UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-Q
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[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED NOVEMBER 27, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
COMMEMORATIVE BRANDS, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 13-3915801
(State or other jurisdiction (I.R.S. Employer Identification Number)
of incorporation or organization)
7211 CIRCLE S ROAD
AUSTIN, TEXAS 78745
(Address of principal executive offices) (Zip Code)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE (512) 444-0571
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
None None
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 [ ] No [X]. (Effective
December 31, 1997, registrant is no longer subject to such filing
requirements.)
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-Q or any
amendment to this FORM 10-Q [X] (Not Applicable)
The aggregate market value of the voting stock held by non-affiliates at
November 27, 1999: $0.00
375,985 shares of common stock
(Number of shares outstanding as of January 11, 2000)
COMMEMORATIVE BRANDS, INC.
FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED NOVEMBER 27, 1999
INDEX
PAGE
PART I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements and Notes
Consolidated Balance Sheets-
As of November 27, 1999 (unaudited) and August 28, 1999 (audited)..............................1
Consolidated Statements of Operations-
For the Three Months Ended November 27, 1999 and November 28, 1998
(all unaudited) ..............................................................................2
Consolidated Statements of Stockholders' Equity -
For the Three Months Ended November 27, 1999 (unaudited) and for the
Year Ended August 28, 1999 (audited)...........................................................3
Consolidated Statements of Cash Flows -
For the Three Months Ended November 27, 1999 and November 28, 1999
(all unaudited) ..............................................................................4
Notes to Consolidated Financial Statements.......................................................5-14
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operation.............15-20
Item 3. Quantitative and Qualitative Disclosures About Market Risk........................................20
PART II. OTHER INFORMATION
Item 1. Legal Proceedings .............................................................................21
Item 2. Changes in Securities.............................................................................21
Item 3. Defaults Upon Senior Securities...................................................................21
Item 4. Submission of Matters to a Vote of Security Holders...............................................21
Item 6. Exhibits and Reports on Form 8-K..................................................................21
SIGNATURES ......................................................................................22
PART I. FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS AND NOTES
COMMEMORATIVE BRANDS, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
November 27, 1999 August 28, 1999
------------------------- -----------------------
(unaudited) (audited)
ASSETS
Current assets:
Cash and cash equivalents $ 2,947 $ 751
Accounts receivable, net 40,834 28,707
Inventories 16,757 13,804
Prepaid expenses and other current assets 9,576 9,900
------------------------- -----------------------
Total current assets 70,114 53,162
Property, plant and equipment, net 41,560 41,780
Trademarks, net 28,467 28,659
Goodwill, net 77,881 78,408
Other assets, net 7,359 7,836
------------------------- -----------------------
Total assets $ 225,381 $ 209,845
========================= =======================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Bank overdraft $ 4,397 $ 3,186
Accounts payable and accrued expenses 34,709 26,142
Current portion of long-term debt 1,875 1,750
------------------------- -----------------------
Total current liabilities 40,981 31,078
Long-term debt, net of current portion 139,259 132,660
Other long-term liabilities 9,146 8,277
------------------------- -----------------------
Total liabilities 189,386 172,015
------------------------- -----------------------
Commitments and contingencies
Stockholders' equity:
Preferred stock, $.01 par value, 750,000 shares authorized
(in total)-
Series A, 100,000 shares issued and outstanding 1 1
Series B, 460,985 shares issued and outstanding 5 5
Common stock, $.01 par value, 750,000 shares
authorized, 375,985 shares issued and outstanding 4 4
Additional paid-in capital 58,766 58,766
Retained deficit (22,781) (20,946)
------------------------- -----------------------
Total stockholders' equity 35,995 37,830
------------------------- -----------------------
Total liabilities and stockholders' equity $ 225,381 $ 209,845
========================= =======================
The accompanying notes are an integral part of these consolidated
financial statements.
-1-
COMMEMORATIVE BRANDS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except share and per share data)
(unaudited)
For the Three For the Three
Months Ended Months Ended
November 27, November 28,
1999 1998
----------------- -----------------
Net sales $ 38,739 $ 41,178
Cost of sales 17,496 17,207
----------------- -----------------
Gross profit 21,243 23,971
Selling, general and administrative expenses 18,872 20,208
----------------- -----------------
Operating income 2,371 3,763
Interest expense, net 3,876 3,746
----------------- -----------------
Income (loss) before provision for income taxes (1,505) 17
Provision for income taxes 30 30
----------------- -----------------
Net loss $ (1,535) $ (13)
Preferred dividends (300) (300)
----------------- -----------------
Net loss to common stockholders $ (1,835) $ (313)
================= =================
Basic and diluted loss per share $ (4.88) $ (0.83)
================= =================
Weighted average common shares outstanding and common and
common equivalent shares outstanding 375,985 377,156
================= =================
The accompanying notes are an integral part of these consolidated
financial statements.
-2-
COMMEMORATIVE BRANDS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(In thousands, except share data)
Preferred Stock Common Stock
----------------------------------- ------------------
Series A Series B Additional
--------------- ------------------ paid-in Retained
Shares Amount Shares Amount Shares Amount capital deficit Total
-------- ------- --------- -------- --------- -------- ------------ ------------- ----------
Balance, August 29, 1998 (audited) 100,000 $ 1 377,156 $ 4 377,156 $ 4 $ 50,391 $ (15,554) $ 34,846
Repurchase of Common Stock - - - - (1,171) - (7) - (7)
Issuance of Preferred Stock - - 83,829 1 - - 8,382 - 8,383
Accrued Preferred Stock Dividends - - - - - - - (1,200) (1,200)
Net loss - - - - - - - (4,192) (4,192)
-------- ------- --------- -------- --------- -------- ------------ ------------- ------------
Balance, August 28, 1999 (audited) 100,000 $ 1 460,985 $ 5 375,985 $ 4 $ 58,766 $ (20,946) $ 37,830
Accrued Preferred Stock Dividends - - - - - - - (300) (300)
Net loss - - - - - - - (1,535) (1,535)
-------- ------- --------- -------- --------- -------- ------------ ------------- ------------
Balance, November 27, 1999
(unaudited) 100,000 $ 1 460,985 $ 5 375,985 $ 4 $ 58,766 $ (22,781) $ 35,995
======== ======= ========= ======== ========= ======== ============ ============= ============
The accompanying notes are an integral part of these consolidated
financial statements.
