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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
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[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE FISCAL YEAR ENDED AUGUST 30, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
COMMEMORATIVE BRANDS, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 13-3915801
(State or other jurisdiction of (I.R.S. Employer Identification Number)
incorporation or organization)
7211 CIRCLE S ROAD
AUSTIN, TEXAS 78745
(Address of principal executive offices) (Zip Code)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE (512) 444-0571
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
None None
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
None
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K [X] (Not Applicable)
The aggregate market value of the voting stock held by non-affiliates at August
30, 1997: $0.00
375,000 shares of common stock
(Number of shares outstanding as of August 30, 1997)
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COMMEMORATIVE BRANDS, INC.
FORM 10-K
FOR THE FISCAL YEAR ENDED AUGUST 30, 1997
INDEX
Page
PART I
Item 1. Business.............................................................1
Item 2. Properties...........................................................7
Item 3. Legal Proceedings....................................................7
Item 4. Submission of Matters to a Vote of Security Holders..................7
PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters..................................................8
Item 6. Selected Financial Data..............................................8
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations...............................................14
Item 8. Financial Statements and Supplementary Data.........................22
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure................................................22
PART III
Item 10. Directors and Executive Officers of the Registrant..................23
Item 11. Executive Compensation..............................................25
Item 12. Security Ownership of Certain Beneficial Owners and Management......28
Item 13. Certain Relationships And Related Transactions......................29
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K....30
Signatures..........................................................31
Financial Statements................................................33
Exhibit Index.......................................................87
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PART I
ITEM 1. BUSINESS
GENERAL
Commemorative Brands, Inc. (the "Company") is a leading manufacturer of
class rings in the United States. The Company also supplies other
graduation-related scholastic products for the high school and college markets
and manufactures and markets recognition and affinity jewelry designed to
commemorate significant events, achievements and affiliations. On December 16,
1996, the Company completed the acquisitions ("Acquisitions") of substantially
all of the scholastic and recognition and affinity products, assets and business
of the ArtCarved ("ArtCarved") operations of CJC Holdings, Inc. ("CJC") and the
Balfour operations ("Balfour") of the L. G. Balfour Company, Inc., a
wholly-owned subsidiary of Town & Country Corporation ("Town & Country").
The ARTCARVED-Registered Trademark- 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. Prior to the
Acquisitions and since 1963, ArtCarved and its predecessor were the leading
supplier of high school rings in the in-store market, and had 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. Prior to the Acquisitions, Balfour manufactured and sold
high school and college class rings, scholastic fine paper products and
graduation accessories through a network of independent sales representatives
who marketed BALFOUR-Registered Trademark- products directly in-school and
on-campus.
The Company was formed as a Delaware corporation in March, 1996, by Castle
Harlan Partners II, L.P., a Delaware limited partnership and private equity
investment fund, for the purpose of acquiring ArtCarved and Balfour, and until
December 16, 1996, engaged in no business or activities other than in connection
with the Acquisitions and the financing thereof.
PRODUCTS
The Company's most significant product line (approximately 88% of net sales
during fiscal 1997) is scholastic products, consisting of high school and
college class rings, graduation-related fine paper products and other graduation
accessories. The Company's other product line (approximately 12% of net sales
during fiscal 1997), its recognition and affinity products, consists of jewelry
and other products designed to enable purchasers to show affinity or support for
their favorite teams, to show pride in their affiliations and to help companies
and other organizations promote and recognize achievement.
The Company's largest product offerings are its high-school and college
class rings. The Company offers over 200 styles of high school class rings
ranging from traditional to highly stylish and fashion oriented. Most of the
Company's high school class rings are available in gold or nonprecious metal,
and most are available with a choice of more than 50 different types of stones
in each of several different cuts. More than 400 designs can be placed on or
under the stone, and emblems of over 100 activities or sports can appear on the
sides. As a result, students have the ability to customize their rings by
designing highly personal and meaningful rings to commemorate their high school
education. During the fiscal year 1997, the Company's high school class rings
generally ranged in price to the student from approximately $50 for a
nonprecious metal ring up to approximately $500 for a gold ring with precious
stones.
The Company's college class rings are similar to the Company's high school
class rings in terms of the variety of customization and personalization options
available. However, college rings tend to be larger than high school rings, and
many more college rings are ordered in 14- and 18-karat gold or with precious or
semiprecious stones. During fiscal year 1997, the average selling price of the
college class ring was higher than that of the Company's high school class ring,
with prices generally ranging from approximately $100 for a nonprecious metal
ring to as much as $2,000 for a gold ring with precious stones.
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The Company produces and markets a wide array of fine paper products,
including customized graduation announcements, name cards, thank-you stationery,
business cards, diplomas, mini-diplomas, certificates, appreciation covers,
diploma covers, and fine paper accessory items. Through its independent sales
representatives, the Company also markets certain graduation accessories that it
does not produce, such as T-shirts and pendants denoting class year, caps and
gowns, yearbooks, memory books and other scholastic products. During the last
quarter of fiscal year 1997, the Company began selling fine paper products,
primarily graduation announcements and name cards, through college bookstores.
The Company manufactures and markets a variety of recognition and affinity
jewelry for specialty niche markets. The Company's "recognition" products are
designed to commemorate accomplishments and achievements in business, sporting
or other endeavors, and "affinity" products are designed to express pride in
one's affiliations with a particular organization or support for one's favorite
teams and organizations. The Company's recognition and affinity jewelry products
are grouped into four primary categories. The personalized family jewelry
products consist of rings custom-made to include children's names, birth dates
and birthstones, and personalized jewelry such as necklaces and bracelets
designed to commemorate family celebrations and holidays such as Mother's Day
and Valentine's Day. The Company distinguishes its personalized family jewelry
from that of its competitors through extensive personalization with family
names, dates, crests and events. The Company's licensed consumer sports jewelry
includes rings, pins and pendants containing team logos, mascots and colors,
that are manufactured for fans to express their support for their favorite
professional or amateur sports team. The Company's professional sports
championship jewelry consists of similar products but is designed for the
championship individual or team to commemorate its championship, accomplishments
or achievements. The Company offers sports championship jewelry for
professional sports organizations (including Super Bowl rings to the San
Francisco 49ers in 1995 and World Series rings to the New York Yankees in 1996)
as well as jewelry for individuals to commemorate American Bowling
Congress-sanctioned perfect games. Corporate recognition and reward jewelry
includes jewelry awards for employees of various corporations.
SALES AND MARKETING
The Company has a 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. Management
believes the Company's presence in 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. No
single customer of the Company represented more than 5% of net sales in fiscal
year 1997.
The Company markets its class rings: (i) in-store to independent and chain
jewelers under the names ARTCARVED-Registered Trademark- and R. JOHNS-Registered
Trademark- and to mass merchants under the names KEYSTONE-Registered Trademark-,
CLASS RINGS, LTD.-Registered Trademark-, and MASTER CLASS RINGS-Registered
Trademark-; (ii) in high schools under the BALFOUR-Registered Trademark- name;
and (iii) on college campuses under the ARTCARVED-Registered Trademark- and
BALFOUR-Registered Trademark- names. The Company markets its graduation-related
fine paper and accessories under the BALFOUR-Registered Trademark- and
ARTCARVED-Registered Trademark- names. The Company markets its licensed consumer
sports jewelry and its corporate recognition and reward jewelry under the
BALFOUR-Registered Trademark- name, its sports championship jewelry under the
BALFOUR-Registered Trademark- and KEEPSAKE-Registered Trademark- names and its
personalized family jewelry under the CELEBRATIONS OF LIFE-Registered
Trademark-, GENERATIONS OF LOVE-TM-, and NAME-SAKE-TM- names.
The Company is one of the leading suppliers of high school class rings in
the in-store channel based on net sales for fiscal 1997. A predecessor of the
Company introduced the concept of in-store sales for high school class rings in
1963 as an alternative to traditional in-school sales. The Company sells its
high school class rings in-store to independent jewelry retailers, large jewelry
chains and to mass merchants. The Company was 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
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distinct product brands, product line characteristics and pricing for each of
the in-store sales channels. Advertising is particularly important in the
in-store market to inform students and parents that the retailer offers
alternatives to the products sold at school. The Company utilizes a combination
of national, regional, local and co-op print and local direct mail advertising
for its products depending on the type of retailer involved.
The Company also markets its products in high schools using the
BALFOUR-Registered Trademark- brand name through its independent sales
representatives, who offer both class rings and a variety of fine paper products
and graduation accessories directly to high school students.. The Company's
in-school sales channel is supported through a sales organization that consists
of approximately 125 regional independent representatives who work exclusively
for the Company with respect to the types of products represented by the
Company's product lines. Approximately 20 independent sales representatives
service colleges and universities.
The Company compensates its independent sales representatives on a
commission basis, and most independent sales representatives receive a monthly
draw against commission earned, although all expenses, including promotional
materials made available by the Company, are the responsibility of the
representative. The Company's independent sales representatives operate under
contract with exclusive non-compete arrangements that prohibit such
representatives from selling competing products during the term of their
arrangement with the Company and for a period of time, generally two years,
thereafter. Depending on geographical size and volume, independent sales
representatives may employ one or more additional sales representatives in
addition to part-time or full-time personnel.
The Company's college class rings are sold under the ARTCARVED-Registered
Trademark- brand name and under the BALFOUR-Registered Trademark- brand name
primarily through on-campus bookstores and, to a lesser extent, through local
bookstores, both of which typically also offer class rings distributed by one or
more of the Company's competitors. The college bookstores display the Company's
products, although approximately 85% of all orders are taken by the Company's
sales representatives at special events periodically set up at the bookstore or
campus student center. College class ring sales are principally supported by
sales promotions with school newspaper advertising and direct mailings to
students and parents. The Company uses promotions to stimulate sales in the
critical back-to-school, pre-Christmas and pre-graduation periods. The Company
differentiates itself from its competitors through its high quality rings,
innovative styles, quick delivery times and promotional services that attract
students to tables containing product information. Beginning during the fourth
quarter of fiscal year 1997, the Company began to offer Balfour fine paper
products through the more extensive ArtCarved college on-campus sales channels.
Recognition and affinity products are sold either (i) to retail outlets or
directly to the group or organization, or (ii) by a combination of field sales
personnel and corporate sales personnel. The Company's BALFOUR-Registered
Trademark- licensed consumer sports jewelry and CELEBRATIONS OF LIFE-Registered
Trademark-, GENERATIONS OF LOVE-TM-, and NAME-SAKE-TM- personalized family
jewelry are primarily distributed to retail outlets and through merchandise
catalogues. The Company markets its BALFOUR-Registered Trademark- sports
championship jewelry directly to the championship team or organization or its
members and its KEEPSAKE-Registered Trademark- bowling rings directly to
individuals. Corporate recognition and reward programs are developed in
conjunction with corporate clients, who order and purchase products directly
from the Company.
During the month of June, 1997, the Company introduced the Balfour licensed
consumer sports rings to 2,200 Wal-Mart locations. In addition, the ArtCarved
on-campus sales group introduced beginning in June 1997 fine paper products to
college bookstores. Also, during fiscal 1997 the Company has increased the
staff of regional sales managers from six to seven to build the base and expand
distribution of the in-school high school business.
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INDUSTRY
Management believes there are three national competitors in the sale of
class rings and fine paper products (the Company, Jostens, Inc. and Herff Jones,
Inc.) and numerous regional producers. The market is highly competitive and
numerous alternative suppliers for the Company's products exist.
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, historically,
approximately 65% of high school class rings have been sold through the
in-school sales channel. In schools, administrators or student representatives
select the authorized supplier for their school. Suppliers contact these
administrators or student representatives through their sales forces, which are
generally comprised of independent sales representatives who market products
directly to high school students.
In addition to the in-school sales channel, the scholastic product market
is also characterized by a strong in-store distribution channel. In 1963, a
predecessor of ArtCarved initiated the use of the in-store sales channel, and
management estimates that this segment represents, historically, approximately
35% of high school class rings sold. The in-store channel consists primarily of
independent jewelry retailers, large jewelry chains and mass merchants.
College class rings are sold primarily through on-campus bookstores and, to
a lesser extent, through local bookstores, both of which typically also offer
class rings distributed by one or more of the Company's major national
competitors. Historically, on-campus bookstores have been owned and operated by
the colleges and universities; however, during the last several years an
increasing number of campus bookstores have been leased to companies engaged in
retail bookstore operations, primarily Barnes & Noble Bookstores, Inc. and
Follett Corporation.
The market for the Company's recognition and affinity products is a broad
(and management believes 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 is well developed in
the apparel category but not with respect to non-apparel products (such as the
Company's licensed consumer sports jewelry). Management believes that the demand
for licensed consumer sports jewelry is influenced by trends in the popularity
of professional and amateur sports. An important success factor in the licensed
consumer jewelry business is obtaining the right to a team name and mascot.
PRODUCTION AND TECHNOLOGY
The Company produces high school and college class rings only upon the
receipt of a customer order and deposit, and each ring is custom manufactured.
The entire production process takes approximately two to eight weeks from
receipt of the customer's order to product shipment, depending on tooling
requirements. Consequently, only a limited amount of finished products inventory
is necessary, reducing the Company's exposure to fluctuations in the price of
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, computer integrated manufacturing, cell manufacturing and the
craftsmanship of the Company's highly-skilled jewelers enable the Company to
produce increasingly personalized and high quality jewelry while maintaining
critical delivery schedules.
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The Company's fine paper manufacturing and distribution activities are
housed at a 100,000 square-foot facility in Louisville, Kentucky. Each fine
paper product requires a high level of customization and is characterized by
having short production runs. For a typical graduation product order, the
Company's salespeople meet with the next class of graduating seniors to chose
their graduation announcements and related designs in the spring of their junior
year or early fall of their senior year. Designs are chosen and 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. Operating results during fiscal
year 1997 have not been materially affected by market volatility. Any material
increase in the price of these raw materials could adversely impact the
Company's cost of sales.
The Company requires significant amounts of gold for the manufacture of its
jewelry. The Company finances the majority of its gold inventory requirements
through borrowings by the Company under its Revolving Credit and Gold
Facilities, defined below. 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. 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 from time to time engage
in certain hedging transactions to reduce the effects of fluctuations in the
price of gold during these periods. As of August 30, 1997, the Company had no
significant hedges in place.
The Company also uses precious metals and both precious and semiprecious
stones in its products. 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.
ENVIRONMENTAL MATTERS
The Company is subject to federal, state and local laws, ordinances and
regulations that establish various health and environmental quality standards
and provide penalties for violations of those standards. Past and present
manufacturing operations of the Company subject to environmental laws include
the use, handling, and contracting for disposal or recycling of hazardous or
toxic substances, the discharge of particles into the air, and the discharge of
process wastewaters into sewers. Management believes that the Company's current
operations are in substantial compliance with all material environmental laws
and that the Company does not currently face environmental liabilities that
would have a material adverse effect on the Company's financial position or
results of operations.
INTELLECTUAL PROPERTY
The Company markets its products under many trademarked brand names, some
of which rank among the most recognized and respected names in the jewelry
industry, including ARTCARVED-Registered Trademark-, BALFOUR-Registered
Trademark-, CELEBRATIONS OF LIFE-Registered Trademark-, CLASS RINGS,
LTD.-Registered Trademark-, GENERATIONS OF LOVE-TM-, KEEPSAKE-Registered
Trademark-, KEYSTONE-Registered Trademark-, MASTER CLASS RINGS-Registered
Trademark-, NAME-SAKE-TM-, and R. JOHNS-Registered Trademark-. Generally, a
trademark registration will remain in effect so long as the trademark remains in
use by the registered holder and any required renewals are obtained. The Company
also holds several patented ring designs. The
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Company's patents expire at varying dates, but management does not believe that
the loss of any one of which would have a material adverse effect on the
Company.
The Company has non-exclusive licensing arrangements with numerous colleges
and universities under which the Company has the right to use the name and other
trademarks and logos of these schools on the Company's products. In addition,
the Company has licensing agreements with certain major professional sports
organizations. Management does not believe that there are any franchises or
licenses the loss of which, individually, would have a material adverse effect
on the Company.
In 1988, CJC Holdings, Inc., ArtCarved's former owner ("CJC"), granted to
Lenox, Inc. a ten-year license to use the KEEPSAKE-Registered Trademark- name
for the sale of nonjewelry goods, with the prior written consent of CJC. 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-Registered Trademark- trademark and exclusive licensing
arrangements for the ARTCARVED-Registered Trademark- trademark to a retailer in
Central America.
The Company had a Trademark License Agreement ("JTW License") with JTW
Industries, Inc. ("JTW"), pursuant to which, JTW was granted the right to use
the ARTCARVED-Registered Trademark- trademark in connection with wedding rings,
engagement rings and anniversary bands on a perpetual and royalty free basis.
Pursuant to the terms of the JTW License, it was canceled in October 1997 upon a
change of control of JTW, and concurrently therewith, a new Trademark License
Agreement ("Aurafin License") was entered into with Aurafin, Inc., the acquiror
of JTW. The Aurafin License is substantially similar to the JTW License other
than providing for (i) multiple royalty rates, and (ii) an initial term of ten
years which automatically renews for successive five-year periods, assuming it
is not otherwise terminated pursuant to its terms.
EMPLOYEES
As of August 30, 1997, the Company employed 1,602 individuals. (See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Cost Savings.") Approximately 1,150 of these employees are involved
in manufacturing, operations and production support, 325 are involved in
marketing and sales and 127 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 663 hourly production and maintenance employees (as of August
30, 1997) at the Austin, Texas manufacturing facility, no employees of the
Company are represented by a labor union. The production and maintenance
workers are represented by the United Brotherhood of Carpenters and Joiners
Union (the "Union"). A collective bargaining agreement was signed on April 24,
1997, after the Company and its predecessor and the Union had operated without
an agreement from June, 1994 to April, 1997. The new agreement provided for wage
rate increases of $0.30 an hour on April 21, 1997, $0.25 an hour on June 1, 1998
and $0.20 an hour on June 1, 1999. The Company, or its predecessors, have 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-campus, respectively.
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ITEM 2. PROPERTIES
The Company's headquarters and principal offices are located at 7211 Circle
S Road, Austin, Texas 78745. The Company's other properties as of August 30,
1997, are as set forth below. Management believes the Company's properties are
in good condition.
Primary Use Location Approximate Size Owned/Leased
- ----------- -------- ---------------- ------------
Administrative Offices Austin, Texas 20,000 Square Feet Owned
Jewelry Manufacturing Austin, Texas 99,830 Square Feet Owned
Jewelry Manufacturing Juarez, Mexico 20,000 Square Feet Leased
Jewelry Manufacturing North Attleboro, MA 35,000 Square Feet Leased(1)
Fine Paper Louisville, KY 100,000 Square Feet Leased
Warehouse Facility Austin, Texas 50.000 Square Feet Leased
______________
(1) This property is being subleased pursuant to a sublease which expires
on the earlier of May 30, 1998, or the date on which the Company
vacates such building.
During the third and fourth quarters of fiscal 1997, the Company (i) closed
the former Balfour administrative facility in North Attleboro, Massachusetts,
(ii) closed the former Balfour ring manufacturing facility in Attleboro,
Massachusetts, and (iii) transferred and consolidated such operations with the
Company's manufacturing and administrative operations in the former ArtCarved
Austin, Texas facilities. The consolidation of the administrative operations
was substantially completed and the related Massachusetts facility vacated
during May 1997. The consolidation of the ring manufacturing operations was
substantially completed and the related Massachusetts facility vacated during
June 1997. As a result of the foregoing, as of August 30, 1997, the Company had
reduced the square footage of the facilities operated by the predecessor
companies immediately before the Acquisitions by approximately 110,000 square
feet. (See "Management's Discussion and Analysis of Financial Condition and
Results of Operations--Results of Operations.")
ITEM 3. LEGAL PROCEEDINGS
There are no material pending legal proceedings to which the Company is a
party or to which any of its property is subject. The Company monitors all
claims, and the Company accrues for those, if any, which management believes are
probable of payment. The Company has no pending administrative proceedings
related to environmental matters involving governmental authorities.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
There is no established public trading market for the Company's common
stock, par value $0.01 per share ("Common Stock"). At November 21, 1997, there
were seven holders of record of the Common Stock.
The Company has never declared dividends on its Common Stock. The Company
is restricted from paying dividends by certain of its bank debt covenants and
the indenture pursuant to which its senior subordinated notes were issued (see
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources") and by provisions of the Company's
outstanding classes of preferred stock. The Company intends to retain any
earnings for internal investment and debt reduction, and does not intend to
declare dividends on its Common Stock in the foreseeable future.
ITEM 6. SELECTED FINANCIAL DATA
This item is presented in three tables for the historical reporting
requirements. The Company began operations on December 16, 1996, by acquiring
and merging two predecessor companies with different fiscal year ends. Selected
historical data for ArtCarved, Balfour and the Company are presented in tables
(A), (B) and (C), respectively.
Table (A) 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 August 31, 1996 and
December 16, 1996, and for the fiscal years ended August 26, 1995, and August
31, 1996, and for the period from September 1, 1996, to December 16, 1996, has
been derived from the audited financial statements of ArtCarved, which have been
audited by Arthur Andersen LLP, independent public accountants, as indicated in
their report dated October 24, 1997, included elsewhere herein. The following
information with respect to ArtCarved as of August 27, 1994 and August 26, 1995,
and for the fiscal year ended August 27, 1994, has been audited by Arthur
Andersen LLP as stated in their report dated November 13, 1996 which is not
included herein. The ArtCarved data as of and for the fiscal year ended 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
results for the period September 1, 1996, to December 16, 1996, are not
necessarily indicative of the results to be expected for the full fiscal year.
The information presented below does not include adjustments related to the
ArtCarved acquisition.
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TABLE (A)
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<TABLE>
<CAPTION>
Fiscal Year Ended (1)
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The Period
from
September 1,
1996 -
August 31, August 27, August 26, August 31, December 16,
1993 1994 1995 1996 1996
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
STATEMENT OF INCOME DATA:
Net sales $ 63,955 $ 69,820 $ 71,994 $ 70,671 $ 27,897
Cost of sales $ 25,290 $ 30,572 $ 32,879 $ 32,655 $ 11,988
--------- --------- --------- --------- ---------
Gross profit $ 38,665 $ 39,248 $ 39,115 $ 38,016 $ 15,909
Selling, general and administrative expenses $ 27,016 $ 26,618 $ 28,224 $ 27,940 $ 9,862
Restructuring charges (2) $ -- $ -- $ 3,244 $ -- $ --
--------- --------- --------- --------- ---------
Operating income(3) $ 11,649 $ 12,630 $ 7,647 $ 10,076 $ 6,047
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
OTHER DATA:
EBITDA (4) $ 17,046 $ 17,324 $ 16,505 $ 15,091 $ 8,039
Depreciation and amortization $ 5,397 $ 4,694 $ 5,614 $ 5,015 $ 1,992
Capital expenditures (5) $ 1,344 $ 1,186 $ 1,120 $ 844 $ 195
Cash flows provided by (used in):
Operating activities $ 10,948 $ 11,132 $ (3,164) $ 1,663 $ 1,498
Investing activities $ (1,344) $ (1,186) $ (1,120) $ (844) $ (195)
Financing activities $ (9,604) $ (9,946) $ 4,284 $ (819) $ 4,261
BALANCE SHEET DATA (AT END OF PERIOD):
Total assets $ 76,008 $ 78,900 $ 75,955 $ 74,542 $ 86,065
Total long-term debt (6) $ 98,485 $ 98,728 $ 99,900 $ 91,221 $ 80,144
Advances in equity (deficit) (6) $ (27,931) $ (51,504) $ (53,186) $ (28,524) $ (6,464)
- -------------------------------------------------------------------------------------------------------------------------
</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 used the proceeds from the sale
of ArtCarved to repay its outstanding debt obligations, the statement of
income data, other data and the balance sheet data include all of CJC's
debt and related interest expense.
(2) For the fiscal year ended August 26, 1995, the restructuring charges of
$3.2 million consisted of the write-off of $2.9 million of capitalized
financing costs incurred in 1990 by CJC and $0.3 million of related
professional
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<PAGE>
advisory fees incurred by CJC. The balance sheet data includes all of
CJC's debt and related interest expense, and therefore all of the
restructuring charges are allocated to ArtCarved assets.
(3) The results of operations for the period from September 1, 1996, through
December 16, 1996, are not comparable to the results of operations for the
fiscal years presented and are not necessarily indicative of the results
that could be expected for a full fiscal year. Due to the highly seasonal
nature of the class ring business, a significant amount of revenues and
income occurred in the three and one-half month period ended December 16,
1996, due to the back-to-school and pre-holiday season.
(4) EBITDA represents operating income (loss) before depreciation, amortization
and restructuring charges. EBITDA is not intended to, and does not,
represent cash flows as defined by generally accepted accounting principles
and does not necessarily indicate that cash flows are sufficient to fund
all of ArtCarved's cash needs. EBITDA should not be considered in
isolation or as a substitute for or more meaningful than net income (loss),
cash flows from operating activities or other measures of liquidity
determined in accordance with generally accepted accounting principles.
The Company has presented EBITDA data because the Company understands that
such information is commonly used by investors to analyze and compare
companies on the basis of operating performance and to determine a
company's ability to service debt. The EBITDA measure presented herein is
not necessarily comparable to similarly-titled measures reported by other
companies.
(5) Historical capital expenditure levels are not necessarily indicative of the
future capital expenditure level for ArtCarved's ongoing operations when
merged with Balfour.
(6) The changes in total long-term debt and advances in equity (deficit) from
August 31, 1996, to December 16, 1996, are due to the sale of CJC's
non-ArtCarved operations.
Table (B) 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 February 25, 1996, and for
the years ended February 26, 1995, and February 25, 1996, and for the period
ended December 16, 1996, has been derived from the audited financial statements
of Balfour, which have been audited by Arthur Andersen LLP, independent public
accountants, as indicated in their report dated November 19, 1997, included
elsewhere herein. The following information with respect to Balfour as of
February 27, 1994, and February 26, 1995, and for the year ended February 27,
1994, has been derived from the audited financial statements of Balfour and is
not included herein. The following information with respect to Balfour as of
and for the year ended February 28, 1993 has been derived from the unaudited
financial statements of Balfour. The results for the period ended December 16,
1996, are not necessarily indicative of the results that could be expected for
the full fiscal year. The information presented below does not include
adjustments related to the Balfour acquisition.
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<PAGE>
TABLE (B)
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Fiscal Year Ended (1)
-------------------------------------------------------
The Period
Through
February 28, February 27, February 26, February 25, February 16,
1993 1994 1995 1996 1996
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
STATEMENT OF INCOME DATA:
Net sales $ 83,938 $ 85,304 $ 77,491 $ 71,300 $ 60,233
Cost of sales $ 47,130 $ 35,860 $ 35,406 $ 35,598 $ 29,350
-------- -------- --------- --------- ---------
Gross profit $ 36,808 $ 49,444 $ 42,085 $ 35,702 $ 30,883
Selling, general and administrative
expenses $ 43,856 $ 43,350 $ 51,743 $ 33,496 $ 31,020
Restructuring charges (2) $ 14,500 $ -- $ -- $ -- $ --
-------- -------- --------- --------- ---------
Operating income (loss) $(21,548) $ 6,094 $ (9,658) $ 2,206 $ (137)
-------- -------- --------- --------- ---------
-------- -------- --------- --------- ---------
OTHER DATA:
EBITDA (3) $ (3,983) $ 7,993 $ (7,680) $ 4,232 $ 1,396
Depreciation and amortization $ 3,065 $ 1,899 $ 1,978 $ 2,026 $ 1,533
Capital expenditures (4) $ 826 $ 1,820 $ 1,274 $ 530 $ 345
Adjusted net sales (5) $ 56,315 $ 61,784 $ 64,891 $ 70,111 $ 59,384
Cash flows provided by (used in):
Operating activities $ -- $ (2,413) $ (7,077) $ 1,604 $ (7,264)
Investing activities $ -- $ (1,807) $ (1,209) $ 421 $ 226
Financing activities $ -- $ 4,245 $ 8,286 $ (1,970) $ 6,977
BALANCE SHEET DATA (AT END OF PERIOD):
Total assets $ 44,795 $ 47,989 $ 45,236 $ 42,563 $ 45,127
Total long-term debt $ 1,801 $ 6,136 $ 15,136 $ 13,166 $ 20,201
Total stockholders' equity $ 20,278 $ 24,966 $ 14,024 $ 13,888 $ 11,735
- ---------------------------------------------------------------------------------------------------------------
</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, 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) 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
-11-
<PAGE>
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
future capital expenditure level for Balfour's ongoing operations when
merged with ArtCarved.
(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.
