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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-Q
(MARK ONE)
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED FEBRUARY 28, 1998
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ______________ TO ______________
COMMISSION FILE NUMBER: 333-20759
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COMMEMORATIVE BRANDS, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 13-3915801
(State of incorporation) (IRS Employer Identification No.)
7211 CIRCLE S ROAD, AUSTIN, TEXAS 78745
(Address of principal executive offices) (Zip code)
(512) 440-0571
(Registrant's telephone number, including area code)
------------------------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes /X/ No / /
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INDEX
ITEM
NUMBER PAGE NUMBER
- --------- -----------
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets--
As of February 28, 1998 (unaudited) and August 30, 1997..................................... 1
Consolidated Income Statements--
For the three months ended February 28, 1998 and December 16, 1996 to March 1, 1997 and from
November 30, 1996 to December 15, 1996 for ArtCarved and from November 25, 1996 to December
15, 1996 for Balfour (all unaudited)........................................................ 2
Consolidated Income Statements--
For the six months ended February 28, 1998 and December 16, 1996 to March 1, 1997 and from
September 1, 1996 to December 15, 1996 for ArtCarved and from August 26, 1996 to December
15,1996 for Balfour (all unaudited)......................................................... 3
Consolidated Statements of Stockholders' Equity--
As of February 28, 1998 (unaudited), August 30, 1997 and March 28, 1996 (unaudited)......... 4
Statements of Cash Flows--
For the six months ended February 28, 1998 and December 16, 1996 to March 1, 1997 and from
September 1, 1996 to December 15, 1996 for ArtCarved and from August 26, 1996 to December
15, 1996 for Balfour (all unaudited)........................................................ 5
Notes to Consolidated Financial Statements.................................................... 6-13
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations......... 14-20
PART II. OTHER INFORMATION
Item 1. Legal Proceedings............................................................................. 21
Item 2. Changes in Securities......................................................................... 21
Item 3. Defaults Upon Senior Securities............................................................... 21
Item 4. Submission of Matters to a Vote of Security Holders........................................... 21
Item 6. Exhibits and Reports on Form 8-K.............................................................. 21
SIGNATURES............................................................................................... 22
PART I--FINANCIAL STATEMENTS
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS AND NOTES
COMMEMORATIVE BRANDS, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA )
AUGUST 30,
1997
FEBRUARY 28, ----------
1998
------------
(UNAUDITED)
ASSETS
Current assets:
Cash and cash equivalents............................................................. $ 4,172 $ 2,174
Accounts receivable, net.............................................................. 37,899 26,444
Inventories........................................................................... 13,891 11,767
Prepaid expenses and other current assets............................................. 5,273 8,522
------------ ----------
Total current assets................................................................ 61,235 48,907
Property, plant and equipment, net...................................................... 34,792 33,460
Trademarks, net......................................................................... 29,800 30,197
Goodwill, net........................................................................... 81,642 82,935
Other assets, net....................................................................... 6,187 5,370
------------ ----------
Total assets........................................................................ $ 213,656 $ 200,869
------------ ----------
------------ ----------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Bank overdraft........................................................................ $ 4,364 $ 4,188
Accounts payable and accrued expenses................................................. 22,016 20,893
Current portion of long-term debt..................................................... 750 750
------------ ----------
Total current liabilities........................................................... 27,130 25,831
Long-term debt, net of current portion.................................................. 133,450 124,700
Other long-term liabilities............................................................. 10,178 9,885
------------ ----------
Total liabilities................................................................... 170,758 160,416
Commitments and contingencies
Stockholders' Equity
Preferred Stock, $.01 par value, 750,000 shares authorized
Series A, 100,000 shares issued and outstanding..................................... 1 1
Series B, 375,000 shares issued and outstanding..................................... 4 4
Common Stock, $.01 par value, 750,000 shares authorized, 375,000 issued and
outstanding......................................................................... 4 4
Additional paid-in capital............................................................ 50,161 50,161
Retained earnings (deficit)........................................................... (7,272) (9,717)
------------ ----------
Total stockholders' equity.......................................................... 42,898 40,453
------------ ----------
Total liabilities & stockholders' equity............................................ $ 213,656 $ 200,869
------------ ----------
------------ ----------
The accompanying notes are an integral part of these consolidated financial
statements.
1
COMMEMORATIVE BRANDS, INC.
CONSOLIDATED INCOME STATEMENTS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(UNAUDITED)
PREDECESSORS
----------------------------
ARTCARVED BALFOUR
FOR THE THREE DECEMBER 16, NOVEMBER 30, NOVEMBER 25,
MONTHS ENDED 1996 TO 1996 TO 1996 TO
FEBRUARY 28, MARCH 1, DECEMBER 15, DECEMBER 15,
1998 1997* 1996 1996
------------- ------------ ------------- -------------
Net sales.............................................. $ 44,168 $ 24,751 $ 5,934 $ 4,712
Cost of sales.......................................... 19,767 14,242 2,362 2,329
------------- ------------ ------ ------
Gross profit........................................... 24,401 10,509 3,572 2,383
Selling, general and administrative expenses........... 18,558 11,750 1,752 3,110
------------- ------------ ------ ------
Operating income....................................... 5,843 (1,241) 1,820 (727)
Interest expense, net.................................. 3,776 2,600 373 137
------------- ------------ ------ ------
Income (loss) before provision for income taxes...... 2,067 (3,841) 1,447 (864)
Provision for income taxes............................. -- 20 -- 3
------------- ------------ ------ ------
Net income (loss).................................... $ 2,067 $ (3,861) $ 1,447 $ (867)
------------- ------------ ------ ------
Preferred dividends.................................... (300) (250) -- --
------------- ------------ ------ ------
Net income (loss) to common stockholders............... $ 1,767 $ (4,111) $ 1,447 $ (867)
------------- ------------ ------ ------
------------- ------------ ------ ------
Basic and dulited earnings (loss) per share............ $ 4.71 $ (10.96)
------------- ------------
------------- ------------
Weighted average common shares outstanding and common
and common equivalent shares outstanding............. 375,000 375,000
------------- ------------
------------- ------------
- ------------------------
* Commemorative Brands, Inc. completed the acquisitions of ArtCarved and
Balfour on December 16, 1996, and until such date engaged in no business
activities other than in connection with the Acquisitions and the financing
thereof.
The accompanying notes are an integral part of these consolidated financial
statements.
2
COMMEMORATIVE BRANDS, INC.