-3-
COMMEMORATIVE BRANDS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(unaudited)
For the Three Months Ended
--------------------------------
November 27, November 28,
1999 1998
--------------- ---------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (1,535) $ (13)
Adjustments to reconcile net loss to net cash used in operating
activities-
Depreciation and amortization 2,370 1,738
Provision for doubtful accounts 259 195
Changes in assets and liabilities-
Increase in receivables (12,386) (12,754)
Increase in inventories (2,953) (776)
Decrease in prepaid expenses and other current assets 324 254
Decrease (increase) in other assets 477 (271)
Increase in bank overdraft, accounts payable, accrued expenses
and other long-term liabilities 10,347 9,851
--------------- ---------------
Net cash used in operating activities (3,097) (1,776)
--------------- ---------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property, plant and equipment (1,431) (2,157)
--------------- ---------------
Net cash used in investing activities (1,431) (2,157)
--------------- ---------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments on term loan facility, net (375) (250)
Revolver borrowings, net 7,099 5,060
--------------- ---------------
Net cash provided by financing activities 6,724 4,810
--------------- ---------------
NET INCREASE IN CASH AND CASH EQUIVALENTS 2,196 877
CASH AND CASH EQUIVALENTS, beginning of period 751 975
--------------- ---------------
CASH AND CASH EQUIVALENTS, end of period $ 2,947 $ 1,852
=============== ===============
SUPPLEMENTAL DISCLOSURE
Cash paid during the period for -
Interest $ 1,111 $ 988
=============== ===============
Taxes $ 20 $ 17
=============== ===============
SUPPLEMENTAL DISCLOSURE OF NONCASH FINANCING ACTIVITIES
Accrued preferred stock dividends $ 300 $ 300
=============== ===============
The accompanying notes are an integral part of these consolidated
financial statements.
-4-
COMMEMORATIVE BRANDS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(1) BACKGROUND AND ORGANIZATION
Commemorative Brands, Inc., a Delaware corporation (together with its
subsidiaries, CBI or the Company), is a manufacturer and supplier of class
rings and other graduation-related scholastic products for the high school
and college markets and manufactures and markets recognition and affinity
jewelry designed to commemorate significant events, achievements and
affiliations. The Company's corporate office and primary manufacturing
facilities are located in Austin, Texas.
CBI was initially formed in March 1996 by Castle Harlan Partners II, L.P.
(CHPII), a Delaware limited partnership and private equity investment fund,
for the purpose of acquiring (the Acquisitions) substantially all of the
scholastic and recognition and affinity product assets and businesses of the
ArtCarved Class Rings (ArtCarved) operations of CJC Holdings, Inc. (CJC) from
CJC and certain assets and liabilities of L.G. Balfour Company, Inc.
(Balfour) from Town and Country Corporation and, until December 16, 1996,
engaged in no business activities other than in connection with the
Acquisitions and the financing thereof.
The accompanying consolidated financial statements have been prepared without
audit pursuant to the rules and regulations of the Securities and Exchange
Commission. Certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted pursuant to such rules
and regulations, although the Company believes the disclosures are adequate
to make the information presented not misleading. In the opinion of
management, all adjustments (consisting only of normal recurring adjustments)
necessary for a fair presentation of the financial position and results of
operations for the periods presented have been included. Operating results
for the three months ended November 27, 1999 are not necessarily indicative
of the results that may be expected for the fiscal year ending August 26,
2000.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
FISCAL YEAR END
CBI uses a 52/53-week fiscal year ending on the last Saturday of August.
CONSOLIDATION
The consolidated financial statements include the accounts of the Company and
its subsidiaries. All material intercompany accounts and transactions have
been eliminated in consolidation.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents include highly liquid investments with original
maturities of three months or less.
INVENTORIES
Inventories, which include raw materials, labor and manufacturing overhead,
are stated at the lower of cost or market using the first-in, first-out
(FIFO) method.
ADVERTISING
The Company incurs advertising and promotion costs that are directly related
to a product in advance of the sale occurring. These amounts are included in
prepaid expenses and other current assets and are amortized over the period
in which the sale of products occurs.
-5-
SALES REPRESENTATIVE ADVANCES AND RESERVE FOR SALES REPRESENTATIVE ADVANCES
The Company advances funds to new sales representatives in order to open up
new sales territories or makes payments to predecessor sales representatives
on behalf of successor sales representatives. Such amounts are repaid by the
sales representatives through earned commissions on product sales. The
Company provides reserves to cover those amounts, which it estimates to be
uncollectible. These amounts are included in prepaid expenses and other
current assets in the accompanying balance sheets.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are stated at cost, net of accumulated
depreciation. Depreciation is provided principally using the straight-line
method based on estimated useful lives of the assets as follows:
Description Useful Life
- ----------- ------------
Land improvements 15 years
Buildings and improvements 10 to 25 years
Tools and dies 10 to 20 years
Machinery and equipment 2 to 10 years
Maintenance, repairs and minor replacements are charged against income as
incurred; major replacements and betterments are capitalized. The cost of
assets sold or retired and the related accumulated depreciation are removed
from the accounts at the time of disposition, and any resulting gain or loss
is reflected as other income or expense for the period.
TRADEMARKS
The value of trademarks was determined based on a third-party appraisal and
is being amortized on a straight-line basis over 40 years.
IMPAIRMENT OF LONG-LIVED ASSETS
Statement of Financial Accounting Standards (SFAS) No. 121, "Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed
Of," deals with accounting for the impairment of long-lived assets, certain
identifiable intangibles and goodwill related to assets to be held and used,
and for long-lived assets and certain identifiable intangibles to be disposed
of. This statement requires that long-lived assets (e.g., property, plant and
equipment and intangibles) be reviewed for impairment whenever events or
changes in circumstances, such as change in market value, indicate that the
assets' carrying amounts may not be recoverable. In performing the review for
recoverability, if future undiscounted cash flows (excluding interest
charges) from the use and ultimate disposition of the assets are less than
their carrying values, an impairment loss is recognized. Impairment losses
are to be measured based on the fair value of the asset. When factors
indicate that long-lived assets should be evaluated for possible impairment,
the Company uses an estimate of the related product lines' undiscounted cash
flows over the remaining lives of the assets in measuring whether the assets
are recoverable.
GOODWILL
Costs in excess of fair value of net tangible and identifiable intangible
assets acquired are included in goodwill in the accompanying balance sheets.
Goodwill is being amortized on a straight-line basis over 40 years. The
Company continually evaluates whether events and circumstances have occurred
that indicate that the remaining estimated useful life of goodwill may
warrant revision or that the remaining balance of goodwill may not be
recoverable. When factors indicate that goodwill should be evaluated for
possible impairment, the Company would use an estimate of the related product
lines' undiscounted cash flows over the remaining life of the goodwill in
measuring whether the goodwill is recoverable.
-6-
OTHER ASSETS
Other assets include deferred financing costs which are amortized over the
lives of the specific debt and ring samples supplied to national chain stores
and sales representatives by the Company which are amortized on a
straight-line basis over six years.
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. Deferred tax
assets are recognized net of any valuation allowance. 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.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company's financial instruments consist primarily of cash and cash
equivalents, accounts receivable, bank overdraft, accounts payable and
long-term debt (including current maturities). The carrying amounts of the
Company's cash and cash equivalents, accounts receivable, bank overdraft and
accounts payable approximate fair value due to their short-term nature. The
fair value of the Company's long-term debt approximates the recorded amount
based on current rates available to the Company for debt with the same or
similar terms.
REVENUE RECOGNITION
Revenues from product sales are recognized at the time the product is shipped.
CONCENTRATION OF CREDIT RISK
Credit is extended to various companies in the retail industry, which may be
affected by changes in economic or other external conditions. The Company's
policy is to manage its exposure to credit risk through credit approvals and
limits.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from these estimates.
