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AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MARCH 14, 2002
REGISTRATION NO. 333-
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
AMERICAN ACHIEVEMENT CORPORATION
(Exact name of registrant as specified in Its Charter)
<Table>
DELAWARE 3911 13-4126506
(State or Other Jurisdiction Primary Standard Industrial (I.R.S. Employer
of Classification Code Number Identification Number)
Incorporation or Organization)
</Table>
SHERICH P. BENCH
CHIEF FINANCIAL OFFICER
7211 CIRCLE S ROAD, P.O. BOX 149107, AUSTIN, TEXAS 78745
PH: (512) 444-0571
FAX: (512) 443-5213
(Address, Including Zip Code, and Telephone Number, Including Area Code,
of Registrant's Principal Executive Offices)
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CO-REGISTRANTS NATIONAL CORPORATE RESEARCH LTD.
SEE NEXT PAGE 615 SOUTH DUPONT HIGHWAY, COUNTY OF KENT
C/O AMERICAN ACHIEVEMENT CORPORATION DOVER, DE 19901
ATTN: SHERICE P. BENCH PH: (302) 734-1450
7211 CIRCLE 5 ROAD, P.O. BOX 149107, FAX: (302) 734-1476
AUSTIN, TEXAS 78745 (Name, Address, Including Zip Code, and
PH: (512) 440-2123 Telephone Number, Including Area Code, of
FAX: (512) 443-5213 Agent For Service)
(Name, Address, Including Zip Code, and
Telephone Number, Including Area Code, of
Co-Registrants)
</Table>
COPIES TO:
MICHAEL R. LITTENBERG, ESQ.
SCHULTE ROTH & ZABEL LLP
919 THIRD AVENUE
NEW YORK, NEW YORK 10022
PH: (212) 756-2000
FAX: (212) 593-5955
--------------------------
Approximate Date of Commencement of Proposed Offer to the Public. As soon as
practicable after this registration statement becomes effective.
If the securities being registered are being offered in connection with the
formation of a holding company and there is compliance with General Instruction
G, check the following box. [ ]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
CALCULATION OF REGISTRATION FEE
<Table>
<Caption>
PROPOSED MAXIMUM PROPOSED MAXIMUM
TITLE OF EACH CLASS OF AMOUNT TO OFFERING PRICE AGGREGATE AMOUNT OF
SECURITIES TO BE REGISTERED BE REGISTERED PER UNIT OFFERING PRICE(1) REGISTRATION FEE(2)
11 5/8% Series B Senior Notes due 2007
and Note Guarantees.................. $177,000,000 100% $177,000,000 $16,284
</Table>
(1) Estimated solely for the purpose of computing the amount of the registration
fee pursuant to Rule 457(f) under the Securities Act of 1933.
(2) Calculated pursuant to Rule 457(f) under the Securities Act.
The Registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the Registrant shall
file a further amendment which specifically states that this Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until the Registration Statement shall become
effective on such date as the Commission acting pursuant to said Section 8(a),
may determine.
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CO-REGISTRANTS
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<Caption>
STATE OR OTHER PRIMARY STANDARD
JURISDICTION OF INDUSTRIAL
INCORPORATION OR CLASSIFICATION CODE I.R.S. EMPLOYER
EXACT NAME OF CO-REGISTRANT AS SPECIFIED IN ITS CHARTER ORGANIZATION NUMBER IDENTIFICATION NUMBER
- ------------------------------------------------------- ---------------- ------------------- ---------------------
Commemorative Brands, Inc. Delaware 3911 13-3915801
CBI North America, Inc. Delaware 3911 74-2802215
Taylor Senior Holding Corp. Delaware 2741 13-4099532
TP Holding Corp. Delaware 2741 13-4099531
Taylor Publishing Company Delaware 2741 75-1251430
Taylor Production Services Company, L.P. Delaware 2741 31-1576205
Educational Communications, Inc. Illinois 2741 23-7032032
</Table>
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SUBJECT TO COMPLETION, DATED MARCH 14, 2002
PRELIMINARY PROSPECTUS
AMERICAN ACHIEVEMENT CORPORATION
$177,000,000
OFFER TO EXCHANGE
11 5/8% SENIOR NOTES DUE 2007, SERIES B
FOR ANY AND ALL OUTSTANDING
11 5/8% SENIOR NOTES DUE 2007, SERIES A
OF
AMERICAN ACHIEVEMENT CORPORATION
- --------------------------------------------------------------------------------
The Exchange Offer will expire at 5:00 p.m., New York City time,
on , unless extended.
- --------------------------------------------------------------------------------
THE COMPANY:
- - We are one of the leading manufacturers and suppliers of class rings,
yearbooks, graduation products, achievement publications and recognition and
affinity jewelry in the United States.
THE OFFERING:
- - Offered securities: the securities offered by this prospectus are senior
notes, which are being issued in exchange for senior notes sold by us in our
private placement that we consummated on February 20, 2002. The new notes are
substantially identical to the original notes and are governed by the same
indenture governing the original notes.
- - Expiration of offering: the exchange offer expires at 5:00 p.m., New York City
time, on , 2002, unless extended.
THE NEW NOTES:
- - Maturity: January 1, 2007.
- - Interest payment dates: semiannually on each January 1 and July 1, beginning
on July 1, 2002.
- - Subsidiary guarantees: all of our existing domestic subsidiaries will fully
and unconditionally and jointly and severally guarantee the new notes. Our
foreign subsidiaries and any subsidiaries we later designate as "unrestricted"
under the indenture will not guarantee the new notes.
- - Redemption: we can redeem the new notes on or after January 1, 2005, except we
may redeem up to 35% of the new notes prior to January 1, 2005 with the
proceeds of one or more public equity offerings. We are required to redeem the
new notes under some circumstances involving changes of control and asset
sales.
- - Ranking: the new notes and subsidiary guarantees will be senior unsecured
obligations, and will rank equally with all of our other existing and future
obligations that are not by their terms subordinated in right of payment to
the new notes. The new notes will rank senior in right of payment to all of
our obligations that are expressly subordinated in right of payment to the new
notes.
SEE "RISK FACTORS," BEGINNING ON PAGE 11, FOR A DISCUSSION OF SOME FACTORS
THAT SHOULD BE CONSIDERED BY HOLDERS IN CONNECTION WITH A DECISION TO TENDER
ORIGINAL NOTES IN THE EXCHANGE OFFER.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED ON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
The date of this prospectus is , 2002
- --------------------------------------------------------------------------------
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TABLE OF CONTENTS
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<Caption>
PAGE
--------
Notice to New Hampshire Residents........................... i
Special Note Regarding Forward-Looking Statements........... i
Market Share, Ranking and Other Data........................ ii
Company Trademarks and Trade Names.......................... ii
Prospectus Summary.......................................... 1
Risk Factors................................................ 10
Use of Proceeds............................................. 18
Capitalization.............................................. 19
Unaudited Pro Forma Financial Statements.................... 20
Selected Consolidated Historical Financial Data............. 27
Management's Discussion and Analysis of Financial Condition
and Results of Operations................................. 29
The Exchange Offer.......................................... 39
Business.................................................... 49
Management.................................................. 63
Security Ownership of Certain Beneficial Owners and
Management................................................ 69
Certain Relationships and Related Transactions.............. 72
Description of Certain Indebtedness......................... 73
Description of New Notes.................................... 76
Certain United States Federal Income Tax Considerations..... 113
Plan of Distribution........................................ 117
Legal Matters............................................... 118
Independent Auditors........................................ 118
Where You Can Find More Information......................... 119
Index to Consolidated Financial Statements.................. F-1
</Table>
NOTICE TO NEW HAMPSHIRE RESIDENTS
Neither the fact that a registration statement or an application for a
license has been filed with the State of New Hampshire nor the fact that a
security is effectively registered or a person is licensed in the State of New
Hampshire constitutes a finding by the Secretary of State that any document
filed under RSA 421-B is true, complete and not misleading. Neither those facts
nor the fact that an exemption or exception is available for a security or a
transaction means that the Secretary of State has passed in any way upon the
merits or qualifications of, or recommended or given approval to, any person,
security, or transaction. It is unlawful to make, or cause to be made, to any
prospective purchaser, customer or client any representation inconsistent with
the provisions of this paragraph.
------------------------
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This prospectus contains forward-looking statements within the meaning of
Section 27A of the Securities Act and Section 21E of the Securities Exchange
Act. The safe harbors contained in these sections are not applicable to
"forward-looking statements" made in connection with "tender offers" or "initial
public offerings." The words "believe," "estimate," "anticipate," "project,"
"intend," "expect" and similar expressions are intended to identify
forward-looking statements. All forward-looking statements involve some risks
and uncertainties. In light of these risks and uncertainties, the forward-
i
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looking events discussed in this prospectus might not occur. Factors that may
cause actual results or events to differ materially from those contemplated by
the foward-looking statements include, among other things, the following
possibilities:
- future revenues are lower than expected;
- costs or difficulties relating to the integration of businesses that we
acquire are greater than expected;
- expected cost savings from our acquisitions are not fully realized or
realized within the expected time frame;
- competitive pressures in the industry increase;
- general economic conditions or conditions affecting the airline industry,
whether internationally, nationally or in the states in which we do
business, are less favorable than expected;
- changes in the interest rate environment generally; and
- conditions in the securities markets are less favorable than expected.
You are cautioned not to place undue reliance on forward-looking statements
contained in this prospectus as these speak only as of its date. We undertake no
obligation to publicly update or revise any forward-looking statements, whether
as a result of new information, future events or otherwise. For a further
discussion of these and other risks related to our business, see the section
entitled "Risk Factors."
MARKET SHARE, RANKING AND OTHER DATA
The market share, ranking and other data contained in this prospectus are
based either on management's own estimates, independent industry publications,
reports by market research firms or other published independent sources and, in
each case, are believed by management to be reasonable estimates. However,
market share, ranking and other data is subject to change and cannot always be
verified with complete certainty due to limits on the availability and
reliability of raw data, the voluntary nature of the data gathering process and
other limitations and uncertainties inherent in any statistical survey. In
addition, consumption patterns and customer preferences can and do change. As a
result, you should be aware that market share, ranking and other similar data
set forth herein, and estimates and beliefs based on such data, may not be
reliable.
COMPANY TRADEMARKS AND TRADE NAMES
We own or have the rights to various trademarks and tradenames used in our
businesses, including: ARTCARVED-REGISTERED TRADEMARK-,
BALFOUR-REGISTERED TRADEMARK-, CELEBRATIONS OF LIFE-TM-, CLASS
RINGS, LTD.-REGISTERED TRADEMARK-, GENERATIONS OF LOVE-TM-,
KEEPSAKE-REGISTERED TRADEMARK-, KEYSTONE-REGISTERED TRADEMARK-, MASTER CLASS
RINGS-REGISTERED TRADEMARK-, NAMESAKE-TM-, R. JOHNS-REGISTERED TRADEMARK-,
TAYLOR PUBLISHING-REGISTERED TRADEMARK-, THE NATIONAL DEAN'S LIST-TM-, WHO'S WHO
AMONG AMERICAN HIGH SCHOOL STUDENTS-TM- and WHO'S WHO AMONG AMERICA'S
TEACHERS-TM-, as well as other trade names and product names.
ii
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PROSPECTUS SUMMARY
IN THIS PROSPECTUS, "AMERICAN ACHIEVEMENT," "WE," "OUR," "THE COMPANY" OR
"US" REFER TO AMERICAN ACHIEVEMENT CORPORATION AND ITS SUBSIDIARIES. OUR FISCAL
YEAR ENDS ON THE LAST SATURDAY IN AUGUST. UNLESS OTHERWISE SPECIFIED, REFERENCES
TO 1999, 2000 AND 2001 RELATE TO THE FISCAL YEARS ENDED ON AUGUST 28, 1999,
AUGUST 26, 2000 AND AUGUST 25, 2001, RESPECTIVELY. UNLESS STATED OTHERWISE, ALL
PRO FORMA FINANCIAL INFORMATION IN THIS PROSPECTUS GIVES EFFECT TO THE
ACQUISITION OF EDUCATIONAL COMMUNICATIONS, INC., OR ECI, THE ISSUANCE OF THE
ORIGINAL NOTES, THE BORROWINGS UNDER OUR NEW CREDIT FACILITY AND THE APPLICATION
OF THE PROCEEDS THEREFROM AS IF THEY HAD OCCURRED AT THE BEGINNING OF THE PERIOD
PRESENTED. THE FOLLOWING SUMMARY CONTAINS BASIC INFORMATION ABOUT US AND THIS
EXCHANGE OFFER. IT LIKELY DOES NOT CONTAIN ALL THE INFORMATION THAT IS IMPORTANT
TO YOU. FOR A MORE COMPLETE UNDERSTANDING OF THIS EXCHANGE OFFER, YOU ARE
ENCOURAGED TO READ THIS ENTIRE DOCUMENT.
OUR COMPANY
We are one of the leading manufacturers and suppliers of class rings,
yearbooks, graduation products, achievement publications and recognition and
affinity jewelry in the United States. Our two principal business segments are:
scholastic products and recognition and affinity products. Our scholastic
products segment consists of three principal categories: class rings, yearbooks
and graduation products, the last of which includes fine paper products and
graduation accessories. Recognition and affinity products include achievement
publications and recognition and affinity jewelry.
Many of our products have leading market share positions that have been
developed over many years and are marketed under well-known names such as
ARTCARVED, BALFOUR, KEEPSAKE, TAYLOR PUBLISHING and WHO'S WHO AMONG AMERICAN
HIGH SCHOOL STUDENTS. Our BALFOUR and ARTCARVED brand names, for example, have
been identified with class rings for over 85 years and 45 years, respectively,
and the TAYLOR PUBLISHING brand name has been identified with yearbooks for over
60 years. Based on the number of units sold, we believe that we were the second
largest provider of class rings and yearbooks in the United States during the
2000-2001 school year, accounting for approximately 35% and 20% of these
markets, respectively.
We manufacture class rings and publish yearbooks primarily for the high
school and college markets. During the 2000-2001 school year, we sold class
rings to students at over 8,100 schools and sold yearbooks to over 7,800
schools. We offer over 100 styles of highly personalized class rings with more
than 400 designs that can be placed on or under the stone. Emblems of over 100
activities, sports or achievements can appear on the sides of the rings in
addition to school crests, mascots and student names. In addition, we also
maintain an inventory of over 650,000 unique proprietary ring dies. We utilize
state-of-the-art technology for our yearbook publishing and recently have
enhanced our color printing press equipment and digital imaging technology. This
printing technology has enabled us to improve on-time delivery, performance and
print quality of our yearbook products.
We publish three achievement publications: WHO'S WHO AMONG AMERICAN HIGH
SCHOOL STUDENTS, THE NATIONAL DEAN'S LIST and WHO'S WHO AMONG AMERICA'S
TEACHERS. These publications recognize the academic achievement of top students
at the high school and college levels, as well as the nation's most inspiring
high school teachers. We believe that these publications are the leading
achievement publications in their respective market niches. Recognition and
affinity jewelry includes affinity group jewelry that commemorates
accomplishments within large groups and associations, jewelry commemorating
family events such as the birth of a child, fan affinity jewelry and
professional sports championship rings such as World Series rings.
1
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We distribute our products through various distribution channels, including
directly to students and through college bookstores, mass merchandisers,
approximately 5,100 independent jewelry stores, many of the nation's largest
jewelry chains and direct marketing. During the 2000-2001 school year, we
believe that we had the leading market share in high school class ring sales
through retail stores. We sell high school class rings to some of the leading
mass merchandisers and national jewelry chains, including Wal-Mart, Zales,
Gordons and Sterling.
COMPETITIVE STRENGTHS
- Leading market positions and well-known brand names;
- Positive industry fundamentals;
- Well-established infrastructure;
- Leading retail store presence; and
- Experienced management team with a proven track record.
BUSINESS STRATEGY
We seek to increase revenues and operating efficiencies in both our
scholastic and recognition and affinity products segments. We intend to achieve
these objectives through the following strategies:
- Leverage well-known brands;
- Capitalize on cross-selling opportunities;
- Expand market penetration;
- Enhance core products;
- Increase operating efficiencies; and
- Capitalize on on-line opportunities.
EQUITY SPONSORSHIP
In December 1996, Castle Harlan, Inc., a leading New York private equity
firm, through its affiliate Castle Harlan Partners II, L.P., or CHPII acquired
substantially all of the ArtCarved operations of CJC Holdings, Inc. and the
Balfour operations of the L.G. Balfour Company, Inc. Castle Harlan's investment
strategy has focused on building a scale competitor in the commemorative
products industry that can provide an extensive range of products and services.
Taylor Publishing Company, or Taylor was acquired by Castle Harlan Partners III,
L.P., or CHPIII, one of our stockholders, on February 11, 2000 and we acquired
Taylor on July 27, 2000. We acquired ECI, a publisher of achievement
publications, on March 30, 2001, in part, with additional equity from CHPIII.
Our principal executive offices are located at 7211 Circle S Road,
P.O. Box 149107, Austin, Texas 78745, and our telephone number is
(512) 444-0571.
2
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THE EXCHANGE OFFER
<Table>
Expiration Date........................ 5:00 p.m., New York City time, on , unless
we extend the exchange offer.
Exchange and Registration Rights....... In an A/B exchange registration rights agreement dated
February 20, 2002, the holders of American Achievement's
11 5/8 senior notes due 2007, series A, which are referred
to in this prospectus as the "Original Notes", were
granted exchange and registration rights. This exchange
offer is intended to satisfy these rights. You have the
right to exchange the Original Notes that you hold for
American Achievement's 11 5/8 senior notes due 2007,
series B, which are referred to in this prospectus as the
"New Notes", with substantially identical terms. Once the
exchange offer is complete, you will no longer be entitled
to any exchange or registration rights with respect to
your Original Notes.
Accrued Interest on the New Notes and
Original Notes....................... The New Notes will bear interest from February 20, 2002.
Holders of Original Notes which are accepted for exchange
will be deemed to have waived the right to receive any
payment in respect of interest on those Original Notes
accrued to the date of issuance of the New Notes.
Conditions to the Exchange Offer....... The exchange offer is conditioned upon some customary
conditions which we may waive and upon compliance with
securities laws.
Procedures for Tendering Original
Notes................................ Each holder of Original Notes wishing to accept the
exchange offer must:
- complete, sign and date the letter of transmittal, or a
facsimile of the letter of transmittal; or
- arrange for DTC to transmit required information in
accordance with DTC's procedures for transfer to the
exchange agent in connection with a book-entry transfer.
You must mail or otherwise deliver this documentation
together with the Original Notes to the exchange agent.
Special Procedures for Beneficial
Holders.............................. If you beneficially own Original Notes registered in the
name of a broker, dealer, commercial bank, trust company
or other nominee and you wish to tender your Original
Notes in the exchange offer, you should contact the
registered holder promptly and instruct them to tender on
your behalf. If you wish to tender on your own behalf, you
must, before completing and executing the letter of
transmittal for the exchange offer and delivering your
Original Notes, either arrange to have your Original Notes
registered in your name or obtain a properly
</Table>
3
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<Table>
completed bond power from the registered holder. The
transfer of registered ownership may take considerable
time.
Guaranteed Delivery Procedures......... You must comply with the applicable procedures for
tendering if you wish to tender your Original Notes and:
- time will not permit your required documents to reach
the exchange agent by the expiration date of the exchange
offer; or
- you cannot complete the procedure for book-entry
transfer on time; or
- your Original Notes are not immediately available.
Withdrawal Rights...................... You may withdraw your tender of Original Notes at any time
up to 5:00 p.m., New York City time, on the business day
prior to the date the exchange offer expires.
Failure to Exchange Will Affect You
Adversely............................ If you are eligible to participate in the exchange offer
and you do not tender your Original Notes, you will not
have further exchange or registration rights and you will
continue to be restricted from transferring your Original
Notes. Accordingly, the liquidity of the Original Notes
will be adversely affected.
Federal Tax Considerations............. We believe that the exchange of the Original Notes for the
New Notes pursuant to the exchange offer will not be a
taxable event for United States federal income tax
purposes. A holder's holding period for New Notes will
include the holding period for original notes, and the
adjusted tax basis of the New Notes will be the same as
the adjusted tax basis of the Original Notes exchanged.
See "Certain United States Federal Income Tax
Consequences."
Exchange Agent......................... The Bank of New York, trustee under the indenture under
which the New Notes will be issued, is serving as exchange
agent.
Use of Proceeds........................ We will not receive any proceeds from the exchange offer.
</Table>
4
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SUMMARY TERMS OF NEW NOTES
<Table>
Issuer................................. American Achievement Corporation
Securities Offered..................... The form and terms of the New Notes will be the same as
the form and terms of the original notes except that:
- the New Notes will bear a different CUSIP number from
the Original Notes;
- the New Notes will have been registered under the
Securities Act and, therefore, will not bear legends
restricting their transfer; and
- you will not be entitled to any exchange or
registrations rights with respect to the New Notes.
The New Notes will evidence the same debt as the Original
Notes. They will be entitled to the benefits of the
indenture governing the Original Notes and will be treated
under the indenture as a single class with the Original
Notes.
Maturity............................... January 1, 2007.
Interest............................... The New Notes will bear cash interest at the rate of
11 5/8% per annum (calculated using a 360-day year),
payable semi-annually in arrears.
Payment frequency--every six months on January 1 and
July 1.
First payment--July 1, 2002.
Ranking................................ The New Notes and subsidiary guarantees will be senior
unsecured obligations and will rank equally with all of
our other existing and future obligations that are not
subordinated in right of payment to the New Notes,
including borrowings under our senior secured credit
facility. There are no obligations that rank senior to the
New Notes. The borrowings under our senior secured credit
facility are the only obligations that rank equally to the
New Notes and the New Notes will rank senior in right of
payment to all of our obligations that are expressly
subordinated in right of payment to the New Notes.
However, the New Notes will be effectively subordinated to
borrowings under the senior secured credit facility
because those borrowings are secured by our assets and
borrowings under the New Notes are not.
Guarantees............................. The New Notes will be fully and unconditionally and
jointly and severally guaranteed by our existing domestic
subsidiaries, and with some exceptions our future
subsidiaries; these subsidiaries are referred to in this
prospectus as the "guarantors." Our existing and future
foreign subsidiaries and any subsidiaries we later
designate as "unrestricted", based on conditions contained
in the indenture, will not be guarantors. The guarantees,
which are referred to in this prospectus as the
"subsidiary guarantees," will be senior unsecured
obligations of each guarantor. These subsidiary guarantees
will rank equal to other existing and future
</Table>
5
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<Table>
senior subordinated indebtedness of the guarantors and
senior in right of payment to all of the existing and
future obligations of the guarantors that are expressly
subordinated in right of payment to the subsidiary
guarantees.
Optional Redemption.................... Except as described below, we cannot redeem the New Notes
until January 1, 2005. Thereafter, we may redeem some or
all of the New Notes at the redemption prices listed in
the "Description of the New Notes" section under the
heading "Optional Redemption" (plus accrued interest). At
any time (which may be more than once) before January 1,
2005, we can choose to redeem up to 35% of the outstanding
New Notes with money that we raise in one or more public
equity offerings, as long as:
- we pay 111.625% of the principal amount of the New
Notes, plus accrued interest;
- we redeem the New Notes within 90 days of completing the
public equity offering; and
- at least 65% of the aggregate principal amount of the
New Notes issued remains outstanding afterwards.
Change of Control Offer................ If a change in control (as defined in the indenture
governing the notes) occurs, we must give holders of the
New Notes the opportunity to sell us their New Notes at
101% of their principal amount, plus accrued interest.
We might not be able to pay you the required price for the
New Notes you present to us at the time of a change of
control, because:
- we might not have enough funds at that time; or
- the terms of our other senior debt may prevent us from
paying.
Asset Sale Proceeds.................... Under the indenture, if we or our subsidiaries engage in
asset sales, we generally must either invest the net cash
proceeds from such sales in our business within a period
of time, permanently repay the debt under our senior
secured credit facility or make an offer to purchase a
principal amount of the New Notes equal to the excess net
cash proceeds. The purchase price of the New Notes will be
100% of their principal amount, plus accrued interest.
Certain Indenture Provisions........... We will issue the New Notes under an indenture with The
Bank of New York. The indenture will contain covenants,
among other things, limiting our (and most or all of our
subsidiaries') ability to:
- incur additional debt or guarantee obligations;
- grant liens on assets;
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6
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<Table>
- make restricted payments (including paying dividends on,
redeeming, repurchasing or retiring our capital stock);
- make investments or acquisitions;
- sell assets;
- engage in transactions with affiliates; and
- merge, consolidate or transfer substantially all of our
assets.
These covenants are subject to a number of important
limitations and exceptions.
For more details, see the section "Description of New
Notes" under the heading "Covenants."
Exchange Offer; Registration Rights.... You have the right to exchange the Original Notes for New
Notes with substantially identical terms. This exchange
offer is intended to satisfy that right. The New Notes
will not provide you with any further exchange or
registration rights.
Resales Without Further Registration... We believe that the New Notes issued in the exchange offer
in exchange for Original Notes may be offered for resale,
resold and otherwise transferred by you without compliance
with the registration and prospectus delivery provisions
of the Securities Act, if:
- you are acquiring the New Notes issued in the exchange
offer in the ordinary course of your business;
- you have not engaged in, do not intend to engage in, and
have no arrangement or understanding with any person to
participate in the distribution of the New Notes issued
to you in the exchange offer; and
- you are not our "affiliate," as defined under Rule 405
of the Securities Act.
Each of the participating broker-dealers that receives New
Notes for its own account in exchange for Original Notes
that were acquired by it as a result of market-making or
other activities must acknowledge that it will deliver a
prospectus in connection with the resale of the New Notes.
We do not intend to list the New Notes on any securities
exchange.
</Table>
7
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SUMMARY CONSOLIDATED HISTORICAL AND UNAUDITED PRO FORMA FINANCIAL DATA
The following table presents our summary consolidated historical financial
and unaudited pro forma financial data and should be read in conjunction with
our financial statements, the notes thereto, "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and the "Unaudited
Pro Forma Financial Statements" and notes thereto included elsewhere in this
prospectus. We have derived the summary historical financial data for the three
months ended November 24, 2001 and November 25, 2000 from our unaudited
consolidated financial statements, which include all adjustments, consisting
only of normal recurring adjustments, which are, in our opinion, necessary for a
fair presentation of our results for such periods. The results of operations for
the three months ended November 24, 2001 are not necessarily indicative of the
results for the full year. The following historical information with respect to
American Achievement as of August 25, 2001 and August 26, 2000 and for the
fiscal years ended August 25, 2001, August 26, 2000 and August 28, 1999 has been
derived from our audited financial statements, which have been audited by Arthur
Andersen LLP, independent public accountants, as indicated in their report dated
October 19, 2001 included herein.
Our results of operations for the fiscal year ended August 25, 2001 are not
comparable to the results of operations for the fiscal years ended August 26,
2000 and August 28, 1999 because the information presented for the fiscal year
ended August 25, 2001 includes the business operations of Taylor for a full
12 months of operations in contrast to the fiscal year ended August 26, 2000,
which includes the business operations of Taylor for only one month, from the
date of its acquisition on July 27, 2000 to year end.
The summary unaudited pro forma financial data presented below is derived
from the unaudited pro forma financial statements set forth herein. The
statement of income and other data gives effect to the issuance of the Original
Notes, the borrowings under our senior secured credit facility and the
application of the proceeds therefrom as if they had occurred at the beginning
of the applicable period presented. In addition, the statement of income and
other data for the fiscal year ended August 25, 2001 and for the twelve months
ended November 24, 2001 gives effect to our acquisition of ECI and related
transactions as if they occurred on September 1, 2000 and December 1, 2000,
respectively. The summary unaudited pro forma balance sheet data gives effect to
the issuance of the Original Notes, the borrowings under our senior secured
credit facility and the application of the proceeds as if they had occurred on
November 24, 2001. The pro forma data is not necessarily indicative of our
results of operations or financial position had these transactions taken place
on the dates indicated and is not intended to project our results of operations
or financial position for any future period or date.
8
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<Table>
<Caption>
HISTORICAL PRO FORMA
------------------------------------------------------------------ --------------------------
FISCAL
FISCAL YEAR ENDED THREE MONTHS ENDED YEAR TWELVE
------------------------------------ --------------------------- ENDED MONTHS ENDED
AUGUST 28, AUGUST 26, AUGUST 25, NOVEMBER 25, NOVEMBER 24, AUGUST 25, NOVEMBER 24,
1999 2000 2001(1) 2000 2001(1) 2001(1) 2001(1)
---------- ---------- ---------- ------------ ------------ ---------- -------------
(DOLLARS IN THOUSANDS)
STATEMENT OF INCOME DATA:
Net sales..................... $168,865 $182,285 $281,515 $ 64,338 $ 77,572 $297,403 $295,104
Cost of sales................. 73,268 80,929 141,946 35,539 35,947 145,045 142,625
-------- -------- -------- -------- -------- -------- --------
Gross profit................ 95,597 101,356 139,569 28,799 41,625 152,358 152,479
Selling, general and
administrative expenses..... 85,075 85,559 119,930 29,543 32,402 126,389 124,394
-------- -------- -------- -------- -------- -------- --------
Operating income............ 10,522 15,797 19,639 (744) 9,223 25,969 28,085
Income (loss) before provision
for income taxes............ (4,072) 106 (3,207) (6,612) 3,293 (1,639) 35
Gain on extinguishments of
debt, net of taxes.......... -- 6,695 -- -- -- -- --
Net income (loss)............. (4,192) 6,468 (3,340) (6,981) 3,173 (1,931) 134
OTHER DATA:
EBITDA(2)..................... $ 17,698 $ 24,897 $ 37,225 $ 3,126 $ 13,985 $ 45,528 $ 47,623
Interest expense.............. 14,594 15,691 22,846 5,868 5,930 28,071 28,276
Depreciation and
amortization................ 7,176 9,100 17,586 3,870 4,762 18,684 19,105
Capital expenditures.......... 9,785 5,087 7,499 1,932 2,088 7,499 7,655
Ratio of earnings to fixed
charges(3).................. -- 1.01x -- -- 1.53x -- 1.00x
BALANCE SHEET DATA
(AT END OF PERIOD):
Total assets.................. $209,845 $326,553 $379,953 $331,553 $379,419 $383,344
Total debt(4)................. 134,410 191,253 223,609 193,200 222,295 233,875
Total stockholders' equity.... 37,830 63,098 71,809 56,024 74,267 68,192
</Table>
- ------------
(1) Includes the results of operations from ECI, which was acquired on
March 30, 2001. ECI sales are highly seasonal with most shipments generally
occurring in the first four months of our fiscal year.
(2) EBITDA represents earnings before interest expense, taxes, depreciation and
amortization and excludes extraordinary gains and losses. EBITDA does not
represent net income or cash flows from operations, as these terms are
defined under generally accepted accounting principles, and should not be
considered as an alternative to net income as an indicator of our operating
performance or to cash flows as a measure of liquidity. We have included
information concerning EBITDA because we use such information as a method of
assessing our cash flow and ability to service debt. The EBITDA measure
presented herein is not necessarily comparable to similarly titled measures
reported by other companies.
(3) For purposes of computing this ratio, earnings consist of income (loss)
before taxes on income and fixed charges. Fixed charges consist of interest
expense, amortization of deferred debt issuance costs and the portion of
rental expense that includes an interest factor. For fiscal years ended
August 28, 1999, August 25, 2001, for the three months ended November 25,
2000 and for the pro forma fiscal year ended August 25, 2001, earnings
before fixed charges were insufficient to cover fixed charges by
approximately $4.1 million, $3.2 million, $6.6 million and $1.6 million,
respectively.
(4) Excludes bank overdraft.
9
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RISK FACTORS
IN ADDITION TO THE OTHER INFORMATION SET FORTH IN THIS PROSPECTUS, YOU
SHOULD CAREFULLY CONSIDER THE FOLLOWING FACTORS BEFORE TENDERING ORIGINAL NOTES
IN EXCHANGE FOR THE NEW NOTES. THE FOLLOWING RISKS COULD MATERIALLY HARM OUR
BUSINESS, FINANCIAL CONDITION OR FUTURE RESULTS. IF THAT OCCURS, THE VALUE OF
THE NEW NOTES COULD DECLINE, AND YOU COULD LOSE ALL OR PART OF YOUR INVESTMENT.
RISKS RELATING TO OUR INDEBTEDNESS
OUR SUBSTANTIAL DEBT COULD ADVERSELY AFFECT OUR FINANCIAL HEALTH AND PREVENT
US FROM MAKING PAYMENTS ON THE NEW NOTES.
We have a substantial amount of debt. As of November 24, 2001, after giving
effect to the issuance of the Original Notes, we would have had approximately
$233.9 million of debt.
Our substantial debt could have important consequences to you. For example,
it could:
- make it more difficult for us to satisfy our obligations with respect to
the New Notes;
- make us vulnerable to general adverse economic and industry conditions;
- limit our ability to obtain additional financing for future working
capital, capital expenditures, raw materials, product development efforts,
strategic acquisitions and other general corporate requirements;
- expose us to interest rate fluctuations because the interest on the debt
under our senior secured credit facility will be at variable rates;
- require us to dedicate a substantial portion of our cash flow from
operations to payments on our debt, thereby reducing the availability of
our cash flow for operations and other purposes;
- limit our flexibility in planning for, or reacting to, changes in our
business and the industry in which we operate; and
- place us at a competitive disadvantage compared to any competitors that
have less debt.
OUR ABILITY TO SERVICE OUR DEBT WILL REQUIRE A SIGNIFICANT AMOUNT OF CASH.
To service our debt, we will require a significant amount of cash. Our
ability to generate cash, make scheduled payments or to refinance our
obligations depends on our successful financial and operating performance. We
cannot assure you that our operating performance, cash flow and capital
resources will be sufficient for payment of our debt in the future. Our
financial and operating performance, cash flow and capital resources depend upon
prevailing economic conditions and certain financial, business and other
factors, many of which are beyond our control. These factors include, among
others:
- economic and competitive conditions affecting the scholastic products and
recognition products markets;
- operating difficulties, increased operating costs or pricing pressures we
may experience;
- increased raw material costs; and
- delays in implementing any strategic projects.
10
<Page>
If our cash flow and capital resources are insufficient to fund our debt
service obligations, we may be forced to reduce or delay scheduled expansion and
capital expenditures, sell material assets or operations, obtain additional
capital or restructure our debt. In the event that we are required to dispose of
material assets or operations or restructure our debt to meet our debt service
and other obligations, we cannot assure you as to the terms of any such
transaction or how soon any such transaction could be completed. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources."
WE MAY INCUR ADDITIONAL DEBT.
We and our subsidiaries may be able to incur substantial additional
indebtedness in the future. The terms of the indenture permit us to incur a
substantial amount of additional debt and our new credit facility permits
additional borrowings. In particular, on a pro forma basis, as of November 24,
2001, we would have had approximately $22.0 million of additional borrowing
capacity under our senior secured credit facility. Accordingly, this additional
indebtedness could further exacerbate all the risks described above.
THE INDENTURE AND OUR SENIOR SECURED CREDIT FACILITY CONTAIN VARIOUS COVENANTS
WHICH LIMIT THE DISCRETION OF OUR MANAGEMENT IN OPERATING OUR BUSINESS AND
COULD PREVENT US FROM ENGAGING IN SOME BENEFICIAL ACTIVITIES.
The indenture and our senior secured credit facility contain various
restrictive covenants that limit our management's discretion in operating our
business. In particular, these agreements will limit our ability to, among other
things:
- incur additional debt or guarantee obligations;
- grant liens on assets;
- make restricted payments (including paying dividends on, redeeming,
repurchasing or retiring our capital stock);
- make investments or acquisitions;
- sell assets;
- engage in transactions with affiliates; and
- merge, consolidate or transfer substantially all of our assets.
In addition, our senior secured credit facility also requires us to maintain
certain financial ratios and limits our ability to make capital expenditures.
If we fail to comply with the restrictions of the indenture, our senior
secured credit facility or any other subsequent financing agreements, a default
may allow the creditors, if the agreements so provide, to accelerate the related
debt as well as any other debt to which a cross-acceleration or cross-default
provision applies. In addition, the lenders may be able to terminate any
commitments they had made to supply us with further funds.
11
<Page>
RISKS RELATING TO THIS OFFERING
THE NEW NOTES ARE UNSECURED AND EFFECTIVELY SUBORDINATED TO OUR SECURED
INDEBTEDNESS.
The New Notes will not be secured. Our senior secured credit facility is
secured by substantially all of our assets and the assets of our subsidiaries.
If we become insolvent or are liquidated, or if payment under the senior secured
credit facility or any of our other secured debt obligations is accelerated, our
lenders would be entitled to exercise the remedies available to a secured lender
under applicable law and will have a claim on those assets before the holders of
the notes. As a result, the notes are effectively subordinated to our secured
indebtedness to the extent of the value of the assets securing that indebtedness
and the holders of the notes may recover ratably less than the lenders of our
secured debt in the event of our bankruptcy or liquidation. At November 24,
2001, on a pro forma basis, we had $17.0 million of senior secured indebtedness
outstanding under our senior secured credit facility, and approximately
$22.0 million of additional unborrowed funds available to be borrowed under our
senior secured credit facility, subject to compliance with our financial and
other covenants and terms of our loan agreements. Accordingly, there can be no
assurance that there will be sufficient assets remaining after satisfying our
obligations under our senior secured debt to pay amounts due on the New Notes.
THE GUARANTEES MAY NOT BE ENFORCEABLE BECAUSE OF FRAUDULENT CONVEYANCE LAWS.
The incurrence of the guarantees by the guarantors (including any future
guarantees) may be subject to review under U.S. federal bankruptcy law or
relevant state fraudulent conveyance laws if a bankruptcy case or lawsuit is
commenced by or on behalf of the guarantors' unpaid creditors. Under these laws,
if in such a case or lawsuit a court were to find that, at the time such
guarantor incurred a guarantee of the notes, such guarantor:
- incurred the guarantee of the New Notes with the intent of hindering,
delaying or defrauding current or future creditors;
- received less than reasonably equivalent value or fair consideration for
incurring the guarantee of the New Notes and such guarantor:
- was insolvent or was rendered insolvent;
- was engaged, or about to engage, in a business or transaction for which
its remaining assets constituted unreasonably small capital to carry on
its business; or
- intended to incur, or believed that it would incur, debts beyond its
ability to pay as such debts matured (as all of the foregoing terms are
defined in or interpreted under the relevant fraudulent transfer or
conveyance statutes);
then such court could avoid the guarantee of such guarantor or subordinate the
amounts owing under such guarantee to such guarantor's presently existing or
future debt or take other actions detrimental to you.
It may be asserted that the guarantors incurred their guarantees for our
benefit and they incurred the obligations under the guarantees for less than
reasonably equivalent value or fair consideration.
The measure of insolvency for purposes of the foregoing considerations will
vary depending upon the law of jurisdiction that is being applied in any such
proceeding. Generally, a company would be considered insolvent if, at the time
it incurred the debt or issued the guarantee, either:
- the sum of its debts (including contingent liabilities) is greater than
its assets, at fair valuation;
12
<Page>
- the present fair saleable value of its assets is less than the amount
required to pay the probable liability on its total existing debts and
liabilities (including contingent liabilities) as they become absolute and
matured; or
- it could not pay its debts as they became due.
If a guarantee is avoided as a fraudulent conveyance or found to be
unenforceable for any reason, you will not have a claim against that obligor and
will only be a creditor of our company or any guarantor whose obligation was not
set aside or found to be unenforceable.
We believe that each guarantor will receive, directly and indirectly,
reasonably equivalent value for the incurrence of its respective guarantee. In
addition, on the basis of historical financial information, recent operating
history and other factors, we believe that each guarantor, after giving effect
to its respective guarantee will not be insolvent, will not have unreasonably
small capital for the business in which it is engaged and will not have incurred
debts beyond its ability to pay such debts as they mature. We cannot assure you,
however, as to what standard a court would apply in making such determinations
or that a court would agree with our conclusions in this regard.
WE ARE A HOLDING COMPANY WITH VIRTUALLY NO INDEPENDENT OPERATIONS. OUR ABILITY
TO REPAY THE NEW NOTES DEPENDS UPON THE PERFORMANCE OF OUR SUBSIDIARIES AND
THEIR ABILITY TO MAKE DISTRIBUTIONS TO US.
Substantially all of our consolidated operations will be conducted by our
subsidiaries and, therefore, our ability to pay our debt, including our
obligations under the New Notes, will be dependent upon cash dividends and
distributions or other transfers from our subsidiaries. Our subsidiaries'
ability to make any payments to us will depend on their indebtedness, business
and tax considerations, legal and regulatory restrictions and economic
conditions.
OUR CONTROLLING STOCKHOLDERS MAY TAKE ACTIONS THAT CONFLICT WITH YOUR
INTERESTS.
Substantially all of the voting power of our common stock is held by
affiliates of Castle Harlan, Inc. Accordingly, they control the power to elect
our directors, to appoint new management and to approve all actions requiring
the approval of the holders of our common stock including, adopting amendments
to our articles of incorporation and approving mergers, acquisitions or sales of
all or substantially all of our assets. The directors have the authority,
subject to the terms of our debt, to issue additional stock, implement stock
repurchase programs, declare dividends and make other such decisions about our
capital stock.
In addition, the interests of our controlling stockholders could conflict
with your interests. For example, if we encounter financial difficulties or are
unable to pay our debts as they mature, the interests of our controlling
stockholders, as equity holders, might conflict with your interests as a note
holder. Our controlling stockholders also may have an interest in pursuing
acquisitions, divestitures, financings or other transactions that, in their
judgment, could enhance their equity investments, even though such transactions
might involve risks to you, as holders of the New Notes.
WE MAY BE UNABLE TO PURCHASE THE NEW NOTES UPON A CHANGE OF CONTROL.
Upon the occurrence of specified "change of control" events, we will be
required to offer to purchase each holder's New Notes at a price of 101% of
their principal amount plus accrued and unpaid interest, unless all New Notes
have been previously called for redemption. We may not have
13
<Page>
sufficient financial resources to purchase all of the New Notes that holders
tender to us upon a change of control offer. The occurrence of a change of
control also could constitute an event of default under our senior secured
credit facility and/or any of our future credit agreements. Our bank lenders may
also have the right to prohibit any such purchase or redemption, in which event
we would be in default on the New Notes.
AN ACTIVE TRADING MARKET MAY NOT DEVELOP FOR THE NEW NOTES.
The New Notes are new securities for which there currently is no established
market, and we cannot be sure if an active trading market will develop for these
notes. We do not intend to apply for listing of the New Notes, on any securities
exchange or on any automated dealer quotation system. Although we have been
informed by the initial purchasers of the Original Notes that they currently
intend to make a market in the New Notes, they are not obligated to do so and
any market making may be discontinued at any time without notice.
The liquidity of, and trading market for the New Notes may also be adversely
affected by, among other things:
- changes in the overall market for high yield securities;
- changes in our financial performance or prospects;
- the prospects for companies in our industry generally;
- the number of holders of the New Notes;
- the interest of securities dealers in making a market for the New Notes;
and
- prevailing interest rates.
If a trading market does not develop or is not maintained, you may
experience difficulty in reselling the New Notes, or you may be unable to sell
them at all.
IF YOU FAIL TO EXCHANGE YOUR ORIGINAL NOTES, YOUR ORIGINAL NOTES WILL REMAIN
SUBJECT TO RESTRICTIONS ON TRANSFER.
Holders of the Original Notes who do not exchange their Original Notes for
New Notes in the exchange offer will continue to be subject to the restrictions
on transfer of the Original Notes described in the legend on those notes. The
restrictions result from the issuance of the Original Notes in reliance on
exemptions from registration under the Securities Act and applicable state
securities laws. In general, the Original Notes may not be transferred or resold
except in a transaction registered in accordance with, or exempt from, these
registration requirements. If we complete this exchange offer, we will not be
required to register the Original Notes, and we do not anticipate that we will
register the Original Notes, under the Securities Act. Additionally, to the
extent that Original Notes are tendered and accepted in the exchange offer, the
aggregate principal amount of the Original Notes outstanding will decrease, with
a resulting decrease in the liquidity of the market for the Original Notes.
MARKET TRADING PRICES FOR THE SECURITIES MAY BE VOLATILE.
Historically, the market for non-investment grade debt has been subject to
disruptions that have caused substantial volatility in the prices of securities
similar to the notes offered hereby. The market
14
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for the New Notes, if any, may be subject to similar disruptions. Any such
disruptions may adversely affect the value of the New Notes.
RISKS RELATED TO OUR BUSINESS
IF WE ARE UNABLE TO MAINTAIN OUR BUSINESS AND FURTHER IMPLEMENT OUR BUSINESS
STRATEGY, OUR BUSINESS AND FINANCIAL CONDITION COULD BE ADVERSELY AFFECTED.
Our ability to meet our debt service and other obligations will depend in
significant part on how successfully we are able to maintain our business and
further implement our business strategy. There can be no assurance that we will
be able to do either of the foregoing or that the anticipated results of our
strategy will be realized. The components of our strategy are subject to
significant business, economic and competitive uncertainties and contingencies,
many of which are beyond our control. If we are unable to continue to
successfully maintain our business and further implement our business strategy,
our long-term growth and profitability may be adversely affected.
OUR BUSINESS COULD BE ADVERSELY AFFECTED DUE TO UNFORESEEN ECONOMIC AND
POLITICAL CONDITIONS.
We believe that growth in the scholastic products market is determined
primarily by demographics. In addition, we believe that purchases are driven
primarily by the pride and sentiment associated with these products, rather than
by the overall state of the economy, which we believe lessens the impact of
economic cycles on the scholastic products industry. However, we are not fully
insulated against economic downturns and unforeseen economic conditions. A
weakening of the U.S. economy, an increase in the unemployment rate, decreased
consumer disposable income, decreased consumer confidence in the economy and
other economic factors may impact us, which could adversely effect our results
of operations and financial condition. In addition, at the present time we are
unable to predict what long-term effect, if any, recent political events,
including those relating to, or arising out of the World Trade Center tragedy,
and their attendant consequences will have on our business. Any of these events
or any similar future events could have a material adverse effect on our results
of operations and financial condition.
WE FACE SIGNIFICANT COMPETITION FROM OTHER NATIONAL COMPETITORS.
We face strong competition for most of our principal products. The class
ring and yearbook markets are highly concentrated and consist primarily of a few
national manufacturers (of which we are one) and, to a significantly lesser
extent, small regional competitors. Our recognition and affinity products
compete with one national manufacturer, and to a lesser extent with various
other companies. There can be no assurances that we will be able to compete
successfully with our competitors, some of whom may have greater resources,
including financial resources, than we have. See "Business--Competition" for
additional information concerning our competitors.
THE RAW MATERIALS WE USE TO MANUFACTURE OUR PRODUCTS ARE SUBJECT TO
FLUCTUATING PRICES.
Numerous raw materials are used in the manufacture of our products. Gold,
precious, semi-precious and synthetic stones, paper products and ink comprise
the bulk of the raw materials we utilize in our business. Prices of these
materials, especially gold, continually fluctuate. Although we engage in hedging
operations to moderate the impact of gold price fluctuations, there can be no
assurance that we will be able to hedge in the future on similar economic terms.
Any material
15
<Page>
long-term increase in the price of one or more of our raw materials could have
an adverse impact on our cost of sales and cannot be hedged. In addition, we may
be unable to pass on the increased costs of raw materials to our customers. Our
inability to pass on these increased costs could adversely affect our results of
operations and financial condition.
COMPONENTS OF OUR CLASS RINGS AND SOME OF OUR RECOGNITION AND AFFINITY
PRODUCTS ARE PURCHASED FROM A SINGLE SUPPLIER.
Virtually all of the synthetic and semi-precious stones used in our rings
are purchased from a single supplier. We believe that most of the class ring
manufacturers in the United States purchase substantially all of these types of
stones from this supplier. If this supplier is unable to supply us with stones,
or if this supplier's inventory of stones significantly decreases, this would
have an adverse affect on our ability to manufacture rings featuring these
stones unless we are able to secure an alternative supply of stones in a timely
fashion, which could adversely affect our results of operations and financial
condition. If we are required to secure an additional source of these stones, we
may not be able to do so on terms as favorable as our current terms, which could
adversely affect our results of operations and financial condition.
OUR BUSINESS MAY BE IMPACTED IF CERTAIN SOURCES OF NOMINATIONS TO OUR
ACHIEVEMENT PUBLICATIONS BECOME UNAVAILABLE.
We obtain nominations for our achievement publications from a wide variety
of commercial and non-commercial sources, which we continuously update. One
company that supplies a significant number of nominees to ECI for inclusion in
its WHO'S WHO AMONG AMERICAN HIGH SCHOOL STUDENTS publication has received an
inquiry from the U.S. Federal Trade Commission relating to its supplying names
and other personal information of high school students to commercial marketers.
We have received a request from the FTC for information relating to this matter
and are complying with this request. At present, we are unable to ascertain the
scope of the FTC's inquiry and what impact, if any, it will have on our ability
to obtain names from this supplier in the future or what, if any, other effects
it may have on us. We believe that, if we were not able to obtain nominees from
this source for any reason, we would be able to obtain the same quantity of
nominees from a number of alternate sources, although we cannot assure you that
this will be the case. Since nominations have already been compiled for fiscal
2003, the failure to maintain and/or replace such nominations, if necessary,
would not be expected to have any impact on our results of operations or
financial condition until 2004 at the earliest.
OUR BUSINESS MAY SUFFER IF WE DO NOT RETAIN OUR MANAGEMENT.
We depend on our senior management and key sales managers. Although we do
not anticipate that we will have to replace any of our management team in the
near future, the loss of services of any of the members of our senior management
or any key sales managers could adversely affect our business until suitable
replacements with industry experience can be found.
OUR FUTURE OPERATING RESULTS ARE DEPENDENT ON MAINTAINING OUR RELATIONSHIPS
WITH OUR INDEPENDENT SALES REPRESENTATIVES.
We rely on the efforts and abilities of our network of independent sales
representatives to sell our class ring, yearbook and graduation products. Many
of our relationships with customers and schools
16
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are cultivated and maintained by our sales representatives. If we were to
experience a significant loss of our independent sales representatives, it could
adversely affect our results of operations and financial condition.
OUR BUSINESS MAY FLUCTUATE WITH THE FINANCIAL CONDITION OF OUR RETAIL
CUSTOMERS.
A significant portion of our jewelry products are sold through major retail
chains, primarily mass merchandisers, jewelry store chains, independent jewelry
stores and other direct distribution channels. As a result, our business and
financial results may be adversely impacted by the financial condition of these
retailers, the retail industry generally and the economy overall. In addition,
bankruptcy filings by these retailers could adversely affect our results of
operations and financial condition.
THE SEASONALITY OF OUR SALES MAY HAVE AN ADVERSE EFFECT ON OUR OPERATIONS AND
OUR ABILITY TO SERVICE OUR DEBT.
Our scholastic products business experiences strong seasonal business swings
which correspond to the U.S. school year. Class ring and achievement publication
sales are highest during October through December, yearbook sales are highest
during May and June and graduation product sales are highest during February
through April. This seasonality requires us to manage our cash flows over the
course of the year. If our sales were to fall substantially below what we would
normally expect during these periods, our annual financial results would be
adversely impacted and our ability to service our debt, including our ability to
make interest payments on the notes, may also be adversely affected.
WE ARE SUBJECT TO ENVIRONMENTAL REGULATIONS THAT COULD IMPOSE SUBSTANTIAL
COSTS UPON US AND MAY ADVERSELY AFFECT OUR FINANCIAL RESULTS AND OUR ABILITY
TO SERVICE OUR DEBT.
We are subject to applicable federal, state and local laws, ordinances and
regulations that establish various health and environmental quality standards
and provide penalties for violations of those standards. Past and present
manufacturing operations subject us to environmental laws that regulate the use,
handling and contracting for disposal or recycling of hazardous or toxic
substances, the discharge of particles into the air and the discharge of process
wastewaters into sewers. We believe that we have adequate environmental
insurance and indemnities to sufficiently cover any liabilities that may exist.
However, environmental liabilities in excess of our environmental insurance and
indemnities could adversely affect our results of operations and financial
condition.
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USE OF PROCEEDS
This exchange offer is intended to satisfy our obligations under the
registration rights agreement entered into in connection with the offering of
the original notes. We will not receive any proceeds from the exchange offer. In
consideration for issuing the New Notes, we will receive Original Notes with
like original principal amount. The form and terms of the Original Notes are the
same as the form and terms of the New Notes, except as otherwise described in
this prospectus. The Original Notes surrendered in exchange for New Notes will
be retired and canceled and cannot be reissued. Accordingly, the issuance of the
New Notes will not result in any increase in our outstanding debt.
We received net proceeds totaling approximately $175.5 million from the
private placement of the Original Notes. The net proceeds and $1.3 million of
proceeds under our $40.0 million senior secured credit facility, were used to:
- repay approximately $167.0 million of outstanding indebtedness of American
Achievement Corporation and some of its subsidiaries;
- make payment of approximately $1.7 million on settlement of certain
interest rate swaps; and
- pay approximately $8.0 million of related fees and expenses.
18
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CAPITALIZATION
The following table sets forth our capitalization as of November 24, 2001,
on an actual and adjusted basis. Adjusted capitalization reflects the issuance
of the Original Notes, borrowings under our senior secured credit facility and
the application of the net proceeds therefrom. This table should be read in
conjunction with "Use of Proceeds," "Unaudited Pro Forma Financial Statements,"
"Selected Consolidated Financial Data," "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and our consolidated financial
statements and the notes thereto included elsewhere in this prospectus.
<Table>
<Caption>
AS OF NOVEMBER 24,
2001
---------------------
ACTUAL ADJUSTED
--------- ---------
(DOLLARS IN MILLIONS)
Existing senior credit facility:
Revolving credit facility............................... $ 35.0 $ --
Term loan A............................................. 54.0 --
Term loan B............................................. 64.2 --
Senior secured credit facility.............................. -- 17.0
Original Notes, net of discount............................. -- 175.5
11% senior subordinated notes of subsidiary................. 41.4 41.4
Bridge notes to affiliates.................................. 27.7 --
------ ------
Total debt.......................................... 222.3 233.9
Redeemable preferred stock of subsidiary.................... 16.0 16.0
Total stockholders' equity.................................. 74.3 68.2
------ ------
Total capitalization................................ $312.6 $318.1
====== ======
</Table>
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UNAUDITED PRO FORMA FINANCIAL STATEMENTS
Each of the unaudited pro forma statements of operations presented below
gives effect to the issuance of the Original Notes, the borrowings under our new
credit facility and the application of the proceeds therefrom as if they had
occurred at the beginning of the applicable period presented. In addition, the
unaudited pro forma statements of operations for the fiscal year ended
August 25, 2001 and for the twelve months ended November 24, 2001 give effect to
our acquisition of ECI and related transactions as if they occurred on
September 1, 2000 and December 1, 2000, respectively. The acquisition of ECI has
been accounted for using the purchase method of accounting and is therefore
reflected in the historical operations of American Achievement from the period
of acquisition. The unaudited pro forma balance sheet gives effect to the
issuance of the Original Notes, the borrowings under our senior secured credit
facility and the application of the proceeds therefrom as if they had occurred
on November 24, 2001.
The pro forma data is not necessarily indicative of our results of
operations or financial position had these transactions taken place on the dates
indicated and is not intended to project our results of operations or financial
position for any future period or date.
The pro forma adjustments are based on preliminary estimates, available
information and certain assumptions that we deem appropriate and may be revised
as additional information becomes available. The unaudited pro forma financial
statements should be read in conjunction with the historical financial
statements and notes thereto included elsewhere in this prospectus.
20
<Page>
UNAUDITED PRO FORMA STATEMENT OF OPERATIONS AND OTHER DATA
FOR THE FISCAL YEAR ENDED AUGUST 25, 2001
(DOLLARS IN THOUSANDS)
<Table>
<Caption>
HISTORICAL STATEMENTS
----------------------------------------
AMERICAN
ACHIEVEMENT EDUCATIONAL
CORPORATION COMMUNICATIONS INC. PRO FORMA ADJUSTMENTS
FISCAL YEAR PERIOD FROM -------------------------
ENDED SEPTEMBER 1, 2000 TO FINANCING
AUGUST 25, 2001 MARCH 30, 2001(1) ACQUISITION TRANSACTION PRO FORMA
---------------- --------------------- ----------- ----------- ---------
Net sales........................... $281,515 $15,888 $ -- $ -- $297,403
Cost of sales....................... 141,946 3,099 145,045
-------- ------- ------- ------- --------
Gross profit.................... 139,569 12,789 -- -- 152,358
Selling, general and administrative
expenses.......................... 119,930 2,924 1,098 (2) -- 126,389
2,145 (3)
292 (4)
-------- ------- ------- ------- --------
Operating income................ 19,639 9,865 (3,535) -- 25,969
Interest expense, net............... 22,846 (412) 595 (5) 5,042 (6) 28,071
Other (income) expense.............. -- (463) -- -- (463)
-------- ------- ------- ------- --------
Income (loss) before provision for
income taxes...................... (3,207) 10,740 (4,130) (5,042) (1,639)
Provision (benefit) for income
taxes(7).......................... 133 159 -- -- 292
-------- ------- ------- ------- --------
Net income (loss)(8).............. (3,340) 10,581 (4,130) (5,042) (1,931)
Preferred dividends(9).............. 1,200 -- -- -- 1,200
-------- ------- ------- ------- --------
Net income (loss) to common
stockholders.................... $ (4,540) $10,581 $(4,130) $(5,042) $ (3,131)
======== ======= ======= ======= ========
Other Data:
Ratio of earnings to fixed
charges(10)....................... -- -- --
</Table>
See accompanying notes to unaudited pro forma financial statements.
21
<Page>
UNAUDITED PRO FORMA STATEMENT OF OPERATIONS AND OTHER DATA
FOR THE THREE MONTHS ENDED NOVEMBER 24, 2001
(DOLLARS IN THOUSANDS)
<Table>
<Caption>
HISTORICAL STATEMENT
--------------------
AMERICAN
ACHIEVEMENT
CORPORATION
THREE MONTHS ADJUSTMENTS FOR
ENDED FINANCING
NOVEMBER 24, 2001 TRANSACTION PRO FORMA
-------------------- --------------- ---------
Net sales......................................... $77,572 $ -- $77,572
Cost of sales..................................... 35,947 -- 35,947
------- ---------- -------
Gross profit.................................. 41,625 -- 41,625
Selling, general and administrative expenses...... 32,402 -- 32,402
------- ---------- -------
Operating income.............................. 9,223 -- 9,223
Interest expense, net............................. 5,930 1,205 (6) 7,135
Other (income) expense............................ -- -- --
------- ---------- -------
Income (loss) before provision for income
taxes....................................... 3,293 (1,205) 2,088
Provision (benefit) for income taxes(7)........... 120 -- 120
------- ---------- -------
Net income (loss)(8).......................... 3,173 (1,205) 1,968
Preferred dividends(9)............................ 300 -- 300
------- ---------- -------
Net income (loss) to common stockholders...... $ 2,873 $ (1,205) $ 1,668
======= ========== =======
Other Data:
Ratio of earnings to fixed charges(10)............ 1.5x 1.3x
</Table>
See accompanying notes to unaudited pro forma financial statements
22
<Page>
UNAUDITED PRO FORMA STATEMENT OF OPERATIONS AND OTHER DATA
FOR THE TWELVE MONTHS ENDED NOVEMBER 24, 2001
(DOLLARS IN THOUSANDS)
<Table>
<Caption>
HISTORICAL STATEMENTS
------------------------------------
AMERICAN
ACHIEVEMENT
CORPORATION EDUCATIONAL
TWELVE MONTHS COMMUNICATIONS INC. PRO FORMA ADJUSTMENTS
ENDED PERIOD FROM -------------------------
NOVEMBER 24, DECEMBER 1, 2000 TO FINANCING
2001 MARCH 30, 2001(1) ACQUISITION TRANSACTION PRO FORMA
------------- -------------------- ----------- ----------- ---------
Net sales............................ $294,749 $ 355 $ -- $ -- $295,104
Cost of sales........................ 142,354 271 -- -- 142,625
-------- ------- ----- ------- --------
Gross profit..................... 152,395 84 -- -- 152,479
Selling, general and administrative
expenses........................... 122,789 1,470 627 (2) -- 124,394
(658)(3)
166 (4)
-------- ------- ----- ------- --------
Operating income................. 29,606 (1,386) (135) -- 28,085
Interest expense, net................ 22,908 (207) 340 (5) 5,235 (6) 28,276
Other (income) expense............... -- (226) -- -- (226)
-------- ------- ----- ------- --------
Income (loss) before provision
for income taxes............... 6,698 (953) (475) (5,235) 35
Provision (benefit) for income
taxes(7)........................... (116) 17 -- -- (99)
-------- ------- ----- ------- --------
Net income (loss)(8)............. 6,814 (970) (475) (5,235) 134
Preferred dividends(9)............... 1,200 -- -- -- 1,200
-------- ------- ----- ------- --------
Net income (loss) to common
stockholders................... $ 5,614 $ (970) $(475) $(5,235) $ (1,066)
======== ======= ===== ======= ========
Other Data:
Ratio of earnings to fixed
charges(10)........................ 1.3x -- 1.0x
</Table>
See accompanying notes to unaudited pro forma financial statements.
23
<Page>
NOTES TO THE UNAUDITED PRO FORMA STATEMENTS OF OPERATIONS
(1) We acquired ECI on March 30, 2001. The results of operations for ECI since
its acquisition on March 30, 2001 have been included in our historical
statements. The historical statement of operations of ECI was conformed to
our fiscal year end by accumulating the results of operations from
September 1, 2000 to March 30, 2001 with respect to the fiscal year ended
August 25, 2001 and from December 1, 2000 to March 30, 2001 with respect to
the twelve months ended November 24, 2001.
(2) Adjustments to reflect the estimated pro forma depreciation for tangible
assets and amortization of intangible assets and goodwill, for the fiscal
year ended August 25, 2001 and for the twelve months ended November 24,
2001, based on their estimated fair market values and their respective
useful lives.
<Table>
<Caption>
PERIOD FROM PERIOD FROM
SEPTEMBER 1, DECEMBER 1,
2000 TO 2000 TO
MARCH 30, 2001 MARCH 30, 2001
--------------- ---------------
(DOLLARS IN THOUSANDS)
Depreciation................................................ $ 78 $ 44
Amortization of intangible assets and goodwill.............. 1,020 583
------ ----
Total adjustments..................................... $1,098 $627
</Table>
For purposes of calculating pro forma amounts, for the fiscal year ended
August 25, 2001 and for the last twelve months ended November 24, 2001,
(i) the fair value of the property, plant and equipment acquired was
$0.4 million, which is being depreciated over three years for equipment, and
(ii) the fair value of trademarks and goodwill was $17.2 million and
$35.5 million, respectively, which is being amortized over 20 years and
40 years, respectively. The adjustment is for the period from September 1,
2000 to March 30, 2001 or December 1, 2000 to March 30, 2001, as applicable,
and represents a pro rata amount of the annual computed depreciation and
amortization expense. We anticipate adopting Statement of Financial
Accounting Standards No. 142 (SFAS 142) beginning on August 31, 2002, the
first day of fiscal 2003. Upon adoption of SFAS 142, trademarks and goodwill
will be subject to the revised useful lives which may result in the
elimination of a majority of the period amortization expense reflected in
these historical statements and these pro forma results.
(3) Adjustment to reflect the difference between ECI's accounting policy to
expense all direct advertising as incurred versus our accounting policy to
defer direct advertising until related revenue is recognized.
(4) Represents the incremental increase in annual management fees payable to
Castle Harlan resulting from our acquisition of ECI.
(5) Represents additional interest expense for bridge financing resulting from
our acquisition of ECI based upon borrowings of $8.5 million at an annual
interest rate of 12%.
(6) To reflect the incremental interest expense associated with the refinancing
of our existing credit facilities and the bridge notes with the net proceeds
from this offering and our new credit facility, which would have had an
assumed outstanding balance of $192.5 million and an assumed weighted
average effective interest rate of 11.7% for all historical periods
presented. In addition, an incremental $3.9 million of deferred financing
costs is assumed to be amortized and included in interest expense over the
term of the related debt.
(7) For tax reporting purposes, we have U.S. net operating loss carryforwards
for all periods presented. Therefore, for purposes of these pro forma
statements, no additional federal tax expense has been computed as a result
of converting ECI from an S Corporation taxpayer to a C Corporation taxpayer
assuming that the net operating loss carryforward held by us eliminates any
federal tax provision associated with ECI.
(8) Net income (loss) excludes the effect of the non-recurring extraordinary
extinguishment charge associated with the repayment of the existing credit
facility, the related party bridge loans and the write-off of deferred
financing charges. If the extinguishment had taken place on November 24,
2001, the estimated extraordinary loss would have been approximately
$6.1 million. Also excluded from net income (loss) is the anticipated effect
of terminating the interest rates swaps associated with the existing debt
which will be refinanced. If such a termination had taken place on
November 24, 2001, approximately $2.6 million would be reclassified out of
accumulated comprehensive income and result in a charge to other expense.
(9) Dividends have accrued but have not been paid.
(10) For purposes of computing this ratio, earnings consist of income (loss)
before taxes on income and fixed charges. Fixed charges consist of interest
expense, amortization of deferred debt issuance costs and the portion of
rental expense that includes an interest factor. For our fiscal year 2001,
earnings before fixed charges were insufficient to cover fixed charges by
approximately $3.2 million. For ECI for the periods from September 1, 2000
through March 30, 2001 and from December 1, 2000 through March 30, 2001, ECI
had no fixed charges as defined above. For the pro forma fiscal year ended
August 25, 2001, earnings before fixed charges were insufficient to cover
fixed charges by approximately $1.6 million.
