UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-Q
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[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED NOVEMBER 28, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER: 333-20759
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COMMEMORATIVE BRANDS, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 13-3915801
(State or other jurisdiction of (I.R.S. Employer Identification Number)
incorporation or organization)
7211 CIRCLE S ROAD
AUSTIN, TEXAS 78745
(Address of principal executive offices) (Zip Code)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE (512) 444-0571
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [ ] No [X]. (Effective December 31, 1997,
registrant is no longer subject to such filing requirements.)
COMMEMORATIVE BRANDS, INC.
FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED NOVEMBER 28, 1998
INDEX
Page
PART I. FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS AND NOTES
Consolidated Balance Sheets-
As of November 28, 1998 (unaudited) and August 29, 1998 (audited).............................. 1
Consolidated Income Statements-
For the three months ended November 28, 1998 and November 30, 1997
(all unaudited)................................................................................ 2
Consolidated Statements of Stockholders' Equity -
As of November 28, 1998 (unaudited), August 29, 1998 (audited) and August
30, 1997 (audited)............................................................................. 3
Consolidated Statements of Cash Flows -
For the three months ended November 28, 1998 and November 30, 1997
(all unaudited)................................................................................. 4
Notes to Consolidated Financial Statements........................................................5-14
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.................................................................................15-21
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.................................................................................. 22
ITEM 2. CHANGES IN SECURITIES.............................................................................. 22
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.................................................................... 22
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS................................................ 22
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K................................................................... 22
SIGNATURES ................................................................................................. 23
PART 1. FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS AND NOTES
COMMEMORATIVE BRANDS, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
November 28, August 29,
1998 1998
------------ ----------
(Unaudited) (Audited)
ASSETS
Current assets:
Cash and cash equivalents $ 1,852 $ 975
Accounts receivable, net 37,264 24,705
Inventories 15,075 14,299
Prepaid expenses and other current assets 10,263 10,517
-------- --------
Total current assets 64,454 50,496
Property, plant and equipment, net 37,433 36,294
Trademarks, net 29,235 29,427
Goodwill, net 79,990 80,517
Other assets 7,341 7,071
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Total assets $218,453 $203,805
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-------- --------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Bank overdraft $ 4,737 $ 3,138
Accounts payable and accrued expenses 30,489 22,116
Current portion of long-term debt 2,375 1,983
-------- --------
Total current liabilities 37,601 27,237
Long-term debt, net of current portion 136,757 132,339
Other long-term liabilities 9,562 9,383
-------- --------
Total liabilities 183,920 168,959
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 377,156 shares issued and outstanding 4 4
Common Stock, $.01 par value, 750,000 shares authorized,
377,156 and 377,156 shares issued and outstanding 4 4
Additional paid-in capital 50,391 50,391
Retained earnings (deficit) (15,867) (15,554)
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Total stockholders' equity 34,533 34,846
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Total liabilities and stockholders' equity $218,453 $203,805
-------- --------
-------- --------
The accompanying notes are an integral part of these
consolidated financial statements.
-1-
COMMEMORATIVE BRANDS, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
(In thousands, except share and per share data)
(Unaudited)
For Three Months For Three Months
Ended Ended
November 28, November 30,
1998 1997
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Net sales $ 41,178 $ 38,364
Cost of sales 17,207 17,226
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Gross profit 23,971 21,138
Selling, general and administrative expenses 20,208 16,560
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Operating income 3,763 4,578
Interest expense, net 3,746 3,600
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Income before provision for income taxes 17 978
Provision for income taxes 30 --
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Net income (loss) $ (13) $ 978
Preferred dividends (300) (300)
-------- --------
Net income (loss) to common stockholders $ (313) $ 678
-------- --------
-------- --------
Basic and diluted earnings
(loss) per share $ (0.83) $ 1.81
-------- --------
-------- --------
Weighted average common shares outstanding and
common and common equivalent shares outstanding 377,156 375,000
-------- --------
-------- --------
The accompanying notes are an integral part of
these consolidated financial statements.
-2-
COMMEMORATIVE BRANDS, INC.