SEASONALITY
The Company's scholastic product sales tend to be seasonal. Class ring sales
are highest during October through December (which overlaps the Company's
first and second fiscal quarters), when students have returned to school
after the summer recess and orders are taken for delivery of class rings to
students before the winter holiday season. Sales of the Company's fine paper
products are predominantly made during February through April (which overlaps
the Company's second and third fiscal quarters) for graduation in May and
June. The Company historically experienced operating losses during the period
of the Company's fourth fiscal quarter, which includes the summer months when
school is not in session. The Company's recognition and affinity product line
is not seasonal in any material respect, although sales generally are highest
during the winter holiday season and in the period prior to Mother's Day. As
a result, the effects of seasonality of the class ring business on the
Company are somewhat tempered by the Company's relatively broad product mix.
As a result of the foregoing, the Company's working capital requirements tend
to exceed its operating cash flows from July through December.
-7-
NEW ACCOUNTING PRONOUNCEMENTS
SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities,"
which was amended by SFAS No. 137, is required to be adopted by the Company
in the first quarter of fiscal year 2001 (November 2000). It establishes
accounting and reporting standards for derivative instruments, including
certain derivative instruments embedded in other contracts and for hedging
activities. It requires that an entity recognize all derivatives as either
assets or liabilities in the balance sheet and measure those instruments at
fair value. Management believes that the adoption of this standard will not
have a material effect on the Company's financial position or results of
operations.
(3) INVENTORIES
A summary of inventories is as follows (in thousands):
November 27, August 28,
1999 1999
---------------- -----------------
(unaudited) (audited)
Raw materials $ 8,480 $ 8,079
Work in process 3,903 1,987
Finished goods 4,374 3,738
---------------- -----------------
$ 16,757 $ 13,804
================ =================
Cost of sales includes depreciation and amortization of $649,000 and $588,000,
for the three months ended November 27, 1999 and November 28,1998, respectively.
(4) LONG-TERM DEBT
Long-term debt consists of the following (in thousands):
November 27, August 28,
1999 1999
----------------- ----------------
(unaudited) (audited)
11% senior subordinated notes due 2007 $ 90,000 $ 90,000
Term loan facility 22,375 22,750
Bank revolver 28,759 21,660
----------------- ----------------
Total debt $ 141,134 $ 134,410
Less: current portion 1,875 1,750
----------------- ----------------
Total long-term debt $ 139,259 $ 132,660
================= ================
11% SENIOR SUBORDINATED NOTES
The Company's 11% senior subordinated notes (the Notes) mature on January 15,
2007. The Notes are redeemable at the option of the Company, in whole or in
part, at any time on or after January 15, 2002, at specified redemption
prices ranging from 105.5% of the principal amount thereof if redeemed during
2002 and declining to 100% of the principle amount thereof if redeemed during
the year 2005 or thereafter, plus accrued and unpaid interest and Liquidated
Damages (as defined in the Indenture), if any, thereon to the date of
redemption. In the event the Company completes one or more Public Equity
Offerings (as defined in the Indenture) on or before January 15, 2000, the
Company may, in its discretion, use the net cash proceeds to redeem up to
33-1/3% of the original principal amount of the Notes at a redemption price
equal to 111% of the principal amount thereof, plus accrued and unpaid
interest and Liquidated Damages, if any, thereon to the date of redemption,
provided that at least 66-2/3% of the original principal amount of the Notes
remains outstanding immediately after each such redemption.
In the event of a Change of Control (as defined in the Indenture), each
holder of the Notes will have the right to require the Company to purchase
all or any part of such holder's Notes at a purchase price in cash equal to
101% of the aggregate principal amount thereof, plus accrued and unpaid
interest and Liquidated Damages, if any, thereon to the
-8-
date of purchase. The Bank Agreement (as defined below) prohibits the Company
from purchasing any Notes upon a Change of Control, and certain Change of
Control events with respect to the Company would constitute a default
thereunder.
In the event of an Asset Sale (as defined in the Indenture), the Company is
required to apply any Net Proceeds (as defined in the Indenture) to
permanently reduce senior indebtedness, to acquire another business or
long-term assets or to make capital expenditures. To the extent such amounts
are not so applied within thirty days and the amount not applied exceeds $5.0
million, the Company is required to make an offer to all holders of the Notes
to purchase an aggregate principal amount of Notes equal to such excess
amount at a purchase price in cash equal to 100% of the principal amount
thereof, plus accrued and unpaid interest and Liquidated Damages, if any,
thereon to the date of purchase.
The 11% senior subordinated notes contain certain covenants that, among other
things, limit the ability of the Company (a) to incur additional indebtedness
and issue preferred stock, (b) to pay dividends or make certain other
restricted payments, (c) to enter into transactions with affiliates, (d) to
create certain liens, (e) to make certain asset dispositions and (f) to merge
or consolidate with, or transfer substantially all of its assets to, another
person. The Company is in compliance with the Indenture covenants as of
November 27, 1999.
REVOLVING CREDIT, TERM LOAN AND GOLD CONSIGNMENT AGREEMENT
The Company has a revolving credit, term loan and gold consignment agreement,
which was entered into as of December 16, 1996, (as amended, the Bank
Agreement) with a group of banks pursuant to which the Company initially
borrowed $25 million under a term loan facility and from time-to-time may
borrow up to $35 million, including a $4.0 million overadvance line extended
in August 1999, under a revolving credit and gold facility. Loans outstanding
under the Bank Agreement bear interest at either fixed or floating rates
based upon the interest rate option selected by the Company.
TERM LOAN FACILITY
The term loan facility (Term Loan) matures on December 16, 2003. The Company
may prepay the Term Loan at any time without penalty. The Company must repay
specified amounts of the Term Loan in 28 consecutive quarterly installments,
which commenced March 31, 1997. Amounts of principal prepaid on the Term Loan
may not be reborrowed.
REVOLVING CREDIT AND GOLD FACILITIES
The revolving credit and gold facilities (Revolving Credit and Gold
Facilities) permit borrowings of up to a maximum aggregate principal amount
of $35 million based upon availability under a borrowing base based on
eligible receivables and eligible inventory (each as defined in the Revolving
Credit and Gold Facilities), with a sublimit of $5 million for letters of
credit and $10 million for gold borrowing or consignment.
The Revolving Credit and Gold Facilities may be borrowed, repaid and
reborrowed from time to time until December 16, 2001, subject to certain
conditions on the date of any such borrowing.
The Bank Agreement is secured by a first priority lien on substantially all
assets of the Company, including all accounts receivable, inventory,
equipment, general intangibles, real estate, buildings and improvements and
the outstanding stock of its subsidiaries. The Company's U.S. subsidiary, CBI
North American, Inc., has guaranteed the Company's obligations and granted a
similar security interest.