Table (C)
The Company completed the Acquisitions of ArtCarved and Balfour on December
16, 1996, and until such date, engaged in no business activities other than
those in connection with the Acquisitions and financing thereof. The following
table presents summary historical financial and other data from the Company and
should be read in conjunction with the financial statements of the Company and
the notes thereto and "Management's Discussion and Analysis of Financial
Condition and Results of Operations" included elsewhere herein. The following
information with respect to the Company as of and for the fiscal year ended
August 30, 1997, have been derived from the audited financial statements of the
Company, which have been audited by Arthur Andersen LLP, independent public
accountants, as indicated in their report dated October 24, 1997, included
elsewhere herein. The results of operations for the period from December 16,
1996, to August 30, 1997, are not necessarily indicative of the results that
could be expected for the full fiscal year or of future operations.
-12-
<PAGE>
TABLE (C)
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Fiscal Year Ended
- -------------------------------------------------------------------------------------------------------------------
August 30, 1997 (1)
(Dollars in Thousands)
<S> <C>
STATEMENT OF INCOME DATA:
Net sales $ 87,600
Cost of sales $ 45,189
----------
Gross profit $ 42,411
Selling, general and administrative expenses $ 41,481
----------
Operating income
Income (loss) from continuing operations
Net loss to common stockholders
Net loss per common and common equivalent share outstanding $ 930
$ (8,867)
$ (9,717)
----------
----------
$ (25.91)
----------
----------
OTHER DATA:
EBITDA (2) $ 5,025
Depreciation and amortization $ 4,095
Capital expenditures $ 3,493
Cash flows provided by (used in):
Operating activities $ (677)
Investing activities $(173,693)
Financing activities $ 175,450
BALANCE SHEET DATA (AT END OF PERIOD):
Total assets $ 200,869
Total long-term debt $ 125,450
Total stockholders' equity $ 40,453
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) The Company completed the acquisitions of ArtCarved and Balfour on December
16, 1996, and until such date, engaged in no business activities other than
those in connection with the Acquisitions and financing thereof.
(2) EBITDA represents operating income (loss) before depreciation, amortization
and restructuring charges. EBITDA is not intended to, and does not,
represent cash flows as defined by generally accepted accounting principles
and does not necessarily indicate that cash flows are sufficient to fund
all of 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
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<PAGE>
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.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
For purposes of the discussion contained in this Item 7, unless the context
otherwise requires (i) the term "CBI" refers to Commemorative Brands, Inc. prior
to the consummation of the Acquisitions, (ii) the term "ArtCarved" refers to the
predecessor assets, businesses, and operations of CJC acquired by CBI, (iii) the
term "Balfour" refers to the predecessor class rings assets, businesses and
operations of L. G. Balfour Company, Inc. acquired by CBI, and (iv) the term
"the Company" refers to CBI consolidated with its subsidiaries as combined with
ArtCarved and Balfour after giving effect to the Acquisitions.
GENERAL
On December 16, 1996, CBI completed the Acquisitions. CBI was initially
formed 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. Until December 16, 1996, CBI engaged in no
business activities other than in connection with the Acquisitions and the
financing thereof. The Company uses a 52/53 week fiscal year ending on the
last Saturday of August.
RESULTS OF OPERATIONS
The financial statements of the Company for the fiscal year ended August
30, 1997, reflect operations for the period from December 16, 1996 (the date of
the Acquisitions) to August 30, 1997. The financial statements are presented
for the predecessors, ArtCarved for the period from September 1, 1996 through
December 16, 1996 and Balfour for the period from February 26, 1996 through
December 16, 1996. (See "Financial Statements.") The results of operations of
the Company for the fiscal year ended August 30, 1997, are not comparable to the
results of operations for the comparable prior periods for each of the
predecessor companies, because (i) CBI was not engaged in business operations
prior to December 16, 1996, and (ii) the information presented for the
predecessor companies includes the operations of such entities for a
twelve-month period in contrast to the approximately eight-month period in the
Company's fiscal year ended August 30, 1997.
The results of operations of the Company for the fiscal year ended August
30, 1997, were adversely impacted as a result of the ongoing consolidation of
the Attleboro and North Attleboro, Massachusetts operations into the Austin,
Texas facilities (the "Combination"). Consolidation and integration of
operations related to the Combination required substantial time and cost due to
complications arising from the integration of different order entry and
manufacturing processes required for the Balfour ring product line. The time to
train new personnel and implement the Balfour class ring operations was
extensive and has resulted in ring manufacturing headcount levels higher than
those experienced in the predecessor companies. The additional headcount is
anticipated to remain in place at least through December 1997, to provide
service levels comparable to those experienced in Massachusetts. The Company
anticipates incurring costs from inefficiencies and a higher than expected
headcount during at least the first two quarters of fiscal 1998. There can be
no assurance that the operations formerly conducted by each of the Company's
predecessors will be fully integrated or as to the amount of any cost savings
that may result from such integration. (See "--Cost Savings.")
COST SAVINGS
ELIMINATION OF OCCUPANCY AND FIXED OVERHEAD COSTS - Two of the three
Balfour facilities were closed as originally scheduled and the occupancy and
overhead costs including duplicative facilities-related personnel associated
with these two facilities (the Attleboro, Massachusetts ring manufacturing
plant and the North Attleboro, Massachusetts
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<PAGE>
administrative facility) were eliminated. These permanent cost savings
amount to approximately $1.5 million on an annual basis and during fiscal
1997, approximately $400,000 of cost savings were realized. The third
Balfour facility, the North Attleboro insignia plant, was not closed. This
facility contains not only the insignia plant, but also the Balfour ring
tooling operation.
MANUFACTURING INTEGRATION - The move of the Balfour ring manufacturing
operation was substantially completed in June, 1997. Expanded manufacturing
capacity in Austin was adequate to absorb the additional production of the
Balfour rings. However, difficulties were encountered in the efficient
manufacture of the Balfour rings. Certain of the costs savings achieved by the
Company by the reduction of duplicative personnel were offset by additional
labor and overhead incurred to manufacture Balfour rings. Manufacturing
inefficiencies were primarily caused by:
- People - The specific Balfour product knowledge that was "lost" due to
Massachusetts employees electing not to relocate to Texas resulted in
higher than normal training expenses and additional costs to
temporarily place former Balfour employees (managers and supervisors)
in the Texas plant.
- Tooling - Because Balfour ring tooling is older and more complicated
to use than the ArtCarved ring tooling, the Company experienced higher
than normal training costs and lower levels of efficiencies than the
wax mold operations at the Balfour Attleboro ring plant.
- Systems - The Balfour computer system is heavily dependent on manual
processing and human interaction. Difficulties were experienced in
the transfer of user knowledge and system documentation. Therefore,
labor costs in excess of those anticipated by management were incurred
to enter, schedule, track and ship the Balfour rings.
THE COMPANY
NET SALES - Net sales for the fiscal year ended August 30, 1997, were $87.6
million. The Acquisitions occurred after the back-to-school and pre-holiday
season during which approximately 35% of the Company's annual net sales were
realized by the predecessor companies, ArtCarved and Balfour.
GROSS PROFIT - Gross profit for the fiscal year ended August 30, 1997, was
$42.4 million, or 48.4% of net sales. Cost of sales for the fiscal year ended
August 30, 1997, includes an incremental charge of $4.7 million related to an
increase in inventory valuation at the time of the Acquisitions in accordance
with purchase price accounting which was expensed to cost of sales as the
related inventory was sold. Gross profit, excluding this $4.7 million charge,
would have been $47.1 million or 53.8% of sales.
Gross profit for the fiscal year ended August 30, 1997, was adversely
affected by the higher overhead costs per unit for the month of December 1996
following the Acquisitions since approximately 70% of the net sales for December
1996 were attributable to the pre-December 16, 1996, period and were therefore
recognized by the Company's predecessors. Gross profit for the fiscal year
ended August 30, 1997, was also adversely affected by the Combination.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES - Selling, general and
administrative expenses for the fiscal year ended August 30, 1997, were $41.5
million or 47.4% of net sales. The selling, general and administrative expenses
for the fiscal year ended August 30, 1997, were adversely affected by the
problems in production, distribution problems and the additional time and effort
required for the Combination.
OPERATING INCOME - As a result of the foregoing, operating income was $0.9
million, or 1.1 % of net sales for the fiscal year ended August 30, 1997.
Operating income, excluding a $4.7 million charge resulting from the increased
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<PAGE>
inventory valuation at the time of the Acquisitions in accordance with purchase
price accounting, would have been $5.6 million or 6.4% of net sales.
INTEREST EXPENSE, NET - Interest expense, net, was $9.8 million for the
fiscal year ended August 30, 1997. The majority of the interest expense was
related to the Bank Credit Facility, as defined below, of $25.5 million at rates
ranging from 9% - 10% and interest on the $90.0 million of Notes, as defined
below, at a rate of 11 %.
PROVISION FOR INCOME TAXES - Since the Company does not have a history of
generating income from operations, no tax benefit on operating losses has been
accrued.
NET INCOME (LOSS) - As a result of the foregoing, the Company had a net
loss of $(8.9) million, or (10.1)% of net sales, for the fiscal year ended
August 30, 1997.
ARTCARVED
THE PERIOD FROM SEPTEMBER 1, 1996 THROUGH DECEMBER 16, 1996 ("THE ARTCARVED
PERIOD THROUGH DECEMBER 16, 1996")
The results of operations for the ArtCarved period through December 16,
1996, are not comparable to the results of operations for the fiscal years ended
August 31, 1996, and August 26, 1995, and are not necessarily indicative of the
results that could be expected for a full fiscal year. Due to the highly
seasonal nature of the class ring business, a significant amount of revenues and
income occurred in the three and one-half month period ended December 16, 1996,
due to the back-to-school and pre-holiday season.
NET SALES - Net sales for the ArtCarved period through December 16, 1996,
were $27.9 million.
GROSS PROFIT - Gross profit for the ArtCarved period through December 16,
1996, was $15.9 million, or 57.0% of net sales.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES - Selling, general and
administrative expenses for the ArtCarved period through December 16, 1996, were
$9.9 million, or 35.4% of net sales.
OPERATING INCOME - As a result of the foregoing, for the ArtCarved period
through December 16, 1996, operating income was $6.0 million or 21.7% of net
sales.
INTEREST EXPENSE, NET - Interest expense, net for the ArtCarved period
through December 16, 1996, was $2.9 million. Average interest rates on debt
during the ArtCarved period through December 16, 1996, were approximately 11.9%
for ArtCarved long-term debt and 9.75% for the ArtCarved gold loan.
INCOME TAX PROVISION - There was no income tax provision for the ArtCarved
period through December 16, 1996, due to available federal net operating tax
losses and other credit carry forwards of CJC that eliminated the need for a
federal tax provision.
NET INCOME (LOSS) - As a result of the foregoing, net income for the
ArtCarved period through December 16, 1996, was $3.2 million, or 11.4% of net
sales.
-16-
<PAGE>
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 net 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. 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.
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 PROVISION. There was no income tax provision in either fiscal
1996 or fiscal 1995, due to available federal net operating tax losses and other
credit carry forwards of CJC that eliminated the need for a federal tax
provision.
NET INCOME (LOSS). As a result of the foregoing, net loss decreased $4.2
million, to $ 1.8 million, in fiscal 1996 from a net loss of $6.0 million in
fiscal 1995.
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<PAGE>
BALFOUR
THE PERIOD FROM FEBRUARY 26, 1996 THROUGH DECEMBER 16, 1996 ("THE BALFOUR
PERIOD THROUGH DECEMBER 16, 1996")
NET SALES - Net sales for the Balfour period through December 16, 1996,
were $60.2 million.
GROSS PROFIT - Gross profit for the Balfour period through December 16,
1996, was $30.9 million, or 51.3% of net sales.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES - Selling, general and
administrative expenses for the Balfour period through December 16, 1996, were
$31.0 million, or 51.5% of net sales.
OPERATING INCOME (LOSS) - As a result of the foregoing, operating loss for
the Balfour period through December 16, 1996, was $(0.1) million, or (0.2)% of
net sales.
INTEREST EXPENSE, NET - Interest expense, net for the Balfour period
through December 16, 1996 was $2.0 million,
substantially on account of intercompany debt at a rate of 11.5%.
INCOME TAX EXPENSE - There was no income tax provision due to available
federal net operating tax losses and other credit carry forwards at Town &
Country that eliminated the need for a federal tax provision. The $63,000
provision for income taxes represents the state income taxes for the Balfour
period through December 16, 1996.
NET INCOME (LOSS) - As a result of the foregoing, net loss for the Balfour
period through December 16, 1996, was $(2.2) million, or (3.6)% of net sales.
TWELVE MONTHS ENDED FEBRUARY 25, 1996 (THE "1996 PERIOD") 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
-18-
<PAGE>
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 carry forwards of Town & Country that eliminated the need
for a federal tax provision. The income tax expense represents a provision for
state income taxes in 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.
SEASONALITY
The Company's scholastic product sales tend to be seasonal. Class ring
sales are highest during October through December (which overlaps the Company's
first and second fiscal quarters), when students have returned to school after
the summer recess and orders are taken for delivery of class rings to students
before the winter holiday season. Sales of the Company's fine paper products
are predominantly made during February through April (which overlaps the
Company's second and third fiscal quarters) for graduation in May and June.
ArtCarved and Balfour historically experienced operating losses during the
period of the Company's fourth fiscal quarter, which includes the summer months
when school is not in session. The Company's recognition and affinity product
line is not seasonal in any material respect, although sales generally are
highest during the winter holiday season and in the period prior to Mother's
Day. As a result, the effects of seasonality of the class ring business on the
Company are tempered by the Company's relatively broad product mix. As a result
of the foregoing, the Company's working capital requirements tend to exceed its
operating cash flows from July through December.
LIQUIDITY AND CAPITAL RESOURCES
As of August 30, 1997, the Company had a $35.0 million Revolving Credit
Facility (as defined below) with a borrowing base limitation of $22.5 million
and had $6.5 million available for future borrowings under its Bank Credit
Facility, as defined below. The Borrowing base limitation is recalculated
monthly. Management believes that cash flows generated by existing operations
and its available Bank Credit Facility will be sufficient to fund its ongoing
operations. The Company's liquidity needs arise primarily from debt service on
the Bank Credit Facility and the Notes, defined below, 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's cash flows from operating activities for the fiscal year
ended August 30, 1997, were primarily the net result of decreased accounts
receivable, decreased inventories, increased other assets and decreased accounts
payable
-19-
<PAGE>
and accrued expenses. The decrease in accounts receivable, inventories, accounts
payable and accrued expenses were due to the short year included in fiscal 1997
beginning in December 1996. As of December 16, 1996, the date of the
consummation of the Acquisitions, inventory and receivables were at a high point
of the year. The majority of the increase in prepaid expenses and other current
assets relates to the sales representative advances and prepaid advertising
being higher at this time of year before the busy season begins. The majority
of the increase in other assets relates to transaction fees and expenses.
Also affecting cash are the one-time costs associated with the closing of
the Attleboro facilities, moving expenses and set-up expenses in Austin. The
Company has established a $12.1 million reserve for these expenses. As of
August 30, 1997, $9.3 million of the costs have been incurred. The remaining
balance of $2.8 million represents reserves for remaining severance expenses
payable to Balfour employees and the moving expenses associated with the metal
stamping and tooling operations currently operating in Attleboro. The Company's
projected capital expenditures for the fiscal year 1998 are $3.7 million for
manufacturing equipment, tools and dies and software development.
The following summarizes certain provisions of the bank credit agreement
governing the Revolving Credit, Term Loan and Gold Consignment Agreement (the
"Bank Credit Facility"), 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
agent, the "Agents") and the financial institutions party thereto.
The Bank Credit Facility consists of a senior secured credit facility of up
to $60,000,000, including (i) a $25,000,000 term loan facility (the "Term Loan
Facility"), (ii) a $25,000,000 revolving credit facility (with a letter of
credit sublimit of $5,000,000) (the "Revolving Credit Facility") and (iii) a
$10,000,000 gold consignment and revolving credit facility (the "Gold Facility",
and together with the Revolving Credit Facility, the "Revolving Credit and Gold
Facilities").
The Term Loan Facility matures on December 16, 2003. The Company may
prepay the Term Loan Facility at any time, except that any repayment of any
portion of the Term Loan Facility bearing interest at the Eurodollar Rate may
only be repaid on the last day of the Interest Period relating thereto. The
Company must repay the Term Loan Facility in 28 consecutive quarterly
installments, which commenced March 31, 1997. The final installment of
principal of the Term Loan Facility is due and payable on December 16, 2003. In
addition, subject to certain exceptions set forth in the Bank Credit Agreement,
the Company must make mandatory prepayments of the Term Loan Facility from
certain asset sales, equity issuances, and 50% of Consolidated Excess Cash Flow
(as defined).
Availability under the Revolving Credit Facility and the Gold Facility is
subject to a borrowing base limitation (the "Borrowing Base") based on the
aggregate of certain percentages of Eligible Receivables (as defined) and
Eligible Inventory (as defined) of the Company. The borrowing base limitation
is recalculated each month. If the aggregate amount of loans and other
extensions of credit under the Revolving Credit Facility and the Gold Facility
exceeds the Borrowing Base, the Company must immediately prepay or cash
collateralize its obligations under the Revolving Credit Facility to the extent
of such excess.
The Gold Facility consists of (a) a purchase and consignment facility,
pursuant to which RIHT, as gold agent, on behalf of the lenders under the Gold
Facility, will purchase amounts of gold inventory for the Company and consign
such amounts to the Company, (b) a consignment facility, pursuant to which the
gold agent, on behalf of the lenders under the Gold Facility, will obtain and
consign amounts of gold to the Company and (c) a revolving loan facility.
Loans outstanding under the Bank Credit Facility bear interest at either
fixed or floating rates based upon the interest rate option selected by the
Company. The weighted average interest rate of debt outstanding at August 30,
1997 is 10.5%.
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<PAGE>
The Revolving Credit and Gold Facilities may be borrowed, repaid and
reborrowed from time to time until December 16, 2001, subject to certain
conditions on the date of any such borrowing. Amounts of principal repaid on
the Term Loan Facility may not be reborrowed.
The Bank Credit Facility is secured by a first priority lien on
substantially all assets of the Company, including all accounts receivable,
inventory, equipment, general intangibles, real estate, buildings and
improvements and the outstanding stock of its subsidiaries. The Company's U.S.
subsidiary, CBI North America, Inc., has guaranteed the Company's obligations
and granted a similar security interest.
The Bank Credit Facility contains certain customary affirmative and
negative covenants, including, among other things, requirements that the Company
(i) periodically deliver certain financial information (including monthly
borrowing base, consigned metal and receivables aging reports), (ii) not merge
or make certain asset sales, (iii) not permit certain liens to exist on its
assets, (iv) not incur additional debt or liabilities except as may be permitted
under the terms of the Bank Credit Facility (v) not make capital expenditures in
excess of limits set forth in the Bank Credit Facility (vi) not declare or make
certain dividend payments, (vii) not make certain investments or consummate
certain acquisitions, (viii) not enter into any consignment transactions as
consignee (except for deliveries of diamonds), (ix) not create a new subsidiary,
(x) not establish any new bank account, and (xi) establish concentration
accounts with 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 Facility). In addition, the
Company must comply with certain financial covenants, including maintaining a
specified minimum interest coverage ratio of Consolidated EBITDA to Consolidated
Interest Expense, maximum Consolidated Senior Funded Debt to Consolidated EBITDA
and minimum Consolidated EBITDA (as those terms are defined in the Bank Credit
Agreement) in amounts set forth in the Bank Credit Facility. Most of the
covenants apply to the Company and its subsidiaries, and the Company was in
compliance with all of its covenants under the Bank Credit Facility as of August
30, 1997.
The Bank Credit Facility contains certain customary events of default,
including nonpayment, misrepresentation, breach of covenant, bankruptcy, ERISA,
judgments, change of control and cross defaults. In addition, the Bank Credit
Facility provides that it shall be an Event of Default if the Company or any of
its subsidiaries (other than its Mexican subsidiary) shall be enjoined or
restrained from conducting any material part of its business for more than 30
days.
The Company's $90,000,000 aggregate principal amount of 11% Senior
Subordinated Notes mature on January 15, 2007 ("Notes"). The Notes are
redeemable at the option of the Company, in whole or in part, at any time on or
after January 15, 2002, plus accrued and unpaid interest and Liquidated Damages
(as defined), if any, thereon to the date of redemption. In the event the
Company completes one or more Public Equity Offerings (as defined) on or before
January 15, 2000, the Company may, in its discretion, use the net cash proceeds
to redeem up to 33 1/3% of the original principal amount of the Notes at a
redemption price equal to 111% of the principal amount thereof, plus accrued and
unpaid interest and Liquidated Damages, if any, thereon to the date of
redemption, with the net proceeds of one or more Public Equity Offerings,
provided that at least 66-2/3% of the original principal amount of the Notes
remains outstanding immediately after each such redemption.
In the event of a Change of Control (as defined), each holder of the
Notes will have the right to require the Company to purchase all or any part
of such holder's Notes at a purchase price in cash equal to 101% of the
aggregate principal amount thereof, plus accrued and unpaid interest and
Liquidated Damages, if any, thereon to the date of purchase. The Bank Credit
Facility prohibits the Company from purchasing any Notes upon a Change of
Control, and certain Change of Control events with respect to the Company
would constitute a default thereunder.
In the event of an Asset Sale (as defined), the Company is required to
apply any Net Proceeds (as defined) to permanently reduce senior
indebtedness, to acquire another business or long-term assets or to make
capital expenditures. To the extent such amounts are not so applied within
thirty days and the amount not applied exceeds $5.0 million, the
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<PAGE>
Company is required to make an offer to all holders of the Notes to purchase
an aggregate principal amount of Notes equal to such excess amount at a
purchase price in cash equal to 100% of the principal amount thereof, plus
accrued and unpaid interest and Liquidated Damages, if any, thereon to the
date of purchase.
The Indenture dated as of December 16, 1996, between the Company and
Marine Midland Bank, as trustee (the "Indenture") pursuant to which the Notes
were issued contains certain covenants that, among other things, limit the
ability of the Company and its subsidiaries to (a) incur additional
indebtedness and issue preferred stock, (b) pay dividends or make certain
other restricted payments, (c) enter into transactions with affiliates, (d)
create certain liens, (e) make certain asset dispositions, and (f) merge or
consolidate with, or transfer substantially all of its assets to, another
person. The Company was in compliance with all debt covenants as of August
30, 1997.
DISCLOSURE REGARDING FORWARD LOOKING STATEMENTS
This report includes forward looking statements within the meaning of
Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended. Although management believes that
the expectations reflected in such forward looking statements are based upon
reasonable assumptions, the Company can give no assurance that these
expectations will be achieved. Important factors that could cause actual
results to differ materially from the Company's expectations include general,
economic, business and market conditions, the volatility of the price of gold,
competition, development and operating costs and the factors that are disclosed
in conjunction with the forward looking statements included herein (collectively
the "Cautionary Disclosures"). Subsequent written and oral forward looking
statements attributable to the Company or persons acting on its behalf are
expressly qualified in their entirety by the Cautionary Disclosures.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements of the Company and the predecessor financial
statements of ArtCarved and Balfour are included as part of this report. (See
page 33.)
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
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<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The following table sets forth in alphabetical order each person who was an
executive officer or director of the Company as of August 30, 1997:
NAME POSITION
- ---- --------
EXECUTIVE OFFICERS AND DIRECTORS:
Jeffrey H. Brennan President and Chief Executive Officer
John K. Castle Director
Richard H. Fritsche Vice President and Chief Financial
Officer
William J. Lovejoy Director
David B. Pittaway Director
Zane Tankel Director
For a description of the employment arrangements with respect to Messrs.
Brennan and Fritsche (hereinafter, the "Named Executive Officers") (see
"Executive Compensation --Employment Agreements"). No family relationship
exists between any of the executive officers or between any of them and any
director of the Company.
JEFFREY H. BRENNAN (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 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 services,
supplies and equipment.
JOHN K. CASTLE (56) 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 Sealed Air Corporation and
Morton's Restaurant 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 (52) has been Vice President and 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.
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<PAGE>
WILLIAM J. LOVEJOY (30) has been a director of the Company since December
16, 1996, and served as Secretary of the Company 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 (46) has been a director of the Company since December
16, 1996, and was President, Treasurer and the sole director of the Company from
April 1996 through December 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. 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 (57) has been a director of the Company since December 16,
1996, and has been Chairman and Chief Executive Officer of Zane Tankel
Consultants, Inc., a sales company, since 1990. In 1994, Mr. Tankel formed Apple
Metro, Inc., a restaurant franchisee for the New York metropolitan area, for the
franchiser Applebee's Neighborhood Grill & Bar. He is presently Chairman and
Chief Executive Officer of Apple Metro, Inc. In 1995, Mr. Tankel was elected
chairman of the Federal Law Enforcement Foundation, which aids the federal law
enforcement community in times of crisis, and was elected to the Board of
Directors of the Metropolitan Presidents Organization, the New York chapter of
the World Presidents Organization, with which Mr. Tankel has been associated
since 1977. Mr. Tankel is also on the advisory board to the Boys Choir of Harlem
and, 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.
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.
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<PAGE>
ITEM 11. EXECUTIVE COMPENSATION
The table below summarizes the total value of compensation received by the
Named Executive Officers who received salary and bonus which exceeded $100,000
in fiscal 1997. The table includes the period from December 16, 1996, through
August 30, 1997.
<TABLE>
<CAPTION>
SUMMARY COMPENSATION TABLE
Annual Compensation Long Term
------------------- Compensation
------------
Securities
Name and Underlying All Other
Principal Position(1) Year Salary($) Bonus($) Options(#)(2) Compensation($)(3)
- ---------------------- ------ -------- -------- ------------ ------------------
<S> <C> <C> <C> <C> <C>
George Agle
Chairman of the Board 1997 207,692 50,000 -0- -0-
Jeffrey H. Brennan
President and Chief Executive Officer 1997 131,538 -0- 8,617 -0-
Richard H. Fritsche
Vice President and Chief
Financial Officer 1997 79,618 -0- 1,723 46,740
</TABLE>
- --------------
(1) Mr. Agle's employment with the Company ended as of March 31, 1997.
(2) The right to exercise the underlying options granted pursuant to the
Company's Amended and Restated 1997 Stock Option Plan (the "Plan") vest at
the rate of 25% per year in years 2 through 5 after grant. As of August
30, 1997, there were no options exercisable under the Plan. The options
expire ten years from the date of grant.
(3) Consists of reimbursement for relocation expenses.
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<PAGE>
The table below summarizes the grants of stock options under the Plan to
each of the Named Executive Officers during fiscal 1997.
<TABLE>
<CAPTION>
OPTION GRANTS IN LAST FISCAL YEAR
Potential realizable value at assumed annual
Individual Grants rates of stock price appreciation for option term
------------------ -------------------------------------------------
Number of
securities Percent of total
underlying options granted Exercise or
Options granted to employees in base price Expiration
Name (#) fiscal year (%) ($/Sh) Date 5% ($)(1) 10% ($)(1)
------- --------------- --------------- ----------- ----------- --------- -----------
<S> <C> <C> <C> <C> <C> <C>
George Agle -0- -0- -0- -0- -0- -0-
Jeffrey H. Brennan 8,617 2.0 6.67 7-29-07 36,100 91,600
Richard H. Fritsche 1,723 0.4 6.67 7-29-07 7,200 18,300
</TABLE>
- --------------
(1) Computed by the product of (i) the per share exercise price at the time of
the grant ($6.67) which was also the estimated fair market value at the
time of grant, (ii) the number of shares subject to the option, and (iii)
the sum of 1 plus the adjusted stock price appreciation rate (the indicated
assumed rate of appreciation compounded annually over the term of the
option).
The table below summarizes the exercise of Company options during fiscal 1997.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
Value of Unexercised
Number of Unexercised In-the-Money Options at FY-
Options at FY-End End ($)
Exercisable/ Exercisable/
Shares Acquired on Unexercisable (#) Unexercisable
Name Exercise (#) Value Realized ($) (in thousands) (1) (in thousands) (2)
------ ------------------ ------------------ --------------------- ----------------------
<S> <C> <C> <C> <C>
George Agle 0 0 0/0 0/0
Jeffrey H. Brennan 0 0 0/8,617 0/0
Richard H. Fritsche 0 0 0/1,723 0/0
</TABLE>
- --------------
(1) Includes options granted under the Company's Amended and Restated 1997
Stock Option Plan.
(2) There is no public trading market for the Company's Common Stock. The
options were granted on July 29, 1997 with an exercise price of $6.67,
which was the assumed fair market value on such date. It is assumed that
the fair market value of the Common Stock at August 30, 1997, has not
changed from the exercise price.
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<PAGE>
STANDARD ARRANGEMENTS WITH DIRECTORS
Directors do not receive any compensation for their services as directors.
