UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
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[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE FISCAL YEAR ENDED AUGUST 29, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
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) 444-0571
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
None None
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
None
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period
that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes [ ]No [X].
(Effective December 31, 1997, registrant is no longer subject to such
filing requirements.)
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form
10-K or any amendment to this Form 10-K [X] (Not Applicable)
The aggregate market value of the voting stock held by non-affiliates at
August 29, 1998: $0.00
377,156 shares of common stock
(Number of shares outstanding as of November 27, 1998)
COMMEMORATIVE BRANDS, INC.
FORM 10-K
FOR THE FISCAL YEAR ENDED AUGUST 29, 1998
INDEX
PAGE
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PART I
Item 1. Business........................................................................................ 1
Item 2. Properties...................................................................................... 6
Item 3. Legal Proceedings............................................................................... 6
Item 4. Submission of Matters to a Vote of Security Holders............................................. 6
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters........................... 7
Item 6. Selected Financial Data......................................................................... 7
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.......... 12
Item 8. Financial Statements and Supplementary Data.................................................... 20
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure........... 20
PART III
Item 10. Directors and Executive Officers of the Registrant............................................. 21
Item 11. Executive Compensation......................................................................... 23
Item 12. Security Ownership of Certain Beneficial Owners and Management................................. 25
Item 13. Certain Relationships And Related Transactions................................................. 26
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K................................ 27
Signatures..................................................................................... 29
Financial Statements........................................................................... 31
Exhibit Index.................................................................................. 73
PART I
ITEM 1. BUSINESS
GENERAL
Commemorative Brands, Inc. (the "Company") is a leading manufacturer of
class rings in the United States. The Company also supplies 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.
On December 16, 1996, the Company completed the acquisitions
("Acquisitions") of substantially all of the scholastic and recognition and
affinity products, assets and business of the ArtCarved ("ArtCarved") operations
of CJC Holdings, Inc. ("CJC") and the Balfour operations ("Balfour") of the L.
G. Balfour Company, Inc., a wholly-owned subsidiary of Town & Country
Corporation ("Town & Country").
The Company was formed as a Delaware corporation in March 1996, by Castle
Harlan Partners II, L.P., a Delaware limited partnership and private equity
investment fund, for the purpose of acquiring ArtCarved and Balfour, and until
December 16, 1996, engaged in no business or activities other than in connection
with the Acquisitions and the financing thereof.
PRODUCTS
Most of the Company's sales (approximately 88% of net sales during fiscal
1998) were derived from the sale of scholastic products, consisting of high
school and college class rings, graduation-related fine paper products and other
graduation accessories. The balance of the Company's sales (approximately 12% of
net sales during fiscal 1998) were derived from the sale of recognition and
affinity products, consisting of jewelry and other products which are designed
to enable purchasers to show affinity or support for their favorite teams, to
show pride in their affiliations and to help companies and other organizations
promote and recognize achievement.
The Company's largest product offerings are its high school and college
class rings. The Company offers over 200 styles of high school class rings
ranging from traditional to highly stylish and fashion oriented. Most of the
Company's high school class rings are available in gold or nonprecious metal,
and most are available with a choice of more than 50 different types of stones
in each of several different cuts. More than 400 designs can be placed on or
under the stone, and emblems of over 100 activities or sports can appear on the
sides. As a result, students have the ability to customize their rings by
designing highly personal and meaningful rings to commemorate their high school
education. During fiscal 1998, the Company's high school class rings generally
ranged in price to the student from approximately $50 for a nonprecious metal
ring up to approximately $500 for a gold ring with precious stones.
The Company's college class rings are similar to the Company's high school
class rings in terms of the variety of customization and personalization options
available. However, college rings tend to be larger than high school rings, and
many more college rings are ordered in 14- and 18-karat gold or with precious or
semiprecious stones. During fiscal 1998, the average selling price of the
college class ring was higher than that of the Company's high school class ring,
with prices generally ranging from approximately $100 for a nonprecious metal
ring to as much as $2,000 for a gold ring with precious stones.
The Company produces and markets a wide array of fine paper products,
including customized graduation announcements, name cards, thank-you stationery,
business cards, diplomas, mini-diplomas, certificates, appreciation covers,
diploma covers, and fine paper accessory items. Through its independent sales
representatives, the Company also markets certain graduation accessories that it
does not produce, such as T-shirts and pendants denoting class year, caps and
gowns, yearbooks, memory books and other scholastic products.
The Company manufactures and markets a variety of recognition and affinity
jewelry for specialty niche markets. The Company's "recognition" products are
designed to commemorate accomplishments and achievements in business, sporting
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or other endeavors, and "affinity" products are designed to express pride in
one's affiliations with a particular organization or support for one's
favorite teams and organizations. The Company's recognition and affinity
jewelry products are grouped into four primary categories. The personalized
family jewelry products consist of rings custom-made to include children's
names, birth dates and birthstones, and personalized jewelry such as
necklaces and bracelets designed to commemorate family celebrations and
holidays such as Mother's Day and Valentine's Day. The Company distinguishes
its personalized family jewelry from that of its competitors through
extensive personalization with family names, dates, crests and events. The
Company's licensed consumer sports jewelry includes rings, pins and pendants
containing team logos, mascots and colors, that are manufactured for fans to
express their support for their favorite professional or amateur sports team.
The Company's professional sports championship jewelry consists of similar
products but is designed for the championship individual or team to
commemorate its championship, accomplishments or achievements. The Company
offers sports championship jewelry for professional sports organizations
(including Super Bowl rings to the San Francisco 49ers in 1995 and World
Series rings to the New York Yankees in 1996) as well as jewelry for
individuals to commemorate American Bowling Congress-sanctioned perfect
games. Corporate recognition and reward jewelry includes jewelry awards for
employees of various corporations.
SALES AND MARKETING
The Company has a national presence in all three primary sales channels
for class rings and scholastic products: (i) the high school in-store sales
channel of independent retail jewelers, retail jewelry chains and mass
merchants; (ii) the high school in-school sales channel of independent sales
representatives; and (iii) the college on-campus sales organization
(primarily on-campus and local bookstores). No single customer of the Company
represented more than 5% of net sales in fiscal 1998.
The Company markets its class rings: (i) in-store to independent and
chain jewelers under the names ARTCARVED-Registered Trademark- and R.
JOHNS-Registered Trademark- and to mass merchants under the names
KEYSTONE-Registered Trademark-, MASTER CLASS RINGS-Registered Trademark- and
CLASS RINGS, LTD.-Registered Trademark-; (ii) in high schools under the
BALFOUR-Registered Trademark- name; and (iii) on college campuses under the
ARTCARVED-Registered Trademark-, BALFOUR-Registered Trademark- and
KEEPSAKE-Registered Trademark- names. The Company markets its
graduation-related fine paper and accessories under the BALFOUR-Registered
Trademark- and ARTCARVED-Registered Trademark- names directly to students
in-school and on college campuses through approximately 100 college
bookstores. The Company markets its licensed consumer sports jewelry and its
corporate recognition and reward jewelry under the BALFOUR-Registered
Trademark- name, its sports championship jewelry under the BALFOUR-Registered
Trademark- and KEEPSAKE-Registered Trademark- names and its personalized
family jewelry under the CELEBRATIONS OF LIFE-Registered Trademark-,
GENERATIONS OF LOVE-Registered Trademark- and NAME-SAKE-Registered
Trademark- names.
The Company is one of the leading suppliers of high school class rings
in the in-store channel based on net sales for fiscal 1998. A predecessor of
the Company introduced the concept of in-store sales for high school class
rings in 1963 as an alternative to traditional in-school sales. The Company
sells its high school class rings in-store to independent jewelry retailers,
large jewelry chains and to mass merchants. The Company was also the first
class ring manufacturer to sell class rings to mass merchants such as
Wal-Mart and Kmart, an area of strong sales growth within the class ring
industry over the last ten years. The Company utilizes distinct product
brands, product line characteristics and pricing for each of the in-store
sales channels. Advertising is particularly important in the in-store market
to inform students and parents that the retailer offers alternatives to the
products sold at school. The Company utilizes a combination of national,
regional, local and co-op print and local direct mail advertising for its
products depending on the type of retailer involved.
The Company also markets its products in high schools using the
BALFOUR-Registered Trademark- brand name through its independent sales
representatives, who offer both class rings and a variety of fine paper
products and graduation accessories directly to high school students. The
Company's in-school sales channel is supported through a sales organization
that consists of approximately 135 regional independent representatives who
work exclusively for the Company with respect to the types of products
represented by the Company's product lines.
The Company compensates its independent sales representatives on a
commission basis, and most independent sales representatives receive a
monthly draw against commissions earned, although all expenses, including
promotional materials made available by the Company, are the responsibility
of the representative. The Company's independent sales representatives
operate under contract with exclusive non-compete arrangements that prohibit
such representatives from selling competing products during the term of their
arrangement with the Company and for a period of time, generally two
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years, thereafter. Depending on geographical size and volume, independent
sales representatives may employ one or more additional sales representatives
in addition to part-time or full-time personnel.
The Company's college class rings are sold under the
ARTCARVED-Registered Trademark- brand name and under the BALFOUR-Registered
Trademark- brand name primarily through on-campus bookstores and, to a lesser
extent, through local bookstores, both of which typically also offer class
rings distributed by one or more of the Company's competitors. The college
bookstores display the Company's products, although approximately 85% of all
orders are taken by the Company's sales representatives at special events
periodically set up at the bookstore or campus student center. College class
ring sales are principally supported by sales promotions with school
newspaper advertising and direct mailings to students and parents. The
Company uses promotions to stimulate sales in the critical back-to-school,
pre-Christmas and pre-graduation periods. The Company differentiates itself
from its competitors through its high quality rings, innovative styles, quick
delivery times and promotional services that attract students to tables
containing product information. Beginning during the fourth quarter of fiscal
1997, the Company began to offer BALFOUR-Registered Trademark- fine paper
products through the more extensive ArtCarved college on-campus sales
channels. At August 29, 1998, BALFOUR-Registered Trademark- fine paper
products, primarily personalized college announcements and name cards, were
being sold in approximately 100 college bookstores.
Recognition and affinity products are sold either (i) to retail outlets
or directly to the group or organization, or (ii) by a combination of field
sales personnel and corporate sales personnel. The Company's
BALFOUR-Registered Trademark- licensed consumer sports jewelry and
CELEBRATIONS OF LIFE-Registered Trademark-, GENERATIONS OF LOVE-Registered
Trademark- and NAME-SAKE-Registered Trademark- personalized family jewelry
are primarily distributed to retail outlets and through merchandise
catalogues. The Company markets its BALFOUR-Registered Trademark- sports
championship jewelry directly to the championship team or organization or its
members and its KEEPSAKE-Registered Trademark- bowling rings directly to
individuals. Corporate recognition and reward programs are developed in
conjunction with corporate clients, who order and purchase products directly
from the Company.
In fiscal l997, the Company introduced the BALFOUR-Registered
Trademark- licensed consumer sports rings to Wal-Mart and, at August 29,
1998, this product line was being sold in more than 2,400 Wal-Mart stores. In
addition, the Company began selling BALFOUR-Registered Trademark- fine paper
products to college bookstores during fiscal 1997 and, at August 29, 1998,
such products were being sold in approximately 100 college bookstores.
INDUSTRY
Management believes there are three national competitors in the sale of
class rings and fine paper products (the Company, Jostens, Inc. and Herff
Jones, Inc.) and numerous regional producers. The class rings and fine paper
markets are highly competitive and numerous alternative suppliers for the
Company's products exist.
Consumers differentiate scholastic products on the basis of price,
quality, marketing and customer service. Customer service is particularly
important in the sale of class rings because of the high degree of
customization and the emphasis on timely delivery. Class rings with different
quality and price points are marketed through different channels and, within
the in-store sales channel, through different retailers.
Scholastic products are sold in retail stores and directly to students
in schools and on college campuses. Management estimates that, historically,
approximately 65% of high school class rings have been sold through the
in-school sales channel. In schools, administrators or student
representatives select the authorized supplier for their school. Suppliers
contact these administrators or student representatives through their sales
forces, which are generally comprised of independent sales representatives
who market products directly to high school students.
In addition to the in-school sales channel, the scholastic product
market is also characterized by a strong in-store distribution channel. In
1963, a predecessor of ArtCarved initiated the use of the in-store sales
channel, and management estimates that this segment represents, historically,
approximately 35% of high school class rings sold. The in-store channel
consists primarily of independent jewelry retailers, large jewelry chains and
mass merchants.
College class rings are sold primarily through on-campus bookstores
and, to a lesser extent, through local bookstores, both of which typically
also offer class rings distributed by one or more of the Company's major
national competitors.
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Historically, on-campus bookstores have been owned and operated by the
colleges and universities; however, during the last several years an
increasing number of campus bookstores have been leased to companies engaged
in retail bookstore operations, primarily Barnes & Noble Bookstores, Inc. and
Follett Corporation. The Company also sells its college class rings in
on-campus bookstores operated by Barnes & Noble Bookstores, Inc. and Follett
Corporation.
The market for the Company's recognition and affinity products is a
broad collection of market niches. It includes championship jewelry for
winners of professional sports championships as well as individual events.
The market for retail affinity products is well developed in the apparel
category but not with respect to non-apparel products (such as the Company's
licensed consumer sports jewelry). Management believes that the demand for
licensed consumer sports jewelry is influenced by trends in the popularity of
professional and amateur sports. An important success factor in the licensed
consumer jewelry business is obtaining the right to use and market a team
name and mascot.
PRODUCTION AND TECHNOLOGY
The Company produces high school and college class rings only upon the
receipt of a customer order and deposit, and each ring is custom
manufactured. The entire production process takes approximately two to eight
weeks from receipt of the customer's order to product shipment, depending on
tooling requirements. Consequently, only a limited amount of finished
products inventory is necessary, reducing the Company's exposure to
fluctuations in the price of the gold material content of its rings and the
Company's investment in working capital.
The Company employs advanced design and manufacturing techniques at its
jewelry manufacturing plants. The use of computer-aided design and
manufacturing equipment, computer integrated manufacturing, cell
manufacturing and the craftsmanship of the Company's highly-skilled jewelers
enable the Company to produce increasingly personalized and high quality
jewelry while maintaining critical delivery schedules.
The Company's fine paper manufacturing and distribution activities are
housed at a 100,000 square-foot facility in Louisville, Kentucky. Each fine
paper product requires a high level of customization and is characterized by
having short production runs. For a typical graduation product order, the
Company's salespeople meet with the next class of graduating seniors to chose
their graduation announcements and related designs in the spring of their
junior year or early fall of their senior year. Designs are chosen and
artwork is produced on the Company's computerized design systems.
RAW MATERIALS
The principal raw materials that the Company purchases are gold and
precious, semiprecious and synthetic stones. The cost (and, with respect to
precious, semiprecious and synthetic stones, the availability) of these
materials are affected by market conditions. Operating results during fiscal
1998 were not materially affected by market volatility. Any material increase
in the price of these raw materials could adversely impact the Company's cost
of sales.
The Company requires significant amounts of gold for the manufacture of
its jewelry. The Company finances the majority of its gold inventory
requirements through borrowings by the Company under its Revolving Credit and
Gold Facilities, described below. Management believes that it has sufficient
availability under its Revolving Credit and Gold Facilities to finance all of
its gold inventory requirements. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations-Liquidity and Capital
Resources" below. The Company reduces its exposure to fluctuations in the
price of gold in several ways. In the Company's in-school sales channel for
the sale of high school class rings, the Company resets its ring prices from
time to time on new ring sales to reflect the then current price of gold.
However, the Company does not have the same flexibility to reset its ring
prices in the in-store and on-campus sales channels for high school and
college rings, respectively, where rings are sold on the basis of seasonal
prices. In either of these two cases, the Company must bear the risk of a
change in the price of gold either from the time the order is placed or from
the time the price is set until the product is shipped. As a result, since
there may be a change in the price of gold during such periods, the Company
may from time to time engage in certain hedging transactions to reduce the
effects of fluctuations in the price of gold during these periods. As of
August 29, 1998, the Company had no hedges in place.
The Company also uses precious metals and precious, semiprecious and
synthetic stones in its products. The Company
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purchases substantially all synthetic and semiprecious stones from a single
supplier, located in Germany, which supplies semiprecious and synthetic
stones to almost all of the class ring manufacturers in the United States.
The Company believes that the loss of this source of synthetic and
semiprecious stones would adversely affect its business during the time
period in which alternate sources adapted production capabilities to meet
increased demand.
ENVIRONMENTAL MATTERS
The Company is subject to federal, state and local laws, ordinances and
regulations that establish various health and environmental quality standards
and provide penalties for violations of those standards. Past and present
manufacturing operations of the Company subject to environmental laws include
the use, handling, and contracting for disposal or recycling of hazardous or
toxic substances, the discharge of particles into the air, and the discharge
of process wastewaters into sewers. Management believes that the Company's
current operations are in substantial compliance with all material
environmental laws and that the Company does not currently face environmental
liabilities that would have a material adverse effect on the Company's
financial position or results of operations.
INTELLECTUAL PROPERTY
The Company markets its products under many trademarked brand names,
some of which rank among the most recognized and respected names in the
jewelry industry, including ARTCARVED-Registered Trademark-,
BALFOUR-Registered Trademark-, CELEBRATIONS OF LIFE-Registered Trademark-,
CLASS RINGS, LTD.-Registered Trademark-, GENERATIONS OF LOVE-Registered
Trademark-, KEEPSAKE-Registered Trademark-, KEYSTONE-Registered Trademark-,
MASTER CLASS RINGS-Registered Trademark-, NAME-SAKE-Registered Trademark-
and R. JOHNS-Registered Trademark-. Generally, a trademark registration will
remain in effect so long as the trademark remains in use by the registered
holder and any required renewals are obtained. The Company also holds several
patented ring designs. The Company's patents expire at varying dates, but
management does not believe that the loss of any one of which would have a
material adverse effect on the Company's financial position or results of
operations.
The Company has non-exclusive licensing arrangements with numerous
colleges and universities under which the Company has the right to use the
name and other trademarks and logos of these schools on the Company's
products. In addition, the Company has licensing agreements with certain
major professional sports organizations. Management does not believe that
there are any franchises or licenses the loss of which, individually, would
have a material adverse effect on the Company's financial position or results
of operations.
In 1988, CJC had granted to Lenox, Inc. a ten-year license to use the
KEEPSAKE-Registered Trademark- name for the sale of non-jewelry goods on a
royalty-free, worldwide and exclusive basis for non-jewelry products. This
license expired by its terms on April 28, 1998. ArtCarved has nonexclusive
licensing arrangements with two manufacturers in Canada for the
ARTCARVED-Registered Trademark- trademark and exclusive licensing
arrangements for the ARTCARVED-Registered Trademark- trademark to a retailer
in Central America.
During October 1997, the Company entered into a Trademark License
Agreement with Aurafin, Inc. ("Aurafin") pursuant to which the Company
granted to Aurafin the right to use the ARTCARVED-Registered Trademark-
trademark in connection with wedding rings, engagement rings and anniversary
bands for an initial term of ten years, which is automatically renewable for
additional successive five-year periods, unless terminated prior thereto.
Under the terms of the agreement, Aurafin will pay the Company royalties
based on decreasing marginal percentages of annual net sales of various
licensed products.
During December 1997, the Company entered into a Trademark License
Agreement with Frederick Goldman, Inc. ("Goldman") pursuant to which the
Company granted Goldman the right to use the KEEPSAKE-Registered Trademark-
trademark in connection with rings, bracelets, pendants, necklaces, earrings,
earring jackets, brooches, pins, neck chains, watches, and related services,
excluding licensor products. The agreement, which has an initial term of ten
(10) years which automatically renews for successive five-year periods,
assuming it is not otherwise terminated pursuant to its terms, provides for
royalty payments based on percentages of sales of various licensed products,
subject to an annual minimum royalty.
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EMPLOYEES
At August 29, 1998, the Company employed 1,809 individuals, of whom
approximately 1,345 were involved in manufacturing, operations and production
support, 323 were involved in customer service, marketing and sales and 141
were employed in various administrative and data processing functions. Many
employees engaged in manufacturing operations are highly skilled technicians
and craftspersons.
Other than 801 hourly production and maintenance employees (at August
29, 1998) at the Austin, Texas manufacturing facility, no employees of the
Company are represented by a labor union. The production and maintenance
workers are represented by the United Brotherhood of Carpenters and Joiners
Union (the "Union"). After the Company and its predecessor had operated
without an agreement for nearly three years, the Company and the Union signed
a collective bargaining agreement on April 24, 1997, which provided for wage
rate increases of $0.30 an hour on April 21, 1997,and $0.25 an hour on June
1, 1998 and provides for an additional wage rate increase of $0.20 an hour on
June 1, 1999. Neither the Company nor its predecessors have experienced any
work stoppages or significant employee-related problems at its Austin, Texas
manufacturing facility in the recent past. Management considers the
relationship between the Company and all of its employees to be satisfactory.
The Company employs two separate sales forces to support its in-store
retail products and its on-campus products, with approximately 50 salespeople
concentrating on in-store and approximately 35 full-time territory managers
(supplemented by approximately 80 to 90 part-time representatives during peak
buying seasons) concentrating on college campuses.
ITEM 2. PROPERTIES
The Company's headquarters and principal executive offices are located
at 7211 Circle S Road, Austin, Texas 78745. The Company's other principal
properties as of August 29, 1998, are as set forth below. Management believes
the Company's properties are in good condition.
Primary Use Location Approximate Size Owned/Leased
- ----------- -------- ---------------- ------------
Administrative Offices Austin, Texas 20,000 Square Feet Owned
Jewelry Manufacturing Austin, Texas 99,830 Square Feet Owned
Jewelry Manufacturing Juarez, Mexico 20,000 Square Feet Leased
Jewelry Manufacturing North Attleboro, MA 35,000 Square Feet Leased
Fine Paper Manufacturing Louisville, KY 100,000 Square Feet Leased
Warehouse Facility Austin, Texas 50,060 Square Feet Leased
ITEM 3. LEGAL PROCEEDINGS
There are no material pending legal proceedings to which the Company is a
party or to which any of its property is subject. The Company monitors all
claims, and the Company accrues for those, if any, which management believes are
probable of payment. The Company has no pending administrative proceedings
related to environmental matters involving governmental authorities.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On July 7, 1998 the stockholders of the Company voted on and approved the
Commemorative Brands, Inc. Incentive Stock Purchase Plan (the "Plan"). See
"Executive Compensation - Incentive Stock Purchase Plan" below.