The Bank Agreement contains certain financial covenants that require the
Company to maintain certain minimum or maximum, as applicable, levels of (a)
senior funded debt to earnings before interest, taxes, depreciation and
amortization (EBITDA, as defined), (b) consolidated EBITDA and (c) interest
coverage. The Bank Agreement contains financial
-9-
covenants pursuant to which the Company agreed that it would not (i) permit
its Consolidated Net Worth (as defined in the Bank Agreement) as of June 28,
1999 to be less than $44 million, (ii) pay the management fee payable to
Castle Harlan, Inc. unless at the time of payment (A) no Event of Default (as
defined in the Bank Agreement) shall have occurred and be continuing or would
result from the payment thereof; (B) the short-term line of credit shall have
been paid in full; and (C) the Company meets the requisite Modified Funded
Debt Ratio (as defined in the Bank Agreement) and (iii) permit or make
certain capital expenditures for computer conversion projects in excess of
$6,500,000 in the aggregate during fiscal 1998 and 1999 and the first fiscal
quarter of 2000. The Company met the Consolidated Net Worth covenant as of
June 28, 1999.
As of June 28, 1999, (a) the short-term line of credit was terminated and
(b) the banks under the Company's Bank Agreement agreed to further amend the
Bank Agreement to, among other things, (i) delete the Consolidated Net Worth
covenant, (ii) amend and retain certain other financial covenants (as defined
above) and (iii) provide for overadvance loans to the Company of up to $4
million in excess of the availability under the Borrowing Base (as defined
below) for a period of up to 120 days expiring on November 30, 1999; provided
that the funds held in a cash collateral account that had been pledged by
CHPII to secure the CHPII guaranty of the Company's obligations under the
short-term line of credit be converted into $8.5 million face amount of
Series B Preferred or other capital stock of the Company having terms
acceptable to the banks. Upon the conversion of the funds in the cash
collateral account into shares of Series B Preferred on June 28, 1999, the
guarantee obligations of CHPII and the indemnification obligations of the
Company were satisfied and released.
The Bank Agreement also contains covenants which, among other things, limit
the ability of the Company and its subsidiaries to (a) incur additional
indebtedness, (b) acquire and dispose of assets, (c) create liens, (d) make
capital expenditures, (e) pay dividends on or redeem shares of the Company's
capital stock, and (f) make certain investments. The Company was in
compliance with all debt covenants under the Bank Agreement as of November
27, 1999.
Availability under the Revolving Credit and Gold Facilities is subject to a
borrowing base limitation (the Borrowing Base) based on the aggregate of
certain percentages of Eligible Receivables (as defined in the Revolving
Credit and Gold Facilities) and Eligible Inventory (as defined in the
Revolving Credit and Gold Facilities) of the Company. The Borrowing Base is
recalculated weekly. If the aggregate amount of loans and other extensions of
credit under the Revolving Credit and Gold Facilities exceeds the Borrowing
Base, the Company must immediately prepay or cash collateralize its
obligations under the Revolving Credit and Gold Facilities to the extent of
such excess. At November 27, 1999, the Company had a total of $598,000
available under the Revolving Credit Facility and the Gold Facility.
The Bank Agreement contains certain customary events of default, including
nonpayment, misrepresentation, breach of covenant, bankruptcy, ERISA,
judgments, change of control and cross defaults. In addition, the Bank
Agreement provides that it shall be an Event of Default if the Company or any
of its subsidiaries (other than its Mexican subsidiary) shall be enjoined or
restrained from conducting any material part of its business for more than 30
days.
CONSIGNED GOLD
Under the Company's gold consignment/loan arrangements, the Company has the
ability to have on consignment up to 26,000 ounces of gold or alternatively
to borrow up to $10 million for the purchase of gold. Under these
arrangements, the Company is limited to a maximum value of $10 million in
consigned inventory and/or gold loan funds. For the three months ended
November 27, 1999 and November 28, 1998, the Company expensed approximately
$92,000 and $62,000, respectively, in connection with consignment fees. Under
the terms of the consignment arrangement, the Company does not own the
consigned gold until it is shipped in the form of a ring to a customer.
Accordingly, the Company does not include the value of consigned gold in
inventory or the corresponding liability for financial statement purposes. As
of November 27, 1999, and August 28, 1999, the Company held approximately
18,511 ounces and 18,911 ounces, respectively, valued at $5.5 million and
$4.8 million, respectively, of gold on consignment from one of its lenders.
-10-
The long-term debt outstanding as of November 27, 1999, matures as follows (in
thousands):
Amount
Fiscal Year Ending Maturing
----------------
(unaudited)
2000 1,875
2001 2,750
2002 35,509
2003 11,000
2004 -
Thereafter 90,000
----------------
$ 141,134
================
The weighted average interest rate of debt outstanding as of November 27,
1999 and August 28, 1999 was 10.3% and 10.2%, respectively.
The Company's management believes the carrying amount of long-term debt,
including the current maturities, approximates fair value as of November 27,
1999 and August 28, 1999, based upon current rates offered for debt with the
same or similar debt terms.
(5) COMMITMENTS AND CONTINGENCIES
Certain Company facilities and equipment are leased under agreements expiring
at various dates through 2005.
The Company is a party to certain contracts with some of its sales
representatives whereby the representatives have purchased from their
predecessors the right to sell the Company's products in a territory. The
contracts generally provide that the value of these rights is primarily
determined by the amount of business achieved by a successor sales
representative and is therefore not determinable in advance of performance by
the successor sales representative.
The Company is not party to any pending legal proceedings other than ordinary
routine litigation incidental to the business. In management's opinion,
adverse decisions on those legal proceedings, in the aggregate, would not
have a materially adverse impact on the Company's results of operations or
financial position.
(6) INCOME TAXES
For each of the three months ended November 27, 1999 and November 28, 1998
the Company expensed $30,000 related to state income taxes. The net current
and deferred provision and/or benefit for federal income taxes is $0, as a
valuation allowance exists due to the net operating losses incurred by the
Company.
(7) STOCKHOLDERS' EQUITY
The Company is authorized to issue 750,000 shares of Preferred Stock, par
value $.01 per share, and 750,000 shares of Common Stock, par value $.01 per
share. As of November 27, 1999, the Company had issued and outstanding
100,000 shares of Series A Preferred, 460,985 shares of Series B Preferred
and 375,985 shares of Common Stock.
SERIES A PREFERRED STOCK (SERIES A PREFERRED)
The holders of shares of Series A Preferred are not entitled to voting
rights. Dividends on the Series A Preferred are payable in cash, when, as and
if declared by the board of directors of the Company, out of funds legally
available therefor, on a quarterly basis. Dividends on the Series A Preferred
accrue from the date of issuance (December 16, 1996) or the last date to
which dividends have been paid at a rate of 12% per annum, whether or not
such dividends have been declared and whether or not there shall be funds
legally available for the payment thereof. Any dividends which
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are declared shall be paid pro rata to the holders. No dividends or interest
shall accrue on any accrued and unpaid dividends. The Company's 11% senior
subordinated notes and bank debt restrict the Company's ability to pay
dividends on the Series A Preferred.
