UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
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[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED EFFECTIVE
OCTOBER 7, 1996]
For Fiscal Year Ended February 23, 1997
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[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the Transition Period from ________________________________ to ____________
Commission File Number: 0-14394
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TOWN & COUNTRY CORPORATION
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(Exact name of Registrant as specified in its charter)
Massachusetts 04-2384321
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) I.D. Number)
25 Union Street, Chelsea, Massachusetts 02150
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (617) 884-8500
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
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Class A Common Stock, $.01 par value American Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
- -
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
The aggregate market value of voting stock, based on the actual price at
which the Class A common stock sold, held by non-affiliates of the Registrant
was $6,851,718 as of May 15, 1997.
On May 15, 1997, the Registrant had outstanding 23,694,509 shares of
Class A Common Stock, $.01 par value and 2,664,927 shares of Class B Common
Stock, $.01 par value. The Registrant also had 1,224,930 shares of Convertible
Preferred Stock, $1 par value, outstanding on May 15, 1997. These shares are
immediately convertible into 2,449,860 shares of Class A Common Stock.
<PAGE>
TABLE OF CONTENTS
PART I PAGE
- ------ ----
Item 1 Business 1
General Business Developments 1
Narrative Description of Business 6
Financial Information about Foreign and
and Domestic Operations and Export Sales 11
Item 2 Properties 12
Item 3 Legal Proceedings 13
Item 4 Submission of Matters to a Vote of
Security-Holders 14
PART II
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Item 5 Market for the Registrant's Common
Equity and Related Stockholder Matters 14
Item 6 Selected Financial Data 15
Item 7 Management's Discussion and Analysis
of Financial Condition and Results of
Operations 16
Item 8 Financial Statements and Supplementary
Data 24
Item 9 Changes in and Disagreements with
Accountants on Accounting and Financial
Disclosure 24
<PAGE>
PART III
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Item 10 Directors and Executive Officers of
the Registrant 25
Item 11 Executive Compensation 25
Item 12 Security Ownership of Certain Beneficial
Owners and Management 25
Item 13 Certain Relationships and Related
Transactions 25
PART IV
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Item 14 Exhibits, Financial Statement Schedules,
and Reports on Form 8-K 26
<PAGE>
PART I
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FORWARD-LOOKING STATEMENTS
Certain statements in this Form 10-K constitute "forward-looking
statements" as that term is defined under the Private Securities Litigation
Reform Act of 1995 (the "Act") and releases issued by the Securities and
Exchange Commission. The words "believe," "expect," "anticipate," "intend,"
"estimate" and other expressions which are predictions of or indicate future
events and trends and which do not relate to historical matters identify
forward-looking statements. Reliance should not be placed on forward-looking
statements because they involve known and unknown risks, uncertainties and other
factors, which may cause the actual results, performance or achievements of the
Company to differ materially from anticipated future results, performance or
achievements expressed or implied by such forward-looking statements. The
Company undertakes no obligation to publicly update or revise any
forward-looking statement, whether as a result of new information, future events
or otherwise.
The Company's ability to achieve its operating results included in its
fiscal 1998 business plan is affected by a number of factors, including the
successful outcome of a revitalization program. While there can be no assurance
that the program will be successful or that operating results including sales
growth and gross margin improvement will be achieved, the Company believes,
based on initiatives to date, that the program is being implemented successfully
and that fiscal 1998 operating objectives are achievable.
While there can be no assurances that the Company's cash and cash
equivalents and funds available under its credit facilities will be sufficient
to fund its on-going operating and investing requirements for fiscal 1998 and it
is possible that the Company could require additional sources of financing as a
result of unanticipated cash needs, or disappointing operating results, the
Company believes that it will have sufficient funds available from its credit
facilities to meet its working capital and investing needs over the next year.
ITEM 1. BUSINESS
General Business Developments
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General
Town & Country Corporation, a Massachusetts corporation incorporated in
1965, (collectively with its consolidated subsidiaries unless the context
otherwise requires, the "Company"), designs, manufactures, and markets an
extensive collection of fine jewelry products in the United States and
internationally. During most of fiscal 1997, the Company consisted of five
operating entities: the parent company, Town & Country Corporation ("Town &
Country"), headquartered in Chelsea, Massachusetts; its wholly owned
subsidiaries, Town & Country Fine Jewelry Group, Inc. ("Fine Jewelry Group"),
headquartered in Chelsea, Massachusetts; Anju Jewelry Limited, a Hong Kong
company and its subsidiaries ("Anju"); Gold Lance, Inc. ("Gold Lance"), located
in Houston, Texas; L.G. Balfour Company, Inc. ("Balfour"), headquartered in
North Attleboro, Massachusetts; and its majority-owned
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subsidiary Essex International Public Company Limited and its affiliates
("Essex"), a Thailand company. On December 16, 1996, the Company sold certain
assets and liabilities constituting substantially all of the operations of its
Balfour subsidiary. Subsequent to year-end, the Company sold certain assets of
its Gold Lance subsidiary.
CAPITALIZATION AND FINANCING
The Company has approximately $89.1 million in principal amount of debt
maturing through December 15, 1998. These debt issues mature as follows:
[bullet] September 15, 1997 $13.3 million Senior Secured Notes
[bullet] May 31, 1998 $68.8 million Senior Subordinated Notes
[bullet] December 15, 1998 $7.0 million Subordinated Notes
The near term maturity of these securities and the material amount of
the principal payments represents a potential liquidity issue for the Company.
The Company, with the assistance of professional advisors, is evaluating
possible alternatives with regard to addressing this situation. It is essential
for the Company to raise additional capital and/or to restructure its debt under
terms which will allow the Company to meet its expected future cash flow
requirements.
In fiscal 1997 and continuing into fiscal 1998, the Company has taken a
number of steps to position itself for the future.
Credit Facility Amendment
On May 30, 1997, the Company completed an amendment (the "Amended
Agreement") to its July 3, 1996 credit agreement (the "Agreement") with Foothill
Capital Corporation ("Foothill") to reflect changes which have taken place in
the Company. The Amended Agreement provides senior secured financing consisting
of a revolving credit facility and a letter of credit in support of a Gold
Consignment Facility provided by Fleet Precious Metals, Inc. ("Fleet"). The
aggregate amount of the combined facilities, which may be outstanding at any
date, is $55 million.
The revolving credit facility has a maximum amount of $40 million from
February through October and $45 million from November through January. The
letter of credit has a maximum amount of $20 million from February through
October and $15 million from November through January. The Agreement is for a
period of two years and provides Foothill with an option to renew for three
additional years. The loans bear interest at a rate per annum equal to the
greater of (a) 2% above the reference rate announced by an identified group of
major banks selected by Foothill or (b) 8%. The Amended Agreement contains
standard covenants for facilities of this type, including financial covenants
relating to interest coverage ratio, minimum net worth, debt to EBITDA ratio and
limitations on dividends, distributions and capital expenditures, as defined.
Advances under the credit line are based on eligible accounts receivables and
inventory. Foothill has first priority security interest in receivables,
inventory and substantially all real estate and fixed assets owned by
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the Company and its domestic subsidiaries subject to Fleet's first position as
gold consignor, supported by the letter of credit.
Amendments to Bond Indentures
During fiscal 1997, the Company obtained modifications to the minimum
net worth covenant in the indentures governing the 11 1/2% Senior Secured Notes
and the 13% Senior Subordinated Notes from a majority of the bondholders of each
of the securities. During fiscal 1998, the Company obtained modifications to
these two indentures from a majority of the bondholders of each of the
securities to allow the Company to repurchase the outstanding shares of Essex
not owned by the Company.
Sale of Balfour Assets
On December 16, 1996, the Company sold certain assets of its Balfour
subsidiary constituting substantially all of the operations of Balfour to
Commemorative Brands, Inc. ("CBI"), a new company formed by Castle Harlan
Partners II, L.P. CBI also assumed certain liabilities of Balfour.
In October 1996, the Federal Trade Commission ("FTC"), which had been
reviewing the transaction since May 1996, gave preliminary approval to a
modified agreement between the Company and CBI. Final FTC approval was received
on December 26, 1996.
At closing, on December 16, 1996, the Company received cash equal to the
purchase price of $44 million, plus $2.7 million in working capital adjustment
from January 28, 1996 to the date of closing, less $14 million which was placed
in escrow pending final FTC approval. Additionally, CBI assumed a liability of
$4.9 million representing the value of gold on hand as of the date of closing.
On December 31, 1996, the Company received the $14 million. Approximately $3.7
million of the proceeds were used to pay transaction costs. Approximately $1.5
million in liabilities not assumed in the sale were paid from operations. On
April 25, 1997, a settlement was reached in which the Company paid CBI $1.1
million to finalize the working capital adjustment and resolve certain other
items. The Company recorded a gain in the fourth quarter of fiscal 1997 of
approximately $10.5 million on this sale (See Note 19 of Notes to Consolidated
Financial Statements).
Sale of Gold Lance Assets
On April 18, 1997, the Company sold certain assets of its Gold Lance
subsidiary to Jostens, Inc. Related to the sale, the Company changed the name of
the subsidiary to GL, Inc.
Prior to or at closing, on April 18, 1997, the Company received cash
equal to the purchase price of approximately $10.8 million, less $2.5 million,
the payment of which is contingent on the operating performance of GL, Inc.
during a transition period between April 18, 1997 and July 31, 1997 (the
"Transition Period"). The Company accrued a loss of $5.0 million on this sale in
the fourth quarter of fiscal 1997. (See Note 19 of Notes to Consolidated
Financial Statements).
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Fine Jewelry Process Restructuring and Reengineering
In fiscal 1997, the Company recorded an approximately $7.2 million
charge consisting of cost associated with the restructuring of the Company's
fine jewelry operations. The Company consolidated its distribution facilities
and has significantly changed its organizational structure, including reducing
the number of senior managers. The new structure is based on the business unit
approach, organized around customer teams, which will be directly responsible
for meeting customer needs. The components of the charge consisted of
approximately $5.3 million of severance costs, $0.8 million in facility closure
costs and approximately $1.1 million of other related costs.
During fiscal 1997, the Company, with the assistance of a management
consulting firm, began reengineering its operational processes. This
reengineering included expanding the Company's product development capabilities
and increasing the pace of product development.
Essex Stock Repurchase and Privatization
During fiscal 1997, the Company began the process of purchasing the
approximately 1.6 million outstanding shares of Essex not owned by the Company.
The Company estimates that the cost to repurchase the shares will be
approximately $3 million and that the process should be completed during the
second quarter of fiscal 1998 (See Note 1 of Notes to Consolidated Financial
Statements).
FISCAL 1997 NONRECURRING OPERATING EVENTS
During fiscal 1997, the Company implemented a program to recycle
inventory to recover gold and diamonds to meet immediate production
requirements. These actions were taken when access to cash and gold under the
Company's working capital facility and gold leasing agreement became constrained
near the end of the second quarter and on a more pronounced basis in the third
quarter, and also because of the Company's commitment to meet its customers'
delivery requirements. The Company also sold, for approximately $2 million,
inventory with an original cost basis of approximately $5 million. The Company
charged second quarter operations approximately $35.5 million related to these
actions.
On November 14, 1996, the Company sold its facility in New York city for
a gross sales price of $6.2 million, of which $5.3 million was paid at closing.
The remaining $0.9 million was paid on January 15, 1997. In the interest of
generating cash on the sale as quickly as possible, management accepted an offer
for less than the net book value of the property. As a result, the Company
sustained a loss of approximately $0.8 million on the sale which is reflected in
the accompanying fiscal 1997 consolidated statements of operations.
Included in current year selling, general and administrative expenses
are charges of approximately $5.5 million in unanticipated customer allowances.
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MAY 14, 1993 RECAPITALIZATION
The Company completed a recapitalization on May 14, 1993. The
recapitalization revised the Company's consolidated capitalization, including
debt structure. The amount of debt outstanding was reduced and a significant
portion of old subordinated debt was exchanged for new debt and shares of Class
A Common Stock and Exchangeable Preferred Stock.
The Company obtained a revolving credit agreement from Foothill to
provide secured financing in an aggregate amount of up to $30 million and new
gold consignment agreements from the Company's existing gold suppliers providing
an aggregate gold consignment availability of up to approximately 63,000 troy
ounces.
The Company sold $30 million of its 11 1/2% Senior Secured Notes due
September 15, 1997. At February 23, 1997, approximately $13 million was
outstanding.
The Company issued approximately $61.5 million, including unamortized
premium of approximately $8 million, of 13% Senior Subordinated Notes, due May
31, 1998, approximately $34.3 million of Exchangeable Preferred Stock, par value
$1.00, and approximately 10 million shares of Class A Common stock valued at
approximately $26.9 million. These securities were issued in exchange for
approximately 93% of the Company's 13% Senior Subordinated Notes due December
15, 1998, and approximately 98% of the Company's 10 1/4% Subordinated Noes due
July 1, 1995. The total carrying value retired, including deferred financing
costs, was approximately $122.7 million.
The Company's 13% Senior Subordinated Notes, due May 31, 1998, were
issued with terms providing for the right to issue additional notes in lieu of
the first four semiannual interest payments . As of February 23, 1997, the
Company had exercised these rights; and, therefore, the carrying value of the
notes, including unamortized premium of approximately $2.3 million, is
approximately $71.2 million. The Company makes semi-annual cash interest
payments of approximately $4.5 million. The most recent payment was made May 15,
1997.
(See "Management's Discussion and Analysis of Financial Condition and
Results of Operations--Financial Condition" and Note 3 of Notes to Consolidated
Financial Statements).
PREFERRED STOCK
On November 23, 1994, the holders of 2,381,038 shares (approximately
94%) of the Company's Exchangeable Preferred Stock exchanged their shares for
shares of Little Switzerland, Inc. Common Stock on a share-for-share basis. Such
an exchange was provided for by the terms of the Exchangeable Preferred Stock.
In addition, as an inducement to exercise their exchange rights, the Company
issued to each participant one share of new Convertible Preferred Stock with
each share of Little Switzerland, Inc. Common Stock. The Company retains an
investment in Little Switzerland, Inc. equal to approximately 4% of the
outstanding shares. The Exchangeable Preferred Stock has a liquidation value of
$14.59 per share and accrues cumulative dividends at the rate of 6% of the
liquidation value per annum.
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Currently, there are 152,217 shares of Exchangeable Preferred Stock outstanding
and, in fiscal 1997, the Company paid cash dividends of $66,625.
Since the carrying value of the Company's investment in Little
Switzerland, Inc. was substantially less than the recorded value of the
Exchangeable Preferred Stock, the transaction resulted in a nonrecurring,
noncash gain in fiscal 1995 of approximately $17 million, net of the estimated
fair value ($2.25 per share) of the Convertible Preferred Stock issued.
Each share of Convertible Preferred Stock is initially convertible, at
the option of the holder, into two shares of Class A Common Stock, subject to
adjustment in certain circumstances and has voting rights as though it had been
converted. The Convertible Preferred Stock has a liquidation value of $6.50 per
share and accrues cumulative dividends at the rate of 6% of the liquidation
value per annum. The Company may pay such dividends in cash or in additional
shares of Convertible Preferred Stock, as defined by the agreement. At February
23, 1997, 1,302,673 shares of Convertible Preferred Stock were outstanding and
in fiscal 1997 and fiscal 1996, the Company paid dividends of approximately
$782,000 and $713,000, respectively, through the issuance of additional shares
of stock.
Narrative Description of Business
General
The Company designs, manufactures and distributes an extensive line of
fine jewelry which it markets on a wholesale basis throughout the U.S., and to a
lesser extent, in the international jewelry market. Its products include 10, 14,
and 18-karat gold rings, earrings, pendants, and bracelets, many of which are
set with precious and semi-precious stones. Upon completion of the Transition
Period, the Company will no longer manufacture scholastic products.
Town & Country Corporation
(Headquartered in Chelsea, Massachusetts)
-----------------------------------------
Town & Country GL, Inc. Anju Jewelry Essex
Fine Jewelry (Houston, TX) Limited International
Group, Inc. (Hong Kong) Public Company
(Chelsea, MA) Limited
(Bangkok,
Thailand)
The Company has manufacturing facilities located in Massachusetts, New
York, Texas, and in Thailand. These facilities are located close to available
labor forces and suppliers of necessary raw materials.
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PRODUCTION METHODS
The Company utilizes a variety of production methods to produce jewelry.
Principal among these is the "lost wax" method of investment casting. This
manufacturing operation originates with a hand designed original which is then
taken through a reverse molding procedure to create a mold. The mold is infused
with wax, and a series of such wax pieces are then surrounded with plaster of
Paris. The plaster of Paris is placed in a furnace where the wax is eliminated
by subjecting the plaster to high temperatures. Molten gold is then poured into
the areas from which the wax has been eliminated and a rough gold piece is
removed after cooling. The piece produced through the investment casting method
may then be ground, polished, and set with stones.
One of the other production methods used is die striking. This process
begins by tooling a master hub (male impression) from an original design. The
hub is used to create dies (female impression) for machine stamping. Additional
tools are created to trim and shape the final product. Gold or base metal is
struck in hydraulic presses or with pneumatic drop hammers in multiple steps
with alternating annealing steps. The product is then trimmed and rounded.
Stamping dies are custom produced by computer-aided tool cutting machines or are
hand crafted. The rough, stamped pieces are polished and finished. Precious,
semi-precious, or synthetic stones may be set in the individual pieces.
In addition, the Company utilizes the carbide, or swiss-cutting,
manufacturing operation. This method uses ring blanks of various widths and
dimensions which have been cut from tubes of karat gold in a lathing process.
The blanks are then placed on a cutting machine which is set up to cut designs
into the ring using diamond tipped or carbide tipped tools.
Photo-etching technology is used to manufacture precious metal charms
and earrings. The process consists of several stages. First, a graphic image of
a charm or earring is transferred to a photographic tool and is replicated by
computer control in an optimum layout. The tool is then placed on a thin metal
plate and passed through an exposure unit which photographically transfers the
images from the tool onto that plate. Next, the metal plate passes by conveyer
through an etching solution where a chemical milling of the exposed surfaces
takes place. Finally, the etched pieces from the plate are cleaned, shaped, and
polished.
MARKETING
There are numerous channels of distribution for fine jewelry, including
jewelry stores (ranging from the independent store with one location to the
large national chains), department stores, catalogue showrooms, warehouse clubs,
and home shopping networks. The Company distributes its products through all of
these channels.
As part of its marketing program, the Company provides a variety of
customer support services designed to meet the varying needs of customers. For
some customers, the
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Company designs product lines and develops total merchandising programs
including displays and advertising to market these lines. The Company's sales
staff provides quick reaction to customer pricing and design requirements. The
Company utilizes computerized data bases and electronic data interfaces which
assist these customers by providing information that may be used in marketing,
merchandising, and inventory management. For the independent retail jewelers,
the Company has designed promotional flyer programs through which marketing and
merchandising support pertaining to a select group of products at specific price
ranges is provided.
An increasing portion of retail sales in the fine jewelry industry is
being made through discount department stores, warehouse clubs and television
shopping networks. These customers are particularly interested in unique
designs, volume production, price and credit terms.
The Fine Jewelry Group has a single product development organization
built around product categories - gold, diamond and colored stones.
Cross-functional development teams were introduced in 1996 to reduce the
timeframe of concept to product. These teams are also responsible for product
maximization across all Town & Country customers. Utilizing this structure, the
Company believes it is able to be more responsive to trends in the marketplace.
The Company also markets directly from its Bangkok facility where
wholesale buyers are able to select and direct order jewelry from the Company.
The Company's products are also sold internationally by the Company's marketing
groups and are exhibited at the major international jewelry trade fairs.
As of May 25, 1997, the Company had approximately $7.3 million of orders
believed to be firm, as compared to approximately $12.1 million at a
corresponding date last year, excluding Balfour orders. The Company believes
that substantially all of these orders will be filled during fiscal 1998. The
Company believes that comparative open order information is not necessarily
indicative of comparative results due to the high level of timing sensitivity in
the fine jewelry business which depends significantly on orders from large
retailers.
COMPETITION
The Company competes with both domestic and foreign jewelry suppliers,
ranging in size from small regional suppliers to those which have national
distribution capabilities. The principal competitive factors are design,
quality, price and customer service. Management believes that the Company has a
reputation for providing extensive customer services and delivering a quality
product line with broad customer appeal.
The Company historically has competed in all of the channels of
distribution across its price range and is therefore competing directly with the
specialists in each distribution category. It has been most successful with
retail jewelry stores and the department and discount store chains.
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SEASONALITY
The Company is impacted by the seasonal demands of its customers. A
significant portion of sales in the fine jewelry industry is concentrated in the
fall in anticipation of the holiday season. Accordingly, the Company's operating
results, and working capital requirements fluctuate considerably during the
year.
The following chart sets forth unaudited quarterly data for fiscal 1997
and fiscal 1996.
<TABLE>
<CAPTION>
First Second Third Fourth
Quarter Quarter Quarter Quarter
Ended Ended Ended Ended
Fiscal 1997 May 26, August 25,(1) November 24, February 23,(2)
----------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Net sales $ 58,264,124 $ 43,192,085 $ 80,527,978 $ 27,168,675
Gross profit 20,198,224 (22,644,800) 25,373,366 3,258,730
Net income (loss) (1,854,443) (47,646,753) 1,035,874 (13,812,713)
Income (loss)
attributable to
common stock-
holders (2,077,571) (47,765,785) 802,984 (13,978,336)
Income (loss)
per common share $ (0.09) $ (1.86) $ 0.03 $ (0.54)
============ ============ ============ ============
<CAPTION>
First Second Third Fourth
Quarter Quarter Quarter Quarter
Ended Ended Ended Ended
Fiscal 1996 May 28, August 27, November 26, February 25,
----------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Net sales $ 68,970,983 $ 48,194,042 $ 86,395,380 $ 47,017,411
Gross profit 21,896,424 14,644,996 27,404,915 13,490,170
Net income (loss) (514,424) (4,181,012) 6,636,293 (3,806,971)
Income (loss)
attributable to
common stock-
holders (758,159) (4,468,316) 6,380,973 (4,060,414)
Income (loss)
per common share $ (0.03) $ (0.19) $ 0.27 $ (0.17)
============ ============ ============ ============
</TABLE>
(1) Net loss in the second quarter of fiscal 1997 includes a charge of
approximately $35.5 million associated with the implementation of a
program to recycle inventory to meet current production requirements
(See Note 4 of Notes to Consolidated Financial Statements).
(2) Net loss in the fourth quarter of fiscal 1997 includes a restructuring
charge of approximately $7.2 million, a loss on the sale of certain
assets of the GL, Inc. subsidiary of $5.0 million and a gain on the sale
of certain assets and liabilities of the Balfour subsidiary of
approximately $10.5 million. (See Notes 5 and 19 of Notes to
Consolidated Financial Statements).
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Significant Customers
The Company had net sales to its largest customer in fiscal 1997 of
approximately $19.4 million or 9% of consolidated net sales in fiscal 1997
compared to $16.0 million or 6% of consolidated net sales in fiscal 1996 and
$12.5 million or 4% of total consolidated net sales in fiscal 1995. Net sales to
this customer were approximately 13% of consolidated net sales excluding fiscal
1997 Balfour sales.
Net sales to the Company's second largest customer were approximately
$14.5 million or 7% of consolidated net sales in fiscal 1997 compared to $22
million or 9% of consolidated net sales in fiscal 1996 and $29 million or 10% of
consolidated net sales in fiscal 1995. Net sales to this customer were 10% of
consolidated net sales excluding fiscal 1997 Balfour sales.
The loss of either or both of these customers or a substantial reduction
in the amount of sales to either or both of these customers would have a
material adverse effect on the Company.
Raw Materials
The principal raw materials purchased by the Company are gold and
precious and semi-precious stones. The Company currently takes delivery of most
of its gold through consignment programs.
The Company's intention is that as the gold selling price for orders is
confirmed, the Company purchases the gold requirements at the then current
market prices. The Company attempts to match the price it pays for gold with the
price it charges its customers. The Company's gold agreements require that the
Company own gold under certain circumstances and it is possible for this
required ownership to exceed the Company's hedging requirements and expose the
Company to gold fluctuations. The Company pays a fee, which is subject to
periodic change, for the value of the gold held by it as a consignee during the
period prior to sale. The Company has a consignment arrangement in place with a
supplier of gold which currently provides for carrying on consignment up to
approximately 53,000 troy ounces (approximately 41,000 troy ounces November
through January). A foreign subsidiary of the Company has a separate consignment
agreement in place with a supplier of gold which currently provides for carrying
on consignment up to approximately 4,800 troy ounces.
Colored precious and semi-precious stones are purchased by the Company
mainly in Asia and Europe. Diamonds are purchased principally at major diamond
markets throughout the world, including Bombay, Tel Aviv, Antwerp, and New York.
The Company is not dependent on one supplier or a small number of suppliers for
the purchases of these raw materials. Availability and cost of these materials
are affected by market conditions and, if there is a period of volatility in the
market, operating results could be affected.
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Employees
The Company employs, on average, 1,300 persons, with approximately 37%
of these persons located in the Far East. The number of employees from quarter
to quarter may vary significantly because of the seasonality of the Company's
business. See "Narrative Description of Business--Seasonality." Of these 1,300
employees, approximately 400 are involved with selling and administrative
functions of the Company, and the remainder are involved in the manufacturing
functions of the Company. Approximately 160 of these persons are employed at GL,
Inc.
A division of Fine Jewelry Group has collective bargaining contracts
covering its manufacturing employees, who are represented by the Service
Employees International Union, Jewelry Workers Division. The number of employees
covered by collective bargaining contracts is approximately seventeen.
The Company considers relations with its employees to be satisfactory.
Management believes the Company would not experience any significant
difficulties in hiring or training additional employees at any of its
facilities.
Industry Practices
In the jewelry industry, traditionally the wholesaler has provided
considerable working capital in the form of credit terms, inventory stocking,
consignment transactions, and transactions with a right of return. The Company
has historically provided this working capital, but in today's retail and
banking environment, has become more selective in its commitment of resources.
The Company is scrutinizing customer credit- worthiness more closely and, as a
result, is restricting customer credit and requires security before providing
consignment inventory. The Company also is restricting the availability of
consigned merchandise.
Trademarks and Copyrights
While the Company maintains certain trademarks and copyrights on product
styles and business names and enforces its rights relative to those trademarks
and copyrights, these are not economically material to the Company.
Financial Information about Foreign and Domestic Operations and Export Sales
- ----------------------------------------------------------------------------
For information on foreign and domestic operations, see Note 20,
"Consolidating Financial Information and Segment Information," in Notes to
Consolidated Financial Statements.
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ITEM 2. PROPERTIES
The Company occupies facilities in the United States and the
Far East as described below. (1)(3)
- --------------------------------------------------------------------------------
Square
Location Use Footage Ownership
- -------- --- ------- ---------
Chelsea, Massachusetts Executive and 88,000 Leased/
administrative offices, Owned
manufacturing,
marketing, and
distribution facility.
- --------------------------------------------------------------------------------
Chelsea, Massachusetts Warehouse facility. 22,000 Leased
- --------------------------------------------------------------------------------
Dallas, Texas Administrative offices 23,000 Leased
and marketing.
- --------------------------------------------------------------------------------
New York, New York Administrative offices, 10,000 Leased
product development and
marketing.
- --------------------------------------------------------------------------------
Houston, Texas(2) Administrative offices, 31,000 Owned
manufacturing,
marketing, and
distribution facility.
- --------------------------------------------------------------------------------
Hong Kong Administrative offices, 8,000 Leased
product development,
purchasing, and quality
control facility.
- --------------------------------------------------------------------------------
Bangkok, Thailand Administrative offices, 36,000 Leased/
manufacturing, Owned
marketing, and
distribution facility.
- --------------------------------------------------------------------------------
Chiang Mai, Thailand Manufacturing facility. 7,000 Leased
- --------------------------------------------------------------------------------
(1) The Company's interests in these properties are security for loans made
by the Company's lenders (See Note 3 of Notes to Consolidated Financial
Statements).
(2) This facility is used by GL, Inc. certain assets of which were sold
subsequent to fiscal 1997, and the Company anticipates selling this
facility as soon as possible after the Transition Period is completed
(See Note 19 of Notes to Consolidated Financial Statements).
(3) The Company has additional properties which, as a result of the Balfour
transaction, it not longer occupies. An owned facility of approximately
56,000 square feet is available for sale.
- --------------------------------------------------------------------------------
The fine jewelry manufacturing and distribution business is seasonal.
Historically, the Company's facilities operate in excess of full capacity during
the peak demand part of the season and are underutilized during the slower
portions of the season (See "Narrative Description of Business--Seasonality").
Additional capacity requirements are satisfied utilizing outside contractors and
seasonal staffing is adjusted accordingly.
Page 12
<PAGE>
During fiscal 1996, the Company leased a portion of its Chelsea,
Massachusetts facility (approximately 39,000 square feet of combined
manufacturing and administrative space) from Carey Realty Trust, a Massachusetts
business trust, which is wholly owned by C. William Carey, the former Chairman
and President, and a major stockholder of the Company. The lease, which was
revised on March 1, 1996, expires on August 31, 1998, and provides the Company
with three ten-year options to renew. The current lease provides for an annual
rental payment of approximately $350,000. The Company obtained comparative
information from a third party when negotiating the revised lease and believes
that these lease arrangements are on terms no less favorable to the Company than
could be obtained from unaffiliated third parties.
Management believes that all its facilities are well maintained, in good
condition and adequate for its present business.
ITEM 3. LEGAL PROCEEDINGS
The Company is not party to any pending legal proceedings, other than
ordinary routine litigation incidental to the business. In the opinion of
management, adverse decisions on those legal proceedings, in the aggregate,
would not have a materially adverse impact on the Company's financial condition
or result of operations.
It is the Company's current understanding that companies which may be
considered predecessors to Balfour have been designated potentially responsible
parties by the Environmental Protection Agency ("EPA") under the Comprehensive
Environmental Response, Compensation and Liability Act of 1980 with respect to
cleanup of hazardous waste in four cases. One of the parties that may be
considered such a predecessor (the "1983 Owner") has, to date, assumed
responsibility for all of these cases in accordance with understandings the 1983
Owner has reached with the party who bought the assets of the predecessor
Balfour Company in 1983 (the "1988 Owner"). In the first of these cases, it is
the Company's understanding that the predecessor 1983 Owner is participating in
the cleanup and has provided financial assurance that it will pay its expected
share of the cleanup expenses (which are currently estimated to be under
$200,000). In the other three cases, it is the Company's understanding that the
1983 Owner has settled its liability as a de minimis waste contributor in each
case and has been given comprehensive releases from further liability for
cleanup costs. The Company acquired the stock of Balfour from the 1988 Owner and
believes that it did not assume responsibility for these cases as a result of
this acquisition. Since its acquisition of Balfour in 1988, the Company has
never paid any amounts with respect to any of these matters and there are no
outstanding claims against the Company or Balfour with respect to any of these
matters. While it is possible that a person or agency could claim that Balfour
as a successor to the 1983 Owner is jointly and severally liable for the cost of
the entire cleanup in these cases, the Company believes that such a claim would
have no merit and would vigorously defend and contest any such claim. Because of
the assumption of responsibility for these cases by the 1983 Owner and the small
waste shares attributed to the 1983 Owner, Management believes that it is
unlikely that the Company will suffer material liability in connection with
these cases.
Page 13
<PAGE>
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS
There were no matters submitted to a vote of security-holders during the
fourth quarter of fiscal 1997.
PART II
-------
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's Class A Common Stock is traded on the American Stock
Exchange (the "AMEX") under the symbol TNC. Set forth below are the high and low
sales prices for the shares of Class A Common Stock as reported by the AMEX.
Class A Common
Stock Price Range
Fiscal Year Ended High Low
- ----------------- ---- ---
February 25, 1996:
First Quarter 7/8 9/16
Second Quarter 13/16 9/16
Third Quarter 1 1/8 5/8
Fourth Quarter 7/8 1/2
February 23, 1997:
First Quarter 1 1/8 9/16
Second Quarter 1 7/16 11/16
Third Quarter 1 1/4
Fourth Quarter 1/2 1/4
There is no established public trading market in effect at this time for
the Class B Common Stock. Shares of Class B Common Stock, however, are
convertible on a share for share basis into shares of Class A Common Stock.
On May 15, 1997, there were 957 holders of record of Class A Common
Stock and 28 holders of record of the Class B Common Stock. The Company's
present policy is to reinvest its earnings in the business. No cash dividends
have been paid during the last two fiscal years, and the Company has no
intention to pay cash dividends in the foreseeable future.
Page 14
<PAGE>
The Company's ability to pay cash dividends is limited by its financing
agreements and other outstanding indebtedness. As a result of these
restrictions, the Company currently may not pay cash dividends on common stock.
Recent Sales of Unregistered Securities - Convertible Preferred Stock
On November 23, 1994, the holders of 2,381,038 shares (approximately
94%) of the Company's Exchangeable Preferred Stock exchanged their shares for
shares of Little Switzerland, Inc. Common Stock on a share-for-share basis. Such
an exchange was provided for by the terms of the Exchangeable Preferred Stock.
In addition, as an inducement to exercise their exchange rights, the Company
issued to each participant one share of new Convertible Preferred Stock with
each share of Little Switzerland, Inc. Common Stock.
Since the carrying value of the Company's investment in Little
Switzerland, Inc. was substantially less than the recorded value of the
Exchangeable Preferred Stock, the transaction resulted in a nonrecurring,
noncash gain in fiscal 1995 of approximately $17 million, net of the estimated
fair value ($2.25 per share) of the Convertible Preferred Stock issued. The
securities were exempt from registration under Section 4(2) of the Securities
Act of 1933.
ITEM 6. SELECTED FINANCIAL DATA
The following table presents certain selected consolidated financial
data of the Company. The information for each of the five years in the period
ended February 23, 1997, has been derived from consolidated financial statements
audited by Arthur Andersen LLP, independent public accountants.