24
<Page>
UNAUDITED PRO FORMA BALANCE SHEET
NOVEMBER 24, 2001
(DOLLARS IN THOUSANDS)
<Table>
<Caption>
AMERICAN ACHIEVEMENT
CORPORATION PRO FORMA
NOVEMBER 24, 2001 ADJUSTMENTS PRO FORMA
-------------------- ----------- ---------
ASSETS
Current assets:
Cash.............................. $ 4,876 $ -- $ 4,876
Receivables....................... 52,598 -- 52,598
Inventories....................... 24,810 -- 24,810
Prepaid expenses and other........ 14,890 -- 14,890
-------- ------- --------
Total current assets.......... 97,174 -- 97,174
Property, plant and equipment......... 64,140 -- 64,140
Trademarks............................ 41,879 -- 41,879
Goodwill.............................. 146,913 -- 146,913
Other assets.......................... 29,313 3,925 (1) 33,238
-------- ------- --------
Total assets.................. $379,419 $ 3,925 $383,344
======== ======= ========
LIABILITIES & STOCKHOLDERS' EQUITY
Current liabilities:
Bank overdraft.................... $ 4,587 $ -- $ 4,587
Accounts payable and accrued
liabilities..................... 57,468 (1,580)(2) 55,888
Current portion of long-term
debt............................ 13,212 (13,212)(3) --
-------- ------- --------
Total current liabilities..... 75,267 (14,792) 60,475
Long-term debt........................ 181,357 52,518 (1)(2)(3) 233,875
Bridge notes to affiliates............ 27,726 (27,726)(3) --
Other long-term liabilities........... 4,852 -- 4,852
-------- ------- --------
Total liabilities............. 289,202 10,000 299,202
Redeemable minority interest in
subsidiary.......................... 15,950 -- 15,950
Stockholders' equity:
Preferred stock................... 10 -- 10
Common stock...................... 8 -- 8
Additional paid-in capital........ 94,760 -- 94,760
Accumulated other comprehensive
loss............................ (3,166) 2,647 (2) (519)
Accumulated deficit............... (17,345) (6,075)(1) (26,067)
(2,647)(2)
-------- ------- --------
Total stockholders' equity.... 74,267 (6,075) 68,192
-------- ------- --------
$379,419 $ 3,925 $383,344
======== ======= ========
</Table>
See accompanying notes to unaudited pro forma financial statements.
25
<Page>
NOTES TO THE UNAUDITED PRO FORMA BALANCE SHEET
NOVEMBER 24, 2001
(1) Reflects the following adjustment to deferred financing costs (dollars in
thousands):
<Table>
Elimination of deferred financing costs associated with
existing credit facility.................................. $(6,075)
Addition of estimated deferred financing costs associated
with the issuance of the Original Notes and the senior
secured credit facility................................... 10,000
-------
Adjustment to deferred financing costs...................... $ 3,925
</Table>
(2) Reflects adjustment to record the anticipated termination of certain
interest rate swaps, representing a notional amount of approximately
$37.5 million, associated with existing debt which will be refinanced. If
such a termination had taken place on November 24, 2001, approximately
$2.6 million would have been reclassified out of accumulated comprehensive
income and result in a charge to other expense. The estimated settlement
payment on the portion of swaps being terminated would have been
approximately $1.6 million based upon management's estimate of fair value.
(3) Reflects the issuance of the Original Notes, net of discount, the borrowings
under our senior secured credit facility and the application of the net
proceeds therefrom.
26
<Page>
SELECTED CONSOLIDATED HISTORICAL FINANCIAL DATA
The following table presents selected consolidated historical financial and
other data for American Achievement and its predecessors and should be read in
conjunction with our financial statements and the notes thereto and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" included elsewhere in this prospectus. We have derived the selected
historical financial data for the three months ended November 24, 2001 and
November 25, 2000 from our unaudited consolidated financial statements, which
include all adjustments, consisting only of normal recurring adjustments, which
are, in our opinion, necessary for a fair presentation of our results for such
periods. The results of operations for the three months ended November 24, 2001
are not necessarily indicative of the results for the full year. The following
information with respect to American Achievement as of August 25, 2001 and
August 26, 2000, and for the fiscal years ended August 25, 2001, August 26, 2000
and August 28, 1999 has been derived from our audited financial statements,
which have been audited by Arthur Andersen LLP, independent public accountants,
as indicated in their report dated October 19, 2001 included herein. The
following information as of August 28, 1999, August 29, 1998 and August 30, 1997
and for the fiscal years ended August 29, 1998 and August 30, 1997 has been
derived from our audited financial statements, which are not included herein.
Our results of operations for the fiscal year ended August 25, 2001 are not
comparable to our results of operations for the fiscal years ended August 26,
2000, August 28, 1999, August 29, 1998 and August 30, 1997 because the
information presented for the fiscal year ended August 25, 2001 includes the
business operations of Taylor for a full 12 months of operations in contrast to
the fiscal year ended August 26, 2000, which includes the business operations of
Taylor for only one month, from the date of its acquisition on July 27, 2000 to
year end. Our results of operations for the fiscal years ended August 25, 2001,
August 26, 2000, August 28, 1999 and August 29, 1998 are not comparable to our
results of operations for the fiscal year ended August 30, 1997 because we had
not been engaged in significant business operations prior to completion of
certain acquisitions on December 16, 1996.
The results of operations of our predecessors, ArtCarved and Balfour, for
the period from September 1, 1996 to December 16, 1996 and for the period from
February 26, 1996 to December 16, 1996, respectively, are not comparable to our
results of operations for the fiscal years ended August 25, 2001, August 26,
2000, August 28, 1999, August 29, 1998 and August 30, 1997 because the
information presented for the predecessor entities does not represent a full
12 months of operations.
27
<Page>
<Table>
<Caption>
PREDECESSORS
---------------------------
ARTCARVED BALFOUR
------------ ------------
AMERICAN ACHIEVEMENT CORPORATION
THE PERIOD THE PERIOD ----------------------------------------------------
FROM FROM
SEPTEMBER 1, FEBRUARY 26, HISTORICAL FOR FISCAL YEAR ENDED
1996 TO 1996 TO ----------------------------------------------------
DECEMBER 16, DECEMBER 16, AUG. 30, AUG. 29, AUG. 28, AUG. 26, AUG. 25,
1996(1) 1996(1) 1997(1) 1998 1999 2000 2001(2)
------------ ------------ -------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS)
STATEMENT OF INCOME DATA:
Net sales............................ $27,897 $60,233 $ 87,600 $151,101 $168,865 $182,285 $281,515
Cost of sales........................ 11,988 29,350 45,189 72,615 73,268 80,929 141,946
------- ------- -------- -------- -------- -------- --------
Gross profit....................... 15,909 30,883 42,411 78,486 95,597 101,356 139,569
Selling, general and administrative
expenses........................... 9,862 31,020 41,481 68,294 85,075 85,559 119,930
------- ------- -------- -------- -------- -------- --------
Operating income................... 6,047 (137) 930 10,192 10,522 15,797 19,639
Income (loss) before provision for
income taxes....................... 3,171 (2,090) (8,867) (4,637) (4,072) 106 (3,207)
Gain on extinguishments of debt, net
of taxes........................... -- -- -- -- -- 6,695 --
Net income (loss).................... 3,171 (2,153) (8,867) (4,637) (4,192) 6,468 (3,340)
Net income (loss) to common
stockholders....................... 3,171 (2,153) (9,717) (5,837) (5,392) 5,268 (4,540)
OTHER DATA:
EBITDA(3)............................ $ 8,039 $ 1,396 $ 5,025 $ 17,093 $ 17,698 $ 24,897 $ 37,225
Interest expense, net................ 2,970 1,953 9,797 14,829 14,594 15,691 22,846
Depreciation and amortization........ 1,992 1,533 4,095 6,901 7,176 9,100 17,586
Capital expenditures................. 195 345 3,493 6,610 9,785 5,087 7,499
Cash flows provided by (used in):
Operating activities............... $ 1,498 $(7,264) $ (677) $ (3,749) $ 1,097 $ (9,368) $ 10,256
Investing activities............... $ (195) $ 226 $(173,693) $ (6,552) $ (9,785) $ (4,182) $(57,865)
Financing activities............... $ 4,261 $ 6,977 $175,450 $ 9,102 $ 8,464 $ 14,686 $ 48,358
Ratio of earnings to fixed
charges(4)......................... -- -- -- 1.0x --
BALANCE SHEET DATA
(AT END OF PERIOD):
Total assets......................... $86,065 $45,127 $200,869 $203,805 $209,845 $326,553 $379,953
Total debt(5)........................ 80,144 20,201 125,450 134,322 134,410 191,253 223,609
Total stockholders' equity........... (6,464) 11,735 40,453 34,846 37,830 63,098 71,809
<Caption>
AMERICAN
ACHIEVEMENT
CORPORATION
-------------------
HISTORICAL FOR THE
THREE MONTHS
ENDED
-------------------
NOV. 25, NOV. 24,
2000 2001(2)
-------- --------
(UNAUDITED)
STATEMENT OF INCOME DATA:
Net sales............................ $ 64,338 $ 77,572
Cost of sales........................ 35,539 35,947
-------- --------
Gross profit....................... 28,799 41,625
Selling, general and administrative
expenses........................... 29,543 32,402
-------- --------
Operating income................... (744) 9,223
Income (loss) before provision for
income taxes....................... (6,612) 3,293
Gain on extinguishments of debt, net
of taxes........................... -- --
Net income (loss).................... (6,981) 3,173
Net income (loss) to common
stockholders....................... (7,281) 2,873
OTHER DATA:
EBITDA(3)............................ $ 3,126 $ 13,985
Interest expense, net................ 5,868 5,930
Depreciation and amortization........ 3,870 4,762
Capital expenditures................. 1,932 2,088
Cash flows provided by (used in):
Operating activities............... $ 357 $ 5,642
Investing activities............... $ (1,932) $ (2,088)
Financing activities............... $ 2,995 $ (1,314)
Ratio of earnings to fixed
charges(4)......................... -- 1.5x
BALANCE SHEET DATA
(AT END OF PERIOD):
Total assets......................... $331,553 $379,419
Total debt(5)........................ 193,200 222,295
Total stockholders' equity........... 56,024 74,267
</Table>
- ------------
(1) We completed the acquisitions of ArtCarved and Balfour on December 16, 1996,
and prior to such date, engaged in no business activities other than those
in connection with the acquisitions and financing thereof. Due to the highly
seasonal nature of the class ring business, a significant amount of revenues
and income were earned by our predecessors in the three and one-half month
period ended December 16, 1996, due to the back to school and pre-holiday
season. The financial results of the predecessor entities are not comparable
to our results of operations because the periods presented for the
predecessor entities are less than a full twelve months of operations. In
addition, the results of operations for our predecessors shown above
together with our 1997 financial results constitute results for a period
greater than 12 months because we only had audited results for Balfour from
February 26, 1996 to December 16, 1996.
(2) Includes the results of operations from ECI, which was acquired on
March 30, 2001. ECI sales are highly seasonal with most shipments generally
occurring in the first four months of our fiscal year.
(3) EBITDA represents earnings before interest expense, taxes, depreciation and
amortization and excludes extraordinary gains and losses. EBITDA does not
represent net income or cash flows from operations, as these terms are
defined under generally accepted accounting principles, and should not be
considered as an alternative to net income as an indicator of our operating
performance or to cash flows as a measure of liquidity. We have included
information concerning EBITDA because we use such information as a method of
assessing our cash flow and ability to service debt. The EBITDA measure
presented herein is not necessarily comparable to similarly titled measures
reported by other companies.
(4) For purposes of computing this ratio, earnings consist of income (loss)
before taxes on income and fixed charges. Fixed charges consist of interest
expense, amortization of deferred debt issuance costs and the portion of
rental expense that includes an interest factor. For fiscal years ended
August 30, 1997, August 29, 1998, August 28, 1999, August 25, 2001 and for
the three months ended November 25, 2000, earnings before fixed charges were
insufficient to cover fixed charges by approximately $8.9 million,
$4.6 million, $4.1 million, $3.2 million and $6.6 million, respectively.
(5) Excludes bank overdraft.
28
<Page>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following discussion of our consolidated financial condition and results
of operations should be read in conjunction with the information contained in
our consolidated financial statements and the notes thereto. The following
discussion includes forward-looking statements that involve certain risks and
uncertainties. See "Disclosure Regarding Forward-Looking Statements."
OVERVIEW
We are one of the leading manufacturers and suppliers of class rings,
yearbooks, academic achievement publications and recognition and affinity
jewelry in the United States. Our two principal business segments are:
scholastic products and recognition and affinity products. The scholastic
products segment serves the high school, college and, to a lesser extent, the
elementary and junior high school markets and accounted for approximately 88% of
our net sales for the twelve months ended November 24, 2001. Our scholastic
products segment consists of three principal categories: class rings, yearbooks
and graduation products, the last of which includes fine paper products and
graduation accessories.
The recognition and affinity products segment accounted for approximately
12% of our net sales for the twelve months ended November 24, 2001. This segment
provides, among other things, publications that recognize the academic
achievement of top students at the high school and college levels, as well as
the nation's most inspiring teachers, jewelry commemorating family events such
as the birth of a child, fan affinity jewelry and related products and
professional sports championship rings such as World Series rings.
COMPANY BACKGROUND
Commemorative Brands, Inc., or CBI was initially formed by CHPII in
March 1996 for the purpose of acquiring substantially all of the ArtCarved
operations of CJC Holdings, Inc. and the Balfour operations of L.G. Balfour
Company, Inc. These acquisitions were consummated on December 16, 1996. Until
such date, CBI engaged in no business activities other than in connection with
the completion of the acquisitions and the financing thereof.
Our company was formed on June 27, 2000 to serve as a holding company for
the CBI operations and future acquisitions. Upon formation, each share of CBI's
issued and outstanding common stock was converted into one share of our common
stock, and each share of CBI's issued and outstanding series B preferred stock
was converted into one share of our series A preferred stock. The original
holders of CBI's series A preferred stock continued to hold such shares. We
changed our name from Commemorative Brands Holding Corporation to American
Achievement Corporation on January 23, 2002.
TAYLOR ACQUISITION. On February 11, 2000, CHPIII acquired Taylor, whose
primary business is the designing and printing of student yearbooks. On
July 27, 2000, we acquired all issued and outstanding shares of Taylor Senior
Holding Corp., or TSHC, Taylor's parent, through the issuance of 320,929 shares
of our common stock and 393,482 shares of our series A preferred stock. This
transaction is sometimes referred to as the Taylor Acquisition.
29
<Page>
The Taylor Acquisition was accounted for under the purchase method of
accounting. Accordingly, our consolidated financial statements for 2000 include
the results of operations for consolidated TSHC for the period from July 27,
2000 to August 26, 2000.
ECI ACQUISITION. On March 30, 2001, we acquired all of the capital stock of
ECI for a purchase price of approximately $58.7 million. This transaction is
sometimes referred to as the ECI Acquisition. ECI has been in the academic
achievement publication business since 1967 and publishes such well-known titles
as, WHO'S WHO AMONG AMERICAN HIGH SCHOOL STUDENTS, THE NATIONAL DEAN'S LIST and
WHO'S WHO AMONG AMERICA'S TEACHERS. The ECI Acquisition was accounted for under
the purchase method of accounting. As a result of this transaction, our
consolidated financial statements for 2001 include the results of operations for
ECI for the period from March 30, 2001 to August 25, 2001.
RESULTS OF OPERATIONS
The following table sets forth selected information from our consolidated
statements of operations expressed on an actual basis and as a percentage of net
sales.
<Table>
<Caption>
FISCAL YEAR ENDED
---------------------------------------------------------------------------------
AUGUST 28, AUGUST 26, AUGUST 25,
1999 2000 2001
------------------------- ------------------------- -------------------------
ACTUAL % OF NET SALES ACTUAL % OF NET SALES ACTUAL % OF NET SALES
-------- -------------- -------- -------------- -------- --------------
(DOLLARS IN THOUSANDS)
Net sales............ $168,865 100.0% $182,285 100.0% $281,515 100.0%
Cost of sales........ 73,268 43.4 80,929 44.4 141,946 50.4
-------- ----- -------- ----- -------- -----
Gross profit....... 95,597 56.6 101,356 55.6 139,569 49.6
Selling, general and
administrative
expenses........... 85,075 50.4 85,559 46.9 119,930 42.6
-------- ----- -------- ----- -------- -----
Operating income
(loss)........... 10,522 6.2 15,797 8.7 19,639 7.0
Interest expense,
net................ 14,594 8.6 15,691 8.6 22,846 8.1
-------- ----- -------- ----- -------- -----
Income (loss)
before provision
for income
taxes............ (4,072) (2.4) 106 0.1 (3,207) (1.1)
Provision for income
taxes.............. 120 0.1 333 0.2 133 0.0
Gain on
extinguishments of
debt, net of income
taxes.............. 0 0 6,695 3.7 0 0
-------- ----- -------- ----- -------- -----
Net income (loss).. $ (4,192) (2.5)% $ 6,468 3.5% $ (3,340) (1.2)%
======== ===== ======== ===== ======== =====
<Caption>
THREE MONTHS ENDED
-----------------------------------------------------
NOVEMBER 25, NOVEMBER 24,
2000 2001
------------------------- -------------------------
ACTUAL % OF NET SALES ACTUAL % OF NET SALES
-------- -------------- -------- --------------
(DOLLARS IN THOUSANDS)
Net sales............ $64,338 100.0% $77,572 100.0%
Cost of sales........ 35,539 55.2 35,947 46.3
------- ----- ------- -----
Gross profit....... 28,799 44.8 41,625 53.7
Selling, general and
administrative
expenses........... 29,543 45.9 32,402 41.8
------- ----- ------- -----
Operating income
(loss)........... (744) (1.2) 9,223 11.9
Interest expense,
net................ 5,868 9.1 5,930 7.6
------- ----- ------- -----
Income (loss)
before provision
for income
taxes............ (6,612) (10.3) 3,293 4.2
Provision for income
taxes.............. 369 0.6 120 0.2
Gain on
extinguishments of
debt, net of income
taxes..............
------- ----- ------- -----
Net income (loss).. $(6,981) (10.9)% $ 3,173 4.1%
======= ===== ======= =====
</Table>
30
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The following table sets forth sales by business segment expressed on an
actual basis and as a percentage of net sales.
<Table>
<Caption>
FISCAL YEAR ENDED
---------------------------------------------------------------------------------
AUGUST 28, AUGUST 26, AUGUST 25,
1999 2000 2001
------------------------- ------------------------- -------------------------
ACTUAL % OF NET SALES ACTUAL % OF NET SALES ACTUAL % OF NET SALES
-------- -------------- -------- -------------- -------- --------------
Scholastic Products.. $150,737 89.3% $163,347 89.6% $258,897 92.0%
Recognition and
Affinity Products.. 18,128 10.7 18,938 10.4 22,618 8.0
-------- ----- -------- ----- -------- -----
Net sales............ $168,865 100.0% $182,285 100.0% $281,515 100.0%
======== ===== ======== ===== ======== =====
<Caption>
THREE MONTHS ENDED
-----------------------------------------------------
NOVEMBER 25, NOVEMBER 24,
2000 2001
------------------------- -------------------------
ACTUAL % OF NET SALES ACTUAL % OF NET SALES
-------- -------------- -------- --------------
Scholastic Products.. $58,389 90.8% $58,386 75.3%
Recognition and
Affinity Products.. 5,949 9.2 19,186 24.7
------- ----- ------- -----
Net sales............ $64,338 100.0% $77,572 100.0%
======= ===== ======= =====
</Table>
THREE MONTHS ENDED NOVEMBER 24, 2001 COMPARED WITH THREE MONTHS ENDED
NOVEMBER 25, 2000
NET SALES. Net sales consist of product sales and are net of product
returns and promotional discounts. Net sales increased $13.3 million, or 20.7%,
to $77.6 million for the three months ended November 24, 2001 from
$64.3 million for the three months ended November 25, 2000. This improvement was
due primarily to the inclusion of $13.6 million of net sales from ECI, which we
acquired on March 30, 2001.
The following details the changes in net sales during such periods by
business segment.
SCHOLASTIC PRODUCTS. Net sales for the three months ended November 24, 2001
and November 25, 2000 were $58.4 million for both periods. The in-school high
school segment for both class rings and graduation products increased
$3.3 million as a result of increased unit volume and earlier shipments of fall
deliveries. The increase was offset by a decline in net sales of college rings
of $1.1 million and in net sales of yearbooks of $2.2 million as a result of
timing of shipments.
RECOGNITION AND AFFINITY PRODUCTS. Net sales increased $13.3 million to
$19.2 million for the three months ended November 24, 2001 from $5.9 million for
the three months ended November 25, 2000. The increase was primarily the result
of $13.6 million of net sales attributable to ECI. The increase was partially
offset by a decline in personalized family jewelry and lower sales of affinity
and sports jewelry.
GROSS PROFIT. Gross margin represents gross profit as a percentage of net
sales. Gross margin was 53.7% for the three months ended November 24, 2001, an
8.9 percentage point increase from 44.8% for the three months ended
November 25, 2000. The gross margin increase for the three months ended
November 24, 2001 was primarily the result of the inclusion of the ECI
operations for this period. Excluding ECI, gross margin for the three months
ended November 24, 2001 would have been 46.8%, a 2.0 percentage point increase
from the three months ended November 25, 2000. The increase, excluding ECI, was
primarily the result of a decrease in class ring labor costs, as a result of
increased manufacturing efficiencies, and a decrease in class ring material
costs, each of which favorably impacted our class rings margin. The higher gross
margin in class rings was partially offset by a decrease in gross margin in
graduation products as a result of timing of returns. Also, gross margins of
personalized family jewelry, affinity and sports jewelry and yearbooks declined
as a result of a decrease in the net sales for the three months ended
November 24, 2001 as compared to the three months ended November 25, 2000.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased $2.9 million, or 9.8%, to $32.4 million for
the three months ended November 24, 2001 from $29.5 million for the three months
ended November 25, 2000. As a percentage of net sales, however,
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selling, general and administrative expenses decreased 4.1 percentage points for
the three months ended November 24, 2001 compared with the three months ended
November 25, 2000. Included in selling, general and administrative expenses are
two sub-categories: selling and marketing expenses and general and
administrative expenses. Selling and marketing expenses increased $2.6 million
to $22.6 million, or 29.1% of net sales, for the three months ended
November 24, 2001 from $20.0 million, or 31.1% of net sales, for the three
months ended November 25, 2000. Excluding ECI, selling and marketing expenses
would have increased to 31.8% of net sales from 31.0% of net sales for the three
months ended November 25, 2000. General and administrative expenses for the
three months ended November 24, 2001 were $9.8 million, or 12.7% of net sales,
as compared to $9.5 million, or 14.8% of net sales, for the three months ended
November 25, 2000. Excluding ECI, general and administrative expenses for the
three months ended November 24, 2001 would have been 13.6% of net sales, a
1.3 percentage point decrease from the three months ended November 25, 2000.
This decrease in general and administrative expenses as a percentage of net
sales was a result of synergy savings realized from the Taylor Acquisition.
OPERATING INCOME (LOSS). As a result of the foregoing, operating income was
$9.2 million, or 11.9% of net sales, for the three months ended November 24,
2001 as compared with an operating loss of $0.7 million, or 1.2% of net sales,
for the three months ended November 25, 2000. The scholastic products segment
reported operating income of $1.1 million for the three months ended
November 24, 2001 as compared with $0.4 million for the three months ended
November 25, 2000. The recognition and affinity products segment reported
operating income of $8.1 million for the three months ended November 24, 2001 as
compared with an operating loss of $1.2 million for the three months ended
November 25, 2000.
INTEREST EXPENSE, NET. Net interest expense was $5.9 million for the three
months ended November 24, 2001 and November 25, 2000. The average debt
outstanding for the three months ended November 24, 2001 and the three months
ended November 25, 2000 was $225.9 million and $197.0 million, respectively. The
weighted average interest rate of debt outstanding for the three months ended
November 24, 2001 and the three months ended November 25, 2000 was 10.4% and
11.8%, respectively.
PROVISION FOR INCOME TAXES. For the three months ended November 24, 2001
and the three months ended November 25, 2000, we expensed $120,000 and $369,000,
respectively, for state income taxes. There is no federal income tax provision
or benefit as a valuation reserve exists due to our historical net operating
losses.
NET INCOME (LOSS). As a result of the foregoing, we reported net income of
$3.2 million for the three months ended November 24, 2001 as compared to a net
loss of $7.0 million for the three months ended November 25, 2000.
YEAR ENDED AUGUST 25, 2001 COMPARED WITH YEAR ENDED AUGUST 26, 2000
NET SALES. Net sales increased $99.2 million, or 54.4%, to $281.5 million
in 2001 from $182.3 million in 2000. This improvement was primarily the result
of the inclusion of Taylor for a full 12 months of operations in 2001 compared
to only one month in 2000.
The following details the changes in net sales during such periods by
business segment.
SCHOLASTIC PRODUCTS. Net sales increased $95.6 million, or 58.5%, to
$258.9 million in 2001 from $163.3 million in 2000, primarily as a result of the
Taylor Acquisition with yearbook net sales increasing
32
<Page>
$94.7 million in 2001 as compared to 2000. The net sales for the in-school high
school segment in both class rings and graduation products increased
$4.9 million as a result of increased prices and unit volume. This increase was
offset by a decline in net sales of retail high school class rings of
$1.9 million and net sales of college rings of $2.1 million.
RECOGNITION AND AFFINITY PRODUCTS. Net sales increased $3.7 million, or
19.4%, to $22.6 million in 2001 from $18.9 million in 2000. The increase was the
result of $6.9 million of net sales related to the Taylor Acquisition and
$0.7 million of net sales attributable to the ECI Acquisition. This increase was
partially offset by lower sales of personalized family jewelry and fan affinity
and sports jewelry.
GROSS PROFIT. Gross margin was 49.6% in 2001, a 6.0 percentage point
decline from 55.6% in 2000. The gross margin decline in 2001 was primarily the
result of the inclusion of a full 12 months of Taylor operations compared to
only one month in 2000. Excluding Taylor and ECI, the 2001 gross margin would
have been 57.4%, or 0.6 percentage points better than 2000. This increase in
margin in 2001 (excluding Taylor and ECI) was primarily the result of favorable
material costs, a net price increase and favorable operating costs, each of
which favorably impacted our class rings margins and increased manufacturing
efficiencies for our graduation products.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased $34.3 million, or 40.1%, to $119.9 million in
2001 from $85.6 million in 2000. As a percentage of net sales, however, selling,
general and administrative expenses decreased 4.3 percentage points in 2001 as
compared to 2000. Selling and marketing expenses increased $24.4 million to
$82.7 million, or 29.4% of net sales, in 2001 from $58.3 million, or 32.0% of
net sales, in 2000. Excluding Taylor and ECI, the selling and marketing expenses
would have increased to 33.8% of net sales from 29.4% of net sales as a result
of management plans to grow the business. General and administrative expenses
increased $9.9 million to $37.2 million, or 13.2% of net sales, in 2001 from
$27.3 million, or 14.9% of net sales in 2000. This decrease in general and
administrative expenses as a percentage of net sales was a result of synergy
savings realized from the Taylor Acquisition and additional efficiency savings
as a result of a computer system conversion in July 1999.
OPERATING INCOME (LOSS). As a result of the foregoing, operating income was
$19.6 million, or 7.0% of net sales, in 2001 as compared with $15.8 million, or
8.7% of net sales, in 2000. The scholastic products segment reported operating
income of $21.6 million in 2001 compared with $12.5 million in 2000. The
recognition and affinity products segment reported operating loss of
$2.0 million in 2001 compared with operating income of $3.3 million in 2000.
INTEREST EXPENSE, NET. Net interest expense was $22.8 million in 2001
compared with $15.7 million in 2000. The $7.1 million increase in interest
expense was a result of the increase in debt outstanding as a result of the
Taylor Acquisition and the ECI Acquisition. The average debt outstanding during
2001 and 2000 was $201.2 million and $138.6 million, respectively. The weighted
average interest rate of debt outstanding as of August 25, 2001 and August 26,
2000 was 11.4% and 11.3%, respectively.
PROVISION (BENEFIT) FOR INCOME TAXES. For 2001, we expensed $133,000
related to state income taxes. There is no federal income tax benefit as a
valuation allowance exists due to our historical net operating losses. For 2000,
we recorded a tax provision of $330,000 related to state taxes, net of tax
related to the utilization of net operating losses related to the gain on
extinguishment of debt, discussed below.
GAIN ON EXTINGUISHMENT OF DEBT, NET OF INCOME TAXES. In 1996, our
subsidiary CBI issued $90 million in aggregate principal amount of 11% senior
subordinated notes, which are sometimes referred to as the 1996 Notes. On
July 27, 2000, TP Holding Corp., the direct parent of Taylor,
33
<Page>
purchased $48.6 million in principal amount of the 1996 Notes at a purchase
price equal to 82% of the principal amount of the notes. As a result of the
Taylor Acquisition, the transaction was considered an extinguishment of debt and
resulted in an extraordinary gain on the sale of the notes of approximately
$6.7 million, net of tax.
NET INCOME (LOSS). As a result of the foregoing, we reported net loss of
$3.3 million in 2001 as compared to net income of $6.5 million in 2000.
YEAR ENDED AUGUST 26, 2000 COMPARED WITH YEAR ENDED AUGUST 28, 1999
NET SALES. Net sales increased $13.4 million, or 7.9%, to $182.3 million in
2000 from $168.9 million in 1999.
The following details the changes in net sales during such periods by
business segment.
SCHOLASTIC PRODUCTS. Net sales increased $12.6 million, or 8.4%, to
$163.3 million in 2000 from $150.7 million in 1999, primarily as a result of the
inclusion of one month of Taylor operations. In addition, net sales increased as
a result of price increases in in-school high school class rings and graduation
products offset by a slight decrease in retail high school ring net sales and
college class ring net sales.
RECOGNITION AND AFFINITY PRODUCTS. Net sales increased $0.8 million, or
4.4%, to $18.9 million in 2000 from $18.1 million in 1999, primarily as a result
of an increase in volume of personalized family jewelry.
GROSS PROFIT. Gross margin was 55.6% in 2000, a 1.0 percentage point
decline from 56.6% in 1999. Excluding the result of one month of Taylor
operations as a result of the acquisition, gross margin for 2000 would have been
56.6%, the same as 1999. The gross margin in scholastic products in 2000
increased a net 0.4 percentage points as a result of a decrease in raw material
costs and an overall net selling price increase, but was partially offset by an
increase in labor costs in the Austin area. The higher gross margin in
scholastic products was offset by a decrease in gross margins of recognition and
affinity product jewelry and graduation products.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased $0.5 million, or 0.6%, to $85.6 million in
2000 from $85.1 million in 1999. As a percentage of net sales, selling, general
and administrative expenses decreased 3.4 percentage points in fiscal 2000 from
1999. Selling and marketing expenses increased $1.7 million to $58.3 million, or
32.0% of net sales, in 2000 from $56.6 million, or 33.5% of net sales, in 1999.
The 1.5 percentage points decline as a percentage of net sales was primarily due
to cost reduction initiatives during March 1999 that reduced advertising costs,
and other expenses. General and administrative costs in 2000 were
$27.3 million, or 14.9% of net sales, as compared to $28.5 million, or 16.8% of
net sales, in 1999. The 1.9 percentage points decline in general and
administrative expenses as a percentage of net sales was the result of a
reduction in information technology expenses as a result of a computer
conversion project in July 1999 and a related reduction in consultant fees and
the cost reduction initiative during March 1999 that reduced general and
administrative costs.
OPERATING INCOME (LOSS). As a result of the foregoing, operating income was
$15.8 million, or 8.7% of net sales, in 2000 as compared with $10.5 million, or
6.2% of net sales, in 1999. The scholastic products segment reported operating
income of $12.5 million in 2000 compared with $7.8 million in 1999. The
recognition and affinity products segment reported operating income of
$3.3 million in 2000 compared with $2.7 million in 1999.
34
<Page>
INTEREST EXPENSE, NET. Net interest expense was $15.7 million in 2000
compared with $14.6 million in 1999. The average debt outstanding during 2000
and 1999 was $138.6 million and $142.6 million, respectively. The weighted
average interest rate of debt outstanding as of August 26, 2000 and August 28,
1999 was 11.3% and 10.2%, respectively.
PROVISION (BENEFIT) FOR INCOME TAXES. For 1999, we expensed $120,000,
related to state income taxes. There is no federal income tax benefit as a
valuation allowance exists due to our historical net operating losses. For 2000,
we recorded a tax provision of $330,000 related to state taxes, net of tax
related to the utilization of net operating losses related to the gain on
extinguishment of debt discussed below.
GAIN ON EXTINGUISHMENTS OF DEBT, NET OF INCOME TAXES. On July 27, 2000, TP
Holding Corp. purchased $48.6 million in principal amount of the 1996 Notes, at
a purchase price equal to 82% of the principal amount of the notes. As a result
of the Taylor Acquisition, the transaction was considered an extinguishment of
debt and resulted in an extraordinary gain on the sale of the notes of
approximately $6.7 million, net of tax.
NET INCOME (LOSS). As a result of the foregoing, net income was
$6.5 million in 2000 as compared to net loss of $4.2 million in 1999.
LIQUIDITY AND CAPITAL RESOURCES
OPERATING ACTIVITIES. Operating activities provided cash of $5.6 million
for the three months ended November 24, 2001 as compared with $0.4 million for
the three months ended November 25, 2000. The $5.2 million increase in cash
provided by operating activities was primarily attributable to an increase in
operating cash from net income before depreciation, amortization and other
non-cash charges of $11.7 million and a decrease in cash used due to a change in
accounts receivable of $6.4 million. These increases were partially offset by a
decrease in bank overdraft, accounts payable, accrued expenses and other
long-term liabilities of $11.4 million and an increase in inventories, prepaids
and other assets of $1.5 million. Operating activities provided cash flows of
$10.3 million for fiscal 2001 as compared to $9.4 million of cash used in
operations for fiscal 2000. The $19.6 million increase in cash flows from
operating activities between the two periods was primarily the result of an
increase in operating cash from net income before depreciation, amortization and
other non-cash charges of $6.7 million, an increase in bank overdraft, accounts
payable, accrued expenses and other long-term liabilities of $22.8 million and
an increase in inventories, prepaids and other assets of $3.8 million, partially
offset by a decrease in cash due to the change in accounts receivable of
$13.7 million. For fiscal 2000, operating activities used cash of $9.4 million
as opposed to providing cash of $1.1 million for fiscal 1999. The $10.5 million
decrease in cash provided by operating activities between the two periods was
due to an increase in cash used due to an increase in inventories, prepaids and
other current and long-term assets of $5.3 million and a decrease in bank
overdraft, accounts payable, accrued expenses and other long-term liabilities of
$19.3 million, partially offset by an increase in net income before
depreciation, amortization and other non-cash charges of $5.1 million and a
decrease in receivables of $9.0 million.
INVESTING ACTIVITIES. Capital expenditures for the three months ended
November 24, 2001 and November 25, 2000 were $2.1 million and $1.9 million,
respectively. Capital expenditures in 2001, 2000 and 1999 were $7.5 million,
$5.1 million and $9.8 million, respectively. The increase in capital
expenditures in 2001 of $2.4 million as compared to 2000 was primarily
attributable to capital expenditures related to the Taylor Acquisition and the
increased tooling cost due to the new BALFOUR IDENTITY high school ring series.
Also affecting investing activities in 2001 and 2000 was the Taylor Acquisition,
and also affecting investing activities in 2001 was the ECI Acquisition. The
majority of the
35
<Page>
$4.7 million decrease in 2000 from 1999 was attributable to capital expenditures
in 1999 related to a computer systems conversion that was completed in
July 1999. Our projected capital expenditures for 2002 are expected to be
$12.0 million.
FINANCING ACTIVITIES. Net cash used in financing activities was
$1.3 million for the three months ended November 24, 2001 and net cash provided
by financing activities was $3.0 million for the three months ended
November 25, 2000. Net cash provided from financing activities in 2001, 2000 and
1999 was $48.4 million, $14.7 million and $8.5 million, respectively. In 2001,
in connection with the acquisition of ECI, we entered into the second amended
and restated credit agreement whereby we borrowed approximately $27.3 million to
fund a portion of the acquisition. In addition, CHPIII provided us with
approximately $24.5 million in cash in return for the issuance of a bridge note
representing an obligation of $8.5 million and the issuance of series A
preferred stock and common stock for $16.0 million. In 2000, as a result of the
acquisition of Taylor, Taylor Holding Corp.'s credit agreement was amended and
restated to include CBI as a borrower. In addition, incremental borrowings of
approximately $62.6 million were made to repay existing debt of CBI and to
repurchase a portion of the outstanding 1996 Notes. In June 1999, CHPII
contributed cash of $8.4 million in exchange for the issuance of series A
preferred shares of CBI.
CAPITAL RESOURCES. In connection with the Taylor Acquisition, we amended
and restated our original credit agreement as of July 27, 2000 and increased the
amounts available under the term loan A, term loan B and the revolving credit
facility. On March 31, 2001, in connection with the ECI Acquisition, we entered
into a second amendment to the credit agreement to increase the amounts
available under the term loan A and term loan B. As of November 24, 2001, we had
approximately $54.0 million, $64.2 million and $35.0 million outstanding under
our term loan A, term loan B and revolving credit facility, respectively. This
facility was repaid with the proceeds that we received from the issuance of the
Original Notes and, upon consummation of the issuance of the Original Notes, we
simultaneously entered into our new senior secured credit facility. See
"Description of Certain Indebtedness--New Facility."
In connection with the Taylor Acquisition, CBI signed a gold consignment
financing agreement with a bank. Under its gold consignment financing agreement,
CBI has the ability to have on consignment the lowest of (i) the dollar value of
27,000 troy ounces of gold, (ii) $10.1 million and (iii) a borrowing base,
determined based upon a percentage of gold located at CBI's facilities and other
approved locations, as specified by the agreement. Under the terms of the
consignment arrangement, CBI does not own the consigned gold nor have risk of
loss related to such inventory until the money is received by the bank from CBI
in payment for the gold purchased. Accordingly, CBI does not include the values
of consigned gold in its inventory or the corresponding liability for financial
statement purposes. As a result, as of November 25, 2000 and November 24, 2001,
CBI held approximately 18,000 ounces and 23,000 ounces, respectively, of gold
valued at $4.9 million and $6.2 million, respectively, on consignment from the
bank.
As of November 24, 2001, TP Holding Corp. had convertible subordinated
bridge promissory notes owing to CHPIII, one of our stockholders, of
approximately $18.5 million in the aggregate, including accrued interest, which
are due on February 28, 2003. The bridge promissory notes bear interest at 12%
per annum, which is added to the outstanding balance of the notes on the last
day of each month. We repaid these notes with the proceeds that we received from
the issuance of the Original Notes.
In addition, as of November 24, 2001, we had a convertible subordinated
bridge promissory note due to CHPIII of approximately $9.2 million, including
accrued interest, which was due on February 28, 2003. The bridge promissory note
bears interest at 12% per annum, which is added to the outstanding balance of
the notes on the last day of each month. We repaid this note with the proceeds
that we received from the issuance of the Original Notes.
36
<Page>
On October 19, 2001, CHPIII provided a letter of forbearance to us for the
two TP Holding Corp. and the one American Achievement convertible subordinated
bridge promissory notes, which are referred to as the Bridge Notes, whereby
CHPIII had agreed to: (a) extend the maturity on all outstanding principal and
accrued interest on the Bridge Notes to February 28, 2003, (b) extend the
maturity date on all additional interest earned on the Bridge Notes from
August 26, 2001 through the maturity date to February 28, 2003, (c) maintain the
stated interest rate of 12% per annum through maturity, (d) waive any and all
prior Events of Defaults, as defined in the Bridge Notes, through October 19,
2001 and (e) remove as an Event of Default, as defined in the Bridge Notes, our
nonpayment of principal or interest prior to February 28, 2003.
Cash generated from operating activities and availability under our credit
facilities have been our principal sources of liquidity. Our liquidity needs
arise primarily from debt service, working capital, capital expenditure and
general corporate requirements. As of November 24, 2001, on a pro forma basis,
we had approximately $22.0 million available under our new senior secured credit
facility. We believe that cash flow from our operating activities combined with
the availability of funds under our credit facility will be sufficient to
support our operations and liquidity requirements for the foreseeable future.
NEW ACCOUNTING PRONOUNCEMENTS
On July 23, 2001, the Financial Accounting Standards Board released for
issuance SFAS No. 141, "Business Combinations," and SFAS No. 142, "Goodwill and
Other Intangible Assets." SFAS No. 141 requires that all business combinations
subsequent to June 30, 2001, be accounted for under the purchase method of
accounting. The pooling-of-interests method is no longer allowed. Under SFAS
No. 142, goodwill and intangible assets with indefinite lives are no longer
amortized but are reviewed annually (or more frequently if impairment indicators
arise) for impairment. Separable intangible assets that are not deemed to have
indefinite lives will continue to be amortized over their useful lives (but with
no maximum life). SFAS No. 142 is effective for fiscal years beginning after
December 15, 2001.
We anticipate adopting SFAS No. 142 beginning on September 1, 2002, the
first day of fiscal year 2003. We are evaluating the impact of the adoption of
these standards and have not yet determined the effect of adoption on our
financial position and results of operations. The impact of adoption may be
material. Upon adoption of these standards, goodwill amortization will cease and
certain intangibles such as workforce in place will be reclassified into
goodwill.
In August 2001, the Financial Accounting Standards Board released SFAS
No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets." SFAS
No. 144 establishes a single accounting model, based upon the framework
established in SFAS No. 121, for long-lived assets to be disposed of by sale.
SFAS No. 144 broadens the presentation of discontinued operations to include
more disposal transactions, and also provides additional implementation guidance
for SFAS No. 121. SFAS No. 144 is effective for fiscal years beginning after
December 15, 2001. We anticipate adopting SFAS No. 144 effective September 1,
2002, and we do not expect the adoption to have a material impact on our
financial position and results of operations.
37
<Page>
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
INTEREST RATE RISK. We have market risk exposure from changes in interest
rates on our variable rate debt. Our policy is to manage interest rate exposure
through the use of a combination of fixed and floating rate debt instruments and
through the use of interest rate swaps. Our credit agreement and our gold
consignment agreement are variable rate facilities. The interest rates under
these facilities are based on a floating benchmark rate (such as LIBOR or the
Federal Funds rate) plus a fixed spread. We do not use derivatives or other
financial instruments for trading purposes. Upon consummation of the issuance of
the Original Notes we terminated approximately $1.7 million of our existing swap
agreements and interest rate swaps representing a notional amount of
approximately $25.0 million remained in place.
Our derivatives and other financial instruments subject to interest rate
risk consist of long-term debt (including current portion), interest rate swaps
and notional amount under the gold consignment agreement. The net market value
of these financial instruments at November 24, 2001 represented a net liability
of $2.6 million.
If the interest rate on our variable debt increased or decreased by 1% in
2001, our interest expense would have changed by approximately $0.9 million for
2001. As of August 25, 2001, August 26, 2000 and August 28, 1999, the fair value
of our debt approximated its carrying value and is estimated based on quoted
market prices for comparable instruments.
SEMI-PRECIOUS STONES. We purchase the majority of our semi-precious stones
from a single source supplier in Germany. We believe that all of our major
competitors purchase their semi-precious stones from this same supplier. The
purchases are payable in Euros. In order to hedge our market risk, we have
purchased forward Euro contracts. During 2001, we purchased a total of
$2.0 million in forward Deutsche Mark contracts with various maturity dates
resulting in a net gain of $0.1 million. For 1999 and 2000, we did not purchase
any forward Deutsche Mark contracts.
GOLD. We purchase all of our gold requirements from The Bank of Nova Scotia
through our revolving credit and gold consignment agreement. We consign the
majority of our gold from The Bank of Nova Scotia and pay for gold as the
product is shipped to customers and as required by the terms of the gold
consignment agreement. As of November 24, 2001, we had hedged our gold
requirements for the fiscal year ending August 31, 2002 by covering the majority
of our estimated gold requirements through the purchase of gold options. At
November 24, 2001, we held options to purchase 43,500 ounces of gold at an
average price of $300 per ounce which expire on a monthly basis from
December 2001 through July 2002.
38
<Page>
THE EXCHANGE OFFER
GENERAL
We sold the Original Notes on February 20, 2002 in a transaction exempt from
the registration requirements of the Securities Act. The initial purchasers of
the Original Notes subsequently resold them to qualified institutional buyers in
reliance on Rule 144A under the Securities Act.
In connection with the sale of Original Notes to the initial purchasers, the
holders of the Original Notes became entitled to the benefits of an A/B exchange
registration rights agreement dated February 20, 2002 among us, some of our
subsidiaries and the initial purchasers.
Under the registration rights agreement, we became obligated to file a
registration statement in connection with an exchange offer within 90 days after
the issue date and use our reasonable best efforts to cause the exchange offer
registration statement to become effective within 150 days after the issue date.
The exchange offer being made by this prospectus, if consummated within the
required time periods, will satisfy our obligations under the registration
rights agreement. This prospectus, together with the letter of transmittal, is
being sent to all beneficial holders known to us.
TERMS OF THE EXCHANGE OFFER
Upon the terms and subject to the conditions set forth in this prospectus
and in the accompanying letter of transmittal, we will accept all Original Notes
properly tendered and not withdrawn on or prior to the expiration date. We will
issue $1,000 principal amount of new notes in exchange for each $1,000 principal
amount of outstanding Original Notes accepted in the exchange offer. Holders may
tender some or all of their Original Notes pursuant to the exchange offer.
Based on no-action letters issued by the staff of the SEC to third parties,
we believe that holders of the New Notes issued in exchange for Original Notes
may offer for resale, resell and otherwise transfer the New Notes, other than
any holder that is an affiliate of ours within the meaning of Rule 405 under the
Securities Act, without compliance with the registration and prospectus delivery
provisions of the Securities Act. This is true as long as the New Notes are
acquired in the ordinary course of the holder's business, the holder has no
arrangement or understanding with any person to participate in the distribution
of the New Notes and neither the holder nor any other person is engaging in or
intends to engage in a distribution of the New Notes. A broker-dealer that
acquired Original Notes directly from us cannot exchange the Original Notes in
the exchange offer. Any holder who tenders in the exchange offer for the purpose
of participating in a distribution of the New Notes cannot rely on the no-action
letters of the staff of the SEC and must comply with the registration and
prospectus delivery requirements of the Securities Act in connection with any
resale transaction.
Each broker-dealer that receives New Notes for its own account in exchange
for Original Notes, where Original Notes were acquired by such broker-dealer as
a result of market-making or other trading activities, must acknowledge that it
will deliver a prospectus in connection with any resale of such New Notes. See
"Plan of Distribution" for additional information.
We will be deemed to have accepted validly tendered Original Notes when, as
and if we have given oral or written notice of the acceptance of those notes to
the exchange agent. The exchange agent will act as agent for the tendering
holders of Original Notes for the purposes of receiving the New Notes from the
issuer and delivering New Notes to those holders.
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If any tendered Original Notes are not accepted for exchange because of an
invalid tender or the occurrence of the conditions set forth under
"--Conditions" without waiver by us, certificates for any of those unaccepted
Original Notes will be returned, without expense, to the tendering holder of any
of those Original Notes as promptly as practicable after the expiration date.
Holders of Original Notes who tender in the exchange offer will not be
required to pay brokerage commissions or fees or, in accordance with the
instructions in the letter of transmittal, transfer taxes with respect to the
exchange of original notes, pursuant to the exchange offer. We will pay all
charges and expenses, other than taxes applicable to holders in connection with
the exchange offer. See "--Fees and Expenses."
SHELF REGISTRATION STATEMENT
If (1) because of any change in law or in currently prevailing
interpretations of the staff of the SEC, we are not permitted to effect the
exchange offer; or (2) the exchange offer is not consummated within 180 days of
the original issue date of the Original Notes (the "Issue Date"); or (3) in
certain circumstances, certain holders of unregistered New Notes so request; or
(4) in the case of any holder that participates in the exchange offer, such
holder does not receive New Notes on the date of the exchange that may be sold
without restriction under state and federal securities laws (other than due
solely to the status of such holder as an affiliate of ours or within the
meaning of the Securities Act), then in each case, we will (x) promptly deliver
to the holders and the Trustee written notice thereof, and (y) at our sole
expense, (a) as promptly as practicable, file a shelf registration statement
covering resales of the notes (the "Shelf Registration Statement") and (b) use
our reasonable best efforts to keep effective the Shelf Registration Statement
until the earlier of two years after the Issue Date or such time as all of the
applicable notes have been sold thereunder.
We will, in the event that a Shelf Registration Statement is filed, provide
to each holder copies of the prospectus that is a part of the Shelf Registration
Statement, notify each such holder when the Shelf Registration Statement for the
notes has become effective and take certain other actions as are required to
permit unrestricted resales of the notes. A holder that sells notes pursuant to
the Shelf Registration Statement will be required to be named as a selling
security holder in the related prospectus and to deliver a prospectus to
purchasers, will be subject to certain of the civil liability provisions under
the Securities Act in connection with such sales and will be bound by the
provisions of the Registration Rights Agreement that are applicable to such a
holder (including certain indemnification rights and obligations).
We will, if and when we file the shelf registration statement, provide to
each holder of the Original Notes copies of the prospectus which is a part of
the shelf registration statement, notify each holder when the shelf registration
statement has become effective and take other actions as are required to permit
unrestricted resales of the Original Notes. A holder that sells Original Notes
pursuant to the shelf registration statement generally must be named as a
selling security-holder in the related prospectus and must deliver a prospectus
to purchasers. A seller will be subject to civil liability provisions under the
Securities Act in connection with these sales. A seller of the Original Notes
also will be bound by applicable provisions of the registration rights
agreement, including indemnification obligations. In addition, each holder of
Original Notes must deliver information to be used in connection with the shelf
registration statement and provide comments on the shelf registration statement
in order to have its Original Notes included in the shelf registration statement
and benefit from the provisions regarding any liquidated damages in the
registration rights agreement.
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ADDITIONAL INTEREST
If we fail to meet the targets listed in the two paragraphs immediately
preceding this paragraph, then additional interest ("Additional Interest") shall
become payable in respect of the notes as follows:
1. if (A) a registration statement on an appropriate registration form with
respect to the Exchange Offer (the "Exchange Offer Registration Statement") is
not filed with the SEC on or prior to 90 days after the Issue Date or
(B) notwithstanding that we have consummated or will consummate an exchange
offer, we are required to file a Shelf Registration Statement and such Shelf
Registration Statement is not filed on or prior to the date required by the
Registration Rights Agreement, then commencing on the day after either such
required filing date, Additional Interest shall accrue on the principal amount
of the notes at a rate of 0.50% per annum for the first 90 days immediately
following each such filing date, such Additional Interest rate increasing by an
additional 0.50% per annum at the beginning of each subsequent 90-day period; or
2. if (A) the Exchange Offer Registration Statement is not declared
effective by the SEC on or prior to 150 days after the Issue Date or
(B) notwithstanding that we have consummated or will consummate an Exchange
Offer, we are required to file a Shelf Registration Statement and such Shelf
Registration Statement is not declared effective by the SEC on or prior to the
date required by the Registration Rights Agreement, then, commencing on the day
after either such required effective date, Additional Interest shall accrue on
the principal amount of the notes at a rate of 0.50% per annum for the first
90 days immediately following such date, such Additional Interest rate
increasing by an additional 0.50% per annum at the beginning of each subsequent
90-day period; or
3. if (A) we have not exchanged New Notes for all notes validly tendered in
accordance with the terms of the exchange offer on or prior to the 180th day
after the Issue Date or (B) if applicable, the Shelf Registration Statement has
been declared effective and such Shelf Registration Statement ceases to be
effective at any time prior to the second anniversary of the Issue Date (other
than after such time as all notes have been disposed of thereunder), then
Additional Interest shall accrue on the principal amount of the notes at a rate
of 0.50% per annum for the first 90 days commencing on (x) the 181st day after
the Issue Date, in the case of (A) above, or (y) the day such Shelf Registration
Statement ceases to be effective, in the case of (B) above, such Additional
Interest rate increasing by an additional 0.50% per annum at the beginning of
each subsequent 90-day period;
PROVIDED, HOWEVER, that the Additional Interest rate on the notes may not accrue
under more than one of the foregoing clauses (1) - (3) at any one time and at no
time shall the aggregate amount of Additional Interest accruing exceed in the
aggregate 1.5% per annum; PROVIDED, FURTHER, HOWEVER, that (a) upon the filing
of the Exchange Offer Registration Statement or a Shelf Registration Statement
(in the case of clause (1) above), (b) upon the effectiveness of the Exchange
Offer Registration Statement or a Shelf Registration Statement (in the case of
clause (2) above), or (c) upon the exchange of New Notes for all notes tendered
(in the case of clause (3) (A) above), or upon the effectiveness of the Shelf
Registration Statement which had ceased to remain effective (in the case of
clause (3) (B) above), Additional Interest on the notes as a result of such
clause (or the relevant subclause thereof), as the case may be, shall cease to
accrue.
No Additional Interest shall accrue with respect to notes that are not
Registrable Notes, as defined in the Registration Rights Agreement.
Any amounts of Additional Interest due pursuant to clause (1), (2) or
(3) above will be payable in cash on the same original interest payment dates as
the notes.
The sole remedy available to the holders of the notes will be that described
above.
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EXPIRATION DATE; EXTENSIONS; AMENDMENT
The term "expiration date" means 5:00 p.m., New York City time, on,
, 2002 unless we extend the exchange offer, in which case the term
"expiration date" means the latest date to which the exchange offer is extended.
In order to extend the expiration date, we will notify the exchange agent of
any extension by oral or written notice and will issue a public announcement of
the extension, each prior to 9:00 a.m., New York City time, on the next business
day after the previously scheduled expiration date.
We reserve the right:
(a) to delay accepting of any Original Notes, to extend the exchange offer
or to terminate the exchange offer and not accept Original Notes not
previously accepted if any of the conditions set forth under
"--Conditions" shall have occurred and shall not have been waived by us,
if permitted to be waived by us, by giving oral or written notice of the
delay, extension or termination to the exchange agent, or
(b) to amend the terms of the exchange offer in any manner deemed by us to
be advantageous to the holders of the Original Notes.
We will notify you as promptly as practicable of any delay in acceptance,
extension, termination or amendment. If the exchange offer is amended in a
manner determined by us to constitute a material change, we will promptly
disclose the amendment in a manner intended to inform the holders of the
Original Notes of the amendment. Depending upon the significance of the
amendment, we may extend the exchange offer if it otherwise would expire during
the extension period.
Without limiting the manner in which we may choose to publicly announce any
extension, amendment or termination of the exchange offer, we will not be
obligated to publish, advertise, or otherwise communicate that announcement,
other than by making a timely release to an appropriate news agency.
PROCEDURES FOR TENDERING
To tender in the exchange offer, a holder must:
- complete, sign and date the letter of transmittal, or a facsimile of the
letter of transmittal;
- have the signatures on the letter of transmittal guaranteed if required by
instruction 3 of the letter of transmittal; and
- mail or otherwise deliver the letter of transmittal or the facsimile in
connection with a book-entry transfer, together with the Original Notes
and any other required documents.
To be validly tendered, the documents must reach the exchange agent by or before
5:00 p.m. New York City time, on the expiration date. Delivery of the Original
Notes may be made by book-entry transfer in accordance with the procedures
described below. Confirmation of the book-entry transfer must be received by the
exchange agent on or prior to the expiration date.
The tender by a holder of Original Notes will constitute an agreement
between that holder and us in accordance with the terms and subject to the
conditions set forth in this prospectus and in the letter of transmittal.
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Delivery of all documents must be made to the exchange agent at its address
set forth below. Holders may also request their brokers, dealers, commercial
banks, trust companies or nominees to effect the tender for those holders.
The method of delivery of Original Notes and the letter of transmittal and
all other required documents to the exchange agent is at the election and risk
of the holders. Instead of delivery by mail, it is recommended that holders use
an overnight or hand delivery service. In all cases, sufficient time should be
allowed to assure timely delivery to the exchange agent by or before 5:00 p.m.
New York City time, on the expiration date. No letter of transmittal or original
notes should be sent to us.
Only a holder of Original Notes may tender Original Notes in the exchange
offer. The term "holder" with respect to the exchange offer means any person in
whose name Original Notes are registered on our books or any other person who
has obtained a properly completed bond power from the registered holder.
Any beneficial holder whose Original Notes are registered in the name of its
broker, dealer, commercial bank, trust company or other nominee and who wishes
to tender should contact the registered holder promptly and instruct the
registered holder to tender on its behalf. If the beneficial holder wishes to
tender on its own behalf, it must, prior to completing and executing the letter
of transmittal and delivering its Original Notes, either make appropriate
arrangements to register ownership of the Original Notes in the holder's name or
obtain a properly completed bond power from the registered holder. The transfer
of record ownership may take considerable time.
Signatures on a letter of transmittal or a notice of withdrawal must be
guaranteed by a member firm of a registered national securities exchange or of
the National Association of Securities Dealers, Inc. or a commercial bank or
trust company having an office or correspondent in the United States referred to
as an "eligible institution," unless the Original Notes are tendered: (a) by a
registered holder who has not completed the box entitled "Special Issuance
Instructions" or "Special Delivery Instructions" on the letter of transmittal;
or (b) for the account of an eligible institution. In the event that signatures
on a letter of transmittal or a notice of withdrawal, are required to be
guaranteed, the guarantee must be by an eligible institution.
If the letter of transmittal is signed by a person other than the registered
holder of any Original Notes listed therein, those Original Notes must be
endorsed or accompanied by appropriate bond powers and a proxy which authorizes
that person to tender the Original Notes on behalf of the registered holder, in
each case signed as the name of the registered holder or holders appears on the
Original Notes.
If the letter of transmittal or any original notes or bond powers are signed
by trustees, executors, administrators, guardians, attorneys-in-fact, officers
of corporations or others acting in a fiduciary or representative capacity, they
should indicate that when signing, and unless waived by us, submit evidence
satisfactory to us of their authority to act with the letter of transmittal.
All questions as to the validity, form, eligibility, including time of
receipt, and withdrawal of the tendered Original Notes will be determined by us
in our sole discretion. This determination will be final and binding. We reserve
the absolute right to reject any Original Notes not properly tendered or any
Original Notes our acceptance of which, in the opinion of counsel for us, would
be unlawful. We also reserve the right to waive any irregularities or conditions
of tender as to particular Original Notes. Our interpretation of the terms and
conditions of the exchange offer, including the instructions in the letter of
transmittal, will be final and binding on all parties. Unless waived, any
defects or irregularities in connection with tenders of Original Notes must be
cured within such time as we shall determine.
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None of us, the exchange agent or any other person shall be under any duty to
give notification of defects or irregularities with respect to tenders of
Original Notes, nor shall any of them incur any liability for failure to give
notification. Tenders of Original Notes will not be deemed to have been made
until irregularities have been cured or waived. Any Original Notes received by
the exchange agent that are not properly tendered and as to which the defects or
irregularities have not been cured or waived will be returned without cost by
the exchange agent to the tendering holders of Original Notes, unless otherwise
provided in the letter of transmittal, as soon as practicable following the
expiration date.
In addition, we reserve the right in our sole discretion to:
(a) purchase or make offers for any Original Notes that remain outstanding
subsequent to the expiration date or, as set forth under "--Conditions,"
to terminate the exchange offer in accordance with the terms of the
registration rights agreements; and
(b) to the extent permitted by applicable law, purchase Original Notes in
the open market, in privately negotiated transactions or otherwise. The
terms of any such purchases or offers may differ from the terms of the
exchange offer.
By tendering Original Notes pursuant to the exchange offer, each holder will
represent to us that, among other things,
(a) the New Notes acquired pursuant to the exchange offer are being obtained
in the ordinary course of business of such holder;
(b) the holder is not engaged in and does not intend to engage in a
distribution of the New Notes;
(c) the holder has no arrangement or understanding with any person to
participate in the distribution of such New Notes; and
(d) the holder is not our "affiliate," as defined under Rule 405 of the
Securities Act, or, if the holder is an affiliate, will comply with the
registration and prospectus delivery requirements of the Securities Act
to the extent applicable.
BOOK-ENTRY TRANSFER
We understand that the exchange agent will make a request promptly after the
date of this prospectus to establish accounts with respect to the Original Notes
at DTC for the purpose of facilitating the exchange offer, and upon the
establishment of those accounts, any financial institution that is a participant
in DTC's system may make book-entry delivery of Original Notes by causing DTC to
transfer the Original Notes into the exchange agent's account with respect to
the Original Notes in accordance with DTC's procedures for transfers. Although
delivery of the Original Notes may be effected through book-entry transfer into
the exchange agent's account at the depository trust company, an appropriate
letter of transmittal properly completed and duly executed with any required
signature guarantee, and all other required documents must in each case be
transmitted to and received or confirmed by the exchange agent at its address
set forth below on or prior to the expiration date, or, if the guaranteed
delivery procedures described below are complied with, within the time period
provided under the procedures. Delivery of documents to the depository trust
company does not constitute delivery to the exchange agent.
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GUARANTEED DELIVERY PROCEDURES
Holders who wish to tender their Original Notes and
(a) whose Original Notes are not immediately available or
(b) who cannot deliver their Original Notes, the letter of transmittal or
any other required documents to the exchange agent on or prior to the
expiration date, may effect a tender if:
(1) the tender is made through an eligible institution;
(2) on or prior to the expiration date, the exchange agent receives from
the eligible institution a properly completed and duly executed
Notice of Guaranteed Delivery, by facsimile transmission, mail or
hand delivery, setting forth the name and address of the holder of
the Original Notes, the certificate number or numbers of the Original
Notes and the principal amount of Original Notes tendered stating
that the tender is being made thereby, and guaranteeing that, within
three business days after the expiration date, the letter of
transmittal, or facsimile thereof, together with the certificate(s)
representing the Original Notes to be tendered in proper form for
transfer and any other documents required by the letter of
transmittal will be deposited by the eligible institution with the
exchange agent; and
(3) the properly completed and executed letter of transmittal, or
facsimile thereof, together with the certificate(s) representing all
tendered Original Notes in proper form for transfer and all other
documents required by the letter of transmittal are received by the
exchange agent within three business days after the expiration date.
WITHDRAWAL OF TENDERS
Except as otherwise provided in this prospectus, tenders of Original Notes
may be withdrawn at any time by or prior to 5:00 p.m., New York City time, on
the expiration date, unless previously accepted for exchange.
To withdraw a tender of Original Notes in the exchange offer, a written or
facsimile transmission notice of withdrawal must be received by the exchange
agent at its address set forth in this prospectus by 5:00 p.m., New York City
time, on the expiration date. Any such notice of withdrawal must:
(a) specify the name of the depositor, who is the person having deposited
the Original Notes to be withdrawn;
(b) identify the Original Notes to be withdrawn, including the certificate
number or numbers and principal amount of the Original Notes or, in the
case of Original Notes transferred by book-entry transfer, the name and
number of the account at DTC to be credited;
(c) be signed by the holder in the same manner as the original signature on
the letter of transmittal by which such Original Notes were tendered,
including any required signature guarantees, or be accompanied by
documents of transfer sufficient to have the trustee with respect to the
Original Notes register the transfer of such Original Notes into the name
of the depositor withdrawing the tender; and
(d) specify the name in which any such Original Notes are being registered
if different from that of the depositor.
All questions as to the validity, form and eligibility, including time of
receipt, of withdrawal notices will be determined by us, and our determination
will be final and binding on all parties. Any Original
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Notes so withdrawn will be deemed not to have been validly tendered for purposes
of the exchange offer and no New Notes will be issued with respect to the
Original Notes withdrawn unless the Original Notes so withdrawn are validly
retendered. Any Original Notes which have been tendered but which are not
accepted for exchange will be returned to their holder without cost to the
holder as soon as practicable after withdrawal, rejection of tender or
termination of the exchange offer. Properly withdrawn Original Notes may be
retendered by following one of the procedures described above under "Procedures
for Tendering" at any time on or prior to the expiration date.
CONDITIONS
Notwithstanding any other term of the exchange offer, we will not be
required to accept for exchange, or exchange, any New Notes for any Original
Notes, and may terminate or amend the exchange offer on or before the expiration
date, if the exchange offer violates any applicable law or interpretation by the
staff of the SEC.
If we determine in our reasonable discretion that the foregoing condition
exists, we may:
- refuse to accept any Original Notes and return all tendered Original Notes
to the tendering holders;
- extend the exchange offer and retain all Original Notes tendered prior to
the expiration of the exchange offer, subject, however, to the rights of
holders who tendered the Original Notes to withdraw their tendered
Original Notes; or
- waive such condition, if permissible, with respect to the exchange offer
and accept all properly tendered Original Notes which have not been
withdrawn.
If a waiver constitutes a material change to the exchange offer, we will
promptly disclose the waiver by means of a prospectus supplement that will be
distributed to the holders, and we will extend the exchange offer as required by
applicable law.
Pursuant to the registration rights agreement, we are required to use our
reasonable best efforts to file with the SEC a shelf registration statement with
respect to the Original Notes on or prior to the 90th day after the delivery of
a Shelf Notice as required pursuant to Section 2(c) of the Registration Rights
Agreement, and thereafter use our reasonable best efforts to cause the shelf
registration statement declared effective on or prior to the 150th day after the
filing date, if:
(a) the exchange offer is not permitted by law or applicable interpretations
of the staff of the SEC; or
(b) the exchange offer is not consummated within 180 days of the Issue Date;
or
(c) certain holders of unregistered New Notes so request; or
(d) in the case of any holder that participates in the exchange offer, such
holder does not receive New Notes on the date of the exchange that may be
sold without restriction under state and federal securities Laws (other
than due solely to the status of such holder as an affiliate of our) or
within the meaning of the Securities Act.
EXCHANGE AGENT
The Bank of New York has been appointed as exchange agent for the exchange
offer, and is also the trustee under the indenture under which the New Notes
will be issued. Questions and requests for
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assistance and requests for additional copies of this prospectus or of the
letter of transmittal should be directed to Enrique Lopez, addressed as follows:
For information by Telephone:
(212) 235-2360
<Table>
By Mail: By Hand or Overnight Delivery
The Bank of New York Service:
15 Broad Street The Bank of New York
16th Floor 15 Broad Street
New York, New York 10007 16th Floor
Attn: Enrique Lopez, Reorganization New York, New York 10007
Attn: Enrique Lopez, Reorganization
</Table>
By Facsimile Transmission:
(212) 235-2261
(Telephone Confirmation)
(212) 235-2360
FEES AND EXPENSES
We have agreed to bear the expenses of the exchange offer pursuant to the
registration rights agreement. We have not retained any dealer-manager in
connection with the exchange offer and will not make any payments to brokers,
dealers or others soliciting acceptances of the exchange offer. We, however,
will pay the exchange agent reasonable and customary fees for its services and
will reimburse it for its reasonable out-of-pocket expenses in connection with
providing the services.