The Series A Preferred is not subject to mandatory redemption. The Series A
Preferred is redeemable at any time at the option of the Company; however,
the Company's 11% senior subordinated notes and bank debt restrict the
Company's ability to redeem the Series A Preferred. In the event of any
liquidation, dissolution or winding up of the Company, the holders of the
Series A Preferred shall receive payment of the liquidation value of $100 per
share plus all accrued and unpaid dividends prior to the payment of any
distributions to the holders of the Series B Preferred or the holders of the
Common Stock of the Company. So long as shares of the Series A Preferred
remain outstanding, the Company may not declare, pay or set aside for payment
dividends on, or redeem or otherwise repurchase any shares of, the Series B
Preferred or Common Stock.
SERIES B PREFERRED STOCK (SERIES B PREFERRED)
The holders of shares of Series B Preferred are entitled to one vote per
share, voting together with the holders of the Common Stock as one class on
all matters presented to the shareholders generally. No dividends accrue on
the Series B Preferred.
Dividends may be paid on the Series B Preferred if and when declared by the
board of directors of the Company out of funds legally available therefor.
The Series B Preferred is nonredeemable. In the event of any liquidation,
dissolution or winding up of the Company, the holders of the Series B
Preferred shall receive payment of the liquidation value of $100 per share
plus any accrued and unpaid dividends prior to the payment of any
distributions to the holders of the Common Stock of the Company. So long as
shares of the Series B Preferred remain outstanding, the Company may not
declare, pay or set aside for payment any dividends on the Common Stock.
On June 28, 1999, the Company issued 85,000 shares of Series B Preferred
Stock to CHP II for $8.5 million in cash, representing funds previously held
in a cash collateral account that had been pledged to secure the CHPII
guaranty of the Company's obligations under the Short-Term Revolving Credit.
According to the terms of an employment agreement, the Company was to have
issued 6,600 shares of Series B Preferred Stock valued at $100 per share to a
former executive of the Company upon the termination of his agreement in
August 1999. The Company and the former executive have agreed to defer the
issuance of such shares until at least January 2000.
COMMON STOCK
The holders of Common Stock are entitled to one vote for each share held of
record on all matters submitted to a vote of shareholders, including the
election of directors, and vote together as one class with the holders of the
Series B Preferred.
Dividends may be paid on the Common Stock if and when declared by the board
of directors of the Company out of funds legally available therefor. The
Company does not expect to pay dividends on the Common Stock in the
foreseeable future. So long as shares of the Series A Preferred and Series B
Preferred remain outstanding, the Company may not declare, pay or set aside
for payment any dividends on the Common Stock.
COMMON STOCK PURCHASE WARRANTS
The Company has issued warrants, exercisable to purchase an aggregate of
21,405 shares of Common Stock (or an aggregate of approximately 4.96% of the
outstanding shares of Common Stock on a fully diluted basis), at an initial
exercise price of $6.67 per share, at any time on or after December 16, 1997,
and on or before January 31, 2008.
In accordance with a subscription agreement entered into by the Company and
CHPII and certain of its affiliates (the
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Castle Harlan Group), the Company granted the Castle Harlan Group certain
registration rights with respect to the shares of capital stock owned by them
pursuant to which the Company agreed, among other things, to effect the
registration of such shares under the Securities Act of 1933 at any time at
the request of the Castle Harlan Group. The Company also granted to the
Castle Harlan Group unlimited piggyback registration rights on certain
registrations of shares of capital stock by the Company.
STOCK-BASED COMPENSATION PLAN
The Company has a stock option plan (the 1997 Stock Option Plan), effective
as of July 29, 1997, for which a total of 69,954 shares of Common Stock have
been reserved for issuance and 35,735 of those shares were available for
grant to directors and employees of the Company as of November 27, 1999. The
1997 Stock Option Plan provides for the granting of both incentive and
nonqualified stock options. Options granted under the 1997 Stock Option Plan
have a maximum term of 10 years and are exercisable under the terms of the
respective option agreements at fair market value of the Common Stock at the
date of grant. Payment of the exercise price must be made in cash or in whole
or in part by delivery of shares of the Company's Common Stock. All Common
Stock issued upon exercise of options granted pursuant to the 1997 Stock
Option Plan will be subject to a voting trust agreement.
INCENTIVE STOCK PURCHASE PLAN
On July 7, 1998 the stockholders of the Company unanimously approved and
adopted the Commemorative Brands, Inc. Incentive Stock Purchase Plan (Stock
Purchase Plan). Pursuant to the terms of Stock Purchase Plan, the Company may
from time to time offer shares of the Company's Class B Preferred Stock and
Common Stock to employees, consultants and independent sales representatives
who are determined to be eligible to purchase shares pursuant to Stock
Purchase Plan by the Plan Administrator (as defined in Stock Purchase Plan)
upon such terms and at such prices as are set forth in Stock Purchase Plan
and as are determined by the Plan Administrator.
(8) RELATED - PARTY TRANSACTIONS
The Company agreed to indemnify CHPII pursuant to an indemnification
agreement, dated August 26, 1998 for any amount that may be incurred by CHPII
under CHPII's guaranty of the Company's obligations under the Short-Term
Revolving Credit (see Note 4). The indemnification agreement was terminated
as of June 28, 1999 (see Note 4).
On June 30, 1998, the Company sold shares of Common Stock and Series B
Preferred Stock to certain executive officers of the Company including
Jeffrey H. Brennan, former President and Chief Executive Officer of the
Company. In conjunction therewith, the Company lent Mr. Brennan $75,000 to
purchase shares of the Company's stock pursuant to a promissory note in the
original principal amount of $75,000, which was due and payable in full on
June 16, 2003, and which bore interest at the rate of 5.77% per annum,
payable annually on the 15th of June. Mr. Brennan granted to the Company a
security interest in the shares acquired by him and his interest in the
voting trust into which the shares were deposited as collateral security for
the repayment in full of the promissory note. As of May 11, 1999, in
connection with the termination of Mr. Brennan's employment, the Company
repurchased for $25,000 in cash plus the return and cancellation of Mr.
Brennan's $75,000 promissory note, all of the shares purchased by Mr. Brennan
at the purchase price paid by him therefor. In connection with the purchase
by another officer of the Company of shares on June 30, 1998, the Company
lent that officer the sum of $25,000 to purchase shares of the Company's
stock on substantially identical terms as the promissory note issued by Mr.
Brennan. The $25,000 loan was repaid in full to the Company on February 15,
1999.
The Company entered into a management agreement dated December 16, 1996 (the
Management Agreement), with Castle Harlan, Inc. (the "Manager"), pursuant to
which the Manager agreed to provide business and organizational strategy,
financial and investment management and merchant and investment banking
services to the Company upon the terms and conditions set forth therein. As
compensation for such services, the Company agreed to pay the Manager $1.5
million per year, which amount was paid in advance for the first year and is
payable quarterly in arrears thereafter. The agreement is for a term of 10
years, renewable automatically from year to year thereafter unless the Castle
Harlan Group then owns less than 5% of the then outstanding capital stock of
the Company. The Company has agreed to
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indemnify the Manager against liabilities, costs, charges and expenses
relating to the Manager's performance of its duties, other than such of the
foregoing resulting from the Manager's gross negligence or willful
misconduct. The Bank Agreement prohibits payment of the CHP Management Fee
unless at the time of payment (i) no Event of Default (as defined in the Bank
Agreement) shall have occurred and is continuing or would result from the
payment of the CHP Management Fee; (ii) the Short-Term Revolving Credit shall
have been repaid in full; and (iii) the Company meets the requisite Modified
Funded Debt Ratio (as defined in the Bank Agreement). The Indenture also
prohibits payment of the CHP Management Fee in the Event of a Default by the
Company in the payment of principal, Redemption Price or Purchase Price (both
as defined in the Indenture), interest or Liquidated Damages (if any) on the
Notes. The CHP Management Fee (as defined in the Indenture) for the three
months ended November 27, 1999 and the fiscal year ended August 28, 1999 has
been accrued but not paid, and is included in accounts payable and accrued
expenses.
