FORM 10-Q
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MAY 30, 1998
- -------------------------------------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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 or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number
7211 Circle S Road, Austin, Texas 78745
-----------------------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (512) 440-0571
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
--- ---
INDEX
Item
Number Page Number
PART 1. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets -
As of May 30, 1998 (unaudited) and August 30, 1997 1
Consolidated Income Statements -
For the three months ended May 30, 1998 and May 31,
1997 (unaudited) 2
Consolidated Income Statements -
For the nine months ended May 30, 1998 and December 16,
1996 to May 31, 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 May 30, 1998 (unaudited), August 30, 1997
and March 28, 1996 (unaudited) 4
Statements of Cash Flows -
For the nine months ended May 30, 1998 and December 16,
1996 to May 31, 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 - 11
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 12 - 17
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 18
Item 2. Changes in Securities 18
Item 3. Defaults Upon Senior Securities 18
Item 4. Submission of Matters to a Vote of Security Holders 18
Item 6. Exhibits and Reports on Form 8-K 18
SIGNATURES 19
PART 1 -- FINANCIAL STATEMENTS
Item 1. Consolidated Financial Statements and Notes
COMMEMORATIVE BRANDS, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data )
May 30, August 30,
1998 1997
---- ----
ASSETS (Unaudited)
Current assets:
Cash and cash equivalents $ 2,875 $ 2,174
Accounts receivable, net 38,036 26,444
Inventories 12,325 11,767
Prepaid expenses and other current assets 5,913 8,522
-------- --------
Total current assets 59,149 48,907
Property, plant and equipment, net 35,643 33,460
Trademarks, net 29,619 30,197
Goodwill, net 81,080 82,935
Other assets, net 6,428 5,370
-------- --------
Total assets $211,919 $200,869
-------- --------
-------- --------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Bank overdraft $ 3,632 $ 4,188
Accounts payable and accrued expenses 22,733 20,893
Current portion of long-term debt 750 750
-------- --------
Total current liabilities 27,115 25,831
Long-term debt, net of current portion 131,600 124,700
Other long-term liabilities 10,298 9,885
-------- --------
Total liabilities 169,013 160,416
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) (7,264) (9,717)
-------- --------
Total stockholders' equity 42,906 40,453
-------- --------
Total liabilities & stockholders' equity $211,919 $200,869
-------- --------
-------- --------
The accompanying notes are an integral part of these consolidated financial
statements.
COMMEMORATIVE BRANDS, INC.
CONSOLIDATED INCOME STATEMENTS
(In thousands, except share and per share data)
(Unaudited)
For the Three For the Three
Months Months
Ended Ended
May 30, May 31,
1998 1997
---- ----
Net sales $ 43,085 $ 36,927
Cost of sales 20,131 18,504
-------- --------
Gross profit 22,954 18,423
Selling, general and administrative expenses 18,891 15,896
-------- --------
Operating income 4,063 2,527
Interest expense, net 3,755 3,371
-------- --------
Income (loss) before provision for income taxes 308 (844)
Provision for income taxes - 30
-------- --------
Net income (loss) $ 308 $ (874)
-------- --------
Preferred dividends (300) (300)
-------- --------
Net income (loss) to common stockholders $ 8 $ (1,174)
-------- --------
-------- --------
Basic and diluted earnings (loss) per share $ 0.02 $ (3.13)
-------- --------
-------- --------
Weighted average common shares outstanding and
common and common equivalent shares outstanding 375,000 375,000
-------- --------
-------- --------
- ------------------------
The accompanying notes are an integral part of these consolidated financial
statements.
COMMEMORATIVE BRANDS, INC.
CONSOLIDATED INCOME STATEMENTS
(In thousands, except share and per share data)
(Unaudited)
Predecessors
------------------------------
For the Nine ArtCarved Balfour
Months December 16, September 1, August 26,
Ended 1996 to 1996 to 1996 to
May 30, May 31, December 15, December 15,
1998 1997* 1996 1996
------------ ----------- ----------- ------------
Net sales $125,617 $ 61,678 $ 27,897 $ 24,247
Cost of sales 57,124 32,746 11,988 11,091
-------- -------- -------- ---------
Gross profit 68,493 28,932 15,909 13,156
Selling, general and
administrative expenses 54,009 27,646 9,862 13,646
-------- -------- -------- ---------
Operating income 14,484 1,286 6,047 (490)
Interest expense, net 11,131 5,971 2,876 756
-------- -------- -------- ---------
Income (loss) before provision
for income taxes 3,353 (4,685) 3,171 (1,246)
Provision for income taxes - 50 - 13
-------- -------- -------- ---------
Net income (loss) $ 3,353 $ (4,735) $ 3,171 $ (1,259)
-------- -------- -------- ---------
Preferred dividends (900) (550) - -
-------- -------- -------- ---------
Net income (loss) to
common stockholders $ 2,453 $ (5,285) $ 3,171 $ (1,259)
-------- -------- -------- ---------
-------- -------- -------- ---------
Basic and dulited earnings
(loss) per share $ 6.54 $ (14.09)
-------- --------
-------- --------
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 withthe Acquisitions and the
financing thereof.