The cash expenses to be incurred in connection with the exchange offer will
be paid by us. These expenses include fees and expenses of The Bank of New York
as exchange agent, accounting and legal fees and printing costs, among others.
ACCOUNTING TREATMENT
The New Notes will be recorded at the same carrying value as the Original
Notes as reflected in our accounting records on the date of exchange.
Accordingly, no gain or loss for accounting purposes will be recognized by us.
The expenses of the exchange offer and the unamortized expenses related to the
issuance of the Original Notes will be amortized over the term of the New Notes.
CONSEQUENCES OF FAILURE TO EXCHANGE
Holders of Original Notes who are eligible to participate in the exchange
offer but who do not tender their Original Notes will not have any further
registration rights, and their Original Notes will continue to be restricted for
transfer. Accordingly, such Original Notes may be resold only:
(a) to us, upon redemption of the Original Notes or otherwise;
(b) so long as the Original Notes are eligible for resale pursuant to
Rule 144A under the Securities Act to a person inside the United States
whom the seller reasonably believes is a
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qualified institutional buyer within the meaning of Rule 144A, in a
transaction meeting the requirements of Rule 144A;
(c) in accordance with Rule 144 under the Securities Act, or under another
exemption from the registration requirements of the Securities Act, and
based upon an opinion of counsel reasonably acceptable to us;
(d) outside the United States to a foreign person in a transaction meeting
the requirements of Rule 904 under the Securities Act; or
(e) under an effective registration statement under the Securities Act;
in each case in accordance with any applicable securities laws of any state of
the United States.
REGULATORY APPROVALS
We do not believe that the receipt of any material federal or state
regulatory approval will be necessary in connection with the exchange offer,
other than the effectiveness of the exchange offer registration statement under
the Securities Act.
OTHER
Participation in the exchange offer is voluntary and holders of Original
Notes should carefully consider whether to accept the terms and condition of
this exchange offer. Holders of the Original Notes are urged to consult their
financial and tax advisors in making their own decisions on what action to take
with respect to the exchange offer.
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BUSINESS
We are one of the leading manufacturers and suppliers of class rings,
yearbooks, graduation products, achievement publications and recognition and
affinity jewelry in the United States. Many of our products have leading market
share positions that have been developed over many years and are marketed under
well-known names such as ARTCARVED, BALFOUR, KEEPSAKE, TAYLOR PUBLISHING and
WHO'S WHO AMONG AMERICAN HIGH SCHOOL STUDENTS. Our BALFOUR and ARTCARVED brand
names, for example, have been identified with class rings for over 85 years and
45 years, respectively, and the TAYLOR PUBLISHING brand name has been identified
with yearbooks for over 60 years. We distribute our products through various
distribution channels, including directly to students and through college
bookstores, mass merchandisers, approximately 5,100 independent jewelry stores,
many of the nation's largest jewelry chains and direct marketing. Based on the
number of units sold, we believe that we were the second largest provider of
class rings and yearbooks in the United States during the 2000-2001 school year,
accounting for approximately 35% and 20% of these markets, respectively.
Our two principal business segments are: scholastic products and recognition
and affinity products. Our scholastic products segment consists of three
principal categories: class rings, yearbooks and graduation products, the last
of which includes fine paper products and graduation accessories. The scholastic
products segment serves the high school, college and, to a lesser extent, the
elementary and junior high school markets and accounted for approximately 88% of
our net sales for the twelve months ended November 24, 2001.
Recognition and affinity products include publications that recognize the
academic achievement of top students at the high school and college levels, as
well as the nation's most inspiring teachers, jewelry commemorating family
events such as the birth of a child, fan affinity jewelry and related products
and professional sports championship rings such as World Series, Super Bowl and
Stanley Cup rings. This segment accounted for approximately 12% of our net sales
for the twelve months ended November 24, 2001.
In December 1996, Castle Harlan, Inc., a leading New York private equity
firm, through its affiliate CHPII, acquired substantially all of the ArtCarved
operations of CJC Holdings, Inc. and the Balfour operations of the L.G. Balfour
Company, Inc. Castle Harlan's investment strategy has focused on building a
scale competitor in the commemorative products industry that can provide an
extensive range of products and services. On June 27, 2000, American Achievement
Corporation was formed as a holding company for the CBI operations and future
acquisitions. Since then, we have made several strategic acquisitions and have
introduced new, complementary products across our brands and product lines to
enhance our market position. The following table summarizes our history and
acquisition rationale.
<Table>
<Caption>
COMPANY ACQUIRED ESTABLISHED ACQUISITION RATIONALE
- -------------------- -------------- ----------- ----------------------------------------
Balfour December 1996 1913 Established a leading position in the
high school and college class ring
markets and in the graduation products
market, with a network of independent
sales representatives who market
products directly in-school. Also
combined with ArtCarved to provide more
efficient ring manufacturing.
</Table>
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<Table>
<Caption>
COMPANY ACQUIRED ESTABLISHED ACQUISITION RATIONALE
- -------------------- -------------- ----------- ----------------------------------------
ArtCarved December 1996 1954 Combined with Balfour to further
strengthen our position in both the high
school and college class rings markets
and to expand distribution to retail
stores and college bookstores.
Taylor Publishing July 2000 1939 Established a leadership position as a
publisher of scholastic yearbooks. The
addition of Taylor created a scale
competitor to better capitalize on
opportunities in the scholastic products
market and provided us with significant
cross-selling opportunities.
ECI March 2001 1967 Established a leadership position in the
achievement directory publishing niche.
The acquisition also expanded our
product offerings and further solidified
our position in the high school and
college commemorative products markets.
</Table>
BUSINESS SEGMENTS
The following table presents an overview of our business segments, including
the pro forma net sales of each segment for the twelve months ended
November 24, 2001.
<Table>
<Caption>
PRIMARY PRODUCT LINES AND PRINCIPAL
BUSINESS SEGMENT BRAND NAMES
- ---------------------------------- ------------------------------------------------------------
SCHOLASTIC PRODUCTS
($258.9 MILLION)
Class rings ARTCARVED, BALFOUR, CLASS RINGS, LTD., KEYSTONE, MASTER
CLASS RINGS and R. JOHNS high school class rings; ARTCARVED
and BALFOUR college class rings.
Yearbooks Taylor Publishing yearbooks primarily for high schools and
colleges.
Graduation products ARTCARVED (college) and BALFOUR (high school) graduation
products, including customized graduation announcements,
name cards, thank-you stationery, diplomas, mini-diplomas,
certificates, appreciation gifts, diploma covers and other
fine paper accessory items.
RECOGNITION AND
AFFINITY PRODUCTS
($36.2 MILLION)
Achievement publications WHO'S WHO AMONG AMERICAN HIGH SCHOOL STUDENTS, THE NATIONAL
DEAN'S LIST and WHO'S WHO AMONG AMERICA'S TEACHERS.
Jewelry CELEBRATIONS OF LIFE, GENERATIONS OF LOVE and NAMESAKE
personalized family jewelry; BALFOUR SPORTS licensed
consumer sports jewelry; and BALFOUR and KEEPSAKE
professional sports championship jewelry.
</Table>
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INDUSTRY OVERVIEW
SCHOLASTIC PRODUCTS
We estimate that the size of the U.S. scholastic products market, excluding
photography, was approximately $1.3 billion during the 2000-2001 school year.
The principal products in this category are class rings and yearbooks, which we
estimate each accounted for approximately $500 million of the total. The
remainder consisted of graduation products. Due to the pride and sentiment
associated with products such as class rings, yearbooks, graduation products and
achievement publications, we believe that revenues are driven more by
demographics than by the overall state of the economy, thus lessening the impact
of economic cycles.
Over the next several years, the U.S. Department of Education projects that
the number of U.S. high school graduates and college graduates earning bachelor
degrees will increase at a 1.32% and 1.43% compounded annual growth,
respectively, between 2000 and 2008. We believe that these projections reflect a
stable and strong foundation for continued growth in the scholastic products
industry.
<Table>
<Caption>
BACHELOR DEGREES
HIGH SCHOOL GRADUATES GRANTED
YEAR (IN THOUSANDS) (IN THOUSANDS)
---- ---------------------------- ----------------------------
1997* 2,612 1,173
1998* 2,704 1,184
1999* 2,762 1,186
2000 2,820 1,193
2001 2,820 1,209
2002 2,849 1,227
2003 2,916 1,241
2004 2,921 1,251
2005 2,929 1,275
2006 2,986 1,294
2007 3,054 1,318
2008 3,132 1,337
</Table>
Source: U.S. Department of Education.
* Actual
Scholastic products are differentiated primarily on the basis of quality,
marketing, customer service and, to a lesser extent, price. We estimate that
approximately 75% of high school class rings are sold directly to students
through independent sales representatives and 25% are sold through retail
channels. College class rings are sold primarily through college bookstores.
Yearbooks are sold directly to schools under exclusive annual contracts through
independent sales representatives. Graduation products are sold primarily
through independent sales representatives directly to the student at the high
school level and through bookstores at the college level.
RECOGNITION AND AFFINITY PRODUCTS
The market for recognition and affinity products is highly fragmented and
consists of several niche markets. Each niche tends to be served by a small
number of companies. However, we have limited
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competition for our student achievement publications, with only a small
percentage of the high school and college students included in our publications
also included in the publications of our competitors. We have no direct
competition in the teacher recognition market. We believe that the market for
recognition and affinity products is large and capable of significant growth
since most of the niches have a large target audience that is underserved. The
manner in which recognition and affinity products are differentiated varies by
product category, although quality and selection generally are the two most
important factors. The channels through which recognition products are sold also
vary. Achievement publications are sold directly to consumers. Other recognition
and affinity products are sold through numerous channels, including retail
stores, direct marketing and catalogs.
COMPETITIVE STRENGTHS
LEADING MARKET POSITIONS AND WELL-KNOWN BRAND NAMES. We have a leading
market position in each of our principal business lines. These market positions
have been built over many years of delivering quality products and service to
our customers. Based on the number of units sold, we believe that we were the
second largest provider of class rings and yearbooks in the United States during
the 2000-2001 school year, accounting for approximately 35% and 20% of these
markets, respectively. In addition, we believe that we had the leading market
share in college class ring sales and in high school class ring sales through
retail stores during the 2000-2001 school year. We also have the leading market
positions in achievement publications for the high school, college and teacher
markets. We market our products under well-established brand and trade names
including ARTCARVED, BALFOUR, KEEPSAKE, TAYLOR PUBLISHING and WHO'S WHO AMONG
AMERICAN HIGH SCHOOL STUDENTS. Our BALFOUR and ARTCARVED brand names, for
example, have been identified with class rings for over 85 years and 45 years,
respectively, and the TAYLOR PUBLISHING brand name has been identified with
yearbooks for over 60 years.
POSITIVE INDUSTRY FUNDAMENTALS. The market for scholastic products
historically has been characterized by stable revenues and cash flows. Due to
the pride and sentiment associated with products such as class rings, yearbooks,
graduation products and achievement publications, we believe that revenues are
driven more by demographics than by the overall state of the economy, thus
lessening the impact of economic cycles. The U.S. Department of Education has
projected that the number of high school graduates and college graduates earning
bachelor degrees will increase at a 1.32% and a 1.43% compound annual growth
rate, respectively, between 2000 and 2008. We believe that these projections
reflect a strong foundation for continued growth in the scholastic products
industry and in the market for our achievement publications.
WELL-ESTABLISHED INFRASTRUCTURE. Our business consists of an extensive
network of sale representatives and a large base of fixed assets that would be
very costly and time consuming for potential new competitors to replicate. We
currently have over 210 independent high school class ring sales representatives
and over 200 independent yearbook sales representatives with average tenures at
our company of approximately 14 and 11 years, respectively. The longevity of our
sales force has resulted in strong relationships with many of our customers and
has contributed to average school retention rates in excess of 94% for high
school class rings and 92% for yearbooks over the past five years. The
manufacturing of class and specialty rings and publishing of yearbooks require a
significant initial capital investment. We also maintain an inventory of more
than 650,000 unique proprietary ring dies. In addition, both products involve a
high degree of specialized skills, such as the creation of new ring dies and
yearbook layout.
LEADING RETAIL STORE PRESENCE. We believe that our strong retail
distribution network for class rings distinguishes us from our competitors. We
believe that we are the leading supplier of high school class rings to retail
stores, where we estimate that 25% of all high school rings are sold. This
distribution
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channel enables us to sell high school rings to students at schools where our
representatives do not have relationships and to students who did not purchase a
class ring at school. We distribute our class rings through many types of retail
stores, including mass merchandisers, approximately 5,100 independent jewelry
stores and many of the nation's largest jewelry chains. For example, we sell our
high school class rings in Wal-Mart, Zales, Gordons and Sterling.
EXPERIENCED MANAGEMENT TEAM WITH A PROVEN TRACK RECORD. We are led by an
experienced management team and our seven senior officers have an average of
20 years of industry experience. Our management team has a proven track record
of achieving growth, developing and maintaining strong relationships with our
customers, enhancing the appeal of our products, successfully integrating
business lines and introducing new products to the market.
BUSINESS STRATEGY
We seek to increase revenues and operating efficiencies in both our
scholastic and recognition and affinity products segments. We intend to achieve
these objectives through the following strategies:
LEVERAGE WELL-KNOWN BRANDS. Leveraging our well-established brands, such as
ARTCARVED, BALFOUR and TAYLOR PUBLISHING, allows us to grow revenues and
introduce complementary products. For example, we introduced a private label cap
and gown product line under the BALFOUR name and now provide a full array of
graduation products for the high school and college markets. In addition, we
intend to further grow our CELEBRATIONS OF LIFE family jewelry brands by
increasing the number of retail outlets that we sell through and through product
extensions, including baby rings for scrapbooks, grandmother's products such as
pins and pendants, daughter's rings and sweet 16 remembrances.
CAPITALIZE ON CROSS-SELLING OPPORTUNITIES. The recent successful
integration of our ring and yearbook operations provides us with significant
cross-selling opportunities. During the 2000-2001 school year, the first full
school year since our purchase of Taylor, out of our approximately 6,500 school
class ring accounts and 7,400 school yearbook accounts, in each instance
excluding colleges, only 24% of these schools purchased both class rings and
yearbooks from us. We intend to leverage the strong, long-standing relationships
that many of our independent sales representatives have cultivated with their
accounts to sell additional products that we offer. To implement the foregoing,
we offer our sales representatives incentives to promote the cross-selling of
our products in certain markets. We also have begun to train our independent
sales representatives to sell multiple product lines.
EXPAND MARKET PENETRATION. The recent successful integration of our ring
and yearbook operations has also positioned us to expand into new geographic
markets and increase in-school penetration. We intend to increase marketing of
our products in the western and midwestern United States and recently added two
new field sales managers in these targeted regions. We also intend to take steps
to increase unit sales of both rings and yearbooks at schools that we service.
During the 2000-2001 school year, we estimate that only slightly more than half
of high school students purchased class rings and only slightly more than a half
of high school students purchased yearbooks. Additionally, we are providing
greater marketing support to our sales representatives, as well as to students
and faculty involved in yearbook sales.
ENHANCE CORE PRODUCTS. We frequently enhance our product lines to increase
sales. For example, during the 2000-2001 school year, we successfully launched
our BALFOUR IDENTITY high school class ring line, which is based on contemporary
teen tastes and preferences. We believe that the new designs will enhance buy
rates due to their more appealing styles. We also have invested in new
technologies that we believe will enable us to increase ring customization and
personalization. In addition, we have enhanced our state-of-the-art color
printing press equipment and related technology for yearbook
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publishing. We believe that as a result of our on-going efforts to enhance the
quality of our color yearbooks, schools will add more color pages, which will
increase both the average contract amount and student buy rates.
INCREASE OPERATING EFFICIENCIES. We have implemented several initiatives
designed to increase our operating efficiencies. For example, as a result of the
recent integration of our ring and yearbook operations, we have eliminated
overlapping jobs. In addition, the state-of-the-art tooling we use in our new
BALFOUR IDENTITY high school class ring line has significantly reduced unit
production costs. Our installation of new color printing press equipment and
related technology has significantly shortened the production run cycles for our
yearbooks, which reduces printing costs. We intend to implement additional
initiatives to further enhance our profitability and operating efficiencies. For
example, we intend to increase the utilization of our new El Paso, Texas ring
manufacturing facility, allowing us to benefit from lower labor costs, and to
further utilize automation and digital imaging in yearbook production.
CAPITALIZE ON ON-LINE OPPORTUNITIES. We believe that the Internet provides
a strong complement to our existing distribution channels. For example, we are
developing a website that will enable a student to design a class ring, view it
virtually and print his or her order form, which can then be taken to an
on-campus sales representative or retailer to complete the purchase. We also are
using the Internet to facilitate yearbook preparation and intend to introduce
on-line page layout submission and proofing during 2002 for full implementation
during 2003. We recently launched an enhanced website that enables students to
purchase copies of our achievement publications and related products
electronically. During 2002, this website will enable students and teacher
nominees for these publications to also submit biographies on-line.
OUR SCHOLASTIC PRODUCTS
Our scholastic products business segment consists of three principal
categories: class rings, yearbooks and graduation products, the last of which
includes fine paper products and graduation accessories. Sales in this segment
were approximately $258.9 million and comprised approximately 88% of our total
net sales for the twelve months ended November 24, 2001.
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The table below sets forth our principal product lines, brand names and the
distribution channels through which we sell our scholastic products.
<Table>
<Caption>
PRODUCT LINES TRADE OR BRAND NAMES DISTRIBUTION CHANNEL
- ------------------------------------- ---------------------------- ---------------------------------------
High school class rings BALFOUR In-school
ARTCARVED Independent jewelry stores and jewelry
chains
R. JOHNS Independent jewelry stores
KEYSTONE Mass merchandisers
CLASS RINGS, LTD.
MASTER CLASS RINGS
College class rings ARTCARVED College bookstores and direct marketing
BALFOUR College bookstores
Yearbooks TAYLOR PUBLISHING In-school
High school graduation products BALFOUR In-school
College graduation products ARTCARVED College bookstores
</Table>
CLASS RINGS
We manufacture class rings for high school and college students and, to a
lesser extent, junior high school students. Our rings are marketed under some of
the most recognized and respected brand names in the industry, including
ARTCARVED and BALFOUR. Our BALFOUR and ARTCARVED brand names have been
identified with class rings for over 85 years and 45 years, respectively. During
the 2000-2001 school year, we sold rings to students at over 8,100 schools.
Based on the number of units sold, we believe that we accounted for
approximately 35% of the U.S. class ring market during the 2000-2001 school
year. In addition, we believe that we had the leading market share in class ring
sales through retail stores during that same period. Our school retention rates
have averaged in excess of 94% for high school class rings over the past five
years.
We offer over 100 styles of class rings ranging from traditional to highly
stylish and fashion-oriented designs. Our rings are available in precious or
nonprecious metal, and most are available with a choice of more than 50
different types of stones in each of several different cuts. More than 400
designs can be placed on or under the stone and emblems of over 100 activities,
sports or achievements can appear on the side of the rings in addition to school
crests and mascots. As a result, students can design highly personal rings to
commemorate their school experience.
We manufacture all of our rings at our own facilities. Each ring is custom
manufactured. We maintain an inventory of more than 650,000 unique proprietary
ring dies that would be expensive and time consuming to replicate. The
production process takes approximately two to eight weeks from receipt of the
customer's order to product shipment, depending on style, option selections and
new or custom tooling requirements. We use computer aided design software to
quickly and cost-effectively convert new custom designs such as school seals,
mascots and activities into physical tools capable of producing rings in large
quantities. Rings are produced only upon the receipt of a customer order and
deposit, which reduces credit risk.
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During the 2000-2001 school year, we launched our BALFOUR IDENTITY high
school class ring line, which is based on contemporary teen tastes and
preferences. We believe that the new designs will enhance buy rates due to their
more appealing styles. This product line also incorporates state-of-the-art
tooling into its production platform, which has significantly reduced unit
production costs. The same design strategy and production process will be
extended to the remainder of the BALFOUR product line, with the new designs and
tooling available during the 2002-2003 school year.
YEARBOOKS
We sell yearbooks primarily to high school and college students. We also
publish specialty military yearbooks, which, for example, commemorate naval
tours of duty at sea, and yearbooks for elementary and junior high schools. Our
TAYLOR PUBLISHING brand name was established in 1939. During the 2000-2001
school year, we sold yearbooks to over 7,800 schools and believe that we were
the second largest yearbook publisher in the United States, with a 20% market
share based on unit volume. Our school retention rates have averaged in excess
of 92% for yearbooks over the past five years.
We publish yearbooks in our own facilities and believe that we are a
technology leader. Since 1994, we have made significant expenditures on
proprietary software and hardware to support electronic platforms for creating,
transmitting and managing yearbook production and printing technology. We also
offer full production support for off-the-shelf desktop publishing tools such as
PageMaker and Quark Xpress. In addition, by upgrading our printing presses and
further integrating digital technology to, among other things, increase the
speed of output and automatically monitor ink flow and control color
composition, we have been able to enhance print quality and reduce manufacturing
costs. The foregoing technology upgrades and enhancements have enabled us to
reduce manufacturing costs and improve on-time delivery, performance and print
quality.
GRADUATION PRODUCTS
Graduation products include graduation announcements, name cards, thank-you
stationery, memory books, diplomas, certificates, appreciation gifts, diploma
covers and other graduation accessory items. All of our graduation products are
customized in varying degrees and therefore have short production runs and
cycles. Graduation products are manufactured in our own facilities. These
products are offered through our independent high school class ring sales
representatives and college bookstores.
We have enhanced our college website to enable students to order graduation
products on-line. We believe that, over time, this will increase sales of our
graduation products and, in particular, personalized college announcements that
include a student's name, degree and other personal information in the text of
the announcement. We also intend to leverage our existing channels of
distribution and, in particular, our presence in college bookstores to further
increase sales of these products.
OUR RECOGNITION AND AFFINITY PRODUCTS
Our recognition and affinity products segment consists of two categories:
achievement publications and recognition and affinity jewelry. The latter
category includes affinity group, personalized family, fan affinity sports and
professional sports championship jewelry. Sales in this segment were
approximately $36.2 million and comprised approximately 12% of our total net
sales for the twelve months ended
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November 24, 2001. The table below sets forth the principal product lines and
brand names of our recognition and affinity products and the distribution
channels through which we sell these products.
<Table>
<Caption>
PRODUCT LINES TRADE OR BRAND NAMES DISTRIBUTION CHANNEL
- ----------------------------- ----------------------------- -----------------------------
Achievement Publications WHO'S WHO AMONG AMERICAN HIGH Direct marketing
SCHOOL STUDENTS
THE NATIONAL DEAN'S LIST
WHO'S WHO AMONG AMERICA'S
TEACHERS
Recognition and Affinity
Jewelry:
Affinity Group Jewelry KEEPSAKE Direct to consumer
R. JOHNS
Personalized Family CELEBRATIONS OF LIFE Independent jewelry stores
Jewelry
GENERATIONS OF LOVE Jewelry chains and mass
merchandisers
NAMESAKE Mass merchandisers
Fan Affinity Sports BALFOUR SPORTS Mass merchandisers and
Jewelry catalog
Professional Sports BALFOUR Direct to consumer
Championship Jewelry
</Table>
ACHIEVEMENT PUBLICATIONS
We produce the following three publications:
WHO'S WHO AMONG AMERICAN HIGH SCHOOL STUDENTS. First published in 1967,
this annual publication is the largest academic achievement publication in the
nation honoring high-achieving high school students. The 1st edition recognized
approximately 13,000 students from approximately 4,000 high schools. The current
35th edition honors approximately 800,000 students, from freshmen through
seniors. Nominees represent over 22,000 of the nation's approximately 24,000
private, public and parochial high schools on the basis of academic achievement,
class rank and extracurricular activities. We believe that more than 4,500,000
students are eligible for inclusion in this publication; thus we believe that we
can substantially increase sales of this publication by further increasing the
number of students nominated.
THE NATIONAL DEAN'S LIST. First published in 1978, this publication is the
largest annual recognition publication in the nation honoring exceptional
college students. The 1st edition recognized over 25,000 students from
approximately 700 universities. The most recent 24th edition honors over 142,000
high-achieving students, representing in excess of 2,500 colleges and
universities throughout the country.
WHO'S WHO AMONG AMERICA'S TEACHERS. First published in 1990, this
publication pays tribute to the country's most inspiring teachers, who are
nominated for inclusion by current and/or former WHO'S WHO high school students.
Published every two years, the 6th edition was published in 2000 and honored
approximately 130,000 outstanding teachers.
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We also sell related products consisting of plaques, certificates, gold and
silver pins and charms, mugs, key chains, paper weights and other items
commemorating a student's or teacher's inclusion in one of our achievement
publications. The primary customer base for our achievement publications and
related products are the students and teachers featured in the publications and
their families.
We have an established network of nomination sources built up over
30 years, which we utilize to recognize students and teachers from the majority
of the private, public and parochial schools in the country. Students and
teachers are not required to purchase publications in order to be included in
them. Printing for our achievement publications is outsourced.
RECOGNITION AND AFFINITY JEWELRY
Recognition and affinity jewelry consist of the following product
categories:
AFFINITY GROUP JEWELRY. Affinity group jewelry is sold to members of large
groups and associations. The jewelry features emblems of, and otherwise
commemorates accomplishments within, the group. For example, through our
KEEPSAKE brand, we provide affinity ring awards to the American Bowling
Congress, including championship rings for bowlers who score a perfect "300"
game. Through our R. JOHNS brand, we provide affinity rings to military
personnel that recognize affiliation and completion of specialized training
ranging from basic training to special forces.
PERSONALIZED FAMILY JEWELRY. Our family jewelry products include rings
commemorating children's birth dates, which feature a level of personalization,
such as birthstones and names, that distinguishes us from our competitors. We
also sell other personalized jewelry, such as necklaces and bracelets, designed
to commemorate family events. We began our family jewelry business in 1997 and,
by 2001, we had grown this business to $8.5 million in net sales by leveraging
these products through our existing channels of distribution. We intend to
further grow our family jewelry business through product extensions, including
baby rings for scrapbooks, grandmother's products such as pins and pendants,
daughter's rings and sweet 16 memorabilia. We provide personalized family
jewelry under our CELEBRATIONS OF LIFE, GENERATIONS OF LOVE and NAMESAKE brand
names.
FAN AFFINITY SPORTS JEWELRY. We produce a variety of team affiliation
products. For example, we manufacture BALFOUR SPORTS brand National Football
League rings, pendants, paperweights and coasters containing team logos, mascots
and colors.
PROFESSIONAL SPORTS CHAMPIONSHIP JEWELRY. We provide sports championship
jewelry for professional teams and their members and have, for example, produced
several Super Bowl, Stanley Cup and World Series rings, including the rings for
the New York Yankees in 1996, 1998, 1999 and 2000 and the 1999 Japanese World
Series ring. We provide sports championship jewelry under the BALFOUR brand.
SALES AND MARKETING
We have over 210 independent high school class ring and over 200 independent
yearbook sales representatives, with an average tenure with our company of
approximately 14 and 11 years, respectively. We also have approximately 30
employee college class ring sales representatives. We compensate our independent
sales representatives on a commission basis. Most independent sales
representatives also receive a monthly draw against commissions earned, although
all expenses, including promotional materials made available by us, are the
responsibility of the representative. Our independent sales representatives
operate under exclusive contracts that contain non-compete arrangements.
Employee sales representatives receive a combination of salary and sales
incentives.
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We support our sales efforts through a variety of marketing programs that
include a combination of national, regional and local advertising, local co-op
advertising and direct marketing. In-school representatives are provided with a
variety of promotional materials and posters, customizable CD-ROMs, as well as
product literature and samples. In addition, we assist schools in their internal
yearbook selling process by promoting entrepreneurial behavior among students.
For example, we provide students and faculty with marketing tools and tips such
as posters, banners, cafeteria tray liners, parent mailers and postcard
reminders, all of which are focused on promoting the sale of yearbooks to the
student body. In our retail channels, we feature in-store displays, counter
cards and other marketing materials.
At the high school level, class rings are sold through two channels of
distribution: independent sales representatives selling directly to students and
retail stores, which include independent jewelry stores, jewelry chains and mass
merchandisers. We believe that we are the leading supplier of high school class
rings to retail stores. Our high school class rings are sold by approximately
5,100 independent jewelry retailers, many of the nation's largest jewelry
chains, including Zales, Gordons and Sterling, and by mass merchants, including
Wal-Mart. We sell different brands and product lines in retail stores in order
to enable them to differentiate their products from those sold by us directly to
students at schools. College rings are sold primarily through college bookstores
by our employee sales representatives. Historically, college bookstores have
been owned and operated by academic institutions. Over the last several years,
an increasing number of college bookstores have been leased to contract
operators, primarily Barnes and Noble Bookstores and Follett Corporation, with
which we have longstanding relationships. Decisions to include our products are
made on a national basis by the bookstore operator.
Yearbooks are produced under an exclusive contract with the school for the
academic year and are sold directly to students by the school. Under the terms
of the contract, the school agrees to pay us a base price for producing the
yearbook, which often increases before production as a result of enhancements to
the contract specifications, such as additional color pages. Our independent
yearbook sales representatives call on schools at the contract stage.
Thereafter, they coordinate between the school's yearbook committee and our
customer service and plant employees to ensure satisfactory quality and service.
We have introduced the SmartPay-Registered Trademark- program, which is aimed at
increasing in-school penetration by drawing parents directly into the yearbook
purchase process. In partnership with the school, we provide yearbook
"expression of interest" cards that include home contact information. The
SmartPay service then invoices the parents for the yearbook, as well as making
them aware of upgrade options. In schools utilizing the SmartPay program for the
first time, unit sales have averaged 23% higher than in the prior year.
Graduation products are sold directly to students through our network of
independent high school class ring sales representatives and in college
bookstores through our network of employee sales representatives. Achievement
publications are sold through direct marketing. Other affinity products are sold
through a variety of distribution channels, including team stores, catalogs and
retail stores. These products are sold to wholesale accounts through employee
sales representatives.
INTELLECTUAL PROPERTY
We have trademarks, patents and licenses that in the aggregate are an
important part of our business. However, we do not regard our business as being
materially dependent upon any single trademark, patent or license. We have
trademark registration applications pending and intend to pursue other
registrations as appropriate to establish and preserve our intellectual property
rights.
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We market our products under many trademarked brand names, some of which
rank among the most recognized and respected names in the jewelry industry,
including ARTCARVED, BALFOUR, CELEBRATIONS OF LIFE, CLASS RINGS, LTD.,
GENERATIONS OF LOVE, KEEPSAKE, KEYSTONE, MASTER CLASS RINGS, NAMESAKE, R. JOHNS,
TAYLOR PUBLISHING, THE NATIONAL DEAN'S LIST, WHO'S WHO AMONG AMERICAN HIGH
SCHOOL STUDENTS and WHO'S WHO AMONG AMERICA'S TEACHERS. Generally, a trademark
registration will remain in effect so long as the trademark remains in use by
the registered holder and any required renewals are obtained. We also own
several patented ring designs and business process patents. We also have
non-exclusive licensing arrangements with the National Football League and
numerous colleges and universities under which we have the right to use the name
and other trademarks and logos of the NFL and those schools, respectively, on
our products.
COMPETITION
SCHOLASTIC PRODUCTS
The class ring, yearbook and graduation products markets are highly
concentrated and consist primarily of a few large national participants. We
believe that we are the second largest competitor nationally within the
scholastic products market (excluding photography). Our principal competitors in
the class ring market are Jostens, Inc. and Herff Jones, Inc., which compete
with us nationally across all product lines. Our principal competitors in the
yearbook and graduation products markets are Jostens, Herff Jones and Walsworth
Publishing Company. All competitors in the scholastic products industry compete
primarily on the basis of quality, marketing, customer service and, to a lesser
extent, price.
RECOGNITION AND AFFINITY PRODUCTS
We have limited competition for our student achievement publications, with
only a small percentage of the high school and college students included in our
publications also included in the publications of our competitors. We have no
direct competition in the teacher recognition market. Our affinity group jewelry
products, fan affinity sports jewelry and products and our professional sports
championship jewelry businesses compete with Jostens and, to a lesser extent,
with various other companies. Our personalized family jewelry products compete
mainly with A&A Jewelry and Bogarz. We compete with our affinity product
competitors primarily on the basis of quality, marketing, customer service and
price.
RAW MATERIALS AND SUPPLIERS
The principal raw materials that we purchase are gold and precious,
semi-precious and synthetic stones that we use in our class rings and jewelry
and paper and ink that we use in our yearbook and graduation products. Our raw
materials are purchased from multiple suppliers at market prices, except that we
purchase substantially all synthetic and semi-precious stones from a single
supplier with multiple plants, which we believe supplies substantially all of
these types of stones to almost all of the class ring manufacturers in the
United States. Synthetic and semi-precious stones are available from other
suppliers, although switching to these suppliers may result in additional costs
to us.
We periodically reset our prices to reflect the then current prices of raw
materials. In addition, we engage in various hedging transactions to reduce the
effects of fluctuations in the price of gold. We also purchase paper on an
annual commitment basis so that we are able to estimate yearbook costs with
greater certainty.
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ENVIRONMENTAL
We are subject to federal, state and local laws, ordinances and regulations
that establish various health and environmental quality standards and provide
penalties for violations of those standards. Past and present manufacturing
operations subject us to environmental laws that regulate the use, handling and
contracting for disposal or recycling of hazardous or toxic substances, the
discharge of particles into the air and the discharge of process wastewaters
into sewers. We believe that we are in substantial compliance with all material
environmental laws. We believe that we have adequate environmental insurance and
indemnities to sufficiently cover any liabilities that may exist and that we do
not currently face environmental liabilities that could have a material adverse
affect on our financial position or results of operations.
BACKLOG
Because of the nature of our business, generally all orders (except
yearbooks) are filled between two and eight weeks after the time of placement.
We enter into yearbook contracts several months prior to delivery. While the
base prices of the yearbooks are established at the time of order, the final
prices of the yearbooks are often not calculated at that time since the content
of the books generally change prior to publication. We estimate (calculated on
the basis of the base price of yearbooks ordered) that the backlog of orders
related to continuing operations was approximately $94.5 million as of both
November 24, 2001 and November 25, 2000, almost exclusively related to student
yearbooks. We expect substantially all of the backlog at November 24, 2001 to be
filled in fiscal 2002.
EMPLOYEES
Given the seasonality of our business, the number of our employees
fluctuates throughout the year, with the number typically being highest during
September through May and lowest from June to August. As of November 24, 2001,
we employed approximately 2,525 employees.
Most of our hourly employees are members of two separate unions, although we
believe that a significant number of these employees are non-dues paying
members. Most of our hourly production and maintenance employees located at our
Austin, Texas manufacturing facility are represented by the United Brotherhood
of Carpenters and Joiners Union, and most of our hourly employees located at our
Dallas, Texas manufacturing facility are represented by the Graphics
Communication International Union. In June 2000, our subsidiary CBI and the
United Brotherhood of Carpenters and Joiners Union signed a collective
bargaining agreement that will expire in June 2003, and, in July 2000 and
February 2001, Taylor and the Graphics Communication International Union signed
two collective bargaining agreements that will expire in July 2003 and
February 2004, respectively.
We have not experienced any significant work stoppages or employee-related
problems that had a material impact on our operations. We consider our
relationship with our employees to be good.
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PROPERTIES
Our principal headquarters and executive offices are located at 7211 Circle
S Road, Austin, Texas. We believe that our facilities are suitable for their
purpose and adequate to support our business. The extent of utilization of
individual facilities varies due to the seasonal nature of our business.
A summary of the physical properties that we use are as follows:
<Table>
<Caption>
APPROXIMATE
LOCATION TYPE OF PROPERTY LEASED OR OWNED SQUARE FOOTAGE
- --------------------- ---------------------------------- ----------------- -----------------
Austin, TX Corporate Headquarters Owned 20,000
Austin, TX Jewelry Manufacturing Owned 99,830
Austin, TX Warehouse Facility Leased 30,600
Dallas, TX Administration (Yearbooks), Owned 320,000
Pre-Press, Press, Bindery
El Paso, TX Pre-Press Leased 52,000
El Paso, TX Jewelry Manufacturing Leased 20,000
San Angelo, TX Pre-Press, Press, Bindery Leased 78,000
Malverne, PA Press, Bindery Leased 128,000
Louisville, KY Fine Paper Manufacturing Leased 100,000
Lake Forest, IL Administration (Achievement Leased 9,000
Publications)
Juarez, Mexico Jewelry Manufacturing Leased 20,000
</Table>
LEGAL PROCEEDINGS
There are no material pending legal proceedings to which we are a party or
to which any of our properties are subject. We monitor all claims, and we accrue
for those, if any, which management believes are probable of payment.
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MANAGEMENT
The following table sets forth certain information regarding our directors,
executive officers and other senior officers. Our directors are elected by the
shareholders at our annual meeting and serve until the next annual meeting and
the election and qualification of their successors.
<Table>
<Caption>
NAME AGE POSITION
- ---- -------- ------------------------------------------
David G. Fiore............................ 54 President, Chief Executive Officer and
Director
Sherice P. Bench.......................... 42 Chief Financial Officer, Secretary and
Treasurer
Charlyn A. Cook........................... 53 Senior Vice President--Jewelry Operations
Parke H. Davis............................ 59 Senior Vice President--Retail Sales
Donald A. Percenti........................ 45 Senior Vice President--Scholastic Products
Timothy Wright............................ 42 Vice President--Print Operations
John K. Castle............................ 61 Director
David B. Pittaway......................... 50 Director
William M. Pruellage...................... 28 Director
Edward O. Vetter.......................... 81 Director
Zane Tankel............................... 59 Director
</Table>
DAVID G. FIORE became our President and Chief Executive Officer and a
director in July 2000, and since August 1999 had been President and CEO and a
director of CBI, one of our subsidiaries. Prior to joining CBI, Mr. Fiore was
the President and CEO of Reliant Building Products, Inc. from 1992 to 1998. From
1988 to 1992, Mr. Fiore was the President and CEO of CalTex Industries, Inc. and
held the positions of Division General Manager, VP of Manufacturing and Director
of Marketing with the Atlas Powder Company from 1977 to 1988.
SHERICE P. BENCH has been our Secretary and Treasurer since July 2000 and
became our Chief Financial Officer in August 2001. From July 2000 to
August 2001, Ms. Bench was CFO of CBI. From 1996 to July 2000, Ms. Bench was
Vice President and Controller of CBI. From 1989 to 1996, Ms. Bench was Vice
President Finance and Controller for CJC Holdings, the prior owner of ArtCarved.
Prior to that time, Ms. Bench was employed as an audit manager with Arthur
Andersen LLP.
CHARLYN A. COOK has been Senior Vice President--Jewelry Operations since
1999. From 1996 to 1999, she was Vice President--Manufacturing of CBI and from
1989 to 1996, Ms. Cook was President--Manufacturing Division of CJC Holdings.
From 1989 to 1990, Ms. Cook was Vice President--Operations of CJC Holdings.
PARKE H. DAVIS has been Senior Vice President--Retail Sales since 1996. From
1991 to 1996, Mr. Davis was President--Class Ring Division of CJC Holdings and
before that served as its President--Keepsake Division and its
President--College Class Ring Sales.
DONALD A. PERCENTI has been Senior Vice President--Scholastic Products since
1996. From 1991 to 1996, he was Vice President--Sales and Marketing of L.G.
Balfour Company. From 1977 to 1991, Mr. Percenti was employed by Balfour in
various capacities.
TIMOTHY WRIGHT has been Vice President--Print Operations since
January 2000. From 1996 to 1999, Mr. Wright was President of Graphic Solutions
Network, a graphics and printing industry consulting company. From 1997 to 1999,
he was President of Sterling Impressions and from 1987 to 1996 he was Director
Operations/Technology for Pinnacle Brands.
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JOHN K. CASTLE has been director of our company since its formation in
July 2000 and was a director of CBI from 1996 to 2000. Mr. Castle is Chairman of
Castle Harlan, Inc. Mr. Castle is also Chairman and CEO of Branford
Castle, Inc., an investment holding company. Immediately prior to forming
Branford Castle in 1986, Mr. Castle was President and Chief Executive Officer
and a Director of Donaldson, Lufkin, & Jenrette, Inc., one of the nation's
leading investment banking firms. Mr. Castle is a Director of Sealed Air
Corporation, Morton's Restaurant Group, Inc., Statia Terminals Group, N.V. and
various private equity companies, and is a member of the corporation of the
Massachusetts Institute of Technology. Mr. Castle is also a Trustee of New York
Presbyterian Hospital and the Whitehead Institute of Biomedical Research.
Previously, he was a Trustee of New York Medical College serving as Chairman of
its Board for 11 years. Formerly, Mr. Castle was a Director of the Equitable
Life Assurance Society of the United States. He was educated at the
Massachusetts Institute of Technology (S.B.) and the Harvard Business School
(M.B.A. with High Distinction and Baker Scholar).
DAVID B. PITTAWAY has been a director of our company since its formation in
July 2000. Mr. Pittaway was President and Treasurer of CBI from its formation in
April 1996 through December 1996, and was a director of CBI from April 1996 to
July 2000. Mr. Pittaway is a Senior Managing Director of Castle Harlan, Inc. and
has been with the firm since its inception in 1987. Prior to joining Castle
Harlan, Mr. Pittaway was Vice President, Strategic Planning, and Assistant to
the President of Donaldson, Lufkin, & Jenrette, Inc. Before joining DLJ, he was
a management consultant in strategic planning with Bain & Company in Boston,
Mass., and previously was an attorney with Morgan, Lewis & Bockius, specializing
in labor relations. He is also a Board Member of McCormick & Schmick's Holding
Corp., Morton's Restaurant Group, Inc., Statia Terminals Group N.V., Charlie
Brown's, Inc., Luther's Bar-B-Q, Inc., Wilshire Restaurant Group, Inc.,
Equipment Support Services, Inc., and Branford Chain, Inc. He is a graduate of
the University of Kansas (B.A. with Highest Distinction), and has both an M.B.A.
with High Distinction (Baker Scholar) and a J.D. from Harvard University.
WILLIAM M. PRUELLAGE has been a director since our formation in July 2000.
Mr. Pruellage is a Vice President of Castle Harlan, Inc. Mr. Pruellage is also a
board member of Universal Compression, Inc., Verdugt Holdings, LLC. and Wilshire
Restaurant Group, Inc. Prior to joining Castle Harlan in 1997, Mr. Pruellage
worked in the Mergers and Acquisition group of Merrill Lynch & Co., where he
assisted clients in strategic planning and corporate mergers. Mr. Pruellage
graduated Summa Cum Laude from Georgetown University with a double major in
Finance and International Business. He is a member of the Beta Gamma Sigma Honor
Society.
EDWARD O. VETTER has been a director since our formation in July 2000 and
was a director of CBI from 1998 to that time. Mr. Vetter has served as President
of Edward O. Vetter & Associates, a private management consulting firm, since
1978 and has also served as a Trustee for the Massachusetts Institute of
Technology since 1979 and is currently a Trustee Emeritus. Mr. Vetter also
served from 1987 to 1991 as Chairman of the Texas Department of Commerce, from
1979 to 1983 as Energy Advisor to the Governor of Texas and from 1976 to 1977 as
U.S. Undersecretary of Commerce, serving as Director of Overseas Private
Investment Corporation and as Director of Pension Benefit Guaranty Corporation.
From 1952 through 1975, Mr. Vetter was employed by Texas Instruments, Inc. in
various capacities and was the Executive Vice President and Chief Financial
Officer at the time of his retirement in 1975. Formerly, Mr. Vetter has served
as a director of AMR Corporation, Champion International, Cabot Corporation,
Dual Drilling Company, Bell Packaging Company, and Pioneer Natural Resources.
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ZANE TANKEL has been a director since our formation in July 2000 and has
been Chairman and CEO of Zane Tankel Consultants, Inc., a sales company, since
1990. In 1994, Mr. Tankel formed Apple Metro, Inc., a restaurant franchisee for
the New York metropolitan area, for the franchisor Applebee's Neighborhood
Grill & Bar. He is presently Chairman and CEO of Apple Metro, Inc. In 1995-1996,
Mr. Tankel was elected Chairman of the Federal Law Enforcement Foundation, which
aids the federal law enforcement community in times of crisis and is currently
on the board. He was the past chapter chairman of the Young Presidents'
Organization and is presently a member of the Board of Directors of the
Metropolitan Presidents Organization, the New York chapter of the World
Presidents Organization, with which Mr. Tankel has been associated since 1977.
Mr. Tankel served on the Board of Directors of Beverly Hills Securities
Corporation, a wholesale mortgage brokerage company, until its sale in
January 1994.
EXECUTIVE COMPENSATION
The following table sets forth the cash and non-cash compensation for 2001,
2000 and 1999 awarded to or earned by the chief executive officer and the four
other most highly compensated executive officers.
SUMMARY COMPENSATION TABLE
<Table>
<Caption>
ANNUAL COMPENSATION LONG-TERM COMPENSATION
------------------------------------- ----------------------------------
RESTRICTED SECURITIES
OTHER ANNUAL STOCK UNDERLYING LTIP
NAME AND PRINCIPAL POSITION YEAR(1) SALARY BONUS COMPENSATION(2) AWARDS OPTIONS(#) PAYOUTS
- --------------------------- -------- -------- -------- --------------- ---------- ---------- --------
David G. Fiore................... 2001 $311,695 $160,000 -- 0 12,524 $ 0
President and Chief Executive 2000 $312,753 $300,000 -- 0 0 $ 0
Officer 1999 $126,923 $ 0 -- 0 0 $ 0
Sherice P. Bench................. 2001 $164,076 $ 39,600 -- 0 0 $ 0
Chief Financial Officer 2000 $155,769 $ 99,000 -- 0 1,034 $ 0
1999 $139,616 $ 37,500 -- 0 0 $ 0
Charlyn A. Cook.................. 2001 $175,538 $ 43,750 -- 0 0 $ 0
Senior Vice President--Jewelry 2000 $174,615 $113,225 -- 0 2,757 $ 0
Operations 1999 $165,000 $ 41,250 -- 0 0 $ 0
Parke H. Davis................... 2001 $184,000 $ 33,300 -- 0 0 $ 0
Senior Vice President--Retail 2000 $180,981 $109,210 -- 0 2,757 $ 0
Sales 1999 $163,000 $ 61,750 -- 0 0 $ 0
Donald A. Percenti............... 2001 $197,808 $ 54,000 -- 0 0 $ 0
Senior Vice President--Scholastic 2000 $195,192 $121,600 -- 0 2,757 $ 0
Products 1999 $190,000 $ 47,500 -- 0 0 $ 0
<Caption>
ALL OTHER
NAME AND PRINCIPAL POSITION COMPENSATION(3)
- --------------------------- ---------------
David G. Fiore................... --
President and Chief Executive --
Officer --
Sherice P. Bench................. --
Chief Financial Officer --
--
Charlyn A. Cook.................. --
Senior Vice President--Jewelry --
Operations --
Parke H. Davis................... --
Senior Vice President--Retail --
Sales --
Donald A. Percenti............... --
Senior Vice President--Scholastic --
Products --
</Table>
- ------------
(1) Our 2001 fiscal year ended on August 25, 2001. Fiscal year 2000 ended on
August 26, 2000 and fiscal year 1999 ended on August 28, 1999. Executive
compensation for 1999, 2000 and 2001 is for the twelve months ended
December 31 of each year.
(2) The perquisites and other personal benefits, securities or property received
by the named executive officers did not exceed $50,000 or 10% of the total
annual salary and bonus reported for the named executive officers in each of
1999, 2000 and 2001. In 2002, we have paid $386,088.10 in taxes associated
with the receipt by Mr. Fiore in 2002 of 5,500 shares of our series A
preferred stock.
(3) Each of the named executive officers have term life insurance policies equal
to one-times their base salary with a benefit payable to a beneficiary
selected by the named executive officer upon his or her death. We have paid
the annual premiums on such policies in each of 1999, 2000 and 2001. The
annual premium does not exceed $700 for any named executive officer. No
named executive officer is entitled to any cash surrender value in such
policies.
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EMPLOYMENT AGREEMENTS
DAVID G. FIORE. Mr. Fiore has an employment agreement with us, pursuant to
which he serves as our Chief Executive Officer and President and as a member of
our Board of Directors. The initial term of his employment agreement was for two
years from August 2, 1999. Unless otherwise terminated, Mr. Fiore's employment
agreement adds one day to the term for each day that passes, and accordingly,
there are always two years remaining on the term. The employment agreement
provides Mr. Fiore with an annual base salary of no less than $300,000. Under
his employment agreement, Mr. Fiore's salary is subject to such increases as our
Board of Directors may determine from time to time.
Mr. Fiore's employment agreement provides for various bonuses to be paid to
him. Mr. Fiore is paid an annual bonus, determined by our Board of Directors,
based upon the achievement of certain EBITDA targets. Mr. Fiore also is entitled
to various stock grants if we achieve certain EBITDA targets as provided for in
his employment agreement. These stock grants are fully vested when granted. At
the discretion of the compensation committee of our Board of Directors, we also
may pay Mr. Fiore a discretionary bonus each year in an amount of up to
$100,000.
Mr. Fiore's employment agreement provides that in the event he is terminated
without "substantial cause" or he terminates his employment for "good reason"
(each as defined in his employment agreement), he will be entitled to receive
his salary for the remainder of the term under the employment agreement, plus
the portion of the annual bonus actually earned through the date of termination,
plus the long-term incentive bonus.
Mr. Fiore's employment agreement further provides that he may terminate his
employment six months after a "change in control" (as defined in his employment
agreement). Upon such termination, Mr. Fiore will be paid $450,000.
SHERICE P. BENCH. Ms. Bench has an employment agreement with CBI, effective
as of December 16, 1996, and serves as our chief financial officer at an annual
salary of $180,000. The initial term of her employment agreement was for two
years, which can be automatically extended for additional one year terms on
December 15th of each succeeding year thereafter unless earlier terminated by us
upon not less than 60 days' prior notice. The current term of her employment
agreement expires on December 15, 2002. Ms. Bench is entitled to participate in
such employee benefit programs, plans and policies (including incentive bonus
plans and incentive stock option plans) as we maintain and as may be established
for our employees from time-to-time on the same basis as other executive
employees are entitled to participate.
Ms. Bench's employment agreement provides that in the event of her
termination without "substantial cause" (as defined in her employment
agreement), she will be entitled to receive 39 bi-weekly severance payments
equal to the average of her bi-weekly compensation in effect within the two
years preceding her termination, accrued but unused vacation, and any accrued
bonus. She will also be entitled to elect the continuation of health benefits at
our cost. Ms. Bench's employment agreement does not provide her with any
payments that are contingent upon a "change in control."
OTHER EMPLOYMENT AGREEMENTS. Charlyn A. Cook, Parke H. Davis and Donald A.
Percenti each have an employment agreement with CBI. The initial term of each
respective employment agreement was for three years, which can be automatically
extended for additional one year terms on December 15th of each succeeding year
thereafter unless earlier terminated by us upon not less than 60 days' prior
notice. The current term of each of their employment agreements expires on
December 15, 2002. Ms. Cook and Messrs. Davis and Percenti are entitled to
participate in such
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employee benefit programs, plans and policies (including incentive bonus plans
and incentive stock option plans) as we maintain and as may be established for
our employees from time-to-time on the same basis as other executive employees
are entitled to participate.
Each of the above-described employment agreements provide that in the event
of their termination without "cause" (as defined in each of their respective
employment agreements), the terminated employee will be entitled to receive
18 months of severance payments equal to the average of such employee's
bi-weekly compensation in effect within the two years preceding their
termination, accrued but unused vacation, and any accrued bonus. Such employee
will also be entitled to elect the continuation of health benefits at our cost.
None of the above-described employment agreements provide any payments that are
contingent upon a "change in control."
2000 STOCK OPTION PLAN
We have adopted a 2000 Stock Option Plan, which provides for the granting of
incentive stock options and nonqualified stock options to our employees and
directors and the employees and directors of our subsidiaries. The number of
shares of common stock available to be awarded under the option plan is 122,985.
As of February 21, 2002, options to purchase 72,087 shares of common stock had
been granted. The option plan is administered by the compensation committee of
our board of directors, which has the discretion to select which employees and
directors will receive awards of options under the plan as well as the amount of
such grant.
Each option will expire on the date determined by the compensation committee
of our board of directors, which will not be later than ten years from the date
of grant. Options granted under the option plan generally vest 25% per year over
a four year period. The exercise price for incentive stock options is the fair
market value of the stock on the date that the option is granted. If the option
holder's employment is terminated for any reason, all options that are not
exercisable as of the date of termination will expire, and those options that
are exercisable may be exercised until the option grant period has expired.
Under the option plan, we have certain rights to repurchase from an option
holder the common stock issued upon exercise of the option upon termination of
the option holder's employment.
We did not grant any options to either our chief executive officer or to any
of our four other most highly compensated executive officers in 2001 nor did any
of the foregoing individuals exercise any stock options in 2001.
COMPENSATION OF DIRECTORS; BOARD COMMITTEES
Directors who are neither members of our management nor affiliates of Castle
Harlan each receive a fee of $25,000 per year, paid quarterly, for their
services as a director.
The Board of Directors has established two committees, a compensation
committee and an audit committee. The compensation committee reviews general
policy matters relating to compensation and benefits. The audit committee
recommends the firm to be appointed as independent accountants to audit our
financial statements, discusses the scope and results of the audit with the
independent accountants, reviews with management and the independent accountants
our interim and year-end operating results, considers the adequacy of our
internal control and audit procedures and reviews the non-audit services to be
performed by the independent accountants. The compensation committee consists of
Messrs. Castle, Pittaway and Tankel and the audit committee consists of
Messrs. Pittaway, Pruellage and Vetter.
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Our certificate of incorporation and by-laws provides that we indemnify our
officers and directors to the fullest extent permitted by the Delaware General
Corporation Law, which is referred to in this prospectus as the DGCL. Under
Section 145 of the DGCL, a corporation may indemnify its directors, officers,
employees and agents and its former directors, officers, employees and agents
and those who serve, at the corporation's request, in such capacities with
another enterprise, against expenses, including attorneys' fees, as well as
judgments, fines and settlements in nonderivative lawsuits, actually and
reasonably incurred in connection with the defense of any action, suit or
proceeding in which they or any of them were or are made parties or are
threatened to be made parties by reason of their serving or having served in
that capacity. The DGCL provides, however, that the person must have acted in
good faith and in a manner that he or she reasonably believed to be in, or not
opposed to, the best interests of the corporation and, in the case of a criminal
action, he or she must have had no reasonable cause to believe his or her
conduct was unlawful. In addition, the DGCL does not permit indemnification in
an action or suit by or in the right of the corporation where he or she has been
adjudged liable to the corporation, unless, and only to the extent that, a court
determines that he or she fairly and reasonably is entitled to indemnity for
costs the court deems proper in light of liability adjudication. Indemnification
is mandatory to the extent a claim, issue or matter has been successfully
defended.
The certificate of incorporation and the DGCL also prohibit limitations on
officer or director liability for acts or omissions which resulted in a
violation of a statute prohibiting dividend declarations, payments to
stockholders after dissolution and particular types of loans. The effect of
these provisions is to eliminate the rights of our company and our stockholders,
through stockholders' derivative suits on behalf of our company, to recover
monetary damages against an officer or director for breach of a fiduciary duty
as an officer or director, except in the situations described above.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors or officers of our company pursuant to the
foregoing provisions, we have been informed that, in the opinion of the SEC,
this indemnification is against public policy as expressed in the Securities Act
and is therefore unenforceable.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
No member of the compensation committee is our employee. There are no
compensation committee interlocks (i.e., no executive officer of ours serves as
a member of the board of directors or the compensation committee of another
entity which has an executive officer serving on our board of directors or the
compensation committee).
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SECURITY OWNERSHIP OF CERTAIN OWNERS AND MANAGEMENT
The following table sets forth certain information regarding the beneficial
ownership of our voting securities as of March 1, 2002, with respect to
(i) each person or entity who is the beneficial owner of more than 5% of any
class of our voting securities, (ii) each of our directors, (iii) each of the
named executive officers, and (iv) all directors and executive officers as a
group.
<Table>
<Caption>
PERCENTAGE OF
NUMBER OF TOTAL NUMBER OF SHARES PERCENTAGE OF
SHARES OF COMMON OF SERIES A TOTAL SERIES A
NAME AND ADDRESS OF BENEFICIAL OWNER (1) COMMON STOCK STOCK (%) PREFERRED PREFERRED (%)
- ---------------------------------------- ------------ --------------------- ---------------- --------------
Castle Harlan Partners III,
L.P.(2)(3)........................... 431,055 53.3 537,867 53.4
Castle Harlan Partners II, L.P.(2)(4)... 372,015 46.0 456,799 45.4
John K. Castle(2)(5)................... 803,070 99.2 994,666 98.8
David B. Pittaway(2)................... 1,005 * 1,126 *
Zane Tankel(2)......................... 938 * 938 *
Edward O. Vetter(2).................... 400 * 400 *
William M. Pruellage(2)................ 0 0.0 0 0.0
David G. Fiore(6)(7)................... 25,024 3.0 5,500 *
Sherice P. Bench(6)(8)................. 1,034 * 0 *
Charlyn A. Cook(6)(9).................. 3,085 * 328 *
Parke H. Davis(6)(9)................... 2,945 * 188 *
Donald A. Percenti(6)(9)............... 3,226 * 469 *
Directors and executive officers as a
group (10 persons, including those
listed above)........................ 840,727 99.6 1,003,615 99.7
</Table>
- ------------
* Denotes beneficial ownership of less than one percent of the class of
capital stock.
(1) Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission. Beneficial ownership includes shares of
common stock and series A preferred stock that any person has the right to
acquire within 60 days after March 1, 2002. Shares of common stock and
series A preferred stock not outstanding but deemed beneficially owned
because a person or group has the right to acquire them within 60 days are
treated as outstanding only for purposes of determining the percentage owned
by that person or group. For purposes of this table, all fractional shares
have been rounded to the nearest whole share. Except as indicated in the
footnotes to this table, each stockholder named in the table has sole voting
and investment power with respect to the shares set forth opposite such
stockholder's name.
(2) The address for each indicated stockholder or director identified in the
table is c/o Castle Harlan, Inc., 150 East 58th Street, New York, New York
10155.
(3) Includes 17,983 shares of common stock and 22,438 shares of series A
preferred stock held by related entities, all of which may be deemed to be
beneficially owned by Castle Harlan Partners III, L.P. Castle Harlan
Partners III, L.P. disclaims beneficial ownership of these shares.
(4) Includes 41,175 shares of common stock and 50,559 shares of series A
preferred stock held by related entities, all of which may be deemed to be
beneficially owned by Castle Harlan Partners II, L.P. Castle Harlan Partners
II, L.P. disclaims beneficial ownership of these shares.
(5) John K. Castle, one of our directors, is the controlling stockholder of
Castle Harlan Partners III, G.P., Inc., the general partner of the general
partner of Castle Harlan Partners III, L.P., and as such may be deemed to be
a beneficial owner of the shares owned by Castle Harlan Partners III, L.P.
and its affiliates. Mr. Castle disclaims beneficial ownership of such shares
in excess of his proportionate partnership share of Castle Harlan Partners
III, L.P. and its affiliates. In addition, Mr. Castle is the controlling
stockholder of Castle Harlan Partners II G.P., Inc., the general partner of
the general partner of Castle Harlan Partners II, L.P., and as such may be
deemed to be a beneficial owner of the shares owned by Castle Harlan
Partners II, L.P. and its affiliates. Mr. Castle disclaims beneficial
ownership of such shares in excess of his proportionate partnership share of
Castle Harlan Partners II, L.P. and its affiliates.
(6) The address for each indicated director or executive officer identified in
the table is c/o American Achievement Corporation, 7211 Circle S Road,
Austin, Texas 78745.
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(7) Mr. Fiore was granted options to purchase 25,024 shares of our common stock,
which have vested pursuant to our 2000 Stock Option Plan.
(8) Ms. Bench was granted options to purchase 1,034 shares of our common stock,
which have vested pursuant to our 2000 Stock Option Plan.
(9) Ms. Cook and Messrs. Davis and Percenti were each granted options to
purchase 2,757 shares of our common stock, which have vested pursuant to our
2000 Stock Option Plan.
DESCRIPTION OF CAPITAL STOCK
Our authorized capital stock consists of 1,250,000 shares of common stock,
par value $0.01 per share, of which 809,351 shares are issued and outstanding,
and 1,250,000 shares of preferred stock, par value $0.01 per share. Of the
amount of authorized preferred stock, 1,200,000 shares of our preferred stock
are designated series A preferred stock and 1,006,847 shares are issued and
outstanding.
COMMON STOCK
The holders of our common stock are entitled to one vote per share on all
matters submitted to a vote of stockholders, including the election of
directors, and vote together as a class with the holders of the series A
preferred stock. Dividends may be paid on the common stock, when declared by our
board of directors. We do not expect to pay dividends on the common stock in the
foreseeable future.
PREFERRED STOCK
Our Board of Directors has the authority, by adopting resolutions, to issue
shares of preferred stock in one or more series, with the designations and
preferences for each series set forth in the adopting resolutions. Our
certificate of incorporation authorizes our Board of Directors to determine,
among other things, the rights, preferences and limitations pertaining to each
series of preferred stock.
SERIES A PREFERRED STOCK
RANKING. The series A preferred stock is senior to all of our capital stock
as to dividend payments and distributions upon liquidation, dissolution or
winding up.
DIVIDENDS. Dividends on the series A preferred stock are payable in cash,
when, as and if declared by our board of directors. All such declared dividends
are paid pro rata to the holders of series A preferred stock. Accrued and unpaid
dividends on the series A preferred stock do not bear interest or dividends.
REDEMPTION. We do not have the right to redeem the series A preferred
stock.
LIQUIDATION. Upon the liquidation, dissolution or winding up of our
company, the holders of the series A preferred stock are entitled to receive
payment at a liquidation value of $100 per share plus all accrued and unpaid
dividends on the series A preferred stock, prior to the payment of any
distributions to the holders of our common stock.
RESTRICTIONS ON PAYMENT OF OTHER DIVIDENDS. So long as any share of the
series A preferred stock remains outstanding, we may not declare, pay or set
aside for payment dividends or other distributions with respect to any other
shares of our capital stock ranking, as to dividend rights and rights upon
liquidation, dissolution or winding up, junior to the series A preferred stock,
other than dividends
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payable in common stock or in another stock ranking junior to the series A
preferred stock as to dividend rights and rights on liquidation, dissolution and
winding up.
VOTING. The holders of our series A preferred stock are entitled to one
vote per share of series A preferred stock on all matters submitted to a vote of
stockholders, including the election of directors, and vote together as a class
with the holders of the common stock. We are not permitted to amend, alter or
repeal any of the provisions of our certificate of incorporation or bylaws, or
merge with or into or consolidate with any other entity, as to affect adversely
any of the preferences, rights, powers or privileges of the series A preferred
stock or its holders, without first obtaining the approval of at least a
majority of the outstanding shares of series A preferred stock voting separately
as one class.
WARRANTS
We have outstanding warrants to purchase 21,405 shares of our common stock
at an exercise price of $6.67 per share. The warrants expire on January 31, 2008
and if exercised in full represent less than 1.2% of our common stock on a fully
diluted basis. Of this amount, warrants to purchase 19,820 shares of common
stock are held by CHPIII and warrants to purchase 1,585 shares of common stock
are held by Deutsche Banc Alex. Brown Inc., formerly Deutsche Bank Securities,
Inc.
CBI SERIES A PREFERRED STOCK
Of CBI's authorized preferred stock, 100,000 shares of preferred stock are
designated series A preferred stock, which is referred to as the "CBI A
Preferred", all of which are issued and outstanding and held by CHPIII.
RANKING. The CBI A Preferred is senior to all other capital stock of CBI as
to dividend payments and distribution upon liquidation, dissolution or winding
up.
DIVIDENDS. Dividends on the CBI A Preferred are payable in cash, when and
if declared by the board of directors of CBI on a quarterly basis. Dividends
accrue from the date of issuance, which was 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 of such dividends. Any dividends which are
declared are payable pro rata to the holders. No dividends or interest accrue on
any accrued and unpaid dividends. The notes and our credit facility each
restrict CBI's ability to pay dividends on the CBI A Preferred.
REDEMPTION. The CBI A Preferred is not subject to mandatory redemption but
is redeemable at any time at the option of CBI; however, the notes offered
hereby and our new credit facility will each restrict CBI's ability to redeem
the CBI A Preferred.
LIQUIDATION. Upon the liquidation, dissolution or winding up of CBI, the
holders of the CBI A Preferred are entitled to receive payment at a liquidation
value of $100 per share plus all accrued and unpaid dividends on the CBI A
Preferred, prior to the payment of any distributions to the holders of CBI's
other capital stock.
RESTRICTIONS ON PAYMENT OF OTHER DIVIDENDS. So long as any share of the CBI
A Preferred remains outstanding, CBI may not declare, pay or set aside for
payment dividends or other distributions with respect to any other shares of its
capital stock ranking, as to dividend rights and rights upon liquidation,
dissolution or winding up, junior to the CBI A Preferred, other than dividends
payable in
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common stock or in another stock ranking junior to the CBI A Preferred as to
dividend rights and rights on liquidation, dissolution and winding up.
VOTING. Generally, the holders of the CBI A Preferred are not entitled to
any voting rights. However, CBI is not permitted to amend, alter or repeal any
of the provisions of its certificate of incorporation or bylaws, or merge with
or into or consolidate with any other entity, as to affect adversely any of the
preferences, rights, powers or privileges of the CBI A Preferred or its holders,
without first obtaining the approval of at least a majority of the outstanding
shares of CBI A Preferred voting separately as one class.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
We entered into a management agreement dated March 30, 2001 with Castle
Harlan, pursuant to which Castle Harlan agreed to provide business and
organizational strategy, financial and investment management and merchant and
investment banking services to us upon the terms and conditions set forth in the
management agreement. As compensation for such services, we agreed to pay Castle
Harlan $3.0 million per year, which amount is payable quarterly in arrears. The
agreement is for a term of ten years, renewable automatically from year to year
thereafter unless Castle Harlan and its affiliates then own less than 5% of our
then outstanding capital stock. We have agreed to indemnify Castle Harlan
against liabilities, costs, charges and expenses relating to its performance of
its duties, other than such of the foregoing resulting from Castle Harlan's
gross negligence or willful misconduct.