Statement of Operations Data:
<TABLE>
<CAPTION>
Fiscal Year Ended
(In thousands, except per share data)
Feb. 23, Feb. 25, Feb. 26, Feb. 27, Feb. 28,
1997(1)(2) 1996 1995(3) 1994 1993 (4)
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Net sales $ 209,153 $ 250,578 $ 288,115 $ 277,750 $ 270,364
Net income (loss) (62,278) (1,866) 572 3,138 (47,296)
Income (loss)
attributable to
common stockholders (63,019) (2,906) (1,116) 1,684 (47,296)
Income (loss)
per common
share: (2.47) (0.12) (0.05) 0.08 (3.80)
</TABLE>
Page 15
<PAGE>
Balance Sheet Data:
<TABLE>
<CAPTION>
Fiscal Year Ended
(In Thousands)
Feb. 23, Feb. 25, Feb. 26, Feb. 27, Feb. 28,
1997(2) 1996 1995(3) 1994 1993(4)
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Total assets $ 121,312 $ 211,129 $ 206,623 $ 223,921 $ 246,858
Senior debt 13,254 13,653 15,128 22,022 35,688
Subordinated debt 78,090 79,766 77,545 71,285 120,285
Exchangeable
preferred stock 2,374 2,319 2,266 35,785 --
Stockholders' equity (deficit) (4,489) 57,871 59,835 55,334 24,744
</TABLE>
(1) In fiscal 1997, the Company recorded an approximately $35.5 million
charge relating to the implementation of a program to recycle inventory
to meet current production requirements (See Note 4 of Notes to
Consolidated Financial Statements). The Company recorded a restructuring
charge of approximately $7.2 million related to its fine jewelry
business (See Note 5 of Notes to Consolidated Financial Statements). The
Company recorded a gain of approximately $10.5 million related to the
sale of certain assets and liabilities of its Balfour subsidiary and a
loss of $5.0 million related to the sale of certain assets of its Gold
Lance subsidiary (See Note 19 of Notes to Consolidated Financial
Statements).
(2) The fiscal 1997 statement of operations includes the operations of the
Company's Balfour subsidiary through December 16, 1996, the date of the
sale of Balfour. The fiscal 1997 balance sheet includes only those
assets and liabilities of Balfour not included in the sale and not
liquidated by year-end (See Note 19 of Notes to Consolidated Financial
Statements).
(3) In fiscal 1995, the Company recorded a gain of approximately $17.3
million as a result of the exchange of Exchangeable Preferred Stock (See
Note 6 of Notes to Consolidated Financial Statements).
(4) In fiscal 1993, the Company recorded a restructuring charge related to
its New York facility of $5 million, a charge related to the disposal of
certain Balfour assets of approximately $14.5 million, and expenses
associated with recapitalizing the Company of approximately $14.4
million (See Notes 10 and 12 of Notes to Consolidated Financial
Statements).
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Forward-Looking Statements
Certain statements in the Form 10-K constitute "forward-looking
statements" as that term is defined under the Private Securities Litigation
Reform Act of 1995 (the "Act") and releases issued by the Securities and
Exchange Commission. The words "believe," "expect," "anticipate," "intend,"
"estimate" and other expressions which are predictions of or indicate
Page 16
<PAGE>
future events and trends and which do not relate to historical matters identify
forward-looking statements. Reliance should not be placed on forward-looking
statements because they involve known and unknown risks, uncertainties and other
factors, which may cause the actual results, performance or achievements of the
Company to differ materially from anticipated future results, performance or
achievements expressed or implied by such forward-looking statements. The
Company undertakes no obligation to publicly update or revise any
forward-looking statement, whether as a result of new information, future events
or otherwise.
The Company's ability to achieve its operating results included in its
fiscal 1998 business plan is affected by a number of factors, including the
successful outcome of a revitalization program. While there can be no assurance
that the program will be successful or that operating results including sales
growth and gross margin improvement will be achieved, the Company believes,
based on initiatives to date, that the program is being implemented successfully
and that fiscal 1998 operating objectives are achievable.
While there can be no assurances that the Company's cash and cash
equivalents and funds available under its credit facilities will be sufficient
to fund its on-going operating and investing requirements for fiscal 1998 and it
is possible that the Company could require additional sources of financing as a
result of unanticipated cash needs, or disappointing operating results, the
Company believes that it will have sufficient funds available from its credit
facilities to meet its working capital and investing needs over the next year.
LIQUIDITY
The Company has approximately $89.1 million in principal amount of debt
maturing through December 15, 1998. These debt issues mature as follows:
[bullet] September 15, 1997 $13.3 million Senior Secured Notes
[bullet] May 31, 1998 $68.8 million Senior Subordinated Notes
[bullet] December 15, 1998 $7.0 million Subordinated Notes
The near term maturity of these securities and the material amount of
the principal payments represents a potential liquidity issue for the Company.
The Company, with the assistance of professional advisors, is evaluating
possible alternatives with regard to addressing this situation. It is essential
for the Company to raise additional capital and/or to restructure its debt under
terms which will allow the Company to meet its expected future cash flow
requirements.
FINANCIAL CONDITION
On May 30, 1997, the Company completed an amendment (the "Amended
Agreement") to its July 3, 1996 credit agreement (the "Agreement") with Foothill
Capital Corporation ("Foothill") to reflect changes which have taken place in
the Company. The Amended Agreement provides senior secured financing consisting
of a revolving credit facility and a letter of credit in support of a Gold
Consignment Facility provided by Fleet Precious Metals, Inc. ("Fleet"). The
aggregate amount of the combined facilities, which may be outstanding at any
date, is $55 million.
Page 17
<PAGE>
The revolving credit facility has a maximum amount of $40 million from
February through October and $45 million from November through January. The
letter of credit has a maximum amount of $20 million from February through
October and $15 million from November through January. The Agreement is for a
period of two years and provides Foothill with an option to renew for three
additional years. The loans bear interest at a rate per annum equal to the
greater of (a) 2% above the reference rate announced by an identified group of
major banks selected by Foothill or (b) 8%. The Amended Agreement contains
standard covenants for facilities of this type including financial covenants
relating to interest coverage ratio, minimum net worth, debt to EBITDA ratio and
limitations on dividends, distributions and capital expenditures. Advances under
the credit line are based on eligible accounts receivables and inventory.
Foothill has first priority security interest in receivables, inventory and
substantially all real estate and fixed assets owned by the Company and its
domestic subsidiaries subject to Fleet's first position as gold consignor,
supported by the letter of credit. The Company believes that it can meet its
working capital and investing needs over the next year through cash flows from
operations and the use of funds available under the Amended Agreement.
The Company had no outstanding balance under its revolving credit
facility at February 23, 1997 and $10.1 million available for borrowing under
the facility. The Company had approximately 33,000 ounces, valued at
approximately $11.5 million, outstanding under its gold agreement and
approximately 20,000 additional ounces available under this agreement at
February 23, 1997. At April 27, 1997 the Company had no outstanding balance on
its revolving credit facilty and approximately 34,000 ounces valued at
approximately $11.7 million outstanding under its gold agreement.
During fiscal 1997, the Company obtained modifications to the minimum
net worth covenant in the indentures governing the 11 1/2% Senior Secured Notes
and the 13% Senior Subordinated Notes from a majority of the bondholders of each
of the securities. During fiscal 1998, the Company obtained modifications to
these two indentures from a majority of the bondholders of each of the
securities to allow the Company to repurchase the outstanding shares of Essex
not owned by the Company.
Essex has available credit facilities with two banks in Thailand to
provide aggregate commercial financing of up to approximately $11.6 million. The
subsidiary had no balance outstanding under these lines at February 23, 1997 and
February 25, 1996, respectively. Essex also has an agreement with a gold
supplier to provide secured gold consignment availability of up to approximately
4,800 troy ounces. This agreement runs through December 4, 1997, and is secured
by a standby letter of credit for $1.9 million under one of the subsidiary's
credit facilities. There were approximately 2,800 ounces, valued at
approximately $1.0 million, on consignment under this gold agreement at February
23, 1997. Subsequent to year-end, this subsidiary's credit facility was reduced
to approximately $8.9 million from one bank.
Cash used in operating activities for the year ended February 23, 1997
was approximately $23.0 million, compared with a source of approximately $2.0
million for the corresponding period of fiscal 1996. The additional cash
requirements are the result of the
Page 18
<PAGE>
operating loss and the requirement to make both interest payments on the 13%
Senior Subordinated Notes in cash in fiscal 1997.
Cash provided by investing activities for the year ended February 23,
1997, was approximately $44.0 million versus a use of approximately $2.1 million
for the corresponding period in fiscal 1996. In the current year, the Company
has received net proceeds from sales of assets, primarily a building in New
York, of approximately $6.8 million, compared with proceeds from sales of assets
in fiscal 1996 of approximately $1.0 million. In the current year, the Company
also benefited from the proceeds related to its sale of certain assets and
liabilities of its Balfour subsidiary of approximately $41.9 million.
Investments in affiliates resulted in a use of approximately $1.5 million of
cash in fiscal 1997 versus $0.4 million in fiscal 1996.
The Company has $2.3 million in an escrow account to pay for the
acquisition of Essex shares held by the minority shareholders.
Cash used in financing activities was approximately $15.7 million for
the year ended February 23, 1997, compared with cash provided by financing
activities of $1.9 million for the year ended February 25, 1996. Proceeds from
the sale of certain assets and liabilities of the Balfour subsidiary and sales
of other fixed assets were used to repay the outstanding amount on the Company's
revolving credit facility and to purchase gold to reduce the Company's gold
facility. Operations are funded with cash borrowed under these facilities.
The Company's net cash position increased from approximately $5.3
million at February 25, 1996, to approximately $10.4 million at February 23,
1997.
Results of Operations
- ---------------------
FISCAL 1997 COMPARED TO FISCAL 1996
During fiscal 1997, the Company implemented a program to recycle
inventory to recover gold and diamonds to meet immediate production
requirements. These actions were taken when access to cash and gold under the
Company's working capital facility and gold leasing agreement became constrained
near the end of the second quarter and on a more pronounced basis in the third
quarter, and also because of the Company's commitment to meet its customer's
delivery requirements. The Company also sold, for approximately $2 million,
inventory with an original cost basis of approximately $5 million. The Company
charged approximately $35.5 million related to these actions to second quarter
fiscal 1997 operations. Of this amount, approximately $2.5 million was incurred
in the second quarter. The remaining approximately $33 million represents third
quarter activity.
Net sales for the fiscal year ended February 23, 1997, decreased $41.4
million or 16.5% from $250.6 million in fiscal 1996 to $209.2 million in fiscal
1997. Current year sales of fine jewelry have decreased approximately $29.5
million or 17.9% over the corresponding period in fiscal 1996. The Company is
concentrating on improving new product design, cycle time to market, customer
service and on upgrading the performance level of manufacturing to reduce cost
and improve product quality.
Page 19
<PAGE>
Cost of goods sold for the fiscal year ended February 23, 1997,
decreased approximately $25.7 million from $173.1 million in fiscal 1996 to
$147.4 million in fiscal 1997, excluding the impact of the inventory charge
discussed above. Margin on sales decreased 1.4% from 30.9% in fiscal 1996 to
29.5% in fiscal 1997. The sale of the operations of the Balfour subsidiary on
December 16, 1996, had a negative effect on overall gross profit margin as
scholastic product has a higher gross profit margin than fine jewelry product
margin. Margin on fine jewelry decreased from 22.5% to 19.5%. This decline is
due to pressure on the absorption of relatively fixed production costs as a
result of the decrease in sales. The sales mix also was weighted toward lower
margin gold product and not higher margin bridal and color product.
In fiscal 1997, the Company recorded an approximately $7.2 million
charge consisting of costs associated with the restructuring of the Company's
fine jewelry operations. The Company consolidated its distribution facilities
and significantly changed its organizational structure including reducing the
number of senior managers. The new structure is based on the business unit
approach, organized around customer teams which will be directly responsible for
meeting customer needs. The components of the charge consisted of approximately
$5.3 million of severance related costs, $0.8 million in facility closure costs
and $1.1 million of other related costs.
Selling, general, and administrative expenses increased approximately
$7.4 million from $66.4 million in fiscal 1996 to $73.8 million in fiscal 1997.
As a percentage of net sales, selling, general, and administrative expenses were
approximately 8.8% higher in the current year than for the year ended February
25, 1996. Included in the current year are charges of approximately $5.5 million
in unanticipated customer allowances. Also contributing to the increase are
certain non-recurring, non-operating items in fiscal 1996, including a $1.5
million benefit associated with the liquidation of additional Zale claim assets
and a $1.6 million benefit from a fiscal 1989 acquisition contingency.
Interest expense for fiscal 1997, decreased approximately $0.4 million
relative to fiscal 1996. This improvement is the result of the Company's ability
to repay the balance on its working capital facility with the proceeds of the
Balfour sale in the fourth quarter of fiscal 1997. The weighted average interest
rate on overall borrowings was approximately 11.20% for fiscal 1997 compared
with 11.24% for fiscal 1996. Average borrowings decreased approximately $3.6
million from approximately $117.1 million in fiscal 1996 to $113.5 million in
fiscal 1997.
On November 14, 1996, the Company sold its building in New York City. In
the interest of generating cash on the sale of the property as quickly as
possible, management accepted an offer for less than the net book value of the
property. As a result, the Company sustained a loss of approximately $0.8
million on the sale.
On December 16, 1996, the Company sold certain assets of its Balfour
subsidiary constituting substantially all of the operations of Balfour to
Commemorative Brands, Inc. ("CBI"), a new company formed by Castle Harlan
Partners II, L.P. CBI also assumed certain liabilities of Balfour.
Page 20
<PAGE>
At closing, on December 16, 1996, the Company received cash equal to the
purchase price of $44 million, plus $2.7 million in working capital adjustment
from January 28, 1996 to the date of closing, less $14 million which was placed
in escrow pending final FTC approval. Additionally, CBI assumed a liability of
$4.9 million representing the value of gold on hand as of the date of closing.
On December 31, 1996, the Company received the $14 million. Approximately $3.7
million of the proceeds were used to pay transaction costs. Approximately $1.5
million in liabilities not assumed in the sale were paid from operations. On
April 25, 1997, a settlement was reached in which the Company paid CBI $1.1
million to finalize the working capital adjustment and resolve certain other
items. The Company recorded a gain in the fourth quarter of approximately $10.5
million on the sale.
Although the Company had a taxable loss in fiscal 1997, a tax provision
of approximately $260,000 was recorded. These tax provisions are primarily due
to state and foreign income taxes.
FISCAL 1996 COMPARED TO FISCAL 1995
Net sales for the fiscal year ended February 25, 1996, decreased
approximately $37.5 million or 13% from approximately $288.1 million in fiscal
1995 to $250.6 million in fiscal 1996. Sales of fine jewelry decreased
approximately $31.1 million from $196.0 million in fiscal 1995 to $164.9 million
in fiscal 1996. The Company believes that current year sales have been affected
by a general softening of demand for colored-stone products and that in the
highly competitive colored-stone and diamond product categories, the Company
needs to improve its ability to meet customer expectations. Also contributing to
the decrease has been management's continuing efforts to manage the credit
extended to certain customers and to eliminate low margin contributors from the
sales mix. Sales of consumer products including licensed sports and other
specialty products decreased $7.8 million from $12.1 million in fiscal 1995 to
$4.3 million in fiscal 1996. This decrease is associated with the Company's
decision, in the third quarter of fiscal 1995, to scale back the consumer
products business.
Gross profit for the fiscal year ended February 25, 1996, decreased
approximately $10.2 million or 12% from $87.6 million in fiscal 1995 to $77.4
million in fiscal 1996. Decreases in gross profit are primarily associated with
the lower volume of sales in the consumer products and fine jewelry lines of
business. Gross profit margin increased slightly from 30.4% in fiscal 1995 to
30.9% in fiscal 1996. Improvements in margin in fine jewelry are being offset by
lower margins in the scholastic and consumer products lines of business.
Selling, general and administrative expenses ("SG&A") for fiscal 1996
decreased approximately $24.0 million, or 26.5% from $90.4 million in fiscal
1995 to $66.4 million in fiscal 1996. As a percentage of net sales, SG&A
expenses decreased from 31.4% in fiscal 1995 to 26.5% in fiscal 1996. The
decrease primarily relates to lower costs associated with the consumer products
line of business, particularly advertising costs and lower provisions for
uncollectible accounts. Also contributing to the decrease are certain
non-operating items in the current year including a $1.5 million benefit
associated with the liquidation of additional Zale claim assets and a $1.6
million benefit from a fiscal 1989 acquisition contingency.
Page 21
<PAGE>
Interest expense for the fiscal year ended February 25, 1996, increased
$1.0 million from approximately $12.2 million to $13.2 million in fiscal 1996.
The weighted average interest rate on overall borrowings was approximately
11.24% for fiscal 1996 compared to 11.08% for fiscal 1995. Average borrowings
increased approximately $7.2 million from approximately $109.9 million in fiscal
1995 to $117.1 million in fiscal 1996 (See Note 3 of Notes to Consolidated
Financial Statements).
The Company has recorded a tax provision for fiscal 1996 of
approximately $0.2 million compared with a provision of $1.8 million in fiscal
1995. These tax provisions are primarily due to state and foreign income taxes.
FISCAL 1995 COMPARED TO FISCAL 1994
On November 23, 1994, holders of approximately 94% of the Company's
Exchangeable Preferred Stock exchanged on a share-for-share basis their shares
for shares of Little Switzerland, Inc. Common Stock held by the Company. Such an
exchange was provided for by the terms of the Exchangeable Preferred Stock. In
addition, the Company issued to each participant one share of new Convertible
Preferred Stock with each share of Little Switzerland, Inc. Common Stock.
Since the carrying value of the Company's investment in Little
Switzerland, Inc. was substantially less than the recorded value of the
Exchangeable Preferred Stock, the transaction resulted in a nonrecurring,
noncash gain in fiscal 1995 of approximately $17 million, net of the estimated
fair value of the Convertible Preferred Stock issued.
Net sales for the fiscal year ended February 26, 1995, increased
approximately $10 million, or 4%, from approximately $278 million in fiscal 1994
to approximately $288 million in fiscal 1995. Sales of fine jewelry increased
approximately $19 million, or 11%, from approximately $177 million in fiscal
1994 to approximately $196 million in fiscal 1995. This increase was achieved
despite a decline in sales to Zale of approximately $4 million, or 12%, from $33
million in fiscal 1994 to $29 million in fiscal 1995. The sales increase is
generally attributable to increased volume rather than increased prices. Sales
for the Company's direct response distribution business of licensed sports and
other specialty products have decreased approximately $10 million, or 37%, from
$27 million in fiscal 1994 to $17 million in fiscal 1995. The Company expects to
further scale back its direct response distribution business in fiscal 1996.
Gross profit for the fiscal year ended February 26, 1995, decreased
approximately $10 million, or 10%, from $97 million in fiscal 1994 to $87
million in fiscal 1995. Gross profit margin declined from 35% for the fiscal
year ended February 27, 1994, to 30% for the fiscal year ended February 26,
1995. The Company's sales increase has been primarily in the lower margin fine
jewelry product categories. In order to better manage and control inventory, the
Company has also sold, or made provisions to sell, inventory in excess of
current requirements, at less than normal margins. This product mix change and
these sales and provisions negatively impacted margin by approximately 3%.
Production requirements for direct response and other specialty products were
lower this year than last year, resulting in under absorbed fixed overhead which
impacted margin by approximately 2%.
Page 22
<PAGE>
Selling, general and administrative expenses ("SG&A") for fiscal 1995
increased approximately $10 million, or 13%, from $80 million in fiscal 1994 to
$90 million in fiscal 1995. As a percentage of net sales, SG&A expenses
increased from 29% in fiscal 1994 to 31% in fiscal 1995. This increase relates,
primarily, to higher costs, particularly for advertising, associated with the
Company's marketing, through direct response, of merchandise manufactured under
licenses from professional sports organizations. This accelerated advertising
effort did not generate sales of these products at the rate anticipated.
Provision for higher than anticipated uncollectible accounts also contributed to
the increase in SG&A as a percentage of sales. The Company anticipates that SG&A
expenses associated with its direct response business of licensed sports and
other specialty products will decline in fiscal 1996 due to the Company's
intentions to scale back its direct response distribution business.
Interest expense for the fiscal year ended February 26, 1995, declined
approximately $2 million from $14 million in fiscal 1994 to $12 million in
fiscal 1995. The weighted average interest rate on overall borrowings was
approximately 11.08% for fiscal 1995 versus 11.24% for fiscal 1994. Average
borrowings for the fiscal year ended February 26, 1995, declined approximately
$15 million from approximately $125 million in fiscal 1994 to approximately $110
million in fiscal 1995 (See Note 3 of Notes to Consolidated Financial
Statements).
The Company has recorded a tax provision for fiscal 1995 of
approximately $1.8 million compared with a provision of $1.0 million in fiscal
1994. These tax provisions are primarily due to state and foreign income taxes.
INFLATION
The Company's operating expenses are directly affected by inflation,
resulting in an increased cost of doing business. Because the cost of sales
depends on the price of raw materials bought in markets located throughout the
world, the Company is influenced by inflation on an international basis. In
addition, gold prices are affected by political factors, by changing perceptions
of the value of gold relative to currencies and by inflationary pressures.
The Company believes that inflation does not currently have a material
effect on the Company's operating expenses, although current rates of inflation
are not necessarily indicative of future effects of inflation on the Company,
and thus, inflation could have a material effect on the Company's operating
expenses in the future.
Page 23
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The following consolidated financial statements of Town & Country
Corporation and subsidiaries are included as part of this Form 10-K:
Report of Independent Public Accountants ..........................F-3
Consolidated Balance Sheets - February 23, 1997
and February 25, 1996 .............................................F-4
Consolidated Statements of Operations - Years
Ended February 23, 1997, February 25, 1996,
and February 26, 1995 .............................................F-6
Consolidated Statements of Stockholders' Equity (Deficit) -
Years Ended February 23, 1997, February 25, 1996,
and February 26, 1995 .............................................F-7
Consolidated Statements of Cash Flows - Years
Ended February 23, 1997, February 25, 1996,
and February 26, 1995 .............................................F-9
Notes to Consolidated Financial Statements .......................F-11
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None
Page 24
<PAGE>
PART III
--------
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information concerning the age and principal occupation of each director
and executive officer is set forth under the captions "Election of Directors,"
"Executive Officers," and "Executive Compensation" in the Proxy Statement and is
incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
Information concerning compensation of directors and executive officers
of the Registrant is set forth under the captions "Board Meetings, Committees,
Attendance and Fees," "Executive Officers," and "Executive Compensation" in the
Proxy Statement and is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Security ownership of executive officers and directors is set forth
under the caption "Election of Directors" and "Security Ownership of Principal
Stockholders and Management" in the Proxy Statement and is incorporated herein
by reference.
Solely for the purpose of calculating the aggregate market value of the
voting stock held by non-affiliates of the Registrant as set forth on the cover
of this report, it has been assumed that directors and executive officers of the
Registrant are affiliates.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information related to certain transactions with directors of the
Registrant is set forth under the caption "Certain Transactions and Business
Relationships" in the Proxy Statement and is incorporated herein by reference.
Page 25
<PAGE>
PART IV
-------
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(A) DOCUMENT LIST
1. Financial Statements
--------------------
The following consolidated financial statements of Town & Country
Corporation and Subsidiaries are included in Item 8:
Page
Report of Independent Public Accountants ..........................F-3
Consolidated Balance Sheets - February 23, 1997 and
February 25, 1996 .................................................F-4
Consolidated Statements of Operations - Years
Ended February 23, 1997, February 25, 1996 and
February 26, 1995 .................................................F-6
Consolidated Statements of Stockholders' Equity (Deficit) -
Years Ended February 23, 1997, February 25, 1996 and
February 26, 1995 .................................................F-7
Consolidated Statements of Cash Flows - Years
Ended February 23, 1997, February 25, 1996 and
February 26, 1995 .................................................F-9
Notes to Consolidated Financial Statements .......................F-11
2. Financial Statement Schedules
-----------------------------
Report of Independent Public Accountants on Schedules ............F-53
Schedules:
II Valuation Accounts .......................................F-54
Page 26
<PAGE>
Schedules other than those listed above are omitted because of the
absence of the condition under which they are required or because the required
information is reflected in the financial statements or notes thereto.
3. Exhibits
--------
Page
3.1 Restated Articles of Organization, as amended ........*6*(3.1)
3.2 By-Laws, as amended ..................................*2*(3.2)
4.1 Amended and Restated Indenture governing 13% .........*6*(4.2)
Senior Subordinated Notes due 12/15/98, (the "Old
13% Notes"), dated as of 5/14/93, from Town &
Country Corporation to State Street Bank and
Trust Company, as Trustee.
4.2 Supplemental Indenture relating to the Old 13% .......*6*(4.4)
Notes, dated as of 5/14/93, from Town & Country
Corporation to State Street Bank and Trust
Company, as Trustee.
4.3 Indenture governing 11 1/2% Senior Secured Notes *6*(4.5)
due 9/15/97, dated as of 5/14/93, from Town &
Country Corporation to Shawmut Bank, N.A., as
Trustee.
4.4 First Supplemental Indenture governing 11-1/2% ...Filed Herewith
Senior Secured Notes due 9/15/97 from Town &
Country Corporation to Fleet National Bank, as
Trustee.
4.5 Second Supplemental Indenture governing 11-1/2% ......*11*(4.1)
Senior Secured Notes due 9/15/97 from Town &
Country Corporation to Fleet National Bank, as
Trustee.
4.6 Third Supplemental Indenture governing 11-1/2% ...Filed Herewith
Senior Secured Notes due 9/15/97 from Town &
Country Corporation to Fleet National Bank, as
Trustee, dated as of March 4, 1997.
Page 27
<PAGE>
4.7 Indenture governing 13% Senior Subordinated Notes .....*6*(4.6)
due 5/31/98, dated as of 5/14/93, from Town &
Country Corporation to Bankers Trust Company,
as Trustee.
4.8 First Supplemental Indenture governing 13% Senior ....*11*(4.2)
Subordinated Notes due 5/31/98 from Town &
Country Corporation to Bankers Trust Company,
as Trustee.
4.9 Second Supplemental Indenture governing 13% ......Filed Herewith
Senior Subordinated Notes due 5/31/98 from Town
& Country Corporation to Bankers Trust Company,
as Trustee, dated as of March 4, 1997.
4.10 Certificate of Vote of Directors Establishing the .....*6*(4.7)
Exchangeable Preferred Stock, par value $1.00
per share, dated as of 5/14/93.
4.11 Certificate of Vote of Directors Establishing the .....*7*(4.8)
Convertible Preferred Stock, par value $1.00 per
share, dated as of November 23, 1994.
Material Contracts:
10.1 1989 Employee Stock Purchase Plan of the ............#1#(10.21)
Registrant.
10.2 1995 Stock Option Plan ..................................&1&(B)
10.3 1994 Non-Employee Directors' Nonqualified ...........*7*(10.44)
Stock Option Plan
10.4 Assignment, Consolidation, Amendment, and ............*9*(10.4)
Restatement to the Lease Agreement between the
Registrant, Fine Jewelry Group, Inc. and Carey
Realty Trust dated 3/1/96.
10.5 Lease Agreement between L.G. Balfour Company, ........*7*(10.9)
Inc. and C.L.C. North Attleboro Trust dated
March 14, 1994.
Page 28
<PAGE>
10.6 Letter-Agreement dated April 4, 1994, to Lease .......*7*(10.10)
between L. G. Balfour Company, Inc. and C.L.C.
North Attleboro Trust, dated March 14, 1994.
10.7 Amendment number one to the lease between ........Filed Herewith
L.G. Balfour Company, Inc. and C.L.C. North
Attleboro Trust, dated April 24, 1997.
10.31 Collateral Agency and Intercreditor Agreement ........*6*(10.16)
dated as of 5/14/93, by and among Town & Country
Corporation, L.G. Balfour Company, Inc., Gold
Lance, Inc., and Town & Country Fine Jewelry
Group, Inc. and Foothill Capital Corporation,
Fleet Precious Metals, Inc., Rhode Island Hospital
Trust National Bank, Republic National Bank, ABN
Amro Bank N.V., Bankers Trust Company, Shawmut
Bank, N.A., and Chemical Bank.
10.32 Form of 1993 Management Stock Option .................#3#(10.23)
Amended and Restated.
10.34 Form of Executive Employment Agreement between ...Filed Herewith
Town & Country Corporation and Francis X. Correra
effective as of July 15, 1996.
10.35 Trust Agreement dated as of 5/14/93, between .........*6*(10.22)
Town & Country Corporation and Baybank, as
Trustee.
10.37 Form of letter dated as of November 4, 1994, to ......#5#(10.21)
Certain Holders of Town & Country Exchangeable
Preferred Stock from Town & Country relating
to the offer by Town & Country to issue shares
of Convertible Preferred Stock.
10.40 Loan Agreement among Town & Country ..................*10*(10.1)
Corporation, Town & Country Fine Jewelry
Group, Inc., Gold Lance, Inc., L.G. Balfour
Company, Inc. and Foothill Capital Corporation
dated July 3, 1996.
Page 29
<PAGE>
10.41 First Amendment to the agreement by and between ......*11*(10.1)
Town & Country Corporation, Fine Jewelry
Group, Inc., L.G. Balfour, Inc., Gold Lance,
Inc. and Foothill Capital Corporation dated as of
October 30, 1996.
10.42 Amendment number two to the agreement by and .....Filed Herewith
between Town & Country Corporation, Fine Jewelry
Group, Inc., L.G. Balfour, Inc., Gold Lance, Inc., and
Foothill Capital Corporation dated as of May 30, 1997.
10.43 Creditor Agreement by and between Foothill Capital ...*10*(10.3)
Corporation and Fleet Precious Metals, Inc. dated
July 3, 1996.
10.44 Amended and Restated Asset Purchase Agreement .........*11*(2.1)
by and among Commemorative Brands, Inc. and
Town & Country Corporation dated November 21, 1996
Schedules to the exhibit have not been filed.
The Company will furnish supplementally a
copy of any schedule to the Commission
upon request
10.46 Second Amended and Restated Consignment ..............*10*(10.2)
Agreement by and between Fleet Precious
Metals Inc. and Town & Country Corporation,
Town & Country Fine Jewelry Group, Inc., L.G. Balfour
Company and Gold Lance, Inc. dated July 3, 1996
10.47 Asset Purchase Agreement by and among .................*12*(2.1)
Jostens, Inc., Gold Lance, Inc. and Town &
Country Corporation dated as of April 18, 1997.
10.48 Transition Agreement by and among Jostens, Inc., ......*12*(2.2)
Gold Lance, Inc. and Town & Country Corporation
dated as of April 18, 1997.
10.50 Termination and Settlement Agreement between .....Filed Herewith
Town & Country Corporation and C. William Carey
dated as of January 3, 1997.
10.51 Voting Agreement between Town & Country ..........Filed Herewith
Corporation and C. William Carey dated as of
January 3, 1997.
10.52 Consulting Agreement between Town & Country ......Filed Herewith
Corporation and C. William Carey dated as of
January 3, 1997.
Page 30
<PAGE>
11 Earnings per Share Computations ..................Filed Herewith
22 Subsidiaries of the Registrant ...................Filed Herewith
24.1 Consent of Arthur Andersen LLP ...................Filed Herewith
27 Financial Data Schedule ..........................Filed Herewith
*2* Incorporated by reference to the designated exhibit in the Annual Report
on Form 10-K, Commission File number 0-14394 filed May 26, 1987.
*6* Incorporated by reference to the designated exhibit in the Annual Report
on Form 10-K, Commission File number 0-14394 filed May 27, 1993.
*7* Incorporated by reference to the designated exhibit in the Annual Report
on Form 10-K, Commission File Number 0-14394 filed May 24, 1995.
*9* Incorporated by reference to the designated exhibit in the Annual Report
on Form 10-K, Commission File Number 0-14394 filed June 13, 1996
*10* Incorporated by reference to the designated exhibit in the Quarterly
Report on Form 10-Q, Commission File Number 0-14394 filed July 9, 1996.
*11* Incorporated by reference to the designated exhibit in the Quarterly
Report on Form 10-Q, Commission File Number 0-14394 filed December 21,
1996.
*12* Incorporated by reference to the designated exhibit in the Current Report
on Form 8-K, Commission File Number 0-14394 filed May 5, 1997.
#1# Incorporated by reference to the designated exhibit of the Registration
Statement on Form S-2 No. 33-25092 filed October 20, 1988.
#3# Incorporated by reference to the designated exhibit of Amendment No. 6 to
the Registration Statement on Form S-4 No. 33-49028 filed March 12, 1993.
#5# Incorporated by reference to the designated exhibit of the Registration
Statement on Form S-2 No. 33-57407 filed January 23, 1995.
&1& Incorporated by reference to the designated exhibit of the Annual Proxy on
Form 14-A, Commission file number 0-014394 filed June 26, 1995.
(B) REPORTS ON FORM 8-K
No Form 8-K was issued by the Registrant during the quarter ended February
23, 1997.
Page 31
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, this Registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
TOWN & COUNTRY CORPORATION
(Registrant)
Date: June 10, 1997 By: /s/ William Schawbel
------------------ -----------------------------------------
William Schawbel, Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been duly signed below by the following persons on behalf of the
Registrant and in the capacities and on the date set forth above.