Directors are reimbursed for expenses incurred by them in attending meetings of
the Board of Directors or any committee thereof.
The Company has entered into indemnification agreements with its each of
directors that, among other things, require the Company to indemnify such
directors to the fullest extent permitted by law, and to advance to the
directors all related expenses, subject to reimbursement if it is subsequently
determined that indemnification is not permitted. The Company has also agreed to
indemnify and advance all expenses incurred by directors seeking to enforce
their rights under the indemnification agreements, and to cover directors under
the Company's directors' and officers' liability insurance.
EMPLOYMENT CONTRACTS
Pursuant to the purchase agreement related to the acquisition of Balfour,
the Company agreed to employ Mr. Agle effective as of December 16, 1996, at an
annual base salary of $300,000 plus a bonus of $50,000 payable under certain
circumstances. In addition, the Company agreed to assume Balfour's obligations
under Mr. Agle's employment agreement with Balfour to pay Mr. Agle a severance
payment equal to 18 months of his yearly salary payable on a monthly basis in
the event he voluntarily terminated employment with the Company under certain
circumstances or was terminated without cause. Mr. Agle's employment by the
Company ended as of March 31, 1997, whereupon Mr. Agle was paid a $50,000 bonus
and the Company commenced making severance payments to Mr. Agle in accordance
with the foregoing.
The Company has entered into an employment agreement with Jeffrey H.
Brennan, effective as of December 16, 1996, pursuant to which Mr. Brennan serves
as Chief Executive Officer of the Company at an annual base salary of $190,000
per year for an initial term of four years, which will automatically be extended
for additional 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
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<PAGE>
period following his termination in an amount equal to the average of his
bi-weekly base compensation in effect within the two years preceding his
termination. Mr. Fritsche has agreed not to compete with the Company in the
United States for a period of one year after the termination of his employment
under his employment agreement.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
No member of the Compensation Committee is an employee of the Company.
There are no compensation committee interlocks (i.e., no executive officer of
the Company serves as a member of the board of directors or the compensation
committee of another entity which has an executive officer serving on the Board
or the Compensation Committee.)
MANAGEMENT OPTIONS
The Board of Directors of the Company approved the Commemorative Brands,
Inc. Amended and Restated 1997 Stock Option Plan (the "Plan") effective July 29,
1997. Approximately 15% of the Common Stock of the Company on a fully diluted
basis (after giving effect to the issuance of the shares of Common Stock
underlying such options) or 69,954 shares of Common Stock have been reserved for
issuance upon exercise of future stock options under the Plan. On July 29,
1997, the Board approved the grant of 34,470 option shares to management
employees at an exercise price of $6.67. The Compensation Committee is
responsible for monitoring the Plan.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information known by the Company
regarding the beneficial ownership of the Company's voting securities as of
August 30, 1997, with respect to (i) each person or entity who is the beneficial
owner of more than 5% of any class of the Company's voting securities, (ii) each
of the Company's directors, (iii) each of the Named Executive Officers, and (iv)
all directors and executive officers as a group.
<TABLE>
<CAPTION>
NUMBER OF PERCENTAGE NUMBER OF PERCENTAGE
SHARES OF OF TOTAL SHARES OF OF TOTAL
COMMON COMMON SERIES B SERIES B
NAME AND ADDRESS OF BENEFICIAL OWNER (1) STOCK STOCK PREFERRED PREFERRED
- ---------------------------------------------------------------------------------------------------------
<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) 469 * 469 *
Zane Tankel (2) -- -- -- --
Jeffrey H. Brennan (5) -- -- -- --
Richard H. Fritsche (5) -- -- -- --
Directors and executive officers as a group
(6 persons including those listed above)(5) 375,000 100.0 375,000 100.0
</TABLE>
- --------------
* Denotes beneficial ownership of less than one percent of the class of
capital stock.
-28-
<PAGE>
(1) Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission. Except as indicated in the footnotes to
this table, each stockholder named in the table has sole voting and
investment power with respect to the shares set forth opposite such
stockholder's name.
(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 Offshore, 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. In addition, Mr. Castle serves as voting
trustee under a voting trust agreement (the "Voting Trust Agreement") with
certain limited partners of CHALP and a corporate entity of which Mr.
Castle is Chairman, Chief Executive Officer and principal stockholder. As
such voting trustee, Mr. Castle may be deemed the beneficial holder of the
shares of Common Stock and Series B Preferred beneficially held by such
partners (which amounts are included in the numbers set forth above). Mr.
Castle disclaims beneficial ownership of such shares.
(5) The address for each individual identified above is c/o Commemorative
Brands, Inc., 7211 Circle S Road, Austin, Texas 78745.
In accordance with a subscription agreement entered into by the Company and
CHP II and certain of CHP II's affiliates (together, 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.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The Company entered into a Management Agreement dated December 16, 1996,
with Castle Harlan, Inc. (the "Manager"), pursuant to which the Manager agreed
to provide business and organizational strategy, financial and investment
management and merchant and investment banking services to the Company upon the
terms and conditions set forth therein. As compensation for such services, the
Company agreed to pay the Manager $1.5 million per year, which amount has been
paid in advance for the first year and is payable quarterly in arrears
thereafter. The agreement is for a term of 10 years, renewable automatically
from year to year thereafter unless the Castle Harlan Group then owns less than
5% of the then outstanding capital stock of the Company. The Company has agreed
to indemnify the Manager against liabilities, costs, charges and expenses
relating to the Manager's performance of its duties, other than such of the
foregoing resulting from the Manager's gross negligence or willful misconduct.
The Indenture prohibits payment of the management fee in the event of a default
by the Company in the payment of principal, Redemption Price, Purchase Price
(both as defined in the Indenture), interest, or Liquidated Damages (if any) on
the Notes. The Bank Credit Facility prohibits payment of the management fee as
long as an Event of Default (as defined) has occurred or is continuing.
-29-
<PAGE>
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
The following documents have been filed as a part of this report or where
noted incorporated by reference:
(a) (1) and (2) The response to this portion of Item 14 is submitted as a
separate section of this report. (See page 33.)
(b) The Company has not filed any reports on Form 8-K over the
last quarter of the period covered by this report.
(a) (3) and (c) The response to this portion of Item 14 is submitted as a
separate section of this report. (See page 87.)
-30-
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
COMMEMORATIVE BRANDS, INC.
By: /s/ RICHARD H. FRITSCHE
--------------------------------
(Signature)
Richard H. Fritsche
Chief Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant in
the indicated capacities on November 26, 1997.
/S/ JEFFREY H. BRENNAN President and Chief Executive
- ----------------------------------- Officer and Director
Jeffrey H. Brennan
/S/ RICHARD H. FRITSCHE Vice President, Chief Financial
- ----------------------------------- Officer and Principal
Richard H. Fritsche Accounting Officer
/S/ JOHN K. CASTLE Director
- -----------------------------------
John K. Castle
/S/ WILLIAM J. LOVEJOY Director
- -----------------------------------
William J. Lovejoy
/S/ DAVID B. PITTAWAY Director
- -----------------------------------
David B. Pittaway
/S/ ZANE TANKEL Director
- -----------------------------------
Zane Tankel
-31-
<PAGE>
SUPPLEMENTAL INFORMATION TO BE FURNISHED WITH REPORTS FILED PURSUANT TO SECTION
15(d) OF THE ACT BY REGISTRANTS WHICH HAVE NOT REGISTERED SECURITIES PURSUANT TO
SECTION 12 OF THE ACT:
The Company has not sent to any of the Company's security holders either (i) an
annual report covering the Company's last fiscal year or (ii) any proxy
statement, form of proxy or other proxy material with respect to any annual or
other meeting of security holders.
-32-
<PAGE>
FINANCIAL STATEMENTS
Index to Financial Statements
<TABLE>
<CAPTION>
Page
<S> <C>
Consolidated Financial Statements of Commemorative Brands, Inc. and Subsidiaries
Report of Independent Public Accountants . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34
Consolidated Balance Sheet as of August 30, 1997 . . . . . . . . . . . . . . . . . . . . . . . . 35
Consolidated Statement of Operations for the Fiscal Year Ended August 30, 1997 . . . . . . . . . 36
Consolidated Statement of Stockholders' Equity for the Fiscal Year Ended August 30, 1997 . . . . 37
Consolidated Statement of Cash Flows for the Fiscal Year Ended August 30, 1997 . . . . . . . . . 38
Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . 39
Financial Statements of CJC Holdings, Inc., Class Rings Business (Artcarved)
Report of Independent Public Accountants . . . . . . . . . . . . . . . . . . . . . . . . . . . . 54
Balance Sheet - August 31, 1996. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 55
Statements of Income (Loss) for the Fiscal Years Ended August 26, 1995, and August 31, 1996,
and for the Period from September 1, 1996, Through December 16, 1996 . . . . . . . . . . . . 56
Statements of Changes in Advances and Equity (Deficit) for the Fiscal Years Ended
August 26, 1995, and August 31, 1996, and for the Period from September 1,
1996, Through December 16, 1996. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 57
Statements of Cash Flows for the Fiscal Years Ended August 26, 1995, and August 31, 1996,
and for the Period from September 1, 1996, Through December 16, 1996 . . . . . . . . . . . . 58
Notes to Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 59
Financial Statements of L. G. Balfour Company, Inc.
Report of Independent Public Accountants. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 69
Balance Sheet as of February 25, 1996 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 70
Statements of Operations for the Years Ended February 26, 1995, and
February 25, 1996, and for the Period Ended December 16, 1996. . . . . . . . . . . . . . . . 71
Statements of Stockholder's Equity for the Years Ended February 26, 1995, and
February 25, 1996, and for the Period Ended December 16, 1996. . . . . . . . . . . . . . . . 72
Statements of Cash Flows for the Years Ended February 26, 1995, and
February 25, 1996, and for the Period Ended December 16, 1996. . . . . . . . . . . . . . . . 73
Notes to Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 74
</TABLE>
-33-
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Stockholders of
Commemorative Brands, Inc.:
We have audited the accompanying consolidated balance sheet of Commemorative
Brands, Inc. (a Delaware corporation), and subsidiaries as of August 30,
1997, and the related consolidated statements of operations, stockholders'
equity and cash flows for the fiscal year ended August 30, 1997. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of
Commemorative Brands, Inc., and subsidiaries, as of August 30, 1997, and the
results of their operations and their cash flows for the fiscal year ended
August 30, 1997, in conformity with generally accepted accounting principles.
/s/ Arthur Andersen LLP
Houston, Texas
October 24, 1997
-34-
<PAGE>
COMMEMORATIVE BRANDS, INC.
CONSOLIDATED BALANCE SHEET
AUGUST 30, 1997
(In Thousands)
ASSETS
<TABLE>
<CAPTION>
<S> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 2,174
Accounts receivable, net of allowance for doubtful accounts of $3,750 26,444
Inventories 11,767
Prepaid expenses and other current assets 8,522
--------
Total current assets 48,907
PROPERTY, PLANT AND EQUIPMENT, net 33,460
TRADEMARKS, net of accumulated amortization of $543 30,197
GOODWILL, net of accumulated amortization of $1,426 82,935
OTHER ASSETS 5,370
--------
Total assets $200,869
--------
--------
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Bank overdraft $ 4,188
Accounts payable and accrued expenses 20,893
Current portion of long-term debt 750
--------
Total current liabilities 25,831
LONG-TERM DEBT, net of current portion 124,700
OTHER LONG-TERM LIABILITIES 9,885
--------
Total liabilities 160,416
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Preferred stock, $.01 par value, 750,000 shares authorized (in total)-
Series A, 100,000 shares issued and outstanding 1
Series B, 375,000 shares issued and outstanding 4
Common Stock, $.01 par value, 750,000 shares authorized, 375,000 issued and
outstanding 4
Additional paid-in capital 50,161
Retained earnings (deficit) (9,717)
--------
Total stockholders' equity 40,453
--------
Total liabilities and stockholders' equity $200,869
--------
--------
</TABLE>
The accompanying notes are an integral part of this consolidated financial
statement.
-35-
<PAGE>
COMMEMORATIVE BRANDS, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE FISCAL YEAR ENDED AUGUST 30, 1997
(In Thousands)
NET SALES $87,600
COST OF SALES 45,189
--------
GROSS PROFIT 42,411
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES 41,481
--------
OPERATING INCOME 930
INTEREST EXPENSE, net 9,797
--------
LOSS BEFORE PROVISION FOR INCOME TAXES (8,867)
PROVISION FOR INCOME TAXES -
--------
NET LOSS (8,867)
PREFERRED DIVIDENDS (850)
--------
NET LOSS TO COMMON STOCKHOLDERS $(9,717)
--------
--------
NET LOSS PER COMMON AND COMMON EQUIVALENT SHARE $(25.91)
--------
--------
Commemorative Brands, Inc., completed the acquisitions of ArtCarved
and Balfour on December 16, 1996, and until such date, engaged in no
business activities other than those in connection with the
Acquisitions and financing thereof.
The accompanying notes are an integral part of this consolidated financial
statement.
-36-
<PAGE>
COMMEMORATIVE BRANDS, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE FISCAL YEAR ENDED AUGUST 30, 1997
(In Thousands, Except Share Data)
<TABLE>
<CAPTION>
Preferred Stock
----------------------------------------
Series A Series B Common Stock Additional Retained
------------------- ----------------- ----------------- Paid-In Earnings
Shares Amount Shares Amount Shares Amount Capital (Deficit) Total
------- -------- ------- ------- ------ ------ ------- --------- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE, March 28, 1996 (date of
inception) -- $ -- -- $ -- -- $ -- $ -- $ -- $ --
ISSUANCE OF COMMON STOCK -- -- -- -- 375,000 4 2,666 -- 2,670
ISSUANCE OF PREFERRED STOCK 100,000 1 375,000 4 -- -- 47,495 -- 47,500
ACCRUED PREFERRED STOCK -- -- -- -- -- -- -- (850) (850)
DIVIDENDS
NET LOSS -- -- -- -- -- -- -- (8,867) (8,867)
------- ------- ------- ------- ------- ------ -------- --------- --------
BALANCE, August 30, 1997 100,000 $ 1 375,000 $ 4 375,000 $ 4 $ 50,161 $ (9,717) $ 40,453
------- ------- ------- ------- ------- ------ -------- --------- --------
------- ------- ------- ------- ------- ------ -------- --------- --------
</TABLE>
Commemorative Brands, Inc., completed the acquisitions of ArtCarved
and Balfour on December 16, 1996, and until such date, engaged in no
business activities other than those in connection with the
Acquisitions and financing thereof.
The accompanying notes are an integral part of
this consolidated financial statement.
-37-
<PAGE>
COMMEMORATIVE BRANDS, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE FISCAL YEAR ENDED AUGUST 30, 1997
(In Thousands)
<TABLE>
<CAPTION>
<S> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(8,867)
Adjustments to reconcile net loss to net cash used in operating activities-
Depreciation and amortization 4,095
Provision for doubtful accounts 632
Changes in assets and liabilities-
Decrease in accounts receivable 8,187
Decrease in inventories 4,557
Increase in prepaid expenses and other current assets (3,237)
Increase in other assets (1,567)
Decrease in bank overdraft, accounts payable and accrued expenses (4,477)
--------
Net cash used in operating activities (677)
--------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property, plant and equipment (3,493)
Cash paid for the acquisitions of ArtCarved and Balfour, including transaction costs (170,200)
--------
Net cash used in investing activities (173,693)
--------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from debt issuance 120,200
Proceeds from issuance of common and preferred stock 50,000
Note borrowings, net 5,250
--------
Net cash provided by financing activities 175,450
--------
NET INCREASE IN CASH AND CASH EQUIVALENTS 1,080
CASH AND CASH EQUIVALENTS, beginning of period 1,094
--------
CASH AND CASH EQUIVALENTS, end of period $ 2,174
--------
--------
SUPPLEMENTAL DISCLOSURE:
Cash paid during the period for-
Interest $ 7,568
--------
--------
Taxes $ -
--------
--------
SUPPLEMENTAL DISCLOSURE OF NONCASH FINANCING ACTIVITIES:
Accrued preferred stock dividends $ 850
--------
--------
</TABLE>
Commemorative Brands, Inc., completed the acquisitions of ArtCarved
and Balfour on December 16, 1996, and until such date, engaged in no
business activities other than those in connection with the
Acquisitions and financing thereof.
The accompanying notes are an integral part of this consolidated financial
statement.
-38-
<PAGE>
COMMEMORATIVE BRANDS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) BACKGROUND AND ORGANIZATION
Commemorative Brands, Inc., a Delaware corporation (together with its
subsidiaries, CBI or the Company), is a manufacturer and supplier of class rings
and other graduation-related scholastic products for the high school and college
markets and manufactures and markets recognition and affinity jewelry designed
to commemorate significant events, achievements and affiliations. CBI was
initially formed in March 1996 by Castle Harlan Partners II, L.P. (CHP II), a
Delaware limited partnership and private equity investment fund, for the purpose
of acquiring ArtCarved and Balfour (as defined below) and, until December 16,
1996, engaged in no business activities other than in connection with the
Acquisitions (as defined below) and the financing thereof. The Company's
scholastic product line consists of high school and college class rings (the
Company's predominate product offering) and graduation-related fine paper
products such as announcements, name cards and diplomas. The Company is a
leading manufacturer of class rings in the United States with its corporate
office and primary manufacturing facilities located in Austin, Texas.
(2) MERGERS AND ACQUISITIONS
On December 16, 1996, the Company completed the acquisitions (the Acquisitions)
of substantially all of the scholastic and recognition and affinity product
assets and businesses of the ArtCarved Class Rings (ArtCarved) operations of CJC
Holdings, Inc. (CJC), from CJC and certain assets and liabilities of L. G.
Balfour Company, Inc. (Balfour), from Town & Country Corporation (Town &
Country).
In consideration for ArtCarved, CBI paid CJC, in cash, the sum of $115.1 million
and assumed certain related liabilities. In consideration for Balfour, CBI paid
Town & Country, in cash, the sum of $45.9 million and assumed certain related
liabilities. In addition, CBI purchased the gold on consignment to L. G.
Balfour Company, Inc., as of the closing date for a cash purchase price of
approximately $5.4 million.
The following represents the allocation of the purchase prices for ArtCarved and
Balfour to their respective assets and liabilities based on third-party
appraisals and management's estimate of fair values. The allocation of the
purchase prices (including transaction costs) for the Acquisitions is as set
forth below (in thousands):
ArtCarved Balfour
---------- ---------
Current assets $ 23,220 $ 35,497
Property, plant and equipment 17,039 15,042
Goodwill 64,127 17,885
Trademarks 17,740 13,000
Other long-term assets 1,687 171
Accounts payable and accrued expenses (6,066) (22,334)
Other long-term liabilities -- (6,808)
-------- --------
$117,747 $ 52,453
-------- --------
-------- --------
The Company has closed and exited substantially all of the Balfour operations
and moved them from Attleboro, Massachusetts, to Austin, Texas.
-39-
<PAGE>
(3) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
FISCAL YEAR-END
CBI uses a 52/53-week fiscal year ending on the last Saturday of August.
CONSOLIDATION
The consolidated financial statements include the accounts of the Company and
its subsidiaries. All material intercompany accounts and transactions have been
eliminated in consolidation.
BUSINESS CONDITIONS
The results of operations of the Company for the fiscal year ended August 30,
1997, were adversely impacted as a result of the ongoing consolidation of the
Attleboro and North Attleboro, Massachusetts operations into the Austin, Texas
facilities (the "Combination"). Consolidation and integration of operations
related to the Combination required substantial time and cost due to
complications arising from the integration of different order entry and
manufacturing processes required for the Balfour ring product line. The time to
train new personnel and implement the Balfour class ring operations was
extensive and has resulted in ring manufacturing headcount levels higher than
those experienced in the predecessor companies. The additional headcount is
anticipated to remain in place at least through December 1997, to provide
service levels comparable to those experienced in Massachusetts. The Company
anticipates incurring costs from inefficiencies and a higher than expected
headcount during at least the first two quarters of fiscal 1998. There can be
no assurance that the operations formerly conducted by each of the Company's
predecessors will be fully integrated or as to the amount of any cost savings
that may result from such integration.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents include highly liquid investments with original
maturities of three months or less.
INVENTORIES
Inventories, which include raw materials, labor and manufacturing overhead, are
stated at the lower of cost or market using the first-in, first-out (FIFO)
method.
SALES REPRESENTATIVE ADVANCES AND RESERVE FOR SALES REPRESENTATIVE ADVANCES
The Company advances funds to new sales representatives in order to open up
new sales territories or makes payments to predecessor sales representatives
on behalf of successor sales representatives. Such amounts are repaid by the
sales representatives through earned commissions on product sales. The
Company provides reserves to cover those amounts which it estimates to be
uncollectible. These amounts are included in prepaid expenses and other
current assets in the accompanying balance sheet.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are stated at cost, net of accumulated
depreciation. Depreciation is provided principally using the straight-line
method based on estimated useful lives of the assets as follows:
Description Useful Life
- ----------- -----------
Land improvements 15 years
Buildings and improvements 10 to 25 years
Tools and dies 10 to 20 years
Machinery and equipment 2 to 10 years
-40-
<PAGE>
Maintenance, repairs and minor replacements are charged against income as
incurred; major replacements and betterments are capitalized. The cost of
assets sold or retired and the related accumulated depreciation are removed from
the accounts at the time of disposition, and any resulting gain or loss is
reflected as other income or expense for the period.
TRADEMARKS
The value of trademarks was determined based on a third-party appraisal and is
being amortized on a straight-line basis over 40 years.
IMPAIRMENT OF LONG-LIVED ASSETS
In March 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (SFAS) No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of." This statement
deals with accounting for the impairment of long-lived assets, certain
identifiable intangibles and goodwill related to assets to be held and used, and
for long-lived assets and certain identifiable intangibles to be disposed of.
This statement requires that long-lived assets (e.g., property, plant and
equipment and intangibles) be reviewed for impairment whenever events or changes
in circumstances, such as change in market value, indicate that the assets'
carrying amounts may not be recoverable. In performing the review for
recoverability, if future undiscounted cash flows (excluding interest charges)
from the use and ultimate disposition of the assets are less than their carrying
values, an impairment loss is recognized. Impairment losses are to be measured
based on the fair value of the asset. When factors indicate that long-lived
assets should be evaluated for possible impairment, the Company uses an estimate
of the related product lines' undiscounted cash flows over the remaining lives
of the assets in measuring whether the assets are recoverable.
GOODWILL
Costs in excess of fair value of net tangible assets acquired and related
acquisition costs are included in goodwill in the accompanying balance sheet.
Goodwill is being amortized on a straight-line basis over 40 years. The Company
continually evaluates whether events and circumstances have occurred that
indicate that the remaining estimated useful life of goodwill may warrant
revision or that the remaining balance of goodwill may not be recoverable. When
factors indicate that goodwill should be evaluated for possible impairment, the
Company uses an estimate of the related product lines' undiscounted cash flows
over the remaining life of the goodwill in measuring whether the goodwill is
recoverable.
OTHER ASSETS
Other assets include deferred financing costs which are amortized over the lives
of the specific debt and ring samples to national chain stores and sales
representatives which are amortized over three years.
INCOME TAXES
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases. Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. Deferred tax assets are
recognized net of any valuation allowance. The effect on deferred tax assets
and liabilities of a change in tax rates is recognized in income in the period
that includes the enactment date.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company's financial instruments consist primarily of cash and cash
equivalents, accounts receivable, bank overdraft, accounts payable and long-term
debt (including current maturities). The carrying amounts of the Company's cash
and cash equivalents, accounts receivable, bank overdraft and accounts payable
approximate fair value due to their
-41-
<PAGE>
short-term nature. The fair value of the Company's long-term debt approximates
the recorded amount based on current rates available to the Company for debt
with the same or similar terms.
REVENUE RECOGNITION
Revenues from product sales are recognized at the time the product is shipped.
CONCENTRATION OF CREDIT RISK
Credit is extended to various companies in the retail industry which may be
affected by changes in economic or other external conditions. The Company's
policy is to manage its exposure to credit risk through credit approvals and
limits.
ADVERTISING EXPENSE
Selling, general and administrative expenses for the Company include advertising
expense of $2,752,000 for the fiscal year ended August 30, 1997 (see Note 1).
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from these estimates.
SEASONALITY
The Company's scholastic product sales tend to be seasonal. Class ring sales are
highest during October through December (which overlaps the Company's first and
second fiscal quarters), when students have returned to school after the summer
recess and orders are taken for delivery of class rings to students before the
winter holiday season. Sales of the Company's fine paper products are
predominantly made during February through April (which overlaps the Company's
second and third fiscal quarters) for graduation in May and June. ArtCarved and
Balfour historically experienced operating losses during the period of the
Company's fourth fiscal quarter, which includes the summer months when school is
not in session. The Company's recognition and affinity product line is not
seasonal in any material respect, although sales generally are highest during
the winter holiday season and in the period prior to Mother's Day. As a result,
the effects of seasonality of the class ring business on the Company are
tempered by the Company's relatively broad product mix. As a result of the
foregoing, the Company's working capital requirements tend to exceed its
operating cash flows from July through December.
NEW ACCOUNTING PRONOUNCEMENTS
In March 1997, the Financial Accounting Standards Board issued SFAS No. 128,
"Earnings Per Share." SFAS No. 128 revises the standards for computing earnings
per share currently prescribed by Accounting Principles Board (APB) Opinion No.
15. SFAS No. 128 retroactively revises the presentation of earnings per share
in the financial statements and is required to be adopted by the Company for the
fiscal year ending August 29, 1998. The earnings per share in the accompanying
financial statements is computed pursuant to APB Opinion No. 15 and is the same
that would be required for basic earnings per share under SFAS No. 128 which is
determined using only the weighted average shares outstanding. The Company also
has outstanding warrants and stock options that are not included in the
computation of diluted earnings per share under SFAS No. 128 because to do so
would be antidilutive.
SFAS No. 129, "Disclosure of Information About Capital Structure," will require
additional disclosure of information about an entity's capital structure,
including information about dividend and liquidation preferences, voting rights,
contracts to issue additional shares, conversion and exercise prices, etc. The
Company is required to adopt this statement for the fiscal year ending August
29, 1998.
-42-
<PAGE>
SFAS No. 130, "Reporting Comprehensive Income," is required to be adopted by the
Company for the fiscal year ending August 28, 1999, and the statement requires
the presentation of comprehensive income in an entity's financial statements.
Comprehensive income represents all changes in equity of an entity during the
reporting period, including net income and charges directly to equity which are
excluded from net income. This statement is not anticipated to have any impact
on the Company as the Company currently does not enter into any transactions
which result in charges (or credits) directly to equity (such as additional
minimum pension liability changes, currency translation adjustments, unrealized
gains and losses on available-for-sale securities, etc.).
SFAS No. 131, "Disclosures About Segments of an Enterprise and Related
Information," is required to be adopted by the Company for the fiscal year
ending August 28, 1999. SFAS No. 131 provides revised disclosure guidelines for
segments of an enterprise based on a management approach to defining operating
segments. The Company currently operates in only one industry segment and
analyzes operations on a companywide basis; therefore, the statement is not
expected to impact the Company.
(4) INVENTORIES
A summary of inventories is as follows (in thousands):
August 30,
1997
----------
Raw materials $ 8,769
Work in process 1,877
Finished goods 1,121
---------
$11,767
---------
---------
Cost of sales includes depreciation and amortization of $1,439,000 for the
fiscal year ended August 30, 1997 (see Note 1).
In accordance with purchase price accounting, at the purchase date (December 16,
1996), the inventory balance was increased by $4.7 million to record inventory
at fair market value. During the fiscal year ended August 30, 1997, this amount
was expensed to cost of sales (see Note 1).
(5) PREPAID EXPENSES AND OTHER CURRENT ASSETS
Prepaid expenses and other current assets consist of the following (in
thousands):
August 30,
1997
---------
Sales representative advances $ 4,491
Reserve on sales representative advances (1,528)
Current deferred tax asset 2,557
Prepaid advertising and promotion materials 1,999
Prepaid management fees 325
Other 678
-------
$ 8,522
-------
-------
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<PAGE>
(6) PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consists of the following (in thousands):
August 30,
1997
----------
Land $ 2,000
Buildings and improvements 4,614
Tools and dies 18,715
Machinery and equipment 9,364
Construction in progress 882
--------
Total 35,575
Accumulated depreciation (2,115)
--------
Property, plant and equipment, net $ 33,460
--------
--------
Depreciation expense (included in cost of sales and selling, general and
administrative expenses) recorded in the accompanying statement of operations is
$2,115,000 for the fiscal year ended August 30, 1997 (see Note 1).
