As filed with the Securities and Exchange Commission on April 11, 1997
Registration No. 333-20759
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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Amendment No. 2
to
Form S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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Commemorative Brands, Inc.
(Exact name of registrant as specified in its charter)
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<S> <C> <C>
Delaware 3911 13-3915801
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification Number)
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7211 Circle S Road
Austin, Texas 78745
(512) 444-0571
(Address, including zip code, and telephone number,
including area code, of Registrant's principal
executive offices)
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Jeffrey H. Brennan
President and Chief Executive Officer
7211 Circle S Road
Austin, Texas 78745
(512) 444-0571
(Name, address, including zip code, and telephone number
including area code, of agent for service)
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Please send copies of all communications to:
Janet C. Walden, Esq.
Schulte Roth & Zabel LLP
900 Third Avenue
New York, New York 10022
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Approximate date of commencement of proposed sale of securities to the public:
As soon as practicable after the Registration Statement becomes effective.
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If the only securities being registered on this form are being offered in
connection with the formation of a holding company and there is compliance with
Instruction G, please check the following box: |_|
CALCULATION OF REGISTRATION FEE
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Amount Proposed Maximum Proposed Maximum
Title of Each Class of to be Offering Price Aggregate Offering Amount of
Securities to be Registered Registered per Note Price(1) Registration Fee
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<S> <C> <C> <C> <C>
11% Senior Subordinated
Notes due 2007 ..................... $90,000,000 100% $90,000,000 $27,275
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(1) Estimated solely for purposes of calculating the amount of the registration
fee.
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The Registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the Registrant shall
file a further amendment which specifically states that the Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933, or until the Registration Statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
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COMMEMORATIVE BRANDS, INC.
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Cross Reference Sheet
Pursuant to Item 501(b) of Regulation S-K
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Form S-4 Number and Caption Location in Prospectus
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1. Forepart of the Registration Statement and Outside Front Cover
Page of Prospectus ............................................. Forepart of the Registration
Statement; Outside Front Cover Page
of Prospectus
2. Inside Front and Outside Back Cover Pages of Prospectus .......... Inside Front and Outside Back Cover
Pages of Prospectus; Available
Information; Table of Contents
3. Risk Factors, Ratio of Earnings to Fixed Charges and Other
Information .................................................... Prospectus Summary; Risk Factors;
Summary Historical Financial and
Other Data--ArtCarved; Summary
Historical Financial and Other
Data-Balfour; Summary Pro Forma
Combined Financial and Other Data
4. Terms of the Transaction ......................................... Prospectus Summary; Risk Factors; The
Exchange Offer; Description of the
Notes
5. Pro Forma Financial Information .................................. Prospectus Summary; Capitalization;
Summary Pro Forma Combined
Financial and Other Data
6. Material Contracts with the Company Being Acquired ............... *
7. Additional Information Required for Reoffering by Persons and
Parties Deemed to be Underwriters .............................. *
8. Interests of Named Experts and Counsel ........................... *
9. Disclosure of Commission Position on Indemnification for
Securities Act Liabilities ..................................... *
10. Information with Respect to S-3 Registrants ...................... *
11. Incorporation of Certain Information by Reference ................ *
12. Information with Respect to S-2 or S-3 Registrants ............... *
13. Incorporation of Certain Information by Reference ................ *
14. Information with Respect to Registrants other than S-3 or S-2
Registrants .................................................... Cover Page of Registration Statement;
Available Information; Prospectus
Summary; Risk Factors; Use of
Proceeds; Capitalization; Selected
Financial Data: Management's
Discussion and Analysis of
Financial Condition and Results of
Operations; Business; Management;
The Transactions; Description of
the Bank Credit Facility;
Description of Notes; Financial
Statements
15. Information with Respect to S-3 Companies ........................ *
16. Information with Respect to S-2 or S-3 Companies ................. *
17. Information with Respect to Companies other than S-2 or S-3
Companies ...................................................... *
18. Information if Proxies, Consents or Authorizations are to be
Solicited ...................................................... *
19. Information if Proxies, Consents or Authorizations are not to be
Solicited or in an Exchange Offer .............................. Management; Certain Relationships and
Related Transactions; Security
Ownership of Certain Beneficial
Owners and Management; The
Transactions; Financial Statements
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* Item is omitted because answer is negative or the item is inapplicable.
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Information contained herein is subject to completion or amendment. This
Prospectus shall not contitute an offer to sell or the solicitation of any offer
to buy nor shall there be any sale of these securities in any jurisdiction in
which such offer, solicitation or sale would be unlawful prior to registration
or qualification under the securities laws of any such jurisdiction.
PRELIMINARY PROSPECTUS
Subject to Completion
Preliminary Prospectus Dated April 11, 1997.
Commemorative Brands, Inc.
Offer to exchange $90,000,000 of new
11% Senior Subordinated Notes due 2007
for $90,000,000 of any and all outstanding
11% Senior Subordinated Notes due 2007
Commemorative Brands, Inc. (formerly known as "Scholastic Brands, Inc."), a
Delaware corporation ("CBI" or the "Company"), hereby offers to exchange (the
"Exchange Offer"), upon the terms and conditions set forth in this Prospectus
(the "Prospectus") and the accompanying Letter of Transmittal (the "Letter of
Transmittal"), up to $90,000,000 in aggregate principal amount of its 11% Senior
Subordinated Notes due 2007 (the "Exchange Notes") for a like principal amount
of its 11% Senior Subordinated Notes due 2007 (the "Initial Notes" and, together
with the Exchange Notes, the "Notes").
The terms of the Exchange Notes are identical in all material respects
(including principal amount, interest rate and maturity) to the terms of the
Initial Notes for which they may be exchanged pursuant to the Exchange Offer,
except that the Exchange Notes will generally be freely transferable by Holders
(as defined) thereof (except as provided in the next paragraph below), and are
not subject to any covenant of the Company regarding registration. The Exchange
Notes will be issued under the indenture governing the Initial Notes. For a
complete description of the terms of the Exchange Notes, see "Description of
Notes."
Interest on the Exchange Notes will be payable semi-annually on January 15
and July 15 of each year, commencing July 15, 1997. The Notes will be redeemable
at the option of the Company, in whole or in part, at any time on or after
January 15, 2002, at the redemption prices set forth herein, plus accrued and
unpaid interest and Liquidated Damages (as defined), if any, thereon to the date
of redemption. In addition, at any time prior to January 15, 2000, the Company
may, in its discretion, 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
(as defined); provided that at least 66-2/3% of the original principal amount of
the Notes remains outstanding immediately after each such redemption. The
Exchange Notes will not be subject to any mandatory sinking fund. 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. See "Description of Notes." There can be no
assurance that the Company will have the financial resources necessary to repay
its obligations under its senior bank credit facilities and to purchase the
Exchange Notes upon a Change of Control. See "Risk Factors -- Payment for Notes
upon a Change in Control." The Notes will be general unsecured obligations of
the Company and will be subordinated in right of payment to all existing and
future Senior Indebtedness (as defined) of the Company. As of December 16, 1996,
the Company had approximately $36.2 million of Senior Indebtedness outstanding
(exclusive of an unused commitment of up to $23.8 million under the Bank Credit
Facility). See "Description of Notes--Subordination" and "Capitalization."
The Initial Notes were issued and sold on December 16, 1996, in a
transaction (the "Initial Offering") not registered under the Securities Act of
1933, as amended (the "Securities Act"), in reliance upon the exemptions
provided in Section 4(2) of the Securities Act, and Rule 144A, Regulation D and
Regulation S under the Securities Act. Accordingly, the Initial Notes may not be
reoffered, resold or otherwise pledged, hypothecated or transferred in the
United States unless so registered or unless an applicable exemption from the
registration requirements of the Securities Act is available. The Exchange Notes
are being offered hereunder in order to satisfy certain of the obligations of
the Company under a registration rights agreement relating to the Initial Notes.
See "The Exchange Offer--Purposes of the Exchange Offer." The Company is making
the Exchange Offer in reliance upon an interpretation by the staff of the
Securities and Exchange Commission (the "Commission") set forth in a series of
no-action letters issued to third parties, although the Company has not sought,
and does not intend to seek, its own no-action letter and there can be no
assurance that the staff of the Commission would make a similar determination
with respect to the Exchange Offer. Based upon the Commission's interpretations,
the Company believes that the Exchange Notes issued pursuant to the Exchange
Offer in exchange for Initial Notes may be offered for resale, resold and
otherwise transferred by holders thereof (other than any holder that is (i) an
"affiliate"
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of the Company within the meaning of Rule 405 under the Securities Act (an
"Affiliate"), (ii) a broker-dealer who acquired Initial Notes directly from the
Company or (iii) a broker-dealer who acquired Initial Notes as a result of
market making or other trading activities) without compliance with the
registration and prospectus delivery provisions of the Securities Act provided
that such Exchange Notes are acquired in the ordinary course of such holders'
business and such holders are not engaged in, and do not intend to engage in,
and have no arrangement or understanding with any person to participate in, a
distribution of such Exchange Notes. Each broker-dealer who receives Exchange
Notes pursuant to the Exchange Offer in exchange for Initial Notes acquired for
its own account as a result of market-making activities or other trading
activities may be a statutory underwriter and must acknowledge that it will
deliver a prospectus meeting the requirements of the Securities Act in
connection with any resale of such Exchange Notes. The Letter of Transmittal
that is filed as an exhibit to the Registration Statement of which this
Prospectus is a part (the "Letter of Transmittal") states that by so
acknowledging and by delivering a prospectus, a broker-dealer will not be deemed
to admit that it is an "underwriter" within the meaning of the Securities Act.
Broker-dealers who acquired Original Notes as a result of market making or other
trading activities may use this Prospectus, as supplemented or amended, in
connection with resales of the Exchange Notes. The Company has agreed that it
will make this Prospectus available to any broker-dealer for use in connection
with any such resale for a period of one year from the date in which the
Registration Statement of which this Prospectus is a part is declared effective.
Any holder that cannot rely upon such interpretations must comply with the
registration and prospectus delivery requirements of the Securities Act in
connection with a secondary resale transaction. See "The Exchange Offer--Tender
Procedure."
The Initial Notes are designated for trading in the Private Offerings,
Resales and Trading through Automated Linkages ("PORTAL") market. The Exchange
Notes constitute a new issue of securities for which there is no established
trading market. Any Initial Notes not tendered and accepted in the Exchange
Offer will remain outstanding. To the extent Initial Notes are tendered and
accepted in the Exchange Offer, a Holder's ability to sell untendered, and
tendered but unaccepted, Initial Notes could be adversely affected. Following
consummation of the Exchange Offer, the Holders of Initial Notes will continue
to be subject to the existing restrictions on transfer thereof and the Company
will have no further obligations to such Holders to provide for the registration
under the Securities Act of the Initial Notes. No assurance can be given as to
the liquidity of the trading market for either the Initial Notes or the Exchange
Notes.
The Exchange Offer is not conditioned upon any minimum aggregate principal
amount of Initial Notes being tendered for exchange but is otherwise subject to
customary conditions. The Exchange Offer will expire at 5:00 p.m., New York City
time, on May 14, 1997, unless extended by the Company to such other date as
the Company, in its sole discretion, may determine (the "Expiration Date"). The
date of acceptance for exchange of the Initial Notes (the "Exchange Date") will
be the first business day following the Expiration Date. Initial Notes tendered
pursuant to the Exchange Offer may be withdrawn at any time prior to the
Expiration Date; otherwise such tenders are irrevocable. There will be no cash
proceeds to the Company from the Exchange Offer.
This Prospectus, as it may be amended or supplemented from time to time,
may be used by a broker-dealer in connection with resales of Exchange Notes
received for Initial Notes where such Initial Notes were acquired for its own
account as a result of market-making activities or other trading activities. The
Company will make copies of this Prospectus available to any broker-dealer for
use in connection with any such resale.
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See "Risk Factors," commencing on page 15, for a description of certain
factors that should be considered by participants in the Exchange Offer
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
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The date of this Prospectus is April 11, 1997.
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AVAILABLE INFORMATION
The Company has filed with the Commission a Registration Statement on Form
S-4 (the "Registration Statement") under the Securities Act with respect to the
Exchange Notes being offered by this Prospectus. This Prospectus does not
contain all of the information set forth in the Registration Statement and the
exhibits and schedules thereto, certain portions of which have been omitted
pursuant to the rules and regulations of the Commission. Statements made in this
Prospectus as to any contract, agreement or other document are summaries of the
material terms of such contracts, agreements or other documents and are not
necessarily complete. With respect to each such contract, agreement or other
document filed as an exhibit to the Registration Statement, reference is made to
the exhibit for a more complete description of the matter involved, and each
such statement is qualified in its entirety by such reference.
The Company is not currently subject to the informational requirements of
the Securities Exchange Act of 1934, as amended (the "Exchange Act"). Upon
completion of the Exchange Offer, the Company will be subject to the
informational requirements of the Exchange Act, and, in accordance therewith,
will file periodic reports and other information with the Commission at 450
Fifth Street, N.W., Washington, D.C. 20549. So long as any of the Notes remain
outstanding, whether or not required by the rules and regulations of the
Commission, the Company is required by the terms of the Indenture, dated as of
December 16, 1996 (the "Indenture"), between the Company and Marine Midland
Bank, as trustee (the "Trustee"), under which the Initial Notes were issued and
under which the Exchange Notes are to be issued, so long as any of the Notes are
outstanding, to furnish, and if applicable, to cause certain subsidiaries of the
Company ("Subsidiary Guarantors") to furnish, to the Holders of the Notes,
within 15 days after they are or would have been required to file such with the
Commission, (i) all quarterly and annual financial information that would be
required to be contained in filings with the Commission on Forms 10-Q and 10-K
if the Company and/or any Subsidiary Guarantor was required to file such forms,
including "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and, with respect to annual consolidated financial
statements and schedules only, a report thereon by the independent auditors of
the Company and/or any Subsidiary Guarantor, and (ii) all information that would
be required to be contained in filings with the Commission on Form 8-K if the
Company and/or any Subsidiary Guarantor was required to file such form. In
addition, whether or not required by the rules and regulations of the
Commission, the Company shall file a copy of all such information and reports
with the Commission for public availability (unless the Commission will not
accept such a filing) and make such information available to securities analysts
and prospective investors upon request. In addition, for so long as any of the
Notes remain outstanding, the Company has agreed to furnish to any Holder of
Notes, and to securities analysts and prospective investors upon their request,
the information required to be delivered pursuant to Rule 144A(d)(4) under the
Securities Act.
Reports and other information filed by the Company with the Commission, and
the Registration Statement and the exhibits and schedules thereto, may be
inspected and copied at the public reference facilities maintained by the
Commission at Room 1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington,
D.C. 20549 and will also be available for inspection and copying at the regional
offices of the Commission at 7 World Trade Center, 13th Floor, New York, New
York 10048 and at Northwestern Atrium Center, 500 West Madison Street (suite
1400), Chicago, Illinois 60661. Copies of such materials may also be obtained
from the public reference section of the Commission at 450 Fifth Street, N.W.,
Washington, D.C. 20549 at prescribed rates. Also, the Company files such reports
and other information with the Commission pursuant to the Commission's EDGAR
system. The Commission maintains a Web site that contains reports and other
information regarding registrants that file electronically with the Commission
pursuant to the EDGAR system. The address of the Commission's Web site is
http://www.sec.gov.
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PROSPECTUS SUMMARY
This following summary is qualified in its entirety by the more detailed
information and financial statements, including the notes thereto, appearing
elsewhere in this Prospectus. Unless the context otherwise requires, (i) the
term "CBI" refers to Commemorative Brands, Inc. (formerly known as Scholastic
Brands, Inc.) prior to the consummation of the acquisitions referred to below
(the "Acquisitions"), (ii) the term "ArtCarved" refers to those assets,
businesses and operations of CJC Holdings, Inc. ("CJC") acquired by CBI, (iii)
the term "Balfour" refers to those assets, businesses and operations of L.G.
Balfour Company, Inc. ("L.G. Balfour Company") acquired by CBI, (v) the term
"the Company" refers to CBI as combined with ArtCarved and Balfour after giving
effect to the Acquisitions, (v) the term "Management" refers to the management
team of the Company, and (vi) the term "Pro Forma Fiscal 1996" refers to the
unaudited pro forma combined operations of ArtCarved and Balfour for the twelve
months ended August 31, 1996.
This Prospectus contains forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933, as amended. Discussions containing
such forward-looking statements may be found in the material set forth below and
under "Risk Factors," "Unaudited Pro Forma Combined Financial Statements and
Other Data," "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and "Business" as well as in the Prospectus generally.
Actual events or results may differ materially from those discussed in the
forward-looking statements as a result of various factors, including, without
limitation, the factors set forth below and the other matters set forth in the
Prospectus generally.
The Company
The Company is the second largest manufacturer of class rings in the United
States based on net sales and 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 of substantially all of the scholastic and recognition and affinity
product assets and businesses of the ArtCarved operations of CJC and the Balfour
operations of L.G. Balfour Company. CBI was initially formed in March 1996 by
Castle Harlan Partners II, L.P., a Delaware limited partnership and private
equity investment fund ("CHP II"), for the purpose of acquiring ArtCarved and
Balfour and until December 16, 1996 engaged in no business other than in
connection with the Acquisitions and the financing thereof.
In combining ArtCarved and Balfour, the Company joined together two of the
most widely recognized and most respected names in the scholastic products
market in the United States. Management believes the Company will benefit from
the combination of the complementary strengths of ArtCarved's leading high
school in-store and college on-campus sales channels for scholastic products and
Balfour's strong presence in the high school in-school sales channel for
scholastic products. In addition, Management expects that the combination of the
operations of ArtCarved and Balfour (the "Combination") will enable the Company
to introduce a complementary range of products through the Company's
distribution network and realize significant cost savings arising from the
consolidation of the Company's operations.
For Pro Forma Fiscal 1996, the Company had net sales of $142.1 million and
EBITDA of $22.8 million, which does not include $3.1 million of the $7.4 million
Annual Cost Savings (as defined). At November 30, 1996, the Company had pro
forma total indebtedness of $126.2 million. See "Unaudited Pro Forma Combined
Financial Statements And Other Data."
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The Company's scholastic product line consists of high school and college
class rings (the Company's largest product offering) and graduation-related fine
paper products such as announcements, name cards and diplomas. The Company's
independent sales representatives also sell or distribute caps and gowns,
yearbooks, memory books, and other graduation apparel and accessories
manufactured by others. The Company markets and distributes its scholastic
products, which represented approximately 85% of net sales in Pro Forma Fiscal
1996, through three distinct sales channels: (i) the high school "in-store"
channel of retailers, including approximately 5,100 independent retail jewelers,
approximately 21 of the nation's 40 largest retail jewelry chains (representing
approximately 1,200 stores throughout the United States) and approximately 2,200
Wal-Mart and 2,100 Kmart stores nationwide; (ii) the high school "in-school"
channel of independent sales representatives, who sell directly to students in
approximately 4,500 high schools throughout the United States; and (iii) the
college "on-campus" sales organization, which sells to students in approximately
1,700 colleges and universities throughout the United States primarily through
on-campus bookstores and to a lesser extent, through local bookstores. As a
result of the Combination, the Company is today the only class ring manufacturer
with a strong national presence in these three primary sales channels for class
rings and scholastic products.
The Company's recognition and affinity product line consists primarily of
rings, pins and other jewelry designed to enable individuals to show pride in
their affiliations with or support for their favorite organizations and sports
teams. The Company's recognition and affinity product line is comprised of four
major product categories: (i) licensed consumer sports jewelry, consisting of
rings and other jewelry, intended for fans who wish to express their affinity
and support for their favorite professional, amateur and collegiate sports
teams, historically including all of the teams in the National Football League,
Major League Baseball, the National Basketball Association and the National
Hockey League; (ii) sports championship jewelry and related products for the
members of championship teams to commemorate their achievements, such as Super
Bowl rings for the San Francisco 49ers in 1995 and World Series trophies for the
members of the 1996 New York Yankees, and rings for individuals who bowl an
American Bowling Congress-sanctioned perfect game; (iii) personalized family
jewelry, consisting primarily of rings, bracelets, necklaces and other jewelry
designed to commemorate family and significant life events such as births and
baptisms and other family celebrations and holidays such as Mother's Day and
Valentine's Day; and (iv) corporate recognition and reward jewelry, consisting
of rings, pins and other jewelry, designed to commemorate employees'
anniversaries with or accomplishments on behalf of various corporations,
historically including The Coca-Cola Company, McDonalds Corp., and Xerox Corp.
Business Strategy
Management's primary objective is to increase profitability through the
growth of the Company's sales and the realization of identified operational
improvements following the Combination. Management seeks to achieve these
objectives by: (i) capitalizing on cost reduction opportunities presented by the
Combination; (ii) marketing a broader array of products by utilizing the
Company's comprehensive distribution network to cross-market existing products
and by continuing to develop and acquire new products and expand product lines;
and (iii) strengthening the Company's in-school sales channel through the
addition of independent sales representatives.
In connection with the Acquisitions, Management has developed a detailed
consolidation plan for the consolidation of the operations of the Balfour
jewelry manufacturing
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2
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facilities in Attleboro and North Attleboro, Massachusetts, into the existing
ArtCarved operations in Austin, Texas that Management believes will enable the
Company to achieve approximately $7.4 million of annual cost savings relative to
the historical cost structures of the Company's predecessors (the "Annual Cost
Savings"). Of the $7.4 million in Annual Cost Savings, Management expects the
Company to realize $4.3 million from the elimination of duplicative personnel,
occupancy and fixed overhead costs and $3.1 million as a result of the lower
prevailing wage rates in Austin, Texas and the elimination of other duplicative
costs resulting from the closure of Balfour facilities. The Annual Cost Savings
do not reflect non-recurring severance and relocation costs of approximately
$5.5 million and incremental capital expenditures of approximately $1.9 million,
each related to the Combination.
The Company has begun the consolidation of the Company's operations to
Austin, Texas, and Management expects that the consolidation of operations will
be completed during the fiscal year ending August 30, 1997. Management expects
that a portion of the Annual Cost Savings will be realized during the fiscal
year ending August 30, 1997 and that all of such savings will be realized during
the fiscal year ending August 29, 1998. There can be no assurance that the
Company will complete its consolidation by the end of its fiscal year ending
August 30, 1997 or that the Annual Cost Savings will be realized by the end of
its fiscal year ending August 29, 1998, or at all.
Management also intends to pursue growth opportunities in selling Balfour's
fine paper products to college students through ArtCarved's existing on-campus
sales channel and selling Balfour's licensed consumer sports jewelry through
ArtCarved's existing retail sales channel, including independent retail
jewelers, retail jewelry chains and mass merchants. Management will seek to
pursue growth by penetrating new markets with new and existing products and to
expand the Company's presence in existing markets by introducing product line
extensions and new products. In addition, Management intends to strengthen its
presence in the in-school sales channel to increase the number of students in
each school who purchase the Company's products, expand school coverage in
geographic areas where the Company is currently under-represented and extend its
scholastic product lines.
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Although Management believes that it will be able to implement its strategy
as set forth above, there can be no assurance that improvements will be
realized, or that there will not be delays in achieving such improvements or
that results will not, in fact, decline.
The Company's principal executive offices are located at 7211 Circle S
Road, Austin, Texas 78745, and its telephone number is (512) 444-0571.
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4
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The Transactions
Pursuant to (i) an asset purchase agreement dated as of May 20, 1996 and
amended as of November 21, 1996 and December 16, 1996 (as so amended, the
"ArtCarved Purchase Agreement") and (ii) an Amended and Restated Asset Purchase
Agreement with Town & Country Corporation ("Town & Country") and its subsidiary,
L.G. Balfour Company, dated as May 20, 1996, as amended and restated on November
21, 1996 and further amended on December 16, 1996 (as so amended, the "Balfour
Purchase Agreement"), CBI acquired substantially all of the assets relating to
the scholastic and recognition and affinity businesses of each of CJC (the
"ArtCarved Acquisition") and Balfour (the "Balfour Acquisition" and together
with the ArtCarved Acquisition, the "Acquisitions") effective as of December 16,
1996. In consideration for ArtCarved, CBI paid (the "ArtCarved Purchase Price")
CJC in cash the sum of $97.8 million plus $17.0 million, representing the
estimated Adjusted Working Capital (as defined in the ArtCarved Purchase
Agreement) of ArtCarved as of the closing date, subject to adjustment upon final
determination of the Adjusted Working Capital. In consideration for Balfour, CBI
paid (the "Balfour Purchase Price") Town & Country and L.G. Balfour Company in
cash the sum of $23.8 million plus $23.6 million, representing the estimated
Adjusted Working Capital (as defined in the Balfour Purchase Agreement) of
Balfour as of the closing date, subject to adjustment upon final determination
of the Adjusted Working Capital. In addition, CBI purchased the gold on
consignment to Balfour as of the closing date ("Balfour Gold") for a cash
purchase price equal to the fair market value of the estimated Balfour Gold
balance as of the closing date (the "Balfour Gold Purchase Price") of
approximately $4.9 million, subject to adjustment upon final determination of
the Balfour Gold balance as of the closing date.
The funds required to finance the Acquisitions and to pay related fees and
expenses (the "Financing") were provided by (i) an initial equity investment of
$50.0 million in CBI (the "Castle Harlan Investment ") by CHP II and certain of
its affiliates (collectively, the "Castle Harlan Group"); (ii) the proceeds from
the sale of the Initial Notes; (iii) borrowings by CBI of $25.0 million under a
bank term loan facility (the "Term Loan Facility"); and (iv) borrowings by CBI
of $5.2 million under a $35.0 million bank revolving credit facility (the
"Revolving Credit Facility") and of $6.0 million under a gold facility (the
"Gold Facility" and together with the Revolving Credit Facility, the "Revolving
Credit and Gold Facilities", and together with the Term Loan Facility, the "Bank
Credit Facility"). See "Capitalization," "Use of Proceeds," "Principal
Stockholders," "Description of Capital Stock," "Description of the Bank Credit
Facility" and "Description of Notes."
The following table illustrates the estimated sources and uses of funds in
connection with the Transactions based on the estimated Adjusted Working Capital
and Balfour Gold balance on the date of closing. The final calculation of the
Adjusted Working Capital and Balfour Gold balance at closing and the resulting
purchase prices for each of ArtCarved, Balfour and Balfour Gold may differ from
the estimates assumed below.
- --------------------------------------------------------------------------------
5
<PAGE>
- --------------------------------------------------------------------------------
(Dollars in thousands)
Sources
Revolving Credit and Gold Facilities.............. $ 11,201
Term Loan Facility................................ 25,000
11% Senior Subordinated Notes due 2007............ 90,000
Preferred Stock(1)................................ 47,500
Common Stock...................................... 2,500
---------
Total Sources of Funds................... $ 176,201
=======
Uses
ArtCarved Acquisition............................. $114,829
Balfour Acquisition............................... 52,287
Transaction fees and expenses(2).................. 9,085
------
Total Uses of Funds...................... $ 176,201
=======
- ----------
(1) Includes $10.0 million of Series A Preferred Stock of the Company ("Series
A Preferred") and $37.5 million of Series B Preferred Stock of the Company
("Series B Preferred"). See "Description of Capital Stock" and "Description
of Notes--Certain Covenants--Restricted Payments."
(2) This amount represents partial transaction fees and expenses and the total
amount is expected to be approximately $9.8 million.
- --------------------------------------------------------------------------------
6
<PAGE>
- --------------------------------------------------------------------------------
The Exchange Offer
Exchange Offer: The Company is offering to exchange
pursuant to the Exchange Offer up to
$90,000,000 in aggregate principal amount
of its new 11% Senior Subordinated Notes
due 2007 (the "Exchange Notes") for a like
principal amount of its outstanding 11% of
Senior Subordinated Notes due 2007 (the
"Initial Notes" and, together with the
Exchange Notes, the "Notes") that were
issued and sold on December 16, 1996 in a
transaction exempt from registration under
the Securities Act of 1933, as amended (the
"Securities Act"). Initial Notes may be
exchanged only in integral multiples of
$1,000. The terms of the Exchange Notes are
identical in all material respects
(including principal amount, interest rate,
maturity and ranking) to the terms of the
Initial Notes for which they may be
exchanged pursuant to the Exchange Offer,
except that the Exchange Notes will have
been registered under the Securities Act
and therefor will be generally freely
transferable by Holders thereof (except as
provided herein--see "The Exchange
Offer--Terms of the Exchange" and "The
Exchange Offer--Terms and Conditions of the
Letter of Transmittal"), and are not
subject to any covenant of the Company
regarding registration. The Company has
agreed to make the Exchange Offer in order
to satisfy its obligations under a
registration rights agreement (the
"Registration Rights Agreement"), dated as
of December 16, 1996, among the Company and
Lehman Brothers Inc. and BT Securities
Corporation (together, the "Initial
Purchasers") relating to the Initial Notes.
Interest Payments: Interest on the Exchange Notes shall accrue
from their date of issuance.
Expiration Date: The Exchange Offer will expire at 5:00
p.m., New York City time, on May 14, 1997,
unless extended by the Company to such
dates as the Company, in its sole
discretion, may determine. Any Notes not
accepted for exchange for any reason will
be returned without expense to the
tendering Holders thereof as promptly as
practicable after the expiration or
termination of the Exchange Offer.
Exchange Date: The date of acceptance for exchange of the
Initial Notes (the "Exchange Date") will be
the first business day following the
Expiration Date.
Conditions of the The Exchange Offer is subject to certain
Exchange Offer: conditions. See "The Exchange
Offer--Conditions to the Exchange Offer."
The Exchange Offer is not conditioned upon
any minimum aggregate principal amount of
Initial Notes being tendered for exchange.
Withdrawal Rights: The tender of Initial Notes pursuant to the
Exchange Offer may be withdrawn at any time
prior to the Expiration Date.
Procedures for Holders wishing to participate in the
Tendering: Exchange Offer must complete and return a
Letter of Transmittal. See "The Exchange
Offer--Tender Procedure." Each holder
tendering Initial Notes for exchange (the
"Transferor") must certify that it is not
an "affiliate" of the Company within the
meaning of Rule 405 under the Securities
Act and that it is acquiring the Exchange
Notes offered hereby in the ordinary course
of such Transferor's business and that such
Transferor has no arrangement or
understanding with
- --------------------------------------------------------------------------------
7
<PAGE>
- --------------------------------------------------------------------------------
any person to participate in the
distribution of such Exchange Notes. Each
Holder must acknowledge that it is not
engaged in, and does not intend to engage
in, a distribution of Exchange Notes. Each
Transferor which is a broker-dealer holding
Initial Notes acquired for its own account
must acknowledge that it will deliver a
prospectus meeting the requirements of the
Securities Act in connection with any
resale of such Exchange Notes. By so
acknowledging and by delivering a
prospectus, a broker-dealer will not be
deemed to admit that it is an "underwriter"
within the meaning of the Securities Act.
This Prospectus, as it may be amended or
supplemented from time to time, may be used
by a broker-dealer in connection with
resales of Exchange Notes received in
exchange for Initial Notes where such
Initial Notes were acquired by such
broker-dealer as a result of market-making
activities or other trading activities. The
Company will make this Prospectus available
to any broker-dealer for use in connection
with any such resale.
Certain Federal Income The Company has been advised by its
Tax Consequences: counsel, Schulte Roth & Zabel LLP, that, in
their opinion, the exchange of Initial
Notes for Exchange Notes will not be a
taxable event to the Holders and the
Holders will not recognize any taxable gain
or loss or any interest income as a result
of such exchange. See "Certain Federal
Income Tax Considerations."
Effect on Holders of Initial Notes: As a result of the making of, and upon
acceptance for exchange of all validly
tendered Initial Notes pursuant to the
terms of, this Exchange Offer, the Company
will have fulfilled a covenant contained in
the Registration Rights Agreement and,
accordingly, the Holders of the Initial
Notes will have no further registration or
other rights under the Registration Rights
Agreement. Holders of the Initial Notes who
do not tender their Initial Notes in the
Exchange Offer or whose Initial Notes are
not accepted for exchange will continue to
hold such Initial Notes and will be
entitled to all the rights and preferences
and will be subject to the limitations
applicable thereto set forth in the
Indenture except for any such rights or
limitations which, by their terms,
terminate or cease to be effective as a
result of the making of, and the acceptance
for exchange of all validly tendered
Initial Notes pursuant to, the Exchange
Offer. All untendered, and tendered but
unaccepted, Initial Notes will continue to
be subject to the restrictions on transfer
provided therein and in the Indenture. To
the extent that Initial Notes are tendered
and accepted in the Exchange Offer, the
trading market for untendered, and tendered
but unaccepted, Initial Notes could be
adversely affected.
Use of Proceeds: There will be no cash proceeds to the
Company from the exchange pursuant to the
Exchange Offer.
Exchange Agent: Marine Midland Bank will serve as Exchange
Agent in connection with the Exchange
Offer.
Consequence of Failure to Exchange: Holders of Initial Notes who do not
exchange their Initial Notes for Exchange
Notes pursuant to the Exchange Offer will
continue to be subject to the restrictions
on transfer of such Initial Notes as set
forth in the legend thereon as a
consequence of the offer or sale of the
Initial Notes pursuant to exemptions from,
or in transactions not subject to, the
registration requirements of the Securities
Act and applicable state securities laws.
In general, the Initial Notes may not be
offered or sold unless registered under the
Securities Act and applicable state
securities laws, except pursuant to an
- --------------------------------------------------------------------------------
8
<PAGE>
- --------------------------------------------------------------------------------
exemption from, or in a transaction not
subject to, the Securities Act and
applicable state securities laws. The
Company does not intend to register the
Initial Notes under the Securities Act and,
after consummation of the Exchange Offer,
will not be obligated to do so.
Resales: Based on an interpretation by the staff of
the Commission set forth in no-action
letters issued to third parties, the
Company believes that Exchange Notes issued
pursuant to the Exchange Offer in exchange
for Initial Notes may be offered for
resale, resold and otherwise transferred by
Holders thereof (other than any such Holder
which is an "affiliate" of the Company
within the meaning of Rule 405 under the
Securities Act) without compliance with the
registration and prospectus delivery
provisions of the Securities Act, provided
that such Exchange Notes are acquired in
the ordinary course of such Holders'
business, such Holders have no arrangement
or understanding with any person to
participate in the distribution of such
Exchange Notes and neither such Holders nor
any such other person is engaging in or
intends to engage in a distribution of such
Exchange Notes. Each broker-dealer that
receives Exchange Notes for its own account
in exchange for Initial Notes, where such
Initial Notes were acquired by such
broker-dealer as a result of market-making
or other activities, must acknowledge that
it will deliver a prospectus in connection
with any sale of such Exchange Notes. Any
broker-dealer that participates in a
distribution of the Exchange Notes may not
participate in the Exchange Offer and will
be deemed to be an underwriter for purposes
of the Securities Act. Any Holder who is an
affiliate of the Company or who uses the
Exchange Offer to participate in a
distribution of the Exchange Notes to be
acquired in the Exchange Offer may not rely
on such interpretation by the staff of the
Commission and must comply with the
registration and prospectus delivery
requirements of the Securities Act in
connection with any resales of such
Exchange Notes. See "Plan of Distribution."
- --------------------------------------------------------------------------------
9
<PAGE>
- --------------------------------------------------------------------------------
Terms of the Notes
The Exchange Offer applies to all $90,000,000 aggregate principal amount of
the Initial Notes. The form and terms of the Exchange Notes are the same as the
form and terms of the Initial Notes, except that the Exchange Notes have been
registered under the Securities Act and, therefore, will not bear legends
restricting the transfer thereof. The Exchange Notes will evidence the same debt
as the Initial Notes and will be entitled to the benefits of the Indenture. See
"Description of Notes."
Securities Offered: $90,000,000 principal amount of 11% Senior
Subordinated Notes due 2007.
Maturity Date: January 15, 2007.
Interest Payment Dates: January 15 and July 15, commencing July 15,
1997.
Optional Redemption: The Notes are redeemable at the option of
the Company, in whole or in part, at any
time on or after January 15, 2002 at the
redemption prices set forth herein, plus
accrued and unpaid interest and Liquidated
Damages, if any, thereon to the date of
redemption. In addition, at any time prior
to January 15, 2000, the Company may, in
its discretion, 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 (as defined); provided
that at least 66-2/3% of the original
principal amount of the Notes remains
outstanding immediately after each such
redemption.
Sinking Fund: None.
Change of Control: 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. There can
be no assurance that the Company will have
the financial resources necessary to repay
its obligations under the Bank Credit
Facility and to purchase the Notes upon a
Change of Control. See "Risk Factors -
Payment for Notes Upon a Change of Control"
and "Description of the Bank Credit
Facility."
Certain Covenants: The Indenture contains certain covenants
that, among other things, limit the ability
of the Company and its restricted
subsidiaries to (i) incur additional
indebtedness and issue preferred stock,
(ii) pay dividends or make certain other
restricted payments, (iii) enter into
transactions with affiliates, (iv) create
certain liens, (v) make certain asset
dispositions and (vi) merge or consolidate
with, or transfer substantially all of its
assets to, another person. In addition, the
Company is obligated, under certain
circumstances, to offer to repurchase Notes
at a purchase price equal to 100% of the
principal amount thereof, plus accrued and
unpaid interest, if any, to the date of
purchase, with the net cash proceeds of
certain sales or other dispositions of
assets. See "Description of
Notes--Covenants."
- --------------------------------------------------------------------------------
10
<PAGE>
- --------------------------------------------------------------------------------
Summary Pro Forma Combined Financial and Other Data
The following table presents summary unaudited pro forma combined financial
and other data and should be read in conjunction with the financial statements
of ArtCarved and the financial statements of Balfour and the respective related
notes thereto, the "Unaudited Pro Forma Combined Financial Statements and Other
Data" and the notes thereto and "Management's Discussions and Analysis of
Financial Condition and Results of Operations" included elsewhere herein. The
pro forma combined balance sheet was prepared as if the Transactions had
occurred on November 30, 1996, and the unaudited pro forma combined statements
of income and other data were prepared as if the Transactions occurred on August
27, 1995. The summary pro forma combined financial and other data assume the
consummation of the Acquisitions and the financing thereof. The summary pro
forma combined financial and other data do not purport to be indicative of the
financial position or results of operations that would have been reported had
the Transactions been effected on the dates indicated, or that may be reported
in the future. The summary pro forma combined financial and other data are based
on the estimated Adjusted Working Capital and Balfour Gold balance on the date
of closing. However, the final calculation of the Adjusted Working Capital and
Balfour Gold balance at closing and the resulting purchase prices for each of
ArtCarved, Balfour and Balfour Gold may differ from the estimates assumed below.
The summary pro forma combined financial statements and other data reflect
the fact that CBI did not purchase certain Balfour facilities but instead will
relocate the Balfour jewelry manufacturing operations and related sales, general
and administrative functions to existing ArtCarved facilities in Austin, Texas.
Consequently, the pro forma adjustments reflect the realization of $4.3 million
of the Annual Cost Savings relating to the elimination of duplicative personnel,
occupancy and fixed overhead costs resulting from the closure of these Balfour
facilities. However, the pro forma adjustments do not reflect $3.1 million of
the Annual Cost Savings resulting from lower prevailing wage rates in Austin,
Texas and the elimination of other duplicative costs. The pro forma adjustments
related to the Annual Cost Savings described above do not reflect non-recurring
severance and relocation costs of approximately $5.5 million and incremental
capital expenditures of approximately $1.9 million, each related to the
Combination.
The Company has begun the consolidation of the Company's operations to
Austin, Texas, and Management expects that the consolidation will be completed
during the fiscal year ending August 30, 1997. Management expects that a portion
of the Annual Cost Savings will be realized during the fiscal year ending August
30, 1997 and that all of such savings will be realized during the fiscal year
ending August 29, 1998. There can be no assurance that the Company will complete
its consolidation by the end of its fiscal year ending August 30, 1997 or that
the Annual Cost Savings will be realized by the end of its fiscal year ending
August 29, 1998, or at all.
<TABLE>
<CAPTION>
Twelve Months Ended Three Months Ended
August 31, 1996 November 30, 1996
------------------------- -------------------
(Dollars in thousands, except ratios)
<S> <C> <C>
Statement of Income Data:
Net sales.............................................. $142,062 $41,498
Gross profit........................................... 77,105 23,745
Selling, general and administrative expenses........... 60,340 18,088
Operating income ...................................... 16,765 5,657
Interest expense, net.................................. 13,739 3,435
Net income ............................................ 1,785 1,311
</TABLE>
- --------------------------------------------------------------------------------
11
<PAGE>
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Twelve Months Ended Three Months Ended
August 31, 1996 November 30, 1996
--------------------------- -------------------
(Dollars in thousands, except ratios)
<S> <C> <C>
Other Data:
EBITDA(1)(2)........................................... $22,832 $7,174
Depreciation and amortization.......................... 6,067 1,517
Capital expenditures(3)................................ 1,480 370
Ratio of EBITDA to cash interest expense(4)............ 1.7x 2.2x
Balance Sheet Data (at end of period):
Total assets........................................... $206,399
Total debt............................................. 126,201
Stockholders' equity................................... 50,000
</TABLE>
(1) 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 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.
(2) The summary pro forma combined financial and other data and pro forma
combined EBITDA do not give effect to $3.1 million of the Annual Cost
Savings, $2.4 million of which are related to lower prevailing wage rates
in Austin, Texas and $0.7 million of which are related to other duplicative
costs resulting from the closure of the Balfour facilities and the
consolidation of Balfour's operations into existing ArtCarved operations in
Austin, Texas. The effect of the additional $3.1 million of the Annual Cost
Savings on the pro forma combined EBITDA results in an adjusted pro forma
combined EBITDA of $25.9 million and $8.0 million for the twelve months
ended August 31, 1996, and the three months ended November 30, 1996,
respectively. Thus, the ratio of adjusted pro forma combined EBITDA to cash
interest expense is 2.0x(4) and 2.4x(4)(5) for the twelve months ended
August 31, 1996, and the three months ended November 30, 1996,
respectively.
(3) The pro forma combined capital expenditure level is not indicative of the
expected capital expenditure level for the Company's fiscal year ending
August 30, 1997. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Seasonality, Liquidity and Capital
Resources."
(4) Cash interest expense represents pro forma combined interest less
amortization of capitalized financing fees.
(5) Ratios for the three months ended November 30, 1996 are not indicative of
the full year results due to the seasonal nature of the business.
- --------------------------------------------------------------------------------
12
<PAGE>
- --------------------------------------------------------------------------------
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 elsewhere herein. The
following information with respect to ArtCarved as of and for the years ended
August 27, 1994; August 26, 1995; and August 31, 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
November 13, 1996 included elsewhere herein. The ArtCarved data as of August 31,
1993 are derived from the audited financial statements of ArtCarved, which have
been audited by Arthur Andersen LLP and are not included herein. The ArtCarved
data as of August 31, 1992 and the three months ended on, and as of, November
25, 1995 and November 30, 1996 are derived from the unaudited financial
statements of ArtCarved. In Management's opinion, the unaudited interim
financial statements reflect all adjustments (consisting only of normal
recurring adjustments) necessary for a fair presentation of the interim periods
presented. The results for the three months ended November 30, 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>
<CAPTION>
Three Months
Fiscal Year Ended(1) Ended(1)
------------------------------------------------------ ------------------
Aug. 31, Aug. 31, Aug. 27, Aug. 26, Aug. 31, Nov. 25, Nov. 30,
1992 1993 1994 1995 1996 1995 1996
---------- --------- ---------- --------- --------- -------- --------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Statement of Income Data:
Net sales.............................. $ 63,847 $ 63,955 $ 69,820 $ 71,994 $ 70,671 $ 21,923 $ 21,963
Cost of sales.......................... 26,993 25,290 30,572 32,879 32,655 9,209 9,626
---------- --------- ---------- --------- --------- -------- --------
Gross profit........................... 36,854 38,665 39,248 39,115 38,016 12,714 12,337
Selling, general and administrative 26,920 27,016 26,618 28,224 27,940 8,484 8,110
expenses...............................
Restructuring charges(2)............... -- -- -- 3,244 -- -- --
---------- --------- ---------- --------- --------- -------- --------
Operating income....................... $ 9,934 $ 11,649 $ 12,630 $ 7,647 $ 10,076 $ 4,230 $ 4,227
========== ========= ========== ========= ========= ======== ========
Other Data:
EBITDA(3).............................. $ 15,548 $ 17,046 $ 17,324 $ 16,505 $15,091 $5,494 $5,691
Depreciation and amortization.......... 5,614 5,397 4,694 5,614 5,015 1,264 1,464
Capital expenditures(4)................ 862 1,344 1,186 1,120 844 420 182
Cash flows provided by (used in):
Operating activities 8,678 10,948 11,132 (3,164) 1,663 (513) 1,083
Investing activities (925) (1,344) (1,186) (1,120) (844) (52) (182)
Financing activities (5,753) (9,604) (9,946) 4,284 (819) 565 3,555
Ratio of earnings to fixed charges(5) -- -- 1.1x -- -- 1.3x 1.6x
Balance Sheet Data (at end of period):
Total assets........................... $ 79,698 $ 76,008 $ 78,900 $ 75,955 $74,542 $83,393
Total long-term debt(6)................ 107,783 98,485 98,728 99,900 91,221 80,144
Advances in equity (deficit)(6)........ (32,989) (27,931) (51,504) (53,186) (28,524) (7,909)
</TABLE>
- ----------
(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 intends to use 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 include
all of CJC's debt and related interest expense, and therefore all of the
restructuring charges are allocated to ArtCarved assets.
(3) 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
- --------------------------------------------------------------------------------
13
<PAGE>
- --------------------------------------------------------------------------------
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.
(4) Historical capital expenditure levels are not necessarily indicative of the
expected capital expenditure level for the Company's fiscal year ending
August 30, 1997. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Seasonality, Liquidity and Capital
Resources."
(5) For the purpose of computing this ratio, earnings consist of income (loss)
before taxes on income and fixed charges. Fixed charges consist of interest
expense, capitalized interest, amortization of deferred debt issuance cost
and a portion of rental expenses. For the fiscal years ended August 31,
1992; August 31, 1993; August 26, 1995 and August 31, 1996, earnings before
fixed charges were insufficient to cover fixed charges by approximately
$3.2 million, $0.7 million, $6.0 million and $1.8 million, respectively.
(6) The changes in total long-term debt and advances in equity (deficit) from
August 31, 1996 to November 30, 1996 are due to the sale of CJC's
non-ArtCarved operations.
- --------------------------------------------------------------------------------
14
<PAGE>
- --------------------------------------------------------------------------------
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 elsewhere herein. The
following information with respect to Balfour as of and for the years ended
February 27, 1994; February 26, 1995; and February 25, 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 September 30, 1996 included elsewhere herein. The following
information with respect to Balfour as of and for the years ended February 29,
1992 and February 28, 1993 and the nine months ended on, and as of, November 26,
1995 and November 24, 1996 has been derived from the unaudited financial
statements of Balfour. In Management's opinion, the data as of and for the years
ended February 29, 1992 and February 28, 1993 and the nine months ended on, and
as of, November 26, 1995 and November 24, 1996 reflect all adjustments
(consisting of normal recurring adjustments) necessary for a fair presentation.
The results for the nine months ended November 24, 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.
<TABLE>
<CAPTION>
Fiscal Year Ended (1) Nine Months Ended(1)
----------------------------------------------------- ------------------
Feb 29, Feb. 28, Feb. 27, Feb. 26, Feb. 25, Nov. 26, Nov. 24,
1992 1993 1994 1995 1996 1995 1996
-------- -------- -------- -------- -------- ------- -------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Statement of Income Data:
Net sales........................ $ 91,681 $ 83,938 $ 85,304 $ 77,491 $ 71,300 $53,413 $55,521
Cost of sales.................... 55,607 47,130 35,860 35,406 35,598 27,160 27,021
-------- -------- -------- -------- -------- ------- -------
Gross profit..................... 36,074 36,808 49,444 42,085 35,702 26,253 28,500
Selling, general and administrative
expenses...................... 42,481 43,856 43,350 51,743 33,496 25,831 27,910
Restructuring charge(2).......... -- 14,500 -- -- -- -- --
-------- -------- -------- -------- -------- ------- -------
Operating income (loss).......... $ (6,407) $(21,548) $ 6,094 $ (9,658) $ 2,206 $ 422 $ 590
======== ======== ======== ======== ======== ======= =======
Other Data:
EBITDA(3)........................ $ (3,376) $ (3,983) $ 7,993 $ (7,680) $ 4,232 $ 1,970 $ 2,050
Depreciation and amortization.... 3,031 3,065 1,899 1,978 2,026 1,548 1,460
Capital expenditures(4).......... 620 826 1,820 1,274 530 320 252
Adjusted net sales(5)............ 59,600 56,315 61,784 64,891 70,111 52,537 54,672
Cash flows provided by (used in):
Operating activities -- -- (2,413) (7,077) 1,604 (5,828) (6,390)
Investing activities -- -- (1,807) (1,209) 421 631 188
Financing activities -- -- 4,245 8,286 (1,970) 5,201 6,181
Ratio of earnings to fixed -- -- 4.3x -- 1.0x -- --
charges(6)
Balance Sheet Data
(at end of period):
Total assets..................... $ 70,086 $ 44,795 $ 47,989 $ 45,236 $ 42,563 $ 45,050
Total long-term debt(7).......... 66,924 1,801 6,136 15,136 13,166 19,405
Stockholders' equity (deficit)... (20,127) 20,278 24,966 14,024 13,888 12,602
</TABLE>
- ----------
(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, Balfour's management
believes these amounts are not significant for the periods presented.
(2) For the fiscal year ended February 28, 1993, Balfour's management decided
to make changes with respect to certain of its operations. As a result of
this decision, Balfour sold or disposed of certain inventory and equipment
no longer considered necessary to its modified business and recorded a
restructuring charge associated with such disposal of assets.
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(3) 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.
(4) Historical capital expenditure levels are not necessarily indicative of the
expected capital expenditure level for the Company's fiscal year ending
August 30, 1997. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Seasonality, Liquidity and Capital
Resources."
(5) 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. See footnote (6) of "Selected Historical
Financial and Other Data--Balfour."
(6) For the purpose of computing this ratio, earnings consist of income (loss)
before taxes on income and fixed charges. Fixed charges consist of interest
expense, capitalized interest, amortization of deferred debt issuance cost
and a portion of rental expenses. For the fiscal years ended February 29,
1992; February 28, 1993 and February 26, 1995, Balfour's earnings before
fixed charges were insufficient to cover fixed charges by $15.9 million,
$31.3 million and $10.9 million, respectively. For the nine months ended
November 26, 1995 and November 24, 1996, Balfour's earnings before fixed
charges were insufficient to cover fixed charges by $1.0 million and $1.2
million, respectively.
(7) The change in total long-term debt from February 25, 1996 to November 24,
1996 is due to the seasonal nature of Balfour's operations.
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RISK FACTORS
In addition to the other information contained in this Prospectus, before
tendering their Initial Notes for the Exchange Notes offered hereby, Holders of
the Initial Notes should review carefully the specific considerations set forth
below:
Substantial Leverage and Debt Service
The Company incurred substantial indebtedness in connection with the
acquisitions of the businesses and operations of ArtCarved and Balfour. As of
December 16, 1996, the Company's pro forma total indebtedness and stockholders'
equity were $126.2 million and $50.0 million, respectively. The Company's sales
tend to be seasonal, with peak borrowings under the Company's Bank Credit
Facility expected to occur during the months of October through December. See
"--Seasonality" and "Management's Discussion and Analysis of Financial Condition
and Results of Operations--Seasonality, Liquidity and Capital Resources."
The Company's ability to meet its debt service obligations and to reduce
its total debt will depend upon its future performance, which, in turn, is
subject to general economic conditions, particularly in the scholastic products
market and the recognition and affinity products market, and to financial,
business and other factors affecting the operations of the Company, many of
which are beyond its control. There can be no assurance that the Company's
business will generate adequate cash flow to meet the Company's requirements for
working capital expenditures, interest payments and scheduled principal
payments, that the Company will be able to borrow sufficient funds under its
Revolving Credit and Gold Facilities or that the anticipated Annual Cost Savings
will be realized. See "-- Realization of Estimated Cost Savings." If the Company
is unable to generate sufficient cash flow from operations or to borrow
sufficient funds in the future to service its debt, it may be required to sell
assets, reduce capital expenditures, refinance all or a portion of its existing
debt (including the Notes) or obtain additional financing. There can be no
assurance that any such refinancing would be possible or that any additional
financing could be obtained, particularly in view of the Company's high level of
debt, the restrictions on the Company's ability to incur additional debt under
the Bank Credit Facility and the Indenture, and the fact that substantially all
of the Company's assets will be pledged to secure obligations under the Bank
Credit Facility.
The degree to which the Company is leveraged could have important
consequences to holders of the Notes, including that: (i) the Company's ability
to obtain additional financing for working capital, capital expenditures,
acquisitions or other purposes, may be impaired; (ii) a substantial portion of
the Company's cash flow from operations must be dedicated to the payment of
principal and interest on indebtedness; and (iii) the Company's leverage may
make it more vulnerable to industry-related or general economic downturns and
may limit its ability to withstand competitive pressures. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
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Inability to Successfully Integrate Operations
The integration of the administrative, finance and manufacturing operations
of ArtCarved and Balfour, the coordination of each company's sales and marketing
organizations and implementation of appropriate operational, financial and
management systems and controls will require substantial attention from the
newly-integrated management team and will result in the diversion of management
attention from managing the Company's core businesses. Any inability of the
Company to integrate these companies successfully in a timely and efficient
manner could have an adverse effect on the Company's financial position or
results of operations. There can be no assurance that the post-acquisition
strategy will be implemented successfully or on a timely basis or that it will
not require unanticipated costs in its implementation.
Failure to Realize Estimated Cost Savings
The Company's post-acquisition strategy is premised upon realizing
substantial cost savings from the integration of the operations of ArtCarved and
Balfour. Management's estimates of cost savings are based upon a number of
assumptions and are subject to significant business, economic and competitive
uncertainties and contingencies, many of which are beyond the control of the
Company. Actual results may vary from Management's estimated cost savings and
such variations may be material.
Competition
The Company's businesses are highly competitive, with the Company facing
competition in each of its product lines. In the scholastic products business,
there are three national competitors, including the Company, in the sale of both
class rings and fine paper products, one additional national competitor in the
sale of class rings, and several additional national competitors in the sale of
fine paper products. In addition, in the scholastic products business the
Company faces several regional competitors, which have been successful in the
past at taking market share from the national competitors (including ArtCarved
and Balfour). The Company's recognition and affinity products compete with those
produced and sold by a broad range of companies, including certain of the
Company's competitors in the scholastic product line and certain other regional
and local companies. The Company's ability to compete in the high school
in-school market depends on its ability to recruit and maintain a high quality
sales force. There can be no assurance that the Company will be able to maintain
its sales force or to continue to compete successfully with other competitors,
some of which may have greater resources, including financial resources, than
the Company. See "Business--Competition."
Declining Demand and Potential Loss of Customers
Management believes that the percentage of high school graduates who
purchase high school class rings has declined for a period of at least five
years. In addition, the Company's volume of high school class rings sold during
this time has declined, and Management believes that the Company's market share
has declined as well. There can be no assurance that such trends will not
continue or that the Company will not experience similar trends in the college
market for class rings. See "Business--Industry."
In addition, a significant portion of the Company's business activity is
with independent and chain jewelry retailers and mass merchants, many of which
are not only subject to the risks generally associated with the effects of an
economic downturn on retailers of discretionary, consumer goods, but also tend
to be highly leveraged. Over the past several years, mass merchants have
accounted for a growing portion of the Company's sales. The Company does not
have exclusive arrangements with these mass merchants and would be adversely
affected if it were no longer able to market its products through such mass
merchants.
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The Company has sold college rings primarily through on-campus bookstores,
most of which also offer class ring products distributed by one or more of the
Company's major competitors, and, to a lesser extent, through local bookstores.
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 Follet Corporation,
which together dominate that industry. If either the colleges or universities or
these bookstores were to grant exclusive rights to one of the Company's
competitors, or if for any other reason the Company were unable to continue
selling its products through these bookstores, the Company's business could be
adversely affected. If the schools or the operators of college on-campus
bookstores were to grant exclusive rights to the Company's competitors, in order
to maintain its college class ring sales the Company would be required to
establish successfully alternative channels, such as direct marketing,
off-campus bookstores and retail jewelry stores, for the distribution of class
rings at colleges serviced by such bookstores.
Subordination and Ranking of the Notes
The Notes are general unsecured obligations of the Company and are
subordinated in right of payment to all existing and future Senior Indebtedness
of the Company, including all indebtedness under the Bank Credit Facility. By
reason of such subordination, in the event of the insolvency, liquidation,
reorganization, dissolution or other winding-up of the Company, the Senior
Indebtedness must be paid in full before the principal of, premium, if any, and
interest or Liquidated Damages (if any) on, the Notes may be paid. As of
December 16, 1996, the Company had approximately $36.2 million of Senior
Indebtedness (exclusive of an unused commitment of up to $23.8 million under the
Bank Credit Facility). The Indenture under which the Notes are issued permits
the Company to incur additional Senior Indebtedness if certain conditions are
met. See "Capitalization," "Description of the Bank Credit Facility" and
"Description of Notes--Certain Covenants."
The Company may not pay principal of, premium, if any, or interest or
Liquidated Damages (if any) on, the Notes, or repurchase, redeem or otherwise
retire the Notes if any Senior Indebtedness is not paid when due or any default
on Senior Indebtedness occurs and the maturity of such Senior Indebtedness is
accelerated in accordance with its terms unless, in either case, the default has
been cured or waived, any such acceleration has been rescinded or such Senior
Indebtedness has been paid in full, except that the Company may make payments
with respect to the Notes with the approval of certain holders of the Senior
Indebtedness. Upon any payment or distribution of assets of the Company upon a
total or partial liquidation, dissolution, reorganization or similar proceeding,
the holders of Senior Indebtedness will be entitled to receive payment in cash
or cash equivalents in full before the holders of the Notes are entitled to
receive any payment. Accordingly, there may be insufficient assets remaining
after such payments to pay principal of, or interest or Liquidated Damages (if
any) on, the Notes. See "Description of Notes--Subordination."
The Indenture contemplates that the Company may, during the term of Notes,
conduct its business through one or more subsidiaries. Except as otherwise
provided in the Indenture, such subsidiaries may not incur indebtedness. Except
to the extent that the Company may itself be a trade creditor with recognized
claims against its subsidiaries, the claims of creditors of such subsidiaries,
including trade creditors, will have priority over the Company with respect to
the assets and earnings of such subsidiaries. Therefore, the Notes will be
effectively subordinated to all indebtedness incurred by subsidiaries of the
Company, even though such indebtedness is not Senior Indebtedness.
Restrictive Covenants
The Indenture contains covenants that restrict, among other things, the
ability of the Company to incur additional indebtedness, pay dividends or make
certain other Restricted Payments (as defined therein), enter into transactions
with affiliates, allow its subsidiaries to make certain payments, create certain
liens, make certain asset dispositions and merge or consolidate with, or
transfer substantially all of its assets to, another person, or engage in
certain change of control transactions. In addition, the Bank Credit Facility
contains other and more restrictive covenants and prohibits the Company from
prepaying certain of its indebtedness, including the Notes. Under the Bank
Credit Facility, the Company is also required to maintain specified financial
ratios, including maintaining specified Minimum Interest Coverage, Maximum
Senior Debt to EBITDA ratios, and Minimum EBITDA (each as
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<PAGE>
defined in the Bank Credit Facility). The failure by the Company to maintain
such financial ratios or to comply with the restrictions contained in the Bank
Credit Facility or the Indenture could result in a default thereunder, which in
turn could cause such indebtedness (and by reason of cross-default provisions,
other indebtedness) to become immediately due and payable. No assurance can be
given that the Company's future operating results will be sufficient to enable
compliance with such covenants, or in the event of default, to remedy such
default. See "Description of the Bank Credit Facility" and "Description of
Notes--Certain Covenants."
Seasonality
The Company's scholastic product sales tend to be seasonal. Class ring
sales (and therefore the Company's borrowing needs) are highest during October
through December and fine paper sales are highest during February through April.
Management does not expect sales of the Company's recognition and affinity
products to be seasonal in any material respect. The Company has historically
experienced operating losses during the summer months, and its working capital
requirements tend to exceed its operating cash flows from July through December.
The Company's ability to draw down funds under the Bank Credit Facility to meet
its borrowing needs during this period will be subject to certain financial
coverage tests. There can be no assurance that the Company will be able to
borrow sufficient funds under the Bank Credit Facility to meet its borrowing
needs during this period. See "Description of the Bank Credit Facility." See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Seasonality, Liquidity and Capital Resources."
Dependence on Single Supplier; Fluctuations in Prices of Raw Materials
The Company purchases substantially all synthetic and semiprecious stones
from a single supplier, located in Germany, which supplies 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. See "Business--Raw
Materials." Gold also constitutes a significant raw material for the Company's
operations. There can be no assurance that the Company would not be adversely
affected by fluctuations in the price of gold. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Raw Material Price
Fluctuations."
Inability to Pay for Notes Upon a Change of Control
The Indenture provides that, upon the occurrence of a Change of Control (as
defined therein), the Company will be required to make an offer to purchase all
of the Notes issued and then outstanding under the Indenture at a purchase price
equal to 101% of the principal amount thereof plus accrued and unpaid interest
and Liquidated Damages (if any) thereon to the date of purchase. Any Change of
Control under the Indenture would constitute a default under the Bank Credit
Facility. Therefore, upon the occurrence of a Change in Control, the lenders
under the Bank Credit Facility would have the right to accelerate their loan and
the holders of the Notes would have the right to require the Company to purchase
their Notes. Upon such event, such lenders would be entitled to receive payment
of all outstanding obligations under the Bank Credit Facility before the Company
may purchase any of the Notes tendered pursuant to such an offer. See
"Description of the Bank Credit Facility." If a Change of Control were to occur,
it is unlikely that the Company would be able to repay all of its obligations
under the Bank Credit Facility and the Notes, unless it could obtain alternate
financing. There can be no assurance that the Company would be able to obtain
any such financing on commercially reasonable terms or at all, and consequently
no assurance can be given that the Company would be able to purchase any of the
Notes tendered pursuant to such an offer.
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Voting Control of the Company
The Castle Harlan Group owns and controls 100% of the Company's outstanding
voting stock. Accordingly, it has the ability to elect the entire Board of
Directors of the Company and, in general, to determine the outcome of any other
matter submitted to stockholders for their approval, including the power to
determine the outcome of all corporate transactions, such as mergers,
consolidations, and the sale of all or substantially all of the assets of the
Company. See "Principal Stockholders."
Fraudulent Transfer
The Company's obligations under the Notes may be subject to review under
federal or state fraudulent transfer laws if the Company becomes a debtor in a
subsequent bankruptcy case or otherwise has financial difficulties. In that
event, if a court in a lawsuit by an unpaid creditor or by a representative of
creditors (such as a trustee in a bankruptcy or a debtor-in-possession) were to
find that the Company received less than fair consideration or reasonably
equivalent value for incurring the indebtedness represented by the Notes and (i)
was insolvent, (ii) was rendered insolvent by reason of such transaction, (iii)
was engaged in a business or transaction, or was about to be engaged in a
business or transaction, for which its remaining assets constituted unreasonably
small capital, or (iv) intended to incur, or believed or reasonably should have
believed that it would incur, debts beyond its ability to pay such debts as they
matured, such court could void the Company's obligations under the Notes and
direct the return of any amounts paid thereunder to the Company or to a fund for
the benefit of its creditors. The measure of insolvency for purposes of the
foregoing will vary depending upon the law of the jurisdiction being applied.
There can be no assurance as to what standard a court would apply in making such
determinations or whether a court would find that the Company received fair
consideration or reasonably equivalent value for incurring the indebtedness
represented by the Notes or was insolvent, or rendered insolvent by reason of
the transaction, or whether the Company had sufficient capital for the business
in which it is engaged and did not incur debts beyond its ability to pay such
debts as they mature. In addition, if either of the prior owners of ArtCarved or
Balfour were to become a debtor in a subsequent bankruptcy case or otherwise
were to have financial difficulties, a court might review the applicable
Acquisition under Federal or state fraudulent transfer laws and could apply a
similar analysis with respect to such Acquisition and such court could void the
prior owners' obligations under the ArtCarved Purchase Agreement or Balfour
Purchase Agreement, as the case may be. There can be no assurance as to what
standard a court would apply in making such determinations or whether a court
would agree with such assessments. See "--Substantial Leverage and Debt Service"
above.
Consequences Of Exchange And Failure To Exchange
Holders of Original Notes who do not exchange their Initial Notes for
Exchange Notes pursuant to the Exchange Offer will continue to be subject to the
restrictions on transfer of such Initial Notes as set forth in the legend
thereon as a consequence of the issuance of the Initial Notes pursuant to
exemptions from, or in transactions not subject to, the registration
requirements of the Securities Act and applicable state securities laws. In
general, the Initial Notes may not be offered or sold, unless registered under
the Securities Act and applicable state securities laws, or pursuant to an
exemption therefrom. Except under certain limited circumstances, the Company
does not intend to register the Initial Notes under the Securities Act. In
addition, any holder of Initial Notes who tenders in the Exchange Offer for the
purpose of participating in a distribution of the Exchange Notes may be deemed
to have received restricted securities and, if so, will be required to comply
with the registration and prospectus delivery requirements of the Securities Act
in connection with any resale transaction. To the extent Initial Notes are
tendered and accepted in the Exchange Offer, the trading market, if any, for the
Initial Notes could be adversely affected. See "The Exchange Offer" and
"Description of Notes -- Registration Rights; Liquidated Damages."