Signature Title
--------- -----
Principal Executive Officer:
/s/ William Schawbel Chief Executive Officer
- -----------------------------------
William Schawbel
Principal Financial and Accounting Officer:
/s/ Veronica Zsolcsak Chief Financial Officer
- -----------------------------------
Veronica Zsolcsak
/s/ Charles Hill Director
- -----------------------------------
Charles Hill
/s/ Richard E. Floor Director
- -----------------------------------
Richard E. Floor
/s/ Marcia Morris Director
- -----------------------------------
Marcia Morris
Page 32
<PAGE>
[This Page Intentionally Left Blank]
<PAGE>
TOWN & COUNTRY CORPORATION AND SUBSIDIARIES
-------------------------------------------
CONSOLIDATED FINANCIAL STATEMENTS
---------------------------------
TOGETHER WITH AUDITORS' REPORT
------------------------------
<PAGE>
Report of Independent Public Accountants
To Town & Country Corporation:
We have audited the accompanying consolidated balance sheets of TOWN &
COUNTRY CORPORATION (a Massachusetts corporation) and subsidiaries as of
February 23, 1997 and February 25, 1996, and the related consolidated statements
of operations, stockholders' equity (deficit) and cash flows for each of the
three years in the period ended February 23, 1997. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Town &
Country Corporation and subsidiaries as of February 23, 1997 and February 25,
1996, and the results of its operations and its cash flows for each of the three
years in the period ended February 23, 1997, in conformity with generally
accepted accounting principles.
The accompanying consolidated financial statements have been prepared
assuming that the Company will continue as a going concern. As discussed in Note
1 to the consolidated financial statements, the Company has suffered recurring
losses and has a net capital deficiency that raises substantial doubt about its
ability to continue as a going concern. Management's plans in regard to these
matters are also described in Note 1. The consolidated financial statements do
not include any adjustments that might result from the outcome of this
uncertainty.
Arthur Andersen LLP
Boston, Massachusetts
April 23, 1997
(Except for the matters discussed in
Notes 1 and 3 and Note 19, for which the dates are
May 30, 1997 and April 25, 1997, respectively).
<PAGE>
TOWN & COUNTRY CORPORATION & SUBSIDIARIES
- -----------------------------------------
CONSOLIDATED BALANCE SHEETS
- ---------------------------
<TABLE>
<CAPTION>
February 23, February 25,
1997 1996
------------ ------------
<S> <C> <C>
ASSETS
------
CURRENT ASSETS:
Cash and cash equivalents (Note 2) $ 10,431,911 $ 5,151,929
Restricted cash (Note 2) 107,090 102,012
Accounts receivable, less allowances for
doubtful accounts of $1,243,000 and
$2,120,000 at February 23, 1997 and
February 25, 1996, respectively 22,247,826 51,294,879
Inventories (Note 2) 42,752,801 90,138,403
Prepaid expenses and other current assets 1,956,587 1,956,537
------------ ------------
Total current assets 77,496,215 148,643,760
------------ ------------
PROPERTY, PLANT AND EQUIPMENT, at
cost (Note 2) 56,215,045 84,073,513
Less-Accumulated depreciation 33,242,256 43,814,604
------------ ------------
22,972,789 40,258,909
------------ ------------
INVESTMENT IN SOLOMON BROTHERS,
LIMITED (Note 8) 13,734,000 13,734,000
------------ ------------
OTHER ASSETS (Note 2 and 7) 7,109,012 8,492,827
------------ ------------
$121,312,016 $211,129,496
============ ============
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
<PAGE>
TOWN & COUNTRY CORPORATION & SUBSIDIARIES
- -----------------------------------------
CONSOLIDATED BALANCE SHEETS (Continued)
- ---------------------------------------
<TABLE>
<CAPTION>
February 23, February 25,
1997 1996
------------ ------------
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
----------------------------------------------
CURRENT LIABILITIES:
Notes payable to banks (Note 3) $ -- $ 15,193,176
Current portion of long-term debt
(Note 3) 13,254,000 244,928
Accounts payable 9,537,829 20,237,262
Accrued expenses (Note 2) 16,934,445 15,078,569
Accrued taxes (Notes 2 and 9) 614,202 659,744
------------- -------------
Total current liabilities 40,340,476 51,413,679
------------- -------------
LONG TERM DEBT, less current portion
(Note 3) 78,090,054 93,174,432
------------- -------------
OTHER LONG-TERM LIABILITIES -- 1,122,625
------------- -------------
COMMITMENTS AND CONTINGENCIES (Note 14)
MINORITY INTEREST 4,996,770 5,228,363
------------- -------------
EXCHANGEABLE PREFERRED STOCK,
$1.00 par value, $14.59 preference value-
Authorized--200,000 shares
Issued and outstanding--152,217
shares (Notes 3 and 6) 2,373,654 2,319,476
------------- -------------
STOCKHOLDERS' EQUITY (DEFICIT) (Notes 3, 6, 13, 15, and 16):
Preferred Stock, $1.00 par value-
Authorized and unissued--2,266,745
shares -- --
Convertible Preferred Stock, $1.00 par value,
$6.50 preference value-
Authorized--2,533,255
Issued and outstanding--1,302,673 and 2,288,567
shares, respectively 1,302,673 2,288,567
Class A Common Stock, $.01 par value-
Authorized--40,000,000 shares
Issued and outstanding--23,508,082 and 21,235,246
shares, respectively 235,081 212,352
Class B Common Stock, $.01 par value-
Authorized--8,000,000 shares
Issued and outstanding--2,664,941 shares 26,649 26,649
Additional paid-in capital 75,797,457 74,175,437
Accumulated deficit (81,850,798) (18,832,084)
------------- -------------
Total stockholders' equity (deficit) (4,488,938) 57,870,921
------------- -------------
$ 121,312,016 $ 211,129,496
============= =============
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
<PAGE>
TOWN & COUNTRY CORPORATION & SUBSIDIARIES
- -----------------------------------------
CONSOLIDATED STATEMENTS OF OPERATIONS
- -------------------------------------
<TABLE>
<CAPTION>
For the Year Ended
--------------------------------------------------------
February 23, February 25, February 26,
1997 1996 1995
------------ ------------ ------------
<S> <C> <C> <C>
NET SALES $ 209,152,862 $ 250,577,816 $ 288,114,608
INVENTORY CHARGE (Note 4) 35,521,000 -- --
COST OF SALES 147,446,342 173,141,311 200,533,890
------------- ------------- -------------
Gross profit $ 26,185,520 $ 77,436,505 $ 87,580,718
SELLING, GENERAL, AND
ADMINISTRATIVE EXPENSES 73,759,927 66,407,484 90,407,855
RESTRUCTURING CHARGE (Note 5) 7,207,694 -- --
------------- ------------- -------------
Income (loss) from operations $ (54,782,101) $ 11,029,021 $ (2,827,137)
INTEREST EXPENSE (12,722,915) (13,153,660) (12,169,615)
INTEREST AND OTHER INCOME, NET 428,715 678,251 234,933
GAIN ON SALE OF ASSETS AND
LIABILITIES OF BALFOUR (Note 19) 10,546,886 -- --
LOSS ON SALE OF ASSETS OF GOLD LANCE
(Note 19) (5,000,000) -- --
NET GAIN (LOSS) ON SALES OF REAL ESTATE (599,921) 417,220 --
GAIN ON LITTLE SWITZERLAND, INC.
EXCHANGE (Note 6) -- -- 17,277,988
INCOME (LOSS) FROM AFFILIATES (55,114) -- 587,814
(Notes 7 and 8)
MINORITY INTEREST (Note 2) 167,177 (673,079) (773,901)
------------- ------------- -------------
Income (loss) before provision for
income taxes $ (62,017,273) $ (1,702,247) $ 2,330,082
PROVISION FOR INCOME TAXES
(Notes 2 and 9) 260,762 163,867 1,758,164
------------- ------------- -------------
Net income (loss) $ (62,278,035) $ (1,866,114) $ 571,918
ACCRETION OF DISCOUNT AND DIVIDENDS
ON PREFERRED STOCKS (Notes 3 and 6) 740,679 1,039,802 1,688,019
------------- ------------- -------------
Income (loss) attributable to common
stockholders $ (63,018,714) $ (2,905,916) $ (1,116,101)
============= ============= =============
INCOME (LOSS) PER COMMON SHARE
(Note 2) $ (2.47) $ (0.12) $ (0.05)
============= ============= =============
WEIGHTED AVERAGE COMMON SHARES
OUTSTANDING (Note 2) 25,504,218 23,769,323 23,433,173
============= ============= =============
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
<PAGE>
TOWN & COUNTRY CORPORATION AND SUBSIDIARIES
- -------------------------------------------
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
- ---------------------------------------------------------
FOR THE YEARS ENDED FEBRUARY 23, 1997, FEBRUARY 25, 1996, AND FEBRUARY 26, 1995
- -------------------------------------- ----------------------------------------
<TABLE>
<CAPTION>
Class A
Convertible Preferred Stock Common Stock
----------------------------- ----------------------------
Number of Number of Par Value
Shares Par Value $1 Shares $.01
--------- ------------ --------- ---------
<S> <C> <C> <C> <C>
BALANCE, February 27, 1994 -- $ -- 20,755,901 $ 207,559
Share issuance related to Little
Switzerland, Inc. exchange 2,381,038 2,381,038 -- --
Conversion of Class B Common Stock
into Class A Common Stock -- -- 5,752 58
Net proceeds from the exercise of
options to purchase common stock
(Notes 15 and 16) -- -- 23,115 231
Accretion of discount and dividends on
preferred stocks (Notes 3 and 6) -- -- -- --
Net income -- -- -- --
--------- ----------- ---------- ----------
BALANCE, February 26, 1995 2,381,038 $ 2,381,038 20,784,768 $ 207,848
Conversion of Convertible Preferred Stock
into Class A Common Stock (202,277) (202,277) 404,554 4,045
Net proceeds from the exercise of
options to purchase common stock
(Notes 15 and 16) -- -- 45,924 459
Issuance of Convertible Preferred Stock as
payment of dividend 109,806 109,806 -- --
Accretion of discount and dividends on
preferred stocks (Notes 3 and 6) -- -- -- --
Net loss -- -- -- --
--------- ----------- ---------- ----------
BALANCE, February 25, 1996 2,288,567 $ 2,288,567 21,235,246 $ 212,352
Conversion of Convertible Preferred Stock
into Class A Common Stock (1,106,159) (1,106,159) 2,212,317 22,124
Net proceeds from the exercise of
options to purchase common stock
(Notes 15 and 16) -- -- 60,519 605
Issuance of Convertible Preferred Stock as
payment of dividend 120,265 120,265 -- --
Accretion of discount and dividends on
preferred stocks (Notes 3 and 6) -- -- -- --
Net loss -- -- -- --
--------- ----------- ---------- ----------
BALANCE, February 23, 1997 1,302,673 $ 1,302,673 23,508,082 $ 235,081
========= =========== ========== ==========
</TABLE>
(Continued on Next Page)
<PAGE>
TOWN & COUNTRY CORPORATION AND SUBSIDIARIES
- -------------------------------------------
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
- ---------------------------------------------------------
FOR THE YEARS ENDED FEBRUARY 23, 1997, FEBRUARY 25, 1996, AND FEBRUARY 26, 1995
- -------------------------------------- ----------------------------------------
<TABLE>
<CAPTION>
Class B
Common Stock
----------------------------
Additional Total
Number of Par Value Paid-in Accumulated Stockholders'
Shares $.01 Capital Deficit Equity (Deficit)
--------- --------- ---------- ----------- ----------------
<S> <C> <C> <C> <C> <C>
BALANCE, February 27, 1994 2,670,693 $ 26,707 $ 69,909,485 $ (14,810,068) $ 55,333,683
Share issuance related to Little
Switzerland, Inc. exchange -- -- 2,976,297 -- 5,357,335
Conversion of Class B Common Stock
into Class A Common Stock (5,752) (58) -- -- --
Net proceeds from the exercise of
options to purchase common stock
(Notes 15 and 16) -- -- 27,352 -- 27,583
Accretion of discount and dividends on
preferred stocks (Notes 3 and 6) -- -- 232,152 (1,688,018) (1,455,866)
Net income -- -- -- 571,918 571,918
--------- --------- ------------ -------------- ------------
BALANCE, February 26, 1995 2,664,941 $ 26,649 $ 73,145,286 $ (15,926,168) $ 59,834,653
Conversion of Convertible Preferred Stock
into Class A Common Stock -- -- 198,232 -- --
Net proceeds from the exercise of
options to purchase common stock
(Notes 15 and 16) -- -- 22,502 -- 22,961
Issuance of Convertible Preferred Stock as
payment of dividend -- -- (109,806) -- --
Accretion of discount and dividends on
preferred stocks (Notes 3 and 6) -- -- 919,223 (1,039,802) (120,579)
Net loss -- -- -- (1,866,114) (1,866,114)
--------- --------- ------------ -------------- ------------
BALANCE, February 25, 1996 2,664,941 $ 26,649 $ 74,175,437 $ (18,832,084) $ 57,870,921
Conversion of Convertible Preferred Stock
into Class A Common Stock -- -- 1,084,035 -- --
Net proceeds from the exercise of
options to purchase common stock
(Notes 15 and 16) -- -- 38,376 -- 38,981
Issuance of Convertible Preferred Stock as
payment of dividend -- -- (120,265) -- --
Accretion of discount and dividends on
preferred stocks (Notes 3 and 6) -- -- 619,874 (740,679) (120,805)
Net loss -- -- -- (62,278,035) (62,278,035)
--------- --------- ------------ -------------- ------------
BALANCE, February 23, 1997 2,664,941 $ 26,649 $ 75,797,457 $ (81,850,798) $ (4,488,938)
========= ========= ============ ============== ============
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
<PAGE>
TOWN & COUNTRY CORPORATION AND SUBSIDIARIES
- -------------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
- -------------------------------------
<TABLE>
<CAPTION>
For the Year Ended
--------------------------------------------------
February 23, February 25, February 26,
1997 1996 1995
------------ ------------ ------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $(62,278,035) $ (1,866,114) $ 571,918
Adjustments to reconcile net income (loss)
to net cash provided by (used in)
operating activities--
Depreciation and amortization 3,013,312 3,929,246 4,846,300
Loss/(gain) on disposal of fixed assets, net 599,921 (423,600) 73,773
Loss/(gain) on sales of assets and liabilities
of subsidiaries, net (Note 19) (5,546,886) -- --
Gain on Little Switzerland, Inc. exchange
(Note 6) -- -- (17,277,988)
Undistributed earnings of affiliates, net
of minority interest (112,063) 673,080 186,087
Interest paid with issuance of debt
(Note 3) -- 4,200,569 7,647,666
Change in assets and liabilities--
(Increase) decrease in accounts
receivable 7,775,439 6,177,243 (1,848,704)
(Increase) decrease in inventories 38,517,105 (9,788,991) (5,320,015)
(Increase) decrease in prepaid
expenses and other current assets 175,088 (1,382,926) 3,418,272
(Increase) decrease in other assets (273,803) (512,991) 6,542,404
Increase (decrease) in accounts payable (8,365,256) 2,428,237 5,081,668
Increase (decrease) in accrued expenses 3,438,070 (380,343) (4,597,420)
Increase (decrease) in accrued taxes (45,542) (692,779) 478,270
Increase (decrease) in other liabilities 53,217 (371,899) (599,231)
------------ ------------ ------------
Net cash provided by (used in)
operating activities $(23,049,433) $ 1,988,732 $ (797,000)
------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of fixed assets $ 6,842,719 $ 996,610 $ 45,331
Capital expenditures (3,238,322) (2,734,122) (2,759,204)
Proceeds from sale of assets and liabilities of
subsidiary (Note 19) 41,914,418 -- --
Investment in affiliates (1,489,884) (380,000) --
------------ ------------ ------------
Net cash provided by (used in)
investing activities $ 44,028,931 $ (2,117,512) $ (2,713,873)
------------ ------------ ------------
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
<PAGE>
TOWN & COUNTRY CORPORATION & SUBSIDIARIES
- -----------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
- -------------------------------------------------
<TABLE>
<CAPTION>
For the Year Ended
-----------------------------------------------------------------
February 23, February 25, February 26,
1997 1996 1995
------------ ------------ ------------
<S> <C> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments on revolving credit facility $(261,017,868) $(257,779,581) $(279,990,373)
Proceeds from borrowings under
revolving credit facility 245,824,692 261,854,934 291,108,200
Decrease (increase) in restricted cash (5,078) (100,123) 36,082
Payments on other debt (399,080) (1,926,044) (7,607,575)
Payment of dividends (141,163) (128,359) --
Proceeds from the issuance of common stock 38,981 22,961 27,584
------------- ------------- -------------
Net cash provided by (used in)
financing activities $ (15,699,516) $ 1,943,788 $ 3,573,918
------------- ------------- -------------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS $ 5,279,982 $ 1,815,008 $ 63,045
CASH AND CASH EQUIVALENTS AT
BEGINNING OF YEAR 5,151,929 3,336,921 3,273,876
------------- ------------- -------------
CASH AND CASH EQUIVALENTS AT END
OF YEAR $ 10,431,911 $ 5,151,929 $ 3,336,921
============= ============= =============
SUPPLEMENTAL CASH FLOW DATA:
CASH PAID DURING THE YEAR FOR:
Interest $ 14,010,558 $ 9,758,857 $ 4,908,642
============= ============= =============
Income taxes $ 420,448 $ 806,463 $ 1,119,864
============= ============= =============
</TABLE>
SUPPLEMENTAL DISCLOSURES OF NONCASH INVESTING AND FINANCING ACTIVITIES (Note 2)
The accompanying notes are an integral part of these
consolidated financial statements.
<PAGE>
TOWN & COUNTRY CORPORATION & SUBSIDIARIES
-----------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
FEBRUARY 23, 1997
-----------------
(1) MANAGEMENT'S PLANS
------------------
Town & Country Corporation and subsidiaries ("the Company") incurred a
substantial loss during fiscal 1997, primarily as a result of the following:
[bullet] The disposal of inventory which resulted in a $35.5 million charge in
the second quarter (See Note 4).
[bullet] The incurrence of an operating loss in the fine jewelry business
resulting primarily from declining sales and gross margins as compared
to fiscal 1996. Additionally, the Company recognized $5.5 million in
unanticipated customer allowances in the second quarter.
[bullet] The incurrence of a $7.2 million restructuring charge in the fourth
quarter to recognize costs associated with reorganizing the fine
jewelry business, primarily related to severance costs (See Note 5).
As a result of the declining performance of the fine jewelry business, the
Company developed a revitalization plan. The major three components of the plan
are (1) disposal of non-core assets, (2) reengineering of company-wide processes
and (3) further expansion internationally.
In order to focus and fund the core business of the Company, a project was
undertaken to dispose of non-core businesses and properties. In December 1996
the Company was successful in selling certain assets and liabilities of its
Balfour subsidiary. In April 1997, the Company announced the sale of certain
assets of its Gold Lance subsidiary. The Company sold real estate not related to
its core business and currently has on the market the remaining real estate and
machinery related to Balfour and Gold Lance. These transactions generated
sufficient cash to allow the Company to repay all amounts outstanding on its
revolving credit facility as of February 23, 1997 (See Note 3).
Town & Country began a reengineering project with the assistance of a management
consulting firm. The Company focused on company-wide processes that needed
streamlining. In November 1996, cross-functional product development teams were
introduced to assist in the effort to reduce the time from concept to product.
These teams review new products in process for marketability, manufacturability
and profitablilty. Products have been eliminated and/or modified. Product lines
were reviewed for completeness and new designs have been introduced based on
specific customer requirements. The Company organized its sales and support
functions around its customers and their business requirements by creating
customer teams. These teams are intended to operate as fully operational
businesses with profit and loss responsibility and accountability.
The changes in the Company included certain management changes. Mr. William
Schawbel, was appointed co-chairman of the Board of Directors and acting CEO
upon the resignation of C. William Carey, the founder, president and Chairman
effective January 3, 1997. Mr.
<PAGE>
Schawbel, a director for three years and founder and CEO of his own company, was
an executive of the Gillette Company for 19 years. During process reengineering
there have also been additional fine jewelry senior management who have left the
Company. The Company believes that the current management structure is in line
with its current needs.
In the international area, the Company began the process of privatizing its
Essex subsidiary in fiscal 1997 (See Note 18). The Company believes that 100%
ownership of Essex will allow the Company to better integrate and utilize its
manufacturing facilities worldwide and achieve cost efficiencies in a more
timely manner. The privatization is scheduled to be completed by the end of July
1997. The Company has also begun designing product specifically for the European
and Asian markets. The Company hopes to take advantage of emerging business in
these parts of the world and is expanding its offshore marketing and sales with
this intent.
The Company has received amendments to the terms of its Senior Secured Notes and
Senior Subordinated Notes for the purposes of: (1) using approximately $3.0
million to reacquire 100% ownership of its Essex subsidiary, and (2) modifying
the net worth financial covenant as a result of the second quarter fiscal 1997
loss.
On May 30, 1997, Town & Country Corporation and its working capital lender,
Foothill Capital Corporation ("Foothill") signed an amendment to its July 1996
revolving credit agreement, which was specifically structured between the
parties to meet the requirements of the Company's business plan for fiscal 1998
(See Note 3).
The fiscal 1997 loss created a net capital deficiency of approximately $4.5
million. The Company also has $13.3 million of Senior Secured Notes maturing
September 15, 1997.
In addition, the Company has approximately $75.8 million in principal amount of
debt maturing in fiscal 1999. These debt issues mature as follows:
[bullet] May 31, 1998 $68.8 million Senior Subordinated Notes
[bullet] December 15, 1998 $ 7.0 million Subordinated Notes
The near term maturity of these securities and the material amount of the
principal payments represents a potential liquidity issue for the Company. The
Company, with the assistance of professional advisors, is evaluating possible
alternatives with regard to addressing this situation. It is essential for the
Company to raise additional capital and/or restructure its debt under terms
which will allow the Company to meet its expected future cash flow requirements.
There can be no assurances that the Company will be able to raise additional
capital and/or restructure its debt.
The Company's ability to achieve its operating results included in its fiscal
1998 business plan is affected by a number of factors, including the successful
outcome of the revitalization program discussed above. There can be no assurance
that the program will be successful or that the operating results, including
anticipated sales growth and gross margin percentage improvements, will be
achieved.
<PAGE>
The accompanying consolidated financial statements have been prepared
assuming that the Company will continue as a going concern and, accordingly, the
consolidated financial statements do not include any adjustments relating to
recoverability and classification of assets carrying amounts or the amount and
classification of liabilities that might result should the Company be unable to
continue as a going concern.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
------------------------------------------
Principles of Consolidation
---------------------------
The accompanying consolidated financial statements include the accounts
of the Company and its controlled domestic and foreign subsidiaries. All
significant intercompany transactions have been eliminated.
Organization
------------
Town & Country Corporation, a Massachusetts corporation incorporated in
1965, (collectively with its consolidated subsidiaries unless the context
otherwise requires, the "Company") designs, manufactures, and markets an
extensive collection of fine jewelry products in the United States and
internationally. The Company consisted of five operating entities: the parent
company, Town & Country Corporation ("Town & Country"), headquartered in
Chelsea, Massachusetts; its wholly owned subsidiaries, Town & Country Fine
Jewelry Group, Inc. ("Fine Jewelry Group"), headquartered in Chelsea,
Massachusetts; Anju Jewelry Limited, a Hong Kong company and its subsidiaries
("Anju"); Gold Lance, Inc. ("Gold Lance"), located in Houston, Texas; L.G.
Balfour Company, Inc. ("Balfour"), headquartered in North Attleboro,
Massachusetts; and its majority-owned subsidiary Essex International Public
Company Limited and its affiliates ("Essex"), a Thailand company. On
<PAGE>
December 16, 1996, the Company sold certain assets and liabilities constituting
substantially all of the operations of its Balfour subsidiary. Subsequent to
year-end, the Company sold certain assets of its Gold Lance subsidiary and
related to the sale changed the name of the subsidiary to GL, Inc. (See Note
19).
Reclassifications
-----------------
Certain reclassifications have been made to the prior years' financial
statements to conform with the presentation of the fiscal 1997 financial
statements.
Comparability
-------------
The accompanying consolidated statements of operations include the
operations of the Company's Balfour subsidiary through December 16, 1996, the
date of the sale of Balfour. The accompanying consolidated balance sheet as of
February 23, 1997 includes only those assets and liabilities of Balfour not
included in the sale and not liquidated by February 23, 1997.
Revenue Recognition
-------------------
The Company generally recognizes revenue upon shipment of its products
to customers. Revenue on consignment product shipped to customers is recognized
from reporting by the customer that the product has been sold to the end user.
Cash and Cash Equivalents
-------------------------
Cash equivalents include highly liquid investments with original
maturities of three months or less.
Investments
-----------
On March 1, 1994, the Company adopted the Financial Accounting Standard
Board's Statement of Financial Accounting Standards (SFAS) No. 115, Accounting
for Certain Investments in Debt and Equity Securities. SFAS No. 115 addresses
the accounting and reporting for investments in equity securities that have
readily determinable fair market values and for all investments in debt
securities. The Company's financial condition and results of operations were not
materially impacted in fiscal 1995 as a result of adopting SFAS No. 115.
Long-Lived Assets
-----------------
On February 26, 1996, the Company adopted SFAS No. 121, Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of.
SFAS No. 121 addresses accounting and reporting requirements for long-term
assets based on their fair
<PAGE>
market values. Adoption of SFAS No. 121 did not have a material impact on the
Company's financial condition and results of operation.
Stock Options
-------------
On February 26, 1996, the Company adopted SFAS No. 123,
Accounting for Stock-Based Compensation. SFAS No. 123 addresses
accounting and reporting requirements for stock options and
other equity instruments issued or granted based on their fair
market values. The Company intends to continue accounting for
its stock based compensation plans for employees in accordance
with Accounting Principles Board Opinion (APB) No. 25. Under
SFAS No. 123, companies choosing to continue to use APB No. 25
to account for stock based compensation plans for employees must
make footnote disclosure of the pro forma effects on earnings
per share had the principles in SFAS No. 123 been applied (See
Note 15).
Income (Loss) Per Common Share
------------------------------
Income (loss) per common share is computed based on the weighted average
number of common and common equivalent shares, where dilutive, outstanding
during each period. Common equivalent shares result from the assumed exercise of
stock options and warrants.
In March 1997, the Financial Accounting Standards Board issued SFAS No.
128. Earnings per Share, which supersedes Accounting Principles Board Opinion
No. 15, the existing authoritative guidance. SFAS No. 128 is designed to improve
the earnings per share information provided in the financial statements by
simplifying the existing computational guidelines, revising the disclosure
requirements and increasing the comparability of earnings per share on an
international basis. SFAS No. 128 is effective for financial statements for both
interim and annual periods ending after December 15, 1997, and requires
restatement of all prior-period earnings per share data presented. The new
statement modifies the calculations of primary and fully diluted earnings per
share and replaces them with basic and diluted earnings per share. Basic
earnings per share includes no dilution and is calculated by dividing net income
(loss) by the weighted average number of common shares outstanding for the
period. Diluted earnings per share reflects the potential dilution of stock
options that could share in the earnings of an entity, similar to fully diluted
earnings per share. Earnings per share in these financial statements would not
be affected under the new pronouncement.
Restricted Cash
---------------
Restricted cash includes cash payments from the Company's investment in
Solomon Brothers, Limited and cash proceeds with respect to the Zale bankruptcy
claim. These funds are escrowed for the benefit of the holders of the Senior
Secured Notes. During fiscal 1997 and fiscal 1996, approximately $0 and $0.7
million, respectively, of Senior Secured Notes were redeemed with such proceeds.
<PAGE>
Foreign Currency
----------------
The Company is subject to fluctuating foreign currency exchange rates
which are reflected currently in the consolidated statements of operations.
Transaction and exchange gains and losses have not been material to the
consolidated financial position or results of operations for the three years in
the period ended February 23, 1997.
Inventories
-----------
Inventories, which include materials, labor and manufacturing overhead,
are stated at the lower of cost or market using the first-in, first-out (FIFO)
method.
Inventories consisted of the following at February 23, 1997, and
February 25, 1996:
1997 1996
----------- -----------
Raw materials $ 8,547,459 $14,820,768
Work-in-process 5,643,042 9,947,057
Finished goods 28,562,300 65,370,578
----------- -----------
$42,752,801 $90,138,403
=========== ===========
The effects of gold price fluctuations are mitigated by the use of a
consignment program with bullion dealers. The Company's intention is that as the
gold selling price for orders is confirmed, the Company purchases the gold
requirements at the then current market prices; any additional requirements for
gold are held as consignee. The Company attempts to match the price it pays for
gold with the price it charges its customers. The Company pays a fee, which is
subject to periodic change, for the value of the gold it holds on consignment
during the period prior to sale. For the years ended February 23, 1997, February
25, 1996 and February 26, 1995, these fees totaled approximately $1.5 million,
$1.4 million and $1.4 million, respectively.
The Company does not include the value of consigned gold in inventory or
the corresponding liability in borrowings for financial statement purposes. As
of February 23, 1997 and February 25, 1996, the Company held approximately
33,000 ounces, valued at $11.5 million, and 63,000 ounces, valued at $24.9
million, respectively, of gold on consignment under its domestic gold
agreements. A foreign subsidiary of the Company held an additional 2,800 ounces,
valued at $1.0 million, and 3,100 ounces, valued at $1.2 million, outstanding at
February 23, 1997, and February 25, 1996, respectively, under a separate
consignment agreement (See Note 3).
<PAGE>
Advertising
-----------
The Company expenses the costs of advertising as incurred.
At February 23, 1997, February 25, 1996 and February 26, 1995,
advertising expense was approximately $5.7 million, $5.8 million and $14.2
million.
Property, Plant and Equipment
-----------------------------
The Company provides for depreciation, principally on the straight-line
method, at rates adequate to depreciate the applicable assets over their
estimated useful lives which range from 3 to 40 years. Certain equipment is
depreciated using the declining balance method.
Property and equipment consisted of the following at February 23, 1997,
and February 25, 1996:
Useful Life
Ranges 1997 1996
------------------------------- -----------
Real estate 10 - 40 Years $15,616,919 $28,991,637
Furniture and fixtures 3 - 7 Years 3,101,232 3,754,091
Equipment 3 - 20 Years 33,288,626 46,161,078
Leasehold improvements 4 - 20 Years 4,175,809 4,795,245
Construction-in-progress 32,459 371,462
----------- -----------
$56,215,045 $84,073,513
=========== ===========
<PAGE>
Accrued Expenses
----------------
The principal components of accrued expenses at February 23, 1997, and
February 25, 1996, are as follows:
1997 1996
----------- -----------
Compensation and related costs $ 3,188,756 $ 4,721,395
Customer deposits -- 4,824,697
Interest 2,954,777 3,088,712
Commissions 567,895 517,606
Restructuring costs (Note 5) 1,704,735 --
Loss on sale of assets of Gold Lance
(Note 19) 4,200,000 --
Balfour purchase price settlement
(Note 19) 1,100,000 --
Other 3,218,282 1,926,159
----------- -----------
$16,934,445 $15,078,569
=========== ===========
Income Taxes
------------
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases. Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. The effect on deferred tax
assets and liabilities of a change in tax rates is recognized in income in the
period that includes the enactment date.
Use of Estimates
----------------
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting periods. Actual results could differ from those estimates.
Long-Term Intangible Assets
---------------------------
The excess of purchase price over the values assigned to net assets
acquired is being amortized using the straight-line method over periods ranging
from 30 to 40 years. The Company continually evaluates whether events and
circumstances have occurred that indicate that the remaining estimated useful
life of goodwill may warrant revision or that the
<PAGE>
remaining balance of goodwill may not be recoverable. When factors indicate that
goodwill should be evaluated for possible impairment, the Company uses an
estimate of the related business segments' undiscounted cash flows over the
remaining life of the goodwill in measuring whether the goodwill is recoverable.
Goodwill included in other assets in the accompanying consolidated balance
sheets is approximately $1,148,000 and $3,885,000 at February 23, 1997 and
February 25, 1996, respectively. Included in operating expenses in the
accompanying consolidated statements of operations is amortization of
approximately $144,000, $183,000 and $183,000 in fiscal 1997, 1996 and 1995,
respectively. Goodwill associated with Balfour was realized as part of the sale
of certain assets and liabilities of Balfour as described in Note 19. Goodwill
remaining at February 23, 1997, relates to Gold Lance, the assets of which were
sold subsequent to year-end in the transaction described in Note 19.
Minority Interest
-----------------
Minority interest is determined based on the percent ownership of the
equity by other investors of the related consolidated subsidiary.
Subsidiary Sale of Stock
------------------------
At the time a subsidiary sells its stock to unrelated parties at a price
in excess of its book value, the Company's net investment in that subsidiary
increases. The Company records the increase as a gain in the consolidated
statement of operations.
Supplemental Disclosures of Noncash Investing and Financing Activities
----------------------------------------------------------------------
As part of the sale of certain assets and liabilities of the Company's
Balfour subsidiary on December 16, 1996, Commemorative Brands, Inc. took
possession of approximately $4.9 million of consigned gold and assumed the
corresponding gold loan liability.
During fiscal 1995, the Company had fixed asset additions of
approximately $0.7 million funded by increases in capital lease obligations.
On November 23, 1994, holders of approximately 94% of the Company's
Exchangeable Preferred Stock exchanged their shares for shares of Little
Switzerland, Inc. common stock held by the Company and shares of the Company's
Convertible Preferred Stock
(See Note 6).
Financial Instruments
---------------------
Cash and Cash Equivalents
The carrying amount of cash and cash equivalents approximates fair value
because of the short-term maturity of the instruments.
<PAGE>
Restricted Cash
The Company's restricted cash is invested in short-term, highly-liquid
investments. The carrying amount approximates fair value because of the
short-term maturity of these investments.
Investment in Little Switzerland, Inc.