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
There is no established public trading market for the Company's common
stock, par value $0.01 per share ("Common Stock"). At November 27, 1998, there
were four (4) holders of record of the Common Stock.
The Company has never declared dividends on its Common Stock. The Company
is restricted from paying dividends by certain of its bank debt covenants and
the indenture pursuant to which its senior subordinated notes were issued (see
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources") and by provisions of the Company's
outstanding classes of preferred stock. The Company intends to retain any
earnings for internal investment and debt reduction, and does not intend to
declare dividends on its Common Stock in the foreseeable future.
ITEM 6. SELECTED FINANCIAL DATA
This item is presented in three tables for the historical reporting
requirements. The Company began operations on December 16, 1996, by acquiring
and merging two predecessor companies with different fiscal year ends. Selected
historical data for the Company, ArtCarved, and Balfour are presented in tables
(A), (B) and (C), respectively.
TABLE (A)
The Company completed the Acquisitions of ArtCarved and Balfour on
December 16, 1996 and prior to such date engaged in no business activities other
than those in connection with the Acquisitions and financing thereof. The
following table presents summary historical financial and other data for the
Company and should be read in conjunction with the financial statements of the
Company and the notes thereto and "Management's Discussion and Analysis of
Financial Condition and Results of Operations" included in Item 7 herein. The
following information with respect to the Company as of and for the fiscal years
ended August 29, 1998 and August 30, 1997 has been derived from the audited
financial statements of the Company, which have been audited by Arthur Andersen
LLP, independent public accountants, as indicated in their report dated November
27, 1998 included herein. See "Financial Statements". The results of operations
for the Company for the fiscal year ended August 29, 1998 are not comparable to
the results of operations for the fiscal year ended August 30, 1997 because the
information presented for the fiscal year ended August 29, 1998 includes
business operations for a full twelve month period in contrast to the fiscal
year ended August 30, 1997 in which the Company had not been engaged in
significant business operations prior to the completion of the Acquisitions on
December 16, 1996. Due to the highly seasonal nature of the class ring business,
a significant amount of revenue and income were earned by the Company's
predecessors in the three and one-half month period ended December 16, 1996, due
to the back to school and pre-holiday season. See "Seasonality" below.
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TABLE (A)
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Fiscal Year Ended
---------------------------------------
August 30, August 29,
1997(1) 1998
----------------------------------------
(Dollars in thousands, except share data)
STATEMENT OF INCOME DATA:
Net sales $ 87,600 $ 151,101
Cost of sales $ 45,189 $ 72,615
----------- ------------
Gross profit $ 42,411 $ 78,486
Selling, general and
administrative expenses $ 41,481 $ 68,294
----------- ------------
$ 10,192
Operating income $ 930
Income (loss) from continuing
operations $ (8,867) $ (4,637)
Net loss to common stockholders $ (9,717) $ (5,837)
Basic and diluted earnings
(loss) per share $ (25.91) $ (15.55)
OTHER DATA:
EBITDA (2) $ 5,025 $ 17,093
Depreciation and amortization $ 4,095 $ 6,901
Capital expenditures $ 3,493 $ 6,610
Cash flows provided by
(used in):
Operating activities $ (677) $ (3,749)
Investing activities $ (173,693) $ (6,552)
Financing activities $ 175,450 $ 9,102
BALANCE SHEET DATA (AT END OF
PERIOD):
Total assets $ 200,869 $ 203,805
Total long-term debt $ 125,450 $ 134,322
Total stockholders' equity $ 40,453 $ 34,846
- ------------------------------------------------------------------------------
(1) The Company completed the Acquisitions of ArtCarved and Balfour on
December 16, 1996, and prior to such date, engaged in no business
activities other than those in connection with the Acquisitions and
financing thereof. Due to the highly seasonal nature of the class ring
business, a significant amount of revenues and income were earned by the
Company's predecessors in the three and one-half month period ended
December 16, 1996, due to the back to school and pre-holiday season.
(2) EBITDA represents operating income (loss) before depreciation and
amortization. EBITDA is not intended to, and does not, represent cash
flows as defined by generally accepted accounting principles and does not
necessarily indicate that cash flows are sufficient to fund all of the
Company's cash needs. EBITDA should not be considered in isolation or as a
substitute for or more meaningful than net income (loss), cash flows from
operating activities or other measures of liquidity determined in
accordance with generally accepted accounting principles. The Company has
presented EBITDA data because the Company understands that such
information is commonly used by investors to analyze and compare companies
on the basis of operating performance and to determine a company's ability
to service debt. The EBITDA measure presented herein is not necessarily
comparable to similarly titled measures reported by other companies.
-8-
Table (B) Summary Historical Financial and Other Data - ArtCarved
The following table presents summary historical financial and other
data for ArtCarved and should be read in conjunction with the financial
statements of ArtCarved and the notes thereto and "Management's Discussion
and Analysis of Financial Condition and Results of Operations" included in
Item 7 herein. The following information with respect to ArtCarved for the
fiscal year ended August 31, 1996 and for the period from September 1, 1996
to December 16, 1996 has been derived from the audited financial statements
of ArtCarved, which have been audited by Arthur Andersen LLP, independent
public accountants, as indicated in their report dated October 24, 1997,
included in the Financial Statements included herein. See "Financial
Statements". The following information with respect to ArtCarved as of August
31, 1996 and December 16, 1996 and for the fiscal year ended August 26, 1995
has been derived from the audited financial statements of ArtCarved, which
have been audited by Arthur Andersen LLP as stated in their report dated
October 24, 1997, which is not included herein. The following information
with respect to ArtCarved as of August 27, 1994 and August 26, 1995 and for
the fiscal year ended August 27, 1994 has been derived from the audited
financial statements of ArtCarved, which have been audited by Arthur Andersen
LLP as stated in their report dated November 13, 1996, which is not included
herein. The results for the period September 1, 1996, to December 16, 1996,
are not necessarily indicative of the results to be expected for the full
fiscal year. The information presented below does not include adjustments
related to the ArtCarved acquisition.
Table (B)
- ------------------------------------------------------------------------------------------------------
Fiscal Year Ended (1)
------------------------------------------------------
The Period
from September
1, 1996 -
August 27, August 26, August 31, December 16,
1994 1995 1996 1996
------------------------------------------------------
(Dollars in thousands)
STATEMENT OF INCOME DATA:
Net sales $ 69,820 $ 71,994 $ 70,671 $27,897
Cost of sales $ 30,572 $ 32,879 $ 32,655 $11,988
-------- -------- -------- -------
Gross profit $ 39,248 $ 39,115 $ 38,016 $15,909
Selling, general and administrative expenses $ 26,618 $ 28,224 $ 27,940 $ 9,862
Restructuring charges (2) $ - $ 3,244 $ - $ -
-------- -------- -------- -------
Operating income(3) $ 12,630 $ 7,647 $ 10,076 $ 6,047
OTHER DATA:
EBITDA (4) $ 17,324 $ 16,505 $ 15,091 $ 8,039
Depreciation and amortization $ 4,694 $ 5,614 $ 5,015 $ 1,992
Capital expenditures (5) $ 1,186 $ 1,120 $ 844 $ 195
Cash flows provided by (used in):
Operating activities $ 11,132 $ (3,164) $ 1,663 $ 1,498
Investing activities $ (1,186) $ (1,120) $ (844) $ (195)
Financing activities $ (9,946) $ 4,284 $ (819) $ 4,261
BALANCE SHEET DATA (AT END OF PERIOD):
Total assets $ 78,900 $ 75,955 $ 74,542 $86,065
Total long-term debt (6) $ 98,728 $ 99,900 $ 91,221 $80,144
Advances in equity (deficit) (6) $(51,504) $(53,186) $(28,524) $(6,464)
- -----------------------------------------------------------------------------------------------------
-9-
(1) During the periods presented, ArtCarved was not operated or accounted
for as a separate entity. As a result, allocations for certain accounts
of CJC were reflected in the financial statements of ArtCarved.
Selling, general and administrative expenses for ArtCarved represent
all the expenses incurred by CJC excluding only the expenses directly
related to the non-ArtCarved operations of CJC. Since CJC used the
proceeds from the sale of ArtCarved to repay its outstanding debt
obligations, the statement of income data, other data and the balance
sheet data include all of CJC's debt and related interest expense.
(2) For the fiscal year ended August 26, 1995, the restructuring charges of
$3.2 million consisted of the write-off of $2.9 million of capitalized
financing costs incurred in 1990 by CJC and $0.3 million of related
professional advisory fees incurred by CJC. The balance sheet data
includes all of CJC's debt and related interest expense, and therefore
all of the restructuring charges are allocated to ArtCarved assets.
(3) The results of operations for the period from September 1, 1996,
through December 16, 1996, are not comparable to the results of
operations for the fiscal years presented and are not necessarily
indicative of the results that could be expected for a full fiscal
year. Due to the highly seasonal nature of the class ring business, a
significant amount of revenues and income occurred in the three and
one-half month period ended December 16, 1996, due to the
back-to-school and pre-holiday season.
(4) EBITDA represents operating income (loss) before depreciation,
amortization and restructuring charges. EBITDA is not intended to, and
does not, represent cash flows as defined by generally accepted
accounting principles and does not necessarily indicate that cash flows
are sufficient to fund all of ArtCarved's cash needs. EBITDA should not
be considered in isolation or as a substitute for or more meaningful
than net income (loss), cash flows from operating activities or other
measures of liquidity determined in accordance with generally accepted
accounting principles. The Company has presented EBITDA data because
the Company understands that such information is commonly used by
investors to analyze and compare companies on the basis of operating
performance and to determine a company's ability to service debt. The
EBITDA measure presented herein is not necessarily comparable to
similarly titled measures reported by other companies.
(5) Historical capital expenditure levels are not necessarily indicative of
the future capital expenditure level for ArtCarved's ongoing operations
when merged with Balfour.
(6) The changes in total long-term debt and advances in equity (deficit)
from August 31, 1996, to December 16, 1996, are due to the sale of
CJC's non-ArtCarved operations.
Table (C) Summary Historical Financial and Other Data - Balfour
The following table presents summary historical financial and other data
for Balfour and should be read in conjunction with the financial statements of
Balfour and the notes thereto and "Management's Discussion and Analysis of
Financial Condition and Results of Operations" included in Item 7 herein. The
following information with respect to Balfour for the year ended February 25,
1996 and for the period ended December 16, 1996 has been derived from the
audited financial statements of Balfour, which have been audited by Arthur
Andersen LLP, independent public accountants, as indicated in their report dated
November 19, 1997, included herein. See "Financial Statements". The following
information with respect to Balfour as of February 25, 1996 and for the year
ended February 26, 1995 has been derived from the audited financial statements
of Balfour, which have been audited by Arthur Andersen LLP as stated in their
report dated November 19, 1997, which is not included herein. The following
information with respect to Balfour as of February 27, 1994 and February 26,
1995 and for the year ended February 27, 1994 has been derived from the audited
financial statements of Balfour and is not included herein. The results for the
period from February 26, 1996 to December 16, 1996 are not necessarily
indicative of the results that could be expected for the full fiscal year. The
information presented below does not include adjustments related to the Balfour
acquisition.
-10-
Table (C)
- ---------------------------------------------------------------------------------------------------------
Fiscal Year Ended (1)
----------------------------------------------------------------
The Period from
February 26, 1996 to
February 27, February 26, February 25, December 16,
1994 1995 1996 1996
----------------------------------------------------------------
(Dollars in thousands)
STATEMENT OF INCOME DATA:
Net sales $85,304 $77,491 $71,300 $60,233
Cost of sales $35,860 $35,406 $35,598 $29,350
------- ------- ------- -------
Gross profit $49,444 $42,085 $35,702 $30,883
Selling, general and administrative
expenses $43,350 $51,743 $33,496 $31,020
------- ------- ------- -------
Operating income (loss) $ 6,094 $(9,658) $ 2,206 $ (137)
OTHER DATA:
EBITDA (2) $ 7,993 $(7,680) $ 4,232 $ 1,396
Depreciation and amortization $ 1,899 $ 1,978 $ 2,026 $ 1,533
Capital expenditures (3) $ 1,820 $ 1,274 $ 530 $ 345
Adjusted net sales (4) $61,784 $64,891 $70,111 $59,384
Cash flows provided by (used in):
Operating activities $(2,413) $(7,077) $ 1,604 $(7,264)
Investing activities $(1,807) $(1,209) $ 421 $ 226
Financing activities $ 4,245 $ 8,286 $(1,970) $ 6,977
BALANCE SHEET DATA (AT END OF PERIOD):
Total assets $47,989 $45,236 $42,563 $45,127
Total long-term debt $ 6,136 $15,136 $13,166 $20,201
Total stockholders' equity $24,966 $14,024 $13,888 $11,735
- -----------------------------------------------------------------------------------------------
(1) During the periods presented, Balfour was operated as a wholly owned
subsidiary of Town & Country and Town & Country administered certain
programs (such as health insurance, workmen's compensation and gold
consignment) and charged all directly identifiable costs to Balfour.
Indirect costs were not allocated to Balfour; however, management
believes these amounts are not significant for the periods presented.
(2) EBITDA represents operating income (loss) before depreciation,
amortization and restructuring charges. EBITDA is not intended to, and
does not, represent cash flows as defined by generally accepted
accounting principles and does not necessarily indicate that cash flows
are sufficient to fund all of Balfour's cash needs. EBITDA should not
be considered in isolation or as a substitute for or more meaningful
than net income (loss), cash flows from operating activities or other
measures of liquidity determined in accordance with generally accepted
accounting principles. The Company has presented EBITDA data because
the Company understands that such information is commonly used by
investors to analyze and compare companies on the basis of operating
performance and to determine a company's ability to service debt. The
EBITDA measure presented herein is not necessarily comparable to
similarly titled measures reported by other companies.
(3) Historical capital expenditure levels are not necessarily indicative of
the future capital expenditure level for Balfour's ongoing operations
when merged with ArtCarved.
-11-
(4) Adjusted net sales represents, for all periods presented, net sales
excluding results from: (i) the direct distribution of licensed
consumer sports jewelry, which was discontinued in February 1995; (ii)
the fraternity jewelry product line, which was sold in March 1994; and
(iii) the service award recognition product line, which was sold in
April 1993. Although Balfour sold substantially all of the service
award recognition product line, Balfour continues to have sales of
service award recognition products, which management believes will not
be a significant percentage of net sales in future periods.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
For purposes of the discussion contained in this Item 7, unless the
context otherwise requires (i) the term "CBI" refers to Commemorative Brands,
Inc. prior to the consummation of the Acquisitions, (ii) the term "ArtCarved"
refers to the predecessor assets, businesses, and operations of CJC acquired by
CBI, (iii) the term "Balfour" refers to the predecessor class rings 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
On December 16, 1996, CBI completed the Acquisitions. CBI was initially
formed by Castle Harlan Partners II, L.P., ("CHPII") a Delaware limited
partnership and private equity investment fund. In March 1996 for the purpose
of acquiring ArtCarved and Balfour. Until December 16, 1996, CBI engaged in
no business activities other than in connection with the Acquisitions and the
financing thereof.
The Company uses a 52/53 week fiscal year ending on the last Saturday of
August.
RESULTS OF OPERATIONS
The financial statements of the Company for the fiscal year ended August
29, 1998 reflect operations of the Company for the period from August 31, 1997
to August 29, 1998. The financial statements of the Company for the fiscal year
ended August 30, 1997 reflect operations for the period from December 16, 1996
(the date of consummation of the Acquisitions) to August 30, 1997. The financial
statements are presented for the predecessors, ArtCarved for the period from
September 1, 1996 through December 16, 1996 and Balfour for the period from
February 26, 1996 through December 16, 1996. See "Financial Statements". The
results of operations for the Company for the fiscal year ended August 29, 1998
are not comparable to the results of operations for the fiscal year ended August
30, 1997 because the information presented for the fiscal year ended August 29,
1998 includes business operations for a full twelve month period in contrast to
the fiscal year ended August 30, 1997 which includes no significant business
operations prior to December 16, 1996. Due to the highly seasonal nature of the
class ring business, a significant amount of revenue and income were earned by
the Company's predecessors in the three and one-half month period ended December
16, 1996, due to the back to school and pre-holiday season. The results of
operations of the Company for the fiscal year ended August 30, 1997, are not
comparable to the results of operations for the comparable prior periods for
each of the predecessor companies, because (i) CBI was not engaged in business
operations prior to December 16, 1996, and (ii) the information presented for
the predecessor companies includes the operations of such entities for a
twelve-month period in contrast to the approximately eight and one-half month
period of operations in the Company's fiscal year ended August 30, 1997.
The results of operations of the Company for the fiscal years ended
August 29, 1998 and August 30, 1997, were negatively impacted as a result of
the consolidation of the Attleboro and North Attleboro, Massachusetts
operations into the Austin, Texas facilities. Although, the consolidation of
the Attleboro and North Attleboro, Massachusetts operations in the Company's
Austin, Texas facilities was substantially completed in the fiscal year ended
August 29, 1998, 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 costs savings that may result from such
integration.
-12-
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 Attleboro, Massachusetts administrative facility) were
eliminated. The closure of these facilities resulted in permanent cost
savings of approximately $1.5 million on an annual basis of which the full
$1.5 million of costs savings were realized during fiscal 1998 and
approximately $400,000 of cost savings were realized during fiscal 1997. The
third Balfour facility which contains the insignia plant and the Balfour
ring tooling operation, was not closed.
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 costs 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 (manager 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 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 system
documentation. Therefore, labor costs in excess of those
anticipated by management were incurred to enter, schedule, track
and ship the Balfour rings.
During January 1998, the Company began a major computer project which,
among other things, will convert the more inefficient Balfour computer
systems to the more efficient ArtCarved systems, unifying the Company's
computer system thereby reducing computer operation and maintenance costs,
streamlining and making the Company's order entry system and process more
accurate, and eliminating any "Year 2000" problems that may be inherent in
the Company's existing computer systems. Management believes that this
computer conversion project will be completed by July 1999, although there
can be no assurance that it will be completed by that date.
THE COMPANY
TWELVE MONTHS ENDED AUGUST 29, 1998 ("FISCAL 1998") AS COMPARED TO
THE TWELVE MONTHS ENDED AUGUST 30, 1997 ("FISCAL 1997")
The results of operations for the Company for fiscal 1998, are not
comparable to the results of operations for fisca1 1997 because the information
presented for fiscal 1998 includes business operations for a full twelve-month
period in contrast to fiscal 1997 which includes no significant business
operations prior to December 16, 1996.
NET SALES - Net sales increased $63.5 million, or 72.5%, to $151.1
million for fiscal 1998, as compared to $87.6 million in fiscal 1997. This
increase in net sales is primarily a result of the fact that fiscal 1998
includes a full twelve months of business operations in contrast to fiscal
1997 which includes only approximately eight and one-half months of business
operations. Due to the highly seasonal nature of the class ring business,
approximately 35% of the Company's fiscal 1997 sales were recognized by the
Company's predecessors in the three and one-half month period ended December
16, 1997. This period included the back-to-school period and the pre-holiday
season. Approximately 18% of the company's increase in net sales was a result
of increases in sales volume of high school and college rings and an increase
in the sales volume of the personalized family jewelry product segment of
recognition and affinity products.
-13-
GROSS PROFIT - Gross profit increased $36.1 million, or 85.1%, to $78.5
million for fiscal 1998, as compared to $42.4 million for fiscal 1997 which
was primarily a result of the fact that fiscal 1998 includes a full twelve
months of business operations in contrast to fiscal 1997 which includes only
approximately eight and one-half months of business operations. As a
percentage of net sales, gross profit was 51.9% for fiscal 1998, compared to
48.4% for fiscal 1997. Cost of sales for fiscal 1997 includes an incremental
charge of $4.7 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. Gross profit
for fiscal 1997, excluding this $4.7 million charge, would have been 53.8% of
sales.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES - Selling, general and
administrative expenses increased $26.8 million, or 64.6%, to $68.3 million
for fiscal 1998, compared to $41.5 million for fiscal 1997. The increase was
primarily a result of the fact that fiscal 1998 includes a full twelve months
of business operations in contrast to fiscal 1997 which includes only
approximately eight and one-half months of business operations. As a
percentage of net sales, selling, general and administrative expenses
decreased to 45.2% for fiscal 1998, compared to 47.4% for fiscal 1997. The
decrease was a result of decreased marketing expenditures 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 $9.3 million to $10.2 million for fiscal 1998 compared to $0.9
million for fiscal 1997 which was primarily a result of the fact that fiscal
1998 includes a full twelve months of business operations in contrast to
fiscal 1997 which includes only approximately eight and on-half months of
business operations. As a percentage of net sales, operating income increased
to 6.7% for fiscal 1998 compared to 1.1% for fiscal 1997.
INTEREST EXPENSE, NET - Interest expense, net, was $14.8 million for
fiscal 1998 and $9.8 million for fiscal 1997 primarily consisting of interest on
the Bank Credit Facility which had an average outstanding balance of $46.6
million and $32.7 million for fiscal 1998 and 1997, respectively, at rates
ranging from 8.5% to 10.5% and interest on the $90.0 million of notes, at a rate
of 11%.
PROVISION FOR INCOME TAXES - For fiscal 1998 and fiscal 1997, no
provisions or benefits were recorded as management believes the net operating
losses and carry-forwards incurred by the Company in prior periods will be
sufficient to cover any tax liability.
NET INCOME (LOSS) - As a result of the foregoing, net loss decreased
$4.2 million to a net loss of $4.6 million for fiscal 1998 compared to a net
loss of $8.9 million for fiscal 1997 which was primarily a result of the fact
that fiscal 1998 includes a full twelve months of business operations in
contrast to fiscal 1997 which includes only approximately eight and one-half
months of business operations.
PREFERRED DIVIDENDS - Preferred dividends were $1.2 million for
fiscal 1998 and $0.9 million for fiscal 1997. No dividends were paid in
fiscal 1998 or fiscal 1997.
NET LOSS TO COMMON STOCKHOLDERS - As a result of the foregoing, net
loss to common stockholders decreased an aggregate of $3.9 million to a net
loss to common stockholders of $5.8 million for fiscal 1998 compared to a net
loss to common stockholders of $9.7 million for fiscal 1997 which was
primarily a result of the fact that fiscal 1998 includes a full twelve months
of business operations in contrast to fiscal 1997 which includes only
approximately eight and one-half months of business operations.