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Absence Of A Public Market For The Notes; Price Volatility
The Exchange Notes are new securities for which there is currently no
market. The Company does not intend to apply for listing of the Exchange Notes
on any securities exchange or for the inclusion of the Exchange Notes in any
automated quotation system and there can be no assurance as to the development
or liquidity of any market for the Exchange Notes. If a market for the Exchange
Notes were to develop, the Exchange Notes could trade at prices that may be
higher or lower than their initial offering price depending upon many factors,
including prevailing interest rates, the Company's operating results and the
markets for similar securities. Historically, the market for non-investment
grade debt has been subject to disruptions that have caused substantial
volatility in the prices of securities similar to the Exchange Notes. There can
be no assurance that, if a market for the Exchange Notes were to develop, such a
market would not be subject to similar disruptions.
Ability of the Company to Effect Transactions That Could Adversely Affect
Holders
The Indenture contains numerous covenants that restrict the Company's
ability, among other things, to incur additional debt, create liens, merge with
or into other corporations, make certain investments and make certain dividends
and other payments and require that the Company offer to repurchase the Notes
upon a Change in Control (as defined in the Indenture) or in connection with
certain Asset Sales (as defined in the Indenture). Such covenants and repurchase
obligations are the result of negotiations between the Company and the Initial
Purchasers. See "Description of Notes - Repurchases at the Option of the
Holders" and "Description of Notes - Certain Covenants." Subject to compliance
with the foregoing limitations contained in the Indenture and to the
restrictions under the Bank Credit Facility (see "Descriptions of the Bank
Credit Facility"), however, the Company is not prohibited by the terms of the
Indenture from entering into certain transactions, including acquisitions,
refinancings, recapitalizations or other highly-leveraged transactions, which
could adversely affect Holders by increasing the indebtedness of the Company,
some or all of which may be senior to the Notes, or otherwise adversely
affecting the Company's capital structure and credit ratings.
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USE OF PROCEEDS
There will be no proceeds to the Company from any exchange pursuant to
the Exchange Offer. The net proceeds to the Company (after discounts,
commissions and estimated fees and expenses in an aggregate amount of
approximately $3.8 million related to the Initial Offering) from the sale of the
Initial Notes in the Initial Offering were approximately $86.2 million. Such
proceeds, together with the proceeds of the Bank Credit Facility and proceeds
from the Castle Harlan Investment, were used to pay (i) the ArtCarved Purchase
Price, (ii) the Balfour Purchase Price, (iii) the Balfour Gold Purchase Price,
(iv) the fees and expenses incurred in connection with the Transactions, and (v)
the ongoing working capital requirements of the Company. See "The Acquisitions"
and "Description of the Bank Credit Facility."
THE EXCHANGE OFFER
Purpose of the Exchange Offer
The Initial Notes were originally issued and sold on December 16, 1996 in
the Initial Offering. The Initial Offering was not registered under the
Securities Act in reliance upon the exemptions provided by Section 4(2) of the
Securities Act, and Rule 144A, Regulation D and Regulation S under the
Securities Act. In connection with the sale of the Initial Notes, the Company
agreed to use best efforts to file with the Commission a registration statement
relating to an exchange offer (the "Exchange Offer Registration Statement")
pursuant to which a new series of senior subordinated notes of the Company
covered by such Exchange Offer Registration Statement and containing terms
identical in all material respects to the terms of the Initial Notes would be
offered in exchange for Initial Notes tendered at the option of the Holders
thereof or, if applicable interpretations of the staff of the Commission did not
permit the Company to effect such an exchange offer (after the Company complies
with certain procedures set forth in the Registration Rights Agreement relating
to seeking a favorable decision from the Commission allowing the Company to
effect such registration), or, if any Holder of Initial Notes that is a
"qualified institutional buyer" (as defined in Rule 144A under the Securities
Act) or an "accredited investor" (as defined in Rule 501 (A)(1), (2), (3) or (7)
under the Securities Act) shall notify the Company within 20 business days after
the Exchange Offer is consummated (A) that such Holder is prohibited by
applicable law or Commission policy from participating in the Exchange Offer or
(B) that such Holder may not resell the Exchange Notes acquired by it in the
Exchange Offer to the public without delivering a prospectus and that the
Prospectus contained in this Registration Statement is not appropriate or
available for such resales by such Holder or (C) that such Holder is a
Broker-Dealer and holds Notes acquired directly from the Company or one of its
affiliates, then the Company agreed, at its cost, to use its best efforts to
file a shelf registration statement covering resales of the Initial Notes (the
"Shelf Registration Statement") and use its best efforts to have such Shelf
Registration Statement declared effective and kept effective for a period of
three years from the effective date thereof.
The purpose of the Exchange Offer is to fulfill certain obligations of the
Company under the Registration Rights Agreement. Except as provided under "Plan
of Distribution" with respect to certain broker-dealers, this Prospectus may not
be used by any Holder of the Exchange Notes to satisfy the registration and
delivery requirements under the Securities Act that may apply in connection with
any resale of the Initial Notes or the Exchange Notes. See "--Terms of the
Exchange" following the consummation of the Exchange Offer, the Company does not
intend to register any untendered Initial Notes under the Securities Act and
will not be obligated to do so.
Terms of the Exchange
The Company hereby offers to exchange, subject to the conditions set forth
herein and in the Letter of Transmittal accompanying this Prospectus (the
"Letter of Transmittal"), $1,000 in principal amount of Exchange Notes for each
$1,000 in principal amount of the Initial Notes. The terms of the Exchange Notes
are identical in all material respects to the terms of the Initial Notes for
which they may be exchanged pursuant to this Exchange Offer, except that the
Exchange Notes (i) will generally be freely transferable by Holders thereof and
(ii) are not subject to any covenant regarding registration. The Exchange Notes
will evidence the same debt as the Initial Notes and will be entitled to the
benefits of the Indenture. See "Description of Notes."
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The Exchange Offer is not conditioned upon any minimum aggregate principal
amount of the Initial Notes being tendered or accepted for exchange.
The Company has not requested, and does not intend to request, an
interpretation by the staff of the Commission with respect to whether the
Exchange Notes issued pursuant to the Exchange Offer in exchange for the Initial
Notes may be offered for sale, resold or otherwise transferred by Holders
without compliance with the registration and prospectus delivery provisions of
the Securities Act. Instead, based on an interpretation by the staff of the
Commission set forth in a series of no-action letters issued to third parties,
the Company believes that Exchange Notes issued pursuant to the Exchange Offer
in exchange for Initial Notes may be offered for sale, resold and otherwise
transferred by Holders of such Exchange Notes (other than any such Holder which
is an "affiliate" of the Company within the meaning of Rule 405 under the
Securities Act) without compliance with the registration and prospectus delivery
provisions of the Securities Act, provided that such Exchange Notes are acquired
in the ordinary course of such Holders' business, such Holders have no
arrangement or understanding with any person to participate in the distribution
of such Exchange Notes and neither such Holders nor any such other person is
engaging in or intends to engage in a distribution of such Exchange Notes. Since
the Commission has not considered the Exchange Offer in the context of a
no-action letter, there can be no assurance that the staff of the Commission
would make a similar determination with respect to the Exchange Offer. Any
Holder who is an affiliate of the Company or who tenders in the Exchange Offer
for the purpose of participating in a distribution of the Exchange Notes cannot
rely on such interpretation by the staff of the Commission and must comply with
the registration and prospectus delivery requirements of the Securities Act in
connection with any resale transaction. Each Holder, other than a broker-dealer,
must acknowledge that it is not engaged in, and does not intend to engage in, a
distribution of Exchange Notes. Each broker-dealer that receives Exchange Notes
for its own account in exchange for Initial Notes, where such Initial Notes were
acquired by such broker-dealer as a result of market-making activities or other
trading activities, must acknowledge that it will deliver a prospectus in
connection with any resale of such Exchange Notes. See "Plan of Distribution."
The Exchange Notes will bear interest from and including their respective
dates of issuance. Holders whose Initial Notes are accepted for exchange will
receive accrued interest thereon to, but not including, the date of issuance of
the Exchange Notes, such interest to be payable with the first interest payment
on the Exchange Notes, but will not receive any payment in respect of interest
on the Initial Notes accrued after the issuance of the Exchange Notes.
Tendering Holders of the Initial Notes shall not be required to pay
brokerage commissions or fees or, subject to the instructions in the Letter of
Transmittal, transfer taxes with respect to the exchange of the Initial Notes
pursuant to the Exchange Offer.
Expiration Date; Extensions; Termination; Amendments
The Exchange Offer shall expire on the Expiration Date. The term "
Expiration Date" means 5:00 p.m., New York City time, on May 14, 1997,
unless the Company extends the period during which the Exchange Offer is open to
such other date as the Company, in its sole discretion, may determine, in which
event the term "Expiration Date" shall mean the latest time and date on which
the Exchange Offer, as so extended by the Company, shall expire. The Company
reserves the right to extend the Exchange Offer at any time and from time to
time by giving oral or written notice to Marine Midland Bank (the "Exchange
Agent") and by timely public announcement communicated, unless otherwise
required by applicable law or regulation, by making a release to the Dow Jones
News Service. During any extension of the Exchange Offer, all Initial Notes
previously tendered and not withdrawn pursuant to the Exchange Offer will remain
subject to the Exchange Offer.
The term "Exchange Date" means the first business day following the
Expiration Date. The Company expressly reserves the right to (i) terminate the
Exchange Offer and not accept for exchange any Initial Notes if any of the
events set forth below under "Conditions to the Exchange Offer" shall have
occurred and shall not have been waived by the Company and (ii) amend the terms
of the Exchange Offer in any manner which, in its good faith judgment, is
advantageous to the Holders of the Initial Notes, whether before or after any
tender of the Initial Notes.
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Unless the Company terminates the Exchange Offer prior to 5:00 p.m., New York
City time, on the Expiration Date, the Company will exchange the Exchange Notes
for the Initial Notes on the Exchange Date.
Tender Procedure
The tender to the Company of Initial Notes by a Holder thereof pursuant to
one of the procedures set forth below and acceptance by the Company will
constitute an agreement between such Holder and the Company in accordance with
the terms and subject to the conditions set forth herein and in the Letter of
Transmittal. This Prospectus, together with the Letter of Transmittal, will
first be mailed on or about April 15, 1997, to all Holders of Initial
Notes known to the Company and the Exchange Agent.
General. A Holder of an Initial Note may tender the same by (i) properly
completing and signing the Letter of Transmittal or a facsimile thereof (all
references in this Prospectus to the Letter of Transmittal shall be deemed to
include a facsimile thereof) and delivering the same, together with the
certificate or certificates representing the Initial Notes being tendered and
any required signature guarantees and any other documents required by the Letter
of Transmittal, to the Exchange Agent at its address set forth on the Letter of
Transmittal on or prior to the Expiration Date (or complying with the procedure
for book entry transfer described below) or (ii) complying with the guaranteed
delivery procedures described below.
If tendered Initial Notes are registered in the name of the signer of the
Letter of Transmittal and the Exchange Notes to be issued in exchange therefor
are to be issued (and any untendered Initial Notes are to be reissued) in the
name of the registered Holder (which term, for the purposes described herein,
shall include any participant in The Depository Trust Company (also referred to
as a "book-entry transfer facility") whose name appears on a security listing as
the owner of Initial Notes), the signature of such signer need not be
guaranteed. In any other case, the tendered Initial Notes must be endorsed or
accompanied by written instruments of transfer in form satisfactory to the
Company and duly executed by the registered Holder and the signature on the
endorsement or instrument of transfer must be guaranteed by a firm that is a
member of a registered national securities exchange or of the National
Association of Securities Dealers, Inc., or a commercial bank or trust company
having an office or correspondent in the United States, or otherwise eligible
within the meaning of "Eligible Institution" as set forth in Rule 17Ad-15 under
the Securities Exchange Act of 1934, as amended (an "Eligible Institution"). If
the Exchange Notes and/or Initial Notes not exchanged are to be delivered to an
address other than that of the registered Holder appearing on the register for
the Initial Notes, the signature on the Letter of Transmittal must be guaranteed
by an Eligible Institution.
Any beneficial owner whose Initial Notes are registered in the name of a
broker, dealer, commercial bank, trust company or other nominee and who wishes
to tender Initial Notes should contact such holder promptly and instruct such
holder to tender Initial Notes on such beneficial owner's behalf. If such
beneficial owner wishes to tender such Initial Notes himself, such beneficial
owner must, prior to completing and executing the Letter of Transmittal and
delivering such Initial Notes, either make appropriate arrangements to register
ownership of the Initial Notes in such beneficial owner's name or follow the
procedures described in the immediately preceding paragraph. The transfer of
record ownership may take considerable time.
Book-Entry Transfer. The Exchange Agent will make a request promptly after
the date of this Prospectus to establish accounts with respect to the Initial
Notes at the book-entry transfer facility for purposes of facilitating the
Exchange Offer, and subject to the establishment thereof, any financial
institution that is a participant in the book-entry transfer facility's system
may make book-entry delivery of Initial Notes by causing such book-entry
transfer facility to transfer such Initial Notes into the Exchange Agent's
account with respect to the Initial Notes in accordance with the book-entry
transfer facility's procedures for such transfer. Although delivery of Initial
Notes may be effected through book-entry transfer into the Exchange Agent's
accounts at the book-entry transfer facility, an appropriate Letter of
Transmittal with any required signature guarantee and all other required
documents must in each case be transmitted to and received or confirmed by the
Exchange Agent at its address set forth on the Letter of Transmittal on or prior
to the Expiration Date, or, if the guaranteed delivery procedures described
below are complied with, within the time period provided under such procedures.
However, the exchange for the Initial Notes so tendered will only be made after
timely confirmation (a "Book-Entry Confirmation") of such book-entry transfer
25
<PAGE>
of Initial Notes into the Exchange Agent's account, and timely receipt by the
Exchange Agent of an Agent's Message (as defined below) and any other documents
required by the Letter of Transmittal. The term "Agent's Message" means a
message, transmitted by the book-entry transfer facility and received by the
Exchange Agent and forming part of a Book-Entry Confirmation, which states that
the book-entry transfer facility has received an express acknowledgment from a
participant tendering Initial Notes which are the subject of such Book-Entry
Confirmation that such participant has received and agrees to be bound by the
terms of the Letter of Transmittal and that the Company may enforce such
agreement against such participant.
THE METHOD OF DELIVERY OF INITIAL NOTES AND ALL OTHER DOCUMENTS IS AT THE
ELECTION AND RISK OF THE HOLDER. IF SENT BY MAIL, IT IS RECOMMENDED THAT
REGISTERED MAIL, RETURN RECEIPT REQUESTED, BE USED, PROPER INSURANCE OBTAINED,
AND THE MAILING BE MADE SUFFICIENTLY IN ADVANCE OF THE EXPIRATION DATE TO PERMIT
DELIVERY TO THE EXCHANGE AGENT ON OR BEFORE THE EXPIRATION DATE. NO LETTER OF
TRANSMITTAL OR INITIAL NOTES SHOULD BE SENT TO THE COMPANY.
Guaranteed Delivery Procedures. If a Holder desires to accept the Exchange
Offer and time will not permit a Letter of Transmittal or Initial Notes to reach
the Exchange Agent before the Expiration Date or the procedure for book-entry
transfer cannot be completed on a timely basis, a tender may be effected if the
Exchange Agent has received at its office listed on the Letter of Transmittal on
or prior to the Expiration Date a letter, telegram or facsimile transmission
(receipt confirmed by telephone and an original delivered by guaranteed
overnight courier) from an Eligible Institution setting forth the name and
address of the tendering Holder, the names in which the Initial Notes are
registered and, if possible, the certificate numbers of the Initial Notes to be
tendered and stating that the tender is being made thereby and guaranteeing that
within three New York Stock Exchange trading days after the date of execution of
such letter, telegram or facsimile transmission by the Eligible Institution, the
Initial Notes, in proper form for transfer (or a confirmation of book-entry
transfer of such Initial Notes into the Exchange Agent's account at the
book-entry transfer facility), will be delivered by such Eligible Institution
together with a properly completed and duly executed Letter of Transmittal (and
any other required documents). Unless Initial Notes being tendered by the
above-described method are deposited with the Exchange Agent within the time
period set forth above (accompanied or preceded by a properly completed Letter
of Transmittal and any other required documents), the Company may, at its
option, reject the tender. Copies of a Notice of Guaranteed Delivery which may
be used by Eligible Institutions for the purposes described in this paragraph
are available from the Exchange Agent.
A tender will be deemed to have been received as of the date when (i) the
tendering Holder's properly completed and duly signed Letter of Transmittal
accompanied by the Initial Notes (or a confirmation of book-entry transfer of
such Initial Notes into the Exchange Agent's account at the book-entry transfer
facility) is received by the Exchange Agent, or (ii) a Notice of Guaranteed
Delivery or letter, telegram or facsimile transmission to similar effect (as
provided above) from an Eligible Institution is received by the Exchange Agent.
Issuances of Exchange Notes in exchange for Initial Notes tendered pursuant to a
Notice of Guaranteed Delivery of letter, telegram or facsimile transmission to
similar effect (as provided above) by an Eligible Institution will be made only
against deposit of the Letter of Transmittal (and any other required documents)
and the tendered Initial Notes.
All questions as to the validity, form, eligibility (including time of
receipt) and acceptance for exchange of any tender of Initial Notes will be
determined by the Company, whose determination will be final and binding. The
Company reserves the absolute right to reject any Initial Notes not properly
tendered or the acceptances for exchange of which may, in the opinion of the
Company's counsel, be unlawful. The Company also reserves the absolute right to
waive any of the conditions of the Exchange Offer or any defect or irregularity
in the tender of any Initial Notes. Unless waived, any defects or irregularities
in connection with tenders of Initial Notes for exchange must be cured within
such reasonable period of time as the Company shall determine. None of the
Company, the Exchange Agent or any other person will be under any duty to give
notification of any defects or irregularities in tenders or incurs any liability
for failure to give any such notification. Tenders will not be deemed to be made
until such irregularities have been cured or waived.
Each broker-dealer that receives Exchange Notes for its own account in
exchange for Initial Notes, where such Initial Notes were acquired by such
broker-dealer as a result of market-making activities or other trading
activities,
26
<PAGE>
must acknowledge that it will deliver a prospectus in connection with any resale
of such Exchange Notes. See "Plan of Distribution."
Terms and Conditions of the Letter of Transmittal
The Letter of Transmittal contains, among other things, the following terms
and conditions, which are part of the Exchange Offer.
The party tendering Initial Notes for exchange (the "Transferor")
exchanges, assigns and transfers the Initial Notes to the Company and
irrevocably constitutes and appoints the Exchange Agent as the Transferor's
agent and attorney-in-fact to cause the Initial Notes to be assigned,
transferred and exchanged. The Transferor represents and warrants that it has
full power and authority to tender, exchange, assign and transfer the Initial
Notes and to acquire Exchange Notes issuable upon the exchange of such tendered
Initial Notes, and that, when the same are accepted for exchange, the Company
will acquire good and unencumbered title to the tendered Initial Notes, free and
clear of all liens, restrictions, charges and encumbrances and not subject to
any adverse claim. The Transferor also warrants that it will, upon request,
execute and deliver any additional documents deemed by the Company to be
necessary or desirable to complete the exchange, assignment and transfer of
tendered Initial Notes or transfer ownership of such Initial Notes on the
account books maintained by a book-entry transfer facility. The Transferor
further agrees that acceptance of any tendered Initial Notes by the Company and
the issuance of Exchange Notes in exchange therefore shall constitute
performance in full by the Company of certain of its obligations under the
Registration Rights Agreement. All authority conferred by the Transferor will
survive the death or incapacity of the Transferor and every obligation of the
Transferor shall be binding upon the heirs, legal representatives, successors,
assigns, executors and administrators of such Transferor.
The Transferor must certify that it is not an "affiliate" of the Company
within the meaning of Rule 405 under the Securities Act and that it is acquiring
the Exchange Notes offered hereby in the ordinary course of such Transferor's
business and that such Transferor has no arrangement or understanding with any
person to participate in the distribution of such Exchange Notes. Each Holder
must acknowledge that it is not engaged in, and does not intend to engage in, a
distribution of Exchange Notes. Each Transferor which is a broker-dealer holding
Initial Notes acquired for its own account must acknowledge that it will deliver
a prospectus meeting the requirements of the Securities Act in connection with
any resale of such Exchange Notes. By so acknowledging and by delivering a
prospectus, a broker-dealer will not be deemed to admit that it is an
"underwriter" within the meaning of the Securities Act. This Prospectus, as it
may be amended or supplemented from time to time, may be used by a broker-dealer
in connection with resales of Exchange Notes received in exchange for Initial
Notes where such Initial Notes were acquired by such broker-dealer as a result
of market-making activities or other trading activities. The Company will make
this Prospectus available to any broker-dealer for use in connection with any
such resale for a period of one year from the date in which the Registration
Statement of which this Prospectus is a part is declared effective.
Withdrawal Rights
Tenders of Initial Notes pursuant to the Exchange Offer may be withdrawn at
any time prior to the Expiration Date; otherwise, such tenders are irrevocable.
For a withdrawal to be effective, a written, telegraphic, telex or
facsimile transmission notice of withdrawal must be timely received by the
Exchange Agent at its address set forth on the Letter of Transmittal, and with
respect to a facsimile transmission, must be confirmed by telephone and an
original delivered by guaranteed overnight delivery. Any such notice of
withdrawal must specify the person named in the Letter of Transmittal as having
tendered Initial Notes to be withdrawn, the certificate numbers of Initial Notes
to be withdrawn, the principal amount of Initial Notes to be withdrawn, a
statement that such Holder is withdrawing his, her or its election to have such
Initial Notes exchanged, and the name of the registered Holder of such Initial
Notes, and must be signed by the Holder in the same manner as the original
signature on the Letter of Transmittal (including any required signature
guarantees) or be accompanied by evidence satisfactory to the Company that the
person withdrawing the tender has succeeded to the beneficial ownership of the
Initial Notes being withdrawn. The Exchange Agent will return the
27
<PAGE>
properly withdrawn Initial Notes promptly following receipt of notice of
withdrawal. If Initial Notes have been tendered pursuant to the procedure for
book-entry transfer, any notice of withdrawal must specify the name and number
of the account at the book-entry transfer facility procedure. All questions as
to the validity of notices of withdrawals, including time of receipt, will be
determined by the Company, and such determination will be final and binding on
all parties.
Any Initial Notes so withdrawn will be deemed not to have been tendered for
exchange for purposes of the Exchange Offer. Any Initial Notes which have been
tendered for exchange but are not exchanged for any reason will be returned to
the Holder thereof without cost to such Holder (or, in the case of Initial Notes
tendered by book-entry transfer into the Exchange Agent's account at the
book-entry transfer facility pursuant to the book-entry transfer procedures
described above, such Initial Notes will be credited to an account with such
book-entry transfer facility specified by the Holder) as soon as practicable
after withdrawal, rejection of tender or termination of the Exchange Offer.
Properly withdrawn Initial Notes may be retendered by following one of the
procedures described under "--Tender Procedure" above at any time on or prior to
the Expiration Date.
Acceptance of Notes for Exchange; Delivery of Exchange Notes
Upon the satisfaction or waiver of all the terms and conditions of the
Exchange Offer, the acceptance for exchange of Initial Notes validly tendered
and not withdrawn and issuance of the Exchange Notes will be made on the
Exchange Date. For the purposes of the Exchange Offer, the Company shall be
deemed to have accepted for exchange validly tendered Initial Notes when, as and
if the Company has given oral or written notice thereof to the Exchange Agent.
The Exchange Agent will act as agent for the tendering Holders of Initial
Notes for the purposes of receiving Exchange Notes from the Company and causing
the Initial Notes to be assigned, transferred and exchanged. Upon the terms and
subject to the conditions of the Exchange Offer, delivery of Exchange Notes to
be issued in exchange for accepted Initial Notes will be made by the Exchange
Agent promptly after acceptance of the tendered Initial Notes. Initial Notes not
accepted for exchange by the Company will be returned without expense to the
tendering Holders promptly following the Expiration Date or, if the Company
terminates the Exchange Offer prior to the Expiration Date, promptly after the
Exchange Offer is so terminated.
Conditions to the Exchange Offer
Notwithstanding any other provision of the Exchange Offer, or any extension
of the Exchange Offer, the Company will not be required to issue Exchange Notes
in respect of any properly tendered Initial Notes not previously accepted and
may terminate the Exchange Offer (by oral or written notice to the Exchange
Agent and by timely public announcement communicated, unless otherwise required
by applicable law or regulation, by making a release to the Dow Jones News
Service) or, at its option, modify or otherwise amend the Exchange Offer, if in
the reasonable judgment of the Company, the Exchange Offer violates any law,
rule or regulation or any applicable interpretation of the staff of the
Commission.
In addition, the Company will not accept for exchange any Initial Notes
tendered and no Exchange Notes will be issued in exchange for any such Initial
Notes, if at such time any stop order shall be threatened or in effect with
respect to the Registration Statement of which this Prospectus constitutes a
part or qualification of the Indenture under the Trust Indenture Act of 1939
(the "Trust Indenture Act"). The Company will use its best efforts to prevent
the issuance of any such order and, if any such order is issued, to obtain the
withdrawal of any such order at the earliest possible moment.
The Company expressly reserves the right to terminate the Exchange Offer
and not accept for exchange any Initial Notes upon the occurrence of any of the
foregoing conditions (which represent all of the material conditions to the
acceptance by the Company of properly tendered Initial Notes). In addition, the
Company may amend the Exchange Offer at any time prior to the Expiration Date if
any of the conditions set forth above occurs. Moreover, regardless of whether
any of such conditions has occurred, the Company may amend the Exchange Offer in
any manner which, in its good faith judgment, is advantageous to Holders of the
Initial Notes.
28
<PAGE>
The foregoing conditions are for the sole benefit of the Company and may be
waived by the Company, in whole or in part, in the reasonable judgment of the
Company. Any determination made by the Company concerning an event, development
or circumstance described or referred to above will be final and binding on all
parties.
The Company is not aware of the existence of any of the foregoing events.
Exchange Agent
Marine Midland Bank has been appointed as the Exchange Agent for the
Exchange Offer. Questions and requests for assistance, requests for additional
copies of the Prospectus or of the Letters of Transmittal must be addressed to
the Exchange Agent at its address set forth on the Letter of Transmittal. Marine
Midland Bank also acts as Trustee, Registrar and Paying Agent under the
Indenture.
DELIVERY TO AN ADDRESS OTHER THAN AS SET FORTH ON THE LETTER OF
TRANSMITTAL, OR TRANSMISSIONS OF INSTRUCTIONS VIA A FACSIMILE OR TELEX NUMBER
OTHER THAN THE ONES SET FORTH ON THE LETTER OF TRANSMITTAL, WILL NOT CONSTITUTE
A VALID DELIVERY.
Solicitation of Tenders; Expenses
The Company has not retained any dealer-manager or similar agent in
connection with the Exchange Offer and will not make any payments to brokers,
dealers or others for soliciting acceptances of the Exchange Offer. The Company
will, however, pay the Exchange Agent its reasonable and customary fees for its
services and will reimburse it for reasonable out-of-pocket expenses in
connection therewith. The Company will also pay brokerage houses and other
custodians, nominees and fiduciaries the reasonable out-of-pocket expenses
incurred by them in forwarding copies of this and related documents to the
beneficial owners of the Initial Notes and in handling or forwarding tenders for
their customers.
No person has been authorized to give any information or to make any
representation in connection with the Exchange Offer other than those contained
in this Prospectus. If given or made, such information or representations should
not be relied upon as having been authorized by the Company. Neither the
delivery of this Prospectus nor any exchange made hereunder shall, under any
circumstances, create any implication that there has been no change in the
affairs of the Company since the respective dates as of which information is
given herein. The Exchange Offer is not being made to (nor will tenders be
accepted from or on behalf of) Holders of Initial Notes in any jurisdiction in
which the making of the Exchange Offer or the acceptance thereof would not be in
compliance with the laws of such jurisdiction. However, the Company may, at its
discretion, take such action as it may deem necessary to make the Exchange Offer
in any such jurisdiction and extend the Exchange Offer to Holders of Initial
Notes in such jurisdiction. In any jurisdiction in which the securities laws or
blue sky laws of which require the Exchange Offer to be made by a licensed
broker or dealer, the Exchange Offer is being made on behalf of the Company by
one or more registered brokers or dealers which are licensed under the laws of
such jurisdiction.
Transfer Taxes
Holders who tender their Initial Notes for exchange will not be obligated
to pay any transfer taxes in connection therewith, except that Holders who
instruct the Company to register Exchange Notes in the name of, or request that
Initial Notes not tendered or tendered but not accepted in the Exchange Offer be
returned to, a person other than the registered tendering Holder will be
responsible for the payment of any applicable transfer tax thereon.
Consequences of Failure to Exchange
Holders of Initial Notes who do not exchange their Initial Notes for
Exchange Notes pursuant to the Exchange Offer will continue to be subject to the
restrictions on transfer of such Initial Notes as set forth in the legend
thereon as a consequence of the offer or sale of the Initial Notes pursuant to
exemptions from, or in transactions not subject
29
<PAGE>
to, the registration requirements of the Securities Act and applicable state
securities laws. In general, the Initial Notes may not be offered or sold,
unless registered under the Securities Act and applicable state securities laws,
except pursuant to an exemption from, or in a transaction not subject to, the
Securities Act and applicable state securities laws. The Company does not intend
to register the Initial Notes under the Securities Act and, after consummation
of the Exchange Offer, will not be obligated to do so. Based on an
interpretation by the staff of the Commission set forth in a series of no-action
letters issued to third parties, the Company believes that Exchange Notes issued
pursuant to the Exchange Offer in exchange for Initial Notes may be offered for
resale, resold or otherwise transferred by Holders thereof (other than any such
Holder which is an "affiliate" of the Company within the meaning of Rule 405
under the Securities Act) without compliance with the registration and
prospectus delivery provisions of the Securities Act, provided that such Initial
Notes are acquired in the ordinary course of such Holders' business and such
Holders have no arrangement or understanding with any person to participate in
the distribution of such Exchange Notes. Each broker-dealer that receives
Exchange Notes for its own account in exchange for Initial Notes, where such
Initial Notes were acquired by such broker-dealer as a result of market-making
activities or other trading activities, must acknowledge that it will deliver a
prospectus in connection with any resale of such Exchange Notes. See "Plan of
Distribution."
Other
Participation in the Exchange Offer is voluntary and Holders should
carefully consider whether to participate. Holders of the Initial Notes are
urged to consult their financial and tax advisors in making their own decisions
of what action to take.
As a result of the making of, and upon acceptance for exchange of all
validly tendered Initial Notes pursuant to the terms of, this Exchange Offer,
the Company will have fulfilled a covenant contained in the Registration Rights
Agreement. Holders of the Initial Notes who do not tender their certificates in
the Exchange Offer will continue to hold such certificates and will be entitled
to all the rights, and limitations applicable thereto, under the Indenture,
except for any such rights under the Registration Rights Agreement, which by
their terms terminate or cease to have further effect as a result of the making
of this Exchange Offer. See "Description of Notes." All untendered Initial Notes
will continue to be subject to the restrictions on transfer set forth in the
Indenture. Such untendered Initial Notes will remain outstanding and continue to
accrue interest, but will not retain any rights under the Registration Rights
Agreement and shall not accrue any applicable liquidated damages under the
Indenture. To the extent that Initial Notes are tendered and accepted in the
Exchange Offer, the trading market for untendered, and tendered but unaccepted,
Initial Notes could be adversely affected.
By acceptance of the Exchange Offer, each broker-dealer that receives
Exchange Notes pursuant to the Exchange Offer hereby agrees to notify the
Company prior to using this Prospectus in connection with the sale or transfer
of Exchange Notes, and acknowledges and agrees that, upon receipt of notice from
the Company of the happening of any event which requires the making of any
changes in the Prospectus in order to make the statements therein not misleading
(which notice the Company agrees to deliver promptly to such broker-dealer),
such broker-dealer will suspend use of the Prospectus until the Company has
amended or supplemented the Prospectus to correct such misstatement or omission
and has furnished copies of the amended or supplemented prospectus to such
broker-dealer.
The Company may in the future seek to acquire untendered Initial Notes
in open market or privately negotiated transactions, through subsequent exchange
offers or otherwise. The Company has no current plans to acquire any Initial
Notes which are not tendered in the Exchange Offer or to file a registration
statement to permit resales of any Initial Notes which are not tendered pursuant
to the Exchange Offer and, after consummation of the Exchange Offer, will not be
obligated to do so. The Company's ability to purchase Initial Notes is subject
to the restrictions set forth in the Indenture and the Bank Credit Facility. See
"Description of the Bank Credit Facility" and "Description of Notes."
30
<PAGE>
CAPITALIZATION
The following table sets forth the unaudited pro forma capitalization of
the Company, as of November 30, 1996, as adjusted to give effect to the
Transactions. This table should be read in conjunction with the financial
statements of ArtCarved and the financial statements of Balfour and the
respective related notes thereto included elsewhere herein. The following table
is based on the estimated Adjusted Working Capital and Balfour Gold balance on
the date of closing. However, the final calculation of the Adjusted Working
Capital and Balfour Gold balance at closing and the resulting purchase prices
for each of ArtCarved, Balfour and Balfour Gold may differ from the estimates
assumed below. See "Use of Proceeds," "Unaudited Pro Forma Combined Financial
Statements and Other Data," "Principal Stockholders," "The Acquisitions,"
"Description of the Bank Credit Facility" and "Description of Notes."
November 30, 1996
Pro Forma
As Adjusted
(Dollars in thousands)
Total debt (including current maturities):
Revolving Credit and Gold Facilities ........ $ 11,201
Term Loan Facility........................... 25,000
11% Senior Subordinated Notes due 2007 ...... 90,000
---------
Total debt............................... $ 126,201
-------
Stockholders' equity:
Preferred stock(1)........................... 47,500
Common Stock ................................ 2,500
---------
Total stockholders' equity............... 50,000
---------
Total capitalization.............................. $ 176,201
=======
- ----------
(1) Includes $10.0 million of Series A Preferred Stock and $37.5 million of
Series B Preferred Stock. See "Description of Capital Stock" and
"Description of Notes--Certain Covenants--Restricted Payments."
31
<PAGE>
UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS AND OTHER DATA
This Prospectus contains forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933, as amended. Discussions containing
such forward-looking statements may be found in the material set forth below and
under "Prospectus Summary," "Risk Factors," "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and "Business" and as
well as in the Prospectus generally. Actual events or results may differ
materially from those discussed in the forward-looking statements as a result of
various factors, including, without limitation, the factors set forth below and
the other matters set forth in the Prospectus generally.
The unaudited pro forma combined balance sheet was prepared as if the
Transactions had occurred on November 30, 1996 and the unaudited pro forma
combined statements of income and other data was prepared as if the Transactions
occurred on August 27, 1995.
The unaudited pro forma combined financial statements and other data have
been prepared under the purchase method of accounting. Under this method of
accounting, based on a preliminary allocation of the purchase price of each of
ArtCarved and Balfour, their respective identifiable assets and liabilities have
been adjusted to their estimated fair values. The preliminary purchase price
allocations are based upon estimates and assumptions which are subject to
subsequent determination and more detailed analyses, receiving final detailed
appraisals and evaluations of specific assets and liabilities and the
calculation of the Adjusted Working Capital yet to be finalized. The final
allocation of the purchase price of the Acquisitions may differ from the amounts
contained in these unaudited pro forma combined financial statements.
The unaudited pro forma combined financial statements and other data
reflect the fact that CBI did not purchase certain Balfour facilities but
instead will relocate the Balfour jewelry manufacturing operations and related
sales, general and administrative functions to existing ArtCarved facilities in
Austin, Texas. Consequently, the pro forma adjustments reflect the realization
of $4.3 million of the Annual Cost Savings relating to the elimination of
duplicative personnel, occupancy and fixed overhead costs resulting from the
closure of these Balfour facilities. However, the pro forma adjustments do not
reflect $3.1 million of the Annual Cost Savings expected to result from lower
prevailing wage rates in Austin, Texas and the elimination of other duplicative
costs. The pro forma adjustments related to Annual Cost Savings described above
do not reflect non-recurring severance and relocation costs of approximately
$5.5 million and incremental capital expenditures of approximately $1.9 million
to be incurred in connection with the Combination.
The Company has begun the consolidation of the Company's operations to
Austin, Texas, and Management expects that the consolidation will be completed
during the fiscal year ending August 30, 1997. Management expects that a portion
of the Annual Cost Savings will be realized during the fiscal year ending August
30, 1997 and that all of such savings will be realized during the fiscal year
ending August 29, 1998. There can be no assurance that the Company will complete
its consolidation by the end of its fiscal year ending August 30, 1997 or that
the Annual Cost Savings will be realized by the end of its fiscal year ending
August 29, 1998, or at all.
The unaudited pro forma combined financial statements and other data have
been prepared based on the foregoing and on certain assumptions described in the
notes thereto. Such statements should be read in conjunction with the historical
financial statements of ArtCarved and the historical financial statements of
Balfour, each including the notes thereto, and "Management's Discussion and
Analysis of Results of Operations and Financial Condition" that are included
elsewhere herein. The following unaudited pro forma combined financial
statements and other data do not purport to be indicative of the financial
position or results of operations that would have been reported had the
Transactions been effected on the dates indicated, or that may be reported in
the future.
UNAUDITED PRO FORMA COMBINED STATEMENT OF INCOME
AND OTHER DATA
FOR THE TWELVE MONTHS ENDED AUGUST 31, 1996
(Dollars in thousands, except ratios)
32
<PAGE>
<TABLE>
<CAPTION>
Historical Statements(1)
------------------------------
Balfour
ArtCarved Twelve Months
Year Ended Ended Pro Forma Pro Forma
Aug. 31, 1996 Aug. 25, 1996 Adjustments Combined
------------- ------------- ----------- --------
<S> <C> <C> <C> <C>
Net sales.......................................... $ 70,671 $ 71,391 $ -- $142,062
Cost of sales...................................... 32,655 34,547 (2,243)(2)(3) 64,957
(2)(4)
---------- ---------- ----------- ---------
Gross profit....................................... 38,016 36,844 2,245 77,105
Selling, general and administrative expenses....... 27,940 34,002 (2,048)(2)(3) 60,340
(916)(4)
95(5)
1,500(6)
(233)(7)
---------- ---------- ----------- ---------
Operating income .................................. 10,076 2,842 3,847 16,765
Other (income) expense............................. -- (418) 418(8) --
Interest expense, net.............................. 11,907 2,597 (765)(9) 13,739
---------- ---------- ----------- ---------
Income (loss) before income tax expense............ (1,831) 663 4,194 3,026
Income tax expense................................. -- 145 1,096(10) 1,241
---------- ---------- ---------- ----------
Net income (loss).................................. $ (1,831) $ 518 $ 3,098 $ 1,785
========== ========== ========== ==========
Other Data:
EBITDA(3)(11)...................................... $ 15,091 $ 4,812 $ 22,832
Depreciation and amortization...................... 5,015 1,970 6,067
Capital expenditures(12)........................... 844 636 1,480
Ratio of earnings to fixed charges(13)............. -- 1.2x 1.2x
Ratio of pro forma combined EBITDA to cash interest
expense(14)................................... 1.7x
</TABLE>
See Notes to the "Unaudited Pro Forma Combined Statement of Income and Other
Data."
33
<PAGE>
UNAUDITED PRO FORMA COMBINED STATEMENT OF INCOME
AND OTHER DATA
FOR THE THREE MONTHS ENDED NOVEMBER 30, 1996
(Dollars in thousands, except ratios)
<TABLE>
<CAPTION>
Historical Statements(1)
ArtCarved Balfour
Three Months Three Months
Ended Ended Pro Forma Pro Forma
Nov. 30, 1996 Nov. 24, 1996 Adjustments Combined
------------- ------------- ----------- --------
<S> <C> <C> <C> <C>
Net sales.......................................... $ 21,963 $ 19,535 $ -- $ 41,498
Cost of sales...................................... 9,626 8,762 (561)(2)(3) 17,753
(74)(4)
---------- ---------- ---------- ----------
Gross profit....................................... 12,337 10,773 635 23,745
Selling, general and administrative expenses....... 8,110 10,536 (512)(2)(3) 18,088
(344)(4)
375(6)
(77)(7)
---------- ---------- ---------- ----------
Operating income................................... 4,227 237 1,193 5,657
Interest expense, net.............................. 2,503 619 313(9) 3,435
---------- ---------- ---------- ----------
Income (loss) before income tax expense............ 1,724 (382) 880 2,222
Income tax expense................................. -- 10 901(10) 911
---------- ---------- ---------- ----------
Net income (loss).................................. $ 1,724 $ (392) $ (21) $ 1,311
========== =========== =========== ==========
Other Data:
EBITDA(3)(11)...................................... $ 5,691 $ 708 $ 7,174
Depreciation and amortization...................... 1,464 471 1,517
Capital expenditures(12)........................... 182 22 204
Ratio of earnings to fixed charges(13)(15)......... 1.6x -- 1.6x
Ratio of pro forma combined EBITDA to cash interest
expense(14)(15)............................... 2.2x
</TABLE>
34
<PAGE>
NOTES TO THE UNAUDITED PRO FORMA COMBINED STATEMENTS OF INCOME
AND OTHER DATA
FOR THE TWELVE MONTHS ENDED AUGUST 31, 1996
AND THE THREE MONTHS ENDED NOVEMBER 30, 1996
(Dollars in thousands, except ratios)
(1) ArtCarved's fiscal year ends on the last Saturday of August and Balfour's
fiscal year ends on the last Sunday of February. The historical statement
of operations of Balfour was conformed to ArtCarved's fiscal year by
subtracting the six months ended August 27, 1995 from, and adding the six
months ended August 25, 1996 to, the fiscal year ended February 25, 1996
statement of operations amounts.
(2) Balfour jewelry manufacturing operations and related sales, general and
administrative functions will be relocated to existing ArtCarved facilities
in Austin, Texas. Consequently, the pro forma adjustments reflect $4.3
million of the Annual Cost Savings relating to the elimination of
duplicative personnel, occupancy and fixed overhead costs resulting from
the closure of certain Balfour facilities, which were not acquired in the
Balfour Acquisition.
(3) Pro forma combined EBITDA does not give effect to $3.1 million of the
Annual Cost Savings, $2.4 million of which are related to lower prevailing
wage rates in Austin, Texas and $0.7 million of which are related to other
duplicative costs resulting from the closure of Balfour facilities and the
consolidation of Balfour's operations into existing ArtCarved operations in
Austin, Texas. The effect of the additional $3.1 million of the Annual Cost
Savings on the pro forma combined EBITDA results in an adjusted pro forma
combined EBITDA of $25.9 million and $8.0 million for the twelve months
ended August 31, 1996, and the three months ended November 30, 1996,
respectively. Thus, the ratio of adjusted pro forma combined EBITDA to cash
interest expense is 2.0x(14) and 2.4x(14)(15) for the twelve months ended
August 31, 1996, and the three months ended November 30, 1996,
respectively.
(4) Adjustments to reflect the estimated pro forma depreciation for tangible
assets and amortization of intangible assets and goodwill based on their
estimated fair market values and their respective useful lives.
<TABLE>
<CAPTION>
Twelve Months Ended Three Months Ended
August 31, 1996 November 30, 1996
------------------------------- --------------------------------
Cost of Sales SG&A Cost of Sales SG&A
-------------- ------------ ---------------- -----------
<S> <C> <C> <C> <C>
Depreciation..................... $ 670 $ (907) $ 206 $ (266)
Amortization of intangible assets
and goodwill..................... (672) (9) (280) (78)
-------- --------- --------- ---------
Total adjustments........... $ (2) $ (916) (74) $ (344)
======== ========= ========= =========
</TABLE>
For purposes of calculating pro forma amounts, (i) the fair value of the
property, plant and equipment acquired is estimated to be $13.3 million,
which
35
<PAGE>
will be depreciated over 20 years for buildings and 2 to 10 years for
equipment, (ii) the fair value of the tools and dies acquired is estimated
to be $19.9 million, which will be depreciated over 14 to 19 years, and
(iii) trademarks and goodwill are estimated to be $30.7 million and $74.7
million, respectively, of which will be amortized over 40 years.
(5) Reflects adjustment for the interest charge related to the accumulated
benefit obligation for the Balfour postretirement medical benefits plan,
net of the accretion of unrecognized transition obligation previously
recorded. See Note (8) to the audited financial statements of Balfour.
(6) Represents a $1.5 million annual management fee payable to Castle Harlan,
Inc.
(7) Reflects adjustment to exclude the Balfour gold consignment fees, which
were replaced by the Gold Facility.
(8) Reflects adjustment to exclude the non-recurring gain from the sale of a
Balfour facility in November 1995.
(9) Adjustments to interest expense, net, includes the following:
<TABLE>
<CAPTION>
Principal Twelve Months Ended Three Months Ended
Rate Amount August 31, 1996 November 30, 1996
------------- ------------- -------------------- ---------------------
<S> <C> <C> <C> <C>
Elimination of historical interest
expense, net................................... $ (14,504) $ (3,122)
New interest expense related to:
Revolving Credit Facility.................. 8.56% $5,200 445 111
Gold Facility.............................. 5.25% 6,001 315 79
Term Loan Facility......................... 9.06% 25,000 2,265 566
Notes ..................................... 11.00% 90,000 9,900 2,475
Amortization of capitalized financing
fees..................................... 608 152
Bank fees.................................. 206 52
---------- ----------
Total new interest expense, net................ 13,739 3,435
---------- ----------
Adjustment to interest expense, net............ $ (765) $ 313
=========== ==========
</TABLE>
Deferred financing costs are estimated to be $5.3 million, which will be
amortized over the term of the related debt instrument.
(10) Reflects adjustment to income tax expense to recognize the federal
statutory income tax rate and additional state tax expense at a combined
effective rate of 41% related to the pro forma combined statements of
income.
(11) 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 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.
(12) The pro forma combined capital expenditure level is not indicative of the
expected capital expenditure level for the Company's fiscal year ending
August 30, 1997. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Seasonality, Liquidity and Capital
Resources."
(13) For the purpose of computing this ratio, earnings consist of income (loss)
before taxes on income and fixed charges. Fixed charges consist of interest
expense, capitalized interest, amortization of deferred debt issuance cost
and a portion of rental expenses. For ArtCarved's fiscal year ended August
31, 1996,
36
<PAGE>
ArtCarved's earnings before fixed charges were insufficient to cover fixed
charges by approximately $1.8 million. For Balfour's three months ended
November 24, 1996, Balfour's earnings before fixed charges were
insufficient to cover fixed charges by approximately $0.4 million.
(14) Cash interest expense represents pro forma combined interest expense less
amortization of capitalized financing fees.
(15) Ratios for the three months ended November 30, 1996 are not indicative of
the full year results due to the seasonal nature of the business.
37
<PAGE>
UNAUDITED PRO FORMA COMBINED BALANCE SHEET
NOVEMBER 30, 1996
(Dollars in thousands)
<TABLE>
<CAPTION>
Historical Statements
------------------------------------ -------------- -----------
ArtCarved Balfour Pro Forma Pro Forma
November 30, 1996 November 24, 1996 Adjustments(1) Combined
----------------- ----------------- -------------- -----------
<S> <C> <C> <C> <C>
ASSETS
Cash ........................................................ $ 4,456 $ 59 $ (4,515) $ --
Receivables ................................................. 14,681 20,605 (1,226) 34,060
Inventories ................................................. 5,298 9,472 7,461 22,231
Prepaid expenses and other current assets ................... 784 2,447 (55) 3,176
-------- -------- -------- --------
Total current assets ................................... 25,219 32,583 1,665 59,467
Property, plant and equipment ............................... 10,848 9,324 13,020 33,192
Trademarks .................................................. 21,207 -- 9,533 30,740
Deferred financing costs .................................... -- -- 5,325 5,325
Goodwill .................................................... 12,186 2,590 59,905 74,681
Other assets ................................................ 13,933 553 (11,492) 2,994
-------- -------- -------- --------
Total assets ........................................... $ 83,393 $ 45,050 $ 77,956 $206,399
======== ======== ======== ========
LIABILITIES AND STOCKHOLDERS'
EQUITY
Bank overdraft .............................................. $ -- $ 708 $ (708) $ --
Current portion of long-term debt ........................... 2,116 257 (1,873) 500
Accounts payable ............................................ 2,385 2,202 -- 4,587
Accrued interest payable .................................... 2,345 -- (2,345) --
Accrued expenses ............................................ 4,312 9,307 5,679 19,298
-------- -------- -------- --------
Total current liabilities .............................. 11,158 12,474 753 24,385
Long-term debt, net of current maturities ................... 80,144 19,148 26,409 125,701
Other long-term liabilities ................................. -- 826 5,487 6,313
-------- -------- -------- --------
Total liabilities ...................................... 91,302 32,448 32,649 156,399
Stockholders' equity:
Preferred stock .......................................... -- -- 47,500 47,500
Common stock ............................................. -- 4 2,496 2,500
Additional paid-in capital ............................... -- 75,970 (75,970) --
Accumulated deficit ...................................... -- (63,372) 63,372 --
Advances and equity (deficit) ............................ (7,909) -- 7,909 --
-------- -------- -------- --------
Total stockholders' equity (deficit) ................... (7,909) 12,602 45,307 50,000
-------- -------- -------- --------
Total liabilities and stockholders' $ 83,393 $ 45,050 $ 77,956 $206,399
equity.................................................. ======== ======== ======== ========
</TABLE>
See Notes to the "Unaudited Pro Forma Combined Balance Sheet."
38
<PAGE>
NOTES TO THE UNAUDITED PRO FORMA COMBINED BALANCE SHEET
NOVEMBER 30, 1996
(Dollars in thousands)
(1) Set forth below are the adjustments to reflect the ArtCarved Acquisition,
the Balfour Acquisition, and the Financing.
<TABLE>
<CAPTION>
ArtCarved Balfour
Acquisition Acquisition Financing Pro Forma
Adjustments Adjustments Adjustments Adjustments
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
ASSETS
Cash .................................................... $(114,829)(a) $ (52,287)(a) $ 167,116(h) $ (4,515)
(4,456)(b) (59)(b)
Receivables ............................................. (300)(c) (926)(c) -- (1,226)
Inventories ............................................. 801(c) (246)(b) -- 7,461
1,843(c)
5,063(e)
Prepaid expenses and other current assets ............... 6(b) (61)(b) -- (55)
--------- --------- --------- ---------
Total current assets ............................... (118,778) (46,673) 167,116 1,665
--------- --------- --------- ---------
Property, plant and equipment ........................... 5,827(c) 10,120(c) -- 13,020
(2,927)(b)
Trademarks .............................................. (3,467)(c) 13,000(c) -- 9,533
Deferred financing costs ................................ -- -- 5,325(h) 5,325
Goodwill ................................................ 50,252(c) 5,143(c) 4,510(h)(j) 59,905
Other assets ............................................ (11,147)(b) (215)(b) -- (11,492)
(130)(c)
Total assets ....................................... $ (77,443) $ (21,552) $ 176,951 $ 77,956
========= ========= ========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Bank overdraft .......................................... $ -- $ (708)(b) $ -- $ (708)
Current portion of long-term debt ....................... (2,116)(d) (257)(d) 500(h) (1,873)
Accounts payable ........................................ -- -- -- --
Accrued interest payable ................................ (2,345)(d) -- -- (2,345)
Accrued expenses ........................................ (747)(c) 196(c) 750(j) 5,679
5,480(f)
Total current liabilities .......................... (5,208) 4,711 1,250 753
--------- --------- --------- ---------
Long-term debt, net of current maturities ............... (80,144)(d) (19,148)(d) 125,701(h) 26,409
Other long-term liabilities ............................. -- 5,487(g) -- 5,487
--------- --------- --------- ---------
Total liabilities .................................. (85,352) (8,950) 126,951 32,649
--------- --------- --------- ---------
Stockholders' equity:
Preferred stock ...................................... -- -- 47,500(h) 47,500
Common stock ......................................... -- (4)(i) 2,500(h) 2,496
Additional paid-in capital ........................... -- (75,970)(i) -- (75,970)
Accumulated deficit .................................. -- 63,372(i) -- 63,372
Advances and equity (deficit) ........................ 7,909(i) -- -- 7,909
--------- --------- --------- ---------
Total stockholders' equity (deficit) ............... 7,909 (12,602) 50,000 45,307
--------- --------- --------- ---------
Total liabilities and stockholders' equity ......... $ (77,443) $ (21,552) $ 176,951 $ 77,956
========= ========= ========= =========
</TABLE>
39
<PAGE>
- ----------
(a) To reflect (i) the ArtCarved Acquisition, which consisted of the ArtCarved
Purchase Price of $114.8 million; and (ii) the Balfour Acquisition, which
consisted of the Balfour Purchase Price of $47.4 million and the Balfour
Gold Purchase Price of $4.9 million, in each case, based on the estimated
Adjusted Working Capital and Balfour Gold balance on the date of closing.
However, the final calculation of the Adjusted Working Capital and Balfour
Gold balance at closing and the resulting purchase prices for each of
ArtCarved, Balfour and Balfour Gold may differ from the amounts set forth
herein. See "The Acquisitions." The following represents the preliminary
allocation of the purchase prices for ArtCarved and Balfour to their
respective assets and liabilities based on Management's estimate of fair
values. This preliminary allocation is based upon estimates and assumptions
which are subject to subsequent determinations and more detailed analyses,
receiving final detailed appraisals and evaluations of specific assets and
liabilities and the calculation of the Adjusted Working Capital and Balfour
Gold balances. Certain components of the purchase prices for ArtCarved and
Balfour are in dispute among the parties. Based on its negotiations with
CJC and Town & Country, Management does not believe that the resolutions of
these items will be material to the overall purchase prices. The final
allocation of the purchase prices for the Acquisitions may differ from the
amounts set forth below.
<TABLE>
<CAPTION>
ArtCarved Acquisition Balfour Acquisition
--------------------- -------------------
<S> <C> <C>
Receivables................................................ $ 14,381 $ 19,679
Inventories................................................ 6,099 16,132
Prepaid expenses and other current assets.................. 790 2,386
Plant, property and equipment.............................. 16,675 16,517
Trademarks................................................. 17,740 13,000
Goodwill................................................... 62,438 7,733
Other assets............................................... 2,656 338
Accounts payable........................................... (2,385) (2,202)
Accrued expenses........................................... (3,565) (14,983)
Other long-term liabilities................................ -- (6,313)
-------- --------
$114,829 $ 52,287
======== ========
</TABLE>
(b) To reflect the exclusion of assets not purchased or liabilities not assumed
as part of the ArtCarved Acquisition and Balfour Acquisition.
(c) To reflect the estimated fair market value of the acquired assets and
assumed liabilities of ArtCarved and Balfour.
(d) To reflect the elimination of existing debt and accrued interest.
(e) To reflect the purchase of Balfour Gold held on consignment.
(f) To record a reserve for the non-recurring severance and relocation costs
associated with the Combination.
(g) To record the accumulated benefit obligation of $5.5 million related to the
unfunded Balfour postretirement medical benefits plan assumed in the
Balfour Acquisition.
(h) To reflect the proceeds from the Financing related to the Transactions. The
use of the proceeds is as follows:
ArtCarved Acquisition.................... $114,829
Balfour Acquisition...................... 52,287
Transaction fees and expenses............ 9,085
--------
$176,201
========
40
<PAGE>
The unaudited pro forma capitalization of the Company, as of November 30, 1996,
as adjusted to give effect to the Transactions is as follows:
<TABLE>
<S> <C>
Total debt (including current maturities):
Revolving Credit and Gold Facilities............................... $ 11,201
Term Loan Facility................................................. 25,000
11% Senior Subordinated Notes due 2007............................. 90,000
-------
Total debt..................................................... $ 126,201
--------
Stockholders' equity:.......................................................
Preferred stock(1)................................................. 47,500
Common stock....................................................... 2,500
------
Total stockholders' equity..................................... 50,000
-------
Total capitalization........................................................ $ 176,201
========
</TABLE>
- ----------
(1) Includes $10.0 million of Series A Preferred Stock and $37.5 million of
Series B Preferred Stock. See "Description of Capital Stock" and
"Description of Notes--Certain Covenants--Restricted Payments."
(i) To reflect the elimination of the historical equity of ArtCarved and
Balfour.
(j) To record accrued costs related to finalizing the purchase prices of the
Acquisitions.
41
<PAGE>
SELECTED HISTORICAL FINANCIAL AND OTHER DATA -- ARTCARVED
The following table presents selected 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 elsewhere herein. The
following information with respect to ArtCarved as of and for each of the years
ended August 27, 1994; August 26, 1995; and August 31, 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 November 13, 1996 included elsewhere herein. The ArtCarved data as
of August 31, 1993 are derived from the audited financial statements of
ArtCarved, which have been audited by Arthur Andersen LLP and are not included
elsewhere herein. The ArtCarved data as of August 31, 1992 and the three months
ended on and as of November 25, 1995 and November 30, 1996 are derived from the
unaudited financial statements of ArtCarved. In Management's opinion, the
unaudited interim financial statements reflect all adjustments (consisting only
of normal recurring adjustments) necessary for a fair presentation of the
interim periods presented. The results for the three months ended November 30,
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>
<CAPTION>
Three Months
Fiscal Year Ended(1) Ended(1)
-------------------------------------------------------- ---------------------
Aug. 31, Aug. 31, Aug. 27, Aug. 26, Aug. 31, Nov. 25, Nov. 30,
1992 1993 1994 1995 1996 1995 1996
-------- -------- -------- -------- -------- -------- --------
(Dollars in thousands, except ratios)
<S> <C> <C> <C> <C> <C> <C> <C>
Statement of Income Data:
Net sales ........................... $ 63,847 $ 63,955 $ 69,820 $ 71,994 $ 70,671 $ 21,923 $ 21,963
Cost of sales ....................... 26,993 25,290 30,572 32,879 32,655 9,209 9,626
--------- --------- --------- --------- --------- --------- ---------
Gross profit ........................ 36,854 38,665 39,248 39,115 38,016 12,714 12,337
Selling, general and administrative
expenses ......................... 26,920 27,016 26,618 28,224 27,940 8,484 8,110
Restructuring charges(2) ............ -- -- -- 3,244 -- -- --
--------- --------- --------- --------- --------- --------- ---------
Operating income (loss) ............. 9,934 11,649 12,630 7,647 10,076 4,230 4,227
Interest expense, net ............... 13,165 12,333 11,506 13,613 11,907 3,355 2,503
--------- --------- --------- --------- --------- --------- ---------
Income (loss) before income tax ..... (3,231) (684) 1,124 (5,966) (1,831) 875 1,724
expense
Income tax expense .................. 65 146 137 -- -- -- --
--------- --------- --------- --------- --------- --------- ---------
Net income (loss) ................... $ (3,296) $ (830) $ 987 $ (5,966) $ (1,831) $ 875 $ 1,724
========= ========= ========= ========= ========= ========= =========
Other Data:
EBITDA(3) ........................... $ 15,548 $ 17,046 $ 17,324 $ 16,505 $ 15,091 $ 5,494 $ 5,691
Depreciation and amortization ....... 5,614 5,397 4,694 5,614 5,015 1,264 1,464
Capital expenditures(4) ............. 862 1,344 1,186 1,120 844 420 182
Cash flows provided by (used in):
Operating activities ............. 8,678 10,948 11,132 (3,164) 1,663 (513) 1,083
Investing activities ............. (925) (1,344) (1,186) (1,120) (844) (52) (182)
Financing activities ............. (5,753) (9,604) (9,946) 4,284 (819) 565 3,555
Ratio of earnings to fixed charges(5) -- -- 1.1x -- -- 1.3x 1.6x
Balance Sheet Data (at end of
period):
Working capital ..................... $ (1,232) $ 6,938 $ (17,064) $ (21,178) $ 3,063 $ 14,061
Total assets ........................ 79,698 76,008 78,900 75,955 74,542 83,393
Total long-term debt(6) ............. 107,783 98,485 98,728 99,900 91,221 80,144
Advances and equity (deficit)(6) .... (32,989) (27,931) (51,504) (53,186) (28,524) (7,909)
</TABLE>
- ----------
footnotes appear on following page
42
<PAGE>
(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
intends to use 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 include all of CJC's debt and related interest expense, and
therefore all of the restructuring charges are allocated to ArtCarved
assets.
(3) 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.
(4) Historical capital expenditure levels are not necessarily indicative
of the expected capital expenditure level for the Company's fiscal
year ending August 30, 1997. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations--Seasonality,
Liquidity and Capital Resources."
(5) For the purpose of computing this ratio, earnings consist of income
(loss) before taxes on income and fixed charges. Fixed charges consist
of interest expense, capitalized interest, amortization of deferred
debt issuance cost and a portion of rental expenses. For the fiscal
years ended August 31, 1992, August 31, 1993, August 26, 1995 and
August 31, 1996, earnings before fixed charges were insufficient to
cover fixed charges by approximately $3.2 million, $0.7 million, $6.0
million and $1.8 million, respectively.
(6) The changes in total long-term debt and advances in equity (deficit)
from August 31, 1996 to November 30, 1996 are due to the sale of CJC's
non-ArtCarved operations.
43
<PAGE>
SELECTED HISTORICAL FINANCIAL AND OTHER DATA--BALFOUR
The following table presents selected 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
Results of Operations and Financial Condition" included elsewhere herein. The
following information with respect to Balfour as of and for the years ended
February 27, 1994; February 26, 1995 and February 25, 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
September 30, 1996 included elsewhere herein. The following information with
respect to Balfour as of and for the years ended February 29, 1992 and February
28, 1993 and the nine months ended on, and as of, November 26, 1995 and November
24, 1996 has been derived from the unaudited financial statements of Balfour. In
Management's opinion, the data as of and for the years ended February 29, 1992
and February 28, 1993 and as of and for the nine months ended November 26, 1995
and November 24, 1996 reflect all adjustments (consisting of normal recurring
adjustments) necessary for a fair presentation. The results for the nine months
ended November 24, 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 Balfour Acquisition.
<TABLE>
<CAPTION>
Fiscal Year Ended(1) Nine Months Ended(1)
------------------------------------------------------- --------------------
Feb. 29, Feb. 28, Feb. 27, Feb. 26, Feb. 25, Nov. 26, Nov. 24,
1992 1993 1994 1995 1996 1995 1996
-------- -------- -------- -------- -------- -------- --------
(Dollars in thousands, except ratios)
<S> <C> <C> <C> <C> <C> <C> <C>
Statement of Income Data:
Net sales ...................................... $ 91,681 $ 83,938 $ 85,304 $ 77,491 $ 71,300 $ 53,413 $ 55,521
Cost of sales .................................. 55,607 47,130 35,860 35,406 35,598 27,160 27,021
-------- -------- -------- -------- -------- -------- --------
Gross profit ................................... 36,074 36,808 49,444 42,085 35,702 26,253 28,500
Selling, general and administrative
expenses .................................... 42,481 43,856 43,350 51,743 33,496 25,831 27,910
Restructuring charges(2) ....................... -- 14,500 -- -- -- -- --
-------- -------- -------- -------- -------- -------- --------
Operating income (loss) ........................ (6,407) (21,548) 6,094 (9,658) 2,206 422 590
-------- -------- -------- -------- -------- -------- --------
Other (income) expense:
Interest expense, net .......................... 306 234 673 700 583 450 432
Payroll tax refund ............................. -- -- -- (574) -- -- --
Gain on sale of facility ....................... -- -- -- -- (418) (418) --
Interest on due to Parent(3) ................... 9,183 9,501 683 1,093 1,986 1,401 1,384
-------- -------- -------- -------- -------- -------- --------
Net other expense .............................. 9,489 9,735 1,356 1,219 2,151 1,433 1,816
-------- -------- -------- -------- -------- -------- --------
Income (loss) before income tax expense ........ (15,896) (31,283) 4,738 (10,877) 55 (1,011) (1,226)
Provision for income taxes ..................... 125 310 50 65 191 144 60
-------- -------- -------- -------- -------- -------- --------
Net income (loss) .............................. $(16,021) $(31,593) $ 4,688 $(10,942) $ (136) $(1.155) $ (1,286)
======== ======== ======== ======== ======== ======== ========
Other Data:
EBITDA(4) ...................................... $ (3,376) $ (3,983) $ 7,993 $ (7,680) $ 4,232 $ 1,970 $ 2,050
Depreciation and amortization .................. 3,031 3,065 1,899 1,978 2,026 1,548 1,460
Capital expenditures(5) ........................ 620 826 1,820 1,274 530 320 252
Adjusted net sales(6) .......................... 59,600 56,315 61,784 64,891 70,111 52,537 54,672
Cash flows provided by (used in):
Operating activities ........................ -- -- (2,413) (7,077) 1,604 (5,828) (6,390)
Investing activities ........................ -- -- (1,807) (1,209) 421 631 188
Financing activities ........................ -- -- 4,245 8,286 (1,970) 5,201 6,181
Ratio of earnings to fixed charges(7) ......... -- -- 4.3x -- 1.0x -- --
Balance Sheet Data (at end of period):
Working capital ................................ $ 24,076 $ 4,848 $ 15,217 $ 14,214 $ 13,898 $ 20,109
Total assets ................................... 70,086 44,795 47,989 45,236 42,563 45,050
Total long-term debt(8) ........................ 66,924 1,801 6,136 15,136 13,166 19,405
Advances and equity (deficit) .................. (20,127) 20,278 24,966 14,024 13,888 12,602
</TABLE>
- ----------
footnotes appear on following page
44
<PAGE>
(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, Balfour's management
believes these amounts are not significant for the periods presented.