The Company owned 318,962 shares of Little Switzerland, Inc. Common
Stock as of February 23, 1997 and February 25, 1996. Of these shares, 152,217
are held by a trustee for the benefit of the holders of the Company's
Exchangeable Preferred Stock and are considered held-to-maturity. The remaining
shares owned by the Company are considered available-for-sale. The Company
believes that the carrying value approximates the fair value of these securities
based on the publicly traded market price of the Little Switzerland, Inc. Common
Stock.
Investment in Solomon Brothers, Limited
The fair value of the Company's investment in Solomon Brothers, Limited
is considered to be no less than its carrying value as of February 23, 1997, and
February 25, 1996, based on the valuation method agreed upon for the redemption
of shares as discussed in Note 8 and the estimated fair value of the underlying
net assets.
Long-Term Subordinated Debt and Exchangeable Preferred Stock
The Company's management believes that estimating the fair value of the
Company's long-term subordinated debt and Exchangeable Preferred Stock as of
February 23, 1997, and February 25, 1996, is not practicable due to the lack of
an established market or comparable securities.
Long-Term Secured Debt
The fair value of the Company's various long-term secured debt, which
are secured by various assets, are considered to approximate their carrying
value as of February 23, 1997 and February 25, 1996. This conclusion is based on
the relationship of carrying value to the value of the related security and the
relatively short-term maturities of the related debt.
<PAGE>
(3) LONG-TERM DEBT AND CREDIT ARRANGEMENTS
--------------------------------------
Long-term debt at February 23, 1997, and February 25, 1996, consists of
the following:
1997 1996
------------ ------------
Senior Subordinated Notes due 1998
with interest payable semiannually at
13%, including unamortized premium of
$2.3 million and $4.0 million in 1997
and 1996, respectively. The first four
interest payments were made with
issuance of additional notes of
approximately $15.3 million. $ 71,155,227 $ 72,843,528
Senior Secured Notes due 1997 with
interest payable monthly at 11.5%.
Payments required prior to maturity for
proceeds received by the Company related
to the Company's investment in Solomon
Brothers, Limited and/or settlement of
the Zale bankruptcy claim and certain
other limited conditions. 13,254,000 13,254,000
Senior Subordinated Notes due 1998
with interest payable semiannually at
13%, net of unamortized discount of
$25,173 and $37,248 in 1997 and 1996,
respectively. 6,934,827 6,922,752
Lease obligation for office furniture
and equipment payable in monthly
installments with interest at 9.67% -- 399,080
------------ ------------
$ 91,344,054 $ 93,419,360
Less-Current portion 13,254,000 244,928
------------ ------------
$ 78,090,054 $ 93,174,432
============ ============
On May 30, 1997 the Company completed an amendment (the "Amended
Agreement") to its July 3, 1996 credit agreement (the "Agreement") with Foothill
Capital Corporation ("Foothill") to reflect changes which have taken place in
the Company. The Amended Agreement provides senior secured financing consisting
of a revolving credit facility and a letter of credit in support of a Gold
Consignment Facility provided by Fleet Precious Metals, Inc. ("Fleet"). The
aggregate amount of the combined facilities, which may be outstanding at any
date, is $55 million.
<PAGE>
The revolving credit facility has a maximum amount of $40 million from
February through October and $45 million from November through January. The
letter of credit has a maximum amount of $20 million from February through
October and $15 million from November through January. The Agreement is for a
period of two years and provides Foothill with an option to renew for three
additional years. The loans bear interest at a rate per annum equal to the
greater of (a) 2% above the reference rate announced by an identified group of
major banks selected by Foothill or (b) 8%. The Amended Agreement contains
standard covenants for facilities of this type including financial covenants
relating to interest coverage ratio, minimum net worth, debt to EBITDA ratio and
limitations on dividends, distributions and capital expenditures, as defined.
Advances under the credit line are based on eligible accounts receivables and
inventory. Foothill has first priority security interest in receivables,
inventory and substantially all real estate and fixed assets owned by the
Company and its domestic subsidiaries subject to Fleet's first position as gold
consignor, supported by the letter of credit.
The Company had no outstanding balance under its revolving credit
facility at February 23, 1997 and $10.1 million available for borrowing under
the facility. The Company had approximately 33,000 ounces outstanding under its
gold agreement and approximately 20,000 additional ounces available under this
agreement at February 23, 1997 (See Note 2). The weighted average interest rate
on overall borrowings under the credit facility was approximately 11.4% for
fiscal 1997 compared to 11.7% for fiscal 1996.
During fiscal 1997, the Company obtained modifications to the minimum
net worth covenant in the indentures governing the 11 1/2% Senior Secured Notes
and the 13% Senior Subordinated Notes from a majority of the bondholders of each
of the securities. During fiscal 1998, the Company obtained modifications to
these two indentures from a majority of the bondholders of each of the
securities to allow the Company to repurchase the outstanding shares of its Thai
subsidiary.
A subsidiary of the Company had available credit facilities with two
banks in Thailand to provide aggregate commercial financing of up to
approximately $11.6 million. The subsidiary had no balance outstanding under
these lines at February 23, 1997 and February 25, 1996, respectively. This
subsidiary also has an agreement with a gold supplier to provide secured gold
consignment availability of up to approximately 4,800 troy ounces. This
agreement runs through December 4, 1997, and is secured by a standby letter of
credit for $1.9 million under one of the subsidiary's credit facilities. There
were approximately 2,800 and 3,100 ounces on consignment under this gold
agreement at February 23, 1997 and February 25, 1996, respectively (See Note 2).
Subsequent to year-end, this subsidiary's credit facility was reduced to
approximately $8.9 million from one bank.
On May 14, 1993, the Company issued $30 million of Senior Secured Notes
due September 15, 1997. Following receipt, by the Company, of cash payments from
the Company's investment in Solomon Brothers, Limited and/or cash or other
payments from the Zale Companies with respect to the Zale bankruptcy claim, net
of certain expenses, the Company is required to redeem an amount of the notes
equal to the amount of such net proceeds at a redemption price equal to 100% of
the principal amount thereof plus accrued interest, if any. During fiscal 1997
and fiscal 1996, the Company redeemed $0 and $0.7 million, respectively, of
Senior Secured Notes with such proceeds.
<PAGE>
In the event that the Company's consolidated stockholders' deficit
exceeds a defined maximum for two consecutive quarters, $7,500,000 as of
February 23, 1997, the Company is required to make an offer to redeem 7.5% of
the outstanding Senior Subordinated Notes due 1998 semiannually and to continue
to do so as long as the condition persists.
On May 14, 1993, the Company issued approximately 2,533,000 shares of
Exchangeable Preferred Stock, the outstanding shares of which will be redeemed
by the Company on December 31, 2000, for $14.59 per share plus accrued and
unpaid dividends payable in cash or shares of Little Switzerland, Inc. common
stock. As of February 23, 1997 there are 152,217 shares outstanding. No
dividends will be paid until after the second anniversary of the date of
issuance of the stock. Thereafter, holders will be entitled to receive
cumulative cash dividends at a rate of 6% per annum based on $14.59 per share.
Dividends will be payable semiannually on each six-month and twelve-month
anniversary of the issuance date. During fiscal 1997 and fiscal 1996,
approximately $67,000 of dividends were paid. At any time after March 1, 1994,
each share of Exchangeable Preferred Stock may be exchanged by the holder for a
share of Little Switzerland, Inc. common stock held by the Company or redeemed
by the Company, for cash, at a declining premium through 1998 (See Note 6).
Cumulative unpaid dividends amounted to approximately $105, 000 and
approximately $39,000 at February 23, 1997 and February 25, 1996, respectively.
For the years ended February 23, 1997, February 25, 1996 and February 26, 1995,
accretion of dividends and discount on Exchangeable Preferred Stock amounted to
approximately $121,000, $121,000 and $1,456,000, respectively.
Aggregate maturities of long-term debt and Exchangeable Preferred Stock
for each of the next five years are approximately $13,254,000, $75,785,000, $0,
$2,221,000 and $0, respectively.
(4) INVENTORY CHARGE
----------------
During fiscal 1997, the Company implemented a program to recycle
inventory to recover gold and diamonds to meet immediate production
requirements. These actions were taken when access to cash and gold under the
Company's working capital facility and gold leasing agreement became constrained
near the end of the second quarter and on a more pronounced basis in the third
quarter, and also because of the Company's commitment to meet its customers'
delivery requirements. The Company also sold, for approximately $2 million,
inventory with an original cost basis of approximately $5 million. The Company
charged second quarter operations approximately $35.5 million related to these
actions.
(5) RESTRUCTURING
-------------
In fiscal 1997, the Company recorded an approximately $7.2 million
charge consisting of costs associated with the restructuring of the Company's
fine jewelry operations. The Company consolidated its distribution facilities
and significantly changed its organizational structure including reducing the
number of senior managers. The new structure is based on the business unit
approach, organized around customer teams which will be directly
<PAGE>
responsible for meeting customer needs. The components of the charge consisted
of approximately $5.3 million of severance related costs, $0.8 million in
facility closure costs and $1.1 million of other related costs (See Note 2).
(6) EXCHANGE OF STOCK
-----------------
On November 23, 1994, holders of approximately 94% of the Company's
Exchangeable Preferred Stock exchanged their shares for shares of Little
Switzerland, Inc. Common Stock held by the Company on a share-for-share basis.
Such an exchange was provided for by the terms of the Exchangeable Preferred
Stock. In addition, the Company issued to each participant one share of new
Convertible Preferred Stock with each share of Little Switzerland, Inc. Common
Stock.
Since the carrying value of the Company's investment in Little
Switzerland, Inc. was substantially less than the recorded value of the
Exchangeable Preferred Stock, the transaction resulted in a nonrecurring,
noncash gain in fiscal 1995 of approximately $17 million, net of the estimated
fair value of the Convertible Preferred Stock issued.
Convertible Preferred Stock
---------------------------
Each share of Convertible Preferred Stock is initially convertible, at
the option of the holder, into two shares of Class A Common Stock, subject to
adjustment in certain circumstances. In the event the market price of a share of
Class A Common Stock equals or exceeds $3.25 for 30 consecutive trading days,
the Company may require the holders of Convertible Preferred Stock to convert
such stock into shares of Class A Common Stock at the then-applicable conversion
rate. Beginning on November 23, 1995, the Company may redeem, in whole or in
part, shares of Convertible Preferred Stock at a price equal to 104% of the
liquidation value and thereafter at prices declining annually to 100% of the
liquidation value on or after November 23, 1997. The Convertible Preferred Stock
has a liquidation value of $6.50 per share and accrues cumulative dividends at
the rate of 6% of the liquidation value per annum. Dividends are payable in cash
or in additional shares of Convertible Preferred Stock as defined by the
agreement. During fiscal 1997 and fiscal 1996, dividends of approximately
$782,000 and $713,000, respectively, were paid with the issuance of
approximately 120,000 and 110,000, respectively, of new shares of Convertible
Preferred Stock. At February 23, 1997, and February 25, 1996, cumulative unpaid
dividends amounted to approximately $336,000 and $438,000, respectively.
The Convertible Preferred Stock is subordinate with respect to
liquidation preference and with respect to dividend payments to the outstanding
shares of Exchangeable Preferred Stock but senior to the Class A Common Stock
and the Class B Common Stock. Holders of shares of Convertible Preferred Stock
are entitled to vote on all matters on which the holders of Class A Common Stock
are entitled to vote. Each share of Convertible Preferred Stock entitles the
holder to the number of votes per share equal to the number of shares of Class A
Common Stock into which each share of Convertible Preferred Stock is then
convertible.
<PAGE>
(7) INVESTMENT IN AFFILIATES
------------------------
The sale of approximately 68% of Little Switzerland, Inc.'s common stock
by a subsidiary of the Company resulted in the deconsolidation of Little
Switzerland, Inc. in the fiscal 1992 consolidated financial statements of the
Company.
As a result of the exchange discussed in Note 6, the Company's
investment in Little Switzerland, Inc., as of November 23, 1994, was reduced to
318,962 shares or approximately 4%. Due to the decrease in ownership in fiscal
1995, the Company changed its method of accounting for this investment from the
equity method to the cost method. The continuing investment in Little
Switzerland, Inc. of approximately $1,651,000 is included in other assets in the
accompanying consolidated balance sheets as of February 23, 1997 and February
25, 1996.
A subsidiary of the Company has investments in two companies totaling
approximately $1.8 million which are included in other assets in the
accompanying consolidated balance sheet as of February 23, 1997. Both
investments are accounted for under the equity method of accounting.
(8) INVESTMENT IN SOLOMON BROTHERS, LIMITED
---------------------------------------
On May 27, 1988, the Company purchased 410,000 shares of nonvoting,
redeemable, cumulative, Participating Preferred Class B Stock of Solomon
Brothers, Limited ("Solomon Brothers"), a Bahamian company, for a total purchase
price of $17,220,020.
The Company is entitled, as holder, to a fixed, cumulative, preferred
dividend equal to 1% of the purchase price annually. The Company is also
entitled to a cumulative, ordinary dividend equal to the change in net book
value per ordinary share of Solomon Brothers, calculated as if the Company was a
holder of ordinary shares, less the preferred dividend and to a fee determined
as a percent of cumulative, accrued, unpaid ordinary dividends. On May 31, 1993,
the Company redeemed 83,000 of the Company's shares for approximately $3.5
million. On March 29, 1994, March 20, 1995, April 4, 1996 and March 3, 1997, as
required by the covenants of its Senior Secured Notes, the Company gave written
notice to Solomon Brothers of the Company's intention to redeem 70,000, 55,000,
55,000 and 55,000 additional shares, respectively. The Company currently expects
to give notice of intention to redeem additional shares annually until all
outstanding shares have been noticed. Solomon Brothers informed the Company that
it would not be able to redeem the March, 1994, March, 1995, April, 1996 and
March, 1997, share requests when due, as a result of constraints imposed by its
banking facilities. The Company believes its investment is realizable, but it is
unable to estimate the timing of future redemption payments. The Company is
monitoring Solomon Brothers' operations and financial position and if it
determines in the future that carrying value is no longer reflective of fair
value, adjustments will be made at that time.
This type of investment, by its terms, and by the nature of Solomon
Brothers, a Bahamian closely held company, is not a highly liquid investment.
The intention of the investment was for the Company to be a long term
beneficiary of Solomon Brothers' growth and success. If the investment were sold
in a distress situation rather than redeemed through
<PAGE>
the cash flows or liquidated through a winding up of Solomon Brothers, the price
which the Company may receive in such a sale might be substantially less than
carrying value.
Presented below is summarized financial information for Solomon Brothers
as of and for the years ended October 25, 1996, October 27, 1995 and October 28,
1994, prepared on a basis substantially in accordance with generally accepted
accounting principles (GAAP) (Bahamian Dollars, $000s):
1996 1995 1994
-------- -------- --------
Working capital $ 15,741 $ 14,363 $ 15,094
Total assets 64,324 64,165 73,378
Total shareholders' equity 24,605 23,955 27,828
Sales $ 74,446 $ 69,952 $ 63,657
Net income (loss) 506 (3,874) 54
Cash flows from operating activities 2,445 3,499 (2,346)
Solomon Brothers' prior years' information has been restated for
consistency purposes for operations which were discontinued.
(9) INCOME TAXES
------------
The domestic and foreign components of income (loss) before provision
for income taxes for the years ended February 23, 1997, February 25, 1996 and
February 26, 1995 are as follows:
1997 1996 1995
------------ ------------ ------------
Domestic $(62,818,733) $ (2,859,405) $ (1,014,997)
Foreign 801,460 1,157,158 3,345,079
------------ ------------ ------------
$(62,017,273) $ (1,702,247) $ 2,330,082
============ ============ ============
<PAGE>
The components of the provision for income taxes for the years ended
February 23, 1997, February 25, 1996 and February 26, 1995 are as follows:
1997 1996 1995
---------- ---------- ----------
Current--
Federal $ -- $ -- $ --
State 240,000 -- 700,000
Foreign 20,762 163,867 1,058,164
---------- ---------- ----------
Total provision $ 260,762 $ 163,867 $1,758,164
========== ========== ==========
The Company's effective tax rate differs from the federal statutory rate
of 35% in fiscal 1997, 1996 and 1995 due to the following:
<TABLE>
<CAPTION>
1997 1996 1995
------------ ------------ ------------
<S> <C> <C> <C>
Computed tax provision
(benefit) at statutory rate $(21,706,045) $ (595,786) $ 815,529
Increases (reductions)
resulting from--
Repatriation of foreign earnings
and difference between
U.S. and foreign tax rates 167,999 221,023 1,061,886
State taxes 240,000 -- 700,000
Tax basis differences related to
Little Switzerland, Inc.
common stock exchange -- -- (2,110,946)
Items not deductible for
income tax purposes 1,053,576 92,488 92,488
Deferral of net
operating losses 20,505,232 446,142 1,199,207
------------ ------------ ------------
$ 260,762 $ 163,867 $ 1,758,164
============ ============ ============
</TABLE>
<PAGE>
DEFERRED TAX ASSETS (in 000's) 1997 1996
-------- --------
Restructuring and recapitalization cost accruals $ 2,952 $ 2,287
Accounts receivable reserves 3,782 2,617
Accrual for loss on assets held for sale or disposal -- 561
Inventory reserves 1,831 1,815
Other 534 1,945
Net operating loss carryforwards 39,338 19,666
-------- --------
Total gross deferred tax assets 48,437 28,891
Less--valuation allowance (41,022) (17,885)
-------- --------
Net deferred tax assets $ 7,415 $ 11,006
-------- --------
DEFERRED TAX LIABILITIES (in 000's) 1997 1996
-------- --------
Property, plant and equipment, principally due to
differences in depreciation $ 1,773 $ 5,629
Investments in affiliated companies, principally
due to undistributed income 5,132 4,971
Other 510 406
-------- --------
Total deferred tax liabilities 7,415 11,006
-------- --------
Net deferred tax asset (liability) $ -- $ --
-------- --------
The valuation allowance relates to uncertainty surrounding the
realizability of the deferred tax assets in excess of the deferred tax
liabilities, principally the net operating loss carryforwards.
For tax reporting purposes, the Company has a U.S. net operating loss
carryforward of approximately $98 million, subject to Internal Revenue Service
review and approval. Utilization of the net operating loss carryforward is
contingent on the Company's ability to generate income in future years. The net
operating loss carryforwards will expire from 2009 to 2012 if not utilized.
(10) LOSS ON ASSETS HELD FOR SALE OR DISPOSAL
----------------------------------------
In fiscal 1993, the Company's management decided to make changes with
respect to certain of the operations of its Balfour subsidiary. As a result of
this decision, the Company recognized a pretax charge of $14.5 million in the
fourth quarter of fiscal 1993 to reserve for the losses associated with the
disposal of certain inventory and fixed assets, including property, plant, and
equipment of approximately $12.9 million and intangible assets of approximately
$1.6 million, no longer considered necessary to its modified business. At
February 25, 1996, the disposals had been substantially completed and the
remaining reserve of approximately $1.4 million, represented the expected loss
associated with the disposition of a plant site being prepared for sale to the
Town of Attleboro. During fiscal 1997, the sale was completed with no material
impact to results of operation. No reserve remains at February 23, 1997.
<PAGE>
(11) CONCENTRATION OF CREDIT RISK
----------------------------
A significant portion of the Company's business activity is with large
jewelry retailers and department store chains, many of which are not only
subject to the risks associated with economic impacts on retailers of
discretionary, consumer goods but also are companies with high debt-to-equity
ratios.
The Company had net sales to its largest customer in fiscal 1997 of
approximately $19.4 million or 9% of consolidated net sales in fiscal 1997
compared to $16.0 million or 6% of consolidated net sales in fiscal 1996 and
$12.5 million or 4% of total consolidated net sales in fiscal 1995. Net sales to
this customer were approximately 13% of consolidated net sales excluding fiscal
1997 Balfour sales.
Net sales to the Company's second largest customer were approximately
$14.5 million or 7% of consolidated net sales in fiscal 1997 compared to $22
million or 9% of consolidated net sales in fiscal 1996 and $29 million or 10% of
consolidated net sales in fiscal 1995. Net sales to this customer were 10% of
consolidated net sales excluding fiscal 1997 Balfour sales.
The loss of either or both of these customers or a substantial reduction
in the amount of sales to either or both of these customers would have a
material adverse effect on the Company.
(12) NONRECURRING EVENTS
-------------------
Based on the success of its operational restructuring during fiscal
1993, the Company concluded that the Feature facility in New York would not be
required as a long-term manufacturing site. As a result of its decision to
dispose of the facility, the Company adjusted the carrying value of the Feature
facility by approximately $5 million, which was recorded as a restructuring
charge during the fourth quarter of fiscal 1993.
On November 14, 1996, the Company sold this facility for a gross sale
price of $6.2 million, of which $5.3 million was paid at closing. The remaining
$0.9 million was paid on January 15, 1997. In the interest of generating cash on
the sale of the property as quickly as possible, management accepted an offer
for less than the net book value of the property. As a result, the Company
sustained a loss of approximately $0.8 million on the sale which is reflected in
the accompanying fiscal 1997 consolidated statement of operations.
<PAGE>
(13) CAPITALIZATION
--------------
Each share of Class B Common Stock entitles the holder to ten votes,
each share of Class A Common Stock entitles the holder to one vote, and each
share of Convertible Preferred Stock entitles the holder to the number of votes
per share equal to the number of shares of Class A Common Stock into which each
share of Convertible Preferred Stock is then convertible, on matters submitted
to stockholders. The Class B Common Stock is convertible at any time, at the
option of the holder, into Class A Common Stock on a share-for-share basis. The
Convertible Preferred Stock is initially convertible, at the option of the
holder, into two shares of Class A Common Stock, subject to adjustment in
certain circumstances. As part of the May, 1993, recapitalization, the Company
issued to its financial advisors warrants to purchase 125,000 shares of Class A
Common Stock, with an exercise price of $2.685 per share and a final maturity of
five years from the date of issuance of the warrants.
The Company's ability to pay cash dividends on common stock is limited
by its financing and other outstanding indebtedness. As a result of these
restrictions, the Company currently may not pay cash dividends on its common
stock.
(14) COMMITMENTS AND CONTINGENCIES
-----------------------------
The Company leases a portion of its Chelsea, Massachusetts, facility
comprised of approximately 39,000 square feet of combined manufacturing and
administrative space from Carey Realty Trust, a Massachusetts business trust
(the "Trust"), which is wholly owned by C. William Carey, the former Chairman
and President and a major stockholder of the Company. The lease which was
revised on March 1, 1996, expires on August 31, 1998, and provides the Company
with three ten-year options to renew. The current lease provides for an annual
rental payment of approximately $350,000. The Company obtained comparative
information from a third party when negotiating the revised lease and believes
that these lease arrangements are on terms no less favorable to the Company than
could be obtained from unaffiliated third parties.
Certain other Company facilities and equipment are leased under
agreements expiring at various dates through 2009. The Company's commitments
under the noncancelable portion of all operating leases for the next five years
and in total thereafter at February 23, 1997, are approximately as follows:
<PAGE>
------------------------------
Year Total Commitment
------------------------------
1998 $745,000
1999 565,000
2000 356,000
2001 222,000
2002 173,000
Thereafter 912,000
------------------------------
Lease and rental expense included in the accompanying consolidated
statements of operations amounted to approximately $1.8 million, $1.9 million
and $1.4 million for the years ended February 23, 1997, February 25, 1996 and
February 26, 1995, respectively.
The Company is not party to any pending legal proceedings, other
than ordinary routine litigation incidental to the business. In management's
opinion, adverse decisions on those legal proceedings, in the aggregate, would
not have a materially adverse impact on the Company's consolidated results of
operations or financial position.
(15) Stock Option Plan
-----------------
The Company has three active stock option plans.
An aggregate of 1,500,000 shares of Class A Common Stock were registered
for issuance under the 1985 Amended and Restated Stock Option Plan (the "1985
Plan"). Both incentive stock options and nonstatutory stock options were granted
under the 1985 Plan. All options outstanding were issued at fair market value at
the date of grant. In general, the grants made under this plan had a vesting
schedule of 20% per year for five years and had a term of ten years. On
September 19, 1995, options under the 1985 Plan were repriced at $0.8125, the
market price on that date. Granting of options under this plan expired in April,
1995.
An aggregate of 2,000,000 shares of Class A Common Stock were registered
for issuance under the 1995 Stock Option and Incentive Plan (together with the
1985 Plan, the "Employee Plans"). Stock options, stock appreciation rights,
restricted stock, performance shares, unrestricted stock and dividend equivalent
rights may be granted under this plan. The option grants which have been made
under this plan have a vesting schedule of 15% when granted and an additional
17% per year for five years and have a term of ten years. On September 19, 1995,
the Company made restricted stock awards of 50,000 shares of Class A Common
Stock which vest on the same schedule as options granted under the plan.
The Company also has a stock plan for non-employee directors, the 1994
Non-Employee Directors' Non-qualified Stock Option Plan (the Directors' Plan).
Each Director received a one-time grant of 20,000 shares of common stock on
October 1, 1994.
<PAGE>
New directors elected after that date receive 20,000 shares upon their election.
Each non-employee director who is a director on the last day of the Company's
fiscal year which is more than four full years after the date of their initial
grant date will be granted an option to purchase 4,000 additional shares of
Class A Common Stock. All such options are immediately exercisable at the fair
market value of Class A Common Stock on the date of issuance. The Company has
set aside 200,000 shares of stock for issuance under the Directors' Plan.
The Company has also granted options not under any plan to consultants
and various individuals to purchase up to 2,126,545 of Class A Common Stock at
prices ranging from $0.81 to $6.75 per share. On September 19, 1995, non-plan
options granted to employees of the Company were repriced at $0.8125, the market
price on that date.
Pro Forma Stock-Based Compensation Expense
In October 1995, the Financial Accounting Standards Board issued SFAS
No. 123, Accounting for Stock-Based Compensation, which sets forth a
fair-valued-based method of recognizing stock-based compensation expense. As
permitted by SFAS No. 123, the Company has elected to continue to apply APB No.
25 to account for its stock-based compensation plans. Had compensation cost for
awards granted in fiscal 1997 and fiscal 1996 under the Company's stock-based
compensation plans been determined based on the fair value at the grant dates
consistent with the method set forth under SFAS No. 123, the effect on the
Company's net loss and loss per common share would have been as follows:
1997 1996
Net Loss
As reported $(62,278,035) $ (1,866,114)
Pro forma $(62,517,467) $ (2,268,844)
Loss per common share
As reported $ (2.47) $ (0.12)
Pro forma $ (2.48) $ (0.14)
Compensation expense for options is reflected over the vesting period;
therefore, future compensation expense may be greater as additional options are
granted.
The fair value of each option grant was estimated on the grant date
using the Black-Scholes option pricing model with the following weighted average
assumptions:
<PAGE>
1997 1996
Volatility 56% 56%
Risk-free interest rate 6.2% 5.1%
Expected life of options 5.8 years 7.0 years
The Black-Scholes option pricing model was developed for use in estimating the
fair value of traded options, which have no vesting restrictions and are fully
transferable. In addition, option pricing models require the input of highly
subjective assumptions, including expected stock price volatility. Because the
Company's stock options have characteristics significantly different from those
of traded options and because changes in the subjective input assumptions can
materially affect the fair value estimate, in management's opinion, the existing
models do not necessarily provide a reliable single measure of the fair value of
its stock options.
Stock Option Activity
A summary of the Company's stock option activity is as follows:
<TABLE>
<CAPTION>
1997 1996 1995
-----------------------------------------------------------------------------
Number of Weighted Number of Weighted Number of Weighted
Shares Average Shares Average Shares Average
Exercise Exercise Exercise
Price Price Price
<S> <C> <C> <C> <C> <C> <C> <C>
Options outstanding,
beginning of year 4,673,700 $ 0.86 2,494,150 $ 2.80 2,348,400 $ 1.75-8.00
Granted 566,545 0.65 4,543,700 0.81 658,500 1.88-8.00
Exercised -- -- -- -- -- --
Forfeited 2,162,350 0.81 2,315,700 2.83 482,750 2.38-8.00
Expired 20,000 4.94 48,450 3.00 30,000 6.25
--------- ---- --------- ---- --------- ---------
Options outstanding
end of year 3,057,895 0.83 4,673,700 0.86 2,494,150 1.75-6.88
========= ==== ========= ==== ========= =========
Options exercisable 2,516,795 0.80 1,919,900 0.89 1,080,800 1.75-6.88
========= ==== ========= ==== ========= =========
Options available for
grant 1,437,500 470,000 651,400
========= ========= =======
Weighted average
fair value per share
of options granted
during year $ 0.38 $ 0.38
======== =========
- ---------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
A summary of the status of the Company's stock options at February 23, 1997 is
as follows:
Range of Number of Weighted Weighted
Exercise Prices Shares Average Average
Remaining Exercise
Contractual Price
Life
- --------------------------------------------------------------------------------
$0.63-2.06 3,057,895 6.0 years $0.83
- --------------------------------------------------------------------------------
(16) EMPLOYEE STOCK PURCHASE PLAN
----------------------------
On January 25, 1988, the Board of Directors adopted the 1988 Employee
Stock Purchase Plan (the "Stock Purchase Plan") for 500,000 shares of the Class
A Common Stock. Under the Stock Purchase Plan, each eligible participating
employee is deemed to have been granted an option to purchase shares of the
Company's Class A Common Stock on a semiannual basis at a price equal to 90% of
the market value on the last day of the period. During the year ended February
23, 1997, 12,991 shares were issued at $0.25 per share. During the year ended
February 25, 1996, 24,146 shares were issued at $0.50 per share and 21,778
shares were issued at $0.50 per share. During the year ended February 26, 1995,
5,855 shares were issued at $2.50 per share and 17,260 shares were issued at
$0.75 per share. At February 23, 1997, there were 247,622 shares reserved for
issuance under the Stock Purchase Plan.
(17) EMPLOYEE BENEFIT PLANS
----------------------
(a) Postemployment Medical Benefits
-------------------------------
The Company's Balfour subsidiary provided certain health care and life
insurance benefits for employees who retired prior to December 31, 1990. The
Company adopted SFAS No. 106, Employers' Accounting for Postretirement Benefits
Other Than Pensions, in fiscal 1994 and was recognizing the actuarial present
value of the accumulated postretirement benefit obligation (APBO) of
approximately $6.1 million on the delayed recognition method over a period of 20
years. As part of the sale of certain assets and liabilities of Balfour on
December 16, 1996, the Company was relieved of its obligation to fund such post
employment medical benefits. (See Note 19)
Included in the February 25, 1996 consolidated balance sheet is an
accrual of approximately $0.6 million associated with this plan. The
consolidated statements of operations for fiscal 1997, 1996 and 1995 include
approximately $599,000, $767,000 and $797,000, respectively, of net periodic
post retirement benefit cost.
<PAGE>
(18) ESSEX PRIVATIZATION
-------------------
During fiscal 1997, the Company began the process of purchasing the
approximately 1.6 million outstanding shares in its majority owned Thai
subsidiary. The Company estimates that the cost to repurchase the shares will be
approximately $3 million and that the process should be completed during the
second quarter of fiscal 1998.
(19) SALES OF ASSETS
---------------
L.G. Balfour Company, Inc.
On December 16, 1996, the Company sold certain assets and liabilities of its
Balfour subsidiary constituting substantially all of the operations of Balfour
to Commemorative Brands, Inc. (CBI) a new company formed by Castle Harlan
Partners II, L.P. (the "Balfour Sale").
In October 1996, the Federal Trade Commission (FTC), which had been reviewing
the transaction since May 1996, gave preliminary approval to a modified
agreement between the Company and CBI. Final FTC approval was received on
December 26, 1996.
At closing, on December 16, 1996, the Company received cash equal to the
purchase price of $44 million, plus $2.7 million in working capital adjustment
from January 28, 1996 to the date of closing, less $14 million which was placed
in escrow pending final FTC approval. Additionally, CBI assumed a liability of
$4.9 million representing the value of gold on hand as of the date of closing.
All of the $4.9 million in gold value acquired by CBI was on consignment at the
closing date and was neither reflected as an asset or a liability on the
Company's consolidated balance sheet. On December 31, 1996, the Company received
the $14 million in escrowed funds. Approximately $3.7 million of the proceeds
were used to pay transaction costs. Approximately $1.5 million in liabilities
not assumed in the sale were paid from operations. On April 25, 1997, a
settlement was reached in which the Company paid CBI $1.1 million to finalize
the working capital adjustment and resolve certain other items and such amount
is included in accrued expenses in the accompanying consolidated balance sheet
as of February 23, 1997 (See Note 2). The Company recorded a gain in the fourth
quarter of approximately $10.5 million on the Balfour Sale which is included in
the accompanying consolidated statement of operations for the year ended
February 23, 1997.
The Balfour Sale did not include any real property. The prime component of real
property is a facility in Attleboro, Massachusetts which had a net book value of
approximately $2.3 million and a fair value of approximately $1.4 million. A
$1.1 million impairment of the carrying value of the facility has been
recognized in association with this transaction and is included as a component
of the gain recognized on the sale and reduced the carrying value of the
facility included in property, plant and equipment in the accompanying
consolidated balance sheet as of February 23, 1997. The Company is leasing the
facility to CBI on a temporary basis for approximately eight months. The Company
has begun searching for a buyer. It is possible that the Company will be
required to hold the facility for an unspecified amount of time after CBI
vacates the facility before being able to complete a sale, therefore, the
Company estimated a one year period to sell the facility and included an
estimate of the carrying costs of approximately $0.2 million in the $1.1 million
impairment recorded.
<PAGE>
The Balfour Sale did not include the assumption of a lease facility in
North Attleboro, Massachusetts. In fiscal 1998 the lease was amended, reducing
the amount of space and the period of time for which the Company is obligated.
The Company's future lease obligation for this facility is for approximately
eighteen months at an annual cost of approximately $0.2 million.