On February 11, 2000, CHPIII acquired Taylor, whose primary business is the
designing and printing of student yearbooks. On July 27, 2000, we acquired from
CHPIII all of the issued and outstanding shares of TSHC, Taylor's parent,
through the issuance of 320,929 shares of our common stock and 393,482 shares of
our series A preferred stock.
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DESCRIPTION OF CERTAIN INDEBTEDNESS
SENIOR SECURED CREDIT FACILITY
On February 20, 2002, we entered into a new $40 million senior revolving
credit facility which is sometimes referred to as the Senior Secured Credit
Facility, with various financial institutions, as lenders, and The Bank of Nova
Scotia, as administrative agent and lead arranger, and with all of our current
domestic subsidiaries as guarantors. The following is a brief description of the
principal terms of the facility, and is qualified in its entirety by reference
to the definitive documents, which are available as indicated below under "Where
You Can Find More Information."
AVAILABILITY. Availability under the Senior Secured Credit Facility is
restricted to the lesser of (1) $40 million and (2) the Borrowing Base Amount.
The Borrowing Base Amount is defined as the difference of (1) the sum of
(a) with respect to eligible accounts receivable, 85% of an amount equal to
(i) the book value of eligible accounts receivable, net of (ii) all credits,
discounts and allowances in respect of all such eligible accounts receivable,
and (b) with respect to eligible inventory, an amount equal to (i) 50% with
respect to nonprecious inventory and (ii) 70% with respect to precious metals/
stones inventory, in each case, of the net book value of all eligible inventory,
less (2) the then applicable account receivable reported amount.
MATURITY AND SECURITY. The Senior Secured Credit Facility matures on the
fourth anniversary of the closing date. Loans made pursuant to the Senior
Secured Credit Facility are secured by a first priority security interest in
substantially all of our and our domestic subsidiaries' assets and in all of our
domestic subsidiaries' capital stock.
INTEREST RATES. Advances under the Senior Secured Credit Facility may be
made as base rate loans or LIBOR (London inter-bank offered rate) loans at our
election (except for the initial loans). Interest rates payable upon advances
are based upon the base rate or LIBOR depending on the type of loan we choose,
plus an applicable margin based upon a consolidated leverage ratio of certain
outstanding indebtedness to EBITDA (to be calculated in accordance with the
terms specified in the Senior Secured Credit Facility). The base rate is defined
as the higher of (1) the Federal Funds Rate plus 0.5%, and (2) the rate of
interest then most recently established by The Bank of Nova Scotia in New York
as its base rate for dollars loaned in the United States. LIBOR is defined as,
relative to any interest period for LIBOR loans, the rate of interest equal to
the average of the rates per annum at which dollar deposits in immediately
available funds are offered to The Bank of Nova Scotia's LIBOR Office in the
London interbank market at or about 11:00 a.m. London, England time, two
business days prior to the beginning of such interest period for delivery on the
first day of such interest period, in an amount approximately equal to the
amount of The Bank of Nova Scotia's LIBOR loan and for a period approximately
equal to such interest period. The applicable margin for all loans from the
effective date of the Senior Secured Credit Facility through the delivery date
of the quarterly financial information for the second full fiscal quarter
following the effective date will be at least 2.5% for base
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rate loans and at least 3.5% for LIBOR loans. Thereafter, the applicable margin
will be the applicable percentage set forth below corresponding to the relevant
leverage ratio:
<Table>
<Caption>
APPLICABLE APPLICABLE
MARGIN FOR MARGIN FOR
LEVERAGE RATIO BASE RATE LOANS LIBOR LOANS
- -------------- --------------- -----------
> 5.00:1.................................................... 3.25% 4.25%
> 4.50:1 but < / = 5.00:1.................................. 2.75% 3.75%
> 4.00:1 but < / = 4.50:1.................................. 2.50% 3.50%
> 3.50:1 but < / = 4.00:1.................................. 2.25% 3.25%
> 3.00:1 but < / = 3.50:1.................................. 2.00% 3.00%
< / = 3.00:1................................................ 1.50% 2.50%
</Table>
FEES. The Senior Secured Credit Facility contains certain fees, including
unused commitment fees, letter of credit fees and agency fees.
COVENANTS. The Senior Secured Credit Facility contains standard negative
covenants and restrictions on actions by us and our subsidiaries including,
without limitation, restrictions on indebtedness, liens, investments,
fundamental changes, asset dispositions outside of the ordinary course of
business, subsidiary stock dispositions, restricted junior payments,
transactions with affiliates, changes relating to indebtedness and the gold
consignment agreement. In addition, the Senior Secured Credit Facility requires
that we meet certain financial covenants, ratios and tests, including capital
expenditure limits, a maximum secured leverage ratio, a minimum interest
coverage ratio, and a minimum fixed charge coverage ratio.
EVENTS OF DEFAULT. The Senior Secured Credit Facility contains customary
events of default including, without limitation, non-payment of principal,
interest or fees, violation of certain covenants, inaccuracy of representations
and warranties in any material respect, cross defaults under certain other
indebtedness and agreements (including the gold consignment agreement),
bankruptcy and insolvency events, material judgments and liabilities, change of
control, dissolution of us or our domestic subsidiaries, failure to maintain
valid and perfected security interests, change in conduct of our holding
companies and unenforceability of certain documents under the Senior Secured
Credit Facility.
GOLD CONSIGNMENT AGREEMENT
On July 27, 2000, CBI entered into a gold consignment agreement with The
Bank of Nova Scotia. The gold consignment agreement permits CBI to hold gold on
consignment up to the lowest of (i) $10.1 million, (ii) the dollar value of
27,000 troy ounces of gold and (iii) a borrowing base, determined based upon a
percentage of gold located at CBI's facilities and other approved locations, as
specified by the agreement. As security for CBI's obligations under the
agreement, CBI has granted The Bank of Nova Scotia a lien on the gold held by
CBI at its jewelry manufacturing plants and other lender approved inventory
locations, as well as a lien on the proceeds from the sale of the gold. In
addition, American Achievement has provided The Bank of Nova Scotia with its
unsecured guaranty of CBI's obligations under the gold consignment agreement.
CBI is required to pay certain fees under the gold consignment agreement,
including:
- a consignment fee based upon the current gold rate; and
- a commitment fee, equal to 0.375% of the dollar value of gold not
consigned to CBI but available to CBI under the gold consignment
agreement.
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The term of the gold consignment agreement is for 364 days and the agreement
may be renewed at the end of each term at the sole discretion of the lender. The
current term of the agreement expires on July 25, 2002. There are no material
restrictive covenants in the agreement that restrict our ability to conduct our
business.
11% SENIOR SUBORDINATED NOTES
In 1996, our subsidiary, CBI completed the offering of $90 million of its
11% senior subordinated notes, which are also referred to as the 1996 Notes. The
1996 Notes are senior subordinated obligations of CBI and mature on January 15,
2007. The 1996 Notes were issued pursuant to an indenture dated December 16,
1996. The 1996 Indenture was amended by the first supplemental indenture dated
as of July 21, 2000.
The 1996 Indenture, as amended, contains restrictive covenants limiting
CBI's ability to sell all or substantially all of its assets or engage in a
change in control transaction. TP Holding Corp., the direct parent of Taylor and
an indirect wholly owned subsidiary of ours, is a guarantor of CBI's obligations
with respect to the 1996 Notes.
On July 27, 2000, TP Holding Corp. purchased $48.6 million in principal
amount of the 1996 Notes at a purchase price equal to 82% of the principal
amount of the 1996 Notes.
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DESCRIPTION OF THE NEW NOTES
The Company issued $177,000,000 aggregate principal amount of Senior Notes
due 2007 on February 20, 2002 (the "Original Notes"), and will issue the New
Notes under an indenture (the "Indenture"), among the Company, the Guarantors
and The Bank of New York, as Trustee (the "Trustee"). The terms of the New Notes
are identical in all material respects to the terms of the Original Notes,
except for transfer restrictions and registration rights relating to the
Original Notes.
The following description is a summary of the material provisions of the
Indenture. It does not include all of the provisions of the Indenture nor does
it restate the Indenture in its entirety. We urge you to read the Indenture
because it defines your rights. The terms of the New Notes will include those
stated in the Indenture and those made part of the Indenture by reference to the
Trust Indenture Act of 1939, as amended (the "TIA"). A copy of the Indenture is
available as indicated below under "Where You Can Find More Information." You
can find definitions of certain capitalized terms used in this Description of
Notes under the subheading "--Certain Definitions." For purposes of this
section, references to the "Company" include only American Achievement
Corporation and not its subsidiaries or affiliates. References to "Notes" in
this section of the prospectus refers to both the "Original Notes" and the "New
Notes."
The New Notes will be senior unsecured obligations of the Company, ranking
PARI PASSU in right of payment with all other senior unsecured obligations of
the Company. The New Notes will be effectively subordinated to all existing and
future secured debt of the Company and the Guarantors to the extent of the
assets securing such debt. After giving effect to the offering of the Original
Notes, at November 24, 2001, the aggregate amount of secured debt outstanding
would have been approximately $17.0 million.
The Company will issue the New Notes in fully registered form only, without
coupons, in denominations of $1,000 and integral multiples thereof. The Trustee
will initially act as Paying Agent and Registrar for the New Notes. The New
Notes may be presented for registration or transfer and exchange at the offices
of the Registrar, which initially will be the Trustee's corporate trust office.
No service charge will be made for any registration of transfer or exchange or
redemption of New Notes, but the Company may require payment in certain
circumstances of a sum sufficient to cover any tax or other governmental charge
that may be imposed in connection therewith. The Company may change any Paying
Agent and Registrar without notice to holders of the New Notes (the "Holders").
The Company will pay principal of (and premium, if any, on) the New Notes at the
Trustee's corporate office in New York, New York. At the Company's option,
interest may be paid at the Trustee's corporate trust office or by check mailed
to the registered address of Holders. Any Original Notes that remain outstanding
after the completion of this Exchange Offer, together with the New Notes issued
in connection with this Exchange Offer, will be treated as a single class of
securities under the Indenture.
PRINCIPAL, MATURITY AND INTEREST
The New Notes will mature on January 1, 2007. $177.0 million in aggregate
principal amount of Original Notes were issued on the Issue Date. Interest on
the New Notes will accrue at the rate of 11 5/8% per annum and will be payable
semiannually in cash on each January 1 and July 1 commencing on July 1, 2002, to
the persons who are registered Holders at the close of business on the
December 15 and June 15, respectively, immediately preceding the applicable
interest payment date. Interest on the New Notes will accrue from the most
recent date to which interest has been paid or, if no interest has been paid,
from the Issue Date. Interest will be computed on the basis of a 360-day year
comprised of twelve 30-day months.
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The New Notes will not be entitled to the benefit of any mandatory sinking
fund.
REDEMPTION
OPTIONAL REDEMPTION. Except as described below, the Notes are not
redeemable before January 1, 2005. Thereafter, the Company may on any one or
more occasions redeem the Notes at its option, in whole or in part, upon not
less than 30 nor more than 60 days' notice, at the following redemption prices
(expressed as percentages of the principal amount thereof) if redeemed during
the twelve-month period commencing on January 1 of the year set forth below:
<Table>
<Caption>
YEAR PERCENTAGE
- ---- ----------
2005........................................................ 105.813%
2006........................................................ 102.906%
</Table>
In addition, the Company must pay accrued and unpaid interest, if any, on
the Notes redeemed to the applicable redemption date.
OPTIONAL REDEMPTION UPON PUBLIC EQUITY OFFERINGS. At any time, or from time
to time, on or prior to January 1, 2005, the Company may, at its option, use the
net cash proceeds of one or more Public Equity Offerings (as defined below) to
redeem up to 35% of the principal amount of the Notes issued under the Indenture
at a redemption price of 111.625% of the principal amount thereof plus accrued
and unpaid interest thereon, if any, to the date of redemption; PROVIDED that:
(1) at least 65% of the principal amount of Notes issued under the
Indenture remains outstanding immediately after each such redemption; and
(2) the Company makes each such redemption not more than 120 days after
the consummation of the related Public Equity Offering.
"Public Equity Offering" means an underwritten public offering of Qualified
Capital Stock of the Company pursuant to a registration statement filed with the
Commission in accordance with the Securities Act in which the gross proceeds to
the Company are at least $20.0 million.
SELECTION AND NOTICE OF REDEMPTION
In the event that the Company chooses to redeem at any time less than all of
the Notes, selection of the Notes for redemption will be made by the Trustee
either:
(1) in compliance with the requirements of the principal national
securities exchange, if any, on which the Notes are listed; or,
(2) if such notes are not then listed on a national securities exchange,
on a PRO RATA basis, by lot or by such method as the Trustee shall deem fair
and appropriate.
No Notes of a principal amount of $1,000 or less shall be redeemed in part.
If a partial redemption is made with the proceeds of a Public Equity Offering,
the Trustee will select the Notes only on a PRO RATA basis or on as nearly a PRO
RATA basis as is practicable (subject to DTC procedures), unless such method is
otherwise prohibited. Notice of redemption will be mailed by first-class mail at
least 30 but not more than 60 days before the redemption date to each Holder of
Notes to be redeemed at its registered address. If any Note is to be redeemed in
part only, the notice of redemption that relates to such Note shall state the
portion of the principal amount thereof to be
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redeemed. A Note in a principal amount equal to the unredeemed portion thereof
will be issued in the name of the Holder thereof upon cancellation of the
original Note. On and after the redemption date, interest will cease to accrue
on Notes or portions thereof called for redemption as long as the Company has
deposited with the Paying Agent funds in satisfaction of the applicable
redemption price pursuant to the Indenture.
GUARANTEES
The Notes will be unconditionally guaranteed by all Domestic Restricted
Subsidiaries of the Company existing on the Issue Date and thereafter all
acquired or created Restricted Subsidiaries other than Foreign Restricted
Subsidiaries and Restricted Subsidiaries that are not Material Domestic
Restricted Subsidiaries. The Guarantors will jointly and severally guarantee the
Company's Obligations under the Indenture and the Notes on a senior unsecured
basis (the "Guarantees"). Each Guarantee will rank PARI PASSU in right of
payment with all other senior unsecured obligations of the respective Guarantor.
The obligations of each Guarantor under its Guarantee will be limited as
necessary to prevent the Guarantee from constituting a fraudulent conveyance or
fraudulent transfer under applicable law.
The Guarantee of a Guarantor will be automatically and unconditionally
released without any action on the part of the Trustee or the Holders of the
Notes: (1) in connection with any sale or other disposition of all or
substantially all of the assets of that Guarantor (including, without
limitation, by way of merger or consolidation), if the Company applies the Net
Cash Proceeds of that sale or other disposition in accordance with the
applicable provisions of the Indenture; or (2) in connection with any sale of
all of the Capital Stock of that Guarantor, if the Company applies the Net Cash
Proceeds of that sale in accordance with the applicable provisions of the
Indenture; (3) if the Company designates that Guarantor as an Unrestricted
Subsidiary in accordance with the applicable provisions of the Indenture; or
(4) upon the payment in full of the Notes.
In addition, concurrently with any Legal Defeasance or Covenant Defeasance,
the Guarantors shall be released from all of their Obligations under their
respective applicable Guarantees.
Separate financial statements of the Guarantors are not included herein
because such Guarantors are jointly and severally liable with respect to the
Company's obligations pursuant to the Notes, and the aggregate net assets,
earnings and equity of the Guarantors and the Company are substantially
equivalent to the net assets, earnings and equity of the Company on a
consolidated basis.
CHANGE OF CONTROL
Upon the occurrence of a Change of Control, each Holder will have the right
to require that the Company purchase all or a portion of such Holder's Notes
pursuant to the offer described below (the "Change of Control Offer"), at a
purchase price equal to 101% of the principal amount thereof plus accrued
interest, if any, to the date of purchase.
Within 30 days following the date upon which a Change of Control occurs, the
Company must send, by first class mail, a notice to each Holder, with a copy to
the Trustee, which notice shall govern the terms of the Change of Control Offer.
Such notice shall state, among other things, the purchase date, which must be no
earlier than 30 days nor later than 45 days from the date such notice is mailed,
other than as may be required by law (the "Change of Control Payment Date").
Holders electing to have a Note purchased pursuant to a Change of Control Offer
will be required to surrender the Note, with the form entitled "Option of Holder
to Elect Purchase" on the reverse of the Note completed, to
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the Paying Agent at the address specified in the notice prior to the close of
business on the third business day prior to the Change of Control Payment Date.
The Company will not be required to make a Change of Control Offer upon a
Change of Control if a third party makes the Change of Control Offer in the
manner, at the times and otherwise in compliance with the requirements set forth
in the Indenture applicable to a Change of Control Offer made by the Company and
purchases all Notes validly tendered and not withdrawn under such Change of
Control Offer.
If a Change of Control Offer is made, there can be no assurance that the
Company will have available funds sufficient to pay the Change of Control
purchase price for all the Notes that might be delivered by Holders seeking to
accept the Change of Control Offer. In the event the Company is required to
purchase outstanding Notes pursuant to a Change of Control Offer, the Company
expects that it would seek third party financing to the extent it does not have
available funds to meet its purchase obligations. However, there can be no
assurance that the Company would be able to obtain such financing.
The Credit Agreement restricts the purchase of the Notes by the Company
prior to their maturity and, upon a Change of Control, all amounts outstanding
under the Credit Agreement may, at the option of the lenders thereunder, become
due and payable. There can be no assurance that in the event of a Change in
Control the Company will be able to obtain the necessary consents from the
lenders under the Credit Agreement to consummate a Change in Control Offer. The
failure of the Company to make or consummate the Change in Control Offer or pay
the applicable Change of Control purchase price when due would result in an
Event of Default and would give the Trustee and the Holders of the Notes the
rights described under "Events of Default".
Neither the Board of Directors of the Company nor the Trustee may waive the
covenant relating to a Holder's right to redemption upon a Change of Control.
Restrictions in the Indenture described herein on the ability of the Company and
its Restricted Subsidiaries to incur additional Indebtedness, to grant Liens on
its property, to make Restricted Payments and to make Asset Sales may also make
more difficult or discourage a takeover of the Company, whether favored or
opposed by the management of the Company. Consummation of any such transaction
in certain circumstances may require redemption or repurchase of the Notes, and
there can be no assurance that the Company or the acquiring party will have
sufficient financial resources to effect such redemption or repurchase. Such
restrictions and the restrictions on transactions with Affiliates may, in
certain circumstances, make more difficult or discourage any leveraged buyout of
the Company or any of its Subsidiaries by the management of the Company. While
such restrictions cover a wide variety of arrangements which have traditionally
been used to effect highly leveraged transactions, the Indenture may not afford
the Holders protection in all circumstances from the adverse aspects of a highly
leveraged transaction, reorganization, restructuring, merger or similar
transaction.
The definition of "Change of Control" in the Indenture is limited in scope.
The provisions of the Indenture may not afford Holders the right to require the
Company to repurchase such Notes in the event of a highly leveraged transaction
or certain transactions with the Company's management or its Affiliates,
including a reorganization, restructuring, merger or similar transaction
involving the Company (including, in certain circumstances, an acquisition of
the Company by management or its Affiliates) that may adversely affect Holders,
if such transaction is not a transaction defined as a Change of Control. See
"Certain Definitions" below for the definition of "Change of Control". A
transaction involving a recapitalization of the Company would result in a Change
of Control if it is the type of transaction specified in such definition.
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One of the events that constitutes a Change of Control under the Indenture
is the disposition of "all or substantially all" of the Company's assets under
certain circumstances. This term has not been interpreted under New York law
(which is the governing law of the Indenture) to represent a specific
quantitative test. As a consequence, in the event Holders elect to require the
Company to purchase the Notes and the Company elects to contest such election,
there can be no assurance as to how a court interpreting New York law would
interpret the phrase in many circumstances.
The Company will comply with the requirements of Rule 14e-1 under the
Exchange Act and any other securities laws and regulations to the extent such
laws and regulations are applicable in connection with the repurchase of Notes
pursuant to a Change of Control Offer. To the extent that the provisions of any
securities laws or regulations conflict with the "Change of Control" provisions
of the Indenture, the Company shall comply with the applicable securities laws
and regulations and shall not be deemed to have breached its obligations under
the "Change of Control" provisions of the Indenture by virtue thereof.
CERTAIN COVENANTS
The Indenture will contain, among others, the following covenants:
LIMITATION ON INCURRENCE OF ADDITIONAL INDEBTEDNESS. (a) The Company will
not, and will not permit any of its Restricted Subsidiaries to, directly or
indirectly, create, incur, assume, guarantee, acquire, become liable,
contingently or otherwise, with respect to, or otherwise become responsible for
payment of (collectively, "incur") any Indebtedness (other than Permitted
Indebtedness); PROVIDED, HOWEVER, that if no Default or Event of Default shall
have occurred and be continuing at the time of or as a consequence of the
incurrence of any such Indebtedness, the Company or any of its Restricted
Subsidiaries that is or, upon such incurrence, becomes a Guarantor may incur
Indebtedness (including, without limitation, Acquired Indebtedness) and any
Restricted Subsidiary of the Company that is not or will not, upon such
incurrence, become a Guarantor may incur Acquired Indebtedness, in each case if
on the date of the incurrence of such Indebtedness, after giving effect to the
incurrence thereof, the Consolidated Fixed Charge Coverage Ratio of the Company
is (i) greater than 2.00 to 1.0 if such Indebtedness is incurred on or before
July 1, 2004 or (ii) greater than 2.25 to 1.0 if such Indebtedness is incurred
after July 1, 2004.
For purposes of determining compliance with this covenant, (i) Acquired
Indebtedness shall be deemed to have been incurred by the Company or one of its
Restricted Subsidiaries, as the case may be, at the time an acquired Person
becomes such a Restricted Subsidiary (or is merged into the Company or such a
Restricted Subsidiary) or at the time of the acquisition of assets, as the case
may be and (ii) the maximum amount of Indebtedness that the Company and its
Restricted Subsidiaries may incur pursuant to this covenant shall not be deemed
to be exceeded, with respect to any outstanding Indebtedness, due solely to the
result of fluctuations in the exchange rates of currencies.
(b) The Company will not, and will not permit any Guarantor to, directly or
indirectly, incur any Indebtedness which by its terms (or by the terms of any
agreement governing such Indebtedness) is subordinated in right of payment to
any other Indebtedness of the Company or such Guarantor, as the case may be,
unless such Indebtedness is also by its terms (or by the terms of any agreement
governing such Indebtedness) made expressly subordinate to the Notes or the
applicable Guarantee, as the case may be, to the same extent and in the same
manner as such Indebtedness is subordinated to other Indebtedness of the Company
or such Guarantor, as the case may be.
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LIMITATION ON RESTRICTED PAYMENTS. The Company will not, and will not cause
or permit any of its Restricted Subsidiaries to, directly or indirectly:
(1) declare or pay any dividend or make any distribution on or in
respect of shares of Capital Stock of the Company or any Restricted
Subsidiary to holders of such Capital Stock, other than (a) dividends or
distributions payable in Qualified Capital Stock of the Company and (b) in
the case of a Restricted Subsidiary, dividends or distributions payable
(i) in Qualified Capital Stock of such Restricted Subsidiary and (ii) to the
Company and to any other Restricted Subsidiary and pro rata dividends or
distributions payable to minority stockholders of such Restricted
Subsidiary;
(2) purchase, redeem or otherwise acquire or retire for value any
Capital Stock of the Company or any Restricted Subsidiary, other than such
Capital Stock held by the Company or any Restricted Subsidiary;
(3) make any principal payment on, purchase, defease, redeem, prepay,
decrease or otherwise acquire or retire for value, prior to any scheduled
final maturity, scheduled repayment or scheduled sinking fund payment, any
Subordinated Indebtedness; or
(4) make any Investment (other than Permitted Investments) (each of the
foregoing actions set forth in clauses (1), (2), (3) and (4) being referred
to as a "Restricted Payment");
if at the time of such Restricted Payment or immediately after giving effect
thereto,
(i) a Default or an Event of Default shall have occurred and be
continuing;
(ii) the Company is not able to incur at least $1.00 of additional
Indebtedness (other than Permitted Indebtedness) in compliance with the
"Limitation on Incurrence of Additional Indebtedness" covenant; or
(iii) the aggregate amount of Restricted Payments (including such
proposed Restricted Payment) made subsequent to the Issue Date (the
amount expended for such purposes, if other than in cash, being the fair
market value of such property as determined in good faith by the Board of
Directors of the Company) shall exceed the sum (the "Restricted Payments
Basket") of:
(v) 50% of the cumulative Consolidated Net Income (or if
cumulative Consolidated Net Income shall be a loss, minus 100% of
such loss) of the Company earned from the beginning of the first full
fiscal quarter commencing subsequent to the Issue Date and ending on
the Company's most recently ended fiscal quarter for which internal
financial statements are available at the time of such proposed
Restricted Payment (the "Reference Date") (treating such period as a
single accounting period); plus
(w) 100% of the aggregate net cash proceeds received by the
Company from any Person (other than a Restricted Subsidiary of the
Company) from the issuance and sale subsequent to the Issue Date and
on or prior to the Reference Date of Qualified Capital Stock of the
Company (but excluding any debt security that is convertible into, or
exchangeable for, Qualified Capital Stock) (excluding any net cash
proceeds from a Public Equity Offering to the extent used to redeem
the Notes in compliance with the provisions set forth under the
subheading "Redemption--Optional Redemption Upon Public Equity
Offerings"); plus
(x) without duplication of any amounts included in
clause (iii)(w) above, 100% of the aggregate net cash proceeds of any
equity contribution received by the Company from a holder of the
Company's Capital Stock (excluding any net cash proceeds from a
Public Equity Offering to the extent used to redeem the Notes in
compliance with the provisions
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set forth under the subheading "Redemption--Optional Redemption Upon
Public Equity Offerings"); plus
(y) the amount by which the aggregate principal amount (or
accreted value, if less) of Indebtedness or the amount by which
Disqualified Capital Stock of the Company and its Restricted
Subsidiaries is reduced on the Company's consolidated balance sheet
upon the conversion or exchange subsequent to the Issue Date of any
Indebtedness (including Disqualified Capital Stock) which is
convertible into or exchangeable for Qualified Capital Stock of the
Company, together with the net cash proceeds received by the Company
at the time of such conversion; plus
(z) without duplication, the sum of:
(1) the aggregate amount returned in cash to the Company or
any Restricted Subsidiary of the Company on or with respect to
Investments (other than Permitted Investments) made subsequent to
the Issue Date whether through interest payments, principal
payments, dividends or other distributions or payments;
(2) the net cash proceeds received by the Company or any of
its Restricted Subsidiaries from the disposition of all or any
portion of such Investments (other than to a Restricted
Subsidiary of the Company); and
(3) upon redesignation of an Unrestricted Subsidiary as a
Restricted Subsidiary, the fair market value of such Subsidiary;
PROVIDED, HOWEVER, that the sum of clauses (1), (2) and
(3) above shall not exceed the aggregate amount of all such
Investments made subsequent to the Issue Date.
Notwithstanding the foregoing, the provisions set forth in the immediately
preceding paragraph do not prohibit:
(1) the payment of any dividend within 60 days after the date of
declaration of such dividend if the dividend would have been permitted on
the date of declaration;
(2) the repurchase, redemption or other acquisition or retirement of any
shares of Capital Stock of the Company or any Restricted Subsidiary of the
Company, either (i) solely in exchange for shares of Qualified Capital Stock
of the Company or (ii) through the application of net proceeds of a
substantially concurrent sale for cash (other than to a Restricted
Subsidiary of the Company) of shares of Qualified Capital Stock of the
Company;
(3) the payment of principal, the repurchase, retirement, redemption or
other repayment of any Subordinated Indebtedness either (i) solely in
exchange for shares of Qualified Capital Stock of the Company, or
(ii) through the application of net proceeds of a substantially concurrent
sale for cash (other than to a Restricted Subsidiary of the Company) of
(a) shares of Qualified Capital Stock of the Company or (b) if no Default or
Event of Default shall have occurred and be continuing, Refinancing
Indebtedness;
(4) if no Default or Event of Default shall have occurred and be
continuing, repurchases by the Company of Capital Stock from directors or
employees or former directors or employees of the Company or any of its
Subsidiaries or their authorized representatives, estates or beneficiaries
upon the death, disability or termination of employment of such employees,
in an aggregate amount not to exceed $500,000 in any twelve-month period;
(5) the repurchase of any Subordinated Indebtedness at a purchase price
not greater than 101% of the principal amount of such Indebtedness in the
event of a change of control in accordance with provisions similar to the
"Change of Control" covenant described herein; PROVIDED that, prior to such
repurchase, the Company has made the Change of Control Offer as provided in
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such covenant with respect to the Notes and has repurchased all Notes
validly tendered for payment in connection with such Change of Control
Offer;
(6) the payment or distribution, to dissenting holders of Capital Stock
pursuant to applicable law, pursuant to or in connection with a
consolidation, merger or transfer of assets that complies with the
provisions of the Indenture applicable to mergers, consolidations and
transfers of all or substantially all of the property and assets of the
Company or any of its Restricted Subsidiaries; and
(7) the cancellation or retirement of CBI Subordinated Notes held by a
Restricted Subsidiary of the Company.
In determining the aggregate amount of Restricted Payments made subsequent
to the Issue Date in accordance with clause (iii) of the second preceding
paragraph, amounts expended pursuant to clauses (1), (4), (5) and (6) of the
immediately preceding paragraph shall be included in such calculation. No
issuance and sale of Qualified Capital Stock pursuant to clause (2) or (3) of
the immediately preceding paragraph shall increase the Restricted Payments
Basket, except to the extent the proceeds thereof exceed the amounts used to
effect the transactions described therein.
LIMITATION ON ASSET SALES. (A) The Company will not, and will not permit
any of its Restricted Subsidiaries to, consummate an Asset Sale unless:
(1) the Company or the applicable Restricted Subsidiary, as the case may
be, receives consideration at the time of such Asset Sale at least equal to
the fair market value of the assets sold or otherwise disposed of (as
determined in good faith by the Company's Board of Directors);
(2) at least 75% of the consideration received by the Company or the
Restricted Subsidiary, as the case may be, from such Asset Sale shall be in
the form of cash or Cash Equivalents and is received at the time of such
disposition; PROVIDED that (a) the amount of any Indebtedness or other
liabilities of the Company or any such Restricted Subsidiary (other than
liabilities that are by their terms subordinated to the Notes) that are
assumed by the transferee of any such assets and (b) the fair market value
of any marketable securities, currencies, notes or other obligations
received by the Company or any such Restricted Subsidiary in exchange for
any such assets that are promptly converted into cash or Cash Equivalents
within 30 days after receipt thereof shall be deemed to be cash for purposes
of this provision; and
(3) upon the consummation of an Asset Sale, the Company shall, subject
to paragraph (B) below, apply, or cause such Restricted Subsidiary to apply,
the Net Cash Proceeds relating to such Asset Sale within 365 days of receipt
thereof either:
(a) to repay or prepay any Indebtedness under the Credit Agreement
and, in the case of any such Indebtedness under any revolving credit
facility, effect a permanent reduction in the availability under such
revolving credit facility; PROVIDED that the Net Cash Proceeds received
by the Company or any of its Restricted Subsidiaries from one or more
Sale and Leaseback Transactions (the "Excluded Sale and Leaseback
Transactions") may be used to repay or prepay Indebtedness under any such
revolving credit facility without effecting a permanent reduction in the
availability under such revolving credit facility to the extent that the
aggregate proceeds received from all such Excluded Sale and Leaseback
Transactions does not exceed $16.0 million;
(b) to make an Investment in properties and assets that replace the
properties and assets that were the subject of such Asset Sale or in
properties and assets that will be used, or Capital Stock of a Person
engaged, in a Permitted Business ("Replacement Assets"); and/or
(c) a combination of prepayment and investment permitted by the
foregoing clauses (3)(a) and (3)(b).
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(B) On the 366th day after an Asset Sale or such earlier date, if any, as
the Board of Directors of the Company or of such Restricted Subsidiary
determines not to apply the Net Cash Proceeds relating to such Asset Sale as set
forth in clauses (3)(a), (3)(b) and (3)(c) of paragraph (A) above (each, a "Net
Proceeds Offer Trigger Date"), such aggregate amount of Net Cash Proceeds which
have not been applied on or before such Net Proceeds Offer Trigger Date as
permitted in clauses (3)(a), (3)(b) and (3)(c) of paragraph (A) above (each a
"Net Proceeds Offer Amount") shall be applied by the Company or such Restricted
Subsidiary to make an offer to purchase (the "Net Proceeds Offer") to all
Holders and, to the extent required by the terms of any Pari Passu Indebtedness,
an offer to purchase to all holders of such Pari Passu Indebtedness, on a date
(the "Net Proceeds Offer Payment Date") not less than 30 nor more than 45 days
following the applicable Net Proceeds Offer Trigger Date, from all Holders (and
holders of any such Pari Passu Indebtedness) on a PRO RATA basis, that amount of
New Notes (and Pari Passu Indebtedness) equal to the Net Proceeds Offer Amount
at a price equal to 100% of the principal amount of the Notes (and Pari Passu
Indebtedness) to be purchased, plus accrued and unpaid interest thereon, if any,
to the date of purchase.
(C) If at any time any non-cash consideration received by the Company or any
Restricted Subsidiary of the Company, as the case may be, in connection with any
Asset Sale is converted into or sold or otherwise disposed of for cash (other
than interest received with respect to any such non-cash consideration), then
such conversion or disposition shall be deemed to constitute an Asset Sale
hereunder and the Net Cash Proceeds thereof shall be applied in accordance with
this covenant.
(D) The Company may defer the Net Proceeds Offer until there is an aggregate
unutilized Net Proceeds Offer Amount equal to or in excess of $5.0 million
resulting from one or more Asset Sales (at which time, the entire unutilized Net
Proceeds Offer Amount, and not just the amount in excess of $5.0 million, shall
be applied as required pursuant to this covenant).
(E) In the event of the transfer of substantially all (but not all) of the
property and assets of the Company and its Restricted Subsidiaries as an
entirety to a Person in a transaction permitted under "--Merger, Consolidation
and Sale of Assets", which transaction does not constitute a Change of Control,
the successor corporation shall be deemed to have sold the properties and assets
of the Company and its Restricted Subsidiaries not so transferred for purposes
of this covenant, and shall comply with the provisions of this covenant with
respect to such deemed sale as if it were an Asset Sale. In addition, the fair
market value of such properties and assets of the Company or its Restricted
Subsidiaries deemed to be sold shall be deemed to be Net Cash Proceeds for
purposes of this covenant.
(F) To the extent that the aggregate value of Notes tendered pursuant to
such Net Proceeds Offer is less than the Net Proceeds Offer Amount, the Company
may use the remaining amounts for general corporate purposes. Upon completion of
such Net Proceeds Offer, the Net Proceeds Offer Amount will be reset to zero.
(G) Notwithstanding paragraphs (A) and (B) of this covenant, the Company and
its Restricted Subsidiaries will be permitted to consummate an Asset Sale
without complying with such paragraphs to the extent that:
(1) at least 75% of the consideration for such Asset Sale constitutes
Replacement Assets; and
(2) such Asset Sale is for fair market value; PROVIDED that any cash or
Cash Equivalents received by the Company or any of its Restricted
Subsidiaries in connection with any Asset Sale permitted to be consummated
under this paragraph shall constitute Net Cash Proceeds subject to the
provisions of paragraphs (A) and (B) of this covenant.
(H) Each Net Proceeds Offer will be mailed to the record Holders as shown on
the register of Holders within 25 days following the Net Proceeds Offer Trigger
Date, with a copy to the Trustee, and shall comply with the procedures set forth
in the Indenture. Upon receiving notice of the Net Proceeds Offer, Holders may
elect to tender their Notes in whole or in part in integral multiples of $1,000
in exchange for cash. To the extent Holders properly tender Notes and holders of
Pari Passu
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Indebtedness properly tender such Indebtedness in an amount exceeding the Net
Proceeds Offer Amount, the tendered Notes and Pari Passu Indebtedness will be
purchased on a PRO RATA basis based on the aggregate amounts of Notes and Pari
Passu Indebtedness tendered (and the Trustee shall select the tendered Notes of
tendering Holders on a PRO RATA basis based on the amount of Notes tendered). A
Net Proceeds Offer shall remain open for a period of 20 business days or such
longer period as may be required by law.
(I) The Company will comply with the requirements of Rule 14e-1 under the
Exchange Act and any other securities laws and regulations to the extent such
laws and regulations are applicable in connection with the repurchase of Notes
pursuant to a Net Proceeds Offer. To the extent that the provisions of any
securities laws or regulations conflict with the "Asset Sale" provisions of the
Indenture, the Company shall comply with the applicable securities laws and
regulations and shall not be deemed to have breached its obligations under the
"Asset Sale" provisions of the Indenture by virtue thereof.
LIMITATION ON DIVIDEND AND OTHER PAYMENT RESTRICTIONS AFFECTING RESTRICTED
SUBSIDIARIES. The Company will not, and will not cause or permit any of its
Restricted Subsidiaries to, directly or indirectly, create or otherwise cause or
permit to exist or become effective any consensual encumbrance or restriction on
the ability of any such Restricted Subsidiary of the Company to:
(1) pay dividends or make any other distributions on or in respect of
its Capital Stock;
(2) make loans or advances or to pay any Indebtedness or other
obligation owed to the Company or any other Restricted Subsidiary of the
Company; or
(3) transfer any of its property or assets to the Company or any other
Restricted Subsidiary of the Company,
except for such encumbrances or restrictions existing under or by reason of:
(a) applicable law;
(b) the Indenture, the Notes and the Guarantees;
(c) in the case of clause (3) above, (A) agreements or instruments that
restrict in a customary manner the subletting, assignment or transfer of any
property or asset that is a lease, license, conveyance or contract or
similar property or asset, (B) any transfer of, agreement to transfer,
option or right with respect to, or Lien on, any property or assets of the
Company, or any Restricted Subsidiary not otherwise prohibited by the
Indenture or (C) provisions arising or agreed to in the ordinary course of
business, not relating to any Indebtedness, that do not, individually or in
the aggregate, detract from the value of property or assets of the Company
or any of its Restricted Subsidiaries in any manner material to the Company
or any of its Restricted Subsidiaries;
(d) any agreement or instrument governing Acquired Indebtedness, which
encumbrance or restriction is not applicable to any Person, or the
properties or assets of any Person, other than the Person or the properties
or assets of the Person so acquired;
(e) agreements or instruments existing on the Issue Date to the extent
and in the manner such encumbrances and restrictions are in effect on the
Issue Date, including the Credit Agreement;
(f) an agreement that has been entered into for the sale or disposition
of all or substantially all of the Capital Stock of, or property and assets
of, any Restricted Subsidiary of the Company or provisions with respect to
the disposition or distribution of assets or property in joint venture
agreements or other similar agreements or arrangements entered into in the
ordinary course of business;
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(g) provisions in agreements or instruments which prohibit the payment
of dividends or the making of other distributions with respect to any class
of Capital Stock of a Person other than on a pro rata basis;
(h) Purchase Money Indebtedness incurred in compliance with the
"Limitation on Incurrence of Additional Indebtedness" covenant that impose
restrictions of the nature described in clause (3) above on the property
acquired;
(i) restrictions on cash or other deposits imposed by customers under
contracts or other arrangements entered into or agreed to in the ordinary
course of business;
(j) restrictions on the ability of any Foreign Restricted Subsidiary to
make dividends or other distributions resulting from the operation of
reasonable financial covenants contained in documentation governing
Indebtedness of such Subsidiary permitted under the Indenture; or
(k) an agreement governing Indebtedness incurred to Refinance the
Indebtedness issued, assumed or incurred pursuant to an agreement referred
to in clause (b), (d), (e), (h) or (j) above; PROVIDED, HOWEVER, that the
provisions relating to such encumbrance or restriction contained in any such
Indebtedness are no less favorable to the Company in any material respect as
determined by the Board of Directors of the Company in their reasonable and
good faith judgment than the provisions relating to such encumbrance or
restriction contained in agreements referred to in such clause (b), (d),
(e), (h) or (j).
LIMITATION ON PREFERRED STOCK OF RESTRICTED SUBSIDIARIES. The Company will
not permit any of its Restricted Subsidiaries that are not Guarantors to issue
any Preferred Stock (other than to the Company or to a Wholly Owned Restricted
Subsidiary of the Company) or permit any Person (other than the Company or a
Wholly Owned Restricted Subsidiary of the Company) to own any Preferred Stock of
any Restricted Subsidiary of the Company that is not a Guarantor.
LIMITATION ON LIENS. The Company will not, and will not cause or permit any
of its Restricted Subsidiaries to, directly or indirectly, create, incur, assume
or permit or suffer to exist any Liens (other than Permitted Liens) of any kind
against or upon any property or assets of the Company or any of its Restricted
Subsidiaries whether owned on the Issue Date or acquired after the Issue Date,
or any proceeds therefrom, or assign or otherwise convey any right to receive
income or profits therefrom unless:
(1) in the case of Liens securing Subordinated Indebtedness, the Notes
are secured by a Lien on such property, assets or proceeds that is senior in
priority to such Liens; and
(2) in all other cases, the Notes are equally and ratably secured by a
Lien on such property, assets, proceeds, income or profit.
In the event that all Liens, the existence of any of which gives rise to a
Lien securing the Notes pursuant to the provisions of this covenant, cease to
exist, the Lien securing the New Notes required by this covenant shall
automatically be released and the Trustee shall execute appropriate
documentation.
MERGER, CONSOLIDATION AND SALE OF ASSETS. The Company will not, in a single
transaction or series of related transactions, consolidate or merge with or into
any Person, or sell, assign, transfer, lease, convey or otherwise dispose of (or
cause or permit any Restricted Subsidiary of the Company to sell, assign,
transfer, lease, convey or otherwise dispose of) all or substantially all of the
Company's assets (determined on a consolidated basis for the Company and the
Company's Restricted Subsidiaries) whether as an entirety or substantially as an
entirety to any Person unless:
(1) either:
(a) the Company shall be the surviving or continuing corporation; or
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(b) the Person (if other than the Company) formed by such
consolidation or into which the Company is merged or the Person which
acquires by sale, assignment, transfer, lease, conveyance or other
disposition the properties and assets of the Company and of the Company's
Restricted Subsidiaries substantially as an entirety (the "Surviving
Entity"):
(x) shall be a corporation organized and validly existing under
the laws of the United States or any State thereof or the District of
Columbia; and
(y) shall expressly assume, by supplemental indenture (in form
and substance reasonably satisfactory to the Trustee in all
respects), executed and delivered to the Trustee, the due and
punctual payment of the principal of, and premium, if any, and
interest on all of the Notes and the performance of every covenant of
the Notes, the Indenture and the Registration Rights Agreement on the
part of the Company to be performed or observed;
(2) except in the case of a consolidation or merger of the Company with
or into a Wholly Owned Restricted Subsidiary, or a sale, assignment,
transfer, lease, conveyance or other disposition of all or substantially all
of the Company's assets to a Wholly Owned Restricted Subsidiary, immediately
after giving effect to such transaction and the assumption contemplated by
clause (1)(b)(y) above (including giving effect to any Indebtedness
(including Acquired Indebtedness) incurred or anticipated to be incurred in
connection with or in respect of such transaction), the Company or such
Surviving Entity, as the case may be, (a) shall have a Consolidated Net
Worth equal to or greater than the Consolidated Net Worth of the Company
immediately prior to such transaction and (b) shall be able to incur at
least $1.00 of additional Indebtedness (other than Permitted Indebtedness)
pursuant to the "--Limitation on Incurrence of Additional Indebtedness"
covenant;
(3) immediately before and immediately after giving effect to such
transaction and the assumption contemplated by clause (1)(b)(y) above
(including, without limitation, giving effect to any Indebtedness (including
Acquired Indebtedness) incurred or anticipated to be incurred and any Lien
granted in connection with or in respect of the transaction), no Default or
Event of Default shall have occurred or be continuing; and
(4) the Company or the Surviving Entity shall have delivered to the
Trustee an officers' certificate and an opinion of counsel, each stating
that such consolidation, merger, sale, assignment, transfer, lease,
conveyance or other disposition and, if a supplemental indenture is required
in connection with such transaction, such supplemental indenture comply with
the applicable provisions of the Indenture and that all conditions precedent
in the Indenture relating to such transaction have been satisfied.
For purposes of the foregoing, the transfer (by lease, assignment, sale or
otherwise, in a single transaction or series of transactions) of all or
substantially all of the properties or assets of one or more Restricted
Subsidiaries of the Company, the Capital Stock of which constitutes all or
substantially all of the properties and assets of the Company, shall be deemed
to be the transfer of all or substantially all of the properties and assets of
the Company and the Company, if surviving, will be automatically discharged from
all of its Obligations under the Indenture and the Notes so long as the
requirements set forth above are satisfied.
The Indenture will provide that upon any consolidation, combination or
merger or any transfer of all or substantially all of the assets of the Company
in accordance with the foregoing, in which the Company is not the continuing
corporation, the Surviving Entity formed by such consolidation or into which the
Company is merged or to which such conveyance, lease or transfer is made shall
succeed to, and be substituted for, and may exercise every right and power of,
the Company under the Indenture and the Notes with the same effect as if such
Surviving Entity had been named as such.
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Each Guarantor (other than any Guarantor whose Guarantee is to be released
in accordance with the terms of the Guarantee and the Indenture in connection
with any transaction complying with the provisions of "--Limitation on Asset
Sales") will not, and the Company will not cause or permit any Guarantor to,
consolidate with or merge with or into any Person other than the Company or any
other Guarantor unless:
(1) the entity formed by or surviving any such consolidation or merger
(if other than the Guarantor) or to which such sale, lease, conveyance or
other disposition shall have been made is a corporation organized and
existing under the laws of the United States or any State thereof or the
District of Columbia;
(2) such entity assumes by supplemental indenture all of the obligations
of the Guarantor under the Guarantee, the Indenture and the Registration
Rights Agreement;
(3) immediately after giving effect to such transaction, no Default or
Event of Default shall have occurred and be continuing; and
(4) immediately after giving effect to such transaction and the use of
any net proceeds therefrom on a PRO FORMA basis, the Company could satisfy
the provisions of clause (2) of the first paragraph of this covenant.
Any merger or consolidation, or sale, assignment, transfer, lease,
conveyance or other disposition of all or substantially all of the property or
assets, (a) of a Guarantor with and into the Company (with the Company being the
surviving entity) or another Guarantor that is a Wholly Owned Restricted
Subsidiary of the Company or (b) of the Company with an Affiliate incorporated
solely for the purpose of reincorporating the Company in another jurisdiction in
the United States or any state thereof or the District of Columbia, need only
comply with clause (4) of the first paragraph of this covenant.
LIMITATIONS ON TRANSACTIONS WITH AFFILIATES. The Company will not, and will
not permit any of its Restricted Subsidiaries to, directly or indirectly, enter
into or permit to exist any transaction or series of related transactions
(including, without limitation, the purchase, sale, lease or exchange of any
property or the rendering of any service) with, or for the benefit of, any of
its Affiliates (each an "Affiliate Transaction"), other than (x) Affiliate
Transactions permitted under the third paragraph of this covenant and
(y) Affiliate Transactions on terms that are no less favorable than those that
might reasonably have been obtained in a comparable transaction at such time on
an arm's-length basis from a Person that is not an Affiliate of the Company or
such Restricted Subsidiary.
All Affiliate Transactions (and each series of related Affiliate
Transactions which are similar or part of a common plan) involving aggregate
payments or other property with a fair market value in excess of $2.0 million
shall be approved by the Board of Directors of the Company or such Restricted
Subsidiary, as the case may be, such approval to be evidenced by a Board
Resolution stating that such Board of Directors has determined that such
transaction complies with the foregoing provisions. If the Company or any
Restricted Subsidiary of the Company enters into an Affiliate Transaction (or a
series of related Affiliate Transactions related to a common plan) that involves
an aggregate fair market value of more than $5.0 million, the Company or such
Restricted Subsidiary, as the case may be, shall, prior to the consummation
thereof, obtain a favorable opinion as to the fairness of such transaction or
series of related transactions to the Company or the relevant Restricted
Subsidiary, as the case may be, from a financial point of view, issued by an
Independent Financial Advisor and file the same with the Trustee.
The restrictions set forth in the first paragraph of this covenant shall not
apply to:
(1) reasonable fees and compensation paid to and indemnity and
reimbursement provided on behalf of, officers, directors, employees or
consultants of the Company or any Restricted
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Subsidiary of the Company as determined in good faith by the Company's Board
of Directors or senior management;
(2) transactions exclusively between or among the Company and any of its
Wholly Owned Restricted Subsidiaries or exclusively between or among such
Wholly Owned Restricted Subsidiaries, provided such transactions are not
otherwise prohibited by the Indenture;
(3) any agreement (other than the Management Agreement) as in effect as
of the Issue Date or any amendment thereto or any transaction contemplated
thereby (including pursuant to any amendment thereto) in any replacement
agreement thereto so long as any such amendment or replacement agreement is
not more disadvantageous to the Holders, taken as a whole, in any material
respect than the original agreement as in effect on the Issue Date;
(4) the payment to Castle Harlan, Inc. of management fees pursuant to
and in accordance with the Management Agreement not to exceed the amount per
year specified in the Management Agreement; PROVIDED that, in the event the
full amount thereof is not paid in any year, the deficiency may cumulate
and, provided that no Default or Event of Default shall have occurred and be
continuing at the time of payment, may be paid together with the then
current management fee for such subsequent year;
(5) Restricted Payments permitted by the Indenture;
(6) any employment, stock option, stock repurchase, employee benefit,
compensation, business expense reimbursement or other employment-related
agreements, arrangements or plans entered into by the Company or any of its
Restricted Subsidiaries in the ordinary course of business;
(7) loans or advances to employees or directors in the ordinary course
of business of the Company or any of its Restricted Subsidiaries to the
extent permitted under the Indenture;
(8) any payments or other transactions pursuant to any tax-sharing
agreement between the Company and any other Person with which it files a
consolidated tax return or with which the Company is part of a consolidated
group for tax purposes;
(9) any Affiliate Transaction which constitutes a Permitted Investment;
(10) any transaction on arm's length terms with non-Affiliates that
become Affiliates as a result of such transaction; and
(11) the issuance of Qualified Capital Stock of the Company or any of
its Restricted Subsidiaries.
ADDITIONAL SUBSIDIARY GUARANTEES. If the Company or any of its Restricted
Subsidiaries transfers or causes to be transferred, in one transaction or a
series of related transactions, any property to any Material Domestic Restricted
Subsidiary that is not a Guarantor, or if the Company or any of its Restricted
Subsidiaries shall organize, acquire or otherwise invest in another Material
Domestic Restricted Subsidiary, then such transferee or acquired or other
Restricted Subsidiary shall:
(1) execute and deliver to the Trustee a supplemental indenture in form
reasonably satisfactory to the Trustee pursuant to which such Restricted
Subsidiary shall unconditionally guarantee all of the Company's obligations
under the Notes and the Indenture on the terms set forth in the Indenture;
and
(2) deliver to the Trustee an opinion of counsel that such supplemental
indenture has been duly authorized, executed and delivered by such
Restricted Subsidiary and constitutes a legal, valid, binding and
enforceable obligation of such Restricted Subsidiary. Thereafter, such
Restricted Subsidiary shall be a Guarantor for all purposes of the
Indenture.
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CONDUCT OF BUSINESS. The Company and its Restricted Subsidiaries will not
engage in any businesses which is not a Permitted Business.
REPORTS TO HOLDERS. The Indenture will provide that, whether or not
required by the rules and regulations of the Commission, so long as any Notes
are outstanding and prior to the Company being subject to the reporting
requirements of Section 13 or 15(d) of the Exchange Act, the Company will
deliver to the Trustee, within the time periods specified in the Commission's
rule and regulations:
(1) all quarterly and annual financial information that would be
required to be contained in a filing with the Commission on Forms 10-Q and
10-K if the Company were required to file such Forms, including a
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" that describes the financial condition and results of operations
of the Company and its consolidated Subsidiaries and, with respect to the
annual financial statements only, a report thereon by the Company's
certified independent accountants; and
(2) all current reports that would be required to be filed with the
Commission on Form 8-K if the Company were required to file such reports, in
each case within the time periods specified in the Commission's rules and
regulations.
In addition, following the consummation of the exchange offer contemplated
by the Registration Rights Agreement, whether or not required by the rules and
regulations of the Commission, the Company will file a copy of all such
information and reports with the Commission for public availability within the
time periods specified in the Commission's rules and regulations (unless the
Commission will not accept such a filing) and make such information available to
securities analysts and prospective investors upon request. In addition, the
Company has agreed that, for so long as any Notes remain outstanding, it will
furnish to the Holders and to securities analysts and prospective investors,
upon their request, the information required to be delivered pursuant to
Rule 144A(d)(4) under the Securities Act.
PAYMENTS FOR CONSENT. Neither the Company nor any of its Subsidiaries
shall, directly or indirectly, pay or cause to be paid any consideration,
whether by way of interest, fee or otherwise, to any Holder of any Notes for or
as an inducement to any consent, waiver or amendment of any of the terms or
provisions of the Indenture or the Notes unless such consideration is offered to
be paid or is paid to all Holders of the Notes that consent, waive or agree to
amend in the time frame set forth in the solicitation documents relating to such
consent, waiver or agreement.
EVENTS OF DEFAULT
The following events are defined in the Indenture as "Events of Default":
(1) the failure to pay interest on any Note when the same becomes due
and payable and the default continues for a period of 30 days;
(2) the failure to pay the principal of any Note, when such principal
becomes due and payable, at maturity, upon redemption or otherwise
(including the failure to make a payment to purchase Notes tendered pursuant
to a Change of Control Offer or a Net Proceeds Offer);
(3) a default in the observance or performance of any other covenant or
agreement contained in the Indenture which default continues for a period of
45 days after the Company receives written notice specifying the default
(and demanding that such default be remedied and stating that such notice is
a "Notice of Default") from the Trustee or the Holders of at least 25% of
the outstanding principal amount of the Notes (except in the case of a
default with respect to the "Merger, Consolidation and Sale of Assets"
covenant, which will constitute an Event of Default with such notice
requirement but without such passage of time requirement);
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(4) the failure to pay at final maturity (giving effect to any
applicable grace periods and any extensions thereof) the principal amount of
any Indebtedness of the Company or any Restricted Subsidiary of the Company,
or the acceleration of the final stated maturity of any such Indebtedness,
if the aggregate principal amount of such Indebtedness, together with the
principal amount of any other such Indebtedness in default for failure to
pay principal at final maturity or which has been accelerated, aggregates
$5.0 million or more at any time and such failure shall not have been cured
or waived within 20 days thereof;
(5) one or more judgments in an aggregate amount in excess of
$5.0 million (net of any insurance or indemnity payments actually received
in respect thereof prior to or within 60 days from the entry thereof, or to
be received in respect thereof in the event any appeal thereof shall be
unsuccessful) shall have been rendered against the Company or any of its
Restricted Subsidiaries and such judgments shall remain undischarged, unpaid
or unstayed for a period of 60 consecutive days after such judgment or
judgments become final and non-appealable;
(6) certain events of bankruptcy affecting the Company or any of its
Significant Subsidiaries; or
(7) any Guarantee of a Significant Subsidiary ceases to be in full force
and effect or any Guarantee of a Significant Subsidiary is declared to be
null and void and unenforceable or any Guarantee of a Significant Subsidiary
is found to be invalid or any Guarantor that is a Significant Subsidiary
denies its liability in writing under its Guarantee (other than by reason of
release of a Guarantor in accordance with the terms of the Indenture).
If an Event of Default (other than an Event of Default specified in
clause (6) above with respect to the Company) shall occur and be continuing, the
Trustee or the Holders of at least 25% in principal amount of outstanding Notes
may declare the principal of and accrued and unpaid interest on all the Notes to
be due and payable by notice in writing to the Company and the Trustee
specifying the respective Event of Default and that it is a "notice of
acceleration", and the same shall become immediately due and payable. If an
Event of Default specified in clause (6) above with respect to the Company
occurs and is continuing, then all unpaid principal of, and premium, if any, and
accrued and unpaid interest on all of the outstanding Notes shall IPSO FACTO
become and be immediately due and payable without any declaration or other act
on the part of the Trustee or any Holder.
The Indenture will provide that, at any time after a declaration of
acceleration with respect to the Notes as described in the preceding paragraph,
the Holders of a majority in principal amount of the Notes may rescind and
cancel such declaration and its consequences:
(1) if the rescission would not conflict with any judgment or decree;
(2) if all existing Events of Default have been cured or waived except
nonpayment of principal or interest that has become due solely because of
the acceleration;
(3) to the extent the payment of such interest is lawful, if interest on
overdue installments of interest and overdue principal, which has become due
otherwise than by such declaration of acceleration, has been paid; and
(4) if the Company has paid the Trustee its reasonable compensation and
reimbursed the Trustee for its expenses, disbursements and advances.
No such rescission shall affect any subsequent Default or impair any right
consequent thereto.
The Holders of a majority in principal amount of the Notes may waive any
existing or past Default or Event of Default under the Indenture, and its
consequences, except a default in the payment of the principal of or interest on
any Notes.
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Holders of the Notes may not enforce the Indenture or the Notes except as
provided in the Indenture and under the TIA. Subject to the provisions of the
Indenture relating to the duties of the Trustee, the Trustee is under no
obligation to exercise any of its rights or powers under the Indenture at the
request, order or direction of any of the Holders, unless such Holders have
offered to the Trustee reasonable indemnity. Subject to all provisions of the
Indenture and applicable law, the Holders of a majority in aggregate principal
amount of the then outstanding Notes have the right to direct the time, method
and place of conducting any proceeding for any remedy available to the Trustee
or exercising any trust or power conferred on the Trustee.
Under the Indenture, the Company is required to provide an officers'
certificate to the Trustee promptly, and in any event within 5 Business Days,
upon any such officer obtaining knowledge of any Default or Event of Default
(provided that the Company shall provide such certification at least annually
whether or not any officer knows of any Default or Event of Default) that has
occurred and, if applicable, describe such Default or Event of Default and the
status thereof.
NO PERSONAL LIABILITY OF DIRECTORS, OFFICERS, EMPLOYEES AND STOCKHOLDERS
No past, present or future director, officer, employee, incorporator, agent
or stockholder or Affiliate of the Company, as such, shall have any liability
for any obligations of the Company under the Notes, the Indenture or for any
claim based on, in respect of, or by reason of, such obligations or their
creation. No past, present or future director, officer, employee, incorporator,
agent or stockholder or Affiliate of any of the Guarantors, as such, shall have
any liability for any obligations of the Guarantors under the Guarantees, the
Indenture or for any claim based on, in respect of, or by reason of, such
obligations or their creation. Each Holder of Notes and Guarantees by accepting
a Note and a Guarantee waives and releases all such liabilities. The waiver and
release are part of the consideration for issuance of the Notes and the
Guarantees. Such waiver may not be effective to waive liabilities under the
federal securities law and it is the view of the Commission that such a waiver
is against public policy.
LEGAL DEFEASANCE AND COVENANT DEFEASANCE
The Company may, at its option and at any time, elect to have its
obligations and the obligations of the Guarantors discharged with respect to the
outstanding Notes ("Legal Defeasance"). Such Legal Defeasance means that the
Company shall be deemed to have paid and discharged the entire indebtedness
represented by the outstanding Notes, except for:
(1) the rights of Holders to receive payments in respect of the
principal of, premium, if any, and interest on the Notes when such payments
are due;
(2) the Company's obligations with respect to the Notes concerning
issuing temporary New Notes, registration of Notes, mutilated, destroyed,
lost or stolen Notes and the maintenance of an office or agency for
payments;
(3) the rights, powers, trust, duties and immunities of the Trustee and
the Company's obligations in connection therewith; and
(4) the Legal Defeasance provisions of the Indenture.
In addition, the Company may, at its option and at any time, elect to have
the obligations of the Company released with respect to certain covenants that
are described in the Indenture ("Covenant Defeasance") and thereafter any
omission to comply with such obligations shall not constitute a Default or Event
of Default with respect to the Notes. In the event Covenant Defeasance occurs,
certain events (not including non-payment, bankruptcy, receivership,
reorganization and insolvency events)
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described under "Events of Default" will no longer constitute Events of Default
with respect to the Notes.
In order to exercise either Legal Defeasance or Covenant Defeasance:
(1) the Company must irrevocably deposit with the Trustee, in trust, for
the benefit of the Holders cash in U.S. dollars, non-callable U.S.
government obligations, or a combination thereof, in such amounts as will be
sufficient, in the opinion of a nationally recognized firm of independent
public accountants selected by the Company, to pay the principal of,
premium, if any, and interest on the Notes on the stated date for payment
thereof or on the applicable redemption date, as the case may be;
(2) in the case of Legal Defeasance, the Company shall have delivered to
the Trustee an opinion of counsel in the United States reasonably acceptable
to the Trustee confirming that:
(a) the Company has received from, or there has been published by,
the Internal Revenue Service a ruling; or
(b) since the date of the Indenture, there has been a change in the
applicable federal income tax law,
in either case to the effect that, and based thereon such opinion of
counsel shall confirm that, the Holders will not recognize income, gain
or loss for federal income tax purposes as a result of such Legal
Defeasance and will be subject to federal income tax on the same amounts,
in the same manner and at the same times as would have been the case if
such Legal Defeasance had not occurred;
(3) in the case of Covenant Defeasance, the Company shall have delivered
to the Trustee an opinion of counsel in the United States reasonably
acceptable to the Trustee confirming that the Holders will not recognize
income, gain or loss for federal income tax purposes as a result of such
Covenant Defeasance and will be subject to federal income tax on the same
amounts, in the same manner and at the same times as would have been the
case if such Covenant Defeasance had not occurred;
(4) no Default or Event of Default shall have occurred and be continuing
on the date of such deposit or insofar as Events of Default from bankruptcy
or insolvency events are concerned, at any time in the period ending on the
91st day after the date of deposit (other than a Default or Event of Default
arising in connection with the borrowing of funds to fund the deposit
referred to in clause (1) above);
(5) such Legal Defeasance or Covenant Defeasance shall not result in a
breach or violation of, or constitute a default under the Indenture or any
other material agreement or instrument to which the Company or any of its
Subsidiaries is a party or by which the Company or any of its Subsidiaries
is bound;
(6) the Company shall have delivered to the Trustee an officers'
certificate stating that the deposit was not made by the Company with the
intent of preferring the Holders over any other creditors of the Company or
with the intent of defeating, hindering, delaying or defrauding any other
creditors of the Company or others;
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(7) the Company shall have delivered to the Trustee an officers'
certificate and an opinion of counsel, each stating that all conditions
precedent provided for or relating to the Legal Defeasance or the Covenant
Defeasance have been complied with;
(8) the Company shall have delivered to the Trustee an opinion of
counsel to the effect that, assuming no intervening bankruptcy of the
Company between the date of deposit and the 91st day following the date of
deposit and that no Holder is an insider of the Company, after the 91st day
following the date of deposit, the trust funds will not be subject to the
effect of any applicable bankruptcy, insolvency, reorganization or similar
laws affecting creditors' rights generally; and
(9) certain other customary conditions precedent are satisfied.
Notwithstanding the foregoing, the opinion of counsel required by
clause (2) above with respect to a Legal Defeasance need not be delivered if all
Notes not theretofore delivered to the Trustee for cancellation (1) have become
due and payable or (2) will become due and payable on the maturity date within
one year under arrangements satisfactory to the Trustee for the giving of notice
of redemption by the Trustee in the name, and at the expense, of the Company.
SATISFACTION AND DISCHARGE
The Indenture will be discharged and will cease to be of further effect as
to all outstanding New Notes when:
(1) either:
(a) all the Notes theretofore authenticated and delivered (except
lost, stolen or destroyed Notes which have been replaced or paid and
Notes for whose payment money has theretofore been deposited in trust or
segregated and held in trust by the Company and thereafter repaid to the
Company or discharged from such trust) have been delivered to the Trustee
for cancellation; or
(b) all Notes not theretofore delivered to the Trustee for
cancellation have become due and payable and the Company has irrevocably
deposited or caused to be deposited with the Trustee funds in an amount
sufficient to pay and discharge the entire Indebtedness on the Notes not
theretofore delivered to the Trustee for cancellation, for principal of,
premium, if any, and interest on the Notes to the date of deposit
together with irrevocable instructions from the Company directing the
Trustee to apply such funds to the payment thereof at maturity or
redemption, as the case may be;
(2) the Company has paid all other sums payable under the Indenture by
the Company; and
(3) the Company has delivered to the Trustee an officers' certificate
and an opinion of counsel stating that all conditions precedent under the
Indenture relating to the satisfaction and discharge of the Indenture have
been complied with.
MODIFICATION OF THE INDENTURE
From time to time, the Company, the Guarantors and the Trustee, without the
consent of the Holders, may amend, waive or otherwise modify provisions of the
Indenture for certain specified purposes, including (a) curing ambiguities,
defects or inconsistencies so long as such changes do not, in the opinion of the
Trustee, adversely affect the rights of any of the Holders in any material
respect, (b) providing for uncertificated Notes in addition to or in place of
certificated Notes, (c) providing for the assumption of the Company's
obligations to Holders of the Notes in case of a merger or
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consolidation or sale of all or substantially all of the Company's assets; or
(d) complying with the requirements of the Commission in order to effect or
maintain the qualification of the Indenture under the TIA. Other amendments,
waivers and other modifications of provisions of the Indenture may be made with
the consent of the Holders of a majority in principal amount of the then
outstanding Notes issued under the Indenture, except that, without the consent
of each Holder affected thereby, no such amendment, waiver or other modification
may:
(1) reduce the principal amount of Notes at maturity whose Holders must
consent to an amendment;
(2) reduce the rate of or change or have the effect of changing the time
for payment of interest, including defaulted interest, on any Notes;
(3) reduce the principal of or change or have the effect of changing the
fixed maturity of any New Notes, or change the date on which any Notes may
be subject to redemption or reduce the redemption price therefor;
(4) make any Notes payable in money other than that stated in the Notes;
(5) make any change in provisions of the Indenture protecting the right
of each Holder to receive payment of principal of and interest on such
Holder's Note or Notes on or after the due date thereof or to bring suit to
enforce such payment, or permitting Holders of a majority in principal
amount of Notes to waive Defaults or Events of Default;
(6) after the Company's obligation to purchase Notes arises thereunder,
amend, change or modify in any material respect the obligation of the
Company to make and consummate a Change of Control Offer in the event of a
Change of Control or make and consummate a Net Proceeds Offer with respect
to any Asset Sale that has been consummated or, after such Change of Control
has occurred or such Asset Sale has been consummated, modify any of the
provisions or definitions with respect thereto;
(7) modify or change any provision of the Indenture or the related
definitions affecting the ranking of the Notes or any Guarantee in a manner
which adversely affects the Holders; or
(8) release any Guarantor that is a Significant Subsidiary from any of
its obligations under its Guarantee or the Indenture otherwise than in
accordance with the terms of the Indenture.
