SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K/A
(Amendment No. 1)
CURRENT REPORT PURSUANT
TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Date of Report (Date of earliest event reported) July 15, 2002
American Achievement Corporation
(Exact Name of Registrant as Specified in Its Charter)
Delaware
(State or Other Jurisdiction of Incorporation)
333-84294 13-4126506
(Commission File Number) (I.R.S Employer
Identification No.)
7211 Circle S Drive, Austin, TX 78745
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code (512) 444-0571
The registrant, American Achievement Corporation ("AAC" or the "Company"),
hereby amends Item 7 of its Current Report on Form 8-K dated July 15, 2002 (the
"Form 8-K") to include the required financial statements of Milestone Marketing,
Incorporated ("Milestone") and the required pro forma financial information for
which it was impracticable to provide at the time the Form 8-K was initially
filed.
ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS
(a) Financial Statements of Business Acquired.
The following information is included in this report beginning at page F-1:
MILESTONE MARKETING, INCORPORATED
- Independent Auditors' Report
- Balance Sheets as of August 31, 2001 (As restated) and May 31, 2002
- Statements of Operations and Accumulated Deficit for the fiscal
year ended August 31, 2001 and the nine months ended May 31, 2002
- Statements of Cash Flows for the year ended August 31, 2001
and the nine months ended May 31, 2002
- Notes to Financial Statements
(b) Pro Forma Financial Information.
The Unaudited Pro Forma Condensed Combined Statements of Operations for
the fiscal year ended August 25, 2001 and the nine months ended May 25,
2002 give effect to our acquisition of Milestone as if it had occurred at
the beginning of the applicable period presented. The Unaudited Pro Forma
Condensed Combined Statement of Operations for the fiscal year ended
August 25, 2001, is based on the historical financial statements of the
Company and Milestone. The Unaudited Pro Forma Condensed Combined Balance
Sheets give effect to our acquisition of Milestone as if it had occurred as
of August 25, 2001 and May 25, 2002.
The pro forma data is not necessarily indicative of our results of
operations or financial position had this transaction 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 condensed combined financial statements should be read in conjunction
with the historical financial statements and notes thereto included
elsewhere herein pertaining to Milestone.
The Milestone acquisition, given effect in the Pro Forma Condensed Combined
Financial Information, is accounted for using the purchase method of
accounting. The aggregate purchase price of Milestone is allocated to the
tangible and intangible assets and liabilities acquired based on their
respective fair values. The allocation of the aggregate purchase price
reflected in the Pro Forma Condensed Combined Financial Information is
preliminary for the Milestone acquisition. The final allocation of the
purchase price is contingent upon the receipt of final appraisals of the
acquired assets and the revision of other estimates;however, the
allocation is not expected to differ materially from the
preliminary allocation.
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
FOR THE FISCAL YEAR ENDED AUGUST 25, 2001
(DOLLARS IN THOUSANDS)
Historical Statements
---------------------------
American
Achievement Milestone Pro Forma
Corporation Marketing, Inc. Adjustments
Fiscal Year Fiscal Year for the
Ended Ended Milestone Pro
August 25, 2001 August 31, 2001(1) Acquisition Forma
--------------- ------------------ ----------- ----------
Net Sales $ 281,053 $ 7,553 $ - $ 288,606
Cost of Sales 142,164 3,951 - 146,115
---------- -------- ---------- ----------
Gross profit 138,889 3,602 - 142,491
Selling, general and administrative
expenses 119,972 4,116 (61) (2) 124,027
---------- -------- ---------- ----------
Operating income 18,917 (514) 61 18,464
Interest expense, net 22,846 284 1,063 (3) 24,193
Other income - (12) - (12)
---------- -------- ---------- ----------
Income (loss) before provision for
income taxes (3,929) (786) (1,002) (5,717)
Provision (benefit) for income taxes (4) (1,443) - - (1,443)
---------- -------- ---------- ----------
Net income (loss) (5) (2,486) (786) (1,002) (4,274)
Preferred dividends (1,200) - - (1,200)
---------- -------- ---------- ----------
Net income (loss) from
continuing operations $ (3,686) $ (786) $ (1,002) $ (5,474)
========== ======== ========== ==========
See accompanying notes to Unaudited Pro Forma Condensed Combined Financial
Statements.
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
FOR THE NINE MONTHS ENDED MAY 25, 2002
(DOLLARS IN THOUSANDS)
Historical Statements
---------------------
American
Achievement Milestone Pro Forma
Corporation Marketing, Inc. Adjustments
Nine Months Nine Months for the
Ended Ended Milestone Pro
May 25, 2002 May 31, 2002 (1) Acquisition Forma
------------ ---------------- ----------- ---------
Net Sales $248,655 $ 5,315 $ - $ 253,970
Cost of Sales 113,403 3,157 - 116,560
-------- --------- --------- ---------
Gross profit 135,252 2,158 - 137,410
Selling, general and administrative
expenses 103,845 3,864 (101) (2) 107,608
-------- --------- --------- ---------
Operating income 31,407 (1,706) 101 29,802
Interest expense, net 18,387 276 701 (3) 19,364
Other expense 2,644 16 - 2,660
-------- --------- --------- ---------
Income (loss) before provision for
income taxes 10,376 (1,998) (600) 7,778
Provision (benefit) for income taxes (4) 5,589 - 5,589
-------- --------- --------- ---------
Net income (loss) (5) 4,787 (1,998) (600) 2,189
Preferred dividends (900) - - (900)
-------- --------- --------- ---------
Net income (loss) from
continuing operations $ 3,887 $ (1,998) $ (600) $ 1,289
======== ========= ========= =========
See accompanying notes to Unaudited Pro Forma Condensed Combined Financial
Statements.