The Company is subleasing the remaining space to CBI on a temporary basis,
however, it is possible that the Company will be required to hold the property
for a period of time after CBI vacates the facility before being able to find
replacement tenants, or that the Company may be required to lease the property
at lower rent payments than the Company is currently obligated to pay. The
Company has assumed that the facility would remain vacant after CBI vacates for
the remainder of the lease term and accrued approximately $0.4 million which is
included in accrued expenses in the accompanying consolidated balance sheet as
of February 23, 1997.
The Balfour Sale included the assumption by CBI of a liability related
to postretirement medical benefit obligations, including an unamortized
accumulated postretirement medical benefit obligation of approximately $5.2
million. This liability did not appear on the Company's consolidated balance
sheet in the past, as the Company had been recognizing it on the delayed
recognition method allowed by FASB No. 106, Employers' Accounting for
Postretirement Benefits Other Than Pensions (See Note 17).
The accompanying consolidated balance sheet as of February 23, 1997
includes assets of Balfour consisting primarily of the real estate and their
associated liabilities, as well as, the accrual of the final working capital
settlement discussed above. Other remaining assets and liabilities are not
material to the financial position of the Company as of February 23, 1997.
The accompanying consolidated statements of operations for the years
ended February 23, 1997, February 25, 1996 and February 26, 1995 include the
following amounts associated with Balfour.
1997(1) 1996 1995
Net sales $ 60,232,527 $ 71,300,472 $ 77,490,988
Cost of sales 29,350,036 35,598,485 35,405,942
------------ ------------ ------------
Gross profit 30,882,491 35,701,987 42,085,046
Selling, general and
administrative expenses 31,019,538 33,496,669 51,169,673
------------ ------------ ------------
Income (loss) from operations $ (137,047) $ 2,205,318 $ (9,084,627)
============ ============ ============
(1) Represents the period from February 26, 1996 to December 16, 1996.
<PAGE>
Gold Lance, Inc.
On April 18, 1997, the Company sold certain assets of its Gold Lance
subsidiary to Jostens, Inc. ("the Gold Lance Sale"). Prior to or at closing, on
April 18, 1997, the Company received cash equal to the purchase price of
approximately $10.8 million, less $2.5 million, the payment of which is
contingent on the operating performance of Gold Lance during a transition period
between April 18, 1997 and July 31, 1997 ("the Transition Period"). The Company
recorded a loss in the fourth quarter of $5.0 million on the Gold Lance Sale
which is included in the accompanying consolidated statement of operations for
the year ended February 23, 1997.
The Gold Lance Sale did not include any real property. The prime
component of real property is a facility in Houston, Texas which had a net book
value of approximately $1.5 million and a fair value of approximately $0.7
million. A $0.8 million impairment of the carrying value of the facility has
been recognized in association with this sale and is included as a component of
the $5.0 million loss recognized on the sale. The carrying value of the facility
included in property, plant and equipment in the accompanying consolidated
balance sheet reflects such impairment as of February 23, 1997. The Company will
continue to operate the property on a temporary basis for approximately four
months. It is possible that the Company will be required to hold the facility
for an unspecified amount of time before being able to complete a sale.
The accompanying consolidated balance sheet as of February 23, 1997
includes the assets and liabilities of Gold Lance. The assets consist primarily
of approximately $2.1 million in accounts receivable, $6.9 million of property,
plant and equipment, net and $2.1 million in other assets primarily related to
goodwill and samples. The liabilities consist primarily of $0.5 million in
accounts payable and $4.5 million in accruals. Approximately $4.2 million of
losses accrued as part of the sale is included in accruals (See Note 2) of which
approximately $1.3 million relates to financial advisor, legal and other
transaction costs associated with the sale. Subsequent to February 23, 1997,
significant remaining assets and liabilities of Gold Lance consist primarily of
the real estate discussed above, extinguishment of transaction costs, accounts
payable and the accrued liabilities in the ordinary course and contingencies
associated with the Transition Period.
The accompanying consolidated statements of operations for the years
ended February 23, 1997, February 25, 1996 and February 26, 1995 include the
following amounts associated with Gold Lance:
1997 1996 1995
Net sales $ 13,505,851 $ 14,352,950 $ 14,627,643
Cost of sales 9,145,533 9,778,055 9,417,540
------------ ------------ ------------
Gross profit 4,360,318 4,574,895 5,210,103
Selling, general and
administrative expenses 5,525,107 5,506,073 4,687,760
------------ ------------ ------------
Income (loss) from operations $ (1,164,789) $ (931,178) $ 522,343
============ ============ ============
<PAGE>
(20) CONSOLIDATING FINANCIAL INFORMATION AND SEGMENT INFORMATION
The Company's long term debt instruments, including current portion, are
guaranteed by its domestic subsidiaries. These guarantees are full,
unconditional, and joint and several. As a result, the Company has included
condensed consolidating financial statements on a domestic and foreign basis for
the Company, the domestic subsidiaries, and the foreign subsidiaries for the
years ended February 23, 1997, February 25, 1996 and February 26, 1995, (in
000's). Foreign gross profit includes gross profit attributable to sales from
foreign subsidiaries to domestic subsidiaries, which is not included in the
eliminations column as the impact is included in cost of sales of the domestic
subsidiaries.
<PAGE>
<TABLE>
<CAPTION>
February 23, 1997 (000's)
------------------------------------------------------------------
ASSETS Parent Domestic Foreign
Company Subsidiaries Subsidiaries Eliminations Consolidated
------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
CURRENT ASSETS:
Cash and cash equivalent $ 7,743 $ 89 $ 2,600 $ - $ 10,432
Restricted cash 107 - - - 107
Accounts receivable, net 21 20,999 2,657 (1,429) 22,248
Inventories 1,307 37,716 3,730 - 42,753
Prepaid expenses and other
current assets (6) 1,307 655 - 1,956
---------- -------- ------- ------- ---------
Total current assets 9,172 60,111 9,642 (1,429) 77,496
---------- -------- ------- ------- ---------
PROPERTY, PLANT AND
EQUIPMENT, at cost 259 48,072 7,884 - 56,215
Less--Accumulated
depreciation 256 29,211 3,775 - 33,242
---------- -------- ------- ------- ---------
3 18,861 4,109 - 22,973
---------- -------- ------- ------- ---------
INTERCOMPANY LOANS 9,122 (15,445) 6,323 - -
---------- -------- ------- ------- ---------
INVESTMENT IN SUBSIDIARIES 69,487 - - (69,487) -
---------- -------- ------- ------- ---------
INVESTMENT IN SOLOMON
BROTHERS, LIMITED 13,734 - - - 13,734
---------- -------- ------- ------- ---------
OTHER ASSETS 1,771 2,993 2,345 - 7,109
---------- -------- ------- ------- ---------
$ 103,289 $ 66,520 $22,419 $(70,916) $121,312
=========== ======== ======= ======== ========
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
February 23, 1997 (000's)
------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' Parent Domestic Foreign
EQUITY (DEFICIT) Company Subsidiaries Subsidiaries Eliminations Consolidated
------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
CURRENT LIABILITIES:
Notes payable $ 2,873 $ (2,873) $ - $ - $ -
Current portion of long-
term debt 13,254 - - - 13,254
Accounts payable 519 9,210 1,238 (1,429) 9,538
Accrued expenses 6,467 9,199 1,268 - 16,934
Accrued income taxes 373 240 1 - 614
-------- -------- ------- -------- --------
Total current liabilities 23,486 15,776 2,507 (1,429) 40,340
-------- -------- ------- -------- --------
LONG-TERM DEBT, less
current portion 78,090 - - - 78,090
-------- -------- ------- -------- -------
OTHER LONG-TERM LIABILITIES - - - - -
-------- -------- ------- -------- --------
MINORITY INTEREST - - - 4,997 4,997
-------- -------- ------- -------- --------
EXCHANGEABLE PREFERRED
STOCK 2,374 - - - 2,374
-------- -------- ------- -------- --------
STOCKHOLDERS' EQUITY (DEFICIT):
Convertible preferred stock 1,303 - - - 1,303
Common stock 262 5 2,109 (2,114) 262
Additional paid-in capital 75,797 232,774 8,439 (241,213) 75,797
Accumulated earnings (deficit) (78,023) (182,035) 9,364 168,843 (81,851)
-------- -------- ------- -------- -------
Total stockholders'
equity (deficit) (661) 50,744 19,912 (74,484) (4,489)
-------- -------- ------- -------- --------
$103,289 $ 66,520 $22,419 $(70,916) $121,312
======== ======== ======= ======== ========
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
February 23, 1997 (000's)
------------------------------------------------------------------
CONSOLIDATING STATEMENT Parent Domestic Foreign
OF OPERATIONS Company Subsidiaries Subsidiaries Eliminations Consolidated
------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
NET SALES $ -- $ 199,119 $ 19,938 $ (9,904) $ 209,153
INVENTORY CHARGE -- 35,521 -- -- 35,521
COST OF SALES -- 140,744 17,597 (10,895) 147,446
------ --------- --------- --------- ---------
Gross profit $ -- $ 22,854 $ 2,341 $ 991 $ 26,186
SELLING, GENERAL &
ADMINISTRATIVE EXPENSES 426 70,432 2,902 -- 73,760
RESTRUCTURING CHARGE -- 7,208 -- -- 7,208
------ --------- --------- --------- ---------
Income (loss) from operations $ (426) $ (54,786) $ (561) $ 991 $ (54,782)
INTEREST EXPENSE, net 5,700 (18,254) 260 -- (12,294)
INCOME FROM AFFILIATES -- -- (55) -- (55)
LOSS ON SALES OF REAL ESTATE, net -- (600) -- -- (600)
GAIN ON SALES OF ASSETS, net -- 5,547 -- -- 5,547
MINORITY INTEREST -- -- -- 167 167
------ --------- --------- --------- ---------
Income (loss) before
income taxes $5,274 $ (68,093 $ (356) $ 1,158 $ (62,017)
PROVISION FOR INCOME TAXES 20 240 1 -- 261
------ --------- --------- --------- ---------
Net income (loss) $5,254 $ (68,333) $ (357) $ 1,158 $ (62,278)
ACCRETION OF DISCOUNT AND
DIVIDENDS ON PREFERRED
STOCKS 740 -- -- -- 740
------ --------- --------- --------- ---------
Income (loss) attributable
to common stockholders $4,514 $ (68,333) $ (357) $ 1,158 $ (63,018)
====== ========= ========= ========= =========
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
February 23, 1997 (000's)
------------------------------------------------------------------
CONSOLIDATING STATEMENT Parent Domestic Foreign
OF CASH FLOWS Company Subsidiaries Subsidiaries Eliminations Consolidated
------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING
ACTIVITIES:
Net income (loss) $ 5,254 $(68,333) $ (357) $ 1,158 $(62,278)
Adjustments to reconcile net income
(loss) to net cash provided by
(used in) operating activities--
Depreciation and amortization (1,619) 3,927 705 -- 3,013
Loss on disposal of fixed as -- -- -- -- --
Gain on sales of assets and
liabilities of subsidiaries, net -- (5,547) -- -- (5,547)
Losses on sales of real estate, net -- 600 -- -- 600
Undistributed earnings of
affiliates net of minority
interest 587 -- 55 (754) (112)
Change in assets and liabilities--
(Increase) decrease in accounts
receivable (47) 8,175 (774) 422 7,776
(Increase) decrease in
inventories (13,494) 53,511 (509) (991) 38,517
(Increase) decrease in prepaid
expenses and other current
assets 702 (341) (186) -- 175
(Increase) decrease in other
assets (11) (95) (168) -- (274)
Increase (decrease) in accounts
payable (1,130) (6,996) 183 (422) (8,365)
Increase (decrease) in accrued
expenses 2,694 211 533 -- 3,438
Increase (decrease) in accrued
income taxes (183) 240 (102) -- (45)
Increase (decrease) in other
liabilities -- 53 -- -- 53
-------- -------- -------- -------- --------
Net cash provided by
(used in) operating
activities $ (7,247) $(14,595) $ (620) $ (587) $(23,049)
-------- -------- -------- -------- --------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
February 23, 1997 (000's)
------------------------------------------------------------------
CONSOLIDATING STATEMENT Parent Domestic Foreign
OF CASH FLOWS (Continued) Company Subsidiaries Subsidiaries Eliminations Consolidated
------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM INVESTING
ACTIVITIES:
Proceeds from sale of fixed assets $ -- $ 6,835 $ 8 $ -- $ 6,843
Investments in affiliates -- -- (1,490) -- (1,490)
Proceeds from sales of
subsidiary assets -- 41,914 -- -- 41,914
Capital expenditures -- (2,718) (520) -- (3,238)
--------- --------- --------- -------- ---------
Net cash provided by (used in)
investing activities $ -- $ 46,031 $ (2,002) $ -- $ 44,029
--------- --------- --------- -------- ---------
CASH FLOWS FROM FINANCING
ACTIVITIES:
Payments on revolving credit
facility $(260,476) $ (542) $ -- $ -- $(261,018)
Proceeds from borrowings under
revolving credit facility 245,825 -- -- -- 245,825
(Increase) decrease in restricted
cash (5) -- -- -- (5)
Change in intercompany notes
payable 29,767 (30,406) 639 -- --
Payments on other debt -- (399) -- -- (399)
Payment of dividends (275) -- (454) 587 (142)
Proceeds from the issuance of
common stock 39 -- -- -- 39
--------- --------- --------- -------- ---------
Net cash provided by
(used in) financing
activities $ 14,875 $ (31,347) $ 185 $ 587 $ (15,700)
--------- --------- --------- -------- ---------
NET INCREASE (DECREASE) IN
CASH AND CASH EQUIVALENTS $ 7,628 $ 89 $ (2,437) $ -- $ 5,280
CASH AND CASH EQUIVALENTS AT
BEGINNING OF YEAR 115 -- 5,037 -- 5,152
--------- --------- --------- -------- ---------
CASH AND CASH EQUIVALENTS AT
END OF YEAR $ 7,743 $ 89 $ 2,600 $- $ 10,432
========= ========= ========= ======== =========
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
February 25, 1996 (000's)
------------------------------------------------------------------------
ASSETS Parent Domestic Foreign
Company Subsidiaries Subsidiaries Eliminations Consolidated
------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
CURRENT ASSETS:
Cash and cash equivalent $ 115 $ -- $ 5,037 $ -- $ 5,152
Restricted cash 102 -- -- -- 102
Accounts receivable, net 55 50,313 1,918 (991) 51,295
Inventories 3,345 84,563 3,221 (991) 90,138
Prepaid expenses and other
current assets 696 792 469 -- 1,957
--------- --------- --------- --------- ---------
Total current assets 4,313 135,668 10,645 (1,982) 148,644
--------- --------- --------- --------- ---------
PROPERTY, PLANT AND
EQUIPMENT, at cost 297 75,649 8,128 -- 84,074
Less--Accumulated
depreciation 282 39,670 3,863 -- 43,815
--------- --------- --------- --------- ---------
15 35,979 4,265 -- 40,259
--------- --------- --------- --------- ---------
INTERCOMPANY LOANS 22,791 (29,753) 6,962 -- --
--------- --------- --------- --------- ---------
INVESTMENT IN SUBSIDIARIES 138,556 -- -- (138,556) --
--------- --------- --------- --------- ---------
INVESTMENT IN SOLOMON
BROTHERS, LIMITED 13,734 -- -- -- 13,734
--------- --------- --------- --------- ---------
OTHER ASSETS 1,806 5,917 769 -- 8,492
--------- --------- --------- --------- ---------
$ 181,215 $ 147,811 $ 22,641 $(140,538) $ 211,129
========= ========= ========= ========= =========
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
February 25, 1996 (000's)
--------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' Parent Domestic Foreign
EQUITY Company Subsidiaries Subsidiaries Eliminations Consolidated
------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
CURRENT LIABILITIES:
Notes payable $ 17,524 $ (2,331) $ -- $ -- $ 15,193
Current portion of long-
term debt -- 245 -- -- 245
Accounts payable 1,648 18,490 1,090 (991) 20,237
Accrued expenses 3,290 11,053 736 -- 15,079
Accrued income taxes 558 -- 102 -- 660
--------- --------- --------- --------- ---------
Total current liabilities 23,020 27,457 1,928 (991) 51,414
--------- --------- --------- --------- ---------
LONG-TERM DEBT, less
current portion 93,020 154 -- -- 93,174
--------- --------- --------- --------- ---------
OTHER LONG-TERM LIABILITIES -- 1,123 -- -- 1,123
--------- --------- --------- --------- ---------
MINORITY INTEREST -- -- -- 5,228 5,228
--------- --------- --------- --------- ---------
EXCHANGEABLE PREFERRED STOCK 2,319 -- -- -- 2,319
--------- --------- --------- --------- ---------
STOCKHOLDERS' EQUITY:
Convertible Preferred Stock 2,289 -- -- -- 2,289
Common stock 239 5 2,109 (2,114) 239
Additional paid-in capital 74,175 232,774 8,439 (241,212) 74,176
Retained earnings (deficit) (13,847) (113,702) 10,165 98,551 (18,833)
--------- --------- --------- --------- ---------
Total stockholders' equity 62,856 119,077 20,713 (144,775) 57,871
--------- --------- --------- --------- ---------
$ 181,215 $ 147,811 $ 22,641 $(140,538) $ 211,129
========= ========= ========= ========= =========
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
February 25, 1996 (000's)
-------------------------------------------------------------------------
CONSOLIDATING STATEMENT Parent Domestic Foreign
OF OPERATIONS Company Subsidiaries Subsidiaries Eliminations Consolidate
------- ------------ ------------ ------------ -----------
<S> <C> <C> <C> <C> <C>
NET SALES $ -- $ 236,559 $ 28,353 $ (14,334) $ 250,578
COST OF SALES -- 162,548 23,182 (12,589) 173,141
--------- --------- --------- --------- ---------
Gross profit $ -- $ 74,011 $ 5,171 $ (1,745) $ 77,437
SELLING, GENERAL &
ADMINISTRATIVE EXPENSES 118 63,081 3,962 (754) 66,407
--------- --------- --------- --------- ---------
Income (loss) from operations $ (118) $ 10,930 $ 1,209 $ (991) $ 11,030
INTEREST INCOME (EXPENSE), net 9,427 (22,536) 633 -- (12,476)
GAIN (LOSS) ON SALES OF REAL ESTATE -- 417 -- -- 417
MINORITY INTEREST -- -- -- (673) (673)
--------- --------- --------- --------- ---------
Income (loss) before income taxes $ 9,309 $ (11,189) $ 1,842 $ (1,664) $ (1,702)
PROVISION (BENEFIT)
FOR INCOME TAXES (147) 147 164 -- 164
--------- --------- --------- --------- ---------
Net income (loss) $ 9,456 $ (11,336) $ 1,678 $ (1,664) $ (1,866)
ACCRETION OF DISCOUNT AND
DIVIDENDS ON PREFERRED 1,040 -- -- -- 1,040
STOCKS --------- --------- --------- --------- ---------
Income (loss) attributable
to common stockholders $ 8,416 $ (11,336) $ 1,678 $ (1,664) $ (2,906)
========= ========= ========= ========= =========
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
February 25, 1996 (000's)
---------------------------------------------------------------------
CONSOLIDATING STATEMENT Parent Domestic Foreign
OF CASH FLOWS Company Subsidiaries Subsidiaries Eliminations Consolidated
------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING
ACTIVITIES:
Net income (loss) $ 9,456 $(11,336) $ 1,678 $ (1,664) $ (1,866)
Adjustments to reconcile net income
(loss) to net cash provided by
(used in) operating activities--
Depreciation and amortization (1,461) 4,766 624 -- 3,929
Loss (gain) on disposal of
fixed assets -- (417) (6) -- (423)
Interest paid by issuance of 4,201 -- -- -- 4,201
Undistributed earnings of
affiliates, net of minorit 287 -- -- 386 673
Change in assets and liabilities--
(Increase) decrease in accounts
receivable 19 5,140 2,113 (1,095) 6,177
(Increase) decrease in
inventories (2,632) (9,309) 1,161 991 (9,789)
(Increase) decrease in prepaid
expenses and other current
assets (1,057) (260) (66) -- (1,383)
(Increase) decrease in other
assets 16 (429) (480) -- (893)
Increase (decrease) in accounts
payable 67 1,820 (554) 1,095 2,428
Increase (decrease) in accrued
expenses (1,868) 1,031 457 -- (380)
Increase (decrease) in accrued
income taxes (266) -- (427) -- (693)
Increase (decrease) in other
liabilities -- (371) (1) -- (372)
-------- -------- -------- -------- --------
Net cash provided by
(used in) operating
activities $ 6,762 $ (9,365) $ 4,499 $ (287) $ 1,609
-------- -------- -------- -------- --------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
February 25, 1996 (000's)
CONSOLIDATING STATEMENT OF -------------------------------------------------------------------------
CASH FLOWS (Continued) Parent Domestic Foreign
Company Subsidiaries Subsidiaries Eliminations Consolidated
------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM INVESTING
ACTIVITIES:
Proceeds from sale of fixed assets $ -- $ 961 $ 35 $ -- $ 996
Capital expenditures (1) (2,326) (407) -- (2,734)
--------- --------- --------- --------- ---------
Net cash provided by
(used in) investing
activities $ (1) $ (1,365) $ (372) $ -- $ (1,738)
--------- --------- --------- --------- ---------
CASH FLOWS FROM FINANCING
ACTIVITIES:
Payments on revolving credit facility $(259,532) $ 1,752 $ -- $ -- $(257,780)
Proceeds from borrowings under
revolving credit facility 261,855 -- -- -- 261,855
(Increase) decrease in restricted cash (100) -- -- -- (100)
Change in intercompany notes
payable (7,722) 9,760 (3,653) 1,615 --
Payments on debt (1,144) (782) -- -- (1,926)
Payment of dividends (67) -- (272) 211 (128)
Proceeds from the issuance of
common stock 23 -- 77 (77) 23
--------- --------- --------- --------- ---------
Net cash provided by
(used in) financing
activities $ (6,687) $ 10,730 $ (3,848) $ 1,749 $ 1,944
--------- --------- --------- --------- ---------
NET INCREASE (DECREASE) IN
CASH AND CASH EQUIVALENTS $ 74 $ -- $ 279 $ 1,462 $ 1,815
CASH AND CASH EQUIVALENTS AT
BEGINNING OF YEAR 41 -- 4,758 (1,462) 3,337
--------- --------- --------- --------- ---------
CASH AND CASH EQUIVALENTS AT
END OF YEAR $ 115 $ -- $ 5,037 $ -- $ 5,152
========= ========= ========= ========= =========
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
February 26, 1995 (000's)
-------------------------------------------------------------------------
ASSETS Parent Domestic Foreign
Company Subsidiaries Subsidiaries Eliminations Consolidated
------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
CURRENT ASSETS:
Cash and cash equivalent $ 41 $ -- $ 4,758 $ (1,462) $ 3,337
Restricted cash 2 -- -- -- 2
Accounts receivable, net 74 55,453 4,031 (2,086) 57,472
Inventories (2,109) 78,076 4,382 -- 80,349
Prepaid expenses and other
current assets (361) 532 403 -- 574
--------- --------- --------- --------- ---------
Total current assets (2,353) 134,061 13,574 (3,548) 141,734
--------- --------- --------- --------- ---------
PROPERTY, PLANT AND
EQUIPMENT, at cost 296 74,210 7,749 -- 82,255
Less--Accumulated
depreciation 255 35,444 3,320 -- 39,019
--------- --------- --------- --------- ---------
41 38,766 4,429 -- 43,236
--------- --------- --------- --------- ---------
INTERCOMPANY LOANS 13,728 (18,653) 3,463 1,462 --
--------- --------- --------- --------- ---------
INVESTMENT IN SUBSIDIARIES 148,501 -- -- (148,501) --
--------- --------- --------- --------- ---------
INVESTMENT IN SOLOMON
BROTHERS, LIMITED 13,734 -- -- -- 13,734
--------- --------- --------- --------- ---------
OTHER ASSETS 1,862 5,687 370 -- 7,919
--------- --------- --------- --------- ---------
$ 175,513 $ 159,861 $ 21,836 $(150,587) $ 206,623
========= ========= ========= ========= =========
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
February 26, 1995 (000's)
--------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' Parent Domestic Foreign
EQUITY Company Subsidiaries Subsidiaries Eliminations Consolidated
------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
CURRENT LIABILITIES:
Notes payable $ 15,201 $ (4,083) $ -- $ -- $ 11,118
Current portion of long-
term debt 447 788 -- -- 1,235
Accounts payable 1,581 16,670 1,644 (2,086) 17,809
Accrued expenses 994 14,186 279 -- 15,459
Accrued income taxes 824 -- 529 -- 1,353
--------- --------- --------- --------- ---------
Total current liabilities 19,047 27,561 2,452 (2,086) 46,974
--------- --------- --------- --------- ---------
LONG-TERM DEBT, less
current portion 91,045 393 -- -- 91,438
--------- --------- --------- --------- ---------
LONG-TERM DEFERRED
OTHER LONG-TERM LIABILITIES -- 1,494 1 -- 1,495
--------- --------- --------- --------- ---------
MINORITY INTEREST -- -- -- 4,617 4,617
--------- --------- --------- --------- ---------
EXCHANGEABLE PREFERRED
STOCK 2,266 -- -- -- 2,266
--------- --------- --------- --------- ---------
STOCKHOLDERS' EQUITY:
Convertible preferred stock 2,381 -- -- -- 2,381
Common stock 234 5 2,109 (2,114) 234
Additional paid-in capital 73,145 232,774 8,515 (241,289) 73,145
Retained earnings (deficit) (12,605) (102,366) 8,759 90,285 (15,927)
--------- --------- --------- --------- ---------
Total stockholders' equity 63,155 130,413 19,383 (153,118) 59,833
--------- --------- --------- --------- ---------
$ 175,513 $ 159,861 $ 21,836 $(150,587) $ 206,623
========= ========= ========= ========= =========
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
February 26, 1995 (000's)
-------------------------------------------------------------------------
CONSOLIDATING STATEMENT Parent Domestic Foreign
OF OPERATIONS Company Subsidiaries Subsidiaries Eliminations Consolidated
------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
NET SALES $ -- $ 271,294 $ 37,822 $ (21,001) $ 288,115
COST OF SALES (1,050) 192,766 30,178 (21,360) 200,534
--------- --------- --------- --------- ---------
Gross profit $ 1,050 $ 78,528 $ 7,644 $ 359 $ 87,581
SELLING, GENERAL &
ADMINISTRATIVE EXPENSES 1,058 85,391 3,959 -- 90,408
--------- --------- --------- --------- ---------
Income (loss) from operations $ (8) $ (6,863) $ 3,685 $ 359 $ (2,827)
INTEREST EXPENSE, net (1,288) (10,730) 83 -- (11,935)
INCOME FROM AFFILIATES 588 -- -- -- 588
GAIN ON LITTLE SWITZERLAND,
INC. EXCHANGE 17,278 -- -- -- 17,278
MINORITY INTEREST -- -- -- (774) (774)
--------- --------- --------- --------- ---------
Income (loss) before income taxes $ 16,570 $ (17,593) $ 3,768 $ (415) $ 2,330
PROVISION FOR INCOME TAXES 195 435 1,058 70 1,758
--------- --------- --------- --------- ---------
Net income (loss) $ 16,375 $ (18,028) $ 2,710 $ (485) $ 572
ACCRETION OF DISCOUNT AND
DIVIDENDS ON PREFERRED 1,688 -- -- -- 1,688
STOCKS --------- --------- --------- --------- ---------
Income (loss) attributable
to common stockholders $ 14,687 $ (18,028) $ 2,710 $ (485) $ (1,116)
========= ========= ========= ========= =========
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
February 26, 1995 (000's)
----------------------------------------------------------------------
CONSOLIDATING STATEMENT Parent Domestic Foreign
OF CASH FLOWS Company Subsidiaries Subsidiaries Eliminations Consolidated
------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING
ACTIVITIES:
Net income (loss) $ 16,375 $(18,028) $ 2,710 $ (485) $ 572
Adjustments to reconcile net income
(loss) to net cash provided by
(used in) operating activities--
Depreciation and amortization (1,302) 5,513 635 -- 4,846
Loss on disposal of fixed assets -- 70 4 -- 74
Gain on Little Switzerland, Inc.
exchange (17,278) -- -- -- (17,278)
Interest paid by debt issuance 7,648 -- -- -- 7,648
Undistributed earnings of
affiliates, net of minority
interest (588) -- -- 774 186
Change in assets and liabilities--
(Increase) decrease in accounts
receivable 1,522 (339) (1,449) (1,583) (1,849)
(Increase) decrease in
inventories 210 (5,003) (168) (359) (5,320)
(Increase) decrease in prepaid
expenses and other current
assets 594 2,798 (55) 81 3,418
(Increase) decrease in other
assets 56 6,340 146 -- 6,542
Increase (decrease) in accounts
payable (248) 3,157 590 1,583 5,082
Increase (decrease) in accrued
expenses (3,830) (191) (576) -- (4,597)
Increase (decrease) in accrued 498 (275) 266 (11) 478
income taxes
Increase (decrease) in other
liabilities -- (599) -- -- (599)
-------- -------- -------- -------- --------
Net cash provided by
(used in) operating
activities $ 3,657 $ (6,557) $ 2,103 $ -- $ (797)
-------- -------- -------- -------- --------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
February 26, 1995 (000's)
CONSOLIDATING STATEMENT OF ---------------------------------------------------------------------------
CASH FLOWS (Continued) Parent Domestic Foreign
Company Subsidiaries Subsidiaries Eliminations Consolidated
------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM INVESTING
ACTIVITIES:
Proceeds from sale of fixed assets $ -- $ 43 $ 2 $ -- $ 45
Capital expenditures (7) (2,210) (542) -- (2,759)
--------- --------- --------- --------- ---------
Net cash used in
investing activities $ (7) $ (2,167) $ (540) $ -- $ (2,714)
--------- --------- --------- --------- ---------
CASH FLOWS FROM FINANCING
ACTIVITIES:
Payments on revolving credit
facility $(277,887) $ (2,103) $ -- $ -- $(279,990)
Proceeds from borrowings under
revolving credit facility 291,108 -- -- -- 291,108
(Increase) decrease in restricted
cash 36 -- -- -- 36
Change in intercompany notes
payable (11,005) 12,343 (1,930) 592 --
Payments on other debt (6,034) (1,574) -- -- (7,608)
Proceeds from the issuance of
common stock 28 -- -- -- 28
--------- --------- --------- --------- ---------
Net cash provided by
(used in) financing
activities $ (3,754) $ 8,666 $ (1,930) $ 592 $ 3,574
--------- --------- --------- --------- ---------
NET INCREASE (DECREASE) IN
CASH AND CASH EQUIVALENTS $ (104) $ (58) $ (367) $ 592 $ 63
CASH AND CASH EQUIVALENTS AT
BEGINNING OF YEAR 145 58 5,125 (2,054) 3,274
--------- --------- --------- --------- ---------
CASH AND CASH EQUIVALENTS AT
END OF YEAR $ 41 $ -- $ 4,758 $ (1,462) $ 3,337
========= ========= ========= ========= =========
</TABLE>
<PAGE>
Report of Independent Public Accountants
On Schedule
To Town & Country Corporation:
We have audited, in accordance with generally accepted auditing
standards, the consolidated financial statements of Town & Country Corporation
and subsidiaries included in this Form 10-K and have issued our report thereon
dated April 23, 1997 (except for the matters discussed in Notes 1 and 3 and Note
19, for which the dates are May 30, 1997 and April 25, 1997, respectively). Our
audit was made for the purpose of forming an opinion on the basic consolidated
financial statements taken as a whole. The schedule listed in Item 14 (A) (2) is
the responsibility of the Company's management and is presented for purposes of
complying with the Securities and Exchange Commission's rules and is not part of
the basic consolidated financial statements. This schedule has been subjected to
the auditing procedures applied in the audit of the basic consolidated financial
statements and, in our opinion, fairly states, in all material respects, the
financial data required to be set forth therein, in relation to the basic
consolidated financial statements taken as a whole.
Arthur Andersen LLP
Boston, Massachusetts
April 23, 1997
<PAGE>
SCHEDULE II
Valuation Accounts
Balance Write-offs, Balance
Beginning Net of End of
Description of year Provision Recoveries Year
----------- -------- --------- ----------- -------
Allowance for Doubtful
Accounts:
February 23, 1997 $2,120,000 $5,008,000 $(5,885,000) $1,243,000
February 25, 1996 7,780,000 464,000 (6,124,000) 2,120,000
February 26, 1995 5,510,000 5,473,000 (3,203,000) 7,780,000
<PAGE>
EXHIBITS
TOWN & COUNTRY CORPORATION AND SUBSIDIARIES
Exhibits, other than Exhibits 4.4, 4.6, 4.9, 10.7, 10.34, 10.42,
10.50, 10.51, 10.52, 11, 22, 24.1, and 27, have been omitted.
The Company will supply, upon written request, copies of any exhibit from the
Document list.
FIRST SUPPLEMENTAL INDENTURE
----------------------------
This First Supplemental Indenture ("First Supplement") dated as of
August 31, 1993, among Town & Country Corporation, a Massachusetts corporation
(the "Company"), Shawmut Bank, N.A., a national banking association, as trustee
(the "Trustee") and the Guarantors listed on the signature pages hereto. All
capitalized terms used and not defined herein shall have the meanings ascribed
to such terms in the Indenture dated as of May 14, 1993 among the Company, the
Trustee and the Guarantors (the "Indenture").
WHEREAS, the Company, the Trustee and the Guarantors desire to amend the
Indenture to the extent set forth in this First Supplement; and
WHEREAS, in accordance with Section 9.02 of the Indenture, each
Securityholder has consented to this First Supplement.