CONSOLIDATED STATEMENTS OF
STOCKHOLDERS' EQUITY
(In thousands, except share data)
(Unaudited)
Additional Retained
paid-in earnings
Preferred Stock Common Stock capital (deficit) Total
-------------------------------- --------------- ------- --------- -----
Series A Series B
--------------- --------------- ---------------
Shares Amount Shares Amount Shares Amount
--------------- --------------- ---------------
Balance, August 30,
1997 (audited) 100,000 $ 1 375,000 $ 4 375,000 $ 4 $50,161 (9,717) $40,453
Issuance of Common stock -- -- -- -- 2,156 -- 14 -- 14
Issuance of Preferred Stock -- -- 2,156 -- -- -- 216 -- 216
Accrued Preferred Stock
Dividends -- -- -- -- -- -- -- (1,200) (1,200)
Net Loss -- -- -- -- -- -- -- (4,637) (4,637)
------- --- ------- --- ------- --- ------- -------- -------
Balance, August 29, 1998
(audited) 100,000 1 377,156 4 377,156 4 50,391 (15,554) 34,846
Accrued Preferred Stock
Dividends -- -- -- -- -- -- -- (300) (300)
Net loss -- -- -- -- -- -- -- (13) (13)
------- --- ------- --- ------- --- ------- -------- -------
Balance, November 28, 1998
(unaudited) 100,000 $ 1 377,156 $ 4 377,156 $ 4 $50,391 ($15,867) $34,533
------- --- ------- --- ------- --- ------- -------- -------
------- --- ------- --- ------- --- ------- -------- -------
The accompanying notes are an integral part of
these consolidated financial statements.
-3-
COMMEMORATIVE BRANDS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
For the Three Months Ended
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November 28, November 30,
1998 1997
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CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (13) $ 978
Adjustments to reconcile net loss to net
cash used in operating activities-
Depreciation and amortization 1,738 1,678
Provision for doubtful accounts 195 177
Changes in assets and liabilities-
Increase in receivables (12,754) (10,652)
Increase in inventories (776) (2,450)
Decrease in prepaid expenses and other current assets 254 1,510
Increase in other assets (271) (390)
Increase in bank overdraft, accounts payable and
accrued expenses 9,851 4,125
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Net cash used in operating activities (1,776) (5,024)
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property, plant and equipment (2,157) (1,448)
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Net cash used in investing activities (2,157) (1,448)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments on term loan facility, net (250) (125)
Note borrowings, net 5,060 6,700
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Net cash provided by financing activities 4,810 6,575
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 877 103
CASH AND CASH EQUIVALENTS, beginning of period 975 2,174
-------- --------
CASH AND CASH EQUIVALENTS, end of period $ 1,852 $ 2,277
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SUPPLEMENTAL DISCLOSURE
Cash paid during the period for -
Interest $ 988 $ 346
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-------- --------
Taxes $ 17 --
-------- --------
-------- --------
SUPPLEMENTAL DISCLOSURE OF NONCASH FINANCING
ACTIVITIES
Accrued preferred stock dividends $ 300 $ 300
-------- --------
-------- --------
The accompanying notes are an integral part of
these consolidated financial statements.
-4-
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 is a leading manufacturer of class
rings in the United States with its corporate office and primary
manufacturing facilities located in Austin, Texas.
The accompanying consolidated financial statements have been prepared without
audit pursuant to the rules and regulations of the Securities and Exchange
Commission. Certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted pursuant to such rules
and regulations, although the Company believes the disclosures are adequate
to make the information presented not misleading. In the opinion of
management, all adjustments (consisting only of normal recurring adjustments)
necessary for a fair presentation of the financial position and results of
operations for the periods presented have been included. Operating results
for the three months ended November 28, 1998 are not necessarily indicative
of the results that may be expected for the fiscal year ending August 28,
1999.
(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 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
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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)
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$ 117,747 $ 52,453
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(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 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
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:
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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.
-7-
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.
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 5 and 8.
-8-
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 ending
August 28, 1999. It revises employers' disclosures about pension and other
post-retirement 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):
November 28, August 29,
1998 1998
----------- ---------
Raw materials $ 8,697 $ 8,754
Work in process 4,778 3,139
Finished goods 1,600 2,406
------- -------
$15,075 $14,299
------- -------
------- -------
Cost of sales includes depreciation and amortization of $588,000 and
$522,000, for the three months ended November 28, 1998 and November 30, 1997,
respectively.
