ability to
service debt of the Company, including the New Senior Subordinated Notes, will
be dependent upon the earnings of its subsidiaries and the distribution of those
earnings to the Company or upon loans or other payments of funds by those
subsidiaries to the Company. The payment of dividends and the making of loans
and advances to the Company by its subsidiaries may be subject to statutory or
contractual restrictions, are contingent upon the earnings of those subsidiaries
and are subject to various business considerations. In the event that the
guarantees issued by the Subsidiary Guarantors in respect of the New Senior
Subordinated Notes are unenforceable, the New Senior Subordinated Notes will be
effectively subordinated to all indebtedness and other liabilities, including
current liabilities and commitments under leases, if any, of the Company's
subsidiaries. See "Risk Factors--Fraudulent Conveyance Considerations." At May
29, 1994, the aggregate amount of such indebtedness of the Company's
subsidiaries was approximately $32.5 million, of which approximately $1.7
million was Senior Indebtedness.
Collateral
The New Senior Subordinated Notes are secured by the following assets of
each of the Borrowers: (i) second priority security interests in the Company's
shares of stock of Solomon Brothers, the Zale Bankruptcy Claim, and 65% of the
Foreign Subsidiaries' Stock; (ii) fifth priority security interests in the Mixed
Inventory, the Domestic Subsidiaries' Stock, Accounts Receivable, the Non-Gold
Inventory, and the Gold Inventory; (iii) fifth priority security interests and,
as applicable, fifth priority mortgages in PP&E; and (iv) a fourth priority
mortgage on the Feature Leasehold. See "Allocation of Security Interests" on the
cover of this Prospectus. Pursuant to the Intercreditor Agreement, holders of
the New Senior Subordinated Notes are subject to a permanent standstill as to
enforcement of junior liens in collateral. Therefore, holders of the New Senior
Subordinated Notes will not be able to exercise rights of foreclosure with
respect to junior liens in collateral but will be entitled to receive proceeds
of such collateral only after payment in full of all Senior Indebtedness,
including without limitation all indebtedness under the Revised Debt Agreements,
the IRBs, the New Senior Secured Notes and permitted refinancings thereof. For a
discussion of the intercreditor arrangements which govern the New Credit
Agreement, the New Gold
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Agreements, the IRBs, the New Senior Secured Notes, and the New Senior
Subordinated Notes, see "Ranking of Indebtedness; Rights in Collateral;
Collateral Agency and Intercreditor Agreement."
If, upon the payment in full of the New Senior Secured Notes, the Company's
Consolidated Fixed Charge Ratio (as defined) is greater than or equal to 1.5 to
1 on a pro forma basis, and no Event of Default (as defined) has occurred and
continues to exist, the New Senior Subordinated Notes will become unsecured
obligations of the Company. See "The Secured Debt Offering--Subordination;
Ranking; Collateral."
"Consolidated Fixed Charge Ratio" means, as of any date, the ratio of
Consolidated EBITDA (as defined) for the Reference Period (as defined) to
Consolidated Fixed Charges (as defined) for the Reference Period.
"Consolidated EBITDA" means, with respect to any period, Consolidated Net
Income for such period (excluding income or expense relating to the unamortized
interest on the New Senior Subordinated Notes which is due to any adjustments
pursuant to Statements of Financial Accounting Standards No. 15 published by the
Financial Accounting Standards Board ("FASB 15")) adjusted for extraordinary,
non-recurring items during such period, increased (to the extent already
deducted therefrom) by the sum, on a consolidated basis, of (i) all income taxes
paid or accrued by the Company and its Subsidiaries during such period, and (ii)
all Consolidated Fixed Charges during such period, and (iii) all depreciation
and amortization expense of the Company and its Subsidiaries for such period,
and decreased (to the extent already included therein) by the sum, on a
consolidated basis, of (i) the non-cash portion of investment income of the
Company and the Subsidiaries for such period and (ii) all extraordinary
dividends paid to the Company for such period in respect of the Little
Switzerland Common Stock, in each case determined in accordance with GAAP
consistently applied.
"Consolidated Net Income" for any defined period means the consolidated net
income (loss) of the Company and its Subsidiaries determined in accordance with
GAAP; provided, however, that there shall not be included in such Consolidated
Net Income: (a) any net loss of (i) any person if such person is not a
Subsidiary, or (ii) any Subsidiary which is subject to restrictions on the
payment of dividends or the making of distributions, loans or advances to the
Company; (b) any net income of (i) any person if such person is not a
Subsidiary; or (ii) any Subsidiary which is subject to restrictions on the
payment of dividends or the making of distributions, loans or advances to the
Company, except to the extent of the aggregate amount of cash received by the
Company on any Subsidiary as a dividend or distribution from such person or
Subsidiary; (c) any net income or loss realized upon a sale or other disposition
of any property, plant or equipment of the Company or any Subsidiary which is
sold or disposed of outside of the ordinary course of business; (d) any gain or
loss realized upon the sale of any capital stock of any Subsidiary; and (e) the
cumulative effect of a change in accounting principles.
"Consolidated Fixed Charges" means, with respect to any period, the sum of
(a) the aggregate amount of interest (including interest on the New Senior
Subordinated Notes which is paid in the form of New Senior Subordinated Interest
Notes but excluding income related to unamortized interest on the New Senior
Subordinated Notes which is due to any adjustment pursuant to FASB 15) required
to be paid on Indebtedness of the Company and its Subsidiaries during such
period, plus (b) the aggregate amount of distributions required to be paid
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during such period under the terms of any Disqualified Stock (as defined) of the
Company including the Exchangeable Preferred Stock, that may not be deferred at
the option of the Company.
"Reference Period" means, as of any date, the four fiscal quarters ending
at least 45 days prior to the date of determination.
"Disqualified Stock" means any capital stock which by its terms or upon the
happening of any event (a) matures or is subject to mandatory redemption; (b) is
convertible or exchangeable for indebtedness or Disqualified Stock; or (c) is
redeemable at the option of the holder thereof, in whole or in part, in each
case on or prior to the date one year after the date the New Senior Subordinated
Notes are originally issued.
Limited Security Guarantees
The obligations of the Company under the New Senior Subordinated Notes are
fully and unconditionally and jointly and severally guaranteed on a subordinated
basis by each of the Subsidiary Guarantors. Each guaranty issued by a Subsidiary
Guarantor in respect of the New Senior Subordinated Notes is subordinated in
right of payment to the guaranty issued by such Subsidiary Guarantor in respect
of the New Credit Agreement, the New Gold Agreements, the IRBs, and the New
Senior Secured Notes. Each guaranty issued by a Subsidiary Guarantor is secured
by the assets of the Subsidiary Guarantor in the same manner and with the same
ranking as the assets of the Company securing the Company's obligations under
the New Credit Agreement, the New Gold Agreements, the IRBs, the New Senior
Secured Notes, and the New Senior Subordinated Notes. As a result, although the
guarantees issued in respect of the New Senior Subordinated Notes are secured by
the assets of each Subsidiary Guarantor, pursuant to the Intercreditor Agreement
the holders of the New Senior Subordinated Notes are subject to a permanent
standstill as to enforcement of junior liens in such collateral. Therefore,
holders of the New Senior Subordinated Notes, unlike the holders of indebtedness
under the New Credit Agreement, the New Gold Agreements, the New Senior Secured
Notes, and the IRBs, will not be able to exercise rights of foreclosure with
respect to junior liens in collateral securing the guarantees issued in respect
of the New Senior Subordinated Notes, but will have to rely on holders of prior
liens in such collateral to exercise such rights. For a discussion of the
collateral securing the guarantees issued in respect of the Revised Debt
Agreements, the IRBs, the New Senior Secured Notes, and the New Senior
Subordinated Notes, see "Ranking of Indebtedness; Rights in Collateral" on the
cover of this Prospectus. See also "Ranking of Indebtedness; Rights in
Collateral; Collateral Agency and Intercreditor Agreement."
Certain Covenants
Limitations on Certain Payments. The New Senior Subordinated Note Indenture
provides that neither the Company nor any of its Subsidiaries (as defined) will
(i) declare or pay any dividend or make any distribution on its capital stock or
to its stockholders (other than (A) regularly scheduled dividends payable to
holders of Exchangeable Preferred Stock, so long as an Event of Default (as
defined) has not occurred and continues to exist in the payment of principal of
or interest on any New Senior Subordinated Note, (B) dividends or distributions
payable in capital stock of the Company or the
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applicable Subsidiary other than Disqualified Stock (as defined), (C) dividends
or distributions payable to the Company or any Subsidiary, or Agreements) in an
aggregate principal amount outstanding in excess of $87,500,000 and (ii) Funded
Indebtedness constituting Senior Indebtedness (other than Senior Indebtedness
consisting of obligations in respect of the New Gold Agreements) in an aggregate
principal amount outstanding in excess of $75,000,000; provided, however, that
if on or after November 30, 1996, the Consolidated Fixed Charge Ratio is greater
than or equal to 2.5 to 1, the foregoing limitations shall terminate and shall
be of no further force and effect; and provided, further, however, that in
calculating the limitations provided by the foregoing clauses (i) and (ii),
Indebtedness of any person arising under a guaranty of direct obligations of the
Company or any Subsidiary shall not be included.
Limitation of Asset Sales. Except for the sales of assets in the ordinary
course of business, the disposition of obsolete property, and dispositions
relating to the Zale Bankruptcy Claim and the Company's investment in Solomon
Brothers, the Company and its Subsidiaries may not sell or otherwise dispose of
assets (including the capital stock of Subsidiaries) with a value in excess of
$250,000, unless the Company or the applicable Subsidiary shall sell such assets
at fair market value. The proceeds of any such asset sales shall either be
reinvested by the Company or the applicable Subsidiary in property related to
the existing lines of business of the Company and its Subsidiaries or be applied
by the Company to reduce indebtedness in respect of the Revised Debt Agreements,
the New Senior Secured Notes, the IRBs, and the New Senior Subordinated Notes in
the order of priority relating to the applicable collateral set forth in the
Intercreditor Agreement (as defined). See "Ranking of Indebtedness; Rights in
Collateral; Collateral Agency and Intercreditor Agreement."
Limitation on Transactions with Affiliates. With certain exceptions,
neither the Company nor any Subsidiary will enter into any transaction with an
Affiliate (as defined), except in good faith and on terms that are set forth in
writing and that are no less favorable to the Company or the applicable
Subsidiary than those that could have been obtained in a comparable transaction
conducted on the arms length basis with a party not an Affiliate.
"Affiliate" means, with respect to any person, any other person directly or
indirectly controlling or controlled by or under direct or indirect common
control with such person. For the purpose of this definition, "control" when
used with respect to any person means the power to direct the management and
policies of such person, directly or indirectly, whether through the ownership
of voting securities, by contract or otherwise, and the terms "controlling" and
"controlled" have meanings correlative to the foregoing. Notwithstanding the
foregoing, for the purpose of this definition, in no event shall the holder of
New Senior Secured Notes or any of their Affiliates be deemed an Affiliate of
the Company or of any of the Subsidiaries.
Limitation on Restrictions on Distributions from Subsidiaries. Neither the
Company nor any Subsidiary shall permit to exist or become effective any
consensual restriction on the ability of any Subsidiary to (i) pay dividends on
its stock or pay indebtedness owed to the Company, (ii) make any loans or
advances to the Company, or (iii) transfer any of its property to the Company,
except for the following: (a) restrictions provided by the Revised Debt
Agreements, the IRBs, the New Senior Secured Notes or any other agreement in
effect on the Issuance Date; (b) restrictions in agreements effecting a
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refinancing of indebtedness permitted under the New Senior Subordinated Note
Indenture, provided such restrictions are not more restrictive than those
replaced; (c) restrictions relating to foreign Subsidiaries imposed by the
country under whose laws such Subsidiary is organized; and (d) certain other
permitted restrictions.
After Acquired Real Estate. The Company and its Subsidiaries shall notify
the New Senior Subordinated Note Trustee of the acquisition, whether by
ownership or lease, of any real property after the Issuance Date (other than
leased real property having aggregate annual rentals of less than $100,000) and,
subject to the rights of the holders of indebtedness under the Revised Debt
Agreements, the IRBs, and the New Senior Secured Notes under the Intercreditor
Agreement, shall take all such actions reasonably required by the holders of New
Senior Subordinated Notes to grant such holders a perfected lien on such
property.
Merger, Consolidation, or Sale of Assets. The Company may not consolidate
or merge with or into, or sell, lease, convey or otherwise dispose of all or
substantially all of its assets to, another corporation, person or entity unless
(i) the Company is the surviving person or the successor or transferee is a
corporation organized under the laws of the United States, any state thereof or
the District of Columbia, (ii) the successor assumes all of the obligations of
the Company under the New Senior Subordinated Notes and the New Senior
Subordinated Note Indenture, (iii) after such transaction, no Event of Default
under the New Senior Subordinated Note Indenture exists, (iv) immediately after
such transaction the successor or surviving corporation shall have a
Consolidated Fixed Charge Ratio (A) from the Issuance Date until the first
anniversary of the Issuance Date, of greater than or equal to 1.75 to 1, and (B)
thereafter, of greater than or equal to 2.0 to 1, in each case determined on a
pro forma basis after giving effect to such merger or consolidation, and (v)
immediately after such transaction the successor or surviving corporation shall
have Consolidated Net Worth at least equal to the Consolidated Net Worth of the
Company prior to giving effect to such transaction.
Home Office Payment Agreements. Payments of interest on, and all or any
portion of the principal of, New Senior Subordinated Notes, in a minimum amount
of $500,000, shall be made by the New Senior Subordinated Note Trustee directly
to the holder of such New Senior Subordinated Notes by federal funds wire
transfer if the Company has filed with the New Senior Subordinated Note Trustee
a copy of an agreement between the Company and such holder providing for such
method of payment. The Company will indemnify the New Senior Subordinated Note
Trustee from any liability in connection with such agreement.
Events of Default and Remedies
An Event of Default with respect to the New Senior Subordinated Notes is
defined in the New Senior Subordinated Note Indenture as: (a) default for 30
days in payment of interest on the New Senior Subordinated Notes; (b) default in
payment when due of principal (whether or not prohibited by the subordination
provisions contained in the New Senior Subordinated Note Indenture) of the New
Senior Subordinated Notes; (c) failure of the Company or a Subsidiary Guarantor
to comply with the merger and consolidation provisions of the New Senior
Subordinated Note Indenture; (d) failure by the Company for 45 days and after
notice to comply with any of its agreements in the New Senior Subordinated Note
Indenture or the New Senior Subordinated Notes; (e) acceleration prior to
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maturity of, or the failure to pay at maturity of, indebtedness of the Company
or any Subsidiary aggregating in excess of $2,000,000; (f) judgments aggregating
in excess of $2,000,000 (excluding amounts covered by insurance as to which the
insurer has not denied liability) rendered against the Company or any
Subsidiary, and either (A) an enforcement action is commenced against the
Company or the applicable Subsidiary, or (B) such judgment is not discharged or
waived within 60 days and such default continues for a period of 20 days after
notice to the Company; (g) certain events of bankruptcy or insolvency relating
to the Company and the Subsidiaries; (h) any lien securing the New Senior
Subordinated Notes shall fail to be in full force and effect or entitled to the
applicable priority relating thereto and such default continues for a period of
20 days after notice to the Company; and (i) any guaranty supporting the New
Senior Subordinated Notes shall cease to be in full force and effect and such
default continues for a period of 20 days after notice to the Company. A
"Default" means any event which is, or with the giving of notice or passage of
time (or both) would be, an Event of Default.
If any Event of Default occurs and is continuing with respect to the New
Senior Subordinated Notes, the New Senior Subordinated Note Trustee or the
holders of at least 25% in principal amount of the then outstanding New Senior
Subordinated Notes may declare all the New Senior Subordinated Notes to be due
and payable immediately; except that in the case of an Event of Default with
respect to the New Senior Subordinated Notes arising from certain events of
bankruptcy or insolvency, all outstanding New Senior Subordinated Notes shall
become due and payable without any action or notice by the New Senior
Subordinated Note Trustee or any holder of a New Senior Subordinated Note.
Holders of New Senior Subordinated Notes may not enforce the New Senior
Subordinated Note Indenture or the New Senior Subordinated Notes except as
provided in the New Senior Subordinated Note Indenture. Subject to certain
limitations, holders of a majority in principal amount of the then outstanding
New Senior Subordinated Notes may direct the New Senior Subordinated Note
Trustee in its exercise of any trust or power. The New Senior Subordinated Note
Trustee may withhold from holders of the New Senior Subordinated Notes notice of
any continuing Default or Event of Default (except a Default or Event of Default
in payment of principal or interest) if the New Senior Subordinated Note Trustee
determines that withholding notice is in such holders' interest.
The holders of a majority in aggregate principal amount of the New Senior
Subordinated Notes then outstanding may on behalf of the holders of all of the
New Senior Subordinated Notes waive any past Default or Event of Default under
the New Senior Subordinated Note Indenture, and the consequences of such Default
or Event of Default, except a Default or Event of Default in the payment of the
principal of or interest on the New Senior Subordinated Notes.
The Company is required to deliver to the New Senior Subordinated Note
Trustee quarterly a statement regarding compliance with the New Senior
Subordinated Note Indenture and, upon becoming aware of any Default or Event of
Default, a statement specifying such Default or Event of Default.
A Director, officer, employee or stockholder, as such, of the Company shall
not have any liability for any obligations of the Company under the New Senior
Subordinated Notes or the New Senior Subordinated Note Indenture or for any
claim based on, in respect of, or by reason of, such obligations or their
creation. Each holder of the New Senior Subordinated Notes by accepting New
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Senior Subordinated Notes waives and releases all such liability. The waiver and
release are part of the consideration for issuance of the New Senior
Subordinated Notes.
Satisfaction and Discharge of the New Senior Subordinated Note Indenture
The Company may terminate its obligations under the New Senior Subordinated
Note Indenture at any time by delivering all outstanding New Senior Subordinated
Notes of the New Senior Subordinated Note Trustee for cancellation. After all
the New Senior Subordinated Notes have been called for redemption, the Company
may terminate all of its obligations under the New Senior Subordinated Note
Indenture (with certain exceptions), at any time, by in the case of redemption
of the New Senior Subordinated Notes, depositing with the New Senior
Subordinated Note Trustee money or non-callable U.S. Government obligations
sufficient to pay all remaining indebtedness on the New Senior Subordinated
Notes provided that a Default has not occurred and continues to exist on the
date of deposit, or would occur after giving effect to such deposit, the
obligations of the Company under the New Senior Subordinated Note Indenture
terminate 92 days after such deposit.
Amendment, Supplement, and Waiver
Subject to certain exceptions, the New Senior Subordinated Note Indenture
may be amended or supplemented with the consent of the holders of at least a
majority in principal amount of the New Senior Subordinated Notes then
outstanding, and any existing default or compliance with any provision of such
New Senior Subordinated Note Indenture or the New Senior Subordinated Notes may
be waived with the consent of the holders of a majority in principal amount of
the then outstanding New Senior Subordinated Notes without notice to any other
holder of New Senior Subordinated Notes. Without the consent of any holder of
the New Senior Subordinated Notes, the Company and the New Senior Subordinated
Note Trustee may amend or supplement the New Senior Subordinated Note Indenture
or the New Senior Subordinated Notes to cure any ambiguity, defect or
inconsistency, to provide for uncertificated New Senior Subordinated Notes in
addition to or in place of the certificated New Senior Subordinated Notes, to
provide for the assumption of the Company's obligations to holders of the New
Senior Subordinated Notes in the case of a merger or acquisition, to add
guarantees, to add covenants of the Company for the benefit of the holders of
the New Senior Subordinated Notes, to comply with any requirements of the TIA,
or to make any change that does not materially adversely affect the legal rights
of any holder of the New Senior Subordinated Notes. Without the consent of each
holder affected, the Company may not reduce the amount of New Senior
Subordinated Notes whose holders must consent to an amendment, reduce the rate
of interest or change the interest payment time of any New Senior Subordinated
Notes; reduce the principal of or change the fixed maturity of any New Senior
Subordinated Notes or alter the redemption provision with respect thereto; make
any New Senior Subordinated Notes payable in money other than that stated in the
respective New Senior Subordinated Notes; increase the number of Interest
Payment Dates on which the Company may exercise its option to deliver New Senior
Subordinated Interest Notes in lieu of the payment of cash interest; make any
change in the provisions concerning waiver of Defaults or Events of Default by
holders of the New Senior Subordinated Notes or rights of holders to receive
payment of principal or interest; make any change in the provisions concerning
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the right of any holder to receive payment of principal of or interest on the
New Senior Subordinated Notes held by such holder, on or after the respective
due dates of the New Senior Subordinated Notes, or to bring suit for the
enforcement of any such payment.
The New Senior Subordinated Note Trustee
Bankers Trust Company is the New Senior Subordinated Note Trustee under the
New Senior Subordinated Note Indenture.
The New Senior Subordinated Note Indenture contains certain limitations on
the rights of the New Senior Subordinated Note Trustee, should it become a
creditor of the Company, to obtain payment of claims in certain cases, or to
realize on certain property received in respect of any such claim as security or
otherwise. The New Senior Subordinated Note Trustee will be permitted to engage
in other transactions; however, if the New Senior Subordinated Note Trustee
acquires any conflicting interest, such New Senior Subordinated Note Trustee
must eliminate such conflict or resign.
The holders of a majority in principal amount of the New Senior
Subordinated Notes then outstanding have the right to direct the time, method
and place of conducting any proceeding for exercising any remedy available to
the New Senior Subordinated Note Trustee. The New Senior Subordinated Note
Indenture provides that, in case an Event of Default with respect to the New
Senior Subordinated Notes issued thereunder shall occur (which shall not be
cured), the New Senior Subordinated Note Trustee thereunder will be required, in
the exercise of its power, to use the degree of care of a prudent man in the
conduct of his own affairs. Subject to such provisions, the New Senior
Subordinated Note Trustee is under no obligation to exercise any of its rights
or powers under the New Senior Subordinated Note Indenture at the request of any
of the holders of any New Senior Subordinated Notes, unless such holders shall
have offered to such New Senior Subordinated Note Trustee security and indemnity
satisfactory to such New Senior Subordinated Note Trustee.
Reports to Holders of New Senior Subordinated Notes
The Company will furnish to holders of the New Senior Subordinated Notes
all quarterly and annual reports which it furnishes to holders of its Class A
Common Stock.
Description of the Exchangeable Preferred Stock
General
In connection with the consummation of the Recapitalization, the Company
issued 2,533,255 shares of Exchangeable Preferred Stock to holders of Old Notes
who tendered their Old Notes pursuant to the Exchange Offers. In connection with
the consummation of the Recapitalization, the Company established the Little
Switzerland Trust for the benefit of the Company and the holders of the
Exchangeable Preferred Stock to secure the performance of the Company's
obligations under the Certificate of Designation. In connection with the
establishment of the Little Switzerland Trust, the Company entered into the
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Trust Agreement with BayBank, as the Little Switzerland Trustee, pursuant to
which the Company conveyed to the Little Switzerland Trustee the shares of
Little Switzerland Common Stock which are being held solely for the use and
benefit of the Company and the holders of Exchangeable Preferred Stock. The
following is a summary of certain provisions of the Exchangeable Preferred
Stock. This summary does not purport to be complete and is subject to, and
qualified in its entirety by, the provisions of the Company's Articles of
Organization, the Certificate of Designation and the Trust Agreement. Copies of
the Articles of Organization, the Certificate of Designation and the Trust
Agreement, which have been filed as exhibits to the Registration Statement of
which this Prospectus forms a part, are available from the Company, 25 Union
Street, Chelsea, Massachusetts 02150, telephone number (617) 884-8500;
Attention: Manager of Corporate Communications.
Each share of Exchangeable Preferred Stock has a liquidation preference of
$14.59, plus accrued and unpaid dividends (the "Liquidation Value"), as adjusted
to reflect subdivisions, combinations, reclassifications, stock dividends, stock
splits or similar events relating to the Exchangeable Preferred Stock. The
Exchangeable Preferred Stock is available only in registered form, without
coupons.
Ranking
The Exchangeable Preferred Stock, as with all other classes and series of
capital stock of the Company, is subordinated with respect to the payment of
dividends, if any, and to the distribution of assets of the Company upon any
voluntary or involuntary bankruptcy, liquidation, dissolution or winding up of
the Company to all existing and future indebtedness of the Company and its
subsidiaries, including, without limitation, indebtedness under the Revised Debt
Agreements, the New Senior Secured Notes, the IRBs, the New Senior Subordinated
Notes, and the Old Notes. See "Allocation of Security Interests" on the cover of
this Prospectus. As of May 29, 1994, the Exchangeable Preferred Stock was
subordinate to approximately $86.4 million of indebtedness (excluding
indebtedness to trade creditors) of the Company. The Exchangeable Preferred
Stock also is subordinate to additional indebtedness of up to $35,000,000 under
the New Credit Agreement and of up to approximately 100,000 troy ounces under
the New Gold Agreements. As of May 29, 1994, the amount of indebtedness under
the New Credit Agreement and New Gold Agreements was approximately $8.3 million
and approximately 63,000 troy ounces, respectively. As of May 29, 1994, the
amount of indebtedness to trade creditors outstanding was approximately $16.3
million. The Exchangeable Preferred Stock ranks senior to the Company's Class A
Common Stock, Class B Common Stock and all other Junior Stock (as defined) with
respect to dividends and to the distribution of assets of the Company upon any
voluntary or involuntary bankruptcy, liquidation, dissolution or winding up of
the Company.
While any shares of Exchangeable Preferred Stock are outstanding, the
Company may not authorize or create any class or series of stock that is senior
to or pari passu with the Exchangeable Preferred Stock with respect to dividends
or liquidation without the consent of the holders of 75% of the outstanding
shares of Exchangeable Preferred Stock voting together as a separate class.
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Collateral
In order to further assure the holders of Exchangeable Preferred Stock the
opportunity to exchange such shares of Exchangeable Preferred Stock for Little
Switzerland Common Stock and/or other Exchange Property (as defined), the
Company has granted the Little Switzerland Trustee for the benefit of the
holders of Exchangeable Preferred Stock a security interest in and to the shares
of Little Switzerland Common Stock and other Exchange Property held in the
Little Switzerland Trust. See "--Exchange Rights."
Certain Bankruptcy Limitations
For a discussion of certain bankruptcy considerations, see "Risk
Factors--Certain Bankruptcy Law Considerations" and "Certain Bankruptcy and
Insolvency Considerations."
Dividends
No dividends will be paid on the Exchangeable Preferred Stock until after
the Second Anniversary Date. Thereafter, holders of the shares of Exchangeable
Preferred Stock will be entitled to receive when and as declared by the Board of
Directors of the Company, cumulative cash dividends at the rate of 6% per annum
of the Liquidation Value thereof. Dividends on the Exchangeable Preferred Stock
will be payable semiannually on each November 15th and May 15th after the Second
Anniversary Date. Each such dividend will be payable to holders of record as
they appear on the stock records of the Company at the close of business on the
record date, not exceeding 60 days preceding the payment date, as shall be fixed
by the Board of Directors of the Company. Dividends shall accrue from the Second
Anniversary Date and will be cumulative from such date, whether or not in any
dividend period or periods there shall be funds of the Company legally available
for the payment of such dividends. Dividends payable on the Exchangeable
Preferred Stock shall be computed on the basis of a 360-day year consisting of
twelve 30-day months.
The Company shall not declare, pay or set apart for payment any dividend or
other distribution with respect to any Junior Stock (as defined) or, unless (A)
all accrued dividends with respect to the Exchangeable Preferred Stock at the
time such dividends are payable have been paid or funds have been set apart for
payment of such dividends and (B) sufficient funds have been set apart for the
payment of the dividends for the current dividend period with respect to the
Exchangeable Preferred Stock. As long as shares of Exchangeable Preferred Stock
are outstanding, the Company also shall not (i) issue or authorize the issuance
of any shares of Exchangeable Preferred Stock other than those issued on the
Issuance Date; (ii) create or issue any class of capital stock which is
exchangeable into shares of Little Switzerland Common Stock; or (iii) redeem,
retire, purchase or otherwise acquire any shares of Junior Stock.
As used herein, (i) the term "dividend" does not include dividends payable
solely in shares of Junior Stock, or options, warrants or rights to holders of
Junior Stock to subscribe for or purchase any Junior Stock, and (ii) the term
"Junior Stock" means Class A Common Stock, Class B Common Stock of the Company
and any other class or capital stock of the Company now or hereafter issued and
outstanding that ranks junior as to dividends or liquidation to the Exchangeable
Preferred Stock.
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The Revised Debt Agreements, New Senior Secured Note Indenture, and New
Senior Subordinated Note Indenture place restrictions on the Company's ability
to pay dividends on the Exchangeable Preferred Stock.
Liquidation Rights
In the event of any liquidation, dissolution or winding up of the Company,
a holder of Exchangeable Preferred Stock will be entitled to receive the
Liquidation Value thereof before the distribution of any assets to the holders
of Junior Stock. The rights of holders of Exchangeable Preferred Stock to
exchange their preferred stock for shares of Little Switzerland Common Stock
could be adversely affected in the event of the voluntary or involuntary
bankruptcy, liquidation, dissolution or winding up of the Company. In such event
the Little Switzerland Common Stock or other Exchange Property (as defined) in
the Little Switzerland Trust could become subject to the claims of general
creditors of the Company. See "Certain Bankruptcy and Insolvency
Considerations."