The accompanying notes are an integral part of these consolidated
financial statements.
COMMEMORATIVE BRANDS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(In thousands, except share data )
(Unaudited)
Preferred Stock
-----------------------------------------------------
Series A Series B
------------------------ ---------------------
Shares Amount Shares Amount
------------------------ ---------------------
Balance, March 28, 1996 - $ - - $ -
(date of inception)
Issuance of Common Stock - - - -
Issuance of Preferred Stock 100,000 1 375,000 4
Accrued Preferred Stock Dividends - - - -
Net loss - - - -
------------------------ ---------------------
Balance, August 30, 1997 100,000 $ 1 375,000 4
Accrued Preferred Stock Dividends - - - -
Net income - - - -
------------------------ ---------------------
Balance, May 30, 1998 100,000 $ 1 375,000 $ 4
------------------------ ---------------------
------------------------ ---------------------
Common Stock Additional Retained
------------------------ Paid-in Earnings
Shares Amount Capital (Deficit) Total
------------------------ ---------- --------- --------
Balance, March 28, 1996 - $ - $ - $ - $ -
(date of inception)
Issuance of Common Stock 375,000 4 2,666 - 2,670
Issuance of Preferred Stock - - 47,495 - 47,500
Accrued Preferred Stock Dividends - - - (850) (850)
Net loss - - - (8,867) (8,867)
------------------------ ---------- --------- --------
Balance, August 30, 1997 375,000 $ 4 $ 50,161 $ (9,717) $ 40,453
Accrued Preferred Stock Dividends - - - (900) (900)
Net income - - - 3,353 3,353
------------------------ ---------- --------- --------
Balance, May 30, 1998 375,000 $ 4 $ 50,161 $ (7,264) $ 42,906
------------------------ ---------- --------- --------
------------------------ ---------- --------- --------
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.
COMMEMORATIVE BRANDS, INC.
STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
Predecessors
--------------------------
For the Nine ArtCarved Balfour
Months December 16, September 1, August 26,
Ended 1996 to 1996 to 1996 to
May 30, May 31, December 15 December 15
1998 1997* 1996 1996
----------- ------------ ----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 3,353 $ (4,735) $ 3,171 $ (1,259)
Adjustments to reconcile net income (loss) to net cash provided
by (used in) operating activities-
Depreciation and amortization 5,033 2,541 1,992 544
Provision for doubtful accounts 531 327 144 -
Changes in assets and liabilities-
(Increase) decrease in receivables (12,123) 1,270 (6,951) (8,239)
(Increase) decrease in inventories (558) 5,967 124 (510)
Decrease in prepaid expenses and other current assets 2,609 89 1,378 496
(Increase) decrease in other assets (996) (1,703) (3,270) 6
Increase in bank overdraft, accounts payable and accrued expenses 797 2,248 4,910 2,877
Increase in deferred compensation - - - 14
-------- --------- -------- ---------
Net cash provided by (used in) operating activities (1,354) 6,004 1,498 (6,071)
-------- --------- -------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of fixed assets - - - 571
Purchases of property, plant and equipment (4,845) (2,100) (195) (115)
Cash paid for the acquitions of ArtCarved
and Balfour including transaction costs - (169,032) - -
-------- --------- -------- ---------
Net cash provided by (used in) investing activities (4,845) (171,132) (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 6,900 (5,325) (14,628) -
Payments on capital leases - - - (74)
Additional paid-in capital - 170 - -
-------- --------- -------- ---------
Net cash provided by financing activities 6,900 165,045 4,261 5,575
-------- --------- -------- ---------
NET INCREASE IN CASH AND
CASH EQUIVALENTS 701 (83) 5,564 (40)
-------- --------- -------- ---------
CASH AND CASH EQUIVALENTS, beginning of period 2,174 1,094 - 59
-------- --------- -------- ---------
CASH AND CASH EQUIVALENTS, end of period $ 2,875 $ 1,011 $ 5,564 $ 19
-------- --------- -------- ---------
-------- --------- -------- ---------
SUPPLEMENTAL DISCLOSURE
Cash paid during the period for-
Interest $ 7,857 $ 844 $ 6,453 $ 6
-------- --------- -------- ---------
-------- --------- -------- ---------
Taxes $ - $ 3 $ - $ 8
-------- --------- -------- ---------
-------- --------- -------- ---------
SUPPLEMENTAL DISCLOSURE OF NONCASH FINANCING ACTIVITIES
Accrued preferred stock dividends $ 900 $ 550 $ - $ -
-------- --------- -------- ---------
-------- --------- -------- ---------
- ----------------------
*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.
