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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-Q
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED FEBRUARY 26, 2000
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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COMMEMORATIVE BRANDS, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 13-3915801
(State or other jurisdiction (I.R.S. Employer
of incorporation or Identification Number)
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
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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
February 26, 2000: $0.00
375,985 shares of common stock
(Number of shares outstanding as of March 11, 2000)
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COMMEMORATIVE BRANDS, INC.
FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED FEBRUARY 26, 2000
INDEX
PAGE
--------
PART I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements and Notes
Consolidated Balance Sheets--
As of February 26, 2000 (unaudited) and August 28, 1999
(audited)................................................. 1
Consolidated Statements of Operations--
For the Three Months Ended February 26, 2000 and February
27, 1999
(all unaudited)........................................... 2
Consolidated Statements of Operations--
For the Six Months Ended February 26, 2000 and February
27, 1999
(all unaudited)........................................... 3
Consolidated Statements of Stockholders' Equity--
For the Six Months Ended February 26, 2000 (unaudited) and
for the Year Ended August 28, 1999 (audited).............. 4
Consolidated Statements of Cash Flows--
For the Six Months Ended February 26, 2000 and February
27, 1999
(all unaudited)........................................... 5
Notes to Consolidated Financial Statements.................. 6 - 16
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operation.................................. 17 - 23
Item 3. Quantitative and Qualitative Disclosures About Market
Risk...................................................... 23
PART II. OTHER INFORMATION
Item 1. Legal Proceedings........................................... 24
Item 2. Changes in Securities....................................... 24
Item 3. Defaults Upon Senior Securities............................. 24
Item 4. Submission of Matters to a Vote of Security Holders......... 24
Item 6. Exhibits and Reports on Form 8-K............................ 24
SIGNATURES............................................................ 25
PART I. FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS AND NOTES
COMMEMORATIVE BRANDS, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
FEBRUARY 26, 2000 AUGUST 28, 1999
----------------- ---------------
(UNAUDITED) (AUDITED)
ASSETS
Current assets:
Cash and cash equivalents................................. $ 2,684 $ 751
Accounts receivable, net.................................. 38,150 28,707
Inventories............................................... 15,302 13,804
Prepaid expenses and other current assets................. 8,833 9,900
-------- --------
Total current assets.................................... 64,969 53,162
Property, plant and equipment, net.......................... 41,665 41,780
Trademarks, net............................................. 28,274 28,659
Goodwill, net............................................... 77,356 78,408
Other assets, net........................................... 6,941 7,836
-------- --------
Total assets............................................ $219,205 $209,845
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Bank overdraft............................................ $ 4,010 $ 3,186
Accounts payable and accrued expenses..................... 37,931 26,142
Current portion of long-term debt......................... 2,000 1,750
-------- --------
Total current liabilities............................... 43,941 31,078
Long-term debt, net of current portion...................... 128,000 132,660
Other long-term liabilities................................. 9,167 8,277
-------- --------
Total liabilities....................................... 181,108 172,015
-------- --------
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.......................................... (20,679) (20,946)
-------- --------
Total stockholders' equity.............................. 38,097 37,830
-------- --------
Total liabilities and stockholders' equity.............. $219,205 $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
FEBRUARY 26, 2000 FEBRUARY 27, 1999
----------------- -----------------
Net sales................................................... $ 46,849 $ 43,323
Cost of sales............................................... 19,736 18,930
-------- --------
Gross profit................................................ 27,113 24,393
Selling, general and administrative expenses................ 20,792 19,358
-------- --------
Operating income............................................ 6,321 5,035
Interest expense, net....................................... 3,889 3,906
-------- --------
Income before provision for income taxes.................. 2,432 1,129
Provision for income taxes.................................. 30 30
-------- --------
Net income................................................ $ 2,402 $ 1,099
Preferred dividends......................................... (300) (300)
-------- --------
Net income to common stockholders......................... $ 2,102 $ 799
======== ========
Basic and diluted earnings per share...................... $ 5.59 $ 2.12
======== ========
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 OPERATIONS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(UNAUDITED)
FOR THE SIX FOR THE SIX
MONTHS ENDED MONTHS ENDED
FEBRUARY 26, 2000 FEBRUARY 27, 1999
----------------- -----------------
Net sales................................................... $ 85,588 $ 84,501
Cost of sales............................................... 37,232 36,137
-------- --------
Gross profit................................................ 48,356 48,364
Selling, general and administrative expenses................ 39,664 39,566
-------- --------
Operating income............................................ 8,692 8,798
Interest expense, net....................................... 7,765 7,652
-------- --------
Income before provision for income taxes.................. 927 1,146
Provision for income taxes.................................. 60 60
-------- --------
Net income................................................ $ 867 $ 1,086
Preferred dividends......................................... (600) (600)
-------- --------
Net income to common stockholders......................... $ 267 $ 486
======== ========
Basic and diluted earnings per share...................... $ 0.71 $ 1.29
======== ========
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.