(2) For the fiscal year ended February 28, 1993, Balfour's management decided
to make changes with respect to certain of its operations. As a result of
this decision, Balfour sold or disposed of certain inventory and equipment
no longer considered necessary to its modified business and recorded a
restructuring charge associated with such disposal of assets.
(3) Effective February 28, 1993, Town & Country contributed amounts due to Town
& Country from Balfour as additional paid-in-capital, thereby reducing
interest charges on the due to Town & Country amounts in future periods.
(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 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.
(5) Historical capital expenditure levels are not necessarily indicative of the
expected capital expenditure level for the Company's fiscal year ending
August 30, 1997. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Seasonality, Liquidity and Capital
Resources."
(6) Adjusted net sales represents, for all periods presented, net sales
excluding results from (i) the direct mail 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.
<TABLE>
<CAPTION>
Fiscal Year Ended Nine Months Ended
-------------------------------------------------- -------------------
Feb. 29, Feb. 28, Feb. 27, Feb. 26, Feb. 25, Nov. 26, Nov. 24,
1992 1993 1994 1995 1996 1995 1996
-------- -------- -------- -------- -------- -------- --------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Net sales ............................................. $91,681 $83,938 $85,304 $77,491 $71,300 $53,413 $55,521
Less:
Direct distribution of licensed
consumer sports jewelry ............................... -- 2,313 16,271 10,481 -- -- --
Fraternity jewelry product line ....................... 3,997 3,537 -- -- -- -- --
Service award recognition product line ................ 28,084 21,773 7,249 2,119 1,189 876 849
------- ------- ------- ------- ------- ------- -------
Adjusted net sales ................................. $59,600 $56,315 $61,784 $64,891 $70,111 $52,537 $54,672
======= ======= ======= ======= ======= ======= =======
</TABLE>
(7) For the purpose of computing this ratio, earnings consist of income (loss)
before taxes on income and fixed charges. Fixed charges consist of interest
expense, capitalized interest, amortization of deferred debt issuance cost
and a portion of rental expenses. For the fiscal years ended February 29,
1992, February 28, 1993 and February 26, 1995, Balfour's earnings before
fixed charges were insufficient to cover fixed charges by $15.9 million,
$31.3 million and $10.9 million, respectively. For the nine months ended
November 26, 1995 and November 24, 1996, Balfour's earnings before fixed
charges were insufficient to cover fixed charges by $1.0 million and $1.2
million, respectively.
(8) The change in total long term debt from February 25, 1996 to November 24,
1996 is due to the seasonal nature of Balfour's operations.
45
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the ArtCarved
financial statements and notes thereto, the Balfour financial statements and
notes thereto and the other financial information appearing elsewhere herein.
See "Index to Financial Statements."
This Prospectus contains forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933, as amended. Discussions containing
such forward-looking statements may be found in the material set forth below and
under "Prospectus Summary," "Risk Factors," "Unaudited Pro Forma Combined
Financial Statements and Other Data" and "Business" as well as in the Prospectus
generally. Actual events or results may differ materially from those discussed
in the forward-looking statements as a result of the various factors, including,
without limitation, the factors set forth below and the other matters set forth
in the Prospectus generally.
General
The Company is the second largest manufacturer of class rings in the United
States based on net sales and is a supplier of graduation-related scholastic
products for the high school and college markets. The Company is the only class
ring manufacturer with a strong national presence in the three primary sales
channels for class rings and scholastic products. The Company also manufactures
and markets recognition and affinity jewelry designed to commemorate significant
events, achievements and affiliations.
During the late 1980s and early 1990s, the prior owners of each of
ArtCarved and Balfour diverted the focus and resources of such companies and
considerable management time from their respective core class ring businesses.
Management believes that the multiple changes in ownership, strategic direction
and management attention to other subsequently discontinued business lines of
ArtCarved and Balfour had an unfavorable impact on the financial performance of
such entities and on the ability of prior management of such companies to
develop and expand their respective businesses.
Despite continued operating profitability in ArtCarved's core class ring
operations, difficulties in CJC's non-ArtCarved operations, which had
substantial working capital requirements, and bankruptcy filings by several
significant customers of that division led to a substantial drain on CJC's
resources and led to CJC's recapitalization, which began in 1993 and was
completed in 1996. Balfour discontinued its direct mail distribution of licensed
consumer sports jewelry (the "direct mail program") due to high marketing costs
and poor collections of installment payments, which were responsible for an
operating loss of $10.3 million, including the allocation of certain fixed
overhead costs, for Balfour's fiscal year ended February 26, 1995. In March
1994, Balfour sold its fraternity jewelry product line, thereby eliminating a
product line with operating losses of $0.6 million, including the allocation of
certain fixed overhead costs, in both of Balfour's fiscal years ended February
29, 1992 and February 28, 1993.
The Company sells its high school class rings through two distinct sales
channels--in-store to independent retail jewelers, chain jewelers and mass
merchants and in-school through Balfour's independent sales representatives.
Historically, Balfour's selling expenses tend to represent a relatively high
percentage of Balfour's net sales because Balfour's products are marketed at
individual schools through independent sales representatives, who are
compensated on a commission basis. Alternatively, ArtCarved has employed a
salaried sales force to sell its class rings in-store, and consequently,
ArtCarved's selling expenses are comparatively lower than those of Balfour. See
"Business--Sales and Marketing" and "--Employees."
Effective September 1, 1993, ArtCarved changed to a fiscal year consisting
of 52 or 53 weeks, as applicable, ending on the last Saturday in August.
Effective February 1990, Balfour changed to a fiscal year consisting of 52 or 53
weeks, as applicable, ending on the last Sunday of February. Neither change in
fiscal years resulted in a material
46
<PAGE>
impact on results of operations. The Company's fiscal year consists of 52 or 53
weeks, as applicable, ending on the last Saturday of August.
Results of Operations
ArtCarved
Three Months Ended November 30, 1996 (the "three months ended November
1996") to Three Months Ended November 25, 1995 (the "three months ended November
1995").
Net Sales. Net sales increased less than $0.1 million, or 0.2%, to $22.0
million for the three months ended November 1996 from $21.9 million for the
three months ended November 1995. The increase in sales reflected a 4.5%
increase in units sold, which more than offset a 4.1% decrease in average unit
price. The increase in units sold primarily reflected a 110.0% increase in units
sold of other jewelry products, primarily through the expansion of personalized
family jewelry products, which was partially offset by a 9.6% decrease in units
sold of college class rings. The decrease in average unit price resulted
primarily from the change in product mix resulting in decreased sales in the
higher average unit price of the college segment to the lower average unit price
of the personalized family jewelry products.
Gross Profit. Gross profit decreased $0.4 million, or 3.0% to $12.3 million
for the three months ended November 1996 from $12.7 million for the three months
ended November 1995. As a percentage of net sales, gross profit decreased to
56.2% for the three months ended November 1996 from 58.0% for the three months
ended November 1995. This decrease was primarily a result of a change in product
mix resulting from decreased sales of college rings, and increased sales of
personalized family jewelry products.
Selling, General & Administrative Expenses. Selling, general and
administrative expenses decreased $0.4 million, or 4.4%, to $8.1 million for the
three months ended November 1996 from $8.5 million for the three months ended
November 1995. As a percentage of net sales, selling, general and administrative
expenses decreased to 36.9% for the three months ended November 1996 from 38.7%
for the three months ended November 1995. This decrease was primarily a result
of postponing certain marketing activities from the three months ended November
1996 until the second and third quarter of the fiscal year ending August 30,
1997.
47
<PAGE>
Operating Income. As a result of the foregoing, operating income was $4.2
million for the three months ended November 1996 and November 1995. As a
percentage of net sales, operating income decreased to 19.2% for the three
months ended November 1996 from 19.3% for the three months ended November 1995.
Interest Expense, Net. Interest expense, net decreased $0.9 million to $2.5
million for the three months ended November 1996 from $3.4 million for the three
months ended November 1995, primarily as a result of $16.4 million of debt
reduction due to the restructuring and recapitalization of CJC that was
consummated in March 1996.
Income Tax Expense. There was no income tax provision in either the three
months ended November 1996 or the three months ended November 1995, due to
available federal net operating tax losses and other credit carryforwards of CJC
that eliminated the need for a federal tax provision.
Net Income (Loss). As a result of the foregoing, net income increased $0.8
million, to $1.7 million for the three months ended November 1996 from $0.9
million for the three months ended November 1995.
Twelve Months Ended August 31, 1996 ("fiscal 1996") to Twelve Months Ended
August 26, 1995 ("fiscal 1995")
Net Sales. Net sales decreased $1.3 million, or 1.8%, to $70.7 million in
fiscal 1996 from $72.0 million in fiscal 1995. The decrease in sales reflected a
4.7% decrease in units sold, which more than offset a 3.0% increase in average
unit price. The decline in units sold primarily reflected an 11.3% decrease in
units sold of high school class rings, which was partially offset by a 3.0%
increase in units sold of college class rings and a 39.3% increase in units sold
of other jewelry products. Management believes the decline in high school units
sold resulted primarily from heightened marketing efforts and aggressive pricing
from competitors in the in-school market during the 1995 fall back-to-school
season. The impact on ArtCarved of this increased competitive environment in the
in-school market was partially offset in the second half of fiscal 1996 by
ArtCarved's increased in-store marketing. The increase in average unit price
primarily resulted from price increases in high school class rings sold to mass
merchants.
Gross Profit. Gross profit decreased $1.1 million, or 2.8%, to $38.0
million in fiscal 1996 from $39.1 million in fiscal 1995. As a percentage of net
sales, gross profit decreased to 53.8% in fiscal 1996 from 54.3% in fiscal 1995.
This decease was due primarily to a decrease in the number of units sold and an
average increase in gold material costs which was not reflected in unit prices
until the end of the second quarter of fiscal 1996.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses decreased $0.3 million, or 1.0%, to $27.9 million in
fiscal 1996 from $28.2 million in fiscal 1995. As a percentage of net sales,
selling, general administrative expenses increased to 39.5% in fiscal 1996 from
39.2% in fiscal 1995, primarily as a result of decreased sales and increased
marketing expenditures. The decrease in selling, general and administrative
expenses resulted from a $1.1 million decrease in general and administrative
expenses and savings associated with staff reductions and a $0.6 million
decrease in depreciation and amortization cost. These cost reductions were
substantially offset by an increase in marketing costs of $1.4 million, which
funded additional college direct mail advertising and enhanced high school
marketing efforts.
Restructuring Charges. Restructuring charges of $3.2 million in fiscal 1995
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.
Operating Income (Loss). As a result of the foregoing, operating income
increased $2.4 million, or 31.8%, to $10.1 million in fiscal 1996 from $7.6
million in fiscal 1995. Operating income before restructuring charges decreased
$0.8 million, or 7.5%, to $10.1 million in fiscal 1996 from $10.9 million in
fiscal 1995. As a percentage of net sales, operating income before restructuring
charges decreased to 14.3% in fiscal 1996 from 15.1% in fiscal 1995.
48
<PAGE>
Interest Expense, Net. Interest expense, net decreased $1.7 million, to
$11.9 million for fiscal 1996 from $13.6 million in fiscal 1995, primarily as a
result of $16.4 million of debt reduction due to the restructuring and
recapitalization of CJC that was consummated in March 1996.
Income Tax Expense. There was no income tax provision in either fiscal 1996
or fiscal 1995, due to available federal net operating tax losses and other
credit carryforwards of CJC that eliminated the need for a federal tax
provision.
Net Income (Loss). As a result of the foregoing, net loss decreased $4.2
million, to $1.8 million, in fiscal 1996 from a net loss of $6.0 million in
fiscal 1995.
Twelve Months Ended August 26, 1995 ("fiscal 1995") to Twelve Months Ended
August 27, 1994 ("fiscal 1994")
Net Sales. Net sales increased $2.2 million, or 3.1% , to $72.0 million in
fiscal 1995 from $69.8 million in fiscal 1994. the increase in net sales
reflected a 4.1% increase in average unit price, which offset a 1.0% decrease in
units sold. This increase was due primarily to increased sales of college class
rings of $2.4 million, which resulted from increased unit sales of 5.3% and a
higher average sales price of 5.0%, which was partially offset by decreased unit
sales of high school class rings of 2.9%. The increase in average unit price
resulted primarily from a favorable product mix change in style and metal type
in the college and high school class ring segments.
Gross Profit. Gross profit decreased $0.1 million, or 0.3%, to $39.1
million in fiscal 1995 from $39.2 million in fiscal 1994. As a percentage of net
sales, gross profit decreased to 54.3% in fiscal 1995 from 56.2% in fiscal 1994.
This decrease was primarily a result of a change in product mix in metal type of
class rings, increased gold and stone raw material costs, and an increase in
hourly wages.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased $1.6 million, or 6.0%, to $28.2 million in
fiscal 1995 from $26.6 million fiscal 1994. As a percentage of net sales,
selling, general and administrative expenses increased to 39.2% in fiscal 1995
from 38.1% in fiscal 1994. This increase was predominately due to an increase of
$0.9 million in marketing costs associated with college and high school direct
mail advertising and an increase of $0.9 million in depreciation and
amortization.
Restructuring Charges. Restructuring charges of $3.2 million in fiscal 1995
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.
Operating Income (Loss). As a result of the foregoing, operating income
decreased $5.0 million, or 39.5%, to $7.6 million in fiscal 1995 from $12.6
million in fiscal 1994. Operating income before restructuring charges decreased
$1.7 million, or 13.8%, to $10.9 million in fiscal 1995 from $12.6 million in
fiscal 1994. As a percentage of net sales, operating income before restructuring
charges decreased to 15.1% in fiscal 1995 from 18.1% in fiscal 1994.
Interest Expense, Net. Interest expense, net increased $2.1 million, or
18.3%, to $13.6 million in fiscal 1995 from $11.5 million in fiscal 1994,
primarily as a result of the higher average loan balances of CJC outstanding
during fiscal 1995.
Income Tax Expense. There was no federal income tax provision in either
fiscal 1995 or fiscal 1994 due to available federal net operating tax losses and
other tax credit carryforwards of CJC that eliminated the need for a federal tax
provision. The fiscal 1994 income tax expense represents a provision for state
income taxes of CJC.
Net Income (Loss). As a result of the foregoing, net income (loss)
decreased $7.0 million to a net loss of $6.0 million in fiscal 1995 from net
income of $1.0 million in fiscal 1994.
Balfour
49
<PAGE>
Nine Months Ended November 24, 1996 (the "nine months ended November 1996")
to Nine Months Ended November 26, 1995 (the "nine months ended November 1995").
Net Sales. Net Sales increased $2.1 million, or 3.9%, to $55.5 million for
the nine months ended November 1996 from $53.4 million for the nine months ended
November 1995. The increase primarily reflects a $3.2 million increase in
scholastic products and a $0.2 million increase in licensed consumer sports
jewelry. These increases were offset by a decline in sports championship jewelry
of $1.3 million, primarily attributable to the fact that Balfour, which had been
awarded the contract to produce the 1995 Super Bowl championship rings, was not
awarded the contract in 1996.
Gross Profit. Gross profit increased $2.2 million, or 8.4%, to $28.5
million for the nine months ended November 1996 from $26.3 for the nine months
ended November 1995. As a percentage of net sales, gross profit increased to
51.3% for the nine months ended November 1996 from 49.3% for the nine months
ended November 1995. The change in gross profit is primarily related to the
volume increase of scholastic products, resulting in a $1.7 million increase in
gross profit, as well as reduced labor and overhead costs associated with class
rings manufacturing resulting in an additional $0.7 million of gross profit.
These gains were offset by a volume reduction of recognition and affinity
products (including Super Bowl rings) resulting in a $0.2 million decline in
gross profit.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased $2.1 million, or 8.1%, to $27.9 million for
the nine months ended November 1996 from $25.8 million for the nine months ended
November 1995. As a percentage of net sales, selling, general and administrative
expenses increased to 50.3% of net sales in the nine months ended November 1996
from 48.3% of net sales in the nine months ended November 1995. This increase is
primarily the result of updating the class rings marketing material for both the
high school and college markets and increased selling expenses associated with
jewelry designed to commemorate the 1996 Summer Olympics.
Operating Income (Loss). Operating income increased $0.2 million to $0.6
million, or 1.1% of net sales, for the nine months ended November 1996 from
operating income of $0.4 million, or 0.8% of net sales, for the nine months
ended November 1995.
Interest Expense, Net. Interest expense decreased $0.1 million to $1.8
million for the nine months ended November 1996 from $1.9 million for the nine
months ended November 1995. The interest rate was at 11.5% for both periods on
amounts due to Town & Country.
Other Income. A gain on the sale of a facility in the amount of $0.4
million is reflected in the nine months ended November 1995.
Income Tax Expense. There was no federal income tax provision in either the
nine months ended November 1996 or the nine months ended November 1995 due to
available federal net operating tax losses and other tax credit carryforwards of
Town & Country that eliminated the need for a federal tax provision. The income
tax expense represents a provision for state income taxes for each of the nine
months ended November 1996 and the nine months ended November 1995.
Net Income (Loss). As a result of the foregoing, net loss increased by $0.1
million, to a net loss of $1.3 million for the nine months ended November 1996
from a net loss of $1.2 million for the nine months ended November 1995.
50
<PAGE>
Twelve Months Ended February 25, 1996 (the "1996 period") to Twelve Months
Ended February 26, 1995 (the "1995 period")
Net Sales. Net sales decreased $6.2 million, or 8.0%, to $71.3 million for
the 1996 period from $77.5 million for the 1995 period. A decrease of $10.5
million in the 1996 period resulted from the decision to discontinue the direct
mail program as of February 1995, and the decision to focus on retail
distribution for licensed consumer sports jewelry. This decline was partially
offset by increased net sales of $4.3 million of scholastic products, primarily
fine paper, reflecting the full-year impact during the 1996 period of the
addition of independent regional sales representatives, which began during the
1995 period. Excluding the direct mail program, net sales would have increased
$4.3 million, or 6.4%, to $71.3 million for the 1996 period from $67.0 million
for the 1995 period.
Gross Profit. Gross profit decreased $6.4 million, or 15.2%, to $35.7
million for the 1996 period from $42.1 million for the 1995 period. As a
percentage of net sales, gross profit decreased to 50.1% for the 1996 period
from 54.3% for the 1995 period. This decrease was largely as a result of the
discontinuation of the direct mail program, which resulted in lower
manufacturing unit throughput. The gross profit for the direct mail program for
the 1995 period was $6.4 million, including the allocation of certain fixed
overhead costs.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses decreased $18.2 million, or 35.3%, to $33.5 million for
the 1996 period from $51.7 million for the 1995 period. As a percentage of net
sales, selling, general and administrative expenses decreased to 47.0% for the
1996 period from 66.8% for the 1995 period. This decrease was primarily related
to the elimination of advertising expense of $7.7 million, bad debt expense of
$5.2 million and other related expenses of $0.8 million associated with the
direct mail program in the 1995 period. In addition, Balfour implemented staff
reductions in the selling, marketing, design, finance, MIS and human resource
functions in November 1994 and January 1995, including the discontinuance of the
direct mail program, that resulted in cost savings of $4.5 million in the 1996
period, net of related expenses. The selling, general and administrative
expenses associated with the direct mail program for the 1995 period were $16.7
million, including the allocation of certain fixed overhead costs.
Operating Income (Loss). As a result of the foregoing, operating income
increased $11.9 million, to $2.2 million, or 3.1% of net sales, for the 1996
period from an operating loss of $9.7 million for the 1995 period. The operating
loss for the direct mail program for the 1995 period was $10.3 million,
including the allocation of certain fixed overhead costs.
Interest Expense, Net. Interest expense, net increased $0.8 million, or
43.3%, to $2.6 million in the 1996 period from $1.8 million in the 1995 period.
This increase was primarily the result of increased borrowings to fund
advertising and other expenses associated with the direct mail program and an
increase in the interest rate charged by Town & Country to 11.5% in the 1996
period from 11.0% for the 1995 period.
Income Tax Expense. There was no federal income tax provision in either the
1996 period or the 1995 period due to available federal net operating tax losses
and other tax credit carryforwards of Town & Country that eliminated the need
for a federal tax provision. The income tax expense represents a provision for
state income taxes in both the 1996 period and the 1995 period.
Net Income (Loss). As a result of the foregoing, net loss decreased $10.8
million to a net loss of $0.1 million for the 1996 period from a net loss of
$10.9 million for the 1995 period.
Twelve Months Ended February 26, 1995 (the "1995 period") to Twelve Months
Ended February 27, 1994 (the "1994 period")
Net Sales. Net sales decreased $7.8 million, or 9.2%, to the $77.5 million
for the 1995 period from $85.3 million for the 1994 period. Net sales decreased
by approximately $5.8 million in the 1995 period due to the decision to
discontinue the direct mail program in the 1995 period, which accounted for
$10.5 million and $16.3 million of net sales in the 1995 and 1994 periods,
respectively. In addition, Balfour experienced a $5.1 million
51
<PAGE>
decrease in sales of recognition and affinity products in the 1995 period due to
a decline in the sale of service award recognition products that remained
following the sale of substantially all of this product line in April 1993. Net
sales of in-school scholastic products increased $2.3 million in the 1995 period
as a result of the addition of new independent sales representatives and net
sales of licensed consumer sports jewelry increased $1.3 million in the 1995
period as a result of the expansion of Balfour's retail distribution of licensed
consumer sports jewelry. Excluding net sales from the direct mail program, net
sales for the 1995 period would have decreased $2.0 million, or 2.9%, to $67.0
million for the 1995 period from $69.0 million for the 1994 period.
Gross Profit. Gross profit decreased $7.3 million, or 14.9% to $42.1
million for the 1995 period from $49.4 million for the 1994 period. As a
percentage of net sales, gross profit decreased to 54.3% for the 1995 period
from 58.0% for the 1994 period. A decline in the direct mail program sales
volume accounted for $6.1 million of the decrease. Additionally, the volume
decline in sales of Balfour affinity and recognition products contributed $1.7
million offset by a volume increase in sales of licensed consumer sports jewelry
due to volume increases of $0.5 million. The gross profit for the direct mail
program for the 1995 and 1994 periods were $6.4 million and $12.5 million,
respectively, including the allocation of certain fixed overhead costs. The
decline in gross profit as a percentage of sales in the 1995 period reflects the
substantially lower manufacturing unit throughput that resulted from the
discontinuation of the direct mail program.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased $8.4 million, or 19.4%, to $51.7 million for
the 1995 period from $43.3 million for the 1994 period. As a percentage of net
sales, selling, general and administrative expenses increased to 66.8% for the
1995 period from 50.8% for the 1994 period. This increase resulted from (i) $5.2
million in bad debt expense associated with the direct mail program, (ii) and
increase of $1.2 million in fine paper selling expenses as a result of increased
sales and the addition of independent sales representatives, and (iii) the
relocation of administrative offices and an increase in staff associated with
administrative support for the direct mail program and MIS improvements. The
selling, general and administrative expenses associated with the direct mail
program for the 1995 and 1994 period were $16.7 million and $11.5 million,
respectively, including an allocation of certain fixed overhead costs.
Operating Income (Loss). As a result of the foregoing, operating income
decreased $15.8 million to an operating loss of $9.7 million for the 1995 period
from operating income of $6.1 million, or 7.1% of net sales, for the 1994
period. Operating loss for the direct mail program for the 1995 period was $10.3
million and the operating income for the 1994 period was $1.0 million, including
the allocation of certain fixed overhead costs for each period.
Interest Expense, Net. Interest expense, net increased $0.4 million, or
32.2%, to $1.8 million in the 1995 period from $1.4 million in the 1994 period.
This increase was the result of higher average loan balances with Town & Country
resulting from the direct mail program.
Income Tax Expense. There was no federal income tax provision in either the
1995 period or the 1994 due to federal net operating tax losses and other tax
credit carryforwards of Town & Country that eliminated the need for a federal
tax provision. The income tax expense represents a provision for state income
taxes in both the 1995 period and the 1994 period.
Net Income (Loss). As a result of the foregoing, net income decreased $15.6
million to a net loss of $10.9 million for the 1995 period from net income of
$4.7 million for the 1994 period.
Tax Matters
Net operating loss carryforwards generated by the predecessor operations
of ArtCarved and Balfour will not be available to benefit the future tax
provision of the Company as assets and liabilities were purchased.
Impact of Inflation
The Company's operating expenses are directly affected by inflation, which
results in an increased cost of conducting business. In general, the Company
believes that the rate of inflation over the past several years has not had a
significant impact on its sales, operating income (loss) or results of
operations.
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Raw Material Price Fluctuations
The Company requires significant amounts of gold for the manufacture of its
jewelry. The Company finances a majority of its gold inventory requirements
through its Gold Facility. Management believes that the Company has sufficient
availability under its Revolving Credit and Gold Facilities to finance all of
its gold inventory requirements.
The Company seeks to reduce 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 can reset 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
case, 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 period, the Company may engage in certain hedging transactions
to reduce the effects of fluctuations in the price of gold during these periods.
The Company currently does not have any such hedges in place.
The Company also uses precious metals and both precious and semiprecious
stones in its products and, accordingly, any increase in the price of these
materials could have a significant adverse impact on its cost of sales. See
"Business--Raw Materials."
Seasonality, Liquidity and Capital Resources
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. The Company
has historically experienced operating losses during its fourth fiscal quarter,
which includes the summer months when school is not in session. Management does
not expect the Company's recognition and affinity product line to be seasonal in
any material respect, although it does anticipate that sales will be 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. See "Risk
Factors--Seasonality."
As a result of the foregoing, the Company's working capital requirements
tend to exceed its operating cash flows from July through December.
Historically, ArtCarved met its working capital and capital expenditures
requirements through cash flow provided by operating activities, while Balfour
met its working capital and capital expenditures requirements through cash flow
from operations and borrowings from its parent. ArtCarved's cash flow from
operating activities was $11.1 million, $(3.1) million, and $1.7 million for the
periods ended August 27, 1994, August 26, 1995 and August 31, 1996,
respectively. In ArtCarved's fiscal year ended August 27, 1994, the cash
provided from operating activities was primarily a result of increased accrued
interest. No interest payments were made due to negotiations related to the
restructuring and recapitalization of CJC's debt. In ArtCarved's fiscal year
ended August 26, 1995, cash used in operating activities was a result of
increased receivables, other assets and decreased accrued expenses. In
ArtCarved's fiscal year ended August 31, 1996, cash provided by operating
activities was $1.7 million, primarily as a result of a decrease in prepaid
expenses.
ArtCarved's cash flow used in investing activities was $1.2 million, $1.1
million and $0.8 million for the periods ending August 27, 1994, August 26, 1995
and August 31, 1996, respectively. The cash used was for purchases of plant,
property and equipment.
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ArtCarved's net cash provided by (used in) financing activities were $(9.9)
million, $4.3 million and $0.8 million for the periods ending August 27, 1994,
August 26, 1995 and August 31, 1996, respectively. In ArtCarved's fiscal year
ended August 27, 1994, the net cash used in financing activities was primarily a
result of the expiration of the gold consignment agreement, and the bank
presenting a draft for payment of the gold under the letter of credit. In
ArtCarved's fiscal year ended August 26, 1995, the net cash provided by
financing activities was a result of the changes in cash flow from operating
activities and investing activities discussed above. The net cash provided by
financing activities in ArtCarved's fiscal year ended August 31, 1996 was a
result of a $16.4 million payment of debt related to the restructuring and
recapitalization of CJC's debt and the changes in cash flow from operating
activities and investing activities discussed above.
Balfour's cash flow provided by (used in) operating activities was $(2.4)
million, $(7.1) million and $1.6 million for the periods ended February 27,
1994, February 26, 1995 and February 25, 1996, respectively. In Balfour's fiscal
year ended February 27, 1994, the use of cash resulted from increased accounts
receivable and inventories for the direct mail program and decreases in deferred
expenses also associated with the direct mail program. In Balfour's fiscal year
ended February 26, 1995, the use of cash primarily resulted from increased
inventories for the direct mail program. In Balfour's fiscal year ended February
25, 1996, the cash flow was provided primarily by reductions in inventories and
prepaid expenses. For the nine months ended November 26, 1995 and November 24,
1996 the use of cash was impacted primarily by increased accounts receivable
caused by the seasonality of the business. Accounts receivable for scholastic
products shipped during the months of August to November become due in January.
The Company's liquidity needs arise primarily from debt service on the
indebtedness to be incurred in connection with the Transactions, payments
required under a Management Agreement with Castle Harlan, Inc. (see "Certain
Relationships and Related Transactions") and working capital and capital
expenditure requirements. The Company is party to the Revolving Credit Facility
and expects peak borrowings to occur from October through December. As of
December 16, 1996, the Company had outstanding approximately $126.2 million of
indebtedness, consisting of the Notes, $25.0 million under the Term Loan
Facility and $11.2 million in borrowings under the Revolving Credit and Gold
Facilities. The Revolving Credit and Gold Facilities permit borrowings of up to
a maximum aggregate principal amount of $35.0 million based upon availability
under a borrowing base, with a sublimit of $5.0 million for letters of credit
and $10.0 million for either gold, pursuant to a consignment arrangement, or
dollar borrowings. Management believes that it will have sufficient availability
under these facilities to meet its working capital needs. See "Description of
the Bank Credit Facility."
Debt Service. Interest payments under the Bank Credit Facility and on the
Notes represent significant liquidity requirements for the Company. The Term
Loan Facility will mature in 2003, and the commitments under the Revolving
Credit and Gold Facilities will expire in 2001. Loans outstanding under the Bank
Credit Facility will bear interest at either fixed or floating rates based upon
the interest rate option elected by the Company. See "Description of the Bank
Credit Facility."
Capital Expenditures. For the fiscal year ending August 30, 1997, ongoing
capital expenditures for the Company are expected to relate principally to tools
and dies, software upgrades, and ongoing capital improvements. Management
estimates that the Company will spend approximately $3.8 million during this
period for these types of recurring expenditures. In addition, Management
estimates that the Company will spend approximately $1.9 million during this
period on non-recurring capital expenditures related to the Combination,
including spending on telephone and computer system upgrades and the preparation
of ArtCarved's Austin, Texas facility to accommodate Balfour's operations.
Future Financing Sources and Cash Flows. Management believes that amounts
available under the Revolving Credit and Gold Facilities are sufficient to meet
future working capital and other business needs of the Company. The Company
believes that cash generated from operations, together with amounts available
under the Revolving Credit and Gold Facilities, will be adequate to permit the
Company to meet its debt service obligations, capital expenditure program
requirements, ongoing operating costs and working capital needs, although no
assurance can be given in this regard. The Company's future operating
performance and its ability to service or refinance the
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<PAGE>
Notes and to repay, extend or refinance the Bank Credit Facility or to incur
additional debt will be subject to future economic conditions, financial
performance and other factors, many of which are beyond the Company's control.
See "Risk Factors." In addition, covenants under the Indenture and the Bank
Credit Facility restrict, among other things, the Company's ability to incur
additional indebtedness, create liens, engage in a business other than certain
permitted lines of business, make certain investments, sell assets, merge with
or into another entity, issue stock and transact with affiliates. See
"Description of Notes--Certain Covenants" and "Description of the Bank Credit
Facility."
55
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BUSINESS
This Prospectus contains forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933, as amended. Discussions containing
such forward-looking statements may be found in the material set forth below and
under "Prospectus Summary," "Risk Factors," "Unaudited Pro Forma Combined
Financial Statements and Other Data" and "Management's Discussion and Analysis
of Financial Condition and Results of Operations" as well as in the Prospectus
generally. Actual events or results may differ materially from those discussed
in the forward-looking statements as a result of various factors, including,
without limitation, the factors as set froth below and the other matters set
forth in the Prospectus generally.
Overview
The Company is the second largest manufacturer of class rings in the United
States based on net sales and also supplies 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 of substantially all of the scholastic and recognition and affinity
products assets and businesses of the ArtCarved operations of CJC and the
Balfour operations of L.G. Balfour Company. In combining ArtCarved and Balfour,
the Company joined together two of the most widely recognized and most respected
names in the scholastic products market in the United States.
The Company's scholastic product line consists of high school and college
class rings (the Company's largest product offering) and graduation-related fine
paper products such as announcements, name cards and diplomas. The Company's
independent sales representatives also sell or distribute caps and gowns,
yearbooks, memory books, and other graduation apparel and accessories
manufactured by others. The Company markets and distributes its scholastic
products, which represented approximately 85% of net sales in Pro Forma Fiscal
1996, through three distinct sales channels: (i) the high school "in-store"
channel of retailers, including approximately 5,100 independent retail jewelers,
approximately 21 of the nation's 40 largest retail jewelry chains (representing
approximately 1,200 stores throughout the United States) and approximately 2,200
Wal-Mart and 2,100 Kmart stores nationwide; (ii) the high school "in-school"
channel of independent sales representatives, who sell directly to students in
approximately 4,500 high schools throughout the United States; and (iii) the
college "on-campus" sales organization, which sells to students in approximately
1,700 colleges and universities throughout the United States primarily through
on-campus bookstores and, to a lesser extent, through local bookstores.
Management believes that this comprehensive distribution network distinguishes
the Company from its competitors and enables it to offer its products through a
wider array of formats and locations throughout the year, thereby providing
customers with the convenience of availability and choice of location for
purchasing scholastic products.
The Company has three national competitors, none of which has a strong
nationwide presence in all three primary sales channels for scholastic products.
Management estimates that the market for high school and college class rings is
approximately $350 million per year, of which the high school segment represents
approximately 70% of the market and the college segment represents approximately
30% of the market. Management also estimates that within the high school
segment, 65% of the high school class rings sold are sold through the in-school
sales channel with the remaining 35% being sold through the in-store sales
channel. College class rings are sold primarily through on-campus bookstores
and, to a lesser extent, through local bookstores.
The Company's recognition and affinity product line consists primarily of
rings, pins and other jewelry designed to enable individuals to show pride in
their affiliations with or support for their favorite organizations and sports
teams. The Company's recognition and affinity product line is comprised of four
major product categories:
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<PAGE>
(i) licensed consumer sports jewelry, consisting of rings and other jewelry,
intended for fans who wish to express their affinity and support for their
favorite professional, amateur and collegiate sports teams, historically
including all of the teams in the National Football League, Major League
Baseball, the National Basketball Association and the National Hockey League;
(ii) sports championship jewelry and related products for the members of
championship teams to commemorate their achievements, such as Super Bowl rings
for the San Francisco 49ers in 1995 and World Series trophies for the members of
the 1996 New York Yankees, and rings for individuals who bowl an American
Bowling Congress-sanctioned perfect game; (iii) personalized family jewelry,
consisting primarily of rings, bracelets, necklaces and other jewelry designed
to commemorate family and significant life events such as births and baptisms
and other family celebrations and holidays such as Mother's Day and Valentine's
Day; and (iv) corporate recognition and reward jewelry, consisting of rings,
pins and other jewelry, designed to commemorate employees' anniversaries with or
accomplishments on behalf of various corporations, historically including The
Coca-Cola Company, McDonalds Corp. and Xerox Corp.
ArtCarved and Balfour historically sold similar products and have
complementary strengths. The ArtCarved(R) brand name has been associated with
numerous technical and marketing innovations during more than 50 years in the
jewelry industry and has been used for class rings since 1976. Since the
inception of the in-store sales channel in 1963, ArtCarved and its predecessor
have been the leading supplier of high school rings in the in-store market, and
have also been a leading supplier of college class rings. Balfour began as an
insignia jewelry manufacturer in 1913 and entered the class ring industry in
1922, eventually becoming a significant producer of class rings as well as
service awards and recognition products. Balfour manufactures and sells high
school and college class rings and scholastic fine paper products and graduation
accessories through a network of independent sales representatives who market
Balfour(R) products directly in-school and on-campus.
CBI (formerly known as "Scholastic Brands, Inc.") was formed 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.
Business Strategy
Management's primary objective is to increase profitability through the
growth of the Company's sales and the realization of identified operational
improvements following the Combination. The Company will build on its leading
market position in class rings and the strong brand recognition of the
ArtCarved(R) and Balfour(R) brand names. Management seeks to achieve these
objectives by: (i) capitalizing on cost reduction opportunities presented by the
Combination; (ii) marketing a broader array of products by utilizing the
Company's comprehensive distribution network to cross-market existing products
and by continuing to develop and acquire new products and expand product lines;
and (iii) strengthening the Company's in-school sales channel through the
addition of independent sales representatives.
Capitalize on Cost Reduction Opportunities. In connection with the
Acquisitions, Management has developed a detailed consolidation plan that
Management believes will enable the Company to achieve approximately $7.4
million of annual cost savings relative to the historical cost structures of the
Company's predecessors (the "Annual Cost Savings"). Of the $7.4 million in
Annual Cost Savings, Management expects the Company to realize $4.3 million from
the elimination of duplicative personnel, occupancy and fixed overhead costs and
$3.1 million as a result of the lower prevailing wage rates in Austin, Texas and
the elimination of other duplicative costs resulting from the closure of Balfour
facilities. The Annual Cost Savings do not reflect estimated non-recurring
severance and relocation costs of approximately $5.5 million and incremental
capital expenditures of approximately $1.9 million to be incurred in connection
with the Combination.
o Manufacturing Integration. Management intends to consolidate the
operations of the Balfour jewelry manufacturing facilities in Attleboro and
North Attleboro, Massachusetts, into the existing ArtCarved operations in
Austin, Texas. During Pro Forma Fiscal 1996, Balfour's Massachusetts jewelry
facilities operated at approximately
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50% of their aggregate manufacturing capacity. ArtCarved and Balfour use
compatible manufacturing processes at their facilities, and ArtCarved's Austin,
Texas facilities have the capacity to accommodate additional production.
Management estimates that as a result of the Combination the Company will
realize cost savings from the elimination of occupancy costs associated with the
Balfour manufacturing facilities, the elimination of specifically identified
duplicative personnel and related expenses, the relocation of other functional
positions to Austin, Texas at lower prevailing wage rates, and the higher
productivity rate at the Austin, Texas manufacturing facilities.
o Selling, General and Administrative Cost Reductions. Management believes
that a significant portion of the SG&A services currently performed by Balfour
can be performed using ArtCarved's existing infrastructure and personnel.
Management estimates that the Company will realize substantial savings resulting
from reduced SG&A expenses, attributable to the elimination of specifically
identified duplicative personnel and related expenses, the relocation of other
functional positions to Austin, Texas at lower prevailing wage rates, and the
elimination of occupancy costs associated with the Balfour administrative
facility in North Attleboro, Massachusetts.
The Company has begun the consolidation of the Company's operations to
Austin, Texas, and Management expects that the consolidation of operations will
be completed during the fiscal year ending August 30, 1997. Management expects
that a portion of the Annual Cost Savings will be realized during the fiscal
year ending August 30, 1997 and that all of such savings will be realized during
the fiscal year ending August 29, 1998. There can be no assurance that the
Company will complete its consolidation by the end of its fiscal year ending
August 30, 1997 or that the Annual Cost Savings will be realized by the end of
its fiscal year ending August 29, 1998, or at all.
The following is a summary of the Annual Cost Savings that details (i) the
portion of the Annual Cost Savings that are reflected in the adjustments to the
unaudited pro forma combined financial statements, and (ii) the balance of the
Annual Cost Savings that Management expects to achieve in connection with the
Combination (dollars in thousands):
<TABLE>
<CAPTION>
Cost of
Sales SG&A Total
-------- -------- --------
<S> <C> <C> <C>
Elimination of duplicative personnel..................... $ 1,304 $ 1,974 $3,278
Elimination of occupancy and fixed overhead.............. 939 74 1,013
-------- -------- --------
Pro forma adjustments........................... 2,243 2,048 4,291
-------- -------- --------
Wage rate differential................................... 1,752 605 2,357
Elimination of other duplicative costs................... 416 339 755
-------- -------- --------
Additional cost savings......................... 2,168 944 3,112
-------- -------- --------
Total Annual Cost Savings................................ $ 4,411 $ 2,992 $ 7,403
======== ======== ========
</TABLE>
Market Broader Array of Products. The Company's comprehensive distribution
network and highly effective sales organization provide the Company with broad
market coverage and strong customer relations, which Management believes present
opportunities to increase net sales without incurring significant incremental
sales and distribution costs. To achieve this objective, Management will
implement the following programs:
Cross-Market Existing Products. Management believes there are
significant growth opportunities in selling Balfour's fine paper products
to college students through ArtCarved's existing on-campus sales channel
and selling Balfour's licensed consumer sports jewelry through ArtCarved's
existing retail sales channel, including independent retail jewelers,
retail jewelry chains and mass merchants. ArtCarved's leading position in
the sale of college class rings through on-campus college bookstores
provides a strong platform to market simultaneously Balfour's fine paper
products to the same student population without incurring any material
incremental selling or marketing expenses. Additionally, beginning in
September 1995, Balfour's licensed
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consumer sports jewelry was test-marketed in 15 J.C. Penney stores in the
San Francisco metropolitan area. As a result of the success of this
program, as of January 15, 1997, J.C. Penney offered this line of jewelry
in over 400 J.C. Penney stores nationwide. Management believes that
Balfour's licensed consumer sports jewelry is well-suited for the ArtCarved
retail sales channel, and has plans to introduce these products to such
retailers during the fiscal year ending August 30, 1997.
Develop and Acquire New Products and Expand Product Lines. Management
intends to pursue growth by penetrating new markets with new and existing
products and to expand the Company's presence in existing markets by
introducing product line extensions and new products. In April 1996,
ArtCarved introduced its Celebrations of Life(R) selection of rings, which
are personalized with children's names, birthdates and birthstones to
commemorate parenthood, to approximately 2,000 independent and chain
jewelers. The Company plans to further expand this product line to include
other jewelry designed to commemorate other significant life events, family
celebrations and holidays. In order to leverage its comprehensive
distribution network, the Company has developed other lines of ArtCarved's
personalized family jewelry for the retail sales channel, primarily mass
merchants. For example, in September 1996, ArtCarved introduced its
Nameosake(TM) selection of personalized family jewelry to approximately
1,350 Wal-Mart stores nationwide, and Management expects to expand this
product line to all Wal-Mart stores nationwide by March 1997. In addition,
the Company plans to expand Balfour's line of licensed consumer sports
jewelry to include additional styles and products, such as charms,
pendants, earrings and cufflinks.
Strengthen In-School Sales Channel. Management intends to strengthen the
Company's presence in the in-school sales channel to increase the number of
students in each school who purchase the Company's products, expand school
coverage in geographic areas where the Company is currently under-represented
and extend its scholastic product lines. In July 1996 the Company introduced a
simplified marketing program for its in-school sales channel to stimulate demand
for the Company's scholastic products in-school. Management also plans to expand
the geographic presence of the Company's in-school independent sales
representatives beyond its primary focus in the Eastern, Southern and Midwestern
sections of the United States by adding additional independent sales
representatives in selected strategic regions to augment its in-school sales
channel. Additionally, Management believes that the improvements in the
Company's product offerings, customer service and financial resources that it
believes will result from the Combination will enable the Company to attract
additional sales representatives as well as improve the effectiveness of the
current in-school independent sales representatives. Specifically, because of
ArtCarved's modern manufacturing techniques and resulting accelerated product
cycles, the Company's Balfour in-school independent sales representatives will
be able to deliver rings in approximately one-half the time as was previously
capable from Balfour's production facilities. This production cycle time
improvement is expected to enhance in-school customer relations by providing
quicker order turnaround, thereby enabling the Balfour independent sales
representatives to market merchandise in the schools more frequently during each
selling season, thereby providing the potential for increased sales. Lastly,
through increased joint marketing efforts with other scholastic product
companies and selective product line acquisitions, the Company intends to
enlarge its product offerings to become a single source supplier of scholastic
products to its customers.
Although Management believes that it will be able to implement its strategy
as set forth above, there can be no assurance that improvements will be
realized, or that there will not be delays in achieving such improvements or
that results will not, in fact, decline.
Products
The Company's larger product line is its scholastic product line,
consisting of high school and college class rings, graduation-related fine paper
products, including graduation announcements, name cards, diplomas and related
products, and graduation accessories, such as memory books, T-shirts, key chains
and pendants. The Company's other product line, its recognition and affinity
product line, is designed to enable purchasers to show their affinity or support
for their favorite teams and to show pride in their affiliations and to help
companies and other organizations promote and recognize achievement.
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The table and sections that follow provide an overview of the Company's
products:
<TABLE>
<CAPTION>
Distribution Channel Brand Name
----------------------------------------- ----------------------
<S> <C> <C>
Scholastic Product Line
High School Class Rings In-School Balfour(R)
In-Store: independent and chain jewelers ArtCarved(R)
R. Johns(R)
In-Store: mass merchants Keystone(R)
Class Rings, Ltd.(R)
Master Class Rings(R)
College Class Rings On-Campus ArtCarved(R)
Balfour(R)
Fine Paper Products In-School Balfour(R)
Recognition and Affinity Product Line
Licensed Consumer Sports Jewelry In-Store, Catalogue Balfour(R)
Sports Championship Jewelry Direct to Consumer Balfour(R)
Keepsake(R)
Corporate Recognition and Reward Director to Consumer Balfour(R)
Jewelry
Personalized Family Jewelry In-Store: independent and chain jewelers Celebrations of Life(R)
In-Store: mass merchants Generations of Love(TM)
Nameosake(TM)
</TABLE>
Class Rings
The Company's largest product offering is its class rings. The Company
manufactures and markets a complete line of both high school and college class
rings with a wide choice of styles, metals, stones and other customized options
that allow students and alumni to personalize their rings in accordance with
their tastes and accomplishments. The Company produces an extensive variety of
traditional jewelry styles as well as an assortment of fashion and contemporary
designs. Purchasers have the option to include the name of the school,
curriculum, date, degree, mascot, activities and either synthetic or genuine
stones in their rings. The Company markets its products in a broad range of
prices through different sales channels.
High School Rings
The Company offers over 100 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, and more than 400 designs that can be placed on or under
the stone and emblems of over 100 activities or sports that 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 Pro Forma Fiscal 1996, the Company's high
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school class rings generally ranged in prices to the student from approximately
$50 for a nonprecious metal ring to approximately $500 for a gold ring with
precious stones. The Company markets its high school class rings under its
ArtCarved(R), Balfour(R), R. Johns(R), Keystone(R), Class Rings, Ltd.(R) and
Master Class Rings(R) brand names.
College Rings
The Company's ArtCarved(R) and Balfour(R) brand 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 Pro Forma
Fiscal 1996, 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 approximately $2,000 for a
gold ring with precious stones.
Fine Paper Products
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 marketed under the Balfour(R)
brand name. Through its independent sales representatives, the Company also
markets certain graduation accessories that it does not produce, such as
T-shirts, pendants denoting class year, caps and gowns, yearbooks, memory books
and other scholastic products manufactured by third parties.
Recognition and Affinity
The Company also offers 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 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 is grouped
into four primary categories. The Company's Balfour(R) 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 has licensing
arrangements with the National Football League and the National Basketball
Association, and the Company has applied to continue Balfour's licensing
arrangements with Major League Baseball and the National Hockey League. These
arrangements enable the licensee to produce rings and other jewelry depicting
the logos and other trademarked names and symbols of all teams in these leagues.
The Company also historically has manufactured jewelry for NASCAR, with United
States Olympic Committee and the U.S. Figure Skating Association. 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 and achievements. The Company offers Balfour(R) sports
championship jewelry on behalf of the foregoing organizations (including Super
Bowl rings to the San Francisco 49ers in 1995 and World Series trophies to the
New York Yankees in 1996) as well as Keepsake(R) jewelry for individuals to
commemorate American Bowling Congress-sanctioned perfect games. The Company's
Celebrations of Life(R), Generations of Love(TM) and Nameosake(TM) personalized
family jewelry consists of rings commemorating children's names, birthdates,
birthstones and baptisms, and other personalized jewelry such as necklaces and
bracelets designed to commemorate family celebrations and other holidays such as
Mother's Day and Valentine's Day. The Company distinguishes its personalized
family jewelry from those of its competitors through extensive personalization
with family names, dates, crests and events. Corporate recognition and reward
Balfour(R) jewelry includes jewelry awards for employees of various corporations
historically including many Fortune 500 corporations such as The Coca-Cola
Company, McDonalds Corp. and Xerox Corp.
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Sales and Marketing
The Company is the only class ring company with a strong 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. No single customer of the Company represented more than 5% of net
sales in Pro Forma Fiscal 1996.
The Company markets its class rings: (i) in-store to independent and chain
jewelers under the names ArtCarved(R) and R. Johns(R) and to mass merchants
under the names Keystone(R), Class Rings, Ltd.(R), and Master Class Rings(R);
(ii) in-school under the Balfour(R) name; and (iii) on-campus under the
ArtCarved(R) and Balfour(R) names. The Company markets its graduation-related
fine paper and accessories under the Balfour(R) name. The Company markets its
licensed consumer sports jewelry and its corporate recognition and reward
jewelry under the Balfour(R) name, its sports championship jewelry under the
Balfour(R) and Keepsake(R) names and its personalized family jewelry under the
Celebrations of Life(R), Generations of Love(TM), and Nameo sake(TM) names.
High School Scholastic Products
The Company is the only class ring manufacturer with a strong national
presence in both of the primary sales channels for high school scholastic
products as a result of the combination of the Balfour in-school channel and the
ArtCarved in-store channel. The Company's presence in both of these sales
channels distinguishes it from its competitors and enables it to sell class
rings throughout the year and to offer its products through a wider array of
formats and locations, thereby providing customers with the convenience and
choice of sales channels.
In-Store Sales Channel.
The Company is the leading supplier of high school class rings in the
in-store channel based on net sales. A predecessor of the Company introduced the
use of in-store sales in 1963 as an alternative to traditional in-school sales.
The Company sells its products in-store to independent jewelry retailers, large
jewelry chains and to mass merchants. The Company was the first class ring
manufacturer to sell class rings to mass merchants, an area of strong sales
growth within the class ring industry over the last eight years. Since 1987, the
Company has sold its products to mass merchants such as Wal-Mart and Kmart. 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.
There are various reasons for selling class rings in the in-store sales
channel rather than the in-school sales channel, including: (i) the advantage of
a year round sales presence at retail store locations compared to the in-school
channel, which typically affords only two to five fixed selling days per school
during each school year; (ii) direct access to both students and their parents,
who, in many cases, are the ultimate purchasers of the scholastic jewelry
product; (iii) the ability to offer products of similar quality at lower prices
due to the Company's lower in-store distribution costs; (iv) the convenience of
the availability of store credit to purchasers to finance a purchase; (v)
quicker product delivery and superior customer service afforded retail
purchasers as a result of the smaller number of units per order; and (vi) the
ability for the Company's salespeople to represent multiple brands in a region.
Independent Retail Jewelers. The Company sells its products to
approximately 5,100 independent jewelers under the name ArtCarved(R) and R.
Johns(R). Most independent jewelers carry one line of class rings. The
Company traditionally develops marketing programs in the spring for the
following school season and presents these programs to the jewelers in the
summer to prepare local advertising placements for the fall, and
supplements these programs with national advertising in magazines targeting
teenage audiences, in-store promotional literature and direct mail
campaigns.
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Chain Jewelers. The Company sells its products to 21 of the nation's
40 largest retail jewelry chains representing approximately 1,200 stores,
including Sterling, Barry's Jewelers, A. A. Friedman, and Carlyle & Co.
Jewelers. Retail jewelry chains usually require marketing efforts tailored
to their own seasonal merchandising theme.
Mass Merchants. The Company has forged relationships with the two
largest retailers in the United States, Wal-Mart and Kmart, and in Pro
Forma Fiscal 1996 sold class rings to approximately 2,200 Wal-Mart stores
under the Keystone(R) brand name and approximately 2,100 Kmart stores under
the Master Class Rings(R) brand name. The Company also sells class rings
under the Class Rings Ltd.(R) brand name to other mass merchants, including
J.C. Penney.
In-School Sales Channel.
The Company markets its products in-school using the Balfour(R) brand name
and its independent sales representatives, who offer both class rings and a
variety of fine paper products and graduation accessories. The Company's
in-school sales channel is supported through a sales organization that consists
of approximately 120 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 has developed its sales organization over
an extended period of time, and the Company intends to devote considerable
resources to maintaining and continually improving the quality of this sales
organization. The Company plans to increase its penetration in the in-school
sales channel in areas where it is not well represented. See "--Business
Strategy."
There are various reasons that students may prefer to purchase a class ring
in-school rather than in-store, including, among others: (i) the ability to
purchase a product that is more customized and symbolic of an individual school;
(ii) the excitement and enthusiasm generated by participating in both the ring
ordering and ring delivery events as a class; and (iii) the convenience of
ordering in-school from trained professionals.
The Company's independent sales representatives gain access to high schools
through administrators or student representatives who are involved in the
selection process of a supplier for their schools. Once selected as the official
supplier, the independent sales representative coordinates between the school
and the supplier to ensure satisfactory quality and service. As a result,
continuous sales coverage is an important element in the independent sales
representative's relationship with the school. Once established, personal
relationships are an important factor to ensure repeat sales.
The Company's independent sales representatives operate under contract with
exclusive non-compete arrangements that prohibit sales of competing products
during the term of the arrangement with the Company and for a period of time,
generally two years, thereafter. Depending on geographical size and volume,
independent sales representatives may employ one or more additional sales
representatives in addition to its part- or full-time personnel. The Company
compensates its independent sales representatives on a commission basis, and
most independent sales representatives receive an annual draw against
commissions earned, although all expenses, including promotional materials made
available by the Company, are the responsibility of the representative. See
"--Employees."
College Scholastic Products
The Company's college class rings are sold under the ArtCarved(R) brand
name and, to a lesser extent, under the Balfour(R) brand name primarily through
on-campus bookstores and, to a lessor 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 paper 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
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information. The Company intends to offer Balfour fine paper products through
the more extensive ArtCarved college on-campus sales channels. See "--Business
Strategy."
The Company employs a direct sales force of approximately 30 full-time
territory managers, who in turn are supported by 80 to 90 part-time
representatives working on a seasonal basis by assisting with the implementation
of scheduled promotions in its college market. Approximately 20 independent
sales representatives service colleges and universities. In Pro Forma Fiscal
1996, the Company sold class rings to students from approximately 1,700 colleges
and universities throughout the United States.
Recognition and Affinity Products
Recognition and affinity products are sold either to retail outlets or
directly to the group or organization or by a combination of field sales
personnel and corporate sales personnel. The Company's Balfour(R) licensed
consumer sports jewelry and Celebrations of Life(R), Generations of Love(TM) ,
and Nameosake(TM) personalized family jewelry are primarily distributed to
retail outlets and through merchandise catalogues. The Company markets its
Balfour(R) sports championship jewelry directly to the championship team or
organization or its members and its Keepsake(R) 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.
Industry
Scholastic
There are three national competitors in the sale of class rings and fine
paper products (the Company, Jostens, Inc. and Herff Jones, Inc.) and one
additional national competitor in the sale of class rings (Gold Lance, Inc.).
Management believes the Company is the second largest among these competitors
based on net sales of class rings and the only competitor with a strong national
presence in the three primary sales channels for class rings. In addition,
regional producers have been successful at penetrating the scholastic market
through the introduction of lower-priced competitive products. The market is
highly competitive and numerous alternative suppliers exist. See "-Competition"
and "Risk Factors-Competition."
Scholastic products are differentiated on the basis of price, quality,
marketing and customer service. Customer service is particularly important in
this product line because of the high degree of customization associated with
the class ring product and the emphasis on its 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 approximately 65% of
the high school class rings sold are sold through the in-school sales channel.
In schools, administrators or student representatives select the authorized
supplier for their school. Suppliers contact these administrators through their
sales forces, which are generally comprised of independent sales representatives
who market products directly to high school students. The supplier, through its
independent sales representatives, manages the entire process of interacting
with the student through the design, promotion, ordering and presentation of the
scholastic products to relieve school officials of any administrative burden
connected with the student's purchase. Successful companies in the scholastic
market have developed their sales organizations over an extended period of time
and devote considerable resources to maintaining and improving the quality of
their sales forces. After gaining access to a school, a sales representative and
the supplier must be able to demonstrate their ability to provide a high level
of customer service to complete the sale. In addition, in order to maintain an
ongoing relationship with a school, the sales representative and supplier must
provide a high-quality product and deliver finished products in a timely manner.
Due to the fact that orders from the in-school channel are placed in bulk, the
supplier must be able to deliver the units for an entire school by specified
dates or the sales representative and supplier run the risk of jeopardizing
their relationship with a particular school. A good relationship between the
sales representative and the school administrator helps ensure repeat sales from
year to year. Of the four national competitors for scholastic products, only the
Company, Jostens, Inc. and Herff Jones, Inc. have a strong presence in the
in-school sales channel.
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
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management estimates that this segment represents approximately 35% of high
school class rings sold. The in-store channel consists primarily of independent
jewelry retailers, large jewelry chains and mass merchants. Suppliers contact
these retailers through their direct sales force. Advertising is particularly
important in the in-store network to inform students and parents that the
retailers offer an alternative to the products sold in school. The in-store
network typically offers a year-round sales presence, products of similar
quality at a low price, convenience of store credit to finance a purchase, and
quicker product delivery as orders are placed on a unit, rather than
school-wide, basis. See "Sales and Marketing-In-Store Distribution." Of the four
national competitors for scholastic products, only the Company and Gold Lance,
Inc. have a strong presence in the in-store sales channel.
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. 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. Of the four national competitors for scholastic products,
only the Company and Jostens, Inc. have a strong presence in the sale of college
class rings.
Class ring manufacturers must enter into licensing arrangements, which
typically are non-exclusive, with colleges and universities in order to use the
name of the college or university and other trademarked names and symbols on the
class rings. Typically, these arrangements provide that the manufacturer must
pay a royalty to the college or university equal to a fixed dollar amount per
unit sold or a percentage of net sales. The school can terminate the arrangement
if, among other things, the class ring manufacturer uses the licensed
intellectual property in a manner not authorized by the relevant licensing
contract. Nonetheless, the ability of a manufacturer to enter into licensing
contracts, particularly exclusive contracts, is an important competitive factor
with respect to colleges and universities. Most high schools do not require
licensing arrangements to use their name, mascot or school colors.
High School. The potential size of the market for high school class rings,
graduation announcements, diplomas, and other high school scholastic products is
affected by high school graduation rates. Those high school students who
purchase class rings typically do so during their junior year. According to the
U.S. Department of Education, the number of high school graduates has declined
steadily since 1981. However, the Department of Education has projected that as
a result of the increase of birth rates in the 1980s, the number of high school
graduates will increase by approximately 16.8% from 2.6 million in 1996 to 3.0
million by 2006. The following table shows the historical and projected number
of U.S. high school graduates from 1986 to 2006:
High School Graduates
<TABLE>
<CAPTION>
Historical Projected
- -------------------------------------------- ----------------------------------------------------------------
High School High School % Increase
Graduates(1) Graduates(2) (Decrease)
Year (In thousands) Year (In thousands) from 1996 Level
- ------------------- ----------------------- ------------------- ------------------- ------------------
<S> <C> <C> <C> <C>
1986 2,643 1997 2,612 0.9%
1987 2,694 1998 2,734 5.6%
1988 2,773 1999 2,828 9.3%
1989 2,727 2000 2,873 11.0%
1990 2,586 2001 2,933 13.3%
1991 2,503 2002 2,961 14.4%
1992 2,482 2003 2,981 15.2%
1993 2,490 2004 3,054 18.0%
1994 2,505(2) 2005 3,051 17.9%
1995 2,564(2) 2006 3,022 16.8%
1996 2,588(2)
</TABLE>
(1) Source: The Department of Education, National Center for Education
Statistics, Projections of Education Statistics to 2006, March 1996.
(2) Projected by the Department of Education.
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Although the number of high school graduates has increased since 1992,
Management believes that the percentage of high school graduates who purchase
high school class rings has declined for a period of at least five years,
although there is no industry data to confirm such belief. In addition, the
Company's volume of high school class rings sold during this time has declined,
and Management believes that the Company's market share has declined as well,
although there is no industry data to confirm such belief. For information
regarding the Company's business performance during this period, see
"Management's Discussion and Analysis of Financial Condition and Results of
Operations." See "Risk Factors--Customers and Sales Channels."
College. The potential size of the college scholastic market is affected by
the number of bachelor degrees granted. Most college class rings are purchased
during either the junior or senior year in anticipation of a student's
graduation. According to the U.S. Department of Education, the number of
bachelor degrees granted is expected to increase by approximately 10.1% from 1.2
million in 1996 to 1.3 million by 2006, although such number is expected to
decline slightly between 1996 and 2000. The following table shows the historical
and projected aggregate number of bachelor degrees granted from 1986 to 2006:
Bachelor Degrees Granted
<TABLE>
<CAPTION>
Historical Projected
- -------------------------------------------- ----------------------------------------------------------------
Degrees Degrees % Increase
Conferred(1) Conferred(2) (Decrease)
Year (in thousands) Year (in thousands) from 1996 Level
- ------------------- ----------------------- ------------------- ------------------- ------------------
<S> <C> <C> <C> <C>
1986 988 1997 1,188 -0.6%
1987 991 1998 1,173 -1.8%
1988 995 1999 1,180 -1.3%
1989 1,019 2000 1,191 -0.3%
1990 1,051 2001 1,211 1.3%
1991 1,095 2002 1,237 3.5%
1992 1,137 2003 1,264 5.8%
1993 1,165 2004 1,288 7.8%
1994 1,182(2) 2005 1,302 9.0%
1995 1,192(2) 2006 1,316 10.1%
1996 1,195(2)
</TABLE>
- -----------------
(1) Source: Middle alternative projections, The Department of Education,
National Center for Education Statistics (the "DOE"), Projections of
Education Statistics to 2006, March 1996.
(2) Projected by the Department of Education.
Management believes that the percentage of college graduates who purchase
college class rings has been relatively stable for a period of five years,
although there is no industry data to confirm such belief. In addition, the
Company's volume of college class rings sold during this time has increased
slightly, but Management believes that the Company's market share has remained
stable, although there is no industry data to confirm such belief. For
information regarding the Company's business performance during this period, see
"Management's Discussion and Analysis of Financial Condition and Results of
Operations." See "Risk Factors--Customers and Sales Channels."
Recognition and Affinity
The market for the Company's recognition and affinity products is a broad
(and expanding) 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, such as licensed consumer sports
jewelry, is well developed in the apparel category but not with respect to
non-apparel products (such as the Company's licensed consumer sports
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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 exclusive right to a team name and mascot.
Professional sports championship jewelry is marketed directly to the
individual or the championship team commemorating a special event in the team's
history. The "Super Bowl Ring" is the most famous example of a special event.
However, the Company targets a range of special sporting events, from minor
league championships to national championships in all major sporting events.
These sporting events include not only football, basketball, baseball and hockey
championships, but also events such as golf, equestrian, figure skating, bowling
and auto racing. Important elements for success in this business are the ability
to contact future prospects, have unique designs and effectively compete on
service and prices. The Company historically has sold to clients in all of the
sporting events mentioned above and will pursue additional venues as resources
and capabilities are put in place.
In contrast, the market for "recognition" products such as the Company's
corporate recognition and reward jewelry is well developed and has a significant
array of competitors. Products are marketed through retail outlets, independent
sales representatives (who develop programs with corporate and other clients),
and directly to corporations through direct mail campaigns. Management
recognizes that the Company is a small player in the market, but the Company's
position in this market is enhanced by its low cost, its high level of service,
its brand name recognition and the quality of its products and designs. This
market is composed of approximately ten significant competitors, including the
Company's major scholastic products competitors--Jostens, Inc. and Herff Jones,
Inc. Two of the Company's competitors, O.C. Tanner and Ad Specialty Institute,
alone account for approximately 75% of the industry's revenues.
Operations
Production and Technology
Class Rings and Recognition and Affinity Products
As part of the identified cost savings program, Management plans to
consolidate Balfour's existing ring and jewelry manufacturing operations with
those of ArtCarved's existing manufacturing facilities. The Company's Austin,
Texas manufacturing facilities employ advanced design and manufacturing
techniques, which provide short production cycle times and high production
yields and has the capacity to absorb Balfour's production requirements.
Management believes that volume efficiencies, modern manufacturing techniques
(including cell manufacturing) and a consistent focus on process improvements
enhances the Company's ability to compete by enabling the Company to provide
quality products and a high level of service.