NOTES TO THE UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENTS OF
OPERATIONS
FOR THE FISCAL YEAR ENDED AUGUST 25, 2001 AND
THE NINE MONTHS ENDED MAY 25, 2002
(1) We acquired Milestone on July 15, 2002. Therefore, the results of operations
for Milestone have not been included in our historical financial statements
presented, but are reflected in this adjustment for the historical statement
of operations of Milestone for the fiscal year ended August 31, 2001 and the
nine months ended May 31, 2002.
(2) Adjustments to reflect the estimated pro forma depreciation for tangible
assets and amortization of intangible assets for the fiscal year ended
August 25, 2001 and the nine months ended May 25, 2002, based on their
estimated fair market values and their respective useful lives.
For purposes of calculating pro forma amounts, for the fiscal year ended
August 25, 2001 and the nine months ended May 25, 2002:
(i) the fair value of the property, plant and equipment acquired was
approximately $0.1 million, which is being depreciated over four years for
equipment. The adjustments for the fiscal year ended August 25, 2001 and
the nine months ended May 25, 2002 represent a pro rata amount of the
annual computed depreciation and amortization expense.
(ii) the fair value of distribution contracts/relationships acquired
was approximately $1.1 million, which is being depreciated over
ten years. The adjustments for the fiscal year ended August 25, 2001
and the nine months ended May 25, 2002 represent a pro rata amount of
the annual computed depreciation and amortization expense.
<Table>
<caption>
Fiscal Year Nine Months
Ended Ended
August 25, 2001 May 25, 2002
--------------- ------------
(Dollars in thousands)
Amortization of Intangible Assets 110 83
Depreciation (171) (184)
----- -----
Total adjustments $(61) $(101)
===== =====
</table>
(iii) the fair value of goodwill and tradename of approximately
$16.1 million and $1.0 million, respectively, are not being amortized in
accordance with our anticipated adoption of Statement of Financial
Accounting Standards No. 142 "Goodwill and Other Intangible Assets"
(SFAS 142) beginning on September 1, 2002, the first day of fiscal 2003.
According to SFAS 142, goodwill and intangible assets determined to have
an indefinite life acquired in a business combination for which the
acquisition date is after June 30, 2001, shall not be amortized.
(3) Adjustment to reflect the following:
Fiscal Year Nine Months
Ended Ended
August 25, 2001 May 25, 2002
--------------- ------------
(Dollars in thousands)
Elimination of historical interest expense (284) (276)
Incremental interest expense on credit facility 1,347 977
-------- -----
Total adjustments $ 1,063 $ 701
======== =====
i)elimination of Milestone historical interest expense associated with
senior and subordinated debt paid in full at the time of acquisition.
ii)incremental interest expense associated with the draw of $15.85 million
made against our senior revolving credit facility to finance the
acquisition, using the effective interest rate of 8.5% for all historical
periods presented.
(4) Provision/(benefit) for income taxes in our historical statements of
operations reflect the Company's effective tax rate as it relates to the
expected annual benefits from the net operating loss carryback generated in
years ending August 31, 2002 and August 25, 2001 attributable to Taylor
Senior Holding Corp (TSHC) as a percentage of the Company's expected annual
pretax loss from continuing operations. No net federal income tax benefit is
reflected in the income statement for net operating losses to be carried
forward since realization of the potential benefit of net operating loss
carry-forwards is not considered to be more likely than not.
For the nine months ended May 25, 2002, no tax benefits have been recorded
on a pro forma basis for the losses from Milestone due to the fact that a
full valuation allowance against additional net operating loss carryforwards
would result on a pro forma basis.
(5) Net income (loss) in our historical statements of operations, for purposes
of this pro forma presentation, excludes the effect of the following:
i)the cumulative effect of change in accounting principle, representing a
loss of $1.8 million, recorded for the fiscal year ended August 25, 2001,
due to the adoption of SAB 101 as of August 27, 2000.
ii)the nonrecurring loss on extraordinary extinguishment of debt of $5.3
million, net of tax benefit, for the nine months ended May 25, 2002. On
February 20, 2002, in conjunction with the issuance of the Unsecured Notes
and entering into the Senior Secured Credit Facility, the Company paid off
the then outstanding term loans and revolver under the former credit
facility and bridge notes to affiliates. The loss was recognized as a
result of writing off the related unamortized deferred financing costs.