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 nine months
ended May 30, 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. 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
-------- --------
-------- --------
Subsequent to the Acquisitions, the Company 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 nine months ended May 30, 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 consolidation and integration
of operations in the Combination required substantial time and cost due to
complications arising from the integration of the Company's 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 maintained higher than expected headcount during
the first three quarters of fiscal 1998. During January 1998, headcount levels
were reduced but still remain above a level that management had hoped to achieve
following the consolidation of 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.
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 they would have no effect as
the exercise price is the same as the market value of the stock.
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.).
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):
May 30, August 30,
1998 1997
---- ----
Raw materials $ 9,241 $ 8,769
Work in process 1,936 1,877
Finished goods 1,148 1,121
------- -------
$12,325 $11,767
------- -------
------- -------
Cost of sales includes depreciation and amortization of $1,583,000 and $900,000
for the nine months ended May 30, 1998 and December 16, 1996 to May 31, 1997,
for the Company. (see Note 1).
(6) LONG-TERM DEBT
Long-term debt consists of the following (in thousands):
May 30, August 30,
1998 1997
---- ----
11% senior subordinated notes due 2007 $ 90,000 $ 90,000
Term loan facility 24,250 24,750
Bank revolver 18,100 10,700
-------- --------
Total debt 132,350 125,450
Less-current portion 750 750
-------- --------
Total long-term debt $131,600 $124,700
-------- --------
-------- --------
The weighted average interest rate of debt outstanding as of May 30, 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 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 was in compliance with all of its debt covenants
under the Indenture as of May 30, 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,
which was entered into as of December 16, 1996, and amended on March 16, 1998
and July 10, 1998, (the Bank Agreement) with a group of banks pursuant to
which the Company initially borrowed $25 million under a term loan facility
and from time to time may borrow up to $35 million under a revolving credit
and gold facility. Loans outstanding under the Bank Agreement bear interest
at either fixed or floating rates based upon the interest rate option
selected by the Company.
TERM LOAN FACILITY
The term loan facility (Term Loan) matures on December 16, 2003. The Company
may prepay the Term Loan at any time. 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 borrowings and 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 was in compliance
with all of its debt covenants under the Bank Agreement as of May 30, 1998 and
August 30, 1997.
CONSIGNED GOLD
Under the Company's gold consignment/loan arrangements, the Company has the
ability to have on consignment up to 26,000 ounces of gold approximating
$10 million or alternatively to borrow up to $10 million for the purchase of
gold. Under these arrangements, the Company is limited to a maximum value of
$10 million in consigned inventory and/or gold loan funds. For the nine months
ended May 30, 1998 and the fiscal year ended August 30, 1997 (see Note 1), the
Company expensed approximately $205,000 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 May 30, 1998 and August 30, 1997, the
Company held approximately 16,627 ounces and 16,265 ounces, respectively, valued
at $4.9 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 May 30, 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 nine months ended May 30, 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.
As of May 30, 1998, the Company had issued and outstanding 100,000 shares of
Series A Preferred Stock, 375,000 shares of Series B Preferred Stock 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. 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 the Agreement 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 any dividends on, or redeem or otherwise repurchase any shares of, the
Series B Preferred or Common Stock.
SERIES B PREFERRED STOCK (SERIES B PREFERRED)
The holders of shares of Series B Preferred are entitled to one vote per share,
voting together with the holders of the Common Stock as one class on all matters
presented to the shareholders generally. No dividends accrue on the Series B
Preferred. Dividends may be paid on the Series B Preferred if and when declared
by the board of directors of the Company out of funds legally available
therefor. The Company's 11 percent senior subordinated notes and the Bank
Agreement generally restrict the Company's ability to pay dividends on Series B
Preferred.
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 and
the Company's Series B Preferred Stock 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.
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 May 30, 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, governing 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.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
In the following discussion, unless the context otherwise requires (i) the
term "CBI" refers to Commemorative Brands, Inc. prior to the consummation of the
acquisition of ArtCarved and Balfour (the "Acquisitions"), (ii) the term
"ArtCarved" refers to the predecessor class ring assets, businesses, and
operations of CJC Holdings, Inc. which were acquired by CBI, (iii) the term
"Balfour" refers to the predecessor assets, businesses and operations of L. G.