ARTCARVED
THE PERIOD FROM SEPTEMBER 1, 1996 THROUGH DECEMBER 16, 1996 ("THE
ARTCARVED PERIOD THROUGH DECEMBER 16, 1996")
The results of operations for the ArtCarved period through December 16,
1996, are not comparable to the results of operations for the fiscal year ended
August 31, 1996, and are not necessarily indicative of the results that could be
expected for a full fiscal year. Due to the highly seasonal nature of the class
ring business, a significant amount of revenues and income were earned in the
three and one-half month period ended December 16, 1996, due to the
back-to-school and pre-holiday season.
-14-
NET SALES - Net sales for the ArtCarved period through December 16, 1996,
were $27.9 million.
GROSS PROFIT - Gross profit for the ArtCarved period through December
16, 1996, was $15.9 million, or 57.0% of net sales.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES - Selling, general and
administrative expenses for the ArtCarved period through December 16, 1996,
were $9.9 million, or 35.4% of net sales.
OPERATING INCOME - As a result of the foregoing, operating income
was $6.0 million or 21.7% of net sales for the ArtCarved period through
December 16, 1996.
INTEREST EXPENSE, NET - Interest expense, net, for the ArtCarved period
through December 16, 1996, was $2.9 million. Average interest rates on debt
during the ArtCarved period through December 16, 1996, were approximately
11.9% for ArtCarved long-term debt and 9.75% for the ArtCarved gold loan.
INCOME TAX PROVISION - There was no income tax provision for the
ArtCarved period through December 16, 1996, due to available federal net
operating tax losses and other credit carry forwards of CJC that eliminated
the need for a tax provision.
NET INCOME (LOSS) - As a result of the foregoing, net income for the
ArtCarved period through December 16, 1996, was $3.2 million, or 11.4% of net
sales.
TWELVE MONTHS ENDED AUGUST 31, 1996 ("FISCAL 1996")
NET SALES. Net sales for fiscal 1996 were $70.7 million.
GROSS PROFIT. Gross profit for fiscal 1996 was $38.0 million, or 53.8%
of net sales.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES - Selling, general and
administrative expenses for fiscal 1996 were $27.9 million, or 39.5% of net
sales.
OPERATING INCOME. As a result of the foregoing, for fiscal 1996
operating income was $10.1 million, or 14.3% of net sales.
INTEREST EXPENSE, NET. Interest expense, net, for fiscal 1996 was
$11.9 million.
INCOME TAX PROVISION. There was no income tax provision in fiscal 1996,
due to available federal net operating tax losses and other credit carry
forwards of CJC that eliminated the need for a federal tax provision.
NET INCOME (LOSS). As a result of the foregoing, net loss for fiscal
1996 was $1.8 million.
BALFOUR
THE PERIOD FROM FEBRUARY 26, 1996 THROUGH DECEMBER 16, 1996 ("THE BALFOUR
PERIOD THROUGH DECEMBER 16, 1996")
NET SALES - Net sales for the Balfour period through December 16, 1996,
were $60.2 million.
GROSS PROFIT - Gross profit for the Balfour period through December 16,
1996, was $30.9 million, or 51.3% of net sales.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES - Selling, general and
administrative expenses for the Balfour period through December 16, 1996, were
$31.0 million, or 51.5% of net sales.
-15-
OPERATING INCOME (LOSS) - As a result of the foregoing, operating loss
for the Balfour period through December 16, 1996, was $0.1 million, or 0.2%
of net sales.
INTEREST EXPENSE, NET - Interest expense, net, for the Balfour period
through December 16, 1996 was $2.0 million, substantially on account of
intercompany debt at a rate of 11.5%.
INCOME TAX EXPENSE - There was no income tax provision due to available
federal net operating tax losses and other credit carry forwards at Town &
Country that eliminated the need for a federal tax provision. The $63,000
provision for income taxes represents the state income taxes for the Balfour
period through December 16, 1996.
NET INCOME (LOSS) - As a result of the foregoing, net loss for the
Balfour period through December 16, 1996, was $2.2 million, or 3.6% of net
sales.
TWELVE MONTHS ENDED FEBRUARY 25, 1996 (THE "1996 PERIOD")
NET SALES. Net sales for the 1996 period were $71.3 million.
GROSS PROFIT. Gross profit for the 1996 period was $35.7 million, or
50.1% of net sales.
SELLING GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses for the 1996 period were $33.5 million or 47.0% of net
sales.
OPERATING INCOME (LOSS). As a result of the foregoing, operating income
for the 1996 period was $2.2 million or 3.1% of net sales.
INTEREST EXPENSE, NET. Interest expense, net for the 1996 period was $2.6
million which related primarily to intercompany debt. Town & Country charged
Balfour an interest rate of 11.5% in the 1996 period.
INCOME TAX EXPENSE. There was no federal income tax provision in the 1996
period due to available federal net operating tax losses and other tax credit
carry forwards of Town & Country that eliminated the need for a federal tax
provision. The income tax expense represents a provision for state income taxes
in the 1996 period.
NET INCOME (LOSS). As a result of the foregoing, net loss for the 1996
period was $0.1 million.
SEASONALITY
The Company's scholastic product sales tend to be seasonal. Class ring
sales are highest during October through December (which overlaps the Company's
first and second fiscal quarters), when students have returned to school after
the summer recess and orders are taken for class rings for delivery to students
before the winter holiday season. Sales of the Company's fine paper products are
predominantly made during February through April (which overlaps the Company's
second and third fiscal quarters) for graduation in May and June. 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 August 29, 1998, the Company had $35.0 million available under the
Revolving Credit and Gold Facilities (as defined below) and an $8.0 million
short term line of credit expiring March 31, 1999 (the "Short Term Revolving
Credit"). The Company had $19,589,000 outstanding under the Revolving Credit
Facility, $3,786,000 outstanding under the Gold Facility and $733,000
outstanding under the Short Term Revolving Credit as of August 29, 1998. At
August 29, 1998 the Company had no availability under its Revolving Credit,
$6,214,000 available under its Gold Facility and $7,267,000
-16-
available under its Short Term Revolving Credit. Management believes that
cash flows generated by existing operations and its available borrowings
under its Bank Credit Facility and Short Term Revolving Credit will be
sufficient to fund its ongoing operations. The Company's liquidity needs
arise primarily from debt service on the Bank Credit Facility, the Short Term
Revolving Credit and the Notes (as defined below), working capital and
capital expenditure requirements and payments required under a Management
Agreement with Castle Harlan, Inc. ("CHP Management Fee") (see "Certain
Relationships and Related Transactions").
The Company's cash flows from operating activities for the fiscal year
ended August 29, 1998, were primarily the net result of decreased
receivables, increased inventories, increased prepaid expenses and other
current assets, increased other assets and decreased overdraft, accounts
payable and accrued expenses. The decreased receivables were primarily the
result of the acceleration of the cash collections from the Balfour sales
representatives, the increased inventories were primarily the result of
increased units in the factory in fiscal 1998, the increase in prepaid
expenses and other assets resulted primarily from an increase in prepaid
marketing expenses and draws paid in advance to the Balfour representatives.
The Company's cash flows from operating activities for the fiscal year ended
August 30, 1997, were primarily the net result of decreased accounts
receivable, decreased inventories, increased prepaid expenses and other
current and noncurrent assets and decreased overdraft, accounts payable and
accrued expenses. The decrease in accounts receivable, inventories, accounts
payable and accrued expenses were primarily due to the fact that the period
included in fiscal 1997 began on December 17, 1996, the day following the
date of the consummation of the Acquisitions, when inventory and receivables
were at a high point of the year. The majority of the higher than average
prepaid expenses and other current assets is primarily due to advances to
sales representatives and prepaid advertising being higher at this time of
year before the busy season begins. The majority of the increase in other
assets relates to transaction fees and expenses arising from the Acquisitions.
Also affecting cash usage in fiscal 1997 and fiscal 1998 are the
one-time costs associated with the closing of the Attleboro facilities,
moving expenses and set-up expenses in Austin. As of August 29, 1998 and
August 30, 1997, $11.3 million and $9.3 million, respectively, of the costs
had been incurred with the remaining balance of $0.8 million in reserves for
remaining expenses associated with the metal stamping and tooling operations
currently operating in Attleboro. The Company's projected capital
expenditures for the fiscal year 1999 are $9.5 million for manufacturing
equipment, tools and dies, software development, and the Balfour computer
project.
The following summarizes certain provisions of the bank credit
agreement governing the Revolving Credit, Term Loan and Gold Consignment
Agreement as amended, (the "Bank Credit Facility"), dated as of December 16,
1996, by and among the Company, as borrower, BankBoston (formerly known as
The First National Bank of Boston and successor by merger to Rhode Island
Hospital Trust National Bank), Rhode Island Hospital Trust National Bank
("RIHT", and together with BankBoston, as agent, the "Agents") and the
financial institutions party thereto, and the Company's Short Term Revolving
Credit.
The Bank Credit Facility 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 of $24,000,000 matures on December 16, 2003. The
Company may prepay the Term Loan Facility at any time, and 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 and the 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 is
recalculated each month. If the aggregate amount of loans and other
extensions of credit under the Revolving Credit and the Gold
Facilities 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.
-17-
At August 29, 1998, the Company had no availability under its Revolving
Credit Facility and $6,214,000 available under its Gold Facility.
The Gold Facility consists of (a) a purchase and consignment facility,
pursuant to which BankBoston, 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 Credit Facility 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 at
August 29, 1998 and August 30, 1997, was 10.3% and10.5%, respectively.
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 Credit Facility 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 Credit Facility contains certain customary affirmative and
negative covenants, including, among other things, requirements that the
Company (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 Credit Facility (v) not make
capital expenditures in excess of limits set forth in the Bank Credit
Facility (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 BankBoston 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 Credit Facility). 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, minimum
Consolidated EBITDA (as those terms are defined in the Bank Credit Facility)
in amounts set forth in the Bank Credit Facility. Furthermore, the covenants
were amended on November 27, 1998, and additional covenants were added in
which the Company must not permit its Consolidated Net Worth (as defined) as
of March 30, 1999 to be less than $42,000,000, not pay the CHP Management Fee
unless at the time of payment (A) no Event of Default shall have occurred and
be continuing or would result from the payment thereof; (B) the Short Term
Revolving Credit shall have been paid in full; and (C) the Company meets the
requisite Modified Funded Debt Ratio (as defined in the Bank Credit Facility)
and will not permit or make certain capital expenditures for computer
conversion projects in excess of $6,500,000 in the aggregate during fiscal
1998 and 1999 and the first fiscal quarter of 2000. Most of the covenants
apply to the Company and its subsidiaries. The Company was in compliance with
all of its covenants under the Bank Credit Facility as of August 29, 1998 and
August 30, 1997. However, the Company may enter into additional transactions
which may require further amendments in the upcoming year. Management
believes the Company can maintain compliance pursuant to the amended Bank
Credit Facility throughout the next year.
The Bank Credit Facility 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
Credit Facility 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.
On August 26, 1998, the Company obtained the Short Term Revolving
Credit from BankBoston pursuant to which the Company may, from time to time,
borrow up to $8,000,000 from BankBoston, until March 31, 1999. At August 29,
1998, the Company had $7,267,000 available under the Short Term Revolving
Credit. Amounts outstanding under the Short Term Revolving Credit bear
interest at either fixed or floating rates based upon the interest rate
option selected by the
-18-
Company. All amounts borrowed under the Short Term Revolving Credit are due
and payable on March 31, 1999. Any Event of Default under the Bank Credit
Facility will also constitute an Event of Default under the Short Term
Revolving Credit. Pursuant to the terms of the Company's Bank Credit
Facility, the Company is prohibited from repaying the outstanding principal
on the Short Term Revolving Credit unless at the time of such repayment and
both before and after giving effect to such payment, no Default or Event of
Default exists under the Bank Credit Facility and the Borrowing Base exceeds
all outstanding amounts under the Bank Credit Facility by at least $2
million. The Short Term Revolving Credit is unsecured. All of the Company's
obligations under the Short Term Revolving Credit are guaranteed by CHPII.
The Company has agreed to indemnify CHPII and pay CHPII upon demand any
amounts that CHPII must pay pursuant to such guaranty. The Short Term
Revolving Credit constitutes Designated Senior Indebtedness for purposes of
the Indenture.
The Company's $90,000,000 aggregate principal amount of 11% Senior
Subordinated Notes ("the Notes") mature on January 15, 2007. The Notes are
redeemable at the option of the Company, in whole or in part, at any time on
or after January 15, 2002, 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 Credit
Facility 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 the Indenture covenants at August
29, 1998 and August 30, 1997.
YEAR 2000 COMPLIANCE
The Company has conducted a review of its computer systems,
applications and equipment and has contacted external parties (such as
suppliers) regarding their preparedness for year 2000 to identify the systems
that could be affected by the "Year 2000" problem and is making certain
investments in its software applications and systems to ensure that the
Company's systems and applications function properly to and through the year
2000. The Company expects its Year 2000 conversion project to be completed by
July 1999, although there can be no assurance that it can be completed by
that date. Failure to meet this schedule could have a material impact on the
operations of the Company. The cost to the Company of the Year 2000 project
as well as the related potential effect on the Company's earnings are not
expected to have a material adverse impact on the financial position, cash
flows or results of operations of the Company.
The materiality of the costs of the project and the date when the Company
believes it will complete the Year 2000 project are based on management's best
estimates, which were derived utilizing numerous assumptions of future events,
-19-
including the continued availability of certain resources and other factors.
However, there can be no guarantee that these estimates will be achieved, and
actual results could differ materially from those anticipated. Specific
factors that might cause such material differences include, but are not
limited to, the availability and cost of personnel trained in this area, the
ability to locate and correct all relevant computer codes and similar
uncertainties.
DISCLOSURE REGARDING FORWARD LOOKING STATEMENTS
This report includes forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended. Although management believes
that the expectations reflected in such forward looking statements are based
upon reasonable assumptions, the Company can give no assurance that these
expectations will be achieved. Any change in the following factors may impact
the achievement of results in forward-looking statements: the price of gold
and precious, semiprecious and synthetic stones; the Company's access to
students and consumers in schools; the seasonality of the Company's business;
regulatory and accounting rules; the Company's relationship with its
independent sales representatives; fashion and demographic trends; general
economic, business and market trends and events, especially during peak
buying seasons for the Company's products; the Company's ability to respond
to customer change orders and delivery schedules; development and operating
costs; competitive pricing changes; successful completion of management
initiatives designed to achieve operating efficiencies; and completion of
Year 2000 compliance projects with respect to internal and external
computer-based systems. The foregoing factors are not exhaustive. New factors
may emerge or changes may occur that impact the Company's operations and
businesses. Forward-looking statements attributable to the Company or persons
acting on behalf of the Company are expressly qualified on the foregoing or
such other factors as may be applicable.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements of the Company and the predecessor financial
statements of ArtCarved and Balfour are included as part of this report. (See
page 30.)
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
-20-
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The following table sets forth in alphabetical order each person who
was an executive officer or director of the Company as of August 29, 1998:
NAME POSITION
- ---- --------
EXECUTIVE OFFICERS AND DIRECTORS:
Jeffrey H. Brennan President, Chief Executive Officer and Director
John K. Castle Director
Richard H. Fritsche* Vice President and Chief Financial Officer
William J. Lovejoy Director
David B. Pittaway Director
Zane Tankel Director
Edward O. Vetter Director
*Mr. Fritsche's employment with the Company was terminated as of August
29, 1998.
For a description of the Company's employment arrangements with Messrs.
Brennan and Fritsche (hereinafter, the "Named Executive Officers") see
"Executive Compensation --Employment Agreements". No family relationship
exists between any of the executive officers or between any of them and any
director of the Company.
JEFFREY H. BRENNAN (54) has been President, Chief Executive Officer and
a director of the Company since December 16, 1996, and prior thereto was
President and Chief Executive Officer of CJC from September 1995 through
December 1996. He also held the position of Chief Financial Officer of CJC
from August 1988 to December 1996 and served as a director of CJC from
December 1988 through December 1996. Before joining CJC in August 1988, Mr.
Brennan served in various financial management positions with Baker Hughes
Incorporated, a provider of oilfield services, supplies and equipment.
JOHN K. CASTLE (57) has been a director of the Company since December
16, 1996, and has been Chairman of Castle Harlan, Inc., a private
merchant bank, since 1987. Mr. Castle is Chairman of Castle Harlan Partners
II GP, Inc., which is the general partner of Castle Harlan Partners II,
L.P., the Company's controlling stockholder. Mr. Castle is also Chairman
and Chief Executive Officer of Branford Castle Holdings, Inc. and Chairman
of Castle Harlan Partners III GP, Inc., the general partner of the general
partner of Castle Harlan Partners III, L.P. Immediately prior to forming
Castle Harlan, Inc., Mr. Castle was President and Chief Executive
Officer and a director of Donaldson, Lufkin and Jenrette, Inc., one of the
nation's leading investment banking firms. Mr. Castle is a director of
Sealed Air Corporation, Morton's Restaurant Group, Inc. and Universal
Compression, Inc.; a Managing Director of Statia Terminals Group,
N.V.; and a member of the corporation of the Massachusetts Institute of
Technology. Mr. Castle is also a Trustee of the New York and Presbyterian
Hospitals, Inc., the Whitehead Institute of Biomedical Research and New
York Medical College (for 11 years serving as Chairman of the Board).
Formerly, Mr. Castle was a Director of the Equitable Life Assurance Society
of the United States.
-21-
WILLIAM J. LOVEJOY (31) has been a director of the Company since December
16, 1996, and served as Secretary of the Company from April 1996 through
December 1996. Mr. Lovejoy is a Vice President of Castle Harlan, Inc., a private
merchant bank, with which he has been associated since December 1994. From June
to August of 1992 and from August 1993 to November 1994, Mr. Lovejoy was a
management consultant at The Boston Consulting Group, Inc. From 1991 to 1993 he
attended Harvard Business School, and prior to that worked as an analyst at
Wasserstein Perella & Co., Inc. Mr. Lovejoy also serves as a director of
Homestead Insurance Company.
DAVID B. PITTAWAY (47) has been a director of the Company since December
16, 1996, and was President, Treasurer and the sole director of the Company from
April 1996 through December 1996. Mr. Pittaway has been Vice President and
Secretary of Castle Harlan, Inc., a private merchant bank, since February 1987
and Managing Director since February 1992. Mr. Pittaway is Secretary of Castle
Harlan Partners II GP, Inc., which is the general partner of the general partner
of Castle Harlan Partners II, L.P., the Company's controlling stockholder. Mr.
Pittaway is also Secretary of Castle Harlan Partners III GP, Inc., the general
partner of the general partner of Castle Harlan Partners III, L.P. Mr. Pittaway
has been Vice President and Secretary of Branford Castle, Inc., an investment
company, since October 1986; Vice President, Chief Financial Officer and a
director of Branford Chain, Inc., a marine wholesale company, since June 1987; a
director of Morton's Restaurant Group, Inc., a public restaurant company and of
Charlie Browns Acquisition Corp; and Managing Director of Statia Terminals
Group, N.V., a holder of marine terminals. Prior to 1987, Mr. Pittaway was Vice
President of Strategic Planning and Assistant to the President of Donaldson
Lufkin & Jenrette. Inc. from 1985.
ZANE TANKEL (58) has been a director of the Company since December 16,
1996, and has been Chairman and Chief Executive Officer of Zane Tankel
Consultants, Inc., a sales company, since 1990. In 1994, Mr. Tankel formed Apple
Metro, Inc., a restaurant franchisee for the New York metropolitan area, for the
franchiser Applebee's Neighborhood Grill & Bar. He is presently Chairman and
Chief Executive Officer of Apple Metro, Inc. In 1995, Mr. Tankel was elected
chairman of the Federal Law Enforcement Foundation, which aids the federal law
enforcement community in times of crisis, and was elected to the Board of
Directors of the Metropolitan Presidents Organization, the New York chapter of
the World Presidents Organization, with which Mr. Tankel has been associated
since 1977. Mr. Tankel is also on the advisory board to the Boys Choir of Harlem
and has also served on the Board of Directors of Beverly Hills Securities
Corporation, a wholesale mortgage brokerage company, from 1987 until its sale in
January 1994. In addition, Mr. Tankel founded Saga Communications, Inc. in 1988.
EDWARD O. VETTER (78) has been a director of the Company since January
28, 1998 and has served as President of Edward O. Vetter & Associates, a
private management consulting firm, since 1978 and has also served as a
Trustee for the Massachusetts Institute of Technology since 1979. Mr. Vetter
also served from 1987 to 1991 as Chairman of the Texas Department of
Commerce, from 1979 to 1983 as Energy Advisor to the Governor of Texas and
from 1976 to 1977 as U.S. Undersecretary of Commerce, serving as Director of
Overseas Private Investment Corporation and as Director of Pension Benefit
Guaranty Corporation. From 1952 through 1975, Mr. Vetter was employed by
Texas Instruments, Inc. in various capacities and was the Executive
Vice-President and Chief Financial Officer at the time of his retirement in
1975. Formerly, Mr. Vetter has served as a director of AMR Corporation,
Champion International, Cabot Corporation, Dual Drilling Company, and Bell
Packaging Company.
The Board of Directors has established two committees, a Compensation
Committee and an Audit Committee. The Compensation Committee reviews general
policy matters relating to compensation and benefits of employees and
officers of the Company. The Audit Committee recommends the firm to be
appointed as independent accountants to audit the Company's financial
statements, discusses the scope and results of the audit with the independent
accountants, reviews with management and the independent accountants the
Company's interim and year-end operating results, considers the adequacy of
the internal controls and audit procedures of the Company and reviews the
non-audit services to be performed by the independent accountants. The
Compensation Committee consists of Messrs. Castle, Pittaway and Tankel and
the Audit Committee consists of Messrs. Pittaway, Lovejoy and Vetter.
-22-
ITEM 11. EXECUTIVE COMPENSATION
The table below summarizes the total value of compensation received by
the Named Executive Officers who received compensation which exceeded
$100,000 during fiscal 1998.