UNAUDITED PRO FORMA CONDENSED COMBINED BALANCE SHEET
AS OF AUGUST 25, 2001
(DOLLARS IN THOUSANDS)
Historical Statements
--------------------------
Pro Forma
Adjustments
American Achievement Milestone for the
Corporation Marketing, Inc Milestone
August 25, 2001 August 31, 2001 Acquisition Pro Forma
--------------- --------------- ----------- -----------
ASSETS
Current assets:
Cash and cash equivalents $ 2,636 $ 289 $ (47) (1) $ 2,878
Accounts receivable 49,931 332 - 50,263
Income tax receivable 776 - - 776
Inventories 26,672 171 - 26,843
Prepaid expenses and other current assets 20,158 58 - 20,216
--------- ------- --------- --------
Total current assets 100,173 850 (47) 100,976
Property, plant and equipment, net 64,842 650 - 65,492
Intangibles, net 42,299 - 2,100 (1) 44,399
Goodwill, net 147,497 - 13,565 (1) 161,062
Other assets 30,160 140 - 30,300
--------- ------- --------- --------
Total assets $ 384,971 $ 1,640 $ 15,618 $402,229
========= ======= ========= ========
LIABILITIES & STOCKHOLDERS' EQUITY
Current liabilities:
Bank overdraft $ 4,243 $ - $ - $ 4,243
Accounts payable and accrued expenses 35,135 567 736 (1) 36,438
Customer deposits 24,180 105 - 24,285
Deferred revenue 6,799 - - 6,799
Current portion of long-term debt 12,900 3,013 (3,013) (2) 12,900
--------- ------- --------- --------
Total current liabilities 83,257 3,685 (2,277) 84,665
Long-term debt, net of current portion 183,714 42 15,850 (1) 199,564
(42) (2)
Bridge notes to affiliates 26,995 - - 26,995
Other long-term liabilities 4,527 - - 4,527
--------- ------- --------- --------
Total liabilities 298,493 3,727 13,531 315,751
Reedemable Minority Interest in Subsidiary 15,650 - - 15,650
Commitments and contingencies
Stockholders' equity:
Preferred stock 10 - - 10
Common stock 8 - - 8
Additional paid-in capital 94,760 481 (481) (3) 94,760
Accumulated other comprehensive loss (2,751) - - (2,751)
Accumulated deficit (21,199) (2,568) 2,568 (3) (21,199)
--------- ------- --------- --------
Total stockholders' equity 70,828 (2,087) 2,087 70,828
--------- ------- --------- --------
Total liabilities and stockholders' equity $ 384,971 $ 1,640 $ 15,618 $402,229
========= ======= ========= ========
See accompanying notes to Unaudited Pro Forma Condensed Combined Financial
Statements.
UNAUDITED PRO FORMA CONDENSED COMBINED BALANCE SHEET
AS OF MAY 25, 2002
(DOLLARS IN THOUSANDS)
Historical Statements
-----------------------
Pro Forma
Adjustments
American Achievement Milestone for the
Corporation Marketing, Inc Milestone
May 25, 2002 May 31, 2002 Acquisition Pro Forma
------------ ------------ ----------- ---------
ASSET
Current assets:
Cash and cash equivalents $ 1,999 $ 369 $ (47) (1) $ 2,321
Accounts receivable 77,112 279 - 77,391
Inventories 27,669 152 - 27,821
Prepaid expenses and other current assets 17,891 38 - 17,929
---------- --------- --------- ---------
Total current assets 124,671 838 - 125,462
Property, plant and equipment, net 64,345 456 - 64,801
Intangibles, net 41,140 - 2,100 (1) 43,240
Goodwill, net 144,739 - 15,575 (1) 160,314
Other assets 30,483 121 - 30,604
---------- --------- --------- ---------
Total assets $ 405,378 $ 1,415 $ 17,628 $ 424,421
========== ========= ========= =========
LIABILITIES & STOCKHOLDERS' EQUITY
Current liabilities:
Bank overdraft $ 5,159 $ - $ - $ 5,159
Accounts payable and accrued expenses 53,572 1,567 736 (1) 55,875
Customer deposits 35,625 890 - 36,515
Deferred revenue 3,369 - - 3,369
Current portion of long-term debt - 3,014 (3,014) (2) -
---------- --------- --------- ---------
Total current liabilities 97,725 5,471 (2,278) 100,918
Long-term debt 216,975 29 15,850 (1) 232,825
- - (29) (2) -
Other long-term liabilities 3,793 - - 3,793
---------- --------- --------- ---------
Total liabilities 318,493 5,500 13,543 337,536
Reedemable Minority Interest in Subsidiary 16,550 - - 16,550
Commitments and contingencies
Stockholders' equity:
Preferred stock 10 - - 10
Common stock 8 - - 8
Additional paid-in capital 95,310 481 (481) (3) 95,310
Accumulated other comprehensive loss (2,419) - - (2,419)
Accumulated deficit (22,574) (4,566) 4,566 (3) (22,574)
---------- --------- --------- ---------
Total stockholders' equity 70,335 (4,085) 4,085 70,335
---------- --------- --------- ---------
Total liabilities and stockholders' equity $ 405,378 $ 1,415 $ 17,628 $ 424,421
========== ========= ========= =========
See accompanying notes to Unaudited Pro Forma Condensed Combined Financial
Statements.
NOTES TO THE UNAUDITED PRO FORMA CONDENSED COMBINED BALANCE SHEETS
AUGUST 25, 2001 AND MAY 25, 2002
(1) Adjustment reflects the purchase price allocation for the Milestone
acquisition as of August 31, 2001 and May 31, 2002 and the related draw on
the Senior Secured Credit Facility of $15.85 million to finance the
transaction in addition to the accrual of certain severance and relocation
expenses.
(2) Adjustment to reflect the Company paying in full all the outstanding
senior and subordinated debt and related outstanding interest of
Milestone at the time of acquisition.
(3) Adjustment to reflect:
i) the net effect of the elimination of the historical deficit of
Milestone based on the purchase method of accounting.
ii) The net effect of the elimination of Milestone additional paid in
capital to reflect consolidation with the Company's financial
statements.