NOW, THEREFORE, the Company, the Guarantors and the Trustee hereby agree
as follows:
1. Article 1 of the Indenture is hereby amended as follows:
(a) By adding thereto, in the appropriate alphabetical order, the
following new defined terms:
"'Collateral Proceeds Offer' has the meaning set forth in Section
3.09
'Collateral Proceeds Offer Amount' has the meaning set forth in
Section 3.09.
'Collateral Proceeds Offer Date' has the meaning set forth in
Section 3.09.
'Collateral Proceeds Offer Redemption Date' has the meaning set
forth in Section 3.09.
(b) By deleting the definition "fiscal year" appearing therein in its
entirety and substituting therefor the following:
"'fiscal year' of the Company shall mean the fifty-two or
1
<PAGE>
fifty-three week period, as the case may be, ending on the last
Sunday in February of each year."
2. Article 3 of the Indenture is hereby amended by adding thereto a new
Section 3.09 as follows:
"Section 3.09. Collateral Proceeds Offers.
(a) Without limiting the obligations of the Company under Sections
3.02(a) and (b), the Company may at any time at which it holds Collateral
Proceeds make an offer in accordance with this Section 3.09 (a "Collateral
Proceeds Offer") to the Securityholders to redeem an amount of Securities not in
excess of the amount of Collateral Proceeds then held by the Company (the
"Collateral Proceeds Offer Amount"), at a redemption price which shall be equal
to 100% of the principal amount thereof plus accrued and unpaid interest to and
including the date of redemption.
(b) On or before the date fifteen (15) days prior to the date on
which the Company intends to make a Collateral Proceeds Offer (the "Collateral
Proceeds Offer Date"), the Company shall deliver to the Trustee an Officers'
Certificate stating:
(i) the redemption price;
(ii) the date fixed for redemption which shall be the Business
Day next succeeding the twentieth Business Day following the date of
the Collateral Proceeds Offer Date (the "Collateral Proceeds Offer
Redemption Date");
(iii) the maximum aggregate principal amount of Securities that
may be redeemed; and
(iv) whether it requests the Trustee to give notice to each
Securityholder as required under Section 3.09(c).
(c) The Company shall make a Collateral Proceeds Offer by mailing no
later than the Collateral Proceeds Offer Date notice by first-class mail to each
Securityholder.
The notice, which shall govern the terms of the Collateral Proceeds
Offer, shall state:
(i) the redemption price;
(ii) the Collateral Proceeds Offer Redemption Date;
(iii) the maximum aggregate principal amount of Securities that
may be redeemed;
2
<PAGE>
(iv) the name and address of the Paying Agent;
(v) that any Security not tendered or not accepted for payment
will continue to accrue interest;
(vi) that Securities called for redemption pursuant to this
Section 3.09 must be surrendered to the Paying Agent to collect the
redemption price;
(vii) that any Security accepted for payment pursuant to the
Collateral Proceeds Offer shall cease to accrue interest after the
Collateral Proceeds Offer Redemption Date;
(viii) that any Securityholder electing to have a Security
redeemed pursuant to the Collateral Proceeds Offer will be required
to provide written notice of such election to the Trustee on or
before the date ten (10) days preceding the Collateral Proceeds Offer
Redemption Date, and will be required to surrender the Security duly
endorsed in blank to the Paying Agent at the address specified on the
notice at least five (5) days before the Collateral Proceeds
Redemption Date, together with a copy of such Securityholder's
election to accept the Company's offer to redeem such Security or a
letter acknowledging such Securityholder's election to accept the
Company's offer to redeem such Security;
(ix) that Securityholders will be entitled to withdraw their
election if the Trustee receives, not later than three (3) Business
Days prior to the Collateral Proceeds Redemption Date, a telegram,
telex, facsimile transmission or letter setting forth the name of the
Securityholder, the principal amount of any Securities the
Securityholder delivered for redemption and statement that such
Securityholder is withdrawing his election to have such Securities
redeemed;
(x) that Securityholders whose Securities were accepted for
payment only in part will be issued new Securities equal in principal
amount to the unredeemed portion of the Securities surrendered; and
(xi) the CUSIP number of the Securities, if any.
At the Company's request, the Trustee shall give notice of a Collateral
Proceeds Offer in the Company's name and at its expense.
A Securityholder receiving a Collateral Proceeds Offer may elect to have
redeemed any or all Securities held by such Securityholder to which the
Collateral Proceeds Offer relates by providing written notice thereof to the
Trustee so as to be received by the Trustee on or before the date ten (10) days
preceding the Collateral Proceeds Offer Redemption Date.
In the event that Securities in an aggregate principal amount in excess
of the Collateral
3
<PAGE>
Proceeds Offer Amount are tendered and not withdrawn, then the Company shall
purchase Securities on a pro rata basis based on the principal amount of
Securities tendered (with such adjustment as may be deemed fair and appropriate
by the Trustee so that only Securities in denominations of $50.00 or integral
multiples of $50.00 shall be redeemed). The Company shall notify each Holder
electing to have Securities redeemed at least one Business Day prior to the
Collateral Proceeds Redemption Date as to the principal amount of Securities
held by such Holder to be redeemed.
(d) Not less than one Business Day prior to the Collateral Proceeds
Redemption Date, if any Securityholders shall have surrendered their Securities
pursuant to the Collateral Proceeds Offer, the Company shall deposit with the
Paying Agent in immediately available funds money sufficient to pay the
redemption price of and accrued and unpaid interest on all Securities to be
redeemed on that date up to the maximum amount required under this Section. The
Paying Agent shall return to the Company any money not required for that
purpose.
(e) On the Collateral Proceeds Redemption Date, Securities
surrendered to and accepted for payment by the Paying Agent shall be paid at the
redemption price, plus accrued and unpaid interest to and including the
Collateral Proceeds Redemption Date.
(f) Upon surrender of a Security that is redeemed in part, the
Company shall execute and issue, the Guarantors shall endorse, and the Trustee
shall authenticate for the Securityholder (at the Company's expense) a new
Security equal in principal amount to the unredeemed portion of the Security
surrendered.
(g) The obligation of the Company to redeem Securities pursuant to
Section 3.02(a) or (b) on any Collateral Redemption Date shall be reduced by an
amount equal to 100% of the principal amount of the Securities that the Company
has delivered to the Trustee for cancellation through its redemption pursuant to
this Section 3.09 during the period from the date following the preceding
Collateral Redemption Date to but not including such Collateral Redemption Date.
3. The form of Security attached to the Indenture as Exhibit "A" is
hereby deleted in its entirety and the form of Security attached hereto as
Exhibit "A" substituted therefor.
4. Except as expressly amended hereby, the terms and provisions of the
Indenture are hereby ratified, confirmed and remain in full force and effect.
[End of Text]
4
<PAGE>
IN WITNESS WHEREOF, the parties have caused this First Supplemental
Indenture to be duly executed as of the date first above written.
COMPANY:
TOWN & COUNTRY CORPORATION
By: /s/ Francis X. Correra
___________________________________
Name: Francis X. Correra
Title: Sr. V.P. amd C.F.O.
GUARANTORS:
TOWN & COUNTRY FINE JEWELRY
GROUP, INC.
By: /s/ Francis X. Correra
___________________________________
Name: Francis X. Correra
Title: Vice President
L.G. BALFOUR COMPANY, INC.
By: /s/ Francis X. Correra
___________________________________
Name: Francis X. Correra
Title: Exec. Vice President
GOLD LANCE, INC.
By: /s/ Francis X. Correra
___________________________________
Name: Francis X. Correra
Title: Treasurer
TRUSTEE:
SHAWMUT BANK, N.A., as Trustee
By: /s/ Lee E. MacDonald
___________________________________
Name: Lee E. MacDonald
Title: Assistant Vice Presiden
5
TOWN & COUNTRY CORPORATION,
as Issuer
AND
TOWN & COUNTRY FINE JEWELRY GROUP, INC.,
L.G. BALFOUR COMPANY, INC. and GOLD LANCE, INC.,
as Guarantors
AND
FLEET NATIONAL BANK (as successor to Shawmut Bank, N.A.),
as Trustee
--------------------------------------------------------------------
THIRD SUPPLEMENTAL INDENTURE
Dated as of March 4, 1997
to
INDENTURE
Dated as of May 14, 1993
----------------------------------------------------------------------
$30,000,000
11-1/2% Senior Secured Notes Due September 15, 1997
<PAGE>
THIRD SUPPLEMENTAL INDENTURE
THIRD SUPPLEMENTAL INDENTURE dated as of March 4, 1997, by and among
TOWN & COUNTRY CORPORATION, a Massachusetts corporation (the "Issuer"),
FLEET NATIONAL BANK (as successor to Shawmut Bank, N.A.), a national banking
association, as Trustee (the "Trustee"), and TOWN & COUNTRY FINE JEWELRY
GROUP, INC., L.G. BALFOUR COMPANY, INC. and GOLD LANCE, INC. (the
"Guarantors").
WHEREAS, all capitalized terms used in this Third Supplemental Indenture
have the respective meanings set forth in the Indenture; and
WHEREAS, the Issuer, the Guarantors and the Trustee entered into that
certain Indenture dated as of May 14, 1993 (as amended by the First Supplemental
Indenture dated as of August 31, 1993 and the Second Supplemental Indenture
dated as of November 13, 1996, the "Indenture"), which authorized the issuance
of $30,000,000 11-1/2% Senior Secured Notes due September 15, 1997 (the
"Securities");
WHEREAS, Section 9.02 of the Indenture provides, among other things, that
the Issuer, the Trustee and the Guarantors may amend the Indenture as provided
herein with the written consent of the Holders of at least a majority in
principal amount of the outstanding Securities; and
WHEREAS, all acts and proceedings required by law, the Indenture, the
articles of organization and the by-laws of the Issuer and the Guarantors to
authorize, approve and constitute this Third Supplemental Indenture as a valid
and binding agreement for the uses and purposes set forth herein, in accordance
with its terms, have been done and taken, and the execution and delivery of this
Third Supplemental Indenture have in all respects been duly authorized by the
Issuer and the Guarantors.
NOW THEREFORE, in consideration of the foregoing and for other good and
valuable consideration, the receipt of which is hereby acknowledged, the Issuer,
the Guarantors and the Trustee hereby agree as follows:
(1) Section 4.10(b) of the Indenture is hereby amended by adding the
following paragraph (6):
"(6) the Company or any such Subsidiary from purchasing, redeeming or
otherwise acquiring or retiring for value, in one or more related or
unrelated transactions in compliance with applicable rules and regulations
of the Thailand Stock Exchange, Capital Stock of Essex International
Company Limited that the Company and its Subsidiaries do not own so long as
the aggregate cash
<PAGE>
consideration paid by the Company and its Subsidiaries in connection with
such purchase, redemption, acquisition or retirement does not exceed $3.5
million.
(2) The Trustee accepts the amendment of the Indenture effected by this
Third Supplemental Indenture. Without limiting the generality of the foregoing,
the Trustee has no responsibility for the correctness of the recitals of fact
herein contained which shall be taken as the statements of the Issuer and the
Guarantors.
(3) This Third Supplemental Indenture shall become valid, binding and
effective upon its execution by the Issuer, the Guarantors and the Trustee.
(4) Except as expressly amended hereby, the Indenture is in all respects
ratified and confirmed and all the terms, conditions and provisions thereof
shall remain in full force and effect.
(5) This Third Supplemental Indenture shall form a part of the Indenture
for all purposes, and every Holder of Securities heretofore or hereafter
authenticated and delivered shall be bound hereby.
(6) This Third Supplemental Indenture may be executed in any number of
counterparts, each of which when so executed shall be deemed to be an original,
and all of such counterparts shall together constitute one and the same
instrument.
(7) The laws of The Commonwealth of Massachusetts shall govern this Third
Supplemental Indenture without regard to principles of conflicts of law.
(8) Nothing contained in this Third Supplemental Indenture shall operate as
a waiver or release of any right, remedy, claim or privilege against the
Company, the Guarantors or any other person as to matters not specifically
addressed by this Third Supplemental Indenture, and all such rights, remedies,
claims and privileges are hereby expressly preserved.
[End of Text]
2
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Third Supplemental
Indenture to be duly executed as of the date first written above.
TOWN & COUNTRY CORPORATION
By: /s/ William Schawbel
_____________________________
Name: William Schawbel
Title: Interim President
TOWN & COUNTRY FINE JEWELRY GROUP, INC.
By: /s/ William Schawbel
_____________________________
Name: William Schawbel
Title: Interim President
L.G. BALFOUR COMPANY, INC.
By: /s/ William Schawbel
_____________________________
Name: William Schawbel
Title: Interim President
GOLD LANCE, INC.
By: /s/ Richard E. Floor
_____________________________
Name: Richard E. Floor
Title: Clerk
BANKERS TRUST COMPANY, as
Trustee
By: /s/ Terrence Rawlins
_____________________________
Name: Terrence Rawlins
Title: Assistant Treasurer
TOWN & COUNTRY CORPORATION,
as Issuer
AND
TOWN & COUNTRY FINE JEWELRY GROUP, INC.,
L.G. BALFOUR COMPANY, INC. and GOLD LANCE, INC.,
as Guarantors
AND
BANKERS TRUST COMPANY,
as Trustee
--------------------------------------------------------------------
SECOND SUPPLEMENTAL INDENTURE
Dated as of March 4, 1997
to
INDENTURE
Dated as of May 14, 1993
----------------------------------------------------------------------
13% Senior Subordinated Notes Due May 31, 1998
<PAGE>
SECOND SUPPLEMENTAL INDENTURE
SECOND SUPPLEMENTAL INDENTURE dated as of March 4, 1997, by and among TOWN
& COUNTRY CORPORATION, a Massachusetts corporation (the "Issuer"), BANKERS TRUST
COMPANY, a New York banking corporation, as Trustee (the "Trustee"), and TOWN &
COUNTRY FINE JEWELRY GROUP, INC., L.G. BALFOUR COMPANY, INC. and GOLD LANCE,
INC. (the "Guarantors").
WHEREAS, all capitalized terms used in this Second Supplemental Indenture
have the respective meanings set forth in the Indenture; and
WHEREAS, the Issuer, the Guarantors and the Trustee entered into that
certain Indenture dated as of May 14, 1993 (as amended by the First Supplemental
Indenture dated November 13, 1996, the "Indenture"), which authorized the
issuance of 13% Senior Subordinated Notes due May 31, 1998 (the "Securities");
and
WHEREAS, Section 9.02 of the Indenture provides, among other things, that
the Issuer, the Trustee and the Guarantors may amend the Indenture as provided
herein with the written consent of the Holders of at least a majority in
principal amount of the outstanding Securities; and
WHEREAS, all acts and proceedings required by law, the Indenture, the
articles of organization and the by-laws of the Issuer and the Guarantors to
authorize, approve and constitute this Second Supplemental Indenture as a valid
and binding agreement for the uses and purposes set forth herein, in accordance
with its terms, have been done and taken, and the execution and delivery of this
Second Supplemental Indenture have in all respects been duly authorized by the
Issuer and the Guarantors.
NOW THEREFORE, in consideration of the foregoing and for other good and
valuable consideration, the receipt of which is hereby acknowledged, the Issuer,
the Guarantors and the Trustee hereby agree as follows:
(1) Section 4.09(b) of the Indenture is hereby amended by adding the
following paragraph (6):
"(6) the Company or any such Subsidiary from purchasing, redeeming or
otherwise acquiring or retiring for value, in one or more related or
unrelated transactions in compliance with applicable rules and regulations
of the Thailand Stock Exchange, Capital Stock of Essex International
Company Limited that the Company and its Subsidiaries do not own so long as
the aggregate cash consideration paid by the Company and its Subsidiaries
in connection with such purchase, redemption, acquisition or retirement
does not exceed $3.5 million.
<PAGE>
(2) The Trustee accepts the amendment of the Indenture effected by this
Second Supplemental Indenture. Without limiting the generality of the foregoing,
the Trustee has no responsibility for the correctness of the recitals of fact
herein contained which shall be taken as the statements of the Issuer and the
Guarantors.
(3) This Second Supplemental Indenture shall become valid, binding and
effective upon its execution by the Issuer, the Guarantors and the Trustee.
(4) Except as expressly amended hereby, the Indenture is in all respects
ratified and confirmed and all the terms, conditions and provisions thereof
shall remain in full force and effect. In addition, without limitation, the
Issuer and the Guarantors hereby reconfirm their obligations to the Trustee
under Section 7.07 of the Indenture.
(5) This Second Supplemental Indenture shall form a part of the Indenture
for all purposes, and every Holder of Securities heretofore or hereafter
authenticated and delivered shall be bound hereby.
(6) This Second Supplemental Indenture may be executed in any number of
counterparts, each of which when so executed shall be deemed to be an original,
and all of such counterparts shall together constitute one and the same
instrument.
(7) The laws of the State of New York shall govern this Second Supplemental
Indenture without regard to principles of conflicts of law.
(8) Nothing contained in this Second Supplemental Indenture shall operate
as a waiver or release of any right, remedy, claim or privilege against the
Company, the Guarantors or any other person as to matters not specifically
addressed by this Second Supplemental Indenture, and all such rights, remedies,
claims and privileges are hereby expressly preserved.
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Second Supplemental
Indenture to be duly executed as of the date first written above.
TOWN & COUNTRY CORPORATION
By: /s/ William Schawbel
_____________________________
Name: William Schawbel
Title: Interim President
TOWN & COUNTRY FINE JEWELRY GROUP, INC.
By: /s/ William Schawbel
_____________________________
Name: William Schawbel
Title: Interim President
L.G. BALFOUR COMPANY, INC.
By: /s/ William Schawbel
_____________________________
Name: William Schawbel
Title: Interim President
GOLD LANCE, INC.
By: /s/ Richard E. Floor
_____________________________
Name: Richard E. Floor
Title: Clerk
FLEET NATIONAL BANK (as successor
to Shawmut Bank, N.A.), as Trustee
By: /s/ Lee MacDonald
_____________________________
Name: Lee MacDonald
Title: Vice President
AMENDED AND RESTATED
EXECUTIVE EMPLOYMENT AGREEMENT
This Executive Employment Agreement (the "Agreement") is effective as of
July 15, 1996 and is made between TOWN & COUNTRY CORPORATION, a Massachusetts
corporation (the "Company"), and FRANCIS X. CORRERA (the "Employee"). This
Agreement amends and restates the Executive Employment Agreement dated as of
February 28, 1994 between the Company and the Employee.
I. EMPLOYMENT
The Company agrees to employ the Employee and the Employee agrees to
continue to serve the Company upon the terms and conditions set forth in this
Agreement for the period commencing on July 15, 1996 and ending on February 28,
2001 (the "Term"). The Employee agrees during the Term to devote substantially
all of his time and best efforts to the business and affairs of the Company and
to the performance of his duties under this Agreement provided, however, that
this Agreement shall not prevent the Employee from acting as a consultant to
other business entities from time to time, including for the entity specifically
identified in Section VI(f), so long as such consulting activities do not
require the Employee to devote more than ten percent (10%) of his actual working
time during the Company's normal business hours to said consulting activities.
The Employee may devote as much time as he desires to consulting activities
during off hours, weekends, holidays and vacations.
The Employee shall serve, during the Term, as President of the Fine Jewelry
Division 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. The 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 (the "Base Salary") of Four Hundred Fifty Thousand Dollars ($450,000.00)
beginning July 15, 1996 and each fiscal year thereafter during the Term,
provided, however, that the Company's Board of Directors may request that the
Employee voluntarily reduce his Base Salary.
(b) Company Stock Options. If the Employee voluntarily agrees to reduce his
Base Salary, then for each twelve month period during which such reduction is in
effect the Employee will receive a stock option (which shall be, to the extent
possible, an "incentive stock option" under the Internal Revenue Code) for the
purchase of shares of common stock $.01, par value, of the Company (the "Common
Stock"), in the amount of shares equal to the quotient of (i) the amount of the
reduction, divided by (ii) the fair market value of the Common Stock at the time
that such reduction becomes effective.
<PAGE>
(c) Annual Bonus. During the Term, the Employee shall receive an annual
bonus payment of up to a maximum of one-hundred percent (100%) of his base
salary.
The annual bonus shall be determined for each year of the Term based on a
formula to be more specifically defined by the Compensation Committee of the
Board of Directors but providing for a bonus of at least 25% for achieving a
minimum of a twelve percent return on invested capital. 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 15 of the following fiscal year.
(d) Transaction Fee. Upon the sale or merger of all or substantially all of
the assets or stock of L.G. Balfour Company, Inc. in lieu of the fee previously
provided, the Company shall promptly pay to the Employee the amount of $150,000
(the "Retained Split Dollar Amount") by contribution to the Split Dollar Plan
(as hereinafter defined).
(e) 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.
(f) Automobile. The Company shall provide Employee with the sole and
exclusive use of an automobile. A new automobile shall be provided at the
commencement of the Term as a replacement for the automobile which was provided
to Employee for his use immediately preceding commencement of this Agreement. On
or before three (3) 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 depreciated book value, or if a leased automobile the depreciated
book value as if the Company had purchased it at the beginning of the lease
term.
(g) 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.
(h) 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.
(i) 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.
2
<PAGE>
(j) Responsible Party. The parties to this Agreement expressly acknowledge
and agree that Town and Country Fine Jewelry Group, Inc., the Company's wholly
owned subsidiary, shall be responsible for paying to the Employee the
compensation set forth in this Section II and in Section III and that it shall
also be responsible for the costs of the benefits to be provided to the Employee
as set forth in this Section II and in Section III.
(k) Split Dollar Insurance Policy. The Company has established and will
maintain a split dollar life insurance arrangement in the aggregate face amount
of $3,000,000 under a program reasonably selected by the Employee (the "Split
Dollar Program"). The Company hereby agrees to pay $750,000 into said Split
Dollar Program at the time of execution hereof.
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) The 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) The 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 actions 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.
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<PAGE>
(3) Compensation. Upon termination of the Employee's employment by the
Company With Cause, the Company shall have no further obligations under Section
II, except that:
(i) The Company shall pay the Employee his salary and accrued
vacation through the date of termination and any benefits
under Section II(e), (f), (g) or (i) accrued but unpaid as
of the date of termination; and
(ii) The 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(c).
(b) Termination Without Cause. The Company may terminate the Employee's
employment upon written notice for reasons other than With Cause. Upon
termination of the Employee's employment by the Company for other than With
Cause, the Company shall have no further obligations under Section II, except
that:
(i) The Company shall pay the Employee his salary and accrued
vacation through the date of termination and any benefits
under Section II(e), (f), (g) or (i) accrued but unpaid as
of the date of termination;
(ii) The 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(c);
(iii) in lieu of any further payment of salary or annual bonus,
the 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 the Employee or
accrued by the Employee during the Term multiplied by (B)
the greater of three (3) 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 the 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;
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<PAGE>
(iv) The Company shall provide the Employee with the
opportunity to purchase the automobile provided pursuant
to Section II(f) at its depreciated book value as of the
date of termination; and
(v) The Company shall continue to maintain for the benefit of
Employee and his family at Company expenses the same
health insurance coverage in effect for the 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 the Employee for
which the 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.
(vi) All stock options granted pursuant to the Option Agreement
shall, at the Employee's election, be accelerated to and
fully vested as of the date of termination, and all stock
options granted pursuant to any stock option agreement
shall, at Employee's election, be accelerated to and fully
vested as of the date of termination and shall be deemed
amended to permit exercise for the full remaining term
thereof as if no such termination had occurred (or 90
days, if longer).
(vii) The Company shall eliminate the collateral assignment on
the Split Dollar Life Insurance policy(s) maintained under
the Split Dollar Plan and transfer to the Employee the
Company's portion of the policy's cash surrender value.
(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 change in control of the Company, including the sale
of a substantial portion of the assets or stock of the
Company to a third party;
(ii) The Employee's removal as President of the Fine Jewelry
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<PAGE>
Division or any other change in the composition of the
Board of Directors of the Company which results in the
removal, resignation or replacement of twenty-five percent
(25%) or more of the directors other than with the
concurrence of a majority of the Directors previously in
office;
(iii) 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;
(iv) 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
(v) Any material breach of this Agreement by the Company.
(2) Notice. The 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), (iii), (iv), or (v)
above and the Company either (a) fails to correct or cure the situation after
being given a reasonable time to do so or (b) accelerated the date of
termination. After receiving a notice from the 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), (iii),
(iv) or (v). In the event that the Company disputes the 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 the Employee contends falls within Section III(c) (1) (i),
(ii), (iii) or (iv) shall, if a timely claim is filed, extend up to and through
the decision of the AAA (as hereinafter defined) and for fifteen (15) days
thereafter.
(3) Compensation. Upon termination of his employment With Good Reason,
the Employee shall receive the same compensation provided for in Section III(b)
hereinabove.
(d) Termination of Agreement by Employee Without Good Reason. Employee may
terminate his employment Without Good Reason.
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<PAGE>
(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 the
Employee's disability, as defined in Section III(f) hereinafter.
(2) Notice. The Employee shall provide the Company with six (6)
months' prior written notice of termination Without Good Reason. After receiving
a notice from the 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, the Employee shall receive the same compensation provided for in Section
III(a) (3).
(e) Continuation of Medical Benefits. With respect to any termination of
the Employee's employment other than for gross misconduct, the Employee shall be
eligible to continue to participate at the Employee's expense in the Company's
health insurance plan for a period of sixty (60) 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 (12) months' salary at the rate then applicable to the
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 (12) 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(g) and (i) 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 (12) 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.
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<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 base
salary, in the amounts set forth herein prior to any salary reduction, 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 five (5) years from the termination date.
(3) Thirty days after the expiration of the term of this Agreement,
and provided that the Company has fully performed all of its obligations to the
Employee under this Agreement: (i) the Company shall be entitled to the return
from the insurer of the principal amount of each Split Dollar Payment made by
the Company other than the Retained Split Dollar Amount, and (ii) upon such
return, the Company shall eliminate the collateral assignment on the
split-dollar life insurance policy(s) maintained under the Split Dollar Plan. In
the event that the Company breaches any of its termination/severance obligations
to the Employee under this Agreement, the Employee shall be entitled to (A) the
immediate elimination of the collateral assignment of the split-dollar policy(s)
under the Split Dollar Plan, and (B) the immediate transfer by the Company of
the Company's portion of the policy's cash surrender value (including all Split
Dollar Payments previously made).
IV. REPRESENTATION 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
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Employee understand and acknowledge that the development and/or acquisition of
trade secrets and confidential information are the results 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 and/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. During the Employee's employment with the Company under
this Agreement or otherwise, and for a period of two (2) 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 nine and nine-tenths percent (9.9%) of the outstanding voting securities of
any class of any such corporation).
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(c) "Jewelry Business". The term "Jewelry Business" as used in the 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 provided, however, that the Jewelry Business shall not include any
business that does not conduct its business primarily through the same channels
of distribution as does the Company on the Termination date.
(d) Enforcement. The 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 the
Employee's obligations under this Section VI. The 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 the 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 under this Agreement within (30) days of the date on which
payment is due or fails to perform any other material obligation when such
performance is due, and further fails to cure the nonpayment or nonperformance
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.
(f) Notwithstanding any of the foregoing provisions contained in this
Section VI, the Company expressly acknowledges and agrees that the Employee
shall be permitted to act as a consultant to L.G. Balfour Company, Inc., both
during and at any time following his employment by the Company pursuant to this
Agreement, without being in violation of the provisions of this Section VI.
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
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Arbitration Association ("AAA"). Such arbitration 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, distributee,
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, 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 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 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
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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.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement on the
date(s) set forth below.
TOWN & COUNTRY CORPORATION
By: /s/ William Schawbel
_______________________________
Title: Interim President
/s/ Francis X. Correra
_______________________________
Francis X. Correra
AMENDMENT NUMBER TWO TO LOAN AGREEMENT
--------------------------------------
(TOWN & COUNTRY CORPORATION AND SUBSIDIARIES)
THIS AMENDMENT NUMBER TWO TO LOAN AGREEMENT (this "Amendment"), dated as of May
30, 1997, is entered into between Town & Country Corporation, a Massachusetts
corporation, Town & Country Fine Jewelry Group, Inc., a Massachusetts
corporation, GL, Inc., a Massachusetts corporation, formerly known as Gold
Lance, Inc., a Massachusetts corporation, L.G. Balfour Company, Inc., a Delaware
corporation (which aforesaid corporations, individually and collectively,
jointly and severally, and together with their successors and assigns, are
herein referred to as "Borrower"), and Foothill Capital Corporation, a
California corporation ("Foothill"), in light of the following:
WHEREAS, Borrower and Foothill are parties to that certain Loan Agreement dated
as of July 3, 1996 (as from time to time amended, modified, supplemented,
renewed, extended, or restated, including, without limitation, by this Amendment
and by the Amendment Number One to Loan Agreement specifically referred to
below, the "Loan Agreement");
WHEREAS, Borrower and Foothill are parties to that certain Amendment Number One
to Loan Agreement dated as of October 31, 1996, amending the Loan Agreement as
therein provided; and
WHEREAS, Borrower has requested that certain provisions of the Loan Agreement be
amended, and Foothill has agreed to amend such provisions in accordance with the
terms hereof.
NOW, THEREFORE, in consideration of the foregoing and the mutual covenants,
conditions, and provisions as hereinafter set forth, the parties hereto agree as
follows:
1. Initially capitalized terms used herein have the meanings defined in
the Loan Agreement unless otherwise defined herein.
2. The reference in clause (ii)(y) of the definition of "Borrowing Base"
to "Twelve Million Five-Hundred Thousand Dollars ($12,500,000)" is changed to
refer to "Eleven Million Dollars ($11,000,000)".
3. Clause (e) of the definition of "Eligible Accounts" in the Loan
Agreement is restated to read:
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(e) Accounts with selling terms of more than ninety (90) days from the
date of the applicable invoice;
4. Clause (k) of the definition of "Eligible Accounts" in the Loan
Agreement is restated to read:
(k) Accounts with respect to an Account Debtor whose total obligations
to Borrower exceed ten percent (10%) of all Eligible Accounts owed to
Borrower, to the extent of the obligations of such Account Debtor in
excess of such percentage; provided, however, that, (1) in the case of
K-Mart Corporation, HSN Broadcasting of Illinois, Inc., Wal-Mart
Stores, Inc., and Sears Roebuck & Company, and such other highly
creditworthy Account Debtors as to which Foothill has agreed to in
writing (not including Montgomery Ward), the foregoing percentage may,
in Foothill's reasonable discretion, be increased to up to twenty
percent (20%) before the excess would be deemed ineligible, and (2) in
the case of Zale Corporation and Gordon Jewelry Corporation
(collectively with their respective successors hereinafter
"Zale/Gordon"), the foregoing percentage for Zale/Gordon, on a combined
basis, may, in Foothill's reasonable discretion, be increased to up to
fifteen percent (15%) before the excess would be deemed ineligible;
5. The reference in clause (i) of the definition of "Eligible Inventory
Advance Component" in the Loan Agreement to "seventy-five percent (75%)" is
changed to refer to "one hundred percent (100%)".
6. Clause (ii) of the definition of "Net Eligible Accounts Availability"
in the Loan Agreement is restated to read:
(ii) an amount equal to such Debtor's cash collections for the
immediately preceding (y) one hundred twenty (120) calendar day period
during the months of December through September, and (z) one hundred
forty-five (145) calendar day period for the months October through
November.
7. The following definitions in Section 1.1 of the Loan Agreement are
restated:
"Consolidated Interest Coverage Ratio" means, with respect to any
determination thereof to be made as of the last day of a fiscal quarter
of Borrower, the ratio of (i) consolidated EBITDA of T&C and its
Subsidiaries for the 12-month period ending on such day to (ii) the
cash interest expense of T&C and its Subsidiaries, determined on a
consolidated basis, including any related bank or lender fees, for the
12-month period ending on such day.
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"GLI" means GL, Inc., a Massachusetts corporation (formerly known as
Gold Lance, Inc., a Massachusetts corporation).
"Maximum Amount" means, (a) during February through October, Forty
Million Dollars ($40,000,000), and (b) during November through January,
Forty-Five Million Dollars ($45,000,000).
"Maximum Gold Letter of Credit Amount" means, (a) during February
through October, Twenty Million Dollars ($20,000,000), and (b) during
November through January, Fifteen Million Dollars ($15,000,000).
8. The following definitions are added to Section 1.1 of the Loan
Agreement:
"Consolidated Net Worth" means, as of any date any determination
thereof is to be made, Borrower and the Subsidiaries' total
stockholder's equity, calculated on a consolidated basis in accordance
with GAAP for such period.
"EBITDA" means, with respect to any fiscal period of a Person, such
Person's earnings (excluding extraordinary items and restructuring
expenses (determined in accordance with GAAP)), plus (except to the
extent attributable to extraordinary items (determined in accordance
with GAAP)) the amount of any interest, taxes, depreciation,
non-Indebtedness amortization deducted in arriving at such earnings;
provided that, for purposes of computing EBITDA, there shall not be
included or taken into account the approximately $39,800,000 charge
taken for the quarter of Borrower ended in August, 1996, with respect
to inventory and accounts.
"Senior Debt to EBITDA Ratio" means, with respect to any determination
thereof to be made as of the last day of a fiscal quarter of Borrower,
the ratio of (i) Consolidated Adjusted Total Senior Liabilities on such
day to (ii) consolidated EBITDA of T&C and its Subsidiaries for the
12-month period ending on such day.
9. The following definitions are deleted from Section 1.1 of the Loan
Agreement: Consolidated Current Assets, Consolidated Current Liabilities,
Consolidated Tangible Capital Base, Consolidated Tangible Net Worth, and Working
Capital.
10. Section 6.13 of the Loan Agreement is restated, effective from and
after February 23, 1997, as follows:
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6.13 Financial Covenants. Borrower shall maintain:
(a) Consolidated Net Worth. Consolidated Net Worth of not less than
Negative Eleven Million Dollars (-$11,000,000) as at the last day of
each fiscal quarter of Borrower commencing 2/23/97.