(7) OTHER ASSETS
Other assets consist of the following (in thousands):
August 30,
1997
----------
Deferred financing costs $ 4,398
Ring samples 1,221
Other 143
------
5,762
Accumulated amortization (392)
------
Other assets, net $ 5,370
-------
-------
(8) ACCOUNTS PAYABLE AND ACCRUED EXPENSES
The principal components of accounts payable and accrued expenses are as follows
(in thousands):
August 30,
1997
--------
Accounts payable $ 5,484
Commissions and royalties 3,265
Compensation and related costs 2,476
Accrued interest payable 1,808
Customer deposits 1,539
Severance costs 1,308
Other 5,013
-------
$20,893
-------
-------
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<PAGE>
(9) LONG-TERM DEBT
Long-term debt consists of the following (in thousands):
August 30,
1997
----------
11% senior subordinated notes due 2007 $ 90,000
Term loan facility 24,750
Bank revolver 10,700
----------
Total debt 125,450
Less- Current portion 750
----------
Total long-term debt $ 124,700
----------
----------
11 PERCENT SENIOR SUBORDINATED NOTES
The Company's 11 percent senior subordinated notes mature on January 15, 2007.
The notes are redeemable at the option of the Company, in whole or in part, at
any time on or after January 15, 2002, plus accrued and unpaid interest and
liquidated damages (as defined), if any, thereon to the date of redemption. In
the event the Company completes one or more public equity offerings (as defined)
on or before January 15, 2000, the Company may, in its discretion, use the net
cash proceeds to redeem up to 33-1/3 percent of the original principal amount of
the notes at a redemption price equal to 111 percent of the principal amount
thereof, plus accrued and unpaid interest and liquidated damages, if any,
thereon to the date of redemption, with the net proceeds of one or more public
equity offerings, provided that at least 66-2/3 percent of the original
principal amount of the notes remains outstanding immediately after each such
redemption.
The 11 percent senior subordinated notes contain certain covenants that, among
other things, limit the ability of the Company (a) to incur additional
indebtedness and issue preferred stock, (b) to pay dividends or make certain
other restricted payments, (c) to enter into transactions with affiliates, (d)
to create certain liens, (e) to make certain asset dispositions and (f) to merge
or consolidate with, or transfer substantially all of its assets to, another
person. The Company was in compliance with all debt covenants as of August 30,
1997.
REVOLVING CREDIT, TERM LOAN AND GOLD CONSIGNMENT AGREEMENT
The Company has a revolving credit, term loan and gold consignment agreement
(the Bank Agreement) with a group of banks pursuant to which the Company
initially borrowed $25 million under a term loan facility and may borrow up to
$35 million under a revolving credit and gold facility. Loans outstanding under
the Bank Agreement bear interest at either fixed or floating rates based upon
the interest rate option selected by the Company.
TERM LOAN FACILITY
The term loan facility (Term Loan) matures on December 16, 2003. The Company
may prepay the Term Loan at any time. The Company must repay specified amounts
of the Term Loan in 28 consecutive quarterly installments which commenced March
31, 1997.
-45-
<PAGE>
REVOLVING CREDIT AND GOLD FACILITIES
The revolving credit and gold facilities permit borrowings of up to a maximum
aggregate principal amount of $35 million based upon availability under a
borrowing base based on eligible receivables and eligible inventory (each as
defined), with a sublimit of $5 million for letters of credit and $10 million
for gold borrowing or consignment. Management believes that it will have
sufficient availability under these facilities to meet its working capital
needs.
The Bank Agreement contains certain financial covenants that require the Company
to maintain certain minimum levels of (a) senior funded debt to earnings before
interest, taxes, depreciation and amortization (EBITDA, as defined), (b)
consolidated EBITDA and (c) interest coverage. The Bank Agreement also contains
other covenants which, among other things, limit the ability of the Company and
its subsidiaries to (a) incur additional indebtedness, (b) acquire and dispose
of assets, (c) create liens, (d) make capital expenditures, (e) pay dividends on
or redeem shares of the Company's capital stock and (f) make certain
investments. The Company was in compliance with all debt covenants under the
Bank Agreement as of August 30, 1997.
The long-term debt outstanding as of August 30, 1997, matures as follows (in
thousands):
Fiscal Year Ending Amount Maturing
---------------
1998 $ 750
1999 1,250
2000 1,750
2001 2,500
2002 16,200
Thereafter 103,000
--------
Total $125,450
--------
--------
The weighted average interest rate of debt outstanding as of August 30, 1997, is
10.5 percent.
CONSIGNED GOLD
Upon the purchases of ArtCarved and Balfour, the Company entered into a gold
consignment/loan arrangement with a certain financial institution. Under this
arrangement, the Company has the availability to have on consignment up to
26,000 ounces of gold approximating $10 million. Alternatively, upon maximizing
the $25 million revolver, the Company would have the availability to draw in
funds up to $10 million for the purchase of gold. Another option, if the
revolver is maximized, is a combination of drawing upon the consigned inventory
and gold loan funds up to a maximum value of $10 million. Under this
arrangement, the Company is limited to a maximum value of $10 million in
consigned inventory and/or gold loan funds. For the fiscal year ended August
30, 1997 (see Note 1), the Company expensed approximately $203,000 in connection
with consignment fees. Under the terms of the consignment arrangement, the
Company does not own the consigned gold until it is shipped in the form of a
ring to a customer. Accordingly, the Company does not include the value of
consigned gold in inventory or the corresponding liability for financial
statement purposes. As of August 30, 1997, the Company holds approximately
16,265 ounces, valued at $5.3 million, of gold on consignment from one of its
lenders.
The Company management believes the carrying amount of long-term debt, including
the current maturities, approximates fair value as of August 30, 1997, based
upon current rates offered for debt with the same or similar debt terms.
-46-
<PAGE>
(10) COMMITMENTS AND CONTINGENCIES
Certain Company facilities and equipment are leased under agreements expiring at
various dates through 2005. The Company's commitments under the noncancelable
portion of all operating leases for the next five years and thereafter as of
August 30, 1997, are approximately as follows (in thousands):
Total
Commitment
-----------
Fiscal year ending-
1998 $ 983
1999 883
2000 647
2001 503
2002 531
Thereafter 1,406
-------
Total $ 4,953
-------
-------
Lease and rental expense included in selling, general and administrative
expenses in the accompanying statement of operations amounts to approximately
$1,056,000 for the fiscal year ended August 30, 1997 (see Note 1).
The Company is a party to certain contracts with some of its sales
representatives whereby the representatives have purchased from their
predecessor the right to sell the Company's products in a territory. The
contracts generally provide that the value of these rights is primarily
determined by the amount of business achieved by a successor sales
representative and is therefore not determinable in advance of performance by
the successor sales representative.
The Company is not party to any pending legal proceedings other than ordinary
routine litigation incidental to the business. In management's opinion, adverse
decisions on those legal proceedings, in the aggregate, would not have a
materially adverse impact on the Company's results of operations or financial
position.
(11) EMPLOYEE COMPENSATION AND BENEFITS
POSTRETIREMENT MEDICAL BENEFITS
In December 1990, the Financial Accounting Standards Board issued SFAS No. 106,
"Employers' Accounting for Postretirement Benefits Other Than Pensions," which
requires that the accrual method of accounting for certain postretirement
benefits be adopted. The Company provides certain health care and life
insurance benefits for employees who retired prior to December 31, 1990. L. G.
Balfour Company, Inc., adopted this statement in fiscal 1994 and recognized the
actuarial present value of the accumulated postretirement benefit obligation
(APBO) of approximately $6.2 million at February 29, 1993, using the delayed
recognition method over a period of 20 years. Prior to adopting SFAS No. 106,
the cost of providing these benefits was expensed as incurred.
At the purchase date (December 16, 1996), CBI assumed this pre-existing
liability and recorded the APBO of $5.5 million in purchase accounting.
-47-
<PAGE>
The following table sets forth the plan status (in thousands):
August 30,
1997
----------
Accumulated postretirement benefit obligation-
Retired employees $ (5,559)
Active employees -
---------
Total (5,559)
Plan assets at fair value -
---------
Unfunded accumulated benefit obligation in excess of
plan assets (5,559)
Unrecognized net gain 125
Unrecognized transition obligation -
---------
Accrued postretirement medical benefit cost, current
and long-term $ (5,434)
---------
---------
The net periodic postretirement benefit costs for the fiscal year ended August
30, 1997 (see Note 1), includes the following components (in thousands):
Fiscal Year
Ended
August 30,
1997
-----------
Service costs, benefits attributed to service during the period $ -
Interest cost 302
Actuarial assumptions -
Amortization of unrecognized transition obligation -
---------
Net periodic postretirement benefit cost $ 302
---------
---------
For measurement purposes, a 9.0 percent annual rate of increase in the per
capita cost of covered health care benefits is assumed for fiscal 1997; the rate
was assumed to decrease gradually to 6.0 percent for fiscal 2000 and remain at
that level thereafter. The health care cost trend rate assumption has a
significant effect on the amounts reported. The discount rate used is 8.0
percent compounded annually.
Interest cost associated with the accumulated postretirement benefit obligation
is included as a component of interest expense in the accompanying statement 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.
-48-
<PAGE>
(12) INCOME TAXES
For the fiscal year ended August 30, 1997 (see Note 1), no current or deferred
provision or benefit exists due to the net operating losses incurred by the
Company.
The Company's effective tax rate differs from the federal statutory rate of 34
percent for the fiscal year ended August 30, 1997 (see Note 1), due to the
following (in percentages):
Computed tax benefit at statutory rate (34.0)%
State taxes 0.0
Deferral of net operating losses 34.0
--------
Total effective tax rate 0.0%
--------
--------
Deferred tax assets and liabilities as of August 30, 1997,
consist of the following (in thousands):
Deferred tax assets-
Allowances and reserves $ 1,557
Net operating loss carryforwards 6,445
Other 1,000
--------
Total gross deferred tax assets 9,002
Less- Valuation allowance (2,180)
--------
Net deferred tax assets 6,822
--------
Deferred tax liabilities-
Property, plant and equipment, principally due to
differences in depreciation 829
Goodwill basis difference 5,993
--------
Total deferred tax liabilities 6,822
--------
Net deferred tax assets (liabilities) $ -
--------
--------
The valuation allowance has been established due to uncertainty surrounding the
realizability of the deferred tax assets, principally the net operating loss
carryforwards.
For tax reporting purposes, the Company has U.S. net operating loss
carryforwards of approximately $16.5 million as of August 30, 1997. Utilization
of the net operating loss carryforwards is contingent on the Company's ability
to generate income in the future. The net operating loss carryforwards will
expire in 2017 if not utilized.
(13) STOCKHOLDERS' EQUITY
The Company is authorized to issue 750,000 shares of preferred stock, par value
$.01 per share, and 750,000 shares of Common Stock, par value $.01 per share.
The Company currently has issued and outstanding 100,000 shares of Series A
Preferred, 375,000 shares of Series B Preferred and 375,000 shares of Common
Stock.
SERIES A PREFERRED STOCK (SERIES A PREFERRED)
The holders of shares of Series A Preferred are not entitled to voting rights.
Dividends on the Series A Preferred are payable in cash, when, as and if
declared by the board of directors of the Company, out of funds legally
available therefor, on a quarterly basis, commencing on January 31, 1997.
Dividends on the Series A Preferred accrue at a rate of 12 percent per annum,
whether or not such dividends have been declared and whether or not there shall
be funds
-49-
<PAGE>
legally available for the payment thereof. Any dividends which are declared
shall be paid pro rata to the holders. No dividends or interest shall accrue on
any accrued and unpaid dividends. The Company's 11 percent senior subordinated
notes and bank debt restrict the Company's ability to pay dividends on the
Series A Preferred.
The Series A Preferred is not subject to mandatory redemption. The Series A
Preferred is redeemable at any time at the option of the Company; however, the
Company's 11 percent senior subordinated notes and bank debt restrict the
Company's ability to redeem the Series A Preferred. In the event of any
liquidation, dissolution or winding up of the Company, the holders of the Series
A Preferred shall receive payment of the liquidation value of $100 per share
plus all accrued and unpaid dividends prior to the payment of any distributions
to the holders of the Series B Preferred or the holders of the common stock of
the Company (Common Stock). So long as shares of the Series A Preferred remain
outstanding, the Company may not declare, pay or set aside for payment dividends
on, or redeem or otherwise repurchase any shares of, the Series B Preferred or
Common Stock.
SERIES B PREFERRED STOCK (SERIES B PREFERRED)
The holders of shares of Series B Preferred are entitled to one vote per share,
voting together with the holders of the Common Stock as one class on all matters
presented to the shareholders generally. No dividends accrue on the Series B
Preferred.
Dividends may be paid on the Series B Preferred if and when declared by the
board of directors of the Company out of funds legally available therefor. The
Series B Preferred is nonredeemable. In the event of any liquidation,
dissolution or winding up of the Company, the holders of the Series B Preferred
shall receive payment of the liquidation value of $100 per share plus any
accrued and unpaid dividends prior to the payment of any distributions to the
holders of the Common Stock of the Company. So long as shares of the Series B
Preferred remain outstanding, the Company may not declare, pay or set aside for
payment any dividends on the Common Stock.
COMMON STOCK
The holders of Common Stock are entitled to one vote for each share held of
record on all matters submitted to a vote of shareholders, including the
election of directors, and vote together as one class with the holders of the
Series B Preferred.
Dividends may be paid on the Common Stock if and when declared by the board of
directors of the Company out of funds legally available therefor. The Company
does not expect to pay dividends on the Common Stock in the foreseeable future.
COMMON STOCK PURCHASE WARRANTS
The Company has issued warrants, exercisable to purchase an aggregate of 21,405
shares of Common Stock (or an aggregate of approximately 5.4 percent of the
outstanding shares of Common Stock on a fully diluted basis), at an initial
exercise price of $6.67 per share, at any time on or after December 16, 1997,
and on or before January 31, 2008.
In accordance with a subscription agreement entered into by the Company and CHP
II and certain of its affiliates (the Castle Harlan Group), the Company granted
the Castle Harlan Group certain registration rights with respect to the shares
of capital stock owned by them pursuant to which the Company agreed, among other
things, to effect the registration of such shares under the Securities Act of
1933 at any time at the request of the Castle Harlan Group. The Company also
granted to the Castle Harlan Group unlimited piggyback registration rights on
certain registrations of shares of capital stock by the Company.
STOCK-BASED COMPENSATION PLAN
The Company has one stock option plan (the 1997 Stock Option Plan), effective as
of July 29, 1997, for which a total of 69,954 shares of Common Stock have been
reserved for issuance; 35,484 of those shares were available for grant to
directors and employees of the Company as of August 30, 1997. The 1997 Stock
Option Plan provides for the granting
-50-
<PAGE>
of both incentive and nonqualified stock options. Options granted under the
1997 Stock Option Plan have a maximum term of 10 years and are exercisable under
the terms of the respective option agreements at fair market value of the Common
Stock at the date of grant. Payment of the exercise price must be made in cash
or in whole or in part by delivery of shares of the Company's Common Stock. All
Common Stock issued pursuant to the 1997 Stock Option Plan is subject to a
voting trust agreement.
The Company applies APB Opinion No. 25, "Accounting for Stock Issued to
Employees," and related interpretations in accounting for the 1997 Stock Option
Plan. Accordingly, no compensation cost has been recognized for its 1997 Stock
Option Plan. Had compensation cost for the Company's stock-based compensation
plan been determined based on the fair value at the grant date for awards under
the plan consistent with the method of SFAS No. 123, "Accounting for Stock-Based
Compensation," the Company's net loss and net loss per share for the year ended
August 30, 1997, would have been increased to the pro forma amounts indicated
below (in thousands, except per share amounts):
Net loss to common shareholders As reported $ (9,717)
Pro forma (9,719)
Net loss per common and common As reported (25.91)
equivalent share outstanding Pro forma (25.92)
Compensation expense for options is reflected over the vesting period;
therefore, future compensation expense may be greater as additional options are
granted.
Incentive stock options for 34,470 shares and no nonqualified stock options of
the Company's Common Stock were outstanding as of August 30, 1997. A summary of
the status of the Company's 1997 Stock Option Plan as of August 30, 1997, and
changes during the fiscal year then ended is presented below:
Weighted
Average
Exercise
Fixed Options Shares Price
- --------------------------------------- -------- ---------
Outstanding at beginning of year - $ -
Granted 34,470 6.67
Exercised - -
Canceled - -
-------- ---------
Outstanding at end of year 34,470 $ 6.67
-------- ---------
-------- ---------
Options exercisable at year-end -
Weighted average fair value of options granted
during the year $ 3.71
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<PAGE>
The following table summarizes information about stock options outstanding as of
August 30, 1997:
Options Outstanding Options Exercisable
----------------------------------- ------------------------
Number Weighted Number
Outstanding Average Weighted Exercisable Weighted
as of Remaining Average as of Average
Exercise August 30, Contractual Exercise August 30, Exercise
Price 1997 Life Price 1997 Price
- -------- ----------- ----------- -------- ---------- ---------
$6.67 34,470 10 years $6.67 - $ -
The fair value of each grant was estimated on the date of the grant using the
Black-Scholes option pricing model with the following weighted average
assumptions used for grants in 1997: dividend yield of nil; expected volatility
of 29 percent; risk-free interest rate of 6.14 percent; and expected life of 10
years. The Black-Scholes option pricing model was developed for use in
estimating the fair value of traded options, which have no vesting restrictions
and are fully transferable. In addition, option pricing models require the
input of highly subjective assumptions, including expected stock price
volatility. Because the Company's stock options have characteristics
significantly different from those of traded options and because changes in the
subjective input assumptions can materially affect the fair value estimate, in
management's opinion, the existing models do not necessarily provide a reliable
single measure of the fair value of its stock options.
(14) RELATED - PARTY TRANSACTIONS
The Company entered into a management agreement dated December 16, 1996 (the
Management Agreement), with Castle Harlan, Inc. (the Manager), pursuant to which
the Manager agreed to provide business and organizational strategy, financial
and investment management and merchant and investment banking services to the
Company upon the terms and conditions set forth therein. As compensation for
such services, the Company agreed to pay the Manager $1.5 million per year,
which amount has been paid in advance for the first year and is payable
quarterly in arrears thereafter. The agreement is for a term of 10 years,
renewable automatically from year to year thereafter unless the Castle Harlan
Group then owns less than 5 percent of the then outstanding capital stock of the
Company. The Company has agreed to indemnify the Manager against liabilities,
costs, charges and expenses relating to the Manager's performance of its duties,
other than such of the foregoing resulting from the Manager's gross negligence
or willful misconduct. The indenture dated as of December 16, 1996, between the
Company and Marine Midland Bank, as trustee, related to the 11 percent senior
subordinated notes prohibits payment of the management fee in the event of a
default by the Company.
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<PAGE>
(15) QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
Summarized quarterly financial data for the Company for the fiscal year ended
August 30, 1997, is as follows:
<TABLE>
<CAPTION>
Second Third Fourth
Quarter Quarter Quarter
Ended Ended Ended
March 1, May 31, August 30,
1997 1997 1997
(11 weeks) (13 weeks) (13 weeks)
--------- --------- ---------
(In Thousands, Except Share Data)
<S> <C> <C> <C>
Net sales $ 24,751 $ 36,927 $ 25,922
--------- --------- ---------
--------- --------- ---------
Gross profit $ 10,509 $ 18,423 $ 13,479
--------- --------- ---------
--------- --------- ---------
Net loss $ (3,861) $ (874) $ (4,132)
--------- --------- ---------
--------- --------- ---------
Net loss to common stockholders $ (4,111) $ (1,174) $ (4,432)
--------- --------- ---------
--------- --------- ---------
Net loss per weighted average common and common
equivalent share outstanding $ (10.96) $ (3.13) $ (11.82)
--------- --------- ---------
--------- --------- ---------
Weighted average common and common equivalent
shares outstanding 375,000 375,000 375,000
--------- --------- ---------
--------- --------- ---------
</TABLE>
Commemorative Brands, Inc., completed the acquisitions of ArtCarved and Balfour
on December 16, 1996, and until such date, engaged in no business activities
other than those in connection with the Acquisitions and financing thereof.
The Company's scholastic product sales tend to be seasonal. Class ring
sales are highest during October through December (which overlaps the Company's
first and second fiscal quarters), when students have returned to school after
the summer recess and orders are taken for delivery of class rings to students
before the winter holiday season. Sales of the Company's fine paper products
are predominantly made during February through April (which overlaps the
Company's second and third fiscal quarters) for graduation in May and June.
ArtCarved and Balfour historically experienced operating losses during the
period of the Company's fourth fiscal quarter, which includes the summer months
when school is not in session. The Company's recognition and affinity product
line is not seasonal in any material respect, although sales generally are
highest during the winter holiday season and in the period prior to Mother's
Day. As a result, the effects of seasonality of the class ring business on the
Company are tempered by the Company's relatively broad product mix. As a result
of the foregoing, the Company's working capital requirements tend to exceed its
operating cash flows from July through December.
-53-
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Stockholders of
Commemorative Brands, Inc.:
We have audited the accompanying balance sheet of the class rings business
(ArtCarved) of CJC Holdings, Inc. (a Texas corporation), as of August 31, 1996,
and the related statements of income (loss), changes in advances and equity
(deficit) and cash flows for the fiscal years ended August 26, 1995, and August
31, 1996, and for the period from September 1, 1996, through December 16, 1996.
These financial statements are the responsibility of Artcarved's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of ArtCarved (as defined above) as
of August 31, 1996, and the results of its operations and its cash flows for the
fiscal years ended August 26, 1995, and August 31, 1996, and for the period from
September 1, 1996, through December 16, 1996, in conformity with generally
accepted accounting principles.
/s/ Arthur Andersen LLP
Houston, Texas
October 24, 1997
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<PAGE>
CJC HOLDINGS, INC., CLASS RINGS BUSINESS (ARTCARVED)
BALANCE SHEET
(In Thousands)
<TABLE>
<CAPTION>
August 31,
1996
---------
ASSETS
CURRENT ASSETS:
<S> <C>
Cash $ -
Receivables-
Trade, net of allowance for doubtful accounts of $633 8,959
Other 432
Inventories 5,402
Prepaid expenses and other current assets 2,115
---------
Total current assets 16,908
PROPERTY, PLANT AND EQUIPMENT, at cost, net of accumulated depreciation of $14,884 11,149
TRADEMARKS, net of accumulated amortization of $5,626 21,421
GOODWILL, net of accumulated amortization of $3,232 12,284
IDENTIFIABLE INTANGIBLE ASSETS, net of accumulated amortization of $3,745 2,075
OTHER ASSETS, net of accumulated amortization of $22,731 10,705
---------
Total assets $ 74,542
---------
---------
LIABILITIES, ADVANCES AND EQUITY (DEFICIT)
CURRENT LIABILITIES:
Accounts payable $ 1,953
Accrued interest payable 1,429
Accrued expenses 2,088
Gold loan 6,375
Current portion of long-term debt 2,000
---------
Total current liabilities 13,845
LONG-TERM DEBT, net of current maturities 89,221
COMMITMENTS AND CONTINGENCIES
ADVANCES AND EQUITY (DEFICIT) (28,524)
---------
Total liabilities, advances and equity (deficit) $ 74,542
---------
---------
</TABLE>
The accompanying notes are an integral part of this financial statement.
-55-
<PAGE>
CJC HOLDINGS, INC., CLASS RINGS BUSINESS (ARTCARVED)
STATEMENTS OF INCOME (LOSS)
(In Thousands)
<TABLE>
<CAPTION>
For the Period
From
For the Fiscal Year Ended September 1,
------------------------- 1996,
Through
August 26, August 31, December 16,
1995 1996 1996
---------- --------- -------------
<S> <C> <C> <C>
NET SALES $71,994 $ 70,671 $ 27,897
COST OF SALES 32,879 32,655 11,988
---------- --------- -------------
Gross profit 39,115 38,016 15,909
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES (28,224) (27,940) (9,862)
RESTRUCTURING CHARGES (3,244) - -
---------- --------- -------------
Operating income 7,647 10,076 6,047
INTEREST INCOME 995 651 94
INTEREST EXPENSE (14,608) (12,558) (2,970)
---------- --------- -------------
Income (loss) before income tax provision (5,966) (1,831) 3,171
INCOME TAX PROVISION - - -
---------- --------- -------------
Net income (loss) $(5,966) $ (1,831) $ 3,171
---------- --------- -------------
---------- --------- -------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
-56-
<PAGE>
CJC HOLDINGS, INC., CLASS RINGS BUSINESS (ARTCARVED)
STATEMENTS OF CHANGES IN ADVANCES AND EQUITY (DEFICIT)
(In Thousands)
BALANCE AT AUGUST 27, 1994
Net increase in advances from parent
Net loss for the fiscal year ended August 26, 1995 $(51,504)
4,284
(5,966)
--------
BALANCE AT AUGUST 26, 1995
Net increase in advances from parent
Net loss for the fiscal year ended August 31, 1996 (53,186)
26,493
(1,831)
--------
BALANCE AT AUGUST 31, 1996
Net increase in advances from parent
Net income for the period from September 1, 1996,
through December 16, 1996 (28,524)
18,889
3,171
--------
BALANCE AT DECEMBER 16, 1996 $ (6,464)
--------
--------
The accompanying notes are an integral part of these financial statements.
-57-
<PAGE>
CJC HOLDINGS, INC., CLASS RINGS BUSINESS (ARTCARVED)
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
(In Thousands)
For the Period
From
September 1,
For the Fiscal Year Ended 1996,
------------------------- Through
August 26, August 31, December 16,
1996 1995 1996
---------- ---------- -----------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ (5,966) $ (1,831) $ 3,171
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities-
Depreciation 1,664 1,843 649
Amortization 3,950 3,172 1,343
Provisions for doubtful accounts 522 596 144
Discount accretion 1,172 - -
Restructuring charges 3,244 - -
Change in assets and liabilities-
Increase in receivables (2,066) (121) (6,951)
(Increase) decrease in inventories 179 (1,500) 124
(Increase) decrease in prepaid expenses and
other current assets (286) 1,880 1,378
Increase in other assets (3,138) (2,113) (3,270)
Increase (decrease) in accounts payable (305) (391) 1,424
Increase (decrease) in accrued expenses (2,134) 128 3,486
---------- ---------- ----------
Net cash provided by (used in) operating activities (3,164) 1,663 1,498
---------- ---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property, plant and equipment (1,120) (844) (195)
---------- ---------- ----------
Net cash used in investing activities (1,120) (844) (195)
---------- ---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net change in advances from parent 4,284 15,620 18,889
---------- ---------- ----------
Note payments - (16,439) (14,628)
---------- ---------- ----------
Net cash provided by (used in) financing activities 4,284 (819) 4,261
---------- ---------- ----------
NET INCREASE IN CASH AND CASH EQUIVALENTS - - 5,564
CASH AND CASH EQUIVALENTS, beginning of period - - -
---------- ---------- ----------
CASH AND CASH EQUIVALENTS, end of period $ - $ - $ 5,564
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
The accompanying notes are an integral part of these financial statements.
-58-
<PAGE>
CJC HOLDINGS, INC., CLASS RINGS BUSINESS (ARTCARVED)
NOTES TO FINANCIAL STATEMENTS
(1) DESCRIPTION OF BUSINESS AND BASIS OF FINANCIAL STATEMENT PRESENTATION
The accompanying financial statements represent the class rings business
(ArtCarved or the Company) of CJC Holdings, Inc. (CJC). Since ArtCarved is not
operated nor accounted for as a separate entity for the periods presented in the
accompanying financial statements, it was necessary for management to make
allocations (carve-outs) for certain accounts to reflect the financial
statements of ArtCarved. Management considers the allocations to be reasonable
and believes the accompanying financial statements materially represent the
operations of ArtCarved on a stand-alone basis. Selling, general and
administrative expenses from the operations of ArtCarved as shown in the
accompanying statements of income (loss) represent all the expenses incurred by
CJC excluding only the expenses directly related to the non-ArtCarved operations
of CJC. CJC sold the assets of ArtCarved and CJC used the sale proceeds to
repay its outstanding debt obligations. Accordingly, the debt obligations of
CJC repaid with the sale proceeds have been recorded on the accompanying balance
sheet with the offsetting charge included in the advances and equity (deficit)
account, and the accompanying statements of income (loss) of ArtCarved presented
herein include all of CJC's debt-related interest expense on such debt
obligations. Interest income of CJC is included in the statements of income
(loss) since all excess cash balances are used to pay principal and interest on
debt obligations.
All cash balances remained with CJC after sale of the assets. No cash balances
have been included in the accompanying balance sheet. All amounts due to/from
CJC for ArtCarved's operations have been included in advances and equity
(deficit). Also, included in advances and equity (deficit) are all intercompany
accounts.