SUMMARY COMPENSATION TABLE
Long Term
Annual Compensation Compensation
------------------- --------------------------------
Awards Payouts
------ -------
Securities
Name and Underlying LTIP All Other
Principal Position Year Salary($) Bonus($) Options(#)(1) Payouts Compensation($)
------------------ ---- --------- -------- ------------- ------- ---------------
George Agle(2)
Former Chairman of the 1998 -0- -0- -0- -0- 300,000(2)
Board 1997 207,692 50,000 -0- -0- -0-
Jeffrey H. Brennan
President and Chief 1998 195,292 -0- -0- -0- -0-
Executive Officer 1997 131,538 -0- 8,617 -0- -0-
Richard H. Fritsche(3)
Vice President and Chief 1998 118,309 50,000 -0- -0- 27,894(4)
Financial Officer 1997 79,618 -0- 1,723 -0- 46,940(4)
- ------------------------
(1) The right to exercise the underlying options granted pursuant to the
Company's Amended and Restated 1997 Stock Option Plan (the "Plan") vest
at the rate of 25% per year at the end of the second through fifth year
following the grant. As of August 29, 1998, there were no options
exercisable under the Plan. Unless otherwise terminated earlier in
accordance with the terms of the Plan, the options expire ten years from
the date of grant.
(2) Mr. Agle's employment with the Company was terminated as of March 31,
1997. Payments to Mr. Agle continued in accordance with the terms of
his employment agreement through September 25, 1998.
(3) Mr. Fritsche's employment with the Company was terminated as of August
29, 1998. Payments to Mr. Fritsche after such date continued to
be made in accordance with the terms of his employment agreement. Mr.
Fritsche's options under the Plan terminated effective August 29, 1998
upon the termination of his employment.
(4) Consists of reimbursement for relocation expenses.
No stock options under the Plan were granted to or exercised by any of
the named executives or officers during fiscal 1998. Options to purchase an
aggregate of 937 shares were granted to each of Messrs. Tankel and Vetter
pursuant to the Plan during fiscal 1998.
Effective January 1, 1998, directors who are neither managers of the
Company nor affiliates of CHPII, are entitled to receive a fee of $25,000 per
year for their services as a director. In addition, all directors are
reimbursed for expenses incurred by them in attending meetings of the Board
of Directors or any committee thereof.
The Company has entered into indemnification agreements with each of
its directors that, among other things, require the Company to indemnify such
directors to the fullest extent permitted by law and to advance to the
directors all related expenses, subject to reimbursement if it is
subsequently determined that indemnification is not permitted. The Company
has also agreed to indemnify and advance all expenses incurred by directors
seeking to enforce their rights under the indemnification agreements, and to
cover directors under the Company's directors' and officers' liability
insurance.
-23-
EMPLOYMENT CONTRACTS
Pursuant to the purchase agreement related to the acquisition of
Balfour, the Company agreed to employ Mr. Agle effective as of December 16,
1996, at an annual base salary of $300,000 plus a bonus of $50,000 payable
under certain circumstances. In addition, the Company agreed to assume
Balfour's obligations under Mr. Agle's employment agreement with Balfour to
pay Mr. Agle a severance payment equal to 18 months of his yearly salary
payable on a monthly basis in the event he voluntarily terminated employment
with the Company under certain circumstances or was terminated without cause.
Mr. Agle's employment by the Company ended as of March 31, 1997, whereupon
Mr. Agle was paid a $50,000 bonus and the Company commenced making severance
payments to Mr. Agle in accordance with the foregoing. All payments due to
Mr. Agle under his employment agreement were completed on September 25, 1998.
The Company entered into an employment agreement with Jeffrey H.
Brennan, effective as of December 16, 1996, pursuant to which Mr. Brennan
serves as Chief Executive Officer of the Company at an annual base salary of
$190,000 per year for an initial term of four years, which will automatically
be extended for additional one-year terms on December 15th of each succeeding
year thereafter unless earlier terminated by the Company by not less than 60
days' prior notice. Mr. Brennan will be entitled to participate in all
employee benefit plans and programs (including any incentive bonus plans and
incentive stock option plans) maintained by the Company from time to time for
the benefit of its employees. In addition, Mr. Brennan's employment agreement
provides that, in the event Mr. Brennan's employment is terminated by the
Company without Cause (as defined) or by Mr. Brennan with Good Reason (as
defined), Mr. Brennan will be entitled to receive bi-weekly severance
payments during the two-year period following his termination in an amount
equal to the average of his bi-weekly base compensation in effect within the
two years preceding his termination. Mr. Brennan has agreed not to compete
with the Company in the United States for a period of one year after the
termination of his employment under his employment agreement.
The Company entered into an employment agreement with Richard H.
Fritsche, effective as of December 16, 1996, pursuant to which Mr. Fritsche
was to serve as an executive of the Company at an annual base salary of
$115,000 per year for an initial term of three years, which could be
automatically extended for additional one year terms on December 15th of each
succeeding year thereafter unless earlier terminated by the Company by not
less than 60 days' prior notice. Mr. Fritsche's employment pursuant to his
employment agreement was terminated on August 29, 1998. In accordance with
Mr. Fritsche's employment agreement, Mr. Fritsche is entitled to receive
bi-weekly severance payments during the 18-month period following his
termination in an amount equal to the average of his bi-weekly base
compensation in effect within the two years preceding his termination. Mr.
Fritsche has agreed not to compete with the Company in the United States for
a period of one year after the termination of his employment under his
employment agreement.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
No member of the Compensation Committee is an employee of the Company.
There are no compensation committee interlocks (i.e., no executive officer of
the Company serves as a member of the board of directors or the compensation
committee of another entity which has an executive officer serving on the
Company's Board or the Compensation Committee.)
MANAGEMENT OPTIONS
The Board of Directors of the Company approved the Commemorative
Brands, Inc. Amended and Restated 1997 Stock Option Plan (the "Option Plan")
effective July 29, 1997, as amended December 9, 1997, pursuant to which
approximately 15% of the Common Stock of the Company on a fully diluted basis
(after giving effect to the issuance of the shares of Common Stock underlying
such options) or 69,954 shares of Common Stock have been reserved for
issuance upon exercise of future stock options under the Option Plan. The
Option Plan provides for the granting of both incentive and nonqualified
stock options. On July 29, 1997, the Board approved the grant of 34,470
options to management employees at an exercise price of $6.67. No options
were granted to management in fiscal 1998. On January 28, 1998 the Board
approved the grant of 937 nonqualified options to each of Messrs. Tankel and
Vetter, at an exercise price of $6.67. The Compensation Committee is
responsible for monitoring the Option Plan. All Common Stock issued upon
exercise of options granted pursuant to the Option Plan will be subject to a
voting trust agreement.
-24-
INCENTIVE STOCK PURCHASE PLAN
On July 7, 1998 the stockholders of the Company unanimously approved
the Commemorative Brands, Inc. Incentive Stock Purchase Plan (the "Stock
Purchase Plan"). Pursuant to the terms of the Stock Purchase Plan, the
Company may from time to time offer shares of the Company's Class B Preferred
Stock and Common Stock to employees, consultants and independent sales
representatives who are determined to be eligible to purchase shares pursuant
to the Stock Purchase Plan by the Plan Administrator (as defined in the Stock
Purchase Plan) upon such terms and at such prices as are set forth in the
Stock Purchase Plan and as are determined by the Plan Administrator.
On July 20, 1998, the Company commenced an offering pursuant to the
Stock Purchase Plan of up to an aggregate of 18,750 shares of each of the
Company's Common Stock and Series B Preferred Stock to eligible employees,
consultants and independent sales representatives. The offering is currently
scheduled to terminate on December 22, 1998.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information known by the Company
regarding the beneficial ownership of the Company's voting securities as of
August 29, 1998, with respect to (i) each person or entity who is the
beneficial owner of more than 5% of any class of the Company's voting
securities, (ii) each of the Company's directors, (iii) each of the Named
Executive Officers, and (iv) all directors and executive officers as a group.
NUMBER OF PERCENTAGE NUMBER OF PERCENTAGE
SHARES OF OF TOTAL SHARES OF OF TOTAL
COMMON COMMON SERIES B SERIES B
NAME AND ADDRESS OF BENEFICIAL OWNER (1) STOCK STOCK PREFERRED PREFERRED
- -----------------------------------------------------------------------------------------------------------------
Castle Harlan Partners II, L.P.(2) 330,840 87.7 330,840 87.7
Castle Harlan Offshore Partners, L.P.(2) (3) 20,804 5.5 20,804 5.5
John K. Castle (2) (3) (4) 377,156 100.0 377,156 100.0
William J. Lovejoy (2) -- -- -- --
David B. Pittaway (2) 469 * 469 *
Zane Tankel (2) 938 * 938 *
Edward O. Vetter(2) 400 * 400 *
Jeffrey H. Brennan (5) 937 * 937 *
Richard H. Fritsche (5)(6) 234 * 234 *
Directors and executive officers as a group
(9 persons, including those listed above)(5) 377,156 100.0 377,156 100.0
- ----------------------
* Denotes beneficial ownership of less than one percent of the class of capital
stock.
(1) Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission. Except as indicated in the
footnotes to this table, each stockholder named in the table has sole
voting and investment power with respect to the shares set forth
opposite such stockholder's name except for John K. Castle who, in his
capacity as voting trust, has sole voting power on such shares, but
disclaims any economic interest in any shares so held.
(2) The address for each such stockholder or director identified above is
c/o Castle Harlan, Inc., 150 East 58th Street, New York, New York
10155.
(3) Affiliates of CHPII include among others, Castle Harlan Offshore
Partners, L.P. ("Offshore"), Dresdner Bank AG, Grand Cayman Branch
Managed Account (the "Managed Account") and the limited partners of the
sole general partner of CHPII. Castle Harlan, Inc. acts as the
investment manager for CHPII, Offshore and the Managed Account,
pursuant to separate investment management agreements. Castle Harlan
Associates, L.P. ("CHALP") is the sole general partner of each of CHPII
and Offshore, therefore, may be deemed to be a beneficial owner of the
shares owned by each of those two partnerships. Castle Harlan Partners
II GP, Inc. is the sole general partner of CHALP and, therefore, may be
deemed to be a beneficial owner of the shares owned by CHALP. Castle
Harlan, Inc., as the investment manager for each of CHPII, Offshore and
the Managed Account (the owner of 18,483 shares of common stock and
18,483 shares of Series B Preferred Stock representing 4.9% of the
total outstanding common stock and 4.9% of the total Series B Preferred
Stock,), may be deemed to be beneficial owner of the shares owned by
such entities.
-25-
(4) John K. Castle is a director of the Company and is the controlling
stockholder of Castle Harlan Partners II GP, Inc., the general partner
of the general partner of CHPII, and as such may be deemed to be a
beneficial owner of the shares owned by CHPII and its affiliates. Mr.
Castle disclaims beneficial ownership of such shares in excess of his
proportionate partnership share. In addition, Mr. Castle serves as
voting trustee under a voting trust agreement (the "Voting Trust
Agreement") with certain officers and directors of the Company, and
limited partners of CHALP and a corporate entity of which Mr. Castle is
Chairman, Chief Executive Officer and principal stockholder. As such
voting trustee, Mr. Castle may be deemed the beneficial owner of the
shares of Common Stock and Series B Preferred beneficially held by such
persons and entities (which amounts are included in the numbers set
forth above). Mr. Castle disclaims any economic interest in such
shares.
(5) The address for each individual identified above is c/o Commemorative
Brands, Inc., 7211 Circle S Road. Austin, Texas 78745.
(6) Following termination of Mr. Fritsche's employment on August 29, 1998,
Mr. Fritsche requested pursuant to the terms of the Stock Purchase and
Subscription Agreement, dated as of June 30, 1998, by and between the
Company and Mr. Fritsche, that the Company repurchase his shares at
the Fair Market Value (as defined in the Agreement) thereof.
In the Spring of 1998, Mr. Edward O. Vetter and Mr. Zane Tankel, both
directors of the Company, purchased an aggregate of 400 and 938 shares,
respectively, of Series B Preferred Stock and 400 and 938 shares,
respectively, of Common Stock from certain members of the Castle Harlan Group
(as defined below) at a purchase price of $100 per share of Series B
Preferred Stock and $6.67 per share of Common Stock. Concurrently with such
purchases, Messrs. Vetter and Tankel deposited their shares into the voting
trust created by the Voting Trust Agreement, of which John K. Castle is
voting trustee.
During June 1998, the company sold 937 newly issued shares of Series B
Preferred Stock and 937 newly issued shares of Common Stock to Jeffrey H.
Brennan, the Chief Executive Officer and President and director of the
Company, and 234 newly issued shares of Series B Preferred Stock and 234
newly issued shares of Common Stock to Richard H. Fritsche, former Vice
President and Chief Financial Officer of the Company. The Company also sold
an aggregate of 985 newly issued shares of Series B Preferred Stock and 985
shares of Common Stock to three other officers of the Company. All such sales
were effected at a purchase price of $100 per share of Series B Preferred
Stock and $6.67 per share of Common Stock. Each of the foregoing purchases of
shares by officers of the Company are subject to stock purchase agreements
that give the Company the right to repurchase such shares or the officer the
right to require the Company to repurchase such shares upon termination of
employment under certain circumstances. Concurrently with such purchases, the
officers placed all of the shares acquired by them into the voting trust
created by the Voting Trust Agreement, of which John K. Castle is voting
trustee.
In accordance with a subscription agreement entered into by the Company
and certain of CHPII's affiliates (together, the "Castle Harlan Group") in
conjunction with the Acquisitions, the Company granted to the Castle Harlan
Group and their permitted transferees, including Messrs. Vetter and Tankel,
certain registration rights with respect to the shares of its 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 at any time
at the request of the Castle Harlan Group and Messrs. Vetter and Tankel and
granted to the Castle Harlan Group and Messrs. Vetter and Tankel unlimited
piggyback registration rights on certain registrations of shares by the
Company.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The Company entered into a Management Agreement dated December 16,
1996, 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% of the then outstanding capital stock of the
Company. The Company has agreed to indemnify the Manager against liabilities,
costs, charges and expenses relating to the Manager's performance of its
duties, other than such of the foregoing resulting from the Manager's gross
negligence or willful misconduct. The Bank Credit Facility prohibits payment
of the CHP Management Fee unless at the time of payment (i) no Event of Default
(as defined in the Bank Credit Facility) shall have occurred and is
-26-
continuing or would result from the payment of the management fee; (ii) the
Short Term Revolving Credit shall have been repaid in full; and (iii) the
Company meets the requisite Modified Funded Debt Ratio (as defined in the
Bank Credit Facility). The Indenture also prohibits payment of the CHP
Management Fee in the event of a default by the Company in the payment of
principal, Redemption Price, Purchase Price (both as defined in the
Indenture), interest, or Liquidated Damages (if any) on the Notes.
On June 30, 1998, the Company sold shares of Common Stock and Series B
Preferred Stock to certain executive officers of the Company including
Jeffrey H. Brennan, President and Chief Executive Officer of the Company and
Richard Fritsche, formerly Chief Financial Officer. In conjunction therewith,
the Company lent Mr. Brennan $75,000 to purchase shares of the Company's
stock pursuant to a promissory note in the original principal amount of
$75,000, which amount is due and payable in full on June 16, 2003, and which
bears interest at the rate of 5.77% per annum, payable annually on the 15th
of June. Mr. Brennan has granted to the Company a security interest in the
937 shares of Common Stock and Series B Preferred Stock acquired by him and
his interest in the voting trust into which the shares have been deposited as
collateral security for the repayment in full of the promissory note. The
Company also lent another officer of the Company the sum of $25,000 to
purchase shares of the Company's stock on substantially identical terms as
the promissory note issued by Mr. Brennan.
The Company has agreed to indemnify CHPII pursuant to an
indemnification agreement, dated August 26, 1998 for any amounts that may be
incurred by CHPII under CHPII's guaranty of the Company's obligations under
the Short Term Revolving Credit. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations - Liquidity and Capital
Resources."
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
The following documents have been filed as a part of this report or
where noted incorporated by reference:
(a) (1) and (2) The response to this portion of Item 14 is submitted
as a separate section of this report. (See page 30.)
(b) The Company has not filed any reports on Form 8-K over
the last quarter of the period covered by this report.
(a) (3) and (c) The following exhibits are filed as a part of the report:
EXHIBIT NO. DESIGNATION
---------- -----------
2.1(a) Asset purchase Agreement dated as of May 20, 1996
("ArtCarved Purchase Agreement"), among the Company, CJC
and CJC North America, Inc. ("CJCNA").
2.2(a) First Amendment to the ArtCarved Purchase Agreement dated
as of November 21, 1996, among the Company, CJC and CJCNA.
2.3(a) Letter Agreement amending the ArtCarved Purchase Agreement
dated December 16, 1996, among the Company, CJC and CJCNA.
2.4(a) Amended and Restated Asset Purchase Agreement dated as of
November 21, 1996 ("Balfour Purchase Agreement"), among the
Company, Town & Country, L. G. Balfour Company, Inc., and
Gold Lance, Inc.
2.5(a) Letter Agreement amending the Balfour Purchase Agreement dated
December 16, 1996, by and among the Company, Town & Country,
L. G. Balfour Company, Inc. and Gold Lance.
3.1(a) Certificate of Incorporation of the Company, as amended.
3.2(a) Certificate of Designations, Preferences and Rights of
Series A Preferred Stock of the Company, effective
December 13, 1996, together with a Certificate of
Correction thereof.
3.3(a) Certificate of Designations, Preferences and Rights of
Series B Preferred Stock of 3.3(a) the Company effective
December 13, 1996.
3.4(a) Restated by-laws of the Company, as amended.
3.5 Certificate of Increase of Series B Preferred Stock dated
June 10, 1998. Filed herewith.
4.1(a) Indenture dated as of December 16, 1996, between the
Company and Marine Midland Bank, as trustee (including the
form of Note).
-27-
4.2(a) Form of Note (Included as part of Indenture).
4.3(a) Registration Rights Agreement dated as of December 16, 1996,
among the Company, Lehman Brothers Inc. and BT Securities
Corporation.
4.4 Amended and Restated Stockholders' and Subscription
Agreement, dated as of April 29, 1998, by and among the
Company, CHPII, Dresdner Bank AG, Grand Cayman Branch,
Offshore, John K. Castle, as Voting Trustee, and the
individuals party thereto. Filed herewith.
4.5(b) Amended and restated 1997 Stock Option Plan of the
Company. Incorporated by reference to the corresponding
Exhibit of the Company's Annual Report - Form 10K
(File No. 333-20759) dated August 30, 1997.
9.1 Voting Trust Agreement, as amended and restated as of
April 29, 1998, among the Company, certain stockholders of
the Company party thereto and John K. Castle, as
Voting Trustee. Filed herewith.
10.1(a) Revolving Credit, Term Loan and Gold Consignment Agreement
dated as of December 16, 1996, among the Company, the
lending institutions listed therein and The First National
Bank of Boston and Rhode Island Hospital Trust National
Bank, as Agents for the Banks.
10.2(a) Purchase Agreement dated December 10,1 996, among the Company
and the Initial Purchasers.
10.3(a)(b) Employment Agreement dated as of December 16, 1996, between the
Company and Jeffrey H. Brennan.
10.4(a)(b) Employment Agreement dated as of December 16, 1996, between the
Company and Richard H. Fritsche.
10.5(a)(b) Employment arrangements between the Company and Balfour with
respect to George Agle.
10.6(a)(b) Form of Indemnification Agreement between the Company and
(i) each director and (ii) certain officers.
10.7 Management Agreement dated as of December 17, 1996, between the
Company and Castle Harlan, Inc. Incorporated by reference to the
corresponding Exhibit of the Company's Annual Report on Form 10-K
(File No. 333-20759) dated August 30, 1997.
10.8 First Amendment to Revolving Credit, Term Loan and Gold Consignment
Agreement, dated March 16, 1998 - incorporated by reference to Exhibit 10.1
to the Company's Quarterly Report on Form 10-Q (File No. 333-20759) dated
February 28, 1998.
10.9 Second Amendment to Revolving Credit, Term Loan and Gold Consignment
Agreement, dated July 10, 1998 - incorporated by reference to Exhibit 10.1
to the Company's Quarterly Report on Form 10-Q (File No. 333-20759) dated
May 30, 1998.
10.10 Incentive Stock Purchase Plan, effective as of July 7, 1998. Filed herewith.
10.11 Third Amendment to Revolving Credit, Term Loan and Gold Consignment Agreement,
dated August 26, 1998. Filed herewith.
10.12 Revolving Credit Note, dated as of August 26, 1998, issued by the Company and
payable to the order of BankBoston, N.A. Filed herewith.
10.13 Indemnity Agreement, dated August 26, 1998, by and between the Company and CHPII.
Filed herewith.
10.14 Fourth Amendment to Revolving Credit, Term Loan and Gold Consignment Agreement,
dated November 27, 1998. Filed herewith.
11.1 Statement re: Computation of per share earnings. Filed herewith.
27.1 Financial Data Schedule. Filed herewith.
- ----------------------
(a) Incorporated by reference to the corresponding Exhibit number of the
Company's Registration Statement on Form S-4 (Registration No. 333-20759),
dated April 11, 1997.
(b) Management contract or compensatory plan or arrangement.
-28-
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
COMMEMORATIVE BRANDS, INC.
By:/s/ Sherice P. Bench
------------------------------------------
(Signature)
Sherice P. Bench
Vice President Finance and Principal
Accounting Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant in the indicated capacities on November 27, 1998.
/s/ Jeffrey H. Brennan President, Chief Executive Officer and Director
----------------------------------
Jeffrey H. Brennan
/s/ John K. Castle Director
----------------------------------
John K. Castle
/s/ William J. Lovejoy Director
----------------------------------
William J. Lovejoy
/s/ David B. Pittaway Director
----------------------------------
David B. Pittaway
/s/ Zane Tankel Director
----------------------------------
Zane Tankel
/s/ Edward O. Vetter Director
----------------------------------
Edward O. Vetter
-29-
SUPPLEMENTAL INFORMATION TO BE FURNISHED WITH REPORTS FILED PURSUANT TO
SECTION 15(d) OF THE ACT BY REGISTRANTS WHICH HAVE NOT REGISTERED SECURITIES
PURSUANT TO SECTION 12 OF THE ACT:
The Company has not sent to any of the Company's security holders either (i)
an annual report covering the Company's last fiscal year or (ii) any proxy
statement, form of proxy or other proxy material with respect to any annual
or other meeting of security holders.