CONSOLIDATED INCOME STATEMENTS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATE)
(UNAUDITED)
PREDECESSORS
---------------------------
ARTCARVED BALFOUR
FOR THE SIX DECEMBER 16, SEPTEMBER 1, AUGUST 26,
MONTHS ENDED 1996 TO 1996 TO 1996 TO
FEBRUARY 28, MARCH 1, DECEMBER 15, DECEMBER 15,
1998 1997* 1996 1996
------------ ------------ ------------- ------------
Net sales.............................................. $ 82,532 $ 24,751 $ 27,897 $ 24,247
Cost of sales.......................................... 36,993 14,242 11,988 11,091
------------ ------------ ------------- ------------
Gross profit........................................... 45,539 10,509 15,909 13,156
Selling, general and administrative expenses........... 35,118 11,750 9,862 13,646
------------ ------------ ------------- ------------
Operating income....................................... 10,421 (1,241) 6,047 (490)
Interest expense, net.................................. 7,376 2,600 2,876 756
------------ ------------ ------------- ------------
Income (loss) before provision for income taxes...... 3,045 (3,841) 3,171 (1,246)
Provision for income taxes............................. -- 20 -- 13
------------ ------------ ------------- ------------
Net income (loss).................................... $ 3,045 $ (3,861) $ 3,171 $ (1,259)
------------ ------------ ------------- ------------
Preferred dividends.................................... (600) (250) -- --
------------ ------------ ------------- ------------
Net income (loss) to common stockholders............. $ 2,445 $ (4,111) $ 3,171 $ (1,259)
------------ ------------ ------------- ------------
------------ ------------ ------------- ------------
Basic and dulited earnings (loss) per share............ $ 6.52 $ (10.96)
------------ ------------
------------ ------------
Weighted average common shares outstanding and common
and common equivalent shares outstanding............. 375,000 375,000
------------ ------------
------------ ------------
- ------------------------
* Commemorative Brands, Inc. completed the acquisitions of ArtCarved and
Balfour on December 16, 1996, and until such date engaged in no business
activities other than in connection with the Acquisitions and the financing
thereof.
The accompanying notes are an integral part of these consolidated financial
statements.
3
COMMEMORATIVE BRANDS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE DATA)
(UNAUDITED)
PREFERRED STOCK
----------------------------------------------
SERIES A SERIES B COMMON STOCK ADDITIONAL
---------------------- ---------------------- ---------------------- PAID-IN
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT CAPITAL
--------- ----------- --------- ----------- --------- ----------- -----------
Balance, March 28, 1996 (date of
inception)........................ -- $ -- -- $ -- -- $ -- $ --
Issuance of Common Stock............ -- -- -- -- 375,000 4 2,666
Issuance of Preferred Stock......... 100,000 1 375,000 4 -- -- 47,495
Accrued Preferred Stock Dividends... -- -- -- -- -- -- --
Net loss............................ -- -- -- -- -- -- --
--------- ----- --------- ----- --------- ----- -----------
Balance, August 30, 1997............ 100,000 $ 1 375,000 4 375,000 $ 4 $ 50,161
Accrued Preferred Stock Dividends... -- -- -- -- -- -- --
Net income.......................... -- -- -- -- -- -- --
--------- ----- --------- ----- --------- ----- -----------
Balance, February 28, 1998.......... 100,000 $ 1 375,000 $ 4 375,000 $ 4 $ 50,161
--------- ----- --------- ----- --------- ----- -----------
--------- ----- --------- ----- --------- ----- -----------
RETAINED
EARNINGS
(DEFICIT) TOTAL
----------- ---------
Balance, March 28, 1996 (date of
inception)........................ $ -- $ --
Issuance of Common Stock............ -- 2,670
Issuance of Preferred Stock......... -- 47,500
Accrued Preferred Stock Dividends... (850) (850)
Net loss............................ (8,867) (8,867)
----------- ---------
Balance, August 30, 1997............ $ (9,717) $ 40,453
Accrued Preferred Stock Dividends... (600) (600)
Net income.......................... 3,045 3,045
----------- ---------
Balance, February 28, 1998.......... $ (7,272) $ 42,898
----------- ---------
----------- ---------
Commemorative Brands, Inc., completed the acquisitions of ArtCarved and
Balfour on December 16, 1996, and until such date engaged in no business
activities other than in connection with the Acquisitions and the financing
thereof.
The accompanying notes are an integral part of these consolidated financial
statements.
4
COMMEMORATIVE BRANDS, INC.
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
PREDECESORS
----------------------------
ARTCARVED BALFOUR
FOR THE SIX DECEMBER 16, SEPTEMBER 1, AUGUST 26,
MONTHS ENDED 1996 TO 1996 TO 1996 TO
FEBRUARY 28, MARCH 1, DECEMBER 15, DECEMBER 15,
1998 1997* 1996 1996
------------ ------------ ------------- -------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss).................................... $ 3,045 $ (3,861) $ 3,171 $ (1,259)
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities--
Depreciation and amortization...................... 3,316 1,290 1,992 544
Provision for doubtful accounts.................... 354 138 144 --
Changes in assets and liabilities--
(Increase) decrease in receivables............... (11,809) 9,156 (6,951) (8,239)
(Increase) decrease in inventories............... (2,124) (329) 124 (510)
(Increase) decrease in prepaid expenses and other
current assets................................. 3,249 (682) 1,378 496
(Increase) decrease in other assets.............. (754) (1,114) (3,270) 6
Increase in bank overdraft, accounts payable and
accrued expenses............................... 992 5,301 4,910 2,877
Increase in deferred compensation................ -- -- -- 14
------------ ------------ ------------- -------------
Net cash provided by (used in) operating
activities..................................... (3,731) 9,899 1,498 (6,071)
------------ ------------ ------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of fixed assets................... -- -- -- 571
Purchases of property, plant and equipment........... (3,021) (787) (195) (115)
Cash paid for the acquitions of ArtCarved and Balfour
including transaction costs........................ -- (170,200) -- --
------------ ------------ ------------- -------------
Net cash provided by (used in) by investing
activities..................................... (3,021) (170,987) (195) 456
------------ ------------ ------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net change in advances............................... -- -- 18,889 --
Proceeds from borrowings from Parent, net............ -- -- -- 5,649
Proceeds from debt issuance.......................... -- 120,200
Proceeds from issuance of common and preferred
stock.............................................. -- 50,000
Note borrowings (payments), net...................... 8,750 (5,200) (14,628) --
Payments on capital leases........................... -- -- -- (74)
------------ ------------ ------------- -------------
Net cash provided by financing activities........ 8,750 165,000 4,261 5,575
------------ ------------ ------------- -------------
NET INCREASE IN CASH AND CASH EQUIVALENTS.............. 1,998 3,912 5,564 (40)
CASH AND CASH EQUIVALENTS, beginning of period......... 2,174 1,094 -- 59
------------ ------------ ------------- -------------
CASH AND CASH EQUIVALENTS, end of period............... $ 4,172 $ 5,006 $ 5,564 $ 19
------------ ------------ ------------- -------------
------------ ------------ ------------- -------------
SUPPLEMENTAL DISCLOSURE
Cash paid during the period for--
Interest........................................... $ 6,506 $ 265 $ 6,453 $ 6
------------ ------------ ------------- -------------
------------ ------------ ------------- -------------
Taxes.............................................. $ -- $ 3 $ -- $ 8
------------ ------------ ------------- -------------
------------ ------------ ------------- -------------
SUPPLEMENTAL DISCLOSURE OF NONCASH FINANCING ACTIVITIES
Accrued preferred stock dividends.................... $ 600 $ 250 $ -- $ --
------------ ------------ ------------- -------------
------------ ------------ ------------- -------------
- ------------------------------
* Commemorative Brands, Inc., completed the acquisitions of ArtCarved and
Balfour on December 16, 1996, and until such date engaged in no business
activities other than in connection with the Acquisitions and the financing
thereof.
The accompanying notes are an integral part of these consolidated financial
statements.