(5) LONG-TERM DEBT
Long-term debt consists of the following (in thousands):
November 28, August 29,
1998 1998
----------- ---------
11% senior subordinated notes due 2007 $ 90,000 $ 90,000
Term loan facility 23,750 24,000
Bank revolver 24,382 19,589
Short-term revolving credit 1,000 733
-------- --------
Total debt $139,132 $134,322
Less-current portion 2,375 1,983
-------- --------
Total long-term debt $136,757 $132,339
-------- --------
-------- --------
-9-
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 in the Indenture), if any,
thereon to the date of redemption. In the event the Company completes one or
more Public Equity Offerings (as defined in the Indenture) 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
November 28, 1998 and August 29, 1998.
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.
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 (the Revolving Credit and Gold
Facilities) permit borrowings of up to a maximum aggregate principal amount
of $35 million based upon availability under a borrowing base based on
eligible receivables and eligible inventory (each as defined in the Revolving
Credit and Gold Facilities), 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 in the Bank Agreement), (b) consolidated EBITDA and (c) interest
coverage. The financial covenants were amended on November 27, 1998, and
additional covenants were added pursuant to which the Company agreed that it
would not (i) permit its Consolidated Net Worth (as defined in the Bank
Agreement) as of March 30, 1999 to be less than $42 million, (ii) pay the
management fee payable to Castle Harlan, Inc. (see Note 9) unless at the time
of payment (A) no Event of Default (as defined under the Bank Agreement)
shall have occurred and be continuing or would result from the payment
thereof; (B) the Short Term Revolving Credit (see "Short-Term Revolving
Credit" below) shall have been paid in full; and (C) the Company meets the
requisite Modified Funded Debt Ratio (as defined in the Bank Agreement) and
(iii) 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
-10-
certain investments. The Company was in compliance with all debt covenants
under the Bank Agreement as of November 28, 1998 and August 29, 1998. In
light of the Company's current financial position and the results of
operations for the three months ended November 28, 1998, there can be no
assurance that the Company will in the future meet these net worth and other
financial covenants under the Bank Agreement.
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 in the Revolving
Credit and Gold Facilities) and Eligible Inventory (as defined in the
Revolving Credit and Gold Facilities) 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 November 28, 1998, the Company had $618,000 available
under the revolving credit facility and $3,804,000 available under the gold
facility.
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 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 three months ended
November 28, 1998 and November 30, 1997 (see Note 1), the Company expensed
approximately $62,000 and $78,000 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 November 28, 1998 and August 29, 1998, the Company held
approximately 20,920 ounces and 13,846 ounces, respectively, valued at $6.2
million and $3.8 million, respectively, of gold on consignment from one of
its lenders.
SHORT TERM REVOLVING CREDIT
On August 26, 1998, the Company obtained a short-term line of credit (the
Short Term Revolving Credit) pursuant to which the Company may borrow up to
$8,000,000 from BankBoston, N.A. (BankBoston) from time to time, until March
31, 1999. At November 28, 1998 and August 29, 1998, the Company had
$7,000,000 and $7,267,000, respectively, 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 Event 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 Revolving
Credit and Gold Facilities 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 (see Note 9). The Short Term Revolving Credit constitutes
Designated Senior Indebtedness for purposes of the Indenture.
-11-
The long-term debt outstanding as of November 28, 1998, matures as follows
(in thousands):
Amount
Maturing
Fiscal Year Ending --------
1999 $ 2,375
2000 1,750
2001 2,500
2002 29,507
2003 8,500
Thereafter 94,500
--------
$139,132
--------
--------
The weighted average interest rate of debt outstanding under the Bank
Agreement as of November 28, 1998 and August 29, 1998 was 10.2% and 10.3%,
respectively. The weighted average interest rate under the Short Term
Revolving Credit as of November 28, 1998 and August 29, 1998 was 8.2% and
8.5%, respectively.
(6) COMMITMENTS AND CONTINGENCIES
Certain Company facilities and equipment are leased under agreements expiring
at various dates through 2005.
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 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.
(7) INCOME TAXES
For the three months ended November 28, 1998 and November 30, 1997, the
Company expensed $0.3 million and $0 million, respectively, related to state
income taxes. There is no federal income tax provision as a valuation
allowance exists due to the net operating losses incurred by the Company.