-30-
FINANCIAL STATEMENTS
Index to Financial Statements
Page
Consolidated Financial Statements of Commemorative Brands, Inc. and Subsidiaries
Report of Independent Public Accountants......................................................... 32
Consolidated Balance Sheets as of August 29, 1998 and August 30, 1997............................ 33
Consolidated Statements of Operations for the Fiscal Years Ended August 29, 1998 and
August 30, 1997......................................................................... 34
Consolidated Statements of Stockholders' Equity for the Fiscal Years Ended August 29, 1998 and
August 30, 1997......................................................................... 35
Consolidated Statements of Cash Flows for the Fiscal Years Ended August 29, 1998 and
August 30, 1997......................................................................... 36
Notes to Consolidated Financial Statements....................................................... 37
Financial Statements of CJC Holdings, Inc., Class Rings Business (ArtCarved)
Report of Independent Public Accountants......................................................... 52
Statements of Income (Loss) for the Fiscal Year Ended August 31, 1996,
and for the Period from September 1, 1996, through December 16, 1996.................... 53
Statements of Changes in Advances and Equity (Deficit) for the Fiscal Year Ended
August 31, 1996, and for the Period from September 1,
1996, through December 16, 1996......................................................... 54
Statements of Cash Flows for the Fiscal Year Ended August 31, 1996,
and for the Period from September 1, 1996, through December 16, 1996.................... 55
Notes to Financial Statements.................................................................... 56
Financial Statements of L. G. Balfour Company, Inc.
Report of Independent Public Accountants......................................................... 63
Statements of Operations for the Year Ended February 25, 1996, and for the Period
Ended December 16, 1996................................................................. 64
Statements of Stockholder's Equity for the Year Ended February 25, 1996, and
for the Period Ended December 16, 1996.................................................. 65
Statements of Cash Flows for the Year Ended February 25, 1996, and for the
Period Ended December 16, 1996.......................................................... 66
Notes to Financial Statements.................................................................... 67
-31-
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Stockholders of
Commemorative Brands, Inc.:
We have audited the accompanying consolidated balance sheets of Commemorative
Brands, Inc. (a Delaware corporation), and subsidiaries as of August 29, 1998
and August 30, 1997, and the related consolidated statements of operations,
stockholders' equity and cash flows for the fiscal years ended August 29,
1998 and August 30, 1997. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these consolidated financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of
Commemorative Brands, Inc., and subsidiaries, as of August 29, 1998 and
August 30, 1997, and the results of their operations and their cash flows for
the fiscal years ended August 29, 1998 and August 30, 1997, in conformity
with generally accepted accounting principles.
Houston, Texas
November 27, 1998
-32-
COMMEMORATIVE BRANDS, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
August 29, August 30,
1998 1997
---------------- --------------
ASSETS
Current assets:
Cash and cash equivalents $ 975 $ 2,174
Accounts receivable, net of allowance for doubtful accounts of $2,356
and $3,750, respectively 24,705 26,444
Inventories 14,299 11,767
Prepaid expenses and other current assets 10,517 8,522
---------------- --------------
Total current assets 50,496 48,907
Property, plant and equipment, net 36,294 33,460
Trademarks, net of accumulated amortization of $1,313
and $543, respectively 29,427 30,197
Goodwill, net of accumulated amortization of $3,844 and
$1,426, respectively 80,517 82,935
Other assets 7,071 5,370
---------------- --------------
Total assets $ 203,805 $ 200,869
================ ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Bank overdraft $ 3,138 $ 4,188
Accounts payable and accrued expenses 22,116 20,893
Current portion of long-term debt 1,983 750
---------------- --------------
Total current liabilities 27,237 25,831
Long-term debt, net of current portion 132,339 124,700
Other long-term liabilities 9,383 9,885
---------------- --------------
Total liabilities 168,959 160,416
Commitments and contingencies
Stockholders' equity:
Preferred stock, $.01 par value, 750,000 shares authorized (in total)-
Series A, 100,000 shares issued and outstanding 1 1
Series B, 377,156 and 375,000 shares issued and outstanding 4 4
Common Stock, $.01 par value, 750,000 shares authorized, 377,156 and
375,000 shares issued and outstanding 4 4
Additional paid-in capital 50,391 50,161
Retained earnings (deficit) (15,554) (9,717)
---------------- --------------
Total stockholders' equity 34,846 40,453
---------------- --------------
Total liabilities and stockholders' equity $ 203,805 $ 200,869
================ ==============
The accompanying notes are an integral part of these consolidated financial
statements.
-33-
COMMEMORATIVE BRANDS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except share data)
August 29, August 30,
1998 1997
----------------- -----------------
Net sales $ 151,101 $ 87,600
Cost of sales 72,615 45,189
----------------- -----------------
Gross profit 78,486 42,411
Selling, general and administrative expenses 68,294 41,481
----------------- -----------------
Operating income 10,192 930
Interest expense, net 14,829 9,797
----------------- -----------------
Loss before provision for income taxes (4,637) (8,867)
Provision for income taxes - -
----------------- -----------------
Net loss $ (4,637) $ (8,867)
Preferred dividends (1,200) (850)
----------------- -----------------
Net loss to common stockholders $ (5,837) $ (9,717)
================= =================
Basic and diluted loss per share $ (15.55) $ (25.91)
================= =================
Weighted average common shares outstanding and common and
common equivalent shares outstanding 375,323 375,000
================= =================
- ----------------------------------------
Commemorative Brands, Inc. completed the acquisitions of ArtCarved
and Balfour on December 16, 1996, and prior to such date engaged in no
business activities other than those in connection with the
Acquisitions and financing thereof.
The accompanying notes are an integral part of these consolidated
financial statements.
-34-
COMMEMORATIVE BRANDS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(In thousands, except share data)
Preferred Stock Common Stock
------------------------------------------------------ -------------------------
Series A Series B
------------------------- ------------------------
Shares Amount Shares Amount Shares Amount
------------ ------------- ------------ ------------ ----------- -------------
Balance, March 28, 1996
(date of formation) - $ - - $ - - $ -
Issuance of Common Stock - - - - 375,000 4
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 4 375,000 4
Issuance of Common Stock - - - - 2,156 -
Issuance of Preferred Stock - - 2,156 - - -
Accrued Preferred Stock dividends - - - - - -
Net loss - - - - - -
------------ ------------- ------------ ------------ ----------- -------------
Balance, August 29, 1998 100,000 $ 1 377,156 $ 4 377,156 $ 4
============ ============= ============ ============ =========== =============
Additional Retained
paid-in earnings
capital (deficit) Total
------------ ------------ ------------
Balance, March 28, 1996 $ - $ - $ -
(date of formation)
Issuance of Common Stock 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 50,161 (9,717) 40,453
Issuance of Common Stock 14 - 14
Issuance of Preferred Stock 216 - 216
Accrued Preferred Stock dividends - (1,200) (1,200)
Net loss - (4,637) (4,637)
------------ ------------ ------------
Balance, August 29, 1998 $ 50,391 $ (15,554) $ 34,846
============ ============ ============
The accompanying notes are an integral part of these consolidated
financial statements.
-35-
COMMEMORATIVE BRANDS, INC.
STATEMENTS OF CASH FLOWS
(In thousands)
For the Fiscal Year Ended
-------------------------------
August 29, August 30,
1998 1997
------------- ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss
Adjustments to reconcile net loss to net cash $ (4,637) $ (8,867)
used in operating activities-
Depreciation and amortization
Provision for doubtful accounts 6,901 4,095
Changes in assets and liabilities- 706 632
Decrease in receivables
Decrease (increase) in inventories 1,033 8,187
Increase in prepaid expenses and other current assets (2,532) 4,557
Increase in other assets (1,995) (3,237)
Decrease in bank overdraft, accounts payable and accrued (1,696) (1,567)
expenses and other
long-term liabilities (1,529) (4,477)
------------- ------------
Net cash used in operating activities (3,749) (677)
------------- ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property, plant and equipment
Cash paid for the acquisitions of ArtCarved and Balfour, including (6,552) (3,493)
transaction costs - (170,200)
------------- ------------
Net cash used in investing activities (6,552) (173,693)
------------- ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from debt issuance - 120,200
Proceeds from issuance of common and preferred stock 230 50,000
Payments on term loan facility, net (750) -
Revolver borrowings, net 9,622 5,250
------------- ------------
Net cash provided by financing activities 9,102 175,450
------------- ------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (1,199) 1,080
CASH AND CASH EQUIVALENTS, beginning of period 2,174 1,094
------------- ------------
CASH AND CASH EQUIVALENTS, end of period $ 975 $ 2,174
============= ============
SUPPLEMENTAL DISCLOSURE
Cash paid during the period for -
Interest $ 14,039 $ 7,568
============= ============
Taxes $ 186 43
============= ============
SUPPLEMENTAL DISCLOSURE OF NONCASH FINANCING ACTIVITIES
Accrued preferred stock dividends $ 1,200 $ 850
============= ============
- ----------------------------------------
Commemorative Brands, Inc. completed the acquisitions of ArtCarved and
Balfour on December 16, 1996, and prior to such date, engaged in no
business activities other than those in connection with the
Acquisitions and financing thereof.
The accompanying notes are an integral part of these consolidated
financial statements.
-36-
COMMEMORATIVE BRANDS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(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. CBI was initially formed in March 1996 by Castle Harlan
Partners II, L.P. (CHPII), a Delaware limited partnership and private equity
investment fund, for the purpose of acquiring 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 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 with its corporate office and primary manufacturing
facilities located in Austin, Texas.
(2) MERGERS AND 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 certain assets and liabilities of L. G.
Balfour Company, Inc. (Balfour), from Town & Country Corporation (Town &
Country).
In consideration for ArtCarved, CBI paid CJC, in cash, the sum of $115.1 million
and assumed certain related liabilities. In consideration for Balfour, CBI paid
Town & Country, in cash, the sum of $45.9 million and assumed certain related
liabilities. In addition, CBI purchased the gold on consignment to L. G. Balfour
Company, Inc. 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
================= ================
The Company has closed and exited substantially all of the Balfour operations
and moved them from Attleboro, Massachusetts, to Austin, Texas.
-37-
(3) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
FISCAL YEAR-END
CBI uses a 52/53-week fiscal year ending on the last Saturday of August.
CONSOLIDATION
The consolidated financial statements include the accounts of the Company and
its subsidiaries. All material intercompany accounts and transactions have been
eliminated in consolidation.
BUSINESS CONDITIONS
The results of operations of the Company for the fiscal year ended August 29,
1998 and August 30, 1997 were negatively impacted as a result of the
consolidation of the Attleboro and North Attleboro, Massachusetts operations
into the Austin, Texas facilities. The consolidation and integration of
operations required substantial time and cost due to complications arising from
the integration of the different order entry and manufacturing processes
required for the Balfour ring product line. The time to train new personnel to
implement the Balfour class ring operations was extensive and resulted in ring
manufacturing headcount levels higher than those experienced by the predecessor
companies through fiscal 1998. The consolidation of the Attleboro and North
Attleboro, Massachusetts operations in Austin, Texas facilities occurred during
the fiscal year ended August 30, 1997 and the integration of these operations
was substantially completed in the fiscal year ended August 29, 1998. There can
be no assurance that the operations formerly conducted by the each of the
Company's predecessors will be fully integrated or as to the amount of any costs
savings that may result from such integration.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents include highly liquid investments with original
maturities of three months or less.
INVENTORIES
Inventories, which include raw materials, labor and manufacturing overhead, are
stated at the lower of cost or market using the first-in, first-out (FIFO)
method.
ADVERTISING
The Company incurs advertising and promotion costs that are directly related to
a product in advance of the sale occurring. These amounts are included in
prepaid expenses and other current assets and are amortized over the period in
which the sale of products occurs.
SALES REPRESENTATIVE ADVANCES AND RESERVE FOR SALES REPRESENTATIVE ADVANCES
The Company advances funds to new sales representatives in order to open up new
sales territories or makes payments to predecessor sales representatives on
behalf of successor sales representatives. Such amounts are repaid by the sales
representatives through earned commissions on product sales. The Company
provides reserves to cover those amounts which it estimates to be uncollectible.
These amounts are included in prepaid expenses and other current assets in the
accompanying balance sheets.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are stated at cost, net of accumulated
depreciation. Depreciation is provided principally using the straight-line
method based on estimated useful lives of the assets as follows:
-38-
- ------------------------------------------------ ----------------------------
Description Useful Life
- ------------------------------------------------ ----------------------------
- ------------------------------------------------ ----------------------------
Land improvements 15 years
- ------------------------------------------------ ----------------------------
- ------------------------------------------------ ----------------------------
Buildings and improvements 10 to 25 years
- ------------------------------------------------ ----------------------------
- ------------------------------------------------ ----------------------------
Tools and dies 10 to 20 years
- ------------------------------------------------ ----------------------------
- ------------------------------------------------ ----------------------------
Machinery and equipment 2 to 10 years
- ------------------------------------------------ ----------------------------
Maintenance, repairs and minor replacements are charged against income as
incurred; major replacements and betterments are capitalized. The cost of
assets sold or retired and the related accumulated depreciation are removed
from the accounts at the time of disposition, and any resulting gain or loss
is reflected as other income or expense for the period.
TRADEMARKS
The value of trademarks was determined based on a third-party appraisal and is
being amortized on a straight-line basis over 40 years.
IMPAIRMENT OF LONG-LIVED ASSETS
In March 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (SFAS) No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of." This statement
deals with accounting for the impairment of long-lived assets, certain
identifiable intangibles and goodwill related to assets to be held and used, and
for long-lived assets and certain identifiable intangibles to be disposed of.
This statement requires that long-lived assets (e.g., property, plant and
equipment and intangibles) be reviewed for impairment whenever events or changes
in circumstances, such as change in market value, indicate that the assets'
carrying amounts may not be recoverable. In performing the review for
recoverability, if future undiscounted cash flows (excluding interest charges)
from the use and ultimate disposition of the assets are less than their carrying
values, an impairment loss is recognized. Impairment losses are to be measured
based on the fair value of the asset. When factors indicate that long-lived
assets should be evaluated for possible impairment, the Company uses an estimate
of the related product lines' undiscounted cash flows over the remaining lives
of the assets in measuring whether the assets are recoverable.
GOODWILL
Costs in excess of fair value of net tangible and identifiable intangible
assets acquired and related acquisition costs are included in goodwill in the
accompanying balance sheets. Goodwill is being amortized on a straight-line
basis over 40 years. The Company continually evaluates whether events and
circumstances have occurred that indicate that the remaining estimated useful
life of goodwill may warrant revision or that the remaining balance of
goodwill may not be recoverable. When factors indicate that goodwill should
be evaluated for possible impairment, the Company would use an estimate of
the related product lines' undiscounted cash flows over the remaining life of
the goodwill in measuring whether the goodwill is recoverable.
OTHER ASSETS
Other assets include deferred financing costs which are amortized over the lives
of the specific debt and ring samples to national chain stores and sales
representatives which are amortized over three years.
INCOME TAXES
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases. Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. Deferred tax assets are
recognized net of any valuation allowance. The effect on deferred tax assets and
liabilities of a change in tax rates is recognized in income in the period that
includes the enactment date.
-39
FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company's financial instruments consist primarily of cash and cash
equivalents, accounts receivable, bank overdraft, accounts payable and long-term
debt (including current maturities). The carrying amounts of the Company's cash
and cash equivalents, accounts receivable, bank overdraft and accounts payable
approximate fair value due to their short-term nature. The fair value of the
Company's long-term debt approximates the recorded amount based on current rates
available to the Company for debt with the same or similar terms.
REVENUE RECOGNITION
Revenues from product sales are recognized at the time the product is shipped.
CONCENTRATION OF CREDIT RISK
Credit is extended to various companies in the retail industry which may be
affected by changes in economic or other external conditions. The Company's
policy is to manage its exposure to credit risk through credit approvals and
limits.
ADVERTISING EXPENSE
Selling, general and administrative expenses for the Company include
advertising expenses of $3,506,000 and $2,752,000 for the fiscal years ended
August 29, 1998 and August 30, 1997 (see Note 1).
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 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 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
ended August 29, 1998. Basic and diluted earnings (loss) per share are the same
as the Company has losses from continuing operations and the computation for
diluted earnings (loss) per share would be antidilutive.
The Company adopted SFAS No. 129, "Disclosure of Information about Capital
Structure", for the fiscal year ended August 29, 1998. It requires an entity
to explain in summary form within its financial statements the pertinent
rights and privileges of the various securities outstanding. This information
is included primarily in Notes 9 and 13.
-40-
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's disclosures as the Company currently does not enter into any
transactions which result in charges (or credits) directly to equity (such as
additional minimum pension liability 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 companywide basis; therefore, the statement is not
expected to impact the Company's disclosures.
SFAS No. 132, "Employers Disclosure about Pensions and Other Postretirement
Benefits", is required to be adopted by the Company for fiscal year 1999. It
revises employers' disclosures about pension and other postretirement benefit
plans. It does not change the measurement or recognition of those plans.
SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities",
is required to be adopted by the Company in the first quarter of fiscal year
2000 (November 1999). It establishes accounting and reporting standards for
derivative instruments, including certain derivative instruments embedded in
other contracts and for hedging activities. It requires that an entity
recognize all derivatives as either assets or liabilities in the balance
sheet and measure those instruments at fair value. Management believes that
the adoption of this standard will not have a material effect on the
Company's financial position or results of operations.
(4) INVENTORIES
A summary of inventories is as follows (in thousands):
August 29, August 30,
1998 1997
----------------- ----------------
Raw materials $ 8,754 $ 8,769
Work in process 3,139 1,877
Finished goods 2,406 1,121
----------------- ----------------
$ 14,299 $ 11,767
================= ================
Cost of sales includes depreciation and amortization of $2,188,000 and
$1,439,000, for the fiscal years ended August 29, 1998 and August 30, 1997,
respectively.
In accordance with purchase price accounting, at the purchase date (December 16,
1996), the inventory balance was increased by $4.7 million to record inventory
at fair market value. During the fiscal year ended August 30, 1997, this amount
was expensed to cost of sales.
-41-
(5) PREPAID EXPENSES AND OTHER CURRENT ASSETS
Prepaid expenses and other current assets consist of the following (in
thousands):
August 29, August 30,
1998 1997
----------------- --------------
Sales representatives advances $ 4,771 $ 4,491
Reserve on sales representatives
advances (1,041) (1,528)
Current deferred tax asset 3,178 2,557
Prepaid advertising and promotion
materials 2,694 1,999
Prepaid management fees - 325
Other 915 678
----------------- --------------
$ 10,517 $ 8,522
================= ==============
(6) PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consists of the following (in thousands):
August 29, August 30,
1998 1997
----------------- ----------------
Land $ 2,000 $ 2,000
Buildings and improvements 5,123 4,614
Tools and dies 20,377 18,715
Machinery and equipment 14,320 9,364
Construction in progress 307 882
----------------- ----------------
Total $ 42,127 $ 35,575
Accumulated depreciation (5,833) (2,115)
----------------- ----------------
Property, plant and equipment, net $ 36,294 $ 33,460
================= ================
Depreciation expense (included in cost of sales and selling, general and
administrative expenses) recorded in the accompanying statement of operations is
$3,776,000 and $2,115,000 for the fiscal years ended August 29, 1998 and August
30, 1997, respectively.
(7) OTHER ASSETS
Other assets consist of the following (in thousands):
August 29, August 30,
1998 1997
----------------- -----------------
Deferred financing costs $ 4,646 $ 4,398
Ring samples 3,155 1,221
Other 215 143
----------------- -----------------
$8,016 $ 5,762
Accumulated amortization (945) (392)
----------------- -----------------
Other assets, net $ 7,071 $ 5,370
================= =================
-42-
(8) ACCOUNTS PAYABLE AND ACCRUED EXPENSES
The principle components of accounts payable and accrued expenses are as follows
(in thousands):
August 29, August 30,
1998 1997
----------------- ---------------
Accounts payable $ 8,682 $ 5,484
Commissions and royalties 3,362 3,265
Compensation and related costs 2,283 2,476
Accrued interest payable 1,872 1,808
Customer deposits 1,179 1,539
Severance costs 847 1,303
Other 3,891 5,018
----------------- ---------------
$ 22,116 $ 20,893
================= ===============
(9) LONG-TERM DEBT
Long-term debt consists of the following (in thousands):
August 29, August 30,
1998 1997
----------------- -----------------
11% senior subordinated notes due 2007 $ 90,000 $ 90,000
Term loan facility 24,000 24,750
Bank revolver 19,589 10,700
Short-term revolving credit 733 -
----------------- -----------------
Total debt $ 134,322 $ 125,450
Less-current portion 1,983 750
----------------- -----------------
Total long-term debt $ 132,339 $ 124,700
================= =================
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 debt covenants as of August 29,
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 as amended, (the Bank Agreement)
with a group of banks pursuant to which the Company initially borrowed $25
million under a term loan facility and from time-to-time may borrow up to $35
million under a revolving credit and gold facility. Loans outstanding under the
Bank Agreement bear interest at either fixed or floating rates based upon the
interest rate option selected by the Company.
-43-
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 (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.
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, as defined), (b)
consolidated EBITDA and (c) interest coverage. Furthermore, the covenants were
amended on November 27, 1998, and additional covenants were added in which the
Company must not permit its Consolidated Net Worth (as defined in the Bank
Agreement) as of March 30, 1999 to be less than $42 million, not pay the
management fee unless at the time of payment (A) no Event of Default shall have
occurred and be continuing or would result from the payment thereof; (B) the
Short Term Revolving Credit shall have been paid in full; and (C) the Company
meets the requisite Modified Funded Debt Ratio (as defined in the Bank
Agreement) and will not permit or make certain capital expenditures for computer
conversion projects in excess of $6,500,000 in the aggregate during fiscal 1998
and 1999 and the first fiscal quarter of 2000. The Bank Agreement also contains
covenants which, among other things, limit the ability of the Company and its
subsidiaries to (a) incur additional indebtedness, (b) acquire and dispose of
assets, (c) create liens, (d) make capital expenditures, (e) pay dividends on or
redeem shares of the Company's capital stock, and (f) make certain investments.
The Company was in compliance with all debt covenants under the Bank Agreement
as of August 29, 1998 and August 30, 1997. However, the Company may enter into
additional transactions which may require further amendments in the upcoming
year. Management believes the Company can maintain compliance pursuant to the
amended Bank Agreement throughout the next year.
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 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.
At August 29, 1998, the Company had no availability under the revolving
credit facility and $6,214,00 available under the gold facility.