5
COMMEMORATIVE BRANDS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(1) BACKGROUND AND ORGANIZATION
Commemorative Brands, Inc., a Delaware corporation (together with its
subsidiaries, CBI or the Company), is a manufacturer and supplier of class rings
and other graduation-related scholastic products for the high school and college
markets and manufactures and markets recognition and affinity jewelry designed
to commemorate significant events, achievements and affiliations. The Company's
scholastic product line consists of high school and college class rings (the
Company's predominate product offering) and graduation-related fine paper
products such as announcements, name cards and diplomas. The Company is a
leading manufacturer of class rings in the United States. The Company's
corporate office and primary manufacturing facilities are located in Austin,
Texas.
CBI was initially formed in March 1996 by Castle Harlan Partners II, L.P.
(CHP II), a Delaware limited partnership and private equity investment fund, for
the purpose of acquiring ArtCarved and Balfour (as defined below) and, until
December 16, 1996, engaged in no business activities other than in connection
with the Acquisitions (as defined below) and the financing thereof.
The accompanying consolidated financial statements have been prepared
without audit pursuant to the rules and regulations of the Securities and
Exchange Commission. Certain information and footnote disclosures normally
included in financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted pursuant to such rules and
regulations, although the Company believes the disclosures are adequate to make
the information presented not misleading. In the opinion of management, all
adjustments (consisting only of normal recurring adjustments) necessary for a
fair presentation of the financial position and results of operations for the
periods presented have been included. Operating results for the six months ended
February 28, 1998 are not necessarily indicative of the results that may be
expected for the fiscal year ending August 29, 1998.
(2) ACQUISITIONS
On December 16, 1996, the Company completed the acquisitions (the
Acquisitions) of substantially all of the scholastic and recognition and
affinity product assets and businesses of the ArtCarved Class Rings (ArtCarved)
operations of CJC Holdings, Inc. (CJC), from CJC and of L. G. Balfour Company,
Inc. (Balfour), from Town & Country Corporation (Town & Country).
In consideration for ArtCarved, CBI paid CJC the sum of $115.1 million in
cash and assumed certain related liabilities. In consideration for Balfour, CBI
paid Town & Country and Balfour the sum of $45.9 million in cash and assumed
certain related liabilities. In addition, CBI purchased the gold on consignment
to Balfour, as of the closing date for a cash purchase price of approximately
$5.4 million.
The following represents the allocation of the purchase prices for ArtCarved
and Balfour to their respective assets and liabilities based on third-party
appraisals and management's estimate of fair values.
6
COMMEMORATIVE BRANDS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
(2) ACQUISITIONS (CONTINUED)
The allocation of the purchase prices (including transaction costs) for the
Acquisitions is as set forth below (in thousands):
ARTCARVED BALFOUR
---------- ----------
Current assets........................................................ $ 23,220 $ 35,497
Property, plant and equipment......................................... 17,039 15,042
Goodwill.............................................................. 64,127 17,885
Trademarks............................................................ 17,740 13,000
Other long-term assets................................................ 1,687 171
Accounts payable and accrued expenses................................. (6,066) (22,334)
Other long-term liabilities........................................... -- (6,808)
---------- ----------
$ 117,747 $ 52,453
---------- ----------
---------- ----------
The Company has closed substantially all of the former Balfour manufacturing
and administration facilities and moved the former Balfour operations from
Attleboro, Massachusetts, to Austin, Texas.
(3) THE PREDECESSORS
The Company completed the Acquisitions of ArtCarved and Balfour on December
16, 1996. The accompanying financial statements include the predecessor
operations of ArtCarved as a division of CJC and of Balfour as a wholly owned
subsidiary of Town & Country for historical periods prior to the acquisition
date of December 16, 1996.
The ArtCarved predecessor financial statements present information with
respect to the assets and businesses acquired by the Company from CJC (the
ArtCarved Business). Since the ArtCarved Business was not operated nor accounted
for as a separate entity for the periods presented in the accompanying financial
statements, it was necessary for management to make allocations (carve-outs) for
certain accounts to reflect the financial statements of the ArtCarved Business.
Management considers the allocations to be reasonable and believes the
accompanying financial statements materially represent the operations of the
ArtCarved Business on a stand-alone basis.
(4) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BUSINESS CONDITIONS
The results of operations of the Company for the fiscal year ended August
30, 1997 and the six months ended February 28, 1998, were negatively impacted as
a result of the consolidation of the Attleboro and North Attleboro,
Massachusetts operations into the Austin, Texas facilities (the "Combination")
which was substantially completed during January, 1998. The Company's
consolidation and integration of operations in the Combination required
substantial time and cost due to complications arising from the integration of
different order entry and manufacturing processes required for the Balfour ring
product line at the Company's Texas facilities. The additional time required to
train new personnel to implement the Balfour class ring operations resulted in
ring manufacturing headcount levels higher than those previously maintained by
the predecessor companies to provide service levels comparable to those
previously provided at the predecessor's Massachusetts facilities. The Company
incurred costs from inefficiencies and
7
COMMEMORATIVE BRANDS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
(4) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
the higher than expected headcount during the first two quarters of fiscal 1998.
During January 1998 headcount levels were reduced. There can be no assurance
that the operations formerly conducted by each of the Company's predecessors
will be fully integrated or as to the amount of any cost savings that may result
from such integration.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from these estimates.
SEASONALITY
The Company's scholastic product sales tend to be seasonal. Class ring sales
are historically highest during October through December (which overlaps the
Company's first and second fiscal quarters), when students have returned to
school after the summer recess and orders are taken for delivery of class rings
to students before the winter holiday season. Sales of the Company's fine paper
products are predominantly made during February through April (which overlaps
the Company's second and third fiscal quarters) for graduation in May and June.
ArtCarved and Balfour historically experienced operating losses during the
period of the Company's fourth fiscal quarter, which includes the summer months
when school is not in session. The Company's recognition and affinity product
line is not seasonal in any material respect, although sales generally are
highest during the winter holiday season and in the period prior to Mother's
Day. As a result, the effects of seasonality of the class ring business on the
Company are tempered by the Company's relatively broad product mix. As a result
of the foregoing, the Company's working capital requirements tend to exceed its
operating cash flows from July through December.
NEW ACCOUNTING PRONOUNCEMENTS
In March 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (SFAS) No. 128, "Earnings Per Share." SFAS No.
128 revises the standards for computing earnings per share currently prescribed
by Accounting Principles Board (APB) Opinion No. 15. SFAS No. 128 retroactively
revises the presentation of earnings per share in the financial statements. The
Company adopted SFAS No. 128 for the fiscal year ending August 29, 1998. Basic
and diluted earnings per share are the same, as the Company's outstanding
warrants and stock options are not included in the computation of diluted
earnings per share because to do so would be antidilutive.
SFAS No. 130, "Reporting Comprehensive Income," is required to be adopted by
the Company for the fiscal year ending August 28, 1999, and the statement
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 is not anticipated to
have any impact on the Company 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 changes, currency translation adjustments,
unrealized gains and losses on available-for-sale securities, etc.).
8
COMMEMORATIVE BRANDS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
(4) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
SFAS No. 131, "Disclosures About Segments of an Enterprise and Related
Information," is required to be adopted by the Company for the fiscal year
ending August 28, 1999. SFAS No. 131 provides revised disclosure guidelines for
segments of an enterprise based on a management approach to defining operating
segments. The Company currently operates in only one industry segment and
analyzes operations on a company-wide basis; therefore, the statement is not
expected to impact the Company.