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 three weeks from
receipt of the customer's order to product shipment. Consequently, only a
limited amount of finished products inventory is necessary, reducing the
Company's exposure to fluctuations in the price of materials 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 (CAD/CAM), computer integrated manufacturing (CIM), 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 utilizes similar manufacturing processes for most of its
jewelry, although licensed customer sports jewelry does not require the high
degree of customization necessary for the Company's other products. College
class rings are often larger and of a more complex design than high school
rings, but both are designed, cast and finished on the same production lines.
For every ring manufactured, an individual wax and steel or plastic mold is
developed according to the features (name, school, activity, mascot, etc.)
specified by the customer. Many of these features have been designed using the
CAD/CAM and other computer-assisted design technologies; many
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others have been designed by the craftsmen of the Company over its long history.
Several individual components may make up the mold, and the Company has indexed
collections of over 1,000,000 such components at its facilities from which to
draw at the design stage of a class ring. A bar code is printed on every
production order and is scanned at every quality inspection station as the order
proceeds through production, thereby allowing quality statistics to be recorded
and providing production personnel summaries of quality data during the day.
Furthermore, this scanning allows the customer service department to review
order status on its computer terminals, identifying the location of the order
and its approximate shipping time. The bar code is also used at several CIM
stations, where personalized information (name, date, school name, degree, etc.)
is retrieved from the main computer database to be cut into the ring using
specialized software and computer-controlled cutting machines.
Fine Paper
In July 1996 Balfour's fine paper manufacturing and distribution activities
were consolidated from Balfour's former Dallas, Texas plant with Balfour's
operations at a 100,000 square-foot facility in Louisville, Kentucky. This
represented the completion of the consolidation of the operations of three of
its fine paper plants with operations at the Louisville facility. Management
believes this consolidation will result in improved efficiency of operations and
increased capacity.
Each fine paper product requires a high level of customization and is
characterized by having short product 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 art
work 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, and when there is a period of
volatility in the market, operating results may be affected. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations--Impact
of Inflation."
The Company purchases diamonds and other precious gems from various
suppliers, and the Company is not dependent upon any one supplier or a small
number of suppliers for diamonds and other precious gems. The Company purchases
substantially all synthetic and semiprecious stones from a single supplier, the
Herbert Stephen Company, a German corporation that supplies synthetic stones to
most of the class ring manufacturers in the United States. See "Risk
Factors--Sources of Semiprecious and Synthetic Gems; Fluctuations in Prices of
Raw Materials."
The Company requires significant amounts of gold for the manufacture of its
jewelry. The Company will finance a majority of its gold inventory requirements
through its Gold Facility. Management believes that it has sufficient
availability under its Revolving Credit and Gold Facilities to finance all of
its gold inventory requirements. The Company reduces its exposure to
fluctuations in the price of gold in several ways. The Company also uses
precious metals and both precious and semiprecious stones in its products and,
accordingly, any increase in the price of these materials could have a
significant impact on its cost of sales. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Raw Material Price
Fluctuations."
The Company purchases its fine paper from two major paper product
distributors, although there are many other suppliers of materials needed to
manufacture the Company's fine paper products if the Company should become
unable to satisfy its raw materials requirements from existing suppliers. The
Company also distributes finished goods such as memory books, T-shirts, caps and
gowns, yearbooks, and other scholastic products manufactured by third parties
for distribution with its fine paper products.
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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. For example, under
certain environmental laws, a current or previous owner or operator of real
property may be liable for remediation of hazardous substances on the property,
whether or not the owner or operator was responsible for the presence of the
hazardous substances. Such environmental laws also may also impose liability for
remediation of hazardous substances at properties to which a company has sent
wastes for disposal or recycling. Other environmental laws govern the
generation, handling, storage, transportation and disposal of hazardous and
toxic wastes, the discharge of pollutants into surface waters and sewers,
emissions of certain potentially harmful substances into the air, and employee
health and safety.
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. Also, minor spills of
chemicals used in the Company's manufacturing processes may occur from time to
time at the Company's facilities, which may result in localized soil or
groundwater contamination, and such spills may have occurred in the past.
Moreover, environmental laws are complex and subject to frequent change, and
Management cannot predict what environmental legislation or regulations will be
enacted in the future, how existing or future laws or regulations will be
administered or interpreted, or what environmental conditions may be found to
exist in the future at the Company's facilities. Management believes, however,
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 effect on the Company's
operations or operating results.
Security
To protect against theft, the Company has instituted security measures at
its facilities that deal with gold and precious stones. The Company also uses
various security techniques for salespeople, other employees and agents while
they are transporting Company products. In spite of such precautions, the
Company has experienced losses through theft from time to time. None of such
losses have had a material adverse effect on the financial condition or results
of operations of the Company, and the Company maintains all-risk insurance to
cover any significant losses.
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(R), Balfour(R), Celebrations of Life(R), Class
Rings, Ltd.(R), Generations of Love(TM), Keepsake(R), Keystone(R), Master Class
Rings(R), Nameosake(TM), and R. Johns(R). 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, which yield a competitive advantage for the Company.
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 effect on the
Company.
In 1988 CJC Holdings, Inc., ArtCarved's former owner, granted to Lenox,
Inc. a ten-year license to use the Keepsake(R), name for the sale of non-jewelry
goods, with the prior written consent of CJC Holdings, Inc. This license is
royalty-free, worldwide and exclusive for non-jewelry products. ArtCarved also
has nonexclusive licensing arrangements with two manufacturers in Canada for the
ArtCarved trademark and exclusive licensing arrangements for the ArtCarved(R)
trademark to a retailer in Central America.
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Pursuant to the ArtCarved Purchase Agreement, the Company has succeeded to
ArtCarved's rights and obligations under a Trademark License Agreement with JTW
Industries, Inc. ("JTW"). JTW is controlled by Mr. J. T. Waugh, the former Chief
Executive Officer of CJC. Pursuant to the Trademark License Agreement, JTW was
granted the right to use the ArtCarved(R) trademark in connection with wedding
rings, engagement rings and anniversary bands. The license granted under the
Trademark License Agreement is perpetual and royalty free; provided, that upon
(i) a transfer of, or agreement to transfer, the license, (ii) a change of
control of JTW, as a result of which Mr. Waugh and his affiliates no longer own
at least a majority of the equity interests in JTW, (iii) the third anniversary
of the death of Mr. Waugh, (iv) a sale or series of sales of equity of JTW as a
result of which Mr. Waugh and his affiliates cease to own a majority of the
equity of JTW, or (v) any act that would violate the Noncompetition Agreement
described below, whether or not the term of such Noncompetition Agreement has
expired, the Trademark License Agreement will terminate unless the parties agree
to a royalty arrangement within 90 days, on terms and conditions satisfactory to
the Company in its sole and absolute discretion. The Trademark License Agreement
cannot be transferred without the Company's consent. As partial consideration
for the Trademark License Agreement, JTW and certain affiliates have entered
into a Noncompetition Agreement with ArtCarved, pursuant to which they have
agreed not to enter the class rings and recognition and affinity businesses for
a period of three years. Pursuant to the ArtCarved Acquisition, the Company has
succeeded to ArtCarved's rights under the Noncompetition Agreement.
Employees
As of March 31, 1997 the Company employed approximately 1,350 individuals.
Approximately 950 of these employees are involved in manufacturing, operations
and production support, 300 are involved in marketing and sales and the balance
are employed in various administrative and data processing functions. Many
employees engaged in manufacturing operations are highly-skilled technicians and
craftsmen, and training times for these positions range from two weeks to four
months.
Other than the approximately 415 hourly production and maintenance
employees (as of March 31, 1997) at the Austin, Texas manufacturing facility,
no employees of the Company are represented by a labor union. The Austin workers
are represented by the United Brotherhood of Carpenters and Joiners Union (the
"Union"). There is currently no collective bargaining agreement in place, and
the prior collective bargaining agreement expired in June, 1994. CJC was subject
to a National Labor Relations Board order requiring it to negotiate in good
faith with the Union. Such order may apply to the Company as a result of the
Acquisitions. The Company has agreed to recognize the Union as the exclusive
bargaining agent for all of the Company's Austin, Texas production and
maintenance employees, and the Company and the Union are currently in
negotiations for a new collective bargaining agreement. ArtCarved had not
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 40 salespeople
concentrating on in-store and approximately 30 full-time territory managers
(supplemented by approximately 80 to 90 part-time representatives during peak
buying seasons) concentrating on on-campus, respectively. The Company
compensates its independent sales representatives servicing the high school
in-school network on a commission basis, and most independent sales
representatives receive an annual draw against commissions earned, although all
expenses, including promotional materials made available by the Company, are the
responsibility of the representative.
Properties
The Company's headquarters are located in ArtCarved's existing facilities
in Austin, Texas, which are being expanded to accommodate the manufacturing and
administrative operations previously conducted at Balfour's jewelry plants in
North Attleboro and Attleboro, Massachusetts. Pending consolidation of such
operations, the
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Company will lease or sublease these facilities from L.G. Balfour Company. The
Company also maintains small sales offices in Mt. Lebanon, Pennsylvania;
Sherman, Texas; and Kingwood, Texas.
The Company's principal executive offices are located at 7211 Circle S
Road, Austin, Texas 78745, and its telephone number is (512) 444-0571.
The Company's properties as of March 31, 1997 are as set forth below.
The Company believes that all of its properties are well maintained and in good
condition.
<TABLE>
<CAPTION>
Primary Use Location Approximate Size Owned/Leased
----------- -------- ---------------- ------------
<S> <C> <C> <C>
Administrative Offices Austin, Texas 20,000 Square Feet Owned
Jewelry Manufacturing Austin, Texas 83,955 Square Feet Owned
Juarez, Mexico 6,800 Square Feet Leased(1)
Attleboro, Massachusetts 56,350 Square Feet Leased(2)
North Attleboro, Massachusetts 101,422 Square Feet Leased(3)
Fine Paper Louisville, Kentucky 100,000 Square Feet Leased
Warehouse Facilities Austin, Texas 50,000 Square Feet Leased
</TABLE>
(1) The Company currently leases this property on a month-to-month basis. On or
about June 30, 1997, the Company anticipates relocating its Mexican
operations from this facility to a new 20,000 square foot facility located
in the city of Juarez in Chihuahua, Mexico. The Company has entered into a
lease for the Juarez property which will expire seven years after the date
the Company assumes occupancy of the facility with options to renew the
lease for two additional one-year periods.
(2) This property is being leased directly from L.G. Balfour Company on a
triple net basis. The lease will terminate on the earlier of September 30,
1997 and the date on which the Company vacates the relevant facility,
unless the parties agree to extend the term.
(3) This property is being subleased from L.G. Balfour Company on terms
substantially similar to L.G. Balfour Company's relevant overlease. The
sublease will terminate on the earlier of September 30, 1997 and the date
on which the Company vacates the relevant facility (except with respect to
the manufacturing building, for which the sublease shall expire on the
earlier of May 30, 1998 and the date on which the Company vacates such
building, which Management expects will occur during the fiscal year ending
August 30, 1997), unless the parties agree to extend the terms.
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. Each of ArtCarved and Balfour
has in the past been subject to various legal proceedings arising in the
ordinary course of business, none of which are expected to have a material
adverse effect on the Company or any of its properties.
Competition
The Company's businesses are highly competitive and the Company faces
competition in each of its product lines. The Company seeks to compete on the
basis of price, service, product quality, product development and marketing.
While each of its product lines faces several strong competitors, the Company's
principal competitors with respect to the full breadth of its product lines are
Jostens, Inc. and Herff Jones, Inc. In the scholastic products business, there
are three national competitors in the sale of both class rings and fine paper
products (the Company, Jostens, Inc. and Herff Jones, Inc.), one additional
national competitor in the sale of class rings (Gold Lance, Inc.), and certain
additional competitors in the sale of fine paper products. An important
competitive factor contributing to the success of the Company in generating
sales through its in-school distribution channels will be its ability to
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recruit, train and maintain a high-quality sales force. In addition, the Company
faces several regional competitors, which have been successful in the past at
taking market share from the national competitors (including ArtCarved and
Balfour).
MANAGEMENT
Directors, Executive Officers and Certain Other Senior Officers
The following table sets forth in alphabetical order each person who is an
executive officer or director of the Company and each other person who is a
senior officer of the Company as of March 31, 1997:
Name Position
Executive Officers and Directors:
<TABLE>
<S> <C>
George E. Agle(1) ............................... Chairman of the Board of Directors
Jeffrey H. Brennan(2) ........................... President, Chief Executive Officer and Director
John K. Castle .................................. Director
Richard H. Fritsche(2) .......................... Chief Financial Officer
William J. Lovejoy .............................. Director
David B. Pittaway ............................... Director
Zane Tankel ..................................... Director
Senior Officers:
Charlyn A. Cook ................................. Vice President-Manufacturing
Parke H. Davis .................................. Vice President-Retail Sales and Marketing
Andrew J. McLean ................................ Vice President-Operations
Donald J. Percenti .............................. Vice President-On Campus Sales and Marketing
R. Barry Shields ................................ Vice President-Specialty Products Sales and Marketing
</TABLE>
- ----------
(1) Mr. Agle resigned as an Executive Officer as of March 31, 1997.
(2) Denotes Executive Officer.
The Company is party to certain employment arrangements with respect to Mr.
Agle and has entered into employment agreements with each of the other
above-named executive and senior officers. For a description of the employment
arrangements with respect to Messrs. Agle, 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.
George E. Agle (56) has been a director and Chairman of the Board of the
Company since December 16, 1996, and served as an executive officer of the
Company from December 16, 1996 to March 31, 1997. Prior thereto, Mr. Agle was
President and Chief Executive Officer of Balfour from September 1994 through
December 1996. Prior to that Mr. Agle was Vice President of Business Alliance
Development at Scott Paper Company from September 1992 to August 1994. Prior to
that, Mr. Agle was President and General Manager of Scott Paper Company Mexico.
Mr. Agle was employed by Scott Paper Company in various capacities for 30 years.
Jeffrey H. Brennan (53) 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
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1995 through December 1996. He also held the position of Chief Financial Officer
of CJC from August 1988 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 service, supplies and equipment.
John K. Castle (55) 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 G.P., Inc.,
which is the general partner of the general partner of Castle Harlan Partners
II, L.P., the Company's controlling stockholder. 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 UNC Inc., Sealed Air
Corporation, Morton's Restaurant Group, Inc. and Oakley Insurance Group, 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.
Richard H. Fritsche (51) has been Chief Financial Officer of the Company
since December 16, 1996, and prior thereto was Vice President of Finance and
Administration of Balfour from August 1994 through December 1996. From 1990 to
1994, Mr. Fritsche served as Vice President of Administration for the Holson
Burnes Group, Inc.
William J. Lovejoy (29) has been a director of the Company since December
16, 1996 and served as Secretary of CBI from April 1996 through December 16,
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 of 1993 to November of 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 (45) has been a director of the Company since December
16, 1996 and was President, Treasurer and the sole director of CBI from April
1996 through December 16, 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 and an
executive officer of Castle Harlan Partners II G.P., Inc., which is the general
partner of the general partner of Castle Harlan Partners II, L.P., the Company's
controlling stockholder. 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; a Managing Director of Statia
Terminals Group, N.V., a holder of marine terminals; and a director of McCormick
& Schmick Holding Corp., a privately-held restaurant holding company. 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 (56) 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 franchisor
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, in 1987, Mr. Tankel served on the Board of Directors of Beverly Hills
Securities Corporation, a wholesale mortgage brokerage company, until its sale
in January 1994. In addition, Mr. Tankel founded Saga Communications, Inc. in
1988.
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The following individuals serve as Senior Officers of the Company:
Charlyn A. Cook (48) has been Vice President--Manufacturing of the Company
since December 16, 1996 and prior thereto was President--Manufacturing Division
of CJC from December 1989 through December 1996. From the formation date of CJC
in April 1988 until December 1989, she was Vice President--Operations. Ms. Cook
was one of the founding employees of R. Johns Ltd., the predecessor company of
CJC. She also served as a director of CJC from April 1988 until March 1996.
Prior to joining R. Johns, she was employed in administrative operations at John
Roberts, Inc.
Parke H. Davis (54) has been Vice President--Retail Sales and Marketing
since December 16, 1996, and prior thereto was President--Class Ring Division of
CJC for more than the past three years and previously served as
President--Keepsake Division and President--College Class Ring Sales. Mr. Davis
has been involved in class ring sales and marketing since his employment with
CJC and its predecessor in 1965.
Andrew J. McLean (49) has been Vice President--Operations since December
16, 1996, and prior thereto was Vice-President of Operations of Balfour from
March 1992 through December 1996. Prior to that, he was Operations Manager--EPG
and Ring Plant Manager from 1990 through 1992.
Donald J. Percenti (40) has been Vice President--On Campus Sales and
Marketing since December 16, 1996, and prior thereto was Vice President of Sales
and Marketing for scholastic products of Balfour from September 1991 through
December 1996. Prior to that, Mr. Percenti was employed by Balfour in various
capacities since 1977.
R. Barry Shields (38) has been Vice President--Specialty Products Sales and
Marketing since December 16, 1996, and prior thereto was Vice President, Sales
and Marketing, Consumer Products Group of Balfour from January 1994 through
December 1996. Prior to that, Mr. Shields was Director of Direct Response
Marketing since December 1992. From July 1989 to November 1992 Mr. Shields
served as Director of Marketing of Color Me Beautiful Cosmetics.
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 accounts 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 and Pittaway and the Audit Committee consists of Messrs. Pittaway and
Lovejoy.
Compensation of Directors
Except as set forth below, Directors are not provided with any compensation
for their services other than the reimbursement of expenses associated with
attending meetings of the Board of Directors or any committee thereof. For a
description of certain employment arrangements with Messrs. Agle and Brennan,
see "--Executive Compensation; Employment Agreements."
The Company has entered into indemnification agreements with its directors
that, among other things, require the Company to indemnify the 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.
The Company has entered into a Management Agreement with Castle Harlan,
Inc. pursuant to which Castle Harlan, Inc. has agreed to provide business and
organizational strategy, financial and investment management and merchant and
investment banking services to the Company, for which the Company will pay
Castle Harlan, Inc. $1.5 million per year for an initial term of ten years and
thereafter automatically renewable for additional year terms unless the Castle
Harlan Group then owns less than 5% of the Company's outstanding stock. See
"Certain Relationships and Related Transactions." Mr. Castle is the Chairman and
majority stockholder of Castle Harlan, Inc. and Mr. Pittaway is Vice President
and Secretary of Castle Harlan, Inc.
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Compensation Committee Interlocks and Insider Participation
No member of the Compensation Committee is or will be 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 Board or the Compensation Committee).
Executive Compensation; Employment Agreements
Pursuant to the Balfour Purchase Agreement, the Company agreed to employ
Mr. Agle 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 certain
of 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 terminates employment with the
Company under certain circumstances or is terminated without cause. Mr. Agle's
employment by the Company was terminated as of March 31, 1997, whereupon Mr.
Agle was paid a $50,000 bonus and the Company commenced making such severance
payments to Mr. Agle in accordance with the foregoing.
The Company has entered into an employment agreement with Jeffrey H.
Brennan, effective as of December 16, 1996, pursuant to which Mr. Brennan will
serve 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 year terms on December 15 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 has entered into an employment agreement with Richard H.
Fritsche, effective as of December 16, 1996, pursuant to which Mr. Fritsche will
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 will automatically be extended
for additional year terms on December 15 of each succeeding year thereafter
unless earlier terminated by the Company by not less than 60 days' prior notice.
The Company also has agreed to pay Mr. Fritsche a $50,000 bonus if Mr. Fritsche
remains employed by the Company through December 15, 1997, or if his employment
is earlier terminated by the Company without Cause (as defined) or by Mr.
Fritsche with Good Reason (as defined), in each case subject to approval by the
Board of Directors of the Company based on his performance during such time. Mr.
Fritsche 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. Fritsche's employment agreement provides that in the event Mr.
Fritsche's employment is terminated by the Company without Cause (as defined) or
by Mr. Fritsche with Good Reason (as defined), Mr. Fritsche will be 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.
Management Options
The Board of Directors of the Company is considering establishing an option
plan for its Management, pursuant to which it will grant performance-based
options representing up to 15% of the capital stock of the Company on a
fully-diluted basis (after giving effect to the issuance of the shares of
capital stock underlying such options) to those employees whose performance is
expected to contribute significantly to the long-term strategic performance and
growth of the Company. The Compensation Committee would monitor any such plan.
PRINCIPAL STOCKHOLDERS
The following table sets forth certain information regarding the beneficial
ownership of the Company's voting securities as of March 31, 1997 with respect
to (i) each person or entity who is the
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beneficial owner of more than 5% 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.
<TABLE>
<CAPTION>
Number of Percentage
Number of Percentage Shares of of Total
Shares of of Total Series B Series B
Name and Address of Beneficial Owner(1) Common Stock Common Stock Preferred Preferred
- ----------------------------------------------------- -------------- ------------ ------------ ------------
<S> <C> <C> <C> <C>
Castle Harlan Partners II, L.P.(2)................... 332,027 88.5 332,027 88.5
Castle Harlan Offshore Partners, L.P.(2)(3).......... 21,878 5.8 21,878 5.8
John K. Castle(2)(3)(4).............................. 375,000 100.0 375,000 100.0
William J. Lovejoy(2)................................ -- * -- *
David B. Pittaway(2)(5).............................. 3,544 * 3,544 *
Zane Tankel(2)....................................... -- * -- *
George Agle(5)....................................... -- * -- *
Jeffrey H. Brennan(6)................................ -- * -- *
Richard H. Fritsche(6)............................... -- * -- *
Directors and executive officers as a group(6)....... 375,000 100.0 375,000 100.0
</TABLE>
* 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 of such
stockholder's name.
(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 CHP II include Castle Harlan Offshore Partners, L.P.
("Offshore"), Dresdner Bank AG, Grand Cayman Branch Managed Account (the
"Managed Account") and certain limited partners of the sole general partner
of CHP II. Castle Harlan, Inc. acts as the investment manager for CHP II,
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 CHP II and Castle Harlan Offshore Partners,
L.P., and 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. is the
investment manager for each of CHP II, Offshore and the Managed Account
(the owner of 18,551 shares of common stock and 18,551 shares of Series B
Preferred Stock representing 4.95% of the total outstanding common stock
and 4.95% of the total Series B Preferred Stock, respectively) ,and
therefore may be deemed to be a beneficial owner of the shares owned by
such entities.
(4) John K. Castle is a director of the Company and is the controlling
stockholder of Castle Harlan Partners II G.P., Inc., the general partner of
the general partner of CHP II, and as such may be deemed to be a beneficial
owner of the shares owned by CHP II and its affiliates. Mr. Castle
disclaims beneficial ownership of such shares in excess of his
proportionate partnership share.
(5) Mr. Pittaway serves as voting trustee under a voting trust holding 3,075
shares of Common Stock and 3,075 shares of Series B Preferred (which
amounts are included in the numbers set forth above) and as such may be
deemed to be a beneficial owner of the shares held in such voting trust.
The record holders of such shares consist of certain limited partners of
CHALP and a corporate entity of which Mr. Castle is Chairman, Chief
Executive Officer and principal stockholder. Mr. Pittaway disclaims
beneficial ownership of such shares.
(6) The address for each individual identified above is c/o Commemorative
Brands, Inc., 7211 Circle S Road, Austin, Texas 78745.
CBI was formed during March 1996 by CHP II, for the purpose of effecting
the Acquisitions. CHP II is a private equity investment partnership formed in
February 1992 and managed by Castle Harlan, Inc., the New York merchant bank
(the "Manager"), CHP II's capital is funded by corporate pension funds, college
endowments,
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foundations and individual investors. The Manager also acts as investment
manager for Castle Harlan Offshore Partners, L.P., a private equity investment
partnership formed by it, and acts as the investment manager under a managed
account formed by Dresdner Bank, AG, Grand Cayman Branch, the Cayman Islands
branch of a German banking corporation.
The Manager was founded by John K. Castle, former President and Chief
Executive Officer of Donaldson, Lufkin & Jenrette, the investment banking firm,
and Leonard M. Harlan, founder and former Chairman of The Harlan Company, a
diversified real estate and corporate advisory firm.
In accordance with a subscription agreement entered into by the Company and
the members of the Castle Harlan Group in conjunction with the consummation of
the Transactions, the Company granted to the Castle Harlan Group certain
registration rights with respect to the shares of its capital stock owned by the
Castle Harlan Group, 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 granted to the Castle Harlan Group
unlimited piggyback registration rights on certain registrations of shares by
the Company. Castle Harlan, Inc. acts as the investment manager for certain
members of the Castle Harlan Group pursuant to separate investment management
agreements, and Mr. Castle acts as voting trustee with respect to the securities
of the Company held by the remaining members of the Castle Harlan Group.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The Company entered into a Management Agreement, dated December 16, 1996,
with Castle Harlan, Inc., as 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 will 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
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 (as
defined in the Indenture), interest, or Liquidated Damages (if any) on the
Notes.
THE ACQUISITIONS
The ArtCarved Acquisition
CBI entered into the ArtCarved Purchase Agreement with CJC as of May 20,
1996, as amended as of November 21, 1996 and December 16, 1996, for the
acquisition by CBI of ArtCarved. In consideration for ArtCarved, CBI paid CJC in
cash the sum of $97.8 million plus an amount equal to the Adjusted Working
Capital (as defined in the ArtCarved Purchase Agreement) of ArtCarved as of the
closing date. Based upon an estimated Adjusted Working Capital of $17.0 million,
the ArtCarved Purchase Price was approximately $114.8 million, subject to
adjustment upon final determination of the Adjusted Working Capital. In
addition, CBI assumed certain liabilities of ArtCarved, including liabilities
included in the determination of Adjusted Working Capital and certain
liabilities relating to the employees to be employed by CBI.
The ArtCarved Purchase Agreement contains customary representations,
warranties and covenants. CBI and CJC have also indemnified one another for
certain breaches of representations (which breaches are discovered by March 31,
1997) or covenants. No claims under the indemnity may be asserted by CBI or CJC
against the other party unless such claims exceed $100,000 in the aggregate, in
which event the indemnitor shall only be obligated to indemnify for the amount
of such claims in excess of such amount. In addition, CJC's indemnification
obligations
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are limited to a $3.0 million escrow account at Texas Commerce Bank, which will
remain in place through March 31, 1997.
The Balfour Acquisition
CBI entered into the Balfour Purchase Agreement with Town & Country, L.G.
Balfour Company and Gold Lance, Inc. (another subsidiary of Town & Country,
"Gold Lance") as of May 20, 1996, as amended and restated as of November 21,
1996 and December 16, 1996, for the acquisition by CBI of Balfour. In
consideration for Balfour, CBI paid Town & Country and L.G. Balfour Company in
cash the aggregate sum of $23.8 million plus an amount equal to the Adjusted
Working Capital (as defined in the Balfour Purchase Agreement) of Balfour as of
the closing date. In addition, CBI purchased the Balfour Gold for the Balfour
Gold Purchase Price. Based upon an estimated Adjusted Working Capital of Balfour
of $23.6 million, the Balfour Purchase Price was approximately $47.4 million,
subject to adjustment upon final determination of the Adjusted Working Capital.
In addition, CBI assumed certain liabilities of Balfour, including liabilities
included in the determination of Adjusted Working Capital, certain liabilities
relating to the employees to be assumed by CBI and an accumulated benefit
obligation of $5.5 million related to the unfunded Balfour postretirement
medical benefits plan.
Originally, the Balfour Purchase Agreement contemplated that CBI would
acquire the assets (and assume certain liabilities) of Gold Lance as well. The
agreement was subsequently amended following the determination of the FTC that
it would not grant its consent under the Hart-Scott-Rodino Antitrust
Improvements Act of 1976, as amended, if the Balfour Acquisition included such
assets. Pursuant to the Final Order, CBI has agreed, among other things, not to
acquire any assets of or interest in Gold Lance, another class ring
manufacturing subsidiary of Town & Country, the assets of which CBI had
originally contracted to buy together with Balfour. Also pursuant to the Final
Order, Town & Country and Gold Lance agreed, among other things, not to sell any
assets to or acquire any interest in CBI, other than the sale of the Balfour
assets to CBI on the terms set forth in the Balfour Purchase Agreement. In
accordance with the Balfour Purchase Agreement $14.0 million of the Balfour
Purchase Price was originally paid into escrow pending receipt of the Final
Order. Following receipt of the Final Order on December 20, 1996, such funds
were paid to Town & Country.
The Balfour Purchase Agreement contains customary representations,
warranties and covenants. CBI, on the one hand, and Town & Country and L.G.
Balfour Company, on the other hand, have also indemnified one another for
certain breaches of representations (which breaches are discovered in a limited
survival period, generally 15 months) or covenants. No claims under the
indemnity may be asserted by CBI or Town & Country against the other party
unless such claims exceed $150,000 in the aggregate, in which event the
indemnitor shall only be obligated to indemnify for the amount of such claims in
excess of such amount, and in no event shall an indemnifying party be liable to
indemnify the other party for any amounts in excess of $7.5 million. If a
petition under bankruptcy laws is filed by or against, or a receiver, fiscal
agent or similar officer is appointed by a court for the business or property
of, Town & Country or L.G. Balfour Company, there can be no assurance that the
Company would be able to collect any amounts determined to be due to it by Town
& Country or L.G. Balfour Company pursuant to such indemnities.
DESCRIPTION OF CAPITAL STOCK
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's Certificate of Incorporation, as amended, authorizes the
Board of Directors (without stockholder approval) to, among other things, issue
classes of preferred stock from time to time in one or more series, each series
to have such designations, voting powers, preferences and relative,
participating, optional or other special rights and qualifications, limitations
or restrictions thereon as shall be stated in the resolutions providing for the
issue thereof by the Board of Directors of the Company. As of the date hereof,
the Company has authorized 100,000 shares of Series A Preferred and 375,000
shares of Series B Preferred, all of which are issued and outstanding. All of
the outstanding shares of the Series A Preferred and Series B Preferred were
initially purchased by the Castle Harlan Group as part of the Castle Harlan
Investment. The shares of the Series A Preferred held by the Castle Harlan Group
were subsequently sold by it to an unrelated third party.
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The following summary of the terms of the Company's capital stock does not
purport to be complete and is subject to, and is qualified in its entirety by
reference to, the Certificate of Incorporation, as amended, of the Company, a
copy of which has been filed as an exhibit to the Registration Statement. See
"Available Information,"
Series A Preferred Stock ("Series A Preferred")
Dividends. Dividends on the Series A Preferred are payable in cash, when,
as and if declared by the board of directors of the Company, commencing on
January 31, 1997, on a quarterly basis, and accrue cumulatively at a rate per
annum of 12%, whether or not such dividends have been declared and whether or
not there shall be surplus, net profits, or the assets of the Company legally
available for the payment of dividends. All such dividends declared shall be
paid pro rata to the holders entitled thereto. Accrued and unpaid dividends do
not bear interest or dividends. Pursuant to the terms of the Indenture,
dividends on the Series A Preferred may not be paid until the Fixed Charge
Coverage Ratio (as defined) for the Company's most recently ended four full
fiscal quarters for which internal financial statements are available
immediately preceding the date on which such dividend payment is made would have
been at least 2.25 to 1, determined on a pro forma basis (including a pro forma
application of such dividend payment), as if the dividend payment had been made
at the beginning of such four-quarter period. See "Description of Notes--Certain
Covenants; Restricted Payments." Pursuant to the terms of the Bank Credit
Facility, dividends on the Series A Preferred may not be paid unless the Company
shall have had, for the period of the four consecutive fiscal quarters most
recently ended prior to the payment of any such dividend, a ratio of
Consolidated EBITDA (as defined in the Bank Credit Agreement) to Consolidated
Total Interest Expense (as defined in the Bank Credit Agreement) equal to at
least 2.25 to 1.0 and no Event of Default (as defined) under the Bank Credit
Facility shall have occurred and be continuing or would result from the making
of such dividend. See "Description of the Bank Credit Facility."
Redemption and Liquidation. 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, pursuant to the terms of the Indenture, the
Company may not redeem the Series A Preferred (a) unless such redemption is for
at least $2.0 million and (b) until the Fixed Charge Coverage Ratio for the
Company's most recently ended four full fiscal quarters for which internal
financial statements are available immediately preceding the date on which such
redemption is made would have been at least 2.5 to 1, determined on a pro forma
basis (including a pro forma application of such redemption), as if the
redemption had been made at the beginning of such four-quarter period. See
"Description of Notes--Certain Covenants; Restricted Payments." The Bank Credit
Facility prohibits the redemption of any shares of Series A Preferred except in
connection with certain permitted replacements or refinancings of the Series A
Preferred. See "Description of the Bank Credit Facility." Subject to the
foregoing, the Company may redeem all or any portion of the Series A Preferred
at its liquidation value of $100 per share, plus accrued and unpaid dividends
thereon, if any, to the date fixed for redemption. In the event of any
liquidation, dissolution or winding up of the Company, the holders of the Series
A Preferred will receive payment of the liquidation value of $100 per share plus
all accrued and unpaid dividends thereon, if any, in full, 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.
Restrictions on Payment of Other Dividends and Redemptions. So long as any
shares of the Series A Preferred remain outstanding, the Company may not
declare, pay or set aside for payment dividends or other distributions with
respect to, or redeem or otherwise repurchase any shares of, the Series B
Preferred or any other shares of capital stock of the Company ranking, as to
dividend rights and rights upon liquidation, dissolution or winding up, junior
to the Series A Preferred, other than dividends payable in Common Stock or in
another stock ranking junior to the Series A Preferred as to dividend rights and
rights on liquidation, dissolution and winding up and other than redemptions or
repurchases of shares of Common Stock or other capital stock of the Company
issued to or held by any officer, director, employee, independent sales
representative or agent of the Company or its subsidiaries (including, without
limitation, any former officer, director, employee, independent sales
representative or agent of the Company or its subsidiaries) or any employee
stock ownership plan or similar trust for the account of any such person.
Voting. Except as set forth below, the holders of shares of Series A
Preferred are not entitled to voting rights. The Company shall not amend, alter
or repeal any of the provisions of its Certificate of Incorporation or Bylaws,
or
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merge with or into or consolidate with any other entity, in any case so as to
affect adversely any of the preferences, rights, powers or privileges of the
Series A Preferred or the holders thereof, without first obtaining the approval
of at least a majority of the outstanding shares of Series A Preferred voting
separately as one class.
Series B Preferred Stock ("Series B Preferred")
Dividends. No dividends shall accrue on the Series B Preferred. Dividends
on the Series B Preferred shall be payable when, as and if declared by the
Company's Board of Directors out of funds legally available therefor.
Redemption and Liquidation. The Series B Preferred is non-redeemable. In
the event of any liquidation, dissolution or winding up of the Company, the
holders of the Series B Preferred will receive payment of the liquidation value
of $100 per share plus all accrued and unpaid dividends thereon, if any, in
full, prior to the payment of any distributions to the holders of the Common
Stock of the Company or any other class of stock of the Company junior to the
Series B Preferred, but only to the extent that the liquidation preference (plus
all accrued and unpaid dividends, if any) of the Series A Preferred and any
other class of stock ranking senior to the Series B Preferred has been paid to
the holders thereof.
Restriction on Payment of Other Dividends. The Company may not declare, pay
or set aside for payment any dividends or distributions (other than dividends
payable in Common Stock or in another stock ranking junior to the Series B
Preferred as to dividend rights and rights on liquidation, dissolution and
winding up) on any Common Stock or other shares of capital stock ranking junior
to the Series B Preferred so long as any shares of Series B Preferred remain
outstanding.
Voting. The holders of shares of Series B Preferred are entitled to one
vote per share, voting together with the holders of the Common Stock on all
matters presented to stockholders generally. The Company may not amend, alter or
repeal any of the provisions of its Certificate of Incorporation or Bylaws, or
merge with or into or consolidate with any other entity, in any case so as to
affect adversely any of the preferences, rights, powers or privileges of the
Series B Preferred or the holders thereof, without first obtaining the approval
of at least a majority of the outstanding shares of Series B Preferred voting
separately as one class.
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 stockholders, including the
election of directors, and shall vote together as a class with the holders of
the Series B Preferred.
Dividends may be paid on the Common Stock, when and as declared by the
Board of Directors 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, initially exercisable to purchase an
aggregate of 21,405 shares of Common Stock (or an aggregate of approximately
5.4% 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
the members of the Castle Harlan Group, the Company granted to the Castle Harlan
Group certain registration rights with respect to the shares of capital stock
owned by the Castle Harlan Group, pursuant to which the Company agreed, among
other things, to effect the registration of such
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shares under the Securities Act of 1933, as amended, at any time at the request
of the Castle Harlan Group and granted to the Castle Harlan Group unlimited
piggyback registration rights on certain registrations of shares of capital
stock by the Company.
DESCRIPTION OF THE BANK CREDIT FACILITY
The following summarizes certain provisions of the bank credit agreement
governing the Bank Credit Facility (the "Bank Credit Agreement"), which was
entered into as of December 16, 1996, by and among the Company, as borrower, The
First National Bank of Boston ("FNBB") and Rhode Island Hospital Trust National
Bank ("RIHT", and together with FNBB, as agents, the "Agents") and the financial
institutions party thereto. This summary does not purport to be complete and is
subject to, and qualified in its entirety by reference to, all of the provisions
of the Bank Credit Agreement, including all of the definitions therein of terms
not defined in this Prospectus. The Bank Credit Agreement has been filed as an
exhibit to the Registration Statement of which this Prospectus is a part.
General. 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"), for the purpose of financing, in part, the
Acquisitions, and to support the ongoing working capital requirements of the
Company.
Term Loan Facility
The Term Loan Facility matures on December 16, 2003. The Company may prepay
the Term Loan at any time, except that any repayment of any portion of the Term
Loan bearing interest at the Eurodollar Rate may only be repaid on the last day
of the Interest Period relating thereto. The Company must repay the Term Loan in
28 consecutive quarterly installments, commencing March 31, 1997, as follows:
Quarterly Annual
Year Amount Amount
------- -------------- ----------
1 $ 125,000 $ 500,000
2 $ 250,000 $1,000,000
3 $ 375,000 $1,500,000
4 $ 500,000 $2,000,000
5 $ 750,000 $3,000,000
6 $ 2,000,000 $8,000,000
7 $ 2,250,000 $9,000,000
The final installment of principal of the Term Loan 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 in an
amount equal to (i) 100% of the net proceeds received from the sale or
disposition of assets of the Company (other than sales of inventory in the
ordinary course of business or other asset sales and dispositions to the extent
the net proceeds received do not exceed $500,000 during the period prior to the
first anniversary of the closing date, and do not exceed $250,000 in any
corresponding one-year period thereafter), (ii) 100% of net proceeds received
from the issuance of equity of the Company until certain conditions are met, and
(iii) 50% of Consolidated Excess Cash Flow (as defined).
Revolving Credit and Gold Facilities
Availability under the Revolving Credit Facility and the Gold Facility is
subject to a borrowing base limitation (the "Borrowing Base") based on the
aggregate of certain percentages of Eligible Receivables (as defined) and
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Eligible Inventory (as defined) of the Company. If the aggregate amount of loans
and other extensions of credit under the Revolving Credit Facility and the Gold
Facility exceeds the Borrowing Base, the Company must immediately prepay or cash
collateralize its obligations under the Revolving Credit Facility to the extent
of such excess.
The Gold Facility consists of (a) a purchase and consignment facility,
pursuant to which the RIHT, as gold agent, on behalf of the lenders under the
Gold Facility, will purchase amounts of gold inventory of 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. The obligation of any Gold Bank to lend to the Company pursuant to the
Gold Facility is subject to the condition that, among other things, such Gold
Loan will not cause the aggregate amount of outstanding Gold Loans by such Gold
Bank to exceed such Gold Bank's Gold Commitment, minus such Gold Bank's
percentage of the fair market value of Consigned Precious Metal outstanding. The
obligation of the Gold Agent to make any gold consignment pursuant to the Gold
Facility is subject to the condition that, among other things, the fair market
value of gold consigned by the Gold Agent to the Company shall not exceed 95%
multiplied by the fair market value of the sum of (i) gold consigned by the Gold
Agent to the Company, plus (ii) gold owned by the Company.
The outstanding principal of each loan under the Bank Credit Facility will
bear interest at a rate per annum equal to (a) the Base Rate plus (i) 1.25% per
annum, in the case of loans under the Revolving Credit and Gold Facilities, and
(ii) 1.75% per annum, in the case of the Term Loan Facility, or (b) at the
option of the Company (but subject to certain specified conditions), the reserve
adjusted Eurodollar Rate plus (i) 3.0% per annum in the case of borrowings under
the Revolving Credit and Gold Facilities and (ii) 3.50% in the case of Term Loan
Facility. The applicable interest rate margins will be subject to up to two
decreases in 25 basis point increments after the first year following the
closing date if the Company meets and maintains certain leverage and interest
coverage ratios. If any payment event of default occurs, the interest rates and
consignment fees will be increased by 2% above the then applicable rate for each
Facility.
Outstanding consigned or purchased and consigned gold under the Gold
Facility shall accrue a daily consignment fee at a rate determined by the Gold
Agent plus 3.0% per annum, payable monthly in arrears, or, at the Borrower's
option, at a rate equal to (a) the greater of (i) the reserve adjusted
Eurodollar Rate minus the average of rates quoted to the Gold Agent as the
London Interbank Bullion Rates as displayed on Reuter's gold loan screen or, if
Reuter's gold loan screen is not available, as set by the Gold Agent for gold
forwards for such period and (ii) zero, plus (b) 3.0% per annum.
In addition to the interest charges described above, the Company will pay
to the applicable Agent (i) for the account of the Dollar Banks, a commitment
fee on the unused portion of the Revolving Credit Facility of 1/2% per annum;
(ii) for the account of the Gold Banks, a commitment fee on the unused portion
of the Gold Facility of 1/2% per annum; and (iii) a letter of credit fee equal
to (a) for standby letters of credit, a rate per annum equal to the Eurodollar
rate margin applicable to Loans under the Revolving Credit Facility then in
effect, and (b) for documentary letters of credit, a per annum rate equal to the
Eurodollar rate margin applicable to loans under the Revolving Credit Facility
then in effect, less 1%.
Repayment. The Revolving Credit and Gold Facilities may be borrowed, repaid
and reborrowed from time to time until five years after the closing date of the
Bank Credit Facility, subject to certain conditions on the date of any such
borrowing. Amounts of principal repaid on the Term Loan Facility may not be
reborrowed.
Security. 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.
Covenants. The Bank Credit Agreement 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
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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 Agreement, (v) not make capital expenditures in excess of
Fimits set forth in the Bank Credit Agreement, (vi) not declare or make certain
dividend payments, (vii) not make certain investments or consummate certain
acquisitions, (viii) not enter into any consignment transactions as consignee
(except for deliveries of diamonds), (ix) not create a new subsidiary, (x) not
establish any new bank account, and (xi) establish concentration accounts with
FNBB and direct all of its depositary banks to transfer all amounts deposited
(on a daily basis) to such concentration accounts (for application in accordance
with the Bank Credit Agreement). Most of the covenants apply to the Company and
its subsidiaries.
In addition, the Company must comply with certain financial covenants,
including maintaining a specified minimum interest coverage ratio of
Consolidated EBITDA to Consolidated Interest Expense, maximum Consolidated
Senior Funded Debt to Consolidated EBITDA and minimum Consolidated EBITDA (as
those terms are defined in the Bank Credit Agreement) in amounts set forth in
the Bank Credit Agreement.
Events of Default. The Bank Credit Agreement contains certain customary
events of default, including nonpayment, misrepresentation, breach of covenant,
bankruptcy, ERISA, judgments, change of control and cross defaults. In addition,
the Bank Credit Agreement provides that it shall be an Event of Default if the
Company or any of its subsidiaries (other than its Mexican subsidiary) shall be
enjoined or restrained from conducting any material part of its business for
more than 30 days.
DESCRIPTION OF NOTES
The Exchange Notes will be issued under the Indenture, a copy of which has
been filed as an exhibit to the Registration Statement of which this Prospectus
constitutes a part. The Indenture is subject to and governed by the Trust
Indenture Act of 1939, as amended (the "Trust Indenture Act"). The following
summary of certain terms and provisions of the Indenture and the Registration
Rights Agreement does not purport to be complete and is subject to, and is
qualified in its entirety by reference to, all of the provisions of the Notes,
the Indenture and the Registration Rights Agreement, including the definitions
of certain terms therein and those terms made a part of the Indenture by
reference to the Trust Indenture Act. The Company will provide, without charge,
to each person, including any beneficial owner, to whom this Prospectus is
delivered, upon such person's written or oral request, copies of the Indenture
and the Registration Rights Agreement. Any such request should be delivered to
the Company, 7211 Circle S Road, Austin, Texas 78745 (telephone number (512)
444-0571), Attention: Secretary. In addition, definitions of certain capitalized
terms used in the following summary are set forth below under "Certain
Definitions."
On December 16, 1996, the Company issued $90,000,000 aggregate principal
amount of Initial Notes under the Indenture. The terms of the Exchange Notes are
identical in all material respects to the Initial Notes, except for certain
transfer restrictions and registration and other rights relating to the exchange
of the Initial Notes for the Exchange Notes. The Trustee will authenticate and
deliver Exchange Notes for original issue only in exchange for a like principal
amount of Initial Notes. Any Initial Notes that remain outstanding after the
consummation of the Exchange Offer will be entitled to vote or consent on all
matters, together with the Exchange Notes, as a single class of securities under
the Indenture.
General
The aggregate principal amount of the Notes that may be issued under the
Indenture is limited to $90.0 million. The Notes mature on January 15, 2007, and
bear interest at a rate of 11% from the date of original issuance of the Initial
Notes (or from the most recent date to which interest has been paid), payable
semi-annually on January 15 and July 15 of each year, commencing on July 15,
1997, to holders of record at the close of business on the January 1 or July 1
immediately preceding such interest payment date. Interest on the Notes will be
computed on the basis of a 360-day year of twelve 30-day months.
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The Notes will rank junior in right of payment to all Senior Indebtedness,
including borrowings under the Bank Credit Facility. Borrowings under the Bank
Credit Facility are secured by substantially all of the Company's assets,
including the capital stock of the Company's existing and future Subsidiaries,
and will be guaranteed by all such Subsidiaries, which guarantees will be
secured by substantially all of such Subsidiaries' assets. The Notes will rank
pari passu in right of payment with all senior subordinated Indebtedness of the
Company issued in the future (if any) and senior in right of payment to all
other subordinated Indebtedness of the Company issued in the future, if any. As
of December 16, 1996, the Company had approximately $36.2 million of Senior
Indebtedness outstanding (exclusive of an unused commitment of up to $23.8
million under the Bank Credit Facility). See "Risk Factors--Substantial Leverage
and Debt Service" and "Capitalization." Although the Indenture contains
limitations on the amount of additional Indebtedness that the Company may incur,
under certain circumstances the amount of such Indebtedness could be substantial
and, in any case, such Indebtedness may be Senior Indebtedness. See "Certain
Covenants--Incurrence of Indebtedness and Issuance of Preferred Stock."
The Indenture provides that principal, Redemption Price and Purchase Price
of, and interest and Liquidated Damages (if any) on the Notes will be payable,
and the Notes will be exchangeable and transferable (subject to compliance with
transfer restrictions imposed by applicable securities laws for so long as the
Notes are not registered for resale under the Securities Act), at the office or
agency of the Company in the City of New York maintained for such purposes;
provided, however, that payment of interest may be made at the option of the
Company by check mailed to the holders of record as shown on the security
register. The Notes will be issued only in fully registered form without
coupons, in denominations of $1,000 and any integral multiple thereof. No
service charge will be made for any registration of transfer, exchange or
redemption of Notes, except in certain circumstances for any tax or other
governmental charge that may be imposed in connection therewith.
Optional Redemption
The Notes will be subject to redemption (an "Optional Redemption"), at the
option of the Company, in whole or in part, at any time on or after January 15,
2002, upon not less than 30 nor more than 60 days' prior notice in amounts of
$1,000 or an integral multiple thereof at the following Redemption Prices
(expressed as a percentage of the principal amount), together with accrued and
unpaid interest and Liquidated Damages (if any) to the applicable redemption
date, if redeemed during the 12-month period beginning January 15 of the years
indicated below:
Year Redemption Price
---- ----------------
2002............................. 105.500%
2003............................. 103.667%
2004............................. 101.833%
2005 and thereafter.............. 100.000%
If less than all the Notes are to be redeemed, the Trustee will select the
particular Notes or portions thereof to be redeemed by lot, pro rata or by any
other method the Trustee shall deem fair and reasonable.
The Company will comply with all applicable notice requirements regarding
redemption as set forth in the Indenture.
Special Redemption
The Indenture provides that in the event the Company completes one or more
Public Equity Offerings on or before January 15, 2000, the Company, in its
discretion, may use the net cash proceeds from any such Public Equity Offering
to redeem up to 33 1/3% of the original principal amount of the Notes (a
"Special Redemption") at a Redemption Price of 111% of the principal amount,
together with accrued and unpaid interest and Liquidated Damages (if any), to
the date of redemption, provided, however, that at least 66-2/3% of the original
principal amount of the Notes will remain outstanding immediately after each
such redemption; and provided, further, that
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each such redemption shall occur within 90 days after the date of the closing of
the applicable Public Equity Offering.
If less than all the Notes are to be redeemed, the Trustee will select the
particular Notes or portions thereof to be redeemed by lot, pro rata or by any
other method the Trustee shall deem fair and reasonable.
The Company will comply with all applicable notice requirements regarding
redemption as set forth in the Indenture.
Subsidiary Guarantees
The Indenture provides that if any Subsidiary of the Company (other than an
Acquisition Subsidiary or a Subsidiary of an Acquisition Subsidiary) becomes a
Significant Subsidiary (whether as a result of creation, acquisition, additional
investment, internal growth or otherwise), then such Subsidiary will be required
to execute a subsidiary guarantee (a "Subsidiary Guarantee"); provided, however,
that any Foreign Subsidiary shall only be required to execute a Subsidiary
Guarantee to the extent permitted under the laws of its jurisdiction of
organization. Each Subsidiary that is obligated to execute a Subsidiary
Guarantee shall execute a Subsidiary Guarantee and deliver an opinion of
counsel, in accordance with the terms of the Indenture.
"Subsidiary Guarantors" means any Subsidiary that executes a Subsidiary
Guarantee in accordance with the provisions of the Indenture, and their
respective successors and assigns.
The Subsidiary Guarantee of each Subsidiary Guarantor will be unsecured and
subordinated to the prior payment in full in cash or Cash Equivalents of all
Senior Indebtedness of such Subsidiary Guarantor (including such Subsidiary
Guarantor's guarantee of the Bank Credit Facility), and the amounts for which
the Subsidiary Guarantors will be liable under the guarantees issued from time
to time with respect to other Senior Indebtedness of the Company. The
subordination of the Subsidiary Guarantees will be substantially similar to the
subordination provided for in the Indenture with respect to the Notes. See
"Subordination." The obligations of each Subsidiary Guarantor under its
Subsidiary Guarantee will be limited with the intent of not creating a
fraudulent conveyance under applicable law. See, however, "Risk Factors
- --Fraudulent Conveyance."
The Indenture provides that no Subsidiary Guarantor may consolidate with or
merge with or into (whether or not such Subsidiary Guarantor is the surviving
Person), another corporation, Person or entity (other than the Company or
another Subsidiary Guarantor) whether or not affiliated with such Subsidiary
Guarantor unless subject to the provisions of the following paragraph, (i) the
Person formed by or surviving any such consolidation or merger (if other than
such Subsidiary Guarantor) assumes all the obligations of such Subsidiary
Guarantor, in form and substance reasonably satisfactory to the Trustee, under
the Notes and the Indenture; (ii) immediately after giving effect to such
transaction, no Default or Event of Default exists; and (iii) the Company would
be permitted, by virtue of the Company's pro forma Fixed Charge Coverage Ratio
immediately after giving effect to such transaction, to incur at least $1.00 of
additional Indebtedness pursuant to the Fixed Charge Coverage Ratio test set
forth in the covenant described below under the caption "--Incurrence of
Indebtedness and Issuance of Preferred Stock."
The Indenture provides that in the event of a sale or other disposition of
all or substantially all of the assets of any Subsidiary Guarantor, by way of
merger, consolidation or otherwise, or a sale or other disposition of all of the
capital stock of any Subsidiary Guarantor, then such Subsidiary Guarantor (in
the event of a sale or other disposition, by way of such a merger, consolidation
or otherwise, of all of the capital stock of such Subsidiary Guarantor) or the
corporation acquiring the property (in the event of a sale or other disposition
of all of the assets of such Subsidiary Guarantor) will be released and relieved
of any obligations under its Subsidiary Guarantee; provided that the Net
Proceeds of such sale or other disposition are applied in accordance with the
applicable provisions of the Indenture. See "--Repurchase at the Option of
Holders."
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Subordination
The Indenture provides that the payment of the principal, Redemption Price
and Purchase Price of, and interest and Liquidated Damages (if any) on, the
Notes (including, without limitation, by any purchase of Notes referred to in
"--Repurchase at the Option of Holders") will be expressly subordinate and
subject in right of payment, as provided in the Indenture, to the prior payment
in full in cash or Cash Equivalents of all Senior Indebtedness (as hereinafter
defined).
"Senior Indebtedness" is defined as Designated Senior Indebtedness and the
principal of, premium (if any) and interest (including interest accruing after
the filing of a petition initiating any proceeding under any applicable
bankruptcy law, whether or not a claim therefor is allowable in such proceeding)
on, any other Indebtedness of the Company, whether outstanding on the date of
the Indenture or thereafter created, incurred or assumed, unless, in the case of
any particular Indebtedness, the instrument creating or evidencing, or the
agreement governing, such Indebtedness or pursuant to which such Indebtedness is
outstanding expressly provides that such Indebtedness shall not be senior in
right of payment to the Notes. Notwithstanding the foregoing, "Senior
Indebtedness" shall not include (i) Indebtedness evidenced by the Notes; (ii)
Indebtedness that is by its terms subordinate or junior in right of payment to
any other Indebtedness of the Company; (iii) that portion of any Indebtedness
which is incurred in violation of the Indenture; (iv) Indebtedness of the
Company to a Subsidiary or any other Affiliate of the Company; (v) Indebtedness
which is represented by Disqualified Stock; (vi) any liability for federal,
state, local or other taxes owed or owing by the Company; (vii) accounts payable
or other obligations to trade creditors created, incurred or assumed in the
ordinary course of business in connection with obtaining materials or services
and other current liabilities (excluding the current portion of long-term Senior
Indebtedness); (viii) Indebtedness of or amounts owing by the Company for
compensation to employees for services; and (ix) amounts owing under leases
(other than Capitalized Lease Obligations).
"Designated Senior Indebtedness" means (i) Indebtedness of the Company
under the Bank Credit Facility, including without limitation all principal,
interest (including interest accruing after the filing of a petition initiating
any proceeding under any applicable bankruptcy law, whether or not a claim
therefor is allowable in such preceding), reimbursements of amounts drawn under
letters of credit, reimbursements of other amounts, Hedging Obligations with an
agent or other representative of the lenders under the Bank Credit Facility,
guarantees in respect thereof, and all charges, consignment and other fees,
indemnifications, damages, penalties, expenses (including expenses accruing
after the filing of a petition initiating any proceeding under any applicable
bankruptcy law, whether or not a claim therefor is allowable in such proceeding)
and all other amounts or liabilities payable in respect thereof; and (ii) any
other Senior Indebtedness, and all fees, expenses, indemnities and other
monetary obligations in respect thereof, which, at the date of creation thereof
or determination, has an aggregate principal amount outstanding of, or under
which at the date of creation thereof or determination, the holders thereof are
committed to lend, at least $7.5 million and is specifically designated by the
Company (with the consent of the Senior Representative for the Bank Credit
Facility unless the Trustee has received written notice from such Senior
Representative waiving such right of consent) in the instrument evidencing or
governing such Senior Indebtedness as "Designated Senior Indebtedness" for
purposes of the Indenture.
During the continuance of any default in the payment of any principal of,
gold consignment repurchase obligation or reimbursement obligation under, or
premium (if any) or interest or consignment fee on, any Senior Indebtedness (a
"Senior Payment Default"), no payment or distribution of any assets of the
Company of any kind or character may be made on account of the Notes (including
without limitation on account of the principal, Redemption Price and Purchase
Price of, and interest and Liquidated Damages (if any) on, the Notes) unless and
until such Senior Payment Default has been cured, waived or has ceased to exist
or such Senior Indebtedness has been discharged or paid in full in cash or Cash
Equivalents or the right under the Indenture to prevent any such payment has
been waived by or on behalf of the holders of such Senior Indebtedness.
During the continuance of any event (other than a Senior Payment Default),
the occurrence of which entitles one or more Persons to accelerate the maturity
of any Designated Senior Indebtedness (a "Senior Covenant Default"), and the
receipt by the Trustee from the Senior Representative for such Designated Senior
Indebtedness of a written notice of such Senior Covenant Default, no payment or
distribution of any assets of the Company of any
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kind or character may be made by the Company on account of the Notes (including
without limitation on account of the principal, Redemption Price and Purchase
Price of, and interest and Liquidated Damages (if any) on, the Notes) for the
period specified below (a "Payment Blockage Period").
A Payment Blockage Period shall commence upon the receipt by the Trustee of
notice from a Senior Representative for Designated Senior Indebtedness of a
Senior Covenant Default and shall end (subject to any blockage of payment that
may be in effect in respect of a Senior Payment Default or insolvency) on the
earliest of (i) 179 days after the receipt of such notice, provided such
Designated Senior Indebtedness shall not theretofore have been accelerated and
no Senior Payment Default shall be in effect; (ii) the date on which such Senior
Covenant Default is cured, waived or ceases to exist or such Designated Senior
Indebtedness is discharged or paid in full in cash or Cash Equivalents; or (iii)
the date on which such Payment Blockage Period shall have been terminated by
written notice to the Company and the Trustee from the Senior Representative
initiating such Payment Blockage Period or the holders of at least a majority in
principal amount of such issue of Designated Senior Indebtedness, after which
the Company shall promptly resume making any and all required payments in
respect of the Notes, including any missed payments. In no event will a Payment
Blockage Period extend beyond 179 days from the date of the receipt by the
Trustee of the notice initiating such Payment Blockage Period. Any number of
notices of a Senior Covenant Default may be given during a Payment Blockage
Period; provided, that no such notice shall extend such Payment Blockage Period,
only one Payment Blockage Period may be commenced within any 360-day period and
there shall be at least 181 consecutive days in each period of 360 consecutive
days when no Payment Blockage Period is in effect. No Senior Covenant Default
with respect to Designated Senior Indebtedness that existed or was continuing on
the date of the commencement of any Payment Blockage Period and that was known
to the holders or the Senior Representative for such Designated Senior
Indebtedness will be, or can be, made the basis for the commencement of a second
Payment Blockage Period, whether or not within a period of 360 consecutive days,
unless such Senior Covenant Default has been cured or waived for a period of not
less than 90 consecutive days. The Company shall deliver a notice to the Trustee
promptly after the date on which any Senior Covenant Default is cured or waived
or ceases to exist or on which the Designated Senior Indebtedness related
thereto is discharged or paid in full in cash or Cash Equivalents.
If the Company fails to make any payment on the Notes when due or within
any applicable grace period, whether or not on account of the payment blockage
provisions referred to above, such failure would constitute an Event of Default
under the Indenture and would enable the Holders of Notes to accelerate the
maturity thereof in accordance with the Indenture. See "--Events of Default."
In the event of any insolvency or bankruptcy case or proceeding, or any
receivership, liquidation, reorganization or other similar case or proceeding in
connection therewith, relative to the Company or its assets, or any liquidation,
dissolution or other winding up of the Company, whether voluntary or
involuntary, or any assignment for the benefit of creditors or other marshaling
of assets or liabilities of the Company (except in connection with the
consolidation or merger of the Company or its liquidation or dissolution
following the sale, assignment, transfer, lease or other disposition of all or
substantially all of its assets in one or more related transactions, upon the
terms and conditions described under "--Covenants--Limitation on Mergers,
Consolidations and Sales of Assets" to the extent permitted under the terms of
outstanding Senior Indebtedness), all Senior Indebtedness (including, in the
case of Designated Senior Indebtedness, interest and consignment fees accruing
after the commencement of any such proceeding at the rate specified in the
instrument evidencing the applicable Designated Senior Indebtedness, whether or
not a claim therefor is allowed in such proceeding, to the date of payment of
such Designated Senior Indebtedness) must be paid in full in cash or Cash
Equivalents before any payment or distribution of any assets of the Company of
any kind or character is made on account of the Notes (including without
limitation the principal, Redemption Price, and Purchase Price of, and interest
and Liquidated Damages (if any) on, the Notes).
By reason of such subordination, in the event of liquidation or insolvency,
creditors of the Company that are holders of Senior Indebtedness of the Company
may recover more, ratably, than the Holders of Notes, and the Company may be
unable to meet its obligations fully with respect to the Notes.
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Repurchase at the Option of Holders
Change of Control
The Indenture provides that, upon the occurrence of a Change of Control,
each Holder of Notes will have the right to require the Company to repurchase
all or any part (equal to $1,000 or an integral multiple thereof) of such
Holder's Notes pursuant to the offer described below (the "Change of Control
Offer") at a Purchase Price in cash equal to 101% of the aggregate principal
amount thereof, together with accrued and unpaid interest and Liquidated Damages
(if any) thereon to the Purchase Date. Within 30 days following any Change of
Control, the Company will mail a notice to each Holder describing the
transaction or transactions that constitute the Change of Control and offering
to repurchase Notes pursuant to the procedures required by the Indenture and
described in such notice.
The Company will comply with the requirements of Rule 14e-1 under the
Exchange Act and any other securities laws and regulations thereunder to the
extent such laws and regulations are applicable in connection with the
repurchase of the Notes as a result of a Change of Control.
On a date that is at least 30 but no more than 60 days from the date on
which the Company mails notice of a Change of Control (the "Purchase Date"), the
Company will, to the extent lawful, (i) accept for payment all Notes or portions
thereof properly tendered pursuant to the Change of Control Offer, (ii) deposit
with the Paying Agent an amount equal to the Purchase Price, together with
accrued and unpaid interest and Liquidated Damages (if any) thereon to the
Purchase Date in respect of all Notes or portions thereof so tendered and
accepted for repurchase and (iii) deliver or cause to be delivered to the
Trustee the Notes so accepted together with an Officers' Certificate stating the
aggregate principal amount of Notes or portions thereof being repurchased by the
Company. The Paying Agent will promptly (but in any case not later than five
days after the Purchase Date) mail to each Holder of Notes so repurchased the
amount due in connection with such Notes, and the Company will promptly issue a
new Note, and the Trustee, upon written request from the Company will
authenticate and mail or deliver to each relevant Holder a new Note, in a
principal amount equal to any unpurchased portion of the Notes surrendered to
the Holder thereof; provided, that each such new Note will be in a principal
amount of $1,000 or an integral multiple thereof. The Company will publicly
announce the results of the Change of Control Offer on or as soon as practicable
after the Purchase Date.
Neither the Board of Directors of the Company nor the Trustee may waive
compliance by the Company with its obligations under the Change of Control
covenant. However, the Change of Control covenant may be amended in a manner
that eliminates or limits a Holder's ability to cause the Company to repurchase
such Holder's Notes as long as any such amendment is approved by a Holder or
Holders of at least 75% in principal amount of the then outstanding Notes. See
"-- Amendments, Supplement and Waiver."
The Change of Control purchase feature is a result of negotiations
between the Company and the Initial Purchasers. Management has no current
intention to engage in a transaction involving a Change of Control, although it
is possible that the Company may decide to do so in the future. Subject to the
limitations described below, including the limitation on the Company's ability
to incur indebtedness, the Company is not prohibited by the terms of the
Indenture from entering into certain transactions, including acquisitions,
refinancings, recapitalizations or other highly-leveraged transactions, that do
not constitute a Change of Control under the Indenture. Such transactions could
adversely affect Holders by increasing the indebtedness of the Company, some or
all of which may be senior to the Notes, or otherwise adversely affecting the
Company's capital structure and credit ratings. The Company's ability to engage
in such transactions is also limited by the restrictions under the Bank Credit
Facility and the occurrence of certain of the events that would constitute a
Change of Control would constitute a default under the Bank Credit Agreement.
See "-- Restrictions under Senior Indebtedness" and "Description of the Bank
Credit Facility."
"Change of Control" means the occurrence of any of the following: (i) the
sale, lease, transfer, conveyance or other disposition (other than by way of
merger or consolidation), in one or a series of related transactions, of all or
substantially all of the assets of the Company and its Subsidiaries taken as a
whole, to any "person" (as such term is used in Section 13(d)(3) of the Exchange
Act), (ii) the adoption of a plan relating to the liquidation or dissolution of
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the Company, (iii) the consummation of any transaction (including, without
limitation, any merger or consolidation) the result of which is that (a) prior
to a Public Equity Offering, the Principals and their Related Parties cease to
be the "beneficial owner" (as such term is defined in Rule 13d-3 and Rule 13d-5
under the Exchange Act) of a majority of the total outstanding Voting Stock of
the Company, or (b) after a Public Equity Offering, any "person" (as defined
above), other than the Principals and their Related Parties, becomes the
"beneficial owner" (as such term is defined in Rule 13d-3 and Rule 13d-5 under
the Exchange Act), directly or indirectly, of more than 35% of the total
outstanding Voting Stock of the Company, and the Principals and their Related
Parties beneficially own a lesser percentage of the Voting Stock of the Company
than such person, or (iv) the first day on which a majority of the members of
the Board of Directors of the Company are not Continuing Directors.