3
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.................. -- -- -- -- -- -- -- (600) (600)
Net income................... -- -- -- -- -- -- -- 867 867
------- -- ------- -- ------- -- ------- -------- -------
Balance, February 26, 2000
(unaudited)................ 100,000 $1 460,985 $5 375,985 $4 $58,766 $(20,679) $38,097
======= == ======= == ======= == ======= ======== =======
The accompanying notes are an integral part of these consolidated financial
statements.
4
COMMEMORATIVE BRANDS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
FOR THE SIX MONTHS ENDED
---------------------------
FEBRUARY 26, FEBRUARY 27,
2000 1999
------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 867 $ 1,086
Adjustments to reconcile net income to net cash used in
operating activities-
Depreciation and amortization........................... 4,319 3,514
Provision for doubtful accounts......................... 586 360
Changes in assets and liabilities-......................
Increase in receivables............................... (10,029) (9,431)
Increase in inventories............................... (1,498) (371)
Decrease (increase) in prepaid expenses and other
current assets....................................... 1,067 (256)
Decrease (increase) in other assets................... 893 (774)
Increase in bank overdraft, accounts payable, accrued
expenses and other long-term liabilities............. 12,903 6,348
-------- -------
Net cash provided by operating activities............. 9,108 476
-------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property, plant and equipment................ (2,765) (4,578)
-------- -------
Net cash used in investing activities................. (2,765) (4,578)
-------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments on term loan facility, net....................... (750) (500)
Revolver borrowings (payments), net....................... (3,660) 5,346
-------- -------
Net cash provided by (used in) financing activities... (4,410) 4,846
-------- -------
NET INCREASE IN CASH AND CASH EQUIVALENTS................... 1,933 744
CASH AND CASH EQUIVALENTS, beginning of period.............. 751 975
-------- -------
CASH AND CASH EQUIVALENTS, end of period.................... $ 2,684 $ 1,719
======== =======
SUPPLEMENTAL DISCLOSURE
Cash paid during the period for--
Interest................................................ $ 7,076 $ 6,030
======== =======
Taxes................................................... $ 33 $ 47
======== =======
SUPPLEMENTAL DISCLOSURE OF NONCASH FINANCING ACTIVITIES
Accrued preferred stock dividends......................... $ 600 $ 600
======== =======
The accompanying notes are an integral part of these consolidated financial
statements.
5
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 six months ended
February 26, 2000 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.
6
COMMEMORATIVE BRANDS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) (CONTINUED)
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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
7
COMMEMORATIVE BRANDS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) (CONTINUED)
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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.
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.
8
COMMEMORATIVE BRANDS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) (CONTINUED)
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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.
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):
FEBRUARY 26, AUGUST 28,
2000 1999
------------ ----------
(UNAUDITED) (AUDITED)
Raw materials.......................................... $ 6,990 $ 8,079
Work in process........................................ 4,111 1,987
Finished goods......................................... 4,201 3,738
------- -------
$15,302 $13,804
======= =======
Cost of sales includes depreciation and amortization of $1,306,000 and
$1,190,000, for the six months ended February 26, 2000 and February 27, 1999,
respectively.