SHORT TERM REVOLVING CREDIT
On August 26, 1998, the Company obtained a short-term line of credit (Short
Term Revolving Credit) pursuant to which the Company may, from time to time,
borrow up to $8,000,000 from BankBoston, N.A. (BankBoston) until March 31,
1999. At August 29, 1998, the Company had $7,267,000 available under the
Short Term Revolving Credit. Amounts outstanding under the Short Term
Revolving Credit bear interest at either fixed or floating rates based upon
the interest rate option selected by the Company. All amounts borrowed
pursuant to the Short Term Revolving Credit are due and payable on March 31,
1999. Any Events of Default under the Bank Agreement will also constitute an
Event of Default under the Short Term Revolving Credit. Pursuant to the terms
of the Company's Bank Agreement, the Company is prohibited from repaying the
outstanding principal of the Short Term Revolving Credit unless at the time
of repayment both before and after giving effect to such repayment, no
Default or Event of Default (as defined in the Bank Agreement) exists under
the Bank Agreement and the Borrowing Base exceeds all outstanding amounts
under the Bank Agreement by at least $2 million. The Short Term Revolving
Credit is unsecured. All of the Company's obligations under the Short Term
Revolving Credit are guaranteed by CHPII. The Company has agreed to indemnify
CHPII and pay CHPII upon demand any amounts that CHPII must pay pursuant to
the guaranty. The Short Term Revolving Credit constitutes Designated Senior
Indebtedness for purposes of the Indenture.
-44-
The long-term debt outstanding as of August 29, 1998, matures as follows (in
thousands):
Fiscal Year Ending Amount Maturing
-----------------
1999 $ 1,983
2000 1,750
2001 2,500
2002 25,089
2003 8,500
Thereafter 94,500
-----------------
$ 134,322
=================
The weighted average interest rate of debt outstanding as of August 29, 1998
and August 30, 1997 was 10.3 percent and 10.5 percent respectively.
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 fiscal years
ended August 29, 1998 and August 30, 1997 (see Note 1), the Company expensed
approximately $230,000 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
August 29, 1998 and August 30, 1997 the Company held approximately 13,846 ounces
and 16,265 ounces, respectively, valued at $3.8 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 August 29, 1998
and August 30, 1997, based upon current rates offered for debt with the same or
similar debt terms.
(10) COMMITMENTS AND CONTINGENCIES
Certain Company facilities and equipment are leased under agreements expiring at
various dates through 2005. The Company's commitments under the noncancelable
portion of all operating leases for the next five years and thereafter as of
August 29, 1998, are approximately as follows (in thousands):
Fiscal Year Ending Commitment
-----------------
1999 $ 1,268
2000 1,028
2001 693
2002 164
2003 101
Thereafter 67
-----------------
$ 3,321
=================
Lease and rental expense included in selling, general and administrative
expenses in the accompanying statement of operations amounts to approximately
$773,000 and $1,056,000 for the fiscal years ended August 29, 1998 and August
30, 1997, respectively (see Note 1).
The Company is a party to certain contracts with some of its sales
representatives whereby the representatives have purchased from their
predecessor the right to sell the Company's products in a territory. The
contracts generally provide that
-45-
the value of these rights is primarily determined by the amount of business
achieved by a successor sales representative and is therefore not
determinable in advance of performance by the successor sales representative.
The Company is not party to any pending legal proceedings other than ordinary
routine litigation incidental to the business. In management's opinion,
adverse decisions on those legal proceedings, in the aggregate, would not
have a materially adverse impact on the Company's results of operations or
financial position.
(11) EMPLOYEE COMPENSATION AND BENEFITS
POSTRETIREMENT MEDICAL BENEFITS
In December 1990, the Financial Accounting Standards Board issued SFAS No. 106,
"Employers' Accounting for Postretirement Benefits Other Than Pensions," which
requires that the accrual method of accounting for certain postretirement
benefits be adopted. The Company provides certain health care and life insurance
benefits for employees who retired prior to December 31, 1990. L. G. Balfour
Company, Inc., adopted this statement in fiscal 1994 and recognized the
actuarial present value of the accumulated postretirement benefit obligation
(APBO) of approximately $6.2 million at February 29, 1993, using the delayed
recognition method over a period of 20 years. Prior to adopting SFAS No. 106,
the cost of providing these benefits was expensed as incurred.
At the purchase date (December 16, 1996), CBI assumed this pre-existing
liability and recorded the APBO of $5.5 million in purchase accounting.
The following table sets forth the plan status (in thousands):
August 29, August 30,
1998 1997
----------------- -----------------
Accumulated postretirement benefit
obligation
Retired employees $ (1,456) $ (5,559)
Active employees - -
----------------- -----------------
Total $ (1,456) $ (5,559)
Plan assets at fair value - -
----------------- -----------------
Unfunded accumulated benefit
obligation in excess of plan
assets $ (1,456) $ (5,559)
Unrecognized net gain (187) 125
Unrecognized prior service
costs (1,739) -
----------------- -----------------
Accumulated post retirement medical
benefit cost, current and long-term $ (3,382) $ (5,434)
================= =================
The net periodic postretirement benefit cost for the fiscal years ended
August 29, 1998 and August 30, 1997 (see Note 1), includes the following
components (in thousands):
August 29, August 30,
1998 1997
---------------- ----------------
Service costs, benefits attributed to service
during the period $ - $ -
Interest cost 100 302
Actual return on assets - -
Recognition of transition obligation - -
Net amortization and deferral (619) -
---------------- ----------------
Net periodic postretirement benefit
cost (income) $ (519) $ 302
================ ================
For measurement purposes, a 5.0% annual rate of increase in the per-capital
cost of covered health care benefits was assumed. The health care cost trend
rate assumption has a significant effect on the amounts reported.
The weighted average discount rate used in determining the accumulated
postretirement benefit obligation was 7.25 percent and 8.0 percent compounded
annually for fiscal 1998 and 1997, respectively. As the plan is unfunded, no
assumption was needed as to the long-term rate of return on assets.
-46-
DEFERRED COMPENSATION
The Company has deferred compensation agreements with certain sales
representatives and executives, which provide for payments upon retirement or
death based on the value of life insurance policies or mutual fund shares at
the retirement date.
(12) INCOME TAXES
For the fiscal years ended August 29, 1998 and August 30, 1997, the net
current and deferred provision and/or benefit is $0 as a valuation allowance
exists due to the net operating losses incurred by the Company.
The Company's effective tax rate differs from the federal statutory rate of
34 percent for the fiscal years ended August 29, 1998 and August 30, 1997,
due to the following (in percentages):
August 29, 1998 August 30, 1997
----------------- -----------------
Computed tax benefit at
statutory rate (34.0)% (34.0)%
State taxes (5.0) (5.0)
Change in assets and
liabilities, net 4.6 14.4
Increase in valuation
allowance 34.4 24.6
----------------- -----------------
Total effective tax rate 0.0% 0.0%
================= =================
Deferred tax assets and liabilities as of August 29, 1998 and August 30, 1997,
consist of the following (in thousands):
Deferred tax assets -
August 29, 1998 August 30, 1997
----------------- -----------------
Allowances and reserves $ 1,947 $ 1,557
Net operating loss
carryforwards 10,995 6,445
Other 1,248 1,000
----------------- -----------------
Total gross deferred tax
assets $ 14,190 $ 9,002
Less - Valuation allowance (3,776) (2,180)
----------------- -----------------
Net deferred tax assets $ 10,414 $ 6,822
----------------- -----------------
Deferred tax liabilities -
Property, plant and equipment,
principally due to differences
in depreciation $ 3,536 $ 829
Goodwill basis difference 6,878 5,993
----------------- -----------------
Total deferred tax liabilities $ 10,414 $ 6,822
----------------- -----------------
Net deferred tax assets
(liabilities) $ - $ -
================= =================
The valuation allowance has been established due to uncertainty surrounding
the realizability of the deferred tax assets, principally the net operating
loss carryforwards.
For tax reporting purposes, the Company has U.S. net operating loss
carryforwards of approximately $28.2 million and $16.5 million as of August
29, 1998 and August 30, 1997, respectively. Utilization of the net operating
loss carryforwards is contingent on the Company's ability to generate income
in the future. The net operating loss carryforwards will expire in years 2017
and 2018 if not utilized.
-47-
(13) 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, 377,156 shares of Series B Preferred and 377,156 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 which are
declared shall be paid pro rata to the holders. No dividends or interest shall
accrue on any accrued and unpaid dividends. The Company's 11 percent senior
subordinated notes and bank debt restrict the Company's ability to pay dividends
on the Series A Preferred.
The Series A Preferred is not subject to mandatory redemption. The Series A
Preferred is redeemable at any time at the option of the Company; however, the
Company's 11 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.
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.
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
CHPII and certain of its affiliates (the Castle Harlan Group), the Company
granted the Castle Harlan Group certain registration rights with respect to the
shares of capital
-48-
stock owned by them pursuant to which the Company agreed, among other things,
to effect the registration of such shares under the Securities Act of 1933 at
any time at the request of the Castle Harlan Group. The Company also granted
to the Castle Harlan Group unlimited piggyback registration rights on certain
registrations of shares of capital stock by the Company.
STOCK-BASED COMPENSATION PLAN
The Company has a stock option plan (the 1997 Stock Option Plan), effective as
of July 29, 1997, for which a total of 69,954 shares of Common Stock have been
reserved for issuance; 36,109 of those shares were available for grant to
directors and employees of the Company as of August 29, 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. All Common Stock issued upon exercise of options
granted pursuant to the 1997 Stock Option Plan will be subject to a voting trust
agreement.
The Company applies APB Opinion No. 25, "Accounting for Stock Issued to
Employees," and related interpretations in accounting for the 1997 Stock Option
Plan. Accordingly, no compensation cost has been recognized for its 1997 Stock
Option Plan. Had compensation cost for the Company's stock-based compensation
plan been determined based on the fair value at the grant date for awards under
the plan consistent with the method of SFAS No. 123, "Accounting for Stock-Based
Compensation," the Company's net loss and net loss per share for the year ended
August 30, 1997 and August 29, 1998 would have been increased to the pro forma
amounts indicated below (in thousands, except per share amounts):
August 29, 1998 August 30, 1997
------------------- -----------------
Net loss to common stockholders As reported $(5,837) $(9,717)
Pro forma (5,862) (9,719)
Basic and diluted loss per share As reported (15.55) (25.91)
Pro forma (15.62) (25.92)
Compensation expense for options is reflected over the vesting period;
therefore, future compensation expense may be greater as additional options
are granted.
Incentive stock options for 31,971 shares and 34,470 shares and nonqualified
stock options for 1,874 shares and -0- shares of the Company's Common Stock
were outstanding as of August 29, 1998 and August 30, 1997, respectively. A
summary of the status of the Company's 1997 Stock Option Plan as of August
29, 1998 and August 30, 1997, and changes during the fiscal years then ended
are presented below:
August 29, 1998 August 30, 1997
--------------------------------- ----------------------------------
Weighted Weighted
Average Average
Exercise Exercise
Fixed Options Shares Price Shares Price
- -------------------------------- ------------- --------------- -------------- ----------------
Outstanding at beginning of
fiscal year 34,470 $ 6.67 - $ -
Granted 1,874 6.67 34,470 6.67
Exercised - - - -
Canceled (2,499) 6.67 - -
------------- --------------- -------------- ----------------
Outstanding at end of fiscal year 33,845 $ 6.67 34,470 $ 6.67
============= =============== ============== ================
Options exercisable at year-end - -
Weighted average fair value of
options granted during the
fiscal year ended $ 3.60 $ 3.71
-49-
The fair value of each grant was estimated on the date of the grant using the
Black-Scholes option pricing model with the following weighted average
assumptions used for grants in 1998 and 1997 respectively: dividend yield of
nil in both fiscal years; expected volatility of 27.36 percent and 29.30
percent, respectively; risk-free interest rate of 6.01 percent and 6.14
percent respectively; and expected life of 10 years in both fiscal years. The
Black-Scholes option pricing model was developed for use in estimating the
fair value of traded options, which have no vesting restrictions and are
fully transferable. In addition, option pricing models require the input of
highly subjective assumptions, including expected stock price volatility.
Because the Company's stock options have characteristics significantly
different from those of traded options and because changes in the subjective
input assumptions can materially affect the fair value estimate, in
management's opinion, the existing models do not necessarily provide a
reliable single measure of the fair value of its stock options.
INCENTIVE STOCK PURCHASE PLAN
On July 7, 1998 the stockholders of the Company unanimously approved and adopted
the Commemorative Brands, Inc. Incentive Stock Purchase Plan (the Plan).
Pursuant to the terms of the Plan, the Company may from time to time offer
shares of the Company's Class B Preferred Stock and Common Stock to employees,
consultants and independent sales representatives who are determined to be
eligible to purchase shares pursuant to the Plan by the Plan Administrator (as
defined in the Plan) upon such terms and at such prices as are set forth in the
Plan and as are determined by the Plan Administrator.
On July 20, 1998, the Company commenced an offering of up to an aggregate of
18,750 shares of each of the Company's Common Stock and Series B Preferred Stock
to eligible employees, consultants and independent sales representatives. The
offering is currently scheduled to terminate on December 22, 1998.
(14) RELATED - PARTY TRANSACTIONS
The Company has agreed to indemnify CHPII pursuant to an indemnification
agreement, dated August 26, 1998 for any amounts that may be incurred by
CHPII under CHPII's guaranty of the Company's obligations under the Short
Term Revolving Credit.
On June 30, 1998, the Company sold shares of Common Stock and Series B
Preferred Stock to certain executive officers of the Company including
Jeffrey H. Brennan, President and Chief Executive Officer of the Company. In
conjunction therewith, the Company lent Mr. Brennan $75,000 to purchase
shares of the Company's stock pursuant to a promissory note in the original
principal amount of $75,000, which is due and payable in full on June 16,
2003, and which bears interest at the rate of 5.77% per annum, payable
annually on the 15th of June. Mr. Brennan has granted to the Company a
security interest in the shares acquired by him and his interest in the
voting trust into which the shares have been deposited as collateral security
for the repayment in full of the promissory note. The Company also lent
another officer of the Company the sum of $25,000 to purchase shares of the
Company's stock on substantially identical terms as the promissory note
issued by Mr. Brennan. The balance of $100,000 is included in prepaid
expenses and other current assets on the accompanying balance sheet as of
August 29,1998.
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 prohibits
payment of the management fee in the Event of a Default by the Company in the
payment of principal, Redemption Price, Purchase Price, (both as defined in
the Indenture), Interest, or Liquidated Damages (if any) on the Notes. The
Bank Agreement prohibits payment of the management fee unless at the time
of payment (i) no Event of Default (as defined in the Bank Agreement) shall
have occurred and is continuing or would result from the payment of the
management fee; (ii) the Short Term Revolving Credit shall have
-50-
been paid in full; and (iii) the Company meets the requisite Modified Funded
Debt Ratio (as defined in the Bank Agreement).
(15) QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
Summarized quarterly financial data for the Company for the fiscal year ended
August 29, 1998, is as follows:
Third Quarter
First Quarter Second quarter Ended Fourth Quarter
Ended November Ended February May 30, Ended
30, 1997 28, 1998 1998 August 29, 1998
---------------- ---------------- ---------------- ----------------
(In thousands, except share data)
Net sales $ 38,364 $ 44,168 $ 43,085 $ 25,484
---------------- ---------------- ---------------- ----------------
Gross profit $ 21,138 $ 24,401 $ 22,954 $ 9,993
---------------- ---------------- ---------------- ----------------
Net income (loss) $ 978 $ 2,067 $ 308 $ (7,990)
---------------- ---------------- ---------------- ----------------
Net income (loss) to common
stockholders $ 678 $ 1,767 $ 8 $ (8,290)
---------------- ---------------- ---------------- ----------------
Basic and diluted earnings (loss) per
share $ 1.81 $ 4.71 $ 0.02 $ (22.03)
---------------- ---------------- ---------------- ----------------
Weighted average common shares
outstanding and common and common
equivalent shares outstanding 375,000 375,000 375,000 376,294
---------------- ---------------- ---------------- ----------------
Summarized quarterly financial data for the Company for the fiscal year ended
August 30, 1997, is as follows:
Second Quarter Third Quarter
Ended Ended Fourth Quarter
March 1, May 31, Ended
1997 1997 August 30, 1997
----------------- ---------------- ----------------
(In thousands, except share data)
Net sales $ 24,751 $ 36,927 $ 25,922
----------------- ---------------- ----------------
Gross profit $ 10,509 $ 18,423 $ 13,479
----------------- ---------------- ----------------
Net income (loss) $ (3,861) $ (874) $ (4,132)
----------------- ---------------- ----------------
Net income (loss) to common
stockholders $ (4,111) $ (1,174) $ (4,432)
----------------- ---------------- ----------------
Basic and diluted earnings (loss) per
share $ (10.96) $ (3.13) $ (11.82)
----------------- ---------------- ----------------
Weighted average common shares
outstanding and common and common
equivalent shares outstanding 375,000 375,000 375,000
================= ================ ================
Commemorative Brands, Inc., completed the Acquisitions of ArtCarved and Balfour
on December 16, 1996, and prior to such date, engaged in no business activities
other than those in connection with the Acquisitions and financing thereof.
The Company's scholastic product sales tend to be seasonal. Class ring sales
are highest during October through December (which overlaps the Company's
first and second fiscal quarters), when students have returned to school
after the summer recess and orders are taken for delivery of class rings to
students before the winter holiday season. Sales of the Company's fine paper
products are predominantly made during February through April (which overlaps
the Company's second and third fiscal quarters) for graduation in May and
June. 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.
-51-
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Stockholders of
Commemorative Brands, Inc.:
We have audited the accompanying statements of income (loss), changes in
advances and equity (deficit) and cash flows of the class rings business
(ArtCarved) of CJC Holdings, Inc. (a Texas corporation), for the fiscal year
ended August 31, 1996, and for the period from September 1, 1996, through
December 16, 1996. These financial statements are the responsibility of
Artcarved's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the results of ArtCarved's (as defined above) operations
and its cash flows for the fiscal year ended August 31, 1996, and for the period
from September 1, 1996, through December 16, 1996, in conformity with generally
accepted accounting principles.
Houston, Texas
October 24, 1997
-52-
CJC HOLDINGS, INC., CLASS RINGS BUSINESS (ARTCARVED)
STATEMENTS OF INCOME (LOSS)
(In Thousands)
For the Period
From
September 1,
Fiscal Year 1996,
Ended Through
August 31, December 16,
1996 1996
----------------- ------------------
NET SALES $ 70,671 $ 27,897
COST OF SALES 32,655 11,988
----------------- ------------------
Gross profit 38,016 15,909
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES (27,940) (9,862)
----------------- ------------------
Operating income 10,076 6,047
INTEREST INCOME 651 94
INTEREST EXPENSE (12,558) (2,970)
----------------- ------------------
Income (loss) before income tax provision (1,831) 3,171
INCOME TAX PROVISION - -
----------------- ------------------
Net income (loss) $ (1,831) $ 3,171
----------------- ------------------
----------------- ------------------
The accompanying notes are an integral part of these financial statements.
-53-
CJC HOLDINGS, INC., CLASS RINGS BUSINESS (ARTCARVED)
STATEMENTS OF CHANGES IN ADVANCES AND EQUITY (DEFICIT)
(In Thousands)
BALANCE AT AUGUST 26, 1995 $ (53,186)
Net increase in advances from parent 26,493
Net loss for the fiscal year ended August 31, 1996 (1,831)
------------
BALANCE AT AUGUST 31, 1996 (28,524)
Net increase in advances from parent 18,889
Net income for the period from September 1, 1996, through December 16, 1996 3,171
------------
BALANCE AT DECEMBER 16, 1996 $ (6,464)
------------
------------
The accompanying notes are an integral part of these financial statements.
-54-
CJC HOLDINGS, INC., CLASS RINGS BUSINESS (ARTCARVED)
STATEMENTS OF CASH FLOWS
(In Thousands)
For the Period
For the Fiscal from September
Year Ended 1, 1996 through
August 31, 1996 December 16, 1996
----------------- -------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ (1,831) $ 3,171
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities-
Depreciation 1,843 649
Amortization 3,172 1,343
Provisions for doubtful accounts 596 144
Discount accretion - -
Restructuring charges - -
Change in assets and liabilities-
Increase in receivables (121) (6,951)
(Increase) decrease in inventories (1,500) 124
(Increase) decrease in prepaid expenses and
other current assets 1,880 1,378
Increase in other assets (2,113) (3,270)
Increase (decrease) in accounts payable (391) 1,424
Increase (decrease) in accrued expenses 128 3,486
----------------- -------------------
Net cash provided by operating activities 1,663 1,498
----------------- -------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property, plant and equipment (844) (195)
----------------- -------------------
Net cash used in investing activities (844) (195)
----------------- -------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net change in advances from parent 15,620 18,889
Note payments (16,439) (14,628)
----------------- -------------------
Net cash provided by (used in) financing activities (819) 4,261
----------------- -------------------
NET INCREASE IN CASH AND CASH EQUIVALENTS - 5,564
CASH AND CASH EQUIVALENTS, beginning of period - -
----------------- -------------------
CASH AND CASH EQUIVALENTS, end of period $ - $ 5,564
----------------- -------------------
----------------- -------------------
The accompanying notes are an integral part of these financial statements.
-55-
CJC HOLDINGS, INC., CLASS RINGS BUSINESS (ARTCARVED)
NOTES TO FINANCIAL STATEMENTS
(1) DESCRIPTION OF BUSINESS AND BASIS OF FINANCIAL STATEMENT PRESENTATION
The accompanying financial statements represent the class rings business
(ArtCarved or the Company) of CJC Holdings, Inc. (CJC). Since ArtCarved is 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 ArtCarved. Management considers the allocations to be reasonable
and believes the accompanying financial statements materially represent the
operations of ArtCarved on a stand-alone basis. Selling, general and
administrative expenses from the operations of ArtCarved as shown in the
accompanying statements of income (loss) represent all the expenses incurred by
CJC excluding only the expenses directly related to the non-ArtCarved operations
of CJC. CJC sold the assets of ArtCarved and CJC used the sale proceeds to repay
its outstanding debt obligations. Accordingly, the debt obligations of CJC
repaid with the sale proceeds have been recorded on the accompanying balance
sheet with the offsetting charge included in the advances and equity (deficit)
account, and the accompanying statements of income (loss) of ArtCarved presented
herein include all of CJC's debt-related interest expense on such debt
obligations. Interest income of CJC is included in the statements of income
(loss) since all excess cash balances are used to pay principal and interest on
debt obligations.