Redemption
Mandatory Redemption. The Company will redeem all outstanding shares of
Exchangeable Preferred Stock on December 31, 2000 at a price per share equal to
the Liquidation Value thereof. The Company may pay such redemption price by
delivering cash, Little Switzerland Common Stock, other Exchange Property or any
combination thereof to a holder. For purposes of such redemption, Little
Switzerland Common Stock or other Exchange Property will have a value equal to
the fair market value thereof.
The Revised Debt Agreements, New Senior Secured Note Indenture, and New
Senior Subordinated Note Indenture place restrictions on the Company's ability
to redeem the Exchangeable Preferred Stock.
Optional Redemption. Except as set forth below, Exchangeable Preferred
Stock may not be redeemed by the Company prior to the Second Anniversary Date.
On and after such date, Exchangeable Preferred Stock may be redeemed at the
option of the Company, in whole at any time or in part from time to time, at the
redemption price (expressed as a percentage of the Liquidation Value) set forth
below if redeemed during the twelve-month period beginning on May 15 of the year
indicated below:
Year Percentage
--------------------- ----------
1995................. 106%
1996................. 104
1997................. 102
1998 and thereafter.. 100
The Company shall pay such redemption price by delivering cash. In the
event that full cumulative dividends on the Exchangeable Preferred Stock have
not been paid or declared and set apart for payment, Exchangeable Preferred
Stock may not be redeemed in part.
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Notwithstanding the foregoing, in the event that during the period from the
date of issuance until the Second Anniversary Date, the Closing Sales Price (as
defined) for Little Switzerland Common Stock equals or exceeds $18.75 per share
for 30 consecutive trading days, the Company may redeem the Exchangeable
Preferred Stock in whole at a price per share equal to 100% of the Liquidation
Value (a "Company Optional Redemption"). In the event of a Company Optional
Redemption, the Company shall pay the redemption price by delivering cash.
The Revised Debt Agreements, New Senior Secured Note Indenture, and New
Senior Subordinated Note Indenture place restrictions on the Company's ability
to redeem the Exchangeable Preferred Stock.
Selection for and Notice of Redemption. If less than all of the shares of
Exchangeable Preferred Stock are to be redeemed, the number of shares of
Exchangeable Preferred Stock to be redeemed from each holder shall be the number
of shares determined by multiplying the total number of shares of Exchangeable
Preferred Stock to be redeemed by a fraction, the numerator of which shall be
the total number of shares of Exchangeable Preferred Stock held by such holder
and the denominator of which shall be the total number of shares of Exchangeable
Preferred Stock then outstanding. Notice of redemption will be mailed not less
than 45 days nor more than 60 days before the redemption date to each holder of
record of shares of Exchangeable Preferred Stock to be redeemed at the address
shown on the books of the Company. Each notice of redemption will specify, among
other things, the date of redemption, the redemption price, and the type of
consideration being paid in connection with the redemption. On and after the
date fixed for redemption, provided that the redemption price has been duly paid
or provided for, dividends shall cease to accrue on the Exchangeable Preferred
Stock called for redemption, such shares shall no longer be deemed to be
outstanding, and all rights of the holders of such shares as stockholders of the
Company shall cease except the right to receive the consideration payable upon
such redemption upon surrender of the certificates evidencing such shares.
Exchange Rights
Exchange at the Option of the Holder. A holder of Exchangeable Preferred
Stock may exchange such stock for Exchange Property (as defined) at any time
after March 1, 1994, at the then current exchange rate (the "Holder Optional
Exchange"). Initially, the Exchange Property shall consist of the shares of
Little Switzerland Common Stock which have been deposited by the Company in the
Little Switzerland Trust in connection with the consummation of the
Recapitalization, and each holder of a share of Exchangeable Preferred Stock
shall be entitled to receive one share of Little Switzerland Common Stock for
each share of Exchangeable Preferred Stock surrendered for exchange, subject to
adjustment to reflect a subdivision, combination, reclassification, stock
dividend, stock option, or similar event relating to the Exchangeable Preferred
Stock or the Little Switzerland Common Stock (the "Exchange Rate"). In addition
to the Company's shares of Little Switzerland Common Stock, the definition of
"Exchange Property" also includes (i) any property (including cash) distributed
in respect of Little Switzerland Common Stock, (ii) any property (including
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cash) issued or distributed upon the exchange or conversion of Little
Switzerland Common Stock, including upon any reorganization, consolidation or
merger or any sale or transfer or lease of all or substantially all the assets
of Little Switzerland, (iii) any property (including cash) paid by a person in
connection with a tender offer or exchange offer for Little Switzerland Common
Stock, and (iv) any interest paid or accrued on investments which are made by
the Little Switzerland Trustee in accordance with the terms of the Trust
Agreement; provided, however, that in the event that the shares of Little
Switzerland Common Stock or any of the property described in clauses (i) through
(iv) above are converted into or exchanged for or otherwise reclassified into
any other securities and/or other property, Exchange Property also shall include
(x) such other securities and/or property received by the Little Switzerland
Trustee upon conversion thereof or in exchange therefor and (y) any securities
or other property issued to the Little Switzerland Trustee with respect to the
securities described in clause (x); provided, further, that Exchange Property
does not include ordinary cash dividends paid on Exchange Property other than
(a) ordinary cash dividends which are paid during a Class Voting Period (as
defined) and (b) any ordinary cash dividends (or portions thereof) which were
previously distributed to the Company by the Little Switzerland Trustee and are
subsequently determined to be extraordinary cash dividends. Except as set forth
in the preceding sentence, the Company is entitled to all ordinary cash
dividends paid on the Exchange Property. Under the Trust Agreement, an
extraordinary cash dividend generally is defined as (i) any dividend which is
designated as extraordinary when declared by a Board of Directors, (ii) any cash
dividend which, when aggregated with all other cash dividends paid in the
preceding 89 days, exceeds .75% of the average trading price of Little
Switzerland Common Stock or (iii) any cash dividend which, when aggregated with
all other cash dividends paid in the preceding 360 days, exceeds 3% of the
average trading price of Little Switzerland Common Stock. In the event of any
distribution, merger, consolidation or tender or exchange offer described above,
the Exchange Rate shall be adjusted so that thereafter each holder of
Exchangeable Preferred Stock surrendered for exchange will be entitled to
receive the kind and amount of shares, securities and other property receivable
upon or in connection with such distribution, merger, consolidation or tender or
exchange offer by a holder of the number of shares of Little Switzerland Common
Stock or other Exchange Property for which such Exchangeable Preferred Stock
might have been exchanged immediately prior to such distribution, merger,
consolidation or tender or exchange offer, as well as a pro rata share of any
cash, securities and other property held for exchange by the Little Switzerland
Trustee in accordance with the terms of the Certificate of Designation and the
Little Switzerland Trust. The Company or the Little Switzerland Trustee will
give holders of Exchangeable Preferred Stock prior notice as promptly as
practicable after it receives notice of any adjustments in its Exchange Rate.
If the Exchangeable Preferred Stock is surrendered for exchange during the
period between the close of business on the record date for a dividend and the
close of business on the payment date and has not been called for redemption
within such period, such surrender must be accompanied by payment of an amount
equal to the amount of dividend payable on such shares of Exchangeable Preferred
Stock being surrendered for exchange. If Exchangeable Preferred Stock is called
for redemption, the holder may exchange it at any time before the close of
business on the redemption date.
In order to exercise the right of exchange, a holder must (i) complete and
manually sign the exchange notice on the back of the Exchangeable Preferred
Stock (or complete and manually sign a facsimile thereof) and deliver such
notice to the Little Switzerland Trustee, (ii) surrender the Exchangeable
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Preferred Stock to the Little Switzerland Trustee by physical delivery, (iii) if
required, furnish appropriate endorsements and transfer documents, and (iv) if
required, pay all transfer or similar taxes. Pursuant to the Certificate of
Designation, the date on which such notice shall have been received by the
Little Switzerland Trustee, and the Exchangeable Preferred Stock shall have been
so surrendered to such trustee, is the exchange date. Such exchange notice shall
be irrevocable and may not be withdrawn by a holder for any reason.
The shares of Little Switzerland Common Stock which are exchangeable for
shares of Exchangeable Preferred Stock have been registered under the Securities
Act pursuant to a registration statement on Form S-3 (File No. 33-69924). A copy
of the prospectus included in such registration statement is being delivered
herewith. The Company has agreed to use its best efforts to keep such
registration statement effective until the date on which all outstanding shares
of Exchangeable Preferred Stock have been exchanged for shares of Little
Switzerland Common Stock or have been redeemed or purchased by the Company
pursuant to the Certificate of Designation.
Little Switzerland Shareholder Rights Agreement
Little Switzerland has adopted a Shareholder Rights Agreement. Upon the
adoption of the Shareholder Rights Agreement, the Board of Directors declared a
dividend distribution of one preferred stock purchase right (a "Right") for each
share of Little Switzerland Common Stock outstanding upon the close of business
on July 25, 1991. Each Right entitles the registered holder to purchase from
Little Switzerland a unit consisting of one one-hundredth of a share (a "Unit")
of Series A Preferred Stock at $50.00 per Unit. Each one one-hundredth of a
share of Series A Preferred Stock of Little Switzerland ("Series A Preferred
Stock") is designed to approximate the value of a share of Little Switzerland
Common Stock.
Initially, the Rights are not exercisable and are attached to all
outstanding shares of Little Switzerland Common Stock. The Rights generally will
separate from Little Switzerland Common Stock and be distributed to registered
holders of Little Switzerland Common Stock upon the earliest to occur of (i) ten
business days after the first public announcement that a person or group of
affiliated or associated persons (an "Acquiring Person") has acquired beneficial
ownership of 15% or more of the shares of Little Switzerland Common Stock then
outstanding (the date of this public announcement will be hereinafter referred
to as the "Stock Acquisition Date"); (ii) ten business days following the
commencement of a tender offer or exchange offer that would result in a person
or group becoming an Acquiring Person; or (iii) the declaration by the Little
Switzerland Board of Directors that any person is an Adverse Person as described
below. A "Grandfathered Person" shall not become an Acquiring Person unless such
person shall become the beneficial owner of more than the "Grandfathered
Percentage" of the outstanding shares of Little Switzerland Common Stock. Under
the Shareholder Rights Agreement, a "Grandfathered Person" is defined as (i) the
Company, together with all of its associates and affiliates, and (ii) Fidelity
Management & Research Company, Fidelity Management Trust Company and the funds
which they manage (the "Fidelity Persons"), together with all of their
associates and affiliates. The "Grandfathered Percentage" is defined in the
Shareholder Rights Agreement as (i) with respect to the Company, the percentage
of outstanding shares of Little Switzerland Common Stock that the Company
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beneficially owned as of the close of business on July 25, 1991, plus an
additional two percentage points, and (ii) with respect to the Fidelity Persons,
the percentage of outstanding shares of Little Switzerland Common Stock that the
Fidelity Persons beneficially owned as a result of their acquisition of shares
of Exchangeable Preferred Stock on the closing date of the Recapitalization,
plus an additional two percentage points. In the event that either the Company
or the Fidelity Persons shall sell, transfer or otherwise dispose of shares of
Little Switzerland Common Stock or (in the case of the Fidelity Persons) shares
of Exchangeable Preferred Stock, the Grandfathered Percentage shall, subsequent
to such sale, transfer or other disposition, mean with respect to such person,
the lesser of (i) the Grandfathered Percentage as in effect immediately prior to
such sale, transfer or disposition or (ii) the percentage of outstanding shares
of Little Switzerland Common Stock that such Grandfathered Person beneficially
owns immediately following such sale, transfer or disposition plus an additional
two percentage points. Unless previously redeemed or exchanged as provided
below, the Rights will expire as of the close of business on July 24, 2001.
The Little Switzerland Board of Directors could (in certain circumstances)
declare a person to be an Adverse Person after a determination that such person,
alone or together with its affiliates and associates, has become the beneficial
owner of 10% or more of the outstanding shares of Little Switzerland Common
Stock.
In the event that a person becomes an Acquiring Person or the Little
Switzerland Board of Directors determines that a person is an Adverse Person,
proper provision will be made so that each holder of a Right will thereafter
have the right to receive upon exercise that number of Units of Series A
Preferred Stock of Little Switzerland having a market value of two times the
exercise price of the Right (such right being referred to as the "Subscription
Right"). In the event that, at any time following the Stock Acquisition Date,
(i) Little Switzerland consolidates with, or merges with and into, any other
person, and Little Switzerland is not the continuing or surviving corporation,
(ii) any person consolidates with Little Switzerland, or merges with and into
Little Switzerland and Little Switzerland is the continuing or surviving
corporation of such merger and, in connection with such merger, all or part of
the shares of Little Switzerland Common Stock are changed into or exchanged for
stock or other securities of any other person or cash or any other property, or
(iii) 50% or more of Little Switzerland's assets or earning power is sold, each
holder of a Right shall thereafter have the right to receive, upon exercise,
common stock of the acquiring company having a market value equal to two times
the exercise price of the Right (such right being referred to as the "Merger
Right"). The holder of a Right will continue to have the Merger Right whether or
not such holder has exercised the Subscription Right. Rights that are or were
beneficially owned by an Acquiring Person or an Adverse Person may (under
certain circumstances specified in the Shareholder Rights Agreement) become null
and void.
At any time after a person becomes an Acquiring Person or the Little
Switzerland Board of Directors determines that a person is an Adverse Person,
the Little Switzerland Board of Directors may, at its option, exchange all or
any part of the then outstanding and exercisable Rights for shares of Little
Switzerland Common Stock or Units or Series A Preferred Stock at an exchange
ratio of one share of Little Switzerland Common Stock or one Unit of Series A
Preferred Stock per Right. Notwithstanding the
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foregoing, the Little Switzerland Board of Directors generally shall not be
empowered to effect such exchange at any time after the person becomes the
beneficial owner of 50% or more of the Little Switzerland Common Stock.
The Rights may be redeemed in whole, but not in part, at a price of $0.01
per Right (payable in cash, Little Switzerland Common Stock or any other
consideration deemed appropriate by the Little Switzerland Board of Directors)
by the Little Switzerland Board of Directors at any time prior to the date on
which a person is declared to be an Adverse Person, the tenth business day after
the Stock Acquisition Date, the occurrence of an event giving rise to the Merger
Right or the expiration date of the Shareholder Rights Agreement. Immediately
upon the action of the Little Switzerland Board of Directors ordering redemption
of the Rights, the Rights will terminate and thereafter the only right of the
holders of Rights will be to receive the redemption price.
Offer to Purchase Upon Change of Control
Upon the occurrence of a Change of Control of the Company (as defined) and
subject to compliance by the Company with its requirements under the Revised
Debt Agreements, the IRBs, the New Senior Secured Note Indenture, and the New
Senior Subordinated Note Indenture, each holder of Exchangeable Preferred Stock
will have the right to require the Company to purchase all or any part, at such
holder's option, of such holder's Exchangeable Preferred Stock at a purchase
price in cash equal to the Liquidation Value thereof. It is unlikely that the
"Change of Control" option will become exercisable in the foreseeable future.
Within 30 days after any Change of Control, the Company shall mail a notice
to each holder of Exchangeable Preferred Stock stating: (i) that a Change of
Control has occurred, and that such holder has the right to require the Company
to redeem such holder's Exchangeable Preferred Stock, in whole or in part, at a
purchase price in cash equal to the Liquidation Value thereof or to exchange
such holder's Exchangeable Preferred Stock for Exchange Property; (ii) the
circumstances and relevant facts regarding such Change of Control; (iii) the
date on which the Company will purchase the Exchangeable Preferred Stock from
electing holders; (iv) the date until which holders of Exchangeable Preferred
Stock may elect to have their Exchangeable Preferred Stock purchased; (v) the
date until which electing holders of Exchangeable Preferred Stock may withdraw
their election to have their Exchangeable Preferred Stock purchased; and (vi)
instructions for tendering Exchangeable Preferred Stock. The Company also will
comply with the provisions of Rule 13e-4, Rule 14e-1, and any other applicable
tender offer rules under the Exchange Act if required and will file Schedule
13E-4 or any other Schedule if required thereunder in connection with any offer
by the Company to purchase Exchangeable Preferred Stock upon a Change of Control
of the Company.
Prior to mailing the notice set forth in the preceding paragraph, one of
the following events must have occurred: (i) the Company makes an offer to repay
in full all monetary obligations under and in respect of the Revised Debt
Agreements, the New Senior Secured Notes, the New Senior Subordinated Notes, and
the IRBs, and either (A) 30 days, or such longer period as required by the
Revised Debt Agreements, the New Senior Secured Notes, the IRBs or the New
Senior Subordinated Notes, elapse after the date of such offer and no bank, gold
supplier or holder of New Senior Secured Notes, the IRBs or New Senior
Subordinated Notes accepts the offer, or (B) one or more banks, gold suppliers
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or holders of New Senior Secured Notes, the IRBs or New Senior Subordinated
Notes accept the offer within 30 days, or such longer period as required by the
Revised Debt Agreements, the New Senior Secured Notes, the IRBs or the New
Senior Subordinated Notes, after the date of such offer and the Company repays
all monetary obligations under and in respect of all banks, gold suppliers, and
the holders of the New Senior Secured Notes, the IRBs, and New Senior
Subordinated Notes in full, and 91 days elapse after the date of such repayment
in full, or (ii) the Company does not make an offer to repay the indebtedness
under the Revised Debt Agreements, the New Senior Secured Notes, the IRBs, and
the New Senior Subordinated Notes, but obtains the requisite consents under the
Revised Debt Agreements, the New Senior Secured Notes, the IRBs, and the New
Senior Subordinated Notes to permit the purchase of the Exchangeable Preferred
Stock. The right of holders of Exchangeable Preferred Stock to have their stock
purchased at their option upon the occurrence of a Change in Control will be
subject to the Company's compliance with the requirements of the preceding
sentence.
A "Change of Control of the Company" shall occur when (i) all or
substantially all of the Company's assets are sold as an entirety to any person
or related group of persons other than an affiliate or affiliates of the
Company, (ii) the Company engages in any merger, consolidation, sale of capital
stock, or any other transaction with any other person, with the effect that the
stockholders of the Company immediately prior thereto own, directly or
indirectly, in the aggregate less than 50% of the voting stock of (x) the
Company if the Company is the surviving entity, or (y) the surviving or
resulting entity if the Company is not the surviving entity, in each such case
immediately after such transaction, or (iii) any person or persons acting
together which would constitute a "group" (a "Group") for purposes of Section
13(d) and 14(d) of the Exchange Act (other than (A) C. William Carey, (B) any
relative or spouse of C. William Carey who has the same principal residence as
C. William Carey, or any relative of such spouse who has the same principal
residence as C. William Carey, or (C) any trust or other estate in which C.
William Carey or any relative or spouse of C. William Carey who has the same
principal residence as C. William Carey or any relative of such spouse who has
the same principal residence as C. William Carey, has a substantial beneficial
interest or as to which he or she, as the case may be, serves as trustee or in a
similar fiduciary capacity) becomes the beneficial owner (as defined in Rules
13d-3 and 13d-5 under the Exchange Act) of 50% or more of the voting stock of
the Company; or (iv) the Company or any significant subsidiary (as defined in
Rule 1.02 of Regulation S-X under the Securities Act) is liquidated, dissolved,
or adopts a plan of liquidation pursuant to any bankruptcy laws.
There is no established meaning of what constitutes a sale of "all or
substantially all" of a company's assets. This uncertainty may make it difficult
for a holder to determine whether or not a Change of Control of the Company has
occurred, and thus, whether the holder is entitled to have its shares purchased
by the Company. The Company could, in the future enter into certain
transactions, including certain leveraged transactions, including, without
limitation, leveraged transactions initiated or supported by the Company, the
Company's management or an affiliate of the Company or the Company's management
that would not constitute a Change of Control of the Company.
The Revised Debt Agreements, the IRBs, the New Senior Secured Note
Indenture, and the New Senior Subordinated Note Indenture place restrictions on
the Company's ability to purchase shares of Exchangeable Preferred Stock upon a
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Change of Control of the Company. In addition, the source of funds for any such
purchases will be the Company's available cash or cash generated from operations
or other sources, including borrowings, sales of assets or sales of equity.
There can be no assurances, however, that sufficient funds will be available at
the time of any Change of Control to purchase any shares of Exchangeable
Preferred Stock.
Trust Arrangements
In connection with the consummation of the Recapitalization, the Company
transferred to the Little Switzerland Trustee 2,533,279 shares of Little
Switzerland Common Stock. The Little Switzerland Trustee holds such stock for
the use and the benefit of the Company and the holders of Exchangeable Preferred
Stock in accordance with the terms of the Certificate of Designation and the
Trust Agreement. While such shares are held by the Little Switzerland Trustee,
the Company may not sell, convey or otherwise transfer such shares of Little
Switzerland Common Stock. The Little Switzerland Trustee will deliver the
Exchange Property to holders who surrender Exchangeable Preferred Stock for
exchange at the Exchange Rate.
If Little Switzerland or any other issuer of securities which constitute
Exchange Property shall grant subscription rights, options, warrants or other
similar rights to holders of Exchange Property, the Little Switzerland Trustee
will, to the extent such securities, other property or rights are transferable,
sell all such securities, other property and rights, for cash. The Little
Switzerland Trustee will apply the proceeds of any such sale first to the
payment of any taxes incurred or deemed incurred by the Company or the Little
Switzerland Trustee on such distribution or sale. The balance of the cash
proceeds shall be Exchange Property and shall be held by the Little Switzerland
Trustee for distribution pro rata with the other Exchange Property to be
delivered to holders requesting exchange of the preferred stock. To the extent
such securities, other property or rights are non-transferable, the Little
Switzerland Trustee will (a) use its best efforts to cause such securities,
other property or rights to be distributed to the holders of the Exchangeable
Preferred Stock or (b) in the event not so distributed retain such securities,
other property or rights for the benefit of the Company and the holders of the
Exchangeable Preferred Stock.
If the Company or the Little Switzerland Trustee incurs any federal, state,
local or foreign tax liability as a result of its interest in the Little
Switzerland Trust or the Exchange Property, the Little Switzerland Trustee will
deliver cash which it then holds for exchange to the Company or to itself for
payment of the taxes arising or deemed to arise from such transaction. If the
cash held for exchange is insufficient to pay the amount of such taxes, the
Little Switzerland Trustee will sell such Exchange Property as may be necessary
to pay the amount of the insufficiency and any taxes payable by the Company or
the Little Switzerland Trustee arising from such sale.
Any cash held by the Little Switzerland Trustee that is deliverable upon
exchange for Exchangeable Preferred Stock will be invested by the Little
Switzerland Trustee in (i) U.S. Government obligations with a maturity of one
year or less or (ii) certificates or deposit or acceptances with a maturity of
one year or less of any financial institution that is a member of the Unites
States Federal Reserve System having combined capital and surplus and undivided
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profits of not less than $500,000,000. Any interest or gain on such investments
shall constitute Exchange Property and any holder exchanging shares of
Exchangeable Preferred Stock shall be entitled to receive upon exchanges (in
addition to the other Exchange Property which they are entitled to receive)
their pro rata share of such interest or gain. To the extent Exchangeable
Preferred Stock is redeemed prior to exchange, the Company will be entitled to
receive from the Little Switzerland Trustee such Exchange Property held by the
Little Switzerland Trustee for exchange which exceeds the amount of Exchange
Property required to be held by the Little Switzerland Trustee for the exchange
of all Exchangeable Preferred Stock remaining outstanding after such redemption.
Any cash, securities or other property remaining in the Little Switzerland Trust
after December 31, 2000, will be returned to the Company free of the terms of
the Trust Agreement.
Voting of Little Switzerland Common Stock and Other Matters
Except during a Class Voting Period (as defined), the Company has the right
to vote the shares of Little Switzerland Common Stock or other securities which
constitute Exchange Property on all matters submitted for vote to the holders of
such securities. During a Class Voting Period, the Little Switzerland Trustee
shall vote such securities in the manner directed by the holders of Exchangeable
Preferred Stock.
Consolidation, Merger, and Sale of Assets
The Company may not consolidate with or merge into, or transfer all or
substantially all of its assets to, another corporation, person or entity
(unless it is the surviving entity and the Exchangeable Preferred Stock is
unchanged) unless (i) the surviving entity is a corporation organized under the
laws of the United States, any state thereof or the District of Columbia, or a
corporation or comparable legal entity organized under the laws of a foreign
jurisdiction and whose equity securities are listed on a national services
exchange in the United States or authorized for quotation on NASDAQ, and (ii)
the Company shall make effective provision such that the holders of the
Exchangeable Preferred Stock shall receive upon the consummation of such
transaction exchangeable preferred stock of the surviving entity having
substantially identical terms (including as to exchange) as the Exchangeable
Preferred Stock.
Voting Rights
Except under the limited circumstances described below and as required by
applicable law, the holders of Exchangeable Preferred Stock have no voting
rights. If and whenever two semi-annual dividend payments on the Exchangeable
Preferred Stock are in arrears, then during the period (hereinafter called the
"Class Voting Period") commencing with such time and ending when all arrearages
in dividends on the Exchangeable Preferred Stock shall have been paid, the
holders of the Exchangeable Preferred Stock, voting together as a separate
class, are entitled to elect one or more additional directors equal to 30% of
the entire Board of Directors and each share of Exchangeable Preferred Stock is
entitled to one vote in such election of directors. The term of any director so
elected shall expire at the end of the Class Voting Period.
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The affirmative vote of the holders of 100% of the outstanding shares of
Exchangeable Preferred Stock, voting together as a separate class, is required
in order to change (i) the amount of the Liquidation Value or the dividend rate
of, or other provisions relating to the calculation of the dividend on, the
Exchangeable Preferred Stock, (ii) any provision relating to the mandatory
redemption of the Exchangeable Preferred Stock; (iii) any provision relating to
a Company Optional Redemption of the Exchangeable Preferred Stock; (iv) any
provision relating to the exchange of Exchangeable Preferred Stock for Exchange
Property; (v) any provision relating to the offer to purchase shares of
Exchangeable Preferred Stock upon a change of control and (vi) any provisions
relating to the voting rights of the Exchangeable Preferred Stock. The
affirmative vote of the holders of at least 75% of the outstanding shares of
Exchangeable Preferred Stock, voting together as a separate class, is required
in order (i) to change, by amendment to the Company's Articles of Organization
or otherwise, any other term or provision of the Exchangeable Preferred Stock so
as to affect adversely any right, preference or voting power of the holders
thereof or (ii) authorize the issuance of any class or series of stock of the
Company that is senior to or pari passu with the Exchangeable Preferred Stock
with respect to dividends or liquidation.
Other Miscellaneous Matters
To the knowledge of the Company, no person presently is making a market in
the Exchangeable Preferred Stock. No person will be obligated to make a market
in the Exchangeable Preferred Stock and any market making activity undertaken by
any person may be discontinued at any time. There can be no assurance that an
active public market for the Exchangeable Preferred Stock will develop and
continue. See "Risk Factors--Lack of Established Market."
Because the Exchangeable Preferred Stock may be exchangeable for shares of
Little Switzerland Common Stock, the prices at which the Exchangeable Preferred
Stock may trade in the market, if it trades at all, will likely be affected by
the market price from time to time of Little Switzerland Common Stock.
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SELLING SECURITYHOLDERS
Because the Fidelity Funds may be deemed underwriters of New Senior Secured
Notes or affiliates of the Company, this Prospectus covers any reoffers or
resales of any Exchange Securities which were acquired by the Fidelity Funds
pursuant to the Exchange Offers and any New Senior Secured Notes and Class A
Common Stock which were acquired by the Fidelity Funds pursuant to the Secured
Debt Offering. See also "Plan of Distribution" and "The Secured Debt
Offering-General." The following table sets forth certain information with
respect to (i) the respective amounts and percentages of New Senior Secured
Notes which were acquired by the Fidelity Funds upon the closing of the Secured
Debt Offering, (ii) the respective amounts and percentages of New Senior
Subordinated Notes, shares and aggregate liquidation value of Exchangeable
Preferred Stock, and shares of Class A Common Stock which were acquired by the
Fidelity Funds upon the closing of the Exchange Offers, and (iii) the respective
amounts of shares of Class A Common Stock which were acquired by the Fidelity
Funds in connection with the Secured Debt Offering, in each case which are still
owned by the Fidelity Funds as of June 30, 1994:
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<TABLE>
<CAPTION>
Percent-
Percent- age of
age of Aggre-
Aggre- gate
gate Prin- Percent-
Prin- cipal age of Percent- Percent-
cipal Amount Shares age of age of
Amount Principal of New Liquidation Number of of Ex- Number of Shares Voting
Prinicpal of New Amount of Senior Value of Shares of change- Shares of of Power
Amount of Senior New Senior Sub- Exchangeable Exchangeable able Class A Class A of
New Senior Secured Subordinated ordinat- Preferred Preferred Preferr- Common Common Common
Name of Fidelity Fund Secured Notes Notes Notes ed Notes Stock Stock ed Stock Stock Stock Stock
- --------------------- ------------- ------- ------------ -------- ------------ ------------ -------- --------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Fidelity Capital &
Income Fund..... $ 840,000 5.0% $11,852,470 19.5% $ 7,618,547 522,176 20.6% 2,355,765 11.3% 5.0%
Certain Funds
Managed by
Fidelity Manage-
ment Trust
Company......... - - 4,000,510 6.6 804,697 55,154 2.2 659,744 3.2 1.4
Fidelity Asset
Manager......... 148,000 0.9 3,738,043 6.2 343,405 23,537 0.9 743,292 3.6 1.6
Spartan High
Income Fund..... 424,000 2.5 2,935,007 4.8 - - - 583,839 2.8 1.2
Fidelity Puritan
Fund............ 1,720,000 10.4 2,684,413 4.4 1,635,510 112,098 4.4 534,507 2.6 1.1
Fidelity Advisor
High Yield
Portfolio....... 610,000 3.7 749,523 1.2 159,323 10,920 0.4 149,004 0.7 0.3
Variable Insurance
Products Fund:
High Income
Portfolio....... - - - - 58,360 4,000 0.2 - - -
- ------------------ ------------- ------- ------------ -------- ------------ ------------ -------- --------- -------- --------
Total............. $ 3,742,000 22.5% $25,959,966 42.8% $10,619,842 727,885 28.7% 5,026,151 24.2% 10.6%
</TABLE>
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The Company will not receive any of the proceeds from the sale by the
Fidelity Funds of the New Senior Secured Notes or the Exchange Securities.