MILESTONE MARKETING INCORPORATED
TABLE OF CONTENTS
- --------------------------------------------------------------------------------
PAGE
INDEPENDENT AUDITORS' REPORT F-2
FINANCIAL STATEMENTS AS OF AND FOR THE YEAR ENDED
AUGUST 31, 2001:
Balance Sheet (As restated, see Note 6) F-3
Statement of Operations and Accumulated Deficit F-4
Statement of Cash Flows F-5
Notes to Financial Statements F-6 - F-9
F-1
<Page>
INDEPENDENT AUDITORS' REPORT
Board of Directors
Milestone Marketing Incorporated
Exton, Pennsylvania
We have audited the accompanying balance sheet of Milestone Marketing
Incorporated (the "Company") as of August 31, 2001, and the related statements
of operations and accumulated deficit, and cash flows for the year then ended.
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 of America. 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, such financial statements present fairly, in all material
respects, the financial position of Milestone Marketing Incorporated as of
August 31, 2001, and the results of its operations and its cash flows for the
year then ended in conformity with accounting principles generally accepted in
the United States of America.
As discussed in Note 6, the balance sheet as of August 31, 2001 has been
restated from that previously reported.
September 26, 2002
F-2
<Page>
<Table>
MILESTONE MARKETING INCORPORATED
BALANCE SHEET (AS RESTATED, SEE NOTE 6)
AUGUST 31, 2001
- ----------------------------------------------------------------------------------------------------------------------------------
ASSETS LIABILITIES AND STOCKHOLDERS' DEFICIENCY
CURRENT ASSETS: CURRENT LIABILITIES:
Cash $ 289,488 Current portion of long-term debt $ 3,013,167
Accounts receivable (net of allowance for Accounts payable 323,866
doubtful accounts of $42,878) 331,700 Accrued expenses 62,390
Royalties payable 180,574
Inventory 171,268 Deferred revenue 105,067
----------
Prepaid expenses 57,984
---------
Total current liabilities 3,685,064
----------
Total current assets 850,440
-------
PROPERTY AND EQUIPMENT: LONG-TERM DEBT, NET OF CURRENT PORTION 41,407
-----------
Equipment 95,259
Leasehold improvements 28,661
Transportation equipment 119,033
Office equipment, furniture and fixtures 45,560
Tools and dies 193,659
Computer equipment and software 545,494 COMMITMENTS AND CONTINGENCIES
--------
1,027,666
Less accumulated depreciation (377,566)
---------
NET PROPERTY AND EQUIPMENT 650,100
---------
STOCKHOLDERS' DEFICIENCY
OTHER ASSETS: Common stock:
Deferred financing costs (net of accumulated Voting, no par value, authorized 1,000
amortization of $20,286) 113,125 shares; issued and outstanding, 100 shares
Deposits 26,140 Additional paid-in capital 481,000
---------
Accumulated deficit (as restated, see Note 6) (2,567,666)
-----------
Total other assets 139,265
---------
Total stockholders' deficiency (2,086,666)
-----------
TOTAL ASSETS $ 1,639,805 TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIENCY $ 1,639,805
============ ===========
See notes to financial statements.
</Table>
F-3
<Page>
<Table>
<Caption>
MILESTONE MARKETING INCORPORATED
STATEMENT OF OPERATIONS AND ACCUMULATED DEFICIT
YEAR ENDED AUGUST 31, 2001
- ----------------------------------------------------------------------------------------------------
NET SALES $ 7,553,376
COST OF GOODS SOLD 3,951,729
---------
Gross profit 3,601,647
---------
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES 4,115,754
---------
LOSS FROM OPERATIONS (514,107)
OTHER (INCOME) AND EXPENSE, NET:
Interest expense 284,011
Other income (12,098)
--------
Total other expense, net 271,913
--------
NET LOSS (786,020)
ACCUMULATED DEFICIT, BEGINNING OF PERIOD (1,781,646)
-----------
ACCUMULATED DEFICIT, END OF PERIOD $ (2,567,666)
=============
See notes to financial statements.
</Table>
F-4
<Page>
<Table>
<Caption>
MILESTONE MARKETING INCORPORATED
STATEMENT OF CASH FLOWS
YEAR ENDED AUGUST 31, 2001
- ---------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (786,020)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 209,441
Changes in assets and liabilities that relate to operations:
Decrease in accounts receivable 623,056
Decrease in inventory 17,920
Increase in prepaid expenses (40,162)
Decrease in deposits 42,651
Decrease in accounts payable (246,624)
Decrease in accrued expenses (36,845)
Decrease in royalties payable (141,724)
Decrease in deferred revenue (42,908)
--------
Net cash used in operating activities (401,215)
---------
CASH FLOWS FROM INVESTING ACTIVITIES--
Purchase of property and equipment (458,081)
---------
Net cash used in investing activities (458,081)
---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net payments on line-of-credit (400,000)
Payments on long-term debt (1,278,845)
Net proceeds from long-term debt 3,000,000
Cash expended for deferred financing costs (125,366)
---------
Net cash provided by financing activities 1,195,789
---------
NET INCREASE IN CASH 336,493
CASH, BEGINNING OF PERIOD (47,005)
---------
CASH, END OF PERIOD $ 289,488
==========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the year for interest $ 242,511
==========
</Table>
See notes to financial statements.
F-5
<Page>
MILESTONE MARKETING INCORPORATED
NOTES TO FINANCIAL STATEMENTS
YEAR ENDED AUGUST 31, 2001
- --------------------------------------------------------------------------------
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION AND OPERATIONS--Milestone Marketing Incorporated (the
"Company") was incorporated in December 1993 under the laws of the
Commonwealth of Pennsylvania. The Company's business is to sell
traditional college rings primarily to college graduates through alumni
associations. The Company also sells watches, clocks, caps and gowns and
announcements.