The definition of Change of Control includes a phrase relating to the sale,
lease, transfer, conveyance or other disposition of "all or substantially all"
of the assets of the Company and its Subsidiaries taken as a whole. Although
there is a developing body of case law interpreting the phrase "substantially
all", there is no precise established definition of the phrase under applicable
law. Accordingly, the ability of a Holder of Notes to require the Company to
repurchase such Notes as a result of a sale, lease, transfer, conveyance or
other disposition of less than all of the assets of the Company and its
Subsidiaries taken as a whole to another Person or group may be uncertain.
"Continuing Directors" means, as of any date of determination, any member
of the Board of Directors of the Company who (i) was a member of such Board of
Directors on the date of the Indenture or (ii) was nominated for election or
elected to such Board of Directors with the approval of a majority of the
Continuing Directors who were members of such Board at the time of such
nomination or election.
"Principals" means Castle Harlan Partners II, L.P., Castle Harlan, Inc. and
their respective Affiliates and the officers and directors of the Company.
"Related Party" means, with respect to any Principal, (A) any controlling
stockholder, director or officer, 80% (or more) owned Subsidiary, or spouse or
immediate family member or estate thereof (in the case of an individual) of such
Principal or (B) or trust, corporation, partnership or other entity, the
beneficiaries, stockholders, partners, owners or Persons beneficially holding an
80% or more controlling interest of which consist of such Principal and/or such
other Persons referred to in the immediately preceding clause (A).
Asset Sales
The Indenture provides that the Company will not, and will not permit any
of its Subsidiaries to, engage in an Asset Sale unless (i) the Company (or the
Subsidiary, as the case may be) receives consideration at the time of such Asset
Sale at least equal to the fair market value (evidenced by a resolution of the
Board of Directors set forth in an Officers' Certificate delivered to the
Trustee, provided that such Officers' Certificate shall be delivered only in the
event of any Asset Sale involving $5.0 million or more of consideration) of the
assets or Capital Stock issued or sold or otherwise disposed of and (ii) at
least 80% of the consideration therefor received by the Company or such
Subsidiary is in the form of cash or Cash Equivalents; provided that the amount
of (x) any liabilities (as shown on the Company's or such Subsidiary's most
recent balance sheet), of the Company or any Subsidiary (other than contingent
liabilities and liabilities that are by their terms subordinated to the Notes or
any guarantee thereof) that are assumed by the transferee of any such assets
pursuant to a customary novation agreement that releases the Company or such
Subsidiary from further liability and (y) any notes or other obligations
received by the Company or any such Subsidiary from such transferee that are
immediately converted by the Company or such Subsidiary into cash (to the extent
of the cash received), will be deemed to be cash for purposes of this provision
and provided, further, that (A) the Company and its Subsidiaries will not be
required to comply with clauses (i) and (ii) of this paragraph in connection
with any Asset Sale effected in order to comply with an FTC Order which is
consummated within the lesser of (a) 365 days of the date of such FTC Order, or
(b) the time period specified in such FTC Order and (B) any Acquisition
Subsidiary and any Subsidiary of an Acquisition Subsidiary will not be required
to comply with clause (ii) of this paragraph in connection with any Asset Sale.
Within 365 days after the receipt of any Net Proceeds from an Asset Sale,
the Company or the applicable Subsidiary may apply such Net Proceeds, at its
option, (a) to permanently reduce outstanding Senior Indebtedness
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(and correspondingly reduce commitments with respect thereto) or (b) to the
acquisition of an interest in another business, the making of a capital
expenditure or the acquisition of other long-term assets, in each case, in a
Permitted Line of Business on the date of such Asset Sale. Pending the final
application of any such Net Proceeds, the Company or the applicable Subsidiary
may temporarily reduce Indebtedness under the Revolving Credit Facility or
otherwise invest such Net Proceeds in any manner that is not prohibited by the
Indenture. Any Net Proceeds from Asset Sales that are not applied or invested as
provided in the first sentence of this paragraph will be deemed to constitute
"Excess Proceeds."
Within 30 days after the aggregate amount of Excess Proceeds exceeds $5.0
million, the Company will be required to make an offer to all Holders of Notes
(an "Asset Sale Offer") to purchase an aggregate principal amount of Notes equal
to such Excess Proceeds (the "Offer Amount"), at a Purchase Price in cash in an
amount equal to 100% of the principal amount thereof, together with accrued and
unpaid interest and Liquidated Damages (if any) thereon to the Purchase Date, in
accordance with the procedures set forth in the Indenture and described in such
notice.
The Company will comply with the requirements of Rule 14e-1 under the
Exchange Act and any other securities laws and regulations thereunder to the
extent such laws and regulations are applicable in connection with the
repurchase of the Notes as a result of an Asset Sale.
On a date that is at least 30 but no more than 60 days from the date on
which the Company mails notice of an Asset Sale Offer (the "Purchase Date"), the
Company will, to the extent lawful, (i) accept for payment all Notes or portions
thereof properly tendered pursuant to the Asset Sale Offer in an aggregate
principal amount not in excess of the Offer Amount, (ii) deposit with the Paying
Agent an amount equal to the Purchase Price, together with accrued and unpaid
interest and Liquidated Damages (if any) thereon to the Purchase Date, in
respect of all Notes or portions thereof so tendered and accepted for repurchase
and (iii) deliver or cause to be delivered to the Trustee the Notes so accepted
together with an Officers' Certificate stating the aggregate principal amount of
Notes or portions thereof being repurchased by the Company. The Paying Agent
will promptly (but in any case not later than five days after the Purchase Date)
mail to each Holder of Notes so repurchased the amount due in connection with
such Notes, and the Company will promptly issue a new Note, and the Trustee,
upon written request from the Company in the form of an Officers' Certificate
will authenticate and mail or deliver (or cause to transfer by book entry) to
each relevant Holder a new Note, in a principal amount equal to any unpurchased
portion of the Notes surrendered to the Holder thereof; provided, that each such
new Note will be in a principal amount of $1,000 or an integral multiple
thereof. The Company will publicly announce the results of the Asset Sale Offer
on or as soon as practicable after the Purchase Date.
To the extent that the aggregate amount of Notes tendered pursuant to an
Asset Sale Offer is less than the Excess Proceeds, the Company or the applicable
Subsidiary may use any remaining Excess Proceeds for general corporate purposes.
If the aggregate principal amount of Notes surrendered by Holders thereof
exceeds the Offer Amount, the Trustee shall select the particular Notes or
portions thereof to be purchased on a pro rata basis. Upon completion of such
Asset Sale Offer, the amount of Excess Proceeds shall be reset at zero.
The Asset Sale purchase feature is a result of negotiations between the
Company and the Initial Purchasers. Management has no current intention to
engage in a transaction involving an Asset Sale, although it is possible that
the Company may decide to do so in the future. Subject to the limitations
described below, including the limitation on the Company's ability to incur
indebtedness, the Company is not prohibited by the terms of the Indenture from
entering into certain transactions, including acquisitions, refinancings,
recapitalizations or other highly-leveraged transactions, that do not constitute
an Asset Sale under the Indenture. Such transactions could adversely affect
Holders by increasing the indebtedness of the Company, some or all of which may
be senior to the Notes, or otherwise adversely affecting the Company's capital
structure and credit ratings. The Company's ability to engage in such
transactions is also limited by restrictions under the Bank Credit Facility. See
"--Restrictions under Senior Indebtedness" and "Description of the Bank Credit
Facility."
"Asset Sale" means (i) the sale (other than sales of inventory), lease,
conveyance or other disposition of any assets (including, without limitation, by
way of a sale and leaseback) other than in the ordinary course of business
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(provided that the sale, lease, conveyance or other disposition of all or
substantially all of the assets of the Company and its Subsidiaries taken as a
whole will be governed by the provisions of the Indenture described above under
the caption "--Change of Control" and/or the provisions described above under
the caption "--Merger, Consolidation or Sales of Assets" and not by the
provisions of the Asset Sale covenant), and (ii) the issue or sale by the
Company or any of its Subsidiaries of Capital Stock of any of the Company's
Subsidiaries, in the case of either clause (i) or (ii), whether in a single
transaction or a series of related transactions (a) that have a fair market
value in excess of $1.0 million or (b) for net proceeds in excess of $1.0
million. Notwithstanding the foregoing: (i) a transfer of assets by the Company
to a Wholly Owned Subsidiary of the Company or by a Wholly Owned Subsidiary of
the Company to the Company or to another Wholly Owned Subsidiary, (ii) an
issuance or sale of Capital Stock by a Wholly Owned Subsidiary of the Company to
the Company or to another Wholly Owed Subsidiary of the Company, (iii) a
Permitted Investment or a Restricted Payment that is permitted by the covenant
described above under the caption "--Restricted Payments," (iv) a Permitted
Lien, provided that no steps or actions have been taken by the holder of such
Permitted Lien to realize upon or dispose of the assets subject thereto, (v) a
sale or other disposition or abandonment of damaged, worn out or obsolete
property, (vi) the licensing of any intellectual property for a period of not
more than five years which is not in connection with the sale of any other
assets of the Company (except for any such licensing of intellectual property
that causes a reduction of the assets of the Company or any of its Subsidiaries
under GAAP), and (vii) the sale of owned gold to consignment banks under the
Bank Credit Facility in the ordinary course of business, will not be deemed to
be Asset Sales.
Restrictions under Senior Indebtedness
The Indenture provides that prior to giving notice to Holders of Notes
relating to a Change of Control Offer or an Asset Sale Offer, but in any event
within 90 days following a Change of Control or the accumulation of Excess
Proceeds in excess of $5.0 million, the Company shall (i) repay, or otherwise
make arrangements satisfactory to the holders of all Senior Indebtedness (or
their respective Senior Representatives) for the repayment of, all Senior
Indebtedness in full in cash or Cash Equivalents or offer to repay all such
Senior Indebtedness in full in cash or Cash Equivalents and have repaid, or
otherwise made arrangements satisfactory to the holders of all Senior
Indebtedness (or their respective Senior Representatives) for the repayment of,
all Senior Indebtedness in full in cash or Cash Equivalents of any lender who
accepts such offer; and/or (ii) obtain the requisite consents under the Bank
Credit Facility or under agreements relating to other Senior Indebtedness to
purchase Notes as required by the Indenture. The Company shall not effect the
purchase of Notes until all Senior Indebtedness has been repaid in full in cash
or Cash Equivalents and/or such requisite consents have been obtained. As of
December 16, 1996, the Company had approximately $36.2 millions of Senior
Indebtedness outstanding (exclusive of an unused commitment of up to $23.8
million) under the Bank Credit Facility.
The Bank Credit Facility prohibits the Company from purchasing any Notes
and also provides that certain change of control events with respect to the
Company and asset sales would constitute a default thereunder. Moreover, the
exercise by the Holders of their right to require the Company to repurchase the
Notes could cause a default under the Senior Indebtedness even if the Change of
Control itself does not, due to the financial effect of such repurchase on the
Company. As of the date hereof, there are no other outstanding securities or
indebtedness of the Company (ranking pari passu with the Notes or otherwise),
other than the Bank Credit Facility, that prohibit certain events that would
constitute a Change of Control or an Asset Sale or that require the Company to
repurchase or refinance such obligations upon a Change of Control of the Company
or an Asset Sale; although any future agreements relating to Senior Indebtedness
or other Indebtedness to which the Company becomes a party or other securities
that may be issued by it in the future may contain similar restrictions and
provisions. In the event the Company becomes obligated pursuant to the Indenture
to purchase Notes at a time when the Company is contractually prohibited by the
Bank Credit Facility or any other such agreement from purchasing Notes, the
Company could seek the consent of its lenders to the purchase of Notes or could
attempt to refinance the borrowings under the agreements that contain such
prohibition. If the Company does not obtain such a consent or repay such
borrowings, the Company would remain contractually prohibited from purchasing
Notes. In such case, the Company's failure to make the required Change of
Control Offer or Asset Sale Offer or to purchase tendered Notes would constitute
an Event of Default under the Indenture which would, in turn, constitute a
default under the Bank of Credit Facility and any other Senior Indebtedness
which contains terms which would result in any event of default upon the
occurrence of an Event of Default under the Notes. In such circumstances, the
Company's ability
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to make payments to the Holders of Notes would be subject to the subordination
provisions of the Indenture. Finally, the Company's ability to pay cash to the
Holders upon a repurchase may be limited by the Company's then existing
financial resources. There can be no assurance that sufficient funds will be
available when necessary to make any required repurchases.
Certain Covenants
Restricted Payments
The Indenture provides that the Company will not, and will not permit any
of its Subsidiaries to, directly or indirectly: (i) declare or pay any dividend
or make any other payment or distribution on account of the Company's Capital
Stock (including, without limitation, any payment in connection with any merger
or consolidation involving the Company) or to the direct or indirect holders of
the Company's Capital Stock in their capacity as such (other than dividends or
distributions payable in Capital Stock (other than Disqualified Stock) of the
Company or dividends or distributions payable to the Company or any Wholly Owned
Subsidiary of the Company); (ii) purchase, redeem or otherwise acquire or retire
for value any Capital Stock of the Company or any direct or indirect parent or
other Affiliate of the Company (other than a Wholly Owned Subsidiary of the
Company); (iii) make any principal payment on, or purchase, redeem, defease or
otherwise acquire or retire for value prior to any scheduled maturity, scheduled
repayment or sinking fund payment date any Indebtedness that is subordinated to
the Notes; or (iv) make any Restricted Investment (all such payments and other
actions set forth in clauses (i) through (iv) above being collectively referred
to as "Restricted Payments"), unless, at the time of and after giving effect to
such Restricted Payment:
(a) no Default or Event of Default shall have occurred and be
continuing or would occur as a consequence thereof; and
(b) the Company would, at the time of such Restricted Payment and
after giving pro forma effect thereto as if such Restricted Payment had
been made at the beginning of the applicable four-quarter period, have been
permitted to incur at least $1.00 of additional Indebtedness pursuant to
the Fixed Charge Coverage Ratio test set forth in the first paragraph of
the covenant described below under the caption "--Incurrence of
Indebtedness and Issuance of Preferred Stock;" and
(c) such Restricted Payment, together with the aggregate of all other
Restricted Payments made by the Company and its Subsidiaries after the date
of the Indenture (excluding Restricted Payments permitted by clauses (2),
(3), (4), (5), (6) and (8) of the next succeeding paragraph), is less than
the sum of (i) 50% of the Consolidated Net Income of the Company for the
period (taken as one accounting period) from the beginning of the first
fiscal quarter commencing after the date of the Indenture to the end of the
Company's most recently ended fiscal quarter for which internal financial
statements are available at the time of such Restricted Payment (or, if
such Consolidated Net Income for such period is a deficit, less 100% of
such deficit), plus (ii) 100% of the aggregate net cash proceeds received
by the Company from the issue or sale since the date of the Indenture of
Capital Stock of the Company (to the extent not used as described under the
caption "Special Redemption") or of debt securities of the Company that
have been converted into such Capital Stock (other than Capital Stock (or
convertible debt securities) sold to a Subsidiary of the Company or
Disqualified Stock or debt securities that have been converted into
Disqualified Stock), plus (iii) to the extent that any Restricted
Investment that was made after the date of the Indenture is sold for cash
or otherwise liquidated or repaid for cash, the lesser of (A) the cash
return of capital with respect to such Restricted Investment (less the cost
of disposition, if any) and (B) the initial amount of such Restricted
Investment.
The foregoing provisions will not prohibit (1) the payment of any dividend
within 60 days after the date of declaration thereof, if at said date of
declaration such payment would have complied with the provisions of the
Indenture; (2) the payment of dividends on Series A Preferred Stock pursuant to
the Certificate of Designation for such Series A Preferred Stock in effect on
the date of the Indenture, provided that the Fixed Charge Coverage Ratio for the
Company's most recently ended four full fiscal quarters for which internal
financial statements are available immediately preceding the date on which such
payment of dividends is made would have been at least 2.25 to 1,
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determined on a pro forma basis, as if the Restricted Payment had been made at
the beginning of such four-quarter period, provided that the amount of any such
dividends paid on Series A Preferred Stock shall, after the date of payment, be
subtracted from the computation of Consolidated Net Income solely for purposes
of clause (c)(i) of the preceding paragraph; (3) the redemption, repurchase,
retirement or other acquisition of Series A Preferred Stock pursuant to the
Certificate of Designation for such Series A Preferred Stock in effect on the
date of the Indenture, provided that (a) such redemption, repurchase, retirement
or other acquisition is for at least $2 million of Series A Preferred Stock, and
(b) the Fixed Charge Coverage Ratio for the Company's most recently ended four
full fiscal quarters for which internal financial statements are available
immediately preceding the date on which such redemption, repurchase, retirement
or other acquisition is made would have been at least 2.5 to 1, determined on a
pro forma basis, as if the Restricted Payment had been made at the beginning of
such four-quarter period; (4) the redemption, repurchase, retirement or other
acquisition of any Capital Stock of the Company in exchange for, or out of the
proceeds of, the substantially concurrent sale (other than to a Subsidiary of
the Company) of other Capital Stock of the Company other than Disqualified
Stock, provided that the amount of any such net cash proceeds that are utilized
for any such redemption, repurchase, retirement or other acquisition shall be
excluded from clause (c)(ii) of the preceding paragraph; (5) the defeasance,
redemption or repurchase of subordinated Indebtedness with the net cash proceeds
from an incurrence of Permitted Refinancing Debt or the substantially concurrent
sale (other than to a Subsidiary of the Company) of Capital Stock of the Company
(other than Disqualified Stock), provided that the amount of any such net cash
proceeds that are utilized for any such redemption, repurchase, retirement or
other acquisition shall be excluded from clause (c)(ii) of the preceding
paragraph; (6) any Investment made by the Company or any of its Subsidiaries in
an Acquisition Subsidiary with the net cash proceeds of an issuance of
Designated Investment Stock within 30 days of such issuance, provided that the
amount of any such net cash proceeds that are utilized for any such Investment
shall be excluded from clause (c)(ii) of the preceding paragraph; (7) the
purchase or redemption of shares of Capital Stock of the Company held by present
or former officers, directors, employees or independent sales representatives of
the Company or by any employee stock ownership plan or similar trust for the
account of such present or former officers, directors, employees or independent
sales representatives upon such person's death, disability, retirement or
termination of employment or other association with the Company or under the
terms of any such plan or trust or any other agreement under which such Capital
Stock was issued in an aggregate amount not to exceed $500,000 per year,
provided that to the extent that less than $500,000 of Capital Stock is
purchased or redeemed in a given year, the difference between $500,000 and the
amount purchased or redeemed during that year shall be added to the amount
available to the Company for purchases and redemptions in the next subsequent
year only (for which purpose the amount so added shall be deemed to be the last
amount expended in such next subsequent year); (8) the payment to Castle Harlan,
Inc. of a management fee of up to $1.5 million per year pursuant to the
Management Agreement entered into between the Company and Castle Harlan, Inc.,
as in force on the Issue Date (the "Management Agreement") (the payment for the
first year following the Issue Date to be a single installment payable at any
time during such year and payments thereafter to be payable in arrears in four
equal quarterly installments per annum), provided that, in the event the full
amount thereof is not paid in any year, the deficiency may cumulate and,
provided that there is no subsisting Default or Event of Default of a type
described in clause (i) or (ii) under the caption "--Events of Default and
Remedies" at the time of payment, may be paid together with the then current
management fee for such subsequent year and (9) a Subsidiary of an Acquisition
Subsidiary may purchase, redeem or otherwise acquire or retire for value any of
its Capital Stock.
The amount of all Restricted Payments (other than cash) shall be the fair
market value (evidenced by a resolution of the Board of Directors set forth in
an Officers' Certificate delivered to the Trustee) on the date of the Restricted
Payment of the asset(s) proposed to be transferred by the Company or such
Subsidiary, as the case may be, pursuant to the Restricted Payment. Not later
than the date of making any Restricted Payment, the Company shall deliver to the
Trustee an Officer's Certificate stating that such Restricted Payment is
permitted and setting forth the basis upon which the calculations required by
the covenant entitled "Restricted Payments" were computed, which calculations
may be based upon the Company's latest available financial statements.
Incurrence of Indebtedness and Issuance of Preferred Stock
The Indenture provides that the Company will not, nor will it permit any of
its Subsidiaries to, directly or indirectly, create, incur, issue, assume,
guarantee or otherwise become directly or indirectly liable, contingently or
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otherwise, with respect to (collectively, "incur") any Indebtedness (including
Acquired Debt) and that the Company will not issue any Disqualified Stock, nor
will it permit any of its Subsidiaries to issue any shares of Preferred Stock
(other than to the Company or a Wholly Owned Subsidiary of the Company other
than an Acquisition Subsidiary or a Subsidiary of an Acquisition Subsidiary);
provided, however, that the Company may incur Indebtedness (including Acquired
Debt) or issue shares of Disqualified Stock, if the Fixed Charge Coverage Ratio
for the Company's most recently ended four full fiscal quarters for which
internal financial statements are available immediately preceding the date on
which such additional Indebtedness is incurred or such Disqualified Stock is
issued would have been at least 2.0 to 1.0, determined on a pro forma basis
(including a pro forma application of the net proceeds therefrom), as if the
additional Indebtedness had been incurred, or the Disqualified Stock had been
issued, as the case may be, at the beginning of such four-quarter period;
provided that (x) until the Company has internal financial statements for two
full fiscal quarters the Company will not, and will not permit any of its
Subsidiaries to, incur any additional Indebtedness or issue any shares of
Preferred Stock, and (y) after the Company has internal financial statements for
two full financial quarters, but before the Company has such internal financial
statements for four full financial quarters, the Fixed Charge Coverage Ratio
will be calculated by annualizing the available internal financial statements of
the Company on a pro rata basis. Notwithstanding the foregoing, neither the
Company nor any Subsidiary of the Company (other than an Acquisition Subsidiary
or a Subsidiary of an Acquisition Subsidiary) may incur Indebtedness in respect
of a Guarantee of Indebtedness of an Acquisition Subsidiary or a Subsidiary of
an Acquisition Subsidiary.
The foregoing provisions will not apply to the incurrence of the following:
(i) the incurrence by the Company of Indebtedness under the term loan
portion of the Bank Credit Facility in an aggregate principal amount at any time
outstanding not to exceed $25 million less the aggregate amount of all
repayments, optional or mandatory, of the principal thereof that have been made
since the date of the Indenture;
(ii) the incurrence by the Company of Indebtedness under the revolving
credit and/or the gold consignment portions of the Bank Credit Facility in an
aggregate principal amount at any time outstanding not to exceed the greater of
(x) $35 million less the aggregate amount of all Net Proceeds of Asset Sales or
other dispositions of assets that have been applied since the date of the
Indenture to permanently reduce the commitments with respect to such
Indebtedness pursuant to the covenant described above under the caption "--Asset
Sales," and (y) the "Borrowing Base" (as determined and calculated under the
terms of the Bank Credit Facility);
(iii) the incurrence by the Company and its Subsidiaries of Existing
Indebtedness;
(iv) the incurrence by the Company of Indebtedness represented by the
Notes;
(v) the incurrence by the Company or any of its Subsidiaries (other than an
Acquisition Subsidiary or a Subsidiary of an Acquisition Subsidiary) of
additional Indebtedness (including Acquired Debt) represented by Capital Lease
Obligations, mortgage financings, or purchase money obligations, in each case
incurred for the purpose of financing or refinancing all or any part of the
purchase price or cost of construction or improvement of property, plant or
equipment used in the business of the Company or such Subsidiary, in an
aggregate principal amount not to exceed $5.0 million at any time outstanding;
(vi) the incurrence by the Company or any of its Subsidiaries of Permitted
Refinancing Debt in exchange for, or the net proceeds of which are used to
extend, refinance, renew, replace, defease or refund, Indebtedness that was
permitted by the Indenture to be incurred;
(vii) the incurrence by the Company or any of its Subsidiaries of
intercompany Indebtedness between or among the Company and any of its Wholly
Owned Subsidiaries; provided, however, that (x) neither the Company nor any of
its Subsidiaries may incur any Indebtedness to any Acquisition Subsidiary of the
Company; (y) if the Company is the obligor of such Indebtedness, such
Indebtedness is evidenced in writing and expressly subordinate to the payment in
full of all obligations with respect to the Notes and (z)(I) any subsequent
issuance, transfer or other disposition of Capital Stock that results in any
such Indebtedness being held by a Person other than the Company or a Wholly
Owned Subsidiary which is not an Acquisition Subsidiary or a Subsidiary of an
Acquisition Subsidiary and (II) any sale, transfer or other disposition of any
such Indebtedness to a Person that is not either the Company or a Wholly Owned
Subsidiary which is not an Acquisition Subsidiary or a Subsidiary of an
Acquisition
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Subsidiary shall be deemed, in each case, to constitute an incurrence of such
Indebtedness by the Company or such Subsidiary, as the case may be;
(viii) the incurrence by the Company or any of its Subsidiaries of Hedging
Obligations that are incurred for the purpose of fixing or hedging interest
rate, commodity or currency risk, in connection with the conduct of its business
and not for speculative purposes;
(ix) the incurrence by the Company of Indebtedness under a Guarantee of any
Indebtedness permitted under the Indenture to be incurred by a Subsidiary of the
Company which is not an Acquisition Subsidiary or a Subsidiary of an Acquisition
Subsidiary;
(x) the incurrence by any Subsidiary of the Company of Indebtedness under a
Guarantee of any Indebtedness permitted under the Indenture to be incurred by
the Company; provided that (a) in the case such Guarantee is of Indebtedness
that is pari passu in right of payment with the Notes, all obligations with
respect to the Notes are Guaranteed on an equal and ratable basis with the
Indebtedness so Guaranteed, and (b) in the case such Guarantee is of
Indebtedness that is subordinated in right of payment to the Notes, all
obligations with respect to the Notes are Guaranteed on a senior basis
reflecting the subordination of the Indebtedness so Guaranteed on terms
substantially similar to, or more favorable to senior creditors than, those
contained in the Indenture;
(xi) the incurrence by the Company of Indebtedness (in addition to
Indebtedness permitted by any other clause of this paragraph) in an aggregate
principal amount (or accreted value, as applicable) at any time outstanding not
to exceed $8.0 million;
(xii) the incurrence by the Company or any of its Subsidiaries of
Indebtedness in respect of bid, performance or advance payment bonds, and appeal
and surety bonds;
(xiii) the incurrence of Indebtedness by an Acquisition Subsidiary or a
Subsidiary or an Acquisition Subsidiary, provided that (a) any such Indebtedness
is without recourse to, and is not Guaranteed by, the Company or any other
Subsidiary of the Company (other than an Acquisition Subsidiary or a Subsidiary
of an Acquisition Subsidiary) without regard to whether such recourse complies
or would comply with the provisions described under the caption "--Restricted
Payments," and (b) no Default or Event of Default is in existence and continuing
after giving effect to such issuance or incurrence:
(xiv) the issuance of Capital Stock, including Disqualified Stock, by a
Subsidiary of an Acquisition Subsidiary, provided that (a) such Disqualified
Stock, is without recourse to, and is not Guaranteed by, the Company or any
other Subsidiary of the Company (other than a Subsidiary of an Acquisition
Subsidiary) without regard to whether such recourse complies or would comply
with the provisions described under the caption "--Restricted Payments," and (b)
no Default or Event of Default is in existence and continuing after giving
effect to such issuance;
(xv) the incurrence by the Company of Indebtedness for the purpose of
effecting a Restricted Payment described in clause (7) of the second paragraph
under the caption "--Restricted Payments" above, provided that (a) the aggregate
original issue price of such Indebtedness at any time outstanding does not
exceed $1 million, (b) such Indebtedness pays no current interest and matures no
earlier than six months after the scheduled maturity date of the Notes, and (c)
such Indebtedness is subordinated to the Notes on terms substantially similar
to, or more favorable to senior creditors than, those contained in the
Indenture; and
(xvi) the incurrence by the Company or any of its Subsidiaries of interest,
fees or other expenses on Indebtedness otherwise permitted under this covenant,
provided that such interest, fees or other expenses are payable on a current
basis no less frequently than semi-annually and are paid when due or within any
applicable customary grace period thereafter, not to exceed thirty days.
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For purposes of determining compliance with this covenant, (i) in the event
that an item of Indebtedness meets the criteria of more than one of the types of
Indebtedness permitted by this covenant, the Company in its sole discretion will
classify such item of Indebtedness and will only be required to include the
amount and type of each class of Indebtedness in the test specified in the first
paragraph of this covenant or in one of the clauses of the second paragraph of
this covenant; (ii) the amount of Indebtedness issued at a price which is less
than the principal amount thereof shall be equal to the amount of liability in
respect thereof determined in accordance with GAAP; and (iii) the amount of
Indebtedness represented by a Guarantee of a primary obligation of another
Person shall be deemed to be the lower of (x) an amount equal to the maximum
amount of the primary obligation (including without limitation all principal,
premiums (if any), interest, fees and all other amounts in respect thereof) in
respect of which such Guarantee is made and (y) the maximum amount for which
such guaranteeing Person may be liable pursuant to the terms of the applicable
Guarantee, which, in any case in which such Guarantee consists solely of the
granting of a Lien on any asset of such guaranteeing Person, shall be limited to
the fair market value of such asset.
Liens
The Indenture provides that the Company will not, and will not permit any
of its Subsidiaries to, directly or indirectly, create, incur, assume or suffer
to exist any Lien on any asset now owned or hereafter acquired, or any income or
profits therefrom or assign or convey any right to receive income therefrom,
except Permitted Liens.
Dividend and Other Payment Restrictions Affecting Subsidiaries
The Indenture provides that the Company will not, and will not permit any
of its Subsidiaries (other than an Acquisition Subsidiary or a Subsidiary
thereof) to, directly or indirectly, create or otherwise cause or suffer to
exist or become effective any encumbrance or restriction on the ability of such
Subsidiary to (i)(a) pay dividends or make any other distributions to the
Company or any of its Subsidiaries (1) on its Capital Stock or (2) with respect
to any other interest or participation in, or measured by, its profits, or (b)
pay any Indebtedness owed to the Company or any of its Subsidiaries, (ii) make
loans or advances to the Company or any of its Subsidiaries, or (iii) transfer
any of its properties or assets to the Company or any of its Subsidiaries,
except for such encumbrances or restrictions existing under or by reason of (a)
written agreements evidencing Existing Indebtedness as in effect on the date of
the Indenture, (b) the Bank Credit Facility as in effect from time to time,
provided that such provisions are no more restrictive with respect to such
dividend and other payment restrictions than those contained in the Bank Credit
Facility as in effect on the date of the Indenture, (c) the Indenture and Notes,
(d) applicable law, (e) any instrument or agreement governing Acquired Debt of
the Company or any of its Subsidiaries or Indebtedness or Capital Stock of a
Person acquired by the Company or any of its Subsidiaries as in effect at the
time of such acquisition (except to the extent such Indebtedness was incurred in
connection with or in contemplation of such acquisition), which encumbrances or
restrictions are not applicable to any Person, or the properties or assets of
any Person, other than the Person, or the property or assets of the Person, so
acquired, (f) by reason of customary non-assignment provisions in leases entered
into in the ordinary course of business, (g) purchase money obligations for
property acquired in the ordinary course of business that impose restrictions of
the nature described in clause (iii) above on the property so acquired, (h)
Permitted Refinancing Debt, provided that the restrictions contained in the
agreements governing such Permitted Refinancing Debt are not more restrictive
than those contained in the agreements governing the Indebtedness being
refinanced, or (i) in the case of any Foreign Subsidiary, the laws, rules or
regulations of any foreign nation.
Limitation on Mergers, Consolidations and Sales of Assets
The Indenture provides that the Company will not consolidate or merge with
or into any other Person (other than a Wholly Owned Subsidiary which is not an
Acquisition Subsidiary or a Subsidiary of an Acquisition Subsidiary), or permit
any other Person to consolidate or merge with or into the Company, nor will the
Company sell, lease, convey or otherwise dispose of all or substantially all of
its assets unless (i) the Company shall be the continuing corporation or the
entity formed by or surviving any such consolidation or merger, or to which such
sale, lease, conveyance or other disposition shall have been made (the
"Surviving Entity"), is a corporation organized and existing under the laws of
the United States, any state thereof, or the District of Columbia; (ii) the
Surviving Entity assumes by supplemental indenture all of the obligations of the
Company under the Notes and the Indenture; (iii)
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immediately after giving effect to such transaction, no Default or Event of
Default shall have occurred and be continuing; (iv) immediately after giving
effect to such transaction, the Consolidated Net Worth of the Company or the
Surviving Entity, as the case may be, would be at least equal to the
Consolidated Net Worth of the Company immediately prior to such transaction; and
(v) immediately after giving effect to such transaction, the Company or the
Surviving Entity, as the case may be, could incur at least $1.00 of additional
Indebtedness pursuant to the Fixed Charge Coverage Ratio test set forth in the
first paragraph of the covenant described above under the caption "--Incurrence
of Indebtedness and Issuance of Preferred Stock."
Transactions with Affiliates
The Indenture provides that the Company will not, and will not permit any
of its Subsidiaries to, make any payment to, or sell, lease, transfer or
otherwise dispose of any of its properties or assets to, or purchase any
property or assets from, or enter into or make or amend any contract, agreement,
loan, advance or guarantee with any Affiliate or with any Person (other than an
Affiliate) for the benefit of any Affiliates (each of the foregoing, an
"Affiliate Transaction"), unless (i) such Affiliate Transaction is on terms that
are no less favorable to the Company or the relevant Subsidiary than those that
would have been obtained in a comparable transaction by the Company or such
Subsidiary with an unrelated Person and (ii) the Company delivers to the Trustee
(a) with respect to any Affiliate Transaction or series of related Affiliate
Transactions involving aggregate consideration in excess of $2.0 million, a
resolution of the Board of Directors set forth in an Officers' Certificate
certifying that such Affiliate Transaction complies with clause (i) above and
that such Affiliate Transaction has been approved by a majority of the
disinterested members of the Board of Directors and (b) with respect to any
Affiliate Transaction or series of related Affiliate Transactions involving
aggregate consideration in excess of $5.0 million, an opinion as to the fairness
to the Company of such Affiliate Transaction from a financial point of view
issued by an accounting, appraisal or investment banking firm of national
standing experienced in the appraisal or similar review of similar types of
transactions; provided that (w) any employment or consulting agreement entered
into or any employee benefit plan adopted by the Company or any of its
Subsidiaries in the ordinary course of business, (x) transactions between or
among the Company and/or its Wholly Owned Subsidiaries (other than Acquisition
Subsidiaries and Subsidiaries of Acquisition Subsidiaries) and transactions
between or among an Acquisition Subsidiary and/or its Subsidiaries, (y)
Restricted Payments (including the management fee payable to Castle Harlan, Inc.
pursuant to the Management Agreement) that are permitted by the provisions of
the Indenture described above under the caption "--Restricted Payments" and
Permitted Investments, and (z) reasonable and customary payments and other
benefits (including indemnification) provided to directors for service on the
Board of Directors of the Company or any of its Subsidiaries, including the
reimbursement or advancement of out-of-pocket expenses and directors' and
officers' liability insurance, in each case, shall not be deemed Affiliate
Transactions. For the purposes of determining if a transaction is an Affiliate
Transaction, Castle Harlan Partners II, L.P., Castle Harlan, Inc. and their
respective Affiliates shall be deemed to be an Affiliate of the Company and each
of its Subsidiaries.
Limitation on Issuances and Sales of Capital Stock of Subsidiaries
The Indenture provides that the Company (i) will not, and will not permit
any Subsidiary of the Company to, transfer, convey, sell, lease or otherwise
dispose of any Capital Stock of any Subsidiary of the Company to any Person
(other than the Company or a Wholly Owned Subsidiary of the Company which is not
an Acquisition Subsidiary or a Subsidiary of an Acquisition Subsidiary), unless
(a) such transfer, conveyance, sale, lease or other disposition (unless made by
an Acquisition Subsidiary or a Subsidiary of an Acquisition Subsidiary) is of
all the Capital Stock of such Subsidiary and (b) the Net Proceeds from such
transfer, conveyance, sale, lease or other disposition are applied in accordance
with the covenant described above under the caption "--Asset Sales," and (ii)
will not permit any Subsidiary of the Company (other than a Subsidiary of an
Acquisition Subsidiary) to issue any of its Capital Stock (other than, if
necessary, shares of its Capital Stock constituting directors' qualifying shares
or, in the case of a Foreign Subsidiary, shares issued to foreign nationals
pursuant to applicable law, provided, that such Foreign Subsidiary remains a
Wholly Owned Subsidiary) to any Person other than to the Company or a Wholly
Owned Subsidiary of the Company which is not an Acquisition Subsidiary or a
Subsidiary of an Acquisition Subsidiary.
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Business Activities
The Indenture provides that the Company will not, nor will it permit any of
its Subsidiaries to, engage in any business other than a Permitted Line of
Business.
Limitations on Future Senior Subordinated Indebtedness
The Indenture provides that the Company will not incur any Indebtedness,
other than the Notes, that is subordinated in right of payment to any other
Indebtedness of the Company unless such Indebtedness, by its terms is pari passu
with the Notes or subordinated to the Notes pursuant to subordination provisions
substantially similar to, or more favorable to senior creditors than, those
contained in the Indenture.
Payments for Consent
The Indenture provides that neither the Company, nor any of its
Subsidiaries will, directly or indirectly, pay or cause to be paid any
consideration, whether by way of interest, fee or otherwise, to any Holder of
any Notes for or as an inducement to any consent, waiver or amendment of any of
the terms or provisions of the Indenture or the Notes unless such consideration
is offered to be paid or is paid to all Holders of the Notes that consent, waive
or agree to amend in the time frame set forth in the solicitation documents
relating to such consent, waiver or agreement.
Reports
The Indenture provides that, whether or not required by the rules and
regulations of the Commission, so long as any Notes are outstanding, the
Company, and, if the Company is required to file financial statements for any
Subsidiary Guarantor, such Subsidiary Guarantor, will furnish to the Holders of
Notes (i) all quarterly and annual financial information that would be required
to be contained in filings with the Commission on Forms 10-Q and 10-K if the
Company and/or any Subsidiary Guarantor was required to file such forms,
including "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and, with respect to annual consolidated financial
statements and schedules only, a report thereon by the independent auditors of
the Company and/or any Subsidiary Guarantor, and (ii) all information that would
be required to be contained in filings with the Commission on Form 8-K if the
Company and/or any Subsidiary Guarantor was required to file such form. In
addition, whether or not required by the rules and regulations of the
Commission, the Company will file a copy of all such information and reports
with the Commission for public availability (unless the Commission will not
accept such a filing) and make such information available to securities analysts
and prospective investors upon request. In addition, the Company has agreed
that, for so long as any Notes remain outstanding, it will furnish to the
Holders, and to securities analysts and prospective investors upon their
request, the information required to be delivered pursuant to Rule 144A(d)(4)
under the Securities Act.
Events of Default and Remedies
The Indenture provides that each of the following constitutes an Event of
Default: (i) default for 30 days in the payment when due of interest or
Liquidated Damages (if any) on the Notes (whether or not prohibited by the
subordination provisions of the Indenture); (ii) default in payment when due of
the principal, Redemption Price or Purchase Price of the Notes (whether or not
prohibited by the subordination provisions of the Indenture); (iii) failure by
the Company to comply with certain provisions described under the caption
"--Repurchase at the Option of Holders" or the provisions described under the
caption "--Limitation on Mergers, Consolidations and Sales of Assets"; (iv)
failure by the Company for 30 days after notice from the Trustee or Holders of
not less than 25% of the aggregate principal amount of the Notes outstanding to
comply with the provisions described under the captions "Covenants--Restricted
Payments" or "Covenants--Incurrence of Indebtedness and Issuance of Preferred
Stock," (v) failure by the Company for 60 days after notice from the Trustee or
Holders of not less than 25% of the aggregate principal amount of the Notes
outstanding to comply with any of its other agreements in the Indenture or the
Notes, (vi) default under any mortgage, indenture or instrument under which
there may be issued or by which there may be secured or evidenced any
Indebtedness for money borrowed by the Company or any of its Subsidiaries
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or the payment of which is Guaranteed by the Company or any of such
Subsidiaries, whether such Indebtedness or Guarantee now exists or is created
after the date of the Indenture, which default (a) is caused by a failure to pay
any amount due with respect to Indebtedness at the stated maturity thereof (a
"Payment Default") or (b) results in the acceleration of such Indebtedness prior
to its express maturity and, in each case, the principal amount of any such
Indebtedness, together with the principal amount of any other such Indebtedness
under which there has been a Payment Default or the maturity of which has been
so accelerated, aggregates $5.0 million or more; (vii) failure by the Company or
any of its Subsidiaries to pay final judgments aggregating in excess of $5.0
million, which judgments are not paid, discharged or stayed for a period of 60
days; (viii) certain events of bankruptcy or insolvency with respect to the
Company, any Significant Subsidiary or any group of Subsidiaries that, taken
together, would constitute a Significant Subsidiary.
If any Event of Default occurs and is continuing, the Trustee or the
Holders of at least 25% in principal amount of the then outstanding Notes by
written notice to the Company (and the Trustee, if such notice is given by such
Holders) may declare all the Notes to be due and payable immediately. Upon such
acceleration, the entire principal amount of, and accrued and unpaid interest
and Liquidated Damages, if any, on the Notes (i) shall become immediately due
and payable; or (ii) if there is any Designated Senior Indebtedness outstanding,
shall become due and payable upon the first to occur of (a) an acceleration
under such Designated Senior Indebtedness or (b) five days after receipt by the
Company and the Senior Representative for such Designated Senior Indebtedness of
such acceleration notice, unless all Events of Default specified in such
acceleration notice (other than any Event of Default in respect of non-payment
of principal, premium or interest, if any, which has become due solely by reason
of such declaration of acceleration) shall have been cured. Notwithstanding the
foregoing, in the case of an Event of Default arising from certain events of
bankruptcy or insolvency, with respect to the Company, any Significant
Subsidiary or any group of Subsidiaries that, taken together, would constitute a
Significant Subsidiary, all outstanding Notes will become due and payable
without further action or notice. The Holders of the Notes may not enforce the
Indenture or the Notes except as provided in the Indenture. Subject to certain
limitations, Holders of a majority in principal amount of the then outstanding
Notes may direct the Trustee in its exercise of any trust or power. The Trustee
may withhold from Holders of the Notes notice of any continuing Default or Event
of Default (except a Default or Event of Default relating to the payment of
principal or interest) if it determines that withholding notice is in their
interest.
In the case of any Event of Default occurring by reason of any willful
action (or inaction) taken (or not taken) by or on behalf of the Company with
the intention of avoiding payment of the premium that the Company would have had
to pay if the Company then had elected to redeem the Notes pursuant to the
optional redemption provisions of the Indenture, an equivalent premium shall
also become and be immediately due and payable to the extent permitted by law
upon the acceleration of the Notes. If an Event of Default occurs prior to
January 15, 2005 by reason of any willful action (or inaction) taken (or not
taken) by or on behalf of the Company with the intention of avoiding the
prohibition on redemption of the Notes prior to January 15, 2005, then the
premium specified in the Indenture will also become immediately due and payable
to the extent permitted by law upon the acceleration of the Notes.
The Holders of a majority in aggregate principal amount of the Notes then
outstanding by notice to the Trustee may on behalf of the Holders of all the
Notes waive any existing Default or Event of Default and its consequences under
the Indenture except a continuing Default or Event of Default in the payment of
the principal, Redemption Price or Purchase Price of, or interest or Liquidated
Damages (if any) on, the Notes. In addition, after a declaration of acceleration
has been made, but before a judgment or decree for payment of the money due has
been obtained by the Trustee, the Holders of at least a majority in aggregate
principal amount of Notes outstanding, by written notice to the Company and the
Trustee, may annul such declaration if (i) the Company has paid or deposited
with the Trustee a sum sufficient to pay (a) all sums paid or advanced by the
Trustee under the Indenture and the reasonable compensation, expenses,
disbursements and advances of the Trustee, its agents and counsel, (b) all
overdue interest on all Notes, and (c) to the extent that payment of such
interest is lawful, interest upon overdue interest and Liquidated Damages, if
any, at the rate borne by the Notes; and (ii) all Events of Default, other than
the non-payment of principal of the Notes which has become due solely by such
declaration of acceleration, have been cured of waived.
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The Company is required to deliver to the Trustee annually a statement
regarding compliance with the Indenture, and the Company is required upon
becoming aware of any Default or Event of Default, to deliver to the Trustee a
statement specifying such Default or Event of Default.
No Personal Liability of Directors, Officers, Employees and Stockholders
Under the Indenture, no past or future director, officer, employee,
incorporator or stockholder of the Company, as such, shall have any liability
for any obligations of the Company under the Notes, the Indenture or for any
claim based on, in respect of, or by reason of, such obligations or their
creation. Each Holder of Notes by accepting a Note waives and releases all such
liability. The waiver and release are part of the consideration for issuance of
the Notes. Such waiver may not be effective to waive liabilities under the
federal securities laws and it is the view of the Commission that such a waiver
is against public policy.
Legal Defeasance and Covenant Defeasance
The Company may, at its option and at any time, elect to have all of the
obligations of the Company and the Subsidiary Guarantors discharged with respect
to the outstanding Notes ("Legal Defeasance") except for (i) the rights of
Holders of outstanding Notes to receive payments in respect of the principal of,
and premium (if any), interest and Liquidated Damages (if any) on such Notes
when such payments are due from the trust referred to below, (ii) the Company's
obligations with respect to the Notes concerning issuing temporary Notes,
registration of Notes, mutilated, destroyed, lost or stolen Notes and the
maintenance of an office or agency for payment and money for security payments
held in trust, (iii) the rights, powers, trusts, duties and immunities of the
Trustee, and the Company's obligations in connection therewith, and (iv) the
Legal Defeasance provisions of the Indenture. In addition, the Company, at its
option at any time, may elect to have the obligations of the Company released
with respect to certain covenants that are contained in the Indenture, including
without limitation those described under the caption "--Repurchase at the Option
of the Holders" ("Covenant Defeasance"), and thereafter any omission to comply
with such obligations shall not constitute a Default or Event of Default with
respect to the Notes. In the event a Covenant Defeasance occurs, certain events
(not including non-payment, bankruptcy, receivership, and insolvency events)
described under "Events of Default" will no longer constitute an Event of
Default with respect to the Notes.
In order to exercise either Legal Defeasance or Covenant Defeasance, (i)
the Company must irrevocably deposit with the Trustee, in trust, for the benefit
of the Holders of the Notes, cash in U.S. dollars, U.S. Government Securities,
or a combination thereof, in such amounts as will be sufficient (without
reinvestment), in the opinion of a nationally recognized firm of independent
public accountants, to pay the principal of and premium (if any), interest and
Liquidated Damages (if any) on the outstanding Notes on the stated maturity or
on the applicable Redemption Date, as the case may be, and the Company must
specify whether the Notes are being defeased to maturity or to a particular
Redemption Date; (ii) in the case of a Legal Defeasance, the Company shall have
delivered to the Trustee an opinion of counsel in the United States reasonably
acceptable to the Trustee confirming that (A) the Company has received from, or
there has been published by, the Internal Revenue Service a ruling or (B) since
the date of the Indenture, there has been a change in the applicable federal
income tax law, in either case to the effect that, and based thereon such
opinion of counsel shall confirm that, the Holders of the outstanding Notes will
not recognize income, gain or loss for federal income tax purposes as a result
of such Legal Defeasance and will be subject to federal income tax on the same
amounts, in the same manner and at the same times as would have been the case if
such Legal Defeasance had not occurred; (iii) in the case of a Covenant
Defeasance, the Company shall have delivered to the Trustee as opinion of
counsel in the United States reasonably acceptable to the Trustee confirming
that the Holders of the outstanding Notes will not recognize income, gain or
loss for federal income purposes as a result of such Covenant Defeasance and
will be subject to federal income tax on the same amounts, in the same manner
and at the same times as would have been the case if such Covenant Defeasance
had not occurred; (iv) no Default or Event of Default shall have occurred and be
continuing on the date of such deposit after giving effect thereto or insofar as
Events of Default from bankruptcy or insolvency events are concerned, no such
Event of Default shall occur at any time during the period ending on the
ninety-first day after the date of deposit (it being understood that such
condition shall not be deemed to be satisfied until such ninety-first day); (v)
such Legal Defeasance or Covenant Defeasance will not result in a breach or
violation of, or constitute a default under any
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material agreement or instrument to which the Company or any of its Subsidiaries
is a party or by which the Company or any of its Subsidiaries is bound; (vi) the
Company must be delivered to the Trustee an opinion of counsel to the effect
that after the ninety-first day following the deposit, the trust funds will not
be subject to the effect of any applicable bankruptcy, insolvency,
reorganization or similar laws affecting creditors' rights generally; (vii) the
Company must deliver to the Trustee an Officers' Certificate stating that the
deposit was not made by the Company with the intent of preferring the Holders of
Notes over the other creditors of the Company or with the intent of defeating,
hindering, delaying or defrauding creditors of the Company or others; and (viii)
the Company must deliver to the Trustee an Officers' Certificate and an opinion
of counsel, each stating that all conditions precedent provided for relating to
the Legal Defeasance or the Covenant Defeasance have been complied with.
Transfer and Exchange
A Holder may transfer or exchange Notes in accordance with the Indenture.
The Registrar and the Trustee may require a Holder, among other things, to
furnish appropriate endorsements and transfer documents, and the Company may
require a Holder to pay any taxes and fees required by law or permitted by the
Indenture. The Company is not required to transfer or exchange any Note selected
for redemption. Also, the Company is not required to transfer or exchange any
Note during the period commencing 15 days before a selection of Notes to be
redeemed. The registered Holder of a Note will be treated as the owner of it for
all purposes.
Amendment, Supplement and Waiver
Except as provided in the next two succeeding paragraphs, the Indenture and
the Notes may be amended or supplemented with the consent of the Holders of at
least a majority in principal amount of the Notes then outstanding (including,
without limitation, consents obtained in connection with a purchase of, or
tender offer or exchange offer for, Notes), and any existing Default or
compliance with any provision of the Indenture or the Notes may be waived with
the consent of the Holders of a majority in principal amount of the then
outstanding Notes (including consents obtained in connection with a tender offer
or exchange offer for Notes).
Without the consent of each Holder affected, an amendment or waiver may not
(with respect to any Notes held by a non-consenting Holder): (i) reduce the
principal amount of Notes whose Holders must consent to an amendment, supplement
or waiver, (ii) reduce the principal or Redemption Price of or change the fixed
maturity of any Note or alter the provisions with respect to the redemption of
the Notes (other than a payment required by one of the covenants described above
under the caption "--Repurchase at the Option of Holders"), (iii) reduce the
rate of or change the time for payment of interest or Liquidated Damages (if
any) on or with respect to any Note, (iv) waive a Default or Event of Default in
the payment of principal, Redemption Price or Purchase Price of, or interest or
Liquidated Damages (if any) on the Notes (except a rescission of acceleration of
the Notes by the Holders of at least a majority in aggregate principal amount of
the Notes and a waiver of the payment default that resulted from such
acceleration), (v) make any Note payable in money other than that stated in the
Notes, (vi) make any change in the provisions of the Indenture relating to
waivers of past Defaults or the rights of Holders of Notes to receive payments
of principal, Redemption Price or Purchase Price of, or interest or Liquidated
Damages (if any) on the Notes (except as described above under the caption
"--Repurchase at the Option of Holders"), (vii) waive a redemption or repurchase
payment with respect to any Note (other than a payment required by one of the
covenants described above under the caption "--Repurchase at the Option of
Holders") or (viii) make any change in the foregoing amendment and waiver
provisions. Without the consent of the Holders of at least 75% in principal
amount of the Notes then outstanding (including consents obtained in connection
with a purchase of, tender offer or exchange offer for, the Notes), no waiver or
amendment to the Indenture may make any change in the provisions described above
under the captions "--Subordination" and "--Repurchase at the Option of the
Holders" that adversely affect the rights of any Holder of Notes.
Notwithstanding the foregoing, without the consent of any Holder of Notes,
the Company and the Trustee may amend or supplement the Indenture or the Notes
to cure any ambiguity, defect or inconsistency, to provide for uncertificated
Notes in addition to or in place of certificated Notes, to provide for the
assumption of the Company's obligations to Holders of Notes in the case of a
merger or consolidation, to make any change that would provide any additional
rights or benefits to the Holders of Notes or that does not adversely affect the
legal rights under the
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Indenture of any such Holder, or to comply with requirements of the Commission
in order to effect or maintain the qualification of the Indenture under the
Trust Indenture Act.
Concerning the Trustee
The Indenture contains certain limitations on the rights of the Trustee,
should it become a creditor of the Company, to obtain payment of claims on
certain cases, or to realize on certain property received in respect of any such
claim as security or otherwise. The Trustee will be permitted to engage in other
transactions; however, if it acquires any conflicting interest it will be
required to (i) eliminate such conflict within 90 days, (ii) subject to the
consent of the Company, apply to the Commission for permission to continue or
(iii) resign.
The Holders of a majority in principal amount of the then outstanding Notes
will have the right to direct the time, method and place of conducting any
proceeding for exercising any remedy available to the Trustee, subject to
certain exceptions. The Indenture provides that in case an Event of Default
shall occur and be continuing (which shall not be cured or waived in conformity
with the Indenture), the Trustee will be required, in the exercise of its power,
to use the degree of care and skill of a prudent man under the circumstances in
the conduct of his own affairs. Subject to such provisions, the Trustee will be
under no obligation to exercise any of its rights or powers under the Indenture
at the request of any Holder of Notes, unless such Holder shall have offered to
the Trustee security and indemnity satisfactory to it against any loss,
liability or expense.
Book Entry, Delivery and Form
The certificates representing the Initial Notes were issued, and the
certificates representing the Exchange Notes will be issued, in fully registered
form (the "Global Note") without interest coupons and will be deposited with the
Trustee, as custodian for The Depositary Trust Company, New York, New York
("DTC") and registered in the name of a nominee of DTC for the accounts of
Euroclear and Cedel. Except as set forth below, the record ownership of the
Global Note may be transferred, in whole or in part, only to another nominee of
DTC or to a successor of DTC or its nominee.
Holders may hold their interests in the Global Note directly through DTC if
such holder is a participant in DTC, or indirectly through organizations which
are participants in DTC (the "Participants"). Transfers between Participants
will be effected in the ordinary way in accordance with DTC rules and will be
settled in immediately available funds. The laws of some states require that
certain persons take physical delivery of securities in definitive form.
Consequently, the ability to transfer beneficial interests in the Global Note to
such persons may be limited.
Foreign Persons may hold their interest in the Global Note directly through
Cedel or Euroclear, or indirectly through organizations that are participants in
Cedel or Euroclear. Cedel and Euroclear will hold interests in the Global Note
on behalf of their participants through DTC. Transfers between participants in
Euroclear and Cedel will be effected in the ordinary way in accordance with
their respective rules and operating procedures.
Holders who are not Participants may beneficially own interests in the
Global Note held by DTC only through Participants, including Euroclear and
Cedel, or certain banks, brokers, dealers, trust companies and other parties
that clear through or maintain a custodial relationship with a Participant,
either directly or indirectly ("Indirect Participants"). So long as Cede, as the
nominee of DTC, is the registered owner of the Global Note, Cede for all
purposes will be considered the sole holder of the Global Note. Except as
provided below, owners of beneficial interests in the Global Note will not be
entitled to have certificates registered in their names, will not receive or be
entitled to receive physical delivery of certificates in definitive form, and
will not be considered holders thereof.
Payment of the principal, Redemption Price and Purchase Price of, and
interest and Liquidated Damages (if any) on the Global Note will be made to
Cede, the nominee for DTC, as the registered owner of the Global Note, by wire
transfer of immediately available funds on each applicable payment date. Neither
the Company, the Trustee nor any paying agent will have any responsibility or
liability for any aspect of the records relating to or payments
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made on account of beneficial ownership interests in the Global Note or for
maintaining, supervising or reviewing any records relating to such beneficial
ownership interest.
The Company has been informed by DTC that, with respect to the principal,
Redemption Price and Purchase Price of, and interest and Liquidated Damages (if
any) on the Global Note, DTC's practice is to credit Participants' accounts on
the payment date therefor with payments in amounts proportionate to their
respective beneficial interests in the principal amount represented by the
Global Note, as shown on the records of DTC (adjusted as necessary so that such
payments are made with respect to whole Notes only), unless DTC has reason to
believe that it will not receive payment on such payment date. Payments by
Participant to owners of beneficial interests in the principal amount
represented by the Global Note held through such Participants will be the
responsibility of such Participants, as is now the case with securities held for
the accounts of customers registered in "street name."
Because DTC can only act on behalf of Participants, who in turn act on
behalf of Indirect Participants and certain banks, the ability of a person
having a beneficial interest in the principal amount represented by the Global
Note to pledge such interest to persons or entities that do not participate in
the DTC system, or otherwise take actions in respect of such interest, may be
affected by the lack of a physical certificate evidencing such interest.
Neither the Company nor the Trustee (or any registrar, paying agent or
conversion agent under the Indenture) will have any responsibility for the
performance of DTC or its Participants or Indirect Participants of their
respective obligations under the rules and procedures governing their
operations. DTC has advised the Company that it will take any action permitted
to be taken by a holder of Notes (including, without limitation, the
presentation of Notes for exchange as described below), only at the direction of
one or more Participants to whose account with DTC interests in the Global Note
are credited, and only in respect of the principal amount of the Notes
represented by the Global Note as to which such Participant or Participants has
or have given such direction.
DTC has advised the Company as follows: DTC is a limited purpose trust
company organized under the laws of the State of New York, a member of the
Federal Reserve System, a "clearing corporation" within the meaning of the
Uniform Commercial Code and a "clearing agency" registered pursuant to the
provisions of Section 17A of the Exchange Act. DTC was created to hold
securities for its Participants and to facilitate the clearance and settlement
of securities transactions between Participants through electronic book-entry
changes to accounts of its Participants, thereby eliminating the need for
physical movement of certificates. Participants include securities brokers and
dealers, banks, trust companies, and clearing corporations and may include
certain other organizations such as the Initial Purchasers. Certain of such
Participants (or their representatives), together with other entities, own DTC.
Indirect access to the DTC system is available to others such as banks, brokers,
dealers and trust companies that clear through, or maintain a custodian
relationship, with a Participant, either directly or indirectly.
Although DTC, Euroclear and Cedel have agreed to the foregoing procedures
in order to facilitate transfers of interests in the Global Note among
Participants of DTC, Euroclear and Cedel, they are under no obligation to
perform or continue to perform such procedures, and such procedures may be
discontinued at any time.
Certificated Securities
Exchange Notes exchanged for Initial Notes held in certificated form will
be issued in the form of definitive registered certificates (the "Certificated
Securities") and may not be represented by the Global Note. Subject to certain
conditions, any person having a beneficial interest in the Global Note may, upon
request to the Trustee, exchange such beneficial interest for Notes in the form
of Certificated Securities. Upon any such issuance, the Trustee is required to
register such Certificated Securities in the name of, and cause the same to be
delivered to, such person or persons (or the nominee of any thereof). In
addition, if (i) the Company notifies the Trustee in writing that the Depositary
is no longer willing or able to act as a depositary and the Company is unable to
locate a qualified successor within 90 days or (ii) the Company, at its option,
notifies the Trustee in writing that it elects to cause the issuance of Notes in
the form of Certificated Securities under the Indenture, then, upon surrender by
the Global Note holder of its Global Note, Notes in such form will be issued to
each person that the Global Note holder and the Depositary identify as being the
beneficial owner of the related Notes.
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Neither the Company nor the Trustee will be liable for any delay by the
Global Note holder or the Depositary in identifying the beneficial owners of
Notes and the Company and the Trustee may conclusively rely on, and will be
protected in relying on, instructions from the Global Note holder or the
Depositary for all purposes.
Same-Day Settlement and Payment
The Indenture requires that payments in respect of the Notes represented by
the Global Note, including principal, Redemption Price, Purchase Price, interest
and Liquidated Damages (if any), be made by wire transfer of immediately
available funds to the amounts specified by the Global Note Holder. With respect
to Certificated Notes, the Company will make all payments of principal, premium
(if any), interest and Liquidated Damages (if any) by wire transfer of
immediately available funds to the accounts specified by the Holders thereof or,
if no such account is specified, by mailing a check to each such Holder's
registered address. The Company expects that secondary trading in the
Certificated Notes will be settled in immediately available funds.
Registration Rights; Liquidated Damages
The Company and the Initial Purchasers entered into the Registration Rights
Agreement on December 16, 1996. The summary herein of certain provisions of the
Registration Rights Agreement does not purport to be complete and is subject to,
and is qualified in its entirety by reference to, all the provisions of the
Registration Rights Agreement, a copy of which has been filed as an exhibit to
the Registration Statement of which this Prospectus is a part. As a result of
the making of, and upon acceptance for exchange of all validly tendered Initial
Notes pursuant to the terms of, this Exchange Offer, the Company will have
fulfilled a covenant contained in the Registration Rights Agreement and,
accordingly, the Holders of the Initial Notes will have no further registration
or other rights under the Registration Rights Agreement.
Pursuant to the Registration Rights Agreement, the Company agreed to file
with the Commission within 45 days after the Issue Date, and use its best
efforts to cause to become effective within 120 days after the Issue Date, the
Exchange Offer Registration Statement with respect to the Exchange Notes and,
upon becoming effective, to offer the Holders of Transfer Restricted Securities
who are able to make certain representations the opportunity to exchange their
Transfer Restricted Securities for the Exchange Notes (the "Exchange Offer"). If
(i) the Company is not required to file the Exchange Offer Registration
Statement or permitted to consummate the Exchange Offer because the Exchange
Offer is not permitted by applicable law or Commission policy or (ii) any Holder
of Transfer Restricted Securities that is a QIB or an Accredited Investor
notifies the Company within the specified time period that (A) it is prohibited
by law or Commission policy from participating in the Exchange Offer or (B) that
it may not resell the Exchange Notes acquired by it in the Exchange Offer to the
public without delivering a prospectus and the prospectus contained in the
Exchange Offer Registration Statement is not appropriate or available for such
resales or (C) that it is a broker-dealer and owns Notes acquired directly from
the Company or an affiliate of the Company, the Company will use its best
efforts to file with the Commission a Shelf Registration Statement to cover
resales of the Notes by the Holders thereof who satisfy certain conditions
relating to the provision of information in connection with the Shelf
Registration Statement. The Company will use its best efforts to cause the
applicable registration statement to be declared effective as promptly as
possible by the Commission.
For purposes of the foregoing, "Transfer Restricted Securities" means each
Note until the earliest to occur of (i) the date on which such Note has been
exchanged for an Exchange Note in the Exchange Offer and is entitled to be
resold to the public by the Holder thereof without complying with the prospectus
delivery requirements of the Securities Act, (ii) the date on which such Note
has been effectively registered under the Securities Act and disposed of in
accordance with the Shelf Registration Statement or (iii) the date on which such
Note is distributed to the public pursuant to Rule 144 under the Securities Act
or by a Broker-Dealer pursuant to the "Plan of Distribution" contemplated by the
registration statement for such Exchange Offer Registration Statement (including
delivery of the Prospectus contained therein).
The Registration Rights Agreement provides that (i) the Company will file
an Exchange Offer Registration Statement with the Commission on or prior to 45
days after the Issue Date, (ii) the Company will use its best efforts to have
the Exchange Offer Registration Statement declared effective by the Commission
on or prior to 120 days
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after the Issue Date, (iii) unless the Exchange Offer would not be permitted by
applicable law or Commission policy, the Company will commence the Exchange
Offer and use its best efforts to issue on or prior to 30 days after the date on
which the Exchange Offer Registration Statement was declared effective by the
Commission, Exchange Notes in exchange for all Notes tendered prior thereto in
the Exchange Offer and (iv) if obligated to file the Shelf Registration
Statement, the Company will use its best efforts to file the Shelf Registration
Statement with the Commission on or prior to 30 days after such filing
obligation arises and to cause the Shelf Registration to be declared effective
by the Commission on or prior to 60 days after such obligation arises.
If (a) the Company fails to file any of the Registration Statements
required by the Registration Rights Agreement on or before the date specified
for such filing, (b) any of such Registration Statements is not declared
effective by the Commission on or prior to the date specified for such
effectiveness (the "Effectiveness Target Date"), or (c) the Company fails to
consummate the Exchange Offer within 30 business days of the Effectiveness
Target Date with respect to the Exchange Offer Registration Statement, or (d)
the Shelf Registration Statement or the Exchange Offer Registration Statement is
declared effective but thereafter ceases to be effective or usable in connection
with resales of Transfer Restricted Notes during the periods specified in the
Registration Rights Agreement (each such event referred to in clauses (a)
through (d) above a "Registration Default"), then the Company will pay
liquidated damages ("Liquidated Damages") to each Holder of Notes, with respect
to the first 90-day period immediately following the occurrence of such
Registration Default in an amount equal to $.05 per week per $1,000 principal
amount of Notes held by such Holder. The amount of the Liquidated Damages will
increase by an additional $.05 per week per $1,000 principal amount of Notes
with respect to each subsequent 90-day period until all Registration Defaults
have been cured, up to a maximum amount of Liquidated Damages of $.50 per week
per $1,000 principal amount of Notes. All accrued Liquidated Damages will be
paid by the Company on each Damages Payment Date to the Holder of record by wire
transfer of immediately available funds or by federal funds check. Following the
cure of all Registration Defaults, the accrual of Liquidated Damages will cease.