PLAN OF DISTRIBUTION
Because the Fidelity Funds may be deemed underwriters of New Senior Secured
Notes or affiliates of the Company, this Prospectus covers any reoffers or
resales of any Exchange Securities which were acquired by the Fidelity Funds
pursuant to the Exchange Offers and New Senior Secured Notes and Class A Common
Stock which were acquired by the Fidelity Funds in connection with the Secured
Debt Offering. See "Selling Securityholders." In the event that any of such
funds distribute any of these securities in the future, such securities may be
sold from time to time to purchasers directly by any of such Fidelity Funds.
Alternatively, the Fidelity Funds may offer from time to time the Exchange
Securities which were acquired pursuant to the Exchange Offers and the New
Senior Secured Notes and Class A Common Stock which were acquired in connection
with the Secured Debt Offering through underwriters, dealers or agents who may
receive compensation in the form of underwriter discounts, concessions or
commissions from the Fidelity Funds and/or the purchasers of such securities for
whom they act as agents. While the Fidelity Funds do not believe they will be
underwriters under the Securities Act, the Fidelity Funds and any such
underwriters, dealers or agents may be deemed underwriters in connection with
such sales, and any profit on the sale of such securities by them and any
discounts, commissions or concessions received by any such underwriters, dealers
or agents may be deemed to be underwriting discounts and commissions under the
Securities Act.
In connection with the Recapitalization, the Company entered into a
Registration Effectiveness Agreement with the Fidelity Funds. Pursuant to this
agreement, the Company agreed to use its best efforts (i) to file a
post-effective amendment to the Prospectus within fifteen days after the closing
of the Recapitalization and (ii) to keep the Prospectus effective until the
earlier of (x) the date on which the Fidelity Funds notify the Company that they
may dispose of the Exchange Securities which were acquired pursuant to the
Exchange Offers and the New Senior Secured Notes and Class A Common Stock which
were acquired in connection with the Secured Debt Offering owned by them without
being subject to the restrictions set forth in Rule 144(e)(i) of the Securities
Act or (y) the date on which the Fidelity Funds no longer own any of such
securities. Under this agreement, if the Prospectus is not continuously
effective for 120 days during any six month period, the Company also generally
will make a cash payment to the Fidelity Funds equal to the product of (x)
.00125 and (y) the aggregate principal amount of the securities owned by the
Fidelity Funds as of the date of such payment which were acquired pursuant to
the Recapitalization (the "Illiquidity Payment"). In the event that the Company
fails to satisfy this test for four consecutive months, the amount of the cash
payment required to be made by the Company will be increased by 100% of the
Illiquidity Payment for such fourth calendar month and for each consecutive
calendar month thereafter in which the Company is obligated to make an
Illiquidity Payment. The Registration Effectiveness Agreement also provides that
the Company will indemnify the Fidelity Funds and any controlling persons of
such funds against certain liabilities, including liabilities under the
Securities Act.
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RANKING OF INDEBTEDNESS; RIGHTS IN COLLATERAL; COLLATERAL AGENCY AND
INTERCREDITOR AGREEMENT
Pursuant to the terms of the Revised Debt Agreements, the IRBs and the New
Senior Secured Notes (collectively, the "Senior Recapitalization Facilities"),
the Senior Recapitalization Facilities each rank pari passu in right of payment
with each other, and the New Senior Subordinated Notes are subordinate and
junior in right of payment to all indebtedness under the Senior Recapitalization
Facilities. Therefore, (i) the holders of the Senior Recapitalization Facilities
each have equal rights to bring an action to collect their respective
indebtedness from the Borrowers and to obtain a judgment against the Borrowers
in respect of such indebtedness, (ii) the Borrowers have not contractually
agreed to pay their indebtedness under any of the Senior Recapitalization
Facilities ahead of or after their indebtedness under any of the other Senior
Recapitalization Facilities, and (iii) the rights of the holders of the New
Senior Subordinated Notes to enforce such notes and to receive payments
thereunder are limited as and to the extent provided by the subordination
provisions of the New Senior Subordinated Note Indenture. See "Description of
the New Securities-- Description of the New Senior Subordinated
Notes--Subordination; Ranking."
Notwithstanding the foregoing, the holders of indebtedness under the Revised
Debt Agreements, the IRBs, the New Senior Secured Notes and the New Senior
Subordinated Notes have different rights in collateral securing such
indebtedness. See "Allocation of Security Interests" on the front cover of the
Prospectus for a discussion of the collateral securing such obligations and the
priority of the liens in such collateral to be granted to such holders. As
described in "Allocation of Security Interests" on the front cover of the
Prospectus, although the obligations of the Borrowers in respect of the Revised
Debt Agreements, the IRBs, the New Senior Secured Notes and the New Senior
Subordinated Notes are secured by liens in substantially all of the assets of
the Company and its domestic subsidiaries, such liens are not of equal priority
and, as a result, are not of equal value. In addition, pursuant to the
Intercreditor Agreement, the rights of the holders of such indebtedness to
exercise rights of foreclosure with respect to collateral in which they hold
junior liens and security interests are limited. Therefore, to the extent that
any such holders hold fewer (or no) first priority liens in collateral, such
holders' rights in such collateral are adversely affected.
The Intercreditor Agreement governs the respective rights in collateral of
the holders of Indebtedness under the New Credit Agreement, the New Gold
Agreements, the IRBs, the New Senior Secured Notes and the New Senior
Subordinated Notes (collectively, the "Claimants"). Pursuant to the
Intercreditor Agreement, the Company and the Subsidiary Guarantors have granted
security interests in substantially all of the assets of the Company and the
Subsidiary Guarantors (collectively, the "Collateral") to a collateral agent
(the "Collateral Agent"). As used herein and in the Intercreditor Agreement, the
term "Collateral" refers to the assets of the Company and the Subsidiary
Guarantors identified in "Allocation of Security Interests" on the front cover
of the Prospectus. The Collateral Agent shall hold the liens and security
interests in the Collateral for the benefit of the Claimants in the priority of
the assets of the Company securing the Company's obligations under the New
Credit Agreement, the New Gold Agreements, the IRBs, the New Senior Secured
Notes, and the New Senior Subordinated Notes. Pursuant to the Intercreditor
Agreement, the priorities of the security interests and liens of the Claimants
in the proceeds of Collateral shall be the same as the corresponding priorities
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with respect to the category of Collateral which gives rise to such proceeds
(the "Related Category of Collateral"). As a general rule, if an item of
property constituted proceeds of a Related Category of Collateral and also falls
within another category of Collateral, the priority of the security interests
and liens of the Claimants in such proceeds shall be determined with reference
to the priorities applicable to the Related Category of Collateral.
Each class of Claimants has deemed the Collateral Agent its agent with
respect to the Collateral and delegate a "Representative" for purposes of the
Intercreditor Agreement. The Collateral Agent shall appoint each Representative
as its subagent with respect to those categories of Collateral in which the
class of Claimants represented by such Representative holds a first priority
security interest, for the purpose of taking all actions with respect to such
categories of Collateral. Each Representative may act with respect to any
category of Collateral within the scope of its subagency without consulting with
the Collateral Agent. Pursuant to the Intercreditor Agreement, the Collateral
Agent and the subagents shall not be trustees for and shall not have any
fiduciary or quasi-fiduciary duty to the Claimants, except to the extent that
the Collateral Agent or any subagent holds the proceeds of the liquidation of
Collateral, in which case the Collateral Agent or the subagent, as applicable,
shall hold such proceeds in trust for the benefit of the Claimants.
Notwithstanding the provisions of the Intercreditor Agreement pursuant to
which liens and security interests are granted to the Collateral Agent for the
benefit of the Claimants, pursuant to the Intercreditor Agreement, each of the
parties has agreed that the Gold Suppliers may hold security interests or liens
in their own names. These security interests and liens are in addition to the
security interests and liens which are perfected in the name of the Collateral
Agent, and shall be held by the Gold Suppliers as additional comfort as to
perfection of their security interests and liens in Collateral.
Following the occurrence and during the continuance of any Event of Default
(after giving effect to any applicable grace or cure periods and after the
giving of any required notices) as defined in the New Credit Agreement, the New
Gold Agreements, the IRBs, the New Senior Secured Note Indenture and the New
Senior Subordinated Note Indenture, the applicable class of Claimants may
instruct its Representative to give notice (a "Formal Event of Default Notice")
to the Collateral Agent and the other Representatives of such default. Upon the
delivery of a Formal Event of Default Notice, a formal event of default (a
"Formal Event of Default") shall exist under the Intercreditor Agreement and the
applicable Representative shall be entitled to exercise all rights and remedies,
as subagent, for purposes of liquidation of the particular categories of
Collateral in which its class of Claimants holds the first priority lien. If
after delivery of a Formal Event of Default Notice the underlying Event of
Default has been cured or waived, such Representative shall promptly notify the
Collateral Agent and the other Representatives that the Formal Event of Default
under the Intercreditor Agreement no longer remains effective. Pursuant to the
Intercreditor Agreement, it is possible for more than one Formal Event of
Default Notice to have been given and to be effective for concurrent or
overlapping periods. As a result, at any one
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time more than one Representative may be entitled to exercise rights and
remedies, as subagent, for purposes of liquidation of categories of Collateral
in which its class of Claimants holds the first priority lien.
Notwithstanding the existence of an Event of Default under its underlying
transactional documents and the delivery of a Formal Event of Default Notice to
the Collateral Agent and other Representatives, no class of Claimants holding a
junior security interest or lien in a category of Collateral may exercise or
instruct the Collateral Agent to exercise rights to collect upon, foreclose
upon, or otherwise dispose of such Collateral unless (a) more than one (1) year
has elapsed since the giving of the Formal Event of Default Notice by the
Representative of such class of Claimants, which Formal Event of Default Notice
was premised on a Material Event of Default (as defined below), (b) Formal Event
of Default existed under the Intercreditor Agreement continuously at all times
since the giving of such Formal Event of Default Notice, (c) the Representative
of such class of Claimants has collected, foreclosed upon, disposed of, or made
diligent and good faith efforts to collect, foreclose upon or dispose of all
Collateral in which the class of Claimants it represents holds a first priority
security interest, and (d) neither the Collateral Agent nor any Representative
of a class of Claimants holding a senior security interest or lien in the
category of Collateral has taken and is diligently pursuing steps to collect,
foreclose upon or dispose of such Collateral; provided, however, the foregoing
shall not apply to Claimants under the New Senior Subordinated Note Indenture or
their Representative, which shall be subject to a permanent standstill as to
enforcement of junior liens in Collateral. As defined in the Intercreditor
Agreement, a "Material Event of Default" means a default in the payment of
principal, interest or premium on the underlying indebtedness, after the
expiration of all applicable grace periods, whether by maturity, acceleration or
otherwise.
Collections with respect to the liquidation of the Collateral shall be
distributed among the Claimants, through their Representatives, in accordance
with their respective priorities therein, with no distribution to a lower level
of priority until all claims of the higher levels of priority are satisfied.
In the event that the Company or any Subsidiary Guarantor sells, transfers
or otherwise disposes of any Collateral outside the ordinary course of its
business, such disposition shall be for fair value and the proceeds derived from
such disposition shall be distributed to each class of Claimants in accordance
with the priorities set forth in the Intercreditor Agreement. The Collateral
Agent may release the security interests in and liens on the disposed Collateral
at the direction of the Representative of the class of Claimants holding the
first security interest and lien on the disposed Collateral without the need to
obtain the consent of the Claimants holding junior liens on the disposed
Collateral or their Representatives; provided, however, if the fair value of the
disposed Collateral is in excess of $10,000,000, the consent of at least three
Representatives of the five classes of Claimants shall be required for the
Collateral Agent to release the security interests in and liens on such disposed
Collateral.
In the event of any bankruptcy or other insolvency proceeding by or against
the Company or any Subsidiary Guarantor, the Intercreditor Agreement shall
remain in full force and effect. Nothing contained in the Intercreditor
Agreement limits the right of the holders of the Revised Debt Agreements, the
IRBs, the New Senior Secured Notes or the New Senior Subordinated Notes to file
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a proof of claim in any such bankruptcy or insolvency proceeding or to vote its
claims against the debtor in such proceedings. However, the provisions of the
Intercreditor Agreement with respect to priorities of security interests and
liens, distributions of proceeds of Collateral, and limitations on the exercise
of rights and remedies with respect to Collateral, shall remain in full force
and effect during any such bankruptcy or insolvency proceeding.
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DESCRIPTION OF CAPITAL STOCK
Preferred Stock
The Company is currently authorized to issue up to 5,000,000 shares of
Preferred Stock, par value $1.00 per share. Pursuant to the Company's Articles,
the Board of Directors is authorized, without further stockholder approval, to
issue shares of Preferred Stock in one or more series. Each such series of
Preferred Stock shall have such rights, preferences, privileges and
restrictions, including voting rights, dividend rights, conversion rights,
redemption privileges and liquidation preferences, as determined by the Board of
Directors. Any such Preferred Stock issued by the Company may rank prior to the
Common Stock as to dividend rights, liquidation preference or both. In
connection with the consummation of the Recapitalization, the Company filed the
Certificate of Designation authorizing the issuance of up to 2,700,000 shares of
Exchangeable Preferred Stock.
The issuance of Preferred Stock, while providing desirable flexibility in
connection with a possible investment in the Company, possible acquisitions by
the Company and other corporate purposes, could have the effect of making it
more difficult for a third party to acquire, or of discouraging a third party
from acquiring the Company.
As of June 17, 1994, there were 3 holders of record of Exchangeable
Preferred Stock.
Common Stock
The Company is authorized to issue up to 20,000,000 shares of Class A Common
Stock, par value $0.01 per share and 8,000,000 shares of Class B Common Stock,
par value $0.01 per share. Except as noted below, holders of both classes of
Common Stock are entitled to receive ratably, such dividends as may be declared
by the Board of Directors. In the event of a liquidation, dissolution or winding
up of the Company, holders of both classes of Common Stock have the right to a
ratable portion of assets remaining after payment of liabilities and
distribution of liquidation preferences to holders of any outstanding shares of
Preferred Stock. See "--Preferred Stock." The holders of Common Stock have no
preemptive rights or, except in the case of the Class B Common Stock, rights to
convert their Common Stock into any other securities and such holders are not
subject to future calls or assessments by the Company. All outstanding shares of
Common Stock are fully paid and non-assessable. The transfer agent for the
Common Stock is State Street Bank and Trust Company.
Class A Common Stock
Each share of Class A Common Stock entitles the holder thereof to one vote
on all matters submitted to the stockholders of the Company generally. All
actions submitted to a vote of stockholders will be voted on by holders of Class
A Common Stock and of Class B Common Stock voting together, provided however,
that twenty-five percent (25%) of the Directors of the Company are Class A
Directors and are elected by a majority vote of the holders of Class A Common
Stock voting separately as a class. Except for the aforementioned election of
Directors and as otherwise provided by law, there is no separate class voting on
any matters. The Class A Common Stock also is entitled to a dividend preference
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over the Class B Common Stock. See "--Class B Common Stock." As of June 17,
1994, there were approximately 975 record holders of the Class A Common Stock.
Class B Common Stock
Each share of Class B Common Stock entitles the holder thereof to ten (10)
votes on all matters submitted to stockholders. All actions submitted to a vote
of stockholders will be voted on by holders of Class A Common Stock and of Class
B Common Stock voting together except as noted above. See "--Class A Common
Stock." Except for the aforementioned election of Directors and as otherwise
provided by law, there is no separate class voting on any matters.
As of the date of this Prospectus, the Class B Common Stock represents 11.4%
of the Company's outstanding equity, but has 56.27% of the combined voting power
of the Company's outstanding Class A Common Stock and Class B Common Stock.
Holders of the Class B Common Stock will be able to elect 75% of the directors
of the Company as long as they hold at least 9.1% of the Company's outstanding
equity (assuming no change in the total number of outstanding shares of Common
Stock). In addition, such holders of Class B Common Stock will have the ability
to approve or disapprove acquisitions, mergers, consolidations and similar
extraordinary transactions requiring a vote of stockholders. See
"--Massachusetts Anti-Takeover Laws and Certain Provisions of the Articles and
By-Laws."
Cash dividends may be declared and paid on Class B Common Stock only if a
dividend of an amount of cash at a quarterly rate no less than $.025 per share
in excess of the dividend on Class B Common Stock will be paid on Class A Common
Stock. The Board in its discretion also may declare and pay a dividend in stock
of the Company, provided, however, that such dividend shall be declared pro rata
on both Class A Common Stock and Class B Common Stock.
Each share of Class B Common Stock is convertible at any time, at the option
of the holder, into one share of Class A Common Stock.
As of June 17, 1994, there were 30 record holders of the Class B Common
Stock.
Registration Rights
In connection with the Bank Forbearance Agreement, the Company entered into
a registration rights agreement with the Banks on July 3, 1992 (the
"Registration Rights Agreement"), with respect to the 602,224 shares of Class A
Common Stock issued to the Banks. Pursuant to the Registration Rights Agreement,
these shares were registered in a registration statement on Form S-3 (File No.
33-72488).
The warrants (the "Warrants") granted to the Financial Advisors in
connection with the Recapitalization provide the Financial Advisors with the
right to have the shares of Class A Common Stock issued upon exercise of the
Warrants registered by the Company in certain circumstances. Capitalized terms
used in this paragraph and not otherwise defined herein are defined in the
Warrants. Pursuant to the Warrants, if, at any time after the date on which the
Warrants are granted, the Company proposes to register any Class A Common Stock
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under the Securities Act in connection with the public offering of such
securities for its own account or the account of a security holder or holders
exercising their respective demand rights, other than certain offerings, the
holders of Registerable Securities shall be entitled to include such
Registerable Securities in such registration. If such registration is an
underwritten public offering, the underwriter may exclude from registration some
or all of the Registerable Securities if the underwriter determines that
marketing factors so require. The Company generally is required to bear all
expenses of any registration pursuant to the Warrants, other than certain
expenses of the holders of Registerable Securities.
Massachusetts Anti-Takeover Laws and Certain Provisions of the Articles and
By-Laws
A number of provisions of the Articles and By-Laws deal with matters of
corporate governance and the rights of stockholders. Certain of these
provisions, as well as certain sections of the Massachusetts General Laws, the
Company's two classes of Common Stock, which have unequal voting rights, and the
ability of the Board of Directors to issue shares of Preferred Stock and to set
the voting rights, preferences and other terms thereof, may be deemed to have an
anti-takeover effect and may discourage takeover attempts not first approved by
the Board of Directors (including takeovers which certain stockholders may deem
to be in their best interests). To the extent takeover attempts are discouraged,
temporary fluctuations in the market price of Class A Common Stock, which may
result from actual or rumored takeover attempts, may be inhibited. These
provisions, together with classified Board of Directors, the two classes of
Common Stock and the ability of the Board to issue Preferred Stock without
further stockholder action, also could delay or frustrate the removal of
incumbent Directors or the assumption of control by stockholders, even if such
removal or assumption would be beneficial to stockholders of the Company. These
provisions also could discourage or make more difficult a merger, tender offer
or proxy contest, even if they could be favorable to the interests of
stockholders, and could potentially depress the market price of Class A Common
Stock. The Board of Directors of the Company believes that these provisions are
appropriate to protect the interests of the Company and all of its stockholders.
The Board of Directors has no present plans to adopt any other measures or
devices which may be deemed to have an "anti-takeover effect."
Under Chapter 110F of the Massachusetts General Laws, a Massachusetts
corporation like the Company with more than 200 stockholders may not engage in a
"business combination" (as defined below) with an "interested stockholder" (as
defined below) for a period of three years after the date of the transaction in
which the person becomes an interested stockholder, unless (i) the interested
stockholder obtains the approval of the Board of Directors prior to becoming an
interested stockholder, (ii) the interested stockholder acquires 90% of the
outstanding voting stock of the corporation (excluding shares held by certain
affiliates of the corporation) at the time it becomes an interested stockholder
or (iii) the business combination is approved by both the Board of Directors and
the holders of two-thirds of the outstanding voting stock of the corporation
(excluding shares held by the interested stockholder). An "interested
stockholder" generally is a person who, together with affiliates and associates,
owns (or at any time within the prior three years did own) 5% or more of the
outstanding voting
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stock of the corporation. A "business combination" includes a merger, a stock or
asset sale, and certain other specified transactions resulting in a financial
benefit to the interested stockholder.
Under Chapter 110D of the Massachusetts General Laws, any person
(hereinafter, the "acquirer") who makes a bona fide offer to acquire, or
acquires, shares of stock of a Massachusetts corporation like the Company that
when combined with shares already owned, would increase the acquirer's ownership
to at least 20%, 33 1/3%, or a majority of the voting stock of such company,
must obtain the approval of a majority of shares held by all stockholders except
the acquirer and the officers and inside Directors of the corporation in order
to vote the shares acquired.
The Articles contain a super majority voting provision, pursuant to which
90% of the votes entitled to be voted thereon are required for the approval of
certain business combinations (including mergers, consolidations, sale of
substantially all of the Company's assets, and liquidations), if the business
combination has not been approved by a majority of the Directors then in office.
The Articles contain a super majority voting provision, pursuant to which
90% of the votes entitled to be voted thereon are required for the approval by
the stockholders of any amendments, alterations, change, or repeal of the
Articles and By-Laws if such action has not been first approved by the Company's
Board of Directors then in office.
In addition to the above-described provisions, the Articles provide that
Directors may not be removed, with or without cause, except by vote of 90% of
the votes entitled to be voted thereon, or by vote of a majority of the members
of the Board of Directors then in office. The Articles divide the Board of
Directors into three equal classes, with members of each class to serve for
three years. In addition, the By-Laws set forth certain notice and informational
requirements and time limitations on any Director nomination which a stockholder
wishes to propose for consideration at an annual or special meeting of
stockholders.
Indemnification; Limitation of Liability
The By-Laws provide that the Directors and officers of the Company shall be
indemnified by the Company to the fullest extent authorized by Massachusetts
law, as it now exists or may in the future be amended, against all expenses and
liabilities reasonably incurred in connection with service for or on behalf of
the Company. In addition, the Articles provide that the Directors of the Company
will not be personally liable for monetary damages to the Company for certain
breaches of their fiduciary duty as Directors, unless they violated their duty
of loyalty to the Company or its stockholders, acted in bad faith, knowingly or
intentionally violated the law, authorized illegal dividends or redemptions or
derived an improper personal benefit from their actions as Directors.
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MATERIAL FEDERAL INCOME TAX CONSEQUENCES
General
Set forth below is a discussion of material federal income tax consequences
associated with the ownership and disposition of New Senior Secured Notes, New
Senior Subordinated Notes, Class A Common Stock and Exchangeable Preferred
Stock. Also set forth below is a discussion of the material federal income tax
consequences of the Recapitalization to the Company which may have had or will
have an adverse effect on the Company. The following discussion represents the
opinion of Goodwin, Procter & Hoar, counsel to the Company ("Tax Counsel"), on
the matters associated with such consequences that are material. The federal
income tax discussion set forth below does not purport to be a complete analysis
or listing of all potential tax considerations that may be relevant to a
decision to purchase New Senior Secured Notes and the Exchange Securities. The
discussion addresses neither the tax consequences that may be relevant to
particular categories of investors subject to special treatment under certain
federal income tax laws, such as dealers in securities, banks, insurance
companies, tax-exempt organizations and foreign investors, nor any tax
consequences arising under the laws of any state, locality or foreign
jurisdiction. The discussion is based upon currently existing provisions of the
Internal Revenue Code of 1986, as amended (the "Code"), existing and proposed
Treasury Regulations promulgated thereunder and current administrative rulings
and court decisions. All of the foregoing are subject to change, and any such
change could affect the continuing validity of this discussion.
Furthermore, the federal income tax consequences associated with the
ownership and disposition of New Senior Secured Notes and the Exchange
Securities and of transactions such as the Recapitalization are unclear in
certain respects. Although Tax Counsel believes that the Company's positions on
certain issues, as set forth below, are reasonable interpretations of the law,
there can be no assurance that the Internal Revenue Service (the "Service") will
not take a contrary view. In particular, the proper determination of the "issue
price" of a New Senior Subordinated Note for purposes of calculating original
issue discount is unclear. This uncertainty results because such issue price
depends on whether the Old Notes or the New Senior Subordinated Notes were
traded on an "established securities market" within the meaning of the Code
provisions governing the calculation of original issue discount and on the
application of certain provisions relating to "potentially abusive situations."
As discussed below, Tax Counsel is of the opinion that the Company has a
reasonable basis for taking the position that, for all relevant federal income
tax purposes, the "issue price" of a New Senior Subordinated Note for purposes
of calculating original issue discount is equal to its stated principal amount.
See "Tax Treatment of the New Senior Secured Notes and New Senior Subordinated
Notes--Original Issue Discount--New Senior Subordinated Notes." This opinion is
based upon a determination, after consideration of certain factual information
provided to Tax Counsel at the time of the Recapitalization, that the Company
has a reasonable basis for taking the position that neither the Old Notes nor
the New Senior Subordinated Notes were "traded on an established securities
market" within the meaning of the Code provisions governing the calculation of
original issue discount and that certain provisions relating to "potentially
abusive situations" did not apply to the Recapitalization. However, there can be
no assurance that the Service will not determine that the Old Notes or the New
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Senior Subordinated Notes were traded on an established securities market within
the meaning of these rules or that the potentially abusive situation provisions
were applicable. If the Service were to determine that either the Old Notes or
the New Senior Subordinated Notes were traded on an established securities
market or that the potentially abusive situation provisions were applicable, the
issue price of the New Senior Subordinated Notes would be equal to their fair
market value at the time of the Recapitalization (based on certain trades of
either the Old Notes or the New Senior Subordinated Notes) and not their stated
principal amount. If the Service's position were sustained and if the issue
price of the New Senior Subordinated Notes were based upon fair market value,
there could be a substantial increase in the amount of cancellation of
indebtedness income recognized by the Company as a result of the
Recapitalization and in the amount of original issue discount on such notes.
Tax Treatment of the New Senior Secured Notes and New Senior Subordinated Notes
General
On April 8, 1986, the Federal Register published proposed regulations (the
"Original Proposed Regulations") relating to the original issue discount
provisions of the Code. On December 22, 1992, the Federal Register published new
proposed regulations (the "Proposed Regulations") relating to the original issue
discount provisions of the Code. The Proposed Regulations were intended to
revise and amend the Original Proposed Regulations and withdrew the majority of
the Original Proposed Regulations effective December 22, 1992. On January 27,
1994, the Service issued new final and temporary regulations relating to the
original issue discount provisions of the Code (the "Final Regulations"). The
Final Regulations generally apply to debt instruments issued on or after April
4, 1994. In addition, the preamble to the Final Regulations provides that (i) a
taxpayer generally may rely on the Final Regulations for debt instruments issued
after December 21, 1992, and (ii) the Service will allow taxpayers to treat the
Proposed Regulations as authority under Section 6662 of the Code (relating to
accuracy-related penalties) for debt instruments (such as the New Senior Secured
Notes and the New Senior Subordinated Notes) issued after December 21, 1992, and
prior to April 4, 1994.
Prior to the consummation of the Recapitalization, the federal income tax
consequences of the proposed Recapitalization, including the tax treatment of
the New Senior Secured Notes and the New Senior Subordinated Notes, were
determined based in large part on the Proposed Regulations, which, although in
fact not effective at such time, provided the best indication of the Service's
position on matters relating to the original issue discount provisions of the
Code. Potential investors and participants in the Recapitalization were provided
with disclosure of the anticipated federal income tax consequences associated
with their potential investment and/or participation that was based in large
part on the Proposed Regulations. Nonetheless, it does not appear that the Final
Regulations have materially and adversely modified the provisions of the
Proposed Regulations upon which the Company had relied. Accordingly, because
taxpayers are entitled to rely on the Final Regulations for debt instruments
issued after December 21, 1992, but are entitled only to treat the Proposed
Regulations as authority under Section 6662 of the Code, the Company believes
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that it is appropriate to rely on the Final Regulations, and, except as
otherwise noted, the following discussion of original issue discount and related
matters is based on the Final Regulations.
The Final Regulations, as well as the Proposed Regulations, are ambiguous in
many respects, and the proper application of either set of regulations to the
New Senior Secured Notes and New Senior Subordinated Notes cannot be determined
with assurance in the absence of further guidance from the Service. Accordingly,
the federal income tax treatment of the New Senior Secured Notes and New Senior
Subordinated Notes may differ from that described below.