9
COMMEMORATIVE BRANDS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) (CONTINUED)
(4) LONG-TERM DEBT
Long-term debt consists of the following (in thousands):
FEBRUARY 26, AUGUST 28,
2000 1999
------------ ----------
(UNAUDITED) (AUDITED)
11% senior subordinated notes due 2007................. $ 90,000 $ 90,000
Term loan facility..................................... 22,000 22,750
Bank revolver.......................................... 18,000 21,660
-------- --------
Total debt........................................... $130,000 $134,410
Less: current portion.................................. 2,000 1,750
-------- --------
Total long-term debt................................. $128,000 $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. The Company did not complete
a Public Equity Offering on or before January 15, 2000.
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 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
10
COMMEMORATIVE BRANDS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) (CONTINUED)
(4) LONG-TERM DEBT (CONTINUED)
all of its assets to, another person. The Company is in compliance with the
Indenture covenants as of February 26, 2000.
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, 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. The Company is in compliance with the terms of the Term
Loan as of February 26, 2000.
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
America, 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 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.
11
COMMEMORATIVE BRANDS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) (CONTINUED)
(4) LONG-TERM DEBT (CONTINUED)
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 February 26, 2000.
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 February 26, 2000,
the Company had a total of $8,600,000 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 six months ended February 26, 2000 and
February 27, 1999, the Company expensed approximately $165,000 and $122,000,
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 February 26, 2000, and August 28, 1999,
the Company held approximately 19,711 ounces and 18,911 ounces, respectively,
valued at $5.8 million and $4.8 million, respectively, of gold on consignment
from one of its lenders.
12
COMMEMORATIVE BRANDS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) (CONTINUED)
(4) LONG-TERM DEBT (CONTINUED)
The long-term debt outstanding as of February 26, 2000, matures as follows
(in thousands):
AMOUNT
FISCAL YEAR ENDING MATURING
- ------------------ -----------
(UNAUDITED)
2000............................................. $ 1,500
2001............................................. 2,750
2002............................................. 24,750
2003............................................. 11,000
2004............................................. --
Thereafter....................................... 90,000
--------
$130,000
========
The weighted average interest rate of debt outstanding as of February 26,
2000 and August 28, 1999 was 10.4% 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 February 26,
2000 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 both the six months ended February 26, 2000 and the six months ended
February 27, 1999, the Company expensed $60,000 and $60,000, 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.
(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 February 26, 2000, 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.
13
COMMEMORATIVE BRANDS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) (CONTINUED)
(7) STOCKHOLDERS' EQUITY (CONTINUED)
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 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. As of February 26, 2000, these shares have been deferred.
14
COMMEMORATIVE BRANDS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) (CONTINUED)
(7) STOCKHOLDERS' EQUITY (CONTINUED)
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 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 February 26, 2000. 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.
15
COMMEMORATIVE BRANDS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) (CONTINUED)
(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 15(th) 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 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 six months ended
February 26, 2000 and the fiscal year ended August 28, 1999 has been accrued but
not paid, and is included in accounts payable and accrued expenses.
16
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
assets, businesses and operations of CJC Holdings, Inc. acquired by CBI
(iii) the term "Balfour" refers to the Balfour operation of the 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 six months ended
February 26, 2000 and February 27, 1999 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 cost 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 was heavily dependent on manual
processing and human interaction. The Company experienced difficulties in
the transfer of user knowledge and system documentation as a result of
employees electing not to relocate to Texas as discussed above. 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 was
implemented 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, and
making the Company's order entry system and process more accurate and
streamlined.
17
As some 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 manufacturing and tooling techniques, which
may in the future, yield additional cost savings, but may require additional
capital investment.
THE COMPANY
THREE MONTHS ENDED FEBRUARY 26, 2000 AS COMPARED TO THE THREE MONTHS ENDED
FEBRUARY 27, 1999.