(5) INVENTORIES
A summary of inventories is as follows (in thousands):
FEBRUARY 28, AUGUST 30,
1998 1997
------------ -----------
Raw materials................................... $ 10,035 $ 8,769
Work in process................................. 2,445 1,877
Finished goods.................................. 1,411 1,121
------------ -----------
$ 13,891 $ 11,767
------------ -----------
------------ -----------
Cost of sales includes depreciation and amortization of $1,052,000 and
$500,000 for the six months ended February 28, 1998 and December 16, 1996 to
March 1, 1997 for Commemorative Brands, Inc. (see Note 1).
(6) LONG-TERM DEBT
Long-term debt consists of the following (in thousands):
FEBRUARY 28, AUGUST 30,
1998 1997
------------ ----------
11% senior subordinated notes due 2007.............................. $ 90,000 $ 90,000
Term loan facility.................................................. 24,500 24,750
Bank revolver....................................................... 19,700 10,700
------------ ----------
Total debt........................................................ 134,200 125,450
Less-current portion................................................ 750 750
------------ ----------
Total long-term debt.............................................. $ 133,450 $ 124,700
------------ ----------
------------ ----------
The weighted average interest rate of debt outstanding as of February 28,
1998 and August 30, 1997 was 10.4 percent.
11 PERCENT SENIOR SUBORDINATED NOTES
The Company's 11 percent senior subordinated notes mature on January 15,
2007. The notes are redeemable at the option of the Company, in whole or in
part, at any time on or after January 15, 2002, plus accrued and unpaid interest
and liquidated damages (as defined), if any, thereon to the date of redemption.
In the event the Company completes one or more public equity offerings (as
defined) on or before January 15, 2000, the Company may, in its discretion, use
the net cash proceeds to redeem up to
9
COMMEMORATIVE BRANDS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
(6) LONG-TERM DEBT (CONTINUED)
33 1/3 percent of the original principal amount of the notes at a redemption
price equal to 111 percent of the principal amount thereof, plus accrued and
unpaid interest and liquidated damages, if any, thereon to the date of
redemption, with the net proceeds of one or more public equity offerings,
provided that at least 66 2/3 percent of the original principal amount of the
notes remains outstanding immediately after each such redemption.
The 11 percent senior subordinated notes contain certain covenants that,
among other things, limit the ability of the Company (a) to incur additional
indebtedness and issue preferred stock, (b) to pay dividends or make certain
other restricted payments, (c) to enter into transactions with affiliates, (d)
to create certain liens, (e) to make certain asset dispositions and (f) to merge
or consolidate with, or transfer substantially all of its assets to, another
person. The Company is in compliance with all of its debt covenants as of
February 28, 1998 and August 30, 1997.
REVOLVING CREDIT, TERM LOAN AND GOLD CONSIGNMENT AGREEMENT
The Company has a revolving credit, term loan and gold consignment agreement
(the Bank Agreement) with a group of banks pursuant to which the Company
initially borrowed $25 million under a term loan facility and may borrow up to
$35 million under a revolving credit and gold facility. Loans outstanding under
the Bank Agreement bear interest at either fixed or floating rates based upon
the interest rate option selected by the Company.
TERM LOAN FACILITY
The term loan facility (Term Loan) matures on December 16, 2003. The Company
may prepay the Term Loan at any time. The Company must repay specified amounts
of the Term Loan in 28 consecutive quarterly installments, which commenced March
31, 1997.
REVOLVING CREDIT AND GOLD FACILITIES
The revolving credit and gold facilities permit borrowings of up to a
maximum aggregate principal amount of $35 million based upon availability under
a borrowing base based on eligible receivables and eligible inventory (each as
defined), with a sublimit of $5 million for letters of credit and $10 million
for gold borrowing or consignment. Management believes that it will have
sufficient availability under these facilities to meet its working capital
needs.
The Bank Agreement contains certain financial covenants that require the
Company to maintain certain minimum levels of (a) senior funded debt to earnings
before interest, taxes, depreciation and amortization (EBITDA), (b) consolidated
EBITDA and (c) interest coverage each as defined in the Bank Agreement. The Bank
Agreement also contains other covenants which, among other things, limit the
ability of the Company and its subsidiaries to (a) incur additional
indebtedness, (b) acquire and dispose of assets, (c) create liens, (d) make
capital expenditures, (e) pay dividends on or redeem shares of the Company's
capital stock and (f) make certain investments. The Company is in compliance
with all of its debt covenants under the Bank Agreement as of February 28, 1998
and August 30, 1997.
10
COMMEMORATIVE BRANDS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
(6) LONG-TERM DEBT (CONTINUED)
CONSIGNED GOLD
Under the Company's gold consignment/loan arrangement, the Company has the
ability to have on consignment up to 26,000 ounces of gold approximating $10
million or alternatively the ability to borrow up to $10 million for the
purchase of gold. Under this arrangement, the Company is limited to a maximum
value of $10 million in consigned inventory and/or gold loan funds. For the six
months ended February 28, 1998 and the fiscal year ended August 30, 1997 (see
Note 1), the Company expensed approximately $138,000 and $203,000, respectively,
in connection with consignment fees. Under the terms of the consignment
arrangement, the Company does not own the consigned gold until it is shipped in
the form of a ring to a customer. Accordingly, the Company does not include the
value of consigned gold in inventory or the corresponding liability for
financial statement purposes. As of February 28, 1998 and August 30, 1997, the
Company held approximately 13,127 ounces and 16,265 ounces, respectively, valued
at $3.9 million and $5.3 million, respectively, of gold on consignment from one
of its lenders.
The Company's management believes the carrying amount of long-term debt,
including the current maturities, approximates fair value as of February 28,
1998 and August 30, 1997, based upon current rates offered for debt with the
same or similar debt terms.
(7) COMMITMENTS AND CONTINGENCIES
Certain Company facilities and equipment are leased under agreements
expiring at various dates through 2005.
The Company is not party to any pending legal proceedings other than
ordinary routine litigation incidental to its business. In management's opinion,
adverse decisions in those legal proceedings, in the aggregate, would not have a
materially adverse impact on the Company's results of operations or financial
position.
(8) INCOME TAXES
For the six months ended February 28, 1998, no current or deferred provision
or benefit exists due to the net operating losses and loss carry-forwards
incurred by the Company.
(9) STOCKHOLDERS' EQUITY
The Company is authorized to issue 750,000 shares of preferred stock, par
value $.01 per share, and 750,000 shares of Common Stock, par value $.01 per
share. The Company currently has issued and outstanding 100,000 shares of Series
A Preferred, 375,000 shares of Series B Preferred and 375,000 shares of Common
Stock.
SERIES A PREFERRED STOCK (SERIES A PREFERRED)
The holders of shares of Series A Preferred are not entitled to voting
rights. Dividends on the Series A Preferred are payable in cash, when, as and if
declared by the board of directors of the Company, out of funds legally
available therefor, on a quarterly basis, commencing on January 31, 1997.
Dividends on the Series A Preferred accrue 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
11
COMMEMORATIVE BRANDS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
(9) STOCKHOLDERS' EQUITY (CONTINUED)
which are declared are payable pro rata to the holders. No dividends or interest
accrue on any accrued and unpaid dividends. The Company's 11 percent senior
subordinated notes and the Bank Agreement generally restrict the Company's
ability to pay dividends on the Series A Preferred.