Stated Interest on the New Senior Secured Notes and New Senior Subordinated
Notes
A holder of a New Senior Secured Note, a New Senior Subordinated Note or a
New Senior Subordinated Interest Note generally will be required to report as
income, for federal income tax purposes, interest accrued on such note in
accordance with the holder's method of tax accounting, unless such interest is
required to be included in income as original issue discount, as discussed
below. Tax Counsel is of the opinion that the New Senior Secured Notes were not
issued with original issue discount within the meaning of the Code, and,
therefore, that holders of New Senior Secured Notes will include stated interest
thereon in income in accordance with their method of tax accounting, subject to
certain rules discussed below. Although the treatment of the New Senior
Subordinated Notes and any New Senior Subordinated Interest Notes under the Code
and the Final Regulations is unclear, Tax Counsel is of the opinion that (i) the
New Senior Subordinated Notes and any New Senior Subordinated Interest Notes
that have been issued were issued with original issue discount pursuant to the
Code and the Final Regulations, which includes the stated interest on such
notes, and (ii) any New Senior Subordinated Interest Notes to be issued will be
issued with original issue discount. Accordingly, each holder of such notes
(whether a cash or accrual method taxpayer) will be required to include such
original issue discount in income as it accrues, subject to the provisions
described below.
Original Issue Discount--General
A debt instrument has original issue discount if its "stated redemption
price at maturity" exceeds its "issue price," subject to a statutory de minimis
exception. In general, under the Final Regulations, the amount of original issue
discount, if any, accrued (and recognized as income) with respect to a debt
instrument for each "accrual period" is the product of (i) the "adjusted issue
price" at the beginning of the accrual period (generally, the original issue
price plus previously accrued original issue discount less any payments other
than "qualified stated interest" (as defined below)) and (ii) the yield to
maturity of the debt instrument (determined on the basis of compounding at the
end of each accrual period), less (iii) the amount of any qualified stated
interest allocable to the accrual period. The resulting amount is allocated
ratably to each day of the accrual period. The amount includible in a holder's
income (whether on the cash or accrual method of accounting) with respect to the
debt instrument is the sum of the resulting daily portions of original issue
discount for each day of the taxable year in which the
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holder held the debt instrument. Modified rules apply to the final accrual
period and in the case of a short initial accrual period. Similar rules appeared
in the Proposed Regulations.
Generally, the tax basis of a debt instrument in the hands of the holder
will be increased by the amount of original issue discount, if any, on the debt
instrument that is included in the holder's income pursuant to these rules and
will be decreased by the amount of any payment received under the debt
instrument other than a payment of qualified stated interest. A holder's initial
tax basis in a New Senior Secured Note or New Senior Subordinated Note will be
determined under the general rules of the Code, and, in the case of a holder
that purchases any such outstanding note for cash, will equal the purchase price
paid for such note.
Tax Counsel is of the opinion that there is original issue discount on the
New Senior Subordinated Notes. Accordingly, holders of New Senior Subordinated
Notes will have to include in income original issue discount as it accrues
regardless of whether they receive a corresponding amount of cash, subject to
certain provisions discussed below.
Original Issue Discount--New Senior Subordinated Notes
Pursuant to Sections 1273 and 1274 of the Code, the issue price of the New
Senior Subordinated Notes generally depended upon (i) whether the New Senior
Subordinated Notes or the Old Notes were "traded on an established securities
market" (an "established market") at the time of the Recapitalization and, if no
such instrument was so traded, (ii) whether the New Senior Subordinated Notes
provide for "adequate stated interest." For these purposes, the Final
Regulations provide that an established market includes national securities
exchanges, certain "inter-dealer quotation systems," certain foreign exchanges,
certain contract markets and interbank markets. Debt is also treated as traded
on an established market under the Final Regulations if it is "property
appearing on a quotation medium" or a "readily quotable debt instrument."
Property appears on a quotation medium if it is property that appears on a
system of general circulation (a "quotation medium") that provides a reasonable
basis to determine fair market value by disseminating either recent price
quotations from identified brokers, dealers, or traders or actual prices of
recent sales transactions. A quotation medium includes a computer listing of
recent sales prices disseminated to subscribing brokers, dealers, or traders. A
debt instrument is a readily quotable debt instrument if price quotations are
readily available from dealers, brokers, or traders. Under the Final Regulations
the Old Notes or the New Senior Subordinated Notes would be treated as publicly
traded if they were traded on such an established market at any time during the
60 day period ending 30 days after the issuance of the New Senior Subordinated
Notes. Similar rules appeared in the Proposed Regulations.
If neither the Old Notes nor the New Senior Subordinated Notes were
considered traded on an established market, as so defined, then, pursuant to
Section 1274 of the Code, the issue price of the New Senior Subordinated Notes
equals their stated principal amount because such notes have "adequate stated
interest" within the meaning of Section 1274. However, if either the Old Notes
or the New Senior Subordinated Notes were treated as traded on an established
market, then the issue price of the New Senior Subordinated Notes would be based
on their fair market value at the time of the Recapitalization, as determined by
such trading. In addition, Section 1274 of the Code provides that, in certain
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"potentially abusive situations," the issue price of the New Senior Subordinated
Notes may be equal to fair market value.
The provisions of the Final Regulations defining debt that is traded (or
exchanged for property that is traded) on an established market (as well as the
corresponding provisions in the Proposed Regulations) are clearly intended to
identify debt instruments for which there is a reliable indicator of fair market
value. If such fair market value can be accurately determined at the time of
issuance of a debt instrument (through either market trading of such debt
instrument or market trading of the property for which the debt instrument is
issued) then it is appropriate to use such fair market value as the issue price
of such debt instrument.
Based on conversations with the Financial Advisors regarding the various
services that provided price information with respect to the Old Notes prior to
the Recapitalization, as of the date of the Recapitalization it did not appear
that such price information provided a reliable indicator of the then-current
fair market value of the Old Notes. As a result, and based on the assumption
that the nature of the price information with respect to the New Senior
Subordinated Notes would be the same as the price information with respect to
the Old Notes, Tax Counsel advised the Company that it had a reasonable basis
for taking the position that neither the Old Notes nor the New Senior
Subordinated Notes were traded on an established market. Based on conversations
with the Financial Advisers subsequent to the Recapitalization, it appears that
the price information with respect to the New Senior Subordinated Notes during
the period immediately following the Recapitalization was similar to the price
information that was available with respect to the Old Notes. Accordingly, and
provided that such price information remained unchanged during the 30 day period
following the Recapitalization, Tax Counsel continues to be of the opinion that
the Company has a reasonable basis for the position that the New Senior
Subordinated Notes were not traded on an established market.
Under Section 1274(b) of the Code, the issue price of the New Senior
Subordinated Notes would be based on their fair market value at the time of the
Recapitalization if the New Senior Subordinated Notes were considered to have
been issued in a "potentially abusive situation." Under Section 1274(b), the
term "potentially abusive situation" includes a "tax shelter" as defined in
Section 6662(d) of the Code. Section 1274(b) also provides that the term
"potentially abusive situation" includes any other situation which, by reason of
(i) recent sales transactions, (ii) nonrecourse financing, (iii) financing with
a term in excess of the economic life of the property or (iv) other
circumstances, is of a type which the Secretary of the Treasury specifies by
regulations as having potential for tax avoidance. In general, under both the
Proposed Regulations and the Final Regulations any situation involving a recent
sales transaction, nonrecourse financing, financing with a term in excess of the
useful life of the property, or a debt instrument with "clearly excessive
interest" constitutes a potentially abusive situation. Under both the Proposed
Regulations and the Final Regulations, an issuer's determination that a debt
instrument is or is not issued in a potentially abusive situation is binding on
all holders of the debt instrument; provided that a holder may take an
inconsistent position if proper disclosure is made to the Service.
Tax Counsel is of the opinion that issuance of the New Senior Subordinated
Notes did not constitute a situation involving a "tax shelter" within the
meaning of Section 6662(d) of the Code. In addition, although the issue is not
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free from doubt, Tax Counsel is of the opinion that the New Senior Subordinated
Notes were not issued in any of the other potentially abusive situations
identified by the Proposed or Final Regulations. The only such other potentially
abusive situation that could possibly have been applicable to the issuance of
the New Senior Subordinated Notes is the "recent sales transaction" situation.
In particular, if the term "recent sales transaction" is construed broadly, it
would arguably include any sale of an Old Note occurring shortly before the
issuance of the New Senior Subordinated Notes, in which case the New Senior
Subordinated Notes would have an issue price based on their fair market value at
the time of the Recapitalization (assuming such recent sales of Old Notes did
occur). Such a reading, however, conflicts with, and would effectively
eliminate, the general rule summarized above that the issue price of the New
Senior Subordinated Notes should be based on fair market value only if either
the Old Notes or the New Senior Subordinated Notes were considered "traded on an
established securities market." In Tax Counsel's opinion, the recent sales
transaction provisions in the potentially abusive situation rules should not be
read to eliminate the "traded on an established securities market" requirement.
Accordingly, although the issue is not free from doubt due to the lack of
authority interpreting the potentially abusive situation rules, Tax Counsel is
of the opinion that the issuance of the New Senior Subordinated Notes was not
treated as a "potentially abusive situation" within the meaning of Section
1274(b) of the Code.
Based on Tax Counsel's opinion that (i) the Company has a reasonable basis
for taking the position that neither the Old Notes nor the New Senior
Subordinated Notes were traded on an established market and (ii) the potentially
abusive situation provisions did not apply, Tax Counsel is of the opinion,
subject to the assumptions above, that the Company has a reasonable basis for
taking the position that the issue price of the New Senior Subordinated Notes
equals their stated principal amount. However, there can be no assurance that
the Service will not take the position that the Old Notes or the New Senior
Subordinated Notes were traded on an established market or that the potentially
abusive situation provisions apply, either of which could affect the issue price
of the New Senior Subordinated Notes.
In general, under both the Proposed Regulations and the Final
Regulations, the stated redemption price at maturity of a debt instrument means
the amount payable at maturity and any other amounts payable other than
"qualified stated interest payments" (defined generally as stated interest that
is unconditionally payable in cash or property (other than debt of the issuer),
or that will be constructively received under Section 451 of the Code, at least
annually at a single fixed rate). Because the Company has the right to pay any
of the first four interest payments on the New Senior Subordinated Notes in the
form of New Senior Subordinated Interest Notes, the stated redemption price at
maturity of the New Senior Subordinated Notes equals their stated principal
amount plus the sum of the interest payments thereon. Thus, the New Senior
Subordinated Notes have original issue discount, which holders of the New Senior
Subordinated Notes generally will have to include in income as it accrues over
the term of such notes at the rate of 13% (the yield to maturity of the New
Senior Subordinated Notes assuming semi-annual accrual periods are used), in the
manner described above but subject to the provisions discussed below.
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The proper treatment under the Final Regulations of any New Senior
Subordinated Interest Notes issued by the Company in lieu of cash interest
payments is unclear. The Final Regulations state that an option to pay interest
with additional debt instruments is treated as an option to defer payment of
such interest, and any such additional debt instruments are treated as part of
the original debt instrument. This rule also appeared in the Proposed
Regulations.
Based on the Proposed and Final Regulations' treatment of New Senior
Subordinated Interest Notes as part of the New Senior Subordinated Notes, Tax
Counsel has advised the Company that it may take the position that any such New
Senior Subordinated Interest Notes represent a pro rata portion of the adjusted
issue price and the stated redemption price at maturity of the New Senior
Subordinated Notes issued pursuant to the Recapitalization (and any outstanding
New Senior Subordinated Interest Notes), rather than payments of interest.
Accordingly, upon issuance of New Senior Subordinated Interest Notes to pay
interest, the Company may take the position that each of the adjusted issue
price and the stated redemption price at maturity of the original New Senior
Subordinated Notes (and any outstanding New Senior Subordinated Interest Notes)
at such time should be allocated between such notes and the New Senior
Subordinated Interest Notes based on their relative principal amounts. In
accordance with this position, any New Senior Subordinated Interest Notes should
have (i) an issue price equal to their stated principal amount and (ii) original
issue discount proportionate to the original issue discount on the New Senior
Subordinated Notes, and thus the holders of New Senior Subordinated Interest
Notes should account for the interest on such notes as original issue discount
as it accrues at the rate of 13% (the yield to maturity of such notes assuming
semi-annual accrual periods are used), in the manner described above.
Original Issue Discount--New Senior Secured Notes
Because each New Senior Secured Note was sold for an amount of cash equal to
its stated principal amount, pursuant to Section 1273 of the Code the issue
price of a New Senior Secured Note equals its stated principal amount. In
addition, interest payments with respect to the New Senior Secured Notes
constitute "qualified stated interest payments," and, therefore, the stated
redemption price at maturity of a New Senior Secured Note equals its stated
principal amount. Accordingly, the New Senior Secured Notes do not have original
issue discount within the meaning of the Code and the Final Regulations.
Acquisition Premium
Under Section 1272 of the Code and the Final Regulations, as well as the
Proposed Regulations, to the extent that a holder of a New Senior Subordinated
Note has a tax basis (with certain adjustments) in such New Senior Subordinated
Note in excess of its adjusted issue price (as defined above) (such excess, an
"acquisition premium"), such holder will be allowed to offset part or all of any
original issue discount which such holder of the New Senior Subordinated Note
would otherwise be required to take into account, by the amount of such excess.
Alternatively, a holder of a debt instrument with an acquisition premium may
elect to compute original issue discount accruals by in effect treating the
issue price of the debt instrument as equal to the holder's tax basis.
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A holder that purchases a New Senior Subordinated Note for more than its
adjusted issue price will have an acquisition premium with respect to such note.
Original Issue Discount--Reporting Requirements
In general, the Company is required to provide annual information statements
to holders of the New Senior Subordinated Notes and any New Senior Subordinated
Interest Notes and to the Service setting forth the amount of original issue
discount determined to be attributable to the New Senior Subordinated Notes and
any New Senior Subordinated Interest Notes for that year.
Amortizable Bond Premium
A holder that acquires a New Senior Secured Note or New Senior Subordinated
Note at an "amortizable bond premium" may elect to deduct a portion of such
premium with respect to the New Senior Secured Note or New Senior Subordinated
Note in each taxable year in which he holds the New Senior Secured Note or New
Senior Subordinated Note. In addition, a holder that acquires a New Senior
Subordinated Note at an amortizable bond premium generally will not be required
to include in income any original issue discount with respect to such New Senior
Subordinated Note. Amortizable bond premium is generally defined as the excess
of the holder's tax basis in a bond over the stated redemption price at maturity
of the bond.
The election to amortize bond premium applies to all taxable bonds held by
the holder at the beginning of the first taxable year to which the election
applies and to all taxable bonds that a holder acquires thereafter, and is
binding for all subsequent taxable years for all taxable bonds of the holder,
unless the Service consents to revocation of the election. A holder who elects
to amortize bond premium must reduce his tax basis in the related obligation by
the amount of the aggregate deductions allowable for amortizable bond premium.
Market Discount
If a New Senior Secured Note or New Senior Subordinated Note (including a
New Senior Subordinated Interest Note) is acquired at a "market discount," some
or all of any gain realized upon a sale or other disposition, partial principal
payment, or payment at maturity of such security may be treated as ordinary
income, as described below. For this purpose "market discount" is generally the
excess of (i) the stated redemption price at maturity of the security (or in the
case of a security issued with original issue discount, its issue price plus
previously accrued original issue discount) over (ii) such holder's tax basis in
such security, except that if such excess is less than 1/4% of the stated
redemption price at maturity times the number of complete years from acquisition
to maturity, the market discount is considered to be zero.
Upon the sale, retirement or other disposition of a "market discount bond,"
gain will generally be recognized as ordinary income to the extent of the market
discount accrued during the holder's period of ownership. An
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exception is made for certain tax-free exchanges, in which case any accrued
market discount on the outstanding security will carry over to the newly issued
security received in exchange for the old market discount security.
The amount of market discount treated as having accrued will be determined
either on a ratable basis or, if the holder so elects, on a constant interest
method. A holder may make that election with respect to any New Senior Secured
Note or New Senior Subordinated Note, or all such securities held by him, and
such election is irrevocable. In lieu of including accrued market discount
income at the time of disposition, a holder of such securities acquired at a
market discount may elect to include market discount in income currently,
through the use of either the ratable inclusion method or the elective constant
interest method. Once made, such an election applies to all New Senior Secured
Notes or New Senior Subordinated Notes and other market discount bonds acquired
by the holder during the taxable year for which the election is made, and in all
subsequent taxable years of the holder, unless the Service consents to a
revocation of the election. If an election is made to include market discount in
income currently, the basis of the securities in the hand of the holder will be
increased by the market discount thereon as it is includible in income.
Unless a holder who acquires a debt instrument at a market discount elects
to include market discount in income currently, such holder may be required to
defer a portion of any interest expense that may otherwise be deductible on any
indebtedness incurred or maintained to purchase or carry such debt instrument
until the holder disposes of the debt instrument in a taxable transaction.
Although the Service has broad regulatory authority to issue regulations
with respect to the treatment of market discount, no such regulations have been
issued or proposed to date. In the absence of Treasury regulations implementing
the market discount rules, the treatment under such rules of any New Senior
Secured Notes or New Senior Subordinated Notes with market discount is not
entirely clear and holders are urged to consult with their own tax advisors with
respect to such treatment.
Election to Treat All Interest As Original Issue Discount
Effective for debt instruments acquired on or after April 4, 1994, the Final
Regulations provide that a holder of a debt instrument may elect to treat all
interest that accrues on the debt instrument as original issue discount, subject
to certain requirements. "Interest" for this purpose includes stated interest,
original issue discount, market discount, de minimis original issue and market
discount, acquisition discount and unstated interest, as adjusted for any
acquisition premium or amortizable bond premium. Making this election for a debt
instrument with market discount or amortizable bond premium, respectively, also
triggers a deemed election to include market discount in income currently on a
modified constant interest method for all of the holder's other market discount
bonds and a deemed election to amortize bond premium for the holder's other
bonds with amortizable bond premium.
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Disposition of New Senior Secured Notes and New Senior Subordinated Notes
Subject to the market discount rules discussed above, a holder of a New
Senior Secured Note or New Senior Subordinated Note (including any New Senior
Subordinated Interest Notes) will recognize gain or loss upon the sale,
redemption, retirement or other disposition of such security measured by the
difference between (i) the amount of cash and the fair market value of property
received (except to the extent attributable to the payment of accrued interest)
and (ii) the holder's adjusted tax basis (other than any basis attributable to
accrued interest on the securities). Except as otherwise provided under the
market discount rules, gain or loss recognized will be capital gain or loss
provided the New Senior Secured Note or New Senior Subordinated Note is held as
a capital asset by the holder, and will be long-term capital gain or loss if the
holder has held such security (or is treated as having held such security) for
longer than one year. Although the issue is not free from doubt, based on the
Final Regulations' treatment of any New Senior Subordinated Interest Notes as
part of the original New Senior Subordinated Notes, for purposes of applying the
foregoing rules, holders should be able to allocate their basis in a New Senior
Subordinated Note between such note and any New Senior Subordinated Interest
Notes issued thereon based on their relative principal amounts.
Tax Consequences of Holding Stock
In general, the sale or exchange of Exchangeable Preferred Stock or Class A
Common Stock (other than certain redemptions taxed as distributions) will result
in gain or loss to the holder thereof in an amount equal to the difference
between the amount realized on such sale or exchange and the holder's tax basis
in the stock. Such gain or loss will be capital gain or loss if the stock has
been held as a capital asset, and will constitute long-term capital gain or loss
if such stock has been held (or is treated as having been held) for more than
one year. An exchange of Exchangeable Preferred Stock for stock of Little
Switzerland pursuant to the terms of the preferred stock will constitute a
taxable exchange, on which the holder will recognize a gain or loss.
Dividends on any Exchangeable Preferred Stock or Class A Common Stock paid
out of current or accumulated earnings and profits will be ordinary income to
the holders thereof when paid, but in the case of corporate holders generally
will be eligible for the corporate dividends received deduction. Distributions
in excess of earnings and profits will be treated first as a tax-free return of
capital, reducing the holder's tax basis in the stock on which such
distributions are made, and any such distributions in excess of the holder's
basis will be treated as gain realized on the sale of such stock.
Under Section 305 of the Code and the Treasury Regulations promulgated
thereunder, the excess of the redemption price of a "preferred stock" (as
specially defined under the Section 305 regulations) over the issue price of the
preferred stock (such excess, a "redemption premium") may constitute a taxable
distribution of stock on preferred stock, to be amortized into income by the
holder of the preferred stock. Although the issue is not free from doubt, Tax
Counsel is of the opinion that these rules will not cause holders of
Exchangeable Preferred Stock to recognize taxable stock distributions on their
Exchangeable Preferred Stock.
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Backup Withholding
Holders of the New Senior Secured Notes, New Senior Subordinated Notes, New
Senior Subordinated Interest Notes, Exchangeable Preferred Stock or Class A
Common Stock may be subject to backup withholding at a rate of 31% with respect
to interest (including original issue discount) or dividends paid on them unless
such holder (a) is a corporation or comes within certain other exempt categories
and, when required, demonstrates this factor or (b) provides a correct taxpayer
identification number, certifies as to no loss of exemption from backup
withholding and otherwise complies with the applicable requirements of the
backup withholding rules. A holder of New Senior Secured Notes, New Senior
Subordinated Notes, New Senior Subordinated Interest Notes, Exchangeable
Preferred Stock or Class A Common Stock that does not provide the Company with
his correct taxpayer identification number may be subject to penalties imposed
by the Service. Any amount paid as backup withholding will be creditable against
the holder's income tax liability.
The Company will report to the holders of the New Senior Secured Notes, New
Senior Subordinated Notes, New Senior Subordinated Interest Notes, Exchangeable
Preferred Stock or Class A Common Stock and to the Service the amount of any
"reportable payments" for each calendar year and the amount of tax withheld, if
any, with respect to the payments on such notes or stock.
Tax Consequences of the Recapitalization to the Company
Cancellation of Indebtedness Income
A debtor generally recognizes income for federal income tax purposes upon
the cancellation or extinguishment of its indebtedness ("COD income"), and, as
discussed below, the Company recognized COD income as a result of the
Recapitalization. However, as also discussed below, provided that the issue
price of the New Senior Subordinated Notes for purposes of calculating original
issue discount equals their stated principal amount, the Company should have had
sufficient net operating loss carryforwards and losses incurred during the
fiscal year in which the Recapitalization occurred (collectively, "NOLs")
available to offset this COD income and eliminate any federal income tax
liability that would otherwise have arisen as a result of any such COD income.
Amount of COD Income
For purposes of determining the amount of COD income of a debtor corporation
that issues a package of consideration, including a new debt instrument and
stock, in satisfaction of an outstanding debt instrument, the debtor is treated
as having satisfied the outstanding debt with an amount of money equal to the
issue price of the new debt instrument as determined for calculating original
issue discount plus the fair market value of the stock. In addition, the amount
of an outstanding debt instrument for this purpose is its "adjusted issue price"
as determined under the original issue discount rules. See "--Tax Treatment of
the New Senior Secured Notes and New Senior Subordinated Notes--Original Issue
Discount--General."
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The Company has informed Tax Counsel that the aggregate adjusted issue price
of the exchanged Old 13% Notes as of May 14, 1993, equaled approximately
$88,800,000 and the amount of accrued interest on the exchanged Old 13% Notes as
of May 14, 1993, equaled approximately $10,700,000. The Company has informed Tax
Counsel that the aggregate adjusted issue price of the exchanged Old 10 1/4%
Notes as of May 14, 1993, equaled approximately $24,400,000 and the amount of
accrued interest on the exchanged Old 10 1/4% Notes as of May 14, 1993, equaled
approximately $2,300,000. Thus, based upon (i) an aggregate issue price of the
New Senior Subordinated Notes issued to holders of Old Notes equal to their
aggregate stated principal amount of approximately $53,500,000, (ii) an
aggregate fair market value of the Exchangeable Preferred Stock issued to
holders of Old Notes equal to approximately $37,000,000, and (iii) an aggregate
fair market value of the Class A Common Stock issued to holders of Old Notes
equal to approximately $26,900,000, the Company recognized approximately
$8,800,000 of COD income with respect to the Old Notes. The amount of COD income
recognized as a result of the Recapitalization would increase significantly if,
as discussed above, the issue price of the New Senior Subordinated Notes were
determined to be the fair market value of such notes or if the Service were to
successfully challenge the foregoing valuations of the Class A Common Stock and
Exchangeable Preferred Stock issued in the Recapitalization.
Exchange of Preferred Stock
The Company will recognize gain upon the exchange of the Exchangeable
Preferred Stock for Little Switzerland Common Stock to the extent the value of
the Little Switzerland Common Stock distributed in the exchange exceeds the
Company's adjusted basis therein at such time.
Limitation on the Use of Net Operating Losses
Deductions for a loss corporation's NOLs and capital loss carryovers and, in
some cases, its built-in losses, are limited as to their utilization after such
corporation undergoes a "ownership change" within the meaning of Section 382 of
the Code. In general, an ownership change occurs with respect to a loss
corporation if, as of the close of the relevant "testing date" the percentage of
stock of the corporation owned by one or more "5% shareholders" has increased by
more than 50 percentage points over the lowest percentage of stock of such
corporation owned by such shareholders at any time during the relevant "testing
period" (generally, three years).
The Company was a loss corporation, and the new issuances of Class A Common
Stock and Exchangeable Preferred Stock pursuant to the Recapitalization, plus
other issuances of Class A Common Stock during the testing period, resulted in
an ownership change of the Company within the meaning of Section 382.
Consequently, the Company's ability to utilize any NOLs or capital loss
carryovers that arose prior to the Recapitalization is substantially reduced.
The Company has informed Tax Counsel that at February 28, 1993, the Company had
net operating loss carryforwards for tax purposes of approximately $24 million.
The Company has obtained a private letter ruling from the Service to the
effect that the COD income resulting from the consummation of the
Recapitalization may be allocated to the period prior to the Recapitalization.
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Based on such ruling, such COD income may be offset with pre-exchange NOLs
without regard to the limitations of Section 382. The amount of any remaining
pre-exchange NOLs that may be utilized in each taxable year after the taxable
year in which the Recapitalization occurred (the "annual limitation") will equal
the value of the Company's stock immediately before the Recapitalization
multiplied by the "long-term tax-exempt rate" for the month in which the
Recapitalization occurred (5.77% for May 1993); subject to the rules described
below regarding recognized built-in gains and provided that any unused annual
limitation from a taxable year will carry forward on a continuous basis to the
next taxable year.
Notwithstanding that the Recapitalization caused an ownership change within
the meaning of Section 382, any built-in gain of the Company that arose prior to
the ownership change and which is recognized during a taxable year any portion
of which is within the 5 year period beginning on the date of the ownership
change generally may be offset with the Company's NOLs from periods prior to the
ownership change if the Company had a "net unrealized built-in gain" immediately
before the ownership change and the amount of such net unrealized built-in gain
exceeded certain threshold amounts. Based on representations from the Company,
Tax Counsel is of the opinion that the Company had a net unrealized built-in
gain in excess of the applicable threshold amount at the time the
Recapitalization was consummated, so that built-in gains recognized in the 5
year period beginning on the date of the Recapitalization may be offset with
pre-exchange NOLs. In addition, because the Company had a net unrealized
built-in gain, any built-in losses recognized after the Recapitalization will
not be subject to limitation under Section 382. The gain inherent in the
Company's Little Switzerland Common Stock is an item of built-in gain. Based on
certain representations and projections provided by the Company, the Company
should have a sufficient "net unrealized built-in gain" to be able to use any
remaining pre-ownership change NOLs to offset gain resulting from the exchange
of Exchangeable Preferred Stock for Little Switzerland Common Stock; provided
that such exchange occurs during a taxable year a portion of which is within the
5 year period beginning with the date of the Recapitalization.
Alternative Minimum Tax
In general, the Company is subject to an "alternative minimum tax" at the
rate of 20% on its "alternative minimum taxable income" to the extent such 20%
tax exceeds the Company's regular federal income tax for the taxable year. The
Company's "alternative minimum taxable income" is its regular taxable income
(including COD income calculated as described above), determined with certain
adjustments and increased by certain items of tax preference. Under these rules,
the Company's net operating loss carryovers (as adjusted for alternative minimum
tax purposes) cannot offset more than 90% of the Company's alternative minimum
taxable income. Based on the Company's determination of its (estimated)
alternative minimum taxable income and alternative minimum tax net operating
loss deduction for the fiscal year ending February 28, 1994, the Company should
not have incurred an alternative minimum tax as a result of the
Recapitalization. If, however, the actual amount of alternative minimum taxable
income recognized by the Company were more than such (estimated) amount
(determined by the Company), the Company could have incurred an alternative
minimum tax as a result of the Recapitalization.
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Deductibility of Original Issue Discount
Although original issue discount is ordinarily deductible in the same manner
as interest, the ability of the Company to deduct original issue discount as it
accrues on the New Senior Subordinated Notes depends upon the application of
certain provisions of the Code that limit the deductibility of interest on
"applicable high yield discount obligations" issued by corporations. In general,
under Section 163(i) of the Code, any debt instrument that has a term of more
than five years and a yield that exceeds the "applicable federal rate" (as
defined in Section 1274(d) of the Code) for the month in which the debt
instrument is issued by five or more percentage points and that has "significant
original issue discount" will be treated as an "applicable high yield discount
obligation." An obligation has significant original issue discount if the amount
includible in gross income of a holder (including accruals of original issue
discount) through the end of the first "accrual period" (within the meaning of
Section 1272(a)(5) of the Code) ending after the date five years after the date
of issue of the obligation exceeds the sum of the amount of interest paid in
cash through such period, plus the product of the issue price of such instrument
and its yield to maturity. It is assumed for this purpose that cash payments are
made on the last date permitted under the debt instrument and that any payment
made in the form of another obligation of the issuer is assumed to be made when
such obligation is required to be paid in cash. In the case of any debt
instrument that constitutes an "applicable high yield discount obligation" the
issuer is permitted to deduct original issue discount only as it is paid in
cash, and, to the extent that the yield on such obligation exceeds the
applicable federal rate by more than six percentage points (the "disqualified
portion"), no deduction will be allowed for the portion of the original issue
discount that represents such excess yield.