Notwithstanding the foregoing, the consent of at least 66 2/3% in principal
amount of the then outstanding Notes issued under the Indenture shall be
required (a) to eliminate any covenant in the Indenture described under
"--Certain Covenants" or "--Change of Control" above or any of the related
definitions or (b) to amend, modify or waive one or more provisions in any such
covenant or definition that would (individually or if aggregated with other
amendments, modifications or waivers previously or concurrently made or given)
effectively eliminate the protections afforded to the Holders by such covenant,
in each case (a) or (b), where such elimination, amendment, modification or
waiver would otherwise require the consent of a majority in principal amount of
the then outstanding Notes issued under the Indenture.
GOVERNING LAW
The Indenture will provide that it, the Notes and the Guarantees will be
governed by, and construed in accordance with, the laws of the State of New York
but without giving effect to applicable principles of conflicts of law to the
extent that the application of the law of another jurisdiction would be required
thereby.
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THE TRUSTEE
The Indenture will provide that, except during the continuance of an Event
of Default, the Trustee will perform only such duties as are specifically set
forth in the Indenture. During the existence of an Event of Default, the Trustee
will exercise such rights and powers vested in it by the Indenture, and use the
same degree of care and skill in its exercise as a prudent person would exercise
or use under the circumstances in the conduct of his or her own affairs.
The Indenture and the provisions of the TIA contain certain limitations on
the rights of the Trustee, should it become a creditor of the Company, to obtain
payments of claims in certain cases or to realize on certain property received
in respect of any such claim as security or otherwise. Subject to the TIA, the
Trustee will be permitted to engage in other transactions; PROVIDED that if the
Trustee acquires any conflicting interest as described in the TIA, it must
eliminate such conflict or resign.
CERTAIN DEFINITIONS
Set forth below is a summary of certain of the defined terms used in the
Indenture. Reference is made to the Indenture for the full definition of all
such terms, as well as any other terms used herein for which no definition is
provided.
"ACQUIRED INDEBTEDNESS" means Indebtedness of a Person or any of its
Subsidiaries existing at the time such Person becomes a Restricted Subsidiary of
the Company or at the time it merges or consolidates with or into the Company or
any of its Restricted Subsidiaries or assumed in connection with the acquisition
of assets from such Person and in each case not incurred by such Person in
connection with, or in anticipation or contemplation of, such Person becoming a
Restricted Subsidiary of the Company or such acquisition, merger or
consolidation.
"AFFILIATE" means, with respect to any specified Person, any other Person
who directly or indirectly through one or more intermediaries controls, or is
controlled by, or is under common control with, such specified Person. The term
"control" means the possession, directly or indirectly, of the power to direct
or cause the direction of the management and policies of a Person, whether
through the ownership of voting securities, by contract or otherwise; and the
terms "controlling" and "controlled" have meanings correlative of the foregoing.
"ASSET ACQUISITION" means (1) an Investment by the Company or any Restricted
Subsidiary of the Company in any other Person pursuant to which such Person
shall become a Restricted Subsidiary of the Company or any Restricted Subsidiary
of the Company, or shall be merged with or into the Company or any Restricted
Subsidiary of the Company, or (2) the acquisition by the Company or any
Restricted Subsidiary of the Company of the assets of any Person (other than a
Restricted Subsidiary of the Company) which constitute all or substantially all
of the assets of such Person or comprises any division or line of business of
such Person or any other properties or assets of such Person other than in the
ordinary course of business.
"ASSET SALE" means any direct or indirect sale, issuance, conveyance,
transfer, lease (other than operating leases entered into in the ordinary course
of business), assignment or other transfer for value by the Company or any of
its Restricted Subsidiaries (including any Sale and Leaseback Transaction) to
any Person other than the Company or a Wholly Owned Restricted Subsidiary of the
Company of: (1) any Capital Stock of any Restricted Subsidiary of the Company;
or (2) any other property or assets of the Company or any Restricted Subsidiary
of the Company other than in the ordinary course of business; PROVIDED, HOWEVER,
that asset sales or other dispositions shall not include: (a) a transaction or
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series of related transactions for which the Company or its Restricted
Subsidiaries receive aggregate consideration of less than $2,000,000; (b) the
sale, lease, conveyance, disposition or other transfer of all or substantially
all of the assets (determined on a consolidated basis for the Company and its
Restricted Subsidiaries) of the Company as permitted under the "Merger,
Consolidation and Sale of Assets" covenant; (c) any Restricted Payment permitted
by the "Limitation on Restricted Payments" covenants or that constitutes a
Permitted Investment; (d) sales or other dispositions of inventory, receivables
or other current assets in the ordinary course of business; (e) a Permitted
Lien; and (f) a sale or other disposition or abandonment of damaged, worn-out or
obsolete property.
"BOARD OF DIRECTORS" means, as to any Person, the board of directors or
similar governing body of such Person or any duly authorized committee thereof.
"BOARD RESOLUTION" means, with respect to any Person, a copy of a resolution
certified by the Secretary or an Assistant Secretary of such Person to have been
duly adopted by the Board of Directors of such Person and to be in full force
and effect on the date of such certification, and delivered to the Trustee.
"BORROWING BASE" means, as of any date, an amount equal to the sum of:
(1) 85% of the aggregate book value of all accounts receivable of the
Company and its Restricted Subsidiaries; and
(2) 60% of the aggregate book value of all inventory owned by the
Company and its Restricted Subsidiaries,
all calculated on a consolidated basis and in accordance with GAAP.
To the extent that information is not available as to the amount of accounts
receivable or inventory as of a specific date, the Company shall use the most
recent available information for purposes of calculating the Borrowing Base.
"CAPITAL STOCK" means:
(1) with respect to any Person that is a corporation, any and all
shares, interests, participations or other equivalents (however designated
and whether or not voting) of corporate stock, including each class of
Common Stock and Preferred Stock of such Person, and all options, warrants
or other rights to purchase or acquire any of the foregoing; and
(2) with respect to any Person that is not a corporation, any and all
partnership, membership or other equity interests of such Person, and all
options, warrants or other rights to purchase or acquire any of the
foregoing.
"CAPITALIZED LEASE OBLIGATION" means, as to any Person, the obligations of
such Person under a lease that are required to be classified and accounted for
as capital lease obligations under GAAP and, for purposes of this definition,
the amount of such obligations at any date shall be the capitalized amount of
such obligations at such date, determined in accordance with GAAP.
"CASH EQUIVALENTS" means:
(1) marketable direct obligations issued by, or unconditionally
guaranteed by, the United States Government or issued by any agency thereof
and backed by the full faith and credit of the United States, in each case
maturing within one year from the date of acquisition thereof;
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(2) marketable direct obligations issued by any state of the United
States of America or any political subdivision of any such state or any
public instrumentality thereof maturing within one year from the date of
acquisition thereof and, at the time of acquisition, having one of the two
highest ratings obtainable from either Standard & Poor's, a division of the
McGraw-Hill Companies ("S&P"), or Moody's Investors Service, Inc.
("Moody's");
(3) commercial paper maturing no more than one year from the date of
creation thereof and, at the time of acquisition, having a rating of at
least A-1 from S&P or at least P-1 from Moody's;
(4) certificates of deposit or bankers' acceptances maturing within one
year from the date of acquisition thereof issued by any bank organized under
the laws of the United States of America or any state thereof or the
District of Columbia or any U.S. branch of a foreign bank having at the date
of acquisition thereof combined capital and surplus of not less than
$250.0 million;
(5) repurchase obligations with a term of not more than seven days for
underlying securities of the types described in clause (1) above entered
into with any bank meeting the qualifications specified in clause (4) above;
and
(6) investments in money market funds which invest substantially all
their assets in securities of the types described in clauses (1) through
(5) above.
"CBI PREFERRED STOCK" means the Series A Preferred Stock, par value $0.01
per share, of Commemorative Brands, Inc.
"CBI SUBORDINATED NOTES" means the 11% senior subordinated notes due
January 15, 2007 of Commemorative Brands, Inc.
"CHANGE OF CONTROL" means the occurrence of one or more of the following
events:
(1) any sale, lease, exchange or other transfer other than a Lien
permitted by the Indenture or by way of consolidation or merger (in one
transaction or a series of related transactions) of all or substantially all
of the assets of the Company and its Subsidiaries, taken as a whole, to any
Person or group of related Persons for purposes of Section 13(d) of the
Exchange Act (a "Group"), together with any Affiliates thereof (whether or
not otherwise in compliance with the provisions of the Indenture) other than
to the Permitted Holders;
(2) the approval by the holders of Capital Stock of the Company of any
plan or proposal for the liquidation or dissolution of the Company (whether
or not otherwise in compliance with the provisions of the Indenture);
(3) (a) prior to a Public Equity Offering after the Issue Date, any
Person or Group (other than the Permitted Holders and any entity formed for
the purpose of owning Capital Stock of the Company) shall become the owner,
directly or indirectly, beneficially or of record, of shares representing
more than 50% of the aggregate ordinary voting power represented by the
issued and outstanding Capital Stock of the Company or (b) following a
Public Equity Offering after the Issue Date, any Person or Group (other than
the Permitted Holders and any entity formed for the purpose of owning
Capital Stock of the Company) shall become the owner, directly or
indirectly, beneficially or of record, of shares representing more than 35%
of the aggregate ordinary voting power represented by the issued and
outstanding Capital Stock of the Company; PROVIDED, HOWEVER, that such event
described in this clause (b) shall not be deemed to be a Change of Control
so long as the Permitted Holders own shares representing in the aggregate a
greater percentage of the total voting power of the issued and outstanding
Capital Stock of the Company than such other Person or Group; or
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(4) the replacement of a majority of the Board of Directors of the
Company over a two-year period from the directors who constituted the Board
of Directors of the Company at the beginning of such period, and such
replacement, or nomination for election by the Company's shareholders, shall
not have been approved by a vote of at least a majority of the Board of
Directors of the Company then still in office who either were members of
such Board of Directors at the beginning of such period or whose election or
nomination as a member of such Board of Directors was previously so
approved.
"COMMISSION" means the Securities and Exchange Commission.
"COMMON STOCK" of any Person means any and all shares, interests or other
participations in, and other equivalents (however designated and whether voting
or non-voting) of such Person's common stock, whether outstanding on the Issue
Date or issued after the Issue Date, and includes, without limitation, all
series and classes of such common stock.
"COMPANY WARRANTS" means warrants to purchase shares of Common Stock of the
Company that expire on January 31, 2008 and were initially issued by
Commemorative Brands, Inc. in connection with the issuance of the CBI Preferred
Stock.
"CONSOLIDATED EBITDA" means, with respect to any Person, for any period, the
sum (without duplication) of:
(1) Consolidated Net Income; and
(2) to the extent Consolidated Net Income has been reduced thereby:
(a) all income taxes of such Person and its Restricted Subsidiaries
paid or accrued in accordance with GAAP for such period (other than
income taxes attributable to extraordinary, unusual or nonrecurring gains
or losses or taxes attributable to sales or dispositions outside the
ordinary course of business);
(b) Consolidated Interest Expense; and
(c) Consolidated Non-cash Charges LESS any non-cash items increasing
Consolidated Net Income for such period, all as determined on a
consolidated basis for such Person and its Restricted Subsidiaries in
accordance with GAAP.
With respect to periods prior to the Issue Date, Consolidated EBITDA shall
include (without duplication) all adjustments relating to the elimination of
salary expense, non-recurring inventory charges and the reunion service
business, in each case of the type reflected in the calculation of Adjusted
EBITDA set forth in footnote 3 to "Summary Consolidated Historical and Unaudited
Pro Forma Financial Data."
"CONSOLIDATED FIXED CHARGE COVERAGE RATIO" means, with respect to any
Person, the ratio of Consolidated EBITDA of such Person during the four full
fiscal quarters (the "Four Quarter Period") ending prior to the date of the
transaction giving rise to the need to calculate the Consolidated Fixed Charge
Coverage Ratio for which financial statements are available (the "Transaction
Date") to Consolidated Fixed Charges of such Person for the Four Quarter Period.
In addition to and without limitation of the foregoing, for purposes of this
definition, "Consolidated EBITDA" and "Consolidated Fixed Charges" shall be
calculated after giving effect on a PRO FORMA basis for the period of such
calculation to:
(1) the incurrence or repayment of any Indebtedness of such Person or
any of its Restricted Subsidiaries (and the application of the proceeds
thereof) giving rise to the need to make such
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calculation and any incurrence or repayment of other Indebtedness (and the
application of the proceeds thereof), other than the incurrence or repayment
of Indebtedness in the ordinary course of business for working capital
purposes pursuant to working capital facilities, occurring during the Four
Quarter Period or at any time subsequent to the last day of the Four Quarter
Period and on or prior to the Transaction Date, as if such incurrence or
repayment, as the case may be (and the application of the proceeds thereof),
occurred on the first day of the Four Quarter Period; and
(2) any asset sales or other dispositions or Asset Acquisitions
(including, without limitation, any Asset Acquisition giving rise to the
need to make such calculation as a result of such Person or one of its
Restricted Subsidiaries (including any Person who becomes a Restricted
Subsidiary as a result of the Asset Acquisition) incurring, assuming or
otherwise being liable for Acquired Indebtedness and also including any
Consolidated EBITDA (including any pro forma expense and cost reductions
calculated on a basis consistent with Regulation S-X under the Exchange Act)
attributable to the assets which are the subject of the Asset Acquisition or
asset sale or other disposition during the Four Quarter Period) occurring
during the Four Quarter Period or at any time subsequent to the last day of
the Four Quarter Period and on or prior to the Transaction Date, as if such
asset sale or other disposition or Asset Acquisition (including the
incurrence, assumption or liability for any such Acquired Indebtedness)
occurred on the first day of the Four Quarter Period.
If such Person or any of its Restricted Subsidiaries directly or indirectly
guarantees Indebtedness of a third Person, the preceding sentence shall give
effect to the incurrence of such guaranteed Indebtedness as if such Person or
any Restricted Subsidiary of such Person had directly incurred or otherwise
assumed such guaranteed Indebtedness.
Furthermore, in calculating "Consolidated Fixed Charges" for purposes of
determining the denominator (but not the numerator) of this "Consolidated Fixed
Charge Coverage Ratio":
(1) interest on outstanding Indebtedness determined on a fluctuating
basis as of the Transaction Date and which will continue to be so determined
thereafter shall be deemed to have accrued at a fixed rate per annum equal
to the rate of interest on such Indebtedness in effect on the Transaction
Date; and
(2) notwithstanding clause (1) above, interest on Indebtedness
determined on a fluctuating basis, to the extent such interest is covered by
agreements relating to Interest Swap Obligations, shall be deemed to accrue
at the rate per annum resulting after giving effect to the operation of such
agreements.
"CONSOLIDATED FIXED CHARGES" means, with respect to any Person for any
period, the sum, without duplication, of:
(1) Consolidated Interest Expense; plus
(2) the product of (x) the amount of all cash dividend payments on any
series of Preferred Stock of such Person and, to the extent permitted under
the Indenture, its Restricted Subsidiaries paid, accrued or scheduled to be
paid or accrued during such period times (y) a fraction, the numerator of
which is one and the denominator of which is one minus the then current
effective consolidated federal, state and local tax rate of such Person,
expressed as a decimal.
"CONSOLIDATED INTEREST EXPENSE" means, with respect to any Person for any
period, the sum of, without duplication:
(1) the aggregate of the interest expense of such Person and its
Restricted Subsidiaries for such period determined on a consolidated basis
in accordance with GAAP, including without
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limitation: (a) any amortization of debt discount and amortization or
write-off of deferred financing costs; (b) the net costs under Interest Swap
Obligations; (c) all capitalized interest; and (d) the interest portion of
any deferred payment obligation; and
(2) the interest component of Capitalized Lease Obligations paid,
accrued and/or scheduled to be paid or accrued by such Person and its
Restricted Subsidiaries during such period as determined on a consolidated
basis in accordance with GAAP.
"CONSOLIDATED NET INCOME" means, with respect to any Person, for any period,
the aggregate net income (or loss) of such Person and its Restricted
Subsidiaries for such period on a consolidated basis, determined in accordance
with GAAP; PROVIDED that there shall be excluded therefrom (without
duplication):
(1) after-tax gains or losses from Asset Sales (without regard to the
$2,000,000 limitation set forth in the definition thereof) or abandonments
or reserves relating thereto;
(2) extraordinary gains and extraordinary losses;
(3) the net income or loss of any Person acquired prior to the date it
becomes a Restricted Subsidiary of the referent Person or is merged or
consolidated with the referent Person or any Restricted Subsidiary of the
referent Person;
(4) the net income (but not loss) of any Restricted Subsidiary of the
referent Person to the extent that the declaration of dividends or similar
distributions by that Restricted Subsidiary of that income is restricted by
a contract, operation of law or otherwise (other than by reason of the CBI
Preferred Stock), except to the extent of cash dividends or distributions
paid to the referent Person or to a Wholly Owned Restricted Subsidiary of
the referent Person by such Restricted Subsidiary;
(5) the net income (but not loss) of any Person, other than a Restricted
Subsidiary of the referent Person, except to the extent of cash dividends or
distributions paid to the referent Person or to a Wholly Owned Restricted
Subsidiary of the referent Person by such Person;
(6) any restoration to income of any contingency reserve, except to the
extent that provision for such reserve was made out of Consolidated Net
Income accrued at any time following the Issue Date;
(7) income or loss attributable to discontinued operations (including,
without limitation, operations disposed of during such period whether or not
such operations were classified as discontinued); and
(8) in the case of a successor to the referent Person by consolidation
or merger or as a transferee of the referent Person's assets, any earnings
of the successor corporation prior to such consolidation, merger or transfer
of assets.
"CONSOLIDATED NET WORTH" of any Person means the consolidated stockholders'
equity of such Person, determined on a consolidated basis in accordance with
GAAP, less (without duplication) amounts attributable to Disqualified Capital
Stock of such Person.
"CONSOLIDATED NON-CASH CHARGES" means, with respect to any Person, for any
period, the aggregate depreciation, amortization and other non-cash expenses of
such Person and its Restricted Subsidiaries reducing Consolidated Net Income of
such Person and its Restricted Subsidiaries for such period, determined on a
consolidated basis in accordance with GAAP (excluding any such charge which
requires an accrual of or a reserve for cash charges for any future period).
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"CREDIT AGREEMENT" means the Credit Agreement dated as of February 20, 2002,
among the Company, the lenders party thereto in their capacities as lenders
thereunder and The Bank of Nova Scotia, as administrative agent, together with
the documents related thereto (including, without limitation, any instruments,
guarantee agreements and pledge and/or security documents), in each case as such
agreements may be amended (including, without limitation, any amendment and
restatement thereof), supplemented or otherwise modified from time to time,
including any agreement extending the maturity of, refinancing, replacing or
otherwise restructuring (including, without limitation, increasing the amount of
available borrowings thereunder (PROVIDED that such increase in borrowings is
permitted by the "Limitation on Incurrence of Additional Indebtedness" covenant
above) or adding Restricted Subsidiaries of the Company as additional borrowers
or guarantors thereunder) all or any portion of the Indebtedness under such
agreement or any successor or replacement agreement and whether by the same or
any other agent, lender or group of lenders.
"CURRENCY AGREEMENT" means any foreign exchange contract, currency swap
agreement or other similar agreement or arrangement designed to protect the
Company or any Restricted Subsidiary of the Company against fluctuations in
currency values.
"DEFAULT" means an event or condition the occurrence of which is, or with
the lapse of time or the giving of notice or both would be, an Event of Default.
"DISQUALIFIED CAPITAL STOCK" means that portion of any Capital Stock which,
by its terms (or by the terms of any security into which it is convertible or
for which it is exchangeable at the option of the holder thereof), or upon the
happening of any event (other than an event which would constitute a Change of
Control), matures or is mandatorily redeemable, pursuant to a sinking fund
obligation or otherwise, or is redeemable at the sole option of the holder
thereof (except, in each case, upon the occurrence of a Change of Control) on or
prior to the final maturity date of the Notes, PROVIDED that any Capital Stock
that would not constitute Disqualified Capital Stock but for provisions thereof
giving holders thereof the right to require such Person to repurchase or redeem
such Capital Stock upon the occurrence of an "asset sale" or "change of control"
occurring prior to the stated maturity of the Notes shall not constitute
Disqualified Capital Stock if the "asset sale" or "change of control" provisions
applicable to such Capital Stock are no more favorable to the holders of such
Capital Stock than the provisions contained in "Limitation on Asset Sales" and
"Change of Control" covenants and such Capital Stock specifically provides that
such Person will not repurchase or redeem any such stock pursuant to such
provision prior to the Company's repurchase of such Notes as are required to be
repurchased pursuant to such covenants.
"DOMESTIC RESTRICTED SUBSIDIARY" means a Restricted Subsidiary incorporated
or otherwise organized or existing under the laws of the United States, any
state thereof or any territory or possession of the United States.
"EXCHANGE ACT" means the Securities Exchange Act of 1934, as amended, or any
successor statute or statutes thereto.
"FAIR MARKET VALUE" means, with respect to any asset or property, the price
which could be negotiated in an arm's-length, free market transaction, for cash,
between a willing seller and a willing and able buyer, neither of whom is under
undue pressure or compulsion to complete the transaction. Fair market value
shall be determined by the Board of Directors of the Company acting reasonably
and in good faith and, if such value exceeds $2.0 million, shall be evidenced by
a Board Resolution of the Board of Directors of the Company delivered to the
Trustee.
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"FOREIGN RESTRICTED SUBSIDIARY" means any Restricted Subsidiary of the
Company other than a Domestic Restricted Subsidiary.
"GAAP" means generally accepted accounting principles set forth in the
opinions and pronouncements of the Accounting Principles Board of the American
Institute of Certified Public Accountants and statements and pronouncements of
the Financial Accounting Standards Board or in such other statements by such
other entity as may be approved by a significant segment of the accounting
profession of the United States, which are in effect from time to time.
"GUARANTOR" means: (1) each of the Company's Domestic Restricted
Subsidiaries as of the Issue Date; and (2) each of the Company's Restricted
Subsidiaries that in the future executes a supplemental indenture in which such
Restricted Subsidiary agrees to be bound by the terms of the Indenture as a
Guarantor; PROVIDED that any Person constituting a Guarantor as described above
shall cease to constitute a Guarantor when its respective Guarantee is released
in accordance with the terms of the Indenture.
"INDEBTEDNESS" means with respect to any Person, without duplication:
(1) all Obligations of such Person for borrowed money;
(2) all Obligations of such Person evidenced by bonds, debentures, notes
or other similar instruments;
(3) all Capitalized Lease Obligations of such Person;
(4) all Obligations of such Person issued or assumed as the deferred
purchase price of property, all conditional sale obligations and all
Obligations under any title retention agreement (but excluding any such
Obligations that constitute trade accounts payable and other accrued
liabilities arising in the ordinary course of business that are not overdue
by 90 days or more or are being contested in good faith by appropriate
proceedings promptly instituted and diligently conducted);
(5) all Obligations of such Person for the reimbursement of any obligor
on any letter of credit, banker's acceptance or similar credit transaction;
(6) guarantees and other contingent obligations in respect of
Indebtedness of other Persons of the type referred to in clauses
(1) through (5) above and clause (8) below;
(7) all Obligations of any other Person of the type referred to in
clauses (1) through (6) which are secured by any Lien on any property or
asset of such Person, the amount of such Obligation being deemed to be the
lesser of the fair market value of such property or asset and the amount of
the Obligation so secured;
(8) all Obligations under currency agreements and interest swap
agreements of such Person; and
(9) all Disqualified Capital Stock issued by such Person with the amount
of Indebtedness represented by such Disqualified Capital Stock being equal
to its maximum fixed repurchase price, but excluding accrued dividends, if
any.
For purposes hereof, the "maximum fixed repurchase price" of any
Disqualified Capital Stock which does not have a fixed repurchase price shall be
calculated in accordance with the terms of such Disqualified Capital Stock as if
such Disqualified Capital Stock were purchased on any date on which Indebtedness
shall be required to be determined pursuant to the Indenture, and if such price
is based upon, or measured by, the fair market value of such Disqualified
Capital Stock, such fair market value
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shall be determined reasonably and in good faith by the Board of Directors of
the issuer of such Disqualified Capital Stock. Any Indebtedness which is
incurred at a discount to the principal amount at maturity thereof shall be
deemed to have been incurred at the full principal amount at maturity thereof.
"INDEPENDENT FINANCIAL ADVISOR" means a firm: (1) which does not, and whose
directors, officers and employees or Affiliates do not, have a direct or
indirect financial interest in the Company; and (2) which, in the judgment of
the Board of Directors of the Company, is otherwise independent and qualified to
perform the task for which it is to be engaged.
"INITIAL PURCHASERS" means Deutsche Banc Alex. Brown Inc., Goldman, Sachs &
Co. and Scotia Capital (USA) Inc.
"INTEREST SWAP OBLIGATIONS" means the obligations of any Person pursuant to
any arrangement with any other Person, whereby, directly or indirectly, such
Person is entitled to receive from time to time periodic payments calculated by
applying either a floating or a fixed rate of interest on a stated notional
amount in exchange for periodic payments made by such other Person calculated by
applying a fixed or a floating rate of interest on the same notional amount and
shall include, without limitation, interest rate swaps, caps, floors, collars
and similar agreements.
"INVESTMENT" means, with respect to any Person, any direct or indirect loan
or other extension of credit (including, without limitation, a guarantee) or
capital contribution to (by means of any transfer of cash or other property to
others or any payment for property or services for the account or use of
others), or any purchase or acquisition by such Person of any Capital Stock,
bonds, notes, debentures or other securities or evidences of Indebtedness issued
by, any other Person. "Investment" shall exclude extensions of trade credit by
the Company and its Restricted Subsidiaries on commercially reasonable terms in
accordance with normal trade practices of the Company or such Restricted
Subsidiary, as the case may be. If the Company or any Restricted Subsidiary of
the Company sells or otherwise disposes of any Capital Stock of any direct or
indirect Restricted Subsidiary of the Company such that, after giving effect to
any such sale or disposition, such Restricted Subsidiary is no longer a
Restricted Subsidiary of the Company, the Company shall be deemed to have made
an Investment on the date of any such sale or disposition equal to the fair
market value of the Common Stock of such Restricted Subsidiary not sold or
disposed of. If the Company designates any of its Restricted Subsidiaries to be
an Unrestricted Subsidiary, the Company shall be deemed to have made an
Investment on the date of such designation equal to the Designation Amount
determined in accordance with the definition of "Unrestricted Subsidiary."
"ISSUE DATE" means the date of original issuance of the Notes.
"LIEN" means any lien, mortgage, deed of trust, pledge, security interest,
charge or encumbrance of any kind (including any conditional sale or other title
retention agreement, any lease in the nature thereof and any agreement to give
any security interest).
"MANAGEMENT AGREEMENT" means the management agreement dated as of March 30,
2001 among the Company, the Subsidiaries of the Company listed therein and
Castle Harlan, Inc., as in effect on the Issue Date.
"MATERIAL DOMESTIC RESTRICTED SUBSIDIARY" means a Domestic Restricted
Subsidiary of the Company or any Restricted Subsidiary of the Company having
total assets with a book value in excess of $500,000.
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"NET CASH PROCEEDS" means, with respect to any Asset Sale, the proceeds in
the form of cash or Cash Equivalents including payments in respect of deferred
payment obligations when received in the form of cash or Cash Equivalents (other
than the portion of any such deferred payment constituting interest) received by
the Company or any of its Restricted Subsidiaries from such Asset Sale net of:
(1) reasonable out-of-pocket commissions, expenses and fees relating to
such Asset Sale (including, without limitation, legal, accounting and
investment banking fees and sales commissions);
(2) net taxes paid or payable as a result of such Asset Sale;
(3) repayment of Indebtedness that is secured by the property or assets
that are the subject of such Asset Sale;
(4) amounts required to be paid to any Person (other than the Company or
any of its Restricted Subsidiaries) owning a beneficial interest in the
assets which are subject to the Asset Sale; and
(5) appropriate amounts to be provided by the Company or any Restricted
Subsidiary, as the case may be, as a reserve, in accordance with GAAP,
against any liabilities associated with such Asset Sale and retained by the
Company or any Restricted Subsidiary, as the case may be, after such Asset
Sale, including, without limitation, pension and other post-employment
benefit liabilities, liabilities related to environmental matters and
liabilities under any indemnification obligations associated with such Asset
Sale.
"OBLIGATIONS" means all obligations for principal, premium, interest,
penalties, fees, indemnifications, reimbursements, damages and other liabilities
payable under the documentation governing any Indebtedness.
"PARI PASSU INDEBTEDNESS" means any Indebtedness of the Company or any
Guarantor that ranks PARI PASSU in right of payment with the Notes or such
Guarantee, as applicable.
"PERMITTED BUSINESS" means any business that is the same, similar,
reasonably related, complementary or incidental to the business in which the
Company or any of its Restricted Subsidiaries are engaged on the Issue Date.
"PERMITTED HOLDERS" means Castle Harlan, Inc., Castle Harlan Partners II,
L.P., Castle Harlan Partners III, L.P. and their respective Affiliates.
"PERMITTED INDEBTEDNESS" means, without duplication, each of the following:
(1) Indebtedness under the Notes and the Guarantees issued on the Issue
Date;
(2) Indebtedness incurred pursuant to the Credit Agreement in an
aggregate principal amount at any time outstanding not to exceed
$50.0 million less the amount of all required permanent repayments (which
are accompanied by a corresponding permanent commitment reduction)
thereunder, plus an amount not exceeding the aggregate amount of
Indebtedness that is permitted to be incurred, but has not been incurred,
under clauses (10) and (14) of this definition;
(3) other Indebtedness of the Company and its Restricted Subsidiaries
outstanding on the Issue Date reduced by the amount of any scheduled
amortization payments or mandatory prepayments when actually paid or
permanent reductions thereon; PROVIDED that the CBI Subordinated Notes held
by a Restricted Subsidiary of the Company on the Issue Date shall not be
included in this clause (3), but shall be included in clause (6) below;
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(4) Interest Swap Obligations of the Company or any Restricted
Subsidiary of the Company covering Indebtedness of the Company or any of its
Restricted Subsidiaries; PROVIDED, HOWEVER, that such Interest Swap
Obligations are entered into to protect the Company and its Restricted
Subsidiaries from fluctuations in interest rates;
(5) Indebtedness under Currency Agreements; PROVIDED that in the case of
Currency Agreements which relate to Indebtedness, such Currency Agreements
do not increase the Indebtedness of the Company and its Restricted
Subsidiaries outstanding other than as a result of fluctuations in foreign
currency exchange rates or by reason of fees, indemnities and compensation
payable thereunder;
(6) Indebtedness of a Restricted Subsidiary of the Company to the
Company or to a Wholly Owned Restricted Subsidiary of the Company for so
long as such Indebtedness is held by the Company or a Wholly Owned
Restricted Subsidiary of the Company, in each case subject to no Lien (other
than pursuant to the Credit Agreement) held by a Person other than the
Company or a Wholly Owned Restricted Subsidiary of the Company; PROVIDED
that if as of any date any Person other than the Company or a Wholly Owned
Restricted Subsidiary of the Company owns or holds any such Indebtedness or
holds a Lien (other than pursuant to the Credit Agreement) in respect of
such Indebtedness, such date shall be deemed the incurrence of Indebtedness
not constituting Permitted Indebtedness by the issuer of such Indebtedness;
(7) Indebtedness of the Company to a Wholly Owned Restricted Subsidiary
of the Company for so long as such Indebtedness is held by a Wholly Owned
Restricted Subsidiary of the Company and subject to no Lien, other than
pursuant to the Credit Agreement; PROVIDED that (a) any Indebtedness of the
Company to any Wholly Owned Restricted Subsidiary of the Company is
unsecured and subordinated, pursuant to a written agreement, to the
Company's obligations under the Indenture and the Notes and (b) if as of any
date any Person other than a Wholly Owned Restricted Subsidiary of the
Company owns or holds any such Indebtedness or any Person holds a Lien in
respect of such Indebtedness, such date shall be deemed the incurrence of
Indebtedness not constituting Permitted Indebtedness under this clause (7)
by the Company;
(8) Indebtedness arising from the honoring by a bank or other financial
institution of a check, draft or similar instrument inadvertently (except in
the case of daylight overdrafts) drawn against insufficient funds in the
ordinary course of business; PROVIDED, HOWEVER, that such Indebtedness is
extinguished within five business days of incurrence;
(9) Indebtedness of the Company or any of its Restricted Subsidiaries in
respect of performance bonds, bankers' acceptances, workers' compensation
claims, surety or appeal bonds, payment obligations in connection with
self-insurance or similar obligations incurred in the ordinary course of
business;
(10) Indebtedness represented by Capitalized Lease Obligations and
Purchase Money Indebtedness of the Company and its Restricted Subsidiaries
incurred in the ordinary course of business not to exceed $10.0 million at
any one time outstanding (reduced by the aggregate amount of additional
Indebtedness incurred under clause (1) hereof in reliance of this
clause (10));
(11) guarantees of Indebtedness of the Company by any Restricted
Subsidiary, PROVIDED that such Indebtedness is permitted to be incurred by
another covenant under the Indenture;
(12) Indebtedness of the Company's Foreign Restricted Subsidiaries in an
aggregate principal amount not to exceed $5.0 million at any time
outstanding;
(13) Refinancing Indebtedness; and
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(14) additional Indebtedness of the Company and its Restricted
Subsidiaries in an aggregate principal amount not to exceed $5.0 million at
any one time outstanding (reduced by the aggregate amount of additional
Indebtedness incurred under clause (1) hereof in reliance of this
clause (14)).
For purposes of determining compliance with the "Limitation on Incurrence of
Additional Indebtedness" covenant, in the event that an item of Indebtedness
meets the criteria of more than one of the categories of Permitted Indebtedness
described in clauses (1) through (14) above or is entitled to be incurred
pursuant to the Consolidated Fixed Charge Coverage Ratio provisions of such
covenant, the Company shall, in its sole discretion, classify (or later
reclassify) such item of Indebtedness in any manner that complies with this
covenant. Accrual of interest, accretion or amortization of original issue
discount, the payment of interest on any Indebtedness in the form of additional
Indebtedness with the same terms, and the payment of dividends on Disqualified
Capital Stock in the form of additional shares of the same class of Disqualified
Capital Stock will not be deemed to be an incurrence of Indebtedness or an
issuance of Disqualified Capital Stock for purposes of the "Limitations on
Incurrence of Additional Indebtedness" covenant.
"PERMITTED INVESTMENTS" means:
(1) Investments by the Company or any Restricted Subsidiary of the
Company in any Person that is or will become immediately after such
Investment a Guarantor or a Wholly Owned Restricted Subsidiary of the
Company that is not a Guarantor or that will merge or consolidate into the
Company, a Guarantor or a Wholly Owned Restricted Subsidiary of the Company
that is not a Guarantor;
(2) Investments in the Company by any Restricted Subsidiary of the
Company; PROVIDED that any Indebtedness evidencing such Investment is
unsecured and subordinated, pursuant to a written agreement, to the
Company's obligations under the Notes and the Indenture;
(3) Investments in cash and Cash Equivalents;
(4) loans and advances to directors, employees and officers of the
Company and its Restricted Subsidiaries (a) to finance the purchase by such
Persons of Capital Stock of the Company or any of its Restricted
Subsidiaries not in excess of $1.0 million in any twelve month period and
(b) in the ordinary course of business for bona fide business purposes not
in excess of $500,000 at any one time outstanding;
(5) Currency Agreements and Interest Swap Obligations entered into in
the ordinary course of the Company's or its Restricted Subsidiaries'
businesses and not for speculative purposes and otherwise in compliance with
the Indenture;
(6) additional Investments having an aggregate fair market value, taken
together with all other Investments made pursuant to this clause (6) that
are at that time outstanding, not to exceed $5.0 million at the time of such
Investment (with the fair market value of each Investment being measured at
the time made and without giving effect to subsequent changes in value);
(7) Investments in securities of trade creditors or customers received
pursuant to any plan of reorganization or similar arrangement upon the
bankruptcy or insolvency of such trade creditors or customers;
(8) Investments made by the Company or its Restricted Subsidiaries as a
result of consideration received in connection with an Asset Sale made in
compliance with the "Limitation on Asset Sales" covenant;
(9) Investments existing on the Issue Date;
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(10) any acquisition of assets solely in exchange for the issuance of
Qualified Capital Stock of the Company or any of its Restricted
Subsidiaries; and
(11) Investments made by the Company or any of its Restricted
Subsidiaries with the proceeds of a substantially concurrent offering of
Qualified Capital Stock of the Company (which proceeds of any such offering
of Qualified Capital Stock shall not have been, and shall not be, included
in the calculation of the Restricted Payments Basket, except to the extent
the proceeds thereof exceed the amounts used to effect such Investments).
"PERMITTED LIENS" means the following types of Liens:
(1) Liens existing as of the Issue Date to the extent and in the manner
such Liens are in effect on the Issue Date;
(2) Liens securing the Notes and the Guarantees;
(3) Liens securing Indebtedness under the Credit Agreement; PROVIDED
that such Indebtedness does not exceed the greater of (a) the amount of
Indebtedness permitted to be incurred pursuant to clause (2) of the
definition of "Permitted Indebtedness" and (b) the Borrowing Base;
(4) Liens in favor of the Company or any Restricted Subsidiary of the
Company;
(5) Liens securing Refinancing Indebtedness which is incurred to
Refinance any Indebtedness which has been secured by a Lien permitted under
the Indenture and which has been incurred in accordance with the provisions
of the Indenture; PROVIDED, HOWEVER, that such Liens: (i) taken as a whole
are no less favorable to the Holders and are not more favorable to the
lienholders with respect to such Liens than the Liens in respect of the
Indebtedness being Refinanced; and (ii) do not extend to or cover any
property or assets of the Company or any of its Restricted Subsidiaries not
securing the Indebtedness so Refinanced;
(6) Liens for taxes, assessments or governmental charges or claims
either (a) not delinquent or (b) being contested in good faith by
appropriate proceedings and as to which the Company or its Restricted
Subsidiaries shall have set aside on its books such reserves as may be
required pursuant to GAAP;
(7) statutory Liens of landlords and Liens of carriers, warehousemen,
mechanics, suppliers, materialmen, repairmen and other Liens imposed by law
incurred in the ordinary course of business for sums not yet delinquent or
being contested in good faith, if such reserve or other appropriate
provision, if any, as shall be required by GAAP shall have been made in
respect thereof;
(8) Liens incurred or deposits made in the ordinary course of business
in connection with workers' compensation, unemployment insurance and other
types of social security, including any Lien securing letters of credit
issued in the ordinary course of business in connection therewith, or to
secure the performance of tenders, statutory obligations, surety and appeal
bonds, bids, leases, government contracts, performance and return-of-money
bonds and other similar obligations (exclusive of obligations for the
payment of borrowed money);
(9) Liens arising by reward of any judgment, decree or order of any
court but not giving rise to an Event of Default so long as such Liens are
adequately bonded and any appropriate legal proceedings which may have been
duly initiated for the review of such judgment, decree or order shall not
have been finally terminated or the period within which such proceedings may
be initiated shall not have expired;
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(10) survey exceptions, easements, rights-of-way, zoning restrictions
and other similar charges or encumbrances in respect of real property not
interfering in any material respect with the ordinary conduct of the
business of the Company or any of its Restricted Subsidiaries;
(11) Liens upon specific items of inventory or other goods and proceeds
of the Company or any of its Restricted Subsidiaries securing such Person's
obligations in respect of bankers' acceptances issued or created for the
account of such Person to facilitate the purchase, shipment or storage of
such inventory or other goods;
(12) Liens securing reimbursement obligations with respect to commercial
letters of credit which encumber documents and other property relating to
such letters of credit and products and proceeds thereof;
(13) Liens encumbering deposits made to secure obligations arising from
statutory, regulatory, contractual, or warranty requirements of the Company
or any of its Restricted Subsidiaries, including rights of offset and
set-off;
(14) Liens securing Interest Swap Obligations which Interest Swap
Obligations relate to Indebtedness that is otherwise permitted pursuant to
clause (4) of the definition of "Permitted Indebtedness";
(15) Liens securing Capitalized Lease Obligations and Purchase Money
Indebtedness; PROVIDED, HOWEVER, that in the case of Capitalized Lease
Obligations, such Liens do not extend to any property or assets which are
not leased property subject to such Capitalized Lease Obligations;
(16) Liens securing Indebtedness under Currency Agreements permitted to
be incurred pursuant to clause (5) of the definition of "Permitted
Indebtedness";
(17) Liens securing Acquired Indebtedness incurred in accordance with
the "Limitation on Incurrence of Additional Indebtedness" covenant; PROVIDED
that:
(a) such Liens secured such Acquired Indebtedness at the time of and
prior to the incurrence of such Acquired Indebtedness by the Company or a
Restricted Subsidiary of the Company and were not granted in connection
with, or in anticipation of, the incurrence of such Acquired Indebtedness
by the Company or a Restricted Subsidiary of the Company; and
(b) such Liens do not extend to or cover any property or assets of
the Company or of any of its Restricted Subsidiaries other than the
property or assets that secured the Acquired Indebtedness prior to the
time such Indebtedness became Acquired Indebtedness of the Company or a
Restricted Subsidiary of the Company and are no more favorable to the
lienholders than those securing the Acquired Indebtedness prior to the
incurrence of such Acquired Indebtedness by the Company or a Restricted
Subsidiary of the Company;
(18) Liens securing Indebtedness incurred pursuant to clause (14) of the
definition of "Permitted Indebtedness";
(19) any provision for the retention of title to an asset by the vendor
or transferor of such asset which asset is acquired by the Company or any
Restricted Subsidiary of the Company in a transaction entered into in the
ordinary course of business of the Company or such Restricted Subsidiary;
(20) Liens incurred in the ordinary course of business of the Company or
any Restricted Subsidiary of the Company with respect to Obligations that do
not exceed $2.5 million at any one time outstanding and that (a) are not
incurred in connection with the borrowing of money or the obtaining of
advances or credit (other than trade credit in the ordinary course of
business) and (b) do not in the aggregate materially detract from the value
of the property or materially impair the use thereof in the operation of
business by the Company or such Restricted Subsidiary;
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(21) Liens incurred in the ordinary course of business of the Company or
any Restricted Subsidiary of the Company securing obligations under precious
metals consignment agreements;
(22) any extension, renewal or replacement, in whole or in part, of any
Lien described in clauses (1), (15) or (17) of the definition of "Permitted
Liens"; PROVIDED that any such extension, renewal or replacement is no more
restrictive in any material respect that the Lien so extended, renewed or
replaced and does not extend to any additional property or assets.
"PERSON" means an individual, partnership, corporation, limited liability
company, unincorporated organization, trust or joint venture, or a governmental
agency or political subdivision thereof.
"PREFERRED STOCK" of any Person means any Capital Stock of such Person that
has preferential rights to any other Capital Stock of such Person with respect
to dividends or redemptions or upon liquidation.
"PURCHASE MONEY INDEBTEDNESS" means Indebtedness of the Company and its
Restricted Subsidiaries incurred in the normal course of business for the
purpose of financing all or any part of the purchase price, or the cost of
installation, construction or improvement, of property or equipment; PROVIDED,
HOWEVER, that (1) the amount of such Indebtedness shall not exceed such purchase
price or cost, (2) such Indebtedness shall not be secured by any asset other
than the specified asset being financed or, in the case of real property or
fixtures, including additions and improvements, the real property to which such
asset is attached and (3) such Indebtedness shall be incurred within 90 days
after such acquisition of such asset by the Company or such Restricted
Subsidiary or such installation, construction or improvement.
"QUALIFIED CAPITAL STOCK" means any Capital Stock that is not Disqualified
Capital Stock.
"REFINANCE" means, in respect of any security or Indebtedness, to refinance,
extend, renew, refund, repay, prepay, redeem, defease or retire, or to issue a
security or Indebtedness in exchange or replacement for, such security or
Indebtedness in whole or in part. "Refinanced" and "Refinancing" shall have
correlative meanings.
"REFINANCING INDEBTEDNESS" means any Refinancing by the Company or any
Restricted Subsidiary of the Company of Indebtedness incurred in accordance with
the "Limitation on Incurrence of Additional Indebtedness" covenant (other than
pursuant to clauses (2), (4), (5), (6), (7), (8), (9), (10), (11), (12) or
(14) of the definition of Permitted Indebtedness), in each case, other than
Refinancing Indebtedness incurred to Refinance all of the Notes, that does not:
(1) result in an increase in the aggregate principal amount of
Indebtedness of such Person as of the date of such proposed Refinancing
(plus accrued interest plus the amount of any premium required to be paid
under the terms of the instrument governing such Indebtedness and plus the
amount of reasonable fees and expenses incurred by the Company in connection
with such Refinancing); or
(2) create Indebtedness with: (a) a Weighted Average Life to Maturity
that is less than the Weighted Average Life to Maturity of the Indebtedness
being Refinanced; or (b) a final maturity earlier than the final maturity of
the Indebtedness being Refinanced; PROVIDED that (x) if such Indebtedness
being Refinanced is Indebtedness solely of the Company, then such
Refinancing Indebtedness shall be Indebtedness solely of the Company and
(y) if such Indebtedness being Refinanced is subordinate or junior to the
Notes, then such Refinancing Indebtedness shall be subordinate to the Notes
at least to the same extent and in the same manner as the Indebtedness being
Refinanced.
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"REGISTRATION RIGHTS AGREEMENT" means the registration rights agreement
dated as of the Issue Date among the Company, the Guarantors and the Initial
Purchasers.
"RESTRICTED SUBSIDIARY" of any Person means any Subsidiary of such Person
which at the time of determination is not an Unrestricted Subsidiary.
"SALE AND LEASEBACK TRANSACTION" means any direct or indirect arrangement
with any Person or to which any such Person is a party, providing for the
leasing to the Company or a Restricted Subsidiary of the Company of any
property, whether owned by the Company or any Restricted Subsidiary of the
Company at the Issue Date or later acquired, which has been or is to be sold or
transferred by the Company or such Restricted Subsidiary to such Person or to
any other Person from whom funds have been or are to be advanced by such Person
on the security of such Property.
"SECURITIES ACT" means the Securities Act of 1933, as amended, or any
successor statute or statutes thereto.
"SIGNIFICANT SUBSIDIARY", with respect to any Person, means (1) any
Restricted Subsidiary of such Person that satisfies the criteria for a
"significant subsidiary" set forth in Rule 1.02(w) of Regulation S-X under the
Exchange Act as such Regulation is in effect on the Issue Date and (2) any
Restricted Subsidiary of such Person that, when aggregated with all other
Restricted Subsidiaries of such Person that are not otherwise Significant
Subsidiaries and as to which any event described in clause (6) under "--Events
of Default" has occurred and is continuing, would constitute a Significant
Subsidiary under clause (1) of this definition.
"SUBORDINATED INDEBTEDNESS" means Indebtedness of the Company or any
Guarantor that is subordinated or junior in right of payment to the Notes or
such Guarantee, as the case may be.
"SUBSIDIARY", with respect to any Person, means:
(1) any corporation of which the outstanding Capital Stock having at
least a majority of the votes entitled to be cast in the election of
directors under ordinary circumstances shall at the time be owned, directly
or indirectly, by such Person; or
(2) any other Person of which at least a majority of the voting interest
under ordinary circumstances is at the time, directly or indirectly, owned
by such Person.
"UNRESTRICTED SUBSIDIARY" of any Person means:
(1) any Subsidiary of such Person that at the time of determination
shall be or continue to be designated an Unrestricted Subsidiary by the
Board of Directors of such Person in the manner provided below; and
(2) any Subsidiary of an Unrestricted Subsidiary.
The Board of Directors may designate any Subsidiary (including any newly
acquired or newly formed Subsidiary) to be an Unrestricted Subsidiary unless
such Subsidiary owns any Capital Stock of, or owns or holds any Lien on any
property of, the Company or any other Subsidiary of the Company that is not a
Subsidiary of the Subsidiary to be so designated; PROVIDED that:
(1) the Company certifies to the Trustee that such designation complies
with the "Limitation on Restricted Payments" covenant, including that the
Company would be permitted to make, at the time of such designation, (a) a
Permitted Investment or (b) an Investment pursuant to the first paragraph of
the "Limitation on Restricted Payments" covenant, in either case, in an
amount (the
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"Designation Amount") equal to the fair market value of the Company's
proportionate interest in such Subsidiary on such date; and
(2) each Subsidiary to be so designated and each of its Subsidiaries has
not at the time of designation, and does not thereafter, create, incur,
issue, assume, guarantee or otherwise become directly or indirectly liable
with respect to any Indebtedness pursuant to which the lender has recourse
to any of the assets of the Company or any of its Restricted Subsidiaries.
The Board of Directors may designate any Unrestricted Subsidiary to be a
Restricted Subsidiary only if:
(1) immediately after giving effect to such designation, the Company is
able to incur at least $1.00 of additional Indebtedness (other than
Permitted Indebtedness) in compliance with the "Limitation on Incurrence of
Additional Indebtedness" covenant; and
(2) immediately before and immediately after giving effect to such
designation, no Default or Event of Default shall have occurred and be
continuing.
Any such designation by the Board of Directors shall be evidenced to the
Trustee by promptly filing with the Trustee a copy of the Board Resolution
giving effect to such designation and an officers' certificate certifying that
such designation complied with the foregoing provisions.
"WEIGHTED AVERAGE LIFE TO MATURITY" means, when applied to any Indebtedness
at any date, the number of years obtained by dividing (a) the then outstanding
aggregate principal amount of such Indebtedness into (b) the sum of the total of
the products obtained by multiplying (i) the amount of each then remaining
installment, sinking fund, serial maturity or other required payment of
principal, including payment at final maturity, in respect thereof, by (ii) the
number of years (calculated to the nearest one-twelfth) which will elapse
between such date and the making of such payment.
"WHOLLY OWNED RESTRICTED SUBSIDIARY" of any Person means any Wholly Owned
Subsidiary of such Person which at the time of determination is a Restricted
Subsidiary of such Person.
"WHOLLY OWNED SUBSIDIARY" of any Person means any Subsidiary of such Person
of which all the outstanding securities which confer on the holders thereof the
right to elect directors or their functional equivalents (other than in the case
of a foreign Subsidiary, directors' qualifying shares or an immaterial amount of
shares required to be owned by other Persons pursuant to applicable law) are
owned by such Person or any Wholly Owned Subsidiary of such Person.
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CERTAIN UNITED STATES FEDERAL INCOME TAX CONSIDERATIONS
GENERAL
The following is a general discussion of certain United States federal
income tax considerations relating to the exchange of Original Notes for New
Notes and the ownership and disposition of the New Notes by an initial
beneficial owner of the Original Notes. This discussion is based upon the
Internal Revenue Code of 1986, as amended (the "Code"), existing and proposed
Treasury Regulations, and judicial decisions and administrative interpretations
thereunder, as of the date hereof, all of which are subject to change, possibly
with retroactive effect, or are subject to different interpretations. We cannot
assure you that the Internal Revenue Service (the "IRS") will not challenge one
or more of the tax considerations described below. We have not obtained and do
not intend to obtain a ruling from the IRS or an opinion of counsel with respect
to the United States federal tax considerations resulting from the exchange of
Original Notes for New Notes or from holding or disposing of the New Notes.
In this discussion, we do not purport to address all tax considerations that
may be important to a particular holder in light of the holder's circumstances,
or to certain categories of investors (such as financial institutions, insurance
companies, tax-exempt organizations, dealers in securities, persons who hold
notes through partnerships or other pass-through entities, U.S. expatriates, or
persons who hold the notes as part of a hedge, conversion transaction, straddle
or other risk reduction transaction) that may be subject to special rules. This
discussion is limited to initial holders who purchased the Original Notes for
cash at the initial offering at the original offering price and who hold the
Original Notes, and will hold the New Notes, as capital assets. This discussion
also does not address the tax considerations arising under the laws of any
foreign, state or local jurisdiction.
YOU SHOULD CONSULT YOUR OWN TAX ADVISORS AS TO THE PARTICULAR TAX
CONSIDERATIONS TO YOU OF THE EXCHANGE OF ORIGINAL NOTES FOR NEW NOTES AND THE,
OWNERSHIP AND DISPOSITION OF THE NEW NOTES, INCLUDING THE EFFECT AND
APPLICABILITY OF STATE, LOCAL OR FOREIGN TAX LAWS.
U.S. HOLDERS
As used herein, the term "U.S. holder" means a beneficial owner of a note
that is for United States federal income tax purposes:
(1) a citizen or resident of the United States;
(2) a corporation created or organized in or under the laws of the United
States or of any political subdivision thereof;
(3) an estate, the income of which is subject to United States federal
income taxation regardless of its source; or
(4) a trust that either is subject to the primary supervision of a court
within the United States and which has one or more United States persons with
authority to control all substantial decisions, or has a valid election in
effect under applicable Treasury Regulations to be treated as a United States
person.
As used herein, the term "non-U.S. holder" means a beneficial owner of a
note that is not a U.S. holder.
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PAYMENTS OF INTEREST
Interest on an Original Note or a New Note will generally be includible in
your gross income as ordinary interest income in accordance with your usual
method of accounting for tax purposes.
EXCHANGE PURSUANT TO EXERCISE OF REGISTRATION RIGHTS
Neither an exchange of an Original Note for a New Note nor the filing of a
registration statement with respect to the resale of the New Notes should be a
taxable event to you, and you should not recognize any taxable gain or loss or
any interest income as a result of such exchange or such filing. We are
obligated to pay Additional Interest on the notes to you under certain
circumstances described under "Exchange Offer; Registration Rights." We intend
to take the position that such payments should be treated for tax purposes as
additional interest, although we cannot assure you that the IRS will not propose
a different method of taxing the Additional Interest payments.
PAYMENTS UPON REGISTRATION DEFAULT
Because the notes provide for the payment of Additional Interest, they could
be subject to certain rules relating to debt instruments that provide for one or
more contingent payments, referred to as the "Contingent Payment Regulations."
Under the Contingent Payment Regulations, however, a payment is not a contingent
payment merely because of a contingency that, as of the issue date, is "remote."
We intend to take the position that, for purposes of the Contingent Payment
Regulations, the payment of Additional Interest is a "remote" contingency as of
the issue date. Accordingly, the Contingent Payment Regulations should not apply
to the notes unless payments are actually made.
If payments of Additional Interest are actually made, then they likely would
be includible in your gross income in the taxable year in which such payments
were actually made, regardless of the tax accounting method you use. If such
payments were actually made the notes would probably be treated as reissued for
purposes of applying the original issue discount rules under the Code and the
Treasury Regulations.
Our position for purposes of the Contingent Payment Regulations that the
payment of such Additional Interest is a remote contingency as of the issue date
is binding on you for U.S. federal income tax purposes, unless you disclose in
the proper manner to the IRS that you are taking a different position.
OPTIONAL REDEMPTION
The notes may be redeemed prior to their stated maturity at our option or at
the option of the holders under certain circumstances. We do not believe that
either our or the holders' ability to redeem or cause the redemption of the
notes prior to the stated maturity thereof would affect the yield of the notes
for U.S. federal income tax purposes.
SALE, EXCHANGE OR REDEMPTION OF THE NOTES
Upon the disposition of a note by sale, exchange or redemption (other than
an exchange pursuant to this exchange offer), you will generally recognize gain
or loss equal to the difference between (i) the amount realized on the
disposition (other than amounts attributable to accrued but unpaid interest)
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and (ii) your adjusted federal income tax basis in the note. Your adjusted
federal income tax basis in a note generally will equal the cost of the note.
Any gain or loss you recognize on a disposition of a note will generally
constitute capital gain or loss and will be long-term capital gain or loss if
you have held the note for longer than one year. Non-corporate taxpayers are
generally subject to a maximum regular federal income tax rate of 20% on net
long-term capital gains. The deductibility of capital losses is subject to
certain limitations.
BACKUP WITHHOLDING AND INFORMATION REPORTING
Under the Code, you may be subject, under certain circumstances, to
information reporting and/or backup withholding with respect to cash payments in
respect of the notes. This withholding applies only if you (i) fail to furnish
your social security number or other taxpayer identification number ("TIN")
within a reasonable time after a request therefor, (ii) furnish an incorrect
TIN, (iii) fail to report interest or dividends properly, or (iv) fail, under
certain circumstances, to provide a certified statement, signed under penalty of
perjury, that the TIN provided is your correct number and that you are not
subject to backup withholding. The backup withholding tax rate for amounts paid
on or before December 31, 2001 is 30.5%. Thereafter, the backup withholding tax
rate will be equal to the fourth lowest rate of tax applicable under
section 1(c) of the Code (for amounts paid after December 31, 2001, the rate
will initially be reduced to 30% and is scheduled to continue to be adjusted
accordingly). Any amount withheld from a payment under the backup withholding
rules is allowable as credit against your United States federal income tax
liability (and may entitle you to a refund), provided that the required
information is furnished to the IRS. Certain persons are exempt from backup
withholding, including corporations and certain financial institutions. You
should consult your tax advisor as to your qualification for exemption from
backup withholding and the procedure for obtaining such exemption.
NON-U.S. HOLDERS
U.S. FEDERAL WITHHOLDING TAX
The 30% U.S. federal withholding tax will not apply to any payment of
principal or interest on the notes provided that:
- you do not actually (or constructively) own 10% or more of the total
combined voting power of all classes of our voting stock within the
meaning of the Code and the Treasury Regulations;
- you are not a controlled foreign corporation that is related, directly or
indirectly, to us through stock ownership;
- you are not a bank whose receipt of interest on the notes is pursuant to a
loan agreement entered into in the ordinary course of business; and
- you have fulfilled the statement requirements set forth in section 871(h)
or section 881(c) of the Code, as discussed below.
The statement requirements referred to above will be fulfilled if you
certify on IRS Form W-8BEN or other successor form, under penalties of perjury,
that you are not a United States person and provide your name and address, and
(i) you file IRS Form W-8BEN or other successor form with the withholding agent
or (ii) in the case of a note held on your behalf by a securities clearing
organization, bank or other financial institution holding customers' securities
in the ordinary course of its trade or business, the financial institution files
with the withholding agent a statement that it has received the IRS Form W-8BEN
or other successor form from the holder and furnishes the withholding agent with
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a copy thereof; provided that a foreign financial institution will fulfill the
certification requirement by filing IRS Form W-8IMY if it has entered into an
agreement with the IRS to be treated as a qualified intermediary. You should
consult your tax advisor regarding possible additional reporting requirements.
If you cannot satisfy the requirements described above, payments of
principal and interest made to you will be subject to the 30% U.S. federal
withholding tax, unless you provide us with a properly executed (1) IRS
Form W-8BEN (or successor form) claiming an exemption from (or a reduction of)
withholding under the benefit of a tax treaty or (2) IRS Form W-8ECI (or
successor form) stating that payments on the note are not subject to withholding
tax because such payments are effectively connected with your conduct of a trade
or business in the United States, as discussed below.
The 30% U.S. federal withholding tax will generally not apply to any gain or
income that you realize on the sale, exchange, or other disposition of the
notes.
U.S. FEDERAL ESTATE TAX
Your estate will not be subject to U.S. federal estate tax on notes
beneficially owned by you at the time of your death, provided that (1) you do
not own, actually or constructively, 10% or more of the total combined voting
power of all classes of our voting stock (within the meaning of the Code and the
Treasury Regulations) and (2) interest on those notes would not have been, if
received at the time of your death, effectively connected with the conduct by
you of a trade or business in the United States.
U.S. FEDERAL INCOME TAX
If you are engaged in a trade or business in the United States and interest
on the notes is effectively connected with the conduct of that trade or
business, you will be subject to U.S. federal income tax on the interest on a
net income basis in the same manner as if you were a U.S. person as defined
under the Code. In that case, you would not be subject to the 30% U.S. federal
withholding tax. See "U.S. Holders" above. In addition, if you are a foreign
corporation, you may be subject to a branch profits tax equal to 30% (or lower
applicable treaty rate) of your earnings and profits for the taxable year that
are effectively connected with the conduct by you of a trade or business in the
United States. For this purpose, interest on notes will be included in earnings
and profits if so effectively connected.
Any gain or income realized on the sale, exchange, or redemption of notes
generally will not be subject to U.S. federal income tax unless:
- that gain or income is effectively connected with the conduct of a trade
or business in the United States by you;
- you are an individual who is present in the United States for 183 days or
more in the taxable year of that disposition, and certain other conditions
are met; or
- you are subject to tax under tax laws applicable to certain U.S.
expatriates.
INFORMATION REPORTING AND BACKUP WITHHOLDING
In general, you will not be subject to information reporting and backup
withholding with respect to payments that we make to you provided that we do not
have actual knowledge that you are a U.S.
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person and we have received from you the statement described above under "U.S.
Federal Withholding Tax."
Under current Treasury Regulations, payments on the sale, exchange or other
disposition of a note made to or through a foreign office of a broker generally
will not be subject to information reporting or backup withholding. However, if
the broker is (i) a United States person, (ii) a controlled foreign corporation
for United States federal income tax purposes, (iii) a foreign person 50% or
more of whose gross income is effectively connected with a United States trade
or business for a specified three-year period, or (iv) a foreign partnership
with certain connections to the United States, then information reporting will
be required unless the broker has in its records documentary evidence that the
beneficial owner is not a United States person and certain other conditions are
met or the beneficial owner otherwise establishes an exemption. Backup
withholding may apply to any payment that the broker is required to report if
the broker has actual knowledge that the payee is a United States person.
Payments to or through the United States office of a broker will be subject to
backup withholding and information reporting unless the beneficial owner
certifies, under penalties of perjury, that it is not a United States person or
otherwise establishes an exemption.
Any amounts withheld under the backup withholding rules will be allowed as a
refund or a credit against your U.S. federal income tax liability provided the
required information is furnished to the IRS.
PLAN OF DISTRIBUTION
A broker-dealer that is the holder of Original Notes that were acquired for
the account of that broker-dealer as a result of market-making or other trading
activities, other than Original Notes acquired directly from us or any of our
affiliates, may exchange those Original Notes for New Notes pursuant to the
exchange offer. This is true so long as each broker-dealer that receives New
Notes for its own account in exchange for Original Notes, where the Original
Notes were acquired by the broker-dealer as a result of market-marking or other
trading activities, acknowledges that it will deliver a prospectus in connection
with any resale of such New Notes. This prospectus, as it may be amended or
supplemented form time to time, may be used by a broker-dealer in connection
with resales of New Notes received in exchange for Original Notes where the
Original Notes were acquired as result of market-making activities or other
trading activities. We have agreed that we will make this prospectus, as it may
be amended or supplemented from time to time, available to any broker-dealer for
use in connection with any resale, except that the period may be suspended for a
period if we and our guarantors determine, upon the advise of counsel, that the
amended or supplemented prospectus would require disclosure of confidential
information or interfere with any of our financing, acquisition, reorganization
or other material transactions. All broker-dealers effecting transactions in the
New Notes may be required to deliver a prospectus.
We will not receive any proceeds from any sale of New Notes by
broker-dealers or any other holder of New Notes. New Notes received by
broker-dealers for their own account in the exchange offer may be sold from time
to time in one or more transactions in the over-the-counter market, in
negotiated transactions, through the writing of options on the New Notes or a
combination of such methods of resale, at market prices prevailing at the time
of resale, at prices related to such prevailing market prices or negotiated
prices. Any resale may be made directly to purchasers or to or through brokers
or dealers who may receive compensation in the form of commissions or
concessions from any such broker-dealer and/or the purchasers of any such New
Notes. Any broker-dealer that resells New Notes that were received by it for its
own account pursuant to the exchange offer and any broker or dealer that
participates in a distribution of such New Notes may be deemed to be an
"underwriter" within the meaning of the Securities Act and any profit on any
resale of New Notes and any
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commissions or concessions received by those persons may be deemed to be
underwriting compensation under the Securities Act. The letter of transmittal
states that by acknowledging that it will deliver and by delivering a
prospectus, a broker-dealer will not be deemed to admit that it is an
"underwriter" within the meaning of the Securities Act.
We have agreed to pay all expenses incident to the exchange offer and to our
performance of, or compliance with, the registration rights agreements (other
than commissions or concessions of any brokers or dealers) and will indemnify
the holders of the New Notes (including any broker-dealers) against some
liabilities, including liabilities under the Securities Act.
LEGAL MATTERS
The validity of the New Notes offered hereby and the subsidiary guarantees
will be passed upon by Schulte Roth & Zabel LLP, New York, New York. In giving
its opinion, Schulte Roth & Zabel will rely as to some matters of Illinois law
with respect to ECI on the opinion of Schwartz Cooper Greenberger Krauss,
Chartered.
INDEPENDENT AUDITORS
The consolidated financial statements and schedules of American Achievement
Corporation, as of August 26, 2000 and August 25, 2001 and for the fiscal years
ended August 28, 1999, August 26, 2000 and August 25, 2001, included in this
prospectus and elsewhere in the registration statement have been audited by
Arthur Andersen LLP, independent public accountants, as indicated in their
report with respect thereto, and are included herein in reliance upon the
authority of said firm as experts (or, as experts in accounting and auditing) in
giving said reports.
The consolidated financial statements of TP Holding Corp., for the six
months ended July 27, 2000, included in this prospectus and elsewhere in the
registration statement have been audited by Arthur Andersen LLP, independent
public accountants, as indicated in their report with respect thereto, and are
included herein in reliance upon the authority of said firm as experts (or, as
experts in accounting and auditing) in giving said reports.
The consolidated financial statements of Taylor Publishing Company and
subsidiary for the five-month period ended February 11, 2000, included in this
prospectus and elsewhere in the registration statement have been audited by
Arthur Andersen LLP, independent public accountants, as indicated in their
report with respect thereto, and are included herein in reliance upon the
authority of said firm as experts (or, as experts in accounting and auditing) in
giving said reports.