The Series A Preferred is not subject to mandatory redemption. The Series A
Preferred is redeemable at any time at the option of the Company; however, the
Company's 11 percent senior subordinated notes and bank debt restrict the
Company's ability to redeem the Series A Preferred. In the event of any
liquidation, dissolution or winding up of the Company, the holders of the Series
A Preferred shall receive payment of the liquidation value of $100 per share
plus all accrued and unpaid dividends prior to the payment of any distributions
to the holders of the Series B Preferred or the holders of the common stock of
the Company (Common Stock). So long as shares of the Series A Preferred remain
outstanding, the Company may not declare, pay or set aside for payment dividends
on, or redeem or otherwise repurchase any shares of, the Series B Preferred or
Common Stock.
SERIES B PREFERRED STOCK (SERIES B PREFERRED)
The holders of shares of Series B Preferred are entitled to one vote per
share, voting together with the holders of the Common Stock as one class on all
matters presented to the shareholders generally. No dividends accrue on the
Series B Preferred. The Company's 11 percent senior subordinated notes and the
Bank Agreement generally restrict the Company's ability to pay dividends on
Series B Preferred.
Dividends may be paid on the Series B Preferred if and when declared by the
board of directors of the Company out of funds legally available therefor. The
Series B Preferred is nonredeemable. In the event of any liquidation,
dissolution or winding up of the Company, the holders of the Series B Preferred
shall receive payment of the liquidation value of $100 per share plus any
accrued and unpaid dividends prior to the payment of any distributions to the
holders of the Common Stock of the Company. So long as shares of the Series B
Preferred remain outstanding, the Company may not declare, pay or set aside for
payment any dividends on the Common Stock.
COMMON STOCK
The holders of Common Stock are entitled to one vote for each share held of
record on all matters submitted to a vote of shareholders, including the
election of directors, and vote together as one class with the holders of the
Series B Preferred.
Dividends may be paid on the Common Stock if and when declared by the board
of directors of the Company out of funds legally available therefor. The Company
does not expect to pay dividends on the Common Stock in the foreseeable future.
The Company's 11 percent senior subordinated notes and the Bank Agreement
generally restrict the Company's ability to pay dividends on Common Stock.
COMMON STOCK PURCHASE WARRANTS
The Company has issued warrants, exercisable to purchase an aggregate of
21,405 shares of Common Stock (or an aggregate of approximately 5.4 percent of
the outstanding shares of Common Stock on a fully diluted basis), at an initial
exercise price of $6.67 per share, at any time on or after December 16, 1997,
and on or before January 31, 2008.
12
COMMEMORATIVE BRANDS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
(9) STOCKHOLDERS' EQUITY (CONTINUED)
In accordance with a subscription agreement entered into by the Company and
CHP II and certain of its affiliates (the Castle Harlan Group), the Company
granted the Castle Harlan Group certain registration rights with respect to the
shares of capital stock owned by them pursuant to which the Company agreed,
among other things, to effect the registration of such shares under the
Securities Act of 1933 at any time at the request of the Castle Harlan Group.
The Company also granted to the Castle Harlan Group unlimited piggyback
registration rights on certain registrations of shares of capital stock by the
Company.
STOCK-BASED COMPENSATION PLAN
The Company has one stock option plan (the 1997 Stock Option Plan),
effective as of July 29, 1997, for which a total of 69,954 shares of Common
Stock have been reserved for issuance; 35,484 of those shares were available for
grant to directors and employees of the Company as of February 28, 1998. The
1997 Stock Option Plan provides for the granting of both incentive and
nonqualified stock options. Options granted under the 1997 Stock Option Plan
have a maximum term of 10 years and are exercisable under the terms of the
respective option agreements at fair market value of the Common Stock at the
date of grant. Payment of the exercise price must be made in cash or in whole or
in part by delivery of shares of the Company's Common Stock. Any Common Stock
issued upon exercise of options granted pursuant to the 1997 Stock Option Plan
will be deposited in a voting trust in favor of an affiliate of Castle Harlan,
Inc. as voting trustee.
(10) RELATED-PARTY TRANSACTIONS
The Company entered into a management agreement dated December 16, 1996 (the
Management Agreement), with Castle Harlan, Inc. (the Manager), pursuant to which
the Manager agreed to provide business and organizational strategy, financial
and investment management and merchant and investment banking services to the
Company upon the terms and conditions set forth therein. As compensation for
such services, the Company agreed to pay the Manager $1.5 million per year,
which amount has been paid in advance for the first year and is payable
quarterly in arrears thereafter. The agreement is for a term of 10 years,
renewable automatically from year to year thereafter unless the Castle Harlan
Group then owns less than 5 percent of the then outstanding capital stock of the
Company. The Company has agreed to indemnify the Manager against liabilities,
costs, charges and expenses relating to the Manager's performance of its duties,
other than such of the foregoing resulting from the Manager's gross negligence
or willful misconduct. The indenture dated as of December 16, 1996, between the
Company and Marine Midland Bank, as trustee, related to the 11 percent senior
subordinated notes and the Company's Bank Agreement prohibit payment of the
management fee in the event of a default by the Company.
13
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
In the following discussions, unless the context otherwise requires (i) the
term "CBI" refers to Commemorative Brands, Inc. prior to the consummation of the
acquisitions of ArtCarved and Balfour (the "Acquisitions"), (ii) the term
"ArtCarved" refers to the predecessor class ring assets, businesses, and
operations of CJC Holdings, Inc. acquired by CBI, (iii) the term "Balfour"
refers to the predecessor assets, businesses and operations of L. G. Balfour
Company, Inc. acquired by CBI, and (iv) the term "the Company" refers to CBI
consolidated with its subsidiaries as combined with ArtCarved and Balfour after
giving effect to the Acquisitions.
GENERAL
The Company is a manufacturer and supplier of class rings and
graduation-related scholastic products for the high school and college markets
and also manufactures and markets recognition and affinity jewelry designed to
commemorate significant events, achievements and affiliations.
CBI was initially formed in March 1996 by Castle Harlan Partners II, L.P., a
Delaware limited partnership and private equity investment fund ("CHP II") for
the purpose of acquiring ArtCarved and Balfour. On December 16, 1996, CBI
completed the Acquisitions. Until December 16, 1996, CBI engaged in no business
activities other than in connection with the Acquisitions and the financing
thereof.
The Company has a 52/53-week fiscal year ending on the last Saturday of
August.
RESULTS OF OPERATIONS
The financial statements of the Company for the three and six months ended
February 28, 1998 reflect the operations of the Company for the three and six
months ended February 28, 1998. For comparative purposes, the prior year results
of operations are comprised of operations of the Company from December 16, 1996
(the date of Acquisition) to March 1, 1997, combined with the operations of the
predecessors from September 1, 1996 and August 26, 1996 for ArtCarved and
Balfour, respectively, to December 15, 1996 (the Combined Prior Year Six-Month
period) and from November 30, 1996 and November 25, 1996 for ArtCarved and
Balfour, respectively to December 15, 1996 (the Combined Prior Year Three-Month
period).