On July 15, 2002, American Achievement Corporation, Inc. ("AAC") of
Austin, TX, a manufacturer of scholastic products and an industry leader
in class rings and school year books, acquired the Company for
$15,750,000, subject to adjustment in accordance with the purchase
agreement. As part of the acquisition, AAC extinguished all of the
Company's senior and subordinated debt (see Note 3) and related
outstanding interest.
USE OF ESTIMATES--Management uses estimates and assumptions in preparing
its financial statements in accordance with accounting principles
generally accepted in the United States of America. Those estimates and
assumptions affect the reported amounts of assets and liabilities, the
disclosure of contingent assets and liabilities, and the reported revenues
and expenses. Actual results could vary from estimates that were used.
CASH--The Company maintains cash at a financial institution with
headquarters in Philadelphia, Pennsylvania which may exceed federally
insured amounts at times.
INVENTORY--Inventory is stated at the lower of cost or market. Cost is
determined by the first-in, first-out method. Inventory consists of
watches and watch dials.
PROPERTY AND EQUIPMENT--Property and equipment are stated at cost.
Expenditures for maintenance and repairs are charged against operations.
Renewals and betterments that materially extend the lives of the assets
are capitalized. Depreciation is computed using the straight-line method
over the estimated useful lives of the related assets which range from 3
to 5 years.
Depreciation amounted to $197,200 for the year ended August 31, 2001.
The Company, using its best estimates based on reasonable and supportable
assumptions and projections, reviews for impairment of long-lived assets
and certain identifiable intangibles to be held and used whenever events
or changes in circumstances indicate that the carrying amount of its
assets might not be recoverable and has concluded no financial statement
adjustment is required.
DEFERRED FINANCING COSTS--Deferred financing costs related to the senior
subordinated debt (see Note 3) are being amortized on the straight-line
method over a five-year period. Amortization was $12,241 for the year
ended August 31, 2001.
CONCENTRATIONS--Two vendors accounted for approximately 86% of total
purchases for the year ended August 31, 2001. Amounts due to the two
vendors were approximately 46% of the accounts payable balance as of
August 31, 2001.
F-6
<Page>
NEW ACCOUNTING PRONOUNCEMENTS--In August 2001, the Financial Accounting
Standards Board issued Statement of Financial Accounting Standards
("SFAS") No. 144, ACCOUNTING FOR THE IMPAIRMENT OR DISPOSAL OF LONG-LIVED
ASSETS. This statement addresses financial accounting and reporting for
the impairment or disposal of long-lived assets. This statement supersedes
SFAS No. 121, ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED ASSETS AND FOR
LONG-LIVED ASSETS TO BE DISPOSED OF, and the accounting and reporting
provisions of Accounting Principles Board Opinion No. 30, REPORTING THE
RESULTS OF OPERATIONS-REPORTING THE EFFECTS OF DISPOSAL OF A SEGMENT OF A
BUSINESS, AND EXTRAORDINARY, UNUSUAL, AND INFREQUENT OCCURRING EVENTS AND
TRANSACTIONS. This statement is effective for fiscal years beginning after
December 15, 2001. Management has not yet determined the impact that the
adoption of SFAS No. 144 will have on its financial position or results of
operations when such statement is adopted.
2. LINE-OF-CREDIT
The Company maintains a line-of-credit of $1,045,000 with a bank, payable
on demand of which $-0- was outstanding as of August 31, 2001. Interest is
payable monthly at the prime rate (prime was 6.5% as of August 31, 2001)
plus 1%. The line-of-credit is collateralized by the assets of the Company
and is guaranteed by the Company's stockholders. The line is used for
working capital purposes.
3. LONG-TERM DEBT AND WARRANTS
Long-term debt as of August 31, 2001 is as follows:
<Table>
Auto loans payable, due in monthly
payments ranging from $577 to $869,
including interest ranging from 7.50% to
7.99%; collateralized by the autos.
Payments extend through July, 2005. $ 54,574
Senior subordinated debt, due in twelve
equal quarterly installments beginning
March 31, 2005, plus interest payable
monthly at 12%; collateralized by the
assets and common stock of the
Company (subordinated to the line-of-credit;
see Note 2) 3,000,000
----------
3,054,574
Less current portion 3,013,167
----------
Total $ 41,407
==========
</Table>
F-7
<Page>
Scheduled maturities of long-term debt as of August 31, 2001 (before
the classification to current of the subordinated debt, as noted below) are
as follows:
<Table>
<Caption>
YEAR ENDING AUGUST 31
2002 $ 13,167
2003 15,162
2004 15,879
2005 510,366
2006 1,000,000
Thereafter 1,500,000
-----------
Total $ 3,054,574
===========
</Table>
Interest expense on all debt was $284,011 for the year ended August 31,
2001.
The subordinated debt includes a commitment for another $500,000 on the
same terms, subject to mutually agreed upon performance criteria.
In connection with the issuance of the subordinated debt on March 16,
2001, the Company issued detachable put warrants which gives the lender
the right to purchase 43 shares of common stock at $0.01 per share
through December 31, 2012. In addition, the lender can put the warrants
to the Company for cash beginning in 2006 at an amount based on a multiple
of earnings before interest, taxes, depreciation and amortization.
The Company accounts for the warrants under EITF Issue 88-9, PUT
WARRANTS, and has determined that the value assigned as of March 16, 2001
and August 31, 2001 is $0.
The subordinated debt agreement contains certain financial covenants
pertaining to maintenance of net worth and indebtedness to earnings
ratios. As of August 31, 2001, the Company has not met such financial
covenants, as such the subordinated debt agreement is classified as
current at August 31, 2001.