The consolidated financial statements of Taylor Publishing Company and
subsidiary as of September 3, 1999 and for the fiscal year then ended have been
included herein and in the registration statement in reliance upon the report of
KPMG LLP, independent accountants, appearing elsewhere herein, and upon the
authority of said firm as experts in accounting and auditing.
The financial statements of Educational Communications, Inc. as of
December 31, 2000 and December 31, 1999 and for the three fiscal years ended
December 31, 2000, included in this prospectus and elsewhere in the registration
statement have been audited by Altschuler, Melvoin and Glasser LLP, independent
auditors, as indicated in their report with respect thereto, and are included
herein in reliance upon the authority of said firm as experts (or, as experts in
accounting and auditing) in giving said reports.
118
<Page>
We have agreed to indemnify and hold KPMG LLP (KPMG) harmless against and
from any and all legal costs and expenses incurred by KPMG in successful defense
of any legal action or proceeding that arises as a result of KPMG's consent to
the inclusion of its audit report on the past financial statements of Taylor
Publishing Company and subsidiary included in this prospectus.
We have agreed to indemnify and hold Altschuler, Melvoin and Glasser LLP
(Altschuler) harmless against and from any and all legal costs and expenses
incurred by Altschuler in successful defense of any legal action or proceeding
that arises as a result of Altschuler's consent to the inclusion of its audit
report on the past financial statements of Educational Communications, Inc.
included in this prospectus.
WHERE YOU CAN FIND MORE INFORMATION
We have filed with the SEC a registration statement on Form S-4 under the
Securities Act with respect to our offering of the New Notes. This prospectus
does not contain all the information included in the registration statement and
the exhibits and schedules thereto. You will find additional information about
us and the New Notes in the registration statement. The registration statement
and the exhibits and schedules thereto may be inspected and copied at the public
reference facilities maintained by the SEC at Room 1024, Judiciary Plaza, 450
Fifth Street, N.W., Washington, D.C. 20549, and at the public reference
facilities of the SEC's Regional Offices: New York Regional Office, Seven World
Trade Center, Suite 1300, New York, New York 10048; and Chicago Regional Office,
Citicorp Center, 500 West Madison Street, Chicago, Illinois 60661. Copies of
this material may also be obtained from the Public Reference Section of the
Securities and Exchange Commission at 450 Fifth Street, N.W., Washington, D.C.
20549 as prescribed rates. The SEC also maintains a site on the World Wide Web
(http://www.sec.gov) that contains reports, proxy and information statements and
other information regarding registrants, including American Achievement, that
file electronically with the SEC. Statements made in this prospectus about legal
documents may not necessarily by complete and you should read the documents
which are filed as exhibits to the registration statement or otherwise filed
with the SEC.
119
<Page>
AMERICAN ACHIEVEMENT CORPORATION
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<Table>
<Caption>
PAGE
----
AMERICAN ACHIEVEMENT CORPORATION
Report of Independent Public Accountants................ F-2
Consolidated Balance Sheets as of August 26, 2000,
August 25, 2001 and November 24, 2001 (unaudited)...... F-3
Consolidated Statements of Operations for the Fiscal
Years Ended August 28, 1999, August 26, 2000 and
August 25, 2001 and for the three months ended
November 25, 2000 (unaudited) and November 24, 2001
(unaudited)............................................ F-4
Consolidated Statements of Stockholders' Equity for the
Fiscal Years Ended August 28, 1999, August 26, 2000
and August 25, 2001 and for the three months ended
November 24, 2001 (unaudited).......................... F-5
Consolidated Statements of Cash Flows for the Fiscal
Years Ended August 28, 1999, August 26, 2000 and
August 25, 2001 and for the three months ended
November 25, 2000 (unaudited) and November 24, 2001
(unaudited)............................................ F-6
Notes to Consolidated Financial Statements.............. F-7
TP HOLDING CORP.
Report of Independent Public Accountants................ F-39
Consolidated Statement of Income for the six months
ended July 27, 2000.................................... F-40
Consolidated Statement of Stockholders' Equity for the
six months ended
July 27, 2000......................................... F-41
Consolidated Statement of Cash Flows for the six months
ended July 27, 2000.................................... F-42
Notes to Consolidated Financial Statements.............. F-43
TAYLOR PUBLISHING COMPANY AND SUBSIDIARY
Report of Independent Public Accountants................ F-48
Consolidated Statement of Operations for the five-month
period ended February 11, 2000......................... F-49
Consolidated Statement of Stockholder's Equity for the
five-month period ended February 11, 2000.............. F-50
Consolidated Statement of Cash Flows for the five-month
period ended February 11, 2000......................... F-51
Notes to Consolidated Financial Statements.............. F-52
TAYLOR PUBLISHING COMPANY AND SUBSIDIARY
Independent Auditors' Report............................ F-58
Consolidated Balance Sheet as of September 3, 1999...... F-59
Consolidated Statement of Operations for the Fiscal Year
Ended September 3, 1999................................ F-60
Consolidated Statement of Stockholder's Equity for the
Fiscal Year Ended September 3, 1999.................... F-61
Consolidated Statement of Cash Flows for the Fiscal Year
Ended September 3, 1999................................ F-62
Notes to Consolidated Financial Statements.............. F-63
EDUCATIONAL COMMUNICATIONS, INC.
Independent Auditor's Report............................ F-69
Balance Sheets as of December 31, 2000 and 1999......... F-70
Statements of Income for the Years Ended December 31,
2000, 1999 and 1998.................................... F-71
Statements of Changes in Stockholders' Equity for the
Years Ended
December 31, 2000, 1999 and 1998...................... F-72
Statements of Cash Flows for the Years Ended
December 31, 2000, 1999 and 1998....................... F-73
Notes to Financial Statements........................... F-74
</Table>
F-1
<Page>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Stockholders of
American Achievement Corporation (f/k/a/ Commemorative Brands Holding
Corporation):
We have audited the accompanying consolidated balance sheets of American
Achievement Corporation (a Delaware corporation, successor to Commemorative
Brands Holding Corporation), and subsidiaries as of August 26, 2000, and
August 25, 2001, and the related consolidated statements of operations,
stockholders' equity and cash flows for the fiscal years ended August 28, 1999,
August 26, 2000 and August 25, 2001. These consolidated financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
American Achievement Corporation and subsidiaries as of August 26, 2000, and
August 25, 2001, and the results of their operations and their cash flows for
the fiscal years ended August 28, 1999, August 26, 2000 and August 25, 2001, in
conformity with accounting principles generally accepted in the United States.
Our audit was made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The schedule listed in the index of
financial statements on valuation and qualifying accounts is presented for
purposes of complying with the Securities and Exchange Commission's rules and is
not part of the basic financial statements. This schedule has been subjected to
the auditing procedures applied in the audit of the basic financial statements
and, in our opinion, fairly states in all material respects the financial data
required to be set forth therein in relation to the basic financial statements
taken as a whole.
/s/ Arthur Andersen LLP
Austin, Texas
October 19, 2001
F-2
<Page>
AMERICAN ACHIEVEMENT CORPORATION
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
<Table>
<Caption>
AUGUST 26, AUGUST 25, NOVEMBER 24,
2000 2001 2001
---------- ---------- ------------
(UNAUDITED)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents............................... $ 1,887 $ 2,636 $ 4,876
Accounts receivable, net of allowance for doubtful
accounts of $2,996, $3,379 and $3,787 (unaudited),
respectively.......................................... 39,339 49,931 52,598
Inventories, net........................................ 27,987 26,672 24,810
Prepaid expenses and other current assets, net.......... 17,463 15,916 14,890
-------- -------- -----------
Total current assets.................................. 86,676 95,155 97,174
Property, plant and equipment, net...................... 67,743 64,842 64,140
Trademarks, net of accumulated amortization of $2,850,
$3,942 and $4,361 (unaudited), respectively........... 27,890 42,299 41,879
Goodwill, net of accumulated amortization of $8,217,
$11,655 and $12,670 (unaudited), respectively......... 114,672 147,497 146,913
Other assets, net....................................... 29,572 30,160 29,313
-------- -------- -----------
Total assets........................................ $326,553 $379,953 $ 379,419
======== ======== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Bank overdraft.......................................... $ 5,152 $ 4,243 $ 4,587
Accounts payable and accrued expenses................... 50,653 60,115 57,468
Bridge Notes due to Affiliates.......................... 16,160 --
Current portion of long-term debt....................... 8,050 12,900 13,212
-------- -------- -----------
Total current liabilities........................... 80,015 77,258 75,267
Long-term debt, net of current portion.................. 167,043 183,714 181,357
Bridge Notes due to Affiliates.......................... -- 26,995 27,726
Other long-term liabilities............................. 1,947 4,527 4,852
-------- -------- -----------
Total liabilities................................... 249,005 292,494 289,202
REDEEMABLE MINORITY INTEREST IN SUBSIDIARY.................. 14,450 15,650 15,950
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
American Achievement Series A preferred, $.01 par value,
1,000,000 shares and 1,200,000 shares authorized,
respectively, 854,467 shares 1,001,347 shares and
1,001,347 (unaudited) issued and outstanding,
respectively, liquidation preference of $85,447,
$100,135, and $100,135 (unaudited) respectively....... 9 10 10
American Achievement Series B preferred, $.01 par value,
25,000 shares and none authorized, respectively, none
issued and outstanding................................ -- -- --
American Achievement common stock, $.01 par value,
1,250,000 shares authorized, 696,914 shares, 809,351
shares and 809,351 shares (unaudited) issued and
outstanding, respectively............................. 7 8 8
Additional paid-in capital.............................. 78,760 94,760 94,760
Accumulated other comprehensive loss.................... -- (2,751) (3,166)
Accumulated deficit..................................... (15,678) (20,218) (17,345)
-------- -------- -----------
Total stockholders' equity.......................... 63,098 71,809 74,267
-------- -------- -----------
Total liabilities and stockholders' equity.......... $326,553 $379,953 $ 379,419
======== ======== ===========
</Table>
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
<Page>
AMERICAN ACHIEVEMENT CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS)
<Table>
<Caption>
FOR THE THREE
FOR THE FISCAL YEARS ENDED MONTHS ENDED
------------------------------------ -----------------------------
AUGUST 28, AUGUST 26, AUGUST 25, NOVEMBER 25, NOVEMBER 24,
1999 2000 2001 2000 2001
---------- ---------- ---------- ------------- -------------
(UNAUDITED)
Net sales............................. $168,865 $182,285 $281,515 $64,338 $77,572
Cost of sales......................... 73,268 80,929 141,946 35,539 35,947
-------- -------- -------- ------- -------
Gross profit...................... 95,597 101,356 139,569 28,799 41,625
Selling, general and administrative
expenses............................ 85,075 85,559 119,930 29,543 32,402
-------- -------- -------- ------- -------
Operating income.................. 10,522 15,797 19,639 (744) 9,223
Interest expense, net................. 14,594 15,691 22,846 5,868 5,930
-------- -------- -------- ------- -------
Income (loss) before provision for
income taxes.................... (4,072) 106 (3,207) (6,612) 3,293
Provision for income taxes............ 120 333 133 369 120
-------- -------- -------- ------- -------
Income (loss) before extraordinary
item............................ (4,192) (227) (3,340) (6,981) 3,173
Gain on extinguishment of debt, net of
income taxes of $46................. -- 6,695 -- -- --
-------- -------- -------- ------- -------
Net income (loss)................. (4,192) 6,468 (3,340) (6,981) 3,173
Preferred dividends................... (1,200) (1,200) (1,200) (300) (300)
-------- -------- -------- ------- -------
Net income (loss) to common
stockholders.................... $ (5,392) $ 5,268 $ (4,540) $(7,281) $ 2,873
======== ======== ======== ======= =======
</Table>
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
<Page>
AMERICAN ACHIEVEMENT CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
<Table>
<Caption>
PREFERRED STOCK
------------------------------------------------------------------
SERIES A SERIES B
------------------------------------------- --------------------
AMERICAN
CBI INC. "OLD" ACHIEVEMENT "NEW" CBI INC. "OLD"
------------------- --------------------- --------------------
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
-------- -------- --------- --------- -------- ---------
BALANCE, August 29, 1998............................ 100,000 $ 1 -- $ -- 377,156 $ 4
Repurchase of CBI Inc. "Old" common stock........... -- -- -- -- -- --
Issuance of CBI Inc. "Old" preferred stock.......... -- -- -- -- 83,829 1
Accrued CBI Inc. "Old" preferred stock dividends.... -- -- -- -- -- --
Net loss............................................ -- -- -- -- -- --
-------- ----- --------- --------- -------- ---------
BALANCE, August 28, 1999............................ 100,000 1 -- -- 460,985 5
Reclassification of CBI Inc. "Old" Series A
preferred stock to redeemable minority interest in
subsidiary in connection with the July 27, 2000,
Merger of CBI Inc. and American Achievement (Note
3)................................................ (100,000) (1) -- -- -- --
Issuance of American Achievement "New" Series A
Preferred and "New" Common in exchange for CBI
Inc. "Old" Series B Preferred and "Old" Common.... -- -- 460,985 5 (460,985) (5)
Issuance of American Achievement "New" Common and
"New" Series A Preferred in acquisition of
Taylor............................................ -- -- 393,482 4 -- --
Accrued dividends on CBI Inc. "Old" Series A
Preferred......................................... -- -- -- -- -- --
Net income.......................................... -- -- -- -- -- --
-------- ----- --------- --------- -------- ---------
BALANCE, August 26, 2000............................ -- -- 854,467 9 -- --
Comprehensive loss-
Net loss............................................ -- -- -- -- -- --
Adjustment in minimum pension liability............. -- -- -- -- -- --
Change in effective portion of derivative loss...... -- -- -- -- -- --
Total comprehensive loss............................
Issuance of American Achievement Series B Preferred
Stock............................................. -- -- -- -- -- --
Exchange of Series B Preferred Stock for Series A
and common stock.................................. -- -- 146,880 1 -- --
Accrued interest on CBI Inc. "Old" Series A
Preferred Stock................................... -- -- -- -- -- --
Exercise of stock options........................... -- -- -- -- -- --
-------- ----- --------- --------- -------- ---------
BALANCE, August 25, 2001............................ -- -- 1,001,347 10 -- --
-------- ----- --------- --------- -------- ---------
Comprehensive loss-
Net loss income (unaudited)......................... -- -- -- -- -- --
Adjustment in minimum pension liability
(unaudited)....................................... -- -- -- -- -- --
Change in effective portion of derivative loss
(unaudited)....................................... -- -- -- -- -- --
Total comprehensive income (loss) (unaudited).......
Accrued interest on CBI Inc. "Old" Series A
Preferred Stock (unaudited)....................... -- -- -- -- -- --
-------- ----- --------- --------- -------- ---------
BALANCE, November 24, 2001 (unaudited).............. -- $ -- 1,001,347 $ 10 -- $ --
======== ===== ========= ========= ======== =========
<Caption>
PREFERRED STOCK
---------------------
SERIES B COMMON STOCK
--------------------- ------------------------------------------
AMERICAN AMERICAN
ACHIEVEMENT "NEW" CBI INC. "OLD" ACHIEVEMENT "NEW"
--------------------- ------------------- --------------------
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
--------- --------- -------- -------- -------- ---------
BALANCE, August 29, 1998............................ -- $ -- 377,156 $ 4 -- $ --
Repurchase of CBI Inc. "Old" common stock........... -- -- (1,171) -- -- --
Issuance of CBI Inc. "Old" preferred stock.......... -- -- -- -- -- --
Accrued CBI Inc. "Old" preferred stock dividends.... -- -- -- -- -- --
Net loss............................................ -- -- -- -- -- --
------- ----- -------- ---- ------- ---------
BALANCE, August 28, 1999............................ -- -- 375,985 4 -- --
Reclassification of CBI Inc. "Old" Series A
preferred stock to redeemable minority interest in
subsidiary in connection with the July 27, 2000,
Merger of CBI Inc. and American Achievement (Note
3)................................................ -- -- -- -- -- --
Issuance of American Achievement "New" Series A
Preferred and "New" Common in exchange for CBI
Inc. "Old" Series B Preferred and "Old" Common.... -- -- (375,985) (4) 375,985 4
Issuance of American Achievement "New" Common and
"New" Series A Preferred in acquisition of
Taylor............................................ -- -- -- -- 320,929 3
Accrued dividends on CBI Inc. "Old" Series A
Preferred......................................... -- -- -- -- -- --
Net income.......................................... -- -- -- -- -- --
------- ----- -------- ---- ------- ---------
BALANCE, August 26, 2000............................ -- -- -- -- 696,914 7
Comprehensive loss-
Net loss............................................ -- -- -- -- -- --
Adjustment in minimum pension liability............. -- -- -- -- -- --
Change in effective portion of derivative loss...... -- -- -- -- -- --
Total comprehensive loss............................
Issuance of American Achievement Series B Preferred
Stock............................................. 16,000 160 -- -- -- --
Exchange of Series B Preferred Stock for Series A
and common stock.................................. (16,000) (160) -- -- 112,137 1
Accrued interest on CBI Inc. "Old" Series A
Preferred Stock................................... -- -- -- -- -- --
Exercise of stock options........................... -- -- -- -- 300 --
------- ----- -------- ---- ------- ---------
BALANCE, August 25, 2001............................ -- -- -- -- 809,351 8
------- ----- -------- ---- ------- ---------
Comprehensive loss-
Net loss income (unaudited)......................... -- -- -- -- -- --
Adjustment in minimum pension liability
(unaudited)....................................... -- -- -- -- -- --
Change in effective portion of derivative loss
(unaudited)....................................... -- -- -- -- -- --
Total comprehensive income (loss) (unaudited).......
Accrued interest on CBI Inc. "Old" Series A
Preferred Stock (unaudited)....................... -- -- -- -- -- --
------- ----- -------- ---- ------- ---------
BALANCE, November 24, 2001 (unaudited).............. -- $ -- -- $ -- 809,351 $ 8
======= ===== ======== ==== ======= =========
<Caption>
ACCUMULATED
ADDITIONAL OTHER
PAID-IN COMPREHENSIVE ACCUMULATED
CAPITAL LOSS DEFICIT TOTAL
---------- ------------- ----------- --------
BALANCE, August 29, 1998............................ $50,391 $ -- $(15,554) $34,846
Repurchase of CBI Inc. "Old" common stock........... (7) -- -- (7)
Issuance of CBI Inc. "Old" preferred stock.......... 8,382 -- -- 8,383
Accrued CBI Inc. "Old" preferred stock dividends.... -- -- (1,200) (1,200)
Net loss............................................ -- -- (4,192) (4,192)
------- ------- -------- -------
BALANCE, August 28, 1999............................ 58,766 -- (20,946) 37,830
Reclassification of CBI Inc. "Old" Series A
preferred stock to redeemable minority interest in
subsidiary in connection with the July 27, 2000,
Merger of CBI Inc. and American Achievement (Note
3)................................................ (9,999) -- -- (10,000)
Issuance of American Achievement "New" Series A
Preferred and "New" Common in exchange for CBI
Inc. "Old" Series B Preferred and "Old" Common.... -- -- -- --
Issuance of American Achievement "New" Common and
"New" Series A Preferred in acquisition of
Taylor............................................ 29,993 -- -- 30,000
Accrued dividends on CBI Inc. "Old" Series A
Preferred......................................... -- -- (1,200) (1,200)
Net income.......................................... -- -- 6,468 6,468
------- ------- -------- -------
BALANCE, August 26, 2000............................ 78,760 -- (15,678) 63,098
Comprehensive loss-
Net loss............................................ -- -- (3,340) $(3,340)
Adjustment in minimum pension liability............. -- (519) -- (519)
Change in effective portion of derivative loss...... -- (2,232) -- (2,232)
------- -------- -------
Total comprehensive loss............................ (2,751) (3,340) $(6,091)
Issuance of American Achievement Series B Preferred
Stock............................................. 15,840 -- -- 16,000
Exchange of Series B Preferred Stock for Series A
and common stock.................................. 158 -- -- --
Accrued interest on CBI Inc. "Old" Series A
Preferred Stock................................... -- -- (1,200) (1,200)
Exercise of stock options........................... 2 -- -- 2
------- ------- -------- -------
BALANCE, August 25, 2001............................ 94,760 (2,751) (20,218) 71,809
------- ------- -------- -------
Comprehensive loss-
Net loss income (unaudited)......................... -- -- 3,173 3,173
Adjustment in minimum pension liability
(unaudited)....................................... -- -- -- --
Change in effective portion of derivative loss
(unaudited)....................................... -- (415) -- (415)
------- -------- -------
Total comprehensive income (loss) (unaudited)....... (415) 3,173 2,758
Accrued interest on CBI Inc. "Old" Series A
Preferred Stock (unaudited)....................... -- -- (300) (300)
------- ------- -------- -------
BALANCE, November 24, 2001 (unaudited).............. $94,760 $(3,166) $(17,345) $74,267
======= ======= ======== =======
</Table>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS.
F-5
<Page>
AMERICAN ACHIEVEMENT CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
<Table>
<Caption>
FOR THE THREE
FOR THE FISCAL YEAR ENDED MONTHS ENDED
------------------------------------ ---------------------------
AUGUST 28, AUGUST 26, AUGUST 25, NOVEMBER 25, NOVEMBER 24,
1999 2000 2001 2000 2001
---------- ---------- ---------- ------------ ------------
(UNAUDITED)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) income.................................... $(4,192) $ 6,468 $ (3,340) $(6,981) $ 3,173
Adjustments to reconcile net (loss) income to net
cash provided by (used in) operating activities--
Depreciation and amortization.................... 7,176 9,100 17,586 3,870 4,762
Gain on retirement of debt....................... -- (6,741) -- -- --
Provision for doubtful accounts.................. 1,389 630 383 35 408
Other............................................ 1,534 340 649
(Increase) decrease in receivables............... (5,391) 3,622 (10,093) (9,449) (3,075)
Decrease in inventories, net..................... 495 151 881 3,406 1,862
(Increase) decrease in prepaid expenses and other
current assets, net............................ 617 (276) 640 (59) 1,026
Increase in other assets, net.................... (765) (4,778) (2,620) 209 (770)
Increase (decrease) in bank overdraft, accounts
payable and accrued expenses and other
long-term liabilities.......................... 1,768 (17,544) 5,285 8,986 (2,393)
------- -------- -------- ------- -------
Net cash provided by (used in) operating
activities................................. 1,097 (9,368) 10,256 357 5,642
------- -------- -------- ------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property, plant and equipment........... (9,785) (5,087) (7,499) (1,932) (2,088)
Sale of Publishing Segment........................... -- -- 47 -- --
Acquisition of Taylor Senior Holding, net of cash
acquired........................................... -- 905 -- -- --
Acquisition of Educational Communications Inc., net
of cash and cash equivalents acquired.............. -- -- (50,413) -- --
------- -------- -------- ------- -------
Net cash used in investing activities........ (9,785) (4,182) (57,865) (1,932) (2,088)
------- -------- -------- ------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from debt issuance.......................... -- 98,984 35,835 478 732
Payments for repurchase of common stock.............. (7) -- -- -- --
Proceeds from issuance of common and preferred
stock.............................................. 8,383 -- 16,000 -- --
Exercise of stock option............................. -- -- 2 -- --
Payments on term loan facility, net.................. (1,250) (62,638) (8,600) (888) (3,225)
Bank revolver borrowings, net........................ 1,338 (21,660) 5,121 3,405 1,179
------- -------- -------- ------- -------
Net cash provided by (used in) financing
activities................................. 8,464 14,686 48,358 2,995 (1,314)
------- -------- -------- ------- -------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS..... (224) 1,136 749 1,420 2,240
CASH AND CASH EQUIVALENTS, beginning of fiscal year...... 975 751 1,887 1,887 2,636
------- -------- -------- ------- -------
CASH AND CASH EQUIVALENTS, end of fiscal year............ $ 751 $ 1,887 $ 2,636 3,307 4,876
======= ======== ======== ======= =======
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the fiscal year for--
Interest......................................... $14,358 $ 17,730 $ 20,461 $ -- $ 399
======= ======== ======== ======= =======
Taxes............................................ $ 94 $ 226 $ 443 $ 443 $ 25
======= ======== ======== ======= =======
SUPPLEMENTAL DISCLOSURE OF NONCASH FINANCING ACTIVITIES:
Accrued dividends on CBI Inc. "Old" Series A
Preferred.......................................... $ 1,200 $ 1,200 $ 1,200 300 300
======= ======== ======== ======= =======
Issuance of common and preferred stock in acquisition
of Taylor Senior Holding........................... $ -- $ 30,000 $ -- -- --
======= ======== ======== ======= =======
</Table>
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
<Page>
AMERICAN ACHIEVEMENT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BACKGROUND AND ORGANIZATION:
AMERICAN ACHIEVEMENT CORPORATION (American Achievement), a Delaware
corporation, was formed on June 27, 2000. Commemorative Brands Inc. (CBI Inc.)
became a subsidiary of American Achivement pursuant to an agreement and plan of
merger among CBI Inc., American Achievement and Commemorative Brands Acquisition
Corp. (CB Acquisition) (see Note 3). On July 27, 2000, American Achievement
acquired all issued and outstanding shares of Taylor Senior Holding Corp.
(Taylor Senior Holding) through the issuance of common and preferred stock of
American Achievement in a transaction accounted for as a purchase. Consequently,
the operating results of Taylor Senior Holding have been included from the
July 27, 2000, acquisition date. On March 30, 2001, American Achievement
acquired all of the outstanding stock of Educational Communications, Inc. (ECI).
The transaction was accounted for as a purchase. Consequently, the results of
operations of ECI are included from the acquisition date, March 30, 2001 (see
Note 3). Taylor Senior Holding and ECI are wholly owned subsidiaries of American
Achievement, and CBI Inc. is a majority-owned subsidiary of American
Achievement. American Achievement, together with its subsidiaries, is referred
to herein as the "Company." The Company is a manufacturer and supplier of class
rings, yearbooks 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 also operates a reunion services division which
provides full-service reunion planning for high schools and sells achievement
publications in the specialty directory publishing industry nationwide. The
Company markets its products and services primarily in the United States and has
identified two distinct reporting segments, scholastic products and affinity
products (see Note 15). The Company's corporate offices and primary
manufacturing facilities are located in Austin and Dallas, Texas.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
FISCAL YEAR-END
The Company uses a 52/53-week fiscal year ending on the last Saturday of
August.
INTERIM FINANCIAL STATEMENTS
The accompanying consolidated balance sheet as of November 24, 2001, the
consolidated statements of operations and cash flows for the three months ended
November 25, 2000 and November 24, 2001 and the consolidated statement of
stockholders' equity for the three months ended November 24, 2001 are unaudited,
but in the opinion of management, include all adjustments, consisting only of
normal recurring adjustments, necessary for a fair presentation of results for
the interim periods. Results for the three months ended November 24, 2001 are
not necessarily indicative of the results that may be expected for the year
ending August 31, 2002.
CONSOLIDATION
The consolidated financial statements for the fiscal year ended August 25,
2001, include the accounts of American Achievement and its subsidiaries, ECI,
CBI Inc. and Taylor Senior Holding, together with their wholly owned
subsidiaries. The consolidated financial statements for the year ended
F-7
<Page>
AMERICAN ACHIEVEMENT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
August 26, 2000, include the accounts of CBI Inc. and Taylor Senior Holding,
together with their wholly owned 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.
SALES REPRESENTATIVE ADVANCES AND RELATED RESERVE
The Company advances funds to sales representatives and makes payments to
predecessor sales representatives on behalf of successor sales representatives
as prepaid commissions against anticipated earnings. 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 consolidated 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:
<Table>
<Caption>
DESCRIPTION USEFUL LIFE
- ----------- --------------
Buildings and improvements.................................. 10 to 25 years
Tools and dies.............................................. 10 to 14 years
Machinery and equipment..................................... 2 to 10 years
</Table>
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. Depreciation expense recorded in the
accompanying consolidated statements of operations is approximately $4,299,000,
$5,890,000 and $10,819,000 for the fiscal years ended August 28, 1999,
August 26, 2000, and August 25, 2001, respectively.
F-8
<Page>
AMERICAN ACHIEVEMENT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
TRADEMARKS
The value of trademarks was determined based on a third-party appraisal.
ECI's trademarks of $15.5 million at August 25, 2001 are being amortized over
20 years. CBI Inc.'s trademarks of $30.7 million are being amortized over
40 years. Amortization expense recorded in the accompanying consolidated
statements of operations amounted to approximately $768,000 for each of the
fiscal years ended August 28, 1999 and August 26, 2000, and approximately
$1,092,000 for the fiscal year ended August 25, 2001.
GOODWILL
Costs in excess of fair value of net tangible and identifiable intangible
assets acquired are included in goodwill in the accompanying consolidated
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. Amortization expense on goodwill
recorded in the accompanying consolidated statements of operations is
approximately $2,109,000, $2,189,000 and $3,438,000 for the fiscal years ended
August 28, 1999, August 26, 2000, and August 25, 2001, respectively.
OTHER ASSETS
Other assets include deferred financing costs, customer lists, work force in
place and ring samples supplied to national chain stores and sales
representatives of the Company. All values are amortized on a straight-line
basis as follows:
<Table>
<Caption>
DESCRIPTION USEFUL LIFE
- ----------- -----------
Deferred financing costs.................................... 1-7 years
Customer lists.............................................. 12 years
Work force in place......................................... 7 years
Ring samples................................................ 6 years
</Table>
F-9
<Page>
AMERICAN ACHIEVEMENT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
Other assets, net consists of the following (in thousands):
<Table>
<Caption>
AUGUST 26, 2000 AUGUST 25, 2001
--------------- ---------------
Deferred financing costs................................. $ 7,341 $ 9,800
Ring samples............................................. 6,237 5,709
Work force in place...................................... 3,377 3,377
Customer lists........................................... 12,932 14,672
Other................................................ 401 1,089
------- -------
30,288 34,647
Less-accumulated amortization............................ (716) (4,487)
------- -------
Other assets, net.................................... $29,572 $30,160
======= =======
</Table>
Amortization expense on other assets recorded in the accompanying
consolidated statements of operations is approximately $--, $177,000 and
$2,237,000 for the fiscal years ended August 28, 1999, August 26, 2000, and
August 25, 2001, respectively.
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 changes 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.
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
basis. 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.
F-10
<Page>
AMERICAN ACHIEVEMENT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
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.
DERIVATIVE FINANCIAL INSTRUMENTS
The Company adopted SFAS No. 133, "Accounting for Derivative Instruments and
Hedging Activities," beginning on August 27, 2000. SFAS No. 133 establishes
accounting and reporting standards for derivative instruments and hedging
activities. SFAS No. 133 requires that an entity recognize derivatives as either
assets or liabilities on the balance sheet and measure those instruments at fair
value. The accounting for changes in the fair value of a derivative depends on
the intended use of the derivative and the resulting designation. The adoption
of SFAS No. 133 did not have a material effect on the Company's financial
statements.
The Company designates its derivatives based upon criteria established by
SFAS No. 133. For a derivative designated as a fair value hedge, the gain or
loss is recognized in earnings in the period of change together with the
offsetting loss or gain on the hedged item attributed to the risk being hedged.
For a derivative designated as a cash flow hedge, the effective portion of the
derivative's gain or loss is initially reported as a component of accumulated
other comprehensive income (loss) and subsequently reclassified into earnings
when the hedged exposure affects earnings. The ineffective portion of the gain
or loss is reported in earnings immediately.
The Company uses derivatives to manage exposures to interest rate risk. The
Company's objectives for holding derivatives are to decrease the volatility of
earnings and cash flows associated with changes in interest rates.
REVENUE RECOGNITION
Revenues from product sales are recognized at the time the product is
shipped and the risks and rewards of ownership have passed to the customer.
Provisions for sales returns, warranty costs and rebates expenses are recorded
at the time of sale based on historical information and current trends.
SEASONALITY
The Company's scholastic product sales tend to be seasonal. Class ring and
achievement publication sales are highest from October through December, 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 from February
F-11
<Page>
AMERICAN ACHIEVEMENT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
through April for graduation in May and June. The Company has historically
experienced operating losses on class ring and graduation product sales during
its fourth fiscal quarter, which includes the summer months when school is not
in session. Yearbook sales are highest during the months of May through June, as
yearbooks are shipped to schools prior to the school's summer break. The Company
has historically experienced operating losses related to yearbook sales during
the first and second fiscal quarters, when very few books are shipped for
delivery. Management does not expect the Company's recognition and affinity
product segment to be seasonal in any material respect, although it does
anticipate that sales will be highest during the winter holiday season and in
the period prior to Mother's Day. As a result, the effects of seasonality on the
Company are tempered by the Company's relatively broad product mix.
CONCENTRATION OF CREDIT RISK
Credit is extended to certain industries, such as educational and retail,
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.
SHIPPING AND HANDLING FEES
In accordance with Emerging Issues Task Force (EITF) No. 00-10, "Accounting
for Shipping and Handling Fees and Costs," the Company recognizes as revenue
amounts billed to customers related to shipping and handling, with the related
expense recorded as a component of cost of sales.
SUPPLIER CONCENTRATION
The Company purchases substantially all synthetic and semi-precious stones
from a single supplier located in Germany who is also the supplier to
substantially all of the class ring manufacturers in the United States.
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.
Selling, general and administrative expenses for the Company include
advertising expenses of approximately $3,694,000, $2,942,000 and $3,568,000 for
the fiscal years ended August 28, 1999, August 26, 2000, and August 25, 2001,
respectively.
F-12
<Page>
AMERICAN ACHIEVEMENT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
USE OF ESTIMATES
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and the disclosure of contingent assets and liabilities at the date
of the financial statements, as well as the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from these
estimates.
RECLASSIFICATIONS
Certain reclassifications of prior-year balances have been made to conform
to current-year presentation.
COMPREHENSIVE LOSS
For fiscal years 2000 and 1999, the Company did not have any transactions
other than net income or loss which comprised comprehensive income. Beginning in
fiscal year 2001, the effective portion of the loss on derivatives and
unrecognized losses on accrued minimum pension liabilities were included in
other comprehensive loss. The following amounts were included in accumulated
other comprehensive loss as of the end of fiscal year 2001 (in thousands):
<Table>
Effective portion of derivative loss........................ $2,232
Unrecognized loss on minimum pension liability.............. 519
------
Accumulated other comprehensive loss........................ $2,751
======
</Table>
NEW ACCOUNTING PRONOUNCEMENTS
On July 23, 2001, the Financial Accounting Standards Board released for
issuance SFAS No. 141, "Business Combinations," and SFAS No. 142, "Goodwill and
Other Intangible Assets." SFAS No. 141 requires that all business combinations
subsequent to June 30, 2001, be accounted for under the purchase method of
accounting. The pooling-of-interests method is no longer allowed. Under SFAS
No. 142, goodwill and intangible assets with indefinite lives are no longer
amortized but are reviewed annually (or more frequently if impairment indicators
arise) for impairment. Separable intangible assets that are not deemed to have
indefinite lives will continue to be amortized over their useful lives (but with
no maximum life). SFAS No. 142 is effective for fiscal years beginning after
December 15, 2001.
The Company anticipates adopting SFAS No. 142 beginning on September 1,
2002, the first day of fiscal year 2003. The Company is evaluating the impact of
the adoption of these standards and has not yet determined the effect of
adoption on its financial position and results of operations. The impact of
adoption may be material. Upon adoption of these standards, goodwill
amortization will cease and certain intangibles such as workforce in place will
be reclassified into goodwill.
F-13
<Page>
AMERICAN ACHIEVEMENT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
In August 2001, the Financial Accounting Standards Board released SFAS
No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets." SFAS
No. 144 establishes a single accounting model, based upon the framework
established in SFAS No. 121, for long-lived assets to be disposed of by sale.
SFAS No. 144 broadens the presentation of discontinued operations to include
more disposal transactions, and also provides additional implementation guidance
for SFAS No. 121. SFAS No. 144 is effective for fiscal years beginning after
December 15, 2001. The Company anticipates adopting SFAS No. 144 effective
September 1, 2002, and management does not expect the adoption to have a
material impact on the Company's financial position and results of operations.
3. SIGNIFICANT ACQUISITIONS:
Effective July 27, 2000, American Achievement, CBI Inc. and CB Acquisition
entered into an agreement and plan of merger (the Merger Agreement). Under the
terms of the Merger Agreement, upon the effective date of the merger, CBI Inc.
merged with CB Acquisition, a wholly owned subsidiary of American Achievement.
Following the merger, CB Acquisition ceased to exist and CBI Inc. remained the
surviving majority-owned subsidiary of American Achievement. Upon consummation
of the merger, each share of CBI Inc.'s issued and outstanding common stock was
converted into one share of American Achievement common stock, and each share of
CBI Inc.'s issued and outstanding Series B Preferred stock was converted into
one share of American Achievement's Series A Preferred Stock.
Immediately following the above transaction, American Achievement acquired
all issued and outstanding shares of Taylor Senior Holding through the issuance
of 320,929 shares of American Achievement common stock and 393,482 shares of
American Achievement Series A Preferred Stock for a purchase price of
$30 million. Taylor Senior Holding holds a 100 percent ownership interest in TP
Holding Corp., which holds a 100 percent ownership interest in Taylor Publishing
Company (TPC), its operating subsidiary. For accounting purposes, American
Achievement has been deemed the acquiror. The acquisition of Taylor Senior
Holding was accounted for using the purchase method and, accordingly, the
purchase price has been allocated to assets acquired and liabilities assumed
based upon estimated fair values. TPC's primary business is design and printing
of student yearbooks.
The estimated fair value of assets acquired and liabilities assumed relating
to the Taylor Senior Holding acquisition is summarized below (in thousands):
<Table>
Working capital............................................. $ (5,590)
Property, plant and equipment............................... 27,481
Other intangibles........................................... 18,616
Goodwill.................................................... 40,265
Other assets................................................ 608
Long-term liabilities....................................... (51,380)
--------
$ 30,000
========
</Table>
Goodwill and other intangibles related to Taylor Senior Holding are
amortized on a straight-line basis over their useful lives, which range from
seven to 40 years.
F-14
<Page>
AMERICAN ACHIEVEMENT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. SIGNIFICANT ACQUISITIONS: (CONTINUED)
The Company incurred approximately $5 million in financing costs associated
with the merger and the amended and restated credit agreement. These costs have
been capitalized and are included in the accompanying consolidated balance sheet
as of August 26, 2000. Finance costs are being amortized over the term of the
amended and restated credit agreement (see Note 8).
Effective March 30, 2001, Honors Acquisition Corporation, a wholly owned
subsidiary of American Achievement, purchased all the outstanding stock of ECI,
for a total purchase price of $58.7 million. The acquisition of ECI was
accounted for using the purchase method of accounting and, accordingly, the
purchase price has been allocated to assets acquired and liabilities assumed
based upon estimated fair values. Subsequent to the transaction, Honors
Acquisition Corporation was dissolved into the Company, and ECI remained the
surviving wholly owned subsidiary of the Company. ECI's primary business is the
sales and marketing of achievement publications of the specialty directory
publishing industry.
The estimated fair value of assets acquired and liabilities assumed relating
to the ECI acquisition, which is preliminary and subject to further refinements
in accordance with accounting principles generally accepted in the United
States, is summarized below (in thousands):
<Table>
Working capital............................................. $ 5,534
Property, plant and equipment............................... 400
Other intangibles........................................... 17,240
Goodwill.................................................... 35,492
Other long-term assets...................................... 44
-------
$58,710
=======
</Table>
Goodwill and other intangibles related to ECI are amortized on a
straight-line basis over their useful lives which range from three to 40 years.
The Company incurred approximately $2.4 million in financing costs
associated with the purchase agreement. These costs have been capitalized and
are included in the accompanying consolidated balance sheet as of August 25,
2001. Finance costs are being amortized over the terms of the second amended and
restated credit agreement and American Achievement Bridge Loan (see Note 8).
As a result of these transactions, the consolidated financial statements of
the Company as of August 25, 2001, include the results of operations of ECI for
the period from March 30, 2001, to August 25, 2001, and the results of
operations for consolidated Taylor Senior Holding and for consolidated CBI Inc.
for the year ended August 25, 2001. The consolidated financial statements of the
Company as of August 26, 2000, include the results of operations for
consolidated Taylor Senior Holding for the period from July 27, 2000, to
August 26, 2000, and the results of operations for consolidated CBI Inc. for the
year ended August 26, 2000.
F-15
<Page>
AMERICAN ACHIEVEMENT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. SIGNIFICANT ACQUISITIONS: (CONTINUED)
The following unaudited pro forma data summarizes the results of operations
for the years indicated as if both the ECI and Taylor Senior Holding
acquisitions had been completed as of the beginning of the fiscal years
presented (in thousands):
<Table>
<Caption>
AUGUST 26, AUGUST 25,
2000 2001
----------- -----------
(UNAUDITED) (UNAUDITED)
Net sales................................................... $290,219 $297,403
Net income (loss) before extraordinary item................. (4,633) 3,111
Net income to common stockholders........................... 862 1,911
</Table>
4. INVENTORIES:
Inventories consist of the following (in thousands):
<Table>
<Caption>
AUGUST 26, AUGUST 25, NOVEMBER 24,
2000 2001 2001
----------- ----------- -------------
(UNAUDITED)
Raw materials....................................... $10,261 $ 8,545 $ 7,604
Work in process..................................... 11,046 10,293 8,465
Finished goods...................................... 7,069 8,092 9,006
Less-Reserves....................................... (389) (258) (265)
------- ------- -------
$27,987 $26,672 $24,810
======= ======= =======
</Table>
Cost of sales includes depreciation and amortization of approximately
$2,425,000, $3,094,000 and $7,535,000 for the fiscal years ended August 28,
1999, August 26, 2000, and August 25, 2001, respectively.
5. PREPAID EXPENSES AND OTHER CURRENT ASSETS:
Prepaid expenses and other current assets consist of the following (in
thousands):
<Table>
<Caption>
AUGUST 26, AUGUST 25,
2000 2001
----------- -----------
Sales representative advances............................... $12,887 $10,433
Less-reserve on sales representative advances........... (4,278) (3,004)
Deferred expenses........................................... -- 2,563
Prepaid advertising and promotion materials................. 2,453 1,983
Assets held for sale........................................ 2,558 --
Other....................................................... 3,843 3,941
------- -------
$17,463 $15,916
======= =======
</Table>
Included in other current assets as of August 26, 2000, and August 25, 2001,
is approximately $535,000 and $215,000, respectively, paid for options to
purchase 58,600 ounces and 23,300 ounces, respectively, of gold. The outstanding
options at August 25, 2001, expire in various amounts through
F-16
<Page>
AMERICAN ACHIEVEMENT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5. PREPAID EXPENSES AND OTHER CURRENT ASSETS: (CONTINUED)
December 2001 and have strike prices ranging from $280 to $290 per ounce of
gold. The Company carries these gold options at the lower of cost or market.
In connection with the acquisition of Taylor Senior Holding, management
established a formal plan to divest from its trade publishing product line. The
value assigned to the assets held for sale represent the expected net realizable
value of these assets and the expected net cash flow between the period from
acquisition to the expected date of sale. The Company continued to accrue losses
on the publishing segment through the date of sale, which occurred on May 3,
2001. The sale resulted in a loss of approximately $1.6 million, which was
treated as an adjustment to the original purchase allocation.
6. PROPERTY, PLANT AND EQUIPMENT:
Property, plant and equipment, net consist of the following (in thousands):
<Table>
<Caption>
AUGUST 26, AUGUST 25,
2000 2001
---------- ----------
Land........................................................ $ 6,315 $ 6,315
Buildings and improvements.................................. 11,113 11,430
Tools and dies.............................................. 24,843 26,795
Machinery and equipment..................................... 38,331 44,062
Construction in progress.................................... 3,162 2,909
-------- --------
Total................................................... 83,764 91,511
Less-accumulated depreciation............................... (16,021) (26,669)
-------- --------
Property, plant and equipment, net.......................... $ 67,743 $ 64,842
======== ========
</Table>
7. ACCOUNTS PAYABLE AND ACCRUED EXPENSES:
Accounts payable and accrued expenses consists of the following (in
thousands):
<Table>
<Caption>
AUGUST 26, AUGUST 25,
2000 2001
----------- -----------
Customer deposits........................................... $12,444 $24,180
Accounts payable............................................ 10,060 11,018
Commissions and royalties................................... 7,191 7,864
Compensation and related costs.............................. 7,429 6,158
Other....................................................... 3,840 3,942
Accrued interest payable.................................... 1,683 2,240
Reserve for acquisition-related liabilities................. 4,793 1,494
Accrued sales and property taxes............................ 1,536 1,393
Accumulated postretirement medical benefit cost............. 642 1,000
Accrued management fees..................................... 108 688
Severance costs............................................. 927 138
------- -------
$50,653 $60,115
======= =======
</Table>
F-17
<Page>
AMERICAN ACHIEVEMENT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8. LONG-TERM DEBT:
Long-term debt consists of the following (in thousands):
<Table>
<Caption>
AUGUST 26, AUGUST 25,
2000 2001
----------- -----------
CBI Inc. 11% senior subordinated notes due 2007............. $ 41,355 $ 41,355
TP Holding Corp. bridge notes............................... 16,160 18,073
American Achievement bridge notes........................... -- 8,922
Term A loan................................................. 50,000 57,000
Term B loan................................................. 55,000 64,400
Revolving loan.............................................. 28,738 33,859
-------- --------
Total long-term debt.................................... 191,253 223,609
-------- --------
Less-current portion........................................ (24,210) (12,900)
-------- --------
Total long-term debt, excluding current portion......... $167,043 $210,709
======== ========
</Table>
CBI INC. 11 PERCENT SENIOR SUBORDINATED NOTES
CBI Inc.'s 11 percent senior subordinated notes (the Notes) mature on
January 15, 2007. The Notes are redeemable at the option of CBI Inc., in whole
or in part, at any time on or after January 15, 2002, at specified redemption
prices ranging from 105.5 percent of the principal amount thereof if redeemed
during 2002 and declining to 100 percent of the principal amount thereof if
redeemed during the year 2005 or thereafter, plus accrued and unpaid interest
and Liquidated Damages (as defined in the Indenture, as amended), if any,
thereon to the date of redemption.
In the event of a Change of Control (as defined in the Indenture, as
amended), each holder of the Notes will have the right to require CBI Inc. to
purchase all or any part of such holder's Notes at a purchase price in cash
equal to 101 percent of the aggregate principal amount thereof, plus accrued and
unpaid interest and Liquidated Damages (as defined in the Indenture, as
amended), if any, thereon to the date of purchase.
In the event of an Asset Sale (as defined in the Indenture, as amended),
CBI Inc. is required to apply any Net Proceeds (as defined in the Indenture, as
amended) 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 365 days and the amount not applied exceeds
$5.0 million, CBI Inc. 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 percent of the principal amount
thereof, plus accrued and unpaid interest and Liquidated Damages, if any,
thereon to the date of purchase.
The Notes contain certain covenants that, among other things, limit the
ability of CBI Inc. to engage in certain business transactions such as mergers,
consolidations or sales of assets that would decrease the value of CBI Inc. or
cause an event of default. CBI Inc. was in compliance with the Indenture
covenants as of August 25, 2001.
F-18
<Page>
AMERICAN ACHIEVEMENT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8. LONG-TERM DEBT: (CONTINUED)
REPURCHASE OF 11 PERCENT SENIOR SUBORDINATED NOTES
On July 27, 2000, TP Holding Corp. purchased $48.6 million face amount of
the Notes for a total purchase price of approximately $45 million, comprised of
$39.9 million, representing 82 percent of the face amount of the Notes, plus
accrued interest on the Notes of approximately $5.1 million. When the Company
acquired TP Holdings, for accounting purposes, the transaction was considered an
extinguishment of debt and resulted in an extraordinary pretax gain on the sale
of the Notes of approximately $6.7 million for the year ended August 26, 2000.
CBI INC. REVOLVING CREDIT, TERM LOAN AND GOLD CONSIGNMENT AGREEMENT
On December 16, 1996, CBI Inc. entered into a revolving credit, term loan
and gold consignment agreement (as amended, the Bank Agreement), with a group of
banks. This Agreement was terminated in July 2000.
In connection with the Taylor Senior Holding acquisition and refinancing
during fiscal year 2000, CBI Inc. signed a gold consignment financing agreement
with a bank. Under CBI Inc.'s gold consignment financing arrangement, CBI Inc.
has the ability to have on consignment the lowest of the dollar value of 27,000
troy ounces of gold, $10.1 million or a borrowing base, determined based upon a
percentage of gold located at CBI Inc.'s facilities and other approved
locations, as specified by the agreement. For the fiscal years ended August 28,
1999, August 26, 2000, and August 25, 2001, CBI Inc. expensed approximately
$265,000, $282,000 and $241,000, respectively, in connection with consignment
fees. Under the terms of the consignment arrangement, CBI Inc. does not own the
consigned gold nor have risk of loss related to such inventory until the money
is received by the bank from CBI Inc. in payment for the gold purchased.
Accordingly, CBI Inc. does not include the value of consigned gold in its
inventory or the corresponding liability for financial statement purposes. As of
August 26, 2000, and August 25, 2001, CBI Inc. held approximately 15,022 ounces
and 14,620 ounces, respectively, of gold valued at $4.1 million and
$4.0 million, respectively, on consignment from the bank.
CREDIT AGREEMENT
In connection with the acquisition discussed in Note 3, TP Holding Corp.
amended its original credit agreement as of July 27, 2000, with a syndication of
banks. Under the original terms of the credit agreement, the borrowers
(thereunder, the "Borrowers") had borrowings outstanding under the Term A, Term
B and revolving loan agreements. Under the amended and restated credit agreement
(the Credit Agreement), existing borrowings under the Term A, Term B and
revolving loan agreements were increased.
On March 30, 2001, in connection with the acquisition of ECI, as discussed
in Note 3, the Borrowers entered into the second amended and restated credit
agreement (the Amended Credit Agreement) to extend the amounts available under
the Term A and Term B loans and to name ECI as a Borrower.
F-19
<Page>
AMERICAN ACHIEVEMENT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8. LONG-TERM DEBT: (CONTINUED)
The Amended Credit Agreement is collateralized by substantially all of the
assets of the Company's subsidiaries. American Achievement has also pledged
100 percent of its equity ownership in CBI Inc., Taylor Senior Holding and ECI
as collateral.
Under the terms of the Amended Credit Agreement, the Borrowers have the
option to voluntarily prepay the loans at any time without penalty, subject to
certain fees and expenses associated with LIBOR loans, if applicable. Commencing
with the fiscal year ending August 25, 2001, the Borrowers must prepay loans
outstanding under the Amended Credit Agreement in an amount equal to 75 percent
of Excess Cash Flow, as defined in the Amended Credit Agreement (reducible to
50 percent in the event certain financial ratios are below certain levels).
Loans shall be prepaid by the Borrowers in an amount equal to cash proceeds
received, net of underwriting fees and certain costs, for the issuance of equity
securities (excluding equity securities issued pursuant to the Merger Agreement,
equity securities sold in connection with the ECI acquisition, equity securities
issued to employees or agents of the Company and equity securities issued
between subsidiaries of the Company).
The Borrowers have the option to designate the interest rates that the Term
A, Term B and revolving loans will bear at either (a) a Base Rate plus a Base
Rate Margin, as defined by the Amended Credit Agreement, or (b) LIBOR plus a
LIBOR Margin, as defined by the Amended Credit Agreement. As of August 26, 2000
the Borrowers have designated the Term A, Term B and the revolving loans as Base
Rate loans. Interest is computed daily and is payable in arrears on the first
day of each month. As of August 25, 2001, the Term A and Term B loans were
designated as LIBOR loans with a weighted average interest rate of 7.3% and
$17,000,000 and $16,859,000 of the revolver balances were designated as LIBOR
and Base Rate loans, respectively with an average interest rate of 8.5% and
7.3%, respectively. On October 13, 2000, in accordance with the Amended Credit
Agreement, the Borrowers entered into a interest rate swap agreement whereby it
will receive a floating rate of interest and pay a fixed rate of interest over
the term of the swap agreement on an amount representing $52.5 million, or
50 percent of the outstanding Term A and Term B loans. All ineffectiveness
associated with this derivative will be included in future earnings (see
Note 9).
The Amended Credit Agreement contains certain financial covenants that
require the Company to maintain certain minimum or maximum, as applicable,
levels of (a) earnings before interest, taxes, depreciation and amortization
(EBITDA), (b) total indebtedness to EBITDA, (c) fixed charge coverage and
(d) interest coverage, all as defined by the Amended Credit Agreement. The
Amended Credit Agreement also contains covenants which limit the Company's
ability to (a) make capital expenditures in excess of stated levels, (b) incur
additional indebtedness, (c) create liens, (d) make certain investments,
(e) enter into contingent obligations, (f) dispose of certain assets or
subsidiary stock and (g) pay dividends on or redeem shares of the Company's
capital stock. The Company was in compliance with these covenants as of
August 25, 2001.
TERM A AND B LOANS--As of August 25, 2001, the Borrowers have borrowings
of approximately $57 million and $64 million outstanding under its Term A
and B loans, respectively. Under the provisions of the term loans, the
Borrowers are to make scheduled quarterly principal installments through the
maturity date of each loan. The Term A loan matures on July 31, 2005, and
the Term B loan matures on July 31, 2006.
F-20
<Page>
AMERICAN ACHIEVEMENT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8. LONG-TERM DEBT: (CONTINUED)
REVOLVING LOANS--As of August 25, 2001, the Borrowers have approximately
$33.9 million outstanding under its revolving credit agreement. The
Borrowers may borrow a maximum of $50 million under its revolving credit
agreement. The maximum revolving loan balance at any point in time, as
defined by the Amended Credit Agreement, will be the lesser of (a) the
Borrowing Base less outstanding Risk Participation Liability, as defined by
the Amended Credit Agreement, or (b) $50 million less outstanding Risk
Participation Liability, as defined by the Amended Credit Agreement. If at
any time the outstanding revolving loans exceed the maximum allowable
revolving loan balance, the excess must be repaid immediately. Revolving
loans may be repaid and reborrowed from time to time through the earlier of
either an event of default under the Amended Credit Agreement or July 31,
2005. As of August 25, 2001, the Borrowers had approximately $15.9 million
available under their revolving credit agreement.
In the event of an asset disposition which results in the Borrowers
receiving net proceeds from the transaction in excess of $1 million during any
fiscal year, or $3 million in the aggregate at any time after July 27, 2000, the
Borrowers must repay the outstanding principal balance of the revolving loans by
the amount of any reduction in the Borrowing Base, as defined by the Amended
Credit Agreement, attributable to the asset disposition. Any remaining proceeds
from the asset disposition must be reinvested into the Borrowers within
180 days, in productive replacement fixed assets used in the normal course of
business.
The Borrowers may also request under its revolving loan commitment, in
addition to advances under the revolving loan, the issuance of standby Letters
of Credit or Risk Participation Agreements to confirm payment to banks which
issue Letters of Credit, all as defined in the Amended Credit Agreement. The
maximum aggregate amount of Letters of Credit or Risk Participation Agreements
allowable under terms of the Amended Credit Agreement at any time shall not
exceed $10 million.
TP HOLDING CORP. BRIDGE LOAN DUE TO AN AFFILIATE
TP Holding Corp. has convertible subordinated bridge promissory notes (the
TP Holding Corp. Bridge Notes) due to Castle Harlan Partners III, L.P. (CHPIII),
a stockholder of the Company, as of August 26, 2000, and August 25, 2001, of
approximately $16.2 million and $18.0 million, respectively. Of the TP Holding
Corp. Bridge Notes, approximately $12,978,000 was due February 11, 2001 and
approximately $3,182,000 was due July 27, 2001. The TP Holding Corp. Bridge
Notes bear interest at 12 percent per annum, which is added to the outstanding
balance of the TP Holding Corp. Bridge Notes on the last day of each month. TP
Holding Corp. may prepay the TP Holding Corp. Bridge Notes, in whole or in part,
at any time without penalty. Such amounts have not been paid; however, as
discussed below, the Company has obtained a forbearance related to the bridge
loans.
The noteholders have the right, at their discretion, to (a) convert the
original principal and accrued interest at July 27, 2000, of $12,850,803 of TP
Holding Corp. Bridge Notes, in whole, into 91,165 shares of American Achievement
common stock and 111,774 shares of American Achievement Series A Preferred Stock
and (b) convert the original principal of $3,149,197 of Bridge Notes, in whole,
into 22,341 shares of American Achievement common stock and 27,391 shares of
American Achievement Series A Preferred Stock. The stockholders are also
entitled to convert accrued interest
F-21
<Page>
AMERICAN ACHIEVEMENT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8. LONG-TERM DEBT: (CONTINUED)
through the date of conversion into shares of American Achievement's stock in
the same proportion above, provided however that no more than one year's worth
of accrued interest will be converted into shares of stock.
AMERICAN ACHIEVEMENT CORP. BRIDGE LOAN DUE TO AN AFFILIATE
American Achievement has a convertible subordinated bridge promissory note
(the American Achievement Bridge Note) due to CHPIII as of August 25, 2001, of
approximately $8.9 million. The principal balance, along with all accrued
interest is due March 30, 2002. The American Achievement Bridge Note bears
interest at 12 percent per annum, which is added to the outstanding balance of
the American Achievement Bridge Note on the last day of each month. The Company
may prepay the American Achievement Bridge Note, in whole or in part, at any
time without penalty.
The noteholder has the right to convert the original principal into 59,585
shares of American Achievement common stock and 78,030 shares of American
Achievement Series A preferred stock. The noteholder also has the right to
convert accrued interest through the date of conversion into shares of American
Achievement's stock in the same proportion as the principal balance.
On October 19, 2001, CHP III provided a letter of forebearance to the
Company for both the TP Holding Corp. Bridge Notes and the American Achievement
Bridge Note (the Bridge Notes), whereby CHP III has agreed to: (a) extend the
maturity date on all outstanding principal and accrued interest on the Bridge
Notes to February 28, 2003, (b) extend the maturity date on all additional
interest earned on the Bridge Notes from August 26, 2001 through the maturity
date to February 28, 2003, (c) maintain the stated interest rate of 12 percent
per annum through maturity, (d) waive any and all prior Events of Default, as
defined in the Bridge Notes, through October 19, 2001, and (e) remove as an
Event of Default, as defined in the Bridge Notes, the Company's nonpayment of
principal or interest prior to February 28, 2003.
The long-term debt outstanding as of August 25, 2001, including amounts owed
to affiliates, matures as follows (in thousands):
<Table>
Fiscal year ending-
2002........................................................ $ 12,900
2003........................................................ 41,145
2004........................................................ 15,400
2005........................................................ 55,459
2006 and thereafter......................................... 98,705
--------
$223,609
========
</Table>
The weighted average interest rate of debt outstanding as of August 26,
2000, and August 25, 2001, was 11.3 percent and 11.4 percent, respectively.
F-22
<Page>
AMERICAN ACHIEVEMENT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9. DERIVATIVE FINANCIAL INFORMATION:
The Company has interest rate swap agreements in place with the intent of
managing its exposure to interest rate risk on its existing debt obligation.
Accordingly, the Company currently has four outstanding agreements to
effectively convert LIBOR-based variable rate debt to fixed rate debt based on a
total notional amount of $62.5 million.
The Company considers these agreements to be cash flow hedging instruments.
Under SFAS No. 133, in order to consider these agreements as hedges, (a) the
Company must designate the instrument as a hedge of future transactions and
(b) the contract must reduce the Company's exposure to the risk of changes in
interest rates. If the above criteria are not met, the Company will record the
market value of the contract at the end of each month on the balance sheet and
will recognize a related gain or loss in the consolidated statement of
operations. Net receipts or payments under these agreements are recognized as an
adjustment to interest expense, while changes in the fair market value of these
hedges are not recognized in income. The Company will recognize the fair market
value of the hedges in income at the time of maturity, sale or termination. In
the event that the Company's term debt were to be repaid, the interest rate swap
agreements would be terminated. The fair value of interest rate swaps is the
estimated amount that the Company would pay or receive to terminate the swap
agreements at the reporting date, taking into account current market conditions
and interest rates.
At August 25, 2001, the notional amount of the contracts in place was
$62.5 million, of which $52.5 million was effective as of October 13, 2000, and
matures in March 2003. The remaining $10.0 million became effective as of
July 29, 2001, and matures in March 2003. The Company will receive variable rate
payments based on a three-month LIBOR (3.71 percent at August 25, 2001) from the
third parties and is obligated to pay fixed interest rate payments (weighted
average fixed rate equal to 6.25 percent) to the third parties during the term
of the contracts. The net unrealized loss, which equals the fair value, net of
tax, on the interest rate swaps at August 25, 2001, was approximately
$2.2 million and was included in accrued expenses in the Company's consolidated
balance sheet and recorded as other comprehensive loss in the consolidated
statement of stockholders' equity.
The net gain or loss during the year related to the ineffective portion of
the interest rate swap agreements was not material. The Company did not
discontinue any hedges because it was probable that the original forecasted
transaction would not occur.
F-23
<Page>
AMERICAN ACHIEVEMENT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
10. COMMITMENTS AND CONTINGENCIES:
LEASES
Certain Company facilities and equipment are leased under agreements
expiring at various dates through 2008. The Company's commitments under the
noncancelable portion of all operating leases for the next five years and
thereafter as of August 25, 2001 are as follows (in thousands):
<Table>
Fiscal year ending-
2002........................................................ $2,378
2003........................................................ 2,174
2004........................................................ 1,548
2005........................................................ 891
2006........................................................ 393
Thereafter.................................................. 501
------
$7,885
======
</Table>
Lease and rental expense included in the accompanying consolidated
statements of operations amounts to approximately $825,000, $937,000 and
$2,226,000 for the fiscal years ended August 28, 1999, August 26, 2000, and
August 25, 2001, respectively.
CONTRACTS WITH SALES REPRESENTATIVES
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 those 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.
PENDING LITIGATION
The Company is not a party to any pending legal proceedings other than
ordinary routine litigation incidental to the business. In management's opinion,
adverse decisions on legal proceedings, in the aggregate, would not have a
materially adverse impact on the Company's results of operations or financial
position.
F-24
<Page>
AMERICAN ACHIEVEMENT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
11. EMPLOYEE COMPENSATION AND BENEFITS:
POSTRETIREMENT PENSION AND MEDICAL BENEFITS
In December 1990, the Financial Accounting Standards Board issued SFAS
No. 106, "Employers' Accounting for Postretirement Benefits Other Than
Pensions," which requires that the accrual method of accounting for certain
postretirement benefits be adopted. CBI Inc. provides certain healthcare and
life insurance benefits for former employees of the L.G. Balfour Company who
retired prior to December 31, 1990. L. G. Balfour Company, Inc., adopted this
statement in fiscal 1994 and recognized the actuarial present value of the
accumulated postretirement benefit obligation (APBO) of approximately
$6.2 million at February 28, 1993, using the delayed recognition method over a
period of 20 years. Prior to adopting SFAS No. 106, the cost of providing these
benefits was expensed as incurred.
Certain hourly employees of TPC are covered by a defined benefit pension
plan (TPC Plan) established by TPC. The benefits under these plans are based
primarily on the employees' years of service and compensation near retirement.
The funding policies for these plans are consistent with the funding
requirements of federal laws and regulations. Such plan is accounted for in
accordance with SFAS No. 132 (see Note 2). The TPC Plan assets are primarily
invested in a money market account.
The following table sets forth the status of each plan (in thousands):
<Table>
<Caption>
AUGUST 26, 2000 AUGUST 25, 2001
------------------------- -------------------------
TPC CBI INC. TPC CBI INC.
PENSION POSTRETIREMENT PENSION POSTRETIREMENT
-------- -------------- -------- --------------
Change in benefit obligation (in thousands):
Obligation beginning of the year................... $ -- $ 1,017 $ 8,866 $ 798
Transfer of obligation to the Company, July 27,
2000............................................. 8,826 -- -- --
Service cost....................................... 27 -- 323 --
Amendments......................................... -- -- -- 2,888
Interest cost...................................... 56 64 656 186
Actuarial loss (gain).............................. (19) 55 144 53
Benefit payments................................... (24) (338) (518) (418)
------- ------- ------- -------
Obligation, end of year............................ $ 8,866 $ 798 $ 9,471 $ 3,507
------- ------- ------- -------
Change in fair value of plan assets (in thousands):
Fair value of plan assets, beginning of year....... $ -- $ -- $ 8,492 $ --
Transfer in of assets to the Company, July 27,
2000............................................. 8,483 -- -- --
Actual return of plan assets....................... 33 -- 437 --
Employer Contributions............................. -- 338 60 418
Benefit payments................................... (24) (338) (518) (418)
------- ------- ------- -------
Fair value of plan assets, end of year............. $ 8,492 $ -- $ 8,471 $ --
------- ------- ------- -------
Plan assets at fair value--
Unfunded accumulated benefit obligation in
excess of plan assets........................ $ (374) $ (798) $(1,000) $(3,507)
Unrecognized net loss (gain)................... 70 (231) -- (174)
Unrecognized prior service costs............... -- (580) -- 2,559
------- ------- ------- -------
Accumulated postretirement benefit cost, current
and long-term.................................... $ (304) $(1,609) $(1,000) $(1,122)
======= ======= ======= =======
</Table>
F-25
<Page>
AMERICAN ACHIEVEMENT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
11. EMPLOYEE COMPENSATION AND BENEFITS: (CONTINUED)
The net periodic postretirement benefit cost for the fiscal years ended
August 28, 1999, August 26, 2000, and August 25, 2001, for CBI Inc. and for the
period from July 27, 2000, to August 26, 2000, and for the year ended
August 25, 2001, for TPC include the following components (in thousands):
<Table>
<Caption>
AUGUST 28, 1999 AUGUST 26, 2000 AUGUST 25, 2001
---------------- ------------------------- -------------------------
CBI INC. TPC CBI INC. TPC CBI INC.
POSTRETIREMENT PENSION POSTRETIREMENT PENSION POSTRETIREMENT
---------------- -------- -------------- -------- --------------
Service costs, benefits attributed to
service during the period.......... $ -- $27 $ -- $323 $ --
Interest cost........................ 96 57 63 656 251
Expected return on assets............ -- (63) -- (743) --
Amortization of unrecognized net loss
(gain)............................. -- -- (22) -- 260
Amortization of unrecognized net
prior service costs................ (580) -- (580) -- (580)
----- --- ----- ---- -----
Net periodic postretirement benefit
cost (income)...................... $(484) $21 $(539) $236 $ (69)
</Table>
Net amounts recognized in the consolidated balance sheet are as follows:
<Table>
<Caption>
AUGUST 26, 2000 AUGUST 25, 2001
------------------------- -------------------------
TPC CBI INC. TPC CBI INC.