Although management considers the above allocation (carve-out) methods to be
reasonable, due to the relationship between ArtCarved and other operations and
activities of CJC, the terms of some or all of the transactions and allocations
discussed above may not necessarily be indicative of that which would have
resulted had ArtCarved been a stand-alone entity.
On December 16, 1996, Commemorative Brands, Inc. (CBI), completed the
acquisitions (the Acquisitions) of substantially all of the scholastic and
recognition and affinity product assets and businesses of ArtCarved of CJC from
CJC and certain assets and liabilities of L. G. Balfour Company, Inc. (Balfour),
from Town & Country Corporation (Town & Country). In consideration for
ArtCarved, CBI paid CJC in cash the sum of $115.1 million and assumed certain
related liabilities.
RESULTS OF OPERATIONS
The results of operations for the period from September 1, 1996, through
December 16, 1996, are not comparable to the results of operations for the
fiscal years ended August 31, 1996, and August 26, 1995, and are not necessarily
indicative of the results that could be expected for a full fiscal year. Due to
the highly seasonal nature of the class ring business, a significant amount of
revenues and income occurred in the three and one-half month period ended
December 16, 1996, related to the back-to-school and pre-holiday season.
-59-
<PAGE>
(2) RESTRUCTURING CHARGES
During fiscal 1995, ArtCarved provided for restructuring charges totaling
$3,244,000. Charges include professional advisory fees and the write-down of
previously incurred financing costs.
(3) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
FISCAL YEAR-END
ArtCarved uses a 52/53-week fiscal year ending on the last Saturday of August.
INVENTORIES
ArtCarved's inventories, which include raw materials, labor and overhead and
other manufacturing and production costs, are stated at the lower of cost or
market using the dollar-value last-in, first-out (LIFO) link-chain method.
Included in raw materials are supplies inventory of approximately $451,000 as of
August 31, 1996.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are stated at cost, net of accumulated
depreciation. Depreciation is provided principally using the straight-line
method based on estimated useful lives of the assets as follows:
Description Useful Life
- ----------- -----------
Land improvements 15 years
Buildings and improvements 10 to 25 years
Tools and dies 5 to 10 years
Machinery and equipment 3 to 10 years
Maintenance, repairs and minor replacements are charged against income as
incurred; major replacements and betterments are capitalized. The cost of
assets sold or retired and the related accumulated depreciation are removed from
the accounts at the time of disposition, and any resulting gain or loss is
reflected as other income or expense for the period.
GOODWILL AND INTANGIBLE ASSETS
Costs in excess of fair value of net tangible assets acquired and related
acquisition costs are included in goodwill and identifiable intangible assets in
the accompanying balance sheets. Intangible assets are being amortized on a
straight-line basis over their estimated lives, not exceeding 40 years.
OTHER ASSETS
Other assets include debt costs, software and software development costs, and
engineering and design costs. Debt costs are amortized over the lives of the
specific debt instruments of one to six years. Software and software
development costs have a useful life of three to five years, and engineering and
design costs are amortized over six years.
FAIR VALUE OF FINANCIAL INSTRUMENTS
ArtCarved's financial instruments consist primarily of cash and cash
equivalents, accounts receivable, accounts payable and long-term debt (including
current maturities). The carrying amounts of ArtCarved's cash and cash
equivalents, accounts receivable and accounts payable approximate fair value due
to their short-term nature. The fair value of ArtCarved's long-term debt is
estimated based on current rates offered to ArtCarved for debt with the same or
similar terms.
-60-
<PAGE>
CASH FLOWS
Total cash interest paid during the fiscal years 1995 and 1996 and for the
period from September 1, 1996, to December 16, 1996, was approximately
$15,905,000, $12,464,000 and $4,405,000, respectively. Total cash paid for
income taxes during the fiscal years 1995 and 1996 and for the period from
September 1, 1996, to December 16, 1996, was approximately $89,000, $83,000 and
$-, respectively. Noncash financing activities during the year ended August 31,
1996, include $7,021,000 of accrued interest, which was converted to new
subordinated notes, and $7,500,000 of original subordinated notes and $1,873,000
of related accrued interest that were both converted to Series 2 common stock.
ACCOUNTING FOR INCOME TAXES
Effective September 1, 1992, CJC (and ArtCarved) adopted Statement of Financial
Accounting Standards (SFAS) No. 109, "Accounting for Income Taxes," which
requires the asset and liability method of accounting for income taxes. Under
the asset and liability method, deferred income taxes are recorded for the tax
consequences of applying currently enacted statutory tax rates applicable to
differences between the financial reporting and income tax bases of assets and
liabilities.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from these estimates.
SEASONALITY
ArtCarved's sales are highly seasonal. Historically, ArtCarved has achieved its
highest sales and income levels in its first fiscal quarter (September through
November), followed in descending order by the third, second and fourth fiscal
quarters. This is primarily due to the fall "back-to-school" selling season for
class rings. The third fiscal quarter includes the spring semester school
activities including graduation events, while the fourth fiscal quarter (and the
second fiscal quarter to a lesser extent) includes the periods when most schools
are not in session.
REVENUE RECOGNITION
Revenues from product sales are recognized at the time the product is shipped.
ADVERTISING EXPENSE
Selling, general and administrative expenses for ArtCarved include advertising
expense in the following amounts for the statements of income (loss) presented
(in thousands):
Period from September 1, 1996, to December 16, 1996 $ 1,222
Fiscal year ended August 31, 1996 $ 2,989
Fiscal year ended August 26, 1995 $ 3,157
(4) RECEIVABLES
Credit is extended to various companies in the retail industry which may be
affected by changes in economic or other external conditions. ArtCarved's
policy is to manage its exposure to credit risk through credit approvals and
limits.
-61-
<PAGE>
(5) INVENTORIES
A summary of inventories is as follows (in thousands):
August 31,
1996
----------
Raw materials $ 4,007
Work in process 1,010
Finished goods 385
--------
$ 5,402
--------
--------
Cost of sales includes depreciation and amortization of the following amounts in
the accompanying statements of income (loss) (in thousands):
Period from September 1, 1996, to December 16, 1996 $ 691
Fiscal year ended August 31, 1996 $ 1,709
Fiscal year ended August 26, 1995 $ 1,674
Inventories are priced using the dollar-value LIFO link-chain method. The
carrying value of LIFO inventories as of August 31, 1996, was approximately
$355,000 greater than costs as determined by the first-in, first-out method.
(6) PREPAID EXPENSES AND OTHER CURRENT ASSETS
Prepaid expenses and other current assets consist of the following (in
thousands):
August 31,
1996
----------
Prepaid advertising $ 1,461
Prepaid insurance 234
Other 420
--------
$ 2,115
--------
--------
(7) ACCRUED EXPENSES
The principal components of accrued expenses are as follows (in thousands):
August 31,
1996
--------
Compensation and related costs $ 832
Sales and use and property taxes 404
Customer deposits 432
Medical claims 355
Other 65
--------
Total accrued expenses $ 2,088
--------
--------
-62-
<PAGE>
(8) PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment, net, consists of the following (in thousands):
August 31,
1996
-----------
Land and improvements $ 4,742
Buildings and improvements 5,172
Tools and dies 6,241
Machinery and equipment 9,878
-----------
Total 26,033
Accumulated depreciation (14,884)
-----------
Property, plant and equipment, net $ 11,149
-----------
-----------
Depreciation expense (included in cost of sales and selling, general and
administrative expenses) recorded in the accompanying statements of income
(loss) is as follows (in thousands):
Period from September 1, 1996 to December 16, 1996 $ 770
Fiscal year ended August 31, 1996 $ 2,026
Fiscal year ended August 26, 1995 $ 2,457
(9) 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
agreement remained with the Consignor. CJC had a credit facility with a bank
which provided for a $25,000,000 letter-of-credit facility which could be
utilized to request letters of credit pursuant to the gold consignment
agreement. The consignment agreement expired in June 1994 and was not renewed.
In connection with the expiration of the gold consignment agreement, the
Consignor presented to the bank a draft for payment under the letter of credit
in the amount of $14,614,255, and such draft was honored by the bank in that
amount. The amount invoiced CJC was for 38,053 ounces of gold at a price of
$384.05 per ounce. As of August 31, 1996, there were 10,555 ounces of gold with
an approximate market value of $4,079,000, included in ArtCarved's balance
sheet. Although a substantial amount of gold is held by other operations of CJC
and serves as collateral for the loan, the entire gold loan was paid with the
proceeds from the asset sale and, therefore, the full amount of the loan is
included in ArtCarved's balance sheet.
(10) LONG-TERM DEBT
Long-term debt consists of the following (in thousands):
August 31,
1996
----------
Senior secured notes $ 56,700
Senior subordinated notes 34,521
----------
91,221
Less- Current portion (2,000)
----------
Long-term debt $ 89,221
----------
----------
-63-
<PAGE>
In November 1995, CJC's board of directors, shareholders and principal creditors
approved its restructuring plan and the plan and agreement of merger (as
defined) whereby CJC's common and preferred shareholders agreed to a
recapitalization and holders of senior secured, senior subordinated notes and
the gold loan agreed to restructure their debt obligations. On March 12, 1996,
the restructuring agreement was consummated. The debt obligations discussed
below were paid with the proceeds of the asset sale of ArtCarved and, therefore,
are included in ArtCarved's financial statements.
The significant components of the restructuring and recapitalization are as
follows:
a. New capital stock consisting of 30,000,000 authorized shares of common
stock designated as either Series 1, Series 2 or Series 3, as defined, of
CJC Newco, Inc. (Newco), was authorized and issued in the following order:
(i) The holder of CJC's Series A preferred stock received an aggregate
of 100 percent or 8,750,000 shares of the Series 1 common stock,
such number to be reduced by that number of shares of Series 1
common stock to be issued to the subordinated noteholders.
(ii) A holder of CJC's senior subordinated notes due 1998 and 1999 (the
Original Subordinated Notes), pursuant to the restructuring,
received 4,410,000 shares of the Series 1 common stock in lieu of
debt of CJC. Holders of CJC's Original Subordinated Notes also
received 94,000 shares of the Series 1 common stock as
compensation for a payment-in-kind (PIK), nondefault rate interest
option, as defined, contained in CJC's new senior subordinated
notes due 2002 (the New Subordinated Notes). In addition, 974,000
shares of the Series 1 common stock authorized to be issued to the
holders of CJC's New Subordinated Notes were not issued as of the
restructuring date but were reserved for issuance in accordance
with the terms of the New Subordinated Note agreement and the new
shareholders' agreement.
(iii) The holders of CJC's Series B preferred stock received an
aggregate of 1,249,020 shares of Series 2 common stock. Each such
holder received 11.67 shares of Series 2 common stock for each
previously held share of Series B preferred stock.
(iv) Previous holders of CJC's common stock received an aggregate of
9,992,317 shares of Series 3 common stock. Each such holder
received 4.20 shares of Series 3 common stock for each previously
held share of common stock. Effective June 30, 1996, the Series 3
shares were redeemed at $0.001 per share.
(v) Holders of CJC's warrants issued in 1990 received new warrants to
purchase 3,023,623 shares of Series 3 common stock. These
warrants expired on June 30, 1996. All other existing warrants,
rights or options outstanding immediately prior to the merger were
canceled and extinguished.
b. Holders of CJC's floating rate senior secured notes, Series A due 1996 (the
Series A Notes), and holders of CJC's 12.12 percent senior secured notes,
Series B-2 due 1998 (the Series B Notes) (collectively, the Original Senior
Notes), received all accrued interest on the unpaid principal amount of
such notes. Pursuant to the terms of a senior note purchase agreement, the
holders of the Series A Notes received New Series A Notes and the holders
of Series B Notes received New Series B Notes.
The New Series A Notes were issued in the aggregate principal amount of
$14,677,000, the outstanding principal balance on the restructuring date.
The New Series A Notes are mandatorily redeemable under certain
circumstances. The maturity date of the New Series A Notes shall be July
15, 1999, and such notes bear interest at the Eurodollar Rate, as defined,
plus 2.25 percent. In addition, the principal of the New Series A Notes
will be repaid in installments of $2.0 million on each semiannual period
currently anticipated to commence no later than July 15, 1997. Interest on
the New Series A Notes is due on the fifteenth day of each quarter,
beginning April 15, 1996.
-64-
<PAGE>
The New Series B Notes were issued in the aggregate principal amount of
$42,023,000, the outstanding principal balance on the restructuring date.
The New Series B Notes are mandatorily redeemable under certain
circumstances. The maturity date of the New Series B Notes shall be July
15, 2000, and such notes bear interest at the rate of 12.12 percent. The
New Series B Notes shall be payable in full at maturity. After the New
Series A Notes have been repaid in full, the $2.0 million semiannual
principal repayments shall be applied to the New Series B Notes. Interest
on the New Series B Notes shall be due on the fifteenth day of each quarter
beginning April 15, 1996. Finally, the holders of the New Series B Notes
may be entitled to certain "make-whole" payments on the original amount
issued once the New Series A Notes have been repaid in full or replaced.
The New Series A Notes and New Series B Notes shall be secured by
substantially all of CJC's assets.
Under the terms of the New Series A Notes and New Series B Notes, CJC,
among other restrictions, will be required to maintain a current ratio, as
defined (excluding current maturities of funded debt), of 3.2 to 1.0 for
the period March 12, 1996, to February 28, 1998, and 2.5 to 1.0 for the
period March 1, 1998, to maturity, minimum shareholders' equity (deficit),
as defined, of $(8,000,000) for the period March 12, 1996, to June 30,
1996, $(9,000,000) for the period July 1, 1996, to May 31, 1997,
$(10,000,000) for the period June 1, 1997, to November 30, 1997, and
beginning to increase to $(5,000,000) until maturity, and an interest
coverage ratio, as defined, of 1.25 to 1.0 for the period March 12, 1996,
to February 28, 1998, 1.50 to 1.0 for the period March 1, 1998, to August
31, 1999, and 1.75 to 1.0 for the period September 1, 1999, to maturity.
CJC will also have certain limitations relating to additional debt, liens,
mergers, asset sales transactions, restricted investments and payments of
dividends and is obligated to make certain reports periodically to the
lenders. As of August 31, 1996, CJC was in compliance with these
covenants.
c. Holders of CJC's Original Subordinated Notes in the amount of $35,000,000
were issued either (i) New Subordinated Notes having an aggregate principal
amount equal to the unpaid principal under the Original Subordinated Notes
plus accrued interest through June 30, 1995, as well as shares of Series 1
common stock as described in a.(ii) above, or (ii) New Subordinated Notes
having an aggregate principal amount equal to 50 percent of the unpaid
principal under the Original Subordinated Notes plus accrued interest
through June 30, 1995, as well as shares of Series 1 common stock as
described in a.(ii) above. One holder elected to convert 50 percent of its
Original Subordinated Notes (principal amount of $7,500,000 plus accrued
interest through June 30, 1995, of approximately $1,873,000) into Series 1
common stock.
The New Subordinated Notes have a maturity of July 15, 2002, with certain
mandatory prepayments, as defined, based upon net cash proceeds, as
defined. The New Subordinated Notes are subordinate to the New Senior
Notes and the New Gold Notes. The New Subordinated Notes have loan
covenants that are substantially identical to the New Senior Notes.
Finally, the holders of the New Subordinated Notes may be entitled to
certain "make-whole" payments on the original amount issued if both the New
Senior Notes and New Subordinated Notes are repaid in full prior to March
1997.
d. Each gold loan holder shall receive a new promissory note evidencing the
existing obligation having a maturity date of February 28, 1997 (the New
Gold Notes). The New Gold Notes shall be issued in an aggregate principal
amount of $8,641,125, the outstanding principal balance on the
restructuring date. The New Gold Notes shall bear interest at the lesser
of (i) the alternate base rate, as defined, plus 1.5 percent or (ii) the
highest lawful rate, as defined. Principal payments under the New Gold
Notes are $2,267,000 and $6,374,125 for fiscal years 1996 and 1997,
respectively. CJC shall prepay the New Gold Notes using available net cash
proceeds, as defined. The New Gold Notes shall be secured by substantially
all of CJC's assets.
In connection with the New Gold Notes, CJC purchased options for 24,053
ounces of gold, exercisable at $384.05 per ounce. The total premiums for
fiscal 1996 relating to these options were approximately $238,000. As of
August 31, 1996, CJC has options on 17,800 ounces of gold outstanding which
expire March 28, 1997. CJC is required to purchase the options under the
New Gold Notes to hedge the collateral against changing gold prices. CJC
does not engage in gold option speculation. CJC has not recorded any
significant gains or losses related to such options as the price of gold
has not fluctuated significantly.
-65-
<PAGE>
Under the terms of the New Gold Notes, CJC, among other restrictions, will
be required to maintain a current ratio, as defined (excluding current
maturities of funded debt), of 3.2 to 1.0, minimum shareholders' equity
(deficit), as defined, of $(8,000,000) for the period March 12, 1996, to
June 30, 1996, and $(9,000,000) for the period July 1, 1996, to maturity,
and an interest coverage ratio, as defined, of 1.25 to 1.0. CJC will also
have certain limitations relating to additional debt, liens, mergers, asset
sales transactions, restricted investments and payments of dividends and is
obligated to make certain reports periodically to the lenders. As of
August 31, 1996, CJC was in compliance with these covenants.
Management believes the carrying amount of long-term debt, including the current
maturities, approximates fair value as of August 31, 1996, based upon current
rates offered for debt with the same or similar debt terms.
Subsequent to year-end, CJC was not in compliance with certain financial
covenants and, accordingly, applied for and has been granted a necessary waiver
through October 31, 1996, and an amendment with respect to such covenants from
its lenders. As discussed in Note 1, all outstanding debt obligations of CJC
were repaid with the sale proceeds from CBI shortly after the Acquisitions
occurred.
(11) COMMITMENTS AND CONTINGENCIES
ArtCarved leased certain of its manufacturing and office facilities and
equipment under various noncancelable operating leases. Expenses under all
operating leases for the fiscal years ended August 26, 1995, and August 31,
1996, and for the period from September 1, 1996, to December 16, 1996, are
approximately $577,000, $577,000 and $208,000, respectively.
ArtCarved is not party to any pending legal proceedings other than ordinary
routine litigation incidental to the business. In management's opinion, adverse
decisions on those legal proceedings, in the aggregate, would not have a
materially adverse impact on ArtCarved's results of operations or financial
position.
(12) INCOME TAXES
For the fiscal years ended August 26, 1995, and August 31, 1996, and for the
period from September 1, 1996, to December 16, 1996, no current or deferred
provision or benefit exists for ArtCarved due to the available operating tax
losses and other credit carryforwards of CJC.
The following represents a reconciliation between tax computed by applying the
35 percent statutory income tax rate to income (loss) before income taxes and
reported income tax expense for the fiscal years ended August 26, 1995, and
August 31, 1996, and the period from September 1, 1996, to December 16, 1996:
Fiscal Year Ended Period From
---------------------- September 1,
1996, to
August 26, August 31, December 16,
1995 1996 1996
---------- ---------- ------------
Pretax book income (loss) (35.0)% (35.0)% 35.0%
Permanent differences 1.0 3.2 -
Addition to (utilization of) operating loss
carryforwards 34.0 31.8 (35.0)
------ ------ ------
-% -% -%
------ ------ ------
------ ------ ------
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<PAGE>
The tax effect of significant temporary differences representing deferred tax
assets and liabilities is as follows (in thousands):
August 31,
1996
---------
Inventories $ 658
Net operating loss and tax credit carryforwards 2,862
Depreciation and amortization (1,067)
Deferred advertising (328)
Other, net 1,311
---------
Net deferred tax asset 3,436
Less- Valuation allowance (3,436)
---------
Net deferred tax liability $ -
---------
---------
Since ArtCarved's financial results have been included in CJC's consolidated
federal income tax return, ArtCarved federal net operating tax losses and other
credits have been included in CJC's income tax return. As a result, any
carryovers of such losses or credits which might have existed had ArtCarved
reported on a stand-alone basis are not available to ArtCarved as ArtCarved was
purchased in a business combination by CBI.
(13) 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 26, 1995,
and August 31, 1996:
Fiscal Year Ended
-------------------------
August 26, August 31,
1995 1996
---------- --------
Service cost, benefits earned during the year $ - $ -
Interest cost of projected benefit obligation 69,200 -
Actual return on plan assets (51,800) -
Net amortization and deferral (50,800) -
---------- --------
Net periodic pension income $ (33,400) $ -
---------- --------
---------- --------
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<PAGE>
Assumptions used in accounting for the pension plan for the fiscal year ended
August 26, 1995, are as follows:
Discount rate 7.30%
Rate of increase in compensation levels N/A
Expected long-term rate of return on assets 7.30%
The following table sets forth the hourly class ring employees' plan's funded
status and the amount recognized in ArtCarved's financial statements as of
August 26, 1995, and August 31, 1996, for the pension plan:
August 26, August 31,
1995 1996
------------- ---------
Actual present value of benefit obligations-
Accumulated benefit obligations, including
vested benefits of $1,139,000 and $- as of
August 26, 1995, and August 31, 1996,
respectively $ (1,139,000) $ -
------------- ------
Projected benefit obligation (1,139,000) -
Plan assets at fair value 1,139,000 -
------------- ------
Plan assets in excess of projected benefit obligation - -
Unrecognized net loss (gain) - -
Prior service cost not yet recognized in net periodic
pension cost - -
------------- ------
Prepaid pension cost $ - $ -
------------- ------
------------- ------
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.
-68-
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To L.G. Balfour Company, Inc.:
We have audited the accompanying balance sheet of L.G. Balfour Company, Inc.
(the Company) (a Delaware corporation), a wholly owned subsidiary of Town &
Country Corporation (the Parent) (a Massachusetts corporation), as of February
25, 1996, the related statements of operations, stockholder's equity and cash
flows for the years ended February 26, 1995 and February 25, 1996 and for the
period ended December 16, 1996. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of L.G. Balfour Company, Inc. as
of February 25, 1996, and the results of its operations and its cash flows for
the years ended February 26, 1995 and February 26, 1996 and for the period ended
December 16, 1996, in conformity with generally accepted accounting principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. The Company relies on funding from
its Parent to support operations. The Parent is in violation under its various
debt agreements and has filed a voluntary petition for relief under Chapter 11
Title 11 of the United States Bankruptcy Code on November 18, 1997; thus, there
is no assurance that the Parent will be able to continue to provide financial
support to the Company. Therefore, there is substantial doubt about the
Company's ability to continue as a going concern. The Parent's plans with
regard to these matters, which primarily relate to the sale of the Company, are
discussed in Notes 1 and 10. The financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
/s/ Arthur Andersen LLP
Boston, Massachusetts
November 19, 1997
-69-
<PAGE>
L.G. BALFOUR COMPANY, INC.
Balance Sheets
(In Thousands)
<TABLE>
<CAPTION>
ASSETS
FEBRUARY 25,
1996
------------
<S> <C>
Current Assets:
Cash and cash equivalents (Note 1) $ 80
Accounts receivable, less allowance for doubtful accounts of $711 at February 25, 1996 15,362
Accounts receivable--affiliates 62
Inventories (Note 1) 10,791
Prepaid expenses and other current assets (Note 7) 2,483
----------
Total current assets 28,778
Property, Plant and Equipment, net (Note 1) 10,399
Intangible Assets (Note 1) 2,698
Other Assets 688
----------
$ 42,563
----------
----------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Bank overdraft $ 1,829
Current portion of capital lease obligation (Note 2) 245
Accounts payable--trade 1,551
Accounts payable--affiliates 43
Accrued expenses (Note 6) 11,212
----------
Total current liabilities 14,880
Due to Parent, net (Note 9) 12,767
Capital Lease Obligation, less current portion (Note 2) 154
Deferred Compensation, less current portion (Note 8) 874
----------
Total liabilities 28,675
----------
Commitments and Contingencies (Note 5)
Stockholder's Equity:
Capital stock 4
Additional paid-in capital 75,970
Accumulated deficit (62,086)
----------
Total stockholder's equity 13,888
----------
$ 42,563
----------
----------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
-70-
<PAGE>
L.G. BALFOUR COMPANY, INC.
Statements of Operations
(In Thousands)
<TABLE>
<CAPTION>
FOR THE YEARS ENDED FOR THE PERIOD
--------------------------- ENDED
FEBRUARY 26, FEBRUARY 25, DECEMBER 16,
1995 1996 1996(a)
------------ ------------ ------------
<S> <C> <C> <C>
Net Sales $ 77,491 $ 71,300 $ 60,233
Cost of Sales 35,406 35,598 29,350
---------- ---------- ----------
Gross profit 42,085 35,702 30,883
---------- ---------- ----------
Expenses:
Selling 42,891 27,788 25,203
General and administrative (Note 4) 8,852 5,708 5,817
---------- ---------- ----------
Total expenses 51,743 33,496 31,020
---------- ---------- ----------
Other (Income) Expense:
Payroll tax refund (Note 5) (574) - -
Gain on sale of facility (Note 1) - (418) -
Interest expense (Note 8) 700 583 454
Interest on Due to Parent, net (Note 9) 1,093 1,986 1,499
---------- ---------- ----------
Net other expense 1,219 2,151 1,953
---------- ---------- ----------
Income (loss) before provision for income taxes (10,877) 55 (2,090)
Provision for Income Taxes (Notes 1 and 3) 65 191 63
---------- ---------- ----------
Net loss $ (10,942) $ (136) $ (2,153)
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
(A) EXCLUDES THE FINANCIAL IMPACT OF THE SALE OF CERTAIN ASSETS AND LIABILITIES
OF THE COMPANY DISCUSSED IN NOTE 10.
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
-71-
<PAGE>
L.G. BALFOUR COMPANY, INC.
Statements of Stockholder's Equity
(In Thousands)
<TABLE>
<CAPTION>
ADDITIONAL TOTAL
PAID-IN ACCUMULATED STOCKHOLDER'S
CAPITAL STOCK CAPITAL DEFICIT EQUITY
------------- ---------- ----------- -------------
<S> <C> <C> <C> <C>
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 - - (2,153) (2,153)
---------- ---------- ----------- ----------
Balance, December 16, 1996 $ 4 $ 75,970 $ (64,239) $ 11,735
---------- ---------- ----------- ----------
---------- ---------- ----------- ----------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
-72-
<PAGE>
L.G. BALFOUR COMPANY, INC.
Statements of Cash Flows
(In Thousands)
<TABLE>
<CAPTION>
FOR THE YEARS ENDED FOR THE PERIOD
---------------------------------- ENDED
FEBRUARY 26, FEBRUARY 25, DECEMBER 16,
1995 1996 1996
--------------- -------------- ---------------
<S> <C> <C> <C>
Cash Flows from Operating Activities:
Net loss $ (10,942) $ (136) $ (2,153)
Adjustments to reconcile net loss to net cash provided by
(used in) operating activities-
Depreciation and amortization 1,978 2,026 1,533
(Gain) loss on sale of property, plant and equipment 89 (417) -
Change in assets and liabilities-
(Increase) decrease in accounts receivable 3,045 (991) (6,049)
(Increase) decrease in inventories (2,303) 894 1,774
Decrease in prepaid expenses and other current assets 492 666 189
Decrease in other assets 182 129 160
Decrease in bank overdraft and accounts payable, net (1,553) (359) (234)
Increase (decrease) in accrued expenses 2,376 133 (2,442)
Decrease in deferred compensation (441) (341) (42)
------------- ------------- --------
Net cash provided by (used in) operating activities (7,077) 1,604 (7,264)
------------- ------------- --------
Cash Flows from Investing Activities:
Proceeds from sale of fixed assets 65 951 571
Capital expenditures (1,274) (530) (345)
------------- ------------- --------
Net cash provided by (used in) investing activities (1,209) 421 226
------------- ------------- --------
Cash Flows from Financing Activities:
Proceeds from (payments on) borrowings from Parent, net 8,502 (1,749) 7,177
Payments on capital leases (216) (221) (200)
------------- ------------- --------
Net cash provided by (used in) financing activities 8,286 (1,970) 6,977
------------- ------------- --------
Net Increase (Decrease) in Cash and Cash Equivalents - 55 (61)
Cash and Cash Equivalents, beginning of period 25 25 80
Cash and Cash Equivalents, end of period 25 80 19
------------- ------------- --------
Supplemental Cash Flow Data:
Cash paid during the period for-
Interest $ 72 $ 52 $ 23
------------- ------------- --------
------------- ------------- --------
Taxes $ 65 $ 191 $ 42
------------- ------------- --------
------------- ------------- --------
</TABLE>
Supplemental Disclosures of Noncash Investing and Financing
Activities (Note 1)
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
-73-
<PAGE>
L.G. BALFOUR COMPANY, INC.
Notes to Financial Statements
(1) Summary of Significant Accounting Policies
GENERAL
The accompanying financial statements are for L.G. Balfour Company, Inc.