For corporate holders of applicable high yield discount obligations, to the
extent that the disqualified portion of the original issue discount on the
obligation would have been treated as a dividend if it had been distributed by
the issuer with respect to its stock, such disqualified portion is treated as a
dividend received from the issuer for purposes of the dividend received
deduction provisions of the Code.
Under Section 1272(a)(5) of the Code, except as provided in regulations, the
accrual periods of a debt instrument generally are the six month periods ending
on the day in the calendar year corresponding to the maturity date of the debt
instrument or the date six months before such maturity date. Under the Final
Regulations, however, accrual periods may be of any length, provided that each
accrual period is no longer than one year and that each scheduled payment of
principal or interest on the debt instrument occurs either on the final day of
an accrual period or on the first day of an accrual period. The Final
Regulations also provide that an issuer's choice of accrual periods to determine
original issue discount for a debt instrument is used to determine whether the
debt instrument has significant original issue discount. Similar rules appeared
in the Proposed Regulations.
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The first accrual period (as defined in Section 1272(a)(5) of the Code
without regard to the Final Regulations) ending after the fifth anniversary of
the issuance of the New Senior Subordinated Notes will be the final accrual
period ending with their maturity date on May 31, 1998. At the close of such
final accrual period all the accrued interest on the New Senior Subordinated
Notes (represented by the New Senior Subordinated Interest Notes) will be paid.
Under the Final Regulations, the first accrual period ending after the fifth
anniversary of the issuance of the New Senior Subordinated Notes also will be
the final short accrual period ending with their maturity date of May 31, 1998.
Therefore, regardless of which definition is used, the New Senior Subordinated
Notes should not have "significant original issue discount" and should not be
"applicable high yield discount obligations."
THE FOREGOING SUMMARY OF THE MATERIAL FEDERAL INCOME TAX CONSEQUENCES OF THE
ACQUISITION AND DISPOSITION OF NEW SENIOR SECURED NOTES AND EXCHANGE SECURITIES
AND OF CERTAIN CONSEQUENCES OF THE RECAPITALIZATION IS NOT INTENDED AS A
SUBSTITUTE FOR CAREFUL TAX PLANNING ON AN INDIVIDUAL BASIS. A PARTICULAR
HOLDER'S DECISION TO ACQUIRE NEW SENIOR SECURED NOTES OR EXCHANGE SECURITIES MAY
REQUIRE CONSIDERATION OF FEDERAL INCOME TAX CONCERNS OR ISSUES WHICH ARE NOT
DISCUSSED ABOVE. MOREOVER, IN ADDITION TO THE FEDERAL INCOME TAX CONSEQUENCES
DISCUSSED ABOVE, THE ACQUISITION AND DISPOSITION OF NEW SENIOR SECURED NOTES OR
EXCHANGE SECURITIES MAY HAVE, AND THE RECAPITALIZATION MAY HAVE HAD, SIGNIFICANT
STATE, LOCAL OR FOREIGN INCOME TAX CONSEQUENCES WHICH ARE NOT DISCUSSED ABOVE.
ACCORDINGLY, PROSPECTIVE PURCHASERS OF NEW SENIOR SECURED NOTES, NEW SENIOR
SUBORDINATED NOTES, NEW SENIOR SUBORDINATED INTEREST NOTES, EXCHANGEABLE
PREFERRED STOCK, OR CLASS A COMMON STOCK ARE URGED TO CONSULT THEIR OWN TAX
ADVISOR CONCERNING THE TAX CONSEQUENCES OF SUCH PURCHASE TO SUCH HOLDER, WITH
SPECIFIC REFERENCE TO THE EFFECT OF ITS OWN PARTICULAR FACTS AND CIRCUMSTANCES
ON THE MATTERS DISCUSSED HEREIN.
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CERTAIN BANKRUPTCY AND INSOLVENCY CONSIDERATIONS
General
There are certain bankruptcy and insolvency considerations associated with
transactions such as the Recapitalization which could affect holders of the New
Securities and the New Senior Secured Notes.
The Company believes that the ability of the holders of the New Senior
Secured Notes and the New Senior Subordinated Notes to recover their investment
is likely to be significantly impaired in a bankruptcy proceeding. Given the
risks inherent in the reorganization process, including (i) the potential
deterioration of the business of the Company and its subsidiaries during a
bankruptcy proceeding, (ii) the possible losses of a significant number of
employees, (iii) the additional administrative expense associated with a
bankruptcy case and (iv) the enhanced risk that state regulatory authorities may
determine not to renew or extend or to revoke the Company's licenses or
approvals to conduct business, it is not possible to determine what percentage
the holders of New Senior Secured Notes, New Senior Subordinated Notes and
Exchangeable Preferred Stock are likely to recover in a bankruptcy
reorganization. Ultimate recovery would depend on, among other things, the
impact of the bankruptcy proceedings on the business of the Company, the
treatment of the debt and preferred stock in such a plan of reorganization and
the length of time necessary to complete the reorganization process. It is not
unusual for complex bankruptcy proceedings to continue for a period of years
before a plan of reorganization is completed and payments are made. Such
reorganization could adversely affect the Company's ability to generate revenues
from operations or asset sales and could significantly diminish the saleable
value of its assets. Alternatively, in certain circumstances, the Company could
be required to liquidate its assets or a liquidating plan under the Bankruptcy
Code.
Amount of Claim
Unmatured interest (which generally includes original issue discount) is not
allowable as a claim under the Bankruptcy Code. If the Company files a voluntary
petition or is the subject of an involuntary proceeding under the Bankruptcy
Code, it is possible that a bankruptcy court might determine that a portion of
the New Senior Subordinated Notes represents unmatured interest. Such a decision
could cause the claims of holders of New Senior Subordinated Notes allowed in
any subsequent bankruptcy to be less than the face amount of the New Senior
Subordinated Notes.
Prior to April 1992, certain court decisions suggested that an exchange of
like face amounts of debt securities in a consensual out-of-court restructuring
would give rise to original issue discount which would be treated as unmatured
interest. However, on April 10, 1992, the United States Court of Appeals for the
Second Circuit (the "Second Circuit"), in a matter entitled In re Chateaugay
Corporation (the "LTV Case"), cited public policy considerations in support of
its holding that, on the facts of that case, no new original issue discount was
created by the exchange of existing debt securities for equal face amounts of
new debt securities. This decision favors limiting the instances in which
original issue discount is created in exchange offers in order to avoid chilling
the process by which the capital structures of ailing companies are restructured
in consensual out-of-court restructurings. On June 12, 1992, the United States
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Court of Appeals for the Fifth Circuit agreed with the Second Circuit's ruling
in the LTV Case when it ruled in In re Pengo Industries, Inc. (No. 91-1769) that
a face value, debt-for-debt exchange in a consensual out-of-court restructuring
does not produce original issue discount.
However, notwithstanding the Second Circuit's decision in the LTV Case and
the Fifth Circuit's decision in In re Pengo, there can be no assurance that a
bankruptcy court reviewing the Exchange Offers would come to a conclusion
similar to the Second Circuit's regarding the creation of original issue
discount in the Exchange Offers. The holding of the LTV Case may not be
controlling in the jurisdiction of a bankruptcy court reviewing the Exchange
Offers. In addition, the facts in the LTV Case may differ in important ways from
the facts in the Exchange Offers and a bankruptcy court may choose to
distinguish the Second Circuit's decision on the facts in coming to a different
conclusion.
If the New Senior Subordinated Notes were found to be issued with original
issue discount, it is likely that the holder of such notes would be allowed a
claim for interest accruing and original issue discount amortized between
completion of the Exchange Offers and the time a petition were to be filed in
bankruptcy by or against the Company. If a bankruptcy proceeding were to be
commenced by or against the Company, and if the court were to adopt this
approach, claims by holders of Old Notes would be allowed in an amount equal to
100% of the principal amount of such Old Notes plus interest accrued to the date
of the filing of a bankruptcy petition by or against the Company.
The amount of the claim of holders of New Senior Subordinated Notes allowed
in bankruptcy proceedings may be substantially less than the face amount of the
New Senior Subordinated Notes at such time. Accordingly, holders of New Senior
Subordinated Notes may under such circumstances, even if sufficient funds are
available, receive a lesser amount than they would be entitled to under the
express terms of the applicable indenture, which amount might be less than the
amount calculated for federal income tax purposes. Shares of Exchangeable
Preferred Stock would represent a claim in bankruptcy ranking below all debt
claims except to the extent of the right to exchange such shares for shares of
Little Switzerland Common Stock.
Fraudulent Conveyance or Transfer
The issuance by the Subsidiary Guarantors of the New Senior Secured Note
Guarantees and the New Senior Subordinated Note Guarantees and the consummation
of the Exchange Offers could be challenged under state and federal fraudulent
conveyance laws.
Holders of the New Senior Secured Notes and New Senior Subordinated Notes
are creditors of the Subsidiary Guarantors by virtue of the New Senior Secured
Note Guarantees and the New Senior Subordinated Note Guarantees. Existing or
future creditors of a Subsidiary Guarantor could, under state and federal
fraudulent conveyance laws, avoid or subordinate the guarantees issued by a
Subsidiary Guarantor if they were successful in establishing that (i) such
guaranty was incurred with intent to hinder, delay, or defraud any present or
future creditor or such Subsidiary Guarantor contemplated insolvency with a
design to prefer one or more creditors to the exclusion in whole or in part of
others or (ii) such Subsidiary Guarantor did not receive fair consideration for
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issuing its guarantees and that it (A) was insolvent at the time of such
issuance, or (B) was rendered insolvent by reason of such issuance, or (C) was
engaged in a business or transaction for which its assets constituted
unreasonably small capital to carry on its business, or (D) intended to incur,
or believed that it would incur, debts beyond its ability to pay such debts as
they matured. A determination of whether a Subsidiary Guarantor received fair
consideration for issuing a guaranty involves a factual analysis of the benefits
received by such Subsidiary Guarantor. While some courts have considered
indirect benefits such as the improvement of the financial position of the
consolidated entity, many courts have restricted benefits to the amount of funds
received by the subsidiary. If it were determined that a Subsidiary Guarantor
did not receive fair consideration and was insolvent at the time it issued its
guarantees (or was rendered insolvent as a result thereof), then such guarantees
may not be enforceable. Even if the guarantees are not set aside under state or
federal fraudulent conveyance law, the guarantees may be enforceable only to the
extent, if any, of the value of the benefits received by such Subsidiary
Guarantor from the Recapitalization.
Existing or future creditors of the Company could, under state and federal
fraudulent conveyance laws, avoid the Exchange Offers as a fraudulent transfer
if they were successful in establishing that (i) the Exchange Offers were
consummated with intent to hinder, delay or defraud any present or future
creditor or the Company contemplated insolvency with a design to prefer one or
more creditors to the exclusion in whole or in part of other creditors or (ii)
the Company did not receive fair consideration for issuing the Exchange
Securities and the Company (A) was insolvent at the time of the issuance of the
Exchange Securities, or (B) was rendered insolvent by reason of such issuance,
or (C) was engaged in a business or transaction for which its assets constituted
unreasonably small capital to carry out its business, or (D) intended to incur,
or believed it would incur, debts beyond its ability to pay such debts as they
matured. A determination of whether the Company received fair consideration for
the Exchange Offers involves a factual analysis of the benefits received by the
Company from the issuance of the Exchange Securities. If it were determined that
the Company did not receive fair consideration and was insolvent at the time
such securities were issued (or was rendered insolvent as a result thereof), a
court could reinstate, in full and without modification, the rights and claims
evidenced by the Old Notes and/or order holders of Exchange Securities to return
to the Company or to a fund for the benefit of its creditors an amount equal to
any value that they received in excess of the value of the Old Notes.
A determination of whether a Subsidiary Guarantor was insolvent at the time
a guaranty was issued or whether the Company was insolvent at the time of the
issuance of Exchange Securities will vary depending upon the law applied in any
such proceeding. Generally, however, a Subsidiary Guarantor or the Company, as
the case may be, will be considered insolvent if the sum of its liabilities,
including contingent liabilities, are greater than the fair marketable value of
all of its assets at a fair valuation. Courts have differed in their approach to
valuing contingent obligations such as guarantees, for purposes of measuring
insolvency, particularly with respect to whether the liability represented by
the face amount of the guarantee is to be reduced by rights of subrogation and
contribution against co-guarantors and/or discounted based on its contingent
nature.
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Voidable Preference
A bankruptcy trustee (or the Company as debtor-in-possession) may avoid as a
preference certain transfers of property of the debtor to a creditor (i) on
account of an antecedent debt while the debtor was insolvent, (ii) where that
creditor receives more than it would have received in a liquidation of the
Company under Chapter 7 of the Bankruptcy Code had the payment not been made,
and (iii) where the payment was made within 90 days of the date the bankruptcy
case was commenced, or, within one year before the commencement of the
bankruptcy case, if the transfer is to or for the benefit of a creditor that is
found to have been an "insider", as defined in the Bankruptcy Code. The debtor
is presumed to have been insolvent during the 90 days preceding the commencement
of the bankruptcy case. If, at any time, all of these conditions are present
with respect to any payment of the principal of, and/or accrued interest on, (i)
the New Securities, (ii) the New Senior Secured Notes, or (iii) any untendered
Old Notes which remain outstanding after the Exchange Offers, such payment might
constitute a preferential transfer to the holder thereof and to the extent
avoided, could be recovered from such holder.
Exchange
Concurrently with the issuance of shares of Exchangeable Preferred Stock,
certain shares of Little Switzerland Common Stock were transferred by the
Company to the Little Switzerland Trustee with the intent that the holders of
Exchangeable Preferred Stock might exercise their exchange rights in the event
of a bankruptcy of the Company. However, the right of holders of Exchangeable
Preferred Stock to exchange their preferred stock for shares of Little
Switzerland Common Stock could be adversely affected in the event of the
bankruptcy, dissolution, liquidation or winding up of the Company. In the event
of a bankruptcy proceeding, the automatic stay enjoins any act to obtain
possession of property of a bankruptcy estate, to exercise control over such
property or to enforce any lien against such property. In addition, the
bankruptcy court may enjoin action by or against non-bankrupt parties if the
action is deemed by the court to have a material impact on the bankruptcy
estate. The Little Switzerland Common Stock was transferred to the Little
Switzerland Trustee in order to protect and enforce the exchange rights of the
holders of the Exchangeable Preferred Stock. Notwithstanding the transfer of
record ownership, a bankruptcy court may determine that the Company's interest
in such stock is property of the Company's bankruptcy estate subject to the
automatic stay. Alternatively, a bankruptcy court or other court may exercise
its equitable power to enjoin an exchange. Under either circumstance, exercise
of the exchange would be delayed.
In the event that the transfer of Little Switzerland Common Stock to the
Little Switzerland Trustee is not effective to provide the holders of
Exchangeable Preferred Stock with Little Switzerland Common Stock upon exercise
of the right of exchange, the rights of such holders also are secured by a
pledge of such common stock. The pledge was perfected by a transfer of ownership
of the shares of Little Switzerland Common Stock to the Little Switzerland
Trustee. In addition, financing statements identifying the Little Switzerland
Trustee as the secured party were filed in the Secretary of State's office in
the Commonwealth of Massachusetts and in the Town Clerk's office in the town of
Chelsea, Massachusetts. However, the pledge of the Little Switzerland Common
Stock may be enforced only after obtaining relief from the automatic stay, and
such relief is subject to approval of the bankruptcy court. Consequently, the
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ability of the holders of the Exchangeable Preferred Stock to exchange the
preferred stock for shares of Little Switzerland Common Stock may be delayed for
a substantial period of time in the event of a bankruptcy.
The right to exchange may be found by a bankruptcy court to constitute an
executory contract subject to rejection by the Company. In the event the right
to exchange were determined to be an executory contract and it were rejected,
the holders of the Exchangeable Preferred Stock would be entitled to a claim for
damages deemed to arise immediately before the filing of the bankruptcy
petition. Claims arising from the rejection of executory contracts are usually
general unsecured claims. The holders of such claims may assert that the claim
is secured by the pledge of the Little Switzerland Common Stock, but there is no
assurance that such pledge will be found enforceable.
In the event the holders of the Exchangeable Preferred Stock have an
enforceable pledge, they may not be entitled to any compensation for a delay in
the right to exercise such pledge and their recovery may be limited to the value
of the Little Switzerland Common Stock at the date of the bankruptcy petition.
In addition, the Company would be entitled to recover such stock upon payment of
the claim secured by the pledge.
The right to exchange may also be found by a bankruptcy court to constitute
a redemption of stock. Under Massachusetts corporate law, the Company may honor
an obligation to redeem shares if the Company is solvent and the redemption will
not render it insolvent. Moreover, in a bankruptcy proceeding, the claims of
creditors must be paid before any distribution is made on account of equity. If
the right to exchange were viewed as an obligation to redeem stock, a bankruptcy
court may refuse to enforce the Company's obligation as a distribution in
violation of bankruptcy priorities, as a fraudulent conveyance, on the grounds
that the Company is not solvent or will be rendered insolvent as a result of the
exchange, or on other grounds.
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LEGAL OPINIONS
The legality of the New Senior Secured Notes, the New Senior Subordinated
Notes, the Exchangeable Preferred Stock, and the shares of Class A Common Stock
has been passed upon for the Company by Goodwin, Procter & Hoar, Boston,
Massachusetts. All material federal income tax consequences associated with the
purchase, ownership and disposition of the Exchange Securities and the New
Senior Secured Notes has been passed upon by Goodwin, Procter & Hoar. Richard E.
Floor, a Director and Clerk of the Company, is the beneficial owner of 163,000
shares of Class A Common Stock and his professional corporation is a partner in
the firm of Goodwin, Procter & Hoar. Mr. Floor is also co-trustee of certain
trusts for the benefit of Mr. Carey's minor children which own, in the
aggregate, 186,000 shares of Class A Common Stock and 140,253 shares of Class B
Common Stock.
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EXPERTS
The audited financial statements and schedules included in the Company's
Annual Report on Form 10-K for the fiscal year ended February 27, 1994 (a copy
of which is being delivered herewith), have been audited by Arthur Andersen &
Co., independent public accountants, as indicated in their reports with respect
thereto and are delivered herewith in reliance upon the authority of said firm
as experts in accounting and auditing.
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PART II
Information Not Required in Prospectus
Item 14. Other Expenses of Issuance and Distribution
The following table sets forth an itemized statement of all expenses
expected to be incurred in connection with the issuance and distribution of the
securities being registered (all of which are estimated).
All expenses in connection with the registration and distribution of the
securities shall be borne by the Company.
Legal fees and expenses.................... $ 25,000
Accounting fees and expenses............... 10,000
---------
Miscellaneous.............................. 25,000
---------
$ 60,000
=========
Item 15. Indemnification of Directors and Officers
Section 67 of the Business Corporation Law of the Commonwealth of
Massachusetts provides that indemnification of directors, officers, employees or
other agents may be provided by a corporation. Section 13(b)(11/2) of the
Business Corporation Law of the Commonwealth of Massachusetts provides that a
certificate of incorporation may contain a provision eliminating or limiting the
personal liability of a director to the corporation or its stockholders for
monetary damages for breach of fiduciary duty as a director provided that such
provision shall not eliminate or limit the liability of a director (i) for any
breach of the director's duty of loyalty to the corporation or its stockholders,
(ii) for acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law, (iii) under Sections 61 or 62 of the
Massachusetts Business Corporation Law, or (iv) for any transaction from which
the director derived an improper personal benefit.
The Company's Articles of Organization contain a provision which limits the
personal liability of directors to the Company or its stockholders for monetary
damages for breach of fiduciary duty as a director to the extent permitted
above.
Article 9 of the Company's By-Laws provides:
(1) Indemnification. Definitions, for purposes of this section:
(a) A "Director" or "Officer" means any person serving as a director of
the corporation or in any other office filled by appointment or election
by the directors or the stockholders and also includes (i) a Director or
Officer of the corporation serving at the request of the corporation as
a director,
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officer, employee, trustee, partner or other agent of another
organization, and (ii) any person who formerly served as a Director or
Officer;
(b) "Expenses" means (i) all expenses (including attorneys' fees and
disbursements) actually and reasonably incurred in defense of a
Proceeding, in being a witness in a Proceeding, or in successfully
seeking indemnification under this Article, (ii) such expenses incurred
in connection with a Proceeding initiated by a Director or Officer as
may be approved by the Board of Directors, and (iii) any judgments,
awards, fines or penalties paid by a Director or Officer in connection
with a Proceeding or reasonable amounts paid in settlement of a
Proceeding; and
(c) A "Proceeding" means any threatened, pending or completed action,
suit or proceeding, whether civil, criminal, administrative or
investigative, and any claim which could be the subject of a Proceeding.
(2) Right to Indemnification. Except as limited by law, the corporation
shall indemnify its Directors and Officers against all Expenses incurred
by them in connection with any Proceedings in which they are involved as
a result of their service as a Director or Officer, except that (i) no
indemnification shall be provided for any Director or Officer regarding
a matter as to which it shall be determined pursuant to Section 5 of
this Article or adjudicated that he did not act in good faith and in the
reasonable belief that his action was in the best interests of the
corporation, or with respect to a criminal matter, that he had
reasonable cause to believe that his conduct was unlawful, and (ii) no
indemnification shall be provided for any Director or Officer with
respect to any Proceeding by or in the right of the corporation or
alleging that a Director or Officer received an improper personal
benefit if he is adjudged liable to the corporation in such Proceeding
or, in the absence of such an adjudication, if he is determined to be
ineligible for indemnification under the circumstances pursuant to
Section 5 of this Article; provided, however, that indemnification of
Expenses incurred by a Director or Officer in successfully defending a
Proceeding alleging that he received an improper personal benefit as a
result of his status as such may be paid if and to the extent authorized
by the Board of Directors.
(3) Settled Proceedings. If a Proceeding is compromised or settled in a
manner which imposes any liability or obligation upon a Director or
Officer, (i) no indemnification shall be provided to him with respect to
a Proceeding by or in the right of the corporation unless a court having
jurisdiction determines that indemnification is reasonable and proper
under the circumstances, and (ii) no indemnification shall be provided
to him with respect to any other type of Proceeding if it is determined
pursuant to Section 5 of this Article on the basis of the circumstances
known at that time (without further investigation) that said Director or
Officer is ineligible for indemnification.
II-2
<PAGE>
(4) Advance Payments. Except as limited by law, Expenses incurred by a
Director or Officer in defending any Proceeding, including a Proceeding
by or in the right of the corporation, shall be paid by the corporation
to said Director or Officer in advance of final disposition of the
Proceeding upon receipt of his written undertaking to repay such amount
if he is determined pursuant to Section 5 of this Article or adjudicated
to be ineligible for indemnification, which undertaking shall be an
unlimited general obligation but need not be secured and may be accepted
without regard to the financial ability of such person to make
repayment; provided, however, that no such advance payment of Expenses
shall be made if it is determined pursuant to Section 5 of this Article
on the basis of the circumstances known at that time (without further
investigation) that said Director or Officer in ineligible for
indemnification.
(5) Determinations; Payments. The determination of whether a Director or
Officer is eligible or ineligible for indemnification under this Article
shall be made in each instance by (a) a majority of the Directors or a
committee thereof who are not parties to the Proceeding in question, (b)
independent legal counsel appointed by a majority of such Directors, or
if there are none, by a majority of the Directors in office, or (c) a
majority vote of the stockholders who are not parties to the Proceeding
in question. Notwithstanding the foregoing, a court having jurisdiction
(which need not be the court in which the Proceeding in question was
brought) may grant or deny indemnification in each instance under the
provisions of law and this Article. The corporation shall be obliged to
pay indemnification applied for by a Director or Officer unless there is
an adverse determination (as provided above) within 45 days after the
application. If indemnification is denied, the applicant may seek an
independent determination of his right to indemnification by a court,
and in such event the corporation shall have the burden of proving that
the applicant was ineligible for indemnification under this Article.
(6) Insurance. The corporation shall have power to purchase and maintain
insurance on behalf of any agent, employee, director or officer against
any liability or cost incurred by him in any such capacity or arising
out of his status as such, whether or not the corporation would have
power to indemnify him against such liability or cost.
(7) Responsibility With Respect to Employee Benefit Plan. If the corporation
or any of its Directors or Officers sponsors or undertakes any
responsibility as a fiduciary with respect to an employee benefit plan,
then for purposes of indemnification of such persons under this Article
(i) a "Director" or "Officer" shall be deemed to include any Director or
Officer of the corporation who serves at its request in any capacity
with respect to said plan, (ii) such Director or Officer shall not be
deemed to have failed to act in good faith in the reasonable belief that
his action was in the best interests of the corporation if he acted in
good faith in the reasonable belief that his action was in the best
interests of the participants or
II-3
<PAGE>
beneficiaries of said plan, and (iii) "Expenses" shall be deemed to
include any taxes or penalties imposed on such Director or Officer with
respect to said plan under applicable law.
(8) Heirs and Personal Representatives. The indemnification provided by this
Article shall inure to the benefit of the heirs and personal
representatives of a Director or Officer.
(9) Non-Exclusivity. The provisions of this Article shall not be construed
to limit the power of the corporation to indemnify its Directors or
Officers to the full extent permitted by law or to enter into specific
agreements, commitments or arrangements for indemnification permitted by
law. In addition, the corporation shall have power to indemnify any of
its agents or employees who are not Directors or Officers on any terms
not prohibited by law which it deems to be appropriate. The absence of
any express provision for indemnification herein shall not limit any
right of indemnification existing independently of this Article.
(10) Amendment. The provisions of this Article may be amended or repealed by
the stockholders; however, no amendment or repeal of such provisions
which adversely affects the rights of a Director or Officer under this
Article with respect to his acts or omissions at any time before or
after such amendment or repeal, shall apply to him without his consent.
Item 16. Exhibits
4.1 Indenture governing 10 1/4% Subordinated Notes *1*(4.1)
due 1995 (the "Old 10 1/4% Notes"), dated as of
July 1, 1985 from Town & Country Jewelry Mfg.
Corporation to The First National Bank of
Boston, as Trustee.
4.2 Supplemental Indenture relating to the Old *9*(4.3)
10 1/4% Notes, dated as of May 14, 1993, from
Town & Country Corporation to The Bank of New
York, as Trustee.
4.3 Indenture governing 13% Senior Subordinated #3#(4.2)
Notes due December 15, 1998 (the "Old 13%
Notes"), dated as of December 16, 1988, from
Town & Country Corporation to Bank of New
England, N.A., as Trustee.
4.4 Supplemental Indenture relating to the Old *9*(4.4)
13% Notes, dated as of May 14, 1993, from Town
& Country Corporation to State Street Bank and
Trust Company, as Trustee.
II-4
<PAGE>
4.5 Form of Indenture governing 10% First Priority ~1~
Senior Subordinated Notes due August 31, 1998,
to be dated as of [ ] from Town & Country
Corporation to Shawmut Bank, N.A., as Trustee,
including form of 10% First Priority Senior
Subordinated Note due August 31, 1998, (the
"New 10% Notes").
4.6 Form of Indenture governing Zero Coupon First ~1~
Priority Senior Subordinated Convertible
Exchangeable Notes due August 31, 1998, to be
dated as of [ ] from Town & Country Corporation
to Bankers Trust Company, as Trustee, including
form of Zero Coupon First Priority Senior
Subordinated Convertible Exchangeable Note due
August 31, 1998, (the "Zero Coupon Notes").
4.7 Indenture governing 11 1/2% Senior Secured *9*(4.5)
Notes due September 15, 1997, dated as of May
14, 1993, from Town & Country Corporation to
Shawmut Bank, N.A., as Trustee, including form
of New Senior Secured Note due September 15,
1997, (the "New Senior Secured Notes").
4.8 Indenture governing 13% Senior Subordinated *9*(4.6)
Notes due May 31, 1998, dated as of May 14,
1993, from Town & Country Corporation to
Bankers Trust Company, as Trustee, including
form of 13% Senior Subordinated Note due May
31, 1998, (the "New Senior Subordinated
Notes").
4.9 Certificate of Vote of Directors Establishing *9*(4.7)
the Exchangeable Preferred Stock, par value
$1.00 per share dated as of May 14, 1993.
4.10 Amended and Restated Indenture governing Old *9*(4.1)
10 1/4% Notes, dated as of May 14, 1993, from
Town & Country Corporation to The Bank of New
York, as Trustee.
4.11 Amended and Restated Indenture governing Old *9*(4.2)
13% Notes, dated as of May 14, 1993, from Town
& Country Corporation to State Street Bank and
Trust Company, as Trustee.
4.12 Specimen Stock Certificate for Exchangeable Previously
Preferred Stock. Filed
5. Opinion of Goodwin, Procter & Hoar. Previously
Filed
10.1 1989 Employee Stock Purchase Plan of Town & #1#(10.21)
Country Corporation.
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<PAGE>
10.2 Non-Qualified Stock Option dated July 19, #3#(10.31)
1989, from Town & Country Corporation to Jerome
Peterson.
10.3 1985 Amended and Restated Stock Option *2*(10.1)
Plan of Town & Country Corporation.
10.4 Lease Agreement between Town & Country *1*(10.2)
Corporation and Carey Realty Trust dated
September 1, 1984.
10.5 Amendment dated July 1, 1989, to the *5*(10.8)
Lease Agreement between Town & Country
Corporation and Carey Realty Trust.
10.6 Amendment dated July 27, 1989, to the *3*(10.3)
Lease Agreement between Town & Country
Corporation and Carey Realty Trust.
10.7 Lease dated September 1, 1985, between #3#(10.30)
the New York City Industrial Development Agency
and Feature Enterprises, Inc.