Holders of Notes will be required to make certain representations to the
Company (as described in the Registration Rights Agreement) in order to
participate in the Exchange Offer and will be required to deliver information to
be used in connection with the Shelf Registration Statement and to provide
comments on the Shelf Registration Statement within the time periods set forth
in the Registration Rights Agreement in order to have their Notes included in
the Shelf Registration Statement and benefit from the provisions regarding
Liquidating Damages set forth above.
Certain Definitions
Set forth below are certain defined terms used in the Indenture. Reference
is made to the Indenture for a full disclosure of all such terms, as well as any
other capitalized terms used herein for which no definition is provided.
"Acquired Debt" means with respect to any specified Person, (i)
Indebtedness of any other Person existing at the time such other Person is
merged with or into or becomes a Subsidiary of such specified Person or assumed
in connection with the acquisition of assets from such other Person, including,
without limitation, Indebtedness incurred in connection with, or in
contemplation of, such other Person merging with or into or becoming a
Subsidiary of such specified Person or such acquisition of assets, and (ii)
Indebtedness secured by a Lien encumbering any asset acquired by such specified
Person.
"Acquisition Subsidiary" means any Wholly Owned Subsidiary of the Company
or any of its Wholly Owned Subsidiaries which is newly formed in anticipation of
and in order to effectuate the acquisition by such entity of the capital stock
or assets of another Person; provided that the making of an Investment in such
Subsidiary by the Company or any other Subsidiary shall be made in compliance
with the covenant described under the caption "--Restricted Payments."
"Affiliate" means with respect to any specified Person, any other Person
directly or indirectly controlling or controlled by or under direct or indirect
common control with such specified Person. For purposes of this definition,
"control" (including, with correlative meanings, the term "controlling,"
"controlled by" and "under common control with"), as used with respect to any
Person, shall mean the possession, directly or indirectly, of the
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power to direct or cause the direction of the management or policies of such
Person, whether through the ownership of voting securities, by agreement or
otherwise; provided that beneficial ownership of 10% or more of the voting
securities of a Person shall be deemed to be control.
"Attributable Debt" means, in respect of a sale and leaseback transaction,
at the time of determination, the present value (discounted at the rate of
interest implicit in such transaction, determined in accordance with GAAP) of
the obligation of the lessee for net rental payments during the remaining term
of the lease included in such sale and leaseback transaction (including any
period for which such lease has been extended or may, at the option of the
lessee, be extended).
"Bank Credit Facility" means the Revolving Credit, Term Loan and Gold
Consignment Agreement among the Company, the Banks from time to time parties
thereto, and The First National Bank of Boston and Rhode Island Hospital Trust
National Bank, as agents for such Banks, together with the related documents
thereto (including, without limitation, any letters of credit issued pursuant
thereto, and any related guarantee agreements and security documents), in each
case as such agreements may be amended (including any amendment and restatement
thereof), supplemented or otherwise modified or replaced (including with other
lenders or consignors), from time to time and including any agreement extending
the maturity of, refinancing, modifying, increasing, substituting for or
otherwise restructuring (including, but not limited to, the inclusion of
additional or different or substitute lenders, consignors or bank agents
thereunder) all or any portion of the Indebtedness, including changing the
borrowing limits, under such agreements or any successor or replacement
agreements, regardless of whether the Bank Credit Facility or any portion
thereof was outstanding or in effect at the time of such replacement,
refinancing, increase, substitution, extension, restructuring, supplement or
modification.
"Capital Lease Obligation" means, at the time any determination thereof is
to be made, the amount of the liability in respect of a capital lease that would
at such time be required to be capitalized on a balance sheet in accordance with
GAAP.
"Capital Stock" means (i) in the case of a corporation, corporate stock,
(ii) in the case of a partnership, partnership interests (whether general or
limited), (iii) in the case of an association or any other business entity, any
and all shares, interests, participations, rights or other equivalents (however
designated) in the equity of such association or entity, and (iv) any other
interest or participation that confers on a Person the right to receive a share
of the profits and losses of, or distributions of assets of, the issuing Person.
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"Cash Equivalents" means (i) United States Dollars, (ii) securities issued
or directly and fully guaranteed or insured by the United States government or
any agency or instrumentality thereof having maturities of not more than six
months from the date of acquisition, (iii) demand and time deposits,
certificates of deposit and eurodollar time deposits with maturities of six
months or less from the date of acquisition, bankers' acceptances with
maturities not exceeding six months and overnight bank deposits, in each case
with any domestic commercial bank having capital and surplus in excess of $500
million and a Keefe Bank Watch Rating of "B" or better, (iv) repurchase
obligations with a term of not more than seven days for underlying securities of
the types described in clauses (ii) and (iii) above entered into with any
financial institution meeting the qualifications specified in clause (iii) above
and (v) commercial paper having the highest rating obtainable from Moody's
Investors Service, Inc. or Standard & Poor's and in each case maturing within
six months after the date of acquisition.
"Common Stock" means, with respect to any Person, Capital Stock of such
Person that does not rank prior, as to the payment of dividends or as to the
distribution of assets upon any voluntary or involuntary liquidation,
dissolution or winding up of such Person, to shares of Capital Stock of any
other class of such Person.
"Consolidated Cash Flow" means, with respect to any Person for any period,
the Consolidated Net Income of such Person for such period plus, to the extent
deducted in computing Consolidated Net Income: (i) an amount equal to any
extraordinary loss plus any net loss realized in connection with any Asset Sale
plus any loss realized on any extraordinary or non-recurring actuarial
assumption adjustment with regard to post-retirement medical and other benefits,
in each case for such periods, plus (ii) provision for taxes based on income or
profits of such Person and its Subsidiaries for such period, plus (iii)
consolidated interest expense of such Person and its Subsidiaries for such
period, whether paid or accrued and whether or not capitalized (including,
without limitation, amortization of original issue discount, non-cash interest
payments, the interest component of any deferred payment obligations, the
interest component of all payments associated with Capital Lease Obligations,
imputed interest with respect to Attributable Debt, commissions, discounts and
other fees and charges incurred in respect of letter of credit or bankers'
acceptance financings, and net payments (if any) pursuant to Hedging
Obligations), plus (iv) depreciation, amortization (including amortization of
goodwill, other intangibles and other assets) and other non-cash charges
(excluding any such non-cash charge to the extent that it represents an accrual
of or reserve for cash charges in any future period) of such Person and its
Subsidiaries for such period, in each case, on a consolidated basis and
determined in accordance with GAAP. Notwithstanding the foregoing, the provision
for taxes on the income or profits of, and the depreciation and amortization and
other non-cash charges of, a Subsidiary of the referent Person shall be added to
Consolidated Net Income to compute Consolidated Cash Flow only to the extent
(and in same proportion) that the Net Income of such Subsidiary was included in
calculating the Consolidated Net Income of such Person and only if a
corresponding amount would be permitted at the date of determination to be
dividended to the Company by such Subsidiary without prior governmental approval
(that has not been obtained), and without direct or indirect restriction
pursuant to, the terms of its charter and all agreements, instruments,
judgments, decrees, orders, statutes, rules and governmental regulations
applicable to that Subsidiary or its stockholders.
"Consolidated Net Income" means, with respect to any Person for any period,
the aggregate of the net income of such Person and its Subsidiaries for such
period, on a consolidated basis, determined in accordance with GAAP; provided
that there shall be excluded therefrom, without duplication:
(i) all items classified as extraordinary, unusual or nonrecurring
gains (but not losses);
(ii) any net loss or net income of any other Person (other than a
Subsidiary of such Person), except to the extent of the amount of dividends
or other distributions actually paid to such Person or its Subsidiaries by
such other Person during such period;
(iii) the net income of any Person acquired by such Person or a
Subsidiary thereof in a pooling-of-interests transaction for any period
prior to the date of such acquisition;
(iv) any gain or loss, net of taxes, realized on the termination of
any employee pension benefit plan;
(v) gains (but not losses) in respect of Asset Sales by such Person or
its Subsidiaries;
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(vi) the net income (but not net loss) of any Subsidiary of such
Person to the extent that the declaration or payment of dividends or
distributions to such Person is restricted by the terms of its constituent
documents or any agreement, instrument, contract, judgment, order, decree,
statute, rule, governmental regulation or otherwise, except for any
dividends or distributions actually paid by such Subsidiary to such Person
or other Subsidiary of such Person;
(vii) with regard to a Subsidiary of such Person (other than a Wholly
Owned Subsidiary of such Person), any aggregate net income (or loss) in
excess of such Person's pro rata share of such Subsidiary's net income (or
loss); and
(viii) the cumulative effect of any change in accounting principles.
"Consolidated Net Worth" means, with respect to any Person as of any date,
the consolidated stockholders' equity of such Person and its consolidated
Subsidiaries, as determined in accordance with GAAP, less, to the extent
included therein, all amounts, if any, attributable to Disqualified Stock.
"Default" means any event, occurrence or condition that, with the passage
of time, the giving of notice or both, would constitute an Event of Default.
"Designated Investment Stock" means any Capital Stock of the Company,
designated as such by the Board of Directors of the Company upon issuance for
use in the capitalization of an Acquisition Subsidiary of the Company, up to a
maximum net cash proceeds of $12.0 million.
"disposition" or "sale" or "transfer" or other words of similar meaning do
not include the granting or suffering of a Permitted Lien in order to secure
Indebtedness permitted by the Indenture, provided that no steps or actions have
been taken by the holder of such Permitted Lien to realize upon or dispose of
the assets subject thereto.
"Disqualified Stock" means any Capital Stock of any Person which, by its
terms, or upon the happening of any event or with the passage of time, matures
or is mandatorily redeemable, pursuant to a sinking fund obligation or
otherwise, or is redeemable at the option of the holder thereof, in whole or in
part, on or prior to 91 days after the maturity date of the Notes, or which is
exchangeable or convertible into debt securities of such Person, except to the
extent that such exchange or conversion rights cannot be exercised prior to 91
days after the maturity date of the Notes. Series A Preferred Stock is not
Disqualified Stock.
"Escrow Agreement" means the escrow or other similar arrangement referred
to in Exhibit D to the Balfour Purchase Agreement, as such may be amended.
"Existing Indebtedness" means all Indebtedness of the Company and its
Subsidiaries (other than under the Bank Credit Facility) in existence on the
Issue Date, until such amounts are repaid.
"Fixed Charge Coverage Ratio" means with respect to any specified Person
for any period, the ratio of the Consolidated Cash Flow of such Person for such
period to the Fixed Charges of such Person for such period.
In the event that such specified Person or any of its Subsidiaries incurs,
assumes, Guarantees, repays or redeems any Indebtedness (other than ordinary
course repayments of revolving credit borrowings under the Revolving Credit
Facility or payments in connection with the consignment of gold under the Gold
Facility) or such specified Person issues or redeems Disqualified Stock
subsequent to the commencement of the period for which the Fixed Charge Coverage
Ratio is being calculated but prior to the date on which the event for which the
calculation of the Fixed Charge Coverage Ratio is made (the "Calculation Date"),
then the Fixed Charge Coverage Ratio shall be calculated giving pro forma effect
to such incurrence, assumption, Guarantee, repayment or redemption of
Indebtedness or such issuance or redemption of Disqualified Stock (including
giving pro forma effect to the application of any cash net proceeds therefrom),
as if the same had occurred at the beginning of the applicable four-quarter
reference period.
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In addition, for purposes of making the computation referred to above, (i)
acquisitions that have been made by the specified Person or any of its
Subsidiaries, including through mergers or consolidations and including any
related financing transactions, during the four-quarter reference period or
subsequent to such reference period and on or prior to the Calculation Date
shall be deemed to have occurred on the first day of the four-quarter reference
period and Consolidated Cash Flow for such reference period shall be calculated
without giving effect to clause (iii) of the proviso set forth in the definition
of Consolidated Net Income, and (ii) the Consolidated Cash Flow attributable to
discontinued operations, as determined in accordance with GAAP, and operations
or businesses disposed of prior to the Calculation Date, shall be excluded, and
(iii) the Fixed Charges attributable to discontinued operations, as determined
in accordance with GAAP, and operations or businesses disposed of prior to the
Calculation Date, shall be excluded, but only to the extent that the obligations
giving rise to such Fixed Charges will not be obligations of the specified
Person or any of its Subsidiaries following the Calculation Date.
"Fixed Charges" means, with respect to any Person for any period, the sum
of (i) the consolidated interest expense of such Person and its Subsidiaries
(other than an Acquisition Subsidiary or any Subsidiary thereof) for such
period, whether paid or accrued and whether expensed or capitalized, determined
on a consolidated basis and in accordance with GAAP (including, without
limitation, amortization of original issue discount, non-cash interest payments,
the interest component of any deferred payment obligations, the interest
component of all Capital Lease Obligations, imputed interest with respect to
Attributable Debt, commissions, discounts and other fees and charges incurred in
respect of letter of credit or bankers' acceptance financings, and net payments
(if any) pursuant to Hedging Obligations), excluding, however, in the case of
the Company, obligations of the Company resulting from any extraordinary or
non-recurring actuarial adjustment assumptions with respect to post-retirement
medical and other benefits, and (ii) any interest expense on Indebtedness of
another Person that is Guaranteed by such Person or one of its Subsidiaries
(other than an Acquisition Subsidiary or any Subsidiary thereof) or secured by a
Lien on assets of such Person or one of its Subsidiaries (other than an
Acquisition Subsidiary or any Subsidiary thereof) (whether or not such Guarantee
or Lien is called upon) and (iii) the product of (a) all cash dividend payments
(and non-cash dividend payments in the case of a Person that is a Subsidiary) on
any series of Preferred Stock of such Person, times (b) a fraction, the
numerator of which is one and the denominator of which is one minus the then
current combined federal, state and local statutory tax rate of such Person,
expressed as a decimal, in each case, on a consolidated basis and in accordance
with GAAP.
"Foreign Subsidiary" means any Subsidiary formed under the laws of any
jurisdiction other than the United States of America or any state, territory,
possession or political subdivision thereof.
"FTC Order" means any order of the Federal Trade Commission requiring the
Company to sell certain Assets or to refrain from certain business activities or
lines of business.
"GAAP" means generally accepted accounting principles set forth in the
opinions and pronouncements of the Accounting Principles Board of the American
Institute of Certified Public Accountants and statements and pronouncements of
the Financial Accounting Standards Board or in such other statements by such
other entity as may be approved by a significant segment of the accounting
profession of the United States, as in effect on the Issue Date; provided,
however, that all financial statements of the Company (but not any other
financial information or ratios calculated pursuant hereto) provided by the
Company to the Holders of the Notes or the Trustee shall be prepared in
accordance with GAAP as in effect on the date of such report or other financial
information.
"Guarantee" means a guarantee (other than by endorsement of negotiable
instruments for collection in the ordinary course of business), direct or
indirect, in any manner (including, without limitation, letters of credit and
reimbursement agreements in respect thereof), of all or any part of any
Indebtedness.
"Hedging Obligations" means, with respect to any Person, the obligations of
such Person under interest rate swap agreements, interest rate cap agreements,
interest rate collar agreements, foreign currency exchange contracts, foreign
currency swaps, commodities futures and any other agreement designed to protect
such Person against fluctuations in interest rates, currency valuations or
commodity prices.
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"Indebtedness" means, with respect to any Person, without duplication (i)
any liability of such Person (a) for borrowed money, or under any reimbursement
obligation relating to a letter of credit, bankers' acceptance or note purchase
facility; (b) evidenced by a bond, note, debenture or similar instrument; (c)
for the balance deferred and unpaid of the purchase price for any property or
service or any obligation upon which interest charges or consignment fees are
customarily paid (except for trade payables (other than consignments) arising in
the ordinary course of business); (d) for the payment of money relating to a
lease that is required to be classified as a Capitalized Lease Obligation in
accordance with GAAP; or (e) for the maximum fixed repurchase price of any
Disqualified Stock of such Person plus accrued and unpaid dividends thereon;
(ii) any obligation of others secured by a Lien on any asset of such Person,
whether or not any obligation secured thereby has been assumed, by such Person;
(iii) any obligations of such Person under any Hedging Obligation; and (iv) any
Guarantee of such Person or any obligation of such Person which in economic
effect is a guarantee with respect to any Indebtedness of another Person.
For purposes of this definition, "maximum fixed repurchase price" of any
Disqualified Stock which does not have a fixed repurchase price shall be
calculated in accordance with the terms of such Disqualified Stock as if such
Disqualified Stock were purchased on any date on which Indebtedness shall be
required to be determined pursuant to the Indenture, and if such price is based
upon, or measured by, the fair market value of such Disqualified Stock, such
fair market value shall be determined in good faith by the board of directors of
the Person issuing such Disqualified Stock.
"Investment" by any Person means any direct or indirect loan, advance (or
other extension of credit) or capital contribution (by means of any transfer of
cash or other Property) to another Person or any other payments for Property or
services for the account or use of another Person, including without limitation
the following:
(i) the purchase or acquisition of any Capital Stock or other evidence
of beneficial ownership in another Person;
(ii) the purchase, acquisition or Guarantee of the Indebtedness of
another Person or the issuance of a "keep well" with respect thereto; and
(iii) the purchase or acquisition of the business or assets of another
Person;
but shall exclude:
(a) accounts receivable and other extensions of trade credit on
commercially reasonable terms in accordance with normal trade practices;
(b) the acquisition of property and assets from equipment suppliers
and other vendors in the ordinary course of business, provided that such
property and assets do not represent all or substantially all of the
production capacity of the supplier or other vendor; and
(c) the acquisition of assets, Capital Stock or other securities by
the Company for consideration consisting solely of the Capital Stock of the
Company other than Disqualified Stock.
"Issue Date" means the date on which the Notes are first authenticated and
delivered under the Indenture.
"Lien" means, with respect to any asset, any mortgage, lien, pledge,
charge, security interest or encumbrance of any kind in respect of such asset,
whether or not filed, recorded or otherwise perfected under applicable law
(including any conditional sale or other title retention agreement, any lease in
the nature thereof, any option or other agreement to sell or give a security
interest in and any filing of or agreement to give any financing statement under
the Uniform Commercial Code (or equivalent statutes) of any jurisdiction).
"Net Proceeds" means the sum of the aggregate cash proceeds received by the
Company or any of its Subsidiaries (other than an Acquisition Subsidiary or a
Subsidiary of an Acquisition Subsidiary) in respect of any Asset Sale
(including, without limitation, any cash received upon the sale or other
disposition of any non-cash
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consideration received in any Asset Sale), and any funds received by the Company
pursuant to the Escrow Agreement, net of (i) the direct costs relating to such
Asset Sale (including, without limitation, legal, accounting and investment
banking fees, and sales commissions) and any relocation, severance or shut-down
costs expenses incurred as a result thereof, (ii) taxes paid or payable as a
result thereof (after taking into account any available tax credits or
deductions and any tax sharing arrangements), (iii) amounts required to be
applied to the repayment of Indebtedness that is (a) secured by a Lien on the
asset or assets that were the subject of such Asset Sale, (b) Senior
Indebtedness, the repayment of which is required either pursuant to the terms
thereof, by applicable law, or in order to obtain a necessary consent to such
transaction, or (c) Indebtedness pari passu with the Notes, the repayment or
purchase of which is required pursuant to the terms thereof on a pro rata basis
with the Notes in the event of an Asset Sale, and (iv) any reserves established
in accordance with GAAP for adjustment in respect of the sale price of such
asset or assets or for any liabilities associated with such Asset Sale,
including, without limitation, pension and other post-employment benefit
liabilities, liabilities relating to environmental matters and liabilities under
any indemnification obligations associated with such Asset Sale; provided that
any reversal of any such reserve shall be added back in the determination of Net
Proceeds.
"Paying Agent" means Marine Midland Bank.
"Permitted Investments" means (a) any Investment in the Company or in a
Wholly Owned Subsidiary of the Company (other than an Acquisition Subsidiary or
a Subsidiary thereof); (b) any Investment in Cash or Cash Equivalents; (c) any
Investment by the Company or any Subsidiary of the Company in a Person, if as a
result of such Investment (i) such Person becomes a Wholly Owned Subsidiary of
the Company (other than an Acquisition Subsidiary or a Subsidiary thereof) or
(ii) such Person is merged, consolidated or amalgamated with or into, or
transfers or conveys substantially all of its assets to, or is liquidated into,
the Company or a Wholly Owned Subsidiary of the Company (other than an
Acquisition Subsidiary or a Subsidiary thereof); (d) any Investment made as a
result of the receipt of non-cash consideration from an Asset Sale that was made
pursuant to and in compliance with the covenant described above under the
caption "--Certain Covenants--Asset Sales"; (e) any obligations or shares of
Capital Stock received in connection with or as a result of bankruptcy, workout
or reorganization of the issuer of such obligations or shares of Capital Stock;
(f) any Investment received involuntarily; (g) any Investment existing on the
date of the Indenture; (h) Investments by the Company or any Subsidiary of the
Company in Permitted Lines of Business that do not exceed $5.0 million in the
aggregate at any one time outstanding; (i) Investments by any Acquisition
Subsidiary or any Subsidiary of an Acquisition Subsidiary in Permitted Lines of
Business (without regard to the aggregate amount thereof) but excluding any
Investment in Capital Stock or Indebtedness of the Company or any of its
Subsidiaries (other than an Acquisition Subsidiary or any Subsidiary thereof),
(j) Investments representing loans or advances made to employees in the ordinary
course of business not exceeding $500,000 at any one time; and (k) Investments
representing loans or advances made to independent sales representatives made in
the ordinary course of business.
"Permitted Liens" means (i) Liens on assets of the Company or its
Subsidiaries securing the Bank Credit Facility; (ii) Liens on assets of the
Company or its Subsidiaries securing Senior Indebtedness which is permitted by
the terms of the Indenture to be incurred; (iii) Liens securing Existing
Indebtedness; (iv) Liens in favor of the Company; (v) Liens on property of a
Person existing at the time such Person is merged into or consolidated with the
Company or any Subsidiary of the Company; provided that such Liens were not
incurred in contemplation of such merger or consolidation and do not extend to
any assets other than those of the Person merged into or consolidated with the
Company or any Subsidiary of the Company; (vi) Liens on property existing at the
time of acquisition thereof by the Company or any Subsidiary of the Company,
provided that such Liens were not incurred in contemplation of such acquisition
and do not extend to any assets other than those so acquired by the Company or
any Subsidiary of the Company; (vii) Liens to secure the performance of
statutory obligations, surety or appeal bonds, performance bonds or other
obligations of a like nature incurred in the ordinary course of business (or to
secure reimbursement obligations in respect of letters of credit issued in
connection with any of the foregoing obligations); (viii) Liens to secure
Indebtedness (including Capital Lease Obligations) permitted by clause (v) of
the second paragraph of the covenant entitled "Incurrence of Indebtedness and
Issuance of Preferred Stock" covering only the assets acquired with such
Indebtedness; (ix) Liens existing on the Issue Date; (x) Liens for taxes,
assessments or governmental charges or claims that are not yet delinquent or
that are being contested in good faith by appropriate proceedings promptly
instituted and diligently concluded, provided that any reserve or other
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appropriate provision as shall be required in conformity with GAAP shall have
been made therefor; (xi) Liens incurred in the ordinary course of business of
the Company or any Subsidiary of the Company with respect to obligations that do
not exceed $5.0 million at any one time outstanding and that (a) are not
incurred in connection with the borrowing of money or the obtaining of advances
or credit (other than trade credit in the ordinary course of business) and (b)
do not in the aggregate materially detract from the value of the property or
materially impair the use thereof in the operation of business by the Company or
such Subsidiary; (xii) Liens to secure any Indebtedness which is pari passu with
or subordinate in right of payment to the Notes, where (a) in the case of any
Lien securing Indebtedness that is pari passu in right of payment with the
Notes, all obligations with respect to the Notes are secured on an equal and
ratable basis with the Indebtedness so secured and (b) in the case of any Lien
securing Indebtedness that is subordinated in right of payment to the Notes, all
obligations with respect to the Notes are secured on a senior basis reflecting
the subordination of the Indebtedness so secured on terms substantially similar
to, or more favorable to senior creditors than, those contained in the
Indenture, in each case, until such time as such pari passu or subordinated
Indebtedness is no longer secured by such Lien, at which time such Lien securing
the Notes shall be automatically released; (xiii) Liens granted by an
Acquisition Subsidiary or a Subsidiary of an Acquisition Subsidiary to secure
Indebtedness incurred by such Acquisition Subsidiary or Subsidiary of an
Acquisition Subsidiary which is permitted by the terms of the Indenture.
"Permitted Line of Business" means (i) the scholastic, graduation-related
and commemorative products business, the fine paper and non-textbook graphics
products business, the recognition, affinity and insignia products business, and
such business activities as are incidental or related thereto, and (ii) such
other businesses as the Company or its Subsidiaries are engaged in on the Issue
Date.
"Permitted Refinancing Debt" means any Indebtedness of the Company or any
of its Subsidiaries issued in exchange for, or the net proceeds of which are
used to extend, refinance, renew, replace, defease or refund other Indebtedness
of the Company or any of its Subsidiaries (other than an Acquisition Subsidiary
or a Subsidiary of an Acquisition Subsidiary); provided that, except with
respect to Indebtedness incurred to repay, repurchase, redeem or defease all of
the outstanding Notes at one time: (i) the principal amount (or accreted value,
if applicable) of such Permitted Refinancing Debt does not exceed the principal
amount (or accreted value, if applicable) of the Indebtedness so extended,
refinanced, renewed, replaced, defeased or refunded (plus the amount of up to
six months of accrued and unpaid interest on such Indebtedness and reasonable
premiums, fees and expenses incurred in connection therewith); (ii) such
Permitted Refinancing Debt has a final maturity date later than the final
maturity date of, and has a Weighted Average Life to Maturity equal to or
greater than the Weighted Average Life to Maturity of, the Indebtedness being
extended, refinanced, renewed, replaced, defeased or refunded; (iii) if the
Indebtedness being extended, refinanced, renewed, replaced, defeased or refunded
is subordinated in right of payment to the Notes, such Permitted Refinancing
Debt has a final maturity date later than the final maturity date of, and is
subordinated in right of payment to, the Notes on terms at least as favorable to
the Holders of Notes as those contained in the documentation governing the
Indebtedness being extended, refinanced, renewed, replaced, defeased or
refunded; and (iv) such Indebtedness is incurred either by the Company or by the
Subsidiary who is the obligor on the Indebtedness being extended, refinanced,
renewed, replaced, defeased or refunded.
"Person" means any individual, corporation, limited or general partnership,
limited liability company, joint venture, association, joint stock company,
trust, unincorporated organization or government or any agency or political
subdivision thereof.
"Preferred Stock" means, with respect to any Person, all Capital Stock of
such Person of any class or classes (however designated, whether voting or
non-voting) that ranks prior, as to distribution in profit or liquidation, to
shares of Common Stock of such Person.
"Public Equity Offering" means any underwritten primary public offering of
the Common Stock or other Voting Stock of the Company, pursuant to an effective
registration statement (other than a registration statement on Form S-4, Form
S-8, or any successor or similar form) under the Securities Act.
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"Purchase Price" means the amount payable for the repurchase of any Note on
a Purchase Date, exclusive of accrued and unpaid interest and Liquidated Damages
(if any) thereon to the Purchase Date, unless otherwise specifically provided.
"Redemption Price" means the amount payable for the redemption of any Note,
exclusive of accrued and unpaid interest and Liquidated Damages (if any) thereon
to the date of redemption, unless otherwise specifically provided.
"Restricted Investment" means an Investment other than a Permitted
Investment.
"Senior Representative" means any trustee, agent or representative (if any)
for the holders of any Designated Senior Indebtedness.
"Series A Preferred Stock" means the Series A preferred stock of the
Company, par value $.01 per share.
"Significant Subsidiary" means any Subsidiary that would be a "significant
subsidiary" as defined in Article 1, Rule 1-02 of Regulation S-X, promulgated
pursuant to the Securities Act, as such Regulation is in effect on the date
hereof.
"Subsidiary" of any Person means any other Person, the majority of the
Voting Stock or other ownership interests having ordinary voting power to elect
a majority of the board of directors of which is directly or indirectly owned by
such Person.
"U.S. Government Securities" shall mean securities which are (i) direct
obligations of the United States of America for the payment of which its full
faith and credit is pledged or (ii) obligations of a Person controlled or
supervised by and acting as an agency or instrumentality of the United States of
America , the payment of which is unconditionally guaranteed as a full faith and
credit obligation by the United States of America, which, in either case, are
not callable or redeemable at the option of the issuer thereof, and shall also
include a depository receipt issued by a bank or trust company as custodian with
respect to any such U.S. Government Securities or a specific payment of interest
on or principal of any such U.S. Government Securities held by such custodian
for the account of the holder of a depository receipt; provided that (except as
required by law) such custodian is not authorized to make any deduction from the
amount payable to the holder of such depository receipt from any amount received
by the custodian in respect of the U.S. Government Securities or the specific
payment of interest on or principal of the U.S. Government Securities evidenced
by such depository receipt.
"Voting Stock" means, with respect to any Person, securities of any class
or classes of Capital Stock in such Person entitling the holders thereof
(whether at all times that such class of Capital Stock has voting power by
reason of the happening of any contingency) to vote in the election of members
of the board of directors or other governing body of such Person.
"Weighted Average Life to Maturity" means, when applied to any Indebtedness
at any date, the number of years obtained by dividing (i) the sum of the
products obtained by multiplying (a) the amount of each then remaining
installment, sinking fund, serial maturity or other required payments of
principal, including payment at final maturity, in respect thereof, by (b) the
number of years (calculated to the nearest one-twelfth) that will elapse between
such date and the making of such payment, by (ii) the then outstanding principal
amount of such Indebtedness.
"Wholly Owned Subsidiary" of any Person means a Subsidiary of such Person,
all of the outstanding Capital Stock or other ownership interests of which
(other than directors' qualifying shares or, in the case of a Foreign Subsidiary
of the Company, shares otherwise required by law to be owned by Persons
domiciled in the jurisdiction in which such Subsidiary is organized, up to a
maximum of 5% of the outstanding Capital Stock, Voting Stock or other ownership
interests of such Subsidiary) is at the time owned by (i) such Person or (ii)
one or more Wholly Owned Subsidiaries of such Person or (iii) such Person and
one or more Wholly Owned Subsidiaries of such Person.
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CERTAIN FEDERAL INCOME TAX CONSIDERATIONS
The following discussion sets forth the material U.S. federal income tax
consequences of the exchange of Initial Notes for Exchange Notes and of the
ownership and disposition of the Exchange Notes. The discussion does not deal
with all possible tax consequences relating to an investment in the Exchange
Notes. In particular, the discussion does not address the tax consequences under
state, local and foreign tax laws. In addition, the discussion does not address
U.S. federal income tax consequences to persons who do not hold the Exchange
Notes as capital assets. The discussion also does not address the tax treatment
of holders that may be subject to special tax rules, such as banks, insurance
companies, dealers in securities and holders whose functional currency is not
the dollar. Accordingly, each prospective investor should consult its own tax
advisor regarding the tax consequences to it of an investment in the Exchange
Notes. The following discussion is based upon provisions of the Internal Revenue
Code of 1986, as amended (the "Code"), and regulations, rulings and judicial
decisions as of the date of this Prospectus, and such authorities may be
repealed, revoked or modified so as to result in federal income tax consequences
different from those discussed below, possibly with retroactive effect. As used
herein, a U.S. Holder is a beneficial owner who is a citizen or resident of the
United States, a corporation, partnership or other entity created or organized
in or under the laws of the United States or any political subdivision thereof,
or an estate or trust the income of which is subject to U.S. federal income
taxation regardless of its source. A Non-U.S. Holder is a beneficial owner who
is not a U.S. Holder.
PERSONS CONSIDERING THE EXCHANGE OF INITIAL NOTES FOR EXCHANGE NOTES SHOULD
CONSULT THEIR OWN TAX ADVISORS WITH REGARD TO THE APPLICATION OF THE U.S.
FEDERAL INCOME TAX LAWS TO THEIR PARTICULAR SITUATIONS, AS WELL AS ANY TAX
CONSEQUENCES ARISING UNDER THE LAWS OF ANY STATE, LOCAL OR FOREIGN TAXING
JURISDICTION.
U.S. Holders
The Company has been advised by its counsel, Schulte Roth & Zabel LLP,
that, in their opinion, the exchange of Exchange Notes for Initial Notes
pursuant to the Exchange Offer will be disregarded for federal income tax
purposes, and each Exchange Note will be treated as a continuation of the
corresponding Initial Note. Accordingly, holders of Initial Notes will not
recognize gain or loss on the exchange, and will have a basis in the New Notes
equal to their basis in the Old Notes.
Interest on a Note will generally be taxable to a U.S. Holder as ordinary
income at the time it is paid or accrued in accordance with the U.S. Holder's
method of tax accounting. Upon the sale, exchange or retirement of a Note, a
U.S. Holder will recognize gain or loss equal to the difference between the
amount realized and the adjusted tax basis of the Note. Such gain or loss will
be capital gain or loss if such Holder holds the Note as a capital asset, and
will be long-term capital gain or loss if the Holder held the Note for more than
one year at the time of such sale, exchange or retirement. The deductibility of
capital losses is subject to limitations.
Non-U.S. Holders
Income, Withholding and Estate Tax
Under current U.S. federal income and estate tax law, and subject to the
discussion below concerning backup withholding:
(a) payments of principal, interest and premium on the Notes by the
Company or any paying agent to any Non-U.S. Holder will not be subject to
U.S. federal withholding tax, provided that, in the case of interest, (i)
(A) such Holder does not own, actually or constructively, 10 percent or
more of the total combined voting power of all classes of stock of the
Company entitled to vote, is not a controlled foreign corporation related,
directly or indirectly, to the Company through stock ownership, and is not
a bank receiving interest described in Section 881(c)(3)(A) of the Code and
(B) either (I) such Holder certifies to the person otherwise required to
withhold United States federal income tax from such interest, under
penalties of perjury, that it is not a United
114
<PAGE>
States person and provides its name and address or (II) a securities
clearing organization, bank or other financial institution that holds
customers' securities in the ordinary course of its trade or business (a
"financial institution") and holds the Note certifies to the person
otherwise required to withhold United States federal income tax from such
interest, under penalties of perjury, that such statement has been received
from such Holder by it or by a financial institution between it and such
Holder and furnishes the payer with a copy thereof; (ii) such Holder is
entitled to the benefits of an income tax treaty under which the interest
is exempt from United States federal withholding tax and such Holder or
such Holder's agent provides U.S. Internal Revenue Service ("IRS") Form
1001 claiming the exemption; or (iii) such Holder conducts a trade or
business in the United States to which the interest is effectively
connected and such Holder or such Holder's agent provides an IRS Form 4224
(in which case interest on the Note would be subject to U.S. income tax as
if such interest was earned by a U.S. Holder and, in the case of any such
Holder that is a corporation, would be subject to the so-called "Branch
Profits Tax" unless an applicable income tax treaty exempts such owner from
the imposition of such tax); provided that in each such case, the relevant
certification or IRS form is delivered pursuant to applicable procedures
and is properly transmitted to the person otherwise required to withhold
United States federal income tax and none of the persons receiving the
relevant certification or IRS form has actual knowledge that the
certification or any statement on the IRS form is false;
(b) a Non-U.S. Holder of a Note will not be subject to U.S. federal
income tax on gain realized on the sale, exchange or other disposition of
such Note, if (i) such gain is not effectively connected with a U.S. trade
or business and (ii) in the case of an individual, such holder is not
present in the United States for 183 days or more in the taxable year of
disposition and certain other requirements are met; and
(c) a Note held by an individual who is not a citizen or resident of
the United States at the time of his death will not be subject to U.S.
federal estate tax as a result of such individual's death, provided that
the individual does not own, actually or constructively, 10 percent or more
of the total combined voting power of all classes of stock of the Company
entitled to vote and, at the time of such individual's death, payments with
respect to such Note would not have been effectively connected to the
conduct by such individual of a trade or business in the United States.
If the conditions set forth in the preceding clause (a) are not satisfied,
payments of interest and premium on the Exchange Notes would be subject to a 30%
U.S. Federal Withholding Tax (or such lower rate as may apply pursuant to an
applicable treaty).
Proposed Regulations. On April 15, 1996, the IRS issued proposed Treasury
Regulations that revise the procedures, discussed in the preceding paragraph
(a), for securing an exemption from U.S. federal withholding tax (the "Proposed
Regulations"). If adopted in final form, the Proposed Regulations would apply to
payments made on the Notes after December 31, 1997. In general, the Proposed
Regulations would (a) provide additional methods for avoiding such withholding
in the case of payment of "portfolio interest" described in clause (i) of such
paragraph (a), (b) replace Forms 1001 and 4224 with a new Form W-8, and (c)
require beneficial owners who claim entitlement to the benefits of a United
States income tax treaty to include a taxpayer identification number that has
been certified by the IRS on such Form W-8. Additionally, in the case of Notes
held by a foreign partnership, the Proposed Regulations would require both that
the certification described in clause (a)(i)(B) above be provided by the
partners rather than by the foreign partnership and that the partnership provide
certain information, including a taxpayer identification number. A look-through
rule would apply in the case of tiered partnerships. There can be no assurance
that the Proposed Regulations will be adopted or as to the provisions that they
will include if they are adopted.
Backup Withholding and Information Reporting
In general, information reporting requirements will apply to payments of
principal, interest, and premium on the Notes, and to the proceeds of the sale,
exchange or retirement of a Note, other than to certain exempt recipients (such
as corporations). A 31% backup withholding tax will apply to such payments if
the holder fails to provide a taxpayer identification number or certificate of
exempt status, or fails to report in full dividend and interest income. Any
amounts withheld under backup withholding rules will be allowed as a refund or
credit against such holder's
115
<PAGE>
U.S. federal income tax liability provided the required information is furnished
to the IRS. Under current Treasury Regulations, backup withholding will not
apply to payments of (i) principal, premium or interest made outside the United
States on the Notes if the certifications described in paragraph (a)(i)(B) under
"U.S. Holders", above, are received, provided, in each case, that the Company or
such paying agent, as the case may be, does not have actual knowledge that the
payee is a U.S. person and (ii) dividends that are subject to withholding at the
30% rate (or lower treaty rate) discussed above.
PLAN OF DISTRIBUTION
Except as described below, a broker-dealer may not participate in the
Exchange Offer in connection with a distribution of the Exchange Notes. A
broker-dealer that participates in the Exchange Offer in connection with a
distribution of the Exchange Notes would be deemed an underwriter in connection
with such distribution, and such broker-dealer would be required to comply with
the registration and prospectus delivery requirements of the Securities Act in
connection with any such secondary resale transactions. Any broker-dealer who
holds Initial Notes that are Transfer Restricted Securities and that were
acquired for its own account as a result of market-making activities or other
trading activities (other than Transfer Restricted Securities acquired directly
from the Company or an affiliate of the Company), may exchange such Initial
Notes pursuant to the Exchange Offer; however, such broker-dealer may be deemed
to be an "underwriter" within the meaning of the Securities Act and must
therefore deliver a prospectus meeting the requirements of the Securities Act in
connection with any resales of the Exchange Notes received by such broker-dealer
in the Exchange Offer, which prospectus delivery requirement may be satisfied by
the delivery by such broker-dealer (other than an "affiliate" of the Company) of
the Prospectus contained in this Registration Statement. The Company has agreed
that for a period of one year from the date on which the Registration Statement
of which this Prospectus is a part is declared effective, it will make this
Prospectus, as amended or supplemented, available to any such broker-dealer for
use in connection with any such resale.
The Company will not receive any proceeds from any sale of Exchange Notes
by broker-dealers. Exchange Notes received by broker-dealers for their own
account pursuant to the Exchange Offer may be sold from time to time in one or
more transactions in the over-the-counter market, in negotiated transactions,
through the writing of options on the Exchange Notes or a combination of such
methods of resale, at market prices prevailing at the time of resale, at prices
related to such prevailing market prices or negotiated prices. Any such resale
may be made directly to purchasers or to or through brokers or dealers who may
receive compensation in the form of commissions or concessions from any such
broker-dealer and/or the purchasers of any such New Notes. Any broker-dealer
that resells New Notes that were received by it for its own account pursuant to
the Exchange Offer may be deemed to be an "underwriter" within the meaning of
the Securities Act and any profit on any such resale of Exchange Notes and any
commissions or concessions received by any such persons may be deemed to be
underwriting compensation under the Securities Act. The Letter of Transmittal
states that by acknowledging that it will deliver and by delivering a
prospectus, a broker-dealer will not be deemed to admit that it is an
"underwriter" within the meaning of the Securities Act.
For a period of one year from the date on which the Registration Statement
of which this Prospectus is a part is declared effective, the Company will
promptly send additional copies of this Prospectus and any amendment or
supplement to this Prospectus to any broker-dealer that requests such documents
in the Letter of Transmittal. The Company has agreed to pay all expenses
incident to the Exchange Offer other than certain applicable taxes and
commissions or concessions of any brokers or dealers.
The Company will indemnify the holders of the Initial Notes (including any
broker-dealers) against certain liabilities, including liabilities under the
Securities Act.
LEGAL MATTERS
The validity of the Notes offered hereby and certain legal matters will be
passed upon for the Company by Schulte Roth & Zabel LLP, New York, New York.
116
<PAGE>
EXPERTS
The balance sheet of CBI as of November 30, 1996 (and the accompanying
footnote) included in this Prospectus has been audited by Arthur Andersen LLP,
independent public accountants, and is included herein in reliance upon the
authority of said firm as experts in giving said report.
The financial statements of ArtCarved included in this Prospectus to the
extent and for the periods indicated in their report dated November 13, 1996
(except for the matter discussed in Note 12, for which the date is December 16,
1996), have been audited by Arthur Andersen LLP, independent public accountants,
and are included herein in reliance upon the authority of said firm as experts
in giving said report.
The financial statements of Balfour included in this Prospectus to the
extent and for the periods indicated in their report dated September 30, 1996
(except for the matter discussed in Note 10, for which the date is December 30,
1996), have been audited by Arthur Andersen LLP, independent public accountants,
and are included herein in reliance upon the authority of said firm as experts
in giving said report.
117
<PAGE>
INDEX TO FINANCIAL STATEMENTS
COMMEMORATIVE BRANDS, INC.
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
Report of Independent Public Accountants................................................................... F-2
Balance Sheet as of November 30, 1996 and Notes to Balance Sheet........................................... F-3
</TABLE>
CJC HOLDINGS, INC.
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
Report of Independent Public Accountants................................................................... F-4
Balance Sheets as of August 27, 1994, August 26, 1995, August 31, 1996 and
November 30, 1996 (Unaudited)............................................................................ F-5
Statements of Income (Loss) for the Years Ended August 27, 1994, August 26, 1995 and August 31, 1996 and to
the Three Months Ended November 25, 1995 (Unaudited) and
November 30, 1996 (Unaudited)............................................................................ F-6
Statements of Changes in Advances and Equity (Deficit) for the Years Ended August 27, 1994, August 26, 1995
and August 31, 1996 and to the Three Months Ended November 25, 1995 and November 30, 1996 (Unaudited).... F-7
Statements of Cash Flows for the Years Ended August 27, 1994, August 26, 1995
and August 31, 1996 and the Three Months Ended November 25, 1995 (Unaudited) and
November 30, 1996 (Unaudited)............................................................................ F-8
Notes to Financial Statements.............................................................................. F-9
</TABLE>
L.G. BALFOUR COMPANY, INC.
<TABLE>
<S> <C>
Report of Independent Public Accountants............................................. F-22
Balance Sheets as of February 27, 1994, February 26, 1995, February 25, 1996 and
November 24, 1996 (Unaudited)...................................................... F-23
Statement of Operations for the Years ended February 27, 1994, February 26, 1995 and
February 25, 1996 and for the Nine Months Ended November 26, 1995 (Unaudited) and
November 24, 1996 (Unaudited)...................................................... F-24
Statements of Stockholder's Equity for the Years Ended February 27, 1994, February
26, 1995, and February 25, 1996 and for the Nine Months Ended November 24, 1996
(Unaudited)........................................................................ F-25
Statements of Cash Flows for the Years Ended February 27, 1994, February 26, 1995 and
February 25, 1996 and for the Nine Months Ended November 26, 1995 (Unaudited) and
November 24, 1996 (Unaudited)...................................................... F-26
Notes to Financial Statements (Including Data Applicable to Unaudited Periods)....... F-27
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Stockholders of Commemorative Brands, Inc.:
We have audited the accompanying balance sheet of Commemorative Brands,
Inc. (a Delaware corporation and the "Company"), as of November 30, 1996. This
financial statement is the responsibility of the Company's management. Our
responsibility is to express an opinion on this financial statement based on our
audit.
We have 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 incudes
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 financial statement referred to above presents fairly,
in all material respects, the financial position of the Company as of November
30, 1996, in conformity with generally accepted accounting principles.
/s/ ARTHUR ANDERSEN LLP
Houston, Texas
March 24, 1997
F-2
<PAGE>
COMMEMORATIVE BRANDS, INC.
BALANCE SHEET
NOVEMBER 30, 1996
ASSETS
CURRENT ASSETS:
Cash........................................................... $10
---------
Total current assets......................................... 10
NONCURRENT ASSETS:............................................... -
---------
Total assets................................................. $10
---------
LIABILITIES AND STOCKHOLDERS EQUITY
LIABILITIES:..................................................... $-
Common Stock, $.01 par value, 1000 shares
authorized, 100 issued......................................... 10
Additional paid-in capital....................................... -
Retained earnings................................................ -
---------
Total stockholders' equity................................... 10
---------
Total liabilities and stockholders' equity....................... $10
=========
Castle Harlan Partners II, L.P. formed Commemorative Brands, Inc.
(formerly Scholastic Brands, Inc.) (the "Company") on March 28, 1996, for the
purpose of acquiring the class rings business of CJC Holdings, Inc.
("ArtCarved") and L.G. Balfour Company, Inc., a wholly-owned subsidiary of
Town & Country Corporation ("Balfour"). The Company had no business activity
from the date of incorporation (except for its formation, the negotiation of
the acquisitions and the financing thereof, and the initial funding of $10)
until it purchased the assets, rights, claims and contracts of ArtCarved and
Balfour on December 16, 1996 (the "Closing Date"). At that time, the
capitalization of the Company was as follows (in thousands):
Total debt (including current maturities):
Revolving Credit and Gold Facilities.......................... $ 11,201
Term Loan Facility............................................ 25,000
11% Senior Subordinated Notes due 2007 90,000
--------
Total debt...................................................... 126,201
--------
Stockholders' equity:
Preferred stock............................................... 47,500
Common Stock.................................................. 2,500
--------
Total stockholders' equity.................................... 50,000
--------
Total capitalization............................................ $176,201
========
- ----------
Includes $10.0 million of Series A Preferred Stock and $37.5 million of Series B
Preferred Stock.
F-3
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors,
CJC Holdings, Inc.:
We have audited the accompanying balance sheets of the class rings business
(the Business) of CJC Holdings, Inc. (a Texas corporation), as of August 27,
1994, August 26, 1995, and August 31, 1996, and the related statements of income
(loss), changes in advances and equity (deficit) and cash flows for each of the
three fiscal years ended August 31, 1996. These financial statements are the
responsibility of 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.
As discussed in Note 1, the Business has been a member of a group of
affiliated entities and, as disclosed in the financial statements, has many
transactions with other members of the group and is allocated certain costs
within the group. Because of these relationships, the terms of some or all of
the transactions and allocations between the Business and affiliated entities
included in the accompanying financial statements are not necessarily indicative
of those which would have resulted had the Business operated as a stand-alone
entity.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of the Business (as defined
above) as of August 27, 1994, August 26, 1995, and August 31, 1996, and the
results of its operations and its cash flows for each of the three fiscal years
in the period ended August 31, 1996, in conformity with generally accepted
accounting principles.
As discussed in Note 2 to the consolidated financial statements, effective
September 1, 1993, the Business changed its fiscal year to a 52/53-week fiscal
year.
/S/ ARTHUR ANDERSEN LLP
Houston, Texas
November 13, 1996
(except for the matter discussed in Note 12,
for which the date is December 16, 1996)
F-4
<PAGE>
CJC HOLDINGS, INC., CLASS RINGS BUSINESS
BALANCE SHEETS
AUGUST 27, 1994, AUGUST 26, 1995, AUGUST 31, 1996, AND NOVEMBER 30, 1996
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
AUGUST 27, AUGUST 26, AUGUST 31,
1994 1995 1996
----------- ----------- ----------- NOVEMBER 30,
1996
------------
(UNAUDITED)
<S> <C> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash............................................................. $ -- $ -- $ -- $ 4,456
Receivables--
Trade, net of allowance for doubtful accounts of $540, $630,
$633, and $701 $ 8,072 $ 9,312 $ 8,959 $ 14,248
Other.......................................................... 250 554 432 433
Inventories...................................................... 4,081 3,902 5,402 5,298
Prepaid expenses................................................. 2,209 2,495 2,115 784
----------- ----------- ----------- ------------
Total current assets....................................... 14,612 16,263 16,908 25,219
PROPERTY, PLANT AND EQUIPMENT, at cost, net of accumulated
depreciation of $11,373, $13,037 and $14,884...................... 12,692 12,148 11,149 10,848
TRADEMARKS, net of accumulated amortization of $4,275, $4,950 and
$5,626............................................................ 22,725 22,050 21,421 21,207
GOODWILL, net of accumulated amortization of $2,457, $2,846 and
$3,232............................................................ 13,059 12,670 12,284 12,186
IDENTIFIABLE INTANGIBLE ASSETS, net of accumulated amortization of
$2,846, $3,296 and $3,745......................................... 2,974 2,524 2,075 1,963
OTHER ASSETS, net of accumulated amortization of $15,575, $21,070
and $22,731....................................................... 12,838 10,300 10,705 11,970
----------- ----------- ----------- ------------
Total assets............................................... $ 78,900 $ 75,955 $ 74,542 $ 83,393
----------- ----------- ----------- ------------
----------- ----------- ----------- ------------
LIABILITIES, ADVANCES AND EQUITY (DEFICIT)
CURRENT LIABILITIES:
Accounts payable................................................. $ 2,649 $ 2,344 $ 1,953 $ 2,385
Accrued interest payable......................................... 12,708 10,229 1,429 2,345
Accrued expenses................................................. 1,705 2,054 2,088 4,312
Gold loan........................................................ 14,614 14,614 6,375 2,116
Current portion of long-term debt................................ -- 8,200 2,000 --
----------- ----------- ----------- ------------
Total current liabilities.................................. 31,676 37,441 13,845 11,158
LONG-TERM DEBT, net of current maturities.......................... 98,728 91,700 89,221 80,144
COMMITMENTS AND CONTINGENCIES
ADVANCES AND EQUITY (DEFICIT)...................................... (51,504) (53,186) (28,524) (7,909)
----------- ----------- ----------- ------------
Total liabilities, advances and equity (deficit)........... $ 78,900 $ 75,955 $ 74,542 $ 83,393
----------- ----------- ----------- ------------
----------- ----------- ----------- ------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-5
<PAGE>
CJC HOLDINGS, INC., CLASS RINGS BUSINESS
STATEMENTS OF INCOME (LOSS)
FOR THE YEARS ENDED AUGUST 27, 1994, AUGUST 26, 1995, AND AUGUST 31, 1996
AND FOR THE THREE MONTHS ENDED NOVEMBER 25, 1995 AND NOVEMBER 30, 1996
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
FISCAL YEAR ENDED FOR THE THREE MONTHS ENDED
------------------------------------- --------------------------
<S> <C> <C> <C> <C> <C>
AUGUST 27, AUGUST 26, AUGUST 31, NOVEMBER 25, NOVEMBER 30,
1994 1995 1996 1995 1996
----------- ----------- ----------- ------------ ------------
<CAPTION>
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
NET SALES....................................... $ 69,820 $ 71,994 $ 70,671 $ 21,923 $ 21,963
COST OF SALES................................... 30,572 32,879 32,655 9,209 9626
----------- ----------- ----------- ------------ ------------
Gross profit.............................. 39,248 39,115 38,016 12,714 12,337
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES.... (26,618) (28,224) (27,940) (8,484) (8,110)
RESTRUCTURING CHARGES........................... -- (3,244) -- -- --
----------- ----------- ----------- ------------ ------------
OPERATING INCOME................................ 12,630 7,647 10,076 4,230 4,227
INTEREST INCOME................................. 463 995 651 151 78
INTEREST EXPENSE................................ (11,969) (14,608) (12,558) (3,506) (2581)
----------- ----------- ----------- ------------ ------------
Income (loss) before income tax expense....... 1,124 (5,966) (1,831) 875 1,724
INCOME TAX EXPENSE.............................. (137) -- -- --
----------- ----------- ----------- ------------ ------------
NET INCOME (LOSS)............................... $ 987 $ (5,966) $ (1,831) $ 875 $ 1,724
----------- ----------- ----------- ------------ ------------
----------- ----------- ----------- ------------ ------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-6
<PAGE>
CJC HOLDINGS, INC., CLASS RINGS BUSINESS
STATEMENTS OF CHANGES IN ADVANCES AND EQUITY (DEFICIT)
FOR THE YEARS ENDED AUGUST 27, 1994, AUGUST 26, 1995, AND AUGUST 31, 1996
AND FOR THE THREE MONTHS ENDED NOVEMBER 30, 1996
(DOLLARS IN THOUSANDS)
<TABLE>
<S> <C>
BALANCE AT AUGUST 31, 1993........................................................ $ (27,931)
Net decrease in advances from parent.............................................. (24,560)
Net income for the year ended August 27, 1994..................................... 987
---------
BALANCE AT AUGUST 27, 1994........................................................ (51,504)
Net increase in advances from parent.............................................. 4,284
Net loss for the year ended August 26, 1995....................................... (5,966)
---------
BALANCE AT AUGUST 26, 1995........................................................ (53,186)
Net increase in advances from parent.............................................. 26,493
Net loss for the year ended August 31, 1996....................................... (1,831)
---------
BALANCE AT AUGUST 31, 1996........................................................ (28,524)
Net increase in advances from parent.............................................. 18,891
Net income for the three months ended November 30, 1996........................... 1,724
---------
BALANCE AT NOVEMBER 30, 1996 (Unaudited).......................................... $ (7,909)
---------
---------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-7
<PAGE>
CJC HOLDINGS, INC., CLASS RINGS BUSINESS
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED AUGUST 27, 1994, AUGUST 26, 1995, AND AUGUST 31, 1996
AND FOR THE THREE MONTHS ENDED NOVEMBER 25, 1995 AND NOVEMBER 30, 1996
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED
FOR THE YEARS ENDED
------------------------------------- --------------------------
<S> <C> <C> <C> <C> <C>
AUGUST 27, AUGUST 26, AUGUST 31, NOVEMBER 25, NOVEMBER 30,
1994 1995 1996 1995 1996
----------- ----------- ----------- ------------ ------------
<CAPTION>
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)................................... $ 987 $ (5,966) $ (1,831) $ 875 $ 1,724
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities--
Deferred income tax expense....................... 137 -- -- -- --
Depreciation...................................... 1,395 1,664 1,843 455 483
Amortization of other assets...................... 3,299 3,950 3,172 809 981
Provisions for doubtful accounts.................. 292 522 596 118 108
Discount accretion................................ 242 1,172 -- -- --
Restructuring charges............................. -- 3,244 -- -- --
Change in assets and liabilities:
Increase in receivables......................... (942) (2,066) (121) (5,542) (5,398)
(Increase) decrease in inventories.............. (992) 179 (1,500) (1,424) 104
(Increase) decrease in prepaid expenses......... (578) (286) 1,880 1,723 1,331
Increase in other assets........................ (4,179) (3,138) (2,113) (724) (1,822)
Increase (decrease) in accounts payable......... 533 (305) (391) 243 432
Increase (decrease) in accrued expenses......... 10,938 (2,134) 128 2954 3,140
----------- ----------- ----------- ------------ ------------
Net cash provided by (used in) operating
activities...................................... 11,132 (3,164) 1,663 (513) 1,083
----------- ----------- ----------- ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property, plant and equipment.......... (1,186) (1,120) (844) (52) (182)
----------- ----------- ----------- ------------ ------------
Net cash used in investing activities............. (1,186) (1,120) (844) (52) (182)
----------- ----------- ----------- ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net change in advances.............................. (24,560) 4,284 15,620 565 18,891
Note payments....................................... -- -- (16,439) -- (15,336)
Note borrowings..................................... 14,614 -- -- -- --
----------- ----------- ----------- ------------ ------------
Net cash provided by (used in) financing
activities...................................... (9,946) 4,284 (819) 565 3,555
----------- ----------- ----------- ------------ ------------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS......................................... -- -- -- -- 4,456
CASH AND CASH EQUIVALENTS, beginning of period........ -- -- -- -- --
----------- ----------- ----------- ------------ ------------
CASH AND CASH EQUIVALENTS, end of period.............. $ -- $ -- $ -- $ -- $ 4,456
----------- ----------- ----------- ------------ ------------
----------- ----------- ----------- ------------ ------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-8
<PAGE>
CJC HOLDINGS, INC., CLASS RINGS BUSINESS
NOTES TO FINANCIAL STATEMENTS
AUGUST 27, 1994, AUGUST 26, 1995, AUGUST 31, 1996
AND NOVEMEBER 30, 1996 (UNAUDITED)
1. DESCRIPTION OF BUSINESS AND BASIS OF FINANCIAL STATEMENT PRESENTATION:
The accompanying financial statements represent the class rings business
(the Business) of CJC Holdings, Inc. (CJC). Since the Business 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 the Business. Management considers the allocations to be
reasonable and believes the accompanying financial statements materially
represent the operations of the Business on a stand-alone basis. Selling,
general and administrative expenses from the operations of the Business 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-Business
operations of CJC. CJC has entered into an agreement to sell the assets of the
Business as defined (see Note 12), and CJC intends to use the sale proceeds to
repay its outstanding debt obligations. Accordingly, the debt obligations of CJC
to be repaid with the sale proceeds have been recorded on the accompanying
balance sheets with the offsetting charge included in the advances and equity
(deficit) account, and the accompanying statements of income (loss) of the
Business 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 are intended to remain with CJC after sale of the assets.
No cash balances have been included in the accompanying balance sheets. All
amounts due to/from CJC for the Business'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 the Business 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 the Business been a stand-alone entity.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
FISCAL YEAR-END
Effective September 1, 1993, CJC (and the Business) changed its fiscal year
to a 52/53-week fiscal year ending on the last Saturday of August. This change
in accounting period did not have a material effect on the Business's financial
position or results of operations.
INVENTORIES
Inventories are valued at the lower of cost or market. Cost is determined by
the last-in, first-out (LIFO) method.
F-9
<PAGE>
CJC HOLDINGS, INC., CLASS RINGS BUSINESS
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
AUGUST 27, 1994, AUGUST 26, 1995, AUGUST 31, 1996
AND NOVEMEBER 30, 1996 (UNAUDITED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
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:
<TABLE>
<CAPTION>
DESCRIPTION USEFUL LIFE
- ---------------------------------------------------------------------------- ----------------
<S> <C>
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
</TABLE>
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.
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, one to six years. Software and software development
have a useful life of three to five years, and engineering and design costs are
amortized over six years.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The Business' financial instruments consist primarily of cash and cash
equivalents, accounts receivable, accounts payable and long-term debt (including
current maturities). The carrying amounts of the Business' cash and cash
equivalents, accounts receivable and accounts payable approximate fair value due
to their short-term nature. The fair value of the Business' long-term debt is
estimated based on current rates offered to the Business for debt with the same
or similar terms.
CASH FLOWS
Total cash interest paid during the fiscal years 1994, 1995 and 1996 was
approximately $359,000, $15,905,000 and $12,464,000, respectively. Total cash
paid for income taxes during the fiscal years 1994, 1995 and 1996 was
approximately $159,000, $89,000 and $83,000, 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 (see Note 7).
F-10
<PAGE>
CJC HOLDINGS, INC., CLASS RINGS BUSINESS
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
AUGUST 27, 1994, AUGUST 26, 1995, AUGUST 31, 1996
AND NOVEMEBER 30, 1996 (UNAUDITED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
ACCOUNTING FOR INCOME TAXES
Effective September 1, 1992, CJC (and the Business) 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 basis of assets and
liabilities.
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.
RECLASSIFICATIONS
Certain reclassifications of amounts previously reported have been made to
conform to the current-year presentation.
SEASONALITY
The Business's sales are highly seasonal. Historically, the Business 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 school is not in session.
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 Business's
policy is to manage its exposure to credit risk through credit approvals and
limits.
PENDING ACCOUNTING PRONOUNCEMENTS
In March 1995, the Financial Accounting Standards Board issued SFAS No. 121,
"Accounting for the Impairment of Long-Lived Assets to Be Disposed Of," which
will be effective for fiscal year 1997. The statement sets forth guidelines
regarding when to recognize an impairment of long-lived assets, including
goodwill and other intangible assets, and how to measure such impairment.
Management does not expect the adoption of SFAS No. 121 to have a significant
effect on the Business's financial statements.
F-11
<PAGE>
CJC HOLDINGS, INC., CLASS RINGS BUSINESS
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
AUGUST 27, 1994, AUGUST 26, 1995, AUGUST 31, 1996
AND NOVEMEBER 30, 1996 (UNAUDITED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
INTERIM FINANCIAL STATEMENTS
The financial statements for the three months ended November 25, 1995, and
November 30, 1996, are unaudited. In management's opinion, these unaudited
financial statements have been prepared on the same basis as the audited
financial statements and include all adjustments, consisting only of normal
recurring adjustments, necessary for the fair statement of the financial data
for such periods. The unaudited results for the three months ended November 30,
1996, are not necessarily indicative of the results expected for the entire
fiscal year.
3. RESTRUCTURING CHARGES:
During fiscal 1995, the Business provided for restructuring charges totaling
$3,244,000. Charges include professional advisory fees and the write-down of
previously incurred financing costs.
4. INVENTORIES:
Inventory components are as follows (in thousands):
<TABLE>
<CAPTION>
AUGUST 27, AUGUST 26, AUGUST 31, NOVEMBER 30,
1994 1995 1996 1996
----------- ----------- ----------- -------------
<S> <C> <C> <C> <C>
(UNAUDITED)
Raw materials.................................................. $ 2,150 $ 2,699 $ 4,007 $ 3,601
Work in process................................................ 1,253 890 1,010 1,155
Finished goods................................................. 678 313 385 542
----------- ----------- ----------- ------
$ 4,081 $ 3,902 $ 5,402 $ 5,298
----------- ----------- ----------- ------
----------- ----------- ----------- ------
</TABLE>
Inventories are priced using the dollar-value LIFO link-chain method. The
carrying value of LIFO inventories at August 27, 1994, August 26, 1995, August
31, 1996 and November 30, 1996, was approximately $519,000, $356,000, $355,000,
and $132,000, respectively, greater than costs as determined by the first-in,
first-out method.
The cost elements of inventory include raw materials, labor and overhead and
other manufacturing and production costs. Included in raw materials are supplies
inventory of approximately $916,000, $486,000, $451,000 and $459,000 at August
27, 1994, August 26, 1995, August 31, 1996, and November 30, 1996, respectively.
See Note 6 for discussion of gold inventory.
Cost of sales includes depreciation and amortization of approximately
$1,562,000, $1,674,000, $1,709,000 and $541,000 for the fiscal years 1994, 1995,
1996 and the three months ended November 30, 1996, respectively.
F-12
<PAGE>
CJC HOLDINGS, INC., CLASS RINGS BUSINESS
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
AUGUST 27, 1994, AUGUST 26, 1995, AUGUST 31, 1996
AND NOVEMEBER 30, 1996 (UNAUDITED)
5. PROPERTY, PLANT AND EQUIPMENT:
Property, plant and equipment is as follows (in thousands):
<TABLE>
<CAPTION>
AUGUST 27, AUGUST 26, AUGUST 31, NOVEMBER 30,
1994 1995 1996 1996
----------- ----------- ----------- ------------
<S> <C> <C> <C> <C>
(UNAUDITED)
Land and improvements.......................................... $ 4,742 $ 4,742 $ 4,742 $ 4,742
Building and improvements...................................... 4,922 5,089 5,172 5,363
Tools and dies................................................. 6,241 6,241 6,241 6,241
Machinery and equipment........................................ 8,160 9,113 9,878 9,869
----------- ----------- ----------- ------------
24,065 25,185 26,033 26,215
Less--Accumulated depreciation................................. (11,373) (13,037) (14,884) (15,367)
----------- ----------- ----------- ------------
$ 12,692 $ 12,148 $ 11,149 $ 10,848
----------- ----------- ----------- ------------
----------- ----------- ----------- ------------
</TABLE>
6. GOLD LOAN:
As a means of hedging against gold market price fluctuations and financing
its needs for gold in the manufacturing process, 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 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. At August 27, 1994, August 26, 1995, August 31, 1996, and
November 30, 1996 there are 7,439, 9,327, 10,555 and 10,319 ounces of gold,
respectively, with an approximate market value of $2,851,000, $3,573,000,
$4,079,000, and $3,849,000, respectively, included in the Business's balance
sheets. Although a substantial amount of gold is held by other operations of CJC
and serves as collateral for the loan, the entire Gold Loan is to be paid with
the proceeds from the asset sale and, therefore, the full amount of the loan is
included in the Business's balance sheets. See Note 7 for a discussion regarding
the refinancing of the Gold Loan.