(the Company), a wholly owned subsidiary of Town & Country Corporation (the
Parent), as of February 25, 1996 and for the years ended February 26, 1995
and February 25, 1996 and for the period ended December 16, 1996. The
accompanying statement of operations for the period ended December 16, 1996
does not include the financial impact of the sale of certain assets and
liabilities of the Company discussed at Note 10. Subsequent to December
16, 1996 substantially all of the normal operations of the Company ceased.
This subsidiary is engaged in the production and distribution of high
school and college class rings on a made-to-order basis. The Company
markets directly to students on campus and at campus book stores and offers
a variety of graphics products, including graduation announcements,
diplomas and memory books, and novelty items, such as T-shirts, key chains
and pendants. During fiscal 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. The
Parent is in violation under its various debt agreements and has filed a
voluntary petition for relief under Chapter 11 Title 11 of the Untied
States Bankruptcy Code on November 18, 1997; thus, there is no assurance
that the Parent will be able to continue to provide financial support to
the Company. Therefore, there is substantial doubt about the Company's
ability to continue as a going concern. The financial statements do not
include any adjustments that might result from the outcome of this
uncertainty.
In addition, substantially all of the Company's assets have been pledged as
collateral against the Parent's debt obligations.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents include highly liquid investments with original
maturities of three months or less; the carrying amount approximates fair
market value because of the short-term maturities of these investments.
REVENUE RECOGNITION
Revenues from product sales are recognized at the time the product is
shipped.
IMPAIRMENT OF LONG-LIVED ASSETS
In March 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (SFAS) No. 121, ACCOUNTING FOR THE
IMPAIRMENT OF LONG-LIVED ASSETS AND FOR LONG-LIVED
-74-
<PAGE>
L.G. BALFOUR COMPANY, INC.
Notes to Financial Statements
(Continued)
ASSETS TO BE DISPOSED OF. This statement deals with accounting for the
impairment of long-lived assets, certain identifiable intangibles and
goodwill related to assets to be held and used, and for long-lived assets
and certain identifiable intangibles to be disposed of.
SFAS No. 121 requires that long-lived assets (e.g., property and equipment
and intangibles) be reviewed for impairment whenever events or changes in
circumstances, such as change in market value, indicate that the assets'
carrying amounts may not be recoverable. In performing the review for
recoverability, if future undiscounted cash flows (excluding interest
charges) from the use and ultimate disposition of the assets are less than
their carrying values, an impairment loss is recognized. Impairment losses
are to be measured based on the fair value of the asset.
On February 26, 1996, the Company adopted SFAS No. 121, which did not have
a material impact on the Company's financial position or results of
operations.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company's financial instruments consist primarily of cash and cash
equivalents, accounts receivable, bank overdraft, accounts payable 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 Note 9 for fair
value information pertaining to the Company's 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:
FEBRUARY 25,
1996
Raw materials $ 3,851,000
Work-in-process 3,622,000
Finished goods 3,318,000
-------------
$ 10,791,000
-------------
-------------
-75-
<PAGE>
L.G. BALFOUR COMPANY, INC.
Notes to Financial Statements
(Continued)
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 26, 1995 and February 25, 1996, these fees totaled approximately
$200,000 each year and for the period ended December 16, 1996, these fees
totaled $233,000.
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 25, 1996, the Company held approximately 12,212 ounces
valued at $4.9 million 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.
ADVERTISING
The Company expenses the costs of advertising as incurred. For the years
ended February 26, 1995 and February 25, 1996 and for the period ended
December 16, 1996, advertising expense was approximately $10,565,000,
$2,465,000 and $2,795,000, respectively.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are stated at cost. Maintenance and repair
items are charged to expense when incurred; renewals and betterments are
capitalized. When property, plant and equipment are retired or sold, their
costs and related accumulated depreciation are removed from the accounts,
and any resulting gain or loss is included in income. Included in other
income in the accompanying statement of operations for fiscal 1996 is a
$418,000 gain associated with the sale of one of the Company's
manufacturing facilities.
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 20 years.
-76-
<PAGE>
L.G. BALFOUR COMPANY, INC.
Notes to Financial Statements
(Continued)
Property, plant and equipment consisted of the following:
USEFUL LIFE FEBRUARY 25,
RANGES 1996
Real estate 10-20 years $ 6,875,000
Furniture and fixtures 3-7 years 820,000
Tools and dies 3-15 years 7,700,000
Equipment 3-8 years 7,119,000
Leasehold improvements 4-20 years 931,000
-----------
Property, plant and equipment, gross 23,445,000
Less--Accumulated depreciation (Note 4) 13,046,000
-----------
Property, plant and equipment, net $10,399,000
-----------
-----------
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting periods. Actual results could differ from those
estimates.
INCOME TAXES
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 tax return of the
Parent. The agreement calls for the provisions (benefits) and payments
(refunds) to be made as if the Company were to file its own separate
company tax returns.
LONG-TERM INTANGIBLE ASSETS
The excess $5,612,000 of purchase price over the values assigned to the net
assets acquired is being amortized using the straight-line method over
approximately 40 years. The Company continually evaluates whether events
and circumstances have occurred that indicate that the remaining estimated
useful life of goodwill may warrant revision or that the remaining balance
of goodwill may not be recoverable. When factors indicate that goodwill
should be evaluated for possible impairment, the Company uses an estimate
of the related business units' undiscounted operating income over the
remaining life of the goodwill, as well as the sale of the Company (see
Note 10), in measuring whether the goodwill is recoverable. Accumulated
amortization was approximately $2,914,000 at February 25, 1996.
-77-
<PAGE>
L.G. BALFOUR COMPANY, INC.
Notes to Financial Statements
(Continued)
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 that it estimates to be uncollectible (Note 7).
SUPPLEMENTAL DISCLOSURES OF NONCASH INVESTING AND FINANCING ACTIVITIES
During fiscal 1995 and the period ended December 16, 1996, the Company had
fixed asset additions of approximately $700,000 and $58,000, respectively,
funded by increases in capital lease obligations.
In addition, during fiscal 1995, a noncash transfer of $1,193,000 from
accrued expenses against property, plant and equipment was recorded (see
Note 4 for further explanation).
(2) Capital Lease Obligation
Capital lease obligation consists of the following:
FEBRUARY 25,
1996
------------
Lease obligation for office furniture and equipment,
payable in monthly installments with interest of 9.67% $ 399,000
Less--Current portion 245,000
------------
$ 154,000
------------
------------
-78-
<PAGE>
L.G. BALFOUR COMPANY, INC.
Notes to Financial Statements
(Continued)
(3) Income Taxes
The components of the provision for income taxes are as follows:
FOR THE
PERIOD
ENDED
FEBRUARY 26, FEBRUARY 25, DECEMBER 16,
1995 1996 1996
------------ ------------ ------------
Current-
Federal $ - $ - $ -
State 65,000 191,000 63,000
------------ ------------ ------------
Total provision $ 65,000 $ 191,000 $ 63,000
------------ ------------ ------------
------------ ------------ ------------
The Company's effective tax rate differs from the federal statutory
rate of 34% for the years ended February 26, 1995 and February 25,
1996 and for the period ended December 16, 1996 due to the following
(in thousands):
FOR THE
PERIOD
ENDED
FEBRUARY 26, FEBRUARY 25, DECEMBER 16,
1995 1996 1996
------------ ------------ ------------
Computed tax provision
(benefit) at statutory rate $ (3,698) $ 19 $ (711)
Increases resulting from
state taxes 65 191 63
Items not deductible for
income tax purposes 64 65 32
(Utilization) deferral of net
operating losses 3,634 (84) 679
------------ ------------ ------------
$65 $191 $63
------------ ------------ ------------
------------ ------------ ------------
-79-
<PAGE>
L.G. BALFOUR COMPANY, INC.
Notes to Financial Statements
(Continued)
Deferred tax assets and liabilities consisted of approximately the
following:
FEBRUARY 25,
1996
-------------
Deferred tax assets-
Accounts receivable reserves $ 883
Accrual for loss on assets held for sale or disposal 561
Inventories 452
Other 1,570
Net operating loss carryforwards 14,554
---------
Total gross deferred tax assets 18,020
Less--Valuation allowance 16,069
---------
Net deferred tax assets $ 1,951
---------
---------
Deferred tax liabilities-
Property, plant and equipment, principally due to
differences in depreciation $ 1,951
---------
Total deferred tax liabilities 1,951
---------
Net deferred tax asset (liability) $ -
---------
---------
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 $38.3 million as of December 16, 1996,
subject to Internal Revenue Service (IRS) review and approval and certain
IRS limitations on net operating loss utilization. Utilization of the net
operating loss carryforwards is contingent on the Company's ability to
generate income in the future. The net operating loss carryforwards will
expire from 2006 to 2012 if not utilized.
(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
-80-
<PAGE>
L.G. BALFOUR COMPANY, INC.
Notes to Financial Statements
(Continued)
is included as a reduction of general and administrative expenses in the
accompanying statement of operations. At 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 sheet.
During the period ended December 16, 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.
(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
(see Note 10):
YEAR TOTAL
COMMITMENT
1997 $ 1,086,000
1998 1,069,000
1999 1,037,000
2000 1,057,000
2001 1,073,000
Thereafter 7,579,000
Lease and rental expense included in the accompanying statements of
operations amounted to approximately $483,000 and $920,000 for the years
ended February 26, 1995 and February 25, 1996, respectively, and
approximately $866,000 for the period ending December 16, 1996.
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 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.
-81-
<PAGE>
L.G. BALFOUR COMPANY, INC.
Notes to Financial Statements
(Continued)
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
Accrued expenses consisted of approximately the following:
FEBRUARY 25,
1996
---------------
Compensation and related costs $ 2,442,000
Sales and use tax 503,000
Commissions and royalties 2,296,000
Customer deposits 4,717,000
Current portion of deferred compensation (Note 8) 355,000
Other 899,000
---------------
$ 11,212,000
---------------
---------------
(7) Prepaid Expenses and Other Current Assets
Prepaid expenses and other current assets consisted of approximately the
following:
FEBRUARY 25,
1996
---------------
Sales representative advances (Note 1) $ 4,571,000
Reserve on sales representative advances (Note 1) (2,497,000)
Other 409,000
---------------
$ 2,483,000
---------------
---------------
-82-
<PAGE>
L.G. BALFOUR COMPANY, INC.
Notes to Financial Statements
(Continued)
The following represents the activity associated with the reserve on sales
representative advances:
<TABLE>
<CAPTION>
VALUATION AND QUALIFYING ACCOUNTS
----------------------------------------------------------------------------------------------
COLUMN C
COLUMN A COLUMN B ADDITIONS COLUMN D COLUMN E
------------------------ ------------ ------------------------ ------------ ------------
CHARGED TO
BALANCE AT CHARGED TO OTHER BALANCE AT
BEGINNING COSTS AND ACCOUNTS-- DEDUCTIONS-- END OF
FOR THE PERIOD ENDING DESCRIPTION OF PERIOD EXPENSES DESCRIBE* DESCRIBE* PERIOD
----------------------- ------------------------ ------------ ---------- ----------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
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
Period Ending Reserve on Sales
December 16, 1996 Representative Advances $ 2,497,000 502,800 -- 2,255,800 $ 744,000
</TABLE>
*REPRESENTS WRITE-OFF OF TERMINATED SALES REPRESENTATIVES AMOUNT AND
FORGIVENESS OF AMOUNTS BY THE COMPANY.
(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. The Company provides certain health
care and life insurance benefits for employees who retired prior to
December 31, 1990. The Company adopted this statement in fiscal 1994 and
is recognizing the actuarial present value of the accumulated
postretirement benefit obligation (APBO) of approximately $6.2 million at
February 27, 1994 using the delayed recognition method over a period of 20
years (see Note 10).
-83-
<PAGE>
L.G. BALFOUR COMPANY, INC.
Notes to Financial Statements
(Continued)
The following table sets forth the plan status (in thousands):
FEBRUARY 25,
1996
-----------
Accumulated postretirement benefit obligation-
Retired employees $ (5,710)
Active employees -
-----------
Total (5,710)
Plan assets at fair value -
-----------
Unfunded accumulated benefit obligation in
excess of plan assets (5,710)
Unrecognized net gain (336)
Unrecognized transition obligation 5,487
-----------
Accrued postretirement medical benefit cost $ (559)
-----------
-----------
The net periodic postretirement benefit costs for the years ending February
26, 1995 and February 25, 1996 and for the period ended December 16, 1996
included the following components (in thousands):
FOR THE
PERIOD
ENDED
FEBRUARY 26, FEBRUARY 25, DECEMBER 16,
1995 1996 1996
----------- ----------- -----------
Service costs--benefits
attributed to service
during the period $ - $ - $ -
Interest cost 474 444 344
Actuarial assumptions - - -
Amortization of
unrecognized transition
obligation 323 323 255
------ ------ ------
Net periodic postretirement
benefit cost $ 797 $ 767 $ 599
------ ------ ------
------ ------ ------
For measurement purposes, a 9% annual rate of increase in the per capita
cost of covered health care benefits is assumed for fiscal 1996; the rate
was assumed to decrease gradually to 6% for fiscal 2000 and remain at that
level thereafter. The health care cost trend rate assumption has a
significant effect on the amounts reported. To illustrate, increasing the
assumed health care cost trend rate one percentage point each year would
increase the APBO as of February 25, 1996 by $380,000 or 7%, and the
aggregate of the service and interest cost components of the net periodic
postretirement benefit cost for fiscal 1996 by $30,000 or 4%.
The weighted average discount rate used in determining APBO was 8.0% in
fiscal 1996.
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<PAGE>
L.G. BALFOUR COMPANY, INC.
Notes to Financial Statements
(Continued)
Interest cost associated with the accumulated postretirement benefit
obligation is included as a component of interest expense in the statements
of operations.
DEFERRED COMPENSATION
The Company has deferred compensation agreements with certain sales
representatives and executives, which provide for payments upon retirement
or death based on the value of life insurance policies or mutual fund
shares at the retirement date. The deferred compensation expense for the
years ended February 26, 1995 and February 25, 1996 was approximately
$156,000 and $50,000, respectively, and for the period ended December 16,
1996 was approximately $79,000.
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
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 1995 and 1996 and for the period ending December 16, 1996.
The net amount due to Parent of $12,767,000 at February 25, 1996 represents
advances to fund operating needs and includes the charges discussed
previously. The Parent charged or credited the Company interest on a
monthly basis at a rate of 11% in fiscal 1995 and 11.5% in fiscal 1996 and
for the period ended December 16, 1996. Included in the accompanying
statements of operations are net interest charges of $1,093,000 and
$1,986,000 in fiscal 1995 and 1996, respectively, and $1,499,000 for the
period ended December 16, 1996.
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) Sale
The Parent, having reviewed the Company's performance, concluded that it
would be in the best interest of the Parent's investors and creditors to
consider opportunities to sell the Company.
On May 20, 1996 (the Original Agreement), the Parent entered into an
agreement to sell certain assets and liabilities of the Company (the
Balfour Acquisition) and Gold Lance, Inc. (the Gold Lance Acquisition),
another class ring manufacturing subsidiary of the Parent, constituting
substantially all of the operations of the Company and Gold Lance, Inc. to
Commemorative Brands, Inc. (CBI and formerly Class Rings, Inc. and
Scholastic Brands, Inc.), a new company formed by Castle Harlan Partners
II, L.P. (CHP II). The Original
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<PAGE>
L.G. BALFOUR COMPANY, INC.
Notes to Financial Statements
(Continued)
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 acquire any interest in
CBI. In October 1996, the FTC, which had been reviewing the transaction
since May 1996, gave preliminary approval to the Modified Agreement. Final
FTC approval was received on December 26, 1996.
On December 16, 1996, the Parent completed the sale of certain assets and
liabilities of the Company (the Closing). At the Closing, the Parent
received cash equal to the purchase price of $44 million, plus $3.0 million
in working capital adjustment from January 28, 1996 to the date of closing,
less $14 million, which was placed in escrow pending final FTC approval.
CBI also assumed a liability of $4.9 million representing the value of gold
on hand as of the Closing. All of the $4.9 million in gold value acquired
by CBI was on consignment at the closing date and was neither reflected as
an asset or a liability on the Company's balance sheet. The Closing also
included the assumption by CBI of a liability related to unamortized
postretirement medical benefit obligations, consisting of approximately
$5.2 million. This liability did not appear on the Company's balance sheet
in the past, as the Company had been recognizing it on the delayed
recognition method allowed by SFAS No. 106, EMPLOYERS' ACCOUNTING FOR
POSTRETIREMENT BENEFITS OTHER THAN PENSIONS (see Note 8). Additionally,
CBI assumed an operating lease obligation for a facility in Louisville,
Kentucky which runs through August 2, 2005 at an average yearly rental cost
of approximately $419,000 (see Note 5). On December 31, 1996, the Parent
received the $14 million in escrowed funds. On April 25, 1997, a
settlement was reached in which the Parent paid CBI $1.1 million to
finalize the purchase price and resolve certain other items.
The Closing did not include the assumption by CBI of a leased facility in
North Attleboro, Massachusetts. On April 24, 1997 (the Lease Amendment
Date), the lease was amended, reducing the amount of space and the period
of time for which the Company is obligated. The Company's future lease
obligation for this facility from the Lease Amendment Date is $16,806 per
month from May 17, 1997 through July 31, 1999. The previous lease required
yearly payments ranging from $605,000 to $699,000 through May 31, 2009 (see
Note 5).
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<PAGE>
EXHIBIT INDEX
The following exhibits are filed as a part of the report:
Exhibit No. Designation
----------- -----------
2.1(a) Asset Purchase Agreement dated as of May 20, 1996
("ArtCarved Purchase Agreement"), among the Company, CJC and
CJC North America, Inc. ("CJCNA").
2.2(a) First Amendment to the ArtCarved Purchase Agreement dated as
of November 21, 1996, among the Company, CJC and CJCNA.
2.3(a) Letter Agreement amending the ArtCarved Purchase Agreement
dated December 16, 1996, among the Company, CJC and CJCNA.
2.4(a) Amended and Restated Asset Purchase Agreement dated as of
November 21, 1996 ("Balfour Purchase Agreement"), among the
Company, Town & Country, L. G. Balfour Company, Inc. , and
Gold Lance, Inc.
2.5(a) Letter Agreement amending the Balfour Purchase Agreement
dated December 16, 1996, by and among the Company, Town &
Country, L. G. Balfour Company, Inc. and Gold Lance.
3.1(a) Certificate of Incorporation of the Company, as amended.
3.2(a) Certificate of Designations, Preferences and Rights of
Series A Preferred Stock of the Company, effective December
13, 1996, together with a Certificate of Correction thereof.
3.3(a) Certificate of Designations, Preferences and Rights of
Series B Preferred Stock of the Company effective December
13, 1996.
3.4(a) Restated by-laws of the Company, as amended.
4.1(a) Indenture dated as of December 16, 1996, between the Company
and Marine Midland Bank, as trustee (including the form of
Note).
4.2(a) Form of Note (Included as part of Indenture).
4.3(a) Registration Rights Agreement dated as of December 16, 1996,
among the Company, Lehman Brothers Inc. and BT Securities
Corporation.
4.4 Subscription Agreement dated as of December 16, 1996, by and
among the Company, CHP II, Dresdner Bank AG, Grand Cayman
Branch and Offshore; 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 -- incorporated by reference to
Exhibit 10.7 from the Company's Registration Statement on
Form S-4 (Registration No. 333-20759) dated April 11, 1997.
4.5 (b)(c) Amended and restated 1997 Stock Option Plan of the Company.
9.1 (b) Voting Trust Agreement dated as of December 17, 1996, among
the Company, certain stockholders of the Company and John K.
Castle, as voting trustee.
10.1(a) Revolving Credit, Term Loan and Gold Consignment Agreement
dated as of December 16, 1996, among the Company, the
lending institutions listed therein and The First National
Bank of Boston and Rhode Island Hospital Trust National
Bank, as Agents for the Banks.
10.2(a) Purchase Agreement dated December 10, 1996, among the
Company and the Initial Purchasers.
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<PAGE>
10.3(a)(c) Employment Agreement dated as of December 16, 1996, between
the Company and Jeffrey H. Brennan.
10.4(a)(c) Employment Agreement dated as of December 16, 1996, between
the Company and Richard H. Fritsche.
10.5(a)(c) Employment arrangements between the Company and Balfour with
respect to George Agle.
10.6(a)(c) Form of Indemnification Agreement between the Company and
(i) each director and (ii) certain officers.
10.7(b) Management Agreement dated as of December 17, 1996, between
the Company and Castle Harlan, Inc.
11.1(b) Statement re: Computation of per share earnings.
27(b) Financial Data Schedule
- ------------
(a) Except as indicated, incorporated by reference from the corresponding
Exhibit number of the Company's Registration Statement on Form S-4
(Registration No. 333-20759), dated April 11, 1997.
(b) Filed herewith.
(c) Management contract or compensatory plan or arrangement.
-88-
<PAGE>
AMENDED AND RESTATED
COMMEMORATIVE BRANDS, INC.
1997 STOCK OPTION PLAN
1. PURPOSE. The Commemorative Brands, Inc., 1997 Stock Option
Plan (the "Plan") was adopted for the purpose of motivating and retaining key
employees responsible for the attainment of the primary long-term performance
goals of Commemorative Brands, Inc. (the "Corporation"). The Plan has been
amended and restated, as set forth herein, to include directors of the
Corporation among those eligible to participate in the Plan. The Plan is
designed to increase the ability of the Corporation to attract and retain
individuals of exceptional ability and to give them a proprietary interest in
the success of the Corporation. This Plan is subject to approval by the
Corporation's stockholders.
2. DEFINITIONS. When used herein, the following terms shall have
the following meanings:
"Administrator" means the Compensation Committee of the Board,
which shall be comprised of two or more non-employee directors, within the
meaning of Securities and Exchange Commission Rule 16b-3.
"Affiliate" means, with respect to any Person, any other Person
directly or indirectly controlling (including but not limited to all
directors and officers of such Person), controlled by, or under direct or
indirect common control with, such Person. A person shall be deemed to
control a corporation if such Person possesses, directly or indirectly, the
power to (i) vote ten percent (10%) or more of the securities having ordinary
voting power for the election of directors of such corporation, or (ii)
direct or cause the direction of the management and policies of such
corporation, whether through the ownership of voting securities, by contract
or otherwise.
"Board" means the Board of Directors of the Corporation.
"Cause" means, with respect to a Participant, (i) a finding by the
Administrator based upon reasonable evidence presented in writing to the
Participant that the Participant engaged in a criminal act involving moral
turpitude, or any criminal act or willful misconduct, which in either case is
inconsistent with his or her employment responsibilities or contractual
relationship with the Corporation or any subsidiary thereof, (ii) the
Participant's willful and continued failure to substantially perform his or
her duties, other than due to the Disability of such Participant, that
results in or is reasonably likely to result in material harm or damage to
the Corporation or any of its assets, properties, businesses, operations or
prospects, (iii) repeated acts of insubordination by the Participant that
result in or are reasonably likely to result in material harm to the
Corporation or any of its assets, properties, businesses, operations or
prospects, or willful failure to execute the Corporation's plans and/or
strategies, or (iv) acts of dishonesty by the Participant resulting or
intending to result in personal gain or enrichment at the expense of the
Corporation. With respect to clauses (ii) and (iii) above, the Participant
shall not be terminated
<PAGE>
for Cause unless the Corporation shall notify the Participant in writing of
such failures and/or acts of subordination prior to termination and the
Participant shall have thirty (30) days after receipt of such notice to cure
such deficiency; PROVIDED, HOWEVER, in the event the Participant shall
continue to engage in the behavior described in clause (ii) or (iii), as the
case may be, after such cure period, the Participant shall not have a cure
period for any subsequent misconduct.
"Change in Control" shall be deemed to have occurred if, at any
time following the effective date of the Plan specified in Section 18: (a)
any Person who is not a stockholder of the Corporation as of the effective
date of the Plan becomes the beneficial owner, directly or indirectly, of
more of the combined voting power of the then outstanding securities of the
Corporation than Castle Harlan Partners II, L.P. and all its Affiliates
(including Castle Harlan Offshore Partners, L.P.; Dresdner Bank AG, Grand
Cayman Branch and all of the Investor Stockholders (as defined in the
Subscription Agreement dated as of December 16, 1996, as amended as of
December 17, 1996, between the Corporation and its stockholders)), except
pursuant to an Initial Public Offering of securities of the Corporation, (b)
there shall occur the sale or other transfer or disposition of all or
substantially all of the assets of the Corporation to one or more Persons who
are not stockholders of the Corporation or a subsidiary of the Corporation as
of the effective date of the Plan, or (c) there occurs a merger,
consolidation or other reorganization or business combination of the
Corporation with a Person who is not a stockholder of the Corporation or a
subsidiary of the Corporation as of the effective date of the Plan and in
which the Corporation or such subsidiary is not the surviving entity or, if
the Corporation is the surviving entity, its shareholders immediately prior
to such merger, consolidation, reorganization or business combination do not,
following such event own or control 50% or more of the voting securities of
the new entity.
"Code" means the Internal Revenue Code of 1986, as amended, or any
successor statute thereto.
"Common Stock" means the Common Stock, par value $.01 per share, of
the Corporation.
"Corporation" means Commemorative Brands, Inc., a Delaware
corporation.
"Designated Beneficiary" shall have the meaning set forth in
Section 7(h) hereof.
"Disability" means, with respect to a Participant, a determination
by the Administrator that such Participant was unable to perform his or her
job, including after reasonable accommodation by the Corporation, for three
consecutive months or for any 120 days in a 360-day period.
"EBITDA" means, for any period, the amount equal to: (a) the net
income (or net loss) of the Corporation and its subsidiaries during such
period after deduction of all expenses, taxes and other charges, determined
in accordance with generally accepted accounting principles, after
eliminating therefrom all extraordinary items of income and expense
(including elimination of any management fee paid to Castle Harlan, Inc.
pursuant to the Management Agreement between it and the Corporation, dated as
of December 16, 1996); PLUS (b) to the extent deducted from net
-2-
<PAGE>
income, dividends on the Corporation's preferred stock; PLUS (c) any
provision for (or less any benefit from) income or franchise taxes included
in the determination of (a) above; PLUS (d) depreciation, depletion and
amortization; PLUS (e) the expenses of the Corporation and its subsidiaries
charged to income for interest on indebtedness (including the current portion
thereof), determined in accordance with generally accepted accounting
principles.
"Exchange Act" means the Securities Exchange Act of 1934, as
amended, and the rules and regulations promulgated thereunder.
"Fair Market Value" means, on any day, with respect to Common Stock
which is (a) listed on a United States securities exchange, the last sales
price of such stock on such day on the largest United States securities
exchange on which such stock shall have traded on such day, or if such day is
not a day on which a United States securities exchange is open for trading,
on the immediately preceding day on which such securities exchange was open,
(b) not listed on a United States securities exchange but is included in The
NASDAQ Stock Market System (including The NASDAQ National Market), the last
sales price on such system of such stock on such day, or if such day is not a
trading day, on the immediately preceding trading day, or (c) neither listed
on a United States securities exchange nor included in The NASDAQ Stock
Market System, the fair market value of such stock as determined from time to
time by the Administrator in good faith in its sole discretion.
"Fully-Diluted Basis" means, without duplication, (a) all shares of
Common Stock outstanding at the time of determination, (b) all shares of
Common Stock issuable upon the exercise of any option, warrant or similar
right outstanding at the time of determination, whether or not currently
exercisable, and (c) all shares of Common Stock issuable upon the exercise of
any conversion or exchange right contained in any security convertible into
or exchangeable for shares of Common Stock.
"Incentive Stock Option" means an Option that is designated by the
Administrator as an incentive stock option and qualifies as such within the
meaning of Section 422 of the Code and is granted by the Administrator to a
Participant.
"Initial Public Offering" means a public offering of Common Stock
pursuant to a registration statement filed with, and declared effective by,
the Securities and Exchange Commission other than on Forms S-4 or S-8 (or
successors thereto), upon the consummation of which the shares so registered
are listed on a United States securities exchange or included in The NASDAQ
Stock Market System.
"Key Employee" means an employee who owns more than 10% of the
total combined voting power of all classes of stock of the Corporation,
determined at the time an Option is proposed to be granted.
"Multiplier" means the number, determined in accordance with the
provisions of Section 11 hereof, which is multiplied by EBITDA for the
applicable Plan Year in order to calculate Purchase Price for purposes of
Section 11 hereof.
-3-
<PAGE>
"Nonqualified Stock Option" means an Option, which is not an
Incentive Stock Option, granted by the Administrator to a Participant.
"Option" means a right granted under the Plan to a Participant to
purchase a stated number of shares of Common Stock as an Incentive Stock
Option or Nonqualified Stock Option.
"Option Period" means the period within which an Option may be
exercised pursuant to the Plan.