4. INCOME TAXES
Prior to March 16, 2001, the Company had elected to be taxed under the
provisions of subchapter S of the Internal Revenue Code and Pennsylvania
Tax Reform Code. Under these provisions, the Company did not pay federal
or state income taxes on its taxable income. Instead, the Company's
income, losses and credits were included in the individual tax returns of
the Company's stockholders. Effective March 16, 2001, the Company
terminated its S election.
The Company provides for federal and state income taxes at the statutory
rates in effect on the reported pretax financial statement income. The
difference between tax and financial statement income is due to certain
income tax provisions which are followed for tax purposes, such as
depreciation. Temporary differences between tax and financial statement
income result in deferred taxes. Deferred taxes are recorded in accordance
with SFAS No. 109, ACCOUNTING FOR INCOME TAXES. The net deferred tax asset
of $154,400 is reserved for by a valuation allowance as it is more likely
than not that the Company will not realize the benefit.
The tax effects of temporary differences that give rise to the deferred
tax assets are as follows:
Allowance for doubtful accounts $ 6,700
Depreciation 6,700
NOL 141,000
----------
154,400
Valuation allowance (154,400)
-----------
Deferred tax asset $ 0
===========
The Company has federal and state net operating loss carryforwards of
approximately $416,000. If unused, the federal and state net operating
loss carryforwards will expire through 2021.
F-8
<Page>
5. COMMITMENTS
LEASES--The Company leases office space, autos and furniture under
operating leases expiring through September, 2006.
The following is a schedule of future minimum rental payments under the
above operating leases as of August 31, 2001:
<Table>
<Caption>
YEAR ENDING AUGUST 31
2002 $ 125,295
2003 111,509
2004 106,717
2005 106,717
2006 --
Thereafter --
-----------
Total $ 450,238
===========
</Table>
Rent expense amounted to $89,240 for the year ended August 31, 2001.
6. RESTATEMENT
The Company has restated its previously reported balance sheet as of
August 31, 2001. The following is a reconciliation of accumulated deficit,
as previously reported to accumulated deficit, as restated.
<Table>
Accumulated deficit, as previously reported (2,381,224)
Reclass loan forgiveness from accumulated deficit to additional paid-in capital (100,000)
Decrease in deferred tax asset (76,000)
Other $ (10,442)
-----------
Accumulated deficit, as restated (2,567,666)
===========
</Table>
7. RELATED PARTY TRANSACTIONS
During the year ended August 31, 2001, the Company forgave loans to
shareholders in the amount of $100,000, and the shareholders forgave
loans to the Company in the amount of $200,000. The forgiveness of
these loans has been recorded as adjustments to additional paid-in
capital as of August 31, 2001.
F-9
<Page>
MILESTONE MARKETING INCORPORATED
TABLE OF CONTENTS
- --------------------------------------------------------------------------------
PAGE
INDEPENDENT AUDITORS' REPORT F-11
FINANCIAL STATEMENTS AS OF AND FOR THE NINE MONTHS IN THE PERIOD ENDED
MAY 31, 2002:
Balance Sheet F-12
Statement of Operations and Accumulated Deficit F-13
Statement of Cash Flows F-14
Notes to Financial Statements F-15 - F-18
F-10
INDEPENDENT AUDITORS' REPORT
Board of Directors
Milestone Marketing Incorporated
Exton, Pennsylvania
We have audited the accompanying balance sheet of Milestone Marketing
Incorporated (the "Company") as of May 31, 2002, and the related statements of
operations and accumulated deficit, and cash flows for the nine months in the
period then ended. 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 of America. 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, such financial statements present fairly, in all material
respects, the financial position of Milestone Marketing Incorporated as of May
31, 2002, and the results of its operations and its cash flows for the nine
months in the period then ended in conformity with accounting principles
generally accepted in the United States of America.
September 26, 2002
F-11
<Page>
<Table>
MILESTONE MARKETING INCORPORATED
BALANCE SHEET
MAY 31, 2002
- --------------------------------------------------------------------------------
ASSETS LIABILITIES AND STOCKHOLDERS' DEFICIENCY
CURRENT ASSETS: CURRENT LIABILITIES:
Cash $ 369,254 Current portion of long-term debt $ 3,014,428
Accounts receivable (net of allowance for Accounts payable 1,042,434
doubtful accounts of $40,023) 278,699 Accrued expenses 150,984
Inventory 151,942 Royalties payable 372,348
Prepaid expenses 38,455 Deferred revenue 889,923
----------- -----------
Total current assets 838,350 Total current liabilities 5,470,117
----------- -----------
PROPERTY AND EQUIPMENT: LONG-TERM DEBT, NET OF CURRENT PORTION 29,317
Leasehold improvements 28,661
Transportation equipment 128,317
Office equipment, furniture and fixtures 53,065
Computer equipment and software 684,842 COMMITMENTS AND CONTINGENCIES
-----------
894,885
Less accumulated depreciation (439,088)
NET PROPERTY AND EQUIPMENT 455,797
-----------
OTHER ASSETS: STOCKHOLDERS' DEFICIENCY
Deferred financing costs (net of accumulated Common stock:
amortization of $39,428) 93,983 Voting, no par value, authorized 1,000 shares;
Deposits 26,688 issued and outstanding, 100 shares;
----------- Additional paid-in capital 481,000
Total other assets 120,671 Accumulated deficit (4,565,616)
----------- -----------
TOTAL ASSETS $ 1,414,818 Total stockholders' deficiency (4,084,616)
=========== -----------
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIENCY $ 1,414,818
===========
See notes to financial statements.