Balfour Company, Inc. which were acquired by CBI, and (iv) the term "the
Company" refers to CBI and its subsidiaries after giving effect to the
Acquisitions and the related transactions.
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 nine months ended
May 30, 1998 reflect operations of the Company for the three and nine months
ended May 30, 1998. For comparative purposes, the prior year results of the
operations are comprised of operations of the Company for the three months ended
May 31, 1997, and from December 16, 1996 (the date of Acquisition) to May 31,
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 Nine-Month period).
The results of operations of the Company for the nine months ended May 30,
1998, and for the period December 16, 1996 to May 31, 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 consolidation and
integration of operations in the Combination required substantial time and cost
due to complications arising from the integration of the Company's 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 maintained the higher than expected headcount
during the first three quarters of fiscal 1998. During January 1998, headcount
levels were reduced to levels necessary to sustain future operations but still
remained above a level that management had hoped to achieve following the
consolidations of 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.
ELIMINATION OF OCCUPANCY AND FIXED OVERHEAD COSTS - Two of the three
Balfour facilities (the Attleboro, Massachusetts ring manufacturing plant and
the North Attleboro, Massachusetts administrative facility) were closed
during fiscal 1997 and the occupancy and overhead costs including duplicative
facilities-related personnel associated with these two facilities were
eliminated resulting in permanent cost savings of approximately $1.5 million
(on an annual basis) which are expected to be realized in fiscal 1998.
During fiscal 1997, approximately $400,000 of cost savings were realized. 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
operations from Massachusetts to Texas 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
resulting in labor costs in excess of those anticipated by management
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 July 1999.
THREE MONTHS ENDED MAY 30, 1998 AS COMPARED TO THE THREE MONTHS ENDED
MAY 31, 1997.
NET SALES - Net sales increased $6.2 million, or 16.7%, to $43.1 million
for the three months ended May 30, 1998, as compared to $36.9 million for the
three months ended May 31, 1997. The increase in sales resulted primarily from
an increase in the sale of high school and college class rings of approximately
$4.8 million. The increase in sales also resulted from an increase in sales of
personalized family jewelry products and an increase in the sales of fine paper
products.
GROSS PROFIT - Gross profit increased $4.5 million, or 24.6%, to $23.0
million for the three months ended May 30, 1998, as compared to $18.4 million
for the three months ended May 31, 1997. As a percentage of net sales, gross
profit was 53.3% for the three months ended May 30, 1998, compared to 49.9%
for the three months ended May 31, 1997. Cost of sales for the three months
ended May 31, 1997, for the Company, includes an incremental charge of $2.0
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. Gross profit for the
three months ended May 31, 1997, excluding this $2.0 million charge, would
have been 55.2% of sales.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES - Selling, general and
administrative expenses increased $3.0 million, or 18.8%, to $18.9 million for
the three months ended May 30, 1998, as compared to $15.9 million for the three
months ended May 31, 1997. As a percentage of net sales, selling, general and
administrative expenses increased to 43.8% for the three months ended May 30,
1998 from 43.0% for the three months ended May 31, 1997. The increase was
primarily a result of expenses associated with having a full staff of general
and administrative positions this year compared to last year when the Balfour
general and administrative functions were in the process of being terminated
and moved from Attleboro, Massachusetts to Austin, Texas during May 1997.
Also, additional expenses were incurred related to the Balfour HP Computer
System.
OPERATING INCOME - As a result of the foregoing, operating income increased
$1.5 million, to $4.1 million for the three months ended May 30, 1998, as
compared to $2.5 million for the three months ended May 31, 1997. As a
percentage of net sales, operating income increased to 9.4% for the three months
ended May 30, 1998 from 6.8% for the three months ended May 31, 1997.
INTEREST EXPENSE - Interest expense, net was $3.8 million for the three
months ended May 30, 1998 consisting primarily of interest on the Bank Credit
Facility of $24.3 million at rates ranging from 8.5% - 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 May 30, 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 $1.2
million, to $0.3 million for the three months ended May 30, 1998, as compared to
a net loss of $0.9 million for the three months ended May 31, 1997.