"Participant" means any employee or any director (whether or not
also an employee) of the Corporation or any subsidiary thereof who is
selected to participate in the Plan in accordance with Section 4.
"Person" means any individual, partnership, firm, trust,
corporation or other similar entity. When two or more Persons act as a
partnership, limited partnership, syndicate or other group for the purpose of
acquiring, holding or disposing of securities of the Corporation, such
partnership, limited partnership, syndicate or group shall be deemed a
"Person."
"Plan" means the Commemorative Brands, Inc. 1997 Stock Option Plan.
"Plan Year" means the year ended on the last Saturday in August in
each year.
"Purchase Price" means an amount equal to EBITDA for the
immediately preceding Plan Year, times the applicable Multiplier, minus the
sum of (i) the amount of the Corporation's debt (determined in accordance
with generally accepted accounting principles as set forth on the
Corporation's most recent quarterly balance sheet, including current and long
term portions) and accrued interest, (ii) liability for gold on consignment
to the extent not included in debt calculated in accordance with (i), and
(iii) the liquidation preference plus accrued and unpaid dividends on its
preferred stock, divided by the number of shares of Common Stock outstanding
on a Fully-Diluted Basis.
3. ADMINISTRATION. The Plan shall be administered by the
Administrator. Subject to the provisions of the Plan, the Administrator
shall have the authority to:
(a) select the Participants;
(b) determine the number of shares of Common Stock covered by
any Option granted to a Participant; PROVIDED, HOWEVER, that
no single Participant may be granted Options relating to
more than 9,000 shares of Common Stock in any Plan Year
(subject to adjustment as provided in Section 7(i)); and
provided, further, that no Option shall be granted after the
expiration of the period of ten (10) years from the
effective date of this Plan, as specified in Section 18
hereof;
(c) determine whether each Option shall be an Incentive Stock
Option or a Nonqualified Stock Option; and
-4-
<PAGE>
(d) establish from time to time regulations for the
administration of the Plan, interpret the Plan, delegate in
writing administrative matters to committees of the Board or
to other persons, and make such other determinations and
take such other action, as it deems necessary or advisable
for the administration of the Plan.
All decisions, actions and interpretations of the Administrator
shall be final, conclusive and binding upon all parties.
4. PARTICIPATION. Participants in the Plan shall be limited to
those employees and directors of the Corporation or any subsidiary thereof
who have been notified in writing by the Administrator that they have been
selected to participate in the Plan.
5. SHARES SUBJECT TO THE PLAN. Options may be granted by the
Administrator to Participants from time to time to purchase not more than in
the aggregate of 69,954 shares of Common Stock (subject to adjustment as
provided in Section 7(j), all of which shares shall be reserved for issuance
upon exercise of Options granted under the Plan. The shares issued upon the
exercise of Options granted under the Plan may be authorized and unissued
shares, shares held in the treasury of the Corporation, or, if applicable,
shares purchased on the open market by the Corporation (at such time or times
and in such manner as it may determine). The Corporation shall be under no
obligation to acquire Common Stock for distribution to optionholders before
payment in shares of Common Stock is due. If any Option granted under the
Plan shall be canceled or shall expire without the shares covered by such
Option being purchased by the applicable optionholder thereunder, new Options
may thereafter be granted covering such shares.
6. GRANTING OPTIONS. The Administrator, at any time and from
time to time, may grant Options under the Plan to any Participant,
exercisable for such number of shares of Common Stock as the Administrator
shall designate, subject to the provisions of Section 7.
7. TERMS AND CONDITIONS OF OPTIONS. Each Option granted under
the Plan shall be evidenced by a written agreement, in form approved by the
Administrator and executed by the President, Chief Financial Officer or
Secretary of the Corporation, which shall be subject to the following express
terms and conditions and to such other terms and conditions as the
Administrator may deem appropriate:
(a) OPTION PERIOD. Each Option agreement shall specify that the
Option thereunder is granted for a period of ten (10) years,
or such shorter period as the Administrator may determine,
from the date of grant and shall provide that the Option
shall expire on such ten (10) year anniversary, or shorter
period, as the case may be (unless earlier exercised or
terminated pursuant to its terms); PROVIDED, HOWEVER, that
any Incentive Stock Option granted to a Key Employee shall
specify that the Incentive Stock Option is granted for a
period of five (5) years from the date of grant and shall
expire on such five (5) year anniversary.
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<PAGE>
(b) OPTION PRICE. The Option price per share shall be the Fair
Market Value at the time the Option is granted or, with
respect to a Nonqualified Stock Option, such other price as
the Administrator shall determine; PROVIDED, HOWEVER, that
the Option price per share for any Incentive Stock Option
granted to a Key Employee shall equal 110% of the Fair
Market Value at the time the Incentive Stock Option is
granted.
(c) EXERCISE OF OPTION; VOTING ARRANGEMENT. Subject to Sections
7(g) and 8, Options shall become exercisable such that on
the second anniversary of the date of grant the amount
exercisable shall be 25% and on each of the third, fourth
and fifth anniversaries of the date of grant the amount
exercisable shall cumulatively increase by 25%, as set forth
in the following schedule:
Years from Amount
Date of Grant Exercisable
------------- -----------
One ............................ 0%
Two ............................ 25%
Three .......................... 50%
Four ........................... 75%
Five ........................... 100%
Notwithstanding the foregoing schedule, the
Administrator may grant Options that become exercisable
in accordance with such other vesting schedule, subject
to the Administrator's authority to amend or accelerate
such vesting schedule and upon such terms and conditions
as the Administrator shall determine, PROVIDED, HOWEVER,
that no Options may be granted with a vesting schedule
of less than six (6) months. A Participant or his or
her Designated Beneficiary who acquires Common Stock
pursuant to the exercise of an Option shall execute and
become a party to the Corporation's Voting Trust
Agreement, dated as of December 17, 1996, as the same
may be amended, restated or otherwise revised, and shall
deposit such shares of Common Stock in the voting trust
described therein, which execution and deposit shall be
a condition precedent to the right of the Participant or
his or her Designated Beneficiary to purchase any shares.
(d) LIMITATION ON AMOUNT OF INCENTIVE STOCK OPTIONS GRANTED.
Options shall be treated as Incentive Stock Options only to
the extent that the aggregate Fair Market Value of stock
with respect to which Incentive Stock Options are
exercisable for the first time by any optionholder during
any calendar year (whether under the terms of the Plan or
any other stock option plan of the Corporation or of its
parent or any subsidiary corporation) is $100,000 or less.
To the extent that such aggregate Fair Market Value exceeds
$100,000, the Options shall be treated as Nonqualified Stock
Options. Fair
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<PAGE>
Market Value shall be determined as of the time the Option
with respect to such stock is granted.
(e) LIMITATIONS ON GRANTING OF OPTIONS. The Administrator shall
have the authority and discretion to grant to an eligible
employee either Incentive Stock Options or Nonqualified
Stock Options or both, but shall clearly designate the
nature of each Option at the time of grant in the stock
option agreement. Participants who are non-employee
directors on the date an Option is granted may only receive
Nonqualified Stock Options.
(f) PAYMENT OF OPTION PRICE UPON EXERCISE. The option price of
the shares of Common Stock as to which an Option shall be
exercised shall be paid to the Corporation at the time of
exercise at the option of the optionholder either (i) in
cash, (ii) by check, (iii) bank draft, (iv) money order
payment to the Corporation, (v) by delivering Common Stock
of the Corporation already owned by the optionholder and
having a total Fair Market Value on the date of such
delivery equal to the option price, (vi) to the extent
authorized by the Administrator, through the written
election of the optionholder to have shares of Common Stock
withheld by the Corporation from the shares otherwise to be
received, with such withheld shares having an aggregate Fair
Market Value on the date of exercise equal to the option
price, (vii) by wire transfer to an account designated by
the Corporation or (viii) any combination of the above
methods of payment.
(g) EXERCISE OF OPTIONS UPON TERMINATION. If a Participant's
relationship with the Corporation terminates for any reason
other than death or Disability, the Options granted to such
Participant that are exercisable as of the date of
termination of such relationship may be so exercised within
three (3) months after termination of such relationship, or
such longer period as the Administrator may determine, and
shall then terminate; PROVIDED, HOWEVER, that any Incentive
Stock Options shall no longer be treated as Incentive Stock
Options unless exercised within three (3) months following
the termination of such Participant's relationship with the
Corporation; PROVIDED, FURTHER, that in no event may such
Options be exercised after the expiration date of such
Options as established in accordance with Section 7(a). All
Options that have been granted to a Participant which are
not exercisable as of the date of the termination of a
Participant's relationship with the Corporation shall
terminate as of such date. If the relationship of a
Participant to the Corporation terminates on account of
death or Disability, the Options granted to such Participant
that are exercisable as of the date of such termination may
be so exercised within one (1) year after such termination,
or such longer period as the Administrator may determine,
and shall then terminate; PROVIDED, HOWEVER, that any
Incentive Stock Options shall no longer be treated as
Incentive Stock Options unless exercised within one (1) year
of the termination of a Participant's relationship with the
Corporation on account of Disability.
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<PAGE>
(h) TRANSFERABILITY OF OPTIONS. No Option granted under the
Plan and no right arising under such Option shall be
transferable other than by will or by the laws of descent
and distribution. During the lifetime of the Participant an
Option shall be exercisable only by such Participant. Any
Option exercisable at the date of the Participant's death
and transferred by will or by the laws of descent and
distribution shall be exercisable in accordance with the
terms of such Option by the executor or administrator, as
the case may be, of the Participant's estate or by the
Person or Persons to whom such Option is transferred by will
or the laws of descent or distribution (each, a "Designated
Beneficiary") for a period of one (1) year after the date of
the Participant's death, or such longer period as the
Administrator may determine, and shall then terminate;
PROVIDED, HOWEVER, that in no event may such Options be
exercised after the expiration date of such Options as
established in accordance with Section 7(a). All Options
not exercisable at the date of the Participant's death shall
terminate as of such date.
(i) INVESTMENT REPRESENTATION. Each Option agreement may
contain an undertaking that, upon demand by the
Administrator for such a representation, the Participant or
his Designated Beneficiary, as the case may be, shall
deliver to the Administrator at the time of any exercise of
an Option a written representation that the shares of Common
Stock to be acquired upon such exercise are to be acquired
for such Participant's or Designated Beneficiary's own
account and not with a view to, or for resale in connection
with, any distribution. Upon such demand, delivery of such
representation prior to the delivery of any shares issued
upon exercise of an Option shall be a condition precedent to
the right of the Participant or his Designated Beneficiary
to purchase any shares.
(j) ADJUSTMENTS IN EVENT OF CHANGE IN COMMON STOCK. In the
event of any change in the Common Stock by reason of any
stock dividend, recapitalization, reorganization, merger,
consolidation, split-up, combination or exchange of shares,
or of any similar change affecting the Common Stock, the
number and kind of shares which thereafter may be optioned
and sold under the Plan and the number and kind of shares
subject to Option in outstanding Option agreements and the
purchase price per share thereof shall be appropriately
adjusted consistent with such change in such manner as the
Board may deem equitable to prevent substantial dilution or
enlargement of the rights granted to, or available for,
Participants in the Plan. Without limiting the generality
of the foregoing, if the Common Stock is recapitalized into
multiple classes of common stock, the kind of shares subject
to Option shall be those common shares intended for broad
general ownership rather than any class of special super-
voting or other control stock.
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<PAGE>
(k) OPTIONHOLDERS TO HAVE NO RIGHTS AS STOCKHOLDERS. No
optionholder shall have any rights as a stockholder with
respect to any shares subject to such optionholder's Option
prior to the date on which such optionholder is recorded as
the holder of such shares on the records of the Corporation.
(l) PLAN AND OPTION NOT TO CONFER RIGHTS WITH RESPECT TO
CONTINUANCE OF EMPLOYMENT. Neither the Plan nor any action
taken thereunder shall be construed as giving any
Participant any right to continue such Participant's
relationship with the Corporation or a subsidiary thereof,
nor shall it give any employee the right to be retained in
the employ of the Corporation, or interfere in any way with
the right of the Corporation to terminate any Participant's
employment or relationship, as the case may be, at any time
with or without Cause.
(m) OTHER OPTION PROVISIONS. The form of option agreement
authorized by the Plan may contain such other provisions,
consistent with this Plan, as the Administrator may, from
time to time, determine.
(n) NOTIFICATION OF SALES OF COMMON STOCK. Subject to the
provisions of Section 11 hereof, any optionholder who
disposes of shares of Common Stock acquired upon the
exercise of an Incentive Stock Option either (a) within two
(2) years from the date of the grant of the Incentive Stock
Option under which the Common Stock was acquired or (b)
within one (1) year after the transfer of such shares of
Common Stock to the optionholder, shall notify the
Corporation of such disposition and of the amount realized
upon such disposition.
8. EFFECT OF CHANGE IN CONTROL OR INITIAL PUBLIC OFFERING.
Notwithstanding the provisions of Section 7, if there should be a Change in
Control of the Corporation, or if the Corporation shall effectuate an Initial
Public Offering, the Corporation shall give each optionholder written notice of
such Change in Control or Initial Public Offering as promptly as practicable
prior to the effective date thereof and all of the Options held by an
optionholder not currently exercisable shall become immediately exercisable
immediately prior to the effective date of such Change in Control or Initial
Public Offering; PROVIDED, HOWEVER, that all or a portion of such Options shall
not be exercisable to the extent that the exercise would cause the optionholder
to be subject to taxes under Section 4999 of the Code.
9. NO CLAIM OR RIGHT UNDER THE PLAN. No employee or director shall
at any time have the right to be selected as a Participant in the Plan nor,
having been selected as a Participant and granted an Option, to be granted any
additional Options.
10. LISTING AND QUALIFICATION OF SHARES. The Plan, the grant and
exercise of Options thereunder, and the obligation of the Corporation to sell
and deliver shares under such Options, shall be subject to all applicable
Federal and state laws, rules and regulations and to such approvals by any
government or regulatory agency as may be required. The Corporation, in its
discretion, may postpone the issuance or delivery of shares upon any exercise of
an Option until
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completion of any stock exchange listing, or other qualification of such
shares under any state or Federal law, rule or regulation as the Corporation
may consider appropriate, and may require any optionholder to make such
representations and furnish such information as it may consider appropriate
in connection with the issuance or delivery of the shares in compliance with
applicable laws, rules and regulations. Certificates representing shares of
Common Stock acquired by the exercise of an Option may bear such legend as
the Corporation may consider appropriate under the circumstances.
11. DISPOSITION OF SHARES. At any time prior to the consummation of
an Initial Public Offering, each share of Common Stock acquired by an exercise
of an Option granted under the Plan may be transferred, other than by will or
the laws of descent and distribution, only to the Corporation and only in
accordance with the following provisions of this Section 11 and Section 12
hereof. Each certificate representing shares of Common Stock acquired by the
exercise of an Option shall bear a legend to such effect.
(a) CALL BY CORPORATION. The Corporation shall have the right
to purchase from a Participant or Designated Beneficiary, as
the case may be, within six (6) months following the death,
Disability or termination of such employee Participant's
employment by the Corporation without Cause, or termination
of such non-employee Participant's relationship with the
Corporation without Cause, the Common Stock acquired by the
exercise of Options by such Participant or Designated
Beneficiary for an amount equal to the Purchase Price where
the Multiplier is 6.0. The Corporation shall have the right
to purchase from a Participant or Designated Beneficiary, as
the case may be, within six (6) months following the
termination of such employee Participant's employment by the
Corporation for Cause or the termination of such non-employee
Participant's relationship with the Corporation for Cause, or
the resignation by the Participant, the Common Stock acquired
by such Participant or Designated Beneficiary, for an amount
equal to the Purchase Price where the Multiplier is 5.0.
(b) PUT BY PARTICIPANT. Each Participant or Designated Beneficiary,
as the case may be, shall have the right (the "Put Right") to
sell to the Corporation, within six (6) months following the
death or Disability of such Participant, or within three (3)
months following termination of such employee Participant's
employment by the Corporation without Cause, or termination of
such non-employee Participant's relationship with the Corporation
without Cause, the Common Stock acquired by the exercise of
Options by such Participant or Designated Beneficiary, for an
amount equal to the Purchase Price where the Multiplier is 5.0;
PROVIDED, that a Participant shall not have the right to exercise
such Put Right (i) if the Corporation is prohibited from
satisfying such Put Right by law, (ii) if the Corporation's
performance of its obligations would cause an event of default
under any financial covenants under any loan documents to which
it is a party (other than loan documents with respect to
indebtedness incurred after the effective date of the Plan the
proceeds of which are used to fund payments
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to the Corporation's securityholders), or (iii) if there is
then pending or under active negotiation an agreement for sale
of all or substantially all of the Corporation's stock or assets
or for a merger. In any such event, the optionholder's rights
under this Section 11(b) shall remain in effect until such time
as the Corporation is able to perform its obligations hereunder
or the proposed sale or merger transaction has been abandoned as
the case may be. The Administrator shall notify the
optionholders in writing that the Corporation is able to perform
such obligation or the proposed sale or merger transaction has
been abandoned as the case may be.
The purchase of Common Stock by the Corporation pursuant to the foregoing
provisions of this Section 11 may, at the discretion of the Administrator, be
paid for either (i) in cash or (ii) up to forty percent (40%) in cash with the
balance payable under a note issued by the Corporation with principal payments
made in four (4) equal annual installments and bearing interest, payable
annually, at the rate of the greater of (i) seven percent (7%) per annum and
(ii) the lowest interest rate required to avoid imputed interest.
12. SALE OF COMMON STOCK. Notwithstanding anything herein to the
contrary, if Castle Harlan Partners II, L.P. ("CHP II") proposes to sell all of
its Common Stock to any third party, in one or a series of transactions (any
such sale being referred to as a "Go-Along Sale"), then CHP II, at its option,
may require a Participant or Designated Beneficiary to sell all of the Common
Stock owned by such Participant or Designated Beneficiary at the same time as
the completion of CHP II's sale for the same consideration as received by CHP II
as provided herein. If CHP II determines to exercise such rights, it shall
provide such Participant or Designated Beneficiary with written notice (a "Go-
Along Notice") at least twenty (20) days prior to the proposed closing of the
Go-Along Sale. Such Go-Along Notice shall set forth: (i) the name and address
of the proposed purchaser in the Go-Along Sale and the proposed closing date for
such Go-Along Sale; and (ii) the proposed amount and form of consideration to be
paid for the Common Stock and the terms and conditions of payment. The closing
of a Go-Along Sale shall take place on such date and at such time as CHP II
specifies to such Participant or Designated Beneficiary by not less than three
(3) days' prior notice. At the closing of a Go-Along Sale, such Participant or
Designated Beneficiary shall cause the stock certificates evidencing all of such
Participant's or Designated Beneficiary's shares of Common Stock (with stock
powers duly executed) to be delivered to the purchaser free and clear of all
liens, charges, encumbrances and rights of third parties of any kind and shall
take all actions necessary to vest in the purchaser at such closing good and
marketable title to all of such Participant's or Designated Beneficiary's Common
Stock, free and clear of all liens, charges, encumbrances and rights of third
parties. In addition, such Participant or Designated Beneficiary shall deliver
to the purchaser at each such closing any opinions of counsel and certificates
that the purchaser may reasonably request. Notwithstanding the provisions of
Sections 7 and 8 hereof, all of the Options granted to such Participant or
Designated Beneficiary not currently exercisable shall become immediately
exercisable as of the effective date of the Go-Along Sale. If such Participant
or Designated Beneficiary elects not to exercise all of the Options on such date
and sell each share of Common Stock acquired by such exercise in the Go-Along
Sale, all of the Options not so exercised shall terminate as of the effective
date of the Go-Along Sale.
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<PAGE>
13. TAXES. The Administrator may make such provisions and take such
steps as it may deem necessary or appropriate for the withholding of all
federal, state, local and other taxes required by law to be withheld by the
Corporation with respect to Options under the Plan including, but not limited to
(a) reducing the number of shares of Common Stock otherwise deliverable, based
upon their Fair Market Value on the date of exercise, to permit deduction of the
amount of any such withholding taxes from the amount otherwise payable under the
Plan, (b) deducting the amount of any such withholding taxes from any other
amount then or thereafter payable to a Participant or Designated Beneficiary, as
the case may be, or (c) requiring a Participant or Designated Beneficiary to pay
to the Corporation the amount required to be withheld or to execute such
documents as the Administrator deems necessary or desirable to enable the
Corporation to satisfy its withholding obligations as a condition of releasing
the Common Stock.
14. NO LIABILITY OF BOARD MEMBERS. No member of the Board shall be
personally liable by reason of any contract or other instrument executed by such
member or on such member's behalf in such member's capacity as a member of the
Board or the Administrator nor for any mistake of judgment made in good faith,
and the Corporation shall indemnify and hold harmless each employee, officer or
director of the Corporation to whom any duty or power relating to the
administration or interpretation of the Plan may be allocated or delegated,
against any cost or expense (including counsel fees) or liability (including any
sum paid in settlement of a claim with the approval of the Board) arising out of
any act or omission to act in connection with the Plan unless arising out of
such person's own fraud or bad faith.
15. AMENDMENT OR TERMINATION. The Administrator may, with
prospective or retroactive effect, amend, suspend, or terminate the Plan or any
portion thereof at any time; PROVIDED, HOWEVER, that no amendment, suspension or
termination of the Plan shall deprive any optionholder of any right with respect
to any Option granted under the Plan without such optionholder's written
consent; and PROVIDED, FURTHER, that unless duly approved by the holders of
stock entitled to vote thereon at a meeting (which may be the annual meeting)
duly called and held for such purpose, except as provided in Section 7(j), no
amendment or change shall be made to the Plan, (i) increasing the total number
of shares which may be issued or transferred under the Plan, (ii) changing the
exercise price specified for the shares subject to the Options, (iii) changing
the maximum periods during which Options may be exercised, (iv) extending the
period during which Options may be granted under the Plan, (v) materially
changing the designation of persons eligible to receive Options under the Plan,
or (vi) materially increasing in any other way the benefits accruing to
Participants under the Plan.
16. CAPTIONS. The captions preceding the sections of the Plan have
been inserted solely as a matter of convenience and shall not in any manner
define or limit the scope or intent of any provisions of the Plan.
17. GOVERNING LAW. The Plan and all rights thereunder shall be
governed by and construed in accordance with the laws of the State of Delaware
applicable to contracts made and to be performed entirely within such State.
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18. EFFECTIVE DATE. The Plan, as amended and restated, shall become
effective as of July 29, 1997.
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VOTING TRUST AGREEMENT
Voting Trust Agreement, dated as of December 17, 1996, among
Commemorative Brands, Inc., a Delaware corporation formerly known as
Scholastic Brands, Inc. (the "Company"), each of the stockholders listed on
the signature pages hereto (the "Stockholders") and John K. Castle and any
successor appointed as provided in this Agreement, as Voting Trustee (the
"Voting Trustee").
RECITALS
The Company is duly organized and validly existing under the laws
of the State of Delaware; and, as of the date hereof, the Stockholders are
the owners of an aggregate of (i) 3544 shares of the issued and outstanding
Common Stock, par value $0.01 per share, of the Company (the "Common Stock"),
and (ii) 3544 shares of the issued and outstanding Series B Preferred Stock,
par value $0.01 per shares, of the Company (the "Series B Preferred Stock")
(the Common Stock and Series B Preferred Stock now or hereafter from time to
time owned by the Stockholders being referred to herein collectively as
"Shares").
In consideration of the premises and of the mutual undertakings of
the parties hereinafter set forth, a voting trust (the "Trust") in respect of
the Shares of the Company owned by the Stockholders is hereby created and
established, subject to the following terms and conditions, to all and every
one of which the parties hereto expressly assent and agree.
1. DEPOSIT OF SHARES.
(a) TRANSFER OF SHARES. Each Stockholder agrees that, concurrently
with the execution and delivery of this Agreement, he or it will transfer and
assign, or cause to be transferred and assigned, to the Voting Trustee all of
the Shares of the Company now owned by him or it and will deposit or cause to be
deposited hereunder, with the Voting Trustee, the certificates for such Shares,
all of which certificates, if not registered in the name of the Voting Trustee,
shall be duly endorsed in blank or accompanied by proper instruments of
assignment and transfer thereof duly executed in blank.
(b) ALL CAPITAL STOCK. The provisions of this Agreement shall apply
to any and all Shares of the Company that (i) may be issued in respect of, in
exchange for, or in substitution of any Shares transferred to the Voting Trustee
pursuant to paragraph (a) hereof, or (ii) are hereafter acquired by any
Stockholder at any time, and each Stockholder agrees that until the termination
of this Agreement no Shares of the Company shall be held by such Stockholder,
but all such Shares shall be deposited with the Voting Trustee in accordance
with the terms and conditions of this Agreement.
<PAGE>
2. VOTING TRUST CERTIFICATES.
(a) ISSUE OF CERTIFICATES. Subject to the provisions of Section 4
hereof, the Voting Trustee shall from time to time issue to each Stockholder,
with respect to the Shares of the Company owned by such Stockholder and so
deposited hereunder, a Voting Trust Certificate or Voting Trust Certificates,
each in the form of EXHIBIT A hereto, for the number of Shares equal to that
deposited by such Stockholder, which Certificate or Certificates shall refer to
the provisions of this Agreement and be registered on the books of the Trust in
such Stockholder's name.
(b) TRANSFER OF CERTIFICATES. Voting Trust Certificates shall, to
the extent permitted by law and the terms of this Agreement, be transferable in
the same manner as negotiable instruments; PROVIDED, HOWEVER, that ownership of
such Voting Trust Certificates shall be transferable on the books of the Trust
by the holders of record thereof only upon (i) the surrender of such
Certificates, properly endorsed by the registered holders, and (ii) delivery to
the Voting Trustee (A) by the proposed transferee, of a valid undertaking, in
form and substance satisfactory to the Voting Trustee, to become, and such
transferee becomes, bound by the terms of this Agreement, and (B) by the
proposed transferor, of an opinion of counsel or no action letter as provided in
Section 4 hereof.
3. SUBSCRIPTION AGREEMENT.
(a) LIMITATIONS ON TRANSFER. All Voting Trust Certificates issued
hereunder shall be subject to (i) the limitations on transfer with respect to
the Shares now or hereafter transferred to the Voting Trustee hereunder, in the
Subscription Agreement dated as of December 16, 1996, among the Company and
certain of its stockholders (the "Subscription Agreement"), a copy of which is
on file with the Company.
(b) NOTICES. Any notice required to be given by any Stockholder to
the Company or others under the Subscription Agreement with respect to the
purchase or sale of any Shares transferred hereunder shall be given to the
Voting Trustee who shall promptly transmit such notice to the Company, and the
Company shall thereafter give all notices required under such Subscription
Agreement to be given to others, including the other stockholders of the
Company.
4. REGISTRATION OF CERTIFICATES.
CERTIFICATES NOT REGISTERED. The Voting Trustee will not register
the Voting Trust Certificates under the Securities Act of 1933, as amended
(the "Securities Act"), or under the securities laws of any state in reliance
upon each Stockholder's representation hereby made that he or it will hold
the Voting Trust Certificates subject to all applicable provisions of the
Securities Act and such state laws and all applicable rules and regulations
promulgated thereunder, and will not offer, sell, transfer or otherwise
dispose of said Voting Trust Certificates or any part thereof unless he or it
shall have first obtained (i) an opinion of counsel, in form and substance
satisfactory to the Voting Trustee, to the effect that such disposition will
not result in a violation of any federal or state law applicable to the offer
and sale of securities, or (ii) written advice from
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the Securities and Exchange Commission that it will take no action with
respect to any such proposed disposition of said Voting Trust Certificates.
5. REPLACEMENT OF CERTIFICATES.
ISSUE OF REPLACEMENT CERTIFICATES. In case any Voting Trust
Certificate shall be mutilated, lost, destroyed or stolen, the Voting Trustee
may issue and deliver in exchange therefor and upon cancellation of the
mutilated Voting Trust Certificate, or in lieu of the lost, destroyed or stolen
Voting Trust Certificate, a new Voting Trust Certificate or Voting Trust
Certificates representing a like number of Shares, upon the production of
evidence of such loss, destruction or theft, satisfactory to the Voting Trustee,
and upon receipt of an indemnity satisfactory to the Voting Trustee, and upon
compliance also with such other reasonable conditions as the Voting Trustee may
prescribe.
6. STOCK CERTIFICATES HELD BY VOTING TRUSTEES.
(a) SURRENDER OF CERTIFICATES. The certificates for Shares of the
Company deposited with the Voting Trustee shall, if not registered in the name
of the Voting Trustee, be surrendered to the Company and canceled and new
certificates therefor issued to and in the name of the Voting Trustee. Notation
shall be made on the face of all certificates issued in the name of the Voting
Trustee that they are issued pursuant to this Agreement, and such fact shall
also be noted in the records of stock ownership of the Company.