(b) Senior Debt to EBITDA Ratio. A Senior Debt to EBITDA Ratio of not
more than the amounts stated below as of the corresponding dates stated
below:
Amount Date
------ ----
15.0:1.0 2/23/97
20.0:1.0 5/24/97
10.0:1.0 8/23/97 and
the last day of each
fiscal quarter of
Borrower thereafter
(c) Consolidated Interest Coverage Ratio. A Consolidated Interest
Coverage Ratio of not less than the amounts stated below as of the
corresponding dates stated below:
Amount Date
------ ----
0.00:1.0 2/23/97
0.10:1.0 5/24/97
0.20:1.0 8/23/97
0.35:1.0 11/22/97
0.40:1.0 2/21/98
To the extent that Borrower was in breach of any of the financial covenants
contained in Section 6.13 of the Loan Agreement for its fiscal quarter ended on
February 23, 1997, as such covenants existed prior to being amended as set forth
above, Foothill hereby waives such breaches.
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11. Section 6.15 of the Loan Agreement is restated as follows:
6.15 Location of Inventory and Equipment. The Inventory and Equipment
shall not at any time now or hereafter be stored with a bailee,
warehouseman, or similar party without Foothill's prior written
consent. Except as otherwise provided in the last sentence of this
Section 6.15, Borrower shall keep the Inventory and Equipment only at
the locations identified on Schedule 6.15A; provided, however, that
Borrower may amend Schedule 6.15A so long as such amendment occurs by
written notice to Foothill not less than thirty (30) days prior to the
date on which the Inventory or Equipment is moved to such new location
and so long as, at the time of such written notification, Borrower
provides any financing statements or fixture filings necessary to
perfect and continue perfected the Collateral Agent's security interest
in such assets and also provides to Foothill a landlord's waiver in
form and substance satisfactory to Foothill; provided further, however,
that the foregoing shall not prevent Borrower from providing Inventory
to its sales personnel or from providing Inventory 'samples' to
customers or potential customers so long as such activities are in the
ordinary course of Borrower's business, consistent with its past
practices, and involve a de minimis amount of Inventory. The foregoing
notwithstanding, Borrower may permit up to, and shall not permit not
more than, 4.0% of Borrower's total fto of Precious Metals in the
aggregate at any time to be in the possession of Outside Processors
located at locations not listed on Schedule 6.15A, provided that not
more than 0.6% of Borrower's total fto of such Precious Metals shall be
maintained at any time at any single location not listed on Schedule
6.15A, and provided that all Precious Metals of Borrower shall be
accounted for in the Monthly Gold Certificates provided by Borrower to
Foothill in accordance with the provisions of this Agreement.
12. Schedule 6.15A of the Loan Agreement is amended to add the following
names and addresses thereto:
Pronto Jewelry Inc.
6 West 48th Street
New York, NY 10036
All Form Tubing, Inc.
Champion Chain
1 Haynes Avenue
Newark, NJ 07114
5
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Regis Manufacturing, Inc.
136 Old Colony Road
Smithfield, RI 02917
Lita Trading
1160 Broadway
New York NY 10001
Gannon & Scott, Inc.
33 Kenny Drive
Cranston, RI 02920
T. Pinto Manufacturing, Inc.
37 West 26th Street
New York, NY 10010
General Findings, Inc.
57 John Deitsch Sq.
North Attleboro, MA 02761
13. Section 7.20 of the Loan Agreement is restated as follows:
. 7.20 Specific Gold Covenants
(a) Consign or deliver Precious Metals to
foreign Subsidiaries or foreign sales representatives.
(b) Deliver "memo Inventory" (including
Precious Metals) anywhere outside the United States of America.
(c) Consign or deliver goods containing an
aggregate, at any one time, of more than five thousand five hundred
(5,500) fto of Precious Metals to the sales representatives or agents
of Borrower.
(d) Consign or deliver (including on memo
or any similar arrangement) goods containing an aggregate, at any
time, of more than ten thousand (10,000) fto of Precious Metals to
customers of Borrower.
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(e) Consign or deliver (including on memo
or any similar arrangement) goods containing an aggregate, at any
time, of more than five thousand (5,000) fto of Precious Metals to any
single customer.
(f) Have more than thirteen thousand
(13,000) fto of Precious Metals in the aggregate, at any time, at, or
in transit to or from, Outside Processors.
(g) Fail to maintain Equity Precious Metals
in an aggregate amount greater than the aggregate amount of Precious
Metal of Borrower (i) on memo or consignment to customers of Borrower
or (ii) in the possession of sales representatives of Borrower.
(h) Permit the aggregate number of fto of
Precious Metals of Borrower (whether consisting of Consigned Precious
Metals or Equity Precious Metals), at any time, without duplication,
(i) at, or in transit to or from, Outside Processors, (ii) on
consignment to customers of Borrower, (iii) at, or in transit to or
from, customers of Borrower pursuant to "memo" transactions, or (iv)
in the possession of sales representatives of Borrower, minus one
hundred percent (100%) of the aggregate number of fto of Equity
Precious Metals, to equal or exceed the percentage of the aggregate
number of fto of Consigned Precious Metals set forth in the following
table during the corresponding month of any year:
================================================================================
Maximum percentage of the aggregate During the month specified below in any
number of fto of Consigned Precious year
Metals
================================================================================
================================================================================
5% January
- --------------------------------------------------------------------------------
5% February
- --------------------------------------------------------------------------------
5% March
- --------------------------------------------------------------------------------
5% April
- --------------------------------------------------------------------------------
5% May
- --------------------------------------------------------------------------------
5% June
- --------------------------------------------------------------------------------
5% July
- --------------------------------------------------------------------------------
10% August
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- --------------------------------------------------------------------------------
10% September
- --------------------------------------------------------------------------------
10% October
- --------------------------------------------------------------------------------
15% November
- --------------------------------------------------------------------------------
10% December
- --------------------------------------------------------------------------------
(i) Obtain Precious Metals on consignment
from a third person or entity except for consignments by Gold
Consignor to Borrower pursuant to the Gold Consignment Agreement.
14. Notwithstanding Section 7.12 of the Loan Agreement, and as a limited
waiver of the provisions thereof confined to the specific instance stated,
Borrower may pay a one-time dividend not to exceed $70,000 to the holders of the
New Exchangeable Preferred Stock (and if such dividend has already been paid,
Foothill agrees that any breach of Section 7.12 of the Loan Agreement resulting
therefrom is waived).
15. The existing Ten Million Dollar ($10,000,000) availability block
previously agreed to between Foothill and Borrower is modified effective June 1,
1997 as follows (and as so modified shall continue in effect): Seven Million
Five Hundred Thousand Dollars ($7,500,000) from June 1, 1997 through August 31,
1997; Two Million Five Hundred Thousand Dollars ($2,500,000) from September 1,
1997, through February 15, 1998; Five Million Dollars ($5,000,000) from February
16, 1998, through February 28, 1998; and Seven Million Five Hundred Thousand
Dollars ($7,500,000) commencing March 1, 1998 and at all times thereafter.
16. The parties stipulate that the Pending Material Transaction closed
prior to the date hereof. Therefore, all provisions of the Loan Agreement that
are dependent on whether the Pending Material Transaction closed shall be
construed to give effect to the prior closure thereof.
17. Borrower hereby represents and warrants to Foothill as follows: (a) The
execution, delivery, and performance by Borrower of this Amendment have been
duly authorized by all necessary corporate and other action and do not and will
not require any registration with, consent or approval of, or notice to or
action by, any Person in order to be effective
8
<PAGE>
and enforceable; and (b) The Loan Agreement, as amended by this Amendment,
constitutes the legal, valid, and binding obligation of Borrower, enforceable
against Borrower in accordance with its terms, without defense, counterclaim, or
offset.
18. Except as herein expressly amended, all terms, covenants and provisions
of the Loan Agreement are and shall remain in full force and effect and all
references therein to the Loan Agreement shall henceforth refer to the Loan
Agreement as amended by this Amendment. This Amendment shall be deemed
incorporated into, and a part of, the Loan Agreement.
19. This Amendment shall be governed by, and construed and enforced in
accordance with, the laws of the State of California.
20. This Amendment may be executed in any number of counterparts, each of
which shall be deemed an original, and all such counterparts together shall
constitute but one and the same instrument. This Amendment shall become
effective when each party has executed and delivered a counterpart hereof.
21. This Amendment, together with the Loan Agreement and the other Loan
Documents, contains the entire and exclusive agreement of the parties hereto
with reference to the matters discussed herein and therein. This Amendment
supersedes all prior drafts and communications with respect thereto. This
Amendment may not be amended except in writing executed by both of the parties
hereto.
22. Any waiver contained herein is limited to the specifics hereof, shall
not apply with respect to any facts or occurrences other than those on which it
is based, shall not excuse future non-compliance with the Loan Agreement (as it
may from time to time be amended), and, except as expressly set forth herein,
shall not operate as a waiver or an amendment of any right, power or remedy of
Foothill, nor as a consent to any further or other matter, under the Loan
Documents.
23. If any term or provision of this Amendment shall be deemed prohibited
by or invalid under any applicable law, such provision shall be invalidated
without affecting the remaining provisions of this Amendment or the Loan
Agreement, respectively.
24. Any reference in any Loan Document to "GLI" or to "Gold Lance, Inc." or
to "Gold Lance" shall refer to GL, Inc., a Massachusetts corporation (formerly
known as Gold Lance, Inc., a Massachusetts corporation).
9
<PAGE>
25. As a condition precedent to the effectiveness of this Amendment,
Foothill shall have received an amendment fee of Fifty Five Thousand Dollars
($55,000), which fee is earned in full by Foothill and due and payable by
Borrower to Foothill concurrently with the execution and delivery of this
Amendment by Foothill.
IN WITNESS HEREOF, this Amendment has been executed and delivered as of the date
first set forth of above.
TOWN & COUNTRY CORPORATION, a Massachusetts
corporation
By /s/ Veronica Zsolcsak
___________________________
Name: Veronica Zsolcsak
Title: CFO/Treasurer
TOWN & COUNTRY FINE JEWELRY GROUP, INC., a
Massachusetts corporation
By /s/ Veronica Zsolcsak
___________________________
Name: Veronica Zsolcsak
Title: CFO/Treasurer
GL, INC., a Massachusetts corporation
By /s/ Veronica Zsolcsak
___________________________
Name: Veronica Zsolcsak
Title: Treasurer
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<PAGE>
L.G. BALFOUR COMPANY, INC., a Delaware
corporation
By /s/ Veronica Zsolcsak
___________________________
Name: Veronica Zsolcsak
Title: Treasurer
FOOTHILL CAPITAL CORPORATION,
a California corporation
By /s/ Anthony Aloi
___________________________
Name: Anthony Aloi
Title: Assistant Vice President
11
TERMINATION AND SETTLEMENT AGREEMENT
This TERMINATION AND SETTLEMENT AGREEMENT (the "Agreement") is made and
entered into as of this 3rd day of January, 1997, by and between Town & Country
Corporation ("Town & Country"), a Massachusetts corporation, and C. William
Carey ("Carey").
WHEREAS, over an extended period of time, Carey has been employed by
Town & Country in various capacities, including as its President and Chief
Executive Officer, and has served each as a Director and Chairman of the Board.
WHEREAS, the Board of Directors ("the Board") of Town & Country
believes it to be in the best interest of Town & Country to terminate Carey's
employment without cause, effective upon execution of this Agreement and payment
of the obligations to Carey, as set forth herein;
WHEREAS, the Board believes that, in view of Carey's high personal
stature in the jewelry industry and his intimate knowledge of Town & Country, it
would be in Town & Country's best interest if Carey would agree to restrictions
as to his ability, directly or indirectly, to compete with Town & Country and
its subsidiaries, and on his ability, directly and indirectly, to solicit for
employment current employees of Town & Country and its subsidiaries;
WHEREAS, the Board believes that it is in the best interest of Town &
Country, in order to provide for a more harmonious period of transition
subsequent to Carey's departure, that Carey tender his resignations, and that
such resignations be accepted, as a member of the Board and as
<PAGE>
Chairman of the Board;
WHEREAS, the Board recognizes the economic disadvantage to Carey in
agreeing to restrict his ability to earn gainful employment in the jewelry
industry, since for over 41 years Carey's professional life has been
concentrated in the jewelry industry;
WHEREAS, after considerable negotiations, the Board and Carey have
agreed to enter into this Agreement for the purpose of resolving the terms of
Carey's termination from Town & Country his resignation as a member and Chairman
of the Board and his agreement to refrain from competition with Town & Country,
which Agreement will supersede any other agreement of the parties on the subject
matter addressed herein;
WHEREAS, in order to assist Town & Country, including its subsidiaries,
during the transition period subsequent to Carey's departure, the Board desires
to retain Carey during a two year consulting period following the termination of
Carey's employment, and further desires to limit certain voting rights which
Carey currently has as a holder of shares of Class B Common Stock of Town &
Country, all as more fully set forth in a Consulting Agreement and Side Letter
Agreements of even date herewith (together, the "Ancillary Agreements"), which
Carey is entering into in consideration of rights granted to Carey in this
Agreement and the Ancillary Agreements; and
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<PAGE>
WHEREAS, Town & Country, acting through its Board, and Carey believe it
to be in the best interest of each to set forth in writing their understandings
as to their respective rights and obligations upon the termination of Carey's
employment, without Cause, from Town & Country as set forth in this Agreement.
NOW, THEREFORE, in consideration of the following terms and conditions,
which the parties hereby acknowledge and agree are in satisfaction of any and
all obligations of Town & Country and Carey with respect to and in any way
relating to or arising out of Carey's employment and the termination of Carey's
employment, the parties agree as follows:
1. "Town & Country" Defined. The parties acknowledge and agree that the
term "Town & Country" includes Town & Country Corporation and each of its
divisions, affiliates and subsidiaries, including, but not limited to, Fine
Jewelry Group, Inc., and its and their respective officers, directors,
employees, agents, successors and assigns.
2. Termination Status; Effective Date. Carey's employment with Town &
Country is terminated without cause, as such term is defined in the Employment
Agreement, as of the date of execution of this Agreement (the "Termination
Date").
3. Compensation Payments and Expense Reimbursement.
(a) Reimbursable Expenses. Contemporaneously with the execution of
this Agreement, Town & Country has paid Carey $__________ via wire transfer in
immediately
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<PAGE>
payable funds, representing reimbursement for all expenses incurred on behalf of
Town & Country for which Carey has submitted appropriate forms for reimbursement
through and including the Termination Date. Town & Country shall promptly pay
Carey, upon submission of appropriate reimbursement forms, for such additional
reasonable expenses incurred on behalf of Town & Country through the Termination
Date as and when Carey submits evidence of incurring such expenses to Town &
Country.
(b) Lump Sum Payment. Contemporaneously upon the execution of this
Agreement and in consideration of the cancellation of Carey's rights under any
agreement with Town & Country, Town & Country has paid Carey $3,568,191, via
wire transfer in immediately available funds, representing the lump sum payment
required to be paid to Carey upon his termination. The parties agree that no tax
withholding shall be required in connection with this payment and that Town &
Country will issue Carey a Form 1099 in connection therewith.
4. Insurance and Other Benefits.
(a) Health and Medical Benefits. Town & Country shall continue to
provide Carey, through and including February 28, 2001, the term of the
Employment all health and medical benefits which may be maintained by the
Company for its most senior executives, either by including Carey in any group
medical plan it may maintain, or by providing comparable coverage through an
individual plan. Carey agrees that the first 18 months of such coverage shall be
the coverage continuation provided for by COBRA (to be paid by Town & Country)
and to execute any documents necessary to continue such
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<PAGE>
coverage, as may be prepared by Town & Country. The parties agree that the
provision of such benefits shall be taxable income to Carey under Internal
Revenue Code Section 106.
(b) Key Man Life Insurance Policy. Town & Country shall
contemporaneously upon the execution of this Agreement assign to Carey, at his
election, all of its rights to the key man life insurance policy currently
maintained by the Company on Carey's life, provided Carey tenders to the Company
the sum equal to the cash surrender value of such key man life insurance policy
plus an amount equal to any paid but unearned premiums on such policy.
(c) Split Dollar Life Insurance Policy. Town & Country hereby
assigns to Carey all of its rights to the split dollar life insurance policy,
including assigning the cash surrender value thereof, currently maintained by
the Company on Carey's life, and Town & Country shall immediately take such
actions as are necessary to eliminate Town & Country's collateral assignment of
such split dollar life insurance policy. Further, contemporaneously upon the
execution of this Agreement, Town & County has paid to Carey via wire transfer
in immediately available funds, the sum of $107,154.64, representing the
remaining premium payments due on such split dollar life insurance policy.
(d) Stock Option Grants Confirmed; Exercise Period Extended. All
stock options granted to Carey by Town & Country and vested as of the
Termination Date under any Town & Country stock option plan, incentive plan or
otherwise, including, but not limited to, the Town & Country 1995 Stock Option
and Incentive Plan, as identified in Schedule A attached hereto, are hereby
confirmed, and each applicable Stock Option Agreement is hereby amended such
that the Exercise Period of each such stock option shall
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<PAGE>
be extended until the fifth (5th) anniversary of the date of this Agreement.
Each stock option, together with the underlying shares of Town & Country Class A
Common Stock, shall continue to be registered with the Securities and Exchange
Commission throughout such five year period.
5. Resignation as Director and Chairman of the Boards. Effective
immediately, Carey hereby tenders his resignation as a member of the Board of
Town & Country and the Board of Directors of each subsidiary of Town & Country
other than Essex Public Company Limited (Town & Country's subsidiary based in
Thailand), and further tenders his resignation as Chairman of the Board of Town
& County and of each subsidiary of Town & Country for which he may hold such
office (except the Chairmanship of Essex Public Company Limited), Town &
Country, on behalf of itself and each of its subsidiaries, hereby accepts each
such resignation.
6. Release. In exchange for the mutual covenants and agreements set
forth in this Agreement, and other good and valuable consideration provided for
in this Agreement, the parties hereby agree to the following:
(a) Carey hereby releases and forever waives his right to assert any
form of legal claim against Town & Country of any kind whatsoever arising from
any events, acts or omissions to act from the beginning of time through the date
hereof. Carey's waiver and release herein is intended to bar any form of legal
claim, charge, complaint or any other form of action (jointly referred to as
"Claims") against Town & Country seeking any form of relief including, without
limitation, equitable relief (whether declaratory, injunctive or
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<PAGE>
otherwise) or the recovery of any damages or any other form of monetary recovery
whatsoever (including, without limitation, back pay, front pay, compensatory
damages, emotional distress damages, punitive damages, liquidated damages,
attorneys fees (except as provided in paragraph 20 hereof) and any other costs)
against or from Town & Country, relating to any such events, actions or
omissions to act. This release of claims includes, without limitation, any
claims Carey may have under the Age Discrimination in Employment Act. Carey's
waiver and release herein is not intended to, nor does it bar any form of Claim
against Town & Country for breach of this Agreement or any of the Ancillary
Agreements.
(b) Carey will not knowingly assist, aid, participate, encourage or
solicit (directly and indirectly) any person(s), including, but not limited to,
any shareholder(s) of Town & Country, in connection with any contemplated or
actual legal proceedings against Town & Country including, without limitation,
any shareholders' derivative suit or other claim under the Massachusetts
Business Corporation Law, or any claim under the Securities Act of 1933, the
Securities Exchange Act of 1934 and Massachusetts "Blue Sky" statutes and
regulations, all as amended. In the event Carey is contacted (formally or
informally) in connection with any such contemplated or actual legal proceedings
against Town & Country including, without limitation, receiving any legal
process, he shall immediately inform the Board of such contact. In the event of
any suit against Town & Country, Carey will assist Town & Country in the
investigation and defense thereof at Town & Country's request and expense.
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<PAGE>
(c) Town & Country hereby releases and forever waives its right to
assert any form of legal claim against Carey of any kind whatsoever arising from
any events, acts or omissions to act from the beginning of time through the date
hereof. Town & Country's waiver and release herein is intended to bar any form
of Claim against Carey seeking any form of relief including, without limitation,
equitable relief (whether declaratory, injunctive or otherwise) or the recovery
of any damages or any other form of monetary recovery whatsoever against or from
Carey, relating to any such events, actions or omissions to act. Town &
Country's waiver and release herein is not intended to bar any form of Claim
against Carey for breach of this Agreement or any of the Ancillary Agreements.
7. Company Documents, Property, Mail and Phone Calls.
(a) Upon the request of the Chairman of the Board of Town & Country,
Carey shall return as necessary all Town & Country documents and property (other
than those specifically agreed to be transferred in connection with the
establishment of the consulting arrangement pursuant to the Consulting Agreement
of even date herewith) including, without limitation, all computer software and
documentation, all computer disks, all sales reports, sales projections,
customer lists and company financial information (the "Company Information");
provided, however, that Carey may use the Company Information on a confidential
basis in connection with the performance of his duties under the Consulting
Agreement.
(b) Town & Country shall use its best efforts to forward immediately
any personal mail or telephone calls to a local address and telephone number
provided by
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<PAGE>
Carey. Carey shall use his best efforts to forward any company mail or telephone
calls to Town & Country.
(c) Carey shall be provided access, during normal business hours, of
records of Town & Country which may directly relate to Carey, including personal
tax matters, litigation in which Carey is a named party and similar records.
8. Confidentiality.
(a) Carey expressly acknowledges and agrees that all information
relating in any way to the subject matter of this Agreement, including the
existence of and terms of this Agreement, shall be held confidential by him and
shall not be publicized or disclosed to any person (other than an immediate
family member, legal counsel or financial advisor, provided that any such
individual to whom disclosure is made agrees to be bound by these
confidentiality obligations), business entity or government agency, except to
comply with state or federal law, including, but not limited to, the Securities
and Exchange Commission and the Internal Revenue Service, and in addition, Carey
may use this Agreement in any litigation or proceeding brought against Carey in
connection with this Agreement or any payments made hereunder.
(b) Carey agrees that he will not use for his own benefit nor
disclose to third persons any trade secrets and/or confidential information,
except to the extent that such trade secrets and/or confidential information (i)
were known to Carey prior to his employment by Town & Country, (ii) are
authorized in writing by Town & Country to be used or disclosed, (iii) were in
or became part of the public domain (other than through
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<PAGE>
Carey in breach of this provision), or (iv) were required to be disclosed by a
court or governmental agency.
9. Non-Competition Agreement.
(a) Noncompetition. For a period of two years after the Termination
Date, Carey will not, anywhere in the United States of America (excluding any
territory or possession thereof): (i) compete with Town & Country in the Jewelry
Business (as hereinafter defined), or (ii) otherwise interfere with, disrupt, or
attempt to interfere with or disrupt the relationship between Town & Country and
any customer, supplier, lessor, licensor, manufacturer, contractor, designer or
employee of Town & Country.
(b) "Compete". The term "compete", used in this Section shall mean
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 Carey at no time owns directly or indirectly
more than 4.9% of the outstanding voting securities of any class of any such
corporation).
(c) "Jewelry Business". The term "Jewelry Business", as used in this
Section, shall mean the business of manufacturing and distributing jewelry
products in which Town & Country is engaged on the Termination Date, provided,
however, that the term "Jewelry Business" shall not include the procurement and
distribution of rough diamonds or loose diamonds (including diamonds in settings
of three stones or less).
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<PAGE>
(d) Enforcement. Carey acknowledges that Town & Country will suffer
irreparable harm and substantial damages not readily ascertainable or
compensable in terms of money in the event of a breach of any of Carey's
obligations under this Section. Carey therefore agrees that Town & Country shall
be entitled (in addition to and not in lieu of any other remedies or rights
otherwise available to Town & Country) to obtain an injunction in a court of
competent jurisdiction prohibiting the breach of this Section 9, and Carey
specifically submits himself to the jurisdiction and venue of the courts of the
Commonwealth of Massachusetts for the purposes of any such action.
(e) Notwithstanding any of the foregoing provisions contained in
this Section, Town & Country expressly acknowledges and agrees that Carey shall
be permitted to own stock in and act as a director, officer, employee or
consultant to Little Switzerland, Inc. and L.S. Wholesale, Inc., and shall be
permitted to act in accordance with the Ancillary Agreements.
10. Non-Disparagement.
(a) Carey agrees that he will not make any statements that are
disparaging about or adverse to Town & Country's business interests (including
its officers, directors and employees) or which are intended to harm Town &
Country's reputation, including, but not limited to, any statements that
disparage any operations, products, services, finances, capability or any other
aspect of Town & Country's business.
(b) Town & Country agrees that it will not make any statements that
are disparaging about Carey's business performance or adverse to Carey's
professional reputation or which are intended to harm Carey's professional or
personal reputation. All
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<PAGE>
statements by Town & Country's Directors and executive officers made to the
investment community, current employees, customers. media and others regarding
Carey's departure shall be consistent with the press release and related written
statements jointly approved and issued contemporaneously with this Agreement.
11. Indemnification and Insurance. Town & Country shall continue to
indemnify Carey, to the fullest extent provided under its Articles of
Incorporation, with respect to any matter pertaining to his association with
Town & Country, including his past service as an officer and Director; and Town
& Country shall continue to include Carey's past service as an officer and
Director for period of not less than five years following the Termination Date,
under directors and officers' insurance coverage with the same insurance
carrier, in the same amount and to the same extent provided to other Directors
and officers of Town & Country. From time to time, at Carey's request, Town &
Country shall cause its insurance carrier to certify that Carey is so covered.
In case any proceeding (including any governmental investigation) shall
be instituted involving Carey in respect of which indemnity may be sought
pursuant to this Section 11, Carey shall promptly notify Town & Country in
writing. In case any such proceeding shall be brought against Carey and he shall
notify Town & Country of the commencement thereof, Town & Country shall be
entitled to participate therein and, to the extent that it shall desire, to
assume the defense thereof, with counsel selected by Town & Country and
reasonably satisfactory to Carey, and shall pay as incurred the fees and
disbursements of such counsel related to such proceeding. In any such
proceeding, Carey shall have the right to retain his own counsel at his own
expense.
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<PAGE>
Notwithstanding the foregoing, Town & Country shall pay as incurred the fees and
expenses of the counsel retained by Carey in the event (i) Town & Country and
Carey shall have mutually agreed to the retention of such counsel or (ii) the
named parties to any such proceeding (including any impleaded parties) include
both Town & Country and Carey and representation of both parties by the same
counsel would be inappropriate due to actual or potential differing interests
between them. Town & Country shall not be liable for any settlement of any claim
or proceeding effected without its written consent, but if settled with such
consent or if there be a final judgment for the plaintiff, Town & Country agrees
to indemnify Carey under this Section 11 from and against any loss or liability
by reason of such settlement or judgment.
12. Entire Agreement; Governing Law. Except as expressly provided for
in this Agreement, this Agreement supersedes any and all prior oral and/or
written agreements between Town & Country and Carey, including but not limited
to the Employment Agreement and any and all correspondence relating to such
employment, and sets forth the entire agreement between Town & Country and Carey
with respect to the matters addressed herein. This Agreement shall take effect
as an instrument under seal and shall be governed and construed in accordance
with the laws of the Commonwealth of Massachusetts.
13. Further Assurances. From and after the date of this Agreement, upon
the request of Carey or Town & Country, Carey and Town & Country shall execute
and deliver such instruments, documents and other writings as may be reasonably
necessary or desirable to confirm or to carry out and effectuate fully the
intent and purposes of this Agreement and the Ancillary
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<PAGE>
Agreements.
14. Modifications and Amendments. The terms and provisions of this
Agreement may be modified or amended only by written agreement executed by all
parties hereto.
15. Waivers and Consents. The terms and provisions of this Agreement
may be waived, or consent for the departure therefrom granted, only by written
document executed by the party entitled to the benefits of such terms or
provisions. No such waiver or consent shall be deemed to be or shall constitute
a waiver or consent with respect to any other terms or provisions of this
Agreement, whether or not similar. Each such waiver or consent shall be
effective only in the specific instance and for the purpose for which it was
given, and shall not constitute a continuing waiver or consent.
16. Severability. In the event that any court of competent jurisdiction
shall determine that any provision, or any portion thereof, contained in this
Agreement shall be unenforceable in any respect, then such provision shall be
deemed limited to the extent that such court deems it enforceable, and as so
limited shall remain in full force and effect. In the event that such court
shall deem any such provision, or portion thereof, wholly unenforceable, the
remaining provisions of this Agreement shall nevertheless remain in full force
and effect.
17. Notices. The parties expressly agree that any notices to be given
hereunder shall be in writing and shall be sent by U.S. Registered or Certified
Mail, Return Receipt Requested, or via
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<PAGE>
a delivery service providing evidence of delivery, addressed to the parties at
their addresses set forth below, or at such other address as either may
designate by notice as aforesaid.
Address for Town & Country:
Town & Country Corporation
25 Union Street
Chelsea, MA 02150
Attn: Chairman of the Board
With a copy to:
Goodwin, Procter & Hoar
Exchange Place
53 State Street
Boston, MA 02109
Attn: Richard E. Floor, Esq.
Address for Carey:
C. William Carey
20 Rowes Wharf, PH 8
Boston, MA 02110
With a copy to:
Mintz, Levin, Cohn, Ferris, Glovsky and Popeo, P.C.
One Financial Center
Boston, MA 02111
Attn: Stanford N. Goldman, Jr., Esq.
18. Representation of Carey. Carey hereby acknowledges that he has read
this Agreement carefully, that he has been afforded sufficient time to
understand the terms and effects of this Agreement, that he has been advised and
encouraged to consult with legal and/or other counsel and in fact he has
consulted with legal counsel, that he voluntarily is entering into and
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<PAGE>
executing this Agreement and that neither Town & Country nor its agents or
representatives have made any representations inconsistent with the terms and
effects of this Agreement.
19. Opinion of Counsel, Statement of Officers. Town & Country has
caused to be provided to Carey: (i) a certificate of the Clerk or Assistant
Clerk of Town & Country certifying the due adoption of resolutions approving the
terms of this Agreement; and (ii) a statement signed by an authorized officer of
Town & Country familiar with its financial condition, stating that Town &
Country has a positive net worth as of the date hereof.
20. Expenses. Town & Country shall reimburse Carey for legal (and
accounting) fees and expenses incurred by Carey in connection with matters
associated with his termination.
22. Headings. The section and paragraph headings contained in this
Agreement are for convenience only and will not be deemed to affect in any way
the language of the provisions to which they refer.
23. Counterparts. This Agreement may be executed in multiple
counterparts, each of which shall be deemed to be an original, and all such
counterparts shall constitute one instrument.
IN WITNESS WHEREOF, the parties have executed this Agreement as a
document under seal as of the date first written above.
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<PAGE>
TOWN & COUNTRY CORPORATION: EMPLOYEE:
/s/ C. William Carey
By: /S/ William Schawbel ______________________________
___________________________
C. William Carey
Name: William Schawbel
_________________________
Title: Interim President
________________________
TOWN & COUNTRY FINE JEWELRY
GROUP, INC.
By: /S/ William Schawbel
___________________________
Name: William Schawbel
_________________________
Title: Interim President
________________________
- 17 -
<PAGE>
SCHEDULE A
Schedule of Stock Options
1. Non-Qualified Stock Option Agreement dated as of March 1, 1996 for
206,545 fully vested shares at an option exercise price per share
of $0.6875.
2. Non-Qualified Stock Option Agreement dated as of March 1, 1996 for
360,000 fully vested shares at an option exercise price per share
of $0.625.
3. Non-Qualified Stock Option Agreement dated May 14, 1993 for
1,000,000 fully vested shares at an option exercise price per share
of $2.75, repriced to an option exercise price of $0.8125 on
September 18, 1995.
VOTING AGREEMENT
This Voting Agreement (this "Agreement") is made as of January 3rd,
1997 by and between Town & Country Corporation, a Massachusetts corporation (the
"Company"), and C. William Carey (the "Shareholder").
WHEREAS, the Company and Carey are parties to that certain Termination
and Settlement Agreement of even date herewith (the "Termination Agreement")
between the Shareholder and the Company;
WHEREAS, in connection with the Termination Agreement, the
Shareholder's employment as Chief Executive Officer of the Company has
terminated and the Shareholder has resigned as Chairman of the Board and as a
Director of the Company;
WHEREAS, the Shareholder owns of record 2,519,787 shares of the
Company's Class B Common Stock;
WHEREAS, the Shareholder desires to promote his interests and the
interests of the Company's other shareholders by agreeing to certain terms and
conditions for voting the shares of the Company's Class B Common Stock owned of
record by him in a manner which may promote stability in the Company's Board of
Directors and in the management and operation of the Company during a period of
management transition without impairing his right to vote, in his sole
discretion, on all other matters on which the holders of shares of the Company's
Class B Common
<PAGE>
Stock are entitled to vote; and
WHEREAS, the Board of Directors of the Company has determined that it
is in the best interests of the Company that the Company enter into this
Agreement.
NOW, THEREFORE, in consideration of the covenants and agreements
contained herein and other good and valuable consideration the receipt and
sufficiency of which are hereby acknowledged, the parties hereto agree as
follows:
1. Shares Subject to Agreement. The Shareholder agrees to hold all of
his Shares (as defined below) subject to, and to vote the Shares in accordance
with, the provisions of this Agreement. As used in this Agreement, the "Shares"
shall mean any shares of Class B Common Stock of the Company held by the
Shareholder and which the Shareholder has the sole power and authority to vote
as of the date of this Agreement.
2. Voting for Board of Directors. In any subsequent election of
directors of the Company in which a director or a slate of directors is
nominated for election by the Board of Directors of the Company, the election of
which nominee or nominees would not result in a majority of the Board of
Directors being directly or indirectly affiliated with or otherwise representing
the interests of a Control Group of Shareholders (as hereinafter defined), the
Shareholder agrees to vote the Shares in accordance with the Majority of Other
Shares Procedure described below.