</Table>
F-12
<Page>
<Table>
<Caption>
MILESTONE MARKETING INCORPORATED
STATEMENT OF OPERATIONS AND ACCUMULATED DEFICIT
NINE MONTHS ENDED MAY 31, 2002
- --------------------------------------------------------------------------------
NET SALES $ 5,314,627
COST OF GOODS SOLD 3,156,773
------------
Gross profit 2,157,854
------------
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES 3,863,918
------------
LOSS FROM OPERATIONS (1,706,064)
OTHER EXPENSE, NET:
Interest expense 275,954
Other expense, net 15,932
------------
Total other expense, net 291,886
------------
NET LOSS (1,997,950)
ACCUMULATED DEFICIT, BEGINNING OF PERIOD (2,567,666)
------------
ACCUMULATED DEFICIT, END OF PERIOD $ (4,565,616)
============
</Table>
See notes to financial statements.
F-13
<Page>
<Table>
<Caption>
MILESTONE MARKETING INCORPORATED
STATEMENT OF CASH FLOWS
NINE MONTHS ENDED MAY 31, 2002
- ------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (1,997,950)
Adjustments to reconcile net loss to net cash
provided by operating activities:
Depreciation and amortization 222,698
Loss on disposal of assets 165,658
Changes in assets and liabilities that relate to operations:
Decrease in accounts receivable 53,001
Decrease in inventory 19,326
Decrease in prepaid expenses 19,529
Increase in deposits (546)
Increase in accounts payable 718,568
Increase in accrued expenses 88,594
Increase in royalties payable 191,774
Increase in deferred revenue 784,856
-------
Net cash provided by operating activities 265,508
-------
CASH FLOWS FROM INVESTING ACTIVITIES--
Purchase of property and equipment (174,912)
--------
Net cash used in investing activities (174,912)
--------
CASH FLOWS FROM FINANCING ACTIVITIES--
Payments on long-term debt (10,830)
--------
Net cash used in financing activities (10,830)
--------
NET INCREASE IN CASH 79,766
CASH, BEGINNING OF PERIOD 289,488
--------
CASH, END OF PERIOD $ 369,254
==========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for interest $ 242,000
==========
</Table>
See notes to financial statements.
F-14
<Page>
MILESTONE MARKETING INCORPORATED
NOTES TO FINANCIAL STATEMENTS
NINE MONTHS ENDED MAY 31, 2002
- --------------------------------------------------------------------------------
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION AND OPERATIONS--Milestone Marketing Incorporated (the
"Company") was incorporated in December 1993 under the laws of the
Commonwealth of Pennsylvania. The Company's business is to sell
traditional college rings primarily to college graduates through alumni
associations. The Company also sells watches, clocks, caps and gowns and
announcements.
On July 15, 2002, American Achievement Corporation, Inc. ("AAC") of
Austin, TX, a manufacturer of scholastic products and an industry leader
in class rings and school year books, acquired the Company for
$15,750,000, subject to adjustment in accordance with the purchase
agreement. As part of the acquisition, AAC extinguished all of the
Company's senior and subordinated debt (see Note 3) and related
outstanding interest.
USE OF ESTIMATES--Management uses estimates and assumptions in preparing
its financial statements in accordance with accounting principles
generally accepted in the United States of America. Those estimates and
assumptions affect the reported amounts of assets and liabilities, the
disclosure of contingent assets and liabilities, and the reported revenues
and expenses. Actual results could vary from estimates that were used.
CASH--The Company maintains cash at a financial institution with
headquarters in Philadelphia, Pennsylvania which may exceed federally
insured amounts at times.
INVENTORY--Inventory is stated at the lower of cost or market. Cost is
determined by the first-in, first-out method. Inventory consists of
watches and watch dials.
PROPERTY AND EQUIPMENT--Property and equipment are stated at cost.
Expenditures for maintenance and repairs are charged against operations.
Renewals and betterments that materially extend the lives of the assets
are capitalized. Depreciation is computed using the straight-line method
over the estimated useful lives of the related assets which range from 3
to 5 years.
Depreciation amounted to $203,555 for the nine months ended May 31, 2002.
The Company, using its best estimates based on reasonable and supportable
assumptions and projections, reviews for impairment of long-lived assets
and certain identifiable intangibles to be held and used whenever events
or changes in circumstances indicate that the carrying amount of its
assets might not be recoverable and has concluded no financial statement
adjustment is required.
DEFERRED FINANCING COSTS--Deferred financing costs related to the senior
subordinated debt (see Note 3) are being amortized on the straight-line
method over a five-year period. Amortization was $19,143 for the nine
months ended May 31, 2002.
CONCENTRATIONS--Two vendors accounted for approximately 81% of total
purchases for the nine months ended May 31, 2002. Amounts due to the two
vendors were approximately 62% of the accounts payable balance as of May
31, 2002.
F-15
<Page>
NEW ACCOUNTING PRONOUNCEMENTS--In August 2001, the Financial Accounting
Standards Board issued Statement of Financial Accounting Standards
("SFAS") No. 144, ACCOUNTING FOR THE IMPAIRMENT OR DISPOSAL OF LONG-LIVED
ASSETS. This statement addresses financial accounting and reporting for
the impairment or disposal of long-lived assets. This statement supersedes
SFAS No. 121, ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED ASSETS AND FOR
LONG-LIVED ASSETS TO BE DISPOSED OF, and the accounting and reporting
provisions of Accounting Principles Board Opinion No. 30, REPORTING THE
RESULTS OF OPERATIONS-REPORTING THE EFFECTS OF DISPOSAL OF A SEGMENT OF A
BUSINESS, AND EXTRAORDINARY, UNUSUAL, AND INFREQUENT OCCURRING EVENTS AND
TRANSACTIONS. This statement is effective for fiscal years beginning after
December 15, 2001. Management has not yet determined the impact that the
adoption of SFAS No. 144 will have on its financial position or results of
operations when such statement is adopted.