The results of operations of the Company for the six months ended February
28, 1998 and the period of December 16, 1996 to March 1, 1997 were negatively
impacted as a result of the consolidation of the Attleboro and North Attleboro,
Massachusetts operations into the Austin, Texas facilities (the "Combination")
which was substantially completed during January 1998. The Company's
consolidation and integration of operations in the Combination required
substantial time and cost due to complications arising from the integration of
different order entry and manufacturing processes required for the Balfour ring
product line at the Company's Texas facilities. The additional time required to
train new personnel to implement the Balfour class ring operations resulted in
ring manufacturing headcount levels higher than those previously maintained by
the predecessor companies to provide service levels comparable to those
previously provided at the predecessor's Massachusetts facilities. The Company
incurred costs from inefficiencies and the higher than expected headcount during
the first two quarters of fiscal 1998. During January 1998 headcount levels were
reduced to levels necessary to sustain future operations. There can be no
assurance that the operations formerly conducted by each of the Company's
predecessors will be fully integrated or as to the amount of any cost savings
that may result from such integration.
COST SAVINGS
ELIMINATION OF OCCUPANCY AND FIXED OVERHEAD COSTS--Two of the three Balfour
facilities were closed during fiscal 1997 and the occupancy and overhead costs
including duplicative facilities-related personnel associated with these two
facilities (the Attleboro, Massachusetts ring manufacturing plant and the North
14
Attleboro, Massachusetts administrative facility) were eliminated. The third
Balfour facility, the North Attleboro insignia plant, was not closed. This
facility contains not only the insignia plant, but also the Balfour ring tooling
operation.
MANUFACTURING INTEGRATION--The move of the Balfour ring manufacturing
operation was substantially completed in June, 1997. Expanded manufacturing
capacity in Austin was adequate to absorb the additional production of the
Balfour rings. However, difficulties were encountered in the efficient
manufacture of the Balfour rings. Certain of the cost savings achieved by the
Company by the reduction of duplicative personnel were offset by additional
labor and overhead incurred to manufacture Balfour rings. Manufacturing
inefficiencies were primarily caused by:
- PEOPLE--The specific Balfour product knowledge that was "lost" due to
Massachusetts employees electing not to relocate to Texas resulted in
higher than normal training expenses and additional costs to temporarily
place former Balfour employees (managers and supervisors) in the Texas
plant.
- TOOLING--Because Balfour ring tooling is older and more complicated to use
than the ArtCarved ring tooling, the Company experienced higher than
normal training costs and lower levels of efficiencies than the wax mold
operations at the Balfour Attleboro ring plant.
- SYSTEMS--The Balfour computer system is heavily dependent on manual
processing and human interaction. Difficulties were experienced in the
transfer of user knowledge and overall lack of system documentation.
Therefore, labor costs in excess of those anticipated by management were
incurred to enter, schedule, track and ship the Balfour rings. The Balfour
computer systems are operating on a Hewlett Packard HP3000 platform. The
consolidation plans of the Company assumed these systems would be
converted to an IBM AS400 platform. The conversion of these systems is
expected to be completed by August, 1999.
THREE MONTHS ENDED FEBRUARY 28, 1998 AS COMPARED TO THE COMBINED PRIOR YEAR
THREE MONTH PERIOD.
NET SALES--Net sales increased $8.8 million, or 24.8%, to $44.2 million for
the three months ended February 28, 1998 as compared to $35.4 million for the
Combined Prior Year Three Month Period. The increase in sales resulted primarily
from an increase in the sale of class rings of approximately $5.5 million. This
increase was partially as a result of the delay of shipments of class rings due
to the transition of the Balfour operations from Massachusetts to Texas in the
three months ended November 30, 1997, and an increase in sales of high school
ring units. The increase in sales also resulted from additional sales of
recognition and affinity products as a result of an increase in sales of
personalized family jewelry products and an increase in the sales of the fine
paper products.
GROSS PROFIT--Gross profit increased $7.9 million, or 48.2%, to $24.4
million for the three months ended February 28, 1998 as compared to $16.5
million for the Combined Prior Year Three Month Period. As a percentage of net
sales, gross profit was 55.2% for the three months ended February 28, 1998
compared to 46.5% for the Combined Prior Year Three Months Period. Cost of sales
for the period December 16, 1996 to March 1, 1997 for the Company, includes an
incremental charge of $2.6 million relating to an increase in inventory
valuation at the time of the Acquisitions in accordance with purchase price
accounting which was expensed to cost of sales as the related inventory was
sold. Combined gross profit for the Prior Year Three Month Period, excluding
this $2.6 million charge, would have been 53.9% of sales. The gross profit
percentage increase is mainly due to the increase in sales of high school ring
units.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES--Selling, general and
administrative expenses increased $2.0 million, or 11.7%, to $18.6 million for
the three months ended February 28, 1998 as compared to $16.6 million for the
Combined Prior Year Three Month Period. As a percentage of net sales, selling,
general and administrative expenses decreased to 42.0% for the three months
ended February 28, 1998 from 46.9% for the Combined Prior Year Three Month
Period. The decrease was a result of decreased selling and marketing expenses as
a percentage of sales primarily related to the recognition and affinity
15
products offset by an increase in general and administrative expenses as a
percentage of net sales as a result of the Combination.
OPERATING INCOME--As a result of the foregoing, operating income increased
$6.0 million, to $5.8 million for the three months ended February 28, 1998 as
compared to a loss of $0.1 million for the Combined Prior Year Three Month
Period. As a percentage of net sales, operating income increased to 13.2% for
the three months ended February 28, 1998 from a loss of 0.4% for the Combined
Prior Year Three Month Period.
INTEREST EXPENSE--Interest expense, net was $3.8 million for the three
months ended February 28, 1998. The majority of the interest expense consists of
interest on the Bank Credit Facility of $24.5 million at rates ranging from 9%
- -10.5% and interest on the $90.0 million of Notes, at a rate of 11%.
PROVISION FOR INCOME TAXES--For the three months ended February 28, 1998, no
current or deferred provision or benefit exists due to the net operating losses
and loss carry-forwards incurred by the Company.
NET INCOME--As a result of the foregoing, net income increased $5.4 million,
to $2.1 million for the three months ended February 28, 1998 as compared to a
net loss of $3.3 million for the Combined Prior Year Three Month Period.
SIX MONTHS ENDED FEBRUARY 28, 1998 AS COMPARED TO THE COMBINED PRIOR YEAR
SIX MONTH PERIOD
NET SALES--Net sales increased $5.6 million, or 7.3%, to $82.5 million for
the six months ended February 28, 1998 as compared to $76.9 million for the
Combined Prior Year Six Month Period. The increase in sales resulted from an
increase in the sale of high school rings of approximately $2.4 million, an
increase in sales of recognition and affinity products as a result of an
increase in sales of personalized family jewelry products, and an increase in
the sales of the fine paper products.