All cash balances remained with CJC after sale of the assets. No cash balances
have been included in cash and cash equivalents in the accompanying statements
of cash flows. All amounts due to/from CJC for ArtCarved's operations have been
included in advances and equity (deficit). Also, included in advances and equity
(deficit) are all intercompany accounts.
Although management considers the above allocation (carve-out) methods to be
reasonable, due to the relationship between ArtCarved and other operations and
activities of CJC, the terms of some or all of the transactions and allocations
discussed above may not necessarily be indicative of that which would have
resulted had ArtCarved been a stand-alone entity.
On December 16, 1996, Commemorative Brands, Inc. (CBI), completed the
acquisitions (the Acquisitions) of substantially all of the scholastic and
recognition and affinity product assets and businesses of ArtCarved of CJC from
CJC and certain assets and liabilities of L. G. Balfour Company, Inc. (Balfour),
from Town & Country Corporation (Town & Country). In consideration for
ArtCarved, CBI paid CJC in cash the sum of $115.1 million and assumed certain
related liabilities.
RESULTS OF OPERATIONS
The results of operations for the period from September 1, 1996, through
December 16, 1996, are not comparable to the results of operations for the
fiscal year ended August 31, 1996, and are not necessarily indicative of the
results that could be expected for a full fiscal year. Due to the highly
seasonal nature of the class ring business, a significant amount of revenues and
income occurred in the three and one-half month period ended December 16, 1996,
related to the back-to-school and pre-holiday season.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
FISCAL YEAR-END
ArtCarved uses a 52/53-week fiscal year ending on the last Saturday of August.
INVENTORIES
ArtCarved's inventories, which include raw materials, labor and overhead and
other manufacturing and production costs, are stated at the lower of cost or
market using the dollar-value last-in, first-out (LIFO) link-chain method.
-56-
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are stated at cost, net of accumulated
depreciation. Depreciation is provided principally using the straight-line
method based on estimated useful lives of the assets as follows:
Description Useful Life
----------- -----------
Land improvements 15 years
Buildings and improvements 10 to 25 years
Tools and dies 5 to 10 years
Machinery and equipment 3 to 10 years
Maintenance, repairs and minor replacements are charged against income as
incurred; major replacements and betterments are capitalized. The cost of assets
sold or retired and the related accumulated depreciation are removed from the
accounts at the time of disposition, and any resulting gain or loss is reflected
as other income or expense for the period.
GOODWILL AND INTANGIBLE ASSETS
Costs in excess of fair value of net tangible assets acquired and related
acquisition costs are included in goodwill and identifiable intangible assets in
the accompanying balance sheets. Intangible assets are being amortized on a
straight-line basis over their estimated lives, not exceeding 40 years.
OTHER ASSETS
Other assets include debt costs, software and software development costs, and
engineering and design costs. Debt costs are amortized over the lives of the
specific debt instruments of one to six years. Software and software development
costs have a useful life of three to five years, and engineering and design
costs are amortized over six years.
FAIR VALUE OF FINANCIAL INSTRUMENTS
ArtCarved's financial instruments consist primarily of cash and cash
equivalents, accounts receivable, accounts payable and long-term debt
(including current maturities). The carrying amounts of ArtCarved's cash and
cash equivalents, accounts receivable and accounts payable approximate fair
value due to their short-term nature. The fair value of ArtCarved's long-term
debt is estimated based on current rates offered to ArtCarved for debt with
the same or similar terms.
CASH FLOWS
Total cash interest paid during the fiscal year 1996 and for the period from
September 1, 1996, to December 16, 1996, was approximately $12,464,000 and
$4,405,000, respectively. Total cash paid for income taxes during the fiscal
year 1996 and for the period from September 1, 1996, to December 16, 1996,
was approximately $83,000 and $-, respectively. Noncash financing activities
during the year ended August 31, 1996, include $7,021,000 of accrued
interest, which was converted to new subordinated notes, and $7,500,000 of
original subordinated notes and $1,873,000 of related accrued interest that
were both converted to Series 2 common stock.
ACCOUNTING FOR INCOME TAXES
Effective September 1, 1992, CJC (and ArtCarved) adopted Statement of
Financial Accounting Standards (SFAS) No. 109, "Accounting for Income Taxes,"
which requires the asset and liability method of accounting for income taxes.
Under the asset and liability method, deferred income taxes are recorded for
the tax consequences of applying currently enacted statutory tax rates
applicable to differences between the financial reporting and income tax
bases of assets and liabilities.
-57-
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
ArtCarved's sales are highly seasonal. Historically, ArtCarved has achieved
its highest sales and income levels in its first fiscal quarter (September
through November), followed in descending order by the third, second and
fourth fiscal quarters. This is primarily due to the fall "back-to-school"
selling season for class rings. The third fiscal quarter includes the spring
semester school activities including graduation events, while the fourth
fiscal quarter (and the second fiscal quarter to a lesser extent) includes
the periods when most schools are not in session.
REVENUE RECOGNITION
Revenues from product sales are recognized at the time the product is shipped.
ADVERTISING EXPENSE
Selling, general and administrative expenses for ArtCarved include
advertising expense in the following amounts for the statements of income
(loss) presented (in thousands):
Period from September 1, 1996, to December 16, 1996 $1,222
Fiscal year ended August 31, 1996 $2,989
(4) RECEIVABLES
Credit is extended to various companies in the retail industry which may be
affected by changes in economic or other external conditions. ArtCarved's policy
is to manage its exposure to credit risk through credit approvals and limits.
(5) INVENTORIES
Cost of sales includes depreciation and amortization of the following amounts in
the accompanying statements of income (loss) (in thousands):
Period from September 1, 1996, to December 16, 1996 $ 691
Fiscal year ended August 31, 1996 $1,709
Inventories are priced using the dollar-value LIFO link-chain method.
(6) PROPERTY, PLANT AND EQUIPMENT
Depreciation expense (included in cost of sales and selling, general and
administrative expenses) recorded in the accompanying statements of income
(loss) is as follows (in thousands):
Period from September 1, 1996 to December 16, 1996 $ 770
Fiscal year ended August 31, 1996 $2,026
(7) GOLD LOAN
As a means of hedging against gold market price fluctuations and financing its
needs for gold in the manufacturing process,
-58-
CJC had historically entered into a fee-bearing gold consignment agreement
with a bank (the Consignor). During the term of the consignment agreement,
title to the gold covered by the consignment agreement remained with the
Consignor. CJC had a credit facility with a bank which provided for a
$25,000,000 letter-of-credit facility which could be utilized to request
letters of credit pursuant to the gold consignment agreement. The consignment
agreement expired in June 1994 and was not renewed. In connection with the
expiration of the gold consignment agreement, the Consignor presented to the
bank a draft for payment under the letter of credit in the amount of
$14,614,255, and such draft was honored by the bank in that amount. The
amount invoiced CJC was for 38,053 ounces of gold at a price of $384.05 per
ounce. Although a substantial amount of gold is held by other operations of
CJC and serves as collateral for the loan, the entire gold loan was paid with
the proceeds from the asset sale and, therefore, the full amount of the loan
is included in ArtCarved's balance sheet.
(8) LONG-TERM DEBT
In November 1995, CJC's board of directors, shareholders and principal
creditors approved its restructuring plan and the plan and agreement of
merger (as defined) whereby CJC's common and preferred shareholders agreed to
a recapitalization and holders of senior secured, senior subordinated notes
and the gold loan agreed to restructure their debt obligations. On March 12,
1996, the restructuring agreement was consummated. The debt obligations
discussed below were paid with the proceeds of the asset sale of ArtCarved
and, therefore, are included in ArtCarved's financial statements.
The significant components of the restructuring and recapitalization are as
follows:
a. New capital stock consisting of 30,000,000 authorized shares of common
stock designated as either Series 1, Series 2 or Series 3, as defined,
of CJC Newco, Inc. (Newco), was authorized and issued in the following
order:
(i) The holder of CJC's Series A preferred stock received an
aggregate of 100 percent or 8,750,000 shares of the Series 1
common stock, such number to be reduced by that number of
shares of Series 1 common stock to be issued to the
subordinated noteholders.
(ii) A holder of CJC's senior subordinated notes due 1998 and 1999
(the Original Subordinated Notes), pursuant to the
restructuring, received 4,410,000 shares of the Series 1
common stock in lieu of debt of CJC. Holders of CJC's Original
Subordinated Notes also received 94,000 shares of the Series 1
common stock as compensation for a payment-in-kind (PIK),
nondefault rate interest option, as defined, contained in
CJC's new senior subordinated notes due 2002 (the New
Subordinated Notes). In addition, 974,000 shares of the Series
1 common stock authorized to be issued to the holders of CJC's
New Subordinated Notes were not issued as of the restructuring
date but were reserved for issuance in accordance with the
terms of the New Subordinated Note agreement and the new
shareholders' agreement.
(iii) The holders of CJC's Series B preferred stock received an
aggregate of 1,249,020 shares of Series 2 common stock. Each
such holder received 11.67 shares of Series 2 common stock for
each previously held share of Series B preferred stock.
(iv) Previous holders of CJC's common stock received an aggregate
of 9,992,317 shares of Series 3 common stock. Each such holder
received 4.20 shares of Series 3 common stock for each
previously held share of common stock. Effective June 30,
1996, the Series 3 shares were redeemed at $0.001 per share.
(v) Holders of CJC's warrants issued in 1990 received new warrants
to purchase 3,023,623 shares of Series 3 common stock. These
warrants expired on June 30, 1996. All other existing
warrants, rights or options outstanding immediately prior to
the merger were canceled and extinguished.
b. Holders of CJC's floating rate senior secured notes, Series A due 1996
(the Series A Notes), and holders of CJC's 12.12 percent senior
secured notes, Series B-2 due 1998 (the Series B Notes) (collectively,
the Original Senior Notes), received all accrued interest on the unpaid
principal amount of such notes. Pursuant to the terms of a senior note
purchase agreement, the holders of the Series A Notes received New
Series A Notes and the holders of Series B Notes received New Series B
Notes.
-59-
The New Series A Notes were issued in the aggregate principal amount of
$14,677,000, the outstanding principal balance on the restructuring
date. The New Series A Notes are mandatorily redeemable under certain
circumstances. The maturity date of the New Series A Notes shall be
July 15, 1999, and such notes bear interest at the Eurodollar Rate, as
defined, plus 2.25 percent. In addition, the principal of the New
Series A Notes will be repaid in installments of $2.0 million on each
semiannual period currently anticipated to commence no later than July
15, 1997. Interest on the New Series A Notes is due on the fifteenth
day of each quarter, beginning April 15, 1996.
The New Series B Notes were issued in the aggregate principal amount of
$42,023,000, the outstanding principal balance on the restructuring
date. The New Series B Notes are mandatorily redeemable under certain
circumstances. The maturity date of the New Series B Notes shall be
July 15, 2000, and such notes bear interest at the rate of 12.12
percent. The New Series B Notes shall be payable in full at maturity.
After the New Series A Notes have been repaid in full, the $2.0 million
semiannual principal repayments shall be applied to the New Series B
Notes. Interest on the New Series B Notes shall be due on the fifteenth
day of each quarter beginning April 15, 1996. Finally, the holders of
the New Series B Notes may be entitled to certain "make-whole" payments
on the original amount issued once the New Series A Notes have been
repaid in full or replaced. The New Series A Notes and New Series B
Notes shall be secured by substantially all of CJC's assets.
Under the terms of the New Series A Notes and New Series B Notes, CJC,
among other restrictions, will be required to maintain a current ratio,
as defined (excluding current maturities of funded debt), of 3.2 to 1.0
for the period March 12, 1996, to February 28, 1998, and 2.5 to 1.0 for
the period March 1, 1998, to maturity, minimum shareholders' equity
(deficit), as defined, of $(8,000,000) for the period March 12, 1996,
to June 30, 1996, $(9,000,000) for the period July 1, 1996, to May 31,
1997, $(10,000,000) for the period June 1, 1997, to November 30, 1997,
and beginning to increase to $(5,000,000) until maturity, and an
interest coverage ratio, as defined, of 1.25 to 1.0 for the period
March 12, 1996, to February 28, 1998, 1.50 to 1.0 for the period March
1, 1998, to August 31, 1999, and 1.75 to 1.0 for the period September
1, 1999, to maturity. CJC will also have certain limitations relating
to additional debt, liens, mergers, asset sales transactions,
restricted investments and payments of dividends and is obligated to
make certain reports periodically to the lenders. As of August 31,
1996, CJC was in compliance with these covenants.
c. Holders of CJC's Original Subordinated Notes in the amount of
$35,000,000 were issued either (i) New Subordinated Notes having an
aggregate principal amount equal to the unpaid principal under the
Original Subordinated Notes plus accrued interest through June 30,
1995, as well as shares of Series 1 common stock as described in a(ii)
above, or (ii) New Subordinated Notes having an aggregate principal
amount equal to 50 percent of the unpaid principal under the Original
Subordinated Notes plus accrued interest through June 30, 1995, as well
as shares of Series 1 common stock as described in a.(ii) above. One
holder elected to convert 50 percent of its Original Subordinated Notes
(principal amount of $7,500,000 plus accrued interest through June 30,
1995, of approximately $1,873,000) into Series 1 common stock.
The New Subordinated Notes have a maturity of July 15, 2002, with
certain mandatory prepayments, as defined, based upon net cash
proceeds, as defined. The New Subordinated Notes are subordinate to the
New Senior Notes and the New Gold Notes. The New Subordinated Notes
have loan covenants that are substantially identical to the New Senior
Notes. Finally, the holders of the New Subordinated Notes may be
entitled to certain "make-whole" payments on the original amount issued
if both the New Senior Notes and New Subordinated Notes are repaid in
full prior to March 1997.
d. Each gold loan holder shall receive a new promissory note evidencing
the existing obligation having a maturity date of February 28, 1997
(the New Gold Notes). The New Gold Notes shall be issued in an
aggregate principal amount of $8,641,125, the outstanding principal
balance on the restructuring date. The New Gold Notes shall bear
interest at the lesser of (i) the alternate base rate, as defined,
plus 1.5 percent or (ii) the highest lawful rate, as defined.
Principal payments under the New Gold Notes are $2,267,000 and
$6,374,125 for fiscal years 1996 and 1997, respectively. CJC shall
prepay the New Gold Notes using available net cash proceeds, as
defined. The New Gold Notes shall be secured by substantially all of
CJC's assets.
-60-
In connection with the New Gold Notes, CJC purchased options for
24,053 ounces of gold, exercisable at $384.05 per ounce. The total
premiums for fiscal 1996 relating to these options were approximately
$238,000. As of August 31, 1996, CJC has options on 17,800 ounces of
gold outstanding which expire March 28, 1997. CJC is required to
purchase the options under the New Gold Notes to hedge the collateral
against changing gold prices. CJC does not engage in gold option
speculation. CJC has not recorded any significant gains or losses
related to such options as the price of gold has not fluctuated
significantly.
Under the terms of the New Gold Notes, CJC, among other restrictions,
will be required to maintain a current ratio, as defined (excluding
current maturities of funded debt), of 3.2 to 1.0, minimum
shareholders' equity (deficit), as defined, of $(8,000,000) for the
period March 12, 1996, to June 30, 1996, and $(9,000,000) for the
period July 1, 1996, to maturity, and an interest coverage ratio, as
defined, of 1.25 to 1.0. CJC will also have certain limitations
relating to additional debt, liens, mergers, asset sales transactions,
restricted investments and payments of dividends and is obligated to
make certain reports periodically to the lenders. As of August 31,
1996, CJC was in compliance with these covenants.
Management believes the carrying amount of long-term debt, including the current
maturities, approximates fair value as of August 31, 1996, based upon current
rates offered for debt with the same or similar debt terms.
Subsequent to year-end, CJC was not in compliance with certain financial
covenants and, accordingly, applied for and has been granted a necessary waiver
through October 31, 1996, and an amendment with respect to such covenants from
its lenders. As discussed in Note 1, all outstanding debt obligations of CJC
were repaid with the sale proceeds from CBI shortly after the Acquisitions
occurred.
(9) COMMITMENTS AND CONTINGENCIES
ArtCarved leased certain of its manufacturing and office facilities and
equipment under various noncancelable operating leases. Expenses under all
operating leases for the fiscal year ended August 31, 1996, and for the period
from September 1, 1996, to December 16, 1996, are approximately $577,000 and
$208,000, respectively.
ArtCarved is not party to any pending legal proceedings other than ordinary
routine litigation incidental to the business. In management's opinion, adverse
decisions on those legal proceedings, in the aggregate, would not have a
materially adverse impact on ArtCarved's results of operations or financial
position.
(10) INCOME TAXES
For the fiscal year ended August 31, 1996, and for the period from September 1,
1996, to December 16, 1996, no current or deferred provision or benefit exists
for ArtCarved due to the available operating tax losses and other credit
carryforwards of CJC.
The following represents a reconciliation between tax computed by applying the
35 percent statutory income tax rate to income (loss) before income taxes and
reported income tax expense for the fiscal year ended August 31, 1996 and the
period from September 1, 1996, to December 16, 1996:
Period From
Fiscal Year Ended September 1, 1996,
August 31, to December 16,
1996 1996
----------------- --------------------
Pretax book income (loss) (35.0)% 35.0%
Permanent differences 3.2 -
Addition to (utilization of)
operating loss carryforwards 31.8 (35.0)
----------------- --------------------
-% -%
----------------- --------------------
----------------- --------------------
-61-
Since ArtCarved's financial results have been included in CJC's consolidated
federal income tax return, ArtCarved federal net operating tax losses and
other credits have been included in CJC's income tax return. As a result, any
carryovers of such losses or credits which might have existed had ArtCarved
reported on a stand-alone basis are not available to ArtCarved as ArtCarved
was purchased in a business combination by CBI.
(11) EMPLOYEE BENEFIT PLANS
DEFINED BENEFIT PLAN
CJC adopted an employee benefit plan for substantially all hourly class ring
employees. The benefits were based on the employee's years of service. CJC's
funding policy was to make contributions equal to or greater than the
requirements prescribed by the Employee Retirement Income Security Act of 1974.
The plan was frozen in 1989 and, effective September 5, 1995, the plan was
terminated. Upon receiving a favorable determination on termination, dated
December 1, 1995, all assets of the plan were distributed.
CJC has a defined contribution plan that is available to all employees.
Employees are eligible to make contributions to the plan after one year of
employment. CJC does not make contributions to the plan but pays substantially
all administrative fees related to the plan.
The following components of net periodic pension income are presented for the
hourly class ring employees plan for the fiscal year ended August 31, 1996:
Fiscal Year
Ended
August 31,
1996
------------------
Service cost, benefits earned during the year $ -
Interest cost of projected benefit obligation -
Actual return on plan assets -
Net amortization and deferral -
-------------
Net periodic pension income $ -
-------------
Assumptions used in accounting for the pension plan for the fiscal year ended
August 31, 1996, are as follows:
Discount rate 7.30%
Rate of increase in compensation levels N/A
Expected long-term rate of return on assets 7.30%
CJC has a defined contribution plan that is available to all employees.
Employees are eligible to make contributions to the plan after one year of
employment. CJC does not make contributions to the plan but pays substantially
all administrative fees related to the plan.
-62-
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To L.G. Balfour Company, Inc.:
We have audited the accompanying statements of operations, stockholder's
equity and cash flows of L.G. Balfour Company, Inc. (the Company) (a Delaware
corporation), a wholly owned subsidiary of Town & Country Corporation (the
Parent) (a Massachusetts corporation), for the year ended February 25, 1996,
and for the period from February 26, 1996 to December 16, 1996. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the results of L. G. Balfour Company, Inc.'s
operations and its cash flows for the year ended February 25, 1996, and for
the period from February 26, 1996 to December 16, 1996, in conformity with
generally accepted accounting principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. The Company relies on funding from
its Parent to support operations. The Parent is in violation under its
various debt agreements and has filed a voluntary petition for relief under
Chapter 11 Title 11 of the United States Bankruptcy Code on November 18,
1997; thus, there is no assurance that the Parent will be able to continue to
provide financial support to the Company. Therefore, there is substantial
doubt about the Company's ability to continue as a going concern. The
Parent's plans with regard to these matters, which primarily relate to the
sale of the Company, are discussed in Notes 1 and 8. The financial statements
do not include any adjustments that might result from the outcome of this
uncertainty.
Boston, Massachusetts
November 19, 1997
-63-
L.G. BALFOUR COMPANY, INC.
Statements of Operations
(In Thousands)
For the Period
For the From February
Year Ended 26, 1996 to
February 25, December 16,
1996 1996(a)
----------------- --------------
Net Sales $ 71,300 $ 60,233
Cost of Sales 35,598 29,350
----------------- --------------
Gross profit 35,702 30,883
----------------- --------------
Expenses:
Selling 27,788 25,203
General and administrative (Note 3) 5,708 5,817
----------------- --------------
Total expenses 33,496 31,020
----------------- --------------
Other (Income) Expense:
Gain on sale of facility (Note 1) (418) -
Interest expense (Note 6) 583 454
Interest on Due to Parent, net (Note 7) 1,986 1,499
----------------- --------------
Net other expense 2,151 1,953
----------------- --------------
Income (loss) before provision for income taxes 55 (2,090)
Provision for Income Taxes (Notes 1 and 2) 191 63
----------------- --------------
Net Loss $ (136) $ (2,153)
----------------- --------------
----------------- --------------
(a) EXCLUDES THE FINANCIAL IMPACT OF THE SALE OF CERTAIN ASSETS AND LIABILITIES
OF THE COMPANY DISCUSSED IN NOTE 8.
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
-64-
L.G. BALFOUR COMPANY, INC.
Statements of Stockholder's Equity
(In Thousands)
TOTAL
ADDITIONAL ACCUMULATED STOCKHOLDER'S
CAPITAL STOCK PAID-IN CAPITAL DEFICIT EQUITY
------------------ ------------------ ---------------- -----------------
Balance, February 26, 1995 $ 4 $ 75,970 $ (61,950) $ 14,024
Net loss - - (136) (136)
------------------ ------------------ ---------------- -----------------
Balance, February 25, 1996 4 75,970 (62,086) 13,888
Net Loss - - (2,153) (2,153)
------------------ ------------------ ---------------- -----------------
Balance, December 16, 1996 $ 4 $ 75,970 $ (64,239) $ 11,735
================== ================== ================ =================
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
-65-
L.G. BALFOUR COMPANY, INC.