PENSION POSTRETIREMENT PENSION POSTRETIREMENT
-------- -------------- -------- --------------
Accrued benefit liability.......................... $304 $1,609 $1,000 $1,122
Accumulated other comprehensive loss............... -- -- (519) --
---- ------ ------ ------
Net amount recognized.............................. $304 $1,609 $ 481 $1,122
==== ====== ====== ======
</Table>
The weighted average discount rate used in determining the accumulated
postretirement benefit obligation for CBI Inc. was 7.25 percent compounded
annually for fiscal years 2000 and 2001. As the plan is unfunded, no assumption
was needed as to the long-term rate of return on assets.
For measurement purposes for the CBI Inc. plan, a 5.0 percent annual rate of
increase in the per capita cost of covered healthcare benefits was assumed for
fiscal years 2000 and 2001. The healthcare cost trend rate assumption has a
significant effect on the amounts reported. Increasing (or decreasing) the
assumed healthcare cost trend rate one percentage point in each year would
increase (or decrease) the accumulated postretirement benefit obligation by
$22,000, or 2 percent, and by $225,000, or 6 percent, as of August 26, 2000, and
August 25, 2001, respectively, and the aggregate of the service and interest
cost components of the net periodic postretirement benefit cost by $1,500, or
2 percent, and by $16,000, or 6 percent, for fiscal years 2000 and 2001,
respectively. For the TPC Plan, the effect of one percentage point increase or
decrease in the healthcare cost trend rate would not have had a material effect
on either the obligation or the service or interest components of the net
periodic benefit cost reported above.
F-26
<Page>
AMERICAN ACHIEVEMENT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
11. EMPLOYEE COMPENSATION AND BENEFITS: (CONTINUED)
For measurement purposes for the TPC Plan, the weighted average discount
rate used in determining the accumulated postretirement benefit obligation was
8.0 percent and 7.5 percent as of August 26, 2000, and August 25, 2001,
respectively, the long-term rate of return on plan assets was 9.0 percent the
annual salary increases were assumed to be 4.5 percent as of August 26, 2000,
and August 25, 2001.
EXECUTIVE STOCK AWARD
Pursuant to an employment agreement entered into between the Company and its
chief executive officer in July 1999, the board of directors authorized the
issuance of 5,500 shares of Series A preferred stock to the Company's chief
executive officer as discretionary compensation in August 2001. Accordingly, the
Company recorded a compensation charge of approximately $550,000 related to this
award.
CBI INC. DEFERRED COMPENSATION
CBI Inc. has deferred compensation agreements with certain sales
representatives and executives, which provide for payments upon retirement or
death based on the value of life insurance policies or mutual fund shares at the
retirement date. As of August 26, 2000, and August 25, 2001, CBI Inc. had
accrued a total of approximately $325,000 and $212,000, respectively, related to
these agreements. Such amounts, net of the current portion of approximately
$212,000 and $149,000 as of August 26, 2000, and August 25, 2001, respectively,
are included in other long-term liabilities in the accompanying consolidated
balance sheets.
TPC 401(K) PLAN
TPC sponsors a qualified defined contribution 401(k) plan which covers
substantially all nonunion employees of TPC. TPC matches 50 percent of nonunion
participants' voluntary contributions up to a maximum of 4 percent of the
participants' compensation. TPC's expense was approximately $82,000 for the
period from July 27, 2000, to August 26, 2000 and approximately $459,000 for the
fiscal year ended August 25, 2001.
CBI INC. 401(K) PLAN
CBI Inc. sponsors a qualified defined contribution 401(k) plan which covers
all eligible employees of CBI Inc. Employer contributions to the plan are
discretionary. CBI Inc. made contributions of approximately $167,000, $182,000
and $172,000 for the fiscal years ended August 28, 1999, August 26, 2000, and
August 25, 2001, respectively.
F-27
<Page>
AMERICAN ACHIEVEMENT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
11. EMPLOYEE COMPENSATION AND BENEFITS: (CONTINUED)
ECI PROFIT-SHARING PLAN
ECI sponsors a qualified profit-sharing and savings plan and trust covering
substantially all employees of ECI which covers all eligible employees of ECI.
Employer contributions to the plan are discretionary. ECI accrued contributions
of approximately $99,000 for the fiscal year ended August 25, 2001.
12. INCOME TAXES:
The Company and its wholly owned domestic subsidiaries file a consolidated
federal income tax return. The provision (benefit) for income taxes reflected in
the consolidated statements of operations consists of the following (in
thousands):
<Table>
<Caption>
FISCAL YEAR ENDED
-------------------------
AUGUST 26, AUGUST 25,
2000 2001
----------- -----------
Federal--
Current................................................. $ 45 $ --
Deferred................................................ (46) --
State--
Current................................................. 334 133
Deferred................................................ -- --
Extraordinary item--........................................ $333 $133
==== ====
Current................................................. $ -- $ --
Deferred................................................ 46 --
---- ----
$ 46 $ --
==== ====
</Table>
The provision for income taxes differs from the amount that would be
computed if the income (loss) before income taxes were multiplied by the federal
income tax rate (statutory rate) as follows (in thousands):
<Table>
<Caption>
AUGUST 28, AUGUST 26, AUGUST 25,
1999 2000 2001
----------- ----------- -----------
Computed tax expense (benefit) at statutory rate
(34%)............................................... $(1,384) $ 2,245 $(918)
State taxes, net of federal benefit................... (204) 221 87
Other................................................. 753 99 133
Reserve for (benefit from) net operating losses....... 835 (2,186) 831
------- ------- -----
Total income tax provision............................ $ -- $ 379 $ 133
======= ======= =====
</Table>
F-28
<Page>
AMERICAN ACHIEVEMENT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
12. INCOME TAXES: (CONTINUED)
Deferred tax assets and liabilities consist of the following (in thousands):
<Table>
<Caption>
AUGUST 26, AUGUST 25,
2000 2001
----------- -----------
Deferred tax assets--
Allowances and reserves................................. $ 1,034 $ 1,486
Net operating loss carryforwards........................ 15,479 19,976
Accrued liabilities and other........................... 4,223 1,619
------- -------
Total deferred tax assets............................... 20,736 23,081
Less--Valuation allowance................................... (6,112) (5,077)
------- -------
Net deferred tax assets................................. 14,624 18,004
------- -------
Deferred tax liabilities--
Property, plant and equipment, principally due to
differences in depreciation........................... 6,113 6,522
Goodwill basis difference................................... 8,511 11,482
------- -------
Total deferred tax liabilities.......................... 14,624 18,004
------- -------
Net deferred tax assets (liabilities)................... $ -- $ --
======= =======
</Table>
The valuation allowance has been established due to uncertainty surrounding
the realizability of the deferred tax assets, principally the net operating loss
carryforwards.
For tax reporting purposes, the Company has U.S. net operating loss
carryforwards of approximately $43.6 million and $53.6 million as of August 26,
2000, and August 25, 2001, respectively. Utilization of the net operating loss
carryforwards is contingent on the Company's ability to generate income in the
future. The net operating loss carryforwards will expire beginning in the year
2017 if not utilized.
13. STOCKHOLDERS' EQUITY:
In connection with the Merger Agreement discussed in Note 3, the Company
issued 460,985 shares of American Achievement "new" Series A preferred stock
(American Achievement "New" Series A Preferred) in exchange for all issued and
outstanding CBI Inc. "old" Series B preferred stock (CBI Inc. "Old" Series B
Preferred). In addition, the Company issued 375,985 shares of American
Achievement "new" common stock (American Achievement "New" Common) for all
issued and outstanding CBI Inc. "old" common stock (CBI Inc. "Old" Common). The
Company also issued 393,482 shares of American Achievement "New" Series A
Preferred and 320,929 shares of American Achievement "New" Common to the
stockholders of Taylor Senior Holding for all the outstanding shares of Taylor
Senior Holding preferred and common stock contributed to the Company by the
Taylor Senior Holding stockholders in connection with the acquisition.
The original CBI Inc. "Old" Series A preferred stock (CBI Inc. "Old"
Series A Preferred) of 100,000 shares remains issued and outstanding from the
Company's subsidiary CBI Inc. and was unaffected by the Merger Agreement. As of
July 27, 2000, and in connection with the merger,
F-29
<Page>
AMERICAN ACHIEVEMENT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
13. STOCKHOLDERS' EQUITY: (CONTINUED)
CBI Inc. "Old" Series A Preferred ownership now represents a minority interest
including all accumulated accrued dividends. The minority interest is stated at
liquidation value.
In connection with the Merger, the Company's board of directors authorized
the issuance of up to 1,250,000 shares of American Achievement "new" preferred
stock, par value $.01 per share (including 1,000,000 shares of "New" Series A
Preferred) and 1,250,000 shares of American Achievement "New" Common, par value
$.01 per share. As of August 26, 2000, the Company had issued and outstanding
854,467 shares of American Achievement "New" Series A Preferred, and 696,914
shares of American Achievement "New" Common.
AMERICAN ACHIEVEMENT "NEW" SERIES A PREFERRED STOCK
(AMERICAN ACHIEVEMENT "NEW" SERIES A PREFERRED)
The holders of American Achievement "New" Series A Preferred are entitled to
one vote per share, voting together with the holders of the American Achievement
"new" common stock as one class on all matters presented to the stockholders. No
dividends accrue on the American Achievement "New" Series A Preferred.
Dividends may be paid on the American Achievement "New" Series A Preferred
if and when declared by the board of directors out of funds legally available
therefor. The American Achievement "New" Series A Preferred is nonredeemable. In
the event of any liquidation, dissolution or winding up of the Company, the
holders of the American Achievement "New" Series A 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
American Achievement "New" Common of the Company, which totals approximately
$85,447,000 and $100,135,000 at August 26, 2000, and August 25, 2001,
respectively. So long as shares of the American Achievement "New" Series A
Preferred remain outstanding, the Company may not declare, pay or set aside for
payment any dividends on the American Achievement "New" Common.
CBI INC. "OLD" SERIES A PREFERRED STOCK
(CBI INC. "OLD" SERIES A PREFERRED)
The holders of shares of CBI Inc. "Old" Series A Preferred are not entitled
to voting rights. Dividends on the CBI Inc. "Old" Series A Preferred are payable
in cash, when and if declared by the board of directors of the Company, out of
funds legally available therefor, on a quarterly basis. Dividends on the
CBI Inc. "Old" 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 percent 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.
CBI Inc.'s bank debt restricted the Company's ability to pay dividends on the
CBI Inc. "Old" Series A Preferred.
F-30
<Page>
AMERICAN ACHIEVEMENT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
13. STOCKHOLDERS' EQUITY: (CONTINUED)
The CBI Inc. "Old" Series A Preferred is not subject to mandatory
redemption. The CBI Inc. "Old" Series A Preferred is redeemable at any time at
the option of CBI Inc.; however, CBI Inc.'s bank debt restricted the Company's
ability to redeem the CBI Inc. "Old" Series A Preferred. In the event of any
liquidation, dissolution or winding up of CBI Inc., the holders of the CBI Inc.
"Old" 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 CBI Inc. "Old" Series B Preferred or the
holders of the CBI Inc. "Old" Common of the Company. So long as shares of the
CBI Inc. "Old" 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 CBI Inc. "Old" Series B Preferred or CBI Inc.
"Old" Common.
CBI INC. "OLD" SERIES B PREFERRED STOCK
(CBI INC. "OLD" SERIES B PREFERRED)
The holders of shares of CBI Inc. "Old" Series B Preferred were entitled to
one vote per share, voting together with the holders of the CBI Inc. "Old"
Common as one class on all matters presented to the stockholders. No dividends
accrue on the CBI Inc. "Old" Series B Preferred.
Dividends would have been paid on the CBI Inc. "Old" Series B Preferred if
and when declared by the board of directors of the Company out of funds legally
available therefor. The CBI Inc. "Old" Series B Preferred was nonredeemable. In
the event of any liquidation, dissolution or winding up of the Company, the
holders of the CBI Inc. "Old" Series B Preferred would 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 CBI Inc. "Old" Common
of the Company. So long as shares of the CBI Inc. "Old" Series B Preferred
remained outstanding, the Company could not declare, pay or set aside for
payment any dividends on the CBI Inc. "Old" Common.
On June 28, 1999, the Company issued 83,829 shares of CBI Inc. "Old"
Series B Preferred to Castle Harlan Partners II, L.P. for $8.5 million in cash,
representing funds previously held in a cash collateral account that had been
pledged to secure the guaranty of the Company's obligations under the short-term
revolving credit agreement.
AMERICAN ACHIEVEMENT SERIES B PREFERRED STOCK
During the fiscal year ended August 25, 2001, the board of directors of the
Company designated 25,000 shares of authorized American Achievement "New"
preferred stock as Series B (American Achievement Series B Preferred) with the
following preferences, rights and limitations. No American Achievement Series B
Preferred was outstanding as of August 25, 2001.
The holders of American Achievement Series B Preferred are entitled to one
vote per share, voting together with the holders of American Achievement "new"
common stock as one class on all matters presented to stockholders. No dividends
accrue on the American Achievement Series B Preferred.
F-31
<Page>
AMERICAN ACHIEVEMENT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
13. STOCKHOLDERS' EQUITY: (CONTINUED)
Dividends may be paid on the American Achievement Series B Preferred if and
when declared by the board of directors out of funds legally available therefor.
The American Achievement Series B Preferred is redeemable only at the option of
the Company. In the event of any liquidation, dissolution or winding up of the
Company, the holders of American Achievement Series B Preferred shall receive
payment of the liquidation value of $1,000 per share plus any accrued and unpaid
dividends subsequent to the payment of American Achievement "New" Series A
Preferred liquidation preferences, but prior to the payment of any distributions
to the holders of the American Achievement "New" Common of the Company. So long
as shares of the American Achievement Series B Preferred remain outstanding, the
Company may not declare, pay or set aside for payment any dividends on the
American Achievement "New" Common.
COMMON STOCK
The features of both the American Achievement "New" and CBI Inc. "Old"
Common are the same. The holders of both the American Achievement "New" and
CBI Inc. "Old" Common are entitled to one vote for each share held of record on
all matters submitted to a vote of stockholders, including the election of
directors, and vote together as one class with the holders of the preferred
stock.
Dividends may be paid on both the American Achievement "New" and the
CBI Inc. "Old" Common 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 American Achievement "New" Common in the foreseeable
future. So long as shares of the American Achievement "New" Series A Preferred
remain outstanding, the Company may not declare, pay or set aside for payment
any dividends on the American Achievement "New" Common.
COMMON STOCK PURCHASE WARRANTS
CBI Inc. had issued warrants, and the Company has assumed these obligations
pursuant to the Merger Agreement. The warrants are exercisable to purchase an
aggregate of 21,405 shares of American Achievement "New" Common. The warrants
expire on January 31, 2008.
SUBSCRIPTION AGREEMENT
In accordance with a subscription agreement entered into by the Company and
Castle Harlan Partners II, L.P. (CHPII), a stockholder of the Company, 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 it 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.
F-32
<Page>
AMERICAN ACHIEVEMENT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
13. STOCKHOLDERS' EQUITY: (CONTINUED)
STOCK-BASED COMPENSATION PLAN
On July 27, 2000, the effective date of the Merger Agreement, all
outstanding options under CBI Inc.'s 1997 Stock Option Plan, whether vested or
unvested, converted into an option to acquire on the same terms and conditions
as were applicable under the 1997 Stock Option Plan, shares of the Company's
"new" common stock at ratio of 1 to 1 at a purchase price based on fair value at
the merger date, determined to be $7.02 per share. The 2000 Stock Option Plan
became effective on July 27, 2000. Under the 2000 Stock Option Plan, a total of
122,985 shares of common stock has been reserved for issuance, and 91,093 of
those shares were available for grant to directors and employees of the Company
as of both August 25, 2001, and August 26, 2000. The 2000 Stock Option Plan
provides for the granting of both incentive and nonqualified stock options.
Options granted under the 2000 Stock Option Plan have a maximum term of
10 years and are exercisable under the terms of the respective option agreements
at 110 percent of fair market value for all incentive stock options issued to
employees and at fair market value of the common stock at the date of grant for
all other options issued. Payment of the exercise price must be made in cash, a
combination of cash and a note 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 2000 Stock Option Plan will be subject to a voting trust
agreement.
During fiscal year 2000, the Company has issued an option for 12,524 shares
of American Achievement "new" common stock to a key executive whereby the terms
of the option are the same as provided for in the 2000 Stock Option Plan with
the exception that the option vests over a two-year period and expires in five
years.
The Company applies Accounting Principles Board (APB) Opinion No. 25,
"Accounting for Stock Issued to Employees," and related interpretations in
accounting for the 2000 Stock Option Plan and the previously outstanding 1997
Stock Option Plan. Accordingly, no compensation cost has been recognized for its
2000 Stock Option Plan. Had compensation cost for the Company's stock-based
compensation plan been determined based on the fair value at the grant date for
awards consistent with the method of SFAS No. 123, "Accounting for Stock-Based
Compensation," the Company's net income (loss) to holders of common stock fiscal
years ended August 28, 1999, August 26, 2000, and August 25, 2001, would not
have been materially impacted.
Incentive stock options for 17,494 shares and 17,194 shares and nonqualified
stock options for 14,398 shares of the Company's common stock were outstanding
as of August 26, 2000, and August 25, 2001, respectively. The weighted average
remaining contractual life of all outstanding options was 6.80 years at
August 25, 2001. A summary of the status of the Company's 1997 Stock Option Plan
as
F-33
<Page>
AMERICAN ACHIEVEMENT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
13. STOCKHOLDERS' EQUITY: (CONTINUED)
of August 26, 2000, and the 2000 Stock Option Plan as of August 25, 2001, and
changes during the fiscal years then ended are presented below:
<Table>
<Caption>
AUGUST 28, 1999 AUGUST 26, 2000 AUGUST 25, 2001
--------------------- -------------------------------------------- --------------------
SHARES WEIGHTED SHARES OF WEIGHTED SHARES WEIGHTED SHARES OF WEIGHTED
OF "OLD" AVERAGE "NEW" AVERAGE OF "OLD" AVERAGE "NEW" AVERAGE
COMMON EXERCISE COMMON EXERCISE COMMON EXERCISE COMMON EXERCISE
STOCK PRICE STOCK PRICE STOCK PRICE STOCK PRICE
---------- -------- --------- -------- ---------- -------- --------- --------
Outstanding at beginning of fiscal
year.............................. 33,845 $ 6.67 -- $ -- 34,478 $6.67 31,892 $7.02
Granted............................. 12,524 6.67 -- -- -- -- -- --
Exercised........................... -- -- -- -- -- -- (300) 7.02
Canceled............................ (11,891) 6.67 -- -- (2,586) 6.67 -- --
Conversion of options for change in
underlying stock.................. -- -- 31,892 7.02 (31,892) 6.67 -- --
------- ------ ------ ---- ------- ----- ------ -----
Outstanding at end of fiscal year... 34,478 6.67 31,892 7.02 -- -- 31,592 7.02
======= ====== ====== ==== ======= ===== ====== =====
Options exercisable at year-end..... 5,020 15,478 -- -- 26,282
Weighted average fair value of
options granted during the fiscal
year ended........................ $ 3.72 $ -- $ -- $ --
</Table>
The fair value of each grant was estimated on the date of the grant using
the Black-Scholes option pricing model with the following weighted average
assumptions used for grants in fiscal year 1999: dividend yield of nil; expected
volatility of 27.99 percent; risk-free interest rate of 6.42 percent; and
expected life of 10 years. The Black-Scholes option pricing model was developed
for use in estimating the fair value of traded options, which have no vesting
restrictions and are fully transferable. In addition, option pricing models
require the input of highly subjective assumptions, including expected stock
price volatility. Because the Company's stock options have characteristics
significantly different from those of traded options and because changes in the
subjective input assumptions can materially affect the fair value estimate, in
management's opinion, the existing models do not necessarily provide a reliable
single measure of the fair value of its stock options.
Pursuant to an employment agreement entered into between the Company and its
chief executive officer in July 1999, if the Company achieves a certain
consolidated EBITDA target, as defined by the agreement, for each fiscal year
commencing with fiscal 2000 and ending in fiscal 2003, the chief executive
officer is entitled to receive for each fiscal year options equal to
0.5 percent of the total issued and outstanding shares of common stock of the
Company on a fully diluted basis. As of August 25, 2001, no options have been
issued related to the Company achieving the consolidated EBITDA target.
14. RELATED-PARTY TRANSACTIONS:
CBI Inc. 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 CBI Inc.'s obligations under the Short-Term Revolving Credit
(see Note 8). The indemnification agreement was terminated as of June 28, 1999
(see Note 8).
The Company entered into a management agreement on March 30, 2001, with
Castle Harlan, Inc. (the Manager), pursuant to which the Manager agreed to
provide business and organization strategy, financial and investment management
and merchant and investment banking services to the Company
F-34
<Page>
AMERICAN ACHIEVEMENT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
14. RELATED-PARTY TRANSACTIONS: (CONTINUED)
and its subsidiaries. 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 agreement is for a term of
10 years, renewable automatically from year to year unless CHPIII or CHPII shall
own less than 5 percent of the then-outstanding capital stock of the Company.
Beginning fiscal year 2002, the Company is to pay a management fee equal to
$3,000,000, unless otherwise prohibited by the Company's Amended Credit
Agreement (see Note 8). The Company was subject to a similar management
agreement with the Manager which was signed on July 27, 2000, and an agreement
signed on December 16, 1996. Amounts paid under all management agreements
totaled $3,125,000 for the fiscal year ended August 28, 1999, and the period
from August 29, 1999, to July 27, 2000, and approximately $2,562,000 for the
fiscal year ended August 25, 2001. The Company expensed approximately $108,000
for the period from July 28, 2000, to August 26, 2000. As of August 26, 2000,
and August 25, 2001, the Company had accrued management fees of approximately
$108,000 and $688,000, respectively. Included in deferred financing costs for
the ECI Acquisition is approximately $557,000 of management fees.
In connection with the Merger and the ECI Acquisition, the Company has a
receivable from the Castle Harlan Group relating to the acquisition and merger
expenses which were to be reimbursed to the Company. The amount of such
receivables were approximately $103,000 and $130,000 as of August 26, 2000, and
August 25, 2001, respectively.
15. BUSINESS SEGMENTS:
The Company operates in two reportable business segments: scholastic
products, and recognition and affinity products. The principal products sold in
the scholastic segment are class rings, yearbooks and graduation products, which
include fine paper products and graduation accessories. The scholastic segment
primarily serves the high school and college markets. The recognition and
affinity segment includes publications that recognize the academic achievement
of top students at the high school and college levels, jewelry commemorating
family events, fan affinity jewelry and related products, and professional
sports championship rings. The accounting policies of the segments are the same
as those described in the summary of significant accounting policies in Note 2.
F-35
<Page>
AMERICAN ACHIEVEMENT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
15. BUSINESS SEGMENTS: (CONTINUED)
The following is a summary of certain financial information relating to the
two segments (in thousands):
<Table>
<Caption>
RECOGNITION AND
SCHOLASTIC AFFINITY TOTAL
---------- --------------- --------
Year ended August 28, 1999--
Net sales............................................. $150,737 $18,128 $168,865
Interest expense...................................... 13,135 1,459 14,594
Depreciation and amortization......................... 6,460 716 7,176
Segment operating income.............................. 7,762 2,760 10,522
Capital expenditures.................................. 8,735 1,050 9,785
Segment assets........................................ 187,318 22,527 209,845
Year ended August 26, 2000--
Net sales............................................. $163,347 $18,938 $182,285
Interest expense...................................... 14,122 1,569 15,691
Depreciation and amortization......................... 8,191 909 9,100
Segment operating income.............................. 12,484 3,313 15,797
Extraordinary gain, net............................... 6,025 670 6,695
Capital expenditures.................................. 4,558 529 5,087
Segment assets........................................ 292,627 33,926 326,553
Year ended August 25, 2001--
Net sales............................................. $258,897 $22,618 $281,515
Interest expense...................................... 20,561 2,285 22,846
Depreciation and amortization......................... 16,856 730 17,586
Segment operating income (loss)....................... 21,554 (1,915) 19,639
Capital expenditures.................................. 6,744 755 7,499
Segment assets........................................ 349,426 30,527 379,953
Three months ended November 25, 2000--(Unaudited)
Net sales............................................. $ 58,389 $ 5,949 $ 64,338
Interest expense...................................... 5,281 587 5,868
Depreciation and amortization......................... 3,514 356 3,870
Segment operating income (loss)....................... 409 (1,153) (744)
Capital expenditures.................................. 1,754 178 1,932
Segment assets........................................ 301,050 30,503 331,553
Three months ended November 24, 2001--(Unaudited)
Net sales............................................. $ 58,386 $19,186 $ 77,572
Interest expense...................................... 5,337 593 5,930
Depreciation and amortization......................... 3,766 996 4,762
Segment operating income.............................. 1,080 8,143 9,223
Capital expenditures.................................. 1,902 186 2,088
Segment assets........................................ 294,530 84,889 379,419
</Table>
The Company's reportable segments are strategic business units that offer
products to different consumer segments. Each segment is managed separately
because each business requires different
F-36
<Page>
AMERICAN ACHIEVEMENT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
15. BUSINESS SEGMENTS: (CONTINUED)
marketing strategies. The Company evaluates the performance of each segment
based on the profit or loss from operations before income taxes, not including
nonrecurring gains or losses.
16. SUBSEQUENT EVENT--DEBT OFFERING AND NEW CREDIT AGREEMENT (UNAUDITED):
As of February 20, 2002, the Company issued $177 million of senior unsecured
notes (the Unsecured Notes) due in 2007. The Unsecured Notes bear interest at a
stated rate of 11 5/8%. The Unsecured Notes were issued at a discount of 0.872%
resulting in net proceeds of approximately $175.5 million before considering
financing costs. The effective rate of the Unsecured Notes after discount is
approximately 11.86%. The Unsecured Notes rank pari passu with the Company's
existing and future senior indebtedness, including obligations under the New
Credit Agreement. The Unsecured Notes are guaranteed by the Company's
subsidiaries, and the guarantees rank pari passu with existing and future senior
debt of the Company and its subsidiaries. The Unsecured Notes and the guarantees
on the Unsecured Notes will be effectively subordinated to any of the Company's
secured debt.
The Company may not redeem the Unsecured Notes until 2005, except that the
Company may redeem up to 35 percent of the Unsecured Notes before the third
anniversary of the issue date of the Unsecured Notes as long as (a) the Company
pays a certain percentage of the principal amount of the Unsecured Notes, plus
interest, (b) the Company redeems the Unsecured Notes within 90 days of
completing a public equity offering and (c) at least 65 percent of the aggregate
principal amount of the Unsecured Notes issued remains outstanding afterward.
If a change in control, as defined in the indenture agreement, occurs, the
Company must give the holders of the Unsecured Notes the opportunity to sell
their Unsecured Notes to the Company at 101 percent of the principal amount of
the Unsecured Notes, plus accrued interest.
The indenture agreement to the Unsecured Notes contains standard negative
covenants and restrictions on actions by the Company and its subsidiaries
including, without limitation, restrictions on additional indebtedness, liens,
and mergers with other entities, among other restrictions as defined in the
indenture agreement. In addition, the indenture agreement requires that the
Company meet certain financial covenants including a minimum fixed charge
coverage ratio.
In conjunction with the issuance of the Unsecured Notes, on February 20,
2002, the Company entered into a new $40 million senior revolving credit
facility (the New Credit Agreement) with various financial institutions, with
all of the Company's current domestic subsidiaries as guarantors. Loans made
pursuant to the New Credit Agreement are secured by a first priority security
interest in substantially all of the Company's and the Company's domestic
subsidiaries' assets and in all of the Company's domestic subsidiaries' capital
stock.
Availability under the the New Credit Agreement is restricted to the lesser
of (1) $40 million and (2) the Borrowing Base Amount as defined in the New
Credit Agreement. Advances under the New Credit Agreement may be made as base
rate loans or LIBOR loans at the Company's election (except for the initial
loans which shall be base rate loans) in accordance with the terms specified in
the New Credit Agreement. The New Credit Agreement matures on February 20, 2006.
F-37
<Page>
AMERICAN ACHIEVEMENT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
16. SUBSEQUENT EVENT--DEBT OFFERING AND NEW CREDIT AGREEMENT (UNAUDITED):
(CONTINUED)
The New Credit Agreement contains standard negative covenants and
restrictions on actions by the Company and its subsidiaries including, without
limitation, restrictions on indebtedness, liens, and the gold consignment
agreement, among other restrictions. In addition, the New Credit Agreement
requires that the Company meet certain financial covenants, ratios and tests,
including capital expenditure limits, a maximum secured leverage ratio, a
minimum interest coverage ratio, and a minimum fixed charge coverage ratio.
In conjunction with the issuance of the Unsecured Notes and entrance into
the New Credit Agreement, the Company paid off the then outstanding former
credit facility, the TP Holding Corp. bridge notes, the American Achievement
bridge notes, and settled a majority of the interest rate swap agreements. The
Company recognized an extraordinary charge in February 2002 of approximately
$6.2 million, net of income tax benefit, relating to the write-off of
unamortized deferred financing costs and, due to the termination or
reclassification of interest rate swaps, the Company recorded a charge to other
expense for approximately $2.8 million.
F-38
<Page>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Stockholders of
TP Holding Corp.:
We have audited the accompanying consolidated statement of income of TP
Holding Corp., a Delaware Corporation, for the six months ended July 27, 2000,
and the related consolidated statements of stockholders' equity and cash flows
for the six months ended July 27, 2000. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audit.
We conducted our audit in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit also includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the results of operations and cash
flows of TP Holding Corp. for the six months ended July 27, 2000, in conformity
with accounting principles generally accepted in the United States.
/s/ Arthur Andersen LLP
Austin, Texas
August 24, 2001
F-39
<Page>
TP HOLDING CORP.
CONSOLIDATED STATEMENT OF INCOME
FOR THE SIX MONTHS ENDED JULY 27, 2000
(DOLLARS IN THOUSANDS)
<Table>
Net sales................................................... $72,148
Cost of sales............................................... 39,673
-------
Gross profit............................................ 32,475
Selling, general and administrative expense................. 20,586
-------
Operating income........................................ 11,889
Interest and other expense.................................. 3,983
-------
Income before income taxes.............................. 7,906
Provision for income taxes.................................. (2,947)
-------
Net income.................................................. $ 4,959
-------
</Table>
The accompanying notes are an integral part of these consolidated financial
statements.
F-40
<Page>
TP HOLDING CORP.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE SIX MONTHS ENDED JULY 27, 2000
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<Table>
<Caption>
ADDITIONAL
PREFERRED STOCK COMMON STOCK PAID-IN ACCUMULATED
SHARES AMOUNT SHARES AMOUNT CAPITAL DEFICIT TOTAL
--------- --------- -------- --------- ---------- ----------- --------
Balance, February 11, 2000........... -- $ -- -- $ -- $ -- $ -- $ --
Change in ownership from Insilco
to TP Holding Corp. (Note 3)... 30,000 -- 30,000 -- 30,000 -- 30,000
Net income........................... -- -- -- -- -- 4,959 4,959
------ --------- ------ --------- ------- ------ -------
Balance, July 27, 2000............... 30,000 $ -- 30,000 $ -- $30,000 $4,959 $34,959
====== ========= ====== ========= ======= ====== =======
</Table>
The accompanying notes are an integral part of these consolidated financial
statements.
F-41
<Page>
TP HOLDING CORP.
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE SIX MONTHS ENDED JULY 27, 2000
(DOLLARS IN THOUSANDS)
<Table>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income.............................................. $ 4,959
Adjustments to reconcile net income to net cash used in
operating activities
Depreciation and amortization....................... 3,520
Change in operating assets and liabilities
Increase in trade receivables................... (8,412)
Decrease in other receivables................... 685
Decrease in inventories, net.................... 6,790
Decrease in prepaids and other current assets,
net.......................................... 1,061
Increase in other assets, net................... (192)
Increase in accounts payable.................... 1,377
Increase in accrued expenses.................... 6,633
Decrease in customer deposits................... (18,610)
Decrease in other long-term liabilities......... (182)
--------
Net cash used in operating activities....... (2,371)
--------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property, plant and equipment.............. (1,222)
--------
Net cash used in investing activities....... (1,222)
--------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from debt issuance............................. 1,368
--------
Net cash provided by financing activities... 1,368
--------
NET DECREASE IN CASH AND CASH EQUIVALENTS................... (2,225)
CASH, beginning of period................................... 3,130
--------
CASH, end of period......................................... $ 905
========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Interest paid........................................... $ 886
========
Taxes paid.............................................. $ 722
========
</Table>
The accompanying notes are an integral part of these consolidated financial
statements.
F-42
<Page>
TP HOLDING CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BACKGROUND AND ORGANIZATION
TP Holding Corp. (TP Holding or the Company) was established on
February 11, 2000, by Castle Harlan Partners III L.P. for the purpose of
acquiring Taylor Publishing Company (TPC) and subsidiary from Insilco Holding
Co. (Insilco). TPC and subsidiary were indirect wholly owned subsidiaries of
Insilco, and effective February 11, 2000, TP Holding acquired all of the
outstanding stock of TPC and subsidiary from Insilco for approximately
$93.4 million (see Note 3). The Company's primary business is the design,
publication and printing of student yearbooks and other specialty books
primarily in the United States. The Company also operates a reunion services
division that provides full-service reunion planning for high schools. The
Company's primary manufacturing facility is located in Dallas, Texas.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
CONSOLIDATION AND PRESENTATION
The consolidated statement of income for the six months from February 12,
2000, through July 27, 2000, includes the accounts of TP Holding and its
subsidiary, TPC, together with its subsidiary, Taylor Production Company, L.P.,
a partnership in which TPC is the general partner and holds a 99 percent
ownership interest. TP Holding owns the remaining 1 percent interest in the
general partnership. All significant intercompany transactions have been
eliminated in consolidation.
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, as well as intangibles) be reviewed for impairment whenever events or
changes in circumstances, such as changes 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 changes)
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 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. On the accompanying
consolidated statement of income for the six months ended July 27, 2000, no
impairment charges were incurred.
REVENUE RECOGNITION
Revenues from product sales are recognized after customer acceptance of the
final product is obtained and once the product has been shipped and the risks
and rewards of ownership have passed to the customer.
F-43
<Page>
TP HOLDING CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
SHIPPING AND HANDLING FEES
In accordance with Emerging Issues Task Force (EITF) Issue No. 00-10,
"Accounting for Shipping and Handling Fees and Costs," the Company recognizes as
revenue amounts billed to customers related to shipping and handling, with the
related expense recorded as a component of cost of goods sold.
SEASONALITY
The Company's core business of student yearbook sales is subject to
seasonality, corresponding with the academic school year. Sales are typically
highest during the months of May and June, as yearbooks are shipped to schools
prior to the school's summer break. The Company historically experiences
operating losses during the first and second fiscal quarters, when very few
books are shipped for delivery.
CUSTOMER DEPOSITS
The Company requires that its customers remit a deposit for a portion of the
ultimate sales price of the order. These deposits are recorded as a liability on
the consolidated balance sheet and are recognized as revenue upon shipment of
the product to the customer. Taylor also pays interest between 6 percent and
7 percent on customer deposit balances that are in excess of the minimum
required deposit. Interest expense on these excess deposits was approximately
$327,000 for the six-month period ended July 27, 2000.
CONCENTRATION OF CREDIT RISK
Credit is extended primarily to educational institutions that 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.
INCOME TAXES
During the six months ended July 27, 2000, deferred tax assets and
liabilities were 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.
USE OF ESTIMATES
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires management to make
estimates and assumptions that affect the reported
F-44
<Page>
TP HOLDING CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
amounts of revenues and expenses during the reporting periods. Actual results
could differ from these estimates.
NEW ACCOUNTING PRONOUNCEMENTS
SFAS No. 130, "Reporting Comprehensive Income," was adopted by the Company
during the period presented and requires the presentation of comprehensive
income in an entity's financial statements. Comprehensive income represents all
changes in equity of an entity during the reporting period, including net income
and charges directly to equity which are excluded from net income. This
statement did not have any impact on the Company's disclosures as the Company
currently does not enter into any transactions which result in charges (or
credits) directly to equity (such as additional minimum pension liability
charges, currency translation adjustments, unrealized gains and losses on
available-for-sales securities, etc.).
SFAS No. 132, "Employers' Disclosure About Pensions and Other Postretirement
Benefits," was adopted by the Company during the period presented. SFAS No. 132
revised employers' disclosures about pension and other postretirement benefit
plans, but it did not change the measurement or recognition of those plans.
3. TP HOLDING PURCHASE
Effective February 11, 2000, Insilco entered into a purchase agreement with
TP Holding for the sale of TPC and its subsidiary. Under the terms of the
purchase agreement, Insilco sold its 100 percent ownership interest in TPC and
its 1 percent partnership interest in Taylor Production Services Company, L.P.,
to TP Holding for approximately $92.5 million and $935,000, respectively. The
acquisition was accounted for using the purchase method and, accordingly, the
purchase price has been allocated to assets acquired and liabilities assumed
based upon estimated fair values.
4. DEBT
In connection with the purchase discussed in Note 3, the Company entered
into a credit facility with a syndication of banks on February 11, 2000. Under
the terms of the credit agreement, the Company had borrowings outstanding under
the Term A, Term B and revolving loan agreements. The Company has the option to
designate the interest rates that the Term A, Term B and revolving loans will
bear at either (a) a base rate plus a base rate margin, as defined by the credit
agreement, or (b) LIBOR plus a LIBOR margin, as defined by the credit agreement.
Interest is computed daily and is payable in arrears on the first day of each
month. For the six months ended July 27, 2000, interest expense incurred under
the credit agreement was approximately $1,876,000.
The Company also entered into a convertible subordinated bridge loan (the
Bridge Loan) with Castle Harlan Partners III, L.P., on February 11, 2000. The
Bridge Loan bears interest at 12 percent per annum, which is added to the
outstanding balance of the Bridge Loan on the last day of each month. Interest
expense incurred on the Bridge Loan for the six months ended July 27, 2000, was
approximately $665,000. The Bridge Loan is due February 11, 2001. Under the
Bridge Loan, the lender has the right, at its discretion, to convert the
original principal and accrued interest into shares of the Company's common and
preferred stock.
F-45
<Page>
TP HOLDING CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5. PENSION PLAN
Certain hourly employees of the Company are covered by a defined pension
plan (the Plan) established and administered by the Company. The benefits under
the Plan are based primarily on the employees' years of service and compensation
near retirement. The funding policies for the Plan are consistent with the
funding requirements of federal laws and regulations. Such Plan is accounted for
in accordance with SFAS No. 132 (see Note 2). The Plan assets are primarily
invested in a money market account.
The following table sets forth the status of the Plan as of June 30, 2000
(in thousands):
<Table>
Accumulated postretirement benefit obligation............... $(8,866)
=======
Fair value of Plan assets................................... $ 8,492
=======
PLAN ASSETS AT FAIR VALUE
Unfunded accumulated benefit obligation in excess of Plan
assets.................................................... $ (374)
Unrecognized net gain....................................... 70
-------
Accumulated postretirement benefit cost, current and
long-term................................................. $ (304)
=======
</Table>
The net periodic postretirement benefit cost for the period from
February 11, 2000, to June 30, 2000, include the following components (in
thousands):
<Table>
Service costs, benefits attributed to service during the
period.................................................... $ 177
Interest cost............................................... 367
Expected return on assets................................... (405)
-----
Net periodic postretirement benefit cost.................... $ 139
=====
</Table>
For measurement purposes, the weighted average discount rate used in
determining the accumulated postretirement benefit obligation was 8.0 percent,
the long-term rate of return on Plan assets was 9.0 percent and the annual
salary increases were assumed to be 4.5 percent.
401(K) PLAN
The Company began sponsoring a qualified defined contribution 401(k) plan
which also covers substantially all nonunion employees of the Company. The
Company matches 50 percent on nonunion participants' voluntary contributions up
to a maximum of 4 percent of the participants' compensation. The Company's
expense was approximately $554,000 for the six months ended July 27, 2000.
F-46
<Page>
TP HOLDING CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. INCOME TAXES
The provision for income taxes differs from the amount that would be
computed if the income before income taxes were multiplied by the federal income
tax rate (statutory rate) as follows for the six months ended July 27, 2000 (in
thousands):
<Table>
Computed tax expense at statutory rate...................... $2,676
State taxes, net of federal benefit......................... 261
Other....................................................... 10
------
Total income tax provision.................................. $2,947
======
</Table>
7. COMMITMENTS AND CONTINGENCIES
LEASES
Certain Company facilities and equipment are leased under agreements
expiring at various dates through September 2006. The Company's commitments
under the noncancelable portion of all operating leases for the next five years
and thereafter as of July 27, 2000, are approximately as follows:
<Table>
<Caption>
FISCAL YEAR
- -----------
2001........................................................ $1,162,000
2002........................................................ 854,000
2003........................................................ 711,000
2004........................................................ 417,000
2005 and thereafter......................................... 1,067,000
----------
$4,211,000
==========
</Table>
Lease and rental expense included in the accompanying consolidated statement
of operations for the six months ended July 27, 2000, was approximately
$760,000.
PENDING LITIGATION
The Company is subject to certain litigation arising from the ordinary
course of business. In management's opinion, adverse decisions on legal
proceedings, in the aggregate, would not have a materially adverse impact on the
Company's results of operations or financial position.
8. RELATED-PARTY TRANSACTIONS
Effective February 11, 2000, the Company entered into a management agreement
with Castle Harlan, Inc. (the Manager), pursuant to which the Manager agreed to
provide business and organizational services to the Company, along with
financial investment management and merchant and investment banking services. As
compensation for such services, the Company expensed $1.2 million during the
six-month period ended June 27, 2000. The agreement was for a term of five
years, requiring payments totaling $1.2 million annually.
9. SUBSEQUENT EVENTS
Effective July 27, 2000, American Achievement acquired all issued and
outstanding shares of the Company through the issuance of 320,929 shares of
American Achievement common stock and 393,482 shares of American Achievement
Series A preferred stock for a total purchase price of $30 million.
F-47
<Page>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors of
Taylor Publishing Company:
We have audited the accompanying consolidated statement of operations of
Taylor Publishing Company and subsidiary for the five-month period ended
February 11, 2000, and the related consolidated statements of stockholder's
equity and cash flows for the five months ended February 11, 2000. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit also includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the results of operations and cash
flows of Taylor Publishing Company and subsidiary for the five-month period
ended February 11, 2000, in conformity with accounting principles generally
accepted in the United States.
/s/ Arthur Andersen LLP
Austin, Texas
August 24, 2001
F-48
<Page>
TAYLOR PUBLISHING COMPANY AND SUBSIDIARY
CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE FIVE-MONTH PERIOD ENDED FEBRUARY 11, 2000
(DOLLARS IN THOUSANDS)
<Table>
Net sales................................................... $22,297
Cost of sales............................................... 17,267
-------
Gross profit............................................ 5,030
Selling, general and administrative expense................. 11,316
Corporate charges from parent............................... 1,503
-------
Operating loss.......................................... (7,789)
Interest and other expense.................................. 709
-------
Loss before income taxes................................ (8,498)
Benefit for income taxes.................................... --
-------
Net loss.................................................... $(8,498)
=======
</Table>
The accompanying notes are an integral part of these consolidated financial
statements.
F-49
<Page>
TAYLOR PUBLISHING COMPANY AND SUBSIDIARY
CONSOLIDATED STATEMENT OF STOCKHOLDER'S EQUITY
FOR THE FIVE-MONTH PERIOD ENDED FEBRUARY 11, 2000
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<Table>
<Caption>
ADDITIONAL
SHARES COMMON PAID-IN ACCUMULATED
OUTSTANDING STOCK CAPITAL DEFICIT TOTAL
----------- -------- ---------- ----------- --------
BALANCE, September 4, 1999................ 10 $1 $10,398 $ (7,845) $ 2,554
Difference between amount recorded
under income tax sharing allocation
and actual income tax benefit....... -- -- -- 1,187 1,187
Net loss.............................. -- -- -- (8,498) (8,498)
-- -- ------- -------- -------
BALANCE, February 11, 2000................ 10 $1 $10,398 $(15,156) $(4,757)
== == ======= ======== =======
</Table>
The accompanying notes are an integral part of these consolidated financial
statements.
F-50
<Page>
TAYLOR PUBLISHING COMPANY AND SUBSIDIARY
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE FIVE-MONTH PERIOD ENDED FEBRUARY 11, 2000
(DOLLARS IN THOUSANDS)
<Table>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss................................................ $(8,498)
Adjustments to reconcile net loss to net cash provided
by operating activities
Depreciation and amortization....................... 1,536
Change in operating assets and liabilities
Decrease in trade receivables, net.............. 11,947
Increase in other receivables................... (2,176)
Increase in inventories, net.................... (9,807)
Increase in prepaids and other current assets... (852)
Decrease in other assets........................ 725
Increase in accounts payable.................... 1,979
Decrease in accrued expenses.................... (705)
Increase in customer deposits................... 28,160
Decrease in other long-term liabilities......... (8)
-------
Net cash provided by operating activities... 22,301
-------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of property, plant and equipment.............. (1,400)
-------
Net cash used in investing activities....... (1,400)
-------
CASH FLOWS FROM FINANCING ACTIVITIES
Change in amount due to parent.......................... (20,904)
-------
Net cash used in financing activities....... (20,904)
-------
NET DECREASE IN CASH........................................ (3)
CASH, beginning of period................................... 18
-------
CASH, end of period......................................... $ 15
=======
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Interest paid........................................... $ 103
=======
Supplemental Disclosure Of Noncash Financing Activities.....
Difference between amount recorded under income tax
sharing allocation and actual income tax expense....... $ 1,187
=======
</Table>
The accompanying notes are an integral part of these consolidated financial
statements.
F-51
<Page>
TAYLOR PUBLISHING COMPANY AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BACKGROUND AND ORGANIZATION:
Taylor Publishing Company and subsidiary (collectively, the Company or
Taylor) are indirect wholly owned subsidiaries of Insilco Holding Co. (Insilco),
for the five months from September 4, 1999, through February 11, 2000. On
February 11, 2000, TP Holding Corp. (TP Holding), a subsidiary of Castle
Harlan, Inc., acquired all of the outstanding stock of the Company for
approximately $93.4 million. The Company's primary business is the design,
publication and printing of student yearbooks and other specialty books
primarily in the United States. The Company also operates a reunion services
division that provides full-service reunion planning for high schools. The
Company's primary manufacturing facility is located in Dallas, Texas.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
CONSOLIDATION AND PRESENTATION
The consolidated statement of operations for the five months from
September 4, 1999, to February 11, 2000, represents the period that the Company
was under ownership of Insilco and includes the accounts of Taylor Publishing
Company and its subsidiary, Taylor Production Company, L.P., a partnership in
which Taylor Publishing Company is the general partner and holds a 99 percent
ownership interest. Insilco owned the remaining 1 percent interest in the
general partnership. The financial statements represent the stand-alone
operations of Taylor apart from the consolidated financial statements and
operations of Insilco. In order to present Taylor on a stand-alone basis,
certain adjustments were identified and recorded. Some of these adjustments
required the allocation of common expenses of the parent company to Taylor.
Management believes that all significant adjustments have been identified and
recorded to represent Taylor on a stand-alone basis and that the method of
allocation of common costs to Taylor is reasonable.
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, as well as intangibles) be reviewed for impairment whenever events or
changes in circumstances, such as changes 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 changes)
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 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. On the accompanying
consolidated statement of operations for the five-month period ended
February 11, 2000, no impairment charges have been incurred.
F-52
<Page>
TAYLOR PUBLISHING COMPANY AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
REVENUE RECOGNITION
Revenues from product sales are recognized after customer acceptance of the
final product is obtained and the product has been shipped and the risks and
rewards of ownership have passed to the customer.
SHIPPING AND HANDLING FEES
In accordance with Emerging Issues Task Force (EITF) Issue No. 00-10,
"Accounting for Shipping and Handling Fees and Costs," the Company recognizes as
revenue amounts billed to customers related to shipping and handling, with the
related expense recorded as a component of costs of goods sold.
SEASONALITY
The Company's core business of student yearbook sales is subject to
seasonality, corresponding with the academic school year. Sales are typically
highest during the months of May and June, as yearbooks are shipped to schools
prior to the school's summer break. The Company historically experiences
operating losses during the first and second fiscal quarters, when very few
books are shipped for delivery.
CUSTOMER DEPOSITS
Taylor requires that its customers remit a deposit for a portion of the
ultimate sales price of the order. These deposits are recorded as a liability on
the consolidated balance sheet and are recognized as revenue upon shipment of
the product to the customer. Taylor also pays interest between 6 percent and
7 percent on customer deposit balances that are in excess of the minimum
required deposit. Interest expense on these excess deposits was approximately
$569,000 for the five-month period ended February 11, 2001.
CONCENTRATION OF CREDIT RISK
Credit is extended primarily to educational institutions that 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.
INCOME TAXES
During the five-month period ended February 11, 2000, the Company was
included in the consolidated federal income tax return of Insilco. Income tax
expense was computed on a separate return basis in accordance with SFAS
No. 109, "Accounting for Income Taxes." Under the Company's tax-sharing
arrangement with Insilco, the Company was allocated income tax expense or
benefit based
F-53
<Page>
TAYLOR PUBLISHING COMPANY AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
on the amount determined by multiplying earnings or loss before allocated
capital changes from Insilco by 40 percent. This amount was added to or deducted
from the balance due to Insilco. The difference between the amount determined
under the Company's tax-sharing arrangement with Insilco and the amount of
computed income tax expense or benefit as described above was recorded as a
direct charge to accumulated deficit or a retained credit to additional paid-in
capital.
USE OF ESTIMATES
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires management to make
estimates and assumptions that affect the reported amounts of revenues and
expenses during the reporting periods. Actual results could differ from these
estimates.
NEW ACCOUNTING PRONOUNCEMENTS
SFAS No. 130, "Reporting Comprehensive Income," was adopted by the Company
during the period presented and requires the presentation of comprehensive
income in an entity's financial statements. Comprehensive income represents all
changes in equity of an entity during the reporting period, including net income
and charges directly to equity which are excluded from net income. This
statement did not have any impact on the Company's disclosures as the Company
currently does not enter into any transactions which would result in a material
charge (or credit) directly to equity (such as additional minimum pension
liability charges, currency translation adjustments, unrealized gains and losses
on available-for-sales securities, etc.).
SFAS No. 132, "Employers' Disclosure About Pensions and Other Postretirement
Benefits," was adopted by the Company during the period presented. SFAS No. 132
revised employers' disclosures about pension and other postretirement benefit
plans, but it did not change the measurement or recognition of those plans.
3. DEBT:
The Company does not have a formal debt arrangement with its parent,
Insilco. Funding received by the Company from Insilco is recorded as due to
parent on the consolidated balance sheet. This amount is payable on demand or,
if no demand is made, in November 2004 subject to approval by Insilco's bank
lenders. Interest expense during this period consists of a capital charge from
Insilco calculated as 10 percent of the difference between total assets and
current liabilities, as defined. For the five-month period ended February 11,
2000, interest expense charged to the Company by Insilco was approximately
$607,000.
4. PENSION PLAN:
Certain hourly employees of the Company are covered by a defined pension
plan (the Plan) established by the Company and administered by Insilco. Certain
salaried employees of the Company were also covered by the Plan. The benefits
under the Plan are based primarily on the employees' years of service and
compensation near retirement. The funding policies for the Plan are consistent
F-54
<Page>
TAYLOR PUBLISHING COMPANY AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. PENSION PLAN: (CONTINUED)
with the funding requirements of federal laws and regulations. Such Plan is
accounted for in accordance with SFAS No. 132 (see Note 2). The Plan assets are
primarily invested in a money market account.
The following tables set forth the status of the Plan as of December 31,
1999 (in thousands):
<Table>
Accumulated postretirement benefit obligation............... $(7,825)
=======
Fair value of Plan assets................................... $ 8,435
=======
PLAN ASSETS AT FAIR VALUE
Unfunded accumulated benefit obligation in excess of
Plan assets........................................... $ (610)
Unrecognized net gain................................... 1,005
-------
Accumulated postretirement benefit costs, current and
long-term $ 395
=======
</Table>
The net periodic postretirement benefit cost for the 12-month period ended
December 31, 1999, includes the following components (in thousands):
<Table>
Service costs, benefits attributed to service during the
period.................................................... $ 378
Interest cost............................................... 623
Expected return on assets................................... (760)
-----
Net periodic postretirement benefit cost.................... $ 241
=====
</Table>
For measurement purposes, the weighted average discount rate used in
determining the accumulated postretirement benefit obligation was 8.0 percent,
the long-term rate of return on Plan assets was 9.0 percent and the annual
salary increases were assumed to be 4.5 percent.
401(K) PLAN
Insilco sponsors a qualified defined contribution 401(k) plan which also
covers substantially all nonunion employees of the Company. The Company matches
50 percent on nonunion participants' voluntary contributions up to a maximum of
3 percent of the participants' compensation. The Company's expense was
approximately $149,000 for the five-month period ended February 11, 2000.
F-55
<Page>
TAYLOR PUBLISHING COMPANY AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5. INCOME TAXES:
Actual benefit for income taxes of $-- differs from the amount that would be
computed if the loss before income taxes were multiplied by the federal income
tax rate (statutory rate) as follows for the five-month period ended
February 11, 2000 (in thousands):
<Table>
Computed tax expense (benefit) at statutory rate............ $(3,350)
State taxes, net of federal benefit......................... (325)
Other....................................................... 9
Change in valuation allowance............................... 3,666
-------
Total income tax benefit.................................... $ --
=======
</Table>
6. COMMITMENTS AND CONTINGENCIES:
LEASES
Certain Company facilities and equipment are leased under agreements
expiring at various dates through September 2006. The Company's commitments
under the noncancelable portion of all operating leases for the next five years
and thereafter as of February 11, 2000, are approximately as follows:
<Table>
Fiscal Year
2001........................................................ $1,165,000
2002........................................................ 854,000
2003........................................................ 711,000
2004........................................................ 417,000
2005 and thereafter......................................... 1,067,000
----------
$4,214,000
==========
</Table>
Lease and rental expense included in the accompanying consolidated statement
of operations for the five-month period ended February 11, 2000, was
approximately $616,000.
GUARANTOR RELATIONSHIPS
During the five-month period ended February 11, 2000, the Company was the
guarantor of and pledged assets for certain borrowings of Insilco. The Company,
along with the other wholly owned domestic subsidiaries of Insilco, were
guarantors of Insilco's borrowings under a $300 million bank credit agreement,
which was also secured by all of the Company's and the other wholly owned
domestic subsidiaries' assets. The Company, along with the other wholly owned
domestic subsidiaries of Insilco, were also the guarantors of $120 million of
12 percent notes sold by Insilco in 1998.
F-56
<Page>
TAYLOR PUBLISHING COMPANY AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. COMMITMENTS AND CONTINGENCIES: (CONTINUED)
PENDING LITIGATION
The Company is subject to certain litigation arising from the ordinary
course of business. In management's opinion, adverse decisions on legal
proceedings, in the aggregate, would not have a materially adverse impact on the
Company's results of operations or financial position.
7. RELATED-PARTY TRANSACTIONS:
During the five-month period ended February 11, 2000, Insilco provided
certain corporate services to the Company, including management, human
resources, accounting and financial reporting, and legal services. These
expenses either were actual expenses incurred by Insilco on behalf of the
Company or were charges to the Company based upon certain financial measures.
Also during this period, Insilco managed a centralized cash management system,
which resulted in the Company carrying minimal cash. Cash distributions were
funded by Insilco, and all cash receipts were remitted to Insilco on a daily
basis. Any net amount due to Insilco was payable upon demand.
See Notes 2 and 6 regarding the Company's tax-sharing arrangement and
guarantor relationships with Insilco.
8. SUBSEQUENT EVENTS:
Effective February 11, 2000, Insilco entered into a purchase agreement with
TP Holding for the sale of the Company. Under the terms of the purchase
agreement, Insilco sold its 100 percent ownership interest in the Company and
its 1 percent partnership interest in Taylor Production Services Company, L.P.,
to TP Holding for approximately $92.5 million and $935,000, respectively.
F-57
<Page>
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Insilco Corporation:
We have audited the accompanying consolidated balance sheet of Taylor
Publishing Company and subsidiary as of September 3, 1999, and the related
consolidated statements of operations, stockholder's equity, and cash flows for
the year then ended. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Taylor
Publishing Company and subsidiary as of September 3, 1999, and the results of
their operations and their cash flows for the year then ended in conformity with
generally accepted accounting principles.
/s/ KPMG LLP
Dallas, Texas
September 24, 1999
F-58
<Page>
TAYLOR PUBLISHING COMPANY
AND SUBSIDIARY
CONSOLIDATED BALANCE SHEET
SEPTEMBER 3, 1999
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
<Table>
ASSETS
Current assets:
Cash.................................................... $ 18
Trade receivables, net.................................. 19,452
Other receivables....................................... 972
Inventories............................................. 11,415
Prepaid expenses and other current assets............... 2,421
-------
Total current assets................................ 34,278
Property, plant and equipment, net.......................... 11,647
Other assets................................................ 1,053
-------
Total assets................................................ $46,978
=======
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities:
Accounts payable........................................ $ 4,289
Accrued expenses........................................ 8,436
Customer deposits....................................... 8,610
-------
Total current liabilities........................... 21,335
Due to parent............................................... 22,367
Other long-term liabilities................................. 722
-------
Total liabilities................................... 44,424
-------
Stockholder's equity:
Common stock, $1 par value. Authorized 1,000 shares, issued
and outstanding 10 shares................................. 1
Additional paid-in capital.............................. 10,398
Accumulated deficit..................................... (7,845)
-------
Total stockholder's equity.......................... 2,554
Commitments and contingencies
-------
Total liabilities and stockholder's equity.......... $46,978
=======
</Table>
See accompanying notes to consolidated financial statements.
F-59
<Page>
TAYLOR PUBLISHING COMPANY
AND SUBSIDIARY
CONSOLIDATED STATEMENT OF OPERATIONS
YEAR ENDED SEPTEMBER 3, 1999
(DOLLARS IN THOUSANDS)
<Table>
Net sales................................................... $102,861
Cost of products sold....................................... 61,066
Selling, general and administrative expenses................ 34,118
Corporate charges from parent............................... 2,130
--------
Operating income........................................ 5,547
Interest expense............................................ 3,159
--------
Income before income taxes.............................. 2,388
Income tax expense.......................................... --
--------
Net income.............................................. $ 2,388
========
</Table>
See accompanying notes to consolidated financial statements.
F-60
<Page>
TAYLOR PUBLISHING COMPANY
AND SUBSIDIARY
CONSOLIDATED STATEMENT OF STOCKHOLDER'S EQUITY
YEAR ENDED SEPTEMBER 3, 1999
<Table>
<Caption>
TOTAL
COMMON ADDITIONAL PAID-IN ACCUMULATED STOCKHOLDER'S
STOCK CAPITAL DEFICIT EQUITY
-------- ------------------ ------------- --------------
Balance at September 4, 1998... $ 1 9,766 (8,845) 922
Capital contribution........... -- 632 -- 632
Net income..................... -- -- 2,388 2,388
Difference between amount
recorded under income tax
sharing allocation and actual
income tax expense........... -- -- (1,388) (1,388)
------ ------ ------ ------
Balance at September 3, 1999... $ 1 10,398 (7,845) 2,554
====== ====== ====== ======
</Table>
See accompanying notes to consolidated financial statements.
F-61
<Page>
TAYLOR PUBLISHING COMPANY
AND SUBSIDIARY
CONSOLIDATED STATEMENT OF CASH FLOWS
YEAR ENDED SEPTEMBER 3, 1999
(DOLLARS IN THOUSANDS)
<Table>
Cash Flows From Operating Activities--
Net income.............................................. $ 2,388
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization....................... 3,336
Changes in operating assets and liabilities:
Trade receivables............................... 3,329
Other receivables............................... 329
Inventories..................................... (517)
Prepaid expenses and other current assets....... (2,208)
Other assets.................................... 1,765
Accounts payable................................ 812
Accrued expenses................................ (1,523)
Customer deposits............................... 48
Other long-term liabilities..................... (177)
-------
Net cash provided by operating activities... 7,582
-------
Cash Flows Used In Investing Activities--
Acquisition of property, plant and equipment............ (1,177)
-------
Net cash used in investing activities....... (1,177)
-------
Cash Flows From Financing Activities--
Change in amount due to Parent.......................... (6,405)
-------
Net cash used in financing activities....... (6,405)
-------
Net decrease in cash.................................... --
Cash at beginning of year............................... 18
-------
Cash at end of year......................................... $ 18
=======
Non-Cash Financing And Investing Activities:
Capital contribution through reduction in amount due to
Parent of $632
Difference between amount recorded under income tax
sharing allocation and actual income tax expense
charged directly to accumulated deficit of $1,388
</Table>
See accompanying notes to consolidated financial statements.
F-62
<Page>
TAYLOR PUBLISHING COMPANY AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 3, 1999
1. DESCRIPTION OF BUSINESS
Taylor Publishing Company and subsidiary (the Company) is an indirect
wholly-owned subsidiary of Insilco Holding Co. (Insilco or Parent). The Company
provides a variety of commercial printing and related services to a diverse,
nationwide customer base. The Company's primary business is the contract design
and printing of student yearbooks. The Company also publishes a variety of
specialty books on a contract basis and a limited number of its own publishing
titles and provides reunion planning and other services for alumni of schools,
colleges and academics.
(A) PRINCIPALS OF CONSOLIDATION
The consolidated financial statements include the accounts of Taylor
Publishing Company and Taylor Production Company, L.P., a partnership in
which Taylor Publishing Company is the general partner holding a 99%
ownership interest. Insilco is the 1% limited partner. All significant
intercompany transactions have been eliminated in consolidation.
(B) TRADE RECEIVABLES
Trade receivables are presented net of allowances for doubtful accounts
of $717 at September 3, 1999.
(C) INVENTORIES
Inventories are stated at the lower of cost or market. Cost includes
materials, labor and production overhead and is primarily determined using
standard costs which approximate costs utilizing the first-in, first-out
(FIFO) method. Inventory reserve represents the estimated amount necessary
to properly state inventory at lower of cost or market.
(D) PROPERTY, PLANT AND EQUIPMENT
Property, plant, and equipment are stated at cost. Depreciation of plant
and equipment is calculated on the straight-line method over the assets'
estimated useful lives, which is 10-25 years for buildings and building
improvements, 9 years for machinery and equipment, 9 years for furniture and
fixtures and 3-5 years for computer equipment.
(E) IMPAIRMENT OF LONG-LIVED ASSETS AND LONG-LIVED ASSETS TO BE DISPOSED OF
The Company reviews long-lived assets for impairment whenever events or
changes in circumstances indicate that the carrying amount of an asset may
not be recoverable. Recoverability of assets to be held and used is measured
by a comparison of the carrying amount of an asset to future net cash flows
expected to be generated by the asset. If such assets are considered to be
impaired, the impairment to be recognized is measured by the amount by which
the carrying amount of the assets exceeds the fair value of the assets.
Assets to be disposed of are reported at the lower of the carrying amount or
fair value less costs to sell.
(F) SALES
Sales are recognized when product is shipped and the risk and rewards of
ownership have passed to the customer.
F-63
<Page>
TAYLOR PUBLISHING COMPANY AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 3, 1999
1. DESCRIPTION OF BUSINESS (CONTINUED)
(G) INCOME TAXES
The Company is included in the consolidated Federal income tax return of
Insilco. Income tax expense has been computed on a separate return basis in
accordance with Statement of Financial Accounting Standards No. 109.
Under the Company's tax sharing arrangement with Insilco, the Company is
allocated income tax expense or benefit based on the amount determined by
multiplying earnings or loss before allocated capital changes from Insilco
by 40%. This amount is added to or deducted from the balance of due to
Parent.
The difference between the amount determined under the Company's tax
sharing arrangement with Insilco and the amount of computed income tax
expense or benefit as described above is recorded as a direct charge to
accumulated deficit or a direct credit to additional paid-in capital.
(H) ESTIMATES
In conformity with generally accepted accounting principles, the
preparation of our consolidated financial statements requires management to
make estimates and assumptions that affect the amounts reported in the
financial statements and therefore actual results may ultimately differ from
those estimates.
2. INVENTORIES
A summary of inventories at September 3, 1999 follows (in thousands):
<Table>
Raw materials and supplies.................................. $ 3,563
Work in process............................................. 7,385
Finished goods.............................................. 1,256
Reserve..................................................... (789)
-------
$11,415
=======
</Table>
3. PROPERTY, PLANT AND EQUIPMENT
A summary of property, plant and equipment at September 3, 1999 follows (in
thousands):
<Table>
Land........................................................ $ 1,648
Building and building improvements.......................... 5,488
Machinery and equipment..................................... 6,965
Furniture and fixtures...................................... 127
Computer equipment.......................................... 15,151
Construction in progress.................................... 144
-------
29,523
Less accumulated depreciation and amortization.............. 17,876
-------
Net property, plant and equipment........................... $11,647
=======
</Table>
F-64
<Page>
TAYLOR PUBLISHING COMPANY AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 3, 1999
4. ACCRUED EXPENSES
A summary of accrued expenses at September 3, 1999 follows (in thousands):
<Table>
Salaries, wages and incentive compensation payable.......... $1,090
Accrued pension cost........................................ 1,029
Accrued taxes other than income............................. 510
Accrued salesmens' commissions.............................. 2,389
Accrued compensated absences................................ 1,463
Accrued severance........................................... 243
Current portion of long-term liabilities.................... 188
Accrued legal settlement.................................... 497
Other accrued expenses...................................... 1,027
------
$8,436
======
</Table>
5. PENSION PLANS
Certain salaried employees of the Company are covered by defined benefit
pension plans established and administered by Insilco. Certain hourly employees
of the Company are covered by a defined benefit pension plan (the Plan)
established by the Company and administered by Insilco. The benefits under these
plans are based primarily on employees' years of service and compensation near
retirement. The funding policies for these plans are consistent with the funding
requirements of Federal laws and regulations. The Plan assets are primarily
invested in a money market account.