NET SALES--Net sales increased $3.5 million, or 8.1%, to $46.8 million for
the three months ended February 26, 2000, as compared to $43.3 million for the
three months ended February 27, 1999. The increase in net sales was the result
of a 5.5% increase in net sales of high school class rings, a 2.2% increase in
net sales of recognition and affinity jewelry as a result of increased unit
sales of personalized family jewelry, and a 1.1% increase in fine paper
products. The increase in high school class rings was the result of a price
increase, an increase in units and changes in the product mix of the in-school
sales channel. Partially offsetting the increase was a decline of 0.7% in
college class rings. The decline in college class rings was a result of a
shortfall in both units and average price per unit due to increased competition
and the changing marketplace.
GROSS PROFIT--Gross Profit increased $2.7 million, or 11.2% to
$27.1 million for the three months ended February 26, 2000 as compared to
$24.4 million for the three months ended February 27, 2000. As a percentage of
net sales, gross profit increased to 57.9% for the three months ended
February 26, 2000 as compared to 56.3% for the three months ended February 27,
1999. The 1.6% increase in gross profit as a percentage of net sales was mainly
the result of improvements in class rings gross margin as a percentage of net
sales by 2.5% as a result of increased selling prices and changes in product
mix. The increase was offset by a 0.5% decline in the margins as a percentage of
net sales of fine paper products as a result of change in timing of shipments of
the fine paper products and a 0.4% decline in recognition and affinity jewelry
as a result of the Company's decreased focus in consumer sports jewelry.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES--Selling, general and
administrative expenses increased $1.4 million, or 7.4% to $20.8 million for the
three months ended February 26, 2000, as compared to $19.4 million for the three
months ended February 27, 1999. As a percentage of net sales, selling, general
and administrative expenses decreased to 44.4% for the three months ended
February 26, 2000, compared to 44.7% for the three months ended February 27,
1999. The 0.3% 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 increased
$1.3 million to $6.3 million for the three months ended February 26, 2000 as
compared to $5.0 million for the three months ended February 27, 1999. As a
percentage of net sales, operating income increased to 13.5% for the three
months ended February 26, 2000 as compared to 11.6% for the three months ended
February 27, 1999.
INTEREST EXPENSE--Net interest expense was $3.9 million for the three months
ended February 26, 2000 and for the three months ended February 27, 1999.
Interest rates remained the same as the prior year as a result of the
combination of higher interest rates on the average outstanding balance under
the Revolving Credit Facility and Term Loan and a decrease of the average
outstanding balance to $45.9 million in the three months ended February 26, 2000
as compared to $48.8 million in the three months ended February 27, 1999.
Interest rates ranged from 8.3% to 9.75% for the three months ended
February 26, 2000 and the three months ended February 27, 1999. Interest on the
$90.0 million of senior subordinated rates is at a fixed rate of 11%.
18
PROVISION FOR INCOME TAXES--For both the three months ended February 26,
2000 and the three months ended February 27, 1999, the Company expensed $30,000
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 INCOME--As a result of the foregoing, the net income increased
$1.3 million to $2.4 million for the three months ended February 26, 2000 as
compared to net income of $1.1 million for the three months ended February 27,
1999.
PREFERRED DIVIDENDS--Preferred dividends of $0.3 million were accrued for
the three months ended February 26, 2000 and for the three months ended
February 27, 1999. No cash dividends were paid for the three months ended
February 26, 2000 or the three months ended February 27, 1999.
NET INCOME TO COMMON STOCKHOLDERS--As a result of the foregoing, net income
to common stockholders increased an aggregate of $1.3 million to $2.1 million
for the three months ended February 26, 2000 as compared to $0.8 million for the
three months ended February 27, 1999.
SIX MONTHS ENDED FEBRUARY 26, 2000 AS COMPARED TO THE SIX MONTHS ENDED
FEBRUARY 27, 1999.
NET SALES--Net sales increased $1.1 million, or 1.3%, to $85.6 million for
the six months ended February 26,2000, from $84.5 million for the six months
ended February 27, 1999. The increase in net sales was the result of a 4.4%
increase in net sales of high school class rings, and a 0.2% increase in
recognition and affinity jewelry offset by a 2.3% decrease in net sales of fine
paper products and a 1.0% decrease in net sales of college class rings. The
increase in high school class rings was the result of a price increase, an
increase in units and changes in the product mix of the in-school sales channel.