(b) SHARES HELD IN TRUST. All Shares deposited with the Voting
Trustee hereunder shall be held in trust for the Stockholders and their
respective heirs, executors, administrators and its assigns, and used and
applied by the Voting Trustee and his successors in office for the purposes of
and in accordance with this Agreement and shall remain subject to the
Subscription Agreement.
(c) TRANSFER OF SHARES. The Voting Trustee may cause any Shares at
any time held by him under this Agreement to be transferred to any name or names
other than the name of the Voting Trustee herein named, if such transfer becomes
necessary by reason of any change in the person holding the office of Voting
Trustee as hereinafter provided.
7. DIVIDENDS; SUBSCRIPTION RIGHTS.
(a) DIVIDENDS. The Company is hereby authorized and directed, and
the Company hereby agrees, to pay all distributions and dividends that are paid
in cash, stock (other than voting stock) or other property directly to the
registered holder of the Voting Trust Certificate evidencing the Shares on which
such distributions or dividends are declared. All shares of voting stock issued
as dividends on Shares that are subject to this Agreement shall also be subject
to this Agreement. The stock certificates for such shares shall be issued in
the name of and delivered to the Voting Trustee to be held hereunder, subject to
all of the provisions hereof, and the Voting Trustee shall issue additional
Voting Trust Certificates in respect of such shares to the Stockholders entitled
thereto.
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(b) DISTRIBUTIONS OF CAPITAL STOCK. In case the Company shall at any
time issue any stock or other securities to which the holders of the capital
stock of the Company shall be entitled to subscribe by way of preemptive right
or otherwise, or any Stockholder shall be otherwise entitled (including, without
limitation, pursuant to the Subscription Agreement) to purchase any shares of
capital stock of the Company, the Voting Trustee shall promptly give notice of
such right so to subscribe or purchase and of the terms thereof to such
Stockholder at his or its address registered with the Voting Trustee; and such
Stockholder upon providing the Voting Trustee with funds in the requisite
amount, shall have the right, subject to such reasonable regulations as may be
prescribed by the Voting Trustee, to instruct the Voting Trustee to subscribe
for or purchase such stock or other securities, or any part thereof; and to the
extent that such Stockholder shall fail to exercise such rights the Voting
Trustee shall be entitled, in its absolute discretion, to permit such rights so
to subscribe or purchase to lapse. Upon receiving proper instructions in
writing, the Voting Trustee shall subscribe for or purchase such stock or other
securities (but only out of funds provided by such Stockholder for the purpose)
and shall distribute the same to such Stockholder, except that any shares of
voting stock of the Company, when so subscribed for or purchased and received by
the Voting Trustee, shall not be distributed but shall be held hereunder,
subject to all the provisions hereof, and the Voting Trustee shall issue new or
additional Voting Trust Certificates in respect of such shares to such
Stockholder.
8. ACTIONS BY VOTING TRUSTEE.
(a) PROXY. A proxy may be given to any person other than the Voting
Trustee provided that such proxy may be voted only in accordance with specific
instructions given by the Voting Trustee.
(b) AGENTS. The Voting Trustee may at any time or from time to time
appoint an agent or agents and may delegate to such agent or agents the
performance of any administrative duty of the Voting Trustee, including, without
limitation, the appointment of a domestic bank or other institution to act as
custodian of the Shares of the Company held by it hereunder. The fees of such
agent or agents shall constitute an expense of the Voting Trustee.
9. LIABILITY OF VOTING TRUSTEE; INDEMNIFICATION.
(a) NO LIABILITY. The Voting Trustee assumes no liability as a
stockholder, his interest hereunder being that of trustee only. In voting the
stock represented by the stock certificates held by it hereunder (which he may
do either in person or by proxy as aforesaid), the Voting Trustee will vote and
act in all matters in accordance with his best good faith judgment and the terms
of this Agreement; but he assumes no responsibility or liability in respect of
any action taken by him or taken in pursuance of his vote so cast, and the
Voting Trustee shall not incur any responsibility as trustee or otherwise by
reason of any error of fact or law, mistake of judgment, or of any matter or
thing done or suffered or omitted to be done under this Agreement, except for
his own individual gross negligence or willful misconduct.
(b) AGENTS. The Voting Trustee shall not be answerable for the
default or misconduct of any agent or attorney appointed by him in pursuance
hereof if such agent or attorney shall have been selected with reasonable care.
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<PAGE>
(c) EXPENSES. The Voting Trustee shall not be entitled to any
compensation for his services but shall be reimbursed by the Stockholders for
any reasonable expenses (other than counsel, advisors' and agents' fees) paid or
incurred in the administration of the trust hereunder.
(d) INDEMNITY. The Stockholders hereby jointly and severally
agree that they will at all times protect, indemnify and save harmless the
Voting Trustee from any loss, cost or expense of any kind or character
whatsoever incurred in connection with this Trust except those, if any,
arising from the gross negligence or willful misconduct of the Voting
Trustee, and will at all times themselves undertake, assume full
responsibility for, and pay all costs and expenses of any suit or litigation
of any character, including any proceedings before any governmental agency,
with respect to the Shares or this Agreement and, if the Voting Trustee shall
be made a party thereto, the Stockholders will pay all costs and expenses,
including counsel fees, to which the Voting Trustee may be subject by reason
thereof. The Voting Trustee may consult with counsel and other advisors, and
the opinions of such counsel and advisors shall be full and complete
authorization and protection in respect of any action taken or omitted or
suffered by the Voting Trustee hereunder in good faith and in accordance with
such opinions.
(e) SURVIVAL. Notwithstanding any other provision hereof, the
provisions of this Section 9 shall survive the termination of this Agreement.
10. VOTING DISCRETION.
(a) VOTING DISCRETION. Except as otherwise provided herein, until
the termination of this Agreement and the actual delivery of stock certificates
in exchange for Voting Trust Certificates hereunder, the Voting Trustee shall
possess and shall be entitled in his discretion, not subject to any review, to
exercise in person or by proxy, in respect of any and all Shares at any time
deposited under this Agreement, all rights and powers of every name and nature,
including the right to vote thereon or to consent to any and every act of the
Company, in the same manner and to the same extent as if he were the absolute
owner of such stock in his own right.
(b) PERMITTED ACTIONS. Without limiting the generality of the
foregoing paragraph (a), the Voting Trustee is specifically authorized to vote
for or consent to any of the following:
(i) the election, removal or replacement of directors of the
Company;
(ii) the sale or disposal in the normal course of business of any
part or parts of the property, assets or business of the Company;
(iii) any changes or amendments in or to the Certificate of
Incorporation or By-laws of the Company;
(iv) any loans to officers, directors or stockholders of the Company;
(v) any indemnification of officers, directors or agents of the
Company;
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(vi) the entering into or submitting of a bid in connection with the
negotiation of or application for any contract that the Company may not enter
into or submit without the approval of the stockholders;
(vii) any other action that, by the terms of the General Corporation
Law of the State of Delaware or the Certificate of Incorporation or By-laws of
the Company, permits or requires a vote of the holders of the capital stock of
the Company; and
(viii) any action with respect to any of the foregoing that any
stockholder might lawfully take.
11. TERMINATION OF THIS AGREEMENT.
(a) TERMINATION. This Agreement shall terminate with respect to any
Shares of the Company (i) as to which a registration statement shall have been
filed pursuant to the Securities Act promptly upon the effectiveness thereof or
(ii) sold, transferred or disposed of by any Stockholder as provided in and
subject to compliance with the terms and conditions of the Subscription
Agreement.
(b) IRREVOCABLE. Subject to the foregoing paragraph (a), during the
term of this Agreement the Trust hereby created shall be irrevocable and no
Shares of the Company held by the Voting Trustee pursuant to the terms of this
Agreement shall be transferred to or upon the order of the holder of a Voting
Trust Certificate evidencing the beneficial ownership thereof prior to the
termination of this Agreement.
(c) TERMINATION BY LAW. Unless terminated sooner (i) pursuant to
paragraph (a) hereof as to all Shares held by the Voting Trustee, or (ii) by
operation of law, this Agreement shall terminate without any action of or notice
by or to the Voting Trustee, the Company or the Stockholders when Castle Harlan
Partners II, L.P. ("CHP II"), (x) fails to maintain voting control over at least
25% of the Shares or (y) owns less than 20%, of the original equity position
acquired by CHP II pursuant to the Subscription Agreement.
12. DELIVERY OF STOCK CERTIFICATES UPON
TERMINATION OF THIS AGREEMENT.
(a) STOCK CERTIFICATES. Upon termination of this Agreement, the
Voting Trustee, in exchange for and upon surrender of any Voting Trust
Certificates then outstanding, shall, in accordance with the terms hereof,
deliver certificates for capital stock of the Company of the series or class and
in the amount called for by such Voting Trust Certificate and either registered
in the name of the holder thereof or duly endorsed in blank or accompanied by
proper instruments of assignment and transfer thereof duly executed in blank to
the holder thereof, and the Voting Trustee may require the holder of such Voting
Trust Certificate to surrender the same for such exchange.
(b) OBLIGATIONS OF TRUSTEE. After any termination of this Agreement
as above provided with respect to all Shares, and delivery by the Voting Trustee
of any stock or other property then held hereunder in exchange for outstanding
Voting Trust Certificates as provided in
-6-
<PAGE>
this Section 12, all further obligations or duties of the Voting Trustee
under this Agreement or any provision hereof shall cease.
13. RESIGNATION; SUCCESSOR TRUSTEE.
The Voting Trustee may resign at any time by providing the Company and
each Stockholder with written notice to such effect thirty (30) days prior to
the effective date of such resignation. If for any reason John K. Castle shall
cease to serve as Voting Trustee hereunder, his immediate successor in such
capacity shall be Leonard M. Harlan; PROVIDED that (i) the person serving as
Voting Trustee may at any time, and from time to time, replace or designate the
successor to John K. Castle and (ii) each such successor shall be an officer of
Castle Harlan, Inc. or an officer of Castle Harlan Partners II GP, Inc. Each
such successive designated person shall, upon assuming the duties hereunder upon
a vacancy occurring in the office of Voting Trustee, be the Voting Trustee.
14. INTERESTS ALLOWED AS VOTING TRUSTEE.
The Voting Trustee may be a creditor or stockholder of the Company and
may act as a director, officer or employee of, or consultant or advisor to, the
Company and receive compensation therefor. In addition, the Voting Trustee and
any firm of which he may be a member, and any of his affiliates, may contract
with the Company or have a pecuniary interest in any matter or transaction to
which the Company may be a party, or in which the Company may be in any way
concerned.
15. EFFECT OF AGREEMENT UPON REPRESENTATIVES,
SUCCESSORS AND ASSIGNS.
This Agreement shall inure to the benefit of and be binding upon
the Voting Trustee and each Stockholder and their respective legal
representatives, successors and assigns.
16. MISCELLANEOUS.
(a) DELIVER TO STOCKHOLDERS. The Voting Trustee shall deliver to
each Stockholder all information received by the Voting Trustee from the Company
or from other stockholders of the Company.
(b) NOTICES. All notices to be given to the owners of Voting Trust
Certificates shall be given by mailing the same in a sealed postpaid envelope to
the registered owners of Voting Trust Certificates addressed to their respective
addresses as shown on the books of the Trust, and any notice whatsoever when
mailed by or on behalf of the Voting Trustee to such registered owners of Voting
Trust Certificates as herein provided shall have the same effect as though
personally served on all holders of Voting Trust Certificates. All notices to
be given to the Voting Trustee shall be given by serving a copy thereof upon him
personally or by mailing the same in a sealed postpaid envelope addressed to him
at his address set forth below or to such other address as he shall from time to
time in writing designate.
-7-
<PAGE>
(c) FILING OF AGREEMENT. Until the termination of this Agreement,
one original counterpart hereof shall be filed at each of (i) the principal
office of the Company and (ii) the registered office of the Company in the State
of Delaware, and each such counterpart shall be open to the inspection of any
holder of any Voting Trust Certificate or any stockholder of the Company daily
during business hours.
(d) AMENDMENT. If at any time it is deemed advisable for the parties
hereto to amend or revoke this Agreement, it may be amended or revoked by an
agreement executed by the Voting Trustee, the Company and the holder or holders
of all of the Voting Trust Certificates.
(e) ACKNOWLEDGMENT OF OBLIGATIONS. The Voting Trustee accepts the
trust created hereby subject to all the terms and conditions herein contained
and agrees that he will exercise the powers and perform the duties of Voting
Trustee as set forth herein according to his best judgment.
(f) ENTIRE AGREEMENT. This Agreement contains the entire agreement
among the parties hereto and supersedes all prior agreements and understandings,
oral and written, among the parties hereto with respect to the subject matter
hereof.
(g) SECTION HEADINGS. The section headings contained herein are
included for convenience of reference only and shall not constitute a part of
this Agreement for any purpose.
(h) COUNTERPARTS. This Agreement may be executed in counterparts,
each of which shall be deemed to be an original and all of which together shall
be deemed to be one and the same instrument.
(i) APPLICABLE LAW. This Agreement shall be governed by, and
construed in accordance with, the laws of the State of New York applicable to
contracts to be performed entirely within such State.
(j) SEVERABILITY. Any section, clause, sentence, provision,
subparagraph or paragraph of this Agreement held by a court of competent
jurisdiction to be invalid, illegal or ineffective shall not impair, invalidate
or nullify the remainder of this Agreement, but the effect thereof shall be
confined to the section, clause, sentence, provision, subparagraph, or paragraph
so held to be invalid, illegal or ineffective.
-8-
<PAGE>
IN WITNESS WHEREOF, the parties hereto have duly executed this
Agreement as of the day and year first above written.
VOTING TRUSTEE: COMPANY:
COMMEMORATIVE BRANDS, INC.
- -------------------------------
John K. Castle
c/o Castle Harlan, Inc. By:
37th Floor ----------------------------------
150 East 58th Street Name:
New York, New York 10155 Title:
STOCKHOLDERS:
BRANFORD CASTLE HOLDINGS, INC.
By:
----------------------------------
Name:
Title:
-------------------------------------
Leonard M. Harlan
-------------------------------------
David B. Pittaway
-------------------------------------
David H. Chow
-9-
<PAGE>
EXHIBIT A
THIS VOTING TRUST CERTIFICATE HAS BEEN ISSUED WITHOUT REGISTRATION UNDER
THE SECURITIES ACT OF 1933, AS AMENDED, AND NO INTEREST THEREIN MAY BE
TRANSFERRED EXCEPT IN COMPLIANCE, ESTABLISHED TO SATISFACTION OF THE ISSUER,
WITH SAID ACT AND THE RULES AND REGULATIONS PROMULGATED THEREUNDER BY THE
SECURITIES AND EXCHANGE COMMISSION.
THIS VOTING TRUST CERTIFICATE AND THE SECURITIES REPRESENTED HEREBY ARE
SUBJECT TO RESTRICTIONS ON TRANSFER PURSUANT TO A SUBSCRIPTION AGREEMENT ON
FILE WITH THE COMPANY.
VOTING TRUST CERTIFICATE
COMMEMORATIVE BRANDS, INC.
NO. V-
----------------------------
Class: Common Stock
Shares:
---------------------------
Class: Series B Preferred
Shares:
---------------------------
This certificate is evidence that _________________ has deposited (i)
________ shares of Common Stock, $0.01 par value per share, of Commemorative
Brands, Inc., a Delaware corporation formerly known as Scholastic Brands, Inc.
(the "Company"), and (ii) ____ shares of Series B Preferred Stock, $0.01 par
value per share, of the Company, with the Voting Trustee hereinafter named in
accordance with the terms of the Voting Trust Agreement (the "Agreement") dated
as of December 17, 1996 among the Company, each of the Stockholders listed on
the signature pages thereof and the person whose name appears below as Voting
Trustee (the "Trustee").
This certificate and the interest represented hereby is transferable on the
books of the Trust only in accordance with the terms of the Agreement and any
holder of this Certificate takes the same subject to all of the terms and
conditions of such Agreement.
IN WITNESS WHEREOF, the Trustee has signed this certificate as of the
___ day of December, 1996.
VOTING TRUSTEE
-------------------------------
John K. Castle
<PAGE>
MANAGEMENT AGREEMENT
AGREEMENT made as of December 16, 1996, between Scholastic Brands,
Inc., a Delaware corporation (the "Company"), and Castle Harlan, Inc., a
Delaware corporation (the "Manager").
WHEREAS, the Company and its subsidiaries are engaged in the
manufacture and marketing of class rings, scholastic fine paper products and
recognition and affinity jewelry, and the Manager is experienced in business and
organizational strategy, financial and investment management and merchant and
investment banking;
WHEREAS, the Company desires to retain the Manager to provide business
and organizational strategy, financial and investment management and merchant
and investment banking services to the Company upon the terms and conditions
hereinafter set forth, and the Manager is willing to undertake such obligations;
and
WHEREAS, pursuant to the Subscription Agreement, dated the date
hereof, each Stockholder of the Company has agreed that the Company shall enter
into a management agreement with the Manager.
NOW, THEREFORE, in consideration of the mutual covenants hereinafter
set forth, the parties hereto agree as follows:
1. APPOINTMENT.
The Company hereby engages the Manager and the Manager hereby agrees
under the terms and conditions set forth herein to provide certain services to
the Company as described in Section 2 hereof.
2. DUTIES OF MANAGER.
The Manager shall provide the Company with consulting services
(collectively, the "Consulting Services") related to the following:
(i) business and organizational strategy, including strategy relating to
(a) development of new products and new markets, and analysis and
research related thereto;
(b) new product implementation;
(c) development of broad business growth strategies; and
<PAGE>
(ii) human resource management, including
(a) design and development of incentive and bonus programs for
management team;
(b) assistance with senior executive hiring decisions;
(c) coordination of activities of compensation committee of the Board
of Directors of the Company;
(d) design and development of employee stock ownership programs;
and
(iii) public relations and related matters, including
(a) assistance in developing an enhanced public relations program
designed to broaden name recognition of the Company in the
business community;
(b) advice on general labor matters; and
(iv) financial and investment management and merchant and investment
banking and corporate finance, including
(a) identification and implementation of merger and acquisition
opportunities for the Company, for which the Manager may
receive additional consideration;
(b) assistance with negotiation of loan documentation (including
amendments thereto) and lender relationships on an ongoing basis;
(c) advice regarding acquisition strategies and responses to external
proposals; and
(d) advice regarding additional capital requirements.
Without limiting any of the foregoing, representatives of the Manager may
participate, without additional compensation, on the Company's and certain of
its affiliates' Boards of Directors and Board Committees.
2.1 EXCLUSIONS FROM "CONSULTING SERVICES". Notwithstanding anything in
the foregoing to the contrary, the following services are specifically excluded
from the definition of "Consulting Services":
(i) INDEPENDENT ACCOUNTING SERVICES. Accounting services rendered to
the Company or the Manager with prior notice and consultation with the
Company's management, by an independent accounting firm or accountant
(I.E., an accountant who is not an employee of the Manager);
-2-
<PAGE>
(ii) INDEPENDENT ACTUARIAL SERVICES. Actuarial services rendered to
the Company or the Manager with prior notice and consultation with the
Company's management, by an independent actuarial firm or actuary (I.E., an
actuary who is not an employee of the Manager);
(iii) LEGAL SERVICES. Legal services rendered to the Company or the
Manager with prior notice and consultation with the Company's management,
by an independent law firm or attorney (i.e., an attorney who is not an
employee of the Manager); and
(iv) TRANSACTION SERVICES. Services in connection with any
transaction in which the Company or its subsidiaries may be, or may
consider becoming, involved, it being understood that the Manager shall
have the right of first refusal concerning all opportunities to perform,
for an additional fee, any of such transaction related services. Such
right must be exercised within 30 business days of receipt by the Manager
of such offer.
2.2 POWERS OF THE MANAGER. So that it may properly perform its duties
hereunder, the Manager shall, subject to Section 2.3 hereof, have the power to
take all action and do all things necessary and proper to carry out the duties
set forth in Section 2 hereof.
2.3 LIMITATIONS ON THE MANAGER'S POWERS. Notwithstanding anything herein
to the contrary, the Manager's responsibilities are consultative only, and the
Manager shall have no power to take any action on behalf of the Company, or to
cause the Company to be responsible for taking any action.
3. COMPENSATION OF MANAGER.
During the term of this Agreement the Company agrees to pay the Manager on
a quarterly basis in arrears, payable on the last business day of each calendar
quarter, a management fee of $1.5 million per year (or $375,000 per quarter);
PROVIDED, HOWEVER, that the full management fee of $1.5 million for the first
year of this agreement shall be payable in advance on the date hereof; and
PROVIDED FURTHER, HOWEVER, that, pursuant to an indenture dated as of December
16, 1996 (the "Indenture"), between the Company and Marine Midland Bank (as
Trustee), at any time and so long as the Company shall be in default in payment
of any principal, Redemption Price (as defined in the Indenture), Purchase Price
(as defined in the Indenture), interest, Liquidated Damages (as defined in the
Indenture ) (if any) or other amounts owing on the Company's 11% Senior
Subordinated Notes due 2007 (the "Notes"), the Company may defer payment of any
fees payable hereunder until such time as the Company shall no longer be in
default or no Notes shall remain outstanding.
-3-
<PAGE>
4. TERM AND TERMINATION OF AGREEMENT.
(a) This Agreement shall be for a term of ten (10) years from the
date hereof, and shall automatically renew from year to year thereafter
unless terminated as described in paragraph (b) of this Section 4.
(b) If Castle Harlan Partners II, L.P. and its affiliates and limited
partners shall own less than 5% of the then aggregate outstanding capital
stock of the Company, this Agreement shall be subject to renegotiation by
the Board of Directors of the Company.
5. LIABILITY.
The Manager is not and never shall be liable to any creditor of the
Company, and the Company agrees to indemnify and hold the Manager and its
officers and employees and affiliates harmless from and against any and all such
claims of alleged creditors and against all costs, charges, liabilities and
expenses (including reasonable attorneys' fees and expenses) incurred or
sustained by the Manager or such other person in connection with any action,
suit or proceeding to which it may be made a party by any alleged creditor. The
Company also agrees to indemnify and hold the Manager and its officers and
employees and affiliates harmless from and against any and all liabilities,
losses, costs or damages suffered, paid or incurred by the Manager or such other
person arising out of, or in any way connected with, or as a result of, the
execution and delivery of this Agreement, or the performance or alleged
performance by or on behalf of the Manager of the Consulting Services hereunder.
Notwithstanding the foregoing, the Company shall not be required to indemnify
the Manager or such other person for any liabilities, losses, costs or damages
that result from the gross negligence or willful misconduct of the Manager or
such other person.
6. ASSIGNMENT.
This Agreement shall be binding upon and inure to the benefit of the
parties' successors and permitted assigns. However, neither this Agreement nor
any of the rights of the parties hereunder may be transferred or assigned by
either party hereto, except that (a) if the Company shall merge or consolidate
with or into, or sell or otherwise transfer substantially all its assets to,
another corporation that assumes the Company's obligations under this Agreement,
the Company may assign its rights hereunder to that corporation, and (b) the
Manager may assign its rights and obligations hereunder to any other person or
entity controlled, directly or indirectly, by John K. Castle. Any attempted
transfer or assignment in violation of this Section 6 shall be void.
-4-
<PAGE>
7. RELATIONSHIP OF THE PARTIES.
Nothing contained in this Agreement is intended or is to be construed
to constitute the Manager and the Company as partners or joint venturers or
either party as an employee of the other party. Neither party hereto shall have
any express or implied right or authority to assume or create any obligations on
behalf of or in the name of the other party or to bind the other party to any
contract, agreement or undertaking with any third party. The services to be
performed by the Manager hereunder are consultation services only. The Company
shall at all times be free to accept or reject the advice rendered by the
Manager hereunder in its sole discretion.
8. MISCELLANEOUS.
(a) AMENDMENTS AND WAIVERS. This Agreement may be amended or
waived only by a writing signed by both parties, and then such consent
shall be effective only in the specific instance and for the specific
purpose for which given.
(b) NOTICES. All notices and other communications provided for
herein shall be dated and in writing and shall be deemed to have been duly
given when delivered, if delivered personally or sent by telecopy, or when
mailed, if sent by registered or certified mail, return receipt requested,
postage prepaid.
(i) if to the Company, to it at:
7211 Circle S. Road
Austin, Texas 78745-6603
Attention: Mr. Jeffrey H. Brennan, President
(ii) if to the Manager, to it at:
150 East 58th Street, 37th Floor
New York, New York 10155
Attention: Mr. David B. Pittaway
or at such other address as any party shall have specified by notice in
writing to the others.
(c) ENTIRE AGREEMENT. This Agreement contains the entire agreement
between the parties hereto and supersedes all prior agreements and
understandings, oral and written, between the parties hereto with respect
to the subject matter hereof.
-5-
<PAGE>
(d) SECTION HEADINGS. The section headings contained herein are
included for convenience of reference only and shall not constitute a part
of this Agreement for any other purpose.
(e) COUNTERPARTS. This Agreement may be executed in
counterparts, each of which shall be deemed to be an original and all of
which together shall be deemed to be one and the same instrument.
(f) APPLICABLE LAW. This Agreement shall be governed by, and
construed in accordance with, the laws of the State of New York applicable
to contracts made and to be performed entirely within such State,
regardless of the law that might be applied under principles of conflicts
of law.
(g) SEVERABILITY. Any section, clause, sentence, provision,
subparagraph or paragraph of this Agreement held by a court of competent
jurisdiction to be invalid, illegal or ineffective shall not impair,
invalidate or nullify the remainder of this Agreement, but the effect
thereof shall be confined to the section, clause, sentence, provision,
subparagraph, or paragraph so held to be invalid, illegal or ineffective.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the date first above written.
SCHOLASTIC BRANDS, INC.
By:
-----------------------------------
Name:
Title:
CASTLE HARLAN, INC.
By:
-----------------------------------
Name:
Title:
-6-
<PAGE>
Exhibit 11.1
COMMEMORATIVE BRANDS, INC.
SCHEDULE OF COMPUTATION OF EARNINGS PER SHARE
(In Thousands, Except Share Data)
Three Months Fiscal Year
Ended Ended
August 30, August 30,
1997 1997
---------- ----------
AVERAGE COMMON SHARES OUTSTANDING 375,000 375,000
COMMON EQUIVALENT SHARES RESULTING FROM STOCK
OPTIONS ISSUED - -
AVERAGE COMMON AND COMMON EQUIVALENT SHARES
OUTSTANDING 375,000 375,000
--------- ---------
--------- ---------
NET LOSS $ (4,132) $ (8,867)
--------- ---------
--------- ---------
NET LOSS AVAILABLE TO COMMON STOCKHOLDERS $ (4,432) $ (9,717)
--------- ---------
--------- ---------
EARNINGS PER COMMON SHARE:
Net loss per common and common equivalent
share $ (11.82) $ (25.91)
--------- ---------
--------- ---------
NOTE:
Earnings per share have been computed by dividing net loss available to
common shareholders by the average number of common and common equivalent
shares outstanding. The Company has outstanding warrants and stock options
that are not included in the computation of diluted earnings per share
because to do so would be antidilutive. There is no difference between the
number of shares for basic and fully diluted earnings per share in any
period.
Commemorative Brands, Inc., completed the acquisitions of ArtCarved
and Balfour on December 16, 1996, and until such date, engaged in no
business activities other than those in connection with the Acquisitions
and financing thereof.
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED FINANCIAL STATEMENTS FROM THE COMPANY'S REPORT ON FORM 10-K
FOR THE PERIOD ENDED AUGUST 30, 1997 AND IS QUALIFIED IN ITS ENTIRETY
BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> AUG-30-1997
<PERIOD-END> AUG-30-1997
<CASH> 2,174
<SECURITIES> 0
<RECEIVABLES> 30,194
<ALLOWANCES> (3,750)
<INVENTORY> 11,767
<CURRENT-ASSETS> 48,907
<PP&E> 35,575
<DEPRECIATION> (2,115)
<TOTAL-ASSETS> 200,869
<CURRENT-LIABILITIES> (25,831)
<BONDS> (125,450)
0
0
<COMMON> (4)
<OTHER-SE> (40,449)
<TOTAL-LIABILITY-AND-EQUITY> (200,869)
<SALES> (87,600)
<TOTAL-REVENUES> (87,600)
<CGS> 45,186
<TOTAL-COSTS> 45,186
<OTHER-EXPENSES> 51,278
<LOSS-PROVISION> 632
<INTEREST-EXPENSE> 9,797
<INCOME-PRETAX> 8,867
<INCOME-TAX> 0
<INCOME-CONTINUING> 8,867
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 9,717
<EPS-PRIMARY> (25.91)
<EPS-DILUTED> (25.91)
</TABLE>