Statements of Cash Flows
(In Thousands)
FOR THE PERIOD
FOR THE YEAR FROM FEBRUARY 26,
ENDED 1996 TO
FEBRUARY 25, DECEMBER 16,
1996 1996
-------------- ------------------
Cash Flows from Operating Activities:
Net loss $ (136) $ (2,153)
Adjustments to reconcile net loss to net cash provided by
(used in) operating activities-
Depreciation and amortization 2,026 1,533
Gain on sale of property, plant and equipment (417) -
Changes in assets and liabilities-
Increase in accounts receivable (991) (6,049)
Decrease in inventories 894 1,774
Decrease in prepaid expenses and other current assets 666 189
Decrease in other assets 129 160
Decrease in bank overdraft and accounts payable, net (359) (234)
Increase (decrease) in accrued expenses 133 (2,442)
Decrease in deferred compensation (341) (42)
-------------- ---------------
Net cash provided by (used in) operating activities 1,604 (7,264)
-------------- ---------------
Cash Flows from Investing Activities:
Proceeds from sale of fixed assets 951 571
Capital expenditures (530) (345)
-------------- ---------------
Net cash provided by investing activities 421 226
-------------- ---------------
Cash Flows from Financing Activities:
Proceeds from (payments on) borrowings from Parent, net (1,749) 7,177
Payments on capital leases (221) (200)
-------------- ---------------
Net cash provided by (used in) financing activities (1,970) 6,977
-------------- ---------------
Net Increase (Decrease) in Cash and Cash Equivalents 55 (61)
Cash and Cash Equivalents, beginning of period 25 80
Cash and Cash Equivalents, end of period $ 80 $ 19
-------------- ---------------
Supplemental Cash Flow Data:
Cash paid during the period for-
Interest $ 52 $ 23
-------------- ---------------
Taxes $ 191 $ 42
-------------- ---------------
Supplemental Disclosures of Noncash Investing and Financing
Activities (Note 1)
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
-66-
L.G. BALFOUR COMPANY, INC.
Notes to Financial Statements
(1) Summary of Significant Accounting Policies
GENERAL
The accompanying financial statements are for L.G. Balfour Company,
Inc. (the Company), a wholly owned subsidiary of Town & Country
Corporation (the Parent), for the year ended February 25, 1996 and for
the period from February 26, 1996 to December 16, 1996. The
accompanying statement of operations for the period from February 26,
1996 to December 16, 1996, does not include the financial impact of the
sale of certain assets and liabilities of the Company discussed at Note
8. Subsequent to December 16, 1996, substantially all of the normal
operations of the Company ceased. This subsidiary is engaged in the
production and distribution of high school and college class rings on a
made-to-order basis. The Company markets directly to students on campus
and at campus book stores and offers a variety of graphics products,
including graduation announcements, diplomas and memory books, and
novelty items, such as T-shirts, key chains and pendants. In addition,
the Company sells licensed sports products through retail distribution
channels.
The Company relies on funding from the Parent to support operations.
The Parent is in violation under its various debt agreements and has
filed a voluntary petition for relief under Chapter 11 Title 11 of the
Untied States Bankruptcy Code on November 18, 1997; thus, there is no
assurance that the Parent will be able to continue to provide financial
support to the Company. Therefore, there is substantial doubt about the
Company's ability to continue as a going concern. The financial
statements do not include any adjustments that might result from the
outcome of this uncertainty.
In addition, substantially all of the Company's assets have been
pledged as collateral against the Parent's debt obligations.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents include highly liquid investments with
original maturities of three months or less; the carrying amount
approximates fair market value because of the short-term maturities of
these investments.
REVENUE RECOGNITION
Revenues from product sales are recognized at the time the product is
shipped.
IMPAIRMENT OF LONG-LIVED ASSETS
In March 1995, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards (SFAS) No. 121, ACCOUNTING
FOR THE IMPAIRMENT OF LONG-LIVED ASSETS AND FOR LONG-LIVED ASSETS TO BE
DISPOSED OF. This statement deals with accounting for the impairment of
long-lived assets, certain identifiable intangibles and goodwill
related to assets to be held and used, and for long-lived assets and
certain identifiable intangibles to be disposed of.
SFAS No. 121 requires that long-lived assets (e.g., property and
equipment and intangibles) be reviewed for impairment whenever events
or changes in circumstances, such as change in market value, indicate
that the assets' carrying amounts may not be recoverable. In performing
the review for recoverability, if future undiscounted cash flows
(excluding interest charges) from the use and ultimate disposition of
the assets are less than their carrying values, an impairment loss is
recognized. Impairment losses are to be measured based on the fair
value of the asset.
On February 26, 1996, the Company adopted SFAS No. 121, which did not
have a material impact on the
-67-
Company's financial position or results of operations.
INVENTORIES
Inventories, which include materials, labor and manufacturing overhead,
are stated at the lower of cost or market using the first-in, first-out
(FIFO) method.
The effects of gold price fluctuations are mitigated by the use of a
consignment program with bullion dealers. As the gold selling price for
orders is confirmed, the Company's Parent purchases the gold
requirements at the then current market prices; any additional
requirements for gold are held as consignee. This technique enables the
Company to match the price it pays for gold with the price it charges
its customers. The Company pays a fee, which is subject to periodic
change, for the value of the gold it holds on consignment during the
period prior to sale. For the year ended February 25, 1996, these fees
totaled approximately $200,000, and for the period from February 26,
1996 to December 16, 1996, these fees totaled $233,000.
ADVERTISING
The Company expenses the costs of advertising as incurred. For the
year ended February 25, 1996 and for the period from February 26, 1996
to December 16, 1996, advertising expense was approximately $2,465,000
and $2,795,000, respectively.
PROPERTY, PLANT AND EQUIPMENT
The Company provides for depreciation, principally using the
straight-line method, at rates adequate to depreciate the applicable
assets (recorded at cost) over their estimated useful lives, which
range from 3 to 20 years. Maintenance and repair items are charged to
expense when incurred; renewals and betterments are capitalized. When
property, plant and equipment are retired or sold, their costs and
related accumulated depreciation are removed from the accounts, and any
resulting gain or loss is included in income. Included in other income
in the accompanying statement of operations for fiscal 1996 is a
$418,000 gain associated with the sale of one of the Company's
manufacturing facilities.
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 periods. Actual results could differ
from those estimates.
INCOME TAXES
The Company and its Parent have a tax-allocation agreement. The
Company's results of operations are included in the consolidated
federal tax return of the Parent. The agreement calls for the
provisions (benefits) and payments (refunds) to be made as if the
Company were to file its own separate company tax returns.
AMORTIZATION OF LONG-TERM INTANGIBLE ASSETS
The excess $5,612,000 of purchase price over the values assigned to the
net assets acquired is being amortized using the straight-line method
over approximately 40 years. The Company continually evaluates whether
events and circumstances have occurred that indicate that the remaining
estimated useful life of goodwill may warrant revision or that the
remaining balance of goodwill may not be recoverable. When factors
indicate that goodwill should be evaluated for possible impairment, the
Company uses an estimate of the related business units' undiscounted
operating income over the remaining life of the goodwill, as well as
the sale of the Company (see Note 8), in measuring whether the goodwill
is recoverable.
-68-
SUPPLEMENTAL DISCLOSURES OF NONCASH INVESTING AND FINANCING ACTIVITIES
During the period from February 26, 1996 to December 16, 1996, the
Company had fixed asset additions of approximately $58,000, funded
by increases in capital lease obligations.
(2) Income Taxes
The components of the provision for income taxes are as follows:
FOR THE YEAR FOR THE PERIOD
ENDED FROM FEBRUARY
FEBRUARY 25, 26, 1996 TO
1996 DECEMBER 16,
1996
----------------- -------------------
Current-
Federal $ - $ -
State 191,000 63,000
----------------- -------------------
Total Provision $ 191,000 $ 63,000
================= ===================
The Company's effective tax rate differs from the federal statutory rate
of 34% for the year ended February 25, 1996, and for the period from
February 26, 1996 to December 16, 1996, due to the following (in thousands):
FOR THE PERIOD
FOR THE YEAR FROM FEBRUARY
ENDED 26, 1996 TO
FEBRUARY 25, DECEMBER 16,
1996 1996
------------------- ------------------
Computed tax provision (benefit)
at statutory rate $ 19 $ (711)
Increases resulting from state taxes 191 63
Items not deductible for income tax purposes 65 32
(Utilization) deferral of net operating losses (84) 679
------------------- ------------------
$ 191 $ 63
=================== ==================
For tax reporting purposes, the Company has U.S. net operating loss
carryforwards of approximately $38.3 million as of December 16, 1996,
subject to Internal Revenue Service (IRS) review and approval and
certain IRS limitations on net operating loss utilization. Utilization
of the net operating loss carryforwards is contingent on the Company's
ability to generate income in the future. The net operating loss
carryforwards will expire from 2006 to 2012 if not utilized.
(3) Loss on Assets Held for Sale or Disposal
In fiscal 1993, the Company's management decided to make changes with
respect to certain of its operations. As a result of this decision, the
Company recognized a pretax charge of $14.5 million in the fourth
quarter of fiscal 1993 to reserve for the losses associated with the
disposal of certain inventory and fixed assets, including property,
plant and equipment of approximately $12.9 million and intangible
assets of approximately $1.6 million no longer considered necessary to
its future business plans. In fiscal 1996, due to a change in estimates
for demolishing the facility, the Company reduced the recorded reserve
by approximately $400,000, which is included as a reduction of general
and administrative expenses in the accompanying statement of
operations. During the period from February 26, 1996 to December 16,
1996, the Company completed the demolition and sale of the
manufacturing facility and reduced the recorded reserve by
approximately $150,000, which is included as a reduction of general and
administrative expenses in the accompanying statement of operations.
-69-
(4) Commitments and Contingencies
Certain Company facilities and equipment are leased under agreements
expiring at various dates through 2009 (see Note 8). Lease and rental
expense included in the accompanying statements of operations amounted
to approximately $920,000 for the year ended February 25, 1996, and
approximately $866,000 for the period from February 26, 1996 to
December 16, 1996.
(5) Reserve on Sales Representative Advances
The Company advances funds to new sales representatives in order to
open up new sales territories or makes payments to predecessor sales
representatives on behalf of successor sales representatives. Such
amounts are repaid by the sales representatives through earned
commissions on product sales. The Company provides reserves to cover
those amounts that it estimates to be uncollectible. The following
represents the activity associated with the reserve on sales
representative advances:
Valuation and Qualifying Accounts
-----------------------------------------------------------------------------------------
Column C
Column A Column B Additions Column D Column E
-------- -------- --------- -------- --------
Balance at Charged to Balance at
Beginning Costs and Deductions-- End of
For the Period Ended Description of Period Expenses Describe* Period
--------------------- ----------- ------------ ---------- ----------- ----------
Reserve on Sales
Twelve Months Ended Representative
February 25, 1996 Advances $2,305,000 $ 659,900 $ 467,900 $2,497,000
Period from February 26, Reserve on Sales
1996 to December 16, Representative
1996 Advances $2,497,000 $ 502,800 $ 2,255,800 $ 744,000
*REPRESENTS WRITE-OFF OF TERMINATED SALES REPRESENTATIVES AMOUNT AND FORGIVENESS OF AMOUNTS BY THE COMPANY.
(6) Employee Benefit Plans
POSTEMPLOYMENT MEDICAL BENEFITS
In December 1990, the Financial Accounting Standards Board issued SFAS
No. 106, EMPLOYERS' ACCOUNTING FOR POSTRETIREMENT BENEFITS OTHER THAN
PENSIONS, which requires that the accrual method of accounting for
certain postretirement benefits be adopted. The Company provides
certain health care and life insurance benefits for employees who
retired prior to December 31, 1990. The Company adopted this statement
in fiscal 1994 and is recognizing the actuarial present value of the
accumulated postretirement benefit obligation (APBO) of approximately
$6.2 million at February 27, 1994 using the delayed recognition method
over a period of 20 years (see Note 8).
-70-
The net periodic postretirement benefit costs for the year ending
February 25, 1996, and for the period from February 26, 1996 to
December 16, 1996, included the following components (in thousands):
FOR THE PERIOD
FOR THE YEAR FROM FEBRUARY
ENDED 26, 1996 TO
FEBRUARY 25, DECEMBER 16,
1996 1996
------------------ ----------------
Service costs--benefits attributed to service
during the period $ - $ -
Interest cost 444 344
Actuarial assumptions - -
Amortization of unrecognized transition obligation 323 255
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Net periodic postretirement benefit cost $ 767 $ 599
================== ================
For measurement purposes, a 9% annual rate of increase in the per
capita cost of covered health care benefits is assumed for fiscal 1996;
the rate was assumed to decrease gradually to 6% for fiscal 2000 and
remain at that level thereafter. The health care cost trend rate
assumption has a significant effect on the amounts reported. To
illustrate, increasing the assumed health care cost trend rate one
percentage point each year would increase the APBO as of February 25,
1996 by $380,000 or 7%, and the aggregate of the service and interest
cost components of the net periodic postretirement benefit cost for
fiscal 1996 by $30,000 or 4%.
The weighted average discount rate used in determining APBO was 8.0% in
fiscal 1996.
Interest cost associated with the accumulated postretirement benefit
obligation is included as a component of interest expense in the
statements of operations.
DEFERRED COMPENSATION
The Company has deferred compensation agreements with certain sales
representatives and executives, which provide for payments upon
retirement or death based on the value of life insurance policies or
mutual fund shares at the retirement date. The deferred compensation
expense for the year ended February 25, 1996 was approximately $50,000,
and for the period from February 26, 1996 to December 16, 1996 was
approximately $79,000.
(7) Related Party Transactions
The Parent administers certain programs (health insurance, workmen's
compensation, gold consignment, etc.) and charges all directly
identifiable costs to the Company. The Parent does not charge or
allocate any indirect costs; however, management believes these amounts
are not significant in fiscal 1996 and for the period from February 26,
1996 to December 16, 1996.
The Parent charged or credited the Company interest on its advances on
a monthly basis at a rate of 11.5% in fiscal 1996 and for the period
from February 26, 1996 to December 16, 1996. Included in the
accompanying statements of operations are net interest charges of
$1,986,000 in fiscal 1996, and $1,499,000 for the period from February
26, 1996 to December 16, 1996.
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(8) Sale
The Parent, having reviewed the Company's performance, concluded that
it would be in the best interest of the Parent's investors and
creditors to consider opportunities to sell the Company.
On May 20, 1996 (the Original Agreement), the Parent entered into an
agreement to sell certain assets and liabilities of the Company (the
Balfour Acquisition) and Gold Lance, Inc. (the Gold Lance Acquisition),
another class ring manufacturing subsidiary of the Parent, constituting
substantially all of the operations of the Company and Gold Lance, Inc.
to Commemorative Brands, Inc. (CBI and formerly Class Rings, Inc. and
Scholastic Brands, Inc.), a new company formed by Castle Harlan
Partners II, L.P. (CHPII). The Original Agreement was amended on
November 21, 1996 (the Modified Agreement), to exclude the Gold Lance
Acquisition, among other things. Separately, CBI entered into an
agreement with CJC Holdings, Inc. (CJC) to acquire its class ring and
recognition and affinity businesses.
On September 6, 1996, CBI, CHPII and the Parent entered into an
Agreement Containing Consent Order (the Consent Agreement) with the
Federal Trade Commission (the FTC). Pursuant to the Consent Agreement,
CBI has agreed, among other things, not to acquire any assets of or
interests in Gold Lance, Inc., which CBI had originally contracted to
buy together with the Company. Also, pursuant to the Consent Agreement,
the Parent and Gold Lance, Inc. agreed, among other things, not to sell
any assets to CBI, other than pursuant to the Balfour Acquisition, or
acquire any interest in CBI. In October 1996, the FTC, which had been
reviewing the transaction since May 1996, gave preliminary approval to
the Modified Agreement. Final FTC approval was received on December 26,
1996.
On December 16, 1996, the Parent completed the sale of certain assets
and liabilities of the Company (the Closing). At the Closing, the
Parent received cash equal to the purchase price of $44 million, plus
$3.0 million in working capital adjustment from January 28, 1996 to the
date of closing, less $14 million, which was placed in escrow pending
final FTC approval. CBI also assumed a liability of $4.9 million
representing the value of gold on hand as of the Closing. All of the
$4.9 million in gold value acquired by CBI was on consignment at the
closing date and was neither reflected as an asset or a liability on
the Company's balance sheet. The Closing also included the assumption
by CBI of a liability related to unamortized postretirement medical
benefit obligations, consisting of approximately $5.2 million. This
liability did not appear on the Company's balance sheet in the past, as
the Company had been recognizing it on the delayed recognition method
allowed by SFAS No. 106, EMPLOYERS' ACCOUNTING FOR POSTRETIREMENT
BENEFITS OTHER THAN PENSIONS (see Note 6). Additionally, CBI assumed an
operating lease obligation for a facility in Louisville, Kentucky which
runs through August 2, 2005 at an average yearly rental cost of
approximately $419,000 (see Note 4). On December 31, 1996, the Parent
received the $14 million in escrowed funds. On April 25, 1997, a
settlement was reached in which the Parent paid CBI $1.1 million to
finalize the purchase price and resolve certain other items.
The Closing did not include the assumption by CBI of a leased facility
in North Attleboro, Massachusetts. On April 24, 1997 (the Lease
Amendment Date), the lease was amended, reducing the amount of space
and the period of time for which the Company is obligated. The
Company's future lease obligation for this facility from the Lease
Amendment Date is $16,806 per month from May 17, 1997 through July 31,
1999. The previous lease required yearly payments ranging from $605,000
to $699,000 through May 31, 2009 (see Note 4).
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EXHIBIT INDEX
The following exhibits are filed as a part of the report:
Exhibit No. Designation
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2.1(a) Asset purchase Agreement dated as of May 20, 1996 ("ArtCarved Purchase Agreement"),
among the Company, CJC and CJC North America, Inc. ("CJCNA").
2.2(a) First Amendment to the ArtCarved Purchase Agreement dated as of November 21, 1996,
among the Company, CJC and CJCNA.
2.3(a) Letter Agreement amending the ArtCarved Purchase Agreement dated December 16, 1996,
among the Company, CJC and CJCNA.
2.4(a) Amended and Restated Asset Purchase Agreement dated as of November 21, 1996
("Balfour Purchase Agreement"), among the Company, Town & Country, L. G. Balfour
Company, Inc., and Gold Lance, Inc.
2.5(a) Letter Agreement amending the Balfour Purchase Agreement dated December 16, 1996,
by and among the Company, Town & Country, L. G. Balfour Company, Inc. and Gold
Lance.
3.1(a) Certificate of Incorporation of the Company, as amended.
3.2(a) Certificate of Designations, Preferences and Rights of Series A Preferred Stock of
the Company, effective December 13, 1996, together with a Certificate of Correction
thereof.
3.3(a) Certificate of Designations, Preferences and Rights of Series B Preferred Stock of
the Company effective December 13, 1996.
3.4(a) Restated by-laws of the Company, as amended.
3.5 Certificate of Increase of Series B Preferred Stock dated June 10, 1998. Filed
herewith.
4.1(a) Indenture dated as of December 16, 1996, between the Company and Marine Midland
Bank, as trustee (including the form of Note).
4.2(a) Form of Note (Included as part of Indenture).
4.3(a) Registration Rights Agreement dated as of December 16, 1996, among the Company,
Lehman Brothers Inc. and BT Securities Corporation.
4.4 Amended and Restated Stockholders' and Subscription Agreement, dated as of
April 29, 1998, by and among the Company, CHPII, Dresdner Bank AG, Grand Cayman
Branch, Offshore, John K. Castle, as Voting Trustee, and the individuals party
thereto. Filed herewith.
4.5(b) Amended and restated 1997 Stock Option Plan of the Company. Incorporated by
reference to the corresponding Exhibit of the Company's Annual Report - Form 10K
(File No. 333-20759) dated August 30, 1997.
9.1 Voting Trust Agreement, as amended and restated as of April 29, 1998, among the
Company, certain stockholders of the Company party thereto and John K. Castle, as
Voting Trustee. Filed herewith.
10.1(a) Revolving Credit, Term Loan and Gold Consignment Agreement dated as of
December 16, 1996, among the Company, the lending institutions listed therein and
The First National Bank of Boston and Rhode Island Hospital Trust National Bank, as
Agents for the Banks.
10.2(a) Purchase Agreement dated December 10, 1996, among the Company and the Initial
Purchasers.
10.3(a)(b) Employment Agreement dated as of December 16, 1996, between the Company and Jeffrey
H. Brennan.
10.4(a)(b) Employment Agreement dated as of December 16, 1996, between the Company and Richard
H. Fritsche.
10.5(a)(b) Employment arrangements between the Company and Balfour with respect to George Agle.
10.6(a)(b) Form of Indemnification Agreement between the Company and (i) each director and
(ii) certain officers.
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10.7 Management Agreement dated as of December 17, 1996, between the Company and Castle
Harlan, Inc. Incorporated by reference to the corresponding Exhibit of the
Company's Annual Report on Form 10-K (File No. 333-20759) dated August 30, 1997.
10.8 First Amendment to Revolving Credit, Term Loan and Gold Consignment Agreement,
dated March 16, 1998 - incorporated by reference to Exhibit 10.1 to the Company's
Quarterly Report on Form 10-Q (File No. 333-20759) dated February 28, 1998.
10.9 Second Amendment to Revolving Credit, Term Loan and Gold Consignment Agreement,
dated July 10, 1998 - incorporated by reference to Exhibit 10.1 to the Company's
10.10 Quarterly Report on Form 10-Q (File No. 333-20759) dated May 30, 1998.
Incentive Stock Purchase Plan, effective as of July 7, 1998. Filed herewith.
10.11 Third Amendment to Revolving Credit, Term Loan and Gold Consignment Agreement,
dated August 26, 1998. Filed herewith.
10.12 Revolving Credit Note, dated as of August 26, 1998, issued by the Company and
payable to the order of BankBoston, N.A. Filed herewith.
10.13 Indemnity Agreement, dated August 26, 1998, by and between the Company and CHPII.
Filed herewith.
10.14 Fourth Amendment to Revolving Credit, Term Loan and Gold Consignment Agreement,
dated November 27, 1998. Filed herewith.
11.1 Statement re: Computation of per share earnings. Filed herewith.
27.1 Financial Data Schedule. Filed herewith.
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(a) Incorporated by reference to the corresponding Exhibit number of the
Company's Registration Statement on Form S-4 (Registration No.
333-20759), dated April 11, 1997.
(b) Management contract or compensatory plan or arrangement.
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