2. LINE-OF-CREDIT
The Company maintains a line-of-credit of $1,045,000 with a bank, payable
on demand of which $-0- was outstanding as of May 31, 2002. Interest is
payable monthly at the prime rate (prime was 4.75% as of May 31, 2002)
plus 1%. The line-of-credit is collateralized by the assets of the Company
and is guaranteed by the Company's stockholders. The line is used for
working capital purposes.
3. LONG-TERM DEBT AND WARRANTS
Long-term debt as of May 31, 2002 is as follows:
<Table>
Auto loans payable, due in monthly
payments ranging from $577 to $869, including
interest ranging from 7.50% to 7.99%;
collateralized by the autos.
Payments extend through July, 2005. $ 43,745
Senior subordinated debt, due in twelve equal
quarterly installments beginning March 31,
2005, plus interest payable monthly at 12%;
collateralized by the assets and common stock
of the Company (subordinated to the line-of-credit;
see Note 2) 3,000,000
-----------
3,043,745
Less current portion 3,014,428
-----------
Total $ 29,317
===========
</Table>
F-16
<Page>
Scheduled maturities of long-term debt as of May 31, 2002 (before the
classification to current of the subordinated debt, as noted below) are as
follows:
<Table>
June 1, 2002 through August 31, 2002 $ 2,338
Year ending August 31, 2003 15,162
Year ending August 31, 2004 15,879
Year ending August 31, 2005 510,366
Year ending August 31, 2006 1,000,000
Year ending August 31, 2007 1,000,000
Thereafter 500,000
-----------
Total $ 3,043,745
===========
</Table>
Interest expense on all debt was $275,954 for the nine months ended May
31, 2002.
The subordinated debt includes a commitment for another $500,000 on the
same terms, subject to mutually agreed upon performance criteria.
In connection with the issuance of the subordinated debt on March 16,
2001, the Company issued detachable put warrants which gives the lender
the right to purchase 43 shares of common stock at $0.01 per share
through December 31, 2012. In addition, the lender can put the warrants
to the Company for cash beginning in 2006 at an amount based on a multiple
of earnings before interest, taxes, depreciation and amortization.
The Company accounts for the warrants under EITF Issue 88-9, PUT
WARRANTS, and has determined that the value assigned as of March 16, 2001
and May 31, 2002 is $0.
The subordinated debt agreement contains certain financial covenants
pertaining to maintenance of net worth and indebtedness to earnings
ratios. As of May 31, 2002, the Company has not met such financial
covenants, as such the subordinated debt agreement is classified as
current at May 31, 2002.
4. INCOME TAXES
Prior to March 16, 2001, the Company had elected to be taxed under the
provisions of subchapter S of the Internal Revenue Code and Pennsylvania
Tax Reform Code. Under these provisions, the Company did not pay federal
or state income taxes on its taxable income. Instead, the Company's
income, losses and credits were included in the individual tax returns of
the Company's stockholders. Effective March 16, 2001, the Company
terminated its S election.
The Company provides for federal and state income taxes at the statutory
rates in effect on the reported pretax financial statement income. The
difference between tax and financial statement income is due to certain
income tax provisions which are followed for tax purposes, such as
depreciation. Temporary differences between tax and financial statement
income result in deferred taxes. Deferred taxes are recorded in accordance
with SFAS No. 109, ACCOUNTING FOR INCOME TAXES. The net deferred tax asset
of $833,500 is reserved for by a valuation allowance as it is more likely
than not that the Company will not realize the benefit.
The tax effects of temporary differences that give rise to the deferred
tax assets are as follows:
Allowance for doubtful accounts $ 5,800
Depreciation 6,700
NOL 821,000
----------
833,500
Valuation allowance (833,500)
-----------
Deferred tax asset $ 0
===========
The Company has federal and state net operating loss carryforwards of
approximately $2,413,000. If unused, the federal and state net operating
loss carryforwards will expire through 2022.
F-17
5. COMMITMENTS
LEASES--The Company leases office space, autos and furniture under
operating leases expiring through May 31, 2002.
The following is a schedule of future minimum rental payments under the
above operating leases as of May 31, 2002:
<Table>
<Caption>
June 1, 2002 through August 31, 2002 $ 31,471
Year ending August 31, 2003 111,509
Year ending August 31, 2004 106,717
Year ending August 31, 2005 106,717
Year ending August 31, 2006 --
Year ending August 31, 2007 --
Thereafter --
---------
Total $ 356,414
=========
</Table>
Rent expense amounted to $74,701 for the nine months ended May 31, 2002.
F-18
(c) Exhibits. The following exhibit is filed herewith.
Exhibit Description
2.1 The Stock Purchase Agreement by and among American Achievement
Corporation, Milestone Marketing Incorporated, and its
stockholders and warrant holders.*
99.1 Joint Press Release of American Achievement Corporation and
Milestone Marketing Incorporated, issued July 23, 2002.*
* Previously filed.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, hereunto duly authorized, on September 30, 2002.
American Achievement Corporation
By: /s/ Sherice P. Bench
------------------------------
Sherice P. Bench
CHIEF FINANCIAL OFFICER