-14-
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
For purposes of the discussion contained in this Item 2, unless the
context otherwise requires (i) the term "CBI" refers to Commemorative Brands,
Inc. prior to the consummation of the Acquisitions, (ii) the term "ArtCarved"
refers to the predecessor assets, businesses and operations of L. G. Balfour
Company, Inc. acquired by CBI, and (iv) the term "the Company" refers to CBI
consolidated with its subsidiaries as combined with ArtCarved and Balfour
after giving effect to the Acquisitions.
GENERAL
On December 16, 1996, CBI completed the Acquisitions. CBI was
initially formed by Castle Harlan Partners II, L.P. ("CHPII"), a Delaware
limited partnership and private equity investment fund, in March 1996 for the
purpose of acquiring ArtCarved and Balfour. Until December 16, 1996, CBI
engaged in no business activities other than in connection with the
Acquisitions and the financing thereof.
The Company uses a 52/53 week fiscal year ending on the last
Saturday of August.
RESULTS OF OPERATIONS
The results of operations of the Company for the three months ended
November 27, 1999 and November 28, 1998 were negatively impacted as a result
of the consolidation of the Attleboro and North Attleboro, Massachusetts
operations into the Austin, Texas facilities. The consolidation of the
Attleboro and North Attleboro, Massachusetts operations into the Company's
Austin, Texas facilities was substantially completed in the fiscal year ended
August 29, 1998. The consolidation of these Massachusetts-based operations
into the Texas facilities was expected to yield cost savings to the combined
Balfour and ArtCarved operations as compared to their predecessor's
historical costs from, among other things, reduced occupancy, overhead and
labor expenses. To date, the company has realized savings of approximately
$1.5 million per year in reduced occupancy and overhead costs. The full
anticipated cost savings from the consolidation of facilities has not been
realized, however, mainly due to the following ongoing circumstances:
- People - The specific Balfour product knowledge that was "lost" due to
Massachusetts employees electing not to relocate to Texas which
resulted in production inefficiencies, higher than normal training
expenses and additional costs to temporarily place former Balfour
employees (manager and supervisors) in the Texas plant. In addition,
labor costs in the Austin, Texas area have increased faster than
anticipated as a result of the tightening of the labor market in the
Austin area.
- Tooling - Because Balfour ring tooling is older and more complicated
to use than the ArtCarved ring tooling, the Company continues to
experience higher than normal training costs and lower levels of
efficiency than that achieved at the ArtCarved ring plant.
- Systems - The Balfour computer system is heavily dependent on manual
processing and human interaction. The Company experienced difficulties
in the transfer of user knowledge and system documentation. As a
result, the Company has incurred labor costs in excess of those
anticipated by management to enter, schedule, produce, track and ship
the Balfour rings.
During January 1998, the Company began a major computer project,
which began implementation in July 1999. The project converted the more
inefficient Balfour computer systems to the more efficient ArtCarved systems,
unifying the Company's computer systems thereby reducing computer operation
and maintenance costs, streamlining and making the Company's order entry
system and process more accurate.
As certain of the labor and tooling costs are imbedded in the
Balfour manufacturing process, management does not anticipate that
significant cost reductions can be accomplished in the near term without
significant changes in the tooling and manufacturing processes of Balfour
products. Management continues to assess more efficient
-15-
manufacturing and tooling techniques, which may in the future, yield
additional cost savings but may require additional capital investment.
THE COMPANY
THREE MONTHS ENDED NOVEMBER 27, 1999 AS COMPARED TO THE THREE MONTHS
ENDED NOVEMBER 28, 1998.
NET SALES - Net sales decreased $2.4 million, or 5.9%, to $38.7 million for
the three months ended November 27, 1999, from $41.2 million for the three
months ended November 28, 1998. The decrease in net sales was the result of a
1.3% decrease in net sales of college class rings, a 5.9% decrease in net
sales of fine paper products and a 1.9% decrease in net sales of recognition
and affinity jewelry, offset by a 3.2% increase in net sales of high school
class rings. The decline in net sales of college class rings was primarily a
result of timing of shipments of class ring orders in December 1999 as
compared to November 1998. The decline in net sales of fine paper products
was as a result of the change in timing of shipments of fine paper products
and the decline of net sales in recognition and affinity jewelry was a result
of the Company's decreased focus in consumer sports jewelry. Partially
offsetting the decline was an increase of 3.2% in net sales of high school
class rings as a result of a 3.8% increase in net sales in the high school
in-school sales channel. This increase was a result of price increases and
changes in product mix and was offset by a 0.6% decline in the in-store sales
channel net sales.
GROSS PROFIT - Gross Profit decreased $2.7 million, or 11.4%, to $21.2
million for the three months ended November 27, 1999 as compared to $24.0 for
the three months ended November 28, 1998. As a percentage of net sales, gross
profit decreased to 54.8% for the three months ended November 27, 1999 from
58.2% for the three months ended November 28, 1998. Of the 11.4% decrease in
gross profit, 7.2% of the decline was a result of the change in timing of
shipments of fine paper products and the majority of the remaining 4.2% was a
result of the decline in the net sales of the consumer sports jewelry.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES - Selling, general and
administrative expenses decreased $1.3 million, or 6.6%, to $18.9 million for
the three months ended November 27, 1999, compared to $20.2 million for the
three months ended November 28, 1998. As a percentage of net sales, selling,
general and administrative expenses decreased to 48.7% for the three months
ended November 27, 1999, compared to 49.1% for the three months ended
November 28, 1998. The 0.4% decrease in selling, general and administrative
expenses as a percentage of net sales was a result of cost cutting changes
initiated during March 1999.
OPERATING INCOME - As a result of the foregoing, operating income decreased
$1.4 million to $2.4 million for the three months ended November 27, 1999
compared to $3.8 million for the three months ended November 28, 1998. As a
percentage of net sales, operating income decreased to 6.1% for the three
months ended November 27, 1999 compared to 9.1% for the three months ended
November 28, 1998.
INTEREST EXPENSE, NET - Net interest expense was $3.9 million for the three
months ended November 27, 1999 and $3.7 million for the three months ended
November 28, 1998. Interest expense remained approximately the same as the
prior year as a result of the combination of lower interest rates on the
average outstanding balance under the Bank Agreement and an increase of the
average outstanding balance to $48.3 million in the three months ended
November 27, 1999 as compared to $45.1 million in the three months ended
November 28, 1998. Interest rates ranged from 8.3% to 11.0% for the three
months ended November 27, 1999 and the three months ended November 28, 1998.