NINE MONTHS ENDED MAY 30, 1998 AS COMPARED TO THE COMBINED PRIOR YEAR NINE
MONTH PERIOD
NET SALES - Net sales increased $11.8 million, or 10.4%, to $125.6 million
for the nine months ended May 30, 1998 as compared to $113.8 million for the
Combined Prior Year Nine Month Period. The increase in sales resulted from an
increase in the sale of high school and college rings of approximately $7.1
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 $10.5 million, or 18.1%, to $68.5
million for the nine months ended May 30, 1998, as compared to $58.0 million for
the Combined Prior Year Nine Month Period. As a percentage of net sales, gross
profit was 54.5% for the nine months ended May 30, 1998, compared to 51.0% for
the Combined Prior Year Nine Month Period. Cost of sales for the period
December 16, 1996 to May 31, 1997, for the Company includes an incremental
charge of $4.5 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 Nine Month Period, excluding this $4.5
million charge, would have been 54.9% of sales.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES - Selling, general and
administrative expenses increased $2.8 million, or 5.5%, to $54.0 million for
the nine months ended May 30, 1998, compared to the $51.2 million for the
Combined Prior Year Nine Month Period. As a percentage of net sales, selling,
general and administrative expenses decreased to 43.0% for the nine months ended
May 30, 1998, compared to 44.9% for the Combined Prior Year Nine Month Period.
The decrease was a result of decreased selling and marketing expenses as a
percentage of sales primarily related to the decrease in recognition and
affinity products marketing expenses offset by an increase in general and
administrative expenses as a percentage of net sales as a result of the
increased expense incurred in the consolidation of the Massachusetts
operations with the Texas operations.
OPERATING INCOME - As a result of the foregoing, operating income increased
$7.7 million, to $14.5 million for the nine months ended May 30, 1998 compared
to $6.8 million for the Combined Prior Year Nine Month Period. As a percentage
of net sales, operating income increased to 11.5% for the nine months ended May
30, 1998 compared to 6.0% for the Combined Prior Year Nine Month Period.
INTEREST EXPENSE - Interest expense, net was $11.1 million for the nine
months ended May 30, 1998 primarily consisting of interest on the Bank Credit
Facility of $24.5 million at rates ranging from 8.5% - 10.5% and interest on the
$90.0 million of Notes, at a rate of 11%.
PROVISION FOR INCOME TAXES - For the nine months ended May 30, 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 $6.2
million to $3.4 million for the nine months ended May 30, 1998, as compared to
the net loss of $2.8 million for the Combined Prior Year Nine 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 May 30, 1998, the Company had a $35.0 million Revolving Credit and
Gold Facilities (as defined below) with a borrowing base limitation of $32.3
million and had $9.2 million available for future borrowings under its Bank
Agreement, as defined below. 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 the Management Agreement with Castle Harlan Inc. and working capital and
capital expenditure requirements.
The Company's cash used in operating activities for the nine months ended
May 30, 1998, was primarily the net result of effects on seasonality on the
Company's operations. There were increased accounts receivable, increased
inventories, and increased other long-term assets 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, prepaid advertising and the receivables from Balfour independent
representatives due to draws in excess of commissions earned 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 May 30, 1998, $10.9 million of these costs had been incurred. The remaining
balance of $1.2 million primarily consists of reserves for remaining severance
expenses payable to former Balfour employees. The Company's projected capital
expenditures for fiscal year 1998 are $4.2 million, not including computer
conversion capital expenditures not to exceed in the aggregate $5.5 million
during the fiscal years 1998 and 1999 and the first fiscal quarter of fiscal
year 2000. For the nine months ended May 30, 1998, the Company incurred $4.8
million in capital expenditures and computer conversion capital expenditures.
The following summarizes certain provisions of the revolving credit, term
loan and gold consignment agreement (the "Bank Agreement"), which was entered
into as of December 16, 1996, and amended on March 16, 1998 and July 10,
1998, 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 provides for 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, from March 31, 1997 through 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 and Gold Facilities is subject to a
borrowing base limitation (the "Borrowing Base") based on the aggregate of
certain percentages of Eligible Receivables (as defined) 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 and Gold Facilities exceeds the Borrowing Base, the Company
must immediately prepay or cash collateralize its obligations under the
Revolving Credit and Gold Facilities to the extent of such excess.
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 under the Bank Agreement as
of May 30, 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 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 May 30, 1998
and August 30, 1997.
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 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 under the Indenture as of May 30, 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 operations.
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.
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:
10.2 Second Amendment to Revolving Credit, Term Loan and Gold Consignment
Agreement dated July 10, 1998
27 Financial Data Schedule for the period ended May 30, 1998.
(b) The Company did not file any reports on Form 8-K during the three months
ended May 30, 1998.
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.
DATE: BY:
------------------------------
Richard H. Fritsche
Chief Financial Officer