A summary of the Plan's funded status and the amount recognized in the
balance sheet at June 30, 1999, a summary of pension activity for the year ended
June 30, 1999, and key assumptions used in determining the accounting for the
Plan follows (in thousands):
<Table>
Projected benefit obligation................................ $9,126
Fair value of plan assets................................... 8,646
------
Funded status........................................... (480)
Unrecognized net actuarial loss............................. 166
------
Accrued benefit cost........................................ $ (314)
======
</Table>
<Table>
Weighted average assumptions as of June 30, 1999:
Discount rate........................................... 7.25%
Expected return on plan assets.......................... 10.00%
Rate of compensation increase........................... 4.50%
======
</Table>
F-65
<Page>
TAYLOR PUBLISHING COMPANY AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 3, 1999
5. PENSION PLANS (CONTINUED)
The net periodic benefit cost for the 12-month period ended June 30, 1999
includes the following components:
<Table>
Service cost................................................ $ 378
Interest cost............................................... 622
Expected return on plan assets.............................. (828)
Recognized net actuarial loss............................... 68
------
Net periodic benefit cost................................. $ 240
======
</Table>
In addition, the Company recognized pension costs of approximately $180,000
for the year ended September 3, 1999 related to contributions to the
multi-employer plans covering collectively bargained employees.
Insilco sponsors a qualified defined contribution 401(k) plan, which covers
substantially all non-union employees of the Company. The Company matches 50% of
non-union participants' voluntary contributions up to a maximum of 3% of the
participants' compensation. The Company's expense was approximately $324,000 for
the year ended September 3, 1999.
6. INTEREST EXPENSE
Interest expense primarily consists of a capital charge from Insilco
calculated as 10% of the difference between total assets and current
liabilities, as defined, and amounts to approximately $2,512,000 for the year
ended September 3, 1999. In addition, the Company pays yearbook customers
interest at 6% to 7% on amounts received by the Company above the required
minimum deposit. The interest on these excess deposits amounted to approximately
$647,000 for the year ending September 3, 1999.
7. INCOME TAXES
There was no income tax expense for the year ended September 3, 1999.
Actual income tax expense of zero differs from the amount computed by
applying the Federal statutory rate to pretax income due to the following (in
thousands):
<Table>
Computed statutory tax expense.............................. $ 812
State taxes, net of Federal effect.......................... 16
Other, net.................................................. 36
Change in valuation allowance............................... (864)
-----
Income tax expense...................................... $ --
=====
</Table>
F-66
<Page>
TAYLOR PUBLISHING COMPANY AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 3, 1999
7. INCOME TAXES (CONTINUED)
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and liabilities at September 3, 1999 follow
(in thousands):
<Table>
Deferred tax assets
Accrued liabilities..................................... $ 1,776
Inventories............................................. 274
Receivables............................................. 260
Intangible assets....................................... 153
Net operating loss carry-forwards....................... 1,772
-------
Total gross deferred tax assets..................... 4,235
Less valuation allowance.................................... (3,082)
-------
Net deferred tax assets............................. 1,153
-------
Deferred tax liabilities
Property, plant and equipment........................... 1,153
-------
Net deferred tax asset.............................. $ --
=======
</Table>
The net reduction in the valuation allowance for deferred tax assets for the
year ended September 3, 1999 was $864,000.
The IRS is presently examining the consolidated Federal income tax returns
of Insilco for tax years 1991 through 1996. Management believes that the
ultimate outcome of this examination will not have a material adverse effect on
the financial condition, results of operations or liquidity of the Company.
8. RELATED PARTY TRANSACTIONS
Insilco provides services to the Company including management, human
resources, accounting and reporting, legal and other corporate services. These
expenses are either actual expenses incurred by Insilco on behalf of the Company
or are charged to the Company based on certain financial measures such as number
of employees and forecasted sales.
Insilco utilizes a centralized cash management system. As a result, the
Company carries minimal cash. Distributions are funded by Insilco upon demand
and cash receipts are transferred to Insilco daily. The amount due to Parent is
subject to an intercompany note agreement. Under the terms of the note
agreement, the amount due to Parent is payable on demand, or if no demand, is
made, in November 2004, except that until such time as the outstanding
obligations of Insilco under a bank credit agreement (see note 9) have been paid
in full. Insilco has agreed not to demand payment without the prior consent of
the requisite lenders, as defined in the bank credit agreement. Accordingly, the
amount due to Parent is reported as a noncurrent liability in the accompanying
consolidated financial statements.
See note 1(g) for information regarding the Company's income tax sharing
arrangement with Insilco and note 9 regarding arrangements between the Company
and Insilco relating to certain litigation.
F-67
<Page>
TAYLOR PUBLISHING COMPANY AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 3, 1999
9. COMMITMENTS AND CONTINGENCIES
Rental expense for all operating leases totaled $1,502,000 for the year
ended September 3, 1999. These leases primarily relate to production facilities,
storage facilities and equipment.
Future minimum lease payments under contractually noncancellable operating
leases (with initial lease terms in excess of one year) for years subsequent to
September 3, 1999 are as follows (in thousands): 2000, $919; 2001, $766; 2002,
$763; 2003, $625; 2004, $300; and thereafter, $1,058.
The Company, along with the other wholly-owned domestic subsidiaries of
Insilco, are guarantors of borrowings under a $300,000,000 bank credit agreement
of Insilco, which terminates in 2005. The borrowings under the bank credit
agreement are secured by all of the Company's and other wholly-owned domestic
subsidiaries' assets.
The Company, along with the other wholly-owned domestic subsidiaries of
Insilco, are also the unconditional joint and several guarantors of
$120 million of 12% notes sold by Insilco in November 1998. The Company's
guarantee of the 12% notes is a general unsecured obligation, is subordinated in
right of payment to all existing and future senior indebtedness of the Company
(including indebtedness of the bank credit facility) and will rank senior in
right of payment to any future subordinated indebtedness of the Company.
In 1998, a $497,000 judgment relating to an Equal Employee Opportunity
Commission claim was rendered against the Company. The case is currently under
appeal. A charge for this amount was recorded during the year ending
September 4, 1998, and the related liability remains in accrued expenses in the
accompanying consolidated balance sheet.
In June 1999, the Company was awarded $25,225,000 in an antitrust lawsuit
against Josten's. However, the court vacated the judgment and awarded Josten's
$50,000 in legal fees to be paid by the Company. The Company has appealed the
Court's second judgment, seeking reinstatement of the first judgment. No amounts
related to these events have been recorded in the accompanying consolidated
financial statements. Effective January 1, 1999, Insilco assumed the rights,
responsibilities and obligations associated with this litigation such that the
ongoing litigation and ultimate outcome of this matter will have no further
impact on the Company's financial position, results of operations or cash flows.
The Company is involved in various other claims and legal actions arising in
the ordinary course of business. In the opinion of management, the ultimate
disposition of these matters discussed above will not have a material adverse
effect on the Company's financial position, results of operations or liquidity.
F-68
<Page>
INDEPENDENT AUDITOR'S REPORT
Board of Directors of
Educational Communications, Inc.
We have audited the accompanying balance sheets of Educational
Communications, Inc. (an Illinois S Corporation) as of December 31, 2000 and
1999, and the related statements of income, changes in stockholders' equity and
cash flows for each of the three years in the period ended December 31, 2000.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Educational
Communications, Inc. as of December 31, 2000 and 1999, and the results of its
operations and its cash flows for each of the three years in the period ended
December 31, 2000 in conformity with accounting principles generally accepted in
the United States.
/s/ Altschuler, Melvoin and Glasser LLP
Chicago, Illinois
February 2, 2001, except for Note 7, as to
which the date is March 30, 2001
F-69
<Page>
EDUCATIONAL COMMUNICATIONS, INC.
BALANCE SHEETS
DECEMBER 31, 2000 AND 1999
<Table>
<Caption>
2000 1999
----------- -----------
ASSETS
Current assets
Cash and cash equivalents............................... $ 1,921,965 $ 1,185,470
Inventories............................................. 99,095 142,755
U.S. government securities.............................. 6,977,350 7,474,944
Prepaid expenses and other current assets............... 392,128 950,901
Deferred publication expenses........................... 190,052 294,151
----------- -----------
9,580,590 10,048,221
----------- -----------
Property and equipment, net................................. 899,658 950,872
----------- -----------
Other assets
Split-dollar life insurance............................. 833,596 833,596
Deposits and other assets............................... 645,964 597,182
----------- -----------
1,479,560 1,430,778
----------- -----------
$11,959,808 $12,429,871
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable........................................ $ 961,934 259,898
Accrued expenses........................................ 389,037 264,257
Deferred publication revenue............................ -- 110,302
----------- -----------
1,350,971 634,457
----------- -----------
Stockholders' equity
Common stock, no par value, 1,000 shares issued and
outstanding........................................... 1,000 1,000
Additional paid-in capital.............................. 450,000 450,000
Retained earnings....................................... 10,157,837 11,344,414
----------- -----------
10,608,837 11,795,414
----------- -----------
$11,959,808 $12,429,871
=========== ===========
</Table>
See accompanying notes
F-70
<Page>
EDUCATIONAL COMMUNICATIONS, INC.
STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
<Table>
<Caption>
2000 1999 1998
----------- ----------- -----------
Net sales............................................. $16,941,507 $12,925,751 $14,373,121
Cost of goods sold.................................... 3,629,734 2,566,020 3,151,292
----------- ----------- -----------
Gross margin.......................................... 13,311,773 10,359,731 11,221,829
Operating expenses.................................... 6,534,793 5,887,524 5,428,553
----------- ----------- -----------
Income from operations................................ 6,776,980 4,472,207 5,793,276
----------- ----------- -----------
Other income
Interest.......................................... 604,115 556,024 612,081
Other income, net................................. 883,742 525,609 296,778
----------- ----------- -----------
1,487,857 1,081,633 908,859
----------- ----------- -----------
Income before state income taxes...................... 8,264,837 5,553,840 6,702,135
State income taxes.................................... 145,036 74,486 104,994
----------- ----------- -----------
Net income............................................ $ 8,119,801 $ 5,479,354 $ 6,597,141
=========== =========== ===========
</Table>
See accompanying notes
F-71
<Page>
EDUCATIONAL COMMUNICATIONS, INC.
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
<Table>
<Caption>
COMMON ADDITIONAL RETAINED
STOCK PAID-IN CAPITAL EARNINGS TOTAL
-------- --------------- ----------- -----------
Balance, January 1, 1998..................... $1,000 $450,000 $11,267,919 $11,718,919
Net income................................... 6,597,141 6,597,141
Distributions................................ (6,000,000) (6,000,000)
------ -------- ----------- -----------
Balance, December 31, 1998................... 1,000 450,000 11,865,060 12,316,060
Net income................................... 5,479,354 5,479,354
Distributions................................ (6,000,000) (6,000,000)
------ -------- ----------- -----------
Balance, December 31, 1999................... 1,000 450,000 11,344,414 11,795,414
Net income................................... 8,119,801 8,119,801
Distributions................................ (9,306,378) (9,306,378)
------ -------- ----------- -----------
BALANCE, DECEMBER 31, 2000................... $1,000 $450,000 $10,157,837 $10,608,837
====== ======== =========== ===========
</Table>
See accompanying notes
F-72
<Page>
EDUCATIONAL COMMUNICATIONS, INC.
STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
<Table>
<Caption>
2000 1999 1998
------------ ----------- -----------
OPERATING ACTIVITIES
Net income........................................ $ 8,119,801 $ 5,479,354 $ 6,597,141
Depreciation and amortization..................... 82,486 121,962 113,281
Gain on sale of assets............................ (11,913)
Changes in
Inventories................................... 43,660 9,496 (48,658)
Prepaid expenses and other current assets..... 558,773 (646,813) 52,404
Deferred publication expenses................. 104,098 (134,130) 45,090
Deposits and other assets..................... (48,782) 77,116 (69,587)
Accounts payable.............................. 702,036 149,357 (595,908)
Accrued expenses.............................. 124,780 (11,618) 37,094
Deferred publication revenue.................. (110,302) 110,302
------------ ----------- -----------
NET CASH PROVIDED BY OPERATING ACTIVITIES......... 9,576,550 5,155,026 6,118,944
------------ ----------- -----------
INVESTING ACTIVITIES
Purchases of property and equipment............... (31,272) (30,599) (26,895)
Proceeds from sale of property.................... 6,000
Purchases of U.S. government securities........... (16,002,405) (7,456,094) (8,940,237)
Proceeds from maturities of U.S. government
securities...................................... 16,500,000 8,850,000 8,000,000
------------ ----------- -----------
NET CASH PROVIDED BY (USED IN) INVESTING
ACTIVITIES...................................... 466,323 1,363,307 (961,132)
------------ ----------- -----------
FINANCING ACTIVITIES
Distributions..................................... (9,306,378) (6,000,000) (6,000,000)
------------ ----------- -----------
NET CASH USED IN FINANCING ACTIVITIES............. (9,306,378) (6,000,000) (6,000,000)
------------ ----------- -----------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS...... 736,495 518,333 (842,188)
CASH AND CASH EQUIVALENTS
Beginning of year................................. 1,185,470 667,137 1,509,325
------------ ----------- -----------
END OF YEAR....................................... $ 1,921,965 $ 1,185,470 $ 667,137
============ =========== ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
State income taxes paid........................... $ 56,036 $ 86,486 $ 89,994
============ =========== ===========
</Table>
See accompanying notes
F-73
<Page>
EDUCATIONAL COMMUNICATIONS, INC.
NOTES TO THE FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
1. NATURE OF OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES
NATURE OF OPERATIONS--Educational Communications, Inc. (the "Company") is a
publisher serving the achievement publications niche of the specialty directory
publishing industry nationwide. The Company produces three publications,
entitled "WHO'S WHO AMONG AMERICAN HIGH SCHOOL STUDENTS," "THE NATIONAL DEAN'S
LIST," and "WHO'S WHO AMONG AMERICA'S TEACHERS."
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 amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
CASH AND CASH EQUIVALENTS--The Company considers short-term, highly liquid
investments purchased with original maturities of three months or less to be
cash equivalents. At December 31, 2000 and 1999, the Company had cash accounts
at a commercial bank that are insured by the Federal Deposit Insurance
Corporation (FDIC) up to $100,000. Account balances exceed the $100,000 FDIC
limit.
INVENTORIES--Inventories are valued at the lower of cost or market under the
first-in, first-out (FIFO) method.
PROPERTY AND EQUIPMENT--Property and equipment are valued at cost and
depreciated using the straight line method over the estimated useful lives of
the assets. Maintenance and repairs are charged to income as incurred.
Expenditures that significantly extend the useful lives of assets are
capitalized.
U.S. GOVERNMENT SECURITIES--U.S. government securities consist of U.S.
Treasury bills and notes that are carried at amortized cost, which approximates
market value. The Company intends to hold these securities to maturity, which is
typically 24 months or less. All such securities will mature during 2001.
OTHER INCOME--Other income primarily consists of fees received from a bank
credit card company for licensing of the Company's publication names.
INCOME TAXES--The Company has elected to be treated as an S corporation
under the provisions of the Internal Revenue Code. Under those provisions, the
Company does not pay federal corporate income taxes on its taxable income. The
stockholders are liable for individual income taxes on their respective shares
of the Company's taxable income. State income taxes are provided for because
they remain an obligation of the Company.
REVENUE AND EXPENSE RECOGNITION OF PUBLICATIONS--Revenue is recognized on
publications (and other merchandise) upon shipment to the customer. The direct
costs incurred for publications are deferred until shipment occurs, as well. All
indirect costs, including solicitation costs, are expensed as incurred.
F-74
<Page>
EDUCATIONAL COMMUNICATIONS, INC.
NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
2. INVENTORIES
Inventories at December 31, 2000 and 1999 consist of:
<Table>
<Caption>
2000 1999
-------- --------
Books....................................................... $32,642 $ 37,642
Collateral.................................................. 56,859 93,906
Postage..................................................... 5,035 3,710
Stationery.................................................. 4,559 7,497
------- --------
$99,095 $142,755
======= ========
</Table>
3. PROPERTY AND EQUIPMENT, NET
Property and equipment at December 31, 2000 and 1999 consist of:
<Table>
<Caption>
2000 1999 ESTIMATED LIFE
----------- ----------- --------------
Land........................................... $ 129,556 $ 129,556
Buildings and improvements..................... 1,526,301 1,526,301 15-39 years
Office equipment............................... 738,672 724,976 3-5 years
Furniture and fixtures......................... 374,064 374,064 5-7 years
Autos.......................................... 41,811 39,910 5 years
----------- -----------
2,810,404 2,794,807
Accumulated depreciation and amortization...... (1,910,746) (1,843,935)
----------- -----------
$ 899,658 $ 950,872
=========== ===========
</Table>
4. SPLIT-DOLLAR LIFE INSURANCE
The Company has split-dollar life insurance agreements with two of its
officers/stockholders. The Company's interest in the agreements is the total
premiums paid by the Company upon termination of the policy or upon death of the
insured.
5. EMPLOYEE BENEFIT PLAN
The Company sponsors a qualified employee profit-sharing plan for the
benefit of eligible employees of the Company. The Company may make annual
discretionary contributions to the plan. The Company recorded profit-sharing
plan contribution expense of $119,398, $91,818 and $80,002, respectively, for
2000, 1999 and 1998.
6. ADVERTISING
The Company incurs advertising and promotion costs in conjunction with the
solicitation of sales. These costs, consisting primarily of printing and
postage, are expensed as incurred. These advertising and promotion costs are
included in operating expenses and amounted to $3,666,054, $3,030,104 and
$2,886,095, respectively, for 2000, 1999 and 1998.
7. SUBSEQUENT EVENT
On March 30, 2001, Honors Acquisition Corp., a subsidiary of American
Achievement Corp., purchased all of the Company's common stock. As a result, the
S corporation income tax status (Note 1) of the Company was terminated as of
that date.
F-75
<Page>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
PROSPECTUS DATED ,
$177,000,000
AMERICAN ACHIEVEMENT CORPORATION
OFFER TO EXCHANGE
11 5/8 SENIOR NOTES DUE 2007, SERIES B
FOR ANY AND ALL OUTSTANDING
11 5/8 SENIOR NOTES DUE 2007, SERIES A
-----------
PROSPECTUS
--------------
- --------------------------------------------------------------------------------
We have not authorized any dealer, salesperson or other person to give you
written information other than this prospectus or to make representations as to
matters not stated in this prospectus. You must not rely on unauthorized
information. This prospectus is not an offer to sell these securities or our
solicitation of your offer to buy the securities in any jurisdiction where that
would not be permitted or legal. Neither the delivery of this prospectus nor any
sales made hereunder after the date of this prospectus shall create an
implication that the information contained herein or the affairs of American
Achievement have not changed since the date hereof.
- --------------------------------------------------------------------------------
Until (90 days from the date of this prospectus), all dealers
effecting transactions in the securities, whether or not participating in this
exchange offer, may be required to deliver a prospectus.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<Page>
PART II
INFORMATION NOT REQUIRED IN THE PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS
INDEMNIFICATION UNDER THE DELAWARE GENERAL CORPORATION LAW
Section 145 of the Delaware General Corporation Law ("DGCL"), authorizes a
corporation to indemnify any person who was or is a party, or is threatened to
be made a party, to any threatened, pending or completed action, suit or
proceeding, whether civil, criminal, administrative or investigative, by reason
of the fact that the person is or was a director, officer, employee or agent of
the corporation, or is or was serving at the request of the corporation as a
director, officer, employee or agent of another corporation, partnership, joint
venture, trust or other enterprise, against expenses, including attorneys' fees,
judgments, fines and amounts paid in settlement actually and reasonably incurred
by the person in connection with such action, suit or proceeding, if the person
acted in good faith and in a manner the person reasonably believed to be in, or
not opposed to, the best interests of the corporation and, with respect to any
criminal action or proceeding, had no reasonable cause to believe the person's
conduct was unlawful. In addition, the Delaware General Corporation Law does not
permit indemnification in any threatened, pending or completed action or suit by
or in the right of the corporation in respect of any claim, issue or matter as
to which such person shall have been adjudged to be liable to the corporation,
unless and only to the extent that the court in which such action or suit was
brought shall determine upon application that, despite the adjudication of
liability, but in view of all the circumstances of the case, such person is
fairly and reasonably entitled to indemnity for such expenses, which such court
shall deem proper. To the extent that a present or former director or officer of
a corporation has been successful on the merits or otherwise in defense of any
action, suit or proceeding referred to above, or in defense of any claim, issue
or matter, such person shall be indemnified against expenses, including
attorneys' fees, actually and reasonably incurred by such person. Indemnity is
mandatory to the extent a claim, issue or matter has been successfully defended.
The Delaware General Corporation Law also allows a corporation to provide for
the elimination or limit of the personal liability of a director to the
corporation or its stockholders for monetary damages for breach of fiduciary
duty as a director, provided that such provision shall not eliminate or limit
the liability of a director
(1) for any breach of the director's duty of loyalty to the corporation or its
stockholders,
(2) for acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law,
(3) for unlawful payments of dividends or unlawful stock purchases or
redemptions, or
(4) for any transaction from which the director derived an improper personal
benefit.
These provisions will not limit the liability of directors or officers under
the federal securities laws of the United States.
INDEMNIFICATION UNDER THE BY-LAWS OF AMERICAN ACHIEVEMENT CORPORATION,
COMMEMORATIVE BRANDS, INC., CBI NORTH AMERICA, INC., TAYLOR SENIOR HOLDING CORP.
AND TP HOLDING CORP.
The by-law provisions of American Achievement Corporation, Commemorative
Brands, Inc., CBI North America, Inc., Taylor Senior Holding Corp. and TP
Holding Corp. relating to indemnification of Officers and Directors are
substantially identical. Accordingly, the description below of "American
Achievement Corporation" or "American" applies to each of American Achievement
Corporation,
II-1
<Page>
Commemorative Brands, Inc., CBI North America, Inc., Taylor Senior Holding Corp.
and TP Holding Corp.
Section 1 of Article VI of the Company's By-Laws provides that, unless
otherwise determined by the Board of Directors, the Company shall, to the
fullest extent permitted by the DGCL (including, without limitation,
Section 145 thereof) or other provisions of the laws of Delaware relating to
indemnification of directors, officers, employees and agents, as the same may be
amended and supplemented from time to time, indemnify any and all such persons
whom it shall have power to indemnify under the DGCL or such other provisions of
law.
Section 2 of Article VI of the Company's By-Laws provides that, without
limiting the generality of Section 1 of Article VI, to the fullest extent
permitted, and subject to the conditions imposed, by law, and pursuant to
Section 145 of the DGCL, unless otherwise determined by the Board of Directors,
the Company shall indemnify any person who was or is a party or is threatened to
be made a party to any threatened, pending or completed action, suit or
proceeding whether civil, criminal, administrative or investigative (other than
an action by or in the right of the Company) by reason of the fact that such
person is or was a director, officer, employee or agent of the Company, or is or
was serving at the request of the Company as a director, officer, employee or
agent of another corporation, partnership, joint venture, trust or other
enterprise against reasonable expenses (including attorneys' fees), judgments,
fines and amounts paid in settlement actually and reasonably incurred by him in
connection with such action, suit or proceeding if such person acted in good
faith and in a manner he reasonably believed to be in or not opposed to the best
interests of the Company, and, with respect to any criminal action or
proceeding, had no reasonable cause to believe his conduct was unlawful; and
that the Company shall indemnify any person who was or is a party or is
threatened to be made a party to any threatened, pending or completed action or
suit by or in the right of the Company to procure a judgment in its favor by
reason of the fact that such person is or was a director, officer, employee or
agent of the Company, or is or was serving at the request of the Company as a
director, officer, employee or agent of another Company, partnership, joint
venture, trust or other enterprise against reasonable expenses (including
attorneys' fees) actually and reasonably incurred by him in connection with the
defense or settlement of such action or suit if such person acted in good faith
and in a manner he reasonably believed to be in or not opposed to the best
interests of the Company, except as otherwise provided by law.
Section 3 of Article VI of the Company's By-Laws provides that, to the
fullest extent permitted by law, indemnification may be granted, and expenses
may be advanced, to the persons described in Section 145 of the DGCL or other
provisions of the laws of Delaware relating to indemnification and advancement
of expenses, as from time to time may be in effect, by (i) a resolution of
stockholders, (ii) a resolution of the Board of Directors, or (iii) an agreement
providing for such indemnification and advancement of expenses.
Section 4 of Article VI of the Company's By-Laws provides that, it is the
intent of Article VI to require the Company, unless otherwise determined by the
Board of Directors, to indemnify the persons referred to therein for judgments,
fines, penalties, amounts paid in settlement and reasonable expenses (including
attorneys' fees), and to advance expenses to such persons, in each and every
circumstance in which such indemnification and such advancement of expenses
could lawfully be permitted by express provision of By-Laws, and the
indemnification and expense advancement provided by this Article VI shall not be
limited by the absence of an express recital of such circumstances. The
indemnification and advancement of expenses provided by, or granted pursuant to,
the Company's By-Laws shall not be deemed exclusive of any other rights to which
a person seeking indemnification or advancement of expenses may be entitled,
whether as a matter of law, under any provision of the Certificate of
Incorporation of the Company, the By-Laws, by agreement, by vote of stockholders
or disinterested
II-2
<Page>
directors of the Company or otherwise, both as to action in his official
capacity and as to action in another capacity while holding such office.
Section 5 of Article VI of the Company's By-Laws provides that
indemnification pursuant to the By-Laws shall inure to the benefit of the heirs,
executors, administrators and personal representatives of those entitled to
indemnification. The indemnification and advancement of expenses provided by or
granted pursuant to Article VI of the Company's By-Laws are not exclusive of any
other rights to which those seeking indemnification or advancement of expenses
may be entitled under any By-Law, agreement, contract, vote of stockholders or
disinterested directors or pursuant to the direction (howsoever embodied) of any
court of competent jurisdiction or otherwise, both as to action in his official
capacity and as to action in another capacity while holding such office, it
being the policy of the Company that indemnification of the persons specified in
Article VI shall be made to the fullest extent permitted by law.
The Company has purchased and maintains insurance on behalf of any person
who is or was a director, officer, employee or agent of the Company, or is or
was a director or officer of the Company serving at the request of the Company
as a director, officer, employee or agent of another Company, partnership, joint
venture, trust, employee benefit plan or other enterprise against any liability
asserted against him and incurred by him in any such capacity, or arising out of
his status as such, whether or not the Company would have the power or the
obligation to indemnify him against such liability under the provisions of
Article VI of the Company's By-Laws.
INDEMNIFICATION UNDER THE BY-LAWS OF TAYLOR PUBLISHING COMPANY
Section 1 of Article VII of Taylor Publishing Company's By-Laws provides
that the corporation shall indemnify any person who was or is a party or is
threatened to be made a party to any threatened, pending or completed action,
suit or proceeding, whether civil, criminal, administrative or investigative by
reason of the fact that he or she is or was a director, officer, employee, agent
or fiduciary of the corporation, or is or was serving at the request of the
corporation as a director, officer, employee, agent or fiduciary of another
corporation, partnership, joint venture, trust, employee benefit plan or other
enterprise, against expenses (including attorneys' fees), judgments, fines and
amounts paid in settlement actually and reasonably incurred by such person in
connection with such action, suit or proceeding (and advance expenses to such
person in connection with such action) to the fullest extent permitted under the
laws of the state of Delaware now or hereafter in existence, including
Section 145 of the Delaware General Corporation Law as currently in existence or
as subsequently amended, modified, supplemented or replaced (but, in case of any
such amendment, modification, supplementation or replacement, only to the extent
that such amendment, modification, supplementation or replacement broadens such
person's rights to indemnification thereunder). Section 2 of Article VII
provides that the rights to receive indemnification and advancement of expenses
provided in Article VII of these By-laws shall not be deemed exclusive of any
other rights to which any person may at any time be entitled under applicable
law, the certificate of incorporation of the corporation, the By-laws, any
agreement, a vote of stockholders, a resolution of the board of directors or
otherwise. No amendment, alteration or repeal of Article VII or any provision
under the By-laws shall be effective as to any person in respect of any act,
event or circumstance that occurred or existed, in whole or in part, before such
amendment, alteration or repeal.
INDEMNIFICATION UNDER THE DELAWARE REVISED UNIFORM LIMITED PARTNERSHIP ACT
AND THE PARTNERSHIP AGREEMENT OF TAYLOR PRODUCTION SERVICES COMPANY, L.P.
Subject to any terms, conditions or restrictions set forth in the
partnership agreements, Section 17-108 of the Delaware Revised Uniform Limited
Partnership Act empowers a Delaware
II-3
<Page>
limited partnership to indemnify and hold harmless a partner or other persons
from and against all claims and demands whatsoever. The partnership agreement of
Taylor Production Services Company, L.P. does not contain any indemnification
provisions or limitations thereon.
INDEMNIFICATION UNDER THE BY-LAWS OF EDUCATIONAL COMMUNICATIONS, INC.
Section 1(a) of Article XI of Educational Communications, Inc. ("ECI")'s
By-Laws provides that, subject to the provisions of Section 3 of Article XI, ECI
shall indemnify any person who was or is a party, or is threatened to be made a
party to any threatened, pending or completed action, suit or proceeding,
whether civil, criminal, administrative or investigative (other than an action
by or in the right of the corporation), by reason of the fact that he is or was
a director, officer, employee or agent of the corporation, or who was serving at
the request of the corporation as a director, officer, employee or agent of
another corporation, partnership, joint venture, trust or other enterprise,
against expenses (including attorneys' fees), judgments, fines and amounts paid
in settlement actually and reasonably incurred by him in connection with such
action, suit or proceeding if he acted in good faith and in a manner he
reasonably believed to be in, or not opposed to the best interests of the
corporation, and with respect to any criminal action or proceeding, had no
reasonable cause to believe his conduct was unlawful. The termination of any
action, suit or proceeding by judgment, order, settlement, conviction, or upon a
plea of nolo contendere or its equivalent, shall not, of itself, create a
presumption that the person did not act in good faith and in a manner which he
reasonably believed to be in or not opposed to the best interests of the
corporation, and, with respect to any criminal action or proceeding, had
reasonable cause to believe that his conduct was unlawful.
Section 1(b) of Article XI provides that, subject to the provisions of
Section 3 of Article XI, ECI shall indemnify any person who was or is a party,
or is threatened to be made a party to any threatened, pending or completed
action or suit by or in the right of the corporation to procure a judgment in
its favor by reason of the fact that he is or was a director, officer, employee
or agent of the corporation, or is or was serving at the request of the
corporation as a director, officer, employee or agent of another corporation,
partnership, joint venture, trust or other enterprise against expenses
(including attorneys' fees) actually and reasonably incurred by him in
connection with the defense or settlement of such action or suit if he acted in
good faith and in a manner he reasonably believed to be in or not opposed to the
best interests of the corporation and except that no indemnification shall be
made in respect of any claim, issue or matter as to which such person shall have
been adjudged to be liable for negligence or misconduct in the performance of
his duty to the corporation, unless, and only to the extent that the court in
which such action or suit was brought shall determine upon application that,
despite the adjudication of liability, but in view of all the circumstances of
the case, such person is fairly and reasonably entitled to indemnity for such
expenses as the court shall deem proper.
Section 2 of Article XI provides that, to the extent that a director,
officer, employee or agent of the corporation has been successful, on the merits
or otherwise, in defense of any action, suit or proceeding referred to in
subsections (a) and (b) of Section 1 of Article XI, or in defense of any claim,
issue or matter therein, he shall be indemnified against expenses (including
attorneys' fees) actually and reasonably incurred by him in connection
therewith.
Section 3 of Article XI provides that any indemnification under subsections
(a) and (b) of Section 1 (unless ordered by a court) shall be made by the
corporation only as authorized in the specific case, upon a determination that
indemnification of the director, officer, employee or agent is proper in the
circumstances because he has met the applicable standard of conduct set forth in
subsections (a) and (b). Such determination shall be made (1) by the board of
directors by a majority vote of a quorum consisting of directors who were not
parties to such action, or (2) if such a quorum is
II-4
<Page>
not obtainable, or, even if obtainable, a quorum of disinterested directors so
directs, by independent legal counsel in a written opinion, or (3) by the
shareholders.
Section 4 of Article XI provides that expenses incurred in defending a civil
or criminal action may be paid by the corporation in advance of the final
disposition of such action, as authorized by the board of directors in the
specific case, upon receipt of any undertaking by or on behalf of the director,
officer, employee or agent to repay such amount, unless it shall ultimately be
determined that he is entitled to be indemnified.
Section 5 of Article XI provides that the indemnification provided by
Article XI shall not be deemed exclusive of any other rights to which those
seeking indemnification may be entitled under any by-law, agreement, vote of
shareholders or disinterested directors or, otherwise, both as to action in his
official capacity and as to action in another capacity while holding such
office, and shall continue as to a person who has ceased to be a director,
officer, employee or agent, and shall inure to the benefit of the heirs,
executors and administrators of such a person.
INDEMNIFICATION UNDER THE ILLINOIS BUSINESS CORPORATION ACT WITH RESPECT TO ECI
In general, Section 8.75 of the Illinois Business Corporation Act empowers
Illinois corporations to indemnify any person who was or is a party or is
threatened to be made a party to any threatened, pending or completed action,
suit or proceeding, whether civil, criminal, administrative or investigative by
reason of the fact that the person is or was a director, officer, employee or
agent of the registrant, or is or was serving at the request of the registrant
as a director, officer, employee or agent of another corporation, partnership,
joint venture, trust or other enterprise, against expenses (including attorneys'
fees), judgments, fines and amounts paid in settlement actually and reasonably
incurred by such person in connection with such action, suit or proceeding, so
long as such person acted in good faith and in a manner such person reasonably
believed to be in or not opposed to the best interests of the registrant and,
with respect to any criminal action or proceeding, had no reasonable cause to
believe his or her conduct was unlawful. For actions or suits by or in the right
of the registrant, no indemnification is permitted in respect of any claim,
issue or matter as to which such person is adjudged to be liable to the
registrant, unless, and only to the extent that, the court in which such action
or suit was brought determines upon application that, despite the adjudication
of liability but in view of all the circumstances of the case, such person is
fairly and reasonably entitled to indemnity for such expenses which the court
deems proper. Any indemnification (unless ordered by a court) will be made by
the registrant only as authorized in the specific case upon a determination that
indemnification of the director, officer, employee or agent is proper in the
circumstances because the person has met the applicable standard of conduct set
forth above. Such determination shall be made (a) by the board of directors by a
majority vote of a quorum consisting of the directors who are not parties to
such action, suit or proceeding, or (b) if such a quorum is not obtainable or if
such directors so direct, by independent legal counsel in a written opinion, or
(c) by the stockholders. Such indemnification is not exclusive of any other
rights to which those indemnified may be entitled under any by-laws, agreement,
vote of stockholders or otherwise.
Section 8.75 also authorizes the registrant to buy directors' and officers'
liability insurance and gives a director, officer, employee or agent of the
registrant, or a person who is or was serving at the request of the registrant
as a director, officer, employee or agent of another corporation, partnership,
joint venture, trust or other enterprise, against any liability asserted against
such person and incurred by such person in any capacity, or arising out of the
person's status as such, whether or not the registrant has the power to
indemnify the person against such liability.
II-5
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ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
<Table>
<Caption>
EXHIBIT
NUMBER DESCRIPTION
- --------------------- ------------------------------------------------------------
1.1 Purchase Agreement, dated as of February 14, 2002, among
American Achievement Corporation, the Guarantors and the
Initial Purchasers
3.1 Certificate of Incorporation of American Achievement
Corporation with all amendments
(f/k/a Commemorative Brands Holding Corp.)
3.2 By-Laws of American Achievement Corporation (f/k/a
Commemorative Brands Holding Corp.)
3.3 Certificate of Incorporation of Commemorative Brands, Inc.
with all amendments (f/k/a Scholastic Brands, Inc., Class
Rings, Inc. and Keepsake Jewelry, Inc.)
3.4 By-Laws of Commemorative Brands, Inc. (f/k/a Scholastic
Brands, Inc., Class Rings, Inc. and Keepsake Jewelry, Inc.)
3.5 Certificate of Incorporation of CBI North America, Inc. with
all amendments (f/k/a SBI North America, Inc.)
3.6 By-Laws of CBI North America, Inc. with all amendments
(f/k/a SBI North America, Inc.)
3.7 Certificate of Incorporation of Taylor Senior Holding Corp.
3.8 By-Laws of Taylor Senior Holding Corp.
3.9 Amended and Restated Certificate of Incorporation of TP
Holding Corp. (f/k/a TP Acquisition Corp.)
3.10 By-Laws of TP Holding Corp. (f/k/a TP Acquisition Corp.)
3.11 Certificate of Incorporation of Taylor Publishing Company
with all amendments (f/k/a Taylor Publishing Company of
Delaware)
3.12 By-Laws of Taylor Publishing Company (f/k/a Taylor
Publishing Company of Delaware)
3.13 Certificate of Limited Partnership of Taylor Production
Services Company, L.P.
3.14 Taylor Production Services Company, L.P. Limited Partnership
Agreement
3.15 Articles of Incorporation of Educational Communications,
Inc. with all amendments (f/k/a Merit Publishing Company)
3.16 By-Laws of Educational Communications, Inc.
4.1 Indenture, dated as of February 20, 2002, among American
Achievement Corporation, The Bank of New York, as Trustee,
and the Guarantors
4.2 Form of 11 5/8 Senior Notes due 2007 (included in Exhibit
4.1)
4.3 Registration Rights Agreement, dated as of February 20,
2002, among American Achievement Corporation, the Guarantors
and the Initial Purchasers
4.4 Form of Guarantee (included in Exhibit 4.1)
4.5 Form of Indenture dated as of December 16, 1996 between
Commemorative Brands, Inc. and HSBC Bank USA (f/k/a Marine
Midland Bank)
4.6 Form of First Supplemental Indenture, dated as of July 21,
2000, between Commemorative Brands, Inc. and HSBC Bank USA
(f/k/a Marine Midland Bank)
5.1* Opinion of Schulte Roth & Zabel LLP
5.2* Opinion of Schwartz Cooper Greenberger Krauss, Chartered
</Table>
II-6
<Page>
<Table>
<Caption>
EXHIBIT
NUMBER DESCRIPTION
- --------------------- ------------------------------------------------------------
10.1 Credit Agreement, dated as of February 20, 2002, among
American Achievement Corporation, as the Borrower, the
Lenders party thereto and The Bank of Nova Scotia, as the
Administrative Agent for the Lenders
10.2 Gold Consignment Agreement dated July 27, 2000 between
Commemorative Brands, Inc. and The Bank of Nova Scotia
10.3 Subsidiary Pledge and Security Agreement, dated as of
February 20, 2002, made by American Achievement Corporation
in favor of The Bank of Nova Scotia, as administrative agent
for each of the Secured Parties (as defined therein)
10.4 Borrower Pledge and Security Agreement, dated as of
February 20, 2002, made by each domestic subsidiary of
American Achievement Corporation from time to time party
hereto in favor of The Bank of Nova Scotia, as
administrative agent for each of the Secured Parties (as
defined therein)
10.5 Subsidiary Guaranty, dated as of February 20, 2002, made by
each subsidiary of American Achievement Corporation from
time to time party hereto in favor of The Bank of Nova
Scotia, as administrative agent for each of the Secured
Parties (as defined therein)
10.6 Form of The Management Agreement dated as of March 30, 2001
among American Achievement Corporation, its Subsidiaries
listed therein and Castle Harlan, Inc.
10.7 Letter Agreement, dated as of October 11, 2000, amended as
of November 3, 2000, between Scotiabank and TP Holdings
Corp., regarding (i) USD 27,500,000.00MM Interest Rate Swap
Transaction (Ref: S24041) and (ii) USD 25,000,000.00MM
Interest Rate Swap Transaction (Ref: S24042)
10.8 Employment Agreement, dated as of July 13, 1999 by and
between Commemorative Brands, Inc. and David G. Fiore
10.9 First Amendment to the Employment Agreement by and between
Commemorative Brands, Inc. and David G. Fiore dated
February 1, 2002
10.10 Employment Agreement, dated as of December 16, 1996 by and
between Commemorative Brands, Inc. and Sherice P. Bench, as
amended
10.11 Employment Agreement, dated as of December 16, 1996 by and
between Commemorative Brands, Inc. and Donald J. Percenti
10.12 Employment Agreement, dated as of December 16, 1996 by and
between Commemorative Brands, Inc. and Charlyn A. Cook
10.13 American Achievement Corporation 2000 Stock Option Plan
(f/k/a Commemorative Brands Holding Corp. 2000 Stock Option
Plan)
12.1 Statement regarding Computation of Ratios of Earnings to
Fixed Charges of American Achievement Corporation
21 Subsidiaries of American Achievement Corporation
23.1 Consent of Arthur Andersen LLP
23.2 Consent of KPMG LLP
23.3 Consent of Altschuler, Melvoin and Glasser
23.4* Consent of Schulte Roth & Zabel LLP (incorporated by
reference in Exhibit 5.1)
23.5* Consent of Schwartz Cooper Greenberger Krauss, Chartered
(incorporated by reference in Exhibit 5.2)
</Table>
II-7
<Page>
<Table>
<Caption>
EXHIBIT
NUMBER DESCRIPTION
- --------------------- ------------------------------------------------------------
24 Power of Attorney (included on Signature Page of initial
filing)
25 Statement of Eligibility and Qualification on Form T-1 of
The Bank of New York, as Trustee
99.1* Form of Letter of Transmittal
99.2* Form of Notice of Guaranteed Delivery for Outstanding
11 5/8% Senior Notes due 2007, Series A, in exchange for
11 5/8% Senior Notes due 2007, Series B
</Table>
- ---------
* To be filed by amendment
ITEM 22. UNDERTAKINGS.
The undersigned Registrants hereby undertake:
(1) To file, during any period in which offers or sales are being made, a
post-effective amendment to this Registration Statement:
(i) To include any prospectus required by Section 10(a)(3) of the Securities
Act of 1933;
(ii) To reflect in the prospectus any facts or events arising after the
effective date of the Registration Statement, or the most recent
post-effective amendment thereof, which, individually or in the
aggregate, represent a fundamental change in the information set forth
in the Registration Statement. Notwithstanding the foregoing, any
increase or decrease in volume of securities offered, if the total
dollar value of securities offered would not exceed that which was
registered, and any deviation from the low or high end of the estimated
maximum offering range may be reflected in the form of prospectus filed
with the SEC pursuant to Rule 424(b) if, in the aggregate, the changes
in volume and price represent no more than 20 percent change in the
maximum aggregate offering price set forth in the "Calculation of
Registration Fee" table in the effective registration statement;
(iii) To include any material information with respect to the plan of
distribution not previously disclosed in the Registration Statement or
any material change to such information in the Registration Statement;
(2) That, for the purpose of determining any liability under the Securities Act
of 1933, each such post-effective amendment shall be deemed to be a new
registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial
BONA FIDE offering thereof; and
(3) To remove from registration by means of a post-effective amendment any of
the securities being registered which remain unsold at the termination of
the offering.
The undersigned Registrants hereby undertake that:
(1) Prior to any public reoffering of the securities registered hereunder
through use of a prospectus which is a part of this Registration Statement,
by any person or party who is deemed to be an underwriter within the meaning
of Rule 145(c), the issuer undertakes that such reoffering prospectus will
contain the information called for by the applicable registration form with
respect to the reofferings by persons who may be deemed underwriters, in
addition to the information called for by the other items of the applicable
form.
(2) Every prospectus: (i) that is filed pursuant to the immediately preceding
paragraph or (ii) that purports to meet the requirements of
Section 10(a)(3) of the Securities Act and is used in
II-8
<Page>
connection with an offering of securities subject to Rule 415, will be filed
as a part of an amendment to the Registration Statement and will not be used
until such amendment is effective, and that, for purposes of determining any
liability under the Securities Act, each such post-effective amendment shall
be deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
The undersigned Registrants hereby undertake to respond to requests for
information that is incorporated by reference into the prospectus pursuant to
Items 4, 10(b), 11, or 13 of this Form, within one business day of receipt of
such request, and to send the incorporated documents by first class mail or
other equally prompt means. This includes information contained in documents
filed subsequent to the effective date of the Registration Statement through the
date of responding to the request.
The undersigned Registrants hereby undertake to supply by means of a
post-effective amendment all information concerning a transaction, and the
company being acquired involved therein, that was not the subject of and
included in the Registration Statement when it became effective.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the
Registrants pursuant to the foregoing provisions, or otherwise, the Registrants
have been advised that in the opinion of the Commission, such indemnification is
against public policy as expressed in the Securities Act and is, therefore,
unenforceable. In the event that a claim for indemnification against such
liabilities (other than the payment by the Registrant of expenses incurred or
paid by a director, officer or controlling person of the Registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrants will, unless in the opinion of their counsel the
matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by then is
against public policy as expressed in the Securities Act and will be governed by
the final adjudication of such issue.
II-9
<Page>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, American
Achievement Corporation has duly caused this registration statement to be signed
on its behalf by the undersigned, thereunto duly authorized, in the City of
Austin, State of Texas on the 14th day of March, 2002.
<Table>
AMERICAN ACHIEVEMENT CORPORATION
By: /s/ DAVID G. FIORE
-----------------------------------------
Name: David G. Fiore
Title: PRESIDENT, CHIEF EXECUTIVE OFFICER
AND DIRECTOR
</Table>
KNOW ALL MEN BY THESE PRESENTS, that each individual whose signature appears
below constitutes and appoints David G. Fiore, David B. Pittaway and William
Pruellage, and each of them, severally (with full power to act alone) as the
true and lawful attorney-in-fact and agent for the undersigned, with full power
of substitution and resubstitution, for and in the name, place and stead of the
undersigned, in any all capacities, to sign any and all amendments to this
registration statement, and to file the same with all exhibits thereto, and all
documents in connection therewith, with the Securities and Exchange Commission,
granting unto each said attorney-in-fact and agent full power and authority to
do and perform each and every act and thing requisite and necessary to be done
in, and abut the premises, as fully to all intents and purposes as he might or
could do in person, hereby ratifying and confirming all that said
attorney-in-fact and agent or his substitute and substitutes, may lawfully do or
cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons in the
capacities and on the date indicated.
<Table>
<Caption>
SIGNATURE TITLE DATE
--------- ----- ----
/s/ DAVID G. FIORE
------------------------------------------- President, Chief Executive March 14, 2002
David G. Fiore Officer and Director
/s/ SHERICE P. BENCH
------------------------------------------- Chief Financial Officer March 14, 2002
Sherice P. Bench
/s/ JOHN K. CASTLE
------------------------------------------- Director March 14, 2002
John K. Castle
/s/ DAVID B. PITTAWAY
------------------------------------------- Director March 14, 2002
David B. Pittaway
/s/ EDWARD O. VETTER
------------------------------------------- Director March 14, 2002
Edward O. Vetter
/s/ WILLIAM PRUELLAGE
------------------------------------------- Director March 14, 2002
William Pruellage
/s/ ZANE TANKEL
------------------------------------------- Director March 14, 2002
Zane Tankel
</Table>
II-10
<Page>
Pursuant to the requirements of the Securities Act of 1933, Commemorative
Brands, Inc. has duly caused this registration statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of Austin,
State of Texas on the 14th day of March, 2002.
<Table>
COMMEMORATIVE BRANDS, INC.
By: /s/ DAVID G. FIORE
-----------------------------------------
Name: David G. Fiore
Title: CHAIRMAN OF THE BOARD OF DIRECTORS,
PRESIDENT AND CHIEF EXECUTIVE
OFFICER
</Table>
KNOW ALL MEN BY THESE PRESENTS, that each individual whose signature appears
below constitutes and appoints David G. Fiore, David B. Pittaway and William
Pruellage, and each of them, severally (with full power to act alone) as the
true and lawful attorney-in-fact and agent for the undersigned, with full power
of substitution and resubstitution, for and in the name, place and stead of the
undersigned, in any all capacities, to sign any and all amendments to this
registration statement, and to file the same with all exhibits thereto, and all
documents in connection therewith, with the Securities and Exchange Commission,
granting unto each said attorney-in-fact and agent full power and authority to
do and perform each and every act and thing requisite and necessary to be done
in, and about the premises, as fully to all intents and purposes as he might or
could do in person, hereby ratifying and confirming all that said
attorney-in-fact and agent or his substitute and substitutes, may lawfully do or
cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons in the
capacities and on the date indicated.
<Table>
<Caption>
SIGNATURE TITLE DATE
--------- ----- ----
/s/ DAVID G. FIORE Chairman of the Board of
------------------------------------------- Directors, President and March 14, 2002
David G. Fiore Chief Executive Officer
/s/ LEAH BUSH
------------------------------------------- Controller and Director March 14, 2002
Leah Bush
/s/ SHERICE P. BENCH Chief Financial Officer,
------------------------------------------- Secretary, Treasurer and March 14, 2002
Sherice P. Bench Director
</Table>
II-11
<Page>
Pursuant to the requirements of the Securities Act of 1933, CBI North
America, Inc. has duly caused this registration statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of Austin,
State of Texas on the 14th day of March, 2002.
<Table>
CBI NORTH AMERICA, INC.
By: /s/ DAVID G. FIORE
-----------------------------------------
Name: David G. Fiore
Title: CHAIRMAN OF THE BOARD OF
DIRECTORS, PRESIDENT AND CHIEF EXECUTIVE
OFFICER
</Table>
KNOW ALL MEN BY THESE PRESENTS, that each individual whose signature appears
below constitutes and appoints David G. Fiore, David B. Pittaway and William
Pruellage, and each of them, severally (with full power to act alone) as the
true and lawful attorney-in-fact and agent for the undersigned, with full power
of substitution and resubstitution, for and in the name, place and stead of the
undersigned, in any all capacities, to sign any and all amendments to this
registration statement, and to file the same with all exhibits thereto, and all
documents in connection therewith, with the Securities and Exchange Commission,
granting unto each said attorney-in-fact and agent full power and authority to
do and perform each and every act and thing requisite and necessary to be done
in, and about the premises, as fully to all intents and purposes as he might or
could do in person, hereby ratifying and confirming all that said
attorney-in-fact and agent or his substitute and substitutes, may lawfully do or
cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons in the
capacities and on the date indicated.
<Table>
<Caption>
SIGNATURE TITLE DATE
--------- ----- ----
/s/ DAVID G. FIORE Chairman of the Board of
------------------------------------------- Directors, President and March 14, 2002
David G. Fiore Chief Executive Officer
/s/ LEAH BUSH
------------------------------------------- Controller and Director March 14, 2002
Leah Bush
/s/ SHERICE P. BENCH Chief Financial Officer,
------------------------------------------- Secretary, Treasurer and March 14, 2002
Sherice P. Bench Director
</Table>
II-12
<Page>
Pursuant to the requirements of the Securities Act of 1933, Taylor Senior
Holding Corp. has duly caused this registration statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of Dallas,
State of Texas on the 14th day of March, 2002.
<Table>
TAYLOR SENIOR HOLDING CORP.
By: /s/ DAVID G. FIORE
-----------------------------------------
Name: David G. Fiore
Title: CHAIRMAN OF THE BOARD OF
DIRECTORS, PRESIDENT AND CHIEF EXECUTIVE
OFFICER
</Table>
KNOW ALL MEN BY THESE PRESENTS, that each individual whose signature appears
below constitutes and appoints David G. Fiore, David B. Pittaway and William
Pruellage, and each of them, severally (with full power to act alone) as the
true and lawful attorney-in-fact and agent for the undersigned, with full power
of substitution and resubstitution, for and in the name, place and stead of the
undersigned, in any all capacities, to sign any and all amendments to this
registration statement, and to file the same with all exhibits thereto, and all
documents in connection therewith, with the Securities and Exchange Commission,
granting unto each said attorney-in-fact and agent full power and authority to
do and perform each and every act and thing requisite and necessary to be done
in, and about the premises, as fully to all intents and purposes as he might or
could do in person, hereby ratifying and confirming all that said
attorney-in-fact and agent or his substitute and substitutes, may lawfully do or
cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons in the
capacities and on the date indicated.
<Table>
<Caption>
SIGNATURE TITLE DATE
--------- ----- ----
/s/ DAVID G. FIORE Chairman of the Board of
------------------------------------------- Directors, President and March 14, 2002
David G. Fiore Chief Executive Officer
/s/ STEVE BAUER
------------------------------------------- Controller and Director March 14, 2002
Steve Bauer
/s/ SHERICE P. BENCH Chief Financial Officer,
------------------------------------------- Secretary, Treasurer and March 14, 2002
Sherice P. Bench Director
</Table>
II-13
<Page>
Pursuant to the requirements of the Securities Act of 1933, TP Holding Corp.
has duly caused this registration statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Dallas, State of Texas on
the 14th day of March, 2002.
<Table>
TP HOLDING CORP.
By: /s/ DAVID G. FIORE
-----------------------------------------
Name: David G. Fiore
Title: CHAIRMAN OF THE BOARD OF
DIRECTORS, PRESIDENT AND CHIEF EXECUTIVE
OFFICER
</Table>
KNOW ALL MEN BY THESE PRESENTS, that each individual whose signature appears
below constitutes and appoints David G. Fiore, David B. Pittaway and William
Pruellage, and each of them, severally (with full power to act alone) as the
true and lawful attorney-in-fact and agent for the undersigned, with full power
of substitution and resubstitution, for and in the name, place and stead of the
undersigned, in any all capacities, to sign any and all amendments to this
registration statement, and to file the same with all exhibits thereto, and all
documents in connection therewith, with the Securities and Exchange Commission,
granting unto each said attorney-in-fact and agent full power and authority to
do and perform each and every act and thing requisite and necessary to be done
in, and about the premises, as fully to all intents and purposes as he might or
could do in person, hereby ratifying and confirming all that said
attorney-in-fact and agent or his substitute and substitutes, may lawfully do or
cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons in the
capacities and on the date indicated.
<Table>
<Caption>
SIGNATURE TITLE DATE
--------- ----- ----
/s/ DAVID G. FIORE Chairman of the Board of
------------------------------------------- Directors, President and March 14, 2002
David G. Fiore Chief Executive Officer
/s/ STEVE BAUER
------------------------------------------- Controller and Director March 14, 2002
Steve Bauer
/s/ SHERICE P. BENCH Chief Financial Officer,
------------------------------------------- Secretary, Treasurer and March 14, 2002
Sherice P. Bench Director
</Table>
II-14
<Page>
Pursuant to the requirements of the Securities Act of 1933, Taylor
Publishing Company has duly caused this registration statement to be signed on
its behalf by the undersigned, thereunto duly authorized, in the City of Dallas,
State of Texas on the 14th day of March, 2002.
<Table>
TAYLOR PUBLISHING COMPANY
By: /s/ DAVID G. FIORE
-----------------------------------------
Name: David G. Fiore
Title: CHAIRMAN OF THE BOARD OF
DIRECTORS, PRESIDENT AND CHIEF EXECUTIVE
OFFICER
</Table>
KNOW ALL MEN BY THESE PRESENTS, that each individual whose signature appears
below constitutes and appoints David G. Fiore, David B. Pittaway and William
Pruellage, and each of them, severally (with full power to act alone) as the
true and lawful attorney-in-fact and agent for the undersigned, with full power
of substitution and resubstitution, for and in the name, place and stead of the
undersigned, in any all capacities, to sign any and all amendments to this
registration statement, and to file the same with all exhibits thereto, and all
documents in connection therewith, with the Securities and Exchange Commission,
granting unto each said attorney-in-fact and agent full power and authority to
do and perform each and every act and thing requisite and necessary to be done
in, and about the premises, as fully to all intents and purposes as he might or
could do in person, hereby ratifying and confirming all that said
attorney-in-fact and agent or his substitute and substitutes, may lawfully do or
cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons in the
capacities and on the date indicated.
<Table>
<Caption>
SIGNATURE TITLE DATE
--------- ----- ----
/s/ DAVID G. FIORE Chairman of the Board of
------------------------------------------- Directors, President and March 14, 2002
David G. Fiore Chief Executive Officer
/s/ STEVE BAUER
------------------------------------------- Controller and Director March 14, 2002
Steve Bauer
/s/ SHERICE P. BENCH Chief Financial Officer,
------------------------------------------- Secretary, Treasurer and March 14, 2002
Sherice P. Bench Director
</Table>
II-15
<Page>
Pursuant to the requirements of the Securities Act of 1933, Taylor
Production Services Company, L.P. has duly caused this registration statement to
be signed on its behalf by the undersigned, thereunto duly authorized, in the
City of Dallas, State of Texas on the 14th day of March, 2002.
<Table>
TAYLOR PRODUCTION SERVICES COMPANY, L.P.
By: Taylor Publishing Company
Its general partner
/s/ DAVID G. FIORE
-----------------------------------------
Name: David G. Fiore
Title: CHAIRMAN OF THE BOARD OF
DIRECTORS, PRESIDENT AND CHIEF EXECUTIVE
OFFICER
</Table>
KNOW ALL MEN BY THESE PRESENTS, that each individual whose signature appears
below constitutes and appoints David G. Fiore, David B. Pittaway and William
Pruellage, and each of them, severally (with full power to act alone) as the
true and lawful attorney-in-fact and agent for the undersigned, with full power
of substitution and resubstitution, for and in the name, place and stead of the
undersigned, in any all capacities, to sign any and all amendments to this
registration statement, and to file the same with all exhibits thereto, and all
documents in connection therewith, with the Securities and Exchange Commission,
granting unto each said attorney-in-fact and agent full power and authority to
do and perform each and every act and thing requisite and necessary to be done
in, and about the premises, as fully to all intents and purposes as he might or
could do in person, hereby ratifying and confirming all that said
attorney-in-fact and agent or his substitute and substitutes, may lawfully do or
cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons in the
capacities and on the date indicated.
<Table>
<Caption>
SIGNATURE TITLE DATE
--------- ----- ----
/s/ DAVID G. FIORE Chairman of the Board of
------------------------------------------- Directors, President and March 14, 2002
David G. Fiore Chief Executive Officer
/s/ STEVE BAUER
------------------------------------------- Controller and Director March 14, 2002
Steve Bauer
/s/ SHERICE P. BENCH Chief Financial Officer,
------------------------------------------- Secretary, Treasurer and March 14, 2002
Sherice P. Bench Director
</Table>
II-16
<Page>
Pursuant to the requirements of the Securities Act of 1933, Educational
Communications, Inc. has duly caused this registration statement to be signed on
its behalf by the undersigned, thereunto duly authorized, in the City of Lake
Forest, State of Illinois on the 14th day of March, 2002.
<Table>
EDUCATIONAL COMMUNICATIONS, INC.
By: /s/ DAVID G. FIORE
-----------------------------------------
Name: David G. Fiore
Title: CHAIRMAN OF THE BOARD OF DIRECTORS
</Table>
KNOW ALL MEN BY THESE PRESENTS, that each individual whose signature appears
below constitutes and appoints David G. Fiore, David B. Pittaway and William
Pruellage, and each of them, severally (with full power to act alone) as the
true and lawful attorney-in-fact and agent for the undersigned, with full power
of substitution and resubstitution, for and in the name, place and stead of the
undersigned, in any all capacities, to sign any and all amendments to this
registration statement, and to file the same with all exhibits thereto, and all
documents in connection therewith, with the Securities and Exchange Commission,
granting unto each said attorney-in-fact and agent full power and authority to
do and perform each and every act and thing requisite and necessary to be done
in, and about the premises, as fully to all intents and purposes as he might or
could do in person, hereby ratifying and confirming all that said
attorney-in-fact and agent or his substitute and substitutes, may lawfully do or
cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons in the
capacities and on the date indicated.
<Table>
<Caption>
SIGNATURE TITLE DATE
--------- ----- ----
/s/ DAVID G. FIORE
------------------------------------------- Chairman of the Board of March 14, 2002
David G. Fiore Directors
/s/ SHERICE P. BENCH
------------------------------------------- Chief Financial Officer, March 14, 2002
Sherice P. Bench Treasurer and Director
/s/ PARKE H. DAVIS
------------------------------------------- President March 14, 2002
Parke H. Davis
</Table>
II-17
<Page>
EXHIBIT INDEX
<Table>
<Caption>
EXHIBIT
NUMBER DESCRIPTION
- --------------------- ------------------------------------------------------------
1.1 Purchase Agreement, dated as of February 14, 2002, among
American Achievement Corporation, the Guarantors and the
Initial Purchasers
3.1 Certificate of Incorporation of American Achievement
Corporation with all amendments
(f/k/a Commemorative Brands Holding Corp.)
3.2 By-Laws of American Achievement Corporation (f/k/a
Commemorative Brands Holding Corp.)
3.3 Certificate of Incorporation of Commemorative Brands, Inc.
with all amendments (f/k/a Scholastic Brands, Inc., Class
Rings, Inc. and Keepsake Jewelry, Inc.)
3.4 By-Laws of Commemorative Brands, Inc. (f/k/a Scholastic
Brands, Inc., Class Rings, Inc. and Keepsake Jewelry, Inc.)
3.5 Certificate of Incorporation of CBI North America, Inc. with
all amendments (f/k/a SBI North America, Inc.)
3.6 By-Laws of CBI North America, Inc. with all amendments
(f/k/a SBI North America, Inc.)
3.7 Certificate of Incorporation of Taylor Senior Holding Corp.
3.8 By-Laws of Taylor Senior Holding Corp.
3.9 Amended and Restated Certificate of Incorporation of TP
Holding Corp. (f/k/a TP Acquisition Corp.)
3.10 By-Laws of TP Holding Corp. (f/k/a TP Acquisition Corp.)
3.11 Certificate of Incorporation of Taylor Publishing Company
with all amendments (f/k/a Taylor Publishing Company of
Delaware)
3.12 By-Laws of Taylor Publishing Company (f/k/a Taylor
Publishing Company of Delaware)
3.13 Certificate of Limited Partnership of Taylor Production
Services Company, L.P.
3.14 Taylor Production Services Company, L.P. Limited Partnership
Agreement
3.15 Articles of Incorporation of Educational Communications,
Inc. with all amendments (f/k/a Merit Publishing Company)
3.16 By-Laws of Educational Communications, Inc.
4.1 Indenture, dated as of February 20, 2002, among American
Achievement Corporation, The Bank of New York, as Trustee,
and the Guarantors
4.2 Form of 11 5/8 Senior Notes due 2007 (included in Exhibit
4.1)
4.3 Registration Rights Agreement, dated as of February 20,
2002, among American Achievement Corporation, the Guarantors
and the Initial Purchasers
4.4 Form of Guarantee (included in Exhibit 4.1)
4.5 Form of Indenture dated as of December 16, 1996 between
Commemorative Brands, Inc. and HSBC Bank USA (f/k/a Marine
Midland Bank)
4.6 Form of First Supplemental Indenture, dated as of July 21,
2000, between Commemorative Brands, Inc. and HSBC Bank USA
(f/k/a Marine Midland Bank)
5.1* Opinion of Schulte Roth & Zabel LLP
5.2* Opinion of Schwartz Cooper Greenberger Krauss, Chartered
10.1 Credit Agreement, dated as of February 20, 2002, among
American Achievement Corporation, as the Borrower, the
Lenders party thereto and The Bank of Nova Scotia, as the
Administrative Agent for the Lenders
10.2 Gold Consignment Agreement dated July 27, 2000 between
Commemorative Brands, Inc. and The Bank of Nova Scotia
</Table>
<Page>
<Table>
<Caption>
EXHIBIT
NUMBER DESCRIPTION
- --------------------- ------------------------------------------------------------
10.3 Subsidiary Pledge and Security Agreement, dated as of
February 20, 2002, made by American Achievement Corporation
in favor of The Bank of Nova Scotia, as administrative agent
for each of the Secured Parties (as defined therein)
10.4 Borrower Pledge and Security Agreement, dated as of
February 20, 2002, made by each domestic subsidiary of
American Achievement Corporation from time to time party
hereto in favor of The Bank of Nova Scotia, as
administrative agent for each of the Secured Parties (as
defined therein)
10.5 Subsidiary Guaranty, dated as of February 20, 2002, made by
each subsidiary of American Achievement Corporation from
time to time party hereto in favor of The Bank of Nova
Scotia, as administrative agent for each of the Secured
Parties (as defined therein)
10.6 Form of The Management Agreement dated as of March 30, 2001
among American Achievement Corporation, its Subsidiaries
listed therein and Castle Harlan, Inc.
10.7 Letter Agreement, dated as of October 11, 2000, amended as
of November 3, 2000, between Scotiabank and TP Holdings
Corp., regarding (i) USD 27,500,000.00MM Interest Rate Swap
Transaction (Ref: S24041) and (ii) USD 25,000,000.00MM
Interest Rate Swap Transaction (Ref: S24042)
10.8 Employment Agreement, dated as of July 13, 1999 by and
between Commemorative Brands, Inc. and David G. Fiore
10.9 First Amendment to the Employment Agreement by and between
Commemorative Brands, Inc. and David G. Fiore dated
February 1, 2002
10.10 Employment Agreement, dated as of December 16, 1996 by and
between Commemorative Brands, Inc. and Sherice P. Bench, as
amended
10.11 Employment Agreement, dated as of December 16, 1996 by and
between Commemorative Brands, Inc. and Donald J. Percenti
10.12 Employment Agreement, dated as of December 16, 1996 by and
between Commemorative Brands, Inc. and Charlyn A. Cook
10.13 American Achievement Corporation 2000 Stock Option Plan
(f/k/a Commemorative Brands Holding Corp. 2000 Stock Option
Plan)
12.1 Statement regarding Computation of Ratios of Earnings to
Fixed Charges of American Achievement Corporation
21 Subsidiaries of American Achievement Corporation
23.1 Consent of Arthur Andersen LLP
23.2 Consent of KPMG LLP
23.3 Consent of Altschuler, Melvoin and Glasser
23.4* Consent of Schulte Roth & Zabel LLP (incorporated by
reference in Exhibit 5.1)
23.5* Consent of Schwartz Cooper Greenberger Krauss, Chartered
(incorporated by reference in Exhibit 5.2)
24 Power of Attorney (included on Signature Page of initial
filing)
25 Statement of Eligibility and Qualification on Form T-1 of
The Bank of New York, as Trustee
99.1* Form of Letter of Transmittal
99.2* Form of Notice of Guaranteed Delivery for Outstanding
11 5/8% Senior Notes due 2007, Series A, in exchange for
11 5/8% Senior Notes due 2007, Series B
</Table>
- ---------
* To be filed by amendment