Interest on the $90.0 million of senior subordinated notes is fixed at a rate
of 11%.
PROVISION FOR INCOME TAXES - For the three months ended November 27, 1999 and
the three months ended November 28, 1998, the Company expensed $30,000 and
$30,000, respectively, related to state income taxes. There is no federal
income tax benefit as a valuation allowance exists due to the net operating
losses incurred by the Company.
NET LOSS - As a result of the foregoing, the net loss increased $1.5 million
to $1.5 million for the three months ended November 27, 1999 compared to net
loss of $13,000 for the three months ended November 28, 1998.
-16-
PREFERRED DIVIDENDS - Preferred dividends of $0.3 million were accrued for
the three months ended November 27, 1999 and for the three months ended
November 28, 1998. No cash dividends were paid for the three months ended
November 27, 1999 or the three months ended November 28, 1998.
NET LOSS TO COMMON STOCKHOLDERS - As a result of the foregoing, net loss to
common stockholders increased an aggregate of $1.5 million to $1.8 million
for the three months ended November 27, 1999 compared to $0.3 million for the
three months ended November 28, 1998.
SEASONALITY
The Company's scholastic product sales tend to be seasonal. The Company
generally recognizes sales on shipment of product. Class ring sales are
highest during October through December (which overlaps the Company's first
and second fiscal quarters), when students have returned to school after the
summer recess and orders are taken for class rings for delivery to students
before the winter holiday season. Sales of the Company's fine paper products
are predominantly made during February through April (which overlaps the
Company's second and third fiscal quarters) for graduation in May and June.
The Company has historically experienced operating losses during the period
of the Company's fourth fiscal quarter, which includes the summer months when
school is not in session. The Company's recognition and affinity product line
is not seasonal in any material respect, although sales generally are highest
during the winter holiday season and in the period prior to Mother's Day. As
a result, the effects of the seasonality of the class ring business on the
Company are somewhat tempered by the Company's relatively broad product mix.
As a result of the foregoing, the Company's working capital requirements tend
to exceed its operating cash flows from July through December.
LIQUIDITY AND CAPITAL RESOURCES
As of November 27, 1999, the Company had a $35.0 million line of credit
under the Revolving Credit and Gold Facilities (each as defined and more
fully discussed in Note 4 to the Consolidated Financial Statements). The
Company had $28,759,000 outstanding under the Revolving Credit Facility and
$5,643,000 outstanding under the Gold Facility at November 27, 1999. At
November 27, 1999, the Company had $598,000 available under its Revolving
Credit Facility, including a $4.0 million overadvance loan extended in
August 1999, and its Gold Facility. The Company's ability to borrow under the
overadvance loan expired on November 30, 1999. As of November 30, 1999 there
were no amounts borrowed in excess of the then current Borrowing Base (as
defined and more fully discussed in Note 4 to the Consolidated Financial
Statements).
The Company's liquidity needs arise primarily from debt service on the
Bank Agreement and the Notes (each as defined and more fully discussed in
Note 4 to the Consolidated Financial Statements), working capital and capital
expenditure requirements, and payments required under a management agreement
with Castle Harlan, Inc. (the "CHP Management Fee"), which has been accrued
but not paid in the three months ended November 27, 1999 and fiscal year 1999
in accordance with the terms of the Bank Agreement (see Note 4 to the
Consolidated Financial Statements). Because of the difficulties in the
consolidation of the Balfour operations and the seasonality of the Company's
business, the Company will continue to have limited capital resources and
limited flexibility in meeting the Company's cash requirements at certain
times during the year. Due to the Company's limited capital resources and
flexibility in meeting cash requirements, the Company does not expect to pay
the full amount of interest due to be paid on the Notes on January 15, 2000.
Management believes that the full amount of interest will be paid within the
30 day grace period provided for in the Indenture; however, there can be no
assurance that this will be the case.
As of June 28, 1999 (a) the $8.0 million short-term line of credit that
the Company had secured from the Banks was terminated and (b) the banks under
the Company's Bank Agreement agreed to further amend the Bank Agreement to,
among other things, (i) delete the Consolidated Net Worth covenant, (ii)
amend certain other financial covenants and (iii) provide for overadvance
loans to the Company of up to $4 million in excess of the availability under
the Borrowing Base for a period of up to 120 days expiring on November 30,
1999; provided that the funds held in a cash collateral account that had been
pledged by CHPII to secure a CHPII guaranty of the Company's obligations
under the short-term line of credit be converted into $8.5 million face
amount of Series B Preferred or other capital stock of the Company having
terms acceptable to the banks. Upon the termination of the short-term line of
credit and the conversion of the funds in the cash collateral account into
shares of Series B Preferred, the guarantee obligations of CHPII and the
indemnification obligations of the Company were satisfied and released. See
Note 4 to the Consolidated Financial Statements.
-17-
Operating activities used cash of $3.1 million for the three months
ended November 27, 1999 as a result of net loss of $1.5 million, adjusted to
eliminate expenses for non-cash items of $2.6 million, and partially offset
by changes in assets and liabilities of $4.2 million. The $4.2 million of
cash used by changes in assets and liabilities resulted from increases in
accounts receivable of $12.4 million and in inventories of $3.0 million,
which were offset by decreases in prepaid expenses and other current assets
of $0.3 million, other assets of $0.5 million, and increases in bank
overdraft, accounts payable, accrued expenses and other long-term liabilities
of $10.3 million. These fluctuations generally reflect the seasonality of the
Company's business. The seasonal fluctuations usually result in higher sales
during the first fiscal quarter of the year and correspondingly higher levels
of accounts receivable, inventories and bank overdraft, accounts payable and
accrued expenses. Prepaid expenses and other current assets usually decline
during the first fiscal quarter as a result of the amortization of prepaid
advertising expenses that are paid for in the fourth fiscal quarter of the
year. The decrease in other assets for the three months ended November 27,
1999 was a result of a reduction in samples. The increase in bank overdraft,
accounts payable, accrued expenses and other long-term liabilities was an
increase of $1.2 million in bank overdraft, an increase of customer deposits
of approximately $5.7 million, an increase of $2.5 million in accounts
payable, an increase of $2.6 million in accrued interest, an increase of $0.7
million in accrued sales and property taxes and an increase of $0.4 million
in accrued management fees, offset by a $1.5 million decrease in commissions,
royalties, compensation and related costs and a $1.3 million decrease in
other accrued expenses.