10.8 Credit Agreement dated as of November 8, *7*(2.1)
1991, by and among Town & Country Corporation,
Feature Enterprises, Inc., L.G. Balfour
Company, Inc., Gold Lance, Inc., and Verilyte
Gold, Inc. and The First National Bank of
Boston, Federal Deposit Insurance Corporation,
Manufacturers Hanover Trust Company, and The
Chase Manhattan Bank, N.A.
10.9 Consignment Agreement dated as of *7*(2.3)
November 8, 1991, by and among Town & Country
Corporation, Feature Enterprises, Inc., L.G.
Balfour Company, Inc., Gold Lance, Inc., and
Verilyte Gold, Inc. and Fleet Precious Metals,
Inc.
10.10 Consignment Agreement dated as of *7*(2.5)
November 8, 1991, by and among Town & Country
Corporation, Feature Enterprises, Inc., L.G.
Balfour Company, Inc., Gold Lance, Inc., and
Verilyte Gold, Inc. and Rhode Island Hospital
Trust National Bank.
10.11 Consignment Agreement dated as of *7*(2.4)
November 8, 1991, by and among Town & Country
Corporation, Feature Enterprises, Inc., L.G.
Balfour Company, Inc., Gold Lance, Inc., and
Verilyte Gold, Inc. and ABN AMRO Bank, N.V.
II-6
<PAGE>
10.12 Consignment Agreement dated as of *7*(2.2)
November 8, 1991, by and among Town & Country
Corporation, Feature Enterprises, Inc., L.G.
Balfour Company, Inc., Gold Lance, Inc., and
Verilyte Gold, Inc. and Republic National Bank
of New York.
10.13 Registration Rights Agreement dated as of *8*(10.13)
July 17, 1991, between Little Switzerland, Inc.
and Switzerland Holding, Inc.
10.14 Forbearance Agreement dated as of March 23, *8*(10.14)
1992, by and among Town & Country Corporation,
Feature Enterprises, Inc., L.G. Balfour
Company, Inc., Gold Lance, Inc., and Verilyte
Gold, Inc. and The First National Bank of
Boston, Federal Deposit Insurance Corporation,
as Receiver, Manufacturers Hanover Trust
Company, and The Chase Manhattan Bank, N.A.
10.15 Forbearance Agreement dated as of March 23, *8*(10.15)
1992, by and among Town & Country Corporation,
Feature Enterprises, Inc., L.G. Balfour
Company, Inc., Gold Lance, Inc., and Verilyte
Gold, Inc. and Fleet Precious Metals Inc.,
Rhode Island Hospital Trust National Bank,
Republic National Bank, and ABN Amro Bank, N.V.
10.16 Forbearance Agreement dated as of May 22, *8*(10.16)
1992, by and among Town & Country Corporation,
Feature Enterprises, Inc., L.G. Balfour
Company, Inc., Gold Lance, Inc., and Verilyte
Gold, Inc. and The First National Bank of
Boston, Federal Deposit Insurance Corporation,
as Receiver, Manufacturers Hanover Trust
Company, and The Chase Manhattan Bank, N.A.
10.17 Forbearance Agreement dated as of June 15, *8*(10.17)
1992, by and among Town & Country Corporation,
Feature Enterprises, Inc., L.G. Balfour
Company, Inc., Gold Lance, Inc., Verilyte Gold,
Inc. and Fleet Precious Metals, Inc., Rhode
Island Hospital Trust National Bank, Republic
National Bank, and ABN AMRO Bank, N.V.
II-7
<PAGE>
10.18 Forbearance Agreement dated as of June 15, *8*(10.18)
1992, by and among Town & Country Corporation,
Feature Enterprises, Inc., L.G. Balfour
Company, Inc., Gold Lance, Inc., Verilyte Gold,
Inc. and The First National Bank of Boston,
Federal Deposit Insurance Corporation, as
Receiver, Chemical Bank (as successor to
Manufacturer's Hanover Trust Company) and The
Chase Manhattan Bank, N.A.
10.19 Registration Rights Agreement dated as of *8*(10.19)
June 15, 1992, among Town & Country Corporation
and The First National Bank of Boston, The
Federal Deposit Insurance Corporation, as
Receiver of New Bank of New England, N.A., as
Assignee of Federal Deposit Insurance
Corporation, as Receiver of Bank of New
England, N.A., Chemical Bank (as successor to
Manufacturer's Hanover Trust Company) and The
Chase Manhattan Bank, N.A.
10.20 Executive Employment Agreement between Filed
Town & Country Corporation and C. William Herewith
Carey effective as of February 28, 1994.
10.21 Executive Employment Agreement between Filed
Town & Country Corporation and Francis X. Herewith
Correra effective as of February 28, 1994.
10.22 Key Man Life Insurance Policy for Previously
C. William Carey. Filed
10.23 Form of 1993 Management Option. Previously
Filed
10.24 Commitment Letter dated as of February 5, Previously
1993, by and among Foothill Capital Filed
Corporation, Town & Country Fine Jewelry Group,
Inc., Town & Country Corporation, Gold Lance,
Inc., Verilyte Gold, Inc., L.G. Balfour
Company, Inc. and Feature Enterprises, Inc.
10.25 Trust Agreement dated as of May 14, 1993, *9.4*(10.22)
by and between Town & Country Corporation and
BayBank.
10.26 Forbearance Agreement dated as of March 18, Previously
1993, among Town & Country Corporation, Filed
Feature Enterprises, Inc., L.G. Balfour
Company, Inc., Gold Lance, Inc. and Verilyte
Gold, Inc. and Fleet Precious Metals, Inc.,
Rhode Island Hospital Trust National Bank,
Republic National Bank and ABN AMRO Bank, N.V.
II-8
<PAGE>
10.27 First Amendment to Lease Agreement dated as *9*(10.8)
of May 1, 1993, between the New York City
Industrial Development Agency and Town &
Country Fine Jewelry Group, Inc.
10.28 Amended and Restated Consignment Agreement *9*(10.9)
dated as of May 14, 1993, 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.
10.29 Amended and Restated Consignment Agreement *9*(10.10)
dated as of May 14, 1993, by and among 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.
10.30 Amended and Restated Consignment Agreement *9*(10.11)
dated as of May 14, 1993, by and among Town &
Country Corporation, L.G. Balfour Company,
Inc., Gold Lance, Inc., and Town & Country Fine
Jewelry Group, Inc. and ABN Amro Bank, N.V.
10.31 Amended and Restated Consignment Agreement *9*(10.12)
dated as of May 14, 1993, by and among 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.
10.32 Letter Agreement dated as of May 6, 1993, *9*(10.14)
between Little Switzerland, Inc. and Town &
Country Corporation relating to the Switzerland
Holding, Inc. Registration Rights Agreement.
10.33 Loan Agreement dated as of May 14, 1993, by *9*(10.15)
and among Town & Country Corporation, L.G.
Balfour Company, Inc., Gold Lance, Inc., and
Town & Country Fine Jewelry Group, Inc. and
Foothill Capital Corporation.
12.1 Historical and Pro Forma Ratios of Earnings Filed
to Fixed Charges. Herewith
12.2 Pro Forma Ratio of Earnings to Fixed Charges Filed
and Exchangeable Preferred Stock Dividends Herewith
and Accretion.
13 Quarterly Report on Form 10-Q for the fiscal Filed
quarter ended May 29, 1994. Herewith
24.1 Consent of Goodwin, Procter & Hoar. Previously
Filed
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<PAGE>
24.2 Consent of Arthur Andersen & Co. relating Filed
to Town & Country Corporation. Herewith
24.4 Consent of Goodwin, Procter & Hoar Previously
regarding certain tax matters. Filed
25.1 Power of Attorney for Town & Country Filed
Corporation. Herewith
25.2 Power of Attorney for L.G. Balfour Previously
Company, Inc. Filed
25.3 Power of Attorney for Feature Enterprises, ~1~
Inc.
25.4 Power of Attorney for Gold Lance, Inc. Previously
Filed
25.5 Power of Attorney for Verilyte Gold, Inc. ~1~
25.6 Power of Attorney for Town & Country Fine Previously
Jewelry Group, Inc. Filed
26.1 Form T-1 Statement of Eligibility and ~1~
Qualification of Shawmut Bank, N.A., as Trustee
for the New 10% Notes.
26.2 Form T-1 Statement of Eligibility and ~1~
Qualification of Shawmut Bank, N.A., as Trustee
for the Zero Coupon Notes.
26.3 Form T-1 Statement of Eligibility and Previously
Qualification of Shawmut Bank, N.A., as Filed
Trustee for the New Senior Secured Notes.
26.4 Form T-1 Statement of Eligibility and Previously
Qualification of Bankers Trust Company, Filed
as Trustee for the New Senior Subordinated
Notes.
26.5 Form T-1 Statement of Eligibility and Previously
Qualification of Bank of New York, as Filed
Trustee for the Old 10 1/4% Notes, as amended.
26.6 Form T-1 Statement of Eligibility and Previously
Qualification of State Street Bank and Filed
Trust Company, as Trustee for the Old 13%
Notes, as amended.
28.1 Form of Consent and Letter of Transmittal Previously
for Old 10 1/4% Notes. Filed
28.2 Form of Consent and Letter of Transmittal Previously
for Old 13% Notes. Filed
28.3 Form of Agreement with Exchange Agent. Previously
Filed
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<PAGE>
28.4 Form of Proxy. Previously
Filed
28.5 Agreement with Transfer Agent. Previously
Filed
28.6 Form of Non-Binding Letter Agreement Previously
between Town & Country Corporation and Filed
Certain Holders of Old 13% Notes and Old 10
1/4% Notes.
28.7 Form of Lock Up Agreement between Town & Previously
Country Corporation and Certain Holders Filed
of Old 13% Notes and Old 10 1/4% Notes.
28.8 Registration Effectiveness Agreement dated *9*(10.23)
as of May 14, 1993, between Town & Country
Corporation and Certain Funds managed by
Fidelity Management & Research Company.
28.9 Collateral Agency and Intercreditor *9*(10.16)
Agreement dated as of May 14, 1993, between
Town & Country Corporation, Town & Country Fine
Jewelry Group, Inc., Gold Lance, Inc., L.G.
Balfour Company, Inc., 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.
------
*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 26, 1989.
*5* Incorporated by reference to the designated exhibit in the Annual Report
on Form 10-K, Commission File number 0-14394 filed May 25, 1990.
*6* Incorporated by reference to the designated exhibit in the Annual Report
on Form 10-K, Commission File number 0-14394 filed June 13, 1991.
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<PAGE>
*7* Incorporated by reference to the designated exhibit in the Current
Report on Form 8-K, Commission File number 0-14394 filed November 21,
1991.
*8* Incorporated by reference to the designated exhibit of the Annual Report
on Form 10-K, Commission File number 0-14394 filed July 6, 1992.
*9* Incorporated by reference to the designated exhibit of the Annual Report
on Form 10-K, Commission File number 0-14394 filed May 28, 1993.
#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. 1
to the Registration Statement on Form S-2 No. 33-25092 filed November 8,
1988.
#3# 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.
~1~ Refers to previously filed exhibit which is no longer applicable to the
Registration Statement.
Item 17. Undertakings
The undersigned Registrant hereby undertakes as follows:
(a) (1) The undersigned registrant hereby undertakes:
(i) To file, during any period in which offers or sales are being made,
a post-effective amendment to this registration statement;
(A) To include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933;
(B) To reflect in the prospectus any facts or events arising after
the effective date of the registration statement (or the most recent
post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth
in the registration statement;
(C) To include any material information with respect to the plan of
distribution not previously disclosed in the registration statement or
any material change to such information in the registration statement;
(ii) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be
deemed to be a new registration statement relating to
II-12
<PAGE>
the securities offered therein, and the offering of such securities at
that time shall be deemed to be the initial bona fide offering thereof.
(iii) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the
termination of the offering.
(iv) If the registrant is a foreign private issuer, to file a
post-effective amendment to the registration statement to include any
financial statements required by Rule 3-19 of Regulation S-X at the
start of any delayed offering or throughout a continuous offering.
Financial statements and information otherwise required by Section
10(a)(3) of the Act need not be furnished, provided, that the registrant
includes in the prospectus, by means of a post-effective amendment,
financial statements required pursuant to this paragraph (a)(1)(iv) and
other information necessary to ensure that all other information in the
prospectus is at least as current as the date of those financial
statements.
(b) Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling
persons of the registrant pursuant to the foregoing provisions, or
otherwise, the registrant has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against
public policy as expressed in the Act and is, therefore, unenforceable.
In the event that a claim for indemnification against such liabilities
(other than the payment by the registrant of expenses incurred or paid
by a director, officer or controlling person of the registrant in the
successful defense of any action, suit or proceeding) is asserted by
such director, officer or controlling person in connection with the
securities being registered, the registrant will, unless in the opinion
of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Act
and will be governed by the final adjudication of such issue.
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<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act, the Registrant has duly
caused this amendment to the Registration Statement to be signed on its behalf
by the undersigned, thereunto duly authorized, in the City of Chelsea, State of
Massachusetts, on July 26, 1994.
TOWN & COUNTRY CORPORATION
By: /s/ Francis X. Correra
-----------------------
Francis X. Correra
Senior Vice President and
Chief Financial Officer
Pursuant to the requirements of the Securities of 1933, this amendment to
the Registration Statement has been duly signed by the following persons in the
capacities and on the date set forth above.
Signature Title
--------- -----
Principal Executive Officer:
* President, Treasurer, and
- ---------------------------- Director
C. William Carey
Principal Financial and Accounting Officer:
/s/ Francis X. Correra Senior Vice President and
- ---------------------------- Chief Financial Officer
Francis X. Correra
* Director
- ----------------------------
Richard E. Floor
* Director
- ----------------------------
Charles Hill
* Director
- ----------------------------
Mone Anathan III
* Director
- ----------------------------
William Schawbel
*By:/s/ Francis X. Correra Attorney-in-Fact
------------------------
Francis X. Correra
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<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act, the Registrant has duly
caused this amendment to the Registration Statement to be signed on its behalf
by the undersigned, thereunto duly authorized, in the City of Chelsea, State of
Massachusetts, on July 26, 1994.
L.G. BALFOUR COMPANY, INC.
By: /s/ Francis X. Correra
-----------------------
Francis X. Correra
Executive Vice President
Pursuant to the requirements of the Securities of 1933, this amendment to
the Registration Statement has been duly signed by the following persons in the
capacities and on the date set forth above.
Signature Title
--------- -----
Principal Executive Officer:
* President and Director
- ----------------------------
C. William Carey
Principal Financial and Accounting Officer:
/s/ Francis X. Correra Executive Vice President,
- ---------------------------- Treasurer, and Director
Francis X. Correra
* Director
- ----------------------------
Richard E. Floor
*By:/s/ Francis X. Correra Attorney-in-Fact
------------------------
Francis X. Correra
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<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act, the Registrant has duly
caused this amendment to the Registration Statement to be signed on its behalf
by the undersigned, thereunto duly authorized, in the City of Chelsea, State of
Massachusetts, on July 26, 1994.
GOLD LANCE, INC.
By: /s/ Francis X. Correra
-----------------------
Francis X. Correra
Treasurer
Pursuant to the requirements of the Securities of 1933, this amendment to
the Registration Statement has been duly signed by the following persons in the
capacities and on the date set forth above.
Signature Title
--------- -----
Principal Executive Officer:
* Chief Executive Officer
- ---------------------------- and Director
C. William Carey
Principal Financial and Accounting Officer:
/s/ Francis X. Correra Treasurer and Director
- ----------------------------
Francis X. Correra
* Director
- ----------------------------
Richard E. Floor
* Director
- ----------------------------
Charles Hill
*By:/s/ Francis X. Correra Attorney-in-Fact
------------------------
Francis X. Correra
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<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act, the Registrant has duly
caused this amendment to the Registration Statement to be signed on its behalf
by the undersigned, thereunto duly authorized, in the City of Chelsea, State of
Massachusetts, on July 26, 1994.
TOWN & COUNTRY FINE JEWELRY
GROUP, INC.
By: /s/ Francis X. Correra
-----------------------
Francis X. Correra
Vice President and
Treasurer
Pursuant to the requirements of the Securities of 1933, this amendment to
the Registration Statement has been duly signed by the following persons in the
capacities and on the date set forth above.
Signature Title
--------- -----
Principal Executive Officer:
* President and Director
- ----------------------------
C. William Carey
Principal Financial and Accounting Officer:
/s/ Francis X. Correra Vice President, Treasurer,
- ---------------------------- and Director
Francis X. Correra
* Director
- ----------------------------
Richard E. Floor
*By:/s/ Francis X. Correra Attorney-in-Fact
------------------------
Francis X. Correra
II-17
EXHIBIT 10.20
EXECUTIVE EMPLOYMENT AGREEMENT
This Executive Employment Agreement (the "Agreement") is effective as of
February 28, 1994, and is made between TOWN & COUNTRY CORPORATION, a
Massachusetts corporation (the "Company"), and C. WILLIAM CAREY (the
"Employee").
I. EMPLOYMENT
The Company agrees to employ the Employee and the Employee agrees to accept
employment and serve the Company upon the terms and conditions set forth in this
Agreement for the period commencing on February 28, 1994 and ending on February
28, 1999 (the "Term"). The Employee agrees during the Term to devote his full
time and best efforts to the business and affairs of the Company and to the
performance of his duties under this Agreement.
The Employee shall serve, during the Term, as Chairman of the Board,
President and Chief Executive Officer and in such other senior executive
management position(s) with the Company and any subsidiary of the Company as the
Board of Directors of the Company may determine from time to time. Employee
shall report to the Board of Directors of the Company.
II. COMPENSATION
(a) Base Salary. The Company agrees to pay the Employee an annual base
salary of Nine Hundred Seventy-Five Thousand Dollars ($975,000) for Fiscal Year
1995 and each fiscal year thereafter during the Term of this Agreement, subject
to the following increase adjustments, payable in equal weekly installments or
at such greater intervals as Employee may request. If Section 162(m) of the
Internal Revenue Code of 1986 should hereafter be repealed or amended to
increase the cap on deductible compensation above the $1 million in place on the
date hereof, then to the extent of any such increase, for each Fiscal Year or
portion thereof from and after the effective date of such repeal or amendment,
the Employee's annual base salary shall be calculated by increasing the salary
of Nine Hundred Seventy-Five Thousand Dollars ($975,000) by a percentage amount
equal to the percentage increase from December 31, 1993 to the last prior
December 31 in the Consumer Price Index All Items for All Urban Consumers for
the District of Columbia area as published by the Bureau of Labor Statistics or,
if such index is not available, the United States Government Index which is most
similar thereto.
(b) Annual Bonus. During the Term, the Employee shall receive an annual
bonus payment of up to a maximum of 120% of his base salary.
The Annual Bonus shall be determined as follows. A bonus shall be paid to
Employee upon achievement of Net Income attributable to each share of Common
Stock on a fully diluted basis in each of the years of the term of this contract
as derived from the Company's audited financial statements (adjusted in each
such year to exclude extraordinary items and material capital transactions and
after provision for the bonus provided hereby) for each of such years as set
forth in Exhibit I hereto.
<PAGE>
The annual bonus or any proration thereof shall be paid at the earlier of:
(a) completion of the audit of the Company's financial statements with respect
to the bonus period by its independent accounting firm, or (b) May 31 of the
following fiscal year.
(c) Balfour Stock Options. Effective as of the date of this Agreement, the
Company shall grant to the Employee a contingent option to purchase up to two
and one-half percent (2.5%) of the outstanding common stock of L.G. Balfour
Company, Inc. as constituted on the date of this Agreement, (the "Option
Shares"), of which twenty percent (20%) shall vest on grant and twenty percent
(20%) on each subsequent anniversary. The options shall be exercisable until
February 28, 2004, and the price thereof will be based upon the book value of
Balfour most recently computed prior to such grant. These options will be wholly
contingent on the approval prior to exercise by any required votes of the
outstanding principal amount of the Company's debt securities by class thereof.
(d) Expenses. During the Employee's employment pursuant to this Agreement,
the Employee is authorized to incur reasonable expenses in accordance with the
policies and procedures established by the Company from time to time generally
for its senior executive officers in connection with and for the promotion of
the business of the Company (including, but not limited to, expenses for meals,
lodging, transportation, telephone and entertainment) as are incurred from time
to time by Employee. The Company shall reimburse the Employee for all such
expenses upon proper accounting therefor in accordance with Company policy.
(e) Automobile. The Company shall provide Employee with the sole and
exclusive use of an automobile. The automobile provided at the commencement of
the Term shall be a new automobile of make and model equivalent to the Company
automobile which was provided to Employee for his use immediately preceding
commencement of this Agreement. On or before three years thereafter, the Company
shall provide a new automobile of equivalent grade. Employee shall have the
right to purchase the automobile provided at the commencement of the Term from
the Company upon its replacement at its then book value.
(f) Employee Benefit Plans. The Employee shall be eligible to participate in
all employee benefits plans maintained generally by the Company from time to
time for the benefit of its senior executive officers.
(g) Vacation. The Employee shall be entitled to paid vacations of such
duration and at such time or times as shall be deemed reasonable by the Board,
but not less than four (4) weeks per fiscal year. In addition, the Employee
shall be entitled to all paid holidays given by the Company generally to its
senior executive officers.
(h) Perquisites. The Employee shall be entitled to receive all perquisites
and fringe benefits consistent with the practice of the Company generally for
senior executive officers, and including a continuation of the existing split
dollar life insurance policy in the face amount of $2 million.
<PAGE>
III. TERMINATION
(a) Termination With Cause. The Company may terminate Employee's employment
pursuant to this Agreement upon written notice "With Cause."
(1) Definition. "With Cause" shall be defined as follows:
(i) Employee's deliberate and continued failure to substantially
perform his duties under this Agreement after written demand
for substantial performance is delivered by the Company
specifically identifying the manner in which the Company
believes the Employee has not substantially performed his
duties and the Employee fails to correct or cure the
situation after being given a reasonable time (not to exceed
thirty (30) days) to do so; or
(ii) Employee's willful misconduct which is materially injurious
to the Company, monetarily or otherwise (which includes but
is not limited to any act of willful dishonesty by the
Employee to the Board of Directors or any committee of the
Board of Directors or the conviction of the Employee for any
felony). For purposes of this subparagraph (ii), an act or
failure to act on the Employee's part shall be considered
"willful" only if done, or omitted to be done, by him in bad
faith and with reasonable belief that his action or omission
was not in the best interests of the Company.
(2) Notice. The Employee shall not be deemed to have been terminated
With Cause unless and until there shall have been delivered to the
Employee a copy of a resolution, duly adopted by the affirmative vote of
not less than three-quarters (3/4) of the entire membership of the Board
of Directors. The Board of Directors shall provide reasonable notice to
the Employee and an opportunity for him, together with his counsel, to
be heard before the Board of Directors prior to the Board's final
decision regarding termination With Cause.
(3) Compensation. Upon termination of Employee's employment by the
Company With Cause, the Company shall have no further obligations under
Section II, except that:
(i) Company shall pay Employee his salary and accrued vacation
through the date of termination and any benefits under
Section II(d), (e), (f) or (h) accrued but unpaid as of the
date of termination; and
(ii) Company shall pay Employee a pro rata allocation of any
annual bonus earned prior to the effective date of
termination, determined, calculated and paid in accordance
with the requirements of Section II(b).
(b) Termination Without Cause. The Company may terminate Employee's
employment upon written notice for reasons other than With Cause.
<PAGE>
(1) Compensation. Upon termination of Employee's employment by the
Company for other than With Cause, the Company shall have no further
obligations under Section II, except that:
(i) Company shall pay the Employee his salary and accrued
vacation through the date of termination and any benefits
under Section II(d), (e), (f) or (h) accrued but unpaid as
of the date of termination;
(ii) Company shall pay the Employee a pro rata allocation of any
annual bonus earned prior to the effective date of
termination, determined, calculated and paid in accordance
with the requirements of Section II(b);
(iii) in lieu of any further payment of salary or annual bonus,
Company shall pay as severance an amount equal to the
product of (A) an amount equal to the sum of the annual base
salary then in effect plus fifty percent (50%) of the
highest annual bonus compensation paid to Employee or
accrued by the Employee during the Term multiplied by (B)
the greater of two (2) years or the number of years
(including a fraction for that portion of any partial year
remaining) that would remain in the Term if the Agreement
had not been terminated. The severance payments shall, at
the option of Employee, be paid: (1) in equal monthly
installments over the remaining Term of the Agreement; or
(2) be paid in a lump sum upon the effective date of
termination, in an amount discounted to present value.
(iv) Company shall provide the Employee with the opportunity to
purchase the automobile provided pursuant to Section II(e)
at its book value as of the date of termination.
(v) Company shall continue to maintain for the benefit of
Employee and his family at Company expense the same health
insurance coverage in effect for Company's employees as of
the termination date, and shall keep in force at its own
expense any life insurance previously provided by the
Company on the life of Employee for which Employee has the
right to designate the beneficiary, which health and life
insurance coverage shall be maintained until the earlier to
occur of the expiration of the Term of this Agreement or
Employee obtaining other employment through which he is
entitled to obtain equivalent health and life insurance
benefits without additional cost to himself.
(2) Stock Options. Upon termination by the Company for other than
With Cause, the Employee may elect to have the Company accelerate the
vesting of all or any portion of the stock options granted pursuant to
the Option Agreement to the date of termination.
<PAGE>
(c) Termination of Employment by Employee With Good Reason. The Employee may
terminate his employment With Good Reason at any time.
(1) Definition. For purposes of this Agreement, "With Good Reason"
shall be defined as:
(i) Any assignment to the Employee of any duties other than
those reasonably requested by the Board of Directors and
other than those consistent with the duties normally
associated with the positions described in Section I hereof;
(ii) Any reduction in the Employee's base salary, or any other
failure by the Company to provide the compensation agreed to
pursuant to Section II of this Agreement; or
(iii) Any material breach of this Agreement by the Company.
(2) Notice. Employee shall provide sixty (60) days' prior written
notice to the Company of termination With Good Reason. Before a
termination With Good Reason can occur, the Employee must deliver notice
to the Company specifically identifying the manner in which the Employee
believes the Company has acted as described in Section III(c) (1)(i),
(ii) or (iii), above and the Company either (a) fails to correct or cure
the situation after being given a reasonable time to do so or (b)
accelerates the date of termination. After receiving a notice from
Employee of termination With Good Reason, the Company may, at its
option, accelerate the Employee's date of termination. Such acceleration
shall not be deemed a termination of the Employee by the Company.
"Reasonable time" for cure as used in this paragraph shall not exceed
thirty (30) days unless the Company disputes the Employee's contention
that the Company has acted as described in Section III(c)(1)(i), (ii) or
(iii). In the event that the Company disputes Employee's contention as
aforesaid, the Company shall have the right to submit the dispute for
resolution to the AAA pursuant to Section VIII hereof, provided that the
Company file its claim within the thirty (30) day cure period.
Reasonable time to correct or cure the situation which Employee contends
falls within Section III(c)(1)(i), (ii) or (iii) shall, if a timely
claim is filed, extend up to and through the decision of the AAA and for
fifteen (15) days thereafter.
(3) Compensation. Upon termination of his employment With Good
Reason, Employee shall receive the same compensation provided for in
Section III(b)(1) and (2) hereinabove.
<PAGE>
(d) Termination of Agreement by Employee Without Good Reason. Employee may
terminate his employment Without Good Reason.
(1) Definition. "Without Good Reason" shall be defined as any
termination other than one which is With Good Reason as defined in
Section III(c)(1) hereinabove, and other than a termination which
results from Employee's disability, as defined in Section III(e)
hereinafter.
(2) Notice. Employee shall provide the Company with six (6) months'
prior written notice of termination Without Good Reason. After receiving
a notice from Employee of termination Without Good Reason, the Company
may, at its option, accelerate the Employee's date of termination. Such
acceleration shall not be deemed a termination of the Employee by the
Company.
(3) Compensation. Upon termination of his employment Without Good
Reason, Employee shall receive the same compensation provided for in
Section III(a)(3).
(e) Continuation of Medical Benefits. With respect to any termination of
Employee's employment other than for gross misconduct, Employee shall be
eligible to continue to participate at the Employee's expense in the Company's
health insurance plan for a period of eighteen months from the date of
termination.
(f) Disability. In the event that the Employee shall become disabled (as
hereinafter defined), the Company shall have the right to terminate the
Employee's employment upon written notice. In such event the Company shall pay
the Employee twelve months' salary at the rate then applicable to Employee and
the Employee shall continue to participate in all employee benefit plans on the
same basis as if he were employed for that twelve month period, to the extent
permitted by the applicable health and life plan and the applicable law, and the
Company shall continue to provide at its expense the insurance called for in
section II(f) and (h) hereof. For purposes of this Agreement, the Employee shall
be considered disabled on the date when any physical or mental illness or other
incapacity shall, in the judgment of a majority of the members (other than the
Employee) of the Board of Directors, after consulting with or being advised by
one or more physicians (it being understood that one of such physicians may be
the Employee's physician but that the Board shall not be bound by his views),
have prevented the performance in a manner reasonably satisfactory to the
Company of the Employee's duties under this Agreement for a period of twelve
consecutive months. The Employee shall provide to the Company or to a physician
designated by the Company such evidence of disability or incapacity as the
Company shall reasonably request.
(g) Death. This Agreement shall automatically terminate upon the death of
the Employee. The Company shall have no further obligations under Section II,
except that the Company shall pay to the Employee's estate any salary and
accrued vacation and all benefits accrued but unpaid as of the date of
Employee's death, all benefits established for or concerning the death of the
Employee, and all stock options previously vested in Employee.