The increase in recognition and affinity jewelry was a result of increased net
sales of personalized family jewelry offset by declining net sales of consumer
sports jewelry. Partially offsetting the increase was a decline in net sales of
fine paper products as a result of changes in timing of shipments of fine paper
products and a decline of college class rings. The decline in college class
rings was a result of a shortfall in both units and average price per unit due
to increased competition and the changing marketplace.
GROSS PROFIT--Gross Profit remained the same at $48.4 million for the six
months ended February 26, 2000 and the six months ended February 27, 2000. As a
percentage of net sales, gross profit decreased to 56.5% for the six months
ended February 26, 2000 from 57.2% for the six months ended February 27, 1999.
The 0.7% decrease in gross profit as a percentage of net sales was mainly the
result of the change in timing of shipments of fine paper products which
decreased the gross margin as a percentage of net sales by 2.0% and a 1.4%
declining margin as a percentage of net sales in recognition and affinity
jewelry as a result of the Company's decreased focus in consumer sports jewelry.
The decline was offset by a 2.7% increase in gross margin as a percentage of
sales as a result of increased net selling prices and changes in product mix of
class rings.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES--Selling, general and
administrative expenses increased $0.1 million, or 0.2% to $39.7 million for the
six months ended February 26, 2000, compared to $39.6 million for the six months
ended February 27, 1999. As a percentage of net sales, selling, general and
administrative expenses decreased to 46.3% for the six months ended
February 26, 2000, compared to 46.8% for the six months ended February 27, 1999.
The 0.5% 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
$0.1 million to $8.7 million for the six months ended February 26, 2000 as
compared to $8.8 million for the six months ended February 27, 1999. As a
percentage of net sales, operating income decreased to 10.2% for the six months
ended February 26, 2000 as compared to 10.4% for the six months ended
February 27, 1999.
INTEREST EXPENSE--Net interest expense was $7.8 million for the six months
ended February 26, 2000 and $7.7 million for the six months ended February 27,
1999. Interest rates remained approximately the same as the prior year due to
the average outstanding balance under the Revolving Credit Facility and
19
Term Loan remaining approximately the same at $47.1 million for the six months
ended February 26, 2000 as compared to $48.0 million for the six months ended
February 27, 1999. Interest rates ranged from 8.0% to 9.75% for the six months
ended February 26, 2000 and the six months ended February 27, 1999. Interest on
the $90.0 million of senior subordinated rates is fixed at a rate of 11%.
PROVISION FOR INCOME TAXES--For both the six months ended February 26, 2000
and the six months ended February 27, 1999, the Company expensed $60,000 and
$60,000, 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 INCOME--As a result of the foregoing, the net income decreased
$0.2 million to $0.9 million for the six months ended February 26, 2000 as
compared to net income of $1.1 million for the six months ended February 27,
1999.
PREFERRED DIVIDENDS--Preferred dividends of $0.6 million were accrued for
the six months ended February 26, 2000 and for the six months ended
February 27, 1999. No cash dividends were paid for the six months ended
February 26, 2000 or the six months ended February 27, 1999.
NET INCOME TO COMMON STOCKHOLDERS--As a result of the foregoing, net income
to common stockholders decreased an aggregate of $0.2 million to $0.3 million
for the six months ended February 26, 2000 as compared to $0.5 million for the
six months ended February 27, 1999.
SEASONALITY
The Company's scholastic product sales tend to be seasonal. The Company
generally recognizes sales upon 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 February 26, 2000, 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
$18,000,000 outstanding under the Revolving Credit Facility and $5,795,000
outstanding under the Gold Facility at February 26, 2000. At February 26, 2000,
the Company had $8,600,000 available under its Revolving Credit Facility and its
Gold Facility.
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 six months ended February 26, 2000 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
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continue to have limited capital resources and limited flexibility in meeting
the Company's cash requirements at certain times during the year.
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.