Comparing the three months ended November 27, 1999 with the three
months ended November 28, 1998, the Company's operating activities used cash
of $3.1 million for the three months ended November 27, 1999 and used $1.8
million for the three months ended November 28, 1998. Changes in assets and
liabilities used cash of $4.2 million for the three months ended November 27,
1999 and $3.7 million for the three months ended November 28, 1998, an
increase in cash used of $0.5 million. For the three months ended November
27, 1999, the increase in accounts receivable was $0.4 million less than the
increase in accounts receivable for the three months ended November 28, 1998
as a result of decreased sales partially offset by increased days sales
outstanding. Inventories increased $2.2 million more during the three months
ended November 27, 1999 than the three months ended November 28, 1998 as a
result of increased fine paper products inventory due to change in timing of
shipments of fine paper products from the prior year partially as a result of
shipping delays related to the conversion of the Balfour systems to the
ArtCarved systems. Other assets decreased $0.5 million during the three
months ended November 27, 1999, but increased $0.3 million during the three
months ended November 28, 1998, a total difference of $0.8 million. The net
decrease during the three months ended November 27, 1999 was due to a
reduction in samples outstanding and amortization of transaction costs. The
net increase during the three months ended November 28, 1998 was due to an
increase in the manufacture of samples to support increased sales volume. For
the three months ended November 27, 1999, the increase in bank overdraft,
accounts payable, accrued expenses and other long-term liabilities was
approximately $0.5 million more than the increase in these accounts for the
three months ended November 28, 1998 as a result of increases of
approximately $3.3 million in accounts payable and $1.6 million in customer
deposits due to the timing of both the college rings and the fine paper
products shipments, partially offset by a $3.2 million decrease in
commissions, royalties and compensation and related costs primarily due to
the decline in net sales volume, a decrease of $0.4 million in the bank
overdraft and a $0.8 million decrease in other accrued expenses.
The Company used $1.4 million for investing activities for the three
months ended November 27, 1999, a $0.7 million decrease over the three months
ended November 28, 1998. The decrease reflects the capital expenditures made
by the Company for the conversion of the Balfour computer systems to the
ArtCarved system during the three months ended November 28, 1998. As a result
of the completion of the system conversion, the Company's projected capital
expenditures for fiscal 2000 are expected to decline from $9.8 million for
fiscal 1999 to approximately $5.1 million for fiscal 2000 for manufacturing
equipment, tools and dies and software development.
YEAR 2000 COMPLIANCE
YEAR 2000 ISSUE. Many software applications, hardware and equipment and
embedded chip systems identify dates using only the last two digits of the
year. These products may be unable to distinguish between dates in the year
2000 and dates in the year 1900. That inability (referred to as the "Year
2000" issue), if not addressed, could cause applications, equipment or
systems to tail or to provide incorrect information after December 31, 1999,
or, when using
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dates after December 31, 1999. This in turn could have an adverse effect on
the Company due to the Company's direct dependence on its own applications,
equipment and systems and indirect dependence on those of other entities with
which the Company must interact.
OUTCOME OF YEAR 2000. The Company experienced no significant problems
or issues once January 1, 2000 occurred. Based on information available at
this time, the Company cannot conclude that any failure of third parties to
achieve Year 2000 compliance will not adversely affect the Company. The
following describes the Company's Year 2000 plan that was implemented.
COMPLIANCE PROGRAM. In order to address the Year 2000 issue, the
Company conducted a review of its computer systems, applications and
equipment and contacted external parties (such as suppliers) regarding their
preparedness for Year 2000 to identify the systems that could be affected by
the Year 2000 problem and made certain investments in its software
applications and systems to ensure that the Company's systems and
applications would function properly to, throughout and beyond the Year 2000.
COMPANY STATE OF READINESS. The awareness phase of the Year 2000
project began with a corporate-wide awareness program. The assessment phase
of the project involved, among other things, efforts to obtain
representations and assurances from third parties, including third party
vendors, that their hardware and equipment, embedded chip systems and
software being used by or impacting the Company or any of its business units
are or will be modified to by Year 2000 compliant. However, the Company does
not consider responses from such third parties to be conclusive. As a result,
management cannot predict any future potential consequences if these or other
third parties are not Year 2000 compliant. Management believes the exposure
associated with the Company's interaction with third parties is minimal.
The Company completed its Year 2000 conversion project in December
1999. All major applications were implemented and testing completed.
COSTS TO ADDRESS YEAR 2000 COMPLIANCE ISSUES. The total cost to the
Company of the Year 2000 project was approximately $0.6 million. Through
November 27, 1999, the Company had expended $0.4 million related to its Year
2000 compliance.
RISK OF NON-COMPLIANCE AND CONTINGENCY PLAN. The major applications
which pose the greatest Year 2000 risks for the Company if implementation of
the Year 2000 compliance program was not successful was order management
applications, production applications, financial applications and related
third party software. Potential problems if the Year 2000 compliance program
were not successful would have included the Company's inability to produce
product, loss of customers and the inability to perform its other financial
and accounting functions.
The goal of the Year 2000 project was to ensure that all of the
critical systems and processes which are under the direct control of the
Company remain functional. However, because certain systems and processes may
be interrelated with systems outside of the control of the Company, there can
be no assurance that all implementations will be successful. Accordingly, as
part of the Year 2000 project, contingency and business plans were developed
to respond to any failures as they may occur. Such contingency and business
plans were completed in early November 1999.
DISCLOSURE REGARDING FORWARD LOOKING STATEMENTS
This report includes forward-looking statements within the meaning of Section
27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended. Although management believes
that the expectations reflected in such forward looking statements are based
upon reasonable assumptions, the Company can give no assurance that these
expectations will be achieved. Any change in or adverse development,
including the following factors may impact the achievement of results in or
accuracy of forward-looking statements: the price of gold and precious,
semiprecious and synthetic stones; the Company's access to students and
consumers in schools; the seasonality of the Company's business; regulatory
and accounting rules; the Company's relationship with its independent sales
representatives; fashion and demographic trends; general economic, business
and market trends and events, especially during peak buying seasons for the
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Company's products; the Company's ability to respond to customer change
orders and delivery schedules; development and operating costs; competitive
pricing changes; successful completion of management initiatives designed
to achieve operating efficiencies; the Company's cash flows; and the
Company's ability to draw down funds under its current bank financings and to
enter into new bank financings. The foregoing factors are not exhaustive.
New factors may emerge or changes may occur that impact the Company's
operations and businesses. Forward-looking statements attributable to the
Company or persons acting on behalf of the Company are expressly qualified on
the foregoing or such other factors as may be applicable.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
There have been no material changes in our market risk during the three
months ended November 27, 1999. For additional information, refer to page 19
of our Annual Report for the fiscal year ended August 28, 1999.
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PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
There are no material pending legal proceedings to which the Company is a
party or to which any of its property is subject. The Company monitors all
claims, and the Company accrues for those, if any, which management believes are
probable of payment. The Company has no pending administrative proceedings
related to environmental matters involving governmental authorities.
ITEM 2. CHANGES IN SECURITIES
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
11.1 State Re: Computation of Per Share Earnings
27. Financial Data Schedule for the period ended November 27, 1999.
(b) The Company did not file any reports on Form 8-K during the three
months ended November 27, 1999.
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COMMEMORATIVE BRANDS, INC.
SIGNATURES
Commemorative Brands, Inc. has duly caused this report to be signed on its
behalf by the undersigned thereunto duly authorized.
COMMEMORATIVE BRANDS, INC.
By:
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SHERICE P. BENCH
VICE PRESIDENT FINANCE AND
PRINCIPAL ACCOUNTING OFFICER
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