<PAGE>
(h) Severance Upon Expiration of this Agreement. Upon expiration of this
Agreement, if the parties do not agree upon a new employment contract and if the
Employee's employment with the Company subsequently terminates, the Company
shall provide the following severance package to the Employee:
(1) An amount which is equal to twice the average of the total
salary and bonus compensation earned by Employee in the two fiscal years
immediately preceding termination; payable at the option of Employee in
twenty-four (24) equal monthly installments commencing on the
termination date or in a lump sum (discounted to present value) payable
on the termination date; and
(2) Continuation of medical benefits at the Company's expense until
the earlier to occur of Employee's employment with another person or
entity or the expiration of two (2) years from the termination date.
IV. REPRESENTATIONS OF THE EMPLOYEE
The Employee represents and warrants to the Company that this Agreement
constitutes a valid and binding obligation enforceable to the best of his
knowledge against him in accordance with its terms, that his obligations under
this Agreement are not in conflict with his obligations and liabilities to any
other person, firm or corporation, and that there are no liabilities or claims
pending or threatened against him which might prevent him from performing any of
his obligations under this Agreement in any material respect.
V. NON-DISCLOSURE COVENANT
The Company and the Employee understand and acknowledge that in order to
enable the Employee to properly perform his duties under this Agreement, the
Company must and will necessarily entrust the Employee with trade secrets and
confidential information including, without limitation, trade secrets and
confidential information relating to product technology, engineering and
production methods, processes and techniques, know-how, pricing policies, market
studies and strategies, customer lists, special needs and characteristics of the
Company's customers, and other aspects of the Company's business. The Company
and the Employee understand and acknowledge that the development and/or
acquisition of trade secrets and confidential information are the result of
great effort and expense on the part of the Company, that trade secrets and
confidential information are critical to the success and survival of the Company
and that the disclosure or use of trade secrets and confidential information
would cause the Company irreparable harm and that the Employee, in entering this
Agreement, is fully aware of the Company's need to protect trade secrets and
confidential information.
Employee agrees that, both during the Term and thereafter, he will not use
for his own benefit nor disclose to third persons any trade secrets or
confidential information, except to the extent that such trade secrets and/or
confidential information (a) were known to Employee prior to his employment by
the Company, (b) are authorized in writing by the Company to be used or
disclosed, (c) were in or became part of the public domain (other than through
the Employee in breach of this provision), or (d) were required to be disclosed
by a court or governmental agency.
<PAGE>
The Employee acknowledges and agrees that the Company's remedies at law will
be inadequate in case of any breach by the Employee of his obligations under
this Section V, that any breach will cause irreparable injury to the Company
within a short period of time, and that the Company shall therefore be entitled
to preliminary injunctive relief and other injunctive relief against any such
breach, in addition to such other legal and equitable remedies which the Company
may have.
VI. NONCOMPETITION AGREEMENT
(a) Noncompetition. (a) During the Employee's employment with the Company
under this Agreement or otherwise, and for a period of two years after the date
of termination of such employment (the "Termination Date"), the Employee will
not, anywhere in the United States or any territory or possession thereof or in
any foreign country in which the Company was active as of the date of the
termination of such employment: (a) compete with the Company, or any other
entity controlled by the Company (each, an "affiliate"), in the Jewelry Business
(as hereinafter defined); or (b) otherwise interfere with, disrupt or attempt to
interfere with or disrupt the relationship between the Company or any affiliate
and any customer, supplier, lessor, licensor, manufacturer, contractor, designer
or employee of the Company or any affiliate on or within two years prior to the
Termination Date. This Section VI shall have no effect if the employment of the
Employee is terminated by the Company during the Term Without Cause or is
terminated by the Employee with good reason.
(b) "Compete." The term "compete" as used in this Section VI means directly
or indirectly, or by association with any entity or business, either as a
proprietor, partner, employee, agent, consultant, director, officer, stockholder
(other than of a corporation whose stock is listed on a national securities
exchange, provided that the Employee at no time owns directly or indirectly more
than 9.9% of the outstanding voting securities of any class of any such
corporation).
(c) "Jewelry Business." The term "Jewelry Business" as used in this Section
VI means (i) any business in which the Company or any affiliate or subsidiary is
engaged on the Termination Date and (ii) any business in which the Company or
any affiliate is actively planning to become engaged on the Termination Date and
in connection with the planning of which the Employee has had significant
involvement.
(d) Enforcement. Employee acknowledges that the Company will suffer
irreparable harm and substantial damages not readily ascertainable or
compensable in terms of money in the event of the breach of any of Employee's
obligations under this Section VI. Employee therefore agrees that the Company
shall be entitled (in addition to and not in lieu of any other rights or
remedies otherwise available to the Company) to obtain an injunction from any
court of competent jurisdiction prohibiting the breach of this Section, and
Employee specifically submits himself to the jurisdiction and venue of the
courts of the Commonwealth of Massachusetts for the purposes of any such action.
<PAGE>
(e) Termination of Obligation. If the Company fails to make any material
payment called for in Section III(b)(1)(iii), (c)(3) (limited to compensation
provided for in Section III(a)(3), (b)(1), (c)(3) or (d)(3)) within thirty (30)
days of the date on which payment is due, and further fails to cure the
non-payment within fourteen (14) days thereafter upon receipt of written notice
and demand, the Employee's obligations under Section VI shall terminate, and
Employee shall thereafter be free to work, conduct business or otherwise render
services with any person or organization.
VII. KEY MAN INSURANCE
The Employee agrees to take such actions as may be reasonably required to
permit the Company to maintain key person life insurance on the Employee's life
in such amounts and for such periods of time as the Company deems appropriate,
with all benefits being payable to the Company. Upon payment by the Employee of
the cash surrender value, if any, of such policy and any paid but unearned
premiums for such policy, the Company will assign such policy to the Employee
upon termination of the Employee's employment with the Company.
VIII. ARBITRATION
Any and all disputes arising out of this Agreement shall be resolved by the
American Arbitration Association ("AAA"). Such arbitrations shall take place in
Boston, Massachusetts, and shall be conducted by three arbitrators in accordance
with the then existing Rules of the American Arbitration Association. The costs
of such arbitration (excluding each party's legal fees and expenses) shall be
shared equally by the parties thereto unless the arbitrators shall expressly
determine otherwise.
IX. MISCELLANEOUS
(a) Assignment. This Agreement involves the rendering of unique personal
services by the Employee and may not be assigned by the Company or the Employee,
except that, in case of any merger or consolidation involving the Company or the
sale or exchange by the Company of all or a substantial part of its business or
assets, the Company shall have the right to assign this Agreement to the
surviving, resulting or transferee corporation, in case of a merger or
consolidation or to the transferee corporation in case of a sale or exchange,
subject to the requirements of Section IX(b) of this Agreement. This Agreement
and all the rights and benefits due to the Employee hereunder shall inure to the
benefit of, and be enforceable by, the Employee's personal or legal
representatives, executors, administrators, successors, heirs, distributees,
devisees and legatees.
(b) Successors. In connection with any successor transaction, the Company
shall cause any successor (whether direct or indirect, by purchase, merger,
consolidation or otherwise) to all or substantially all of the business and/or
assets of the Company, to assume and agree to perform this Agreement in the same
manner and to the same extent that the Company would be required to perform it
if no such succession had taken place. Failure of the Company to obtain the
successor's agreement specified in this paragraph shall be a breach of this
Agreement and shall entitle the Employee to all compensation, stock options and
other benefits from the Company in the same amount and on the same terms as he
would be entitled to hereunder if he terminated his employment With Good Reason.
For purposes of implementing the foregoing, a date of at least seven (7) days
prior to
<PAGE>
the date on which any such succession becomes effective shall be deemed the date
of termination in the event that the Company fails to comply with its obligation
to obtain an agreement from its successor prior to that date as specified
herein.
(c) Modification. This Agreement shall not be modified or amended except in
writing signed by both the Company and the Employee.
(d) Notices. Any notices required to be given hereunder shall be deemed
sufficiently given when sent by registered mail or certified mail to the Company
at 25 Union Street, Chelsea, Massachusetts 02150 and to the Employee at Town &
Country Corporation, 25 Union Street, Chelsea, Massachusetts 02150 or as either
party may hereafter communicate to the other by notice given as herein
prescribed.
(e) Severability. If any provision of this Agreement or its application to
any person or circumstance is invalid or unenforceable, then the remainder of
this Agreement or the application of such provision to other persons or
circumstances shall not be affected thereby.
(f) Integration. This Agreement constitutes the entire agreement between the
parties with respect to the subject matter hereof and supersedes all prior
agreements with respect to such subject matter between the parties.
(g) Governing Law. This Agreement shall be interpreted and enforced in
accordance with, and shall be governed in all respects by, the laws of the
Commonwealth of Massachusetts.
(h) Stockholder Approval. This Agreement shall be contingent upon approval
by a majority vote of shareholders prior to payment of any amounts hereunder.
Pending such shareholder approval, and in the event such shareholder approval is
not received, Employee shall be employed under the terms of his former agreement
with the Company on a year to year basis.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement on the
date(s) set forth below.
TOWN & COUNTRY CORPORATION
Date: February 28, 1994 By: \s\Francis X. Correra
---------------------------- -------------------------
Francis X. Correra
Senior Vice President and
Chief Financial Officer
Date: February 28, 1994 \s\C. William Carey
---------------------------- -----------------------
C. William Carey
T&C
sdb
EXHIBIT 10.21
EXECUTIVE EMPLOYMENT AGREEMENT
This Executive Employment Agreement (the "Agreement") is effective as of
February 28, 1994, and is made between TOWN & COUNTRY CORPORATION, a
Massachusetts corporation (the "Company"), and FRANCIS X. CORRERA (the
"Employee").
I. EMPLOYMENT
The Company agrees to employ the Employee and the Employee agrees to accept
employment and serve the Company upon the terms and conditions set forth in this
Agreement for the period commencing on February 28, 1994 and ending on February
28, 1999 (the "Term"). The Employee agrees during the Term to devote his full
time and best efforts to the business and affairs of the Company and to the
performance of his duties under this Agreement.
The Employee shall serve, during the Term, as Senior Vice President and
Chief Financial Officer and in such other senior executive management
position(s) with the Company and any subsidiary of the Company as the Board of
Directors of the Company may determine from time to time. Employee shall report
to the Board of Directors of the Company.
II. COMPENSATION
(a) Base Salary. The Company agrees to pay the Employee an annual base
salary, payable in equal weekly installments or at such greater intervals as
Employee may request. Salary for the first fiscal year of this Agreement, Fiscal
Year 1995 and each year thereafter, shall be calculated by increasing his salary
of $365,000 provided for the Fiscal Year 1994 as set forth in the Executive
Employment Agreement between the Company and the Employee dated as of March 1,
1989 by a percentage amount equal to the percentage increase from December 31,
1993 to the last prior December 31 in the Consumer Price Index All Items for all
Urban Consumers for the District of Columbia area as published by the Bureau of
Labor Statistics or, if such Index is not available, the United States
Government Index which is most similar thereto.
(b) Annual Bonus. During the Term, the Employee shall receive an annual
bonus payment of up to a maximum of 110% of his base salary.
The Annual Bonus shall be determined as follows. A bonus shall be paid to
Employee upon achievement of Net Income attributable to each share of Common
Stock on a fully diluted basis in each of the years of the term of this contract
as derived from the Company's audited financial statements (adjusted in each
such year to exclude extraordinary items and material capital transactions and
after provision for the bonus provided hereby) for each of such years as set
forth in Exhibit I hereto.
The annual bonus or any proration thereof shall be paid at the earlier of:
(a) completion of the audit of the Company's financial statements with respect
to the bonus period by its independent accounting firm, or (b) May 31 of the
following fiscal year.
<PAGE>
(c) Balfour Stock Options. Effective as of the date of this Agreement, the
Company shall grant to the Employee a contingent option to purchase up to one
and one-half percent (1.5%) of the outstanding common stock of L.G. Balfour
Company, Inc. as constituted on the date of this Agreement, (the "Option
Shares"), of which twenty percent (20%) shall vest on grant and twenty percent
(20%) on each subsequent anniversary. The options shall be exercisable until
February 28, 2004, and the price thereof will be based upon the book value of
Balfour most recently computed prior to such grant. These options will be wholly
contingent on the approval prior to exercise by any required votes of the
outstanding principal amount of the Company's debt securities by class thereof.
(d) Expenses. During the Employee's employment pursuant to this Agreement,
the Employee is authorized to incur reasonable expenses in accordance with the
policies and procedures established by the Company from time to time generally
for its senior executive officers in connection with and for the promotion of
the business of the Company (including, but not limited to, expenses for meals,
lodging, transportation, telephone and entertainment) as are incurred from time
to time by Employee. The Company shall reimburse the Employee for all such
expenses upon proper accounting therefor in accordance with Company policy.
(e) Automobile. The Company shall provide Employee with the sole and
exclusive use of an automobile. The automobile provided at the commencement of
the Term shall be a new automobile of make and model equivalent to the Company
automobile which was provided to Employee for his use immediately preceding
commencement of this Agreement. On or before three years thereafter, the Company
shall provide a new automobile of equivalent grade. Employee shall have the
right to purchase the automobile provided at the commencement of the Term from
the Company upon its replacement at its then book value.
(f) Employee Benefit Plans. The Employee shall be eligible to participate in
all employee benefits plans maintained generally by the Company from time to
time for the benefit of its senior executive officers.
(g) Vacation. The Employee shall be entitled to paid vacations of such
duration and at such time or times as shall be deemed reasonable by the Board,
but not less than four (4) weeks per fiscal year. In addition, the Employee
shall be entitled to all paid holidays given by the Company generally to its
senior executive officers.
(h) Perquisites. The Employee shall be entitled to receive all perquisites
and fringe benefits consistent with the practice of the Company generally for
senior executive officers.
III. TERMINATION
(a) Termination With Cause. The Company may terminate Employee's employment
pursuant to this Agreement upon written notice "With Cause."
<PAGE>
(1) Definition. "With Cause" shall be defined as follows:
(i) Employee's deliberate and continued failure to substantially
perform his duties under this Agreement after written demand
for substantial performance is delivered by the Company
specifically identifying the manner in which the Company
believes the Employee has not substantially performed his
duties and the Employee fails to correct or cure the
situation after being given a reasonable time (not to exceed
thirty (30) days) to do so; or
(ii) Employee's willful misconduct which is materially injurious
to the Company, monetarily or otherwise (which includes but
is not limited to any act of willful dishonesty by the
Employee to the Board of Directors or any committee of the
Board of Directors or the conviction of the Employee for any
felony). For purposes of this subparagraph (ii), an act or
failure to act on the Employee's part shall be considered
"willful" only if done, or omitted to be done, by him in bad
faith and with reasonable belief that his action or omission
was not in the best interests of the Company.
(2) Notice. The Employee shall not be deemed to have been terminated
With Cause unless and until there shall have been delivered to the
Employee a copy of a resolution, duly adopted by the affirmative vote of
not less than three-quarters (3/4) of the entire membership of the Board
of Directors. The Board of Directors shall provide reasonable notice to
the Employee and an opportunity for him, together with his counsel, to
be heard before the Board of Directors prior to the Board's final
decision regarding termination With Cause.
(3) Compensation. Upon termination of Employee's employment by the
Company With Cause, the Company shall have no further obligations under
Section II, except that:
(i) Company shall pay Employee his salary and accrued vacation
through the date of termination and any benefits under
Section II(d), (e), (f) or (h) accrued but unpaid as of the
date of termination; and
(ii) Company shall pay Employee a pro rata allocation of any
annual bonus earned prior to the effective date of
termination, determined, calculated and paid in accordance
with the requirements of Section II(b).
(b) Termination Without Cause. The Company may terminate Employee's
employment upon written notice for reasons other than With Cause.
<PAGE>
(1) Compensation. Upon termination of Employee's employment by the
Company for other than With Cause, the Company shall have no further
obligations under Section II, except that:
(i) Company shall pay the Employee his salary and accrued
vacation through the date of termination and any benefits
under Section II(d), (e), (f) or (h) accrued but unpaid as
of the date of termination;
(ii) Company shall pay the Employee a pro rata allocation of any
annual bonus earned prior to the effective date of
termination, determined, calculated and paid in accordance
with the requirements of Section II(b);
(iii) in lieu of any further payment of salary or annual bonus,
Company shall pay as severance an amount equal to the
product of (A) an amount equal to the sum of the annual base
salary then in effect plus fifty percent (50%) of the
highest annual bonus compensation paid to Employee or
accrued by the Employee during the Term multiplied by (B)
the greater of two (2) years or the number of years
(including a fraction for that portion of any partial year
remaining) that would remain in the Term if the Agreement
had not been terminated. The severance payments shall, at
the option of Employee, be paid: (1) in equal monthly
installments over the remaining Term of the Agreement; or
(2) be paid in a lump sum upon the effective date of
termination, in an amount discounted to present value.
(iv) Company shall provide the Employee with the opportunity to
purchase the automobile provided pursuant to Section II(e)
at its book value as of the date of termination.
(2) Stock Options. Upon termination by the Company for other than
With Cause, the Employee may elect to have the Company accelerate the
vesting of all or any portion of the stock options granted pursuant to
the Option Agreement to the date of termination.
(c) Termination of Employment by Employee With Good Reason. The Employee may
terminate his employment With Good Reason at any time.
(1) Definition. For purposes of this Agreement, "With Good Reason"
shall be defined as:
(i) Any assignment to the Employee of any duties other than
those reasonably requested by the Board of Directors and
other than those consistent with the duties normally
associated with the positions described in Section I hereof;
<PAGE>
(ii) Any reduction in the Employee's base salary, or any other
failure by the Company to provide the compensation agreed to
pursuant to Section II of this Agreement; or
(iii) Any material breach of this Agreement by the Company.
(2) Notice. Employee shall provide sixty (60) days' prior written
notice to the Company of termination With Good Reason. Before a
termination With Good Reason can occur, the Employee must deliver notice
to the Company specifically identifying the manner in which the Employee
believes the Company has acted as described in Section III(c) (1)(i),
(ii) or (iii), above and the Company either (a) fails to correct or cure
the situation after being given a reasonable time to do so or (b)
accelerates the date of termination. After receiving a notice from
Employee of termination With Good Reason, the Company may, at its
option, accelerate the Employee's date of termination. Such acceleration
shall not be deemed a termination of the Employee by the Company.
"Reasonable time" for cure as used in this paragraph shall not exceed
thirty (30) days unless the Company disputes the Employee's contention
that the Company has acted as described in Section III(c)(1)(i), (ii) or
(iii). In the event that the Company disputes Employee's contention as
aforesaid, the Company shall have the right to submit the dispute for
resolution to the AAA pursuant to Section VIII hereof, provided that the
Company file its claim within the thirty (30) day cure period.
Reasonable time to correct or cure the situation which Employee contends
falls within Section III(c)(1)(i), (ii) or (iii) shall, if a timely
claim is filed, extend up to and through the decision of the AAA and for
fifteen (15) days thereafter.
(3) Compensation. Upon termination of his employment With Good
Reason, Employee shall receive the same compensation provided for in
Section III(b)(1) and (2) hereinabove.
(d) Termination of Agreement by Employee Without Good Reason. Employee may
terminate his employment Without Good Reason.
(1) Definition. "Without Good Reason" shall be defined as any
termination other than one which is With Good Reason as defined in
Section III(c)(1) hereinabove, and other than a termination which
results from Employee's disability, as defined in Section III(e)
hereinafter.
(2) Notice. Employee shall provide the Company with six (6) months'
prior written notice of termination Without Good Reason. After receiving
a notice from Employee of termination Without Good Reason, the Company
may, at its option, accelerate the Employee's date of termination. Such
acceleration shall not be deemed a termination of the Employee by the
Company.
(3) Compensation. Upon termination of his employment Without Good
Reason, Employee shall receive the same compensation provided for in
Section III(a)(3).
<PAGE>
(e) Continuation of Medical Benefits. With respect to any termination of
Employee's employment other than for gross misconduct, Employee shall be
eligible to continue to participate at the Employee's expense in the Company's
health insurance plan for a period of eighteen months from the date of
termination.
(f) Disability. In the event that the Employee shall become disabled (as
hereinafter defined), the Company shall have the right to terminate the
Employee's employment upon written notice. In such event the Company shall pay
the Employee twelve months' salary at the rate then applicable to Employee and
the Employee shall continue to participate in all employee benefit plans on the
same basis as if he were employed for that twelve month period, to the extent
permitted by the applicable plan and the applicable law, and the Company shall
continue to provide at its expense the insurance called for in section II(f)
hereof. For purposes of this Agreement, the Employee shall be considered
disabled on the date when any physical or mental illness or other incapacity
shall, in the judgment of a majority of the members (other than the Employee) of
the Board of Directors, after consulting with or being advised by one or more
physicians (it being understood that one of such physicians may be the
Employee's physician but that the Board shall not be bound by his views), have
prevented the performance in a manner reasonably satisfactory to the Company of
the Employee's duties under this Agreement for a period of twelve consecutive
months. The Employee shall provide to the Company or to a physician designated
by the Company such evidence of disability or incapacity as the Company shall
reasonably request.
(g) Death. This Agreement shall automatically terminate upon the death of
the Employee. The Company shall have no further obligations under Section II,
except that the Company shall pay to the Employee's estate any salary and
accrued vacation and all benefits accrued but unpaid as of the date of
Employee's death, all benefits established for or concerning the death of the
Employee, and all stock options previously vested in Employee.
(h) Severance Upon Expiration of this Agreement. Upon expiration of this
Agreement, if the parties do not agree upon a new employment contract and if the
Employee's employment with the Company subsequently terminates, the Company
shall provide the following severance package to the Employee:
(1) An amount which is equal to twice the average of the total
salary and bonus compensation earned by Employee in the two fiscal years
immediately preceding termination; payable at the option of Employee in
twenty-four (24) equal monthly installments commencing on the
termination date or in a lump sum (discounted to present value) payable
on the termination date; and
(2) Continuation of medical benefits at the Company's expense until
the earlier to occur of Employee's employment with another person or
entity or the expiration of two (2) years from the termination date.
<PAGE>
IV. REPRESENTATIONS OF THE EMPLOYEE
The Employee represents and warrants to the Company that this Agreement
constitutes a valid and binding obligation enforceable to the best of his
knowledge against him in accordance with its terms, that his obligations under
this Agreement are not in conflict with his obligations and liabilities to any
other person, firm or corporation, and that there are no liabilities or claims
pending or threatened against him which might prevent him from performing any of
his obligations under this Agreement in any material respect.
V. NON-DISCLOSURE COVENANT
The Company and the Employee understand and acknowledge that in order to
enable the Employee to properly perform his duties under this Agreement, the
Company must and will necessarily entrust the Employee with trade secrets and
confidential information including, without limitation, trade secrets and
confidential information relating to product technology, engineering and
production methods, processes and techniques, know-how, pricing policies, market
studies and strategies, customer lists, special needs and characteristics of the
Company's customers, and other aspects of the Company's business. The Company
and the Employee understand and acknowledge that the development and/or
acquisition of trade secrets and confidential information are the result of
great effort and expense on the part of the Company, that trade secrets and
confidential information are critical to the success and survival of the Company
and that the disclosure or use of trade secrets and confidential information
would cause the Company irreparable harm and that the Employee, in entering this
Agreement, is fully aware of the Company's need to protect trade secrets and
confidential information.
Employee agrees that, both during the Term and thereafter, he will not use
for his own benefit nor disclose to third persons any trade secrets or
confidential information, except to the extent that such trade secrets and/or
confidential information (a) were known to Employee prior to his employment by
the Company, (b) are authorized in writing by the Company to be used or
disclosed, (c) were in or became part of the public domain (other than through
the Employee in breach of this provision), or (d) were required to be disclosed
by a court or governmental agency.
The Employee acknowledges and agrees that the Company's remedies at law will
be inadequate in case of any breach by the Employee of his obligations under
this Section V, that any breach will cause irreparable injury to the Company
within a short period of time, and that the Company shall therefore be entitled
to preliminary injunctive relief and other injunctive relief against any such
breach, in addition to such other legal and equitable remedies which the Company
may have.
VI. NONCOMPETITION AGREEMENT
(a) Noncompetition. (a) During the Employee's employment with the Company
under this Agreement or otherwise, and for a period of two years after the date
of termination of such employment (the "Termination Date"), the Employee will
not, anywhere in the United States or any territory or possession thereof or in
any foreign country in which the Company was active as of the date of the
termination of such employment: (a) compete with the Company, or any other
entity controlled by the Company (each, an "affiliate"), in the Jewelry Business
(as hereinafter defined); or (b) otherwise interfere with, disrupt or attempt to
interfere with or disrupt the relationship between the Company or any affiliate
and any customer, supplier, lessor, licensor, manufacturer, contractor, designer
<PAGE>
or employee of the Company or any affiliate on or within two years prior to the
Termination Date. This Section VI shall have no effect if the employment of the
Employee is terminated by the Company during the Term Without Cause or is
terminated by the Employee with good reason.
(b) "Compete." The term "compete" as used in this Section VI means directly
or indirectly, or by association with any entity or business, either as a
proprietor, partner, employee, agent, consultant, director, officer, stockholder
(other than of a corporation whose stock is listed on a national securities
exchange, provided that the Employee at no time owns directly or indirectly more
than 9.9% of the outstanding voting securities of any class of any such
corporation).
(c) "Jewelry Business." The term "Jewelry Business" as used in this Section
VI means (i) any business in which the Company or any affiliate or subsidiary is
engaged on the Termination Date and (ii) any business in which the Company or
any affiliate is actively planning to become engaged on the Termination Date and
in connection with the planning of which the Employee has had significant
involvement.
(d) Enforcement. Employee acknowledges that the Company will suffer
irreparable harm and substantial damages not readily ascertainable or
compensable in terms of money in the event of the breach of any of Employee's
obligations under this Section VI. Employee therefore agrees that the Company
shall be entitled (in addition to and not in lieu of any other rights or
remedies otherwise available to the Company) to obtain an injunction from any
court of competent jurisdiction prohibiting the breach of this Section, and
Employee specifically submits himself to the jurisdiction and venue of the
courts of the Commonwealth of Massachusetts for the purposes of any such action.
(e) Termination of Obligation. If the Company fails to make any material
payment called for in Section III(b)(1)(iii), (c)(3) (limited to compensation
provided for in Section III(a)(3), (b)(1), (c)(3), or (d)(3)) within thirty (30)
days of the date on which payment is due, and further fails to cure the
non-payment within fourteen (14) days thereafter upon receipt of written notice
and demand, the Employee's obligations under Section VI shall terminate, and
Employee shall thereafter be free to work, conduct business or otherwise render
services with any person or organization.
VII. KEY MAN INSURANCE
The Employee agrees to take such actions as may be reasonably required to
permit the Company to maintain key person life insurance on the Employee's life
in such amounts and for such periods of time as the Company deems appropriate,
with all benefits being payable to the Company. Upon payment by the Employee of
the cash surrender value, if any, of such policy and any paid but unearned
premiums for such policy, the Company will assign such policy to the Employee
upon termination of the Employee's employment with the Company, provided,
however, that, in the event the Employee's
<PAGE>
employment is terminated by reason of the disability of the Employee and the
death of the Employee may reasonably be expected within one year after such
termination as a result of such disability, the Company shall not be required to
assign any such policy.
VIII. ARBITRATION
Any and all disputes arising out of this Agreement shall be resolved by the
American Arbitration Association ("AAA"). Such arbitrations shall take place in
Boston, Massachusetts, and shall be conducted by three arbitrators in accordance
with the then existing Rules of the American Arbitration Association. The costs
of such arbitration (excluding each party's legal fees and expenses) shall be
shared equally by the parties thereto unless the arbitrators shall expressly
determine otherwise.
IX. MISCELLANEOUS
(a) Assignment. This Agreement involves the rendering of unique personal
services by the Employee and may not be assigned by the Company or the Employee,
except that, in case of any merger or consolidation involving the Company or the
sale or exchange by the Company of all or a substantial part of its business or
assets, the Company shall have the right to assign this Agreement to the
surviving, resulting or transferee corporation, in case of a merger or
consolidation or to the transferee corporation in case of a sale or exchange,
subject to the requirements of Section IX(b) of this Agreement. This Agreement
and all the rights and benefits due to the Employee hereunder shall inure to the
benefit of, and be enforceable by, the Employee's personal or legal
representatives, executors, administrators, successors, heirs, distributees,
devisees and legatees.
(b) Successors. In connection with any successor transaction, the Company
shall cause any successor (whether direct or indirect, by purchase, merger,
consolidation or otherwise) to all or substantially all of the business and/or
assets of the Company, to assume and agree to perform this Agreement in the same
manner and to the same extent that the Company would be required to perform it
if no such succession had taken place. Failure of the Company to obtain the
successor's agreement specified in this paragraph shall be a breach of this
Agreement and shall entitle the Employee to all compensation, stock options and
other benefits from the Company in the same amount and on the same terms as he
would be entitled to hereunder if he terminated his employment With Good Reason.
For purposes of implementing the foregoing, a date of at least seven (7) days
prior to the date on which any such succession becomes effective shall be deemed
the date of termination in the event that the Company fails to comply with its
obligation to obtain an agreement from its successor as specified herein.
(c) Modification. This Agreement shall not be modified or amended except in
writing signed by both the Company and the Employee.
(d) Notices. Any notices required to be given hereunder shall be deemed
sufficiently given when sent by registered mail or certified mail to the Company
at 25 Union Street, Chelsea, Massachusetts 02150 and to the Employee at Town &
Country Corporation, 25 Union Street, Chelsea, Massachusetts 02150 or as either
party may hereafter communicate to the other by notice given as herein
prescribed.