F-13
<PAGE>
CJC HOLDINGS, INC., CLASS RINGS BUSINESS
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
AUGUST 27, 1994, AUGUST 26, 1995, AUGUST 31, 1996
AND NOVEMEBER 30, 1996 (UNAUDITED)
7. LONG-TERM DEBT:
Long-term debt consists of the following (in thousands):
<TABLE>
<CAPTION>
AUGUST 27, AUGUST 26, AUGUST 31, NOVEMBER 30,
1994 1995 1996 1996
----------- ----------- ----------- ------------
<S> <C> <C> <C> <C>
(UNAUDITED)
Senior secured notes........................................... $ 64,900 $ 64,900 $ 56,700 $ 45,623
Senior subordinated notes, net of unamortized discount of
$1,172, $--, $-- and $--, respectively....................... 33,828 35,000 34,521 34,521
----------- ----------- ----------- ------------
98,728 99,900 91,221 80,144
Less--Current portion.......................................... -- (8,200) (2,000) --
----------- ----------- ----------- ------------
Long-term debt................................................. $ 98,728 $ 91,700 $ 89,221 $ 80,144
----------- ----------- ----------- ------------
----------- ----------- ----------- ------------
</TABLE>
The following is a summary of scheduled debt maturities by fiscal year (in
thousands):
<TABLE>
<S> <C>
1997............................................................... $ 2,000
1998............................................................... 4,000
1999............................................................... 10,677
2000............................................................... 40,023
2001............................................................... --
Thereafter......................................................... 34,521
---------
$ 91,221
---------
---------
</TABLE>
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. It is anticipated that the debt
obligations discussed below will be paid with the proceeds of the asset sale of
the Business and, therefore, they are included in the Business'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:
(1) 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.
(2) 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
F-14
<PAGE>
CJC HOLDINGS, INC., CLASS RINGS BUSINESS
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
AUGUST 27, 1994, AUGUST 26, 1995, AUGUST 31, 1996
AND NOVEMEBER 30, 1996 (UNAUDITED)
7. LONG-TERM DEBT: (CONTINUED)
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.
(3) 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.
(4) 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.
(5) 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 the to Merger were canceled and
extinguished.
Effective June 30, 1996, the Series 3 shares were redeemed at $0.001
per share.
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, and together with the Series
A Notes, 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.
The New Series A Notes were issued in the aggregate principal amount of
$14,677,000, the outstanding principal balance on the Restructuring Data.
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 15th 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 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 15th 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.
F-15
<PAGE>
CJC HOLDINGS, INC., CLASS RINGS BUSINESS
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
AUGUST 27, 1994, AUGUST 26, 1995, AUGUST 31, 1996
AND NOVEMEBER 30, 1996 (UNAUDITED)
7. LONG-TERM DEBT: (CONTINUED)
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 (1) 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.(2) above, or (2) 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.(2) 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 the (1)
Alternate Base Rate, as defined, plus 1.5 percent or (2) 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.
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
F-16
<PAGE>
CJC HOLDINGS, INC., CLASS RINGS BUSINESS
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
AUGUST 27, 1994, AUGUST 26, 1995, AUGUST 31, 1996
AND NOVEMEBER 30, 1996 (UNAUDITED)
7. LONG-TERM DEBT: (CONTINUED)
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, approximated 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.
8. INCOME TAXES:
For federal income tax purposes, the Business's operating results have been
included in CJC's consolidated federal income tax return. For financial
reporting purposes, the Business has provided federal income taxes as if it were
a stand-alone entity. However, since the Business is not a taxpaying entity with
respect to federal income taxes, deferred income taxes payable have been
included in the advances and equity (deficit) in the accompanying balance
sheets.
As discussed in Note 2, CJC (and the Business) adopted SFAS No. 109 as of
the beginning of fiscal year 1993. Under SFAS 109, deferred tax assets and
liabilities are computed based on the difference between the financial reporting
and income tax bases of assets and liabilities applying currently enacted
statutory tax rates. The components of deferred taxes of the Business are
comprised of the following (in thousands):
F-17
<PAGE>
CJC HOLDINGS, INC., CLASS RINGS BUSINESS
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
AUGUST 27, 1994, AUGUST 26, 1995, AUGUST 31, 1996
AND NOVEMEBER 30, 1996 (UNAUDITED)
8. INCOME TAXES: (CONTINUED)
<TABLE>
<CAPTION>
AUGUST 27, AUGUST 26, AUGUST 31,
1994 1995 1996
----------- ----------- -----------
<S> <C> <C> <C>
Current deferred taxes--
Gross assets................................................................ $ 597 $ 1,835 $ 1,969
Gross liabilities........................................................... (508) (385) (328)
----------- ----------- -----------
Total, net.............................................................. 89 1,450 1,641
----------- ----------- -----------
Noncurrent deferred taxes--
Gross assets................................................................ 1,947 2,741 2,862
Gross liabilities........................................................... (1,586) (1,318) (1,067)
Less--Valuation allowance................................................... (450) (2,873) (3,436)
----------- ----------- -----------
Total, net.............................................................. (89) (1,450) (1,641)
----------- ----------- -----------
Net deferred income taxes..................................................... $ -- $ -- $ --
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
The significant increase in the valuation allowance as of August 26, 1995,
is due to the increase in deferred tax assets arising from the restructuring
charges being reserved.
The tax effect of significant temporary differences representing deferred
tax assets and liabilities is as follows (in thousands):
<TABLE>
<CAPTION>
AUGUST 27, AUGUST 26, AUGUST 31,
1994 1995 1996
----------- ----------- -----------
<S> <C> <C> <C>
UNICAP........................................................................ $ 597 $ 587 $ 658
Net operating loss and tax credit carryforwards............................... 1,947 2,741 2,862
Depreciation and amortization................................................. (1,586) (1,318) (1,067)
Deferred advertising.......................................................... (399) (385) (328)
Other, net.................................................................... (109) 1,248 1,311
----------- ----------- -----------
Net deferred tax asset........................................................ 450 2,873 3,436
Less--Valuation allowance..................................................... (450) (2,873) (3,436)
----------- ----------- -----------
Net deferred tax liability.................................................... $ -- $ -- $ --
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
The income tax provision for the fiscal year 1994, 1995 and 1996 consisted
of the following (in thousands):
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
-------------------------------
1994 1995 1996
--------- --------- ---------
<S> <C> <C> <C>
Current................................................................................. $ -- $ -- $ --
Deferred................................................................................ -- -- --
State Income taxes...................................................................... (137) -- --
--------- --------- ---------
$ (137) $ -- $ --
--------- --------- ---------
--------- --------- ---------
</TABLE>
F-18
<PAGE>
CJC HOLDINGS, INC., CLASS RINGS BUSINESS
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
AUGUST 27, 1994, AUGUST 26, 1995, AUGUST 31, 1996
AND NOVEMEBER 30, 1996 (UNAUDITED)
8. INCOME TAXES: (CONTINUED)
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 years ended August 27, 1994, August 26,
1995, and August 31, 1996 (in thousands):
<TABLE>
<CAPTION>
1994 1995 1996
--------- --------- ---------
<S> <C> <C> <C>
Pretax book income (loss)......................................................... 35.0% (35.0)% (35.0)%
Permanent differences............................................................. (8.7) 1.0 3.2
--------- --------- ---------
Addition to (utilization of) operating loss carryforwards......................... (26.3) 34.0 31.8
--------- --------- ---------
--% --% --%
--------- --------- ---------
--------- --------- ---------
</TABLE>
Since the Business's financial results have been included in CJC's
consolidated federal income tax return, the Business's 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
the Business reported on a stand-alone basis will not be available to the
Business after the sale to Class Rings, Inc. is completed.
9. COMMITMENTS AND CONTINGENCIES:
Various lawsuits and claims arising in the ordinary course of business are
pending or threatened against CJC. While plaintiffs to these matters are seeking
recoveries from CJC and other relief, management believes that the ultimate
resolution of these matters will not have a material effect on CJC's financial
position or results of operations.
10. LEASES:
The Business leases certain of its manufacturing and office facilities and
equipment, under various noncancelable operating leases. Expenses under all
operating leases for the fiscal years ended August 27, 1994, August 26, 1995,
and August 31, 1996, were approximately $784,000, $577,000 and $577,000,
respectively. Future minimum payments under noncancelable operating leases with
initial or remaining terms of one year or more are as follows at August 31,
1996.
<TABLE>
<S> <C>
Fiscal 1997....................................................... $ 383,000
Fiscal 1998....................................................... 241,000
Fiscal 1999....................................................... 241,000
Fiscal 2000....................................................... 32,000
Fiscal 2001....................................................... --
---------
$ 897,000
---------
---------
</TABLE>
F-19
<PAGE>
CJC HOLDINGS, INC., CLASS RINGS BUSINESS
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
AUGUST 27, 1994, AUGUST 26, 1995, AUGUST 31, 1996
AND NOVEMEBER 30, 1996 (UNAUDITED)
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.
The following components of net periodic pension income are presented for
the hourly class ring employees' plan for the fiscal years ended August 27,
1994, August 26, 1995 and August 31, 1996:
<TABLE>
<CAPTION>
1994 1995 1996
---------- ---------- ----------
<S> <C> <C> <C>
Service cost, benefits earned during the year................................. $ -- $ -- $ --
Interest cost of projected benefit obligation................................. 64,000 69,200 --
Actual return on plan assets.................................................. (43,900) (51,800) --
Net amortization and deferral................................................. (40,300) (50,800) --
---------- ---------- ----------
Net periodic pension income................................................... $ (20,200) $ (33,400) $ --
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
Assumptions used in accounting for the pension plan for the fiscal years
ended August 27, 1994, and August 26, 1995, are as follows:
<TABLE>
<CAPTION>
1994 1995
--------- ---------
<S> <C> <C>
Discount rate................................................................. 7.85% 7.30%
Rate of increase in compensation levels....................................... N/A N/A
Expected long-term rate of return on assets................................... 8.75 7.30
</TABLE>
The following table sets forth the hourly class ring employees' plan's
funded status and the amount recognized in the Business's balance sheets at
August 27, 1994, August 26, 1995, and August 31, 1996, for the pension plan:
<TABLE>
<CAPTION>
1994 1995 1996
------------ ------------- ------------
<S> <C> <C> <C>
Actuarial present value of benefit obligations--
Accumulated benefit obligations, including vested benefits of
$855,000, $1,139,000 and $-- at August 27, 1994, August 26, 1995,
and August 31, 1996, respectively.................................. $ (882,000) $ (1,139,000) $ --
------------ ------------- ------------
Projected benefit obligation........................................... $ (882,000) $ (1,139,000) --
Plan assets at fair value.............................................. 1,101,000 1,139,000 --
------------ ------------- ------------
Plan assets in excess of projected benefit obligation.................. 219,000 -- --
Unrecognized net loss (gain)........................................... (219,000) -- --
Prior service cost not yet recognized in net periodic
pension cost......................................................... -- -- --
------------ ------------- ------------
Prepaid pension cost................................................... $ -- $ -- $ --
------------ ------------- ------------
------------ ------------- ------------
</TABLE>
F-20
<PAGE>
CJC HOLDINGS, INC., CLASS RINGS BUSINESS
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
AUGUST 27, 1994, AUGUST 26, 1995, AUGUST 31, 1996
AND NOVEMEBER 30, 1996 (UNAUDITED)
11. EMPLOYEE BENEFIT PLANS: (CONTINUED)
401(K) PLAN
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.
12. SALE OF CLASS RINGS BUSINESS:
On December 16, 1996, (closing date) CJC completed the sale of substantially
all of the properties, assets, rights, claims and contracts of CJC associated
with the Business to Commemorative Brands, Inc. (formerly Scholastic Brands,
Inc. which was formerly Class Rings, Inc.) (CBI). In consideration for the
Business, CBI paid CJC in cash the sum of $97.8 million plus an amount equal to
the Adjusted Working Capital (as defined in the ArtCarved Purchase Agreement) of
ArtCarved as of the closing date. Based upon the estimated Adjusted Working
Capital of ArtCarved of $17.0 million, the ArtCarved Purchase Price was
approximately $114.8 million, subject to adjustment upon final determinations of
the Adjusted Working Capital.
F-21
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Stockholder of
L.G. Balfour Company, Inc.:
We have audited the accompanying balance sheets of L.G. Balfour Company,
Inc. (a Delaware corporation and the Company), a wholly owned subsidiary of Town
& Country Corporation (a Massachusetts corporation and the Parent), as of
February 27, 1994, February 26, 1995 and February 25, 1996, and the related
statements of operations, stockholder's equity and cash flows for the years
ended February 27, 1994, February 26, 1995 and February 25, 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 financial position of L.G. Balfour Company, Inc.,
as of February 27, 1994, February 26, 1995 and February 25, 1996, and the
results of its operations and its cash flows for the years ended February 27,
1994, February 26, 1995 and February 25, 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 and 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 10. The financial statements
do not include any adjustments that might result from the outcome of this
uncertainty.
/S/ ARTHUR ANDERSEN LLP
Boston, Massachusetts
September 30, 1996 (except for the
matter discussed in Note 10,
for which the date is December 30, 1996)
F-22
<PAGE>
L.G. BALFOUR COMPANY, INC.
BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
FEBRUARY 27, FEBRUARY 26, FEBRUARY 25, NOVEMBER 24,
1994 1995 1996 1996
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
(UNAUDITED)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents (Note 1)..................... $ 25 $ 25 $ 80 $ 59
Accounts receivable, less allowance for doubtful
accounts of $1,961, $5,866, $711 and $871 at February
27, 1994, February 26, 1995, February 25, 1996 and
November 24, 1996, respectively...................... 17,374 14,427 15,362 20,605
Accounts receivable--affiliates........................ 104 6 62 --
Inventories (Note 1)................................... 9,382 11,685 10,791 9,472
Prepaid expenses and other current assets (Note 7)..... 3,641 3,149 2,483 2,447
------------ ------------ ------------ ------------
Total current assets............................... 30,526 29,292 28,778 32,583
PROPERTY, PLANT AND EQUIPMENT, net (Note 1).............. 13,478 12,285 10,399 9,324
INTANGIBLE ASSETS (Note 1)............................... 2,986 2,842 2,698 2,590
OTHER ASSETS............................................. 999 817 688 553
------------ ------------ ------------ ------------
$ 47,989 $ 45,236 $ 42,563 $ 45,050
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Bank overdraft......................................... $ 1,866 $ 1,986 $ 1,829 $ 708
Current portion of long-term debt
(Note 2)............................................. 78 217 245 257
Accounts payable--trade................................ 3,022 1,756 1,551 2,079
Accounts payable--affiliates........................... 447 40 43 123
Accrued expenses (Note 6).............................. 9,896 11,079 11,212 9,307
------------ ------------ ------------ ------------
Total current liabilities.......................... 15,309 15,078 14,880 12,474
DUE TO PARENT, NET (Note 9).............................. 6,014 14,516 12,767 19,148
LONG-TERM DEBT, less current portion (Note 2)............ 44 403 154 --
DEFERRED COMPENSATION, less current portion (Note 8)..... 1,656 1,215 874 826
------------ ------------ ------------ ------------
Total liabilities.................................. 23,023 31,212 28,675 32,448
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
COMMITMENTS AND CONTINGENCIES (Note 5)
STOCKHOLDER'S EQUITY:
Capital stock.......................................... 4 4 4 4
Additional paid-in capital............................. 75,970 75,970 75,970 75,970
Accumulated deficit.................................... (51,008) (61,950) (62,086) (63,372)
------------ ------------ ------------ ------------
Total stockholders' equity......................... 24,966 14,024 13,888 12,602
------------ ------------ ------------ ------------
$ 47,989 $ 45,236 $ 42,563 $ 45,050
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-23
<PAGE>
L.G. BALFOUR COMPANY, INC.
STATEMENTS OF OPERATIONS
(IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE NINE MONTHS
FOR THE YEARS ENDED ENDED
---------------------------------------- --------------------------
<S> <C> <C> <C> <C> <C>
FEBRUARY 27, FEBRUARY 26, FEBRUARY 25, NOVEMBER 26, NOVEMBER 24,
1994 1995 1996 1995 1996
------------ ------------ ------------ ------------ ------------
<CAPTION>
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
NET SALES................................. $ 85,304 $ 77,491 $ 71,300 $ 53,413 $ 55,521
COST OF SALES............................. 35,860 35,406 35,598 27,160 27,021
------------ ------------ ------------ ------------ ------------
Gross profit........................ 49,444 42,085 35,702 26,253 28,500
------------ ------------ ------------ ------------ ------------
EXPENSES:
Selling................................. 36,220 42,891 27,788 20,695 22,899
General and administrative (Note 4)..... 7,130 8,852 5,708 5,136 5,011
------------ ------------ ------------ ------------ ------------
Total expenses...................... 43,350 51,743 33,496 25,831 27,910
------------ ------------ ------------ ------------ ------------
OTHER (INCOME) EXPENSE:
Payroll tax refund (Note 5)............. -- (574) -- -- --
Gain on sale of facility (Note 1)....... -- -- (418) (418) --
Interest expense (Note 8)............... 673 700 583 450 432
Interest on due to Parent, net (Note
9).................................... 683 1,093 1,986 1,401 1,384
------------ ------------ ------------ ------------ ------------
Net other expense................... 1,356 1,219 2,151 1,433 1,816
------------ ------------ ------------ ------------ ------------
Income (loss) before provision for
income taxes...................... 4,738 (10,877) 55 (1,011) (1,226)
PROVISION FOR INCOME TAXES
(Notes 1 and 3)......................... 50 65 191 144 60
------------ ------------ ------------ ------------ ------------
Net income (loss)................... $ 4,688 $ (10,942) $ (136) $ (1,155) $ (1,286)
------------ ------------ ------------ ------------ ------------
------------ ------------ ------------ ------------ ------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-24
<PAGE>
L.G. BALFOUR COMPANY, INC.
STATEMENTS OF STOCKHOLDER'S EQUITY
(IN THOUSANDS)
<TABLE>
<CAPTION>
TOTAL
ADDITIONAL STOCK-
PAID-IN ACCUMULATED HOLDER'S
CAPITAL STOCK CAPITAL DEFICIT EQUITY
----------------- ----------- ------------ ------------
<S> <C> <C> <C> <C>
BALANCE, FEBRUARY 28, 1993................................. $ 4 $ 75,970 $ (55,696) $ 20,278
Net income............................................... -- 4,688 4,688
--
----------- ------------ ------------
BALANCE, FEBRUARY 27, 1994................................. $ 4 75,970 (51,008) 24,966
Net loss................................................. -- (10,942) (10,942)
--
----------- ------------ ------------
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................................................. -- (1,286) (1,286)
--
----------- ------------ ------------
BALANCE, NOVEMBER 24, 1996 (Unaudited)..................... $ 4 $ 75,970 $ (63,372) $ 12,602
--
--
----------- ------------ ------------
----------- ------------ ------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-25
<PAGE>
L.G. BALFOUR COMPANY, INC.
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE
FOR THE YEARS ENDED NINE MONTHS ENDED
------------------------------------------ ----------------------------
<S> <C> <C> <C> <C> <C>
FEBRUARY 27, FEBRUARY 26, FEBRUARY 25, NOVEMBER 26, NOVEMBER 24,
1994 1995 1996 1995 1996
------------- ------------ ------------- ------------- -------------
<CAPTION>
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)............................... $ 4,688 $ (10,942) $ (136) $ (1,155) $ (1,286)
Adjustments to reconcile net income (loss) to
net cash provided by (used in) operating
activities--
Depreciation and amortization................. 1,899 1,978 2,026 1,548 1,460
(Gain) loss on sale of property, plant and
equipment................................... 25 89 (417) (417) --
Change in assets and liabilities--
(Increase) decrease in accounts receivable.. (5,759) 3,045 (991) (4,736) (5,181)
(Increase) decrease in inventories.......... (1,351) (2,303) 894 (1,085) 1,319
(Increase) decrease in prepaid expenses and
other current assets...................... 1,278 492 666 787 36
(Increase) decrease in other assets......... 2,559 182 129 52 135
Increase (decrease) in bank overdraft and
accounts payable, net..................... 1,931 (1,553) (359) 714 (513)
Increase (decrease) in accrued expenses..... (6,444) 2,376 133 (1,386) (2,312)
Increase (decrease) in deferred
compensation.............................. (1,239) (441) (341) (150) (48)
------ ------------ ------ ------------- -------------
Net cash provided by (used in) operating
activities.............................. (2,413) (7,077) 1,604 (5,828) (6,390)
------ ------------ ------ ------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of fixed assets:............. 13 65 951 951 440
Capital expenditures............................ (1,820) (1,274) (530) (320) (252)
------ ------------ ------ ------------- -------------
Net cash provided by (used in) investing
activities.............................. (1,807) (1,209) 421 631 188
------ ------------ ------ ------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from (payments on) borrowings from
Parent, net................................... 4,213 8,502 (1,749) 5,364 6,381
Borrowings (payments) on capital leases......... 32 (216) (221) (163) (200)
------ ------------ ------ ------------- -------------
Net cash provided by (used in) financing
activities.............................. 4,245 8,286 (1,970) 5,201 6,181
------ ------------ ------ ------------- -------------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS..................................... 25 -- 55 4 (21)
CASH AND CASH EQUIVALENTS, beginning of year...... -- 25 25 25 80
------ ------------ ------ ------------- -------------
CASH AND CASH EQUIVALENTS, end of year............ $ 25 $ 25 $ 80 $ 29 $ 59
------ ------------ ------ ------------- -------------
------ ------------ ------ ------------- -------------
SUPPLEMENTAL CASH FLOW DATA:
Cash paid during the year for--
Interest...................................... $ 20 $ 72 $ 52 $ 42 $ 23
------ ------------ ------ ------------- -------------
------ ------------ ------ ------------- -------------
Taxes......................................... $ 78 $ 65 $ 191 $ 191 $ 42
------ ------------ ------ ------------- -------------
------ ------------ ------ ------------- -------------
SUPPLEMENTAL DISCLOSURES OF NONCASH INVESTING AND
FINANCING ACTIVITIES (Note 1)
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-26
<PAGE>
L.G. BALFOUR COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS
(INCLUDING DATA APPLICABLE TO UNAUDITED PERIODS)
(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). 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. During
fiscal 1994 and 1995, the Company operated a licensed sports products direct
mail distribution business. During the fourth quarter of fiscal 1995, the
Company began selling the licensed sports products through retail as opposed to
direct mail distribution channels.
The Company relies on funding from the Parent to support operations.This
funding is primarily obtained by the Parent through borrowings under its debt
obligations. Compliance with the financial covenants under its debt obligations
are measured quarterly. There can be no assurance that the Parent will remain in
compliance with the financial covenants included in its working capital
facility, Senior Secured and Senior Subordinated Notes and can continue to
provide funding to support the Company's operations through fiscal year 1997.
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 as the time the product is
shipped.
IMPAIRMENT OF LONG-LIVED ASSETS
In March 1995, the Financial Accounting Standards Board issued 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 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 Company's financial position or results of operations.
F-27
<PAGE>
L.G. BALFOUR COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INCLUDING DATA APPLICABLE TO UNAUDITED PERIODS)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company's financial instruments consist primarily of cash and cash
equivalents, accounts receivable, bank overdraft, accounts payable, long-term
debt (including current maturities) and due to Parent, net. 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. See
Notes 2 and 9 for fair value information pertaining to the Company's long-term
debt and due to Parent, net. In fiscal 1995, in connection with its licensed
sports products direct mail distribution business, the Company determined that
its actual collection rate of sales was significantly less than previously
estimated. Overall, the Company provided approximately 22% (the average
provision rate) for allowances for uncollectible amounts relating to sales of
products through this distribution channel. In fiscal 1995, the Company provided
additional reserves to take into account its change in estimate regarding the
realizability of these receivables, which resulted in a charge of approximately
$2.6 million over the average provision rate.
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.
Inventories consisted of the following:
<TABLE>
<CAPTION>
FEBRUARY 27, FEBRUARY 26, FEBRUARY 25, NOVEMBER 24,
1994 1995 1996 1996
------------ ------------- ------------- ------------
<S> <C> <C> <C> <C>
(UNAUDITED)
Raw materials......................................... $ 3,158,000 $ 4,020,000 $ 3,851,000 $3,766,000
Work-in-process....................................... 4,197,000 3,897,000 3,622,000 2,978,000
Finished goods........................................ 2,027,000 3,768,000 3,318,000 2,728,000
------------ ------------- ------------- ------------
$ 9,382,000 $ 11,685,000 $ 10,791,000 $9,472,000
------------ ------------- ------------- ------------
------------ ------------- ------------- ------------
</TABLE>
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 years ended February 27, 1994, February
26, 1995 and February 25, 1996, these fees totaled approximately $200,000 each
year and for the nine month periods ended November 26, 1995 and November 24,
1996, these fees totaled $162,000 and $214,000, respectively.
The Company does not include the value of consigned gold in inventory or the
corresponding liability in borrowings for financial statement purposes. As of
February 27, 1994, February 26, 1995, February 25, 1996 and November 24, 1996,
the Company held approximately 15,027 ounces valued at $5.7 million, 12,298
ounces valued at $4.6 million, 12,212 ounces valued at $4.9 million and 13,431
ounces valued at $5.1 million, respectively, of gold on consignment under its
Parent's domestic gold agreements. The lenders under the Parent's domestic gold
consignment agreements have a first priority security interest in the gold
content of inventory.
F-28
<PAGE>
L.G. BALFOUR COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INCLUDING DATA APPLICABLE TO UNAUDITED PERIODS)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
ADVERTISING
The Company expenses the costs of advertising as incurred, except for
certain direct-response advertising costs, which are capitalized and amortized
over their expected period of future benefits.
For the years ended February 27, 1994, February 26, 1995 and February 25,
1996 and for the nine-month periods ended November 26, 1995 and November 24,
1996, advertising expense was approximately $9,022,000, $10,565,000, $2,465,000,
$1,797,000 and $2,321,000, respectively. At February 27, 1994, February 26,
1995, February 25, 1996 and November 24, 1996, approximately $2,644,000, $0, $0
and $0, respectively, of direct response advertising costs were capitalized and
included in prepaid expenses and other current assets.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are stated at cost. Maintenance and repair
items and 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 the nine-month period ended November
26, 1995 and year ended February 25, 1996 is a $418,000 gain associated with the
sale of one of the Company's manufacturing facilities.
The Company provides for depreciation, principally using the straight-line
method, at rates adequate to depreciate the applicable assets over their
estimated useful lives, which range from 3 to 30 years.
PROPERTY, PLANT AND EQUIPMENT CONSISTED OF THE FOLLOWING:
<TABLE>
<CAPTION>
USEFUL LIFE FEBRUARY 27, FEBRUARY 26, FEBRUARY 25, NOVEMBER 24,
RANGES 1994 1995 1996 1996
------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
(UNAUDITED)
Real estate................................. 10-20 Years $ 7,720,000 $ 7,629,000 $ 6,875,000 $ 5,271,000
Furniture and fixtures...................... 3-7 Years 268,000 817,000 820,000 878,000
Tools and dies.............................. 3-15 Years 7,700,000 7,700,000 7,700,000 7,700,000
Equipment................................... 3-8 Years 6,675,000 6,957,000 7,119,000 7,361,000
Leasehold improvements...................... 4-20 Years -- 629,000 931,000 931,000
------------- ------------- ------------- -------------
Property, plant and equipment, gross.... 22,363,000 23,732,000 23,445,000 22,141,000
Less--Accumulated depreciation (Note 4)..... 8,885,000 11,447,000 13,046,000 12,817,000
------------- ------------- ------------- -------------
Property, plant and equipment, net...... $ 13,478,000 $ 12,285,000 $ 10,399,000 $ 9,324,000
</TABLE>
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
F-29
<PAGE>
L.G. BALFOUR COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INCLUDING DATA APPLICABLE TO UNAUDITED PERIODS)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
USE OF ESTIMATES (CONTINUED)
reported amounts of revenues and expenses during the reporting periods. Actual
results could differ from those estimates.
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. The Company and its Parent have a tax-allocation
agreement. The Company's results of operations are included in the consolidated
federal 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.
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 pending sale of the Company (see Note 10), in measuring whether the
goodwill is recoverable. Accumulated amortization was approximately $2,626,000,
$2,770,000, $2,914,000 and $3,022,000 at February 27, 1994, February 26, 1995,
February 25, 1996 and November 24, 1996, respectively.
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 (Note 5). 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 (Note 7).
SUPPLEMENTAL DISCLOSURES OF NONCASH INVESTING AND FINANCING ACTIVITIES
During fiscal 1994 and 1995 and the nine-month period ended November 24,
1996, the Company had fixed asset additions of approximately $90,000, $700,000
and $58,000, respectively, funded by increases in capital lease obligations.
INTERIM FINANCIAL STATEMENTS
The financial statements for the nine months ended November 26, 1995 and
November 24, 1996 are unaudited. In management's opinion, these unaudited
financial statements have been prepared on the
F-30
<PAGE>
L.G. BALFOUR COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INCLUDING DATA APPLICABLE TO UNAUDITED PERIODS)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
INTERIM FINANCIAL STATEMENTS (CONTINUED)
same basis as the audited financial statements and include all adjustments,
consisting only of normal recurring adjustments, necessary for the fair
statement of the financial data for such periods. The unaudited results for the
nine months ended November 24, 1996 are not necessarily indicative of the
results expected for the entire fiscal year.
(2) LONG-TERM DEBT
Long-term debt consists of the following:
<TABLE>
<CAPTION>
FEBRUARY 27, FEBRUARY 26, FEBRUARY 25, NOVEMBER 24,
1994 1995 1996 1996
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
(UNAUDITED)
Lease obligation for office furniture and equipment, payable in
monthly installments with interest of 9.67%.................. $ -- $ 620,000 $ 399,000 $ 218,000
Other obligations.............................................. 122,000 -- -- 39,000
------------ ------------ ------------ ------------
122,000 620,000 399,000 257,000
Less--Current portion.......................................... 78,000 217,000 245,000 257,000
------------ ------------ ------------ ------------
$ 44,000 $ 403,000 $ 154,000 $ --
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
</TABLE>
The Company's management believes, based on the short-term nature of the
Company's debt and because interest rates approximate the Company's incremental
borrowing rate, that the carrying value approximates fair value.
(3) INCOME TAXES
The components of the provision for income taxes are as follows:
<TABLE>
<CAPTION>
FOR THE NINE MONTHS ENDED
--------------------------
FEBRUARY 27, FEBRUARY 26, FEBRUARY 25, NOVEMBER 26, NOVEMBER 24,
1994 1995 1996 1995 1996
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
(UNAUDITED)
Current--
Federal................................. $ -- $ -- $ -- $ -- $ --
State................................... 50,000 65,000 191,000 144,000 60,000
------------ ------------ ------------ ------------ ------------
Total provision..................... $ 50,000 $ 65,000 $ 191,000 $ 144,000 $ 60,000
------------ ------------ ------------ ------------ ------------
------------ ------------ ------------ ------------ ------------
</TABLE>
F-31
<PAGE>
L.G. BALFOUR COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INCLUDING DATA APPLICABLE TO UNAUDITED PERIODS)
(3) INCOME TAXES (CONTINUED)
The Company's effective tax rate differs from the federal statutory rate of
35% for the years ended February 27, 1994, February 26, 1995 and February 25,
1996 and for the nine months ended November 26, 1995 and November 24, 1996 due
to the following (in thousands):
<TABLE>
<CAPTION>
FOR THE
NINE MONTHS ENDED
--------------------------------
<S> <C> <C> <C> <C> <C>
FEBRUARY 27, FEBRUARY 26, FEBRUARY 25, NOVEMBER 26, NOVEMBER 24,
1994 1995 1996 1995 1996
------------- ------------ --------------- --------------- ---------------
<CAPTION>
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Computed tax provision (benefit) at statutory
rate............................................ $ 1,658 $ (3,807) $ 20 $ (354) $ (429)
Increases resulting from State taxes.............. 50 65 191 144 60
Items not deductible for income tax purposes...... 68 64 64 48 48
(Utilization) deferral of net operating losses.... (1,726) 3,743 (84) 306 381
------ ------------ ----- ----- -----
$ 50 $ 65 $ 191 $ 144 $ 60
------ ------------ ----- ----- -----
------ ------------ ----- ----- -----
</TABLE>
<TABLE>
<CAPTION>
FEBRUARY 27, FEBRUARY 26, FEBRUARY 25, NOVEMBER 24,
1994 1995 1996 1996
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
(UNAUDITED)
Deferred tax assets--
Accounts receivable reserves................................. $ 1,174 $ 2,190 $ 883 $ 856
Accrual for loss on assets held for sale or disposal......... 1,873 742 561 --
Inventories.................................................. 526 525 452 373
Other........................................................ 594 1,345 1,570 1,347
Net operating loss carryforwards............................. 6,790 12,042 14,554 14,502
------------ ------------ ------------ ------------
Total gross deferred tax assets.......................... 10,957 16,844 18,020 17,078
Less--Valuation allowance...................................... 8,344 14,356 16,069 15,529
------------ ------------ ------------ ------------
Net deferred tax assets.................................. $ 2,613 $ 2,488 $ 1,951 $ 1,549
------------ ------------ ------------ ------------
Deferred tax liabilities--
Property, plant and equipment, principally due to differences
in depreciation............................................ $ 2,613 $ 2,488 $ 1,951 $ 1,549
------------ ------------ ------------ ------------
Total deferred tax liabilities........................... 2,613 2,488 1,951 1,549
Net deferred tax asset (liability)....................... $ -- $ -- $ -- $ --
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
</TABLE>
The valuation allowance relates 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 $36.3 million as of November 24, 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.
F-32
<PAGE>
L.G. BALFOUR COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INCLUDING DATA APPLICABLE TO UNAUDITED PERIODS)
(4) 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. At February 26, 1995, the disposals had
been substantially completed and the remaining reserve of approximately $1.8
million was intended to cover the net book value and demolition costs associated
with the disposition of a manufacturing facility. At February 25, 1996, the
remaining reserve was approximately $1.4 million. In fiscal 1996, due to a
change in estimates for demolishing the facility, the Company reduced the
reserve by approximately $400,000, which is included as a reduction of general
and administrative expenses in the accompanying statement of operations. At
February 26, 1995 and February 25, 1996, approximately $1.2 million of the
reserve is included in accumulated depreciation as an offset against property,
plant and equipment (Note 1), and the remaining reserve is included in accrued
expenses in the accompanying balance sheets. During the nine-month period ended
November 24, 1996, the Company completed the demolition and sale of the
manufacturing facility and reduced the reserve by approximately $150,000, which
is included as a reduction of general and administrative expenses in the
accompanying statement of operations. Additionally, the remaining reserve of
approximately $1.2 million was utilized to write-off the associated property,
plant and equipment as opposed to being included in accumulated depreciation as
an offset, against property, plant and equipment as described above.
(5) COMMITMENTS AND CONTINGENCIES
Certain Company facilities and equipment are leased under agreements
expiring at various dates through 2009. The Company's commitments under the
noncancelable portion of all operating leases for the next five years and in
total thereafter at February 25, 1996 are approximately as follows:
<TABLE>
<CAPTION>
TOTAL
YEAR COMMITMENT
- ---------------------------------------------------------------------- ------------
<S> <C>
1997.................................................................. $1,086,000
1998.................................................................. 1,069,000
1999.................................................................. 1,037,000
2000.................................................................. 1,057,000
2001.................................................................. 1,073,000
Thereafter............................................................ 7,579,000
</TABLE>
There were no significant additions, deletions or modifications to the
Company's commitments under the noncancelable portion of all operating leases
from February 25, 1996 through November 24, 1996.
Lease and rental expense included in the accompanying statements of
operations amounted to approximately $184,000, $483,000 and $920,000 for the
years ended February 27, 1994, February 26, 1995 and February 25, 1996,
respectively, and approximately $673,000 and $866,000 for the nine month periods
ending November 26, 1995 and November 24, 1996, respectively.
The Company is a party to certain contracts with some of its sales
representatives whereby the representatives have purchased the right to sell the
Company's products in a territory from their predecessor. The contracts
generally provide that the value of these rights is primarily determined by the
F-33
<PAGE>
L.G. BALFOUR COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INCLUDING DATA APPLICABLE TO UNAUDITED PERIODS)
(5) COMMITMENTS AND CONTINGENCIES (CONTINUED)
amount of business achieved by a successor sales representative and is therefore
not determinable in advance of performance by the successor sales
representative.
Substantially all of the Company's assets have been pledged as collateral
against the Parent's debt obligations.
During fiscal 1995, the Company received an IRS tax refund of approximately
$574,000 (including interest), which is reflected in other income in the
accompanying statement of operations. This amount represents a favorable
settlement related to payroll taxes paid by the Company for individuals
determined to be independent contractors.
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.
(6) ACCRUED EXPENSES
The principal components of accrued expenses are approximately as follows:
<TABLE>
<CAPTION>
FEBRUARY 27, FEBRUARY 26, FEBRUARY 25, NOVEMBER 24,
1994 1995 1996 1996
------------ ------------- ------------- ------------
<S> <C> <C> <C> <C>
(UNAUDITED)
Compensation and related costs............................... $ 1,854,000 $ 1,926,000 $ 2,442,000 $ 1,857,000
Sales and use tax............................................ 969,000 794,000 503,000 687,000
Commissions and royalties.................................... 1,479,000 2,900,000 2,296,000 2,710,000
Customer deposits............................................ 4,243,000 4,199,000 4,717,000 2,756,000
Current portion of deferred compensation (Note 8)............ 414,000 380,000 355,000 344,000
Other........................................................ 937,000 880,000 899,000 953,000
------------ ------------- ------------- ------------
Total accrued expenses................................. $ 9,896,000 $ 11,079,000 $ 11,212,000 $ 9,307,000
------------ ------------- ------------- ------------
------------ ------------- ------------- ------------
</TABLE>
(7) PREPAID EXPENSES AND OTHER CURRENT ASSETS
Prepaid expenses and other current assets consisted of approximately the
following:
<TABLE>
<CAPTION>
FEBRUARY 27, FEBRUARY 26, FEBRUARY 25, NOVEMBER 24,
1994 1995 1996 1996
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
(UNAUDITED)
Sales representative advances (Note 1)...................... $ 4,056,000 $ 5,169,000 $ 4,571,000 $ 2,386,000
Reserve on sales representative advances (Note 1)(a)........ (3,295,000) (2,305,000) (2,497,000) (733,000)
Prepaid advertising (Note 1)................................ 2,644,000 -- -- --
Other....................................................... 236,000 285,000 409,000 794,000
------------- ------------- ------------- -------------
$ 3,641,000 $ 3,149,000 $ 2,483,000 $ 2,447,000
------------- ------------- ------------- -------------
------------- ------------- ------------- -------------
</TABLE>
(a)
Valuation and Qualifying Accounts --
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------------
Column A Column B Column C Column D Column E
- -------------------------------------------------------------------------------------------------------------------------------
ADDITIONS
------------------------------
(1) (2)
BALANCE Charged to Charged to BALANCE AT
FOR THE PERIOD BEGINNING Costs and Other Accounts-- DEDUCTIONS- END OF
ENDING DESCRIPTION OF PERIOD Expenses Describe DESCRIBE(*) PERIOD
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Twelve Months Ending Reserve on Sales
February 27, 1994 Representative Advances $5,095,000 703,100 -- 2,503,100 $3,295,000
Twelve Months Ending Reserve on Sales
February 26, 1995 Representative Advances $3,295,000 284,900 -- 1,274,900 $2,305,000
Twelve Months Ending Reserve on Sales
February 25, 1996 Representative Advances $2,305,000 659,900 -- 467,900 $2,497,000
Nine Months Ending Reserve on Sales
November 24, 1996 Representative Advances $2,497,000 491,800 -- 2,255,800 $733,000
- -------------------------------------------------------------------------------------------------------------------------------
</TABLE>
* Represents write-off of terminated sales representatives amount and
foregiveness of amounts by Balfour.
F-34
<PAGE>
L.G. BALFOUR COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INCLUDING DATA APPLICABLE TO UNAUDITED PERIODS)
(8) 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. Adoption is required for fiscal years beginning after
December 1992. 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 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 and amounted to approximately $508,000 for the year
ended February 28, 1993.
The following table sets forth the plan status (in thousands):
<TABLE>
<CAPTION>
FEBRUARY 27, FEBRUARY 26, FEBRUARY 25,
1994 1995 1996
------------ ------------ ------------
<S> <C> <C> <C>
Accumulated postretirement benefit obligation--
Retired employees..................................................... $ (6,477) $ (6,088) $ (5,710)
Active employees...................................................... -- -- --
------------ ------------ ------------
Total............................................................. (6,477) (6,088) (5,710)
Plan assets at fair value............................................... -- -- --
------------ ------------ ------------
Unfunded accumulated benefit obligation in excess of plan
assets.......................................................... (6,477) (6,088) (5,710)
Unrecognized net gain................................................... -- (73) (336)
Unrecognized transition obligation...................................... 6,162 5,810 5,487
------------ ------------ ------------
Accrued postretirement medical benefit cost....................... $ (315) $ (351) $ (559)
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
As of November 24, 1996, there was $738,000 accrued for postretirement
medical benefit costs.
F-35
<PAGE>
L.G. BALFOUR COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INCLUDING DATA APPLICABLE TO UNAUDITED PERIODS)
(8) EMPLOYEE BENEFIT PLANS (CONTINUED)
The net periodic postretirement benefit costs for the years ending February
27, 1994, February 26, 1995 and February 25, 1996 and for the nine-month periods
ended November 26, 1995 and November 24, 1996 included the following components
(in thousands):
<TABLE>
<CAPTION>
FOR THE
NINE MONTHS
ENDED
---------------
<S> <C> <C> <C> <C>
FEBRUARY 27, FEBRUARY 26, FEBRUARY 25, NOVEMBER 26,
1994 1995 1996 1995
--------------- --------------- --------------- ---------------
<CAPTION>
(UNAUDITED)
<S> <C> <C> <C> <C>
Service costs--benefits attributed to service
during the period............................... $ -- $ -- $ -- $ --
Interest cost..................................... 494 474 444 356
Actuarial assumptions............................. -- -- -- --
Amortization of unrecognized transition
obligation...................................... 324 323 323 242
----- ----- ----- -----
Net periodic postretirement benefit cost.... $ 818 $ 797 $ 767 $ 598
----- ----- ----- -----
----- ----- ----- -----
<CAPTION>
<S> <C>
NOVEMBER 24,
1996
---------------
<S> <C>
Service costs--benefits attributed to service
during the period............................... $ --
Interest cost..................................... 326
Actuarial assumptions............................. --
Amortization of unrecognized transition
obligation...................................... 242
-----
Net periodic postretirement benefit cost.... $ 568
-----
-----
</TABLE>
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 1994, 1995 and 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 cost of the Company's liability under these compensation
agreements for the years ended February 27, 1994, February 26, 1995 and February
25, 1996 was approximately $156,000, $156,000 and $50,000, respectively, and for
the nine-month periods ended November 26, 1995 and November 24, 1996 was
approximately $50,000 and $79,000, respectively.
EMPLOYEE STOCK PURCHASE PLAN
On January 25, 1988, the Board of Directors of the Parent adopted the 1988
Employee Stock Purchase Plan (the Stock Purchase Plan) for 500,000 shares of the
Parent Class A Common Stock. Under the Stock Purchase Plan, each eligible
participating employee is deemed to have been granted an option to
F-36
<PAGE>
L.G. BALFOUR COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INCLUDING DATA APPLICABLE TO UNAUDITED PERIODS)
(8) EMPLOYEE BENEFIT PLANS (CONTINUED)
purchase shares of the Parent's Class A Common Stock on a semiannual basis at a
price equal to 90% of the market value on the last day of the period.
(9) 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 1994,
1995 and 1996 and for the nine-month periods ending November 26, 1995 and
November 24, 1996.
The net amount due to Parent of $6,014,000, $14,516,000, $12,767,000 and
$19,148,000 at February 27, 1994, February 26, 1995, February 25, 1996 and
November 24, 1996, respectively, represent advances to fund operating needs and
include the charges discussed previously. The Parent charged or credited the
Company interest on a monthly basis at a rate of 11% in fiscal 1994 and 1995 and
11.5% in fiscal 1996 and for the nine-month period ending November 24, 1996.
Included in the accompanying statements of operations are net interest charges
of $683,000, $1,093,000 and $1,986,000 in fiscal 1994, 1995 and 1996,
respectively, and $1,401,000 and $1,384,000 for the nine-month periods ended
November 26, 1995 and November 24, 1996, respectively.
As the net amount due to Parent has no specified maturity date and the
Parent has no present intention to demand repayment, management believes that
estimating its fair market value is not practicable.
(10) PENDING SALE
The Parent company, 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 the 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. ("CHP II"). 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, CHP II 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 to acquire any interest in CBI. On October 8, 1996, the FTC
placed the Consent Agreement and the proposed order on the public record for a
period of 60 days for the receipt and consideration of comments or views from
any interested person.
F-37
<PAGE>
L.G. BALFOUR COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INCLUDING DATA APPLICABLE TO UNAUDITED PERIODS)
(10) PENDING SALE (CONTINUED)
On December 16, 1996, the Parent completed the sale of certain assets and
liabilities of the Company (the "Closing"). At Closing, the Parent received cash
equal to the purchase price of $44 million, plus $3.4 million in working capital
adjustments from January 28, 1996 to the date of Closing, plus $4.9 million
representing the value of gold on-hand as of the date of Closing less $14
million placed in escrow pending final FTC approval. Following the expiration of
the public comment period described above, final approval from the FTC was
received on December 20, 1996. The $14 million in escrowed funds were
subsequently released and paid to the Parent on December 30, 1996. The working
capital and gold values are contingent upon pending reconciliations to be
completed within 45 days from the date of closing for working capital and 90
days for the value of gold on-hand.
F-38
<PAGE>
No person has been authorized to give any information or to make any
representations not in this Prospectus, and, if given or made, such other
information or representations must not be relied upon as having been authorized
by the Company. This Prospectus does not constitute an offer to sell or a
solicitation of an offer to buy any of the Notes to any person in any
jurisdiction in which it would be unlawful to make such an offer or solicitation
to such person. Neither the delivery of this Prospectus nor any sale made
hereunder shall under any circumstances, create any implication that the
information contained herein is correct as of any date subsequent to the date
hereof.
____________________
TABLE OF CONTENTS
Page
----
Available Information ............................. i
Prospectus Summary ................................ 1
Risk Factors ...................................... 15
Use of Proceeds ................................... 20
The Exchange Offer................................. 20
Capitalization .................................... 28
Unaudited Pro Forma Combined Financial
Statements and Other Data .................... 30
Selected Historical Financial and Other Data....... 39
Management's Discussion and Analysis of
Financial Condition and Results of
Operations ................................... 43
Business .......................................... 54
Management ........................................ 70
Principal Stockholders ............................ 74
Certain Relationships and Related
Transactions ................................. 75
The Acquisitions .................................. 75
Description of Capital Stock ...................... 76
Description of the Bank Credit Facility ........... 78
Description of Notes .............................. 81
Certain Federal Income
Tax Considerations ........................... 111
Plan of Distribution .............................. 113
Legal Matters ..................................... 114
Experts ........................................... 114
Index to Financial Statements ..................... F-1
COMMEMORATIVE BRANDS, INC.
Offer to exchange $90,000,000
of new
11% Senior Subordinated Notes
due 2007
for $90,000,000 of any and all outstanding 11% Senior
Subordinated Notes
due 2007
Marine Midland Bank
Exchange Agent
40 Broadway
New York, New York 10005
Attention: Corporate Trust Administration
Telephone: (212) 658-1000
Telecopier: (212) 658-6425
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 20. Indemnification of Directors and Officers
Section 102(b)(7) of the Delaware General Company Law (the "DGCL") permits
a provision in the certificate of incorporation of each Company organized
thereunder, such as the Company, eliminating or limiting the personal liability,
with certain exceptions, of a director to the Company or its stockholders for
monetary damages for certain breaches of fiduciary duty as a director. Article
FIFTH of the Company's Restated Certificate of Incorporation, as amended,
eliminates the personal liability of directors to the fullest extent permitted
by law. Specifically, the directors of the Company will not be personally liable
for monetary damages for breach of the director's fiduciary duty as a director,
except for liability (i) for any breach of the director's duty of loyalty to the
Company or its stockholders, (ii) for acts or omissions not in good faith or
which involve intentional misconduct or a knowing violation of law, (iii) for
unlawful payments of dividends or unlawful stock repurchases or redemptions as
provided in Section 174 of the DGCL, or (iv) for any transaction from which the
director derived an improper personal benefit.
Section 145 of the DGCL grants a Delaware Company, such as the Company,
the power to indemnify a director, officer, employee or agent against reasonable
expenses (including attorneys' fees) incurred by him in connection with any
proceeding brought by or on behalf of the Company and against judgments, fines,
settlements and reasonable expenses (including attorneys' fees) incurred by him
in connection with any other proceeding, if (a) he acted in good faith and in a
manner he reasonably believed to be in or not opposed to the best interests of
the Company, and (b) in the case of any criminal proceeding, he had no
reasonable cause to believe his conduct was unlawful. Except as ordered by a
court, however, no indemnification is to be made in connection with any
proceeding brought by or in the right of the Company where the person involved
is adjudged to be liable to the Company.
Section 1 of Article VI of the Company's Restated By-Laws provides that,
unless otherwise determined by the Board of Directors, the Company shall, to the
fullest extent permitted by the DGCL (including, without limitation, Section 145
thereof) or other provisions of the laws of Delaware relating to indemnification
of directors, officers, employees and agents, as the same may be amended and
supplemented from time to time, indemnify any and all such persons whom it shall
have power to indemnify under the DGCL or such other provisions of law.
Section 2 of Article VI of the Company's Restated By-Laws provides that,
without limiting the generality of Section 1 of Article VI, to the fullest
extent permitted, and subject to the conditions imposed, by law, and pursuant to
Section 145 of the DGCL, unless otherwise determined by the Board of Directors,
the Company shall indemnify any person who was or is a party or is threatened to
be made a party to any threatened, pending or completed action, suit or
proceeding whether civil, criminal, administrative or investigative (other than
an action by or in the right of the Company) by reason of the fact that such
person is or was a director, officer, employee or agent of the Company, or is or
was serving at the request of the Company as a director, officer, employee or
agent of another Corporation, partnership, joint venture, trust or other
enterprise against reasonable expenses (including attorneys' fees), judgments,
fines and amounts paid in settlement actually and reasonably incurred by him in
connection with such action, suit or proceeding if such person acted in good
faith and in a manner he reasonably believed to be in or not opposed to the best
interests of the Company, and, with respect to any criminal action or
proceeding, had no reasonable cause to believe his conduct was unlawful; and
that the Company shall indemnify any person who was or is a party or is
threatened to be made a party to any threatened, pending or completed action or
suit by or in the right of the Company to procure a judgment in its favor by
reason of the fact that such person is or was a director, officer, employee or
agent of the Company, or is or was serving at the request of the Company as a
director, officer, employee or agent of another Company, partnership, joint
venture, trust or other enterprise against reasonable expenses (including
attorneys' fees) actually and reasonably incurred by him in connection with the
defense or settlement of such action or suit if such person acted in good faith
and in a manner he reasonably believed to be in or not opposed to the best
interests of the Company, except as otherwise provided by law.
II-1
<PAGE>
Section 3 of Article VI of the Company's Restated By-Laws provides that,
to the fullest extent permitted by law, indemnification may be granted, and
expenses may be advanced, to the persons described in Section 145 of the DGCL or
other provisions of the laws of Delaware relating to indemnification and
advancement of expenses, as from time to time may be in effect, by (i) a
resolution of stockholders, (ii) a resolution of the Board of Directors, or
(iii) an agreement providing for such indemnification and advancement of
expenses.
Section 4 of Article VI of the Company's Restated By-Laws provides that,
it is the intent of Article VI to require the Company, unless otherwise
determined by the Board of Directors, to indemnify the persons referred to
therein for judgments, fines, penalties, amounts paid in settlement and
reasonable expenses (including attorneys' fees), and to advance expenses to such
persons, in each and every circumstance in which such indemnification and such
advancement of expenses could lawfully be permitted by express provision of
By-Laws, and the indemnification and expense advancement provided by this
Article VI shall not be limited by the absence of an express recital of such
circumstances. The indemnification and advancement of expenses provided by, or
granted pursuant to, the Company's Restated By-Laws shall not be deemed
exclusive of any other rights to which a person seeking indemnification or
advancement of expenses may be entitled, whether as a matter of law, under any
provision of the Restated Certificate of Incorporation of the Company, the
Restated By-Laws, by agreement, by vote of stockholders or disinterested
directors of the Company or otherwise, both as to action in his official
capacity and as to action in another capacity while holding such office.
Section 5 of Article VI of the Company's Restated By-Laws provides that
indemnification pursuant to the Restated By-Laws shall inure to the benefit of
the heirs, executors, administrators and personal representatives of those
entitled to indemnification.
The indemnification and advancement of expenses provided by or granted
pursuant to Article VI of the Company's By-Laws are not exclusive of any other
rights to which those seeking indemnification or advancement of expenses may be
entitled under any By-Law, agreement, contract, vote of stockholders or
disinterested directors or pursuant to the direction (howsoever embodied) of any
court of competent jurisdiction or otherwise, both as to action in his official
capacity and as to action in another capacity while holding such office, it
being the policy of the Company that indemnification of the persons specified in
Article VI shall be made to the fullest extent permitted by law.
The Company has purchased and maintains insurance on behalf of any person
who is or was a director, officer, employee or agent of the Company, or is or
was a director or officer of the Company serving at the request of the Company
as a director, officer, employee or agent of another Company, partnership, joint
venture, trust, employee benefit plan or other enterprise against any liability
asserted against him and incurred by him in any such capacity, or arising out of
his status as such, whether or not the Company would have the power or the
obligation to indemnify him against such liability under the provisions of
Article VI of the Company's By-Laws.
The Company has entered into indemnification agreements with each of its
directors and officers which require the Company to indemnify the directors and
officers to the fullest extent permitted by law, and to advance to directors and
officers all related expenses, subject to reimbursement if it is subsequently
determined that indemnification is not permitted. The Company must also
indemnify and advance all expenses incurred by directors and officers seeking to
enforce their rights under the indemnification agreements, and cover directors
and officers under the Company's directors' and officers' liability insurance.
See "Management--Compensation of Directors" contained in this Prospectus
comprising part of this Registration Statement.
II-2
<PAGE>
Item 21. Exhibits and Financial Statement Schedules
(a) Exhibits
**2.1 Asset Purchase Agreement, dated as of May 20, 1996 ("ArtCarved
Purchase Agreement"), among the Company and CJC Holdings, Inc.
("CJC"), and CJC North America, Inc. ("CJCNA").
**2.2 First Amendment to the ArtCarved Purchase Agreement, dated as
of November 21, 1996, among the Company, CJC and CJCNA.
**2.3 Letter Agreement amending the ArtCarved Purchase Agreement,
dated December 16, 1996, among the Company, CJC and CJCNA.
**2.4 Amended and Restated Asset Purchase Agreement, dated as of
November 21, 1996 ("Balfour Purchase Agreement"), among the
Company, Town & Country Corporation ("T&C"), L.G. Balfour
Company, Inc. ("Balfour"), and Gold Lance, Inc.
**2.5 Letter Agreement amending the Balfour Purchase Agreement,
dated December 16, 1996, by and among the Company, T&C,
Balfour and Gold Lance.
**3.1 Certificate of Incorporation of the Company, as amended.
**3.2 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 Certificate of Designations, Preferences and Rights of Series
B Preferred Stock of the Company, effective December 13, 1996.
**3.4 Restated By-Laws of the Company, as amended.
**4.1 Indenture, dated as of December 16, 1996, between the Company
and Marine Midland Bank, as trustee (including the form of
Note).
4.2 Form of Note (included as part of Indenture).
**4.3 Registration Rights Agreement, dated as of December 16, 1996,
among the Company and Lehman Brothers Inc. and BT Securities
Corporation (the "Initial Purchasers").
*5.1 Opinion of Schulte Roth & Zabel LLP as to the legality of the
securities being registered.
**8.1 Opinion of Schulte Roth & Zabel LLP regarding certain
federal income tax matters.
**10.1 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 Purchase Agreement, dated December 10, 1996, among the Company
and the Initial Purchasers.
**10.3 Employment Agreement, dated as of December 16, 1996, by and
between the Company and Jeffrey H. Brennan.
- -----------
* Filed herewith
** Previously filed
*** Not Applicable
II-3
<PAGE>
**10.4 Employment Agreement, dated as of December 16, 1996, by and
between the Company and Richard H. Fritsche.
**10.5 Employment arrangements between the Company and Balfour with
respect to George Agle
*10.6 Form of Indemnification Agreement between the Company and
(i) each director and (ii) certain officers.
**10.7 Subscription Agreement, dated as of December 16, 1996, by
and among the Company, Castle Harlan Partners II, L.P.,
Dresdner Bank AG, Grand Cayman Branch and Castle Harlan
Offshore Partners, L.P.; as amended by instruments of
accession, dated as of December 17, 1996, by each of
Branford Castle Holdings, Inc., Leonard M. Harlan, David B.
Pittaway and David H. Chow.
**12 Computation of Ratios.
***21 Subsidiaries of the Company.
*23.1 Consent of Arthur Andersen LLP.
*23.2 Consent of Arthur Andersen LLP.
*23.3 Consent of Arthur Andersen LLP.
*23.4 Consent of Schulte Roth & Zabel LLP (included in the opinion
of Schulte Roth & Zabel LLP under Exhibit 5.1).
*24 Powers of Attorney (included in the signature pages of the
Registration Statement).
**25 Statement on Form T-1 of Eligibility of Trustee (bound
separately).
***27 Financial Data Schedule.
*99.1 Form of Letter of Transmittal.
**99.2 Form of Notice of Guaranteed Delivery.
*99.3 Form of Exchange Agency Agreement to be entered into between
the Company and Marine Midland Bank.
- -----------
* Filed herewith
** Previously filed
*** Not Applicable
Item 22. Undertakings
Insofar as indemnification for liabilities under the Securities Act of
1933 may be permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions, or otherwise, the registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the registrant of expenses incurred
or paid by a director, officer or controlling person of the registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
The undersigned registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act of 1933, each filing of the
registrant's annual report pursuant to Section 13(a) or 15(d) of the Securities
Exchange Act of 1934 (and, where applicable, each filing of an employee benefit
plan's annual report pursuant to Section 15(d) of the Securities Exchange Act of
1934) that is incorporated by reference in the registration statement shall be
deemed to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to be
the initial bona fide offering thereof.
The undersigned registrant hereby undertakes to respond to requests for
information that is incorporated by reference into the Prospectus pursuant to
Items 4, 10(b), 11 or 13 of this Form, within one business day of receipt of
such request, and to send the incorporated documents by first class mail or
other equally prompt means. This
II-4
<PAGE>
includes information contained in documents filed subsequent to the effective
date of the registration statement through the date of responding to the
request.
The undersigned registrant hereby undertakes to supply by means of a
post-effective amendment all information concerning a transaction, and the
company being acquired involved therein, that was not the subject of and
included in the registration statement when it became effective.
II-5
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
hereby has duly caused this Registration Statement to be signed on its behalf by
the undersigned, thereunto duly authorized in the City of New York, State of New
York, on April 11, 1997.
COMMEMORATIVE BRANDS, INC.
By: /s/ Jeffrey H. Brennan
---------------------------------
Name: Jeffrey H. Brennan
Title: President and Chief Executive Officer
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints each of Jeffrey H. Brennan and Richard H.
Fritsche his or her true and lawful attorney-in-fact and agent with the full
power and substitution, for him in any and all capacities, to sign any and all
amendments (including post-effective amendments) or supplements to this
Registration Statement and to file the same, with all the exhibits thereto and
other documents in connection therewith, with the Securities and Exchange
Commission, granting unto each said attorney-in-fact and agent full power and
authority to do and perform each and every act and thing necessary and
appropriate to be done with respect to this Registration Statement or any
amendments or supplements hereto, including without limitation to make any and
all state securities law or blue sky filings, hereby ratifying and confirming
all that each said attorney-in-fact and agent, or his substitutes, may lawfully
do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.
Signature Title Date
--------- ----- ----
/s/ George E. Agle Chairman of the Board April 11, 1997
- ------------------------- and Director
George E. Agle
/s/ Jeffrey H. Brennan President, Chief Executive April 11, 1997
- ------------------------- Officer and Director
Jeffrey H. Brennan
/s/ Richard H. Fritsche Chief Financial Officer April 11, 1997
- ------------------------- and Principal Accounting
Richard H. Fritsche Officer
/s/ John K. Castle Director April 11, 1997
- -------------------------
John K. Castle
/s/ William J. Lovejoy Director April 11, 1997
- -------------------------
William J. Lovejoy
II-6
<PAGE>
/s/ David B. Pittaway Director April 11, 1997
- -------------------------
David B. Pittaway
/s/ Zane Tankel Director April 11, 1997
- -------------------------
Zane Tankel
II-7
<PAGE>
Exhibit Index
**2.1 Asset Purchase Agreement, dated as of May 20, 1996 ("ArtCarved
Purchase Agreement"), among the Company and CJC Holdings, Inc.
("CJC"), and CJC North America, Inc. ("CJCNA").
**2.2 First Amendment to the ArtCarved Purchase Agreement, dated as
of November 21, 1996, among the Company, CJC and CJCNA.
**2.3 Letter Agreement amending the ArtCarved Purchase Agreement,
dated December 16, 1996, among the Company, CJC and CJCNA.
**2.4 Amended and Restated Asset Purchase Agreement, dated as of
November 21, 1996 ("Balfour Purchase Agreement"), among the
Company, Town & Country Corporation ("T&C"), L.G. Balfour
Company, Inc. ("Balfour"), and Gold Lance, Inc.
**2.5 Letter Agreement amending the Balfour Purchase Agreement,
dated December 16, 1996, by and among the Company, T&C,
Balfour and Gold Lance.
**3.1 Certificate of Incorporation of the Company, as amended.
**3.2 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 Certificate of Designations, Preferences and Rights of Series
B Preferred Stock of the Company, effective December 13, 1996.
**3.4 Restated By-Laws of the Company, as amended.
**4.1 Indenture, dated as of December 16, 1996, between the Company
and Marine Midland Bank, as trustee (including the form of
Note).
4.2 Form of Note (included as part of Indenture).
**4.3 Registration Rights Agreement, dated as of December 16, 1996,
among the Company and Lehman Brothers Inc. and BT Securities
Corporation (the "Initial Purchasers").
*5.1 Opinion of Schulte Roth & Zabel LLP as to the legality of the
securities being registered.
**8.1 Opinion of Schulte Roth & Zabel LLP regarding certain
federal income tax matters.
**10.1 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 Purchase Agreement, dated December 10, 1996, among the Company
and the Initial Purchasers.
**10.3 Employment Agreement, dated as of December 16, 1996, by and
between the Company and Jeffrey H. Brennan.
- -----------
* Filed herewith
** Previously filed
*** Not Applicable
<PAGE>
**10.4 Employment Agreement, dated as of December 16, 1996, by and
between the Company and Richard H. Fritsche.
**10.5 Employment arrangements between the Company and Balfour with
respect to George Agle
*10.6 Form of Indemnification Agreement between the Company and
(i) each director and (ii) certain officers.
**10.7 Subscription Agreement, dated as of December 16, 1996, by
and among the Company, Castle Harlan Partners II, L.P.,
Dresdner Bank AG, Grand Cayman Branch and Castle Harlan
Offshore Partners, L.P.; as amended by instruments of
accession, dated as of December 17, 1996, by each of
Branford Castle Holdings, Inc., Leonard M. Harlan, David B.
Pittaway and David H. Chow.
**12 Computation of Ratios.
***21 Subsidiaries of the Company.
*23.1 Consent of Arthur Andersen LLP.
*23.2 Consent of Arthur Andersen LLP.
*23.3 Consent of Arthur Anderson LLP.
*23.4 Consent of Schulte Roth & Zabel LLP (included in the opinion
of Schulte Roth & Zabel LLP under Exhibit 5.1).
*24 Powers of Attorney (included in the signature pages of the
Registration Statement).
**25 Statement on Form T-1 of Eligibility of Trustee (bound
separately).
***27 Financial Data Schedule.
*99.1 Form of Letter of Transmittal.