Operating activities provided cash of $9.1 million for the six months ended
February 26, 2000 as a result of net income of $0.9 million, adjusted to
eliminate expenses for non-cash items of $4.9 million, and changes in assets and
liabilities of $3.3 million. The $3.3 million of cash provided by changes in
assets and liabilities resulted from decreases in prepaid expenses and other
current assets of $1.0 million, decreases in other assets of $0.9 million and
increases in bank overdraft, accounts payable, accrued expenses and other
long-term liabilities of $12.9 million offset by increases in receivables of
$10.0 million and increases in inventories of $1.5 million. These fluctuations
generally reflect the seasonality of the Company's business. The seasonal
fluctuations usually result in higher sales during the first six months of the
fiscal 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 six months of
the fiscal year 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 six months ended February 26, 2000 was a result of a
reduction in samples. The increase in bank overdraft, accounts payable, accrued
expenses and other long-term liabilities was due to an increase of $0.8 million
in bank overdraft, an increase of customer deposits of approximately
$10.6 million, an increase of $2.1 million in accrued bonuses and compensation,
an increase of $0.7 million in accrued sales and property taxes, an increase of
$0.8 million in accrued management fees, and an increase of $0.2 million in
accrued interest offset by a decrease of $1.1 million in accounts payable, a
decrease of $0.7 million in commissions and royalties and a decrease
$0.5 million in other accrued expenses.
Comparing the six months ended February 26, 2000 with the six months ended
February 27, 1999, the Company's operating activities provided cash of
$9.1 million for the six months ended February 26, 2000 and provided
$0.5 million for the six months ended February 27, 1999. Changes in assets and
liabilities provided cash of $3.3 million for the six months ended February 26,
2000 and used $4.4 million for the six months ended February 27, 1999, an
increase in cash provided of $7.7 million. For the six months ended
February 26, 2000 the increase in accounts receivable was $0.6 million more than
the increase in accounts receivable for the six months ended February 27, 1999
as a result of increased sales partially offset by increased days sales
outstanding. Inventories increased $1.1 million during the six months ended
February 26, 2000 more than the six months ended February 27, 1999 as a result
of increased fine paper products inventory due to change in timing of shipments
of fine paper products from the prior year. Prepaid expenses and other current
assets decreased $1.1 million during the six months ended February 26, 2000 as
compared to increasing $0.3 million during the six months ended February 27,
1999. The net decrease of $1.4 million was a result of a decrease in prepaid
advertising for the six months ended February 26, 2000 as a result of the cost
cutting initiatives during March 1999. Other assets decreased $0.9 million
during the six months ended February 26, 2000, but increased $0.8 million during
the six months ended February 27, 1999, a total difference of $1.7 million. The
net decrease during the six months ended February 26, 2000
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was due to a reduction in samples outstanding and amortization of transaction
costs. The net increase during the six months ended February 27, 1999 was due to
an increase in the manufacture of samples to support increased sales volume. For
the six months ended February 26, 2000, the increase in bank overdraft, accounts
payable, accrued expenses and other long-term liabilities was approximately
$6.5 million more than the increase in these accounts for the six months ended
February 26, 2000 as a result of increases of approximately $2.3 million in
accounts payable, a $5.4 million increase in customer deposits as a result of a
policy change on required amount of deposits for graphic products, partially
offset by a $2.4 million decrease in commissions, royalties and compensation and
related costs.
The Company used $2.8 million for investing activities for the six months
ended February 26, 2000, a $1.8 million decrease over the six months ended
February 27, 1999. The decrease reflects the capital expenditures made by the
Company for the conversion of the Balfour computer systems to the ArtCarved
system during the six months ended February 27, 1999. 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
OUTCOME OF YEAR 2000. The Company experienced no significant Year 2000
problems or issues on or after January 1, 2000. 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.
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 remained
functional. However, because certain systems and
22
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 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 six months
ended February 26, 2000. 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 may
be adversely decided against the Company and result in money damages to a third
party. 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 February 26, 2000.
(b) The Company did not file any reports on Form 8-K during the six months
ended February 26, 2000.
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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: /s/ SHERICE P. BENCH
-----------------------------------------
Sherice P. Bench
VICE PRESIDENT FINANCE AND
PRINCIPAL ACCOUNTING OFFICER
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