(8) 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. Dividends on the Series A Preferred
accrue from the date of issuance (December 16, 1996) to the last date to
which dividends have been paid at a rate of 12 percent per annum, whether or
not such dividends have been declared and whether or not there shall be funds
legally available for the payment thereof. Any dividends which are declared
shall be paid pro rata to the holders. No dividends or interest shall accrue
on any accrued and unpaid dividends. The Company's 11 percent senior
subordinated notes and bank debt restrict the Company's ability to pay
dividends on the Series A Preferred.
-12-
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 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, as amended, 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 and 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 the fair market value of the Common Stock at
the date of grant. Payment of the exercise
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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.
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 Series 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 was terminated on December 22, 1998 prior to
the consummation thereof and no Company shares were sold pursuant thereto.
(9) 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 (see Note 5).
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 sheets as of
November 28, 1998 and 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 was paid in advance for the first year and is
payable quarterly in arrears thereafter. The management fee for the three
months ended November 28, 1998 has been accrued, but not paid. 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 been paid in full; and (iii) the
Company meets the requisite Modified Funded Debt Ratio (as defined in the
Bank Agreement).
-14-
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
For purposes of the discussion contained in this Item 2, 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.
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 results of operations of the Company for the three months ended
November 30, 1997, were negatively impacted due to excess costs and
inefficiencies resulting from additional labor and overhead incurred to
manufacture Balfour rings during the consolidation of the former Balfour
Attleboro and North Attleboro, Massachusetts operations into the Company's
Austin, Texas facilities. Although the consolidation of the Attleboro and
North Attleboro, Massachusetts operations into 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.
During January 1998, the Company began a computer project which,
among other things, is intended to (i) convert the more inefficient Balfour
computer systems to the more efficient ArtCarved systems, (ii) unify 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 (iii) 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
THREE MONTHS ENDED NOVEMBER 28, 1998 AS COMPARED TO THE THREE MONTHS
ENDED NOVEMBER 30, 1997
NET SALES - Net sales increased $2.8 million, or 7.3%, to $41.2
million for the three months ended November 28, 1998, as compared to $38.4
million for the three months ended November 30, 1997. The increase in net
sales was primarily a result of the 6.7% increase in net sales of high school
class rings in the high school in-school sales channel of which 5.3% is
related to a volume increase. The remaining increase in net sales was a
result of the 2.4% increase in fine paper products and the recognition and
affinity jewelry.
GROSS PROFIT - Gross profit increased $2.8 million, or 13.4%, to
$24.0 million for the three months ended November 28, 1998, as compared to
$21.1 million for the three months ended November 30, 1997. As a percentage
of net sales, gross profit was 58.2% for the three months ended November 28,
1998 compared to 55.1% for the three months ended November 30, 1997. The
increase in gross profit was the result of the three months ended November
30, 1997 being adversely affected by the additional costs incurred in
connection with the consolidation of the Attleboro and North Attleboro,
Massachusetts operations into the Austin, Texas facilities and the decrease
in gold prices in the three months ended November 28, 1998.
-15-
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES - Selling, general and
administrative expenses increased $3.6 million, or 22.0%, to $20.2 million
for the three months ended November 28, 1998, compared to $16.6 million for
the three months ended November 30, 1997. As a percentage of net sales,
selling, general and administrative expenses increased to 49.1% for the three
months ended November 28, 1998, compared to 43.2% for the three months ended
November 30, 1997. The increase in selling, general and administrative
expenses was primarily a result of increased commissions due to the increase
in net sales volume of high school class rings in the in-school sales channel
and the mix of product that had a higher commission rate.
OPERATING INCOME - As a result of the foregoing, operating income
decreased $0.8 million to $3.8 million for the three months ended November
28, 1998 compared to $4.6 million for the three months ended November 30,
1997. As a percentage of net sales, operating income decreased to 9.1% for
the three months ended November 28, 1998 compared to 11.9% for the three
months ended November 30, 1997.
INTEREST EXPENSE, NET - Interest expense, net, was $3.7 million for
the three months ended November 28, 1998 and $3.6 million for the three
months ended November 30, 1997 primarily consisting of interest on the Bank
Credit Facility which had an average outstanding balance of $45.1 million and
$40.6 million for the three months ended November 28, 1998 and for the three
months ended November 30, 1997, respectively, at rates ranging from 8.3% to
10.5% and interest on the $90.0 million of notes, at a rate of 11%.