GROSS PROFIT--Gross profit increased $6.0 million, or 15.1%, to $45.5
million for the six months ended February 28, 1998 as compared to $39.6 million
for the Combined Prior Year Six Month Period. As a percentage of net sales,
gross profit was 55.2% for the six months ended February 28, 1998 compared to
51.5% for the Combined Prior Year Six Month Period. Cost of sales for the period
December 16, 1996 to March 1, 1997 for the Company includes an incremental
charge of $2.6 million related to an increase in inventory valuation at the time
of the Acquisitions in accordance with purchase price accounting which was
expensed to cost of sales as the related inventory was sold. Combined gross
profit for the Combined Prior Year Six Month Period, excluding this $2.6 million
charge, would have been 54.8% of sales. The gross profit percentage increase is
mainly due to an increase in sales of high school ring units and the increase in
gross profit related to the recognition and affinity products through the
personalized family jewelry products.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES--Selling, general and
administrative expenses decreased $0.2 million, or 0.4%, to $35.1 million for
the six months ended February 28, 1998 compared to the $35.3 million for the
Combined Prior Year Six Month Period. As a percentage of net sales, selling,
general and administrative expenses decreased to 42.6% for the six months ended
February 28, 1998 compared to 45.9% for the Combined Prior Year Six Month
Period. The decrease was a result of decreased selling and marketing expenses as
a percentage of sales primarily related to the recognition and affinity products
offset by an increase in general and administrative expenses as a percentage of
net sales as a result of the Combination.
OPERATING INCOME--As a result of the foregoing, operating income increased
$6.1 million, to $10.4 million for the six months ended February 28, 1998
compared to $4.3 million for the Combined Prior Year Six Month Period. As a
percentage of net sales, operating income increased to 12.6% for the six months
ended February 28, 1998 compared to 5.6% for the Combined Prior Year Six Month
Period.
16
INTEREST EXPENSE--Interest expense, net was $7.4 million for the six months
ended February 28, 1998. The majority of the interest expense was related to the
Bank Credit Facility of $24.5 million at rates ranging from 9%-10.5% and
interest on the $90.0 million of Notes, at a rate of 11%.
PROVISION FOR INCOME TAXES--For the six months ended February 28, 1998, no
current or deferred provision or benefit exists due to the net operating losses
and loss carry-forwards incurred by the Company.
NET INCOME--As a result of the foregoing, net income increased $5.0 million,
to $3.0 million for the six months ended February 28, 1998 as compared to the
net loss of $2.0 million for the Combined Prior Year Six Month Period.
SEASONALITY
The Company's scholastic product sales tend to be seasonal. Class ring sales
are historically highest during October through December (which overlaps the
Company's first and second fiscal quarters), when students have returned to
school after the summer recess and orders are taken for delivery of class rings
to students before the winter holiday season. Sales of the Company's fine paper
products are predominantly made during February through April (which overlaps
the Company's second and third fiscal quarters) for graduation in May and June.
ArtCarved and Balfour historically experienced operating losses during the
period of the Company's fourth fiscal quarter, which includes the summer months
when school is not in session. The Company's recognition and affinity product
line is not seasonal in any material respect, although sales generally are
highest during the winter holiday season and in the period prior to Mother's
Day. As a result, the effects of seasonality of the class ring business on the
Company are tempered by the Company's relatively broad product mix. As a result
of the foregoing, the Company's working capital requirements tend to exceed its
operating cash flows from July through December.
LIQUIDITY AND CAPITAL RESOURCES
As of February 28, 1998, the Company has Revolving Credit and Gold
Facilities (as defined below) in the amount of $35.0 million with a borrowing
base limitation of $29.4 million and had $9.7 million available for future
borrowings under its Bank Agreement, as defined below. As of March 13, 1998 the
Company had a borrowing base limitation of $34.8 million and had $15.1 million
available for future borrowings. The borrowing base limitation is recalculated
monthly. Management believes that cash flows generated by existing operations
and its available borrowings under its Bank Agreement will be sufficient to fund
its ongoing operations. The Company's liquidity needs arise primarily from debt
service on the Bank Agreement and the Notes (defined below) payments required
under a Management Agreement with Castle Harlan, Inc. and working capital and
capital expenditure requirements.
The Company's cash used in operating activities for the six months ended
February 28, 1998, was primarily the net result of the Company's seasonality.
There were increased accounts receivable and increased inventories, which were
greater than the decrease in prepaid expenses and other current assets and
increase in bank overdraft, accounts payable and accrued expenses. The majority
of the decrease in prepaid expenses and other current assets relates to the
prepaid management fee and prepaid advertising being lower at this time of year.
Also affecting cash were the incremental costs associated with the closing
of the Attleboro facilities and the related moving and consolidation expenses in
Austin. The Company established a $12.1 million reserve for these expenses. As
of February 28, 1998, $10.4 million of these costs had been incurred. The
remaining balance of $1.7 million primarily consists of reserves for remaining
severance expenses payable to Balfour employees. The Company's projected capital
expenditures for fiscal year 1998 are $3.7 million, not including computer
conversion capital expenditures not to exceed in the aggregate $5.5 million
during the fiscal years 1998, 1999 and the first fiscal quarter of fiscal year
2000. For the six months ended
17
February 28, 1998, the Company incurred $3.0 million in capital expenditures for
manufacturing equipment, tools and dies, software development and computer
conversion capital expenditures.
The following summarizes certain provisions governing the Revolving Credit,
Term Loan and Gold Consignment Agreement, as amended (the "Bank Agreement"),
dated December 16, 1996, by and among the Company, as borrower, The First
National Bank of Boston ("FNBB") and Rhode Island Hospital Trust National Bank
("RIHT", and together with FNBB, as agent, the "Agents") and the financial
institutions party thereto.
The Bank Agreement consists of a senior secured credit facility of up to
$60,000,000, including (i) a $25,000,000 term loan facility (the "Term Loan
Facility"), (ii) a $25,000,000 revolving credit facility (with a letter of
credit sublimit of $5,000,000) (the "Revolving Credit Facility") and (iii) a
$10,000,000 gold consignment and revolving credit facility (the "Gold Facility",
and together with the Revolving Credit Facility, the "Revolving Credit and Gold
Facilities").
The Term Loan Facility matures on December 16, 2003. The Company may prepay
the Term Loan Facility at any time, except that any repayment of any portion of
the Term Loan Facility bearing interest at the Eurodollar Rate may only be
repaid on the last day of the Interest Period relating thereto. The Company must
repay the Term Loan Facility in 28 consecutive quarterly installments, which
commenced March 31, 1997. The final installment of principal of the Term Loan
Facility is due and payable on December 16, 2003. In addition, subject to
certain exceptions set forth in the Bank Credit Agreement, the Company must make
mandatory prepayments of the Term Loan Facility from certain asset sales, equity
issuances, and 50% of Consolidated Excess Cash Flow (as defined).
Availability under the Revolving Credit Facility and the Gold Facility is
subject to a borrowing base limitation (the "Borrowing Base") based on the
aggregate of certain percentages of Eligible Receivables (as defined) and
Eligible Inventory (as defined) of the Company. The borrowing base limitation is
recalculated each month. If the aggregate amount of loans and other extensions
of credit under the Revolving Credit Facility and the Gold Facility exceeds the
Borrowing Base, the Company must immediately prepay or cash collateralize its
obligations under the Revolving Credit Facility to the extent of such excess.
The Gold Facility consists of (a) a purchase and consignment facility,
pursuant to which RIHT, as gold agent, on behalf of the lenders under the Gold
Facility, will purchase amounts of gold inventory for the Company and consign
such amounts to the Company, (b) a consignment facility, pursuant to which the
gold agent, on behalf of the lenders under the Gold Facility, will obtain and
consign amounts of gold to the Company and (c) a revolving loan facility.
Loans outstanding under the Bank Agreement bear interest at either fixed or
floating rates based upon the interest rate option selected by the Company. The
weighted average interest rate of debt outstanding as of February 28, 1998 and
August 30, 1997 was 10.5 percent.