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<PAGE>
As used herein, the "Majority of Other Shares Procedure" shall be as
follows:
(i) At any meeting of the shareholders of Class A Common Stock
and Class B Common Stock of the Company, the Company shall
cause one preliminary calculation (each, a "Preliminary
Calculation") to be made on behalf of the Shareholder not less
than 5 minutes after the commencement of voting upon each
proposal to elect a nominee or nominees to the Board of
Directors of the Company, the election of which nominee or
nominees would not result in a majority of the Board of
Directors being directly or indirectly affiliated with or
otherwise representing the interests of a Control Group of
Shareholders (each, a "Proposal") to be voted on at such
meeting by holders of shares of Class A Common Stock and Class
B Common Stock of the Company, in order to determine the
manner in which the shares of Class A Common Stock of the
Company voted at such meeting, including the shares of Class A
Common Stock owned by the Shareholder (collectively, the
"Class A Shares"), have been voted on each Proposal; and
(ii) Upon completing the Preliminary Calculation and
determining the percentage of the Class A Shares that were
voted for or against each Proposal, the Shareholder shall vote
the same percentage of the Shares for and against the Proposal
as the percentage of Class A Shares in the Preliminary
Calculation that were voted for an against the Proposal; for
such purpose, the percentage of the
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<PAGE>
Class A Shares that were voted for or against a Proposal shall
be calculated based upon the number of Class A Shares that are
present (in person or by proxy) and voting at the meeting of
the shareholders.
The parties agree that only the Shareholder's right to cast votes in
elections of directors meeting the qualifications described above shall be
affected by this Agreement, and that the Shareholder's right to cast votes with
respect to any other matter shall not be affected in any way, directly or
indirectly, by this Agreement. For example, the Shareholder may, in his sole
discretion and without regard to the Majority of Other Shares Procedure, vote
for, vote against or abstain from voting for any nominee for director whose
election would result in a majority of the Board of Directors being directly or
indirectly affiliated with or otherwise representing the interests of a Control
Group of Shareholders, or for any transaction or other matter submitted to the
holders of Class A Common Stock and Class B Common Stock for their approval. As
used herein, a "Control Group of Shareholders" shall mean one or more persons or
entities who, individually or in the aggregate, own of record or beneficially
20% or more of any class of the Company's capital stock or who, individually or
in the aggregate, have the power, directly and indirectly, to vote 20% or more
of the combined voting power of all classes of the Company's stock entitled to
vote for election of the Company's directors.
3. Termination. Unless earlier terminated by a written agreement
between the Company and the Shareholder, this Agreement shall terminate upon the
first to occur of (i) February 28, 2001, (ii) the adjudication by a court of
competent jurisdiction that the Company is
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<PAGE>
bankrupt or insolvent, or (iii) the dissolution or liquidation of the Company.
4. Successors in Interest; Transferability of Shares. The provisions of
this Agreement shall not be binding upon any third party transferee or assignee
of the Shares for value without the written consent of the Shareholder. Nothing
contained in this Agreement shall affect the Shareholder's ability to sell,
assign or otherwise transfer the Shares to any unrelated party for value, free
from the voting restrictions set forth herein.
5. Notices. The Company and the Shareholder expressly agree that any
notices to be given hereunder shall be in writing and shall be sent by U.S.
Registered or Certified Mail, Return Receipt Requested, or via a delivery
service providing evidence of delivery, addressed to the parties at their
addresses set forth below, or at such other address as either may designate by
notice as aforesaid.
Address for Town & Country:
Town & Country Corporation
25 Union Street
Chelsea, MA 02150
Attn: Chairman of the Board
With a copy to:
Goodwin, Procter & Hoar
Exchange Place
53 State Street
Boston, MA 02109
Attn: Richard E. Floor, Esq.
- 5 -
<PAGE>
Address for Shareholder:
C. William Carey
20 Rowes Wharf, PH 8
Boston, MA 02110
With a copy to:
Mintz, Levin, Cohn, Ferris, Glovsky and Popeo, P.C.
One Financial Center
Boston, MA 02111
Attn: Stanford N. Goldman, Jr., Esq.
6. Delays or Omissions. No delay or omission to exercise any right,
power or remedy accruing to any holder of any Shares upon any breach or default
under this Agreement shall impair any such right, power or remedy of such
holder, nor shall it be construed to be a waiver of any such breach of default,
or an acquiescence therein, or of or in any similar breach or default thereafter
occurring, nor shall any waiver of any single breach or default be deemed a
waiver of any other breach or default theretofore or thereafter occurring. Any
waiver, consent or approval on the part of any holder of any breach or default
under this Agreement, or any waiver on the part of any holder of any provisions
or conditions of this Agreement, must be in writing and shall be effective only
to the extent specifically set forth in such writing or as provided in this
Agreement. All remedies, either under this Agreement or by law or otherwise
afforded to any holder, shall be cumulative and not alternative.
7. Counterparts. This Agreement may be executed in any number of
counterparts, each of which shall be enforceable against the parties actually
executing such counterparts, and all of which together shall constitute one and
the same agreement.
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<PAGE>
8. Applicable Law. This Agreement shall be governed by and construed in
accordance with the laws of the Commonwealth of Massachusetts without giving
effect to the conflict of law principles thereof.
9. Entire Agreement. This Agreement constitutes the full and entire
understanding and agreement between the parties regarding the subject matter
hereof.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement
under seal as of the date first written above.
TOWN & COUNTRY CORPORATION
By: /S/ William Schawbel
___________________________
Name: William Schawbel
Title: Interim President
SHAREHOLDER
/s/ C. William Carey
________________________________________
C. William Carey
- 7 -
CONSULTING AGREEMENT
This CONSULTING AGREEMENT (this "Agreement") is made and entered into
as of the 3rd day of January, 1997, by and between Town & Country Corporation
("Town & Country"), a Massachusetts corporation, and C. William Carey ("Carey").
As used herein, "Town & Country" shall include each of the subsidiaries of Town
& Country Corporation.
WHEREAS, Carey was, prior to the date hereof, employed by Town &
Country in various capacities, including as its Chairman and Chief Executive
Officer.
WHEREAS, Town & Country desires to retain Carey as a consultant for a
period of not less than two years, and especially in connection with the
disposition of certain assets of Town & Country, as more fully set forth herein;
WHEREAS, the parties desire to set forth in this Agreement certain
undertakings by Town & Country and Carey in connection with consulting and other
services to be performed by Carey;
NOW, THEREFORE, in consideration of the mutual promises and covenants
contained in this Agreement, and for other good and valuable consideration, the
receipt and sufficiency of which are hereby mutually acknowledged, the parties
agree as follows:
1. Consulting Services. For a period of two (2) years following the
date hereof (the "Term"), Carey shall be available to consult with Town &
Country on special projects as may be assigned to Carey by the Board of
Directors of Town & Country Corporation (the "Board") and with respect to such
assignments, Carey shall report directly to the Chairman of the Board. Special
projects may include the disposition of core and non-core assets of Town &
Country, entering into strategic alliances, and entering into other business
arrangements not in the ordinary course. The consulting services described
herein shall be provided by Carey at such times and locations reasonably
requested by Town & Country.
<PAGE>
2. Compensation.
(a) Unless otherwise set forth herein, Carey's fee for
assignments undertaken by Carey pursuant to this Agreement shall be
mutually determined by the Board and Carey. Carey's fee shall be
determined on a project-by-project basis, and is expected, where
appropriate, to be based on a percentage of the total consideration
received by Town & Country. In addition to Carey's fee for each
project, Town & Country shall reimburse Carey for all expenses incurred
in connection with the performance of his duties hereunder, as more
fully set forth in Section 3 below.
(b) If Town & Country undertakes any of the following projects
and requests Carey's assistance, Carey shall be compensated therefor on
the following basis:
(i) With respect to disposition of Town & Country real
estate, compensation equal to 2% of gross proceeds;
(ii) With respect to disposition of Town & Country
properties located in the People's Republic of China,
compensation equal to 4% of gross proceeds;
(iii) With respect to disposition of Town & Country
machinery and equipment, including furniture and
fixtures, 5% of gross proceeds;
(iv) With respect to disposition of the Gold Lance
Division of Town & Country, if sold pursuant to any
agreement or letter of intent for the sale entered
into prior to March 31, 1997, 1% of gross proceeds up
to $7.5 million, and 2% of gross proceeds in excess
of $7.5 million; if sold after March 31, 1997, and
not pursuant to any agreement or letter of intent for
the sale entered into prior to March 31, 1997, 4% of
the gross proceeds;
(v) With respect to disposition of Salomon Brothers
preferred stock held by Town & Country, compensation
equal to 4%; of the gross proceeds; and
(vi) In connection with the privatization of Essex
International Public
- 2 -
<PAGE>
Company Limited ("Essex"), a Town & Country
subsidiary based in Thailand, $75,000 plus any
additional fee the Board may determine based on the
time, effort, and success of Carey in effecting the
transaction.
All payments hereunder shall be payable to Carey by wire transfer, in
immediately available funds and according to Carey's instructions
provided to the Company from time to time.
3. Office Space, Personnel and Expenses.
(a) To assist Carey in the performance of his duties
hereunder, during the Term, Town & Country shall provide funds to Carey
for not fewer than two (2) administrative assistants and such other
personnel as Town & Country and Carey may deem necessary or appropriate
(such assistants and other personnel to be selected by Carey) and
office space of a type appropriate for a senior executive of Carey's
position. The office space may be located in a downtown Boston location
selected by Carey (subject to the reasonable consent of the Board). The
direct cost to Town & Country for Carey's personnel and office space
shall be $200,000 during the first year of the Term and $150,000 during
the second year of the Term; excess costs to be borne by Carey. Such
amounts shall be payable to Carey in advance by wire transfer in
immediately available funds and according to the wiring instructions
provided by Carey. Town & Country acknowledges and agrees that in
anticipation of Carey's engagement as a consultant as set forth herein,
Carey has already committed to a two-year lease for office space and
the hiring of personnel for a two-year period and that the $350,000
payable to Carey hereunder shall be guaranteed and shall not be
refundable. The parties agree that such $350,000 payment is a
reimbursement to Carey and that no income tax withholding shall be
made.
(b) Town & Country shall transfer Carey's office furniture
from his office at Town & Country to his new office, and shall provide
office furniture for Carey's administrative assistants. After the Term
is complete, Carey shall have the option to purchase said furniture at
its fair market value, which the parties agree will be the value
- 3 -
<PAGE>
carried on the Company's books at such time.
(c) During the Term, Carey shall be provided the sole and
exclusive use of a new automobile of a make and model appropriate for a
senior executive of Carey's position. The parties acknowledge and agree
that the cost of such automobile, including costs associated therewith
during the Term, is estimated to be approximately $100,000, and shall
payable in advance via wire transfer in immediately available funds.
(d) All reasonable expenses incurred by Carey in carrying out
his duties under this Agreement shall be reimbursed by Town & Country
upon submission of evidence of such expenses by Carey.
4. Independent Contractor Status. Carey agrees to render services to
Town & Country as an independent contractor to, and not as an employee of, Town
& Country. Carey acknowledges and agrees that he shall be an independent
contractor for all purposes including, but not limited to, payroll and tax
purposes, and that he shall not represent himself to be an employee or officer
of Town & Country.
5. Entire Agreement. This Agreement embodies the entire agreement and
understanding between the parties hereto with respect to the subject matter
hereof and supersedes all prior oral or written agreements and understandings
relating to the subject matter hereof; provided, however, that this Consulting
Agreement shall not supersede or otherwise affect the Termination and Settlement
Agreement or side letter agreements of even date herewith. No statement,
representation, warranty, covenant or agreement of any kind not expressly set
forth in this Agreement shall affect, or be used to interpret, change or
restrict, the express terms and provisions of this Agreement.
6. Modifications and Amendments. The terms and provisions of this
Agreement may be modified or amended only by written agreement executed by all
parties hereto.
7. Waivers and Consents. The terms and provisions of this Agreement may
be
- 4 -
<PAGE>
waived, or consent for the departure therefrom granted, only by written document
executed by the party entitled to the benefits of such terms or provisions. No
such waiver or consent shall be deemed to be or shall constitute a waiver or
consent with respect to any other terms or provisions of this Agreement, whether
or not similar. Each such waiver or consent shall be effective only in the
specific instance and for the purpose for which it was given, and shall not
constitute a continuing waiver or consent.
8. Severability. In the event that any court of competent jurisdiction
shall determine that any provision, or any portion thereof, contained in this
Agreement shall be unenforceable in any respect, then such provision shall be
deemed limited to the extent that such court deems it enforceable, and as so
limited shall remain in full force and effect. In the event that such court
shall deem any such provision, or portion thereof, wholly unenforceable, the
remaining provisions of this Agreement shall nevertheless remain in full force
and effect.
9. Notices. The parties expressly agree that any notices to be given
hereunder shall be in writing and shall be sent by U.S. Registered or Certified
Mail, Return Receipt Requested, or via a delivery service providing evidence of
delivery, addressed to the parties at their addresses set forth below, or at
such other address as either may designate by notice as aforesaid.
Address for Town & Country: Copy to:
Town & Country Corporation Goodwin, Procter & Hoar
25 Union Street Exchange Place - 53 State St.
Chelsea, MA 02150 Boston, MA 02109
Attn: Chairman Attn: Richard E. Floor
Address for Carey: Copy to:
C. William Carey Mintz, Levin, Cohn,
20 Rowes Wharf, PH 8 Ferris, Glovsky and Popeo, P.C.
Boston, MA 02110 One Financial Center
Boston, MA 02111
Attn: Stanford N. Goldman, Jr., Esq.
- 5 -
<PAGE>
10. Assignment. Town & Country may assign its rights and obligations
hereunder to any person or entity who succeeds to all or substantially all of
Town & Country's business or that aspect of Town & Country's business in which
Carey is principally involved. Carey's rights and obligations under this
Agreement may not be assigned by Carey without the prior written consent of Town
& Country.
11. Benefit. All statements, representations, warranties, covenants and
agreements in this Agreement shall be binding on the parties hereto and, in the
case of Town & Country, its parents, subsidiaries and other affiliates, and in
the case of Carey, upon his heirs, executors and administrators; and shall inure
to the benefit of the respective successors and permitted assigns of each party
hereto. Nothing in this Agreement shall be construed to create any rights or
obligations except among the parties hereto, and no person or entity shall be
regarded as a third-party beneficiary of this Agreement.
12. Governing Law. This Agreement and the rights and obligations of the
parties hereunder shall be construed in accordance with and governed by the law
of the Commonwealth of Massachusetts, without giving effect to the conflict of
law principles thereof.
13. Arbitration. Any controversy, dispute or claim arising out of or in
connection with this Agreement, or the breach, termination or validity hereof,
shall be settled by final and binding arbitration to be conducted by an
arbitration tribunal in Boston, Massachusetts, pursuant to the rules of the
American Arbitration Association. The arbitration tribunal shall consist of
three arbitrators. The party initiating arbitration shall nominate one
arbitrator in the request for arbitration and the other party shall nominate a
second in the answer thereto within thirty (30) days of receipt of the request.
The two arbitrators so named shall then jointly appoint the third arbitrator. If
the answering party fails to nominate its arbitrator within the thirty (30) day
period, or if the arbitrators named by the parties fail to agree on the third
arbitrator within thirty (30) days, the office of the American Arbitration
Association in Boston, Massachusetts shall make the necessary appointments of
such arbitrator(s). The decision or award of the arbitration tribunal (by a
majority
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<PAGE>
determination, or if there is no majority, then by the determination of the
third arbitrator, if any) shall be final, and judgment upon such decision or
award may be entered in any competent court or application may be made to any
competent court for judicial acceptance of such decision or award and an order
of enforcement. In the event of any procedural matter not covered by the
aforesaid rules, the procedural law of the Commonwealth of Massachusetts shall
govern.
14. Jurisdiction and Service of Process. Any legal action or proceeding
with respect to this Agreement shall be brought in the courts of the
Commonwealth of Massachusetts or of the United States of America for the
District of Massachusetts. By execution and delivery of this Agreement, each of
the parties hereto accepts for itself and in respect of its property, generally
and unconditionally, the jurisdiction of the aforesaid courts. Each of the
parties hereto irrevocably consents to the service of process of any of the
aforementioned courts in any such action or proceeding by the mailing of copies
thereof by certified mail, postage prepaid, to the party at its address set
forth in Section 9 hereof.
15. Headings. The section and paragraph headings contained in this
Agreement are for convenience only and shall not be deemed to affect in any way
the language of the provisions to which they refer.
16. Counterparts. This Agreement may be executed in multiple
counterparts, each of which shall be deemed to be an original, and all such
counterparts shall constitute one instrument.
IN WITNESS WHEREOF, the parties have executed this Agreement as a
document under seal as of the date first written above.
TOWN & COUNTRY CORPORATION: CONSULTANT:
By: /s/ William Schawbel /s/ C. William Carey
___________________________ ______________________________
Name: William Schawbel C. William Carey
_________________________
Title: Interim President
________________________
- 7 -
AMENDMENT NO. 1 OF LEASE
This Amendment No. 1 of Lease executed as of the 24th day of April,
1997 by and between C.L.C. North Attleboro Trust u/d/t dated October 1, 1981 (as
amended of record from time to time), recorded with Bristol County (North
District) Registry of Deeds in Book 2230, Page 213 (the "Landlord") and L.G.
Balfour Company, Inc., a Delaware corporation (the "Tenant").
Reference is made to the following:
A. The certain Indenture of Lease, dated as of March 14, 1994,
between Landlord and Tenant, pertaining to certain premises (referred to therein
as the "Premises", and hereinafter as the "Original Premises"), more
particularly described therein and now commonly known as and numbered 15 John L.
Dietsch Boulevard, in North Attleboro, Bristol County, Massachusetts. That
instrument, as heretofore amended (if at all), is hereinafter referred to as the
"Lease".
B. Landlord and Tenant have agreed to amend the Lease to reduce the
premises covered thereby and shorten the term thereof, upon all of the terms and
provisions hereinafter set forth.
NOW, THEREFORE, in consideration of the agreements herein contained,
and for ONE DOLLAR ($1.00) and other good and valuable consideration by each of
the parties hereto to the other of them in hand this day paid, the receipt and
sufficiency of which are hereby acknowledged, it is agreed as follows:
1. Lease Term. The term of the Lease shall run through and expire
at 11:59 P.M. on July 31, 1999, unless sooner terminated as provided therein or
hereinbelow, with the same force and effect as though said expiration date
originally had been specified in the Lease as the end of the term thereof.
2. Premises. Annexed hereto and made a part hereof is a copy of the
Exhibit A Site Plan originally annexed to and made part of the Lease; and a new
copy of that plan, labeled (and hereinafter referred to) as "Exhibit A-1". As of
May 17, 1997 (referred to hereinafter as the "Delivery Date"), the Lease shall
relate to and cover only the portion of the Original Premises which are
comprised of the premises located on the area identified on Exhibit A-1 as the
"Balfour Parcel" (together with an appurtenant right of access and egress
between the Balfour Parcel and John Dietsch Blvd.). Accordingly, and without
limitation, effective from and after the Delivery Date, the Tenant shall have no
right, title or interest in and to the balance of the Original Premises (shown
on Exhibit A-1, and referred to hereinafter, as the "Adjacent Parcel"), and the
Tenant shall vacate and deliver up possession of the Adjacent Parcel including,
without limitation, the Building located thereon, in the condition required as
if 12:01 A.M. on the Delivery Date were the end of the term of the Lease with
respect to the Adjacent Parcel, on or before the Delivery
-1-
<PAGE>
Date. Further, from and after the Delivery Date: all references in the Lease to
the "Lot" shall be references to the parcel(s) comprising the area shown on
Exhibit A-1 as the Balfour Parcel; all such references to a Building or the
Buildings, as the case may be, shall be references to the Building located on
the Balfour Parcel; all such references to the "improvements" thereon shall be
references to those contained on the Balfour Parcel; and all such references to
the "Premises" shall be references to the Balfour Parcel together with the
Building and improvements thereon. Likewise, from and after the Delivery Date,
whenever reference is made to the Site Plan or to Exhibit A in the Lease, such
reference shall be construed to be reference to Exhibit A-1 hereto.
3. Provisions Applicable to the Balance of the Term. The period
from and after the date (the "Effective Date") which is fourteen (14) days
following (i) the Delivery Date or (ii) if later, the date on which Tenant
actually vacates and delivers possession of the Adjacent Parcel to Landlord as
aforesaid, through the end of the term of the Lease, is hereinafter referred to
as the "Balance of the Term". Landlord and Tenant agree to memorialize said
Effective Date in writing promptly when the same has been determined. The
following provisions shall be applicable to the Balance of the Term:
A. Fixed Rate. Throughout the Balance of the Term, Fixed
Rent to be paid by Tenant to Landlord shall be at the
rate of $201,666.67 per annum, payable at the rate of
$16,805.55 per calendar month (and proportionately at
such rate for any partial month); all as the Fixed Rent
payable for and with respect to the Balance of the Term.
B. Other charges and Matters. All other charges, costs and
expenses with respect to the Original Premises accruing
up to the Effective Date shall continue to be the
responsibility and liability of Tenant as set forth in
the Lease. Without limitation, Tenant shall be and remain
liable for the prompt and complete payment when due of
all charges for utilities and services, real estate taxes
and any other maintenance obligations with respect to the
Original Premises, subject to and in accordance with all
applicable provisions of the Lease, and for all of
Tenant's indemnity, insurance and other monetary and
non-monetary obligations under the provisions of the
Lease, accruing up to the Effective Date. From and after
the Effective Date, all of Tenant's said monetary and
non-monetary obligations shall continue in full force and
effect with respect to the Balfour Premises (and only
with respect thereto).
In the event that there are any real estate taxes or
other Impositions (or any maintenance or other costs and
expenses) which are assessed against or applicable to the
Original Premises or any
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<PAGE>
larger parcel of land (with or without improvements)
which includes the Balfour Parcel (any such larger parcel
being referred to for the purposes of this provision as
the "Larger Parcel"), then Tenant shall be responsible
for its share of such real estate taxes, Impositions and
any other charges, as the case may be, in a fair and
equitable portion determined reasonably and in good faith
by Landlord; and, in the absence of such a determination
by Landlord for good cause to apportion any such charged
differently, the same shall be apportioned based upon the
square footage of ground floor area contained within the
Building as a percentage of the total square footage of
ground floor area contained within all buildings intended
for occupancy and located upon the Larger Parcel. In
particular, as the Building located on the Balfour
Parcel, unless otherwise determined for good cause by
Landlord as aforesaid, all real estate taxes and
Impositions assessed against the Larger Parcel which is
comprised of the Original Premises and/or the Buildings
and improvements thereon, shall be apportioned such that
Tenant's share thereof shall be equal to one-third (1/3)
thereof.
C. Landlord's Option to Terminate. Landlord shall have the
right and option to terminate the Lease earlier than
hereinabove set forth, upon notice of Landlord's election
so to do given to Tenant hereafter any time and setting
forth an earlier termination date during the Balance of
the Term which is not less than sixty (60) days from the
date of Landlord's said notice to Tenant, but effective
in no event earlier than May 31, 1998. Said notice from
Landlord electing to exercise said option to terminate,
if given, shall be addressed to Tenant c/o Town & Country
Corporation at 25 Union Street, Chelsea, Massachusetts
02150 (Attention: Mr. Robert Hannon), or to such other
address as may from time to time hereafter be designated
by Tenant as its notice address, provided the same is
theretofore received by Landlord at its notice address
under the Lease, and shall be given in writing by
registered or certified mail, postage prepaid, or by
recognized overnight express service (such as Federal
Express, Express Mail, or the like). As set forth in the
Lease any such notice from Landlord's attorney acting or
purporting to act on behalf of Landlord shall be deemed
to be notice from Landlord for the purposes hereof
provided that such attorney is them employed at Goulston
& Storrs, P.C., in Boston, Massachusetts, or otherwise is
an attorney authorized to act on behalf of Landlord.
-3-
<PAGE>
If Landlord gives such a notice to Tenant, the term of
the Lease shall end on the date designated in Landlord's
said notice in accordance with the foregoing, with the
same force and effect as though that date originally had
been specified in the Lease, as amended hereby, as the
expiration date of the term thereof. If either party so
requests, each party agrees promptly to join in the
execution and delivery of a recordable instrument
memorializing any such earlier termination date.
4. Landlord hereby confirms and agrees that any new lease or
other occupancy agreement it executes with a third party
covering the Adjacent Parcel will contain a provision
expressly reserving the continuing right of access and
egress between the Balfour Parcel and John Dietsch
Boulevard and an agreement from the tenant or occupant of
the Adjacent Parcel not materially to disturb the
Tenant's rights under the Lease, as amended hereby,
during the Balance of the Term.
5. This instrument and the effectiveness of all of the
provisions hereof are conditioned upon the satisfaction
by Tenant (or written waiver by Landlord) of the
following conditions precedent: (i) the vacating by
Tenant and delivery to Landlord of possession of the
Adjacent Premises in accordance with the applicable
provisions of the Lease and this instrument, on or before
the Delivery Date (or, if despite reasonable efforts, the
same is delayed, then in any event on or before May 27,
1997); and (ii) the execution and delivery by Landlord
and a replacement tenant of a new lease covering the
Adjacent Premises contemporaneously with the execution
and delivery hereof (and, in any event, on or before the
Delivery Date); failing which this instrument shall be
void as if it never had been executed or delivered.
Landlord agrees, upon request of Tenant, to confirm the
satisfaction (or waiver) of said conditions and the
effectiveness hereof, or that this instrument is void,
promptly when determined.
6. Tenant does hereby warrant and represent to Landlord that
it is the lawful and sole owner of the Tenant's interest
in and to the Lease and that Tenant has full right, power
and authority to execute this instrument and effect a
valid and binding amendment of the Lease as set forth
herein; and the signatory below on behalf of Tenant does
hereby warrant and represent to Landlord that said
signatory has been duly and validly authorized to execute
this instrument on behalf of Tenant.
7. Reference is made to the Sublease dated December 16,
1996, between Tenant and Commemorative Brands, Inc.
(f/k/a Scholastic Brands, Inc.), as Subtenant and to the
Consent and Estoppel Certificate dated as of December 16,
1996, by and among Landlord, Tenant and said subtenant,
relating to said Sublease; and to that certain Lessor's
Waiver dated as of December 19, 1996, between Landlord,
Tenant and the Secured party referred to therein. Tenant
shall give such notice and take such other steps, if any,
as may be necessary or appropriate in accordance with the
requirements of its documentation with said Subtenant
and/or Secured Party, in order to perform its obligations
under this instrument.
-4-
<PAGE>
8. Landlord and Tenant each agrees that it will indemnify
and hold the other harmless from any and all claims for
brokerage (and including any attorneys' fees and
disbursements incurred in connection with the defense of
any such claim) from any broker or finder with respect to
the transaction memorialized hereby (or the
contemporaneous re-leasing of the Adjacent Parcel) and
predicated upon dealings with either of them,
respectively. In any event, however, if there should be
any brokerage fee payable to Lynch, Murphy, Walsh &
Partners with respect to the transaction memorialized
hereby (or the contemporaneous re-leasing of the Adjacent
Parcel), Tenant shall not be responsible therefore and
Landlord's foregoing indemnity will cover the same.
WITNESS the execution hereof, under seal, in any number of counterpart
copies each of which shall be an original for all purposes, as of the date first
set forth hereinabove.
LANDLORD
C.L.C. North Attleboro Trust
/s/ Julian Cohen
--------------------------------------
/s/ Sandra K. Cummings
--------------------------------------
Trustees of C.L.C. North Attleboro Trust,
for themselves and their co-Trustee, but in
their fiduciary capacity only, and without
personal liability
TENANT
L.G. Balfour Company, Inc.
By: /s/ Veronica Zsolcsak
______________________
Its: Treasurer
Hereunto duly authorized
-5-
<PAGE>
COMMONWEALTH OF MASSACHUSETTS
Middlesex, SS: May 2, 1997
- ----------
Then personally appeared the above-named Julian Cohen and Sandra K.
Cummings, as Trustees of C.L.C. North Attleboro Trust, and acknowledged the
foregoing instrument to be their free act and deed in said capacity, before me,
/s/ Michael A. Hammer
____________________________________
Michael A. Hammer, Notary Public
My Commission Expires: June 15, 2001
COMMONWEALTH OF MASSACHUSETTS
Suffolk, SS: April 24, 1997
Then personally appeared the above-named Veronica Zsolcsak, Treasurer
of L.G. Balfour Company, Inc., and acknowledged the foregoing instrument to be
his free act and deed in said capacity and the free act and deed of L.G.
Balfour Company, Inc., before me,
/s/ Gail F. Prisby
____________________________________
Gail F. Prisby, Notary Public
My Commission Expires: Sept. 18, 2003
-6-
<PAGE>
L.G. BALFOUR COMPANY LEASE
EXHIBIT A-1
[Site Plan of Land in North Attleborough, Massachusetts showing Balfour Parcel
and Adjacent Parcel.]
EXHIBIT 11
Earnings Per Share Computations
Five Years Ended
(Unaudited)
<TABLE>
<CAPTION>
February 23, February 25, February 26, February 27, February 28,
1997 1996 1995 1994 1993
------------ ------------ ------------ ------------ ------------
PRIMARY EPS:
<S> <C> <C> <C> <C> <C>
Net income (loss) $(62,278,035) $ (1,866,114) $ 571,918 $ 3,137,556 $(47,295,592)
Accretion of discount and
dividends on preferred
stocks 740,679 1,039,802 1,688,019 1,453,511 --
------------ ------------ ------------ ------------ ------------
Income (loss)
attributable to
common stockholders $(63,018,714) $ (2,905,916) $ (1,116,101) $ 1,684,047 $(47,295,592)
============ ============ ============ ============ ============
Weighted average common
shares outstanding 25,504,218 23,769,323 23,433,173 21,205,949 12,450,290
Weighted shares issued
from exercise and
assumed exercise of:
warrants -- -- -- -- --
options -- -- -- -- --
------------ ------------ ------------ ------------ ------------
Shares for EPS
calculation 25,504,218 23,769,323 23,433,173 21,205,949 12,450,290
============ ============ ============ ============ ============
REPORTED EPS:
Income (loss) before
accretion of discount
and dividends on
preferred stocks $ (2.44) $ (0.08) $ 0.02 $ 0.15 $ (3.80)
Accretion of discount and
dividends on preferred
stocks (0.03) (0.04) (0.07) (0.07) --
------------ ------------ ------------ ------------ ------------
Income (loss)
per common share $ (2.47) $ (0.12) $ (0.05) $ 0.08 $ (3.80)
============ ============ ============ ============ ============
</TABLE>
Fully Diluted EPS:
For the five years presented in this exhibit, there is no dilution from Primary
EPS.
This exhibit should be reviewed in conjunction with Note 2 of Notes to
Consolidated Financial Statements.
EXHIBIT 22
TOWN & COUNTRY CORPORATION AND SUBSIDIARIES
Subsidiaries of the Registrant
Set forth below is a list of the Registrant's subsidiaries (1) as of February
23, 1997, with their state or other jurisdiction of incorporation, names under
which they do business, and the percentage of their voting securities owned by
the Registrant as of such date:
Percent
Name Incorporation and Date Ownership
Essex International Public
Company Limited(2) Thailand, 1984 75%
Gold Lance, Inc.(3) Massachusetts, 1986 100%
Anju Jewelry Limited Hong Kong, 1973 100%
Town & Country Fine Jewelry Group, Inc.(4) Massachusetts, 1991 100%
- -----------------------
(1) Excluded are the names of particular subsidiaries, which, when considered
in the aggregate as a single subsidiary, would not constitute a significant
subsidiary as of February 23, 1997.
(2) During fiscal 1997, the Company began the process of purchasing the
remaining 25% of Essex International Company Limited.
(3) Related to the sale of certain assets of Gold Lance, Inc. on April 18,
1997, the Company changed the name to GL, Inc.
(4) Verilyte Gold, Inc. and Feature Enterprises, Inc. were merged into Town &
Country Fine Jewelry Group, Inc. as of May 14, 1993.
EXHIBIT 24.1
TOWN & COUNTRY CORPORATION AND SUBSIDIARIES
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the
incorporation of our reports included in this Form 10-K, into the Company's
previously filed Registration Statement on Form S-8, File No. 33-23860.
Arthur Andersen LLP
Boston, Massachusetts
June 10, 1997
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0000768608
<NAME> Town & Country Corporation
<CURRENCY> U.S. DOLLARS
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> Feb-23-1997
<PERIOD-START> Feb-26-1996
<PERIOD-END> Feb-23-1997
<EXCHANGE-RATE> 1
<CASH> 10,431,911
<SECURITIES> 0
<RECEIVABLES> 23,490,826
<ALLOWANCES> 1,243,000
<INVENTORY> 42,752,801
<CURRENT-ASSETS> 77,496,215
<PP&E> 56,215,045
<DEPRECIATION> 33,242,256
<TOTAL-ASSETS> 121,312,016
<CURRENT-LIABILITIES> 40,340,476
<BONDS> 78,090,054
2,373,654
1,302,673
<COMMON> 261,730
<OTHER-SE> (6,053,341)
<TOTAL-LIABILITY-AND-EQUITY> 121,312,016
<SALES> 209,152,862
<TOTAL-REVENUES> 209,152,862
<CGS> 147,466,342
<TOTAL-COSTS> 182,967,342
<OTHER-EXPENSES> 74,393,433
<LOSS-PROVISION> 6,574,188
<INTEREST-EXPENSE> 12,722,915
<INCOME-PRETAX> (62,017,273)
<INCOME-TAX> 260,762
<INCOME-CONTINUING> (62,278,035)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (63,018,708)
<EPS-PRIMARY> (2.47)
<EPS-DILUTED> (2.47)
</TABLE>