PROVISION FOR INCOME TAXES - For the three months ended November 28,
1998 and November 30, 1997, the Company expensed $0.3 million and $0,
respectively, related to state income taxes. There is no federal income tax
provision as a valuation allowance exists due to the net operating losses
incurred by the Company.
NET INCOME (LOSS) - As a result of the foregoing, net income
decreased $1.0 million to a $0 net income for the three months ended November
28, 1998 compared to a net income of $1.0 million for the three months ended
November 30, 1997.
PREFERRED DIVIDENDS - Preferred dividends of $0.3 million were
accrued for the three months ended November 28, 1998 and for the three months
ended November 30, 1997. No cash dividends were paid in the three months
ended November 28, 1998 or in the three months ended November 30, 1997.
NET LOSS TO COMMON STOCKHOLDERS - As a result of the foregoing, net
loss to common stockholders decreased an aggregate of $1.0 million to a net
loss to common stockholders of $0.3 million for the three months ended
November 28, 1998 compared to a net income to common stockholders of $0.7
million for the three months ended November 30, 1997.
LIQUIDITY AND CAPITAL RESOURCES
As of November 28, 1998, the Company had a $35.0 million aggregate
borrowing limit 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 $24,382,000 outstanding
under the Revolving Credit Facility, $6,196,000 outstanding under the Gold
Facility and $1,000,000 outstanding under the Short Term Revolving Credit as
of November 28, 1998. At November 28, 1998 the Company had $618,000 available
under its Revolving Credit Facility, $3,804,000 available under its Gold
Facility and $7,000,000 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 Related Party Transactions).
-16-
The Company's cash used in operating activities for the three months
ended November 28, 1998, was primarily the net result of the seasonality of
the Company's scholastic product sales which are the highest between October
and December. As a result, receivables and inventories are both at a peak
during this time of the year. The increase in inventories for the three
months ended November 28, 1998 is only $776,000 compared to the three months
ended November 30, 1997 of $2,450,000 due to Balfour high school class rings
being shipped late in the prior year as a result of problems encountered in
the integration of the Balfour operations. Prepaid and other current assets
are lower at this time of year as a result of prepaid advertising costs being
amortized over the period in which the sale of product occurs. Also, for the
three months ended November 30, 1997, prepaid management fees were lower due
to the management fee being prepaid as of January 1997 for a year. The
increase in other assets for the three months ended November 28, 1998 and
November 30, 1997 was a result of an increase in the manufacture of samples
to support the increased sales volume. The increase in overdraft, accounts
payable and accrued expenses was also a result of the seasonal nature of the
class ring sales. The majority of the increase in overdraft, accounts payable
and accrued expenses for the three months ended November 28, 1998 and the
three months ended November 30, 1997, was a result of an increase in customer
deposits on unshipped class rings of approximately $4,000,000 and $4,500,000,
respectively. The remaining increase was due to increased vendor payables and
increased commissions owed to the sales representatives and for the three
months ended November 30, 1997, the increase was offset by approximately
$800,000 of one-time costs associated with the closing of the Attleboro
facilities, moving expenses and set-up expenses in Austin. As of November 28,
1998 and August 29, 1998, there was a balance remaining of $0.8 million in
reserves for expenses associated with the metal stamping and tooling
operations currently in Attleboro.
Also affecting cash usage in the three months ended November 28,
1998 and November 30, 1997, were capital expenditures of $2.2 million and
$1.4 million, respectively. 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 $23,750,000 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 in the
Term Loan Facility).
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 in the
Revolving Credit and Gold Facilities) and Eligible Inventory (as defined in
the Revolving Credit and Gold Facilities) of the Company. The Borrowing Base
is recalculated weekly. 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 Facility to the extent of such excess.
At November 28, 1998 the Company had $618,000 available under its Revolving
Credit Facility and $3,804,000 available under its Gold Facility.