The Revolving Credit and Gold Facilities may be borrowed, repaid and
reborrowed from time to time until December 16, 2001, subject to certain
conditions on the date of any such borrowing. Amounts of principal repaid on the
Term Loan Facility may not be reborrowed.
The Bank Agreement is secured by a first priority lien on substantially all
assets of the Company, including all accounts receivable, inventory, equipment,
general intangibles, real estate, buildings and improvements and the outstanding
stock of its subsidiaries. The Company's U.S. subsidiary, CBI North America,
Inc., has guaranteed the Company's obligations and granted a similar security
interest.
The Bank Agreement contains certain customary affirmative and negative
covenants, including, among other things, requirements that the Company and its
subsidiaries (i) periodically deliver certain financial information (including
monthly borrowing base, consigned metal and receivables aging reports), (ii) not
merge or make certain asset sales, (iii) not permit certain liens to exist on
its assets, (iv) not incur
18
additional debt or liabilities except as may be permitted under the terms of the
Bank Agreement, (v) not make capital expenditures in excess of limits set forth
in the Bank Agreement, (vi) not declare or make certain dividend payments, (vii)
not make certain investments or consummate certain acquisitions, (viii) not
enter into any consignment transactions as consignee (except for deliveries of
diamonds), (ix) not create a new subsidiary, (x) not establish any new bank
account, and (xi) establish concentration accounts with FNBB and direct all of
its depositary banks to transfer all amounts deposited (on a daily basis) to
such concentration accounts (for application in accordance with the Bank
Agreement). In addition, the Company must comply with certain financial
covenants, including maintaining a specified minimum interest coverage ratio of
Consolidated EBITDA to Consolidated Interest Expense, maximum Consolidated
Senior Funded Debt to Consolidated EBITDA and minimum Consolidated EBITDA (as
those terms are defined in the Bank Agreement) in amounts set forth in the Bank
Agreement. The Company was in compliance with all of its covenants under the
Bank Agreement as of February 28, 1998 and August 30, 1997.
On March 16, 1998, the Bank Agreement was amended to (1) redefine the
classification of overdue receivables from independent sales representatives and
(2) increase by $5.5 million, the allowable capital expenditures during fiscal
years 1998, 1999 and the first quarter of fiscal year 2000 to take into account
additional capital expenditures for computer conversions.
The Bank Agreement contains certain customary events of default, including
nonpayment, misrepresentation, breach of covenant, bankruptcy, ERISA, judgments,
change of control and cross defaults. In addition, the Bank Agreement provides
that it shall be an Event of Default if the Company or any of its subsidiaries
(other than its Mexican subsidiary) shall be enjoined or restrained from
conducting any material part of its business for more than 30 days.
The Company's $90,000,000 aggregate principal amount of 11% Senior
Subordinated Notes mature on January 15, 2007 ("Notes"). The Notes are
redeemable at the option of the Company, in whole or in part, at any time on or
after January 15, 2002, plus accrued and unpaid interest and Liquidated Damages
(as defined), if any, thereon to the date of redemption. In the event the
Company completes one or more Public Equity Offerings (as defined) on or before
January 15, 2000, the Company may, in its discretion, use the net cash proceeds
to redeem up to 33 1/3% of the original principal amount of the Notes at a
redemption price equal to 111% of the principal amount thereof, plus accrued and
unpaid interest and Liquidated Damages, if any, thereon to the date of
redemption, with the net proceeds of one or more Public Equity Offerings,
provided that at least 66 2/3% of the original principal amount of the Notes
remains outstanding immediately after each such redemption.
In the event of a Change of Control (as defined), each holder of the Notes
will have the right to require the Company to purchase all or any part of such
holder's Notes at a purchase price in cash equal to 101% of the aggregate
principal amount thereof, plus accrued and unpaid interest and Liquidated
Damages, if any, thereon to the date of purchase. The Bank Agreement prohibits
the Company from purchasing any Notes upon a Change of Control, and certain
Change of Control events with respect to the Company would constitute a default
thereunder.
In the event of an Asset Sale (as defined), the Company is required to apply
any Net Proceeds (as defined) to permanently reduce senior indebtedness, to
acquire another business or long-term assets or to make capital expenditures. To
the extent such amounts are not so applied within thirty days and the amount not
applied exceeds $5.0 million, the Company is required to make an offer to all
holders of the Notes to purchase an aggregate principal amount of Notes equal to
such excess amount at a purchase price in cash equal to 100% of the principal
amount thereof, plus accrued and unpaid interest and Liquidated Damages, if any,
thereon to the date of purchase.
The Indenture dated as of December 16, 1996, between the Company and Marine
Midland Bank, as trustee (the "Indenture") pursuant to which the Notes were
issued contains certain covenants that, among other things, limit the ability of
the Company and its subsidiaries to (a) incur additional indebtedness and
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issue preferred stock, (b) pay dividends or make certain other restricted
payments, (c) enter into transactions with affiliates, (d) create certain liens,
(e) make certain asset dispositions, and (f) merge or consolidate with, or
transfer substantially all of its assets to, another person. The Company was in
compliance with all debt covenants as of February 28, 1998 and August 30, 1997.
YEAR 2000 COMPLIANCE
The Company has developed a plan to ensure its computer systems function
properly to and through the year 2000. The Company believes that with upgrades
or modifications to existing software and the conversion of the Hewlett Packard
HP3000 platform to the IBM AS400 platform which is expected to be completed by
July 1999, the impact of the Year 2000 Compliance will be minimized. The total
costs of Year 2000 Compliance are not expected to be material to the Company's
results of operation.
DISCLOSURE REGARDING FORWARD LOOKING STATEMENTS
This report includes forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended. Although management believes that
the expectations reflected in such forward looking statements are based upon
reasonable assumptions, the Company can give no assurance that these
expectations will be achieved. Important factors that could cause actual results
to differ materially from the Company's expectations include general, economic,
business and market conditions, the volatility of the price of gold,
competition, development and operating costs and the factors that are disclosed
in conjunction with the forward looking statements included herein (collectively
the "Cautionary Disclosures"). Subsequent written and oral forward looking
statements attributable to the Company or persons acting on its behalf are
expressly qualified in their entirety by the Cautionary Disclosures.
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PART II--OTHER
ITEM 1. LEGAL PROCEEDINGS
There are no material pending legal proceedings to which the Company is a
party to or which any of its property is subject. The Company monitors all
claims, and the Company accrues for those, if any, which management believes are
probable of payment. The Company has no pending administrative proceedings
related to environmental matters involving governmental authorities.
ITEM 2. CHANGES IN SECURITIES
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
10.1 First Amendment to Revolving Credit, Term Loan and Gold Consignment
Agreement, dated March 16, 1998
27 Financial Data Schedule for the period ended February 28, 1998.
(b) The Company did not file any reports on Form 8-K during the three months
ended February 28, 1998.
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COMMEMORATIVE BRANDS, INC.
SIGNATURES
Commemorative Brands, Inc. has duly caused this report to be signed on its
behalf by the undersigned thereunto duly authorized.
COMMEMORATIVE BRANDS, INC.
By: /s/ RICHARD H. FRITSCHE
-----------------------------------------
Richard H. Fritsche
CHIEF FINANCIAL OFFICER
DATE: April 8, 1998
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