(e) Severability. If any provision of this Agreement or its application to
any person or circumstance is invalid or unenforceable, then the remainder of
this Agreement or the application of such provision to other persons or
circumstances shall not be affected thereby.
<PAGE>
(f) Integration. This Agreement constitutes the entire agreement between the
parties with respect to the subject matter hereof and supersedes all prior
agreements with respect to such subject matter between the parties.
(g) Governing Law. This Agreement shall be interpreted and enforced in
accordance with, and shall be governed in all respects by, the laws of the
Commonwealth of Massachusetts.
(h) Stockholder Approval. This Agreement shall be contingent upon approval
by a majority vote of shareholders prior to payment of any amounts hereunder.
Pending such shareholder approval, and in the event such shareholder approval is
not received, Employee shall be employed under the terms of his former agreement
with the Company on a year to year basis.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement on the
date(s) set forth below.
TOWN & COUNTRY CORPORATION
Date: February 28, 1994 By: \s\C. William Carey
---------------------------- -----------------------
C. William Carey
Chairman, President and
Chief Executive Officer
Date: February 28, 1994 \s\Francis X. Correra
---------------------------- -------------------------
Francis X. Correra
T&C
sdb
EXHIBIT 12.1
TOWN & COUNTRY CORPORATION AND SUBSIDIARIES
HISTORICAL AND PRO FORMA RATIOS OF EARNINGS TO FIXED CHARGES
<TABLE>
<CAPTION>
Historical Ratio of Earnings to Fixed Charges
(in thousands)
Fiscal Year Ended Fiscal Quarter Ended
(Unaudited) (Unaudited)
------------------------------------------------- ------------------
2/28/90 2/28/91 2/29/92 2/28/93 2/27/94 5/30/93 5/29/94
-------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Fixed charges:
Interest expense (in-
cluding amortization
of debt discount and
and expense).......... $ 26,662 $ 28,561 $ 25,067 $ 20,093 $ 14,045 $ 4,844 $ 2,656
Interest element of
rental expense........ 908 910 338 430 397 116 96
-------- -------- -------- -------- -------- -------- --------
Total................... $ 27,570 $ 29,471 $ 25,405 $ 20,523 $ 14,442 $ 4,960 $ 2,752
======== ======== ======== ======== ======== ======== ========
Earnings:
Net income (loss)....... $ 6,613 $ 1,249 $(19,018) $(47,296) $ 3,138 $ (499) $ (2,478)
Extraordinary gain...... -- (1,885) (726) -- -- -- --
Equity in net income of
Little Switzerland(1). -- -- (1,487) (1,914) (1,106) (315) (353)
Provision for income
taxes................. 2,834 1,791 3,252 956 1,010 52 419
Fixed charges........... 27,570 29,471 25,405 20,523 14,442 4,960 2,752
-------- -------- -------- -------- -------- -------- --------
Total................... $ 37,017 $ 30,626 $ 7,426 $(27,731) 17,484 4,198 340
======== ======== ======== ======== ======== ======== ========
Ratio of earnings to
fixed charges(2)...... 1.34x 1.04x -- -- 1.21x -- --
</TABLE>
<PAGE>
EXHIBIT 12.1
TOWN & COUNTRY CORPORATION AND SUBSIDIARIES
HISTORICAL AND PRO FORMA RATIOS OF EARNINGS TO FIXED CHARGES
(Continued)
Pro Forma Ratio of Earnings
to Fixed Charges
(in thousands)
Fiscal Year Ended
February 27, 1994
(Unaudited)
-------------------------------------
Pro Forma
Pro Forma for the
for the Little Switzerland
Recapitalization Exchange
---------------- -----------------
Fixed charges:
Interest expense (including
amortization of debt discount
and expense) .................... $ 12,540 $ 12,540
Interest element of rental
expense ......................... 397 397
---------------- ------------------
Total ............................. $ 12,937 $ 12,937
================ ==================
Earnings:
Net income......................... $ 4,643 $ 3,537
Equity in net income of Little
Switzerland(1) .................. (1,106) --
Provision for income taxes ........ 1,010 1,010
Fixed charges ..................... 12,937 12,937
---------------- ------------------
Total ............................. $ 17,484 $ 17,484
================ ==================
Ratio of earnings to fixed
charges(2) ...................... 1.35 1.35
- ------
(1) Reflects equity in net income of Little Switzerland, Inc. subsequent to the
sale by the Company of 68% of its ownership interest. (See Note 1 of
Notes to Consolidated Financial Statements.)
(2) Calculated by dividing total earnings by total fixed charges for the period.
For the years-ended February 29, 1992, and February 28, 1993, the Company's
earnings before fixed charges were insufficient to cover fixed charges by
approximately $18.0 million and $48.3 million, respectively. For the
quarters ended May 30, 1993 and May 29, 1994, the Company's earnings before
fixed charges were insufficient to cover fixed charges by approximately $0.8
million and $2.4 million, respectively.
EXHIBIT 12.2
TOWN & COUNTRY CORPORATION AND SUBSIDIARIES
HISTORICAL AND PRO FORMA RATIO OF EARNINGS TO FIXED CHARGES AND
EXCHANGEABLE PREFERRED STOCK DIVIDENDS AND ACCRETION
<TABLE>
<CAPTION>
Pro Forma Ratio of Earning
to Fixed Charges
(in thousands)
Fiscal Year Ended
February 27, 1994
(Unaudited)
---------------- ------------------
Pro Forma
Fiscal Year Ended Fiscal Quarter Ended Pro Forma for the
February 27, 1994 May 29, 1994 for the Little Switzerland
(Unaudited) (Unaudited) Recapitalization Exchange
----------------- -------------------- ---------------- ------------------
HISTORICAL HISTORICAL
----------------- --------------------
<S> <C> <C> <C> <C>
Fixed charges:
Interest expense (including
amortization of debt discount
and expense) .................... $ 12,540 $ 2,656 $ 12,540 $ 12,540
Interest element of rental
expense ......................... 397 96 397 397
--------------- --------------- --------------- ---------------
Total fixed charges ............... $ 12,937 $ 2,752 $ 12,937 $ 12,937
--------------- --------------- --------------- ---------------
Accretion of discount and
dividends on preferred
stock ........................... 1,454 467 1,864 --
--------------- --------------- --------------- ---------------
Total fixed charges and
preferred stock accretion ....... $ 14,391 $ 3,219 $ 14,801 $ 12,937
--------------- --------------- ---------------- ---------------
Earnings:
Net income (loss).................. $ 1,684 $ (2,945) $ 2,779 $ 3,537
Equity in net income of Little
Switzerland(1) .................. (1,106) (353) (1,106) --
Provision for income taxes ........ 1,010 419 1,010 1,010
Fixed charges ..................... 14,391 3,219 14,801 12,937
--------------- --------------- --------------- ---------------
Total ............................. $ 15,979 $ 340 $ 17,484 $ 17,484
=============== =============== =============== ===============
Ratio of earnings to fixed
charges(2) ...................... 1.11 -- 1.18 1.35
</TABLE>
- ------
(1) Reflects equity in net income of Little Switzerland, Inc. subsequent to the
sale by the Company of 68% of its ownership interest. (See Note 1 of
Notes to Consolidated Financial Statements.)
(2) Calculated by dividing total pro forma earnings by total fixed charges and
preferred stock dividends for the period. For the years-ended February 29,
1992, and February 28, 1993, the Company's earnings before fixed charges and
preferred stock dividends were insufficient to cover fixed charges by
approximately $18.0 million and $48.3 million, respectively. For the
quarter ended May 29, 1994, the Company's earnings before
fixed charges and preferred stock dividends were insufficient to cover fixed
charges by approximately $2.9 million, respectively.
EXHIBIT 13
TOWN & COUNTRY CORPORATION AND SUBSIDIARIES
QUARTERLY REPORT ON FORM 10-Q FOR THE FISCAL QUARTER ENDED MAY 29, 1994
<PAGE>
10Q-94-05--10--AS ELECTRONICALLY FILED WITH THE S.E.C.
FORM 10-Q
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
[ x ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended May 29, 1994
------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
---------------- -------------------
Commission File Number: 0-14394
-------
TOWN & COUNTRY CORPORATION
--------------------------
(Exact name of Registrant as specified in its charter)
Massachusetts 04-2384321
---------------------------------------------------
(State or other jurisdiction (I.R.S. Employer
of incorporation or Identification
organization) Number)
25 Union Street, Chelsea, Massachusetts 02150
----------------------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (617) 884-8500
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
----- ----
On June 15, 1994, the Registrant had outstanding 20,756,096 shares of Class A
Common Stock, $.01 par value and 2,670,498 shares of Class B Common Stock, $.01
par value.
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
CONSOLIDATED BALANCE SHEETS
May 29, February 27,
1994 1994
(Unaudited)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 2,328,980 $ 3,273,876
Restricted cash 111,017 37,971
Accounts receivable--
Less allowances for doubtful
accounts of $6,096,000 at
05/29/94 and $5,510,000 at
2/27/94 65,309,439 55,623,418
Inventories (Note 4) 75,086,503 75,029,397
Prepaid expenses & other current
assets 1,456,428 3,991,883
Total current assets $ 144,292,367 $ 137,956,545
PROPERTY, PLANT & EQUIPMENT, at cost $ 80,007,685 $ 79,340,723
Less - Accumulated depreciation 35,072,034 33,636,099
$ 44,935,651 $ 45,704,624
INVESTMENT IN AFFILIATES (Note 6) $ 27,391,089 $ 27,038,089
OTHER ASSETS (Note 2) $ 9,588,463 $ 13,221,467
$ 226,207,570 $ 223,920,725
The accompanying notes are an integral part of these
consolidated financial statements.
<PAGE>
CONSOLIDATED BALANCE SHEETS (Continued)
May 29, February 27,
1994 1994
(Unaudited)
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Notes payable (Note 3) $ 8,278,503 $ -
Current portion of long-term debt 1,655,992 1,479,590
Accounts payable 16,254,733 12,727,357
Accrued expenses 13,250,815 19,956,332
Accrued and currently deferred
income taxes 930,837 874,253
Total current liabilities $ 40,370,880 $ 35,037,532
LONG-TERM DEBT, less current portion
(Note 3) $ 91,267,901 $ 91,827,239
OTHER LONG-TERM LIABILITIES $ 1,961,173 $ 2,093,755
Total liabilities $ 133,599,954 $ 128,958,526
COMMITMENTS AND CONTINGENCIES (Note 2)
MINORITY INTEREST $ 3,966,497 $ 3,843,117
EXCHANGEABLE PREFERRED STOCK, $1.00
par value-
Authorized--2,700,000 shares
Issued and outstanding--2,533,255
shares (Note 3) $ 36,252,595 $ 35,785,399
STOCKHOLDERS' EQUITY (Note 3):
Preferred stock, $1.00 par value-
Authorized and unissued--2,300,000
shares $ - $ -
Class A Common Stock, $.01 par value-
Authorized--40,000,000 shares
Issued and outstanding--20,755,901
shares 207,559 207,559
Class B Common Stock, $.01 par value-
Authorized--8,000,000 shares
Issued and outstanding--2,670,693
shares 26,707 26,707
Additional paid-in capital 69,909,485 69,909,485
Retained deficit (17,755,227) (14,810,068)
Total stockholders' equity $ 52,388,524 $ 55,333,683
$ 226,207,570 $ 223,920,725
The accompanying notes are an integral part of these
consolidated financial statements.
<PAGE>
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
For the Three Months Ended
May 29, May 30,
1994 1993
NET SALES $ 70,568,460 $ 64,125,732
COST OF SALES 45,949,170 39,474,967
Gross profit $ 24,619,290 $ 24,650,765
SELLING, GENERAL &
ADMINISTRATIVE
EXPENSES 24,348,251 20,479,180
Income from
operations $ 271,039 $ 4,171,585
INTEREST EXPENSE,
net (2,560,087) (4,742,098)
INCOME FROM
AFFILIATES 353,000 454,581
MINORITY INTEREST (123,380) (331,022)
The accompanying notes are an integral part of these
consolidated financial statements.
<PAGE>
CONSOLIDATED STATEMENTS OF OPERATIONS (Continued)
(Unaudited)
For the Three Months Ended
May 29, May 30,
1994 1993
LOSS BEFORE
INCOME TAXES $ (2,059,428) $ (446,954)
PROVISION FOR
INCOME TAXES 418,535 52,000
NET LOSS $ (2,477,963) $ (498,954)
ACCRETION OF
DISCOUNT ON
EXCHANGEABLE
PREFERRED STOCK 467,196 76,004
LOSS ATTRIBUTABLE
TO COMMON
STOCKHOLDERS $ (2,945,159) $ (574,958)
LOSS PER COMMON
SHARE (Note 5): $ (0.13) $ (0.04)
WEIGHTED AVERAGE
COMMON SHARES
OUTSTANDING
(Note 5): 23,426,594 14,559,819
The accompanying notes are an integral part of these
consolidated financial statements.
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
For the Three Months Ended
May 29, May 30,
1994 1993
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (2,477,963) $ (498,954)
Adjustments to reconcile net income to
net cash used in operating activities-
Depreciation and amortization 1,203,628 2,021,680
Loss (gain) on disposal of certain
assets 4,239 1,068
Undistributed earnings of affiliates,
net of minority interest (229,620) (53,338)
Interest paid with issuance of debt 1,543,116 -
Change in assets and liabilities--
Decrease (increase) in accounts
receivable (9,686,021) (1,048,250)
Decrease (increase) in inventory (57,106) (1,860,627)
Decrease (increase) in prepaid
expenses and other current assets 2,535,455 641,404
Decrease (increase) in other assets 3,535,948 176,790
Increase (decrease) in accounts
payable 3,527,376 (357,913)
Increase (decrease) in accrued
expenses (4,545,163) (1,194,129)
Increase (decrease) in accrued and
current deferred taxes 56,584 (97,250)
Increase (decrease) in other
liabilities (132,582) 8,040
Net cash used in operating
activities $ (4,722,109) $ (2,261,479)
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures $ (673,306) $ (477,781)
Net cash used in investing
activities $ (673,306) $ (477,781)
The accompanying notes are an integral part of these
consolidated financial statements.
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
(Unaudited)
For the Three Months Ended
May 29, May 30,
1994 1993
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments on revolving credit facilities $ (57,645,898) $(13,460,369)
Proceeds from borrowings under
revolving credit facilities 65,924,401 18,700,000
Payments on long-term debt (3,754,938) (1,433,541)
Decrease (increase) in restricted cash (73,046) --
Payments to retire credit facility -- (37,250,000)
Proceeds from senior secured notes -- 30,000,000
Payments for recapitalization expenses -- (4,669,964)
Net cash provided by (used in)
financing activities $ 4,450,519 $ (8,113,874)
NET DECREASE IN CASH AND CASH
EQUIVALENTS $ (944,896) $(10,853,134)
CASH AND CASH EQUIVALENTS AT
BEGINNING OF PERIOD 3,273,876 15,353,259
CASH AND CASH EQUIVALENTS AT
END OF PERIOD $ 2,328,980 $ 4,500,125
SUPPLEMENTAL CASH FLOW DATA:
Cash paid during the period for:
Interest $ 730,348 $ 1,098,228
Income taxes 355,491 141,698
Supplemental Disclosure of Non-Cash Investing & Financing Activities:
On May 14, 1993, the Company completed its recapitalization as described
in Note 3. As a result of this transaction, long-term debt with a carrying value
of $122,673,945, including accrued interest and 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.
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.
As of May 29, 1994 and May 30, 1993, accretion of discount on
exchangeable preferred shares has amounted to $467,196 and $76,004,
respectively.
On May 15, 1994, the Company issued approximately $3.7 million in new 13%
Senior Subordinated Notes due May 31, 1998, as payment of the semiannual
interest installment. Approximately $2.2 million of this amount was classified
as accrued expenses in the February 27, 1994, Consolidated Balance Sheet.
The accompanying notes are an integral part of these
consolidated financial statements.
<PAGE>
PART I - FINANCIAL INFORMATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 29, 1994
(1) Significant Accounting Policies
The unaudited consolidated financial statements presented herein have been
prepared by the Company and contain all adjustments (consisting of only normal
recurring adjustments) necessary to present fairly and on a basis consistent
with the consolidated financial statements for the year ended February 27,
1994, the Company's financial position as of May 29, 1994, and the results of
its operations and cash flows for the quarters ended May 29, 1994 and
May 30, 1993.
The significant accounting policies followed by the Company are set forth in
Note (1) of the Company's consolidated financial statements for the
year ended February 27, 1994, which have been included in the Annual Report
on Form 10-K, Commission File Number 0-14394, for the fiscal year
ended February 27, 1994. The Company has made no change in these
policies during the quarter ended May 29, 1994.
The consolidated financial statements include the accounts of
subsidiary companies more than fifty percent owned.
The results of operations for the quarter ended May 29, 1994, are not
necessarily indicative of the results to be expected for the year due to
the seasonal nature of the Company's operations.
(2) Commitments and Contingencies
Zale Bankruptcy
The Company's largest customer for a number of years has been the Zale
Corporation and its affiliated companies, including Gordon Jewelry Corporation.
On July 30, 1993, this group of companies completed a reorganization under
Chapter 11 of the United States Bankruptcy Code in the United States Bankruptcy
Court and emerged from bankruptcy as Zale Delaware, Inc. (Zale).
The Company has reached agreement on most issues with the new Zale concerning
the Company's claim of approximately $40 million, filed with the Bankruptcy
Court, representing the net outstanding balance of trade accounts receivable and
the wholesale value of the consignment inventory as of the date of Zale's
bankruptcy petition.
The Company's Consolidated Financial Statements at February 28, 1992, originally
reflected a net valuation 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 $11.6 million.
The Consolidated Financial Statements at May 29, 1994, reflect a net valuation
of approximately $2.4 million, representing management's estimate of the value
of the remaining claim related assets.
<PAGE>
The Company continues to conduct business with Zale.
(3) Loan Arrangements
In order to significantly reduce the amount of the Company's cash interest and
principal requirements and to satisfy the Company's near-term and long-term
liquidity needs, the Company completed a major recapitalization on May 14, 1993.
This recapitalization revised the Company's consolidated capitalization,
including debt structure, to be consistent with the Company's current and
expected operating performance levels. The amount of debt outstanding was
reduced and a significant portion of the old subordinated debt was exchanged for
new debt, shares of Class A Common Stock and Exchangeable Preferred Stock.
The new debt structure consisted of a new revolving credit agreement which was
obtained from Foothill Capital Corporation to provide secured financing in an
aggregate amount of up to $30 million, new gold consignment agreements which
were obtained from the Company's gold suppliers to provide an aggregate gold
consignment availability of up to approximately 100,000 troy ounces, $30 million
principal amount of 11 1/2% Senior Secured Notes due September 15, 1997, which
were purchased by various investors, and approximately $53 million principal
amount of 13% Senior Subordinated Notes due May 31, 1998, issued as a component
of the exchange. As of May 29, 1994, approximately $8.3 million was outstanding
under the revolving credit agreement.
The results of the exchange offer were:
(a) holders of approximately 93% of the Company's existing 13% Senior
Subordinated Notes due December 15, 1998, exchanged each $1,000
principal amount of those notes for $478.96 principal amount of the
Company's 13% Senior Subordinated Notes due May 31, 1998, $331.00 of
the Company's Exchangeable Preferred Stock, par value $1.00 per share,
and 89.49 shares of the Company's Class A Common Stock, par value
$0.01 per share, and
(b) holders of approximately 98% of the Company's existing 10 1/4%
Subordinated Notes due July 1, 1995, exchanged each $1,000 principal
amount of those notes for $408.11 principal amount of the Company's
13% Senior Subordinated Notes due May 31, 1998, $282.04 of the
Company's Exchangeable Preferred Stock, par value $1.00 per share, and
76.25 shares of the Company's Class A Common Stock, par value $0.01
per share.
The Company reached an agreement with Chemical Bank to change the terms of
the IRB financing for the Company's facility located in New York, New
York. This agreement includes, among other things, an accelerated payment
schedule relative to that which had previously been in place and the
release of certain collateral by Chemical Bank.
<PAGE>
(4) Inventories
Inventories consisted of the following at May 29, 1994 and February 27,
1994:
May 29, February 27,
1994 1994
Raw Materials $16,770,674 $16,753,865
Work-in-Process 6,715,394 7,154,300
Finished Goods 51,600,435 51,121,232
$75,086,503 $75,029,397
(5) Earnings Per Common Share
Loss per common share is computed by adjusting the Company's net loss for the
accretion of discount on exchangeable preferred stock and dividing by the
weighted average number of common shares outstanding during each period.
(6) Investment in Little Switzerland, Inc.
Presented below is summarized financial information (in thousands) for Little
Switzerland, Inc. as of and for the fiscal quarters ended February 28, 1994 and
1993:
1994 1993
Current Assets $36,228 $40,179
Noncurrent Assets 14,761 13,893
Current Liabilities 7,884 14,858
Noncurrent Liabilities 794 847
Total Equity 42,311 38,367
Sales $22,938 $22,249
Gross Profit 10,193 10,002
Net Income 2,856 2,711
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Results of Operations for the Quarter Ended May 29, 1994, Compared to the
Quarter Ended May 30, 1993
Net sales for the fiscal quarter ended May 29, 1994, increased approximately $6
million or 10% from approximately $64 million in fiscal 1994 to approximately
$70 million in fiscal 1995. Sales of fine jewelry increased approximately $5
million from $36 million in fiscal 1994 to $41 million in fiscal 1995. The
Company believes that the increase in sales of fine jewelry is indicative of
improved customer confidence in its ability to meet customer needs.
Gross profit for the fiscal quarter ended May 29, 1994, was approximately the
same as for the first quarter of fiscal 1994, or $24 million. Gross profit
margin decreased from 38% for the quarter ended May 30, 1993, to 35% for the
quarter ended May 29, 1994. The Company's sales increase has been primarily in
the lower margin fine jewelry product categories. In its effort to manage
inventory levels, the Company has also sold or made provisions to sell
inventory, which it believes may be in excess of current requirements, at less
than normal margins. Also, the Company is now pursuing the direct response
distribution business for its licensed sports and other specialty products
which requires the expenditure of product development costs at a more
substantial rate than in prior periods.
Selling, general and administrative expenses for the fiscal quarter ended May
29, 1994, increased approximately $4 million or 20% from $20 million in fiscal
1994 to $24 million in fiscal 1995. As a percentage of net sales, selling,
general and administrative expenses were approximately 3% more than for the
comparable quarter in fiscal 1994. Increases primarily relate to higher costs
associated with the Company's direct response distribution business of licensed
sports and other specialty products which was in the start-up phase during the
first quarter of fiscal 1994.
Net interest expense for the fiscal quarter ended May 29, 1994, decreased
approximately $2 million relative to the corresponding quarter of fiscal 1994.
This decrease is the result of the recapitalization which occurred on May 14,
1993. Approximately $115 million of the Company's long-term debt was exchanged
for approximately $53 million of new debt, approximately $37 million of
exchangeable preferred stock and approximately 10 million shares of the
Company's Class A common stock.
During the quarter ended May 29, 1994, the Company had equity income from its
ownership of Little Switzerland, Inc. stock and Solomon Brothers, Limited stock
of approximately $0.4 million. This compares to approximately $0.5 million for
the first quarter in fiscal 1994.
Although the Company had a taxable loss for the fiscal quarter ended May 29,
1994, the Company recorded a tax provision of approximately $419,000. The tax
provision was primarily due to the Company's inability to fully recognize the
tax benefits of operating losses in certain jurisdictions as well as state and
foreign income taxes.
<PAGE>
Liquidity and Working Capital
Cash used in operating activities during the quarter ended May 29, 1994, was
approximately $5 million compared with $2 million for the same quarter of fiscal
1994. This change is primarily due to a greater net loss in the current period,
as well as, increases in accounts receivable from higher sales and the direct
marketing of licensed sports products in fiscal 1995. The Company has benefited
from the issuance of approximately $3.7 million in new 13% Senior Subordinated
Notes due May 31, 1998, as payment of the semiannual interest installment due in
May 1994. Approximately $2.2 million of this amount was classified as accrued
expenses in the February 27, 1994, Consolidated Balance Sheet.
Cash used in investing activities for the quarter ended May 29, 1994, was $0.7
million compared to $0.5 million in fiscal 1994. The increase is due to higher
capital expenditures in the current period.
Cash provided by financing activities was approximately $4 million for May 29,
1994, compared with cash used in financing activities of $8 million for May 30,
1993. The change in cash used in financing activities is the direct result of
costs associated with the recapitalization which was completed in the first
quarter of fiscal 1994. Outstanding borrowings under the revolving credit
agreement were approximately $8.3 million at May 29, 1994, compared with
approximately $5.2 million at May 30, 1993.
The Company is required to escrow, for the benefit of the holders of the Senior
Secured Notes, cash payments resulting from share redemptions and dividends,
related to its investment in Solomon Brothers, Limited and net proceeds with
respect to the Zale bankruptcy claim. During the quarter ended May 29, 1994,
approximately $3.4 million of Senior Secured Notes were redeemed with such
proceeds. The Company's net cash position decreased from approximately $3
million at February 27, 1994, to approximately $2 million at May 29, 1994.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
11 Earnings Per Share Computations
(b) Reports on Form 8-K
There were no Form 8-K filings during the first quarter ended May 29,
1994.
<PAGE>
SIGNATURES
----------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this Report to be signed on its behalf by the
undersigned thereunto duly authorized.
TOWN & COUNTRY CORPORATION
(Registrant)
Date: July 13, 1994 /s/ Francis X. Correra
------------- -------------------
Francis X. Correra
Senior Vice President and
Chief Financial Officer
<PAGE>
EXHIBIT 11
Earnings Per Share Computations
(Unaudited)
For the Three Months Ended
May 29, May 30,
1994 1993
PRIMARY EPS:
Net loss $(2,477,963) $ (498,954)
Accretion of discount on
Exchangeable Preferred
Stock 467,196 76,004
Net loss for EPS
calculation $(2,945,159) $ (574,958)
Weighted average common
shares outstanding 23,426,594 14,559,819
Weighted shares issued from
exercise and assumed
exercise of:
warrants - -
options - -
Shares for EPS calculation 23,426,594 14,559,819
REPORTED EPS:
Loss before accretion of
discount on Exchangeable
Preferred Stock $ (0.11) $ (0.03)
Accretion of discount on
Exchangeable Preferred
Stock (0.02) (0.01)
Net loss per share: $ (0.13) $ (0.04)
FULLY DILUTED EPS:
Net loss $(2,477,963) $ (498,954)
Accretion of discount on
Exchangeable Preferred
Stock 467,196 76,004
Net loss for EPS
calculation $(2,945,159) $ (574,958)
Weighted average common
shares outstanding 23,426,594 14,559,819
Weighted shares issued from
exercise and assumed
exercise of:
warrants - -
options - -
Shares for EPS calculation 23,426,594 14,559,819
REPORTED EPS:
Loss before accretion of
discount on Exchangeable
Preferred Stock $ (0.11) $ (0.03)
Accretion of discount on
Exchangeable Preferred
Stock (0.02) (0.01)
Net loss per share: $ (0.13) $ (0.04)
This exhibit should be reviewed in conjunction with Note 5 of Notes
to Consolidated Financial Statements
EXHIBIT 24.2
TOWN & COUNTRY CORPORATION AND SUBSIDIARIES
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation of
our reports and to all references to our Firm included in or made part of this
Registration Statement.
Arthur Andersen & Co.
Boston, Massachusetts
July 26, 1994
EXHIBIT 25.1
TOWN & COUNTRY CORPORATION AND SUBSIDIARIES
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS that the individual whose signature appears
below constitutes and appoints C. William Carey, Richard E. Floor and Francis X.
Correra, and each of them, his true and lawful attorneys-in-fact and agents with
full power of substitution, for him and in his name, place and stead, in any and
all capacities, to sign any and all amendments to Town & Country Corporation's
Registration Statement on Form S-2 (File No. 33-49028), and to file the same and
all documents in connection therewith, with the Securities and Exchange
Commission, granting unto said attorneys-in-fact and agents and each of them,
full power and authority to do and perform each and every act and thing which
they, or any of them, may deem necessary or advisable to be done in connection
with said Registration Statement, as fully to all intents and purposes as he
might or could do in person, hereby ratifying and confirming all that said
attorneys-in-fact and agents or any of them, or any substitute or substitutes
for any or all of them, may lawfully do or cause to be done by virtue hereof.
\s\ Mone Anathan III
---------------------------
Mone Anathan III
<PAGE>
EXHIBIT 25.1
TOWN & COUNTRY CORPORATION AND SUBSIDIARIES
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS that the individual whose signature appears
below constitutes and appoints C. William Carey, Richard E. Floor and Francis X.
Correra, and each of them, his true and lawful attorneys-in-fact and agents with
full power of substitution, for him and in his name, place and stead, in any and
all capacities, to sign any and all amendments to Town & Country Corporation's
Registration Statement on Form S-2 (File No. 33-49028), and to file the same and
all documents in connection therewith, with the Securities and Exchange
Commission, granting unto said attorneys-in-fact and agents and each of them,
full power and authority to do and perform each and every act and thing which
they, or any of them, may deem necessary or advisable to be done in connection
with said Registration Statement, as fully to all intents and purposes as he
might or could do in person, hereby ratifying and confirming all that said
attorneys-in-fact and agents or any of them, or any substitute or substitutes
for any or all of them, may lawfully do or cause to be done by virtue hereof.
\s\ William Schawbel
--------------------------
William Schawbel