-17-
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 sell 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
November 28, 1998 and August 29, 1998, was 10.2% and 10.3%, 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. The financial covenants
were amended on November 27, 1998, and additional covenants were added
pursuant to which the Company agreed that it would not (i) permit its
Consolidated Net Worth (as defined) as of March 30, 1999 to be less than
$42,000,000, (ii) pay the CHP Management Fee payable to Castle Harlan Inc.
(see Related Party Transactions) 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 (iii) 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 November 28, 1998 and August 29, 1998. In light of the Company's current
financial position and the results of operations for the three months ended
November 28, 1998, there can be no assurance that the Company will in the
future meet these net worth and other financial covenants under the Bank
Agreement.
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.
-18-
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 November
28, 1998, the Company had $7,000,000 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. The weighted average interest rate at
November 28, 1998 and August 29, 1998, was 8.2% and 8.5%, respectively. 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 Revolving Credit and Gold Facilities 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
November 28, 1998 and August 29, 1998.
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YEAR 2000 COMPLIANCE
YEAR 2000 ISSUES. Many software applications, hardware and equipment
and embedded chip systems identify dates using only the last two digits of
the year. These products may be unable to distinguish between dates in the
year 2000 and dates in the year 1900. That inability (referred to as the
"Year 2000" issue), if not addressed, could cause applications, equipment or
systems to fail or provide incorrect information after December 31, 1999, or
when using dates after December 31, 1999. This in turn could have an adverse
effect on the company due to the Company's direct dependence on its own
applications, equipment and systems and indirect dependence on those of other
entities with which the Company must interact.
COMPLIANCE PROGRAM. In order to address the Year 2000 issue, 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..
COMPANY STATE OF READINESS. The awareness phase of the Year 2000
project has begun with a corporate-wide awareness program which will continue
to be updated throughout the life of the project. The assessment phase of the
project involves, among other things, efforts to obtain representations and
assurances from third parties, including third party vendors, that their
hardware and equipment, embedded chip systems and software being used by or
impacting the Company or any of its business units are or will be modified to
be Year 2000 compliant. To date, the Company does not expect that responses
from such third parties will be conclusive. As a result, management cannot
predict the potential consequences if these or other third parties are not
Year 2000 compliant. The exposure associated with the Company's interaction
with third parties is also currently being evaluated.
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.
COSTS TO ADDRESS YEAR 2000 COMPLIANCE ISSUES. While the total cost
to the company of the Year 2000 project is still being evaluated, management
currently estimates that the costs to be incurred by the Company in 1999 will
range from $0.5 million to $1.0 million. 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, 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. To date, the Company
has not expended significant funds related to its Year 2000 compliance
assessment.
RISK OF NON-COMPLIANCE AND CONTINGENCY PLAN. The major applications
which pose the greatest Year 2000 risks for the Company if implementation of
the Year 2000 compliance program is not successful are order management
applications, production applications, financial applications and related
third party software. Potential problems if the Year 2000 compliance program
is not successful include the Company's inability to produce product, loss of
customers and the inability to perform its other financial and accounting
functions.
The goal of the Year 2000 project is to ensure that all of the
critical systems and processes which are under the direct control of the
Company remain functional. However, because certain systems and processes may
be interrelated with systems outside of the control of the Company, there can
be no assurance that all implementations will be successful. Accordingly, as
part of the Year 2000 project, contingency and business plans will be
developed to respond to any failures as they may occur. Such contingency and
business plans are scheduled to be completed during 1999. Management does not
expect the costs to the Company of the Year 2000 project to have a material
adverse effect on the Company's financial position, results of operations or
cash flows. However, based on information available at this time, the Company
cannot conclude that any
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failure of the Company or third parties to achieve Year 2000 compliance will
not adversely affect the Company.
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.
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PART II. OTHER INFORMATION
ITEM 1. 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 2. CHANGES IN SECURITIES
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
27. Financial Data Schedule for the period ended
November 28, 1998.
(b) The Company did not file any reports on Form 8-K during the
three months ended November 28, 1998.
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COMMEMORATIVE BRANDS, INC.
SIGNATURES
Commemorative Brands, Inc. has duly caused this report to be signed
on its behalf by the undersigned thereunto duly authorized.
COMMEMORATIVE BRANDS, INC.
By: /s/ Sherice P. Bench
--------------------------------
Sherice P. Bench
Vice President Finance and
Principal Accounting Officer
Date: January 12, 1999
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