**99.2 Form of Notice of Guaranteed Delivery.
*99.3 Form of Exchange Agency Agreement to be entered into between
the Company and Marine Midland Bank.
- -----------
* Filed herewith
** Previously filed
*** Not Applicable
April 11, 1997
Commemorative Brands, Inc.
7211 Circle S Road
Austin, Texas 78745
Ladies and Gentlemen:
We have acted as special counsel for Commemorative Brands, Inc., a Delaware
corporation (the "Company"), in connection with (i) the preparation and filing
by the Company with the Securities and Exchange Commission (the "Commission") of
a Registration Statement on Form S-4 (the "Registration Statement") filed by the
Company on the date hereof under the Securities Act of 1933, as amended (the
"Securities Act"), relating to the 11% Senior Subordinated Notes due 2007 of the
Company in the aggregate principal amount of $90,000,000 (the "Exchange Notes")
and (ii) the issuance and exchange of the Exchange Notes pursuant to the terms
of an Indenture, dated as of December 16, 1996 (the "Indenture"), between the
Company and Marine Midland Bank, as trustee (the "Trustee"), qualified to act as
an indenture trustee under the Trust Indenture Act of 1939, as amended, and
pursuant to a Registration Rights Agreement, dated as of December 16, 1996 (the
"Registration Rights Agreement"), among the Company and the Initial Purchasers
(as defined in the Registration Rights Agreement), which agreements are filed as
Exhibits to the Registration Statement. The Exchange Notes are to be offered by
the Company in exchange for $90,000,000 in aggregate principal amount of its
outstanding 11% Senior Subordinated Notes due 2007 (the "Initial Notes").
In this capacity, we have examined originals, telecopies or copies
certified or otherwise identified to our satisfaction, of such records of the
Company and all such agreements, certificates of public officials, certificates
of officers or representatives of the Company and others, and such other
documents, certificates and corporate or other records as we have deemed
necessary or appropriate as a basis for this opinion. In such examination, we
have assumed the genuineness of all signatures, the legal capacity of natural
persons signing or delivering any instrument, the authenticity of all documents
submitted to us as originals, the conformity to
<PAGE>
Commemorative Brands, Inc.
April 11, 1997
Page 2
original documents of all documents submitted to us as certified or photostatic
copies and the authenticity of the originals of such latter documents. As to any
facts material to this opinion that were not independently established or
verified, we have relied upon statements and representations of officers and
other representatives of the Company.
Based on the foregoing, and having such regard for such legal
considerations as we deem relevant, we are of the opinion that, upon the
issuance and exchange of the Exchange Notes in the manner referred to in the
Registration Statement, and when the Exchange Notes are duly authorized and
executed by the Company and authenticated by the Trustee, the Exchange Notes
will be legally issued and binding obligations of the Company, enforceable in
accordance with their terms, subject to applicable bankruptcy, reorganization,
fraudulent conveyance, insolvency, moratorium or other laws affecting creditors'
rights generally from time to time in effect and to general principles of
equity.
We hereby consent to the filing of this opinion as an Exhibit to the
Registration Statement and to the reference to this firm under the heading
"Legal Matters" in the Prospectus included in the Registration Statement. In
giving such consent, we do not thereby admit that we are in the category of
persons whose consent is required under Section 7 of the Securities Act, or the
rules and regulations of the Commission promulgated thereunder.
Very truly yours,
/S/SCHULTE ROTH & ZABEL LLP
Form of
DIRECTORS INDEMNIFICATION AGREEMENT
This DIRECTORS INDEMNIFICATION AGREEMENT made and entered into as of [first
date on the Board] ("Agreement"), by and between COMMEMORATIVE BRANDS, INC., a
Delaware corporation ("Company"), and ___________ ("INDEMNITEE"):
WHEREAS, highly competent persons are becoming more reluctant to serve
publicly-held corporations as directors or in other capacities unless they are
provided with adequate protection through insurance and indemnification against
inordinate risks of claims and actions against them arising out of their service
to and activities on behalf of the corporation; and
WHEREAS, the current difficulties of obtaining adequate insurance and
uncertainties relating to indemnification have increased the difficulty of
attracting and retaining such persons;
WHEREAS, the Board of Directors has determined that the inability to
attract and retain such persons is detrimental to the best interests of the
Company's stockholders and that the Company should act to assure such persons
that there will be increased certainty of such protection in the future; and
WHEREAS, it is reasonable, prudent and necessary for the Company
contractually to obligate itself to indemnify such persons to the fullest extent
permitted by
<PAGE>
applicable law so that they will serve or continue to serve the Company free
from undue concern that they will not be so indemnified; and
WHEREAS, INDEMNITEE is willing to serve, continue to serve and to take on
additional service for or on behalf of the Company on the condition that he be
so indemnified;
NOW, THEREFORE, in consideration of the premises and the covenants
contained herein, the Company and INDEMNITEE do hereby covenant and agree as
follows:
Section 1. Services by INDEMNITEE. INDEMNITEE agrees to continue to serve
as a director of the Company. This Agreement does not create or otherwise
establish any right on the part of INDEMNITEE to be and continue to be nominated
to be a director of the Company.
Section 2. Indemnification. The Company shall indemnify INDEMNITEE to the
fullest extent permitted by applicable law in effect on the date hereof or as
such laws may from time to time be amended. Without diminishing the scope of the
indemnification provided by this Section 2, the rights of indemnification of
INDEMNITEE provided hereunder shall include but shall not be limited to those
rights set forth hereinafter, except to the extent expressly prohibited by
applicable law.
Section 3. Action or Proceeding Other Than an Action by or in the Right of
the Company. INDEMNITEE shall be entitled to the indemnification rights provided
in this section if he is a party or is threatened to be made a party to any
threatened, pending or completed action, suit or proceeding, whether civil,
criminal, administrative or investigative in nature, other than an action by or
in the right of the Company, by reason of the fact that he is
-2-
<PAGE>
or was a director, agent, or fiduciary of the Company or is or was serving at
the request of the Company as a director, agent, or fiduciary of any other
entity or by reason of anything done or not done by him in any such capacity.
Pursuant to this section INDEMNITEE shall be indemnified against expenses
(including attorneys' fees and disbursements), judgments, penalties, fines and
amounts paid in settlement actually and reasonably incurred by him in connection
with such action, suit or proceeding (including, but not limited to, the
investigation, defense or appeal thereof), if he acted in good faith and in a
manner he reasonably believed to be in or not opposed to the best interests of
the Company, and, with respect to any criminal action or proceeding, had no
reasonable cause to believe his conduct was unlawful.
Section 4. Actions by or in the Right of the Company. INDEMNITEE shall be
entitled to the indemnification rights provided in this section if he is a
person who was or is made a party or is threatened to be made a party to any
threatened, pending or completed action or suit brought by or in the right of
the Company to procure a judgment in its favor by reason of the fact that he is
or was a director, agent, or fiduciary of the Company or is or was serving at
the request of the Company as a director, agent, or fiduciary of any other
entity by reason of anything done or not done by him in any such capacity.
Pursuant to this Section INDEMNITEE shall be indemnified against expenses
(including attorneys' fees and disbursements) actually and reasonably incurred
by him in connection with such action or suit (including, but not limited to,
the investigation, defense, settlement or appeal thereof) if he acted in good
faith and in a manner he reasonably believed to be in or not opposed to the best
interests of the Company; provided, however, that no such indemnification shall
be made in
-3-
<PAGE>
respect of any claim, issue or matter as to which applicable law expressly
prohibits such indemnification by reason of an adjudication of liability of
INDEMNITEE to the Company, unless, and only to the extent that, the Court of
Chancery of the State of Delaware or the court in which such action or suit was
brought shall determine upon application that, despite such adjudication of
liability but in view of all the circumstances of the case, INDEMNITEE is fairly
and reasonably entitled to indemnification for such expenses as such court shall
deem proper.
Section 5. Indemnification for Expenses of Successful Party.
Notwithstanding the other provisions of this Agreement, to the extent that
INDEMNITEE has been successful on the merits or otherwise, including, without
limitation, the dismissal of an action without prejudice, in defense of any
action, suit or proceeding referred to in Section 4 hereof, or in defense of any
claim, issue or matter therein, he shall be indemnified against all expenses
(including attorneys' fees and disbursements) actually and reasonably incurred
by him or on his behalf in connection therewith.
Section 6. Indemnification for Expenses of a Witness. To the extent that
INDEMNITEE is, by reason of his or her Corporate Status (as hereinafter
defined), a witness in any proceeding, INDEMNITEE shall be indemnified by the
Company against all expenses actually and reasonably incurred by INDEMNITEE or
on INDEMNITEE's behalf in connection therewith.
Section 7. Partial Indemnification. If INDEMNITEE is only partially
successful in the defense, investigation, settlement or appeal of any action,
suit, investigation or proceeding described in Section 4 hereof, and as a result
is not entitled under Section 5
-4-
<PAGE>
hereof to indemnification by the Company for the total amount of the expenses
(including attorneys' fees and disbursements), judgments, penalties, fines, and
amounts paid in settlement actually and reasonably incurred by him, the Company
shall nevertheless indemnify INDEMNITEE, as a matter of right pursuant to
Section 5 hereof, to the extent INDEMNITEE has been partially successful.
Section 8. Determination of Entitlement to Indemnification. Upon written
request by INDEMNITEE for indemnification pursuant to Section 3 or 4 hereof, the
entitlement of the INDEMNITEE to indemnification pursuant to the terms of this
Agreement shall be determined by the following person or persons who shall be
empowered to make such determination: (a) the Board of Directors of the Company
by a majority vote of the Disinterested Directors (as hereinafter defined) even
though less than a quorum; or (b) if such vote is not obtainable or, even if
obtainable, if such Disinterested Directors so direct by majority vote, by
Independent Counsel (as hereinafter defined) in a written opinion to the Board
of Directors, a copy of which shall be delivered to INDEMNITEE; or (c) by the
stockholders. Such Independent Counsel shall be selected by the Board of
Directors and approved by INDEMNITEE. Upon failure of the Board to so select
such Independent Counsel or upon failure of INDEMNITEE to so approve, such
Independent Counsel shall be selected by the Chancellor of the State of Delaware
or such other person as the Chancellor shall designate to make such selection.
Such determination of entitlement to indemnification shall be made not later
than 60 days after receipt by the Company of a written request for
indemnification. Such request shall include documentation or information which
is necessary for such determination and which is reasonably available to
INDEMNITEE. Any expenses
-5-
<PAGE>
(including attorneys' fees and disbursements) incurred by INDEMNITEE in
connection with his request for indemnification hereunder shall be borne by the
Company. The Company hereby indemnifies and agrees to hold INDEMNITEE harmless
therefrom irrespective of the outcome of the determination of INDEMNITEE's
entitlement to indemnification. If the person making such determination shall
determine that INDEMNITEE is entitled to indemnification as to part (but not
all) of the application for indemnification, such person shall reasonably
prorate such partial indemnification among such claims, issues or matters.
Section 9. Presumptions and Effect of Certain Proceedings. The Secretary of
the Company shall, promptly upon receipt of INDEMNITEE's request for
indemnification, advise in writing the Board of Directors or such other person
or persons empowered to make the determination as provided in Section 8 that
INDEMNITEE has made such request for indemnification. Upon making such request
for indemnification, INDEMNITEE shall be presumed to be entitled to
indemnification hereunder and the Company shall have the burden of proof in the
making of any determination contrary to such presumption. If the person or
persons so empowered to make such determination shall have failed to make the
requested indemnification within 60 days after receipt by the Company of such
request, the requisite determination of entitlement to indemnification shall be
deemed to have been made and INDEMNITEE shall be absolutely entitled to such
indemnification, absent actual and material fraud in the request for
indemnification. The termination of any action, suit, investigation or
proceeding described in Section 3 or 4 hereof by judgment, order, settlement or
conviction, or upon a plea of nolo contendere or its equivalent, shall not, of
itself: (a) create a presumption that INDEMNITEE did not act in good faith and
in a manner which he reasonably believed to
-6-
<PAGE>
be in or not opposed to the best interests of the Company, and, with respect to
any criminal action or proceeding, that INDEMNITEE had reasonable cause to
believe that his conduct was unlawful; or (b) otherwise adversely affect the
rights of INDEMNITEE to indemnification except as may be provided herein.
Section 10. Advancement of Expenses. All reasonable expenses incurred by
INDEMNITEE (including attorneys' fees, retainers and advances of disbursements
required of INDEMNITEE) shall be paid by the Company in advance of the final
disposition of such action, suit or proceeding, whether civil, criminal,
administrative or investigative in nature, at the request of INDEMNITEE within
twenty days after the receipt by the Company of a statement or statements from
INDEMNITEE requesting such advance or advances from time to time. INDEMNITEE's
entitlement to such expenses shall include those incurred in connection with any
proceeding by INDEMNITEE seeking an adjudication or award in arbitration
pursuant to this Agreement. Such statement or statements shall reasonably
evidence the expenses incurred by him in connection therewith and shall include
or be accompanied by an undertaking by or on behalf of INDEMNITEE to repay such
amount if it is ultimately determined that INDEMNITEE is not entitled to be
indemnified against such expenses and costs by the Company as provided by this
Agreement or otherwise. The Company shall have the burden of proof in any
determination under this Section.
Section 11. Remedies of INDEMNITEE in Cases of Determination not to
Indemnify or to Advance Expenses. In the event that a determination is made that
INDEMNITEE is not entitled to indemnification hereunder or if payment has not
been timely made following a determination of entitlement to indemnification
pursuant to Sections 8 and 9,
-7-
<PAGE>
or if expenses are not advanced pursuant to Section 10, INDEMNITEE shall be
entitled to a final adjudication in the Delaware Court of Chancery, first, and
then in any other court of competent jurisdiction of his entitlement to such
indemnification or advance. Alternatively, INDEMNITEE at his option may seek an
award in arbitration to be conducted by a single arbitrator pursuant to the
rules of the American Arbitration Association, such award to be made within
sixty days following the filing of the demand for arbitration. The Company shall
not oppose INDEMNITEE's right to seek any such adjudication or award in
arbitration or any other claim. Such judicial proceeding or arbitration shall be
made de novo and INDEMNITEE shall not be prejudiced by reason of a determination
(if so made) that he is not entitled to indemnification. If a determination is
made or deemed to have been made pursuant to the terms of Section 8 or 9 hereof
that INDEMNITEE is entitled to indemnification, the Company shall be bound by
such determination and is precluded from asserting that such determination has
not been made or that the procedure by which such determination was made is not
valid, binding and enforceable. The Company further agrees to stipulate in any
such court or before any such arbitrator that the Company is bound by all the
provisions of this agreement and is precluded from making any assertion to the
contrary. If the court or arbitrator shall determine that INDEMNITEE is entitled
to any indemnification hereunder, the Company shall pay all reasonable expenses
(including attorneys' fees and disbursements) actually incurred by INDEMNITEE in
connection with such adjudication or award in arbitration (including, but not
limited to, any appellate proceedings).
Section 12. Other Rights to Indemnification. The indemnification and
advancement of expenses (including attorneys' fees and disbursements) provided
by this
-8-
<PAGE>
Agreement shall not be deemed exclusive of any other rights to which INDEMNITEE
may now or in the future be entitled under any provision of the by-laws,
agreement, provision of the Certificate of Incorporation, vote of stockholders
or disinterested directors, provision of law, or otherwise.
Section 13. Attorneys' Fees and Other Expenses To Enforce Agreement. In the
event that INDEMNITEE is subject to or intervenes in any proceeding in which the
validity or enforceability of this Agreement is at issue or seeks an
adjudication or award in arbitration to enforce his rights under, or to recover
damages for breach of, this Agreement, INDEMNITEE, if he prevails in whole or in
part in such action, shall be entitled to recover from the Company and shall be
indemnified by the Company against, any actual expenses for attorneys' fees and
disbursements reasonably incurred by him, provided that in bringing the
advancement action, INDEMNITEE acted in good faith.
Section 14. Duration of Agreement. This Agreement shall apply with respect
to INDEMNITEE's occupation of any of the position(s) described in Sections 3 and
4 of this Agreement prior to the date of this agreement and with respect to all
periods of such service after the date of this Agreement, even though the
INDEMNITEE may have ceased to occupy such positions(s). This Agreement shall be
binding upon the Company and its successors and assigns (including any
transferee of all or substantially all of its assets and any successor by merger
of operation of law) and shall inure to the benefit INDEMNITEE and his spouse,
assigns, heirs, devises, executors, administrators or other legal
representatives. This Agreement supercedes any prior indemnification arrangement
between the Company (or its predecessor) and INDEMNITEE.
-9-
<PAGE>
Section 15. Severability. If any provision of provisions of this Agreement
shall be held to be invalid, illegal or unenforceable for any reason whatsoever:
(a) the validity, legality and enforceability of the remaining provisions of
this Agreement (including without limitation, all portions of any paragraphs of
this Agreement containing any such provision held to be invalid, illegal or
unenforceable, that are not themselves invalid, illegal or unenforceable) shall
not in any way be affected or impaired thereby; and (b) to the fullest extent
possible, the provisions of this Agreement (including, without limitation, all
portions of any paragraph of this Agreement containing any such provision held
to be invalid, illegal or unenforceable, that are not themselves invalid,
illegal or unenforceable) shall be construed so as to give effect to the intent
manifested by the provision held invalid, illegal or unenforceable.
Section 16. Identical Counterparts. This Agreement may be executed in one
or more counterparts, each of which shall for all purposes be deemed to be an
original but all of which together shall constitute one and the same Agreement.
Only one such counterpart signed by the party against whom enforceability is
sought needs to be produced to evidence the existence of this Agreement.
Section 17. Headings. The headings of the paragraphs of this Agreement are
inserted for convenience only and shall not be deemed to constitute part of this
Agreement or to affect the construction thereof.
Section 18. Definitions. For purposes of this Agreement:
(a) "Disinterested Director" shall mean a director of the Company who
is not or was not a party to the action, suit, investigation or proceeding in
respect of which indemnification is being sought by INDEMNITEE.
-10-
<PAGE>
(b) "Independent Counsel" shall mean a law firm or a member of a law
firm that neither is presently nor in the past five years has been retained to
represent: (i) the Company or INDEMNITEE in any matter material to either such
party, or (ii) any other party to the action, suit, investigation or proceeding
giving rise to a claim for indemnification hereunder. Notwithstanding the
foregoing, the term "Independent Counsel" shall not include any person who,
under the applicable standards of professional conduct then prevailing, would
have a conflict of interest in representing either the Company or INDEMNITEE in
an action to determine INDEMNITEE's right to indemnification under this
Agreement.
(c) "Corporate Status" shall mean the status of a person who is or was
a director, officer, employee, agent or fiduciary of the Company or any majority
owned subsidiary or of any other corporation, partnership, joint venture, trust,
employee benefit plan or other enterprise that such person is or was serving at
the request of the Company.
Section 19. Modification and Waiver. No supplement, modification or
amendment of this Agreement shall be binding unless executed in writing by both
of the parties hereto. No waiver of any of the provisions of this Agreement
shall be deemed or shall constitute a waiver of any other provisions hereof
(whether or not similar) nor shall such waiver constitute a continuing waiver.
Section 20. Notice by INDEMNITEE. INDEMNITEE agrees promptly to notify the
Company in writing upon being served with any summons, citation, subpoena,
complaint, indictment, information or other document relating to any matter
which may be subject to indemnification covered hereunder, either civil,
criminal, administrative, investigative or otherwise, provided, however, that
the failure to so notify the Company will
-11-
<PAGE>
not relieve the Company from any liability it may have to INDEMNITEE except to
the extent that such failure materially prejudices the Company's ability to
defend such claim. With respect to any such action, suit, proceeding, inquiry or
investigation as to which INDEMNITEE notifies the Company of the commencement
thereof:
(i) The Company will be entitled to participate therein at its
own expense; and
(ii) Except as otherwise provided below, to the extent that it
may wish, the Company jointly with any other indemnifying party similarly
notified will be entitled to assume the defense thereof, with counsel reasonably
satisfactory to INDEMNITEE. After notice from the Company to INDEMNITEE of its
election so to assume the defense thereof, the Company will not be liable to
INDEMNITEE under this Agreement for any legal or other expenses subsequently
incurred by INDEMNITEE in connection with the defense thereof other than
reasonable costs of investigation or as otherwise provided below. INDEMNITEE
shall have the right to employ his own counsel in such action, suit, proceeding,
inquiry or investigation, but the fees and expenses of such counsel incurred
after notice from the Company of its assumption of the defense thereof shall be
at the expense of INDEMNITEE and not subject to indemnification hereunder unless
(x) the employment of counsel by INDEMNITEE has been authorized by the Company;
(y) in the reasonable opinion of counsel to INDEMNITEE there is or may be a
conflict of interest between he Company and INDEMNITEE in the conduct of the
defense of such action; or (z) the Company shall not in fact have employed
counsel to assume the defense of such action, in each of which cases the fees
and expenses of counsel shall be at the expense of the Company.
-12-
<PAGE>
(b) Neither the Company nor the INDEMNITEE shall settle any Claim
without the prior written consent of the other (which shall not be unreasonably
withheld).
Section 21. Notices. All notices, requests, demands and other
communications hereunder shall be in writing and shall be deemed to have been
duly given if (i) delivered by hand and receipted for by the party to whom said
notice or other communication shall have been directed or if (ii) mailed by
certified or registered mail with postage prepaid, on the third business day
after the date on which it is so mailed:
(a) If to INDEMNITEE, to the address set forth below his signature.
(b) If to the Company to:
Commemorative Brands, Inc.
7211 Circle S Road
Austin, Texas 78745
Attn: Chief Executive Officer
or to such other address as may have been furnished to INDEMNITEE by the Company
or to the Company by INDEMNITEE, as the case may be.
Section 22. Governing Law. The parties agree that this Agreement shall be
governed by, and construed and enforced in accordance with, the laws of the
State of Delaware.
-13-
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Agreement on the
day and year first above written.
COMMEMORATIVE BRANDS, INC.
By:_______________________________
Jeffrey H. Brennan
President and Chief Executive Officer
7211 Circle S Road
Austin, Texas 78745
_____________________________________
[Name]
Address:
-14-
Exhibit 23.1
[Letterhead of Arthur Andersen LLP]
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our report
and to all references to our firm included in or made a part of this
registration statement.
/s/ Arthur Anderson LLP
Houston, Texas
April 10, 1997
Exhibit 23.2
[Letterhead of Arthur Andersen LLP]
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our report
and to all references to our firm included in or made a part of this
registration statement.
/s/ Arthur Anderson LLP
Houston, Texas
April 10, 1997
Exhibit 23.3
[Letterhead of Arthur Andersen LLP]
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our report
and to all references to our firm included in or made a part of this
registration statement.
/s/ Arthur Anderson LLP
Boston, Massachusetts
April 10, 1997
FORM OF LETTER OF TRANSMITTAL EXHIBIT 99.1
THE EXCHANGE OFFER WILL EXPIRE AT 5 P.M., NEW YORK CITY TIME, ON MAY 14,
1997, UNLESS EXTENDED (THE "EXPIRATION DATE"). TENDERS MAY BE WITHDRAWN PRIOR TO
5 P.M., EASTERN STANDARD TIME, ON THE EXPIRATION DATE.
ISSUER:
COMMEMORATIVE BRANDS, INC.
7211 Circle S Road
Austin, Texas 78745
Telephone: (512) 444-0571
Attention: Jeffrey H. Brennan, President and Chief Executive Officer
LETTER OF TRANSMITTAL
FOR 11% SENIOR SUBORDINATED NOTES DUE 2007
EXCHANGE AGENT:
MARINE MIDLAND BANK
By Facsimile:
(212) 658-2298
Attention: Corporate Trust Operations
Confirm by telephone:
(212) 658-6524
By Registered or Certified Mail:
Marine Midland Bank
140 Broadway, A Level
New York, New York 10005-1180
Attention: Corporate Trust Operations
By Hand:
Marine Midland Bank
140 Broadway, A Level
New York, New York 10005-1180
Attention: Corporate Trust Operations
By Overnight Courier:
Marine Midland Bank
140 Broadway, A Level
New York, New York 10005-1180
Attention: Corporate Trust Operations
DELIVERY OF THIS INSTRUMENT TO AN ADDRESS OTHER THAN AS SET FORTH ABOVE
DOES NOT CONSTITUTE A VALID DELIVERY.
-1-
<PAGE>
The undersigned acknowledges receipt of the Prospectus dated April 14, 1997 (the
"Prospectus") of Commemorative Brands, Inc. (the "Company" or the "Issuer") and
this Letter of Transmittal for 11% Senior Subordinated Notes Due 2007, which may
be amended from time to time (this "Letter"). The Prospectus and Letter together
constitute the Issuer's offer to exchange $1,000 in principal amount of its 11%
Senior Subordinated Notes Due 2007 ("Exchange Notes"), for each $1,000 in
principal amount of its outstanding 11% Senior Subordinated Notes Due 2007 that
were issued and sold in a transaction exempt from registration under the
Securities Act of 1933, as amended ("Initial Notes").
The undersigned has completed, executed and delivered this Letter to
indicate the action he or she desires to take with respect to the Exchange
Offer.
All holders of Initial Notes who wish to tender their Initial Notes must,
prior to the Expiration Date: (1) complete, sign, date and mail or otherwise
deliver this Letter to the Exchange Agent, in person or to the address set forth
above; and (2) tender his or her Initial Notes or, if a tender of Initial Notes
is to be made by book-entry transfer to the account maintained by the Exchange
Agent at The Depository Trust Company (the "Book-Entry Transfer Facility"),
confirm such book-entry transfer (a "Book-Entry Confirmation"), in each case in
accordance with the procedures for tendering described in the Instructions to
this Letter. Holders of Initial Notes whose certificates are not immediately
available, or who are unable to deliver their certificates or Book-Entry
Confirmation and all other documents required by this Letter to be delivered to
the Exchange Agent on or prior to the Expiration Date, must tender their Initial
Notes according to the guaranteed delivery procedures set forth under the
caption "The Exchange Offer - Tender Procedure" in the Prospectus. (See
Instruction 1).
The Instructions included with this Letter must be followed in their
entirety. Questions and requests for assistance or for additional copies of the
Prospectus or this Letter may be directed to the Exchange Agent, at the address
listed above, or Jeffrey H. Brennan, President and Chief Executive Officer of
the Company, at (512) 444-0571, 7211 Circle S Road, Austin, Texas 78745.
-2-
<PAGE>
PLEASE READ THE ENTIRE LETTER OF TRANSMITTAL, INCLUDING
THE INSTRUCTIONS TO THIS LETTER, CAREFULLY
BEFORE CHECKING ANY BOX BELOW
Capitalized terms used in this Letter and not defined herein shall have the
respective meanings ascribed to them in the Prospectus.
List in Box 1 below the Initial Notes of which you are the holder. If the
space provided in Box 1 is inadequate, list the certificate numbers and
principal amount of Initial Notes on a separate SIGNED schedule and affix that
schedule to this Letter.
BOX 1
TO BE COMPLETED BY ALL TENDERING HOLDERS
<TABLE>
<CAPTION>
Name(s) and Address(es) of Principal Amount of
Registered Holder(s) Certificate Principal Amount of Initial Notes
(Please Fill in if Blank) Numbers(s) (1) Initial Notes Tendered (2)
- ---------------------------------- ---------------------------- ---------------------------------- -----------------------------
<S> <C> <C> <C>
Totals:
</TABLE>
(1) Need not be completed if Initial Notes are being tendered by book-entry
transfer.
(2) Unless otherwise indicated, the entire principal amount of Initial Notes
represented by a certificate or Book-Entry Confirmation delivered to the
Exchange Agent will be deemed to have been tendered.
-3-
<PAGE>
Ladies and Gentlemen:
Upon the terms and subject to the conditions of the Exchange Offer, the
undersigned tenders to the Issuer the principal amount of Initial Notes
indicated above. Subject to, and effective upon, the acceptance for exchange of
the Initial Notes tendered with this Letter, the undersigned hereby exchanges,
assigns and transfers to, or upon the order of, the Issuer all right, title and
interest in and to the Initial Notes tendered.
The undersigned hereby irrevocably constitutes and appoints the Exchange
Agent as the undersigned's agent and attorney-in-fact to cause the Initial Notes
to be assigned, transferred and exchanged. The undersigned represents and
warrants that it has full power and authority to tender, exchange, assign and
transfer the Initial Notes and to acquire Exchange Notes issuable upon the
exchange of such tendered Initial Notes, and that, when the same are accepted
for exchange, the Issuer will acquire good and unencumbered title to the
tendered Initial Notes, free and clear of all liens, restrictions, charges and
encumbrances and not subject to any adverse claim. The undersigned also warrants
that it will, upon request, execute and deliver any additional documents deemed
by the Issuer to be necessary or desirable to complete the exchange, assignment
and transfer of tendered Initial Notes or transfer ownership of such Initial
Notes on the account books maintained by a book-entry transfer facility. The
undersigned further agrees that acceptance of any tendered Initial Notes by the
Issuer and the issuance of Exchange Notes in exchange therefore shall constitute
performance in full by the Issuer of certain of its obligations under the
Registration Rights Agreement. All authority conferred by the undersigned will
survive the death or incapacity of the undersigned and every obligation of the
undersigned shall be binding upon the heirs, legal representatives, successors,
assigns, executors and administrators of such undersigned.
The undersigned hereby certifies that it is not an "affiliate" of the
Issuer within the meaning of Rule 405 under the Securities Act and that it is
acquiring the Exchange Notes offered hereby in the ordinary course of such
undersigned's business and that such undersigned has no arrangement or
understanding with any person to participate in the distribution of such
Exchange Notes. The undersigned hereby acknowledges that it is not engaged in,
and does not intend to engage in, a distribution of Exchange Notes. The
undersigned, if it is a broker-dealer holding Initial Notes acquired for its own
account, hereby acknowledges that it will deliver a prospectus meeting the
requirements of the Securities Act in connection with any resale of such
Exchange Notes. By so acknowledging and by delivering a prospectus, a
broker-dealer will not be deemed to admit that it is an "underwriter" within the
meaning of the Securities Act. The Prospectus, as it may be amended or
supplemented from time to time, may be used by a broker-dealer in connection
with resales of Exchange Notes received in exchange for Initial Notes where such
Initial Notes were acquired by such broker-dealer as a result of market-making
activities or other trading activities. The Issuer will make the Prospectus
available to any broker-dealer for use in connection with any such resale for a
period of one year from the date in which the Registration Statement is a part
is declared effective.
The undersigned understands that the Issuer may accept the undersigned's
tender by delivering written notice of acceptance to the Exchange Agent, at
which time the undersigned's right to withdraw such tender will terminate.
All authority conferred or agreed to be conferred by this Letter shall
survive the death or incapacity of the undersigned, and every obligation of the
undersigned under this Letter shall be binding upon the undersigned's heirs,
personal representatives, successors and assigns. Tenders may be withdrawn only
in accordance with the procedures set forth in the Instructions contained in
this Letter.
-4-
<PAGE>
Unless otherwise indicated under "Special Delivery Instructions" below, the
Exchange Agent will deliver Exchange Notes (and, if applicable, a certificate
for any Initial Notes not tendered but represented by a certificate also
encompassing Initial Notes which are tendered) to the undersigned at the address
set forth in Box 1.
-5-
<PAGE>
The undersigned acknowledges that the Exchange Offer is subject to the more
detailed terms set forth in the Prospectus and, in case of any conflict between
the terms of the Prospectus and this Letter, the Prospectus shall prevail.
[ ] CHECK HERE IF TENDERED INITIAL NOTES ARE BEING DELIVERED BY
BOOK-ENTRY TRANSFER MADE TO THE ACCOUNT MAINTAINED BY THE EXCHANGE
AGENT WITH THE BOOK-ENTRY TRANSFER FACILITY AND COMPLETE THE FOLLOWING:
Name of Tendering Institution:_____________________________________________
Account Number:____________________________________________________________
Transaction Code Number:___________________________________________________
[ ] CHECK HERE IF TENDERED INITIAL NOTES ARE BEING DELIVERED PURSUANT TO
A NOTICE OF GUARANTEED DELIVERY PREVIOUSLY SENT TO THE EXCHANGE AGENT
AND COMPLETE THE FOLLOWING:
Name(s) of Registered Owner(s):____________________________________________
Date of Execution of Notice of Guaranteed Delivery:________________________
Window Ticket Number (if available):_______________________________________
Name of Institution which Guaranteed Delivery:_____________________________
-6-
<PAGE>
PLEASE READ THE ACCOMPANYING INSTRUCTIONS CAREFULLY
BOX 2
PLEASE SIGN HERE
WHETHER OR NOT INITIAL NOTES ARE BEING
PHYSICALLY TENDERED HEREBY
X _____________________________________________ ______________
X _____________________________________________ ______________
SIGNATURE(S) OF OWNER(S) OR AUTHORIZED DATE
SIGNATORY
Area Code and Telephone Number:________________________________________________
This box must be signed by registered holder(s) of Initial Notes as their
name(s) appear(s) on certificates(s) for Initial Notes, or by person(s)
authorized to become registered holder(s) by endorsement and documents
transmitted with this Letter. If signature is by a trustee, executor,
administrator, guardian, officer or other person acting in a fiduciary or
representative capacity, such person must set forth his or her full title below.
(See Instruction 3)
Name(s)________________________________________________________________________
_______________________________________________________________________________
(PLEASE PRINT)
Capacity_______________________________________________________________________
Address________________________________________________________________________
_____________________________________________________________(INCLUDE ZIP CODE)
Signature(s) Guaranteed __________________________________
by an Eligible Institution: (AUTHORIZED SIGNATURE)
(If required by Instruction 3) __________________________________
(TITLE)
__________________________________
(NAME OF FIRM)
-7-
<PAGE>
BOX 3
TO BE COMPLETED BY ALL TENDERING HOLDERS
PAYOR'S NAME: MARINE MIDLAND BANK
<TABLE>
<S> <C> <C>
SUBSTITUTE PART 1 - Please provide your TIN Social Security Number or
FORM W-9 in the space at right and certify by Employer Identification Number
DEPARTMENT OF signing and dating below. __________________________________
THE TREASURY
INTERNAL REVENUE
SERVICE
===========================================================================
PAYOR'S REQUEST PART 2 - Check the box if you are NOT subject to backup withholding under
FOR TAXPAYER the provisions of Section 2406(a) (1) (C) of the Internal Revenue Code
IDENTIFICATION because (1) you have not been notified that you are subject to back-up
NUMBER (TIN) withholding as a result of failure to report all interest or dividends or
(2) the Internal Revenue Service has notified you that you are no longer
subject to back-up withholding.
[ ]
===========================================================================
CERTIFICATION - UNDER THE PENALTIES OF PERJURY, I CERTIFY THAT THE
INFORMATION PROVIDED ON THIS FORM IS TRUE, CORRECT, AND COMPLETE.
SIGNATURE____________________________DATE_______________
===========================================================================
PART 3 - Check if Awaiting TIN [ ]
</TABLE>
-8-
<PAGE>
BOX 4
To be completed ONLY if certificates for Initial Notes in a principal amount not
exchanged, or Exchange Notes, are to be issued in the name of someone other than
the person whose signature appears in Box 2, or if Initial Notes delivered by
book-entry transfer which are not accepted for exchange are to be returned by
credit to an account maintained at the Book-Entry Transfer Facility other than
the account indicated above.
Issue and deliver: (check appropriate boxes)
[ ] Initial Notes not tendered
[ ] Exchange Notes to: Name___________________________________
(PLEASE PRINT)
Address________________________________
_______________________________________
Please complete the Substitute Form W-9 at Box 3
________________________________________________
(TAX I.D. or SOCIAL SECURITY NUMBER)
BOX 5
SPECIAL DELIVERY INSTRUCTIONS
(SEE INSTRUCTIONS 3 AND 4)
To be completed ONLY if certificates for Initial Notes in a principal amount not
exchanged, or Exchange Notes, are to be sent to someone other than the person
whose signature appears in Box 2 or to an address other than that shown in Box
1.
Deliver: (check appropriate boxes)
[ ] Initial Notes not tendered
[ ] Exchange Notes, to: Name___________________________________
(PLEASE PRINT)
Address________________________________
-9-
<PAGE>
INSTRUCTIONS
FORMING PART OF THE TERMS AND
CONDITIONS OF THE EXCHANGE OFFER
1. DELIVERY OF THIS LETTER AND CERTIFICATES. Certificates for Initial Notes
or a Book-Entry Confirmation, as the case may be, as well as a properly
completed and duly executed copy of this Letter and any other documents required
by this Letter, must be received by the Exchange Agent at one of its addresses
set forth herein on or before the Expiration Date. The method of delivery of
this Letter, certificates for Initial Notes or a Book-Entry Confirmation, as the
case may be, and any other required documents is at the election and risk of the
tendering holder, but except as otherwise provided below, the delivery will be
deemed made when actually received by the Exchange Agent. If delivery is by
mail, the use of registered mail with return receipt requested, properly
insured, is suggested.
Holders whose Initial Notes are not immediately available or who cannot
deliver their Initial Notes or Book-Entry Confirmation, as the case may be, and
all other required documents to the Exchange Agent before the Expiration Date
may tender their Initial Notes pursuant to the guaranteed delivery procedures
set forth in the Prospectus. Pursuant to such procedure: (i) tender must be made
by or through an Eligible Institution (as defined in the Prospectus under the
caption "The Exchange Offer Tender Procedure"); (ii) on or prior to the
Expiration Date, the Exchange Agent must have received from the Eligible
Institution a properly completed and duly executed Notice of Guaranteed Delivery
by letter, telegram or facsimile transmission (receipt confirmed by telephone
and an original delivered by guaranteed overnight courier) (x) setting forth the
name and address of the holder, the names in which the Initial Notes are
registered and, if possible, the certificate numbers of the Initial Notes to be
tendered, (y) stating that the tender is being made thereby and (z) guaranteeing
that, within three New York Stock Exchange trading dates after the date of
execution of such Notice of Guaranteed Delivery by an Eligible Institution, this
Letter together with the Initial Notes, in proper form for transfer (or a
confirmation of book-entry transfer of such Initial Notes into the Exchange
Agent's account at the book-entry transfer facility and any other documents
required by this Letter will be deposited by the Eligible Institution with the
Exchange Agent; and (iii) the certificates for all tendered Initial Notes or a
Book-Entry Confirmation, as the case may be, as well as all other documents
required by this Letter, must be received by the Exchange Agent within five New
York Stock Exchange trading days after the date of execution of such Notice of
Guaranteed Delivery, all as provided in the Prospectus under the caption "The
Exchange Offer - Tender Procedure".
All questions as to the validity, form, eligibility (including time of
receipt) and acceptance for exchange of any tender of Initial Notes will be
determined by the Issuer, whose determination will be final and binding. The
Issuer reserves the absolute right to reject any Initial Notes not properly
tendered or the acceptances for exchange of which may, in the opinion of the
Issuer's counsel, be unlawful. The Issuer also reserves the absolute right to
waive any of the conditions of the Exchange Offer or any defect or irregularity
in the tender of any Initial Notes. Unless waived, any defects or irregularities
in connection with tenders of Initial Notes for exchange must be cured within
such reasonable period of time as the Issuer shall determine. None of the
Issuer, the Exchange Agent or any other person will be under any duty to give
notification of any defects or irregularities in tenders or incurs any liability
for failure to give any such notification. Tenders will not be deemed to be made
until such irregularities have been cured or waived.
All tendering holders, by execution of this Letter, waive any right to
receive notice of acceptance of their Initial Notes.
-10-
<PAGE>
2. PARTIAL TENDERS; WITHDRAWALS. If less than the entire principal amount
of any Initial Note evidenced by a submitted certificate or a Book-Entry
Confirmation is tendered, the tendering holder must fill in the principal amount
tendered in the fourth column in Box 1 above. All of the Initial Notes
represented by a Book-Entry Confirmation delivered to the Exchange Agent will be
deemed to have been tendered unless otherwise indicated. A certificate for
Initial Notes not tendered will be sent to the holder, unless otherwise provided
in Box 5, as soon as practicable after the Expiration Date, in the event that
less than the entire principal amount of Initial Notes represented by a
submitted certificate is tendered (or, in the case of Initial Notes tendered by
book-entry transfer, such non-exchanged Initial Notes will be credited to an
account maintained by the holder with the Book-Entry Transfer Facility).
If not yet accepted, a tender pursuant to the Exchange Offer may be
withdrawn prior to the Expiration Date. To be effective with respect to the
tender of Initial Notes, a notice of withdrawal must: (i) be received by the
Exchange Agent at its address set forth in this Letter and, with respect to a
facsimile transmission, must be confirmed by telephone and an original delivered
by guaranteed overnight delivery, before the Issuer notifies the Exchange Agent
that it has accepted the tender of Initial Notes pursuant to the Exchange Offer;
(ii) specify the person named in this Letter as having tendered Initial Notes to
be withdrawn; (iii) contain the certificate numbers of the Initial Notes to be
withdrawn and the principal amount of Initial Notes to be withdrawn, (iii) a
statement that the holder of the Initial Notes to be withdrawn is withdrawing
his, her or its election to have such Initial Notes exchanged, (iv) the name of
the registered Holder of the Initial Notes to be withdrawn and (v) be signed by
the holder in the same manner as the original signature on this Letter
(including any required signature guarantees) or be accompanied by evidence
satisfactory to the Company that the person withdrawing the tender has succeeded
to the beneficial ownership of the Initial Notes being withdrawn. The Exchange
Agent will return the properly withdrawn Initial Notes promptly following
receipt of notice of withdrawal. If Initial Notes have been tendered pursuant to
the procedure for book-entry transfer, any notice of withdrawal must specify the
name and number of the account at the book-entry transfer facility procedure.
All Questions as to the validity of notices of withdrawal, including time of
receipt, will be determined by the Issuer, and such determination will be final
and binding on all parties.
3. SIGNATURES ON THIS LETTER; ASSIGNMENTS; GUARANTEE OF SIGNATURES. If this
Letter is signed by the holder(s) of Initial Notes tendered hereby, the
signature must correspond with the name(s) as written on the face of the
certificate(s) for such Initial Notes, without alteration, enlargement or any
change whatsoever.
If any of the Initial Notes tendered hereby are owned by two or more joint
owners, all owners must sign this Letter. If any tendered Initial Notes are held
in different names on several certificates, it will be necessary to complete,
sign and submit as many separate copies of this Letter as there are names in
which certificates are held.
If this Letter is signed by the holder of record and (i) the entire
principal amount of the holder's Initial Notes are tendered; and/or (ii)
untendered Initial Notes, if any, are to be issued to the holder of record, then
the holder of record need not endorse any certificates for tendered Initial
Notes, nor provide a separate bond power. In any other case, the holder of
record must transmit a separate bond power with this Letter.
If this Letter or any certificate or assignment is signed by trustees,
executors, administrators, guardians, attorneys-in-fact, officers of
corporations or others acting in a fiduciary or representative capacity, such
persons should so indicate when signing and proper evidence satisfactory to the
Issuer of their authority to so act must be submitted, unless waived by the
Issuer.
-11-
<PAGE>
Signatures on this Letter must be guaranteed by an Eligible Institution,
unless Initial Notes are tendered: (i) by a holder who has not completed the Box
entitled "Special Issuance Instructions" or "Special Delivery Instructions" on
this Letter; or (ii) for the account of an Eligible Institution. In the event
that the signatures in this Letter or a notice of withdrawal, as the case may
be, are required to be guaranteed, such guarantees must be by an eligible
guarantor institution which is a member of The Securities Transfer Agents
Medallion Program (STAMP), The New York Stock Exchanges Medallion Signature
Program (MSP) or The Stock Exchanges Medallion Program (SEMP) (collectively,
"Eligible Institutions"). If Initial Notes are registered in the name of a
person other than the signer of this Letter, the Initial Notes surrendered for
exchange must be endorsed by, or be accompanied by a written instrument or
instruments of transfer or exchange, in satisfactory form as determined by the
Issuer, in its sole discretion, duly executed by the registered holder with the
signature thereon guaranteed by an Eligible Institution.
4. SPECIAL ISSUANCE AND DELIVERY INSTRUCTIONS. Tendering holders should
indicate, in Box 4 or 5, as applicable, the name and address to which the
Exchange Notes or certificates for Initial Notes not exchanged are to be issued
or sent, if different from the name and address of the person signing this
Letter. In the case of issuance in a different name, the Tax Identification
Number ("TIN") of the person named must also be indicated. Holders tendering
Initial Notes by book-entry transfer may request that Initial Notes not
exchanged be credited to such account maintained at the Book-Entry Transfer
Facility as such holder may designate.
5. TAX IDENTIFICATION NUMBER. Federal income tax law requires that a holder
whose tendered Initial Notes are accepted for exchange must provide the Exchange
Agent (as payor) with his or her correct TIN, which, in the case of a holder who
is an individual, is his or her social security number. If the Exchange Agent is
not provided with the correct TIN, the holder may be subject to a $50 penalty
imposed by the Internal Revenue Service. In addition, delivery to the holder of
the Exchange Notes pursuant to the Exchange Offer may be subject to back-up
withholding. (If withholding results in overpayment of taxes, a refund may be
obtained.) Exempt holders (including, among others, all corporations and certain
foreign individuals) are not subject to these back-up withholding and reporting
requirements. See the enclosed Guidelines for Certification of Taxpayer
Identification Number on Substitute Form W-9 for additional instructions.
Under federal income tax laws, payments that may be made by the Issuer on
account of Exchange Notes issued pursuant to the Exchange Offer may be subject
to back-up withholding at a rate of 31%. In order to prevent back-up
withholding, each tendering holder must provide his or her correct TIN by
completing the "Substitute Form W-9" referred to above, certifying that the TIN
provided is correct (or that the holder is awaiting a TIN) and that: (i) the
holder has not been notified by the Internal Revenue Service that he or she is
subject to back-up withholding as a result of failure to report all interest or
dividends; or (ii) the Internal Revenue Service has notified the holder that he
or she is no longer subject to back-up withholding; or (iii) in accordance with
the Guidelines, such holder is exempt from back-up withholding. If the Initial
Notes are in more than one name or are not in the name of the actual owner,
consult the enclosed guidelines for information on which TIN to report.
6. TRANSFER TAXES. Holders who tender their Initial Notes for exchange will
not be obligated to pay any transfer taxes in connection therewith, except that
Holders who instruct the Issuer to register Exchange Notes in the name of, or
request that Initial Notes not tendered or tendered but not accepted in the
Exchange Offer be returned to, a person other than the registered tendering
Holder will be responsible for the payment of any applicable transfer tax
thereon.
-12-
<PAGE>
Except as provided in this Instruction 6, it will not be necessary for
transfer tax stamps to be affixed to the certificates listed in this Letter.
7. WAIVER OF CONDITIONS. The Issuer reserves the right to amend or waive,
in whole or in part, any of the specified conditions in the Exchange Offer in
the case of any Initial Notes tendered, based on the reasonable judgment of the
Issuer.
8. MUTILATED, LOST, STOLEN OR DESTROYED CERTIFICATES. Any holder whose
certificates for Initial Notes have been mutilated, lost, stolen or destroyed
should contact the Exchange Agent at the address indicated above, for further
instructions.
9. REQUESTS FOR ASSISTANCE OR ADDITIONAL COPIES. Questions relating to the
procedure for tendering, as well as requests for additional copies of the
Prospectus or this Letter, may be directed to the Exchange Agent.
IMPORTANT: This Letter (together with certificates representing tendered
Initial Notes or a Book-Entry Confirmation and all other required documents)
must be received by the Exchange Agent on or before the Expiration Date (as
defined in the Prospectus).
-13-
April __, 1997
FORM OF EXCHANGE AGENT AGREEMENT
Marine Midland Bank
140 Broadway, 12th Floor
New York, New York 10005-1180
Ladies and Gentlemen:
Commemorative Brands, Inc. (formerly known as Scholastic Brands, Inc.), a
Delaware corporation (the "Company"), proposes to make an offer (the "Exchange
Offer") to exchange its 11% Senior Subordinated Notes Due 2007 (the "Original
Notes") for its registered 11% Senior Subordinated Notes Due 2007 (the "Exchange
Notes"). The terms and conditions of the Exchange Offer as currently
contemplated are set forth in a prospectus, dated April __, 1997 (the
"Prospectus"), proposed to be distributed to all record holders of the Original
Notes. The Original Notes and the Exchange Notes are collectively referred to
herein as the "Notes" or the "Securities."
The Company hereby appoints Marine Midland Bank to act as exchange agent
(the "Exchange Agent") in connection with the Exchange Offer. References
hereinafter to "you" shall refer to Marine Midland Bank.
The Exchange Offer is expected to be commenced by the Company on or about
April 15, 1997. The Letter of Transmittal accompanying the Prospectus is to be
used by the holders of the Original Notes to accept the Exchange Offer, and
contains instructions with respect to the delivery of Original Notes tendered.
The Exchange Agent obligations with respect to receipt and inspection of the
Letter of Transmittal in connection with this Exchange Offer shall be satisfied
for all purposes hereof by inspection of the electronic message transmitted to
the Exchange Agent by Exchange Offer participants in accordance with the
Automated Tender Offer Program ("ATOP") of the Depository Trust Company ("DTC"),
and by otherwise observing and complying with all procedures established by DTC
in connection with ATOP.
The Exchange Offer shall expire at 5:00 p.m., New York City time, on May
14, 1997 or on such later date or time to which the Company may extend the
Exchange Offer (the
<PAGE>
"Expiration Date"). Subject to the terms and conditions set forth in the
Prospectus, the Company expressly reserves the right to extend the Exchange
offer from time to time and may extend the Exchange Offer by giving oral
(confirmed in writing) or written notice to you before 5:00 p.m., New York City
time, on the business day following the previously scheduled Expiration Date,
and in such case the term "Expiration Date" shall mean the time and date on
which such Exchange Offer as so extended shall expire.
The Company expressly reserves the right to delay, amend or terminate the
Exchange Offer, and not to accept for exchange any Original Notes not
theretofore accepted for exchange, upon the occurrence of any of the conditions
of the Exchange Offer specified in the Prospectus under the caption "The
Exchange Offer." The Company will give to you as promptly as practicable oral
(confirmed in writing) or written notice of any delay, amendment, termination or
nonacceptance.
In carrying out your duties as Exchange Agent, you are to act in accordance
with the following instructions:
1. You will perform such duties and only such duties as are specifically
set forth herein or in the section of the Prospectus captioned "The Exchange
Offer" and such duties which are necessarily incidental thereto.
2. You will establish an account with respect to the Original Notes at The
Depository Trust Company (the "Book-Entry Transfer Facility") for purposes of
the Exchange Offer within two business days after the date of the Prospectus,
and any financial institution that is a participant in the Book-Entry Transfer
Facility's systems may make book-entry delivery of the Original Notes by causing
the Book-Entry Transfer Facility to transfer such Original Notes into your
account in accordance with the Book-Entry Transfer Facility's procedure for such
transfer.
3. You are to examine each of the Letters of Transmittal and Original Notes
(or confirmation of book-entry transfer into your account at the Book-Entry
Transfer Facility) and any other documents delivered or mailed to you by or for
holders of the Original Notes to ascertain whether: (i) the Letters of
Transmittal and any such other documents are duly executed and properly
completed in accordance with instructions set forth therein and in the
Prospectus and (ii) the Original Notes have otherwise been properly tendered. In
each case where the Letter of Transmittal or any other document has been
improperly completed or executed or any of the Original Notes are not in proper
form for transfer or some other irregularity in connection with the acceptance
of the Exchange Offer exists, you will endeavor to inform the presenters of the
need for fulfillment of all requirements and to take any other action as may be
necessary or advisable to cause such irregularity to be corrected.
4. With the approval of the Chairman of the Board, the President, or any
Vice President of the Company (such approval, if given orally, promptly to be
confirmed in writing) or any other party designated by such officer in writing,
you are authorized to waive any irregularities in connection with any tender of
Original Notes pursuant to the Exchange Offer.
<PAGE>
5. Tenders of Original Notes may be made only as bet forth in the Letter of
Transmittal and in the section of the Prospectus captioned "The Exchange Offer -
Tender Procedure" and Original Notes shall be considered properly tendered to
you only when tendered in accordance with the procedures set forth therein.
Notwithstanding the provisions of this paragraph 5, Original Notes which
the Chairman of the Board, the President or any Vice President of the Company or
any other party designated by any such officer in writing shall approve as
having been properly tendered shall be considered to be properly tendered (such
approval, if given orally, promptly shall be confirmed in writing).
6. You shall advise the Company with respect to any Original Notes
delivered subsequent to the Expiration Date and accept its instructions with
respect to disposition of such Original Notes.
7. You shall accept tenders:
(a) in cases where the Original Notes are registered in two or more
names only if signed by all named holders;
(b) in cases where the signing person (as indicated on the Letter of
Transmittal) is acting in a fiduciary or a representative capacity only when
proper evidence of his or her authority so to act is submitted, and
(c) from persons other than the registered holder of Original Notes
provided that customary transfer requirements, including any applicable transfer
taxes, are fulfilled.
You shall accept partial tenders of Original Notes where so indicated and
as permitted in the Letter of Transmittal and deliver the Original Notes to the
transfer agent for split-up and return any untendered Original Notes to the
holder (or such other person as may be designated in the Letter of Transmittal)
as promptly as practicable after expiration or termination of the Exchange
Offer.
8. Upon satisfaction or waiver of all of the conditions to the Exchange
Offer, the Company will notify you (such notice if given orally, promptly to be
confirmed in writing) of its acceptance, promptly after the Expiration Date, of
all original Notes properly tendered and you, on behalf of the Company, will
exchange such Original Notes for Exchange Notes and cause such Original Notes to
be canceled. Delivery of Exchange Notes will be made on behalf of the Company by
you at the rate of $1,000 principal amount of Exchange Notes for each $1,000
principal amount of the Original Notes tendered promptly after notice (such
notice if given orally, promptly to be confirmed in writing) of acceptance of
said Original Notes by the Company provided, however, that in all cases,
Original Notes tendered pursuant to the Exchange Offer will be exchanged only
after timely receipt by you of certificates for such Original Notes (or
confirmation of book-entry transfer into your account at the Book-Entry Transfer
Facility), a properly completed and duly executed Letter of Transmittal (or
facsimile thereof, or an Agent's Message (as defined in the Prospectus) in lieu
thereof) with any required signature guarantees
<PAGE>
and any other required document. You shall issue Exchange Notes only in
denominations of $1,000 or any integral multiple thereof.
9. Tenders pursuant to the Exchange Offer are irrevocable, except that,
subject to the terms and upon the conditions set forth in the Prospectus and the
Letter of Transmittal, Original Notes tendered pursuant to the Exchange Offer
may be withdrawn at any time prior to the Expiration Date.
10. The Company shall not be required to exchange any Original Notes
tendered if any of the conditions set forth in the Exchange Offer are not met.
Notice of any decision by the Company not to exchange any Original Notes
tendered shall be given (such notices if given orally, promptly shall be
confirmed in writing) by the Company to you.
11. If, pursuant to the Exchange Offer, the Company does not accept for
exchange all or part of the Original Notes tendered because of an invalid
tender, the occurrence of certain other events set forth in the Prospectus under
the caption "The Exchange Offer" or otherwise, you shall as soon as practicable
after the expiration or termination of the Exchange Offer return those
certificates for unaccepted Original Notes (or effect appropriate book-entry
transfer), together with any related required documents and the Letters of
Transmittal relating thereto that are in your possession, to the persons who
deposited them.
12. All reissued Original Notes, unaccepted Original Notes or Exchange
Notes shall be forwarded by (a) first-class mail, postage pre-paid under a
blanket surety bond protecting you and the Company from loss or liability
arising out of the non-receipt or non-delivery of such certificates or (b) by
registered mail insured separately for the replacement value of each of such
certificates.
13. You are not authorized to pay or offer to pay any concessions,
commissions or solicitation fees to any broker, dealer, bank or other persons or
to engage or utilize any persons to solicit tenders.
14. As Exchange Agent hereunder you:
(a) will be regarded as making no representations and having no
responsibilities as to the validity, sufficiency, value or genuineness of any of
the Original Notes deposited with you pursuant to the Exchange Offer, and will
not be required to and will make no representation as to the validity, value or
genuineness of the Exchange Offer;
(b) shall not be obligated to take any legal action hereunder which
might in your reasonable judgment involve any expense or liability, unless you
shall have been furnished with reasonable indemnity;
(c) shall not be liable to the Company for any action taken or omitted
by you, or any action suffered by you to be taken or omitted, without
negligence, misconduct or bad faith on your part, by reason of or as a result of
the administration of your duties hereunder in accordance with the terms and
conditions of this Agreement or by reason of your compliance
<PAGE>
with the instructions set forth herein or with any written or oral instructions
delivered to you pursuant hereto, and may reasonably rely on and shall be
protected in acting in good faith in reliance upon any certificate, instrument,
opinion, notice, letter, facsimile or other document or security delivered to
you and reasonably believed by you to be genuine and to have been signed by the
proper party or parties;
(d) may reasonably act upon any tender, statement, request, comment,
agreement or other instrument whatsoever not only as to its due execution and
validity and effectiveness of its provisions, but also as to the truth and
accuracy of any information contained therein, which you shall in good faith
reasonably believe to be genuine or to have been signed or represented by a
proper person or persons;
(e) may rely on and shall be protected in acting upon written notice
or oral instructions (confirmed in writing) from any officer of the Company with
respect to the Exchange Offer;
(f) shall not advise any person tendering Original Notes pursuant to
the Exchange Offer as to the wisdom of making such tender or as to the market
value or decline or appreciation in market value of any Original Notes;
(g) may consult with counsel and the written advice or opinion of such
counsel shall be full and complete authorization and protection in respect of
any action taken, suffered or omitted by you hereunder in good faith and in
reliance thereon.
15. You shall send to all holders of Original Notes a copy of the
Prospectus, the Letter of Transmittal, the Notice of Guaranteed Delivery, as
used in the Prospectus, and such other documents (collectively, the "Exchange
Offer Documents") as may be furnished by the Company to commence the Exchange
Offer and take such other action as may from time to time he requested by the
Company or its counsel (and such other action as you may reasonably deem
appropriate) to furnish copies of the Exchange Offer Documents or such other
forms as may be approved from time to time by the Company, to all holders of
Original Notes and to all persons requesting such documents and to accept and
comply with telephone requests for information relating to the Exchange Offer,
provided that such information shall relate only to the procedures for accepting
(or withdrawing from) the Exchange Offer. The Company will furnish you with
copies of such documents at your request. All other request for information
relating to the Exchange Offer shall be directed to the Company, Attention:
_____________________, at the Company's offices at 7211 Circle S Road, Austin,
Texas 78745; telephone no (512) 444-0571.
16. You shall advise by facsimile transmission or telephone, and promptly
thereafter confirm in writing to _______________ of the Company, and such other
person or persons as the Company may request in writing, not later than 7:00
p.m., New York City time, each business day, and more frequently if reasonably
requested, up to and including the Expiration Date, as to the number of Original
Notes which have been tendered pursuant to the Exchange Offer and the items
received by you pursuant to this Agreement, separately reporting and giving
cumulative totals as to items properly received and items improperly received.
In addition, you will also inform, and cooperate in making available to, the
Company or any such other person or persons
<PAGE>
as the Company requests in writing from time to time prior to the Expiration
Date of such other information as it reasonably requests. Such cooperation shall
include, without limitation, the granting by you to the Company and such person
as the Company may request of access to those persons on your staff who are
responsible for receiving tenders, in order to ensure that immediately prior to
the Expiration Date the Company shall have received information in sufficient
detail to enable it to decide whether to extend the Exchange Offer. You shall
prepare a final list of all persons whose tenders were accepted, the aggregate
principal amount of Original Notes tendered and the aggregate principal amount
of Original Notes accepted and deliver said list to the Company.
17. Letters of Transmittal and Notices of Guaranteed Delivery shall be
stamped by you as to the date and the time of receipt thereof and shall be
preserved by you for a period of time at least equal to the period of time you
customarily preserve other records pertaining to the transfer of securities. You
shall dispose of unused Letters of Transmittal and other surplus materials in
accordance with your customary procedures.
18. You hereby expressly waive any lien, encumbrance or right of set-off
whatsoever that you may have with respect to funds deposited with you for the
payment of transfer taxes by reasons of amounts, if any, borrowed by the
Company, or any of its subsidiaries or affiliates pursuant to any loan or credit
agreement with you or for compensation owed to you hereunder.
19. For services rendered as Exchange Agent hereunder you shall be entitled
to such compensation and reimbursement of out-of-pocket expenses as set forth on
Schedule I attached hereto.
20. You hereby acknowledge receipt of the Prospectus, the Letter of
Transmittal and the other documents associated with the Exchange Offer attached
hereto and further acknowledge that you have examined each of them. Any
inconsistency between this Agreement, on the one hand, and the Prospectus, the
Letter of Transmittal and such other forms (as they may be amended from time to
time), on the other hand, shall be resolved in favor of the latter two
documents, except (i) with respect to the duties, liabilities and
indemnification of you as Exchange Agent which shall be controlled by this
Agreement, and (ii) that the last sentence of the third introductory paragraph
shall control.
21. The Company agrees to indemnify and hold you harmless in your capacity
as Exchange Agent hereunder against any liability, cost or expense, including
reasonable attorneys' fees and expenses, arising out of or in connection with
your appointment as Exchange Agent and the performance of your duties hereunder,
including, without limitation, any act, omission, delay or refusal made by you
in reasonable reliance upon any signature, endorsement, assignment, certificate,
order, request, notice, instruction or other instrument or document reasonably
believed by you to be valid, genuine and sufficient and in accepting any tender
or effecting any transfer of Original Notes reasonably believed by you in good
faith to be authorized, and in delaying or refusing in good faith to accept any
tenders or effect any transfer of Original Notes; provided, however, that the
Company shall not be liable for indemnification or otherwise for any loss,
liability, cost or expense to the extent arising out of your negligence, willful
misconduct or
<PAGE>
bad faith. The Company's and the Exchange Agent's obligations under this
paragraph 21 shall survive the termination of this Agreement and the discharge
of your obligation hereunder and any other termination of this Agreement under
any federal or state bankruptcy law.
22. You shall arrange to comply with all requirements under the tax laws of
the United States, including those relating to missing Tax Identification
Numbers, and shall prepare and file such tax information forms as are
appropriate or required to be prepared by you with respect to any payments made
by you to any Note holder with the Internal Revenue Service. The Company
understands that you are required to deduct 31% on payments to holders who have
not supplied their correct Taxpayer Identification Number or required
certification. Such funds will he turned over to the Internal Revenue Service in
accordance with applicable regulations.
23. You shall deliver or cause to be delivered, in a timely manner, to each
governmental authority to which any transfer taxes are payable in respect of the
exchange of Original Notes your check in the amount of all transfer taxes so
payable, and the Company shall reimburse you for the amount of any and all
transfer taxes payable in respect of the exchange of Original Notes; provided,
however, that you shall reimburse the Company for amounts refunded to you in
respect of your payment of any such transfer taxes, at such time as such refund
is received by you.
24. This Agreement and your appointment as Exchange Agent hereunder shall
be construed and enforced in accordance with the laws of the State of New York
applicable to agreements made and to be performed entirely within such state,
and without regard to conflicts of law principles, and shall inure to the
benefit of, and the obligations created hereby shall be binding upon, the
successors and assigns of each of the parties hereto.
25. This Agreement may be executed in two or more counterparts, each of
which shall be deemed to be an original and all of which taken together shall
constitute one and the same agreement.
26. In case any provision of this Agreement shall be invalid, illegal or
unenforceable, the validity, legality and enforceability of the remaining
provisions shall not in any way be affected or impaired thereby.
27. This Agreement shall not be deemed or construed to be modified,
amended, rescinded, canceled or waived, in whole or in part, except by a written
instrument signed by a duly authorized representative of the party to be
charged. This Agreement may not be modified orally.
28. Unless otherwise provided herein, all notices, requests and other
communications to any party hereunder shall be in writing (including facsimile)
and shall be given to such party, addressed to it, as its address or telecopy
number set forth below:
<PAGE>
If to the Company:
Commemorative Brands, Inc.
7211 Circle S Road
Austin, Texas 78745
Facsimile: ( )
Attention: ____________________
If to the Exchange Agent:
Marine Midland Bank
140 Broadway, 12th Floor
New York, New York 10005-1180
Facsimile: (212) 658-2298
Attention: Corporate Trust Administration Department
29. Unless terminated earlier by the parties hereto, this Agreement shall
terminate 90 days following the Expiration Date. Notwithstanding the foregoing,
Paragraphs 18, 19, 21 and 23 shall survive the termination of this Agreement.
Upon any termination of this Agreement, you shall promptly deliver to the
Company any certificates for Original Notes, funds or property (including,
without limitation, Letters of Transmittal and any other documents relating to
the Exchange Offer) then held by you as Exchange Agent under this Agreement.
30. This Agreement shall be binding and effective as of the date hereof.
Please acknowledge receipt of this Agreement and confirm the arrangements
herein provided by signing and returning the enclosed copy.
COMMEMORATIVE BRANDS, INC.
By: ___________________________
Name:
Title:
Accepted as the date first above written:
MARINE MIDLAND BANK
By: _______________________
Name:
Title:
