As filed with the Securities and Exchange Commission on March 31, 1997
Registration No. 333-20759
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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Amendment No. 1
to
Form S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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Commemorative Brands, Inc.
(Exact name of registrant as specified in its charter)
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<S> <C> <C>
Delaware 3911 13-3915801
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification Number)
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7211 Circle S Road
Austin, Texas 78745
(512) 444-0571
(Address, including zip code, and telephone number,
including area code, of Registrant's principal
executive offices)
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Jeffrey H. Brennan
President and Chief Executive Officer
7211 Circle S Road
Austin, Texas 78745
(512) 444-0571
(Name, address, including zip code, and telephone number
including area code, of agent for service)
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Please send copies of all communications to:
Janet C. Walden, Esq.
Schulte Roth & Zabel LLP
900 Third Avenue
New York, New York 10022
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Approximate date of commencement of proposed sale of securities to the public:
As soon as practicable after the Registration Statement becomes effective.
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If the only securities being registered on this form are being offered in
connection with the formation of a holding company and there is compliance with
Instruction G, please check the following box: |_|
CALCULATION OF REGISTRATION FEE
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Amount Proposed Maximum Proposed Maximum
Title of Each Class of to be Offering Price Aggregate Offering Amount of
Securities to be Registered Registered per Note Price(1) Registration Fee
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<S> <C> <C> <C> <C>
11% Senior Subordinated
Notes due 2007 ..................... $90,000,000 100% $90,000,000 $27,275
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(1) Estimated solely for purposes of calculating the amount of the registration
fee.
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The Registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the Registrant shall
file a further amendment which specifically states that the Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933, or until the Registration Statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
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COMMEMORATIVE BRANDS, INC.
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Cross Reference Sheet
Pursuant to Item 501(b) of Regulation S-K
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Form S-4 Number and Caption Location in Prospectus
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1. Forepart of the Registration Statement and Outside Front Cover
Page of Prospectus ............................................. Forepart of the Registration
Statement; Outside Front Cover Page
of Prospectus
2. Inside Front and Outside Back Cover Pages of Prospectus .......... Inside Front and Outside Back Cover
Pages of Prospectus; Available
Information; Table of Contents
3. Risk Factors, Ratio of Earnings to Fixed Charges and Other
Information .................................................... Prospectus Summary; Risk Factors;
Summary Historical Financial and
Other Data--ArtCarved; Summary
Historical Financial and Other
Data-Balfour; Summary Pro Forma
Combined Financial and Other Data
4. Terms of the Transaction ......................................... Prospectus Summary; Risk Factors; The
Exchange Offer; Description of the
Notes
5. Pro Forma Financial Information .................................. Prospectus Summary; Capitalization;
Summary Pro Forma Combined
Financial and Other Data
6. Material Contracts with the Company Being Acquired ............... *
7. Additional Information Required for Reoffering by Persons and
Parties Deemed to be Underwriters .............................. *
8. Interests of Named Experts and Counsel ........................... *
9. Disclosure of Commission Position on Indemnification for
Securities Act Liabilities ..................................... *
10. Information with Respect to S-3 Registrants ...................... *
11. Incorporation of Certain Information by Reference ................ *
12. Information with Respect to S-2 or S-3 Registrants ............... *
13. Incorporation of Certain Information by Reference ................ *
14. Information with Respect to Registrants other than S-3 or S-2
Registrants .................................................... Cover Page of Registration Statement;
Available Information; Prospectus
Summary; Risk Factors; Use of
Proceeds; Capitalization; Selected
Financial Data: Management's
Discussion and Analysis of
Financial Condition and Results of
Operations; Business; Management;
The Transactions; Description of
the Bank Credit Facility;
Description of Notes; Financial
Statements
15. Information with Respect to S-3 Companies ........................ *
16. Information with Respect to S-2 or S-3 Companies ................. *
17. Information with Respect to Companies other than S-2 or S-3
Companies ...................................................... *
18. Information if Proxies, Consents or Authorizations are to be
Solicited ...................................................... *
19. Information if Proxies, Consents or Authorizations are not to be
Solicited or in an Exchange Offer .............................. Management; Certain Relationships and
Related Transactions; Security
Ownership of Certain Beneficial
Owners and Management; The
Transactions; Financial Statements
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* Item is omitted because answer is negative or the item is inapplicable.
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Information contained herein is subject to completion or amendment. This
Prospectus shall not contitute an offer to sell or the solicitation of any offer
to buy nor shall there be any sale of these securities in any jurisdiction in
which such offer, solicitation or sale would be unlawful prior to registration
or qualification under the securities laws of any such jurisdiction.
PRELIMINARY PROSPECTUS
Subject to Completion
Preliminary Prospectus Dated March 31, 1997.
Commemorative Brands, Inc.
Offer to exchange $90,000,000 of new
11% Senior Subordinated Notes due 2007
for $90,000,000 of any and all outstanding
11% Senior Subordinated Notes due 2007
Commemorative Brands, Inc. (formerly known as "Scholastic Brands, Inc."), a
Delaware corporation ("CBI" or the "Company"), hereby offers to exchange (the
"Exchange Offer"), upon the terms and conditions set forth in this Prospectus
(the "Prospectus") and the accompanying Letter of Transmittal (the "Letter of
Transmittal"), up to $90,000,000 in aggregate principal amount of its 11% Senior
Subordinated Notes due 2007 (the "Exchange Notes") for a like principal amount
of its 11% Senior Subordinated Notes due 2007 (the "Initial Notes" and, together
with the Exchange Notes, the "Notes").
The terms of the Exchange Notes are identical in all material respects
(including principal amount, interest rate and maturity) to the terms of the
Initial Notes for which they may be exchanged pursuant to the Exchange Offer,
except that the Exchange Notes will generally be freely transferable by Holders
(as defined) thereof (except as provided in the next paragraph below), and are
not subject to any covenant of the Company regarding registration. The Exchange
Notes will be issued under the indenture governing the Initial Notes. For a
complete description of the terms of the Exchange Notes, see "Description of
Notes."
Interest on the Exchange Notes will be payable semi-annually on January 15
and July 15 of each year, commencing July 15, 1997. The Notes will be redeemable
at the option of the Company, in whole or in part, at any time on or after
January 15, 2002, at the redemption prices set forth herein, plus accrued and
unpaid interest and Liquidated Damages (as defined), if any, thereon to the date
of redemption. In addition, at any time prior to January 15, 2000, the Company
may, in its discretion, redeem up to 33-1/3% of the original principal amount of
the Notes at a redemption price equal to 111% of the principal amount thereof,
plus accrued and unpaid interest and Liquidated Damages, if any, thereon to the
date of redemption, with the net proceeds of one or more Public Equity Offerings
(as defined); provided that at least 66-2/3% of the original principal amount of
the Notes remains outstanding immediately after each such redemption. The
Exchange Notes will not be subject to any mandatory sinking fund. In the event
of a Change of Control (as defined), each holder of the Notes will have the
right to require the Company to purchase all or any part of such holder's Notes
at a purchase price in cash equal to 101% of the aggregate principal amount
thereof, plus accrued and unpaid interest and Liquidated Damages, if any,
thereon to the date of purchase. See "Description of Notes." There can be no
assurance that the Company will have the financial resources necessary to repay
its obligations under its senior bank credit facilities and to purchase the
Exchange Notes upon a Change of Control. See "Risk Factors -- Payment for Notes
upon a Change in Control." The Notes will be general unsecured obligations of
the Company and will be subordinated in right of payment to all existing and
future Senior Indebtedness (as defined) of the Company. As of December 16, 1996,
the Company had approximately $36.2 million of Senior Indebtedness outstanding
(exclusive of an unused commitment of up to $23.8 million under the Bank Credit
Facility). See "Description of Notes--Subordination" and "Capitalization."
The Initial Notes were issued and sold on December 16, 1996, in a
transaction (the "Initial Offering") not registered under the Securities Act of
1933, as amended (the "Securities Act"), in reliance upon the exemptions
provided in Section 4(2) of the Securities Act, and Rule 144A, Regulation D and
Regulation S under the Securities Act. Accordingly, the Initial Notes may not be
reoffered, resold or otherwise pledged, hypothecated or transferred in the
United States unless so registered or unless an applicable exemption from the
registration requirements of the Securities Act is available. The Exchange Notes
are being offered hereunder in order to satisfy certain of the obligations of
the Company under a registration rights agreement relating to the Initial Notes.
See "The Exchange Offer--Purposes of the Exchange Offer." The Company is making
the Exchange Offer in reliance upon an interpretation by the staff of the
Securities and Exchange Commission (the "Commission") set forth in a series of
no-action letters issued to third parties, although the Company has not sought,
and does not intend to seek, its own no-action letter and there can be no
assurance that the staff of the Commission would make a similar determination
with respect to the Exchange Offer. Based upon the Commission's interpretations,
the Company believes that the Exchange Notes issued pursuant to the Exchange
Offer in exchange for Initial Notes may be offered for resale, resold and
otherwise transferred by holders thereof (other than any holder that is (i) an
"affiliate"
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of the Company within the meaning of Rule 405 under the Securities Act (an
"Affiliate"), (ii) a broker-dealer who acquired Initial Notes directly from the
Company or (iii) a broker-dealer who acquired Initial Notes as a result of
market making or other trading activities) without compliance with the
registration and prospectus delivery provisions of the Securities Act provided
that such Exchange Notes are acquired in the ordinary course of such holders'
business and such holders are not engaged in, and do not intend to engage in,
and have no arrangement or understanding with any person to participate in, a
distribution of such Exchange Notes. Each broker-dealer who receives Exchange
Notes pursuant to the Exchange Offer in exchange for Initial Notes acquired for
its own account as a result of market-making activities or other trading
activities may be a statutory underwriter and must acknowledge that it will
deliver a prospectus meeting the requirements of the Securities Act in
connection with any resale of such Exchange Notes. The Letter of Transmittal
that is filed as an exhibit to the Registration Statement of which this
Prospectus is a part (the "Letter of Transmittal") states that by so
acknowledging and by delivering a prospectus, a broker-dealer will not be deemed
to admit that it is an "underwriter" within the meaning of the Securities Act.
Broker-dealers who acquired Original Notes as a result of market making or other
trading activities may use this Prospectus, as supplemented or amended, in
connection with resales of the Exchange Notes. The Company has agreed that it
will make this Prospectus available to any broker-dealer for use in connection
with any such resale for a period of one year from the date in which the
Registration Statement of which this Prospectus is a part is declared effective.
Any holder that cannot rely upon such interpretations must comply with the
registration and prospectus delivery requirements of the Securities Act in
connection with a secondary resale transaction. See "The Exchange Offer--Tender
Procedure."
The Initial Notes are designated for trading in the Private Offerings,
Resales and Trading through Automated Linkages ("PORTAL") market. The Exchange
Notes constitute a new issue of securities for which there is no established
trading market. Any Initial Notes not tendered and accepted in the Exchange
Offer will remain outstanding. To the extent Initial Notes are tendered and
accepted in the Exchange Offer, a Holder's ability to sell untendered, and
tendered but unaccepted, Initial Notes could be adversely affected. Following
consummation of the Exchange Offer, the Holders of Initial Notes will continue
to be subject to the existing restrictions on transfer thereof and the Company
will have no further obligations to such Holders to provide for the registration
under the Securities Act of the Initial Notes. No assurance can be given as to
the liquidity of the trading market for either the Initial Notes or the Exchange
Notes.
The Exchange Offer is not conditioned upon any minimum aggregate principal
amount of Initial Notes being tendered for exchange but is otherwise subject to
customary conditions. The Exchange Offer will expire at 5:00 p.m., New York City
time, on ___________, 1997, unless extended by the Company to such other date as
the Company, in its sole discretion, may determine (the "Expiration Date"). The
date of acceptance for exchange of the Initial Notes (the "Exchange Date") will
be the first business day following the Expiration Date. Initial Notes tendered
pursuant to the Exchange Offer may be withdrawn at any time prior to the
Expiration Date; otherwise such tenders are irrevocable. There will be no cash
proceeds to the Company from the Exchange Offer.
This Prospectus, as it may be amended or supplemented from time to time,
may be used by a broker-dealer in connection with resales of Exchange Notes
received for Initial Notes where such Initial Notes were acquired for its own
account as a result of market-making activities or other trading activities. The
Company will make copies of this Prospectus available to any broker-dealer for
use in connection with any such resale.
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See "Risk Factors," commencing on page 15, for a description of certain
factors that should be considered by participants in the Exchange Offer
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
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The date of this Prospectus is March 31, 1997.
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AVAILABLE INFORMATION
The Company has filed with the Commission a Registration Statement on Form
S-4 (the "Registration Statement") under the Securities Act with respect to the
Exchange Notes being offered by this Prospectus. This Prospectus does not
contain all of the information set forth in the Registration Statement and the
exhibits and schedules thereto, certain portions of which have been omitted
pursuant to the rules and regulations of the Commission. Statements made in this
Prospectus as to any contract, agreement or other document are summaries of the
material terms of such contracts, agreements or other documents and are not
necessarily complete. With respect to each such contract, agreement or other
document filed as an exhibit to the Registration Statement, reference is made to
the exhibit for a more complete description of the matter involved, and each
such statement is qualified in its entirety by such reference.
The Company is not currently subject to the informational requirements of
the Securities Exchange Act of 1934, as amended (the "Exchange Act"). Upon
completion of the Exchange Offer, the Company will be subject to the
informational requirements of the Exchange Act, and, in accordance therewith,
will file periodic reports and other information with the Commission at 450
Fifth Street, N.W., Washington, D.C. 20549. So long as any of the Notes remain
outstanding, whether or not required by the rules and regulations of the
Commission, the Company is required by the terms of the Indenture, dated as of
December 16, 1996 (the "Indenture"), between the Company and Marine Midland
Bank, as trustee (the "Trustee"), under which the Initial Notes were issued and
under which the Exchange Notes are to be issued, so long as any of the Notes are
outstanding, to furnish, and if applicable, to cause certain subsidiaries of the
Company ("Subsidiary Guarantors") to furnish, to the Holders of the Notes,
within 15 days after they are or would have been required to file such with the
Commission, (i) all quarterly and annual financial information that would be
required to be contained in filings with the Commission on Forms 10-Q and 10-K
if the Company and/or any Subsidiary Guarantor was required to file such forms,
including "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and, with respect to annual consolidated financial
statements and schedules only, a report thereon by the independent auditors of
the Company and/or any Subsidiary Guarantor, and (ii) all information that would
be required to be contained in filings with the Commission on Form 8-K if the
Company and/or any Subsidiary Guarantor was required to file such form. In
addition, whether or not required by the rules and regulations of the
Commission, the Company shall file a copy of all such information and reports
with the Commission for public availability (unless the Commission will not
accept such a filing) and make such information available to securities analysts
and prospective investors upon request. In addition, for so long as any of the
Notes remain outstanding, the Company has agreed to furnish to any Holder of
Notes, and to securities analysts and prospective investors upon their request,
the information required to be delivered pursuant to Rule 144A(d)(4) under the
Securities Act.
Reports and other information filed by the Company with the Commission, and
the Registration Statement and the exhibits and schedules thereto, may be
inspected and copied at the public reference facilities maintained by the
Commission at Room 1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington,
D.C. 20549 and will also be available for inspection and copying at the regional
offices of the Commission at 7 World Trade Center, 13th Floor, New York, New
York 10048 and at Northwestern Atrium Center, 500 West Madison Street (suite
1400), Chicago, Illinois 60661. Copies of such materials may also be obtained
from the public reference section of the Commission at 450 Fifth Street, N.W.,
Washington, D.C. 20549 at prescribed rates. Also, the Company files such reports
and other information with the Commission pursuant to the Commission's EDGAR
system. The Commission maintains a Web site that contains reports and other
information regarding registrants that file electronically with the Commission
pursuant to the EDGAR system. The address of the Commission's Web site is
http://www.sec.gov.
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PROSPECTUS SUMMARY
This following summary is qualified in its entirety by the more detailed
information and financial statements, including the notes thereto, appearing
elsewhere in this Prospectus. Unless the context otherwise requires, (i) the
term "CBI" refers to Commemorative Brands, Inc. (formerly known as Scholastic
Brands, Inc.) prior to the consummation of the acquisitions referred to below
(the "Acquisitions"), (ii) the term "ArtCarved" refers to those assets,
businesses and operations of CJC Holdings, Inc. ("CJC") acquired by CBI, (iii)
the term "Balfour" refers to those assets, businesses and operations of L.G.
Balfour Company, Inc. ("L.G. Balfour Company") acquired by CBI, (v) the term
"the Company" refers to CBI as combined with ArtCarved and Balfour after giving
effect to the Acquisitions, (v) the term "Management" refers to the management
team of the Company, and (vi) the term "Pro Forma Fiscal 1996" refers to the
unaudited pro forma combined operations of ArtCarved and Balfour for the twelve
months ended August 31, 1996.
This Prospectus contains forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933, as amended. Discussions containing
such forward-looking statements may be found in the material set forth below and
under "Risk Factors," "Unaudited Pro Forma Combined Financial Statements and
Other Data," "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and "Business" as well as in the Prospectus generally.
Actual events or results may differ materially from those discussed in the
forward-looking statements as a result of various factors, including, without
limitation, the factors set forth below and the other matters set forth in the
Prospectus generally.
The Company
The Company is the second largest manufacturer of class rings in the United
States based on net sales and also supplies other graduation-related scholastic
products for the high school and college markets and manufactures and markets
recognition and affinity jewelry designed to commemorate significant events,
achievements and affiliations. On December 16, 1996, the Company completed the
Acquisitions of substantially all of the scholastic and recognition and affinity
product assets and businesses of the ArtCarved operations of CJC and the Balfour
operations of L.G. Balfour Company. CBI was initially formed in March 1996 by
Castle Harlan Partners II, L.P., a Delaware limited partnership and private
equity investment fund ("CHP II"), for the purpose of acquiring ArtCarved and
Balfour and until December 16, 1996 engaged in no business other than in
connection with the Acquisitions and the financing thereof.
In combining ArtCarved and Balfour, the Company joined together two of the
most widely recognized and most respected names in the scholastic products
market in the United States. Management believes the Company will benefit from
the combination of the complementary strengths of ArtCarved's leading high
school in-store and college on-campus sales channels for scholastic products and
Balfour's strong presence in the high school in-school sales channel for
scholastic products. In addition, Management expects that the combination of the
operations of ArtCarved and Balfour (the "Combination") will enable the Company
to introduce a complementary range of products through the Company's
distribution network and realize significant cost savings arising from the
consolidation of the Company's operations.
For Pro Forma Fiscal 1996, the Company had net sales of $142.1 million and
EBITDA of $22.8 million, which does not include $3.1 million of the $7.4 million
Annual Cost Savings (as defined). At November 30, 1996, the Company had pro
forma total indebtedness of $126.2 million. See "Unaudited Pro Forma Combined
Financial Statements And Other Data."
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1
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The Company's scholastic product line consists of high school and college
class rings (the Company's largest product offering) and graduation-related fine
paper products such as announcements, name cards and diplomas. The Company's
independent sales representatives also sell or distribute caps and gowns,
yearbooks, memory books, and other graduation apparel and accessories
manufactured by others. The Company markets and distributes its scholastic
products, which represented approximately 85% of net sales in Pro Forma Fiscal
1996, through three distinct sales channels: (i) the high school "in-store"
channel of retailers, including approximately 5,100 independent retail jewelers,
approximately 21 of the nation's 40 largest retail jewelry chains (representing
approximately 1,200 stores throughout the United States) and approximately 2,200
Wal-Mart and 2,100 Kmart stores nationwide; (ii) the high school "in-school"
channel of independent sales representatives, who sell directly to students in
approximately 4,500 high schools throughout the United States; and (iii) the
college "on-campus" sales organization, which sells to students in approximately
1,700 colleges and universities throughout the United States primarily through
on-campus bookstores and to a lesser extent, through local bookstores. As a
result of the Combination, the Company is today the only class ring manufacturer
with a strong national presence in these three primary sales channels for class
rings and scholastic products.
The Company's recognition and affinity product line consists primarily of
rings, pins and other jewelry designed to enable individuals to show pride in
their affiliations with or support for their favorite organizations and sports
teams. The Company's recognition and affinity product line is comprised of four
major product categories: (i) licensed consumer sports jewelry, consisting of
rings and other jewelry, intended for fans who wish to express their affinity
and support for their favorite professional, amateur and collegiate sports
teams, historically including all of the teams in the National Football League,
Major League Baseball, the National Basketball Association and the National
Hockey League; (ii) sports championship jewelry and related products for the
members of championship teams to commemorate their achievements, such as Super
Bowl rings for the San Francisco 49ers in 1995 and World Series trophies for the
members of the 1996 New York Yankees, and rings for individuals who bowl an
American Bowling Congress-sanctioned perfect game; (iii) personalized family
jewelry, consisting primarily of rings, bracelets, necklaces and other jewelry
designed to commemorate family and significant life events such as births and
baptisms and other family celebrations and holidays such as Mother's Day and
Valentine's Day; and (iv) corporate recognition and reward jewelry, consisting
of rings, pins and other jewelry, designed to commemorate employees'
anniversaries with or accomplishments on behalf of various corporations,
historically including The Coca-Cola Company, McDonalds Corp., and Xerox Corp.
Business Strategy
Management's primary objective is to increase profitability through the
growth of the Company's sales and the realization of identified operational
improvements following the Combination. Management seeks to achieve these
objectives by: (i) capitalizing on cost reduction opportunities presented by the
Combination; (ii) marketing a broader array of products by utilizing the
Company's comprehensive distribution network to cross-market existing products
and by continuing to develop and acquire new products and expand product lines;
and (iii) strengthening the Company's in-school sales channel through the
addition of independent sales representatives.
In connection with the Acquisitions, Management has developed a detailed
consolidation plan for the consolidation of the operations of the Balfour
jewelry manufacturing
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2
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facilities in Attleboro and North Attleboro, Massachusetts, into the existing
ArtCarved operations in Austin, Texas that Management believes will enable the
Company to achieve approximately $7.4 million of annual cost savings relative to
the historical cost structures of the Company's predecessors (the "Annual Cost
Savings"). Of the $7.4 million in Annual Cost Savings, Management expects the
Company to realize $4.3 million from the elimination of duplicative personnel,
occupancy and fixed overhead costs and $3.1 million as a result of the lower
prevailing wage rates in Austin, Texas and the elimination of other duplicative
costs resulting from the closure of Balfour facilities. The Annual Cost Savings
do not reflect non-recurring severance and relocation costs of approximately
$5.5 million and incremental capital expenditures of approximately $1.9 million,
each related to the Combination.
The Company has begun the consolidation of the Company's operations to
Austin, Texas, and Management expects that the consolidation of operations will
be completed during the fiscal year ending August 30, 1997. Management expects
that a portion of the Annual Cost Savings will be realized during the fiscal
year ending August 30, 1997 and that all of such savings will be realized during
the fiscal year ending August 29, 1998. There can be no assurance that the
Company will complete its consolidation by the end of its fiscal year ending
August 30, 1997 or that the Annual Cost Savings will be realized by the end of
its fiscal year ending August 29, 1998, or at all.
Management also intends to pursue growth opportunities in selling Balfour's
fine paper products to college students through ArtCarved's existing on-campus
sales channel and selling Balfour's licensed consumer sports jewelry through
ArtCarved's existing retail sales channel, including independent retail
jewelers, retail jewelry chains and mass merchants. Management will seek to
pursue growth by penetrating new markets with new and existing products and to
expand the Company's presence in existing markets by introducing product line
extensions and new products. In addition, Management intends to strengthen its
presence in the in-school sales channel to increase the number of students in
each school who purchase the Company's products, expand school coverage in
geographic areas where the Company is currently under-represented and extend its
scholastic product lines.
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Although Management believes that it will be able to implement its strategy
as set forth above, there can be no assurance that improvements will be
realized, or that there will not be delays in achieving such improvements or
that results will not, in fact, decline.
The Company's principal executive offices are located at 7211 Circle S
Road, Austin, Texas 78745, and its telephone number is (512) 444-0571.
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4
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The Transactions
Pursuant to (i) an asset purchase agreement dated as of May 20, 1996 and
amended as of November 21, 1996 and December 16, 1996 (as so amended, the
"ArtCarved Purchase Agreement") and (ii) an Amended and Restated Asset Purchase
Agreement with Town & Country Corporation ("Town & Country") and its subsidiary,
L.G. Balfour Company, dated as of November 21, 1996 and amended on December 16,
1996 (as so amended, the "Balfour Purchase Agreement"), CBI acquired
substantially all of the assets relating to the scholastic and recognition and
affinity businesses of each of CJC (the "ArtCarved Acquisition") and Balfour
(the "Balfour Acquisition" and together with the ArtCarved Acquisition, the
"Acquisitions") effective as of December 16, 1996. In consideration for
ArtCarved, CBI paid (the "ArtCarved Purchase Price") CJC in cash the sum of
$97.8 million plus $17.0 million, representing the estimated Adjusted Working
Capital (as defined in the ArtCarved Purchase Agreement) of ArtCarved as of the
closing date, subject to adjustment upon final determination of the Adjusted
Working Capital. In consideration for Balfour, CBI paid (the "Balfour Purchase
Price") Town & Country and L.G. Balfour Company in cash the sum of $23.8 million
plus $23.6 million, representing the estimated Adjusted Working Capital (as
defined in the Balfour Purchase Agreement) of Balfour as of the closing date,
subject to adjustment upon final determination of the Adjusted Working Capital.
In addition, CBI purchased the gold on consignment to Balfour as of the closing
date ("Balfour Gold") for a cash purchase price equal to the fair market value
of the estimated Balfour Gold balance as of the closing date (the "Balfour Gold
Purchase Price") of approximately $4.9 million, subject to adjustment upon final
determination of the Balfour Gold balance as of the closing date.
The funds required to finance the Acquisitions and to pay related fees and
expenses (the "Financing") were provided by (i) an initial equity investment of
$50.0 million in CBI (the "Castle Harlan Investment ") by CHP II and certain of
its affiliates (collectively, the "Castle Harlan Group"); (ii) the proceeds from
the sale of the Initial Notes; (iii) borrowings by CBI of $25.0 million under a
bank term loan facility (the "Term Loan Facility"); and (iv) borrowings by CBI
of $5.2 million under a $35.0 million bank revolving credit facility (the
"Revolving Credit Facility") and of $6.0 million under a gold facility (the
"Gold Facility" and together with the Revolving Credit Facility, the "Revolving
Credit and Gold Facilities", and together with the Term Loan Facility, the "Bank
Credit Facility"). See "Capitalization," "Use of Proceeds," "Principal
Stockholders," "Description of Capital Stock," "Description of the Bank Credit
Facility" and "Description of Notes."
The following table illustrates the estimated sources and uses of funds in
connection with the Transactions based on the estimated Adjusted Working Capital
and Balfour Gold balance on the date of closing. The final calculation of the
Adjusted Working Capital and Balfour Gold balance at closing and the resulting
purchase prices for each of ArtCarved, Balfour and Balfour Gold may differ from
the estimates assumed below.
- --------------------------------------------------------------------------------
5
<PAGE>
- --------------------------------------------------------------------------------
(Dollars in thousands)
Sources
Revolving Credit and Gold Facilities.............. $ 11,201
Term Loan Facility................................ 25,000
11% Senior Subordinated Notes due 2007............ 90,000
Preferred Stock(1)................................ 47,500
Common Stock...................................... 2,500
---------
Total Sources of Funds................... $ 176,201
=======
Uses
ArtCarved Acquisition............................. $114,829
Balfour Acquisition............................... 52,287
Transaction fees and expenses(2).................. 9,085
------
Total Uses of Funds...................... $ 176,201
=======
- ----------
(1) Includes $10.0 million of Series A Preferred Stock of the Company ("Series
A Preferred") and $37.5 million of Series B Preferred Stock of the Company
("Series B Preferred"). See "Description of Capital Stock" and "Description
of Notes--Certain Covenants--Restricted Payments."
(2) This amount represents partial transaction fees and expenses and the total
amount is expected to be approximately $9.8 million.
- --------------------------------------------------------------------------------
6
<PAGE>
- --------------------------------------------------------------------------------
The Exchange Offer
Exchange Offer: The Company is offering to exchange
pursuant to the Exchange Offer up to
$90,000,000 in aggregate principal amount
of its new 11% Senior Subordinated Notes
due 2007 (the "Exchange Notes") for up to
$90,000,000 in aggregate principal amount
of its outstanding 11% of Senior
Subordinated Notes due 2007 (the "Initial
Notes" and, together with the Exchange
Notes, the "Notes") that were issued and
sold on December 16, 1996 in a transaction
exempt from registration under the
Securities Act of 1933, as amended (the
"Securities Act"). Initial Notes may be
exchanged only in integral multiples of
$1,000. The terms of the Exchange Notes are
identical in all material respects
(including principal amount, interest rate,
maturity and ranking) to the terms of the
Initial Notes for which they may be
exchanged pursuant to the Exchange Offer,
except that the Exchange Notes will have
been registered under the Securities Act
and therefor will be generally freely
transferable by Holders thereof (except as
provided herein--see "The Exchange
Offer--Terms of the Exchange" and "The
Exchange Offer--Terms and Conditions of the
Letter of Transmittal"), and are not
subject to any covenant of the Company
regarding registration. The Company has
agreed to make the Exchange Offer in order
to satisfy its obligations under a
registration rights agreement (the
"Registration Rights Agreement"), dated as
of December 16, 1996, among the Company and
Lehman Brothers Inc. and BT Securities
Corporation (together, the "Initial
Purchasers") relating to the Initial Notes.
Interest Payments: Interest on the Exchange Notes shall accrue
from their date of issuance.
Expiration Date: The Exchange Offer will expire at 5:00
p.m., New York City time, on [ ], 1997,
unless extended by the Company to such
dates as the Company, in its sole
discretion, may determine. Any Notes not
accepted for exchange for any reason will
be returned without expense to the
tendering Holders thereof as promptly as
practicable after the expiration or
termination of the Exchange Offer.
Exchange Date: The date of acceptance for exchange of the
Initial Notes (the "Exchange Date") will be
the first business day following the
Expiration Date.
Conditions of the The Exchange Offer is subject to certain
Exchange Offer: conditions. See "The Exchange
Offer--Conditions to the Exchange Offer."
The Exchange Offer is not conditioned upon
any minimum aggregate principal amount of
Initial Notes being tendered for exchange.
Withdrawal Rights: The tender of Initial Notes pursuant to the
Exchange Offer may be withdrawn at any time
prior to the Expiration Date.
Procedures for Holders wishing to participate in the
Tendering: Exchange Offer must complete and return a
Letter of Transmittal. See "The Exchange
Offer--Tender Procedure." Each holder
tendering Initial Notes for exchange (the
"Transferor") must certify that it is not
an "affiliate" of the Company within the
meaning of Rule 405 under the Securities
Act and that it is acquiring the Exchange
Notes offered hereby in the ordinary course
of such Transferor's business and that such
Transferor has no arrangement or
understanding with
- --------------------------------------------------------------------------------
7
<PAGE>
- --------------------------------------------------------------------------------
any person to participate in the
distribution of such Exchange Notes. Each
Holder must acknowledge that it is not
engaged in, and does not intend to engage
in, a distribution of Exchange Notes. Each
Transferor which is a broker-dealer holding
Initial Notes acquired for its own account
must acknowledge that it will deliver a
prospectus meeting the requirements of the
Securities Act in connection with any
resale of such Exchange Notes. By so
acknowledging and by delivering a
prospectus, a broker-dealer will not be
deemed to admit that it is an "underwriter"
within the meaning of the Securities Act.
This Prospectus, as it may be amended or
supplemented from time to time, may be used
by a broker-dealer in connection with
resales of Exchange Notes received in
exchange for Initial Notes where such
Initial Notes were acquired by such
broker-dealer as a result of market-making
activities or other trading activities. The
Company will make this Prospectus available
to any broker-dealer for use in connection
with any such resale.
Certain Federal Income The exchange of Initial Notes for Exchange
Tax Consequences: Notes will not be a taxable event to the
Holders and the Holders will not recognize
any taxable gain or loss or any interest
income as a result of such exchange. See
"Certain Federal Income Tax
Considerations."
Effect on Holders of Initial Notes: As a result of the making of, and upon
acceptance for exchange of all validly
tendered Initial Notes pursuant to the
terms of, this Exchange Offer, the Company
will have fulfilled a covenant contained in
the Registration Rights Agreement and,
accordingly, the Holders of the Initial
Notes will have no further registration or
other rights under the Registration Rights
Agreement. Holders of the Initial Notes who
do not tender their Initial Notes in the
Exchange Offer or whose Initial Notes are
not accepted for exchange will continue to
hold such Initial Notes and will be
entitled to all the rights and preferences
and will be subject to the limitations
applicable thereto set forth in the
Indenture except for any such rights or
limitations which, by their terms,
terminate or cease to be effective as a
result of the making of, and the acceptance
for exchange of all validly tendered
Initial Notes pursuant to, the Exchange
Offer. All untendered, and tendered but
unaccepted, Initial Notes will continue to
be subject to the restrictions on transfer
provided therein and in the Indenture. To
the extent that Initial Notes are tendered
and accepted in the Exchange Offer, the
trading market for untendered, and tendered
but unaccepted, Initial Notes could be
adversely affected.
Use of Proceeds: There will be no cash proceeds to the
Company from the exchange pursuant to the
Exchange Offer.
Exchange Agent: Marine Midland Bank will serve as Exchange
Agent in connection with the Exchange
Offer.
Consequence of Failure to Exchange: Holders of Initial Notes who do not
exchange their Initial Notes for Exchange
Notes pursuant to the Exchange Offer will
continue to be subject to the restrictions
on transfer of such Initial Notes as set
forth in the legend thereon as a
consequence of the offer or sale of the
Initial Notes pursuant to exemptions from,
or in transactions not subject to, the
registration requirements of the Securities
Act and applicable state securities laws.
In general, the Initial Notes may not be
offered or sold unless registered under the
Securities Act and applicable state
securities laws, except pursuant to an
- --------------------------------------------------------------------------------
8
<PAGE>
- --------------------------------------------------------------------------------
exemption from, or in a transaction not
subject to, the Securities Act and
applicable state securities laws. The
Company does not intend to register the
Initial Notes under the Securities Act and,
after consummation of the Exchange Offer,
will not be obligated to do so.
Resales: Based on an interpretation by the staff of
the Commission set forth in no-action
letters issued to third parties, the
Company believes that Exchange Notes issued
pursuant to the Exchange Offer in exchange
for Initial Notes may be offered for
resale, resold and otherwise transferred by
Holders thereof (other than any such Holder
which is an "affiliate" of the Company
within the meaning of Rule 405 under the
Securities Act) without compliance with the
registration and prospectus delivery
provisions of the Securities Act, provided
that such Exchange Notes are acquired in
the ordinary course of such Holders'
business, such Holders have no arrangement
or understanding with any person to
participate in the distribution of such
Exchange Notes and neither such Holders nor
any such other person is engaging in or
intends to engage in a distribution of such
Exchange Notes. Each broker-dealer that
receives Exchange Notes for its own account
in exchange for Initial Notes, where such
Initial Notes were acquired by such
broker-dealer as a result of market-making
or other activities, must acknowledge that
it will deliver a prospectus in connection
with any sale of such Exchange Notes. Any
broker-dealer that participates in a
distribution of the Exchange Notes may not
participate in the Exchange Offer and will
be deemed to be an underwriter for purposes
of the Securities Act. Any Holder who is an
affiliate of the Company or who uses the
Exchange Offer to participate in a
distribution of the Exchange Notes to be
acquired in the Exchange Offer may not rely
on such interpretation by the staff of the
Commission and must comply with the
registration and prospectus delivery
requirements of the Securities Act in
connection with any resales of such
Exchange Notes. See "Plan of Distribution."
- --------------------------------------------------------------------------------
9
<PAGE>
- --------------------------------------------------------------------------------
Terms of the Notes
The Exchange Offer applies to all $90,000,000 aggregate principal amount of
the Initial Notes. The form and terms of the Exchange Notes are the same as the
form and terms of the Initial Notes, except that the Exchange Notes have been
registered under the Securities Act and, therefore, will not bear legends
restricting the transfer thereof. The Exchange Notes will evidence the same debt
as the Initial Notes and will be entitled to the benefits of the Indenture. See
"Description of Notes."
Securities Offered: $90,000,000 principal amount of 11% Senior
Subordinated Notes due 2007.
Maturity Date: January 15, 2007.
Interest Payment Dates: January 15 and July 15, commencing July 15,
1997.
Optional Redemption: The Notes are redeemable at the option of
the Company, in whole or in part, at any
time on or after January 15, 2002 at the
redemption prices set forth herein, plus
accrued and unpaid interest and Liquidated
Damages, if any, thereon to the date of
redemption. In addition, at any time prior
to January 15, 2000, the Company may, in
its discretion, redeem up to 33-1/3% of the
original principal amount of the Notes at a
redemption price equal to 111% of the
principal amount thereof, plus accrued and
unpaid interest and Liquidated Damages, if
any, thereon to the date of redemption,
with the net proceeds of one or more Public
Equity Offerings (as defined); provided
that at least 66-2/3% of the original
principal amount of the Notes remains
outstanding immediately after each such
redemption.
Sinking Fund: None.
Change of Control: In the event of a Change of Control (as
defined), each holder of the Notes will
have the right to require the Company to
purchase all or any part of such holder's
Notes at a purchase price in cash equal to
101% of the aggregate principal amount
thereof, plus accrued and unpaid interest
and Liquidated Damages, if any, thereon to
the date of purchase. The Bank Credit
Facility prohibits the Company from
purchasing any Notes upon a Change of
Control, and certain Change of Control
events with respect to the Company would
constitute a default thereunder. There can
be no assurance that the Company will have
the financial resources necessary to repay
its obligations under the Bank Credit
Facility and to purchase the Notes upon a
Change of Control. See "Risk Factors -
Payment for Notes Upon a Change of Control"
and "Description of the Bank Credit
Facility."
Certain Covenants: The Indenture contains certain covenants
that, among other things, limit the ability
of the Company and its restricted
subsidiaries to (i) incur additional
indebtedness and issue preferred stock,
(ii) pay dividends or make certain other
restricted payments, (iii) enter into
transactions with affiliates, (iv) create
certain liens, (v) make certain asset
dispositions and (vi) merge or consolidate
with, or transfer substantially all of its
assets to, another person. In addition, the
Company is obligated, under certain
circumstances, to offer to repurchase Notes
at a purchase price equal to 100% of the
principal amount thereof, plus accrued and
unpaid interest, if any, to the date of
purchase, with the net cash proceeds of
certain sales or other dispositions of
assets. See "Description of
Notes--Covenants."
- --------------------------------------------------------------------------------
10
<PAGE>
- --------------------------------------------------------------------------------
Summary Pro Forma Combined Financial and Other Data
The following table presents summary unaudited pro forma combined financial
and other data and should be read in conjunction with the financial statements
of ArtCarved and the financial statements of Balfour and the respective related
notes thereto, the "Unaudited Pro Forma Combined Financial Statements and Other
Data" and the notes thereto and "Management's Discussions and Analysis of
Financial Condition and Results of Operations" included elsewhere herein. The
pro forma combined balance sheet was prepared as if the Transactions had
occurred on November 30, 1996, and the unaudited pro forma combined statements
of income and other data were prepared as if the Transactions occurred on August
27, 1995. The summary pro forma combined financial and other data assume the
consummation of the Acquisitions and the financing thereof. The summary pro
forma combined financial and other data do not purport to be indicative of the
financial position or results of operations that would have been reported had
the Transactions been effected on the dates indicated, or that may be reported
in the future. The summary pro forma combined financial and other data are based
on the estimated Adjusted Working Capital and Balfour Gold balance on the date
of closing. However, the final calculation of the Adjusted Working Capital and
Balfour Gold balance at closing and the resulting purchase prices for each of
ArtCarved, Balfour and Balfour Gold may differ from the estimates assumed below.
The summary pro forma combined financial statements and other data reflect
the fact that CBI did not purchase certain Balfour facilities but instead will
relocate the Balfour jewelry manufacturing operations and related sales, general
and administrative functions to existing ArtCarved facilities in Austin, Texas.
Consequently, the pro forma adjustments reflect the realization of $4.3 million
of the Annual Cost Savings relating to the elimination of duplicative personnel,
occupancy and fixed overhead costs resulting from the closure of these Balfour
facilities. However, the pro forma adjustments do not reflect $3.1 million of
the Annual Cost Savings resulting from lower prevailing wage rates in Austin,
Texas and the elimination of other duplicative costs. The pro forma adjustments
related to the Annual Cost Savings described above do not reflect non-recurring
severance and relocation costs of approximately $5.5 million and incremental
capital expenditures of approximately $1.9 million, each related to the
Combination.
The Company has begun the consolidation of the Company's operations to
Austin, Texas, and Management expects that the consolidation will be completed
during the fiscal year ending August 30, 1997. Management expects that a portion
of the Annual Cost Savings will be realized during the fiscal year ending August
30, 1997 and that all of such savings will be realized during the fiscal year
ending August 29, 1998. There can be no assurance that the Company will complete
its consolidation by the end of its fiscal year ending August 30, 1997 or that
the Annual Cost Savings will be realized by the end of its fiscal year ending
August 29, 1998, or at all.
<TABLE>
<CAPTION>
Twelve Months Ended Three Months Ended
August 31, 1996 November 30, 1996
------------------------- -------------------
(Dollars in thousands, except ratios)
<S> <C> <C>
Statement of Income Data:
Net sales.............................................. $142,062 $41,498
Gross profit........................................... 77,105 23,745
Selling, general and administrative expenses........... 60,340 18,088
Operating income ...................................... 16,765 5,657
Interest expense, net.................................. 13,739 3,435
Net income ............................................ 1,785 1,311
</TABLE>
- --------------------------------------------------------------------------------
11
<PAGE>
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Twelve Months Ended Three Months Ended
August 31, 1996 November 30, 1996
--------------------------- -------------------
(Dollars in thousands, except ratios)
<S> <C> <C>
Other Data:
EBITDA(1)(2)........................................... $22,832 $7,174
Depreciation and amortization.......................... 6,067 1,517
Capital expenditures(3)................................ 1,480 370
Ratio of EBITDA to cash interest expense(4)............ 1.7x 2.2x
Balance Sheet Data (at end of period):
Total assets........................................... $206,399
Total debt............................................. 126,201
Stockholders' equity................................... 50,000
</TABLE>
(1) EBITDA represents operating income (loss) before depreciation, amortization
and restructuring charges. EBITDA is not intended to, and does not,
represent cash flows as defined by generally accepted accounting principles
and does not necessarily indicate that cash flows are sufficient to fund
all of the Company's cash needs. EBITDA should not be considered in
isolation or as a substitute for or more meaningful than net income (loss),
cash flows from operating activities or other measures of liquidity
determined in accordance with generally accepted accounting principles. The
Company has presented EBITDA data because the Company understands that such
information is commonly used by investors to analyze and compare companies
on the basis of operating performance and to determine a company's ability
to service debt. The EBITDA measure presented herein is not necessarily
comparable to similarly-titled measures reported by other companies.
(2) The summary pro forma combined financial and other data and pro forma
combined EBITDA do not give effect to $3.1 million of the Annual Cost
Savings, $2.4 million of which are related to lower prevailing wage rates
in Austin, Texas and $0.7 million of which are related to other duplicative
costs resulting from the closure of the Balfour facilities and the
consolidation of Balfour's operations into existing ArtCarved operations in
Austin, Texas. The effect of the additional $3.1 million of the Annual Cost
Savings on the pro forma combined EBITDA results in an adjusted pro forma
combined EBITDA of $25.9 million and $8.0 million for the twelve months
ended August 31, 1996, and the three months ended November 30, 1996,
respectively. Thus, the ratio of adjusted pro forma combined EBITDA to cash
interest expense is 2.0x(4) and 2.4x(4)(5) for the twelve months ended
August 31, 1996, and the three months ended November 30, 1996,
respectively.
(3) The pro forma combined capital expenditure level is not indicative of the
expected capital expenditure level for the Company's fiscal year ending
August 30, 1997. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Seasonality, Liquidity and Capital
Resources."
(4) Cash interest expense represents pro forma combined interest less
amortization of capitalized financing fees.
(5) Ratios for the three months ended November 30, 1996 are not indicative of
the full year results due to the seasonal nature of the business.
- --------------------------------------------------------------------------------
12
<PAGE>
- --------------------------------------------------------------------------------
Summary Historical Financial and Other Data--ArtCarved
The following table presents summary historical financial and other data
for ArtCarved and should be read in conjunction with the financial statements of
ArtCarved and the notes thereto and "Management's Discussion and Analysis of
Financial Condition and Results of Operations" included elsewhere herein. The
following information with respect to ArtCarved as of and for the years ended
August 27, 1994; August 26, 1995; and August 31, 1996 has been derived from the
audited financial statements of ArtCarved, which have been audited by Arthur
Andersen LLP, independent public accountants, as indicated in their report dated
November 13, 1996 included elsewhere herein. The ArtCarved data as of August 31,
1993 are derived from the audited financial statements of ArtCarved, which have
been audited by Arthur Andersen LLP and are not included herein. The ArtCarved
data as of August 31, 1992 and the three months ended on, and as of, November
25, 1995 and November 30, 1996 are derived from the unaudited financial
statements of ArtCarved. In Management's opinion, the unaudited interim
financial statements reflect all adjustments (consisting only of normal
recurring adjustments) necessary for a fair presentation of the interim periods
presented. The results for the three months ended November 30, 1996 are not
necessarily indicative of the results to be expected for the full fiscal year.
The information presented below does not include adjustments related to the
ArtCarved Acquisition.
<TABLE>
<CAPTION>
Three Months
Fiscal Year Ended(1) Ended(1)
------------------------------------------------------ ------------------
Aug. 31, Aug. 31, Aug. 27, Aug. 26, Aug. 31, Nov. 25, Nov. 30,
1992 1993 1994 1995 1996 1995 1996
---------- --------- ---------- --------- --------- -------- --------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Statement of Income Data:
Net sales.............................. $ 63,847 $ 63,955 $ 69,820 $ 71,994 $ 70,671 $ 21,923 $ 21,963
Cost of sales.......................... 26,993 25,290 30,572 32,879 32,655 9,209 9,626
---------- --------- ---------- --------- --------- -------- --------
Gross profit........................... 36,854 38,665 39,248 39,115 38,016 12,714 12,337
Selling, general and administrative 26,920 27,016 26,618 28,224 27,940 8,484 8,110
expenses...............................
Restructuring charges(2)............... -- -- -- 3,244 -- -- --
---------- --------- ---------- --------- --------- -------- --------
Operating income....................... $ 9,934 $ 11,649 $ 12,630 $ 7,647 $ 10,076 $ 4,230 $ 4,227
========== ========= ========== ========= ========= ======== ========
Other Data:
EBITDA(3).............................. $ 15,548 $ 17,046 $ 17,324 $ 16,505 $15,091 $5,494 $5,691
Depreciation and amortization.......... 5,614 5,397 4,694 5,614 5,015 1,264 1,464
Capital expenditures(4)................ 862 1,344 1,186 1,120 844 420 182
Cash flows provided by (used in):
Operating activities 8,678 10,948 11,132 (3,164) 1,663 (513) 1,083
Investing activities (925) (1,344) (1,186) (1,120) (844) (52) (182)
Financing activities (5,753) (9,604) (9,946) 4,284 (819) 565 3,555
Ratio of earnings to fixed charges(5) -- -- 1.1x -- -- 1.3x 1.6x
Balance Sheet Data (at end of period):
Total assets........................... $ 79,698 $ 76,008 $ 78,900 $ 75,955 $74,542 $83,393
Total long-term debt(6)................ 107,783 98,485 98,728 99,900 91,221 80,144
Advances in equity (deficit)(6)........ (32,989) (27,931) (51,504) (53,186) (28,524) (7,909)
</TABLE>
- ----------
(1) During the periods presented, ArtCarved was not operated or accounted for
as a separate entity. As a result, allocations for certain accounts of CJC
were reflected in the financial statements of ArtCarved. Selling, general
and administrative expenses for ArtCarved represent all the expenses
incurred by CJC excluding only the expenses directly related to the
non-ArtCarved operations of CJC. Since CJC intends to use the proceeds from
the sale of ArtCarved to repay its outstanding debt obligations, the
statement of income data, other data, and the balance sheet data include
all of CJC's debt and related interest expense.
(2) For the fiscal year ended August 26, 1995, the restructuring charges of
$3.2 million consisted of the write-off of $2.9 million of capitalized
financing costs incurred in 1990 by CJC and $0.3 million of related
professional advisory fees incurred by CJC. The balance sheet data include
all of CJC's debt and related interest expense, and therefore all of the
restructuring charges are allocated to ArtCarved assets.
(3) EBITDA represents operating income (loss) before depreciation,
amortization, and restructuring charges. EBITDA is not intended to, and
does not, represent cash flows as defined by generally accepted accounting
principles and does not necessarily indicate that cash flows are sufficient
to fund all of ArtCarved's cash needs. EBITDA should not be considered in
isolation or as a substitute for or more meaningful than net income (loss),
cash flows from operating activities or other measures of liquidity
determined in accordance with generally
- --------------------------------------------------------------------------------
13
<PAGE>
- --------------------------------------------------------------------------------
accepted accounting principles. The Company has presented EBITDA data
because the Company understands that such information is commonly used by
investors to analyze and compare companies on the basis of operating
performance and to determine a company's ability to service debt. The
EBITDA measure presented herein is not necessarily comparable to
similarly-titled measures reported by other companies.
(4) Historical capital expenditure levels are not necessarily indicative of the
expected capital expenditure level for the Company's fiscal year ending
August 30, 1997. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Seasonality, Liquidity and Capital
Resources."
(5) For the purpose of computing this ratio, earnings consist of income (loss)
before taxes on income and fixed charges. Fixed charges consist of interest
expense, capitalized interest, amortization of deferred debt issuance cost
and a portion of rental expenses. For the fiscal years ended August 31,
1992; August 31, 1993; August 26, 1995 and August 31, 1996, earnings before
fixed charges were insufficient to cover fixed charges by approximately
$3.2 million, $0.7 million, $6.0 million and $1.8 million, respectively.
(6) The changes in total long-term debt and advances in equity (deficit) from
August 31, 1996 to November 30, 1996 are due to the sale of CJC's
non-ArtCarved operations.
- --------------------------------------------------------------------------------
14
<PAGE>
- --------------------------------------------------------------------------------
Summary Historical Financial and Other Data--Balfour
The following table presents summary historical financial and other data
for Balfour and should be read in conjunction with the financial statements of
Balfour and the notes thereto and "Management's Discussion and Analysis of
Financial Condition and Results of Operations" included elsewhere herein. The
following information with respect to Balfour as of and for the years ended
February 27, 1994; February 26, 1995; and February 25, 1996 has been derived
from the audited financial statements of Balfour, which have been audited by
Arthur Andersen LLP, independent public accountants, as indicated in their
report dated September 30, 1996 included elsewhere herein. The following
information with respect to Balfour as of and for the years ended February 29,
1992 and February 28, 1993 and the nine months ended on, and as of, November 26,
1995 and November 24, 1996 has been derived from the unaudited financial
statements of Balfour. In Management's opinion, the data as of and for the years
ended February 29, 1992 and February 28, 1993 and the nine months ended on, and
as of, November 26, 1995 and November 24, 1996 reflect all adjustments
(consisting of normal recurring adjustments) necessary for a fair presentation.
The results for the nine months ended November 24, 1996 are not necessarily
indicative of the results that could be expected for the full fiscal year. The
information presented below does not include adjustments related to the Balfour
Acquisition.
<TABLE>
<CAPTION>
Fiscal Year Ended (1) Nine Months Ended(1)
----------------------------------------------------- ------------------
Feb 29, Feb. 28, Feb. 27, Feb. 26, Feb. 25, Nov. 26, Nov. 24,
1992 1993 1994 1995 1996 1995 1996
-------- -------- -------- -------- -------- ------- -------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Statement of Income Data:
Net sales........................ $ 91,681 $ 83,938 $ 85,304 $ 77,491 $ 71,300 $53,413 $55,521
Cost of sales.................... 55,607 47,130 35,860 35,406 35,598 27,160 27,021
-------- -------- -------- -------- -------- ------- -------
Gross profit..................... 36,074 36,808 49,444 42,085 35,702 26,253 28,500
Selling, general and administrative
expenses...................... 42,481 43,856 43,350 51,743 33,496 25,831 27,910
Restructuring charge(2).......... -- 14,500 -- -- -- -- --
-------- -------- -------- -------- -------- ------- -------
Operating income (loss).......... $ (6,407) $(21,548) $ 6,094 $ (9,658) $ 2,206 $ 422 $ 590
======== ======== ======== ======== ======== ======= =======
Other Data:
EBITDA(3)........................ $ (3,376) $ (3,983) $ 7,993 $ (7,680) $ 4,232 $ 1,970 $ 2,050
Depreciation and amortization.... 3,031 3,065 1,899 1,978 2,026 1,548 1,460
Capital expenditures(4).......... 620 826 1,820 1,274 530 320 252
Adjusted net sales(5)............ 59,600 56,315 61,784 64,891 70,111 52,537 54,672
Cash flows provided by (used in):
Operating activities -- -- (2,413) (7,077) 1,604 (5,828) (6,390)
Investing activities -- -- (1,807) (1,209) 421 631 188
Financing activities -- -- 4,245 8,286 (1,970) 5,201 6,181
Ratio of earnings to fixed -- -- 4.3x -- 1.0x -- --
charges(6)
Balance Sheet Data
(at end of period):
Total assets..................... $ 70,086 $ 44,795 $ 47,989 $ 45,236 $ 42,563 $ 45,050
Total long-term debt(7).......... 66,924 1,801 6,136 15,136 13,166 19,405
Stockholders' equity (deficit)... (20,127) 20,278 24,966 14,024 13,888 12,602
</TABLE>
- ----------
(1) During the periods presented, Balfour was operated as a wholly-owned
subsidiary of Town & Country and Town & Country administered certain
programs (such as health insurance, workmen's compensation, and gold
consignment) and charged all directly identifiable costs to Balfour.
Indirect costs were not allocated to Balfour; however, Balfour's management
believes these amounts are not significant for the periods presented.
(2) For the fiscal year ended February 28, 1993, Balfour's management decided
to make changes with respect to certain of its operations. As a result of
this decision, Balfour sold or disposed of certain inventory and equipment
no longer considered necessary to its modified business and recorded a
restructuring charge associated with such disposal of assets.
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(3) EBITDA represents operating income (loss) before depreciation,
amortization, and restructuring charges. EBITDA is not intended to, and
does not, represent cash flows as defined by generally accepted accounting
principles and does not necessarily indicate that cash flows are sufficient
to fund all of Balfour's cash needs. EBITDA should not be considered in
isolation or as a substitute for or more meaningful than net income (loss),
cash flows from operating activities or other measures of liquidity
determined in accordance with generally accepted accounting principles. The
Company has presented EBITDA data because the Company understands that such
information is commonly used by investors to analyze and compare companies
on the basis of operating performance and to determine a company's ability
to service debt. The EBITDA measure presented herein is not necessarily
comparable to similarly-titled measures reported by other companies.
(4) Historical capital expenditure levels are not necessarily indicative of the
expected capital expenditure level for the Company's fiscal year ending
August 30, 1997. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Seasonality, Liquidity and Capital
Resources."
(5) Adjusted net sales represents, for all periods presented, net sales
excluding results from: (i) the direct distribution of licensed consumer
sports jewelry, which was discontinued in February 1995; (ii) the
fraternity jewelry product line, which was sold in March 1994; and (iii)
the service award recognition product line, which was sold in April 1993.
Although Balfour sold substantially all of the service award recognition
product line, Balfour continues to have sales of service award recognition
products, which Management believes will not be a significant percentage of
net sales in future periods. See footnote (6) of "Selected Historical
Financial and Other Data--Balfour."
(6) For the purpose of computing this ratio, earnings consist of income (loss)
before taxes on income and fixed charges. Fixed charges consist of interest
expense, capitalized interest, amortization of deferred debt issuance cost
and a portion of rental expenses. For the fiscal years ended February 29,
1992; February 28, 1993 and February 26, 1995, Balfour's earnings before
fixed charges were insufficient to cover fixed charges by $15.9 million,
$31.3 million and $10.9 million, respectively. For the nine months ended
November 26, 1995 and November 24, 1996, Balfour's earnings before fixed
charges were insufficient to cover fixed charges by $1.0 million and $1.2
million, respectively.
(7) The change in total long-term debt from February 25, 1996 to November 24,
1996 is due to the seasonal nature of Balfour's operations.
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RISK FACTORS
In addition to the other information contained in this Prospectus, before
tendering their Initial Notes for the Exchange Notes offered hereby, Holders of
the Initial Notes should review carefully the specific considerations set forth
below:
Substantial Leverage and Debt Service
The Company incurred substantial indebtedness in connection with the
acquisitions of the businesses and operations of ArtCarved and Balfour. As of
December 16, 1996, the Company's pro forma total indebtedness and stockholders'
equity were $126.2 million and $50.0 million, respectively. The Company's sales
tend to be seasonal, with peak borrowings under the Company's Bank Credit
Facility expected to occur during the months of October through December. See
"--Seasonality" and "Management's Discussion and Analysis of Financial Condition
and Results of Operations--Seasonality, Liquidity and Capital Resources."
The Company's ability to meet its debt service obligations and to reduce
its total debt will depend upon its future performance, which, in turn, is
subject to general economic conditions, particularly in the scholastic products
market and the recognition and affinity products market, and to financial,
business and other factors affecting the operations of the Company, many of
which are beyond its control. There can be no assurance that the Company's
business will generate adequate cash flow to meet the Company's requirements for
working capital expenditures, interest payments and scheduled principal
payments, that the Company will be able to borrow sufficient funds under its
Revolving Credit and Gold Facilities or that the anticipated Annual Cost Savings
will be realized. See "-- Realization of Estimated Cost Savings." If the Company
is unable to generate sufficient cash flow from operations or to borrow
sufficient funds in the future to service its debt, it may be required to sell
assets, reduce capital expenditures, refinance all or a portion of its existing
debt (including the Notes) or obtain additional financing. There can be no
assurance that any such refinancing would be possible or that any additional
financing could be obtained, particularly in view of the Company's high level of
debt, the restrictions on the Company's ability to incur additional debt under
the Bank Credit Facility and the Indenture, and the fact that substantially all
of the Company's assets will be pledged to secure obligations under the Bank
Credit Facility.
The degree to which the Company is leveraged could have important
consequences to holders of the Notes, including that: (i) the Company's ability
to obtain additional financing for working capital, capital expenditures,
acquisitions or other purposes, may be impaired; (ii) a substantial portion of
the Company's cash flow from operations must be dedicated to the payment of
principal and interest on indebtedness; and (iii) the Company's leverage may
make it more vulnerable to industry-related or general economic downturns and
may limit its ability to withstand competitive pressures. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
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Successful Integration of Operations
The integration of the administrative, finance and manufacturing operations
of ArtCarved and Balfour, the coordination of each company's sales and marketing
organizations and implementation of appropriate operational, financial and
management systems and controls will require substantial attention from the
newly-integrated management team and will result in the diversion of management
attention from managing the Company's core businesses. Any inability of the
Company to integrate these companies successfully in a timely and efficient
manner could have an adverse effect on the Company's financial position or
results of operations. There can be no assurance that the post-acquisition
strategy will be implemented successfully or on a timely basis or that it will
not require unanticipated costs in its implementation.
Realization of Estimated Cost Savings
The Company's post-acquisition strategy is premised upon realizing
substantial cost savings from the integration of the operations of ArtCarved and
Balfour. Management's estimates of cost savings are based upon a number of
assumptions and are subject to significant business, economic and competitive
uncertainties and contingencies, many of which are beyond the control of the
Company. Actual results may vary from Management's estimated cost savings and
such variations may be material.
Competition
The Company's businesses are highly competitive, with the Company facing
competition in each of its product lines. In the scholastic products business,
there are three national competitors, including the Company, in the sale of both
class rings and fine paper products, one additional national competitor in the
sale of class rings, and several additional national competitors in the sale of
fine paper products. In addition, in the scholastic products business the
Company faces several regional competitors, which have been successful in the
past at taking market share from the national competitors (including ArtCarved
and Balfour). The Company's recognition and affinity products compete with those
produced and sold by a broad range of companies, including certain of the
Company's competitors in the scholastic product line and certain other regional
and local companies. The Company's ability to compete in the high school
in-school market depends on its ability to recruit and maintain a high quality
sales force. There can be no assurance that the Company will be able to maintain
its sales force or to continue to compete successfully with other competitors,
some of which may have greater resources, including financial resources, than
the Company. See "Business--Competition."
Declining Demand and Potential Loss of Customers
Management believes that the percentage of high school graduates who
purchase high school class rings has declined for a period of at least five
years. In addition, the Company's volume of high school class rings sold during
this time has declined, and Management believes that the Company's market share
has declined as well. There can be no assurance that such trends will not
continue or that the Company will not experience similar trends in the college
market for class rings. See "Business--Industry."
In addition, a significant portion of the Company's business activity is
with independent and chain jewelry retailers and mass merchants, many of which
are not only subject to the risks generally associated with the effects of an
economic downturn on retailers of discretionary, consumer goods, but also tend
to be highly leveraged. Over the past several years, mass merchants have
accounted for a growing portion of the Company's sales. The Company does not
have exclusive arrangements with these mass merchants and would be adversely
affected if it were no longer able to market its products through such mass
merchants.
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The Company has sold college rings primarily through on-campus bookstores,
most of which also offer class ring products distributed by one or more of the
Company's major competitors, and, to a lesser extent, through local bookstores.
Historically, on-campus bookstores have been owned and operated by the colleges
and universities; however, during the last several years an increasing number of
campus bookstores have been leased to companies engaged in retail bookstore
operations, primarily Barnes & Noble Bookstores, Inc. and Follet Corporation,
which together dominate that industry. If either the colleges or universities or
these bookstores were to grant exclusive rights to one of the Company's
competitors, or if for any other reason the Company were unable to continue
selling its products through these bookstores, the Company's business could be
adversely affected. If the schools or the operators of college on-campus
bookstores were to grant exclusive rights to the Company's competitors, in order
to maintain its college class ring sales the Company would be required to
establish successfully alternative channels, such as direct marketing,
off-campus bookstores and retail jewelry stores, for the distribution of class
rings at colleges serviced by such bookstores.
Subordination and Ranking of the Notes
The Notes are general unsecured obligations of the Company and are
subordinated in right of payment to all existing and future Senior Indebtedness
of the Company, including all indebtedness under the Bank Credit Facility. By
reason of such subordination, in the event of the insolvency, liquidation,
reorganization, dissolution or other winding-up of the Company, the Senior
Indebtedness must be paid in full before the principal of, premium, if any, and
interest or Liquidated Damages (if any) on, the Notes may be paid. As of
December 16, 1996, the Company had approximately $36.2 million of Senior
Indebtedness (exclusive of an unused commitment of up to $23.8 million under the
Bank Credit Facility). The Indenture under which the Notes are issued permits
the Company to incur additional Senior Indebtedness if certain conditions are
met. See "Capitalization," "Description of the Bank Credit Facility" and
"Description of Notes--Certain Covenants."
The Company may not pay principal of, premium, if any, or interest or
Liquidated Damages (if any) on, the Notes, or repurchase, redeem or otherwise
retire the Notes if any Senior Indebtedness is not paid when due or any default
on Senior Indebtedness occurs and the maturity of such Senior Indebtedness is
accelerated in accordance with its terms unless, in either case, the default has
been cured or waived, any such acceleration has been rescinded or such Senior
Indebtedness has been paid in full, except that the Company may make payments
with respect to the Notes with the approval of certain holders of the Senior
Indebtedness. Upon any payment or distribution of assets of the Company upon a
total or partial liquidation, dissolution, reorganization or similar proceeding,
the holders of Senior Indebtedness will be entitled to receive payment in cash
or cash equivalents in full before the holders of the Notes are entitled to
receive any payment. Accordingly, there may be insufficient assets remaining
after such payments to pay principal of, or interest or Liquidated Damages (if
any) on, the Notes. See "Description of Notes--Subordination."
The Indenture contemplates that the Company may, during the term of Notes,
conduct its business through one or more subsidiaries. Except as otherwise
provided in the Indenture, such subsidiaries may not incur indebtedness. Except
to the extent that the Company may itself be a trade creditor with recognized
claims against its subsidiaries, the claims of creditors of such subsidiaries,
including trade creditors, will have priority over the Company with respect to
the assets and earnings of such subsidiaries. Therefore, the Notes will be
effectively subordinated to all indebtedness incurred by subsidiaries of the
Company, even though such indebtedness is not Senior Indebtedness.
Restrictive Covenants
The Indenture contains covenants that restrict, among other things, the
ability of the Company to incur additional indebtedness, pay dividends or make
certain other Restricted Payments (as defined therein), enter into transactions
with affiliates, allow its subsidiaries to make certain payments, create certain
liens, make certain asset dispositions and merge or consolidate with, or
transfer substantially all of its assets to, another person, or engage in
certain change of control transactions. In addition, the Bank Credit Facility
contains other and more restrictive covenants and prohibits the Company from
prepaying certain of its indebtedness, including the Notes. Under the Bank
Credit Facility, the Company is also required to maintain specified financial
ratios, including maintaining specified Minimum Interest Coverage, Maximum
Senior Debt to EBITDA ratios, and Minimum EBITDA (each as
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defined in the Bank Credit Facility). The failure by the Company to maintain
such financial ratios or to comply with the restrictions contained in the Bank
Credit Facility or the Indenture could result in a default thereunder, which in
turn could cause such indebtedness (and by reason of cross-default provisions,
other indebtedness) to become immediately due and payable. No assurance can be
given that the Company's future operating results will be sufficient to enable
compliance with such covenants, or in the event of default, to remedy such
default. See "Description of the Bank Credit Facility" and "Description of
Notes--Certain Covenants."
Seasonality
The Company's scholastic product sales tend to be seasonal. Class ring
sales (and therefore the Company's borrowing needs) are highest during October
through December and fine paper sales are highest during February through April.
Management does not expect sales of the Company's recognition and affinity
products to be seasonal in any material respect. The Company has historically
experienced operating losses during the summer months, and its working capital
requirements tend to exceed its operating cash flows from July through December.
The Company's ability to draw down funds under the Bank Credit Facility to meet
its borrowing needs during this period will be subject to certain financial
coverage tests. There can be no assurance that the Company will be able to
borrow sufficient funds under the Bank Credit Facility to meet its borrowing
needs during this period. See "Description of the Bank Credit Facility." See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Seasonality, Liquidity and Capital Resources."
Dependence on Single Supplier; Fluctuations in Prices of Raw Materials
The Company purchases substantially all synthetic and semiprecious stones
from a single supplier, located in Germany, which supplies synthetic stones to
almost all of the class ring manufacturers in the United States. The Company
believes that the loss of this source of synthetic and semiprecious stones would
adversely affect its business during the time period in which alternate sources
adapted production capabilities to meet increased demand. See "Business--Raw
Materials." Gold also constitutes a significant raw material for the Company's
operations. There can be no assurance that the Company would not be adversely
affected by fluctuations in the price of gold. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Raw Material Price
Fluctuations."
Payment for Notes Upon a Change of Control
The Indenture provides that, upon the occurrence of a Change of Control (as
defined therein), the Company will be required to make an offer to purchase all
of the Notes issued and then outstanding under the Indenture at a purchase price
equal to 101% of the principal amount thereof plus accrued and unpaid interest
and Liquidated Damages (if any) thereon to the date of purchase. Any Change of
Control under the Indenture would constitute a default under the Bank Credit
Facility. Therefore, upon the occurrence of a Change in Control, the lenders
under the Bank Credit Facility would have the right to accelerate their loan and
the holders of the Notes would have the right to require the Company to purchase
their Notes. Upon such event, such lenders would be entitled to receive payment
of all outstanding obligations under the Bank Credit Facility before the Company
may purchase any of the Notes tendered pursuant to such an offer. See
"Description of the Bank Credit Facility." If a Change of Control were to occur,
it is unlikely that the Company would be able to repay all of its obligations
under the Bank Credit Facility and the Notes, unless it could obtain alternate
financing. There can be no assurance that the Company would be able to obtain
any such financing on commercially reasonable terms or at all, and consequently
no assurance can be given that the Company would be able to purchase any of the
Notes tendered pursuant to such an offer.
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Voting Control of the Company
The Castle Harlan Group owns and controls 100% of the Company's outstanding
voting stock. Accordingly, it has the ability to elect the entire Board of
Directors of the Company and, in general, to determine the outcome of any other
matter submitted to stockholders for their approval, including the power to
determine the outcome of all corporate transactions, such as mergers,
consolidations, and the sale of all or substantially all of the assets of the
Company. See "Principal Stockholders."
Fraudulent Transfer
The Company's obligations under the Notes may be subject to review under
federal or state fraudulent transfer laws if the Company becomes a debtor in a
subsequent bankruptcy case or otherwise has financial difficulties. In that
event, if a court in a lawsuit by an unpaid creditor or by a representative of
creditors (such as a trustee in a bankruptcy or a debtor-in-possession) were to
find that the Company received less than fair consideration or reasonably
equivalent value for incurring the indebtedness represented by the Notes and (i)
was insolvent, (ii) was rendered insolvent by reason of such transaction, (iii)
was engaged in a business or transaction, or was about to be engaged in a
business or transaction, for which its remaining assets constituted unreasonably
small capital, or (iv) intended to incur, or believed or reasonably should have
believed that it would incur, debts beyond its ability to pay such debts as they
matured, such court could void the Company's obligations under the Notes and
direct the return of any amounts paid thereunder to the Company or to a fund for
the benefit of its creditors. The measure of insolvency for purposes of the
foregoing will vary depending upon the law of the jurisdiction being applied.
There can be no assurance as to what standard a court would apply in making such
determinations or whether a court would find that the Company received fair
consideration or reasonably equivalent value for incurring the indebtedness
represented by the Notes or was insolvent, or rendered insolvent by reason of
the transaction, or whether the Company had sufficient capital for the business
in which it is engaged and did not incur debts beyond its ability to pay such
debts as they mature. In addition, if either of the prior owners of ArtCarved or
Balfour were to become a debtor in a subsequent bankruptcy case or otherwise
were to have financial difficulties, a court might review the applicable
Acquisition under Federal or state fraudulent transfer laws and could apply a
similar analysis with respect to such Acquisition and such court could void the
prior owners' obligations under the ArtCarved Purchase Agreement or Balfour
Purchase Agreement, as the case may be. There can be no assurance as to what
standard a court would apply in making such determinations or whether a court
would agree with such assessments. See "--Substantial Leverage and Debt Service"
above.
Consequences Of Exchange And Failure To Exchange
Holders of Original Notes who do not exchange their Initial Notes for
Exchange Notes pursuant to the Exchange Offer will continue to be subject to the
restrictions on transfer of such Initial Notes as set forth in the legend
thereon as a consequence of the issuance of the Initial Notes pursuant to
exemptions from, or in transactions not subject to, the registration
requirements of the Securities Act and applicable state securities laws. In
general, the Initial Notes may not be offered or sold, unless registered under
the Securities Act and applicable state securities laws, or pursuant to an
exemption therefrom. Except under certain limited circumstances, the Company
does not intend to register the Initial Notes under the Securities Act. In
addition, any holder of Initial Notes who tenders in the Exchange Offer for the
purpose of participating in a distribution of the Exchange Notes may be deemed
to have received restricted securities and, if so, will be required to comply
with the registration and prospectus delivery requirements of the Securities Act
in connection with any resale transaction. To the extent Initial Notes are
tendered and accepted in the Exchange Offer, the trading market, if any, for the
Initial Notes could be adversely affected. See "The Exchange Offer" and
"Description of Notes -- Registration Rights; Liquidated Damages."
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Absence Of A Public Market For The Notes; Price Volatility
The Exchange Notes are new securities for which there is currently no
market. The Company does not intend to apply for listing of the Exchange Notes
on any securities exchange or for the inclusion of the Exchange Notes in any
automated quotation system and there can be no assurance as to the development
or liquidity of any market for the Exchange Notes. If a market for the Exchange
Notes were to develop, the Exchange Notes could trade at prices that may be
higher or lower than their initial offering price depending upon many factors,
including prevailing interest rates, the Company's operating results and the
markets for similar securities. Historically, the market for non-investment
grade debt has been subject to disruptions that have caused substantial
volatility in the prices of securities similar to the Exchange Notes. There can
be no assurance that, if a market for the Exchange Notes were to develop, such a
market would not be subject to similar disruptions.
Forward-Looking Statements
Statements contained in this Prospectus that are not based on historical
fact, including without limitation statements containing the words "believes,"
"anticipates," "intends," "estimates," "expects" and words of similar import,
constitute "forward-looking statements" within the meaning of the Private
Securities Litigation Reform Act of 1995. Such forward-looking statements
involve known and unknown risks, uncertainties and other factors that may cause
the actual results, events or developments to be materially different from any
future results, events or developments expressed on implied by such
forward-looking statements. Such factors include, among others, the following:
general economic and business conditions; competition; changes in business
strategy or development plans; the high leverage of the Company; the ability to
attract and retain qualified personnel; and other factors referenced in this
Prospectus, including without limitation under the captions "Summary," "Risk
Factors," "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and "Business." Given these uncertainties, prospective
investors are cautioned not to place undue reliance on such forward-looking
statements. The Company disclaims any obligation to update any such factors or
to announce publicly the result of any revisions to any of the forward-looking
statements contained herein to reflect future results, events or developments.
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USE OF PROCEEDS
There will be no proceeds to the Company from any exchange pursuant to
the Exchange Offer. The net proceeds to the Company (after discounts,
commissions and estimated fees and expenses in an aggregate amount of
approximately $3.8 million related to the Initial Offering) from the sale of the
Initial Notes in the Initial Offering were approximately $86.2 million. Such
proceeds, together with the proceeds of the Bank Credit Facility and proceeds
from the Castle Harlan Investment, were used to pay (i) the ArtCarved Purchase
Price, (ii) the Balfour Purchase Price, (iii) the Balfour Gold Purchase Price,
(iv) the fees and expenses incurred in connection with the Transactions, and (v)
the ongoing working capital requirements of the Company. See "The Acquisitions"
and "Description of the Bank Credit Facility."
THE EXCHANGE OFFER
Purpose of the Exchange Offer
The Initial Notes were originally issued and sold on December 16, 1996 in
the Initial Offering. The Initial Offering was not registered under the
Securities Act in reliance upon the exemptions provided by Section 4(2) of the
Securities Act, and Rule 144A, Regulation D and Regulation S under the
Securities Act. In connection with the sale of the Initial Notes, the Company
agreed to use best efforts to file with the Commission a registration statement
relating to an exchange offer (the "Exchange Offer Registration Statement")
pursuant to which a new series of senior subordinated notes of the Company
covered by such Exchange Offer Registration Statement and containing terms
identical in all material respects to the terms of the Initial Notes would be
offered in exchange for Initial Notes tendered at the option of the Holders
thereof or, if applicable interpretations of the staff of the Commission did not
permit the Company to effect such an exchange offer (after the Company complies
with certain procedures set forth in the Registration Rights Agreement relating
to seeking a favorable decision from the Commission allowing the Company to
effect such registration), or, if any Holder of Initial Notes that is a
"qualified institutional buyer" (as defined in Rule 144A under the Securities
Act) or an "accredited investor" (as defined in Rule 501 (A)(1), (2), (3) or (7)
under the Securities Act) shall notify the Company within 20 business days after
the Exchange Offer is consummated (A) that such Holder is prohibited by
applicable law or Commission policy from participating in the Exchange Offer or
(B) that such Holder may not resell the Exchange Notes acquired by it in the
Exchange Offer to the public without delivering a prospectus and that the
Prospectus contained in this Registration Statement is not appropriate or
available for such resales by such Holder or (C) that such Holder is a
Broker-Dealer and holds Notes acquired directly from the Company or one of its
affiliates, then the Company agreed, at its cost, to use its best efforts to
file a shelf registration statement covering resales of the Initial Notes (the
"Shelf Registration Statement") and use its best efforts to have such Shelf
Registration Statement declared effective and kept effective for a period of
three years from the effective date thereof.
The purpose of the Exchange Offer is to fulfill certain obligations of the
Company under the Registration Rights Agreement. Except as provided under "Plan
of Distribution" with respect to certain broker-dealers, this Prospectus may not
be used by any Holder of the Exchange Notes to satisfy the registration and
delivery requirements under the Securities Act that may apply in connection with
any resale of the Initial Notes or the Exchange Notes. See "--Terms of the
Exchange" following the consummation of the Exchange Offer, the Company does not
intend to register any untendered Initial Notes under the Securities Act and
will not be obligated to do so.
Terms of the Exchange
The Company hereby offers to exchange, subject to the conditions set forth
herein and in the Letter of Transmittal accompanying this Prospectus (the
"Letter of Transmittal"), $1,000 in principal amount of Exchange Notes for each
$1,000 in principal amount of the Initial Notes. The terms of the Exchange Notes
are identical in all material respects to the terms of the Initial Notes for
which they may be exchanged pursuant to this Exchange Offer, except that the
Exchange Notes (i) will generally be freely transferable by Holders thereof and
(ii) are not subject to any covenant regarding registration. The Exchange Notes
will evidence the same debt as the Initial Notes and will be entitled to the
benefits of the Indenture. See "Description of Notes."
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The Exchange Offer is not conditioned upon any minimum aggregate principal
amount of the Initial Notes being tendered or accepted for exchange.
The Company has not requested, and does not intend to request, an
interpretation by the staff of the Commission with respect to whether the
Exchange Notes issued pursuant to the Exchange Offer in exchange for the Initial
Notes may be offered for sale, resold or otherwise transferred by Holders
without compliance with the registration and prospectus delivery provisions of
the Securities Act. Instead, based on an interpretation by the staff of the
Commission set forth in a series of no-action letters issued to third parties,
the Company believes that Exchange Notes issued pursuant to the Exchange Offer
in exchange for Initial Notes may be offered for sale, resold and otherwise
transferred by Holders of such Exchange Notes (other than any such Holder which
is an "affiliate" of the Company within the meaning of Rule 405 under the
Securities Act) without compliance with the registration and prospectus delivery
provisions of the Securities Act, provided that such Exchange Notes are acquired
in the ordinary course of such Holders' business, such Holders have no
arrangement or understanding with any person to participate in the distribution
of such Exchange Notes and neither such Holders nor any such other person is
engaging in or intends to engage in a distribution of such Exchange Notes. Since
the Commission has not considered the Exchange Offer in the context of a
no-action letter, there can be no assurance that the staff of the Commission
would make a similar determination with respect to the Exchange Offer. Any
Holder who is an affiliate of the Company or who tenders in the Exchange Offer
for the purpose of participating in a distribution of the Exchange Notes cannot
rely on such interpretation by the staff of the Commission and must comply with
the registration and prospectus delivery requirements of the Securities Act in
connection with any resale transaction. Each Holder, other than a broker-dealer,
must acknowledge that it is not engaged in, and does not intend to engage in, a
distribution of Exchange Notes. Each broker-dealer that receives Exchange Notes
for its own account in exchange for Initial Notes, where such Initial Notes were
acquired by such broker-dealer as a result of market-making activities or other
trading activities, must acknowledge that it will deliver a prospectus in
connection with any resale of such Exchange Notes. See "Plan of Distribution."
The Exchange Notes will bear interest from and including their respective
dates of issuance. Holders whose Initial Notes are accepted for exchange will
receive accrued interest thereon to, but not including, the date of issuance of
the Exchange Notes, such interest to be payable with the first interest payment
on the Exchange Notes, but will not receive any payment in respect of interest
on the Initial Notes accrued after the issuance of the Exchange Notes.
Tendering Holders of the Initial Notes shall not be required to pay
brokerage commissions or fees or, subject to the instructions in the Letter of
Transmittal, transfer taxes with respect to the exchange of the Initial Notes
pursuant to the Exchange Offer.
Expiration Date; Extensions; Termination; Amendments
The Exchange Offer shall expire on the Expiration Date. The term "
Expiration Date" means 5:00 p.m., New York City time, on _______________, 1997,
unless the Company extends the period during which the Exchange Offer is open to
such other date as the Company, in its sole discretion, may determine, in which
event the term "Expiration Date" shall mean the latest time and date on which
the Exchange Offer, as so extended by the Company, shall expire. The Company
reserves the right to extend the Exchange Offer at any time and from time to
time by giving oral or written notice to Marine Midland Bank (the "Exchange
Agent") and by timely public announcement communicated, unless otherwise
required by applicable law or regulation, by making a release to the Dow Jones
News Service. During any extension of the Exchange Offer, all Initial Notes
previously tendered and not withdrawn pursuant to the Exchange Offer will remain
subject to the Exchange Offer.
The term "Exchange Date" means the first business day following the
Expiration Date. The Company expressly reserves the right to (i) terminate the
Exchange Offer and not accept for exchange any Initial Notes if any of the
events set forth below under "Conditions to the Exchange Offer" shall have
occurred and shall not have been waived by the Company and (ii) amend the terms
of the Exchange Offer in any manner which, in its good faith judgment, is
advantageous to the Holders of the Initial Notes, whether before or after any
tender of the Initial Notes.
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Unless the Company terminates the Exchange Offer prior to 5:00 p.m., New York
City time, on the Expiration Date, the Company will exchange the Exchange Notes
for the Initial Notes on the Exchange Date.
Tender Procedure
The tender to the Company of Initial Notes by a Holder thereof pursuant to
one of the procedures set forth below and acceptance by the Company will
constitute an agreement between such Holder and the Company in accordance with
the terms and subject to the conditions set forth herein and in the Letter of
Transmittal. This Prospectus, together with the Letter of Transmittal, will
first be mailed on or about __________________, 1997, to all Holders of Initial
Notes known to the Company and the Exchange Agent.
General. A Holder of an Initial Note may tender the same by (i) properly
completing and signing the Letter of Transmittal or a facsimile thereof (all
references in this Prospectus to the Letter of Transmittal shall be deemed to
include a facsimile thereof) and delivering the same, together with the
certificate or certificates representing the Initial Notes being tendered and
any required signature guarantees and any other documents required by the Letter
of Transmittal, to the Exchange Agent at its address set forth on the Letter of
Transmittal on or prior to the Expiration Date (or complying with the procedure
for book entry transfer described below) or (ii) complying with the guaranteed
delivery procedures described below.
If tendered Initial Notes are registered in the name of the signer of the
Letter of Transmittal and the Exchange Notes to be issued in exchange therefor
are to be issued (and any untendered Initial Notes are to be reissued) in the
name of the registered Holder (which term, for the purposes described herein,
shall include any participant in The Depository Trust Company (also referred to
as a "book-entry transfer facility") whose name appears on a security listing as
the owner of Initial Notes), the signature of such signer need not be
guaranteed. In any other case, the tendered Initial Notes must be endorsed or
accompanied by written instruments of transfer in form satisfactory to the
Company and duly executed by the registered Holder and the signature on the
endorsement or instrument of transfer must be guaranteed by a firm that is a
member of a registered national securities exchange or of the National
Association of Securities Dealers, Inc., or a commercial bank or trust company
having an office or correspondent in the United States, or otherwise eligible
within the meaning of "Eligible Institution" as set forth in Rule 17Ad-15 under
the Securities Exchange Act of 1934, as amended (an "Eligible Institution"). If
the Exchange Notes and/or Initial Notes not exchanged are to be delivered to an
address other than that of the registered Holder appearing on the register for
the Initial Notes, the signature on the Letter of Transmittal must be guaranteed
by an Eligible Institution.
Any beneficial owner whose Initial Notes are registered in the name of a
broker, dealer, commercial bank, trust company or other nominee and who wishes
to tender Initial Notes should contact such holder promptly and instruct such
holder to tender Initial Notes on such beneficial owner's behalf. If such
beneficial owner wishes to tender such Initial Notes himself, such beneficial
owner must, prior to completing and executing the Letter of Transmittal and
delivering such Initial Notes, either make appropriate arrangements to register
ownership of the Initial Notes in such beneficial owner's name or follow the
procedures described in the immediately preceding paragraph. The transfer of
record ownership may take considerable time.
Book-Entry Transfer. The Exchange Agent will make a request promptly after
the date of this Prospectus to establish accounts with respect to the Initial
Notes at the book-entry transfer facility for purposes of facilitating the
Exchange Offer, and subject to the establishment thereof, any financial
institution that is a participant in the book-entry transfer facility's system
may make book-entry delivery of Initial Notes by causing such book-entry
transfer facility to transfer such Initial Notes into the Exchange Agent's
account with respect to the Initial Notes in accordance with the book-entry
transfer facility's procedures for such transfer. Although delivery of Initial
Notes may be effected through book-entry transfer into the Exchange Agent's
accounts at the book-entry transfer facility, an appropriate Letter of
Transmittal with any required signature guarantee and all other required
documents must in each case be transmitted to and received or confirmed by the
Exchange Agent at its address set forth on the Letter of Transmittal on or prior
to the Expiration Date, or, if the guaranteed delivery procedures described
below are complied with, within the time period provided under such procedures.
However, the exchange for the Initial Notes so tendered will only be made after
timely confirmation (a "Book-Entry Confirmation") of such book-entry transfer
25
<PAGE>
of Initial Notes into the Exchange Agent's account, and timely receipt by the
Exchange Agent of an Agent's Message (as defined below) and any other documents
required by the Letter of Transmittal. The term "Agent's Message" means a
message, transmitted by the book-entry transfer facility and received by the
Exchange Agent and forming part of a Book-Entry Confirmation, which states that
the book-entry transfer facility has received an express acknowledgment from a
participant tendering Initial Notes which are the subject of such Book-Entry
Confirmation that such participant has received and agrees to be bound by the
terms of the Letter of Transmittal and that the Company may enforce such
agreement against such participant.
THE METHOD OF DELIVERY OF INITIAL NOTES AND ALL OTHER DOCUMENTS IS AT THE
ELECTION AND RISK OF THE HOLDER. IF SENT BY MAIL, IT IS RECOMMENDED THAT
REGISTERED MAIL, RETURN RECEIPT REQUESTED, BE USED, PROPER INSURANCE OBTAINED,
AND THE MAILING BE MADE SUFFICIENTLY IN ADVANCE OF THE EXPIRATION DATE TO PERMIT
DELIVERY TO THE EXCHANGE AGENT ON OR BEFORE THE EXPIRATION DATE. NO LETTER OF
TRANSMITTAL OR INITIAL NOTES SHOULD BE SENT TO THE COMPANY.
Guaranteed Delivery Procedures. If a Holder desires to accept the Exchange
Offer and time will not permit a Letter of Transmittal or Initial Notes to reach
the Exchange Agent before the Expiration Date or the procedure for book-entry
transfer cannot be completed on a timely basis, a tender may be effected if the
Exchange Agent has received at its office listed on the Letter of Transmittal on
or prior to the Expiration Date a letter, telegram or facsimile transmission
(receipt confirmed by telephone and an original delivered by guaranteed
overnight courier) from an Eligible Institution setting forth the name and
address of the tendering Holder, the names in which the Initial Notes are
registered and, if possible, the certificate numbers of the Initial Notes to be
tendered and stating that the tender is being made thereby and guaranteeing that
within three New York Stock Exchange trading days after the date of execution of
such letter, telegram or facsimile transmission by the Eligible Institution, the
Initial Notes, in proper form for transfer (or a confirmation of book-entry
transfer of such Initial Notes into the Exchange Agent's account at the
book-entry transfer facility), will be delivered by such Eligible Institution
together with a properly completed and duly executed Letter of Transmittal (and
any other required documents). Unless Initial Notes being tendered by the
above-described method are deposited with the Exchange Agent within the time
period set forth above (accompanied or preceded by a properly completed Letter
of Transmittal and any other required documents), the Company may, at its
option, reject the tender. Copies of a Notice of Guaranteed Delivery which may
be used by Eligible Institutions for the purposes described in this paragraph
are available from the Exchange Agent.
A tender will be deemed to have been received as of the date when (i) the
tendering Holder's properly completed and duly signed Letter of Transmittal
accompanied by the Initial Notes (or a confirmation of book-entry transfer of
such Initial Notes into the Exchange Agent's account at the book-entry transfer
facility) is received by the Exchange Agent, or (ii) a Notice of Guaranteed
Delivery or letter, telegram or facsimile transmission to similar effect (as
provided above) from an Eligible Institution is received by the Exchange Agent.
Issuances of Exchange Notes in exchange for Initial Notes tendered pursuant to a
Notice of Guaranteed Delivery of letter, telegram or facsimile transmission to
similar effect (as provided above) by an Eligible Institution will be made only
against deposit of the Letter of Transmittal (and any other required documents)
and the tendered Initial Notes.
All questions as to the validity, form, eligibility (including time of
receipt) and acceptance for exchange of any tender of Initial Notes will be
determined by the Company, whose determination will be final and binding. The
Company reserves the absolute right to reject any Initial Notes not properly
tendered or the acceptances for exchange of which may, in the opinion of the
Company's counsel, be unlawful. The Company also reserves the absolute right to
waive any of the conditions of the Exchange Offer or any defect or irregularity
in the tender of any Initial Notes. Unless waived, any defects or irregularities
in connection with tenders of Initial Notes for exchange must be cured within
such reasonable period of time as the Company shall determine. None of the
Company, the Exchange Agent or any other person will be under any duty to give
notification of any defects or irregularities in tenders or incurs any liability
for failure to give any such notification. Tenders will not be deemed to be made
until such irregularities have been cured or waived.
Each broker-dealer that receives Exchange Notes for its own account in
exchange for Initial Notes, where such Initial Notes were acquired by such
broker-dealer as a result of market-making activities or other trading
activities,
26
<PAGE>
must acknowledge that it will deliver a prospectus in connection with any resale
of such Exchange Notes. See "Plan of Distribution."
Terms and Conditions of the Letter of Transmittal
The Letter of Transmittal contains, among other things, the following terms
and conditions, which are part of the Exchange Offer.
The party tendering Initial Notes for exchange (the "Transferor")
exchanges, assigns and transfers the Initial Notes to the Company and
irrevocably constitutes and appoints the Exchange Agent as the Transferor's
agent and attorney-in-fact to cause the Initial Notes to be assigned,
transferred and exchanged. The Transferor represents and warrants that it has
full power and authority to tender, exchange, assign and transfer the Initial
Notes and to acquire Exchange Notes issuable upon the exchange of such tendered
Initial Notes, and that, when the same are accepted for exchange, the Company
will acquire good and unencumbered title to the tendered Initial Notes, free and
clear of all liens, restrictions, charges and encumbrances and not subject to
any adverse claim. The Transferor also warrants that it will, upon request,
execute and deliver any additional documents deemed by the Company to be
necessary or desirable to complete the exchange, assignment and transfer of
tendered Initial Notes or transfer ownership of such Initial Notes on the
account books maintained by a book-entry transfer facility. The Transferor
further agrees that acceptance of any tendered Initial Notes by the Company and
the issuance of Exchange Notes in exchange therefore shall constitute
performance in full by the Company of certain of its obligations under the
Registration Rights Agreement. All authority conferred by the Transferor will
survive the death or incapacity of the Transferor and every obligation of the
Transferor shall be binding upon the heirs, legal representatives, successors,
assigns, executors and administrators of such Transferor.
The Transferor must certify that it is not an "affiliate" of the Company
within the meaning of Rule 405 under the Securities Act and that it is acquiring
the Exchange Notes offered hereby in the ordinary course of such Transferor's
business and that such Transferor has no arrangement or understanding with any
person to participate in the distribution of such Exchange Notes. Each Holder
must acknowledge that it is not engaged in, and does not intend to engage in, a
distribution of Exchange Notes. Each Transferor which is a broker-dealer holding
Initial Notes acquired for its own account must acknowledge that it will deliver
a prospectus meeting the requirements of the Securities Act in connection with
any resale of such Exchange Notes. By so acknowledging and by delivering a
prospectus, a broker-dealer will not be deemed to admit that it is an
"underwriter" within the meaning of the Securities Act. This Prospectus, as it
may be amended or supplemented from time to time, may be used by a broker-dealer
in connection with resales of Exchange Notes received in exchange for Initial
Notes where such Initial Notes were acquired by such broker-dealer as a result
of market-making activities or other trading activities. The Company will make
this Prospectus available to any broker-dealer for use in connection with any
such resale for a period of one year from the date in which the Registration
Statement of which this Prospectus is a part is declared effective.
Withdrawal Rights
Tenders of Initial Notes pursuant to the Exchange Offer may be withdrawn at
any time prior to the Expiration Date; otherwise, such tenders are irrevocable.
For a withdrawal to be effective, a written, telegraphic, telex or
facsimile transmission notice of withdrawal must be timely received by the
Exchange Agent at its address set forth on the Letter of Transmittal, and with
respect to a facsimile transmission, must be confirmed by telephone and an
original delivered by guaranteed overnight delivery. Any such notice of
withdrawal must specify the person named in the Letter of Transmittal as having
tendered Initial Notes to be withdrawn, the certificate numbers of Initial Notes
to be withdrawn, the principal amount of Initial Notes to be withdrawn, a
statement that such Holder is withdrawing his, her or its election to have such
Initial Notes exchanged, and the name of the registered Holder of such Initial
Notes, and must be signed by the Holder in the same manner as the original
signature on the Letter of Transmittal (including any required signature
guarantees) or be accompanied by evidence satisfactory to the Company that the
person withdrawing the tender has succeeded to the beneficial ownership of the
Initial Notes being withdrawn. The Exchange Agent will return the
27
<PAGE>
properly withdrawn Initial Notes promptly following receipt of notice of
withdrawal. If Initial Notes have been tendered pursuant to the procedure for
book-entry transfer, any notice of withdrawal must specify the name and number
of the account at the book-entry transfer facility procedure. All questions as
to the validity of notices of withdrawals, including time of receipt, will be
determined by the Company, and such determination will be final and binding on
all parties.
Any Initial Notes so withdrawn will be deemed not to have been tendered for
exchange for purposes of the Exchange Offer. Any Initial Notes which have been
tendered for exchange but are not exchanged for any reason will be returned to
the Holder thereof without cost to such Holder (or, in the case of Initial Notes
tendered by book-entry transfer into the Exchange Agent's account at the
book-entry transfer facility pursuant to the book-entry transfer procedures
described above, such Initial Notes will be credited to an account with such
book-entry transfer facility specified by the Holder) as soon as practicable
after withdrawal, rejection of tender or termination of the Exchange Offer.
Properly withdrawn Initial Notes may be retendered by following one of the
procedures described under "--Tender Procedure" above at any time on or prior to
the Expiration Date.
Acceptance of Notes for Exchange; Delivery of Exchange Notes
Upon the satisfaction or waiver of all the terms and conditions of the
Exchange Offer, the acceptance for exchange of Initial Notes validly tendered
and not withdrawn and issuance of the Exchange Notes will be made on the
Exchange Date. For the purposes of the Exchange Offer, the Company shall be
deemed to have accepted for exchange validly tendered Initial Notes when, as and
if the Company has given oral or written notice thereof to the Exchange Agent.
The Exchange Agent will act as agent for the tendering Holders of Initial
Notes for the purposes of receiving Exchange Notes from the Company and causing
the Initial Notes to be assigned, transferred and exchanged. Upon the terms and
subject to the conditions of the Exchange Offer, delivery of Exchange Notes to
be issued in exchange for accepted Initial Notes will be made by the Exchange
Agent promptly after acceptance of the tendered Initial Notes. Initial Notes not
accepted for exchange by the Company will be returned without expense to the
tendering Holders promptly following the Expiration Date or, if the Company
terminates the Exchange Offer prior to the Expiration Date, promptly after the
Exchange Offer is so terminated.
Conditions to the Exchange Offer
Notwithstanding any other provision of the Exchange Offer, or any extension
of the Exchange Offer, the Company will not be required to issue Exchange Notes
in respect of any properly tendered Initial Notes not previously accepted and
may terminate the Exchange Offer (by oral or written notice to the Exchange
Agent and by timely public announcement communicated, unless otherwise required
by applicable law or regulation, by making a release to the Dow Jones News
Service) or, at its option, modify or otherwise amend the Exchange Offer, if in
the good faith determination of the Company, the Exchange Offer violates any
law, rule or regulation or any applicable interpretation of the staff of the
Commission.
In addition, the Company will not accept for exchange any Initial Notes
tendered and no Exchange Notes will be issued in exchange for any such Initial
Notes, if at such time any stop order shall be threatened or in effect with
respect to the Registration Statement of which this Prospectus constitutes a
part or qualification of the Indenture under the Trust Indenture Act of 1939
(the "Trust Indenture Act"). The Company will use its best efforts to prevent
the issuance of any such order and, if any such order is issued, to obtain the
withdrawal of any such order at the earliest possible moment.
The Company expressly reserves the right to terminate the Exchange Offer
and not accept for exchange any Initial Notes upon the occurrence of any of the
foregoing conditions (which represent all of the material conditions to the
acceptance by the Company of properly tendered Initial Notes). In addition, the
Company may amend the Exchange Offer at any time prior to the Expiration Date if
any of the conditions set forth above occurs. Moreover, regardless of whether
any of such conditions has occurred, the Company may amend the Exchange Offer in
any manner which, in its good faith judgment, is advantageous to Holders of the
Initial Notes.
28
<PAGE>
The foregoing conditions are for the sole benefit of the Company and may be
waived by the Company, in whole or in part, in the reasonable judgment of the
Company. Any determination made by the Company concerning an event, development
or circumstance described or referred to above will be final and binding on all
parties.
The Company is not aware of the existence of any of the foregoing events.
Exchange Agent
Marine Midland Bank has been appointed as the Exchange Agent for the
Exchange Offer. Questions and requests for assistance, requests for additional
copies of the Prospectus or of the Letters of Transmittal must be addressed to
the Exchange Agent at its address set forth on the Letter of Transmittal. Marine
Midland Bank also acts as Trustee, Registrar and Paying Agent under the
Indenture.
DELIVERY TO AN ADDRESS OTHER THAN AS SET FORTH ON THE LETTER OF
TRANSMITTAL, OR TRANSMISSIONS OF INSTRUCTIONS VIA A FACSIMILE OR TELEX NUMBER
OTHER THAN THE ONES SET FORTH ON THE LETTER OF TRANSMITTAL, WILL NOT CONSTITUTE
A VALID DELIVERY.
Solicitation of Tenders; Expenses
The Company has not retained any dealer-manager or similar agent in
connection with the Exchange Offer and will not make any payments to brokers,
dealers or others for soliciting acceptances of the Exchange Offer. The Company
will, however, pay the Exchange Agent its reasonable and customary fees for its
services and will reimburse it for reasonable out-of-pocket expenses in
connection therewith. The Company will also pay brokerage houses and other
custodians, nominees and fiduciaries the reasonable out-of-pocket expenses
incurred by them in forwarding copies of this and related documents to the
beneficial owners of the Initial Notes and in handling or forwarding tenders for
their customers.
No person has been authorized to give any information or to make any
representation in connection with the Exchange Offer other than those contained
in this Prospectus. If given or made, such information or representations should
not be relied upon as having been authorized by the Company. Neither the
delivery of this Prospectus nor any exchange made hereunder shall, under any
circumstances, create any implication that there has been no change in the
affairs of the Company since the respective dates as of which information is
given herein. The Exchange Offer is not being made to (nor will tenders be
accepted from or on behalf of) Holders of Initial Notes in any jurisdiction in
which the making of the Exchange Offer or the acceptance thereof would not be in
compliance with the laws of such jurisdiction. However, the Company may, at its
discretion, take such action as it may deem necessary to make the Exchange Offer
in any such jurisdiction and extend the Exchange Offer to Holders of Initial
Notes in such jurisdiction. In any jurisdiction in which the securities laws or
blue sky laws of which require the Exchange Offer to be made by a licensed
broker or dealer, the Exchange Offer is being made on behalf of the Company by
one or more registered brokers or dealers which are licensed under the laws of
such jurisdiction.
Transfer Taxes
Holders who tender their Initial Notes for exchange will not be obligated
to pay any transfer taxes in connection therewith, except that Holders who
instruct the Company to register Exchange Notes in the name of, or request that
Initial Notes not tendered or tendered but not accepted in the Exchange Offer be
returned to, a person other than the registered tendering Holder will be
responsible for the payment of any applicable transfer tax thereon.
Consequences of Failure to Exchange
Holders of Initial Notes who do not exchange their Initial Notes for
Exchange Notes pursuant to the Exchange Offer will continue to be subject to the
restrictions on transfer of such Initial Notes as set forth in the legend
thereon as a consequence of the offer or sale of the Initial Notes pursuant to
exemptions from, or in transactions not subject
29
<PAGE>
to, the registration requirements of the Securities Act and applicable state
securities laws. In general, the Initial Notes may not be offered or sold,
unless registered under the Securities Act and applicable state securities laws,
except pursuant to an exemption from, or in a transaction not subject to, the
Securities Act and applicable state securities laws. The Company does not intend
to register the Initial Notes under the Securities Act and, after consummation
of the Exchange Offer, will not be obligated to do so. Based on an
interpretation by the staff of the Commission set forth in a series of no-action
letters issued to third parties, the Company believes that Exchange Notes issued
pursuant to the Exchange Offer in exchange for Initial Notes may be offered for
resale, resold or otherwise transferred by Holders thereof (other than any such
Holder which is an "affiliate" of the Company within the meaning of Rule 405
under the Securities Act) without compliance with the registration and
prospectus delivery provisions of the Securities Act, provided that such Initial
Notes are acquired in the ordinary course of such Holders' business and such
Holders have no arrangement or understanding with any person to participate in
the distribution of such Exchange Notes. Each broker-dealer that receives
Exchange Notes for its own account in exchange for Initial Notes, where such
Initial Notes were acquired by such broker-dealer as a result of market-making
activities or other trading activities, must acknowledge that it will deliver a
prospectus in connection with any resale of such Exchange Notes. See "Plan of
Distribution."
Other
Participation in the Exchange Offer is voluntary and Holders should
carefully consider whether to participate. Holders of the Initial Notes are
urged to consult their financial and tax advisors in making their own decisions
of what action to take.
As a result of the making of, and upon acceptance for exchange of all
validly tendered Initial Notes pursuant to the terms of, this Exchange Offer,
the Company will have fulfilled a covenant contained in the Registration Rights
Agreement. Holders of the Initial Notes who do not tender their certificates in
the Exchange Offer will continue to hold such certificates and will be entitled
to all the rights, and limitations applicable thereto, under the Indenture,
except for any such rights under the Registration Rights Agreement, which by
their terms terminate or cease to have further effect as a result of the making
of this Exchange Offer. See "Description of Notes." All untendered Initial Notes
will continue to be subject to the restrictions on transfer set forth in the
Indenture. Such untendered Initial Notes will remain outstanding and continue to
accrue interest, but will not retain any rights under the Registration Rights
Agreement and shall not accrue any applicable liquidated damages under the
Indenture. To the extent that Initial Notes are tendered and accepted in the
Exchange Offer, the trading market for untendered, and tendered but unaccepted,
Initial Notes could be adversely affected.
By acceptance of the Exchange Offer, each broker-dealer that receives
Exchange Notes pursuant to the Exchange Offer hereby agrees to notify the
Company prior to using this Prospectus in connection with the sale or transfer
of Exchange Notes, and acknowledges and agrees that, upon receipt of notice from
the Company of the happening of any event which requires the making of any
changes in the Prospectus in order to make the statements therein not misleading
(which notice the Company agrees to deliver promptly to such broker-dealer),
such broker-dealer will suspend use of the Prospectus until the Company has
amended or supplemented the Prospectus to correct such misstatement or omission
and has furnished copies of the amended or supplemented prospectus to such
broker-dealer.
The Company may in the future seek to acquire untendered Initial Notes
in open market or privately negotiated transactions, through subsequent exchange
offers or otherwise. The Company has no current plans to acquire any Initial
Notes which are not tendered in the Exchange Offer or to file a registration
statement to permit resales of any Initial Notes which are not tendered pursuant
to the Exchange Offer and, after consummation of the Exchange Offer, will not be
obligated to do so. The Company's ability to purchase Initial Notes is subject
to the restrictions set forth in the Indenture and the Bank Credit Facility. See
"Description of the Bank Credit Facility" and "Description of Notes."
30
<PAGE>
CAPITALIZATION
The following table sets forth the unaudited pro forma capitalization of
the Company, as of November 30, 1996, as adjusted to give effect to the
Transactions. This table should be read in conjunction with the financial
statements of ArtCarved and the financial statements of Balfour and the
respective related notes thereto included elsewhere herein. The following table
is based on the estimated Adjusted Working Capital and Balfour Gold balance on
the date of closing. However, the final calculation of the Adjusted Working
Capital and Balfour Gold balance at closing and the resulting purchase prices
for each of ArtCarved, Balfour and Balfour Gold may differ from the estimates
assumed below. See "Use of Proceeds," "Unaudited Pro Forma Combined Financial
Statements and Other Data," "Principal Stockholders," "The Acquisitions,"
"Description of the Bank Credit Facility" and "Description of Notes."
November 30, 1996
Pro Forma
As Adjusted
(Dollars in thousands)
Total debt (including current maturities):
Revolving Credit and Gold Facilities ........ $ 11,201
Term Loan Facility........................... 25,000
11% Senior Subordinated Notes due 2007 ...... 90,000
---------
Total debt............................... $ 126,201
-------
Stockholders' equity:
Preferred stock(1)........................... 47,500
Common Stock ................................ 2,500
---------
Total stockholders' equity............... 50,000
---------
Total capitalization.............................. $ 176,201
=======
- ----------
(1) Includes $10.0 million of Series A Preferred Stock and $37.5 million of
Series B Preferred Stock. See "Description of Capital Stock" and
"Description of Notes--Certain Covenants--Restricted Payments."
31
<PAGE>
UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS AND OTHER DATA
This Prospectus contains forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933, as amended. Discussions containing
such forward-looking statements may be found in the material set forth below and
under "Prospectus Summary," "Risk Factors," "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and "Business" and as
well as in the Prospectus generally. Actual events or results may differ
materially from those discussed in the forward-looking statements as a result of
various factors, including, without limitation, the factors set forth below and
the other matters set forth in the Prospectus generally.
The unaudited pro forma combined balance sheet was prepared as if the
Transactions had occurred on November 30, 1996 and the unaudited pro forma
combined statements of income and other data was prepared as if the Transactions
occurred on August 27, 1995.
The unaudited pro forma combined financial statements and other data have
been prepared under the purchase method of accounting. Under this method of
accounting, based on a preliminary allocation of the purchase price of each of
ArtCarved and Balfour, their respective identifiable assets and liabilities have
been adjusted to their estimated fair values. The preliminary purchase price
allocations are based upon estimates and assumptions which are subject to
subsequent determination and more detailed analyses, receiving final detailed
appraisals and evaluations of specific assets and liabilities and the
calculation of the Adjusted Working Capital yet to be finalized. The final
allocation of the purchase price of the Acquisitions may differ from the amounts
contained in these unaudited pro forma combined financial statements.
The unaudited pro forma combined financial statements and other data
reflect the fact that CBI did not purchase certain Balfour facilities but
instead will relocate the Balfour jewelry manufacturing operations and related
sales, general and administrative functions to existing ArtCarved facilities in
Austin, Texas. Consequently, the pro forma adjustments reflect the realization
of $4.3 million of the Annual Cost Savings relating to the elimination of
duplicative personnel, occupancy and fixed overhead costs resulting from the
closure of these Balfour facilities. However, the pro forma adjustments do not
reflect $3.1 million of the Annual Cost Savings expected to result from lower
prevailing wage rates in Austin, Texas and the elimination of other duplicative
costs. The pro forma adjustments related to Annual Cost Savings described above
do not reflect non-recurring severance and relocation costs of approximately
$5.5 million and incremental capital expenditures of approximately $1.9 million
to be incurred in connection with the Combination.
The Company has begun the consolidation of the Company's operations to
Austin, Texas, and Management expects that the consolidation will be completed
during the fiscal year ending August 30, 1997. Management expects that a portion
of the Annual Cost Savings will be realized during the fiscal year ending August
30, 1997 and that all of such savings will be realized during the fiscal year
ending August 29, 1998. There can be no assurance that the Company will complete
its consolidation by the end of its fiscal year ending August 30, 1997 or that
the Annual Cost Savings will be realized by the end of its fiscal year ending
August 29, 1998, or at all.
The unaudited pro forma combined financial statements and other data have
been prepared based on the foregoing and on certain assumptions described in the
notes thereto. Such statements should be read in conjunction with the historical
financial statements of ArtCarved and the historical financial statements of
Balfour, each including the notes thereto, and "Management's Discussion and
Analysis of Results of Operations and Financial Condition" that are included
elsewhere herein. The following unaudited pro forma combined financial
statements and other data do not purport to be indicative of the financial
position or results of operations that would have been reported had the
Transactions been effected on the dates indicated, or that may be reported in
the future.
UNAUDITED PRO FORMA COMBINED STATEMENT OF INCOME
AND OTHER DATA
FOR THE TWELVE MONTHS ENDED AUGUST 31, 1996
(Dollars in thousands, except ratios)
32
<PAGE>
<TABLE>
<CAPTION>
Historical Statements(1)
------------------------------
Balfour
ArtCarved Twelve Months
Year Ended Ended Pro Forma Pro Forma
Aug. 31, 1996 Aug. 25, 1996 Adjustments Combined
------------- ------------- ----------- --------
<S> <C> <C> <C> <C>
Net sales.......................................... $ 70,671 $ 71,391 $ -- $142,062
Cost of sales...................................... 32,655 34,547 (2,243)(2)(3) 64,957
(2)(4)
---------- ---------- ----------- ---------
Gross profit....................................... 38,016 36,844 2,245 77,105
Selling, general and administrative expenses....... 27,940 34,002 (2,048)(2)(3) 60,340
(916)(4)
95(5)
1,500(6)
(233)(7)
---------- ---------- ----------- ---------
Operating income .................................. 10,076 2,842 3,847 16,765
Other (income) expense............................. -- (418) 418(8) --
Interest expense, net.............................. 11,907 2,597 (765)(9) 13,739
---------- ---------- ----------- ---------
Income (loss) before income tax expense............ (1,831) 663 4,194 3,026
Income tax expense................................. -- 145 1,096(10) 1,241
---------- ---------- ---------- ----------
Net income (loss).................................. $ (1,831) $ 518 $ 3,098 $ 1,785
========== ========== ========== ==========
Other Data:
EBITDA(3)(11)...................................... $ 15,091 $ 4,812 $ 22,832
Depreciation and amortization...................... 5,015 1,970 6,067
Capital expenditures(12)........................... 844 636 1,480
Ratio of earnings to fixed charges(13)............. -- 1.2x 1.2x
Ratio of pro forma combined EBITDA to cash interest
expense(14)................................... 1.7x
</TABLE>
See Notes to the "Unaudited Pro Forma Combined Statement of Income and Other
Data."
33
<PAGE>
UNAUDITED PRO FORMA COMBINED STATEMENT OF INCOME
AND OTHER DATA
FOR THE THREE MONTHS ENDED NOVEMBER 30, 1996
(Dollars in thousands, except ratios)
<TABLE>
<CAPTION>
Historical Statements(1)
ArtCarved Balfour
Three Months Three Months
Ended Ended Pro Forma Pro Forma
Nov. 30, 1996 Nov. 24, 1996 Adjustments Combined
------------- ------------- ----------- --------
<S> <C> <C> <C> <C>
Net sales.......................................... $ 21,963 $ 19,535 $ -- $ 41,498
Cost of sales...................................... 9,626 8,762 (561)(2)(3) 17,753
(74)(4)
---------- ---------- ---------- ----------
Gross profit....................................... 12,337 10,773 635 23,745
Selling, general and administrative expenses....... 8,110 10,536 (512)(2)(3) 18,088
(344)(4)
375(6)
(77)(7)
---------- ---------- ---------- ----------
Operating income................................... 4,227 237 1,193 5,657
Interest expense, net.............................. 2,503 619 313(9) 3,435
---------- ---------- ---------- ----------
Income (loss) before income tax expense............ 1,724 (382) 880 2,222
Income tax expense................................. -- 10 901(10) 911
---------- ---------- ---------- ----------
Net income (loss).................................. $ 1,724 $ (392) $ (21) $ 1,311
========== =========== =========== ==========
Other Data:
EBITDA(3)(11)...................................... $ 5,691 $ 708 $ 7,174
Depreciation and amortization...................... 1,464 471 1,517
Capital expenditures(12)........................... 182 22 204
Ratio of earnings to fixed charges(13)(15)......... 1.6x -- 1.6x
Ratio of pro forma combined EBITDA to cash interest
expense(14)(15)............................... 2.2x
</TABLE>
34
<PAGE>
NOTES TO THE UNAUDITED PRO FORMA COMBINED STATEMENTS OF INCOME
AND OTHER DATA
FOR THE TWELVE MONTHS ENDED AUGUST 31, 1996
AND THE THREE MONTHS ENDED NOVEMBER 30, 1996
(Dollars in thousands, except ratios)
(1) ArtCarved's fiscal year ends on the last Saturday of August and Balfour's
fiscal year ends on the last Sunday of February. The historical statement
of operations of Balfour was conformed to ArtCarved's fiscal year by
subtracting the six months ended August 27, 1995 from, and adding the six
months ended August 25, 1996 to, the fiscal year ended February 25, 1996
statement of operations amounts.
(2) Balfour jewelry manufacturing operations and related sales, general and
administrative functions will be relocated to existing ArtCarved facilities
in Austin, Texas. Consequently, the pro forma adjustments reflect $4.3
million of the Annual Cost Savings relating to the elimination of
duplicative personnel, occupancy and fixed overhead costs resulting from
the closure of certain Balfour facilities, which were not acquired in the
Balfour Acquisition.
(3) Pro forma combined EBITDA does not give effect to $3.1 million of the
Annual Cost Savings, $2.4 million of which are related to lower prevailing
wage rates in Austin, Texas and $0.7 million of which are related to other
duplicative costs resulting from the closure of Balfour facilities and the
consolidation of Balfour's operations into existing ArtCarved operations in
Austin, Texas. The effect of the additional $3.1 million of the Annual Cost
Savings on the pro forma combined EBITDA results in an adjusted pro forma
combined EBITDA of $25.9 million and $8.0 million for the twelve months
ended August 31, 1996, and the three months ended November 30, 1996,
respectively. Thus, the ratio of adjusted pro forma combined EBITDA to cash
interest expense is 2.0x(14) and 2.4x(14)(15) for the twelve months ended
August 31, 1996, and the three months ended November 30, 1996,
respectively.
(4) Adjustments to reflect the estimated pro forma depreciation for tangible
assets and amortization of intangible assets and goodwill based on their
estimated fair market values and their respective useful lives.
<TABLE>
<CAPTION>
Twelve Months Ended Three Months Ended
August 31, 1996 November 30, 1996
------------------------------- --------------------------------
Cost of Sales SG&A Cost of Sales SG&A
-------------- ------------ ---------------- -----------
<S> <C> <C> <C> <C>
Depreciation..................... $ 670 $ (907) $ 206 $ (266)
Amortization of intangible assets
and goodwill..................... (672) (9) (280) (78)
-------- --------- --------- ---------
Total adjustments........... $ (2) $ (916) (74) $ (344)
======== ========= ========= =========
</TABLE>
For purposes of calculating pro forma amounts, (i) the fair value of the
property, plant and equipment acquired is estimated to be $13.3 million,
which
35
<PAGE>
will be depreciated over 20 years for buildings and 2 to 10 years for
equipment, (ii) the fair value of the tools and dies acquired is estimated
to be $19.9 million, which will be depreciated over 14 to 19 years, and
(iii) trademarks and goodwill are estimated to be $30.7 million and $74.7
million, respectively, of which will be amortized over 40 years.
(5) Reflects adjustment for the interest charge related to the accumulated
benefit obligation for the Balfour postretirement medical benefits plan,
net of the accretion of unrecognized transition obligation previously
recorded. See Note (8) to the audited financial statements of Balfour.
(6) Represents a $1.5 million annual management fee payable to Castle Harlan,
Inc.
(7) Reflects adjustment to exclude the Balfour gold consignment fees, which
were replaced by the Gold Facility.
(8) Reflects adjustment to exclude the non-recurring gain from the sale of a
Balfour facility in November 1995.
(9) Adjustments to interest expense, net, includes the following:
<TABLE>
<CAPTION>
Principal Twelve Months Ended Three Months Ended
Rate Amount August 31, 1996 November 30, 1996
------------- ------------- -------------------- ---------------------
<S> <C> <C> <C> <C>
Elimination of historical interest
expense, net................................... $ (14,504) $ (3,122)
New interest expense related to:
Revolving Credit Facility.................. 8.56% $5,200 445 111
Gold Facility.............................. 5.25% 6,001 315 79
Term Loan Facility......................... 9.06% 25,000 2,265 566
Notes ..................................... 11.00% 90,000 9,900 2,475
Amortization of capitalized financing
fees..................................... 608 152
Bank fees.................................. 206 52
---------- ----------
Total new interest expense, net................ 13,739 3,435
---------- ----------
Adjustment to interest expense, net............ $ (765) $ 313
=========== ==========
</TABLE>
Deferred financing costs are estimated to be $5.3 million, which will be
amortized over the term of the related debt instrument.
(10) Reflects adjustment to income tax expense to recognize the federal
statutory income tax rate and additional state tax expense at a combined
effective rate of 41% related to the pro forma combined statements of
income.
(11) EBITDA represents operating income (loss) before depreciation,
amortization, and restructuring charges. EBITDA is not intended to, and
does not, represent cash flows as defined by generally accepted accounting
principles and does not necessarily indicate that cash flows are sufficient
to fund all of the Company's cash needs. EBITDA should not be considered in
isolation or as a substitute for or more meaningful than net income (loss),
cash flows from operating activities or other measures of liquidity
determined in accordance with generally accepted accounting principles. The
Company has presented EBITDA data because the Company understands that such
information is commonly used by investors to analyze and compare companies
on the basis of operating performance and to determine a company's ability
to service debt. The EBITDA measure presented herein is not necessarily
comparable to similarly-titled measures reported by other companies.
(12) The pro forma combined capital expenditure level is not indicative of the
expected capital expenditure level for the Company's fiscal year ending
August 30, 1997. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Seasonality, Liquidity and Capital
Resources."
(13) For the purpose of computing this ratio, earnings consist of income (loss)
before taxes on income and fixed charges. Fixed charges consist of interest
expense, capitalized interest, amortization of deferred debt issuance cost
and a portion of rental expenses. For ArtCarved's fiscal year ended August
31, 1996,
36
<PAGE>
ArtCarved's earnings before fixed charges were insufficient to cover fixed
charges by approximately $1.8 million. For Balfour's three months ended
November 24, 1996, Balfour's earnings before fixed charges were
insufficient to cover fixed charges by approximately $0.4 million.
(14) Cash interest expense represents pro forma combined interest expense less
amortization of capitalized financing fees.
(15) Ratios for the three months ended November 30, 1996 are not indicative of
the full year results due to the seasonal nature of the business.
37
<PAGE>
UNAUDITED PRO FORMA COMBINED BALANCE SHEET
NOVEMBER 30, 1996
(Dollars in thousands)
<TABLE>
<CAPTION>
Historical Statements
------------------------------------ -------------- -----------
ArtCarved Balfour Pro Forma Pro Forma
November 30, 1996 November 24, 1996 Adjustments(1) Combined
----------------- ----------------- -------------- -----------
<S> <C> <C> <C> <C>
ASSETS
Cash ........................................................ $ 4,456 $ 59 $ (4,515) $ --
Receivables ................................................. 14,681 20,605 (1,226) 34,060
Inventories ................................................. 5,298 9,472 7,461 22,231
Prepaid expenses and other current assets ................... 784 2,447 (55) 3,176
-------- -------- -------- --------
Total current assets ................................... 25,219 32,583 1,665 59,467
Property, plant and equipment ............................... 10,848 9,324 13,020 33,192
Trademarks .................................................. 21,207 -- 9,533 30,740
Deferred financing costs .................................... -- -- 5,325 5,325
Goodwill .................................................... 12,186 2,590 59,905 74,681
Other assets ................................................ 13,933 553 (11,492) 2,994
-------- -------- -------- --------
Total assets ........................................... $ 83,393 $ 45,050 $ 77,956 $206,399
======== ======== ======== ========
LIABILITIES AND STOCKHOLDERS'
EQUITY
Bank overdraft .............................................. $ -- $ 708 $ (708) $ --
Current portion of long-term debt ........................... 2,116 257 (1,873) 500
Accounts payable ............................................ 2,385 2,202 -- 4,587
Accrued interest payable .................................... 2,345 -- (2,345) --
Accrued expenses ............................................ 4,312 9,307 5,679 19,298
-------- -------- -------- --------
Total current liabilities .............................. 11,158 12,474 753 24,385
Long-term debt, net of current maturities ................... 80,144 19,148 26,409 125,701
Other long-term liabilities ................................. -- 826 5,487 6,313
-------- -------- -------- --------
Total liabilities ...................................... 91,302 32,448 32,649 156,399
Stockholders' equity:
Preferred stock .......................................... -- -- 47,500 47,500
Common stock ............................................. -- 4 2,496 2,500
Additional paid-in capital ............................... -- 75,970 (75,970) --
Accumulated deficit ...................................... -- (63,372) 63,372 --
Advances and equity (deficit) ............................ (7,909) -- 7,909 --
-------- -------- -------- --------
Total stockholders' equity (deficit) ................... (7,909) 12,602 45,307 50,000
-------- -------- -------- --------
Total liabilities and stockholders' $ 83,393 $ 45,050 $ 77,956 $206,399
equity.................................................. ======== ======== ======== ========
</TABLE>
See Notes to the "Unaudited Pro Forma Combined Balance Sheet."
38
<PAGE>
NOTES TO THE UNAUDITED PRO FORMA COMBINED BALANCE SHEET
NOVEMBER 30, 1996
(Dollars in thousands)
(1) Set forth below are the adjustments to reflect the ArtCarved Acquisition,
the Balfour Acquisition, and the Financing.
<TABLE>
<CAPTION>
ArtCarved Balfour
Acquisition Acquisition Financing Pro Forma
Adjustments Adjustments Adjustments Adjustments
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
ASSETS
Cash .................................................... $(114,829)(a) $ (52,287)(a) $ 167,116(h) $ (4,515)
(4,456)(b) (59)(b)
Receivables ............................................. (300)(c) (926)(c) -- (1,226)
Inventories ............................................. 801(c) (246)(b) -- 7,461
1,843(c)
5,063(e)
Prepaid expenses and other current assets ............... 6(b) (61)(b) -- (55)
--------- --------- --------- ---------
Total current assets ............................... (118,778) (46,673) 167,116 1,665
--------- --------- --------- ---------
Property, plant and equipment ........................... 5,827(c) 10,120(c) -- 13,020
(2,927)(b)
Trademarks .............................................. (3,467)(c) 13,000(c) -- 9,533
Deferred financing costs ................................ -- -- 5,325(h) 5,325
Goodwill ................................................ 50,252(c) 5,143(c) 4,510(h)(j) 59,905
Other assets ............................................ (11,147)(b) (215)(b) -- (11,492)
(130)(c)
Total assets ....................................... $ (77,443) $ (21,552) $ 176,951 $ 77,956
========= ========= ========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Bank overdraft .......................................... $ -- $ (708)(b) $ -- $ (708)
Current portion of long-term debt ....................... (2,116)(d) (257)(d) 500(h) (1,873)
Accounts payable ........................................ -- -- -- --
Accrued interest payable ................................ (2,345)(d) -- -- (2,345)
Accrued expenses ........................................ (747)(c) 196(c) 750(j) 5,679
5,480(f)
Total current liabilities .......................... (5,208) 4,711 1,250 753
--------- --------- --------- ---------
Long-term debt, net of current maturities ............... (80,144)(d) (19,148)(d) 125,701(h) 26,409
Other long-term liabilities ............................. -- 5,487(g) -- 5,487
--------- --------- --------- ---------
Total liabilities .................................. (85,352) (8,950) 126,951 32,649
--------- --------- --------- ---------
Stockholders' equity:
Preferred stock ...................................... -- -- 47,500(h) 47,500
Common stock ......................................... -- (4)(i) 2,500(h) 2,496
Additional paid-in capital ........................... -- (75,970)(i) -- (75,970)
Accumulated deficit .................................. -- 63,372(i) -- 63,372
Advances and equity (deficit) ........................ 7,909(i) -- -- 7,909
--------- --------- --------- ---------
Total stockholders' equity (deficit) ............... 7,909 (12,602) 50,000 45,307
--------- --------- --------- ---------
Total liabilities and stockholders' equity ......... $ (77,443) $ (21,552) $ 176,951 $ 77,956
========= ========= ========= =========
</TABLE>
39
<PAGE>
- ----------
(a) To reflect (i) the ArtCarved Acquisition, which consisted of the ArtCarved
Purchase Price of $114.8 million; and (ii) the Balfour Acquisition, which
consisted of the Balfour Purchase Price of $47.4 million and the Balfour
Gold Purchase Price of $4.9 million, in each case, based on the estimated
Adjusted Working Capital and Balfour Gold balance on the date of closing.
However, the final calculation of the Adjusted Working Capital and Balfour
Gold balance at closing and the resulting purchase prices for each of
ArtCarved, Balfour and Balfour Gold may differ from the amounts set forth
herein. See "The Acquisitions." The following represents the preliminary
allocation of the purchase prices for ArtCarved and Balfour to their
respective assets and liabilities based on Management's estimate of fair
values. This preliminary allocation is based upon estimates and assumptions
which are subject to subsequent determinations and more detailed analyses,
receiving final detailed appraisals and evaluations of specific assets and
liabilities and the calculation of the Adjusted Working Capital and Balfour
Gold balances. Certain components of the purchase prices for ArtCarved and
Balfour are in dispute among the parties, and the final allocation of the
purchase prices for the Acquisitions will not be determined until these
amounts are resolved and may differ from the amounts set forth below.
<TABLE>
<CAPTION>
ArtCarved Acquisition Balfour Acquisition
--------------------- -------------------
<S> <C> <C>
Receivables................................................ $ 14,381 $ 19,679
Inventories................................................ 6,099 16,132
Prepaid expenses and other current assets.................. 790 2,386
Plant, property and equipment.............................. 16,675 16,517
Trademarks................................................. 17,740 13,000
Goodwill................................................... 62,438 7,733
Other assets............................................... 2,656 338
Accounts payable........................................... (2,385) (2,202)
Accrued expenses........................................... (3,565) (14,983)
Other long-term liabilities................................ -- (6,313)
-------- --------
$114,829 $ 52,287
======== ========
</TABLE>
(b) To reflect the exclusion of assets not purchased or liabilities not assumed
as part of the ArtCarved Acquisition and Balfour Acquisition.
(c) To reflect the estimated fair market value of the acquired assets and
assumed liabilities of ArtCarved and Balfour.
(d) To reflect the elimination of existing debt and accrued interest.
(e) To reflect the purchase of Balfour Gold held on consignment.
(f) To record a reserve for the non-recurring severance and relocation costs
associated with the Combination.
(g) To record the accumulated benefit obligation of $5.5 million related to the
unfunded Balfour postretirement medical benefits plan assumed in the
Balfour Acquisition.
(h) To reflect the proceeds from the Financing related to the Transactions. The
use of the proceeds is as follows:
ArtCarved Acquisition.................... $114,829
Balfour Acquisition...................... 52,287
Transaction fees and expenses............ 9,085
--------
$176,201
========
40
<PAGE>
The unaudited pro forma capitalization of the Company, as of November 30, 1996,
as adjusted to give effect to the Transactions is as follows:
<TABLE>
<S> <C>
Total debt (including current maturities):
Revolving Credit and Gold Facilities............................... $ 11,201
Term Loan Facility................................................. 25,000
11% Senior Subordinated Notes due 2007............................. 90,000
-------
Total debt..................................................... $ 126,201
--------
Stockholders' equity:.......................................................
Preferred stock(1)................................................. 47,500
Common stock....................................................... 2,500
------
Total stockholders' equity..................................... 50,000
-------
Total capitalization........................................................ $ 176,201
========
</TABLE>
- ----------
(1) Includes $10.0 million of Series A Preferred Stock and $37.5 million of
Series B Preferred Stock. See "Description of Capital Stock" and
"Description of Notes--Certain Covenants--Restricted Payments."
(i) To reflect the elimination of the historical equity of ArtCarved and
Balfour.
(j) To record accrued costs related to finalizing the purchase prices of the
Acquisitions.
41
<PAGE>
SELECTED HISTORICAL FINANCIAL AND OTHER DATA -- ARTCARVED
The following table presents selected historical financial and other data
for ArtCarved and should be read in conjunction with the financial statements of
ArtCarved and the notes thereto and "Management's Discussion and Analysis of
Financial Condition and Results of Operations" included elsewhere herein. The
following information with respect to ArtCarved as of and for each of the years
ended August 27, 1994; August 26, 1995; and August 31, 1996 has been derived
from the audited financial statements of ArtCarved, which have been audited by
Arthur Andersen LLP, independent public accountants, as indicated in their
report dated November 13, 1996 included elsewhere herein. The ArtCarved data as
of August 31, 1993 are derived from the audited financial statements of
ArtCarved, which have been audited by Arthur Andersen LLP and are not included
elsewhere herein. The ArtCarved data as of August 31, 1992 and the three months
ended on and as of November 25, 1995 and November 30, 1996 are derived from the
unaudited financial statements of ArtCarved. In Management's opinion, the
unaudited interim financial statements reflect all adjustments (consisting only
of normal recurring adjustments) necessary for a fair presentation of the
interim periods presented. The results for the three months ended November 30,
1996 are not necessarily indicative of the results to be expected for the full
fiscal year. The information presented below does not include adjustments
related to the ArtCarved Acquisition.
<TABLE>
<CAPTION>
Three Months
Fiscal Year Ended(1) Ended(1)
-------------------------------------------------------- ---------------------
Aug. 31, Aug. 31, Aug. 27, Aug. 26, Aug. 31, Nov. 25, Nov. 30,
1992 1993 1994 1995 1996 1995 1996
-------- -------- -------- -------- -------- -------- --------
(Dollars in thousands, except ratios)
<S> <C> <C> <C> <C> <C> <C> <C>
Statement of Income Data:
Net sales ........................... $ 63,847 $ 63,955 $ 69,820 $ 71,994 $ 70,671 $ 21,923 $ 21,963
Cost of sales ....................... 26,993 25,290 30,572 32,879 32,655 9,209 9,626
--------- --------- --------- --------- --------- --------- ---------
Gross profit ........................ 36,854 38,665 39,248 39,115 38,016 12,714 12,337
Selling, general and administrative
expenses ......................... 26,920 27,016 26,618 28,224 27,940 8,484 8,110
Restructuring charges(2) ............ -- -- -- 3,244 -- -- --
--------- --------- --------- --------- --------- --------- ---------
Operating income (loss) ............. 9,934 11,649 12,630 7,647 10,076 4,230 4,227
Interest expense, net ............... 13,165 12,333 11,506 13,613 11,907 3,355 2,503
--------- --------- --------- --------- --------- --------- ---------
Income (loss) before income tax ..... (3,231) (684) 1,124 (5,966) (1,831) 875 1,724
expense
Income tax expense .................. 65 146 137 -- -- -- --
--------- --------- --------- --------- --------- --------- ---------
Net income (loss) ................... $ (3,296) $ (830) $ 987 $ (5,966) $ (1,831) $ 875 $ 1,724
========= ========= ========= ========= ========= ========= =========
Other Data:
EBITDA(3) ........................... $ 15,548 $ 17,046 $ 17,324 $ 16,505 $ 15,091 $ 5,494 $ 5,691
Depreciation and amortization ....... 5,614 5,397 4,694 5,614 5,015 1,264 1,464
Capital expenditures(4) ............. 862 1,344 1,186 1,120 844 420 182
Cash flows provided by (used in):
Operating activities ............. 8,678 10,948 11,132 (3,164) 1,663 (513) 1,083
Investing activities ............. (925) (1,344) (1,186) (1,120) (844) (52) (182)
Financing activities ............. (5,753) (9,604) (9,946) 4,284 (819) 565 3,555
Ratio of earnings to fixed charges(5) -- -- 1.1x -- -- 1.3x 1.6x
Balance Sheet Data (at end of
period):
Working capital ..................... $ (1,232) $ 6,938 $ (17,064) $ (21,178) $ 3,063 $ 14,061
Total assets ........................ 79,698 76,008 78,900 75,955 74,542 83,393
Total long-term debt(6) ............. 107,783 98,485 98,728 99,900 91,221 80,144
Advances and equity (deficit)(6) .... (32,989) (27,931) (51,504) (53,186) (28,524) (7,909)
</TABLE>
- ----------
footnotes appear on following page
42
<PAGE>
(1) During the periods presented, ArtCarved was not operated or accounted
for as a separate entity. As a result, allocations for certain
accounts of CJC were reflected in the financial statements of
ArtCarved. Selling, general and administrative expenses for ArtCarved
represent all the expenses incurred by CJC excluding only the expenses
directly related to the non-ArtCarved operations of CJC. Since CJC
intends to use the proceeds from the sale of ArtCarved to repay its
outstanding debt obligations, the statement of income data, other
data, and the balance sheet data include all of CJC's debt and related
interest expense.
(2) For the fiscal year ended August 26, 1995, the restructuring charges
of $3.2 million consisted of the write-off of $2.9 million of
capitalized financing costs incurred in 1990 by CJC and $0.3 million
of related professional advisory fees incurred by CJC. The balance
sheet data include all of CJC's debt and related interest expense, and
therefore all of the restructuring charges are allocated to ArtCarved
assets.
(3) EBITDA represents operating income (loss) before depreciation,
amortization, and restructuring charges. EBITDA is not intended to,
and does not, represent cash flows as defined by generally accepted
accounting principles and does not necessarily indicate that cash
flows are sufficient to fund all of ArtCarved's cash needs. EBITDA
should not be considered in isolation or as a substitute for or more
meaningful than net income (loss), cash flows from operating
activities or other measures of liquidity determined in accordance
with generally accepted accounting principles. The Company has
presented EBITDA data because the Company understands that such
information is commonly used by investors to analyze and compare
companies on the basis of operating performance and to determine a
company's ability to service debt. The EBITDA measure presented herein
is not necessarily comparable to similarly-titled measures reported by
other companies.
(4) Historical capital expenditure levels are not necessarily indicative
of the expected capital expenditure level for the Company's fiscal
year ending August 30, 1997. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations--Seasonality,
Liquidity and Capital Resources."
(5) For the purpose of computing this ratio, earnings consist of income
(loss) before taxes on income and fixed charges. Fixed charges consist
of interest expense, capitalized interest, amortization of deferred
debt issuance cost and a portion of rental expenses. For the fiscal
years ended August 31, 1992, August 31, 1993, August 26, 1995 and
August 31, 1996, earnings before fixed charges were insufficient to
cover fixed charges by approximately $3.2 million, $0.7 million, $6.0
million and $1.8 million, respectively.
(6) The changes in total long-term debt and advances in equity (deficit)
from August 31, 1996 to November 30, 1996 are due to the sale of CJC's
non-ArtCarved operations.
43
<PAGE>
SELECTED HISTORICAL FINANCIAL AND OTHER DATA--BALFOUR
The following table presents selected historical financial and other data
for Balfour and should be read in conjunction with the financial statements of
Balfour and the notes thereto and "Management's Discussion and Analysis of
Results of Operations and Financial Condition" included elsewhere herein. The
following information with respect to Balfour as of and for the years ended
February 27, 1994; February 26, 1995 and February 25, 1996 has been derived from
the audited financial statements of Balfour, which have been audited by Arthur
Andersen LLP, independent public accountants, as indicated in their report dated
September 30, 1996 included elsewhere herein. The following information with
respect to Balfour as of and for the years ended February 29, 1992 and February
28, 1993 and the nine months ended on, and as of, November 26, 1995 and November
24, 1996 has been derived from the unaudited financial statements of Balfour. In
Management's opinion, the data as of and for the years ended February 29, 1992
and February 28, 1993 and as of and for the nine months ended November 26, 1995
and November 24, 1996 reflect all adjustments (consisting of normal recurring
adjustments) necessary for a fair presentation. The results for the nine months
ended November 24, 1996 are not necessarily indicative of the results to be
expected for the full fiscal year. The information presented below does not
include adjustments related to the Balfour Acquisition.
<TABLE>
<CAPTION>
Fiscal Year Ended(1) Nine Months Ended(1)
------------------------------------------------------- --------------------
Feb. 29, Feb. 28, Feb. 27, Feb. 26, Feb. 25, Nov. 26, Nov. 24,
1992 1993 1994 1995 1996 1995 1996
-------- -------- -------- -------- -------- -------- --------
(Dollars in thousands, except ratios)
<S> <C> <C> <C> <C> <C> <C> <C>
Statement of Income Data:
Net sales ...................................... $ 91,681 $ 83,938 $ 85,304 $ 77,491 $ 71,300 $ 53,413 $ 55,521
Cost of sales .................................. 55,607 47,130 35,860 35,406 35,598 27,160 27,021
-------- -------- -------- -------- -------- -------- --------
Gross profit ................................... 36,074 36,808 49,444 42,085 35,702 26,253 28,500
Selling, general and administrative
expenses .................................... 42,481 43,856 43,350 51,743 33,496 25,831 27,910
Restructuring charges(2) ....................... -- 14,500 -- -- -- -- --
-------- -------- -------- -------- -------- -------- --------
Operating income (loss) ........................ (6,407) (21,548) 6,094 (9,658) 2,206 422 590
-------- -------- -------- -------- -------- -------- --------
Other (income) expense:
Interest expense, net .......................... 306 234 673 700 583 450 432
Payroll tax refund ............................. -- -- -- (574) -- -- --
Gain on sale of facility ....................... -- -- -- -- (418) (418) --
Interest on due to Parent(3) ................... 9,183 9,501 683 1,093 1,986 1,401 1,384
-------- -------- -------- -------- -------- -------- --------
Net other expense .............................. 9,489 9,735 1,356 1,219 2,151 1,433 1,816
-------- -------- -------- -------- -------- -------- --------
Income (loss) before income tax expense ........ (15,896) (31,283) 4,738 (10,877) 55 (1,011) (1,226)
Provision for income taxes ..................... 125 310 50 65 191 144 60
-------- -------- -------- -------- -------- -------- --------
Net income (loss) .............................. $(16,021) $(31,593) $ 4,688 $(10,942) $ (136) $(1.155) $ (1,286)
======== ======== ======== ======== ======== ======== ========
Other Data:
EBITDA(4) ...................................... $ (3,376) $ (3,983) $ 7,993 $ (7,680) $ 4,232 $ 1,970 $ 2,050
Depreciation and amortization .................. 3,031 3,065 1,899 1,978 2,026 1,548 1,460
Capital expenditures(5) ........................ 620 826 1,820 1,274 530 320 252
Adjusted net sales(6) .......................... 59,600 56,315 61,784 64,891 70,111 52,537 54,672
Cash flows provided by (used in):
Operating activities ........................ -- -- (2,413) (7,077) 1,604 (5,828) (6,390)
Investing activities ........................ -- -- (1,807) (1,209) 421 631 188
Financing activities ........................ -- -- 4,245 8,286 (1,970) 5,201 6,181
Ratio of earnings to fixed charges(7) ......... -- -- 4.3x -- 1.0x -- --
Balance Sheet Data (at end of period):
Working capital ................................ $ 24,076 $ 4,848 $ 15,217 $ 14,214 $ 13,898 $ 20,109
Total assets ................................... 70,086 44,795 47,989 45,236 42,563 45,050
Total long-term debt(8) ........................ 66,924 1,801 6,136 15,136 13,166 19,405
Advances and equity (deficit) .................. (20,127) 20,278 24,966 14,024 13,888 12,602
</TABLE>
- ----------
footnotes appear on following page
44
<PAGE>
(1) During the periods presented, Balfour was operated as a wholly-owned
subsidiary of Town & Country and Town & Country administered certain
programs (such as health insurance, workmen's compensation and gold
consignment) and charged all directly identifiable costs to Balfour.
Indirect costs were not allocated to Balfour; however, Balfour's management
believes these amounts are not significant for the periods presented.
(2) For the fiscal year ended February 28, 1993, Balfour's management decided
to make changes with respect to certain of its operations. As a result of
this decision, Balfour sold or disposed of certain inventory and equipment
no longer considered necessary to its modified business and recorded a
restructuring charge associated with such disposal of assets.
(3) Effective February 28, 1993, Town & Country contributed amounts due to Town
& Country from Balfour as additional paid-in-capital, thereby reducing
interest charges on the due to Town & Country amounts in future periods.
(4) EBITDA represents operating income (loss) before depreciation, amortization
and restructuring charges. EBITDA is not intended to, and does not,
represent cash flows as defined by generally accepted accounting principles
and does not necessarily indicate that cash flows are sufficient to fund
all of Balfour's cash needs. EBITDA should not be considered in isolation
or as a substitute for or more meaningful than net income (loss), cash
flows from operating activities or other measures of liquidity determined
in accordance with generally accepted accounting principles. The Company
has presented EBITDA data because the Company understands that such
information is commonly used by investors to analyze and compare companies
on the basis of operating performance and to determine a company's ability
to service debt. The EBITDA measure presented herein is not necessarily
comparable to similarly-titled measures reported by other companies.
(5) Historical capital expenditure levels are not necessarily indicative of the
expected capital expenditure level for the Company's fiscal year ending
August 30, 1997. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Seasonality, Liquidity and Capital
Resources."
(6) Adjusted net sales represents, for all periods presented, net sales
excluding results from (i) the direct mail distribution of licensed
consumer sports jewelry, which was discontinued in February 1995; (ii) the
fraternity jewelry product line, which was sold in March 1994; and (iii)
the service award recognition product line, which was sold in April 1993.
Although Balfour sold substantially all of the service award recognition
product line, Balfour continues to have sales of service award recognition
products, which Management believes will not be a significant percentage of
net sales in future periods.
<TABLE>
<CAPTION>
Fiscal Year Ended Nine Months Ended
-------------------------------------------------- -------------------
Feb. 29, Feb. 28, Feb. 27, Feb. 26, Feb. 25, Nov. 26, Nov. 24,
1992 1993 1994 1995 1996 1995 1996
-------- -------- -------- -------- -------- -------- --------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Net sales ............................................. $91,681 $83,938 $85,304 $77,491 $71,300 $53,413 $55,521
Less:
Direct distribution of licensed
consumer sports jewelry ............................... -- 2,313 16,271 10,481 -- -- --
Fraternity jewelry product line ....................... 3,997 3,537 -- -- -- -- --
Service award recognition product line ................ 28,084 21,773 7,249 2,119 1,189 876 849
------- ------- ------- ------- ------- ------- -------
Adjusted net sales ................................. $59,600 $56,315 $61,784 $64,891 $70,111 $52,537 $54,672
======= ======= ======= ======= ======= ======= =======
</TABLE>
(7) For the purpose of computing this ratio, earnings consist of income (loss)
before taxes on income and fixed charges. Fixed charges consist of interest
expense, capitalized interest, amortization of deferred debt issuance cost
and a portion of rental expenses. For the fiscal years ended February 29,
1992, February 28, 1993 and February 26, 1995, Balfour's earnings before
fixed charges were insufficient to cover fixed charges by $15.9 million,
$31.3 million and $10.9 million, respectively. For the nine months ended
November 26, 1995 and November 24, 1996, Balfour's earnings before fixed
charges were insufficient to cover fixed charges by $1.0 million and $1.2
million, respectively.
(8) The change in total long term debt from February 25, 1996 to November 24,
1996 is due to the seasonal nature of Balfour's operations.
45
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the ArtCarved
financial statements and notes thereto, the Balfour financial statements and
notes thereto and the other financial information appearing elsewhere herein.
See "Index to Financial Statements."
This Prospectus contains forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933, as amended. Discussions containing
such forward-looking statements may be found in the material set forth below and
under "Prospectus Summary," "Risk Factors," "Unaudited Pro Forma Combined
Financial Statements and Other Data" and "Business" as well as in the Prospectus
generally. Actual events or results may differ materially from those discussed
in the forward-looking statements as a result of the various factors, including,
without limitation, the factors set forth below and the other matters set forth
in the Prospectus generally.
General
The Company is the second largest manufacturer of class rings in the United
States based on net sales and is a supplier of graduation-related scholastic
products for the high school and college markets. The Company is the only class
ring manufacturer with a strong national presence in the three primary sales
channels for class rings and scholastic products. The Company also manufactures
and markets recognition and affinity jewelry designed to commemorate significant
events, achievements and affiliations.
During the late 1980s and early 1990s, the prior owners of each of
ArtCarved and Balfour diverted the focus and resources of such companies and
considerable management time from their respective core class ring businesses.
Management believes that the multiple changes in ownership, strategic direction
and management attention to other subsequently discontinued business lines of
ArtCarved and Balfour had an unfavorable impact on the financial performance of
such entities and on the ability of prior management of such companies to
develop and expand their respective businesses.
Despite continued operating profitability in ArtCarved's core class ring
operations, difficulties in CJC's non-ArtCarved operations, which had
substantial working capital requirements, and bankruptcy filings by several
significant customers of that division led to a substantial drain on CJC's
resources and led to CJC's recapitalization, which began in 1993 and was
completed in 1996. Balfour discontinued its direct mail distribution of licensed
consumer sports jewelry (the "direct mail program") due to high marketing costs
and poor collections of installment payments, which were responsible for an
operating loss of $10.3 million, including the allocation of certain fixed
overhead costs, for Balfour's fiscal year ended February 26, 1995. In March
1994, Balfour sold its fraternity jewelry product line, thereby eliminating a
product line with operating losses of $0.6 million, including the allocation of
certain fixed overhead costs, in both of Balfour's fiscal years ended February
29, 1992 and February 28, 1993.
The Company sells its high school class rings through two distinct sales
channels--in-store to independent retail jewelers, chain jewelers and mass
merchants and in-school through Balfour's independent sales representatives.
Historically, Balfour's selling expenses tend to represent a relatively high
percentage of Balfour's net sales because Balfour's products are marketed at
individual schools through independent sales representatives, who are
compensated on a commission basis. Alternatively, ArtCarved has employed a
salaried sales force to sell its class rings in-store, and consequently,
ArtCarved's selling expenses are comparatively lower than those of Balfour. See
"Business--Sales and Marketing" and "--Employees."
Effective September 1, 1993, ArtCarved changed to a fiscal year consisting
of 52 or 53 weeks, as applicable, ending on the last Saturday in August.
Effective February 1990, Balfour changed to a fiscal year consisting of 52 or 53
weeks, as applicable, ending on the last Sunday of February. Neither change in
fiscal years resulted in a material
46
<PAGE>
impact on results of operations. The Company's fiscal year consists of 52 or 53
weeks, as applicable, ending on the last Saturday of August.
Results of Operations
ArtCarved
Three Months Ended November 30, 1996 (the "three months ended November
1996") to Three Months Ended November 25, 1995 (the "three months ended November
1995").
Net Sales. Net sales increased less than $0.1 million, or 0.2%, to $22.0
million for the three months ended November 1996 from $21.9 million for the
three months ended November 1995. The increase in sales reflected a 4.5%
increase in units sold, which more than offset a 4.1% decrease in average unit
price. The increase in units sold primarily reflected a 110.0% increase in units
sold of other jewelry products, primarily through the expansion of personalized
family jewelry products, which was partially offset by a 9.6% decrease in units
sold of college class rings. The decrease in average unit price resulted
primarily from the change in product mix resulting in decreased sales in the
higher average unit price of the college segment to the lower average unit price
of the personalized family jewelry products.
Gross Profit. Gross profit decreased $0.4 million, or 3.0% to $12.3 million
for the three months ended November 1996 from $12.7 million for the three months
ended November 1995. As a percentage of net sales, gross profit decreased to
56.2% for the three months ended November 1996 from 58.0% for the three months
ended November 1995. This decrease was primarily a result of a change in product
mix resulting from decreased sales of college rings, and increased sales of
personalized family jewelry products.
Selling, General & Administrative Expenses. Selling, general and
administrative expenses decreased $0.4 million, or 4.4%, to $8.1 million for the
three months ended November 1996 from $8.5 million for the three months ended
November 1995. As a percentage of net sales, selling, general and administrative
expenses decreased to 36.9% for the three months ended November 1996 from 38.7%
for the three months ended November 1995. This decrease was primarily a result
of postponing certain marketing activities from the three months ended November
1996 until the second and third quarter of the fiscal year ending August 30,
1997.
47
<PAGE>
Operating Income. As a result of the foregoing, operating income was $4.2
million for the three months ended November 1996 and November 1995. As a
percentage of net sales, operating income decreased to 19.2% for the three
months ended November 1996 from 19.3% for the three months ended November 1995.
Interest Expense, Net. Interest expense, net decreased $0.9 million to $2.5
million for the three months ended November 1996 from $3.4 million for the three
months ended November 1995, primarily as a result of $16.4 million of debt
reduction due to the restructuring and recapitalization of CJC that was
consummated in March 1996.
Income Tax Expense. There was no income tax provision in either the three
months ended November 1996 or the three months ended November 1995, due to
available federal net operating tax losses and other credit carryforwards of CJC
that eliminated the need for a federal tax provision.
Net Income (Loss). As a result of the foregoing, net income increased $0.8
million, to $1.7 million for the three months ended November 1996 from $0.9
million for the three months ended November 1995.
Twelve Months Ended August 31, 1996 ("fiscal 1996") to Twelve Months Ended
August 26, 1995 ("fiscal 1995")
Net Sales. Net sales decreased $1.3 million, or 1.8%, to $70.7 million in
fiscal 1996 from $72.0 million in fiscal 1995. The decrease in sales reflected a
4.7% decrease in units sold, which more than offset a 3.0% increase in average
unit price. The decline in units sold primarily reflected an 11.3% decrease in
units sold of high school class rings, which was partially offset by a 3.0%
increase in units sold of college class rings and a 39.3% increase in units sold
of other jewelry products. Management believes the decline in high school units
sold resulted primarily from heightened marketing efforts and aggressive pricing
from competitors in the in-school market during the 1995 fall back-to-school
season. The impact on ArtCarved of this increased competitive environment in the
in-school market was partially offset in the second half of fiscal 1996 by
ArtCarved's increased in-store marketing. The increase in average unit price
primarily resulted from price increases in high school class rings sold to mass
merchants.
Gross Profit. Gross profit decreased $1.1 million, or 2.8%, to $38.0
million in fiscal 1996 from $39.1 million in fiscal 1995. As a percentage of net
sales, gross profit decreased to 53.8% in fiscal 1996 from 54.3% in fiscal 1995.
This decease was due primarily to a decrease in the number of units sold and an
average increase in gold material costs which was not reflected in unit prices
until the end of the second quarter of fiscal 1996.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses decreased $0.3 million, or 1.0%, to $27.9 million in
fiscal 1996 from $28.2 million in fiscal 1995. As a percentage of net sales,
selling, general administrative expenses increased to 39.5% in fiscal 1996 from
39.2% in fiscal 1995, primarily as a result of decreased sales and increased
marketing expenditures. The decrease in selling, general and administrative
expenses resulted from a $1.1 million decrease in general and administrative
expenses and savings associated with staff reductions and a $0.6 million
decrease in depreciation and amortization cost. These cost reductions were
substantially offset by an increase in marketing costs of $1.4 million, which
funded additional college direct mail advertising and enhanced high school
marketing efforts.
Restructuring Charges. Restructuring charges of $3.2 million in fiscal 1995
consisted of the write-off of $2.9 million of capitalized financing costs
incurred in 1990 by CJC and $0.3 million of related professional advisory fees
incurred by CJC.
Operating Income (Loss). As a result of the foregoing, operating income
increased $2.4 million, or 31.8%, to $10.1 million in fiscal 1996 from $7.6
million in fiscal 1995. Operating income before restructuring charges decreased
$0.8 million, or 7.5%, to $10.1 million in fiscal 1996 from $10.9 million in
fiscal 1995. As a percentage of net sales, operating income before restructuring
charges decreased to 14.3% in fiscal 1996 from 15.1% in fiscal 1995.
48
<PAGE>
Interest Expense, Net. Interest expense, net decreased $1.7 million, to
$11.9 million for fiscal 1996 from $13.6 million in fiscal 1995, primarily as a
result of $16.4 million of debt reduction due to the restructuring and
recapitalization of CJC that was consummated in March 1996.
Income Tax Expense. There was no income tax provision in either fiscal 1996
or fiscal 1995, due to available federal net operating tax losses and other
credit carryforwards of CJC that eliminated the need for a federal tax
provision.
Net Income (Loss). As a result of the foregoing, net loss decreased $4.2
million, to $1.8 million, in fiscal 1996 from a net loss of $6.0 million in
fiscal 1995.
Twelve Months Ended August 26, 1995 ("fiscal 1995") to Twelve Months Ended
August 27, 1994 ("fiscal 1994")
Net Sales. Net sales increased $2.2 million, or 3.1% , to $72.0 million in
fiscal 1995 from $69.8 million in fiscal 1994. the increase in net sales
reflected a 4.1% increase in average unit price, which offset a 1.0% decrease in
units sold. This increase was due primarily to increased sales of college class
rings of $2.4 million, which resulted from increased unit sales of 5.3% and a
higher average sales price of 5.0%, which was partially offset by decreased unit
sales of high school class rings of 2.9%. The increase in average unit price
resulted primarily from a favorable product mix change in style and metal type
in the college and high school class ring segments.
Gross Profit. Gross profit decreased $0.1 million, or 0.3%, to $39.1
million in fiscal 1995 from $39.2 million in fiscal 1994. As a percentage of net
sales, gross profit decreased to 54.3% in fiscal 1995 from 56.2% in fiscal 1994.
This decrease was primarily a result of a change in product mix in metal type of
class rings, increased gold and stone raw material costs, and an increase in
hourly wages.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased $1.6 million, or 6.0%, to $28.2 million in
fiscal 1995 from $26.6 million fiscal 1994. As a percentage of net sales,
selling, general and administrative expenses increased to 39.2% in fiscal 1995
from 38.1% in fiscal 1994. This increase was predominately due to an increase of
$0.9 million in marketing costs associated with college and high school direct
mail advertising and an increase of $0.9 million in depreciation and
amortization.
Restructuring Charges. Restructuring charges of $3.2 million in fiscal 1995
consisted of the write-off of $2.9 million of capitalized financing costs
incurred in 1990 by CJC and $0.3 million of related professional advisory fees
incurred by CJC.
Operating Income (Loss). As a result of the foregoing, operating income
decreased $5.0 million, or 39.5%, to $7.6 million in fiscal 1995 from $12.6
million in fiscal 1994. Operating income before restructuring charges decreased
$1.7 million, or 13.8%, to $10.9 million in fiscal 1995 from $12.6 million in
fiscal 1994. As a percentage of net sales, operating income before restructuring
charges decreased to 15.1% in fiscal 1995 from 18.1% in fiscal 1994.
Interest Expense, Net. Interest expense, net increased $2.1 million, or
18.3%, to $13.6 million in fiscal 1995 from $11.5 million in fiscal 1994,
primarily as a result of the higher average loan balances of CJC outstanding
during fiscal 1995.
Income Tax Expense. There was no federal income tax provision in either
fiscal 1995 or fiscal 1994 due to available federal net operating tax losses and
other tax credit carryforwards of CJC that eliminated the need for a federal tax
provision. The fiscal 1994 income tax expense represents a provision for state
income taxes of CJC.
Net Income (Loss). As a result of the foregoing, net income (loss)
decreased $7.0 million to a net loss of $6.0 million in fiscal 1995 from net
income of $1.0 million in fiscal 1994.
Balfour
49
<PAGE>
Nine Months Ended November 24, 1996 (the "nine months ended November 1996")
to Nine Months Ended November 26, 1995 (the "nine months ended November 1995").
Net Sales. Net Sales increased $2.1 million, or 3.9%, to $55.5 million for
the nine months ended November 1996 from $53.4 million for the nine months ended
November 1995. The increase primarily reflects a $3.2 million increase in
scholastic products and a $0.2 million increase in licensed consumer sports
jewelry. These increases were offset by a decline in sports championship jewelry
of $1.3 million, primarily attributable to the fact that Balfour, which had been
awarded the contract to produce the 1995 Super Bowl championship rings, was not
awarded the contract in 1996.
Gross Profit. Gross profit increased $2.2 million, or 8.4%, to $28.5
million for the nine months ended November 1996 from $26.3 for the nine months
ended November 1995. As a percentage of net sales, gross profit increased to
51.3% for the nine months ended November 1996 from 49.3% for the nine months
ended November 1995. The change in gross profit is primarily related to the
volume increase of scholastic products, resulting in a $1.7 million increase in
gross profit, as well as reduced labor and overhead costs associated with class
rings manufacturing resulting in an additional $0.7 million of gross profit.
These gains were offset by a volume reduction of recognition and affinity
products (including Super Bowl rings) resulting in a $0.2 million decline in
gross profit.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased $2.1 million, or 8.1%, to $27.9 million for
the nine months ended November 1996 from $25.8 million for the nine months ended
November 1995. As a percentage of net sales, selling, general and administrative
expenses increased to 50.3% of net sales in the nine months ended November 1996
from 48.3% of net sales in the nine months ended November 1995. This increase is
primarily the result of updating the class rings marketing material for both the
high school and college markets and increased selling expenses associated with
jewelry designed to commemorate the 1996 Summer Olympics.
Operating Income (Loss). Operating income increased $0.2 million to $0.6
million, or 1.1% of net sales, for the nine months ended November 1996 from
operating income of $0.4 million, or 0.8% of net sales, for the nine months
ended November 1995.
Interest Expense, Net. Interest expense decreased $0.1 million to $1.8
million for the nine months ended November 1996 from $1.9 million for the nine
months ended November 1995. The interest rate was at 11.5% for both periods on
amounts due to Town & Country.
Other Income. A gain on the sale of a facility in the amount of $0.4
million is reflected in the nine months ended November 1995.
Income Tax Expense. There was no federal income tax provision in either the
nine months ended November 1996 or the nine months ended November 1995 due to
available federal net operating tax losses and other tax credit carryforwards of
Town & Country that eliminated the need for a federal tax provision. The income
tax expense represents a provision for state income taxes for each of the nine
months ended November 1996 and the nine months ended November 1995.
Net Income (Loss). As a result of the foregoing, net loss increased by $0.1
million, to a net loss of $1.3 million for the nine months ended November 1996
from a net loss of $1.2 million for the nine months ended November 1995.
50
<PAGE>
Twelve Months Ended February 25, 1996 (the "1996 period") to Twelve Months
Ended February 26, 1995 (the "1995 period")
Net Sales. Net sales decreased $6.2 million, or 8.0%, to $71.3 million for
the 1996 period from $77.5 million for the 1995 period. A decrease of $10.5
million in the 1996 period resulted from the decision to discontinue the direct
mail program as of February 1995, and the decision to focus on retail
distribution for licensed consumer sports jewelry. This decline was partially
offset by increased net sales of $4.3 million of scholastic products, primarily
fine paper, reflecting the full-year impact during the 1996 period of the
addition of independent regional sales representatives, which began during the
1995 period. Excluding the direct mail program, net sales would have increased
$4.3 million, or 6.4%, to $71.3 million for the 1996 period from $67.0 million
for the 1995 period.
Gross Profit. Gross profit decreased $6.4 million, or 15.2%, to $35.7
million for the 1996 period from $42.1 million for the 1995 period. As a
percentage of net sales, gross profit decreased to 50.1% for the 1996 period
from 54.3% for the 1995 period. This decrease was largely as a result of the
discontinuation of the direct mail program, which resulted in lower
manufacturing unit throughput. The gross profit for the direct mail program for
the 1995 period was $6.4 million, including the allocation of certain fixed
overhead costs.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses decreased $18.2 million, or 35.3%, to $33.5 million for
the 1996 period from $51.7 million for the 1995 period. As a percentage of net
sales, selling, general and administrative expenses decreased to 47.0% for the
1996 period from 66.8% for the 1995 period. This decrease was primarily related
to the elimination of advertising expense of $7.7 million, bad debt expense of
$5.2 million and other related expenses of $0.8 million associated with the
direct mail program in the 1995 period. In addition, Balfour implemented staff
reductions in the selling, marketing, design, finance, MIS and human resource
functions in November 1994 and January 1995, including the discontinuance of the
direct mail program, that resulted in cost savings of $4.5 million in the 1996
period, net of related expenses. The selling, general and administrative
expenses associated with the direct mail program for the 1995 period were $16.7
million, including the allocation of certain fixed overhead costs.
Operating Income (Loss). As a result of the foregoing, operating income
increased $11.9 million, to $2.2 million, or 3.1% of net sales, for the 1996
period from an operating loss of $9.7 million for the 1995 period. The operating
loss for the direct mail program for the 1995 period was $10.3 million,
including the allocation of certain fixed overhead costs.
Interest Expense, Net. Interest expense, net increased $0.8 million, or
43.3%, to $2.6 million in the 1996 period from $1.8 million in the 1995 period.
This increase was primarily the result of increased borrowings to fund
advertising and other expenses associated with the direct mail program and an
increase in the interest rate charged by Town & Country to 11.5% in the 1996
period from 11.0% for the 1995 period.
Income Tax Expense. There was no federal income tax provision in either the
1996 period or the 1995 period due to available federal net operating tax losses
and other tax credit carryforwards of Town & Country that eliminated the need
for a federal tax provision. The income tax expense represents a provision for
state income taxes in both the 1996 period and the 1995 period.
Net Income (Loss). As a result of the foregoing, net loss decreased $10.8
million to a net loss of $0.1 million for the 1996 period from a net loss of
$10.9 million for the 1995 period.
Twelve Months Ended February 26, 1995 (the "1995 period") to Twelve Months
Ended February 27, 1994 (the "1994 period")
Net Sales. Net sales decreased $7.8 million, or 9.2%, to the $77.5 million
for the 1995 period from $85.3 million for the 1994 period. Net sales decreased
by approximately $5.8 million in the 1995 period due to the decision to
discontinue the direct mail program in the 1995 period, which accounted for
$10.5 million and $16.3 million of net sales in the 1995 and 1994 periods,
respectively. In addition, Balfour experienced a $5.1 million
51
<PAGE>
decrease in sales of recognition and affinity products in the 1995 period due to
a decline in the sale of service award recognition products that remained
following the sale of substantially all of this product line in April 1993. Net
sales of in-school scholastic products increased $2.3 million in the 1995 period
as a result of the addition of new independent sales representatives and net
sales of licensed consumer sports jewelry increased $1.3 million in the 1995
period as a result of the expansion of Balfour's retail distribution of licensed
consumer sports jewelry. Excluding net sales from the direct mail program, net
sales for the 1995 period would have decreased $2.0 million, or 2.9%, to $67.0
million for the 1995 period from $69.0 million for the 1994 period.
Gross Profit. Gross profit decreased $7.3 million, or 14.9% to $42.1
million for the 1995 period from $49.4 million for the 1994 period. As a
percentage of net sales, gross profit decreased to 54.3% for the 1995 period
from 58.0% for the 1994 period. A decline in the direct mail program sales
volume accounted for $6.1 million of the decrease. Additionally, the volume
decline in sales of Balfour affinity and recognition products contributed $1.7
million offset by a volume increase in sales of licensed consumer sports jewelry
due to volume increases of $0.5 million. The gross profit for the direct mail
program for the 1995 and 1994 periods were $6.4 million and $12.5 million,
respectively, including the allocation of certain fixed overhead costs. The
decline in gross profit as a percentage of sales in the 1995 period reflects the
substantially lower manufacturing unit throughput that resulted from the
discontinuation of the direct mail program.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased $8.4 million, or 19.4%, to $51.7 million for
the 1995 period from $43.3 million for the 1994 period. As a percentage of net
sales, selling, general and administrative expenses increased to 66.8% for the
1995 period from 50.8% for the 1994 period. This increase resulted from (i) $5.2
million in bad debt expense associated with the direct mail program, (ii) and
increase of $1.2 million in fine paper selling expenses as a result of increased
sales and the addition of independent sales representatives, and (iii) the
relocation of administrative offices and an increase in staff associated with
administrative support for the direct mail program and MIS improvements. The
selling, general and administrative expenses associated with the direct mail
program for the 1995 and 1994 period were $16.7 million and $11.5 million,
respectively, including an allocation of certain fixed overhead costs.
Operating Income (Loss). As a result of the foregoing, operating income
decreased $15.8 million to an operating loss of $9.7 million for the 1995 period
from operating income of $6.1 million, or 7.1% of net sales, for the 1994
period. Operating loss for the direct mail program for the 1995 period was $10.3
million and the operating income for the 1994 period was $1.0 million, including
the allocation of certain fixed overhead costs for each period.
Interest Expense, Net. Interest expense, net increased $0.4 million, or
32.2%, to $1.8 million in the 1995 period from $1.4 million in the 1994 period.
This increase was the result of higher average loan balances with Town & Country
resulting from the direct mail program.
Income Tax Expense. There was no federal income tax provision in either the
1995 period or the 1994 due to federal net operating tax losses and other tax
credit carryforwards of Town & Country that eliminated the need for a federal
tax provision. The income tax expense represents a provision for state income
taxes in both the 1995 period and the 1994 period.
Net Income (Loss). As a result of the foregoing, net income decreased $15.6
million to a net loss of $10.9 million for the 1995 period from net income of
$4.7 million for the 1994 period.
Impact of Inflation
The Company's operating expenses are directly affected by inflation, which
results in an increased cost of conducting business. In general, the Company
believes that the rate of inflation over the past several years has not had a
significant impact on its sales, operating income (loss) or results of
operations.
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Raw Material Price Fluctuations
The Company requires significant amounts of gold for the manufacture of its
jewelry. The Company finances a majority of its gold inventory requirements
through its Gold Facility. Management believes that the Company has sufficient
availability under its Revolving Credit and Gold Facilities to finance all of
its gold inventory requirements.
The Company seeks to reduce its exposure to fluctuations in the price of
gold in several ways. In the Company's in-school sales channel for the sale of
high school class rings, the Company can reset its ring prices from time to time
on new ring sales to reflect the then current price of gold. However, the
Company does not have the same flexibility to reset its ring prices in the
in-store and on-campus sales channels for high school and college rings,
respectively, where rings are sold on the basis of seasonal prices. In either
case, the Company must bear the risk of a change in the price of gold either
from the time the order is placed or from the time the price is set until the
product is shipped. As a result, since there may be a change in the price of
gold during such period, the Company may engage in certain hedging transactions
to reduce the effects of fluctuations in the price of gold during these periods.
The Company currently does not have any such hedges in place.
The Company also uses precious metals and both precious and semiprecious
stones in its products and, accordingly, any increase in the price of these
materials could have a significant adverse impact on its cost of sales. See
"Business--Raw Materials."
Seasonality, Liquidity and Capital Resources
The Company's scholastic product sales tend to be seasonal. Class ring
sales are highest during October through December (which overlaps the Company's
first and second fiscal quarters), when students have returned to school after
the summer recess and orders are taken for delivery of class rings to students
before the winter holiday season. Sales of the company's fine paper products are
predominantly made during February through April (which overlaps the Company's
second and third fiscal quarters) for graduation in May and June. The Company
has historically experienced operating losses during its fourth fiscal quarter,
which includes the summer months when school is not in session. Management does
not expect the Company's recognition and affinity product line to be seasonal in
any material respect, although it does anticipate that sales will be highest
during the winter holiday season and in the period prior to Mother's Day. As a
result, the effects of seasonality of the class ring business on the Company are
tempered by the Company's relatively broad product mix. See "Risk
Factors--Seasonality."
As a result of the foregoing, the Company's working capital requirements
tend to exceed its operating cash flows from July through December.
Historically, ArtCarved met its working capital and capital expenditures
requirements through cash flow provided by operating activities, while Balfour
met its working capital and capital expenditures requirements through cash flow
from operations and borrowings from its parent. ArtCarved's cash flow from
operating activities was $11.1 million, $(3.1) million, and $1.7 million for the
periods ended August 27, 1994, August 26, 1995 and August 31, 1996,
respectively. In ArtCarved's fiscal year ended August 27, 1994, the cash
provided from operating activities was primarily a result of increased accrued
interest. No interest payments were made due to negotiations related to the
restructuring and recapitalization of CJC's debt. In ArtCarved's fiscal year
ended August 26, 1995, cash used in operating activities was a result of
increased receivables, other assets and decreased accrued expenses. In
ArtCarved's fiscal year ended August 31, 1996, cash provided by operating
activities was $1.7 million, primarily as a result of a decrease in prepaid
expenses.
ArtCarved's cash flow used in investing activities was $1.2 million, $1.1
million and $0.8 million for the periods ending August 27, 1994, August 26, 1995
and August 31, 1996, respectively. The cash used was for purchases of plant,
property and equipment.
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ArtCarved's net cash provided by (used in) financing activities were $(9.9)
million, $4.3 million and $0.8 million for the periods ending August 27, 1994,
August 26, 1995 and August 31, 1996, respectively. In ArtCarved's fiscal year
ended August 27, 1994, the net cash used in financing activities was primarily a
result of the expiration of the gold consignment agreement, and the bank
presenting a draft for payment of the gold under the letter of credit. In
ArtCarved's fiscal year ended August 26, 1995, the net cash provided by
financing activities was a result of the changes in cash flow from operating
activities and investing activities discussed above. The net cash provided by
financing activities in ArtCarved's fiscal year ended August 31, 1996 was a
result of a $16.4 million payment of debt related to the restructuring and
recapitalization of CJC's debt and the changes in cash flow from operating
activities and investing activities discussed above.
Balfour's cash flow provided by (used in) operating activities was $(2.4)
million, $(7.1) million and $1.6 million for the periods ended February 27,
1994, February 26, 1995 and February 25, 1996, respectively. In Balfour's fiscal
year ended February 27, 1994, the use of cash resulted from increased accounts
receivable and inventories for the direct mail program and decreases in deferred
expenses also associated with the direct mail program. In Balfour's fiscal year
ended February 26, 1995, the use of cash primarily resulted from increased
inventories for the direct mail program. In Balfour's fiscal year ended February
25, 1996, the cash flow was provided primarily by reductions in inventories and
prepaid expenses. For the nine months ended November 26, 1995 and November 24,
1996 the use of cash was impacted primarily by increased accounts receivable
caused by the seasonality of the business. Accounts receivable for scholastic
products shipped during the months of August to November become due in January.
The Company's liquidity needs arise primarily from debt service on the
indebtedness to be incurred in connection with the Transactions, payments
required under a Management Agreement with Castle Harlan, Inc. (see "Certain
Relationships and Related Transactions") and working capital and capital
expenditure requirements. The Company is party to the Revolving Credit Facility
and expects peak borrowings to occur from October through December. As of
December 16, 1996, the Company had outstanding approximately $126.2 million of
indebtedness, consisting of the Notes, $25.0 million under the Term Loan
Facility and $11.2 million in borrowings under the Revolving Credit and Gold
Facilities. The Revolving Credit and Gold Facilities permit borrowings of up to
a maximum aggregate principal amount of $35.0 million based upon availability
under a borrowing base, with a sublimit of $5.0 million for letters of credit
and $10.0 million for either gold, pursuant to a consignment arrangement, or
dollar borrowings. Management believes that it will have sufficient availability
under these facilities to meet its working capital needs. See "Description of
the Bank Credit Facility."
Debt Service. Interest payments under the Bank Credit Facility and on the
Notes represent significant liquidity requirements for the Company. The Term
Loan Facility will mature in 2003, and the commitments under the Revolving
Credit and Gold Facilities will expire in 2001. Loans outstanding under the Bank
Credit Facility will bear interest at either fixed or floating rates based upon
the interest rate option elected by the Company. See "Description of the Bank
Credit Facility."
Capital Expenditures. For the fiscal year ending August 30, 1997, ongoing
capital expenditures for the Company are expected to relate principally to tools
and dies, software upgrades, and ongoing capital improvements. Management
estimates that the Company will spend approximately $3.8 million during this
period for these types of recurring expenditures. In addition, Management
estimates that the Company will spend approximately $1.9 million during this
period on non-recurring capital expenditures related to the Combination,
including spending on telephone and computer system upgrades and the preparation
of ArtCarved's Austin, Texas facility to accommodate Balfour's operations.
Future Financing Sources and Cash Flows. Management believes that amounts
available under the Revolving Credit and Gold Facilities are sufficient to meet
future working capital and other business needs of the Company. The Company
believes that cash generated from operations, together with amounts available
under the Revolving Credit and Gold Facilities, will be adequate to permit the
Company to meet its debt service obligations, capital expenditure program
requirements, ongoing operating costs and working capital needs, although no
assurance can be given in this regard. The Company's future operating
performance and its ability to service or refinance the
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Notes and to repay, extend or refinance the Bank Credit Facility or to incur
additional debt will be subject to future economic conditions, financial
performance and other factors, many of which are beyond the Company's control.
See "Risk Factors." In addition, covenants under the Indenture and the Bank
Credit Facility restrict, among other things, the Company's ability to incur
additional indebtedness, create liens, engage in a business other than certain
permitted lines of business, make certain investments, sell assets, merge with
or into another entity, issue stock and transact with affiliates. See
"Description of Notes--Certain Covenants" and "Description of the Bank Credit
Facility."
55
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BUSINESS
This Prospectus contains forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933, as amended. Discussions containing
such forward-looking statements may be found in the material set forth below and
under "Prospectus Summary," "Risk Factors," "Unaudited Pro Forma Combined
Financial Statements and Other Data" and "Management's Discussion and Analysis
of Financial Condition and Results of Operations" as well as in the Prospectus
generally. Actual events or results may differ materially from those discussed
in the forward-looking statements as a result of various factors, including,
without limitation, the factors as set froth below and the other matters set
forth in the Prospectus generally.
Overview
The Company is the second largest manufacturer of class rings in the United
States based on net sales and also supplies graduation-related scholastic
products for the high school and college markets and manufactures and markets
recognition and affinity jewelry designed to commemorate significant events,
achievements and affiliations. On December 16, 1996, the Company completed the
Acquisitions of substantially all of the scholastic and recognition and affinity
products assets and businesses of the ArtCarved operations of CJC and the
Balfour operations of L.G. Balfour Company. In combining ArtCarved and Balfour,
the Company joined together two of the most widely recognized and most respected
names in the scholastic products market in the United States.
The Company's scholastic product line consists of high school and college
class rings (the Company's largest product offering) and graduation-related fine
paper products such as announcements, name cards and diplomas. The Company's
independent sales representatives also sell or distribute caps and gowns,
yearbooks, memory books, and other graduation apparel and accessories
manufactured by others. The Company markets and distributes its scholastic
products, which represented approximately 85% of net sales in Pro Forma Fiscal
1996, through three distinct sales channels: (i) the high school "in-store"
channel of retailers, including approximately 5,100 independent retail jewelers,
approximately 21 of the nation's 40 largest retail jewelry chains (representing
approximately 1,200 stores throughout the United States) and approximately 2,200
Wal-Mart and 2,100 Kmart stores nationwide; (ii) the high school "in-school"
channel of independent sales representatives, who sell directly to students in
approximately 4,500 high schools throughout the United States; and (iii) the
college "on-campus" sales organization, which sells to students in approximately
1,700 colleges and universities throughout the United States primarily through
on-campus bookstores and, to a lesser extent, through local bookstores.
Management believes that this comprehensive distribution network distinguishes
the Company from its competitors and enables it to offer its products through a
wider array of formats and locations throughout the year, thereby providing
customers with the convenience of availability and choice of location for
purchasing scholastic products.
The Company has three national competitors, none of which has a strong
nationwide presence in all three primary sales channels for scholastic products.
Management estimates that the market for high school and college class rings is
approximately $350 million per year, of which the high school segment represents
approximately 70% of the market and the college segment represents approximately
30% of the market. Management also estimates that within the high school
segment, 65% of the high school class rings sold are sold through the in-school
sales channel with the remaining 35% being sold through the in-store sales
channel. College class rings are sold primarily through on-campus bookstores
and, to a lesser extent, through local bookstores.
The Company's recognition and affinity product line consists primarily of
rings, pins and other jewelry designed to enable individuals to show pride in
their affiliations with or support for their favorite organizations and sports
teams. The Company's recognition and affinity product line is comprised of four
major product categories:
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<PAGE>
(i) licensed consumer sports jewelry, consisting of rings and other jewelry,
intended for fans who wish to express their affinity and support for their
favorite professional, amateur and collegiate sports teams, historically
including all of the teams in the National Football League, Major League
Baseball, the National Basketball Association and the National Hockey League;
(ii) sports championship jewelry and related products for the members of
championship teams to commemorate their achievements, such as Super Bowl rings
for the San Francisco 49ers in 1995 and World Series trophies for the members of
the 1996 New York Yankees, and rings for individuals who bowl an American
Bowling Congress-sanctioned perfect game; (iii) personalized family jewelry,
consisting primarily of rings, bracelets, necklaces and other jewelry designed
to commemorate family and significant life events such as births and baptisms
and other family celebrations and holidays such as Mother's Day and Valentine's
Day; and (iv) corporate recognition and reward jewelry, consisting of rings,
pins and other jewelry, designed to commemorate employees' anniversaries with or
accomplishments on behalf of various corporations, historically including The
Coca-Cola Company, McDonalds Corp. and Xerox Corp.
ArtCarved and Balfour historically sold similar products and have
complementary strengths. The ArtCarved(R) brand name has been associated with
numerous technical and marketing innovations during more than 50 years in the
jewelry industry and has been used for class rings since 1976. Since the
inception of the in-store sales channel in 1963, ArtCarved and its predecessor
have been the leading supplier of high school rings in the in-store market, and
have also been a leading supplier of college class rings. Balfour began as an
insignia jewelry manufacturer in 1913 and entered the class ring industry in
1922, eventually becoming a significant producer of class rings as well as
service awards and recognition products. Balfour manufactures and sells high
school and college class rings and scholastic fine paper products and graduation
accessories through a network of independent sales representatives who market
Balfour(R) products directly in-school and on-campus.
CBI (formerly known as "Scholastic Brands, Inc.") was formed in March 1996
by Castle Harlan Partners II, L.P., a Delaware limited partnership and private
equity investment fund, for the purpose of acquiring ArtCarved and Balfour, and
until December 16, 1996 engaged in no business or activities other than in
connection with the Acquisitions and the Financing.
Business Strategy
Management's primary objective is to increase profitability through the
growth of the Company's sales and the realization of identified operational
improvements following the Combination. The Company will build on its leading
market position in class rings and the strong brand recognition of the
ArtCarved(R) and Balfour(R) brand names. Management seeks to achieve these
objectives by: (i) capitalizing on cost reduction opportunities presented by the
Combination; (ii) marketing a broader array of products by utilizing the
Company's comprehensive distribution network to cross-market existing products
and by continuing to develop and acquire new products and expand product lines;
and (iii) strengthening the Company's in-school sales channel through the
addition of independent sales representatives.
Capitalize on Cost Reduction Opportunities. In connection with the
Acquisitions, Management has developed a detailed consolidation plan that
Management believes will enable the Company to achieve approximately $7.4
million of annual cost savings relative to the historical cost structures of the
Company's predecessors (the "Annual Cost Savings"). Of the $7.4 million in
Annual Cost Savings, Management expects the Company to realize $4.3 million from
the elimination of duplicative personnel, occupancy and fixed overhead costs and
$3.1 million as a result of the lower prevailing wage rates in Austin, Texas and
the elimination of other duplicative costs resulting from the closure of Balfour
facilities. The Annual Cost Savings do not reflect estimated non-recurring
severance and relocation costs of approximately $5.5 million and incremental
capital expenditures of approximately $1.9 million to be incurred in connection
with the Combination.
o Manufacturing Integration. Management intends to consolidate the
operations of the Balfour jewelry manufacturing facilities in Attleboro and
North Attleboro, Massachusetts, into the existing ArtCarved operations in
Austin, Texas. During Pro Forma Fiscal 1996, Balfour's Massachusetts jewelry
facilities operated at approximately
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50% of their aggregate manufacturing capacity. ArtCarved and Balfour use
compatible manufacturing processes at their facilities, and ArtCarved's Austin,
Texas facilities have the capacity to accommodate additional production.
Management estimates that as a result of the Combination the Company will
realize cost savings from the elimination of occupancy costs associated with the
Balfour manufacturing facilities, the elimination of specifically identified
duplicative personnel and related expenses, the relocation of other functional
positions to Austin, Texas at lower prevailing wage rates, and the higher
productivity rate at the Austin, Texas manufacturing facilities.
o Selling, General and Administrative Cost Reductions. Management believes
that a significant portion of the SG&A services currently performed by Balfour
can be performed using ArtCarved's existing infrastructure and personnel.
Management estimates that the Company will realize substantial savings resulting
from reduced SG&A expenses, attributable to the elimination of specifically
identified duplicative personnel and related expenses, the relocation of other
functional positions to Austin, Texas at lower prevailing wage rates, and the
elimination of occupancy costs associated with the Balfour administrative
facility in North Attleboro, Massachusetts.
The Company has begun the consolidation of the Company's operations to
Austin, Texas, and Management expects that the consolidation of operations will
be completed during the fiscal year ending August 30, 1997. Management expects
that a portion of the Annual Cost Savings will be realized during the fiscal
year ending August 30, 1997 and that all of such savings will be realized during
the fiscal year ending August 29, 1998. There can be no assurance that the
Company will complete its consolidation by the end of its fiscal year ending
August 30, 1997 or that the Annual Cost Savings will be realized by the end of
its fiscal year ending August 29, 1998, or at all.
The following is a summary of the Annual Cost Savings that details (i) the
portion of the Annual Cost Savings that are reflected in the adjustments to the
unaudited pro forma combined financial statements, and (ii) the balance of the
Annual Cost Savings that Management expects to achieve in connection with the
Combination (dollars in thousands):
<TABLE>
<CAPTION>
Cost of
Sales SG&A Total
-------- -------- --------
<S> <C> <C> <C>
Elimination of duplicative personnel..................... $ 1,304 $ 1,974 $3,278
Elimination of occupancy and fixed overhead.............. 939 74 1,013
-------- -------- --------
Pro forma adjustments........................... 2,243 2,048 4,291
-------- -------- --------
Wage rate differential................................... 1,752 605 2,357
Elimination of other duplicative costs................... 416 339 755
-------- -------- --------
Additional cost savings......................... 2,168 944 3,112
-------- -------- --------
Total Annual Cost Savings................................ $ 4,411 $ 2,992 $ 7,403
======== ======== ========
</TABLE>
Market Broader Array of Products. The Company's comprehensive distribution
network and highly effective sales organization provide the Company with broad
market coverage and strong customer relations, which Management believes present
opportunities to increase net sales without incurring significant incremental
sales and distribution costs. To achieve this objective, Management will
implement the following programs:
Cross-Market Existing Products. Management believes there are
significant growth opportunities in selling Balfour's fine paper products
to college students through ArtCarved's existing on-campus sales channel
and selling Balfour's licensed consumer sports jewelry through ArtCarved's
existing retail sales channel, including independent retail jewelers,
retail jewelry chains and mass merchants. ArtCarved's leading position in
the sale of college class rings through on-campus college bookstores
provides a strong platform to market simultaneously Balfour's fine paper
products to the same student population without incurring any material
incremental selling or marketing expenses. Additionally, beginning in
September 1995, Balfour's licensed
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<PAGE>
consumer sports jewelry was test-marketed in 15 J.C. Penney stores in the
San Francisco metropolitan area. As a result of the success of this
program, as of January 15, 1997, J.C. Penney offered this line of jewelry
in over 400 J.C. Penney stores nationwide. Management believes that
Balfour's licensed consumer sports jewelry is well-suited for the ArtCarved
retail sales channel, and has plans to introduce these products to such
retailers during the fiscal year ending August 30, 1997.
Develop and Acquire New Products and Expand Product Lines. Management
intends to pursue growth by penetrating new markets with new and existing
products and to expand the Company's presence in existing markets by
introducing product line extensions and new products. In April 1996,
ArtCarved introduced its Celebrations of Life(R) selection of rings, which
are personalized with children's names, birthdates and birthstones to
commemorate parenthood, to approximately 2,000 independent and chain
jewelers. The Company plans to further expand this product line to include
other jewelry designed to commemorate other significant life events, family
celebrations and holidays. In order to leverage its comprehensive
distribution network, the Company has developed other lines of ArtCarved's
personalized family jewelry for the retail sales channel, primarily mass
merchants. For example, in September 1996, ArtCarved introduced its
Nameosake(TM) selection of personalized family jewelry to approximately
1,350 Wal-Mart stores nationwide, and Management expects to expand this
product line to all Wal-Mart stores nationwide by March 1997. In addition,
the Company plans to expand Balfour's line of licensed consumer sports
jewelry to include additional styles and products, such as charms,
pendants, earrings and cufflinks.
Strengthen In-School Sales Channel. Management intends to strengthen the
Company's presence in the in-school sales channel to increase the number of
students in each school who purchase the Company's products, expand school
coverage in geographic areas where the Company is currently under-represented
and extend its scholastic product lines. In July 1996 the Company introduced a
simplified marketing program for its in-school sales channel to stimulate demand
for the Company's scholastic products in-school. Management also plans to expand
the geographic presence of the Company's in-school independent sales
representatives beyond its primary focus in the Eastern, Southern and Midwestern
sections of the United States by adding additional independent sales
representatives in selected strategic regions to augment its in-school sales
channel. Additionally, Management believes that the improvements in the
Company's product offerings, customer service and financial resources that it
believes will result from the Combination will enable the Company to attract
additional sales representatives as well as improve the effectiveness of the
current in-school independent sales representatives. Specifically, because of
ArtCarved's modern manufacturing techniques and resulting accelerated product
cycles, the Company's Balfour in-school independent sales representatives will
be able to deliver rings in approximately one-half the time as was previously
capable from Balfour's production facilities. This production cycle time
improvement is expected to enhance in-school customer relations by providing
quicker order turnaround, thereby enabling the Balfour independent sales
representatives to market merchandise in the schools more frequently during each
selling season, thereby providing the potential for increased sales. Lastly,
through increased joint marketing efforts with other scholastic product
companies and selective product line acquisitions, the Company intends to
enlarge its product offerings to become a single source supplier of scholastic
products to its customers.
Although Management believes that it will be able to implement its strategy
as set forth above, there can be no assurance that improvements will be
realized, or that there will not be delays in achieving such improvements or
that results will not, in fact, decline.
Products
The Company's larger product line is its scholastic product line,
consisting of high school and college class rings, graduation-related fine paper
products, including graduation announcements, name cards, diplomas and related
products, and graduation accessories, such as memory books, T-shirts, key chains
and pendants. The Company's other product line, its recognition and affinity
product line, is designed to enable purchasers to show their affinity or support
for their favorite teams and to show pride in their affiliations and to help
companies and other organizations promote and recognize achievement.
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The table and sections that follow provide an overview of the Company's
products:
<TABLE>
<CAPTION>
Distribution Channel Brand Name
----------------------------------------- ----------------------
<S> <C> <C>
Scholastic Product Line
High School Class Rings In-School Balfour(R)
In-Store: independent and chain jewelers ArtCarved(R)
R. Johns(R)
In-Store: mass merchants Keystone(R)
Class Rings, Ltd.(R)
Master Class Rings(R)
College Class Rings On-Campus ArtCarved(R)
Balfour(R)
Fine Paper Products In-School Balfour(R)
Recognition and Affinity Product Line
Licensed Consumer Sports Jewelry In-Store, Catalogue Balfour(R)
Sports Championship Jewelry Direct to Consumer Balfour(R)
Keepsake(R)
Corporate Recognition and Reward Director to Consumer Balfour(R)
Jewelry
Personalized Family Jewelry In-Store: independent and chain jewelers Celebrations of Life(R)
In-Store: mass merchants Generations of Love(TM)
Nameosake(TM)
</TABLE>
Class Rings
The Company's largest product offering is its class rings. The Company
manufactures and markets a complete line of both high school and college class
rings with a wide choice of styles, metals, stones and other customized options
that allow students and alumni to personalize their rings in accordance with
their tastes and accomplishments. The Company produces an extensive variety of
traditional jewelry styles as well as an assortment of fashion and contemporary
designs. Purchasers have the option to include the name of the school,
curriculum, date, degree, mascot, activities and either synthetic or genuine
stones in their rings. The Company markets its products in a broad range of
prices through different sales channels.
High School Rings
The Company offers over 100 styles of high school class rings ranging from
traditional to highly stylish and fashion oriented. Most of the company's high
school class rings are available in gold or nonprecious metal, and most are
available with a choice of more than 50 different types of stones in each of
several different cuts, and more than 400 designs that can be placed on or under
the stone and emblems of over 100 activities or sports that can appear on the
sides. As a result, students have the ability to customize their rings by
designing highly personal and meaningful rings to commemorate their high school
education. During Pro Forma Fiscal 1996, the Company's high
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school class rings generally ranged in prices to the student from approximately
$50 for a nonprecious metal ring to approximately $500 for a gold ring with
precious stones. The Company markets its high school class rings under its
ArtCarved(R), Balfour(R), R. Johns(R), Keystone(R), Class Rings, Ltd.(R) and
Master Class Rings(R) brand names.
College Rings
The Company's ArtCarved(R) and Balfour(R) brand college class rings are
similar to the Company's high school class rings in terms of the variety of
customization and personalization options available. However, college rings tend
to be larger than high school rings, and many more college rings are ordered in
14- and 18-karat gold or with precious or semiprecious stones. During Pro Forma
Fiscal 1996, the average selling price of the college class ring was higher than
that of the Company's high school class ring, with prices generally ranging from
approximately $100 for a nonprecious metal ring to approximately $2,000 for a
gold ring with precious stones.
Fine Paper Products
The Company produces and markets a wide array of fine paper products,
including customized graduation announcements, name cards, thank-you stationery,
business cards, diplomas, mini-diplomas, certificates, appreciation covers,
diploma covers, and fine paper accessory items marketed under the Balfour(R)
brand name. Through its independent sales representatives, the Company also
markets certain graduation accessories that it does not produce, such as
T-shirts, pendants denoting class year, caps and gowns, yearbooks, memory books
and other scholastic products manufactured by third parties.
Recognition and Affinity
The Company also offers a variety of recognition and affinity jewelry for
specialty niche markets. The Company's "recognition" products are designed to
commemorate accomplishments and achievements in business, sporting or other
endeavors, and "affinity" products are designed to express pride in one's
affiliations with a particular organization or support for one's favorite teams
and organizations. The Company's recognition and affinity jewelry is grouped
into four primary categories. The Company's Balfour(R) licensed consumer sports
jewelry includes rings, pins and pendants containing team logos, mascots and
colors, that are manufactured for fans to express their support for their
favorite professional or amateur sports team. The Company has licensing
arrangements with the National Football League and the National Basketball
Association, and the Company has applied to continue Balfour's licensing
arrangements with Major League Baseball and the National Hockey League. These
arrangements enable the licensee to produce rings and other jewelry depicting
the logos and other trademarked names and symbols of all teams in these leagues.
The Company also historically has manufactured jewelry for NASCAR, with United
States Olympic Committee and the U.S. Figure Skating Association. The Company's
professional sports championship jewelry consists of similar products but is
designed for the championship individual or team to commemorate its championship
accomplishments and achievements. The Company offers Balfour(R) sports
championship jewelry on behalf of the foregoing organizations (including Super
Bowl rings to the San Francisco 49ers in 1995 and World Series trophies to the
New York Yankees in 1996) as well as Keepsake(R) jewelry for individuals to
commemorate American Bowling Congress-sanctioned perfect games. The Company's
Celebrations of Life(R), Generations of Love(TM) and Nameosake(TM) personalized
family jewelry consists of rings commemorating children's names, birthdates,
birthstones and baptisms, and other personalized jewelry such as necklaces and
bracelets designed to commemorate family celebrations and other holidays such as
Mother's Day and Valentine's Day. The Company distinguishes its personalized
family jewelry from those of its competitors through extensive personalization
with family names, dates, crests and events. Corporate recognition and reward
Balfour(R) jewelry includes jewelry awards for employees of various corporations
historically including many Fortune 500 corporations such as The Coca-Cola
Company, McDonalds Corp. and Xerox Corp.
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Sales and Marketing
The Company is the only class ring company with a strong national presence
in all three primary sales channels for class rings and scholastic products: (i)
the high school in-store sales channel of independent retail jewelers, retail
jewelry chains and mass merchants; (ii) the high school in-school sales channel
of independent sales representatives; and (iii) the college on-campus sales
organization. No single customer of the Company represented more than 5% of net
sales in Pro Forma Fiscal 1996.
The Company markets its class rings: (i) in-store to independent and chain
jewelers under the names ArtCarved(R) and R. Johns(R) and to mass merchants
under the names Keystone(R), Class Rings, Ltd.(R), and Master Class Rings(R);
(ii) in-school under the Balfour(R) name; and (iii) on-campus under the
ArtCarved(R) and Balfour(R) names. The Company markets its graduation-related
fine paper and accessories under the Balfour(R) name. The Company markets its
licensed consumer sports jewelry and its corporate recognition and reward
jewelry under the Balfour(R) name, its sports championship jewelry under the
Balfour(R) and Keepsake(R) names and its personalized family jewelry under the
Celebrations of Life(R), Generations of Love(TM), and Nameo sake(TM) names.
High School Scholastic Products
The Company is the only class ring manufacturer with a strong national
presence in both of the primary sales channels for high school scholastic
products as a result of the combination of the Balfour in-school channel and the
ArtCarved in-store channel. The Company's presence in both of these sales
channels distinguishes it from its competitors and enables it to sell class
rings throughout the year and to offer its products through a wider array of
formats and locations, thereby providing customers with the convenience and
choice of sales channels.
In-Store Sales Channel.
The Company is the leading supplier of high school class rings in the
in-store channel based on net sales. A predecessor of the Company introduced the
use of in-store sales in 1963 as an alternative to traditional in-school sales.
The Company sells its products in-store to independent jewelry retailers, large
jewelry chains and to mass merchants. The Company was the first class ring
manufacturer to sell class rings to mass merchants, an area of strong sales
growth within the class ring industry over the last eight years. Since 1987, the
Company has sold its products to mass merchants such as Wal-Mart and Kmart. The
Company utilizes distinct product brands, product line characteristics and
pricing for each of the in-store sales channels. Advertising is particularly
important in the in-store market to inform students and parents that the
retailer offers alternatives to the products sold at school. The Company
utilizes a combination of national, regional, local and co-op print and local
direct mail advertising for its products depending on the type of retailer
involved.
There are various reasons for selling class rings in the in-store sales
channel rather than the in-school sales channel, including: (i) the advantage of
a year round sales presence at retail store locations compared to the in-school
channel, which typically affords only two to five fixed selling days per school
during each school year; (ii) direct access to both students and their parents,
who, in many cases, are the ultimate purchasers of the scholastic jewelry
product; (iii) the ability to offer products of similar quality at lower prices
due to the Company's lower in-store distribution costs; (iv) the convenience of
the availability of store credit to purchasers to finance a purchase; (v)
quicker product delivery and superior customer service afforded retail
purchasers as a result of the smaller number of units per order; and (vi) the
ability for the Company's salespeople to represent multiple brands in a region.
Independent Retail Jewelers. The Company sells its products to
approximately 5,100 independent jewelers under the name ArtCarved(R) and R.
Johns(R). Most independent jewelers carry one line of class rings. The
Company traditionally develops marketing programs in the spring for the
following school season and presents these programs to the jewelers in the
summer to prepare local advertising placements for the fall, and
supplements these programs with national advertising in magazines targeting
teenage audiences, in-store promotional literature and direct mail
campaigns.
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Chain Jewelers. The Company sells its products to 21 of the nation's
40 largest retail jewelry chains representing approximately 1,200 stores,
including Sterling, Barry's Jewelers, A. A. Friedman, and Carlyle & Co.
Jewelers. Retail jewelry chains usually require marketing efforts tailored
to their own seasonal merchandising theme.
Mass Merchants. The Company has forged relationships with the two
largest retailers in the United States, Wal-Mart and Kmart, and in Pro
Forma Fiscal 1996 sold class rings to approximately 2,200 Wal-Mart stores
under the Keystone(R) brand name and approximately 2,100 Kmart stores under
the Master Class Rings(R) brand name. The Company also sells class rings
under the Class Rings Ltd.(R) brand name to other mass merchants, including
J.C. Penney.
In-School Sales Channel.
The Company markets its products in-school using the Balfour(R) brand name
and its independent sales representatives, who offer both class rings and a
variety of fine paper products and graduation accessories. The Company's
in-school sales channel is supported through a sales organization that consists
of approximately 120 regional independent representatives who work exclusively
for the Company with respect to the types of products represented by the
Company's product lines. The Company has developed its sales organization over
an extended period of time, and the Company intends to devote considerable
resources to maintaining and continually improving the quality of this sales
organization. The Company plans to increase its penetration in the in-school
sales channel in areas where it is not well represented. See "--Business
Strategy."
There are various reasons that students may prefer to purchase a class ring
in-school rather than in-store, including, among others: (i) the ability to
purchase a product that is more customized and symbolic of an individual school;
(ii) the excitement and enthusiasm generated by participating in both the ring
ordering and ring delivery events as a class; and (iii) the convenience of
ordering in-school from trained professionals.
The Company's independent sales representatives gain access to high schools
through administrators or student representatives who are involved in the
selection process of a supplier for their schools. Once selected as the official
supplier, the independent sales representative coordinates between the school
and the supplier to ensure satisfactory quality and service. As a result,
continuous sales coverage is an important element in the independent sales
representative's relationship with the school. Once established, personal
relationships are an important factor to ensure repeat sales.
The Company's independent sales representatives operate under contract with
exclusive non-compete arrangements that prohibit sales of competing products
during the term of the arrangement with the Company and for a period of time,
generally two years, thereafter. Depending on geographical size and volume,
independent sales representatives may employ one or more additional sales
representatives in addition to its part- or full-time personnel. The Company
compensates its independent sales representatives on a commission basis, and
most independent sales representatives receive an annual draw against
commissions earned, although all expenses, including promotional materials made
available by the Company, are the responsibility of the representative. See
"--Employees."
College Scholastic Products
The Company's college class rings are sold under the ArtCarved(R) brand
name and, to a lesser extent, under the Balfour(R) brand name primarily through
on-campus bookstores and, to a lessor extent, through local bookstores, both of
which typically also offer class rings distributed by one or more of the
Company's competitors. The college bookstores display the Company's products,
although approximately 85% of all orders are taken by the Company's sales
representatives at special events periodically set up at the bookstore or campus
student center. College class ring sales are principally supported by sales
promotions with school paper advertising and direct mailings to students and
parents. The Company uses promotions to stimulate sales in the critical
back-to-school, pre-Christmas and pre-graduation periods. The Company
differentiates itself from its competitors through its high-quality rings,
innovative styles, quick delivery times and promotional services that attract
students to tables containing product
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information. The Company intends to offer Balfour fine paper products through
the more extensive ArtCarved college on-campus sales channels. See "--Business
Strategy."
The Company employs a direct sales force of approximately 30 full-time
territory managers, who in turn are supported by 80 to 90 part-time
representatives working on a seasonal basis by assisting with the implementation
of scheduled promotions in its college market. Approximately 20 independent
sales representatives service colleges and universities. In Pro Forma Fiscal
1996, the Company sold class rings to students from approximately 1,700 colleges
and universities throughout the United States.
Recognition and Affinity Products
Recognition and affinity products are sold either to retail outlets or
directly to the group or organization or by a combination of field sales
personnel and corporate sales personnel. The Company's Balfour(R) licensed
consumer sports jewelry and Celebrations of Life(R), Generations of Love(TM) ,
and Nameosake(TM) personalized family jewelry are primarily distributed to
retail outlets and through merchandise catalogues. The Company markets its
Balfour(R) sports championship jewelry directly to the championship team or
organization or its members and its Keepsake(R) bowling rings directly to
individuals. Corporate recognition and reward programs are developed in
conjunction with corporate clients, who order and purchase products directly
from the Company.
Industry
Scholastic
There are three national competitors in the sale of class rings and fine
paper products (the Company, Jostens, Inc. and Herff Jones, Inc.) and one
additional national competitor in the sale of class rings (Gold Lance, Inc.).
Management believes the Company is the second largest among these competitors
based on net sales of class rings and the only competitor with a strong national
presence in the three primary sales channels for class rings. In addition,
regional producers have been successful at penetrating the scholastic market
through the introduction of lower-priced competitive products. The market is
highly competitive and numerous alternative suppliers exist. See "-Competition"
and "Risk Factors-Competition."
Scholastic products are differentiated on the basis of price, quality,
marketing and customer service. Customer service is particularly important in
this product line because of the high degree of customization associated with
the class ring product and the emphasis on its timely delivery. Class rings with
different quality and price points are marketed through different channels and,
within the in-store sales channel, through different retailers.
Scholastic products are sold in retail stores and directly to students in
schools and on college campuses. Management estimates that approximately 65% of
the high school class rings sold are sold through the in-school sales channel.
In schools, administrators or student representatives select the authorized
supplier for their school. Suppliers contact these administrators through their
sales forces, which are generally comprised of independent sales representatives
who market products directly to high school students. The supplier, through its
independent sales representatives, manages the entire process of interacting
with the student through the design, promotion, ordering and presentation of the
scholastic products to relieve school officials of any administrative burden
connected with the student's purchase. Successful companies in the scholastic
market have developed their sales organizations over an extended period of time
and devote considerable resources to maintaining and improving the quality of
their sales forces. After gaining access to a school, a sales representative and
the supplier must be able to demonstrate their ability to provide a high level
of customer service to complete the sale. In addition, in order to maintain an
ongoing relationship with a school, the sales representative and supplier must
provide a high-quality product and deliver finished products in a timely manner.
Due to the fact that orders from the in-school channel are placed in bulk, the
supplier must be able to deliver the units for an entire school by specified
dates or the sales representative and supplier run the risk of jeopardizing
their relationship with a particular school. A good relationship between the
sales representative and the school administrator helps ensure repeat sales from
year to year. Of the four national competitors for scholastic products, only the
Company, Jostens, Inc. and Herff Jones, Inc. have a strong presence in the
in-school sales channel.
In addition to the in-school sales channel, the scholastic product market
is also characterized by a strong in-store distribution channel. In 1963, a
predecessor of ArtCarved initiated the use of the in-store sales channel, and
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management estimates that this segment represents approximately 35% of high
school class rings sold. The in-store channel consists primarily of independent
jewelry retailers, large jewelry chains and mass merchants. Suppliers contact
these retailers through their direct sales force. Advertising is particularly
important in the in-store network to inform students and parents that the
retailers offer an alternative to the products sold in school. The in-store
network typically offers a year-round sales presence, products of similar
quality at a low price, convenience of store credit to finance a purchase, and
quicker product delivery as orders are placed on a unit, rather than
school-wide, basis. See "Sales and Marketing-In-Store Distribution." Of the four
national competitors for scholastic products, only the Company and Gold Lance,
Inc. have a strong presence in the in-store sales channel.
College class rings are sold primarily through on-campus bookstores and, to
a lesser extent, through local bookstores, both of which typically also offer
class rings distributed by one or more of the Company's major national
competitors. Historically, on-campus bookstores have been owned and operated by
the colleges and universities; however, during the last several years an
increasing number of campus bookstores have been leased to companies engaged in
retail bookstore operations, primarily Barnes & Noble Bookstores, Inc. and
Follett Corporation. Of the four national competitors for scholastic products,
only the Company and Jostens, Inc. have a strong presence in the sale of college
class rings.
Class ring manufacturers must enter into licensing arrangements, which
typically are non-exclusive, with colleges and universities in order to use the
name of the college or university and other trademarked names and symbols on the
class rings. Typically, these arrangements provide that the manufacturer must
pay a royalty to the college or university equal to a fixed dollar amount per
unit sold or a percentage of net sales. The school can terminate the arrangement
if, among other things, the class ring manufacturer uses the licensed
intellectual property in a manner not authorized by the relevant licensing
contract. Nonetheless, the ability of a manufacturer to enter into licensing
contracts, particularly exclusive contracts, is an important competitive factor
with respect to colleges and universities. Most high schools do not require
licensing arrangements to use their name, mascot or school colors.
High School. The potential size of the market for high school class rings,
graduation announcements, diplomas, and other high school scholastic products is
affected by high school graduation rates. Those high school students who
purchase class rings typically do so during their junior year. According to the
U.S. Department of Education, the number of high school graduates has declined
steadily since 1981. However, the Department of Education has projected that as
a result of the increase of birth rates in the 1980s, the number of high school
graduates will increase by approximately 16.8% from 2.6 million in 1996 to 3.0
million by 2006. The following table shows the historical and projected number
of U.S. high school graduates from 1986 to 2006:
High School Graduates
<TABLE>
<CAPTION>
Historical Projected
- -------------------------------------------- ----------------------------------------------------------------
High School High School % Increase
Graduates(1) Graduates(2) (Decrease)
Year (In thousands) Year (In thousands) from 1996 Level
- ------------------- ----------------------- ------------------- ------------------- ------------------
<S> <C> <C> <C> <C>
1986 2,643 1997 2,612 0.9%
1987 2,694 1998 2,734 5.6%
1988 2,773 1999 2,828 9.3%
1989 2,727 2000 2,873 11.0%
1990 2,586 2001 2,933 13.3%
1991 2,503 2002 2,961 14.4%
1992 2,482 2003 2,981 15.2%
1993 2,490 2004 3,054 18.0%
1994 2,505(2) 2005 3,051 17.9%
1995 2,564(2) 2006 3,022 16.8%
1996 2,588(2)
</TABLE>
(1) Source: The Department of Education, National Center for Education
Statistics, Projections of Education Statistics to 2006, March 1996.
(2) Projected by the Department of Education.
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Although the number of high school graduates has increased since 1992,
Management believes that the percentage of high school graduates who purchase
high school class rings has declined for a period of at least five years,
although there is no industry data to confirm such belief. In addition, the
Company's volume of high school class rings sold during this time has declined,
and Management believes that the Company's market share has declined as well,
although there is no industry data to confirm such belief. For information
regarding the Company's business performance during this period, see
"Management's Discussion and Analysis of Financial Condition and Results of
Operations." See "Risk Factors--Customers and Sales Channels."
College. The potential size of the college scholastic market is affected by
the number of bachelor degrees granted. Most college class rings are purchased
during either the junior or senior year in anticipation of a student's
graduation. According to the U.S. Department of Education, the number of
bachelor degrees granted is expected to increase by approximately 10.1% from 1.2
million in 1996 to 1.3 million by 2006, although such number is expected to
decline slightly between 1996 and 2000. The following table shows the historical
and projected aggregate number of bachelor degrees granted from 1986 to 2006:
Bachelor Degrees Granted
<TABLE>
<CAPTION>
Historical Projected
- -------------------------------------------- ----------------------------------------------------------------
Degrees Degrees % Increase
Conferred(1) Conferred(2) (Decrease)
Year (in thousands) Year (in thousands) from 1996 Level
- ------------------- ----------------------- ------------------- ------------------- ------------------
<S> <C> <C> <C> <C>
1986 988 1997 1,188 -0.6%
1987 991 1998 1,173 -1.8%
1988 995 1999 1,180 -1.3%
1989 1,019 2000 1,191 -0.3%
1990 1,051 2001 1,211 1.3%
1991 1,095 2002 1,237 3.5%
1992 1,137 2003 1,264 5.8%
1993 1,165 2004 1,288 7.8%
1994 1,182(2) 2005 1,302 9.0%
1995 1,192(2) 2006 1,316 10.1%
1996 1,195(2)
</TABLE>
- -----------------
(1) Source: Middle alternative projections, The Department of Education,
National Center for Education Statistics (the "DOE"), Projections of
Education Statistics to 2006, March 1996.
(2) Projected by the Department of Education.
Management believes that the percentage of college graduates who purchase
college class rings has been relatively stable for a period of five years,
although there is no industry data to confirm such belief. In addition, the
Company's volume of college class rings sold during this time has increased
slightly, but Management believes that the Company's market share has remained
stable, although there is no industry data to confirm such belief. For
information regarding the Company's business performance during this period, see
"Management's Discussion and Analysis of Financial Condition and Results of
Operations." See "Risk Factors--Customers and Sales Channels."
Recognition and Affinity
The market for the Company's recognition and affinity products is a broad
(and expanding) collection of market niches. It includes championship jewelry
for winners of professional sports championships as well as individual events.
The market for retail affinity products, such as licensed consumer sports
jewelry, is well developed in the apparel category but not with respect to
non-apparel products (such as the Company's licensed consumer sports
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jewelry). Management believes that the demand for licensed consumer sports
jewelry is influenced by trends in the popularity of professional and amateur
sports. An important success factor in the licensed consumer jewelry business is
obtaining the exclusive right to a team name and mascot.
Professional sports championship jewelry is marketed directly to the
individual or the championship team commemorating a special event in the team's
history. The "Super Bowl Ring" is the most famous example of a special event.
However, the Company targets a range of special sporting events, from minor
league championships to national championships in all major sporting events.
These sporting events include not only football, basketball, baseball and hockey
championships, but also events such as golf, equestrian, figure skating, bowling
and auto racing. Important elements for success in this business are the ability
to contact future prospects, have unique designs and effectively compete on
service and prices. The Company historically has sold to clients in all of the
sporting events mentioned above and will pursue additional venues as resources
and capabilities are put in place.
In contrast, the market for "recognition" products such as the Company's
corporate recognition and reward jewelry is well developed and has a significant
array of competitors. Products are marketed through retail outlets, independent
sales representatives (who develop programs with corporate and other clients),
and directly to corporations through direct mail campaigns. Management
recognizes that the Company is a small player in the market, but the Company's
position in this market is enhanced by its low cost, its high level of service,
its brand name recognition and the quality of its products and designs. This
market is composed of approximately ten significant competitors, including the
Company's major scholastic products competitors--Jostens, Inc. and Herff Jones,
Inc. Two of the Company's competitors, O.C. Tanner and Ad Specialty Institute,
alone account for approximately 75% of the industry's revenues.
Operations
Production and Technology
Class Rings and Recognition and Affinity Products
As part of the identified cost savings program, Management plans to
consolidate Balfour's existing ring and jewelry manufacturing operations with
those of ArtCarved's existing manufacturing facilities. The Company's Austin,
Texas manufacturing facilities employ advanced design and manufacturing
techniques, which provide short production cycle times and high production
yields and has the capacity to absorb Balfour's production requirements.
Management believes that volume efficiencies, modern manufacturing techniques
(including cell manufacturing) and a consistent focus on process improvements
enhances the Company's ability to compete by enabling the Company to provide
quality products and a high level of service.
The Company produces high school and college class rings only upon the
receipt of a customer order and deposit, and each ring is custom manufactured.
The entire production process takes approximately two to three weeks from
receipt of the customer's order to product shipment. Consequently, only a
limited amount of finished products inventory is necessary, reducing the
Company's exposure to fluctuations in the price of materials and the Company's
investment in working capital.
The Company employs advanced design and manufacturing techniques at its
jewelry manufacturing plants. The use of computer-aided design and manufacturing
equipment (CAD/CAM), computer integrated manufacturing (CIM), cell manufacturing
and the craftsmanship of the Company's highly-skilled jewelers enable the
Company to produce increasingly personalized and high quality jewelry while
maintaining critical delivery schedules.
The Company utilizes similar manufacturing processes for most of its
jewelry, although licensed customer sports jewelry does not require the high
degree of customization necessary for the Company's other products. College
class rings are often larger and of a more complex design than high school
rings, but both are designed, cast and finished on the same production lines.
For every ring manufactured, an individual wax and steel or plastic mold is
developed according to the features (name, school, activity, mascot, etc.)
specified by the customer. Many of these features have been designed using the
CAD/CAM and other computer-assisted design technologies; many
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others have been designed by the craftsmen of the Company over its long history.
Several individual components may make up the mold, and the Company has indexed
collections of over 1,000,000 such components at its facilities from which to
draw at the design stage of a class ring. A bar code is printed on every
production order and is scanned at every quality inspection station as the order
proceeds through production, thereby allowing quality statistics to be recorded
and providing production personnel summaries of quality data during the day.
Furthermore, this scanning allows the customer service department to review
order status on its computer terminals, identifying the location of the order
and its approximate shipping time. The bar code is also used at several CIM
stations, where personalized information (name, date, school name, degree, etc.)
is retrieved from the main computer database to be cut into the ring using
specialized software and computer-controlled cutting machines.
Fine Paper
In July 1996 Balfour's fine paper manufacturing and distribution activities
were consolidated from Balfour's former Dallas, Texas plant with Balfour's
operations at a 100,000 square-foot facility in Louisville, Kentucky. This
represented the completion of the consolidation of the operations of three of
its fine paper plants with operations at the Louisville facility. Management
believes this consolidation will result in improved efficiency of operations and
increased capacity.
Each fine paper product requires a high level of customization and is
characterized by having short product runs. For a typical graduation product
order, the Company's salespeople meet with the next class of graduating seniors
to chose their graduation announcements and related designs in the spring of
their junior year or early fall of their senior year. Designs are chosen and art
work is produced on the Company's computerized design systems.
Raw Materials
The principal raw materials that the Company purchases are gold and
precious, semiprecious and synthetic stones. The cost (and, with respect to
precious, semiprecious and synthetic stones, the availability) of these
materials are affected by market conditions, and when there is a period of
volatility in the market, operating results may be affected. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations--Impact
of Inflation."
The Company purchases diamonds and other precious gems from various
suppliers, and the Company is not dependent upon any one supplier or a small
number of suppliers for diamonds and other precious gems. The Company purchases
substantially all synthetic and semiprecious stones from a single supplier, the
Herbert Stephen Company, a German corporation that supplies synthetic stones to
most of the class ring manufacturers in the United States. See "Risk
Factors--Sources of Semiprecious and Synthetic Gems; Fluctuations in Prices of
Raw Materials."
The Company requires significant amounts of gold for the manufacture of its
jewelry. The Company will finance a majority of its gold inventory requirements
through its Gold Facility. Management believes that it has sufficient
availability under its Revolving Credit and Gold Facilities to finance all of
its gold inventory requirements. The Company reduces its exposure to
fluctuations in the price of gold in several ways. The Company also uses
precious metals and both precious and semiprecious stones in its products and,
accordingly, any increase in the price of these materials could have a
significant impact on its cost of sales. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Raw Material Price
Fluctuations."
The Company purchases its fine paper from two major paper product
distributors, although there are many other suppliers of materials needed to
manufacture the Company's fine paper products if the Company should become
unable to satisfy its raw materials requirements from existing suppliers. The
Company also distributes finished goods such as memory books, T-shirts, caps and
gowns, yearbooks, and other scholastic products manufactured by third parties
for distribution with its fine paper products.
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Environmental Matters
The Company is subject to federal, state and local laws, ordinances and
regulations that establish various health and environmental quality standards
and provide penalties for violations of those standards. For example, under
certain environmental laws, a current or previous owner or operator of real
property may be liable for remediation of hazardous substances on the property,
whether or not the owner or operator was responsible for the presence of the
hazardous substances. Such environmental laws also may also impose liability for
remediation of hazardous substances at properties to which a company has sent
wastes for disposal or recycling. Other environmental laws govern the
generation, handling, storage, transportation and disposal of hazardous and
toxic wastes, the discharge of pollutants into surface waters and sewers,
emissions of certain potentially harmful substances into the air, and employee
health and safety.
Past and present manufacturing operations of the Company subject to
environmental laws include the use, handling, and contracting for disposal or
recycling of hazardous or toxic substances, the discharge of particles into the
air, and the discharge of process wastewaters into sewers. Also, minor spills of
chemicals used in the Company's manufacturing processes may occur from time to
time at the Company's facilities, which may result in localized soil or
groundwater contamination, and such spills may have occurred in the past.
Moreover, environmental laws are complex and subject to frequent change, and
Management cannot predict what environmental legislation or regulations will be
enacted in the future, how existing or future laws or regulations will be
administered or interpreted, or what environmental conditions may be found to
exist in the future at the Company's facilities. Management believes, however,
that the Company's current operations are in substantial compliance with all
material environmental laws and that the Company does not currently face
environmental liabilities that would have a material effect on the Company's
operations or operating results.
Security
To protect against theft, the Company has instituted security measures at
its facilities that deal with gold and precious stones. The Company also uses
various security techniques for salespeople, other employees and agents while
they are transporting Company products. In spite of such precautions, the
Company has experienced losses through theft from time to time. None of such
losses have had a material adverse effect on the financial condition or results
of operations of the Company, and the Company maintains all-risk insurance to
cover any significant losses.
Intellectual Property
The Company markets its products under many trademarked brand names, some
of which rank among the most recognized and respected names in the jewelry
industry, including ArtCarved(R), Balfour(R), Celebrations of Life(R), Class
Rings, Ltd.(R), Generations of Love(TM), Keepsake(R), Keystone(R), Master Class
Rings(R), Nameosake(TM), and R. Johns(R). Generally, a trademark registration
will remain in effect so long as the trademark remains in use by the registered
holder and any required renewals are obtained. The Company also holds several
patented ring designs, which yield a competitive advantage for the Company.
The Company has non-exclusive licensing arrangements with numerous colleges
and universities under which the Company has the right to use the name and other
trademarks and logos of these schools on the Company's products. In addition,
the Company has licensing agreements with certain major professional sports
organizations. Management does not believe that there are any franchises or
licenses the loss of which, individually, would have a material effect on the
Company.
In 1988 CJC Holdings, Inc., ArtCarved's former owner, granted to Lenox,
Inc. a ten-year license to use the Keepsake(R), name for the sale of non-jewelry
goods, with the prior written consent of CJC Holdings, Inc. This license is
royalty-free, worldwide and exclusive for non-jewelry products. ArtCarved also
has nonexclusive licensing arrangements with two manufacturers in Canada for the
ArtCarved trademark and exclusive licensing arrangements for the ArtCarved(R)
trademark to a retailer in Central America.
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Pursuant to the ArtCarved Purchase Agreement, the Company has succeeded to
ArtCarved's rights and obligations under a Trademark License Agreement with JTW
Industries, Inc. ("JTW"). JTW is controlled by Mr. J. T. Waugh, the former Chief
Executive Officer of CJC. Pursuant to the Trademark License Agreement, JTW was
granted the right to use the ArtCarved(R) trademark in connection with wedding
rings, engagement rings and anniversary bands. The license granted under the
Trademark License Agreement is perpetual and royalty free; provided, that upon
(i) a transfer of, or agreement to transfer, the license, (ii) a change of
control of JTW, as a result of which Mr. Waugh and his affiliates no longer own
at least a majority of the equity interests in JTW, (iii) the third anniversary
of the death of Mr. Waugh, (iv) a sale or series of sales of equity of JTW as a
result of which Mr. Waugh and his affiliates cease to own a majority of the
equity of JTW, or (v) any act that would violate the Noncompetition Agreement
described below, whether or not the term of such Noncompetition Agreement has
expired, the Trademark License Agreement will terminate unless the parties agree
to a royalty arrangement within 90 days, on terms and conditions satisfactory to
the Company in its sole and absolute discretion. The Trademark License Agreement
cannot be transferred without the Company's consent. As partial consideration
for the Trademark License Agreement, JTW and certain affiliates have entered
into a Noncompetition Agreement with ArtCarved, pursuant to which they have
agreed not to enter the class rings and recognition and affinity businesses for
a period of three years. Pursuant to the ArtCarved Acquisition, the Company has
succeeded to ArtCarved's rights under the Noncompetition Agreement.
Employees
As of February 28, 1997, the Company employed approximately 1,530
individuals. Approximately 980 of these employees are involved in manufacturing,
operations and production support, 370 are involved in marketing and sales and
the balance are employed in various administrative and data processing
functions. Many employees engaged in manufacturing operations are highly-skilled
technicians and craftsmen, and training times for these positions range from two
weeks to four months.
Other than the approximately 285 hourly production and maintenance
employees (as of February 28, 1997) at the Austin, Texas manufacturing facility,
no employees of the Company are represented by a labor union. The Austin workers
are represented by the United Brotherhood of Carpenters and Joiners Union (the
"Union"). There is currently no collective bargaining agreement in place, and
the prior collective bargaining agreement expired in June, 1994. CJC was subject
to a National Labor Relations Board order requiring it to negotiate in good
faith with the Union. Such order may apply to the Company as a result of the
Acquisitions. The Company has agreed to recognize the Union as the exclusive
bargaining agent for all of the Company's Austin, Texas production and
maintenance employees, and the Company and the Union are currently in
negotiations for a new collective bargaining agreement. ArtCarved had not
experienced any work stoppages or significant employee-related problems at its
Austin, Texas manufacturing facility in the recent past. Management considers
the relationship between the Company and all of its employees to be
satisfactory.
The Company employs two separate sales forces to support its in-store
retail products and its on-campus products, with approximately 40 salespeople
concentrating on in-store and approximately 30 full-time territory managers
(supplemented by approximately 80 to 90 part-time representatives during peak
buying seasons) concentrating on on-campus, respectively. The Company
compensates its independent sales representatives servicing the high school
in-school network on a commission basis, and most independent sales
representatives receive an annual draw against commissions earned, although all
expenses, including promotional materials made available by the Company, are the
responsibility of the representative.
Properties
The Company's headquarters are located in ArtCarved's existing facilities
in Austin, Texas, which are being expanded to accommodate the manufacturing and
administrative operations previously conducted at Balfour's jewelry plants in
North Attleboro and Attleboro, Massachusetts. Pending consolidation of such
operations, the
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Company will lease or sublease these facilities from L.G. Balfour Company. The
Company also maintains small sales offices in Mt. Lebanon, Pennsylvania;
Sherman, Texas; and Kingwood, Texas.
The Company's principal executive offices are located at 7211 Circle S
Road, Austin, Texas 78745, and its telephone number is (512) 444-0571.
The Company's properties as of December 31, 1996 are as set forth below.
The Company believes that all of its properties are well maintained and in good
condition.
<TABLE>
<CAPTION>
Primary Use Location Approximate Size Owned/Leased
----------- -------- ---------------- ------------
<S> <C> <C> <C>
Administrative Offices Austin, Texas 20,000 Square Feet Owned
Jewelry Manufacturing Austin, Texas 83,955 Square Feet Owned
Juarez, Mexico 6,800 Square Feet Leased(1)
Attleboro, Massachusetts 56,350 Square Feet Leased(2)
North Attleboro, Massachusetts 101,422 Square Feet Leased(3)
Fine Paper Louisville, Kentucky 100,000 Square Feet Leased
Warehouse Facilities Austin, Texas 50,000 Square Feet Leased
</TABLE>
(1) The Company currently leases this property on a month-to-month basis. On or
about June 30, 1997, the Company anticipates relocating its Mexican
operations from this facility to a new 20,000 square foot facility located
in the city of Juarez in Chihuahua, Mexico. The Company has entered into a
lease for the Juarez property which will expire seven years after the date
the Company assumes occupancy of the facility with options to renew the
lease for two additional one-year periods.
(2) This property is being leased directly from L.G. Balfour Company on a
triple net basis. The lease will terminate on the earlier of September 30,
1997 and the date on which the Company vacates the relevant facility,
unless the parties agree to extend the term.
(3) This property is being subleased from L.G. Balfour Company on terms
substantially similar to L.G. Balfour Company's relevant overlease. The
sublease will terminate on the earlier of September 30, 1997 and the date
on which the Company vacates the relevant facility (except with respect to
the manufacturing building, for which the sublease shall expire on the
earlier of May 30, 1998 and the date on which the Company vacates such
building, which Management expects will occur during the fiscal year ending
August 30, 1997), unless the parties agree to extend the terms.
Legal Proceedings
There are no material pending legal proceedings to which the Company is a
party or to which any of its property is subject. Each of ArtCarved and Balfour
has in the past been subject to various legal proceedings arising in the
ordinary course of business, none of which are expected to have a material
adverse effect on the Company or any of its properties.
Competition
The Company's businesses are highly competitive and the Company faces
competition in each of its product lines. The Company seeks to compete on the
basis of price, service, product quality, product development and marketing.
While each of its product lines faces several strong competitors, the Company's
principal competitors with respect to the full breadth of its product lines are
Jostens, Inc. and Herff Jones, Inc. In the scholastic products business, there
are three national competitors in the sale of both class rings and fine paper
products (the Company, Jostens, Inc. and Herff Jones, Inc.), one additional
national competitor in the sale of class rings (Gold Lance, Inc.), and certain
additional competitors in the sale of fine paper products. An important
competitive factor contributing to the success of the Company in generating
sales through its in-school distribution channels will be its ability to
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recruit, train and maintain a high-quality sales force. In addition, the Company
faces several regional competitors, which have been successful in the past at
taking market share from the national competitors (including ArtCarved and
Balfour).
MANAGEMENT
Directors, Executive Officers and Certain Other Senior Officers
The following table sets forth in alphabetical order each person who is an
executive officer or director of the Company and each other person who is a
senior officer of the Company as of March 28, 1997:
Name Position
Executive Officers and Directors:
<TABLE>
<S> <C>
George E. Agle(1)(2) ............................ Chairman of the Board of Directors
Jeffrey H. Brennan(1) ........................... President, Chief Executive Officer and Director
John K. Castle .................................. Director
Richard H. Fritsche(1) .......................... Chief Financial Officer
William J. Lovejoy .............................. Director
David B. Pittaway ............................... Director
Zane Tankel ..................................... Director
Senior Officers:
Charlyn A. Cook ................................. Vice President-Manufacturing
Parke H. Davis .................................. Vice President-Retail Sales and Marketing
Andrew J. McLean ................................ Vice President-Operations
Donald J. Percenti .............................. Vice President-On Campus Sales and Marketing
R. Barry Shields ................................ Vice President-Specialty Products Sales and Marketing
</TABLE>
- ----------
(1) Denotes Executive Officer.
(2) Mr. Agle is expected to resign as an Executive Officer as of March 31, 1997.
The Company is party to certain employment arrangements with respect to Mr.
Agle and has entered into employment agreements with each of the other
above-named executive and senior officers. For a description of the employment
arrangements with respect to Messrs. Agle, Brennan and Fritsche (hereinafter,
the "Named Executive Officers"), see "--Executive Compensation; Employment
Agreements." No family relationship exists between any of the executive officers
or between any of them and any director of the Company.
George E. Agle (56) has been Chairman of the Board of the Company since
December 16, 1996, and prior thereto was President and Chief Executive Officer
of Balfour from September 1994 through December 1996. Prior to that Mr. Agle was
Vice President of Business Alliance Development at Scott Paper Company from
September 1992 to August 1994. Prior to that, Mr. Agle was President and General
Manager of Scott Paper Company Mexico. Mr. Agle was employed by Scott Paper
Company in various capacities for 30 years.
Jeffrey H. Brennan (53) has been President, Chief Executive Officer and a
director of the Company since December 16, 1996, and prior thereto was President
and Chief Executive Officer of CJC from September
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1995 through December 1996. He also held the position of Chief Financial Officer
of CJC from August 1988 and served as a director of CJC from December 1988
through December 1996. Before joining CJC in August 1988, Mr. Brennan served in
various financial management positions with Baker Hughes Incorporated, a
provider of oilfield service, supplies and equipment.
John K. Castle (55) has been a director of the Company since December 16,
1996 and has been Chairman of Castle Harlan, Inc., a private merchant bank,
since 1987. Mr. Castle is Chairman of Castle Harlan Partners II G.P., Inc.,
which is the general partner of the general partner of Castle Harlan Partners
II, L.P., the Company's controlling stockholder. Immediately prior to forming
Castle Harlan, Inc. Mr. Castle was President and Chief Executive Officer and a
Director of Donaldson, Lufkin and Jenrette, Inc., one of the nation's leading
investment banking firms. Mr. Castle is a director of UNC Inc., Sealed Air
Corporation, Morton's Restaurant Group, Inc. and Oakley Insurance Group, Inc.; a
Managing Director of Statia Terminals Group, N.V.; and a member of the
corporation of the Massachusetts Institute of Technology. Mr. Castle is also a
Trustee of the New York and Presbyterian Hospitals, Inc., the Whitehead
Institute of Biomedical Research and New York Medical College (for 11 years
serving as Chairman of the Board). Formerly, Mr. Castle was a Director of the
Equitable Life Assurance Society of the United States.
Richard H. Fritsche (51) has been Chief Financial Officer of the Company
since December 16, 1996, and prior thereto was Vice President of Finance and
Administration of Balfour from August 1994 through December 1996. From 1990 to
1994, Mr. Fritsche served as Vice President of Administration for the Holson
Burnes Group, Inc.
William J. Lovejoy (29) has been a director of the Company since December
16, 1996 and served as Secretary of CBI from April 1996 through December 16,
1996. Mr. Lovejoy is a Vice President of Castle Harlan, Inc., a private merchant
bank, with which he has been associated since December 1994. From June to August
of 1992 and from August of 1993 to November of 1994, Mr. Lovejoy was a
management consultant at The Boston Consulting Group, Inc. From 1991 to 1993 he
attended Harvard Business School, and prior to that worked as an analyst at
Wasserstein Perella & Co., Inc. Mr. Lovejoy also serves as a director of
Homestead Insurance Company.
David B. Pittaway (45) has been a director of the Company since December
16, 1996 and was President, Treasurer and the sole director of CBI from April
1996 through December 16, 1996. Mr. Pittaway has been Vice President and
Secretary of Castle Harlan, Inc., a private merchant bank, since February 1987
and Managing Director since February 1992. Mr. Pittaway is Secretary and an
executive officer of Castle Harlan Partners II G.P., Inc., which is the general
partner of the general partner of Castle Harlan Partners II, L.P., the Company's
controlling stockholder. Mr. Pittaway has been Vice President and Secretary of
Branford Castle, Inc., an investment company, since October 1986; Vice
President, Chief Financial Officer and a director of Branford Chain, Inc., a
marine wholesale company, since June 1987; a director of Morton's Restaurant
Group, Inc., a public restaurant company; a Managing Director of Statia
Terminals Group, N.V., a holder of marine terminals; and a director of McCormick
& Schmick Holding Corp., a privately-held restaurant holding company. Prior to
1987, Mr. Pittaway was Vice President of Strategic Planning and Assistant to the
President of Donaldson Lufkin & Jenrette, Inc. from 1985.
Zane Tankel (56) has been a director of the Company since December 16, 1996
and has been Chairman and Chief Executive Officer of Zane Tankel Consultants,
Inc., a sales company, since 1990. In 1994, Mr. Tankel formed Apple Metro, Inc.,
a restaurant franchisee for the New York metropolitan area, for the franchisor
Applebee's Neighborhood Grill & Bar. He is presently Chairman and Chief
Executive Officer of Apple Metro, Inc. In 1995, Mr. Tankel was elected chairman
of the Federal Law Enforcement Foundation, which aids the federal law
enforcement community in times of crisis, and was elected to the Board of
Directors of the Metropolitan Presidents Organization, the New York chapter of
the World Presidents Organization, with which Mr. Tankel has been associated
since 1977. Mr. Tankel is also on the advisory board to the Boys Choir of Harlem
and, in 1987, Mr. Tankel served on the Board of Directors of Beverly Hills
Securities Corporation, a wholesale mortgage brokerage company, until its sale
in January 1994. In addition, Mr. Tankel founded Saga Communications, Inc. in
1988.
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The following individuals serve as Senior Officers of the Company:
Charlyn A. Cook (48) has been Vice President--Manufacturing of the Company
since December 16, 1996 and prior thereto was President--Manufacturing Division
of CJC from December 1989 through December 1996. From the formation date of CJC
in April 1988 until December 1989, she was Vice President--Operations. Ms. Cook
was one of the founding employees of R. Johns Ltd., the predecessor company of
CJC. She also served as a director of CJC from April 1988 until March 1996.
Prior to joining R. Johns, she was employed in administrative operations at John
Roberts, Inc.
Parke H. Davis (54) has been Vice President--Retail Sales and Marketing
since December 16, 1996, and prior thereto was President--Class Ring Division of
CJC for more than the past three years and previously served as
President--Keepsake Division and President--College Class Ring Sales. Mr. Davis
has been involved in class ring sales and marketing since his employment with
CJC and its predecessor in 1965.
Andrew J. McLean (49) has been Vice President--Operations since December
16, 1996, and prior thereto was Vice-President of Operations of Balfour from
March 1992 through December 1996. Prior to that, he was Operations Manager--EPG
and Ring Plant Manager from 1990 through 1992.
Donald J. Percenti (40) has been Vice President--On Campus Sales and
Marketing since December 16, 1996, and prior thereto was Vice President of Sales
and Marketing for scholastic products of Balfour from September 1991 through
December 1996. Prior to that, Mr. Percenti was employed by Balfour in various
capacities since 1977.
R. Barry Shields (37) has been Vice President--Specialty Products Sales and
Marketing since December 16, 1996, and prior thereto was Vice President, Sales
and Marketing, Consumer Products Group of Balfour from January 1994 through
December 1996. Prior to that, Mr. Shields was Director of Direct Response
Marketing since December 1992. From July 1989 to November 1992 Mr. Shields
served as Director of Marketing of Color Me Beautiful Cosmetics.
The Board of Directors has established two committees, a Compensation
Committee and an Audit Committee. The Compensation Committee reviews general
policy matters relating to compensation and benefits of employees and officers
of the Company. The Audit Committee recommends the firm to be appointed as
independent accountants to audit the Company's financial statements, discusses
the scope and results of the audit with the independent accountants, reviews
with management and the independent accounts the Company's interim and year-end
operating results, considers the adequacy of the internal controls and audit
procedures of the Company and reviews the non-audit services to be performed by
the independent accountants. The Compensation Committee consists of Messrs.
Castle and Pittaway and the Audit Committee consists of Messrs. Pittaway and
Lovejoy.
Compensation of Directors
Except as set forth below, Directors are not provided with any compensation
for their services other than the reimbursement of expenses associated with
attending meetings of the Board of Directors or any committee thereof. For a
description of certain employment arrangements with Messrs. Agle and Brennan,
see "--Executive Compensation; Employment Agreements."
The Company has entered into indemnification agreements with its directors
that, among other things, require the Company to indemnify the directors to the
fullest extent permitted by law, and to advance to the directors all related
expenses, subject to reimbursement if it is subsequently determined that
indemnification is not permitted. The Company has also agreed to indemnify and
advance all expenses incurred by directors seeking to enforce their rights under
the indemnification agreements, and to cover directors under the Company's
directors' and officers' liability insurance.
The Company has entered into a Management Agreement with Castle Harlan,
Inc. pursuant to which Castle Harlan, Inc. has agreed to provide business and
organizational strategy, financial and investment management and merchant and
investment banking services to the Company, for which the Company will pay
Castle Harlan, Inc. $1.5 million per year. See "Certain Relationships and
Related Transactions." Mr. Castle is the Chairman and majority stockholder of
Castle Harlan, Inc. and Mr. Pittaway is Vice President and Secretary of Castle
Harlan, Inc.
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Compensation Committee Interlocks and Insider Participation
No member of the Compensation Committee is or will be an employee of the
Company. There are no compensation committee interlocks (i.e., no executive
officer of the Company serves as a member of the board of directors or the
compensation committee of another entity which has an executive officer serving
on the Board or the Compensation Committee).
Executive Compensation; Employment Agreements
Pursuant to the Balfour Purchase Agreement, the Company has agreed to
employ Mr. Agle at an annual base salary of $300,000, plus a bonus of $50,000
payable under certain circumstances. In addition, the Company has agreed to
assume certain of Balfour's obligations under Mr. Agle's employment agreement
with Balfour to pay Mr. Agle a severance payment equal to 18 months of his
yearly salary payable on a monthly basis in the event he voluntarily terminates
employment with the Company under certain circumstances or is terminated without
cause. It is expected that Mr. Agle will voluntarily terminate such employment
and that the Company will make such severance payment to Mr. Agle.
The Company has entered into an employment agreement with Jeffrey H.
Brennan, effective as of December 16, 1996, pursuant to which Mr. Brennan will
serve as Chief Executive Officer of the Company at an annual base salary of
$190,000 per year for an initial term of four years, which will automatically be
extended for additional year terms on December 15 of each succeeding year
thereafter unless earlier terminated by the Company by not less than 60 days'
prior notice. Mr. Brennan will be entitled to participate in all employee
benefit plans and programs (including any incentive bonus plans and incentive
stock option plans) maintained by the Company from time to time for the benefit
of its employees. In addition, Mr. Brennan's employment agreement provides that,
in the event Mr. Brennan's employment is terminated by the Company without Cause
(as defined) or by Mr. Brennan with Good Reason (as defined), Mr. Brennan will
be entitled to receive bi-weekly severance payments during the two-year period
following his termination in an amount equal to the average of his bi-weekly
base compensation in effect within the two years preceding his termination. Mr.
Brennan has agreed not to compete with the Company in the United States for a
period of one year after the termination of his employment under his employment
agreement.
The Company has entered into an employment agreement with Richard H.
Fritsche, effective as of December 16, 1996, pursuant to which Mr. Fritsche will
serve as an executive of the Company at an annual base salary of $115,000 per
year for an initial term of three years, which will automatically be extended
for additional year terms on December 15 of each succeeding year thereafter
unless earlier terminated by the Company by not less than 60 days' prior notice.
The Company also has agreed to pay Mr. Fritsche a $50,000 bonus if Mr. Fritsche
remains employed by the Company through December 15, 1997, or if his employment
is earlier terminated by the Company without Cause (as defined) or by Mr.
Fritsche with Good Reason (as defined), in each case subject to approval by the
Board of Directors of the Company based on his performance during such time. Mr.
Fritsche will be entitled to participate in all employee benefit plans and
programs (including any incentive bonus plans and incentive stock option plans)
maintained by the Company from time to time for the benefit of its employees. In
addition, Mr. Fritsche's employment agreement provides that in the event Mr.
Fritsche's employment is terminated by the Company without Cause (as defined) or
by Mr. Fritsche with Good Reason (as defined), Mr. Fritsche will be entitled to
receive bi-weekly severance payments during the 18-month period following his
termination in an amount equal to the average of his bi-weekly base compensation
in effect within the two years preceding his termination. Mr. Fritsche has
agreed not to compete with the Company in the United States for a period of one
year after the termination of his employment under his employment agreement.
Management Options
The Board of Directors of the Company is considering establishing an option
plan for its Management, pursuant to which it will grant performance-based
options representing up to 15% of the capital stock of the Company on a
fully-diluted basis (after giving effect to the issuance of the shares of
capital stock underlying such options) to those employees whose performance is
expected to contribute significantly to the long-term strategic performance and
growth of the Company. The Compensation Committee would monitor any such plan.
PRINCIPAL STOCKHOLDERS
The following table sets forth certain information regarding the beneficial
ownership of the Company's voting securities as of February 28, 1997 with
respect to (i) each person or entity who is the
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beneficial owner of more than 5% of the Company's voting securities, (ii) each
of the Company's directors, (iii) each of the Named Executive Officers, and (iv)
all directors and executive officers as a group.
<TABLE>
<CAPTION>
Number of Percentage
Number of Percentage Shares of of Total
Shares of of Total Series B Series B
Name and Address of Beneficial Owner(1) Common Stock Common Stock Preferred Preferred
- ----------------------------------------------------- -------------- ------------ ------------ ------------
<S> <C> <C> <C> <C>
Castle Harlan Partners II, L.P.(2)................... 332,027 88.5 332,027 88.5
Castle Harlan Offshore Partners, L.P.(2)(3).......... 21,878 5.8 21,878 5.8
John K. Castle(2)(3)(4).............................. 375,000 100.0 375,000 100.0
William J. Lovejoy(2)................................ -- * -- *
David B. Pittaway(2)................................. 469 * 469 *
Zane Tankel(2)....................................... -- * -- *
George Agle(5)....................................... -- * -- *
Jeffrey H. Brennan(5)................................ -- * -- *
Richard H. Fritsche(5)............................... -- * -- *
Directors and executive officers as a group(5)....... 375,000 100.0 375,000 100.0
</TABLE>
* Denotes beneficial ownership of less than one percent of the class of
capital stock.
(1) Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission. Except as indicated in the footnotes to
this table, each stockholder named in the table has sole voting and
investment power with respect to the shares set forth opposite of such
stockholder's name.
(2) The address for each such stockholder or director identified above is c/o
Castle Harlan, Inc., 150 East 58th Street, New York, New York 10155.
(3) Affiliates of CHP II include Castle Harlan Offshore Partners, L.P.
("Offshore"), Dresdner Bank AG, Grand Cayman Branch Managed Account (the
"Managed Account") and certain limited partners of the sole general partner
of CHP II. Castle Harlan, Inc. acts as the investment manager for CHP II,
Offshore and the Managed Account, pursuant to separate investment
management agreements. Castle Harlan Associates, L.P. ("CHALP") is the sole
general partner of each of CHP II and Castle Harlan Offshore Partners,
L.P., and therefore may be deemed to be a beneficial owner of the shares
owned by each of those two partnerships. Castle Harlan Partners II GP, Inc.
is the sole general partner of CHALP, and therefore may be deemed to be a
beneficial owner of the shares owned by CHALP. Castle Harlan, Inc. is the
investment manager for each of CHP II, Offshore and the Managed Account
(the owner of 18,551 shares of common stock and 18,551 shares of Series B
Preferred Stock representing 4.95% of the total outstanding common stock
and 4.95% of the total Series B Preferred Stock, respectively) ,and
therefore may be deemed to be a beneficial owner of the shares owned by
such entities.
(4) John K. Castle is a director of the Company and is the controlling
stockholder of Castle Harlan Partners II G.P., Inc., the general partner of
the general partner of CHP II, and as such may be deemed to be a beneficial
owner of the shares owned by CHP II and its affiliates. Mr. Castle
disclaims beneficial ownership of such shares in excess of his
proportionate partnership share. In addition, Mr. Castle serves as voting
trustee under a voting trust holding 3,544 shares of Common Stock and 3,544
shares of Series B Preferred and as such may be deemed to be a beneficial
owner of the shares held in such voting trust. The record holders of such
shares consist of certain limited partners of CHALP and a corporate entity
of which Mr. Castle is Chairman, Chief Executive Officer and principal
stockholder. Mr. Castle disclaims beneficial ownership of such shares.
(5) The address for each such officer identified above is c/o Commemorative
Brands, Inc., 7211 Circle S Road, Austin, Texas 78745.
CBI was formed during March 1996 by CHP II, for the purpose of effecting
the Acquisitions. CHP II is a private equity investment partnership formed in
February 1992 and managed by Castle Harlan, Inc., the New York merchant bank
(the "Manager"), CHP II's capital is funded by corporate pension funds, college
endowments,
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foundations and individual investors. The Manager also acts as investment
manager for Castle Harlan Offshore Partners, L.P., a private equity investment
partnership formed by it, and acts as the investment manager under a managed
account formed by Dresdner Bank, AG, Grand Cayman Branch, the Cayman Islands
branch of a German banking corporation.
The Manager was founded by John K. Castle, former President and Chief
Executive Officer of Donaldson, Lufkin & Jenrette, the investment banking firm,
and Leonard M. Harlan, founder and former Chairman of The Harlan Company, a
diversified real estate and corporate advisory firm.
In accordance with a subscription agreement entered into by the Company and
the members of the Castle Harlan Group in conjunction with the consummation of
the Transactions, the Company granted to the Castle Harlan Group certain
registration rights with respect to the shares of its capital stock owned by the
Castle Harlan Group, pursuant to which the Company agreed, among other things,
to effect the registration of such shares under the Securities Act at any time
at the request of the Castle Harlan Group and granted to the Castle Harlan Group
unlimited piggyback registration rights on certain registrations of shares by
the Company. Castle Harlan, Inc. acts as the investment manager for certain
members of the Castle Harlan Group pursuant to separate investment management
agreements, and Mr. Castle acts as voting trustee with respect to the securities
of the Company held by the remaining members of the Castle Harlan Group.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The Company entered into a Management Agreement, dated December 16, 1996,
with Castle Harlan, Inc., as Manager, pursuant to which the Manager agreed to
provide business and organizational strategy, financial and investment
management and merchant and investment banking services to the Company upon the
terms and conditions set forth therein. As compensation for such services, the
Company will pay the Manager $1.5 million per year, which amount has been paid
in advance for the first year and is payable quarterly in arrears thereafter.
The agreement is for a term of 10 years, renewable automatically from year to
year thereafter unless the Castle Harlan Group then owns less than 5% of the
then outstanding capital stock of the Company. The Company has agreed to
indemnify the Manager against liabilities, costs, charges and expenses relating
to the Manager's performance of its duties, other than such of the foregoing
resulting from the Manager's gross negligence or willful misconduct. The
Indenture prohibits payment of the Management Fee in the event of a default by
the Company in the payment of principal, Redemption Price, Purchase Price (as
defined in the Indenture), interest, or Liquidated Damages (if any) on the
Notes.
THE ACQUISITIONS
The ArtCarved Acquisition
CBI entered into the ArtCarved Purchase Agreement with CJC as of May 20,
1996, as amended as of November 21, 1996 and December 16, 1996, for the
acquisition by CBI of ArtCarved. In consideration for ArtCarved, CBI paid CJC in
cash the sum of $97.8 million plus an amount equal to the Adjusted Working
Capital (as defined in the ArtCarved Purchase Agreement) of ArtCarved as of the
closing date. Based upon an estimated Adjusted Working Capital of $17.0 million,
the ArtCarved Purchase Price was approximately $114.8 million, subject to
adjustment upon final determination of the Adjusted Working Capital. In
addition, CBI assumed certain liabilities of ArtCarved, including liabilities
included in the determination of Adjusted Working Capital and certain
liabilities relating to the employees to be employed by CBI.
The ArtCarved Purchase Agreement contains customary representations,
warranties and covenants. CBI and CJC have also indemnified one another for
certain breaches of representations (which breaches are discovered by March 31,
1997) or covenants. No claims under the indemnity may be asserted by CBI or CJC
against the other party unless such claims exceed $100,000 in the aggregate, in
which event the indemnitor shall only be obligated to indemnify for the amount
of such claims in excess of such amount. In addition, CJC's indemnification
obligations
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are limited to a $3.0 million escrow account at Texas Commerce Bank, which will
remain in place through March 31, 1997.
The Balfour Acquisition
CBI entered into the Balfour Purchase Agreement with Town & Country, L.G.
Balfour Company and Gold Lance, Inc. (another subsidiary of Town & Country,
"Gold Lance") as of May 20, 1996, as amended and restated as of November 21,
1996 and December 16, 1996, for the acquisition by CBI of Balfour. In
consideration for Balfour, CBI paid Town & Country and L.G. Balfour Company in
cash the aggregate sum of $23.8 million plus an amount equal to the Adjusted
Working Capital (as defined in the Balfour Purchase Agreement) of Balfour as of
the closing date. In addition, CBI purchased the Balfour Gold for the Balfour
Gold Purchase Price. Based upon an estimated Adjusted Working Capital of Balfour
of $23.6 million, the Balfour Purchase Price was approximately $47.4 million,
subject to adjustment upon final determination of the Adjusted Working Capital.
In addition, CBI assumed certain liabilities of Balfour, including liabilities
included in the determination of Adjusted Working Capital, certain liabilities
relating to the employees to be assumed by CBI and an accumulated benefit
obligation of $5.5 million related to the unfunded Balfour postretirement
medical benefits plan.
Originally, the Balfour Purchase Agreement contemplated that CBI would
acquire the assets (and assume certain liabilities) of Gold Lance as well. The
agreement was subsequently amended following the determination of the FTC that
it would not grant its consent under the Hart-Scott-Rodino Antitrust
Improvements Act of 1976, as amended, if the Balfour Acquisition included such
assets. Pursuant to the Final Order, CBI has agreed, among other things, not to
acquire any assets of or interest in Gold Lance, another class ring
manufacturing subsidiary of Town & Country, the assets of which CBI had
originally contracted to buy together with Balfour. Also pursuant to the Final
Order, Town & Country and Gold Lance agreed, among other things, not to sell any
assets to or acquire any interest in CBI, other than the sale of the Balfour
assets to CBI on the terms set forth in the Balfour Purchase Agreement. In
accordance with the Balfour Purchase Agreement $14.0 million of the Balfour
Purchase Price was originally paid into escrow pending receipt of the Final
Order. Following receipt of the Final Order on December 20, 1996, such funds
were paid to Town & Country.
The Balfour Purchase Agreement contains customary representations,
warranties and covenants. CBI, on the one hand, and Town & Country and L.G.
Balfour Company, on the other hand, have also indemnified one another for
certain breaches of representations (which breaches are discovered in a limited
survival period, generally 15 months) or covenants. No claims under the
indemnity may be asserted by CBI or Town & Country against the other party
unless such claims exceed $150,000 in the aggregate, in which event the
indemnitor shall only be obligated to indemnify for the amount of such claims in
excess of such amount, and in no event shall an indemnifying party be liable to
indemnify the other party for any amounts in excess of $7.5 million. If a
petition under bankruptcy laws is filed by or against, or a receiver, fiscal
agent or similar officer is appointed by a court for the business or property
of, Town & Country or L.G. Balfour Company, there can be no assurance that the
Company would be able to collect any amounts determined to be due to it by Town
& Country or L.G. Balfour Company pursuant to such indemnities.
DESCRIPTION OF CAPITAL STOCK
The Company is authorized to issue 750,000 shares of preferred stock, par
value $.01 per share, and 750,000 shares of common stock, par value $.01 per
share. The Company's Certificate of Incorporation, as amended, authorizes the
Board of Directors (without stockholder approval) to, among other things, issue
classes of preferred stock from time to time in one or more series, each series
to have such designations, voting powers, preferences and relative,
participating, optional or other special rights and qualifications, limitations
or restrictions thereon as shall be stated in the resolutions providing for the
issue thereof by the Board of Directors of the Company. As of the date hereof,
the Company has authorized 100,000 shares of Series A Preferred and 375,000
shares of Series B Preferred, all of which are issued and outstanding. All of
the outstanding shares of the Series A Preferred and Series B Preferred were
initially purchased by the Castle Harlan Group as part of the Castle Harlan
Investment. The shares of the Series A Preferred held by the Castle Harlan Group
were subsequently sold by it to an unrelated third party.
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The following summary of the terms of the Company's capital stock does not
purport to be complete and is subject to, and is qualified in its entirety by
reference to, the Certificate of Incorporation, as amended, of the Company, a
copy of which has been filed as an exhibit to the Registration Statement. See
"Available Information,"
Series A Preferred Stock ("Series A Preferred")
Dividends. Dividends on the Series A Preferred are payable in cash, when,
as and if declared by the board of directors of the Company, commencing on
January 31, 1997, on a quarterly basis, and accrue cumulatively at a rate per
annum of 12%, whether or not such dividends have been declared and whether or
not there shall be surplus, net profits, or the assets of the Company legally
available for the payment of dividends. All such dividends declared shall be
paid pro rata to the holders entitled thereto. Accrued and unpaid dividends do
not bear interest or dividends. Pursuant to the terms of the Indenture,
dividends on the Series A Preferred may not be paid until the Fixed Charge
Coverage Ratio (as defined) for the Company's most recently ended four full
fiscal quarters for which internal financial statements are available
immediately preceding the date on which such dividend payment is made would have
been at least 2.25 to 1, determined on a pro forma basis (including a pro forma
application of such dividend payment), as if the dividend payment had been made
at the beginning of such four-quarter period. See "Description of Notes--Certain
Covenants; Restricted Payments." Pursuant to the terms of the Bank Credit
Facility, dividends on the Series A Preferred may not be paid unless the Company
shall have had, for the period of the four consecutive fiscal quarters most
recently ended prior to the payment of any such dividend, a ratio of
Consolidated EBITDA (as defined in the Bank Credit Agreement) to Consolidated
Total Interest Expense (as defined in the Bank Credit Agreement) equal to at
least 2.25 to 1.0 and no Event of Default (as defined) under the Bank Credit
Facility shall have occurred and be continuing or would result from the making
of such dividend. See "Description of the Bank Credit Facility."
Redemption and Liquidation. The Series A Preferred is not subject to
mandatory redemption. The Series A Preferred is redeemable at any time at the
option of the Company. However, pursuant to the terms of the Indenture, the
Company may not redeem the Series A Preferred (a) unless such redemption is for
at least $2.0 million and (b) until the Fixed Charge Coverage Ratio for the
Company's most recently ended four full fiscal quarters for which internal
financial statements are available immediately preceding the date on which such
redemption is made would have been at least 2.5 to 1, determined on a pro forma
basis (including a pro forma application of such redemption), as if the
redemption had been made at the beginning of such four-quarter period. See
"Description of Notes--Certain Covenants; Restricted Payments." The Bank Credit
Facility prohibits the redemption of any shares of Series A Preferred except in
connection with certain permitted replacements or refinancings of the Series A
Preferred. See "Description of the Bank Credit Facility." Subject to the
foregoing, the Company may redeem all or any portion of the Series A Preferred
at its liquidation value of $100 per share, plus accrued and unpaid dividends
thereon, if any, to the date fixed for redemption. In the event of any
liquidation, dissolution or winding up of the Company, the holders of the Series
A Preferred will receive payment of the liquidation value of $100 per share plus
all accrued and unpaid dividends thereon, if any, in full, prior to the payment
of any distributions to the holders of the Series B Preferred or the holders of
the Common Stock of the Company.
Restrictions on Payment of Other Dividends and Redemptions. So long as any
shares of the Series A Preferred remains outstanding, the Company may not
declare, pay or set aside for payment dividends or other distributions with
respect to, or redeem or otherwise repurchase any shares of, the Series B
Preferred or any other shares of capital stock of the Company ranking, as to
dividend rights and rights upon liquidation, dissolution or winding up, junior
to the Series A Preferred, other than dividends payable in Common Stock or in
another stock ranking junior to the Series A Preferred as to dividend rights and
rights on liquidation, dissolution and winding up and other than redemptions or
repurchases of shares of Common Stock or other capital stock of the Company
issued to or held by any officer, director, employee, independent sales
representative or agent of the Company or its subsidiaries (including, without
limitation, any former officer, director, employee, independent sales
representative or agent of the Company or its subsidiaries) or any employee
stock ownership plan or similar trust for the account of any such person.
Voting. Except as set forth below, the holders of shares of Series A
Preferred are not entitled to voting rights. The Company shall not amend, alter
or repeal any of the provisions of its Certificate of Incorporation or Bylaws,
or
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merge with or into or consolidate with any other entity, in any case so as to
affect adversely any of the preferences, rights, powers or privileges of the
Series A Preferred or the holders thereof, without first obtaining the approval
of at least a majority of the outstanding shares of Series A Preferred voting
separately as one class.
Series B Preferred Stock ("Series B Preferred")
Dividends. No dividends shall accrue on the Series B Preferred. Dividends
on the Series B Preferred shall be payable when, as and if declared by the
Company's Board of Directors out of funds legally available therefor.
Redemption and Liquidation. The Series B Preferred is non-redeemable. In
the event of any liquidation, dissolution or winding up of the Company, the
holders of the Series B Preferred will receive payment of the liquidation value
of $100 per share plus all accrued and unpaid dividends thereon, if any, in
full, prior to the payment of any distributions to the holders of the Common
Stock of the Company or any other class of stock of the Company junior to the
Series B Preferred, but only to the extent that the liquidation preference (plus
all accrued and unpaid dividends, if any) of the Series A Preferred and any
other class of stock ranking senior to the Series B Preferred has been paid to
the holders thereof.
Restriction on Payment of Other Dividends. The Company may not declare, pay
or set aside for payment any dividends or distributions (other than dividends
payable in Common Stock or in another stock ranking junior to the Series B
Preferred as to dividend rights and rights on liquidation, dissolution and
winding up) on any Common Stock or other shares of capital stock ranking junior
to the Series B Preferred so long as any shares of Series B Preferred remain
outstanding.
Voting. The holders of shares of Series B Preferred are entitled to one
vote per share, voting together with the holders of the Common Stock on all
matters presented to stockholders generally. The Company may not amend, alter or
repeal any of the provisions of its Certificate of Incorporation or Bylaws, or
merge with or into or consolidate with any other entity, in any case so as to
affect adversely any of the preferences, rights, powers or privileges of the
Series B Preferred or the holders thereof, without first obtaining the approval
of at least a majority of the outstanding shares of Series B Preferred voting
separately as one class.
Common Stock
The holders of Common Stock are entitled to one vote for each share held of
record on all matters submitted to a vote of stockholders, including the
election of directors, and shall vote together as a class with the holders of
the Series B Preferred.
Dividends may be paid on the Common Stock, when and as declared by the
Board of Directors out of funds legally available therefor. The Company does not
expect to pay dividends on the Common Stock in the foreseeable future.
Common Stock Purchase Warrants.
The Company has issued Warrants, initially exercisable to purchase an
aggregate of 21,405 shares of Common Stock (or an aggregate of approximately
5.4% of the outstanding shares of Common Stock on a fully-diluted basis), at an
initial exercise price of $6.67 per share, at any time on or after December 16,
1997, and on or before January 31, 2008.
In accordance with a subscription agreement entered into by the Company and
the members of the Castle Harlan Group, the Company granted to the Castle Harlan
Group certain registration rights with respect to the shares of capital stock
owned by the Castle Harlan Group, pursuant to which the Company agreed, among
other things, to effect the registration of such
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shares under the Securities Act of 1933, as amended, at any time at the request
of the Castle Harlan Group and granted to the Castle Harlan Group unlimited
piggyback registration rights on certain registrations of shares of capital
stock by the Company.
DESCRIPTION OF THE BANK CREDIT FACILITY
The following summarizes certain provisions of the bank credit agreement
governing the Bank Credit Facility (the "Bank Credit Agreement"), which was
entered into as of December 16, 1996, by and among the Company, as borrower, The
First National Bank of Boston ("FNBB") and Rhode Island Hospital Trust National
Bank ("RIHT", and together with FNBB, as agents, the "Agents") and the financial
institutions party thereto. This summary does not purport to be complete and is
subject to, and qualified in its entirety by reference to, all of the provisions
of the Bank Credit Agreement, including all of the definitions therein of terms
not defined in this Prospectus. The Bank Credit Agreement has been filed as an
exhibit to the Registration Statement of which this Prospectus is a part.
General. The Bank Credit Facility consists of a senior secured credit
facility of up to $60,000,000, including (i) a $25,000,000 term loan facility
(the "Term Loan Facility"), (ii) a $25,000,000 revolving credit facility (with a
letter of credit sublimit of $5,000,000) (the "Revolving Credit Facility") and
(iii) a $10,000,000 gold consignment and revolving credit facility (the "Gold
Facility", and together with the Revolving Credit Facility, the "Revolving
Credit and Gold Facilities"), for the purpose of financing, in part, the
Acquisitions, and to support the ongoing working capital requirements of the
Company.
Term Loan Facility
The Term Loan Facility matures on December 16, 2003. The Company may prepay
the Term Loan at any time, except that any repayment of any portion of the Term
Loan bearing interest at the Eurodollar Rate may only be repaid on the last day
of the Interest Period relating thereto. The Company must repay the Term Loan in
28 consecutive quarterly installments, commencing March 31, 1997, as follows:
Quarterly Annual
Year Amount Amount
------- -------------- ----------
1 $ 125,000 $ 500,000
2 $ 250,000 $1,000,000
3 $ 375,000 $1,500,000
4 $ 500,000 $2,000,000
5 $ 750,000 $3,000,000
6 $ 2,000,000 $8,000,000
7 $ 2,250,000 $9,000,000
The final installment of principal of the Term Loan is due and payable on
December 16, 2003.
In addition, subject to certain exceptions set forth in the Bank Credit
Agreement, the Company must make mandatory prepayments of the Term Loan in an
amount equal to (i) 100% of the net proceeds received from the sale or
disposition of assets of the Company (other than sales of inventory in the
ordinary course of business or other asset sales and dispositions to the extent
the net proceeds received do not exceed $500,000 during the period prior to the
first anniversary of the closing date, and do not exceed $250,000 in any
corresponding one-year period thereafter), (ii) 100% of net proceeds received
from the issuance of equity of the Company until certain conditions are met, and
(iii) 50% of Consolidated Excess Cash Flow (as defined).
Revolving Credit and Gold Facilities
Availability under the Revolving Credit Facility and the Gold Facility is
subject to a borrowing base limitation (the "Borrowing Base") based on the
aggregate of certain percentages of Eligible Receivables (as defined) and
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Eligible Inventory (as defined) of the Company. If the aggregate amount of loans
and other extensions of credit under the Revolving Credit Facility and the Gold
Facility exceeds the Borrowing Base, the Company must immediately prepay or cash
collateralize its obligations under the Revolving Credit Facility to the extent
of such excess.
The Gold Facility consists of (a) a purchase and consignment facility,
pursuant to which the RIHT, as gold agent, on behalf of the lenders under the
Gold Facility, will purchase amounts of gold inventory of the Company and
consign such amounts to the Company, (b) a consignment facility, pursuant to
which the gold agent, on behalf of the lenders under the Gold Facility, will
obtain and consign amounts of gold to the Company and (c) a revolving loan
facility. The obligation of any Gold Bank to lend to the Company pursuant to the
Gold Facility is subject to the condition that, among other things, such Gold
Loan will not cause the aggregate amount of outstanding Gold Loans by such Gold
Bank to exceed such Gold Bank's Gold Commitment, minus such Gold Bank's
percentage of the fair market value of Consigned Precious Metal outstanding. The
obligation of the Gold Agent to make any gold consignment pursuant to the Gold
Facility is subject to the condition that, among other things, the fair market
value of gold consigned by the Gold Agent to the Company shall not exceed 95%
multiplied by the fair market value of the sum of (i) gold consigned by the Gold
Agent to the Company, plus (ii) gold owned by the Company.
The outstanding principal of each loan under the Bank Credit Facility will
bear interest at a rate per annum equal to (a) the Base Rate plus (i) 1.25% per
annum, in the case of loans under the Revolving Credit and Gold Facilities, and
(ii) 1.75% per annum, in the case of the Term Loan Facility, or (b) at the
option of the Company (but subject to certain specified conditions), the reserve
adjusted Eurodollar Rate plus (i) 3.0% per annum in the case of borrowings under
the Revolving Credit and Gold Facilities and (ii) 3.50% in the case of Term Loan
Facility. The applicable interest rate margins will be subject to up to two
decreases in 25 basis point increments after the first year following the
closing date if the Company meets and maintains certain leverage and interest
coverage ratios. If any payment event of default occurs, the interest rates and
consignment fees will be increased by 2% above the then applicable rate for each
Facility.
Outstanding consigned or purchased and consigned gold under the Gold
Facility shall accrue a daily consignment fee at a rate determined by the Gold
Agent plus 3.0% per annum, payable monthly in arrears, or, at the Borrower's
option, at a rate equal to (a) the greater of (i) the reserve adjusted
Eurodollar Rate minus the average of rates quoted to the Gold Agent as the
London Interbank Bullion Rates as displayed on Reuter's gold loan screen or, if
Reuter's gold loan screen is not available, as set by the Gold Agent for gold
forwards for such period and (ii) zero, plus (b) 3.0% per annum.
In addition to the interest charges described above, the Company will pay
to the applicable Agent (i) for the account of the Dollar Banks, a commitment
fee on the unused portion of the Revolving Credit Facility of 1/2% per annum;
(ii) for the account of the Gold Banks, a commitment fee on the unused portion
of the Gold Facility of 1/2% per annum; and (iii) a letter of credit fee equal
to (a) for standby letters of credit, a rate per annum equal to the Eurodollar
rate margin applicable to Loans under the Revolving Credit Facility then in
effect, and (b) for documentary letters of credit, a per annum rate equal to the
Eurodollar rate margin applicable to loans under the Revolving Credit Facility
then in effect, less 1%.
Repayment. The Revolving Credit and Gold Facilities may be borrowed, repaid
and reborrowed from time to time until five years after the closing date of the
Bank Credit Facility, subject to certain conditions on the date of any such
borrowing. Amounts of principal repaid on the Term Loan Facility may not be
reborrowed.
Security. The Bank Credit Facility is secured by a first priority lien on
substantially all assets of the Company, including all accounts receivable,
inventory, equipment, general intangibles, real estate, buildings and
improvements and the outstanding stock of its subsidiaries. The Company's U.S.
subsidiary, CBI North America, Inc., has guaranteed the Company's obligations
and granted a similar security interest.
Covenants. The Bank Credit Agreement contains certain customary affirmative
and negative covenants, including, among other things, requirements that the
Company (i) periodically deliver certain financial information (including
monthly borrowing base, consigned metal and receivables aging reports), (ii) not
merge or make certain
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asset sales, (iii) not permit certain liens to exist on its assets, (iv) not
incur additional debt or liabilities except as may be permitted under the terms
of the Bank Credit Agreement, (v) not make capital expenditures in excess of
Fimits set forth in the Bank Credit Agreement, (vi) not declare or make certain
dividend payments, (vii) not make certain investments or consummate certain
acquisitions, (viii) not enter into any consignment transactions as consignee
(except for deliveries of diamonds), (ix) not create a new subsidiary, (x) not
establish any new bank account, and (xi) establish concentration accounts with
FNBB and direct all of its depositary banks to transfer all amounts deposited
(on a daily basis) to such concentration accounts (for application in accordance
with the Bank Credit Agreement). Most of the covenants apply to the Company and
its subsidiaries.
In addition, the Company must comply with certain financial covenants,
including maintaining a specified minimum interest coverage ratio of
Consolidated EBITDA to Consolidated Interest Expense, maximum Consolidated
Senior Funded Debt to Consolidated EBITDA and minimum Consolidated EBITDA (as
those terms are defined in the Bank Credit Agreement) in amounts set forth in
the Bank Credit Agreement.
Events of Default. The Bank Credit Agreement contains certain customary
events of default, including nonpayment, misrepresentation, breach of covenant,
bankruptcy, ERISA, judgments, change of control and cross defaults. In addition,
the Bank Credit Agreement provides that it shall be an Event of Default if the
Company or any of its subsidiaries (other than its Mexican subsidiary) shall be
enjoined or restrained from conducting any material part of its business for
more than 30 days.
DESCRIPTION OF NOTES
The Exchange Notes will be issued under the Indenture, a copy of which has
been filed as an exhibit to the Registration Statement of which this Prospectus
constitutes a part. The Indenture is subject to and governed by the Trust
Indenture Act of 1939, as amended (the "Trust Indenture Act"). The following
summary of certain terms and provisions of the Indenture and the Registration
Rights Agreement does not purport to be complete and is subject to, and is
qualified in its entirety by reference to, all of the provisions of the Notes,
the Indenture and the Registration Rights Agreement, including the definitions
of certain terms therein and those terms made a part of the Indenture by
reference to the Trust Indenture Act. The Company will provide, without charge,
to each person, including any beneficial owner, to whom this Prospectus is
delivered, upon such person's written or oral request, copies of the Indenture
and the Registration Rights Agreement. Any such request should be delivered to
the Company, 7211 Circle S Road, Austin, Texas 78745 (telephone number (512)
444-0571), Attention: Secretary. In addition, definitions of certain capitalized
terms used in the following summary are set forth below under "Certain
Definitions."
On December 16, 1996, the Company issued $90,000,000 aggregate principal
amount of Initial Notes under the Indenture. The terms of the Exchange Notes are
identical in all material respects to the Initial Notes, except for certain
transfer restrictions and registration and other rights relating to the exchange
of the Initial Notes for the Exchange Notes. The Trustee will authenticate and
deliver Exchange Notes for original issue only in exchange for a like principal
amount of Initial Notes. Any Initial Notes that remain outstanding after the
consummation of the Exchange Offer will be entitled to vote or consent on all
matters, together with the Exchange Notes, as a single class of securities under
the Indenture.
General
The aggregate principal amount of the Notes that may be issued under the
Indenture is limited to $90.0 million. The Notes mature on January 15, 2007, and
bear interest at a rate of 11% from the date of original issuance of the Initial
Notes (or from the most recent date to which interest has been paid), payable
semi-annually on January 15 and July 15 of each year, commencing on July 15,
1997, to holders of record at the close of business on the January 1 or July 1
immediately preceding such interest payment date. Interest on the Notes will be
computed on the basis of a 360-day year of twelve 30-day months.
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The Notes will rank junior in right of payment to all Senior Indebtedness,
including borrowings under the Bank Credit Facility. Borrowings under the Bank
Credit Facility are secured by substantially all of the Company's assets,
including the capital stock of the Company's existing and future Subsidiaries,
and will be guaranteed by all such Subsidiaries, which guarantees will be
secured by substantially all of such Subsidiaries' assets. The Notes will rank
pari passu in right of payment with all senior subordinated Indebtedness of the
Company issued in the future (if any) and senior in right of payment to all
other subordinated Indebtedness of the Company issued in the future, if any. As
of December 16, 1996, the Company had approximately $36.2 million of Senior
Indebtedness outstanding (exclusive of an unused commitment of up to $23.8
million under the Bank Credit Facility). See "Risk Factors--Substantial Leverage
and Debt Service" and "Capitalization." Although the Indenture contains
limitations on the amount of additional Indebtedness that the Company may incur,
under certain circumstances the amount of such Indebtedness could be substantial
and, in any case, such Indebtedness may be Senior Indebtedness. See "Certain
Covenants--Incurrence of Indebtedness and Issuance of Preferred Stock."
The Indenture provides that principal, Redemption Price and Purchase Price
of, and interest and Liquidated Damages (if any) on the Notes will be payable,
and the Notes will be exchangeable and transferable (subject to compliance with
transfer restrictions imposed by applicable securities laws for so long as the
Notes are not registered for resale under the Securities Act), at the office or
agency of the Company in the City of New York maintained for such purposes;
provided, however, that payment of interest may be made at the option of the
Company by check mailed to the holders of record as shown on the security
register. The Notes will be issued only in fully registered form without
coupons, in denominations of $1,000 and any integral multiple thereof. No
service charge will be made for any registration of transfer, exchange or
redemption of Notes, except in certain circumstances for any tax or other
governmental charge that may be imposed in connection therewith.
Optional Redemption
The Notes will be subject to redemption (an "Optional Redemption"), at the
option of the Company, in whole or in part, at any time on or after January 15,
2002, upon not less than 30 nor more than 60 days' prior notice in amounts of
$1,000 or an integral multiple thereof at the following Redemption Prices
(expressed as a percentage of the principal amount), together with accrued and
unpaid interest and Liquidated Damages (if any) to the applicable redemption
date, if redeemed during the 12-month period beginning January 15 of the years
indicated below:
Year Redemption Price
---- ----------------
2002............................. 105.500%
2003............................. 103.667%
2004............................. 101.833%
2005 and thereafter.............. 100.000%
If less than all the Notes are to be redeemed, the Trustee will select the
particular Notes or portions thereof to be redeemed by lot, pro rata or by any
other method the Trustee shall deem fair and reasonable.
The Company will comply with all applicable notice requirements regarding
redemption as set forth in the Indenture.
Special Redemption
The Indenture provides that in the event the Company completes one or more
Public Equity Offerings on or before January 15, 2000, the Company, in its
discretion, may use the net cash proceeds from any such Public Equity Offering
to redeem up to 33 1/3% of the original principal amount of the Notes (a
"Special Redemption") at a Redemption Price of 111% of the principal amount,
together with accrued and unpaid interest and Liquidated Damages (if any), to
the date of redemption, provided, however, that at least 66-2/3% of the original
principal amount of the Notes will remain outstanding immediately after each
such redemption; and provided, further, that
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each such redemption shall occur within 90 days after the date of the closing of
the applicable Public Equity Offering.
If less than all the Notes are to be redeemed, the Trustee will select the
particular Notes or portions thereof to be redeemed by lot, pro rata or by any
other method the Trustee shall deem fair and reasonable.
The Company will comply with all applicable notice requirements regarding
redemption as set forth in the Indenture.
Subsidiary Guarantees
The Indenture provides that if any Subsidiary of the Company (other than an
Acquisition Subsidiary or a Subsidiary of an Acquisition Subsidiary) becomes a
Significant Subsidiary (whether as a result of creation, acquisition, additional
investment, internal growth or otherwise), then such Subsidiary will be required
to execute a subsidiary guarantee (a "Subsidiary Guarantee"); provided, however,
that any Foreign Subsidiary shall only be required to execute a Subsidiary
Guarantee to the extent permitted under the laws of its jurisdiction of
organization. Each Subsidiary that is obligated to execute a Subsidiary
Guarantee shall execute a Subsidiary Guarantee and deliver an opinion of
counsel, in accordance with the terms of the Indenture.
"Subsidiary Guarantors" means any Subsidiary that executes a Subsidiary
Guarantee in accordance with the provisions of the Indenture, and their
respective successors and assigns.
The Subsidiary Guarantee of each Subsidiary Guarantor will be unsecured and
subordinated to the prior payment in full in cash or Cash Equivalents of all
Senior Indebtedness of such Subsidiary Guarantor (including such Subsidiary
Guarantor's guarantee of the Bank Credit Facility), and the amounts for which
the Subsidiary Guarantors will be liable under the guarantees issued from time
to time with respect to other Senior Indebtedness of the Company. The
subordination of the Subsidiary Guarantees will be substantially similar to the
subordination provided for in the Indenture with respect to the Notes. See
"Subordination." The obligations of each Subsidiary Guarantor under its
Subsidiary Guarantee will be limited with the intent of not creating a
fraudulent conveyance under applicable law. See, however, "Risk Factors
- --Fraudulent Conveyance."
The Indenture provides that no Subsidiary Guarantor may consolidate with or
merge with or into (whether or not such Subsidiary Guarantor is the surviving
Person), another corporation, Person or entity (other than the Company or
another Subsidiary Guarantor) whether or not affiliated with such Subsidiary
Guarantor unless subject to the provisions of the following paragraph, (i) the
Person formed by or surviving any such consolidation or merger (if other than
such Subsidiary Guarantor) assumes all the obligations of such Subsidiary
Guarantor, in form and substance reasonably satisfactory to the Trustee, under
the Notes and the Indenture; (ii) immediately after giving effect to such
transaction, no Default or Event of Default exists; and (iii) the Company would
be permitted, by virtue of the Company's pro forma Fixed Charge Coverage Ratio
immediately after giving effect to such transaction, to incur at least $1.00 of
additional Indebtedness pursuant to the Fixed Charge Coverage Ratio test set
forth in the covenant described below under the caption "--Incurrence of
Indebtedness and Issuance of Preferred Stock."
The Indenture provides that in the event of a sale or other disposition of
all or substantially all of the assets of any Subsidiary Guarantor, by way of
merger, consolidation or otherwise, or a sale or other disposition of all of the
capital stock of any Subsidiary Guarantor, then such Subsidiary Guarantor (in
the event of a sale or other disposition, by way of such a merger, consolidation
or otherwise, of all of the capital stock of such Subsidiary Guarantor) or the
corporation acquiring the property (in the event of a sale or other disposition
of all of the assets of such Subsidiary Guarantor) will be released and relieved
of any obligations under its Subsidiary Guarantee; provided that the Net
Proceeds of such sale or other disposition are applied in accordance with the
applicable provisions of the Indenture. See "--Repurchase at the Option of
Holders."
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Subordination
The Indenture provides that the payment of the principal, Redemption Price
and Purchase Price of, and interest and Liquidated Damages (if any) on, the
Notes (including, without limitation, by any purchase of Notes referred to in
"--Repurchase at the Option of Holders") will be expressly subordinate and
subject in right of payment, as provided in the Indenture, to the prior payment
in full in cash or Cash Equivalents of all Senior Indebtedness (as hereinafter
defined).
"Senior Indebtedness" is defined as Designated Senior Indebtedness and the
principal of, premium (if any) and interest (including interest accruing after
the filing of a petition initiating any proceeding under any applicable
bankruptcy law, whether or not a claim therefor is allowable in such proceeding)
on, any other Indebtedness of the Company, whether outstanding on the date of
the Indenture or thereafter created, incurred or assumed, unless, in the case of
any particular Indebtedness, the instrument creating or evidencing, or the
agreement governing, such Indebtedness or pursuant to which such Indebtedness is
outstanding expressly provides that such Indebtedness shall not be senior in
right of payment to the Notes. Notwithstanding the foregoing, "Senior
Indebtedness" shall not include (i) Indebtedness evidenced by the Notes; (ii)
Indebtedness that is by its terms subordinate or junior in right of payment to
any other Indebtedness of the Company; (iii) that portion of any Indebtedness
which is incurred in violation of the Indenture; (iv) Indebtedness of the
Company to a Subsidiary or any other Affiliate of the Company; (v) Indebtedness
which is represented by Disqualified Stock; (vi) any liability for federal,
state, local or other taxes owed or owing by the Company; (vii) accounts payable
or other obligations to trade creditors created, incurred or assumed in the
ordinary course of business in connection with obtaining materials or services
and other current liabilities (excluding the current portion of long-term Senior
Indebtedness); (viii) Indebtedness of or amounts owing by the Company for
compensation to employees for services; and (ix) amounts owing under leases
(other than Capitalized Lease Obligations).
"Designated Senior Indebtedness" means (i) Indebtedness of the Company
under the Bank Credit Facility, including without limitation all principal,
interest (including interest accruing after the filing of a petition initiating
any proceeding under any applicable bankruptcy law, whether or not a claim
therefor is allowable in such preceding), reimbursements of amounts drawn under
letters of credit, reimbursements of other amounts, Hedging Obligations with an
agent or other representative of the lenders under the Bank Credit Facility,
guarantees in respect thereof, and all charges, consignment and other fees,
indemnifications, damages, penalties, expenses (including expenses accruing
after the filing of a petition initiating any proceeding under any applicable
bankruptcy law, whether or not a claim therefor is allowable in such proceeding)
and all other amounts or liabilities payable in respect thereof; and (ii) any
other Senior Indebtedness, and all fees, expenses, indemnities and other
monetary obligations in respect thereof, which, at the date of creation thereof
or determination, has an aggregate principal amount outstanding of, or under
which at the date of creation thereof or determination, the holders thereof are
committed to lend, at least $7.5 million and is specifically designated by the
Company (with the consent of the Senior Representative for the Bank Credit
Facility unless the Trustee has received written notice from such Senior
Representative waiving such right of consent) in the instrument evidencing or
governing such Senior Indebtedness as "Designated Senior Indebtedness" for
purposes of the Indenture.
During the continuance of any default in the payment of any principal of,
gold consignment repurchase obligation or reimbursement obligation under, or
premium (if any) or interest or consignment fee on, any Senior Indebtedness (a
"Senior Payment Default"), no payment or distribution of any assets of the
Company of any kind or character may be made on account of the Notes (including
without limitation on account of the principal, Redemption Price and Purchase
Price of, and interest and Liquidated Damages (if any) on, the Notes) unless and
until such Senior Payment Default has been cured, waived or has ceased to exist
or such Senior Indebtedness has been discharged or paid in full in cash or Cash
Equivalents or the right under the Indenture to prevent any such payment has
been waived by or on behalf of the holders of such Senior Indebtedness.
During the continuance of any event (other than a Senior Payment Default),
the occurrence of which entitles one or more Persons to accelerate the maturity
of any Designated Senior Indebtedness (a "Senior Covenant Default"), and the
receipt by the Trustee from the Senior Representative for such Designated Senior
Indebtedness of a written notice of such Senior Covenant Default, no payment or
distribution of any assets of the Company of any
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kind or character may be made by the Company on account of the Notes (including
without limitation on account of the principal, Redemption Price and Purchase
Price of, and interest and Liquidated Damages (if any) on, the Notes) for the
period specified below (a "Payment Blockage Period").
A Payment Blockage Period shall commence upon the receipt by the Trustee of
notice from a Senior Representative for Designated Senior Indebtedness of a
Senior Covenant Default and shall end (subject to any blockage of payment that
may be in effect in respect of a Senior Payment Default or insolvency) on the
earliest of (i) 179 days after the receipt of such notice, provided such
Designated Senior Indebtedness shall not theretofore have been accelerated and
no Senior Payment Default shall be in effect; (ii) the date on which such Senior
Covenant Default is cured, waived or ceases to exist or such Designated Senior
Indebtedness is discharged or paid in full in cash or Cash Equivalents; or (iii)
the date on which such Payment Blockage Period shall have been terminated by
written notice to the Company and the Trustee from the Senior Representative
initiating such Payment Blockage Period or the holders of at least a majority in
principal amount of such issue of Designated Senior Indebtedness, after which
the Company shall promptly resume making any and all required payments in
respect of the Notes, including any missed payments. In no event will a Payment
Blockage Period extend beyond 179 days from the date of the receipt by the
Trustee of the notice initiating such Payment Blockage Period. Any number of
notices of a Senior Covenant Default may be given during a Payment Blockage
Period; provided, that no such notice shall extend such Payment Blockage Period,
only one Payment Blockage Period may be commenced within any 360-day period and
there shall be at least 181 consecutive days in each period of 360 consecutive
days when no Payment Blockage Period is in effect. No Senior Covenant Default
with respect to Designated Senior Indebtedness that existed or was continuing on
the date of the commencement of any Payment Blockage Period and that was known
to the holders or the Senior Representative for such Designated Senior
Indebtedness will be, or can be, made the basis for the commencement of a second
Payment Blockage Period, whether or not within a period of 360 consecutive days,
unless such Senior Covenant Default has been cured or waived for a period of not
less than 90 consecutive days. The Company shall deliver a notice to the Trustee
promptly after the date on which any Senior Covenant Default is cured or waived
or ceases to exist or on which the Designated Senior Indebtedness related
thereto is discharged or paid in full in cash or Cash Equivalents.
If the Company fails to make any payment on the Notes when due or within
any applicable grace period, whether or not on account of the payment blockage
provisions referred to above, such failure would constitute an Event of Default
under the Indenture and would enable the Holders of Notes to accelerate the
maturity thereof in accordance with the Indenture. See "--Events of Default."
In the event of any insolvency or bankruptcy case or proceeding, or any
receivership, liquidation, reorganization or other similar case or proceeding in
connection therewith, relative to the Company or its assets, or any liquidation,
dissolution or other winding up of the Company, whether voluntary or
involuntary, or any assignment for the benefit of creditors or other marshaling
of assets or liabilities of the Company (except in connection with the
consolidation or merger of the Company or its liquidation or dissolution
following the sale, assignment, transfer, lease or other disposition of all or
substantially all of its assets in one or more related transactions, upon the
terms and conditions described under "--Covenants--Limitation on Mergers,
Consolidations and Sales of Assets" to the extent permitted under the terms of
outstanding Senior Indebtedness), all Senior Indebtedness (including, in the
case of Designated Senior Indebtedness, interest and consignment fees accruing
after the commencement of any such proceeding at the rate specified in the
instrument evidencing the applicable Designated Senior Indebtedness, whether or
not a claim therefor is allowed in such proceeding, to the date of payment of
such Designated Senior Indebtedness) must be paid in full in cash or Cash
Equivalents before any payment or distribution of any assets of the Company of
any kind or character is made on account of the Notes (including without
limitation the principal, Redemption Price, and Purchase Price of, and interest
and Liquidated Damages (if any) on, the Notes).
By reason of such subordination, in the event of liquidation or insolvency,
creditors of the Company that are holders of Senior Indebtedness of the Company
may recover more, ratably, than the Holders of Notes, and the Company may be
unable to meet its obligations fully with respect to the Notes.
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Repurchase at the Option of Holders
Change of Control
The Indenture provides that, upon the occurrence of a Change of Control,
each Holder of Notes will have the right to require the Company to repurchase
all or any part (equal to $1,000 or an integral multiple thereof) of such
Holder's Notes pursuant to the offer described below (the "Change of Control
Offer") at a Purchase Price in cash equal to 101% of the aggregate principal
amount thereof, together with accrued and unpaid interest and Liquidated Damages
(if any) thereon to the Purchase Date. Within 30 days following any Change of
Control, the Company will mail a notice to each Holder describing the
transaction or transactions that constitute the Change of Control and offering
to repurchase Notes pursuant to the procedures required by the Indenture and
described in such notice.
The Company will comply with the requirements of Rule 14e-1 under the
Exchange Act and any other securities laws and regulations thereunder to the
extent such laws and regulations are applicable in connection with the
repurchase of the Notes as a result of a Change of Control.
On a date that is at least 30 but no more than 60 days from the date on
which the Company mails notice of a Change of Control (the "Purchase Date"), the
Company will, to the extent lawful, (i) accept for payment all Notes or portions
thereof properly tendered pursuant to the Change of Control Offer, (ii) deposit
with the Paying Agent an amount equal to the Purchase Price, together with
accrued and unpaid interest and Liquidated Damages (if any) thereon to the
Purchase Date in respect of all Notes or portions thereof so tendered and
accepted for repurchase and (iii) deliver or cause to be delivered to the
Trustee the Notes so accepted together with an Officers' Certificate stating the
aggregate principal amount of Notes or portions thereof being repurchased by the
Company. The Paying Agent will promptly (but in any case not later than five
days after the Purchase Date) mail to each Holder of Notes so repurchased the
amount due in connection with such Notes, and the Company will promptly issue a
new Note, and the Trustee, upon written request from the Company will
authenticate and mail or deliver to each relevant Holder a new Note, in a
principal amount equal to any unpurchased portion of the Notes surrendered to
the Holder thereof; provided, that each such new Note will be in a principal
amount of $1,000 or an integral multiple thereof. The Company will publicly
announce the results of the Change of Control Offer on or as soon as practicable
after the Purchase Date.
Neither the Board of Directors of the Company nor the Trustee may waive
compliance by the Company with its obligations under the Change of Control
covenant. However, the Change of Control covenant may be amended in a manner
that eliminates or limits a Holder's ability to cause the Company to repurchase
such Holder's Notes as long as any such amendment is approved by a Holder or
Holders of at least 75% in principal amount of the then outstanding Notes. See
"-- Amendments, Supplement and Waiver."
The Change of Control purchase feature is a result of negotiations
between the Company and the Initial Purchasers. Management has no current
intention to engage in a transaction involving a Change of Control, although it
is possible that the Company may decide to do so in the future. Subject to the
limitations described below, including the limitation on the Company's ability
to incur indebtedness, the Company is not prohibited by the terms of the
Indenture from entering into certain transactions, including acquisitions,
refinancings, recapitalizations or other highly-leveraged transactions, that do
not constitute a Change of Control under the Indenture. Such transactions could
adversely affect Holders by increasing the indebtedness of the Company, some or
all of which may be senior to the Notes, or otherwise adversely affect the
Company's capital structure and credit ratings. The Company's ability to engage
in such transactions is also limited by the restrictions under the Bank Credit
Facility and the occurrence of certain of the events that would constitute a
Change of Control would constitute a default under the Bank Credit Agreement.
See "-- Restrictions under Senior Indebtedness" and "Description of the Bank
Credit Facility."
"Change of Control" means the occurrence of any of the following: (i) the
sale, lease, transfer, conveyance or other disposition (other than by way of
merger or consolidation), in one or a series of related transactions, of all or
substantially all of the assets of the Company and its Subsidiaries taken as a
whole, to any "person" (as such term is used in Section 13(d)(3) of the Exchange
Act), (ii) the adoption of a plan relating to the liquidation or dissolution of
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the Company, (iii) the consummation of any transaction (including, without
limitation, any merger or consolidation) the result of which is that (a) prior
to a Public Equity Offering, the Principals and their Related Parties cease to
be the "beneficial owner" (as such term is defined in Rule 13d-3 and Rule 13d-5
under the Exchange Act) of a majority of the total outstanding Voting Stock of
the Company, or (b) after a Public Equity Offering, any "person" (as defined
above), other than the Principals and their Related Parties, becomes the
"beneficial owner" (as such term is defined in Rule 13d-3 and Rule 13d-5 under
the Exchange Act), directly or indirectly, of more than 35% of the total
outstanding Voting Stock of the Company, and the Principals and their Related
Parties beneficially own a lesser percentage of the Voting Stock of the Company
than such person, or (iv) the first day on which a majority of the members of
the Board of Directors of the Company are not Continuing Directors.
The definition of Change of Control includes a phrase relating to the sale,
lease, transfer, conveyance or other disposition of "all or substantially all"
of the assets of the Company and its Subsidiaries taken as a whole. Although
there is a developing body of case law interpreting the phrase "substantially
all", there is no precise established definition of the phrase under applicable
law. Accordingly, the ability of a Holder of Notes to require the Company to
repurchase such Notes as a result of a sale, lease, transfer, conveyance or
other disposition of less than all of the assets of the Company and its
Subsidiaries taken as a whole to another Person or group may be uncertain.
"Continuing Directors" means, as of any date of determination, any member
of the Board of Directors of the Company who (i) was a member of such Board of
Directors on the date of the Indenture or (ii) was nominated for election or
elected to such Board of Directors with the approval of a majority of the
Continuing Directors who were members of such Board at the time of such
nomination or election.
"Principals" means Castle Harlan Partners II, L.P., Castle Harlan, Inc. and
their respective Affiliates and the officers and directors of the Company.
"Related Party" means, with respect to any Principal, (A) any controlling
stockholder, director or officer, 80% (or more) owned Subsidiary, or spouse or
immediate family member or estate thereof (in the case of an individual) of such
Principal or (B) or trust, corporation, partnership or other entity, the
beneficiaries, stockholders, partners, owners or Persons beneficially holding an
80% or more controlling interest of which consist of such Principal and/or such
other Persons referred to in the immediately preceding clause (A).
Asset Sales
The Indenture provides that the Company will not, and will not permit any
of its Subsidiaries to, engage in an Asset Sale unless (i) the Company (or the
Subsidiary, as the case may be) receives consideration at the time of such Asset
Sale at least equal to the fair market value (evidenced by a resolution of the
Board of Directors set forth in an Officers' Certificate delivered to the
Trustee, provided that such Officers' Certificate shall be delivered only in the
event of any Asset Sale involving $5.0 million or more of consideration) of the
assets or Capital Stock issued or sold or otherwise disposed of and (ii) at
least 80% of the consideration therefor received by the Company or such
Subsidiary is in the form of cash or Cash Equivalents; provided that the amount
of (x) any liabilities (as shown on the Company's or such Subsidiary's most
recent balance sheet), of the Company or any Subsidiary (other than contingent
liabilities and liabilities that are by their terms subordinated to the Notes or
any guarantee thereof) that are assumed by the transferee of any such assets
pursuant to a customary novation agreement that releases the Company or such
Subsidiary from further liability and (y) any notes or other obligations
received by the Company or any such Subsidiary from such transferee that are
immediately converted by the Company or such Subsidiary into cash (to the extent
of the cash received), will be deemed to be cash for purposes of this provision
and provided, further, that (A) the Company and its Subsidiaries will not be
required to comply with clauses (i) and (ii) of this paragraph in connection
with any Asset Sale effected in order to comply with an FTC Order which is
consummated within the lesser of (a) 365 days of the date of such FTC Order, or
(b) the time period specified in such FTC Order and (B) any Acquisition
Subsidiary and any Subsidiary of an Acquisition Subsidiary will not be required
to comply with clause (ii) of this paragraph in connection with any Asset Sale.
Within 365 days after the receipt of any Net Proceeds from an Asset Sale,
the Company or the applicable Subsidiary may apply such Net Proceeds, at its
option, (a) to permanently reduce outstanding Senior Indebtedness
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(and correspondingly reduce commitments with respect thereto) or (b) to the
acquisition of an interest in another business, the making of a capital
expenditure or the acquisition of other long-term assets, in each case, in a
Permitted Line of Business on the date of such Asset Sale. Pending the final
application of any such Net Proceeds, the Company or the applicable Subsidiary
may temporarily reduce Indebtedness under the Revolving Credit Facility or
otherwise invest such Net Proceeds in any manner that is not prohibited by the
Indenture. Any Net Proceeds from Asset Sales that are not applied or invested as
provided in the first sentence of this paragraph will be deemed to constitute
"Excess Proceeds."
Within 30 days after the aggregate amount of Excess Proceeds exceeds $5.0
million, the Company will be required to make an offer to all Holders of Notes
(an "Asset Sale Offer") to purchase an aggregate principal amount of Notes equal
to such Excess Proceeds (the "Offer Amount"), at a Purchase Price in cash in an
amount equal to 100% of the principal amount thereof, together with accrued and
unpaid interest and Liquidated Damages (if any) thereon to the Purchase Date, in
accordance with the procedures set forth in the Indenture and described in such
notice.
The Company will comply with the requirements of Rule 14e-1 under the
Exchange Act and any other securities laws and regulations thereunder to the
extent such laws and regulations are applicable in connection with the
repurchase of the Notes as a result of an Asset Sale.
On a date that is at least 30 but no more than 60 days from the date on
which the Company mails notice of an Asset Sale Offer (the "Purchase Date"), the
Company will, to the extent lawful, (i) accept for payment all Notes or portions
thereof properly tendered pursuant to the Asset Sale Offer in an aggregate
principal amount not in excess of the Offer Amount, (ii) deposit with the Paying
Agent an amount equal to the Purchase Price, together with accrued and unpaid
interest and Liquidated Damages (if any) thereon to the Purchase Date, in
respect of all Notes or portions thereof so tendered and accepted for repurchase
and (iii) deliver or cause to be delivered to the Trustee the Notes so accepted
together with an Officers' Certificate stating the aggregate principal amount of
Notes or portions thereof being repurchased by the Company. The Paying Agent
will promptly (but in any case not later than five days after the Purchase Date)
mail to each Holder of Notes so repurchased the amount due in connection with
such Notes, and the Company will promptly issue a new Note, and the Trustee,
upon written request from the Company in the form of an Officers' Certificate
will authenticate and mail or deliver (or cause to transfer by book entry) to
each relevant Holder a new Note, in a principal amount equal to any unpurchased
portion of the Notes surrendered to the Holder thereof; provided, that each such
new Note will be in a principal amount of $1,000 or an integral multiple
thereof. The Company will publicly announce the results of the Asset Sale Offer
on or as soon as practicable after the Purchase Date.
To the extent that the aggregate amount of Notes tendered pursuant to an
Asset Sale Offer is less than the Excess Proceeds, the Company or the applicable
Subsidiary may use any remaining Excess Proceeds for general corporate purposes.
If the aggregate principal amount of Notes surrendered by Holders thereof
exceeds the Offer Amount, the Trustee shall select the particular Notes or
portions thereof to be purchased on a pro rata basis. Upon completion of such
Asset Sale Offer, the amount of Excess Proceeds shall be reset at zero.
The Asset Sale purchase feature is a result of negotiations between the
Company and the Initial Purchasers. Management has no current intention to
engage in a transaction involving an Asset Sale, although it is possible that
the Company may decide to do so in the future. Subject to the limitations
described below, including the limitation on the Company's ability to incur
indebtedness, the Company is not prohibited by the terms of the Indenture from
entering into certain transactions, including acquisitions, refinancings,
recapitalizations or other highly-leveraged transactions, that do not constitute
an Asset Sale under the Indenture. Such transactions could adversely affect
Holders by increasing the indebtedness of the Company, some or all of which may
be senior to the Notes, or otherwise adversely affect the Company's capital
structure and credit ratings. The Company's ability to engage in such
transactions is also limited by restrictions under the Bank Credit Facility. See
"--Restrictions under Senior Indebtedness" and "Description of the Bank Credit
Facility."
"Asset Sale" means (i) the sale (other than sales of inventory), lease,
conveyance or other disposition of any assets (including, without limitation, by
way of a sale and leaseback) other than in the ordinary course of business
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(provided that the sale, lease, conveyance or other disposition of all or
substantially all of the assets of the Company and its Subsidiaries taken as a
whole will be governed by the provisions of the Indenture described above under
the caption "--Change of Control" and/or the provisions described above under
the caption "--Merger, Consolidation or Sales of Assets" and not by the
provisions of the Asset Sale covenant), and (ii) the issue or sale by the
Company or any of its Subsidiaries of Capital Stock of any of the Company's
Subsidiaries, in the case of either clause (i) or (ii), whether in a single
transaction or a series of related transactions (a) that have a fair market
value in excess of $1.0 million or (b) for net proceeds in excess of $1.0
million. Notwithstanding the foregoing: (i) a transfer of assets by the Company
to a Wholly Owned Subsidiary of the Company or by a Wholly Owned Subsidiary of
the Company to the Company or to another Wholly Owned Subsidiary, (ii) an
issuance or sale of Capital Stock by a Wholly Owned Subsidiary of the Company to
the Company or to another Wholly Owed Subsidiary of the Company, (iii) a
Permitted Investment or a Restricted Payment that is permitted by the covenant
described above under the caption "--Restricted Payments," (iv) a Permitted
Lien, provided that no steps or actions have been taken by the holder of such
Permitted Lien to realize upon or dispose of the assets subject thereto, (v) a
sale or other disposition or abandonment of damaged, worn out or obsolete
property, (vi) the licensing of any intellectual property for a period of not
more than five years which is not in connection with the sale of any other
assets of the Company (except for any such licensing of intellectual property
that causes a reduction of the assets of the Company or any of its Subsidiaries
under GAAP), and (vii) the sale of owned gold to consignment banks under the
Bank Credit Facility in the ordinary course of business, will not be deemed to
be Asset Sales.
Restrictions under Senior Indebtedness
The Indenture provides that prior to giving notice to Holders of Notes
relating to a Change of Control Offer or an Asset Sale Offer, but in any event
within 90 days following a Change of Control or the accumulation of Excess
Proceeds in excess of $5.0 million, the Company shall (i) repay, or otherwise
make arrangements satisfactory to the holders of all Senior Indebtedness (or
their respective Senior Representatives) for the repayment of, all Senior
Indebtedness in full in cash or Cash Equivalents or offer to repay all such
Senior Indebtedness in full in cash or Cash Equivalents and have repaid, or
otherwise made arrangements satisfactory to the holders of all Senior
Indebtedness (or their respective Senior Representatives) for the repayment of,
all Senior Indebtedness in full in cash or Cash Equivalents of any lender who
accepts such offer; and/or (ii) obtain the requisite consents under the Bank
Credit Facility or under agreements relating to other Senior Indebtedness to
purchase Notes as required by the Indenture. The Company shall not effect the
purchase of Notes until all Senior Indebtedness has been repaid in full in cash
or Cash Equivalents and/or such requisite consents have been obtained. As of
December 16, 1996, the Company had approximately $36.2 millions of Senior
Indebtedness outstanding (exclusive of an unused commitment of up to $23.8
million) under the Bank Credit Facility.
The Bank Credit Facility prohibits the Company from purchasing any Notes
and also provides that certain change of control events with respect to the
Company and asset sales would constitute a default thereunder. Moreover, the
exercise by the Holders of their right to require the Company to repurchase the
Notes could cause a default under the Senior Indebtedness even if the Change of
Control itself does not, due to the financial effect of such repurchase on the
Company. As of the date hereof, there are no other outstanding securities or
indebtedness of the Company (ranking pari passu with the Notes or otherwise),
other than the Bank Credit Facility, that prohibit certain events that would
constitute a Change of Control or an Asset Sale or that require the Company to
repurchase or refinance such obligations upon a Change of Control of the Company
or an Asset Sale; although any future agreements relating to Senior Indebtedness
or other Indebtedness to which the Company becomes a party or other securities
that may be issued by it in the future may contain similar restrictions and
provisions. In the event the Company becomes obligated pursuant to the Indenture
to purchase Notes at a time when the Company is contractually prohibited by the
Bank Credit Facility or any other such agreement from purchasing Notes, the
Company could seek the consent of its lenders to the purchase of Notes or could
attempt to refinance the borrowings under the agreements that contain such
prohibition. If the Company does not obtain such a consent or repay such
borrowings, the Company would remain contractually prohibited from purchasing
Notes. In such case, the Company's failure to make the required Change of
Control Offer or Asset Sale Offer or to purchase tendered Notes would constitute
an Event of Default under the Indenture which would, in turn, constitute a
default under the Bank of Credit Facility and any other Senior Indebtedness
which contains terms which would result in any event of default upon the
occurrence of an Event of Default under the Notes. In such circumstances, the
Company's ability
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to make payments to the Holders of Notes would be subject to the subordination
provisions of the Indenture. Finally, the Company's ability to pay cash to the
Holders upon a repurchase may be limited by the Company's then existing
financial resources. There can be no assurance that sufficient funds will be
available when necessary to make any required repurchases.
Certain Covenants
Restricted Payments
The Indenture provides that the Company will not, and will not permit any
of its Subsidiaries to, directly or indirectly: (i) declare or pay any dividend
or make any other payment or distribution on account of the Company's Capital
Stock (including, without limitation, any payment in connection with any merger
or consolidation involving the Company) or to the direct or indirect holders of
the Company's Capital Stock in their capacity as such (other than dividends or
distributions payable in Capital Stock (other than Disqualified Stock) of the
Company or dividends or distributions payable to the Company or any Wholly Owned
Subsidiary of the Company); (ii) purchase, redeem or otherwise acquire or retire
for value any Capital Stock of the Company or any direct or indirect parent or
other Affiliate of the Company (other than a Wholly Owned Subsidiary of the
Company); (iii) make any principal payment on, or purchase, redeem, defease or
otherwise acquire or retire for value prior to any scheduled maturity, scheduled
repayment or sinking fund payment date any Indebtedness that is subordinated to
the Notes; or (iv) make any Restricted Investment (all such payments and other
actions set forth in clauses (i) through (iv) above being collectively referred
to as "Restricted Payments"), unless, at the time of and after giving effect to
such Restricted Payment:
(a) no Default or Event of Default shall have occurred and be
continuing or would occur as a consequence thereof; and
(b) the Company would, at the time of such Restricted Payment and
after giving pro forma effect thereto as if such Restricted Payment had
been made at the beginning of the applicable four-quarter period, have been
permitted to incur at least $1.00 of additional Indebtedness pursuant to
the Fixed Charge Coverage Ratio test set forth in the first paragraph of
the covenant described below under the caption "--Incurrence of
Indebtedness and Issuance of Preferred Stock;" and
(c) such Restricted Payment, together with the aggregate of all other
Restricted Payments made by the Company and its Subsidiaries after the date
of the Indenture (excluding Restricted Payments permitted by clauses (2),
(3), (4), (5), (6) and (8) of the next succeeding paragraph), is less than
the sum of (i) 50% of the Consolidated Net Income of the Company for the
period (taken as one accounting period) from the beginning of the first
fiscal quarter commencing after the date of the Indenture to the end of the
Company's most recently ended fiscal quarter for which internal financial
statements are available at the time of such Restricted Payment (or, if
such Consolidated Net Income for such period is a deficit, less 100% of
such deficit), plus (ii) 100% of the aggregate net cash proceeds received
by the Company from the issue or sale since the date of the Indenture of
Capital Stock of the Company (to the extent not used as described under the
caption "Special Redemption") or of debt securities of the Company that
have been converted into such Capital Stock (other than Capital Stock (or
convertible debt securities) sold to a Subsidiary of the Company or
Disqualified Stock or debt securities that have been converted into
Disqualified Stock), plus (iii) to the extent that any Restricted
Investment that was made after the date of the Indenture is sold for cash
or otherwise liquidated or repaid for cash, the lesser of (A) the cash
return of capital with respect to such Restricted Investment (less the cost
of disposition, if any) and (B) the initial amount of such Restricted
Investment.
The foregoing provisions will not prohibit (1) the payment of any dividend
within 60 days after the date of declaration thereof, if at said date of
declaration such payment would have complied with the provisions of the
Indenture; (2) the payment of dividends on Series A Preferred Stock pursuant to
the Certificate of Designation for such Series A Preferred Stock in effect on
the date of the Indenture, provided that the Fixed Charge Coverage Ratio for the
Company's most recently ended four full fiscal quarters for which internal
financial statements are available immediately preceding the date on which such
payment of dividends is made would have been at least 2.25 to 1,
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determined on a pro forma basis, as if the Restricted Payment had been made at
the beginning of such four-quarter period, provided that the amount of any such
dividends paid on Series A Preferred Stock shall, after the date of payment, be
subtracted from the computation of Consolidated Net Income solely for purposes
of clause (c)(i) of the preceding paragraph; (3) the redemption, repurchase,
retirement or other acquisition of Series A Preferred Stock pursuant to the
Certificate of Designation for such Series A Preferred Stock in effect on the
date of the Indenture, provided that (a) such redemption, repurchase, retirement
or other acquisition is for at least $2 million of Series A Preferred Stock, and
(b) the Fixed Charge Coverage Ratio for the Company's most recently ended four
full fiscal quarters for which internal financial statements are available
immediately preceding the date on which such redemption, repurchase, retirement
or other acquisition is made would have been at least 2.5 to 1, determined on a
pro forma basis, as if the Restricted Payment had been made at the beginning of
such four-quarter period; (4) the redemption, repurchase, retirement or other
acquisition of any Capital Stock of the Company in exchange for, or out of the
proceeds of, the substantially concurrent sale (other than to a Subsidiary of
the Company) of other Capital Stock of the Company other than Disqualified
Stock, provided that the amount of any such net cash proceeds that are utilized
for any such redemption, repurchase, retirement or other acquisition shall be
excluded from clause (c)(ii) of the preceding paragraph; (5) the defeasance,
redemption or repurchase of subordinated Indebtedness with the net cash proceeds
from an incurrence of Permitted Refinancing Debt or the substantially concurrent
sale (other than to a Subsidiary of the Company) of Capital Stock of the Company
(other than Disqualified Stock), provided that the amount of any such net cash
proceeds that are utilized for any such redemption, repurchase, retirement or
other acquisition shall be excluded from clause (c)(ii) of the preceding
paragraph; (6) any Investment made by the Company or any of its Subsidiaries in
an Acquisition Subsidiary with the net cash proceeds of an issuance of
Designated Investment Stock within 30 days of such issuance, provided that the
amount of any such net cash proceeds that are utilized for any such Investment
shall be excluded from clause (c)(ii) of the preceding paragraph; (7) the
purchase or redemption of shares of Capital Stock of the Company held by present
or former officers, directors, employees or independent sales representatives of
the Company or by any employee stock ownership plan or similar trust for the
account of such present or former officers, directors, employees or independent
sales representatives upon such person's death, disability, retirement or
termination of employment or other association with the Company or under the
terms of any such plan or trust or any other agreement under which such Capital
Stock was issued in an aggregate amount not to exceed $500,000 per year,
provided that to the extent that less than $500,000 of Capital Stock is
purchased or redeemed in a given year, the difference between $500,000 and the
amount purchased or redeemed during that year shall be added to the amount
available to the Company for purchases and redemptions in the next subsequent
year only (for which purpose the amount so added shall be deemed to be the last
amount expended in such next subsequent year); (8) the payment to Castle Harlan,
Inc. of a management fee of up to $1.5 million per year pursuant to the
Management Agreement entered into between the Company and Castle Harlan, Inc.,
as in force on the Issue Date (the "Management Agreement") (the payment for the
first year following the Issue Date to be a single installment payable at any
time during such year and payments thereafter to be payable in arrears in four
equal quarterly installments per annum), provided that, in the event the full
amount thereof is not paid in any year, the deficiency may cumulate and,
provided that there is no subsisting Default or Event of Default of a type
described in clause (i) or (ii) under the caption "--Events of Default and
Remedies" at the time of payment, may be paid together with the then current
management fee for such subsequent year and (9) a Subsidiary of an Acquisition
Subsidiary may purchase, redeem or otherwise acquire or retire for value any of
its Capital Stock.
The amount of all Restricted Payments (other than cash) shall be the fair
market value (evidenced by a resolution of the Board of Directors set forth in
an Officers' Certificate delivered to the Trustee) on the date of the Restricted
Payment of the asset(s) proposed to be transferred by the Company or such
Subsidiary, as the case may be, pursuant to the Restricted Payment. Not later
than the date of making any Restricted Payment, the Company shall deliver to the
Trustee an Officer's Certificate stating that such Restricted Payment is
permitted and setting forth the basis upon which the calculations required by
the covenant entitled "Restricted Payments" were computed, which calculations
may be based upon the Company's latest available financial statements.
Incurrence of Indebtedness and Issuance of Preferred Stock
The Indenture provides that the Company will not, nor will it permit any of
its Subsidiaries to, directly or indirectly, create, incur, issue, assume,
guarantee or otherwise become directly or indirectly liable, contingently or
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otherwise, with respect to (collectively, "incur") any Indebtedness (including
Acquired Debt) and that the Company will not issue any Disqualified Stock, nor
will it permit any of its Subsidiaries to issue any shares of Preferred Stock
(other than to the Company or a Wholly Owned Subsidiary of the Company other
than an Acquisition Subsidiary or a Subsidiary of an Acquisition Subsidiary);
provided, however, that the Company may incur Indebtedness (including Acquired
Debt) or issue shares of Disqualified Stock, if the Fixed Charge Coverage Ratio
for the Company's most recently ended four full fiscal quarters for which
internal financial statements are available immediately preceding the date on
which such additional Indebtedness is incurred or such Disqualified Stock is
issued would have been at least 2.0 to 1.0, determined on a pro forma basis
(including a pro forma application of the net proceeds therefrom), as if the
additional Indebtedness had been incurred, or the Disqualified Stock had been
issued, as the case may be, at the beginning of such four-quarter period;
provided that (x) until the Company has internal financial statements for two
full fiscal quarters the Company will not, and will not permit any of its
Subsidiaries to, incur any additional Indebtedness or issue any shares of
Preferred Stock, and (y) after the Company has internal financial statements for
two full financial quarters, but before the Company has such internal financial
statements for four full financial quarters, the Fixed Charge Coverage Ratio
will be calculated by annualizing the available internal financial statements of
the Company on a pro rata basis. Notwithstanding the foregoing, neither the
Company nor any Subsidiary of the Company (other than an Acquisition Subsidiary
or a Subsidiary of an Acquisition Subsidiary) may incur Indebtedness in respect
of a Guarantee of Indebtedness of an Acquisition Subsidiary or a Subsidiary of
an Acquisition Subsidiary.
The foregoing provisions will not apply to the incurrence of the following:
(i) the incurrence by the Company of Indebtedness under the term loan
portion of the Bank Credit Facility in an aggregate principal amount at any time
outstanding not to exceed $25 million less the aggregate amount of all
repayments, optional or mandatory, of the principal thereof that have been made
since the date of the Indenture;
(ii) the incurrence by the Company of Indebtedness under the revolving
credit and/or the gold consignment portions of the Bank Credit Facility in an
aggregate principal amount at any time outstanding not to exceed the greater of
(x) $35 million less the aggregate amount of all Net Proceeds of Asset Sales or
other dispositions of assets that have been applied since the date of the
Indenture to permanently reduce the commitments with respect to such
Indebtedness pursuant to the covenant described above under the caption "--Asset
Sales," and (y) the "Borrowing Base" (as determined and calculated under the
terms of the Bank Credit Facility);
(iii) the incurrence by the Company and its Subsidiaries of Existing
Indebtedness;
(iv) the incurrence by the Company of Indebtedness represented by the
Notes;
(v) the incurrence by the Company or any of its Subsidiaries (other than an
Acquisition Subsidiary or a Subsidiary of an Acquisition Subsidiary) of
additional Indebtedness (including Acquired Debt) represented by Capital Lease
Obligations, mortgage financings, or purchase money obligations, in each case
incurred for the purpose of financing or refinancing all or any part of the
purchase price or cost of construction or improvement of property, plant or
equipment used in the business of the Company or such Subsidiary, in an
aggregate principal amount not to exceed $5.0 million at any time outstanding;
(vi) the incurrence by the Company or any of its Subsidiaries of Permitted
Refinancing Debt in exchange for, or the net proceeds of which are used to
extend, refinance, renew, replace, defease or refund, Indebtedness that was
permitted by the Indenture to be incurred;
(vii) the incurrence by the Company or any of its Subsidiaries of
intercompany Indebtedness between or among the Company and any of its Wholly
Owned Subsidiaries; provided, however, that (x) neither the Company nor any of
its Subsidiaries may incur any Indebtedness to any Acquisition Subsidiary of the
Company; (y) if the Company is the obligor of such Indebtedness, such
Indebtedness is evidenced in writing and expressly subordinate to the payment in
full of all obligations with respect to the Notes and (z)(I) any subsequent
issuance, transfer or other disposition of Capital Stock that results in any
such Indebtedness being held by a Person other than the Company or a Wholly
Owned Subsidiary which is not an Acquisition Subsidiary or a Subsidiary of an
Acquisition Subsidiary and (II) any sale, transfer or other disposition of any
such Indebtedness to a Person that is not either the Company or a Wholly Owned
Subsidiary which is not an Acquisition Subsidiary or a Subsidiary of an
Acquisition
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Subsidiary shall be deemed, in each case, to constitute an incurrence of such
Indebtedness by the Company or such Subsidiary, as the case may be;
(viii) the incurrence by the Company or any of its Subsidiaries of Hedging
Obligations that are incurred for the purpose of fixing or hedging interest
rate, commodity or currency risk, in connection with the conduct of its business
and not for speculative purposes;
(ix) the incurrence by the Company of Indebtedness under a Guarantee of any
Indebtedness permitted under the Indenture to be incurred by a Subsidiary of the
Company which is not an Acquisition Subsidiary or a Subsidiary of an Acquisition
Subsidiary;
(x) the incurrence by any Subsidiary of the Company of Indebtedness under a
Guarantee of any Indebtedness permitted under the Indenture to be incurred by
the Company; provided that (a) in the case such Guarantee is of Indebtedness
that is pari passu in right of payment with the Notes, all obligations with
respect to the Notes are Guaranteed on an equal and ratable basis with the
Indebtedness so Guaranteed, and (b) in the case such Guarantee is of
Indebtedness that is subordinated in right of payment to the Notes, all
obligations with respect to the Notes are Guaranteed on a senior basis
reflecting the subordination of the Indebtedness so Guaranteed on terms
substantially similar to, or more favorable to senior creditors than, those
contained in the Indenture;
(xi) the incurrence by the Company of Indebtedness (in addition to
Indebtedness permitted by any other clause of this paragraph) in an aggregate
principal amount (or accreted value, as applicable) at any time outstanding not
to exceed $8.0 million;
(xii) the incurrence by the Company or any of its Subsidiaries of
Indebtedness in respect of bid, performance or advance payment bonds, and appeal
and surety bonds;
(xiii) the incurrence of Indebtedness by an Acquisition Subsidiary or a
Subsidiary or an Acquisition Subsidiary, provided that (a) any such Indebtedness
is without recourse to, and is not Guaranteed by, the Company or any other
Subsidiary of the Company (other than an Acquisition Subsidiary or a Subsidiary
of an Acquisition Subsidiary) without regard to whether such recourse complies
or would comply with the provisions described under the caption "--Restricted
Payments," and (b) no Default or Event of Default is in existence and continuing
after giving effect to such issuance or incurrence:
(xiv) the issuance of Capital Stock, including Disqualified Stock, by a
Subsidiary of an Acquisition Subsidiary, provided that (a) such Disqualified
Stock, is without recourse to, and is not Guaranteed by, the Company or any
other Subsidiary of the Company (other than a Subsidiary of an Acquisition
Subsidiary) without regard to whether such recourse complies or would comply
with the provisions described under the caption "--Restricted Payments," and (b)
no Default or Event of Default is in existence and continuing after giving
effect to such issuance;
(xv) the incurrence by the Company of Indebtedness for the purpose of
effecting a Restricted Payment described in clause (7) of the second paragraph
under the caption "--Restricted Payments" above, provided that (a) the aggregate
original issue price of such Indebtedness at any time outstanding does not
exceed $1 million, (b) such Indebtedness pays no current interest and matures no
earlier than six months after the scheduled maturity date of the Notes, and (c)
such Indebtedness is subordinated to the Notes on terms substantially similar
to, or more favorable to senior creditors than, those contained in the
Indenture; and
(xvi) the incurrence by the Company or any of its Subsidiaries of interest,
fees or other expenses on Indebtedness otherwise permitted under this covenant,
provided that such interest, fees or other expenses are payable on a current
basis no less frequently than semi-annually and are paid when due or within any
applicable customary grace period thereafter, not to exceed thirty days.
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For purposes of determining compliance with this covenant, (i) in the event
that an item of Indebtedness meets the criteria of more than one of the types of
Indebtedness permitted by this covenant, the Company in its sole discretion will
classify such item of Indebtedness and will only be required to include the
amount and type of each class of Indebtedness in the test specified in the first
paragraph of this covenant or in one of the clauses of the second paragraph of
this covenant; (ii) the amount of Indebtedness issued at a price which is less
than the principal amount thereof shall be equal to the amount of liability in
respect thereof determined in accordance with GAAP; and (iii) the amount of
Indebtedness represented by a Guarantee of a primary obligation of another
Person shall be deemed to be the lower of (x) an amount equal to the maximum
amount of the primary obligation (including without limitation all principal,
premiums (if any), interest, fees and all other amounts in respect thereof) in
respect of which such Guarantee is made and (y) the maximum amount for which
such guaranteeing Person may be liable pursuant to the terms of the applicable
Guarantee, which, in any case in which such Guarantee consists solely of the
granting of a Lien on any asset of such guaranteeing Person, shall be limited to
the fair market value of such asset.
Liens
The Indenture provides that the Company will not, and will not permit any
of its Subsidiaries to, directly or indirectly, create, incur, assume or suffer
to exist any Lien on any asset now owned or hereafter acquired, or any income or
profits therefrom or assign or convey any right to receive income therefrom,
except Permitted Liens.
Dividend and Other Payment Restrictions Affecting Subsidiaries
The Indenture provides that the Company will not, and will not permit any
of its Subsidiaries (other than an Acquisition Subsidiary or a Subsidiary
thereof) to, directly or indirectly, create or otherwise cause or suffer to
exist or become effective any encumbrance or restriction on the ability of such
Subsidiary to (i)(a) pay dividends or make any other distributions to the
Company or any of its Subsidiaries (1) on its Capital Stock or (2) with respect
to any other interest or participation in, or measured by, its profits, or (b)
pay any Indebtedness owed to the Company or any of its Subsidiaries, (ii) make
loans or advances to the Company or any of its Subsidiaries, or (iii) transfer
any of its properties or assets to the Company or any of its Subsidiaries,
except for such encumbrances or restrictions existing under or by reason of (a)
written agreements evidencing Existing Indebtedness as in effect on the date of
the Indenture, (b) the Bank Credit Facility as in effect from time to time,
provided that such provisions are no more restrictive with respect to such
dividend and other payment restrictions than those contained in the Bank Credit
Facility as in effect on the date of the Indenture, (c) the Indenture and Notes,
(d) applicable law, (e) any instrument or agreement governing Acquired Debt of
the Company or any of its Subsidiaries or Indebtedness or Capital Stock of a
Person acquired by the Company or any of its Subsidiaries as in effect at the
time of such acquisition (except to the extent such Indebtedness was incurred in
connection with or in contemplation of such acquisition), which encumbrances or
restrictions are not applicable to any Person, or the properties or assets of
any Person, other than the Person, or the property or assets of the Person, so
acquired, (f) by reason of customary non-assignment provisions in leases entered
into in the ordinary course of business, (g) purchase money obligations for
property acquired in the ordinary course of business that impose restrictions of
the nature described in clause (iii) above on the property so acquired, (h)
Permitted Refinancing Debt, provided that the restrictions contained in the
agreements governing such Permitted Refinancing Debt are not more restrictive
than those contained in the agreements governing the Indebtedness being
refinanced, or (i) in the case of any Foreign Subsidiary, the laws, rules or
regulations of any foreign nation.
Limitation on Mergers, Consolidations and Sales of Assets
The Indenture provides that the Company will not consolidate or merge with
or into any other Person (other than a Wholly Owned Subsidiary which is not an
Acquisition Subsidiary or a Subsidiary of an Acquisition Subsidiary), or permit
any other Person to consolidate or merge with or into the Company, nor will the
Company sell, lease, convey or otherwise dispose of all or substantially all of
its assets unless (i) the Company shall be the continuing corporation or the
entity formed by or surviving any such consolidation or merger, or to which such
sale, lease, conveyance or other disposition shall have been made (the
"Surviving Entity"), is a corporation organized and existing under the laws of
the United States, any state thereof, or the District of Columbia; (ii) the
Surviving Entity assumes by supplemental indenture all of the obligations of the
Company under the Notes and the Indenture; (iii)
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immediately after giving effect to such transaction, no Default or Event of
Default shall have occurred and be continuing; (iv) immediately after giving
effect to such transaction, the Consolidated Net Worth of the Company or the
Surviving Entity, as the case may be, would be at least equal to the
Consolidated Net Worth of the Company immediately prior to such transaction; and
(v) immediately after giving effect to such transaction, the Company or the
Surviving Entity, as the case may be, could incur at least $1.00 of additional
Indebtedness pursuant to the Fixed Charge Coverage Ratio test set forth in the
first paragraph of the covenant described above under the caption "--Incurrence
of Indebtedness and Issuance of Preferred Stock."
Transactions with Affiliates
The Indenture provides that the Company will not, and will not permit any
of its Subsidiaries to, make any payment to, or sell, lease, transfer or
otherwise dispose of any of its properties or assets to, or purchase any
property or assets from, or enter into or make or amend any contract, agreement,
loan, advance or guarantee with any Affiliate or with any Person (other than an
Affiliate) for the benefit of any Affiliates (each of the foregoing, an
"Affiliate Transaction"), unless (i) such Affiliate Transaction is on terms that
are no less favorable to the Company or the relevant Subsidiary than those that
would have been obtained in a comparable transaction by the Company or such
Subsidiary with an unrelated Person and (ii) the Company delivers to the Trustee
(a) with respect to any Affiliate Transaction or series of related Affiliate
Transactions involving aggregate consideration in excess of $2.0 million, a
resolution of the Board of Directors set forth in an Officers' Certificate
certifying that such Affiliate Transaction complies with clause (i) above and
that such Affiliate Transaction has been approved by a majority of the
disinterested members of the Board of Directors and (b) with respect to any
Affiliate Transaction or series of related Affiliate Transactions involving
aggregate consideration in excess of $5.0 million, an opinion as to the fairness
to the Company of such Affiliate Transaction from a financial point of view
issued by an accounting, appraisal or investment banking firm of national
standing experienced in the appraisal or similar review of similar types of
transactions; provided that (w) any employment or consulting agreement entered
into or any employee benefit plan adopted by the Company or any of its
Subsidiaries in the ordinary course of business, (x) transactions between or
among the Company and/or its Wholly Owned Subsidiaries (other than Acquisition
Subsidiaries and Subsidiaries of Acquisition Subsidiaries) and transactions
between or among an Acquisition Subsidiary and/or its Subsidiaries, (y)
Restricted Payments (including the management fee payable to Castle Harlan, Inc.
pursuant to the Management Agreement) that are permitted by the provisions of
the Indenture described above under the caption "--Restricted Payments" and
Permitted Investments, and (z) reasonable and customary payments and other
benefits (including indemnification) provided to directors for service on the
Board of Directors of the Company or any of its Subsidiaries, including the
reimbursement or advancement of out-of-pocket expenses and directors' and
officers' liability insurance, in each case, shall not be deemed Affiliate
Transactions. For the purposes of determining if a transaction is an Affiliate
Transaction, Castle Harlan Partners II, L.P., Castle Harlan, Inc. and their
respective Affiliates shall be deemed to be an Affiliate of the Company and each
of its Subsidiaries.
Limitation on Issuances and Sales of Capital Stock of Subsidiaries
The Indenture provides that the Company (i) will not, and will not permit
any Subsidiary of the Company to, transfer, convey, sell, lease or otherwise
dispose of any Capital Stock of any Subsidiary of the Company to any Person
(other than the Company or a Wholly Owned Subsidiary of the Company which is not
an Acquisition Subsidiary or a Subsidiary of an Acquisition Subsidiary), unless
(a) such transfer, conveyance, sale, lease or other disposition (unless made by
an Acquisition Subsidiary or a Subsidiary of an Acquisition Subsidiary) is of
all the Capital Stock of such Subsidiary and (b) the Net Proceeds from such
transfer, conveyance, sale, lease or other disposition are applied in accordance
with the covenant described above under the caption "--Asset Sales," and (ii)
will not permit any Subsidiary of the Company (other than a Subsidiary of an
Acquisition Subsidiary) to issue any of its Capital Stock (other than, if
necessary, shares of its Capital Stock constituting directors' qualifying shares
or, in the case of a Foreign Subsidiary, shares issued to foreign nationals
pursuant to applicable law, provided, that such Foreign Subsidiary remains a
Wholly Owned Subsidiary) to any Person other than to the Company or a Wholly
Owned Subsidiary of the Company which is not an Acquisition Subsidiary or a
Subsidiary of an Acquisition Subsidiary.
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Business Activities
The Indenture provides that the Company will not, nor will it permit any of
its Subsidiaries to, engage in any business other than a Permitted Line of
Business.
Limitations on Future Senior Subordinated Indebtedness
The Indenture provides that the Company will not incur any Indebtedness,
other than the Notes, that is subordinated in right of payment to any other
Indebtedness of the Company unless such Indebtedness, by its terms is pari passu
with the Notes or subordinated to the Notes pursuant to subordination provisions
substantially similar to, or more favorable to senior creditors than, those
contained in the Indenture.
Payments for Consent
The Indenture provides that neither the Company, nor any of its
Subsidiaries will, directly or indirectly, pay or cause to be paid any
consideration, whether by way of interest, fee or otherwise, to any Holder of
any Notes for or as an inducement to any consent, waiver or amendment of any of
the terms or provisions of the Indenture or the Notes unless such consideration
is offered to be paid or is paid to all Holders of the Notes that consent, waive
or agree to amend in the time frame set forth in the solicitation documents
relating to such consent, waiver or agreement.
Reports
The Indenture provides that, whether or not required by the rules and
regulations of the Commission, so long as any Notes are outstanding, the
Company, and, if the Company is required to file financial statements for any
Subsidiary Guarantor, such Subsidiary Guarantor, will furnish to the Holders of
Notes (i) all quarterly and annual financial information that would be required
to be contained in filings with the Commission on Forms 10-Q and 10-K if the
Company and/or any Subsidiary Guarantor was required to file such forms,
including "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and, with respect to annual consolidated financial
statements and schedules only, a report thereon by the independent auditors of
the Company and/or any Subsidiary Guarantor, and (ii) all information that would
be required to be contained in filings with the Commission on Form 8-K if the
Company and/or any Subsidiary Guarantor was required to file such form. In
addition, whether or not required by the rules and regulations of the
Commission, the Company will file a copy of all such information and reports
with the Commission for public availability (unless the Commission will not
accept such a filing) and make such information available to securities analysts
and prospective investors upon request. In addition, the Company has agreed
that, for so long as any Notes remain outstanding, it will furnish to the
Holders, and to securities analysts and prospective investors upon their
request, the information required to be delivered pursuant to Rule 144A(d)(4)
under the Securities Act.
Events of Default and Remedies
The Indenture provides that each of the following constitutes an Event of
Default: (i) default for 30 days in the payment when due of interest or
Liquidated Damages (if any) on the Notes (whether or not prohibited by the
subordination provisions of the Indenture); (ii) default in payment when due of
the principal, Redemption Price or Purchase Price of the Notes (whether or not
prohibited by the subordination provisions of the Indenture); (iii) failure by
the Company to comply with certain provisions described under the caption
"--Repurchase at the Option of Holders" or the provisions described under the
caption "--Limitation on Mergers, Consolidations and Sales of Assets"; (iv)
failure by the Company for 30 days after notice from the Trustee or Holders of
not less than 25% of the aggregate principal amount of the Notes outstanding to
comply with the provisions described under the captions "Covenants--Restricted
Payments" or "Covenants--Incurrence of Indebtedness and Issuance of Preferred
Stock," (v) failure by the Company for 60 days after notice from the Trustee or
Holders of not less than 25% of the aggregate principal amount of the Notes
outstanding to comply with any of its other agreements in the Indenture or the
Notes, (vi) default under any mortgage, indenture or instrument under which
there may be issued or by which there may be secured or evidenced any
Indebtedness for money borrowed by the Company or any of its Subsidiaries
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or the payment of which is Guaranteed by the Company or any of such
Subsidiaries, whether such Indebtedness or Guarantee now exists or is created
after the date of the Indenture, which default (a) is caused by a failure to pay
any amount due with respect to Indebtedness at the stated maturity thereof (a
"Payment Default") or (b) results in the acceleration of such Indebtedness prior
to its express maturity and, in each case, the principal amount of any such
Indebtedness, together with the principal amount of any other such Indebtedness
under which there has been a Payment Default or the maturity of which has been
so accelerated, aggregates $5.0 million or more; (vii) failure by the Company or
any of its Subsidiaries to pay final judgments aggregating in excess of $5.0
million, which judgments are not paid, discharged or stayed for a period of 60
days; (viii) certain events of bankruptcy or insolvency with respect to the
Company, any Significant Subsidiary or any group of Subsidiaries that, taken
together, would constitute a Significant Subsidiary.
If any Event of Default occurs and is continuing, the Trustee or the
Holders of at least 25% in principal amount of the then outstanding Notes by
written notice to the Company (and the Trustee, if such notice is given by such
Holders) may declare all the Notes to be due and payable immediately. Upon such
acceleration, the entire principal amount of, and accrued and unpaid interest
and Liquidated Damages, if any, on the Notes (i) shall become immediately due
and payable; or (ii) if there is any Designated Senior Indebtedness outstanding,
shall become due and payable upon the first to occur of (a) an acceleration
under such Designated Senior Indebtedness or (b) five days after receipt by the
Company and the Senior Representative for such Designated Senior Indebtedness of
such acceleration notice, unless all Events of Default specified in such
acceleration notice (other than any Event of Default in respect of non-payment
of principal, premium or interest, if any, which has become due solely by reason
of such declaration of acceleration) shall have been cured. Notwithstanding the
foregoing, in the case of an Event of Default arising from certain events of
bankruptcy or insolvency, with respect to the Company, any Significant
Subsidiary or any group of Subsidiaries that, taken together, would constitute a
Significant Subsidiary, all outstanding Notes will become due and payable
without further action or notice. The Holders of the Notes may not enforce the
Indenture or the Notes except as provided in the Indenture. Subject to certain
limitations, Holders of a majority in principal amount of the then outstanding
Notes may direct the Trustee in its exercise of any trust or power. The Trustee
may withhold from Holders of the Notes notice of any continuing Default or Event
of Default (except a Default or Event of Default relating to the payment of
principal or interest) if it determines that withholding notice is in their
interest.
In the case of any Event of Default occurring by reason of any willful
action (or inaction) taken (or not taken) by or on behalf of the Company with
the intention of avoiding payment of the premium that the Company would have had
to pay if the Company then had elected to redeem the Notes pursuant to the
optional redemption provisions of the Indenture, an equivalent premium shall
also become and be immediately due and payable to the extent permitted by law
upon the acceleration of the Notes. If an Event of Default occurs prior to
January 15, 2005 by reason of any willful action (or inaction) taken (or not
taken) by or on behalf of the Company with the intention of avoiding the
prohibition on redemption of the Notes prior to January 15, 2005, then the
premium specified in the Indenture will also become immediately due and payable
to the extent permitted by law upon the acceleration of the Notes.
The Holders of a majority in aggregate principal amount of the Notes then
outstanding by notice to the Trustee may on behalf of the Holders of all the
Notes waive any existing Default or Event of Default and its consequences under
the Indenture except a continuing Default or Event of Default in the payment of
the principal, Redemption Price or Purchase Price of, or interest or Liquidated
Damages (if any) on, the Notes. In addition, after a declaration of acceleration
has been made, but before a judgment or decree for payment of the money due has
been obtained by the Trustee, the Holders of at least a majority in aggregate
principal amount of Notes outstanding, by written notice to the Company and the
Trustee, may annul such declaration if (i) the Company has paid or deposited
with the Trustee a sum sufficient to pay (a) all sums paid or advanced by the
Trustee under the Indenture and the reasonable compensation, expenses,
disbursements and advances of the Trustee, its agents and counsel, (b) all
overdue interest on all Notes, and (c) to the extent that payment of such
interest is lawful, interest upon overdue interest and Liquidated Damages, if
any, at the rate borne by the Notes; and (ii) all Events of Default, other than
the non-payment of principal of the Notes which has become due solely by such
declaration of acceleration, have been cured of waived.
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The Company is required to deliver to the Trustee annually a statement
regarding compliance with the Indenture, and the Company is required upon
becoming aware of any Default or Event of Default, to deliver to the Trustee a
statement specifying such Default or Event of Default.
No Personal Liability of Directors, Officers, Employees and Stockholders
Under the Indenture, no past or future director, officer, employee,
incorporator or stockholder of the Company, as such, shall have any liability
for any obligations of the Company under the Notes, the Indenture or for any
claim based on, in respect of, or by reason of, such obligations or their
creation. Each Holder of Notes by accepting a Note waives and releases all such
liability. The waiver and release are part of the consideration for issuance of
the Notes. Such waiver may not be effective to waive liabilities under the
federal securities laws and it is the view of the Commission that such a waiver
is against public policy.
Legal Defeasance and Covenant Defeasance
The Company may, at its option and at any time, elect to have all of the
obligations of the Company and the Subsidiary Guarantors discharged with respect
to the outstanding Notes ("Legal Defeasance") except for (i) the rights of
Holders of outstanding Notes to receive payments in respect of the principal of,
and premium (if any), interest and Liquidated Damages (if any) on such Notes
when such payments are due from the trust referred to below, (ii) the Company's
obligations with respect to the Notes concerning issuing temporary Notes,
registration of Notes, mutilated, destroyed, lost or stolen Notes and the
maintenance of an office or agency for payment and money for security payments
held in trust, (iii) the rights, powers, trusts, duties and immunities of the
Trustee, and the Company's obligations in connection therewith, and (iv) the
Legal Defeasance provisions of the Indenture. In addition, the Company, at its
option at any time, may elect to have the obligations of the Company released
with respect to certain covenants that are contained in the Indenture, including
without limitation those described under the caption "--Repurchase at the Option
of the Holders" ("Covenant Defeasance"), and thereafter any omission to comply
with such obligations shall not constitute a Default or Event of Default with
respect to the Notes. In the event a Covenant Defeasance occurs, certain events
(not including non-payment, bankruptcy, receivership, and insolvency events)
described under "Events of Default" will no longer constitute an Event of
Default with respect to the Notes.
In order to exercise either Legal Defeasance or Covenant Defeasance, (i)
the Company must irrevocably deposit with the Trustee, in trust, for the benefit
of the Holders of the Notes, cash in U.S. dollars, U.S. Government Securities,
or a combination thereof, in such amounts as will be sufficient (without
reinvestment), in the opinion of a nationally recognized firm of independent
public accountants, to pay the principal of and premium (if any), interest and
Liquidated Damages (if any) on the outstanding Notes on the stated maturity or
on the applicable Redemption Date, as the case may be, and the Company must
specify whether the Notes are being defeased to maturity or to a particular
Redemption Date; (ii) in the case of a Legal Defeasance, the Company shall have
delivered to the Trustee an opinion of counsel in the United States reasonably
acceptable to the Trustee confirming that (A) the Company has received from, or
there has been published by, the Internal Revenue Service a ruling or (B) since
the date of the Indenture, there has been a change in the applicable federal
income tax law, in either case to the effect that, and based thereon such
opinion of counsel shall confirm that, the Holders of the outstanding Notes will
not recognize income, gain or loss for federal income tax purposes as a result
of such Legal Defeasance and will be subject to federal income tax on the same
amounts, in the same manner and at the same times as would have been the case if
such Legal Defeasance had not occurred; (iii) in the case of a Covenant
Defeasance, the Company shall have delivered to the Trustee as opinion of
counsel in the United States reasonably acceptable to the Trustee confirming
that the Holders of the outstanding Notes will not recognize income, gain or
loss for federal income purposes as a result of such Covenant Defeasance and
will be subject to federal income tax on the same amounts, in the same manner
and at the same times as would have been the case if such Covenant Defeasance
had not occurred; (iv) no Default or Event of Default shall have occurred and be
continuing on the date of such deposit after giving effect thereto or insofar as
Events of Default from bankruptcy or insolvency events are concerned, no such
Event of Default shall occur at any time during the period ending on the
ninety-first day after the date of deposit (it being understood that such
condition shall not be deemed to be satisfied until such ninety-first day); (v)
such Legal Defeasance or Covenant Defeasance will not result in a breach or
violation of, or constitute a default under any
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material agreement or instrument to which the Company or any of its Subsidiaries
is a party or by which the Company or any of its Subsidiaries is bound; (vi) the
Company must be delivered to the Trustee an opinion of counsel to the effect
that after the ninety-first day following the deposit, the trust funds will not
be subject to the effect of any applicable bankruptcy, insolvency,
reorganization or similar laws affecting creditors' rights generally; (vii) the
Company must deliver to the Trustee an Officers' Certificate stating that the
deposit was not made by the Company with the intent of preferring the Holders of
Notes over the other creditors of the Company or with the intent of defeating,
hindering, delaying or defrauding creditors of the Company or others; and (viii)
the Company must deliver to the Trustee an Officers' Certificate and an opinion
of counsel, each stating that all conditions precedent provided for relating to
the Legal Defeasance or the Covenant Defeasance have been complied with.
Transfer and Exchange
A Holder may transfer or exchange Notes in accordance with the Indenture.
The Registrar and the Trustee may require a Holder, among other things, to
furnish appropriate endorsements and transfer documents, and the Company may
require a Holder to pay any taxes and fees required by law or permitted by the
Indenture. The Company is not required to transfer or exchange any Note selected
for redemption. Also, the Company is not required to transfer or exchange any
Note during the period commencing 15 days before a selection of Notes to be
redeemed. The registered Holder of a Note will be treated as the owner of it for
all purposes.
Amendment, Supplement and Waiver
Except as provided in the next two succeeding paragraphs, the Indenture and
the Notes may be amended or supplemented with the consent of the Holders of at
least a majority in principal amount of the Notes then outstanding (including,
without limitation, consents obtained in connection with a purchase of, or
tender offer or exchange offer for, Notes), and any existing Default or
compliance with any provision of the Indenture or the Notes may be waived with
the consent of the Holders of a majority in principal amount of the then
outstanding Notes (including consents obtained in connection with a tender offer
or exchange offer for Notes).
Without the consent of each Holder affected, an amendment or waiver may not
(with respect to any Notes held by a non-consenting Holder): (i) reduce the
principal amount of Notes whose Holders must consent to an amendment, supplement
or waiver, (ii) reduce the principal or Redemption Price of or change the fixed
maturity of any Note or alter the provisions with respect to the redemption of
the Notes (other than a payment required by one of the covenants described above
under the caption "--Repurchase at the Option of Holders"), (iii) reduce the
rate of or change the time for payment of interest or Liquidated Damages (if
any) on or with respect to any Note, (iv) waive a Default or Event of Default in
the payment of principal, Redemption Price or Purchase Price of, or interest or
Liquidated Damages (if any) on the Notes (except a rescission of acceleration of
the Notes by the Holders of at least a majority in aggregate principal amount of
the Notes and a waiver of the payment default that resulted from such
acceleration), (v) make any Note payable in money other than that stated in the
Notes, (vi) make any change in the provisions of the Indenture relating to
waivers of past Defaults or the rights of Holders of Notes to receive payments
of principal, Redemption Price or Purchase Price of, or interest or Liquidated
Damages (if any) on the Notes (except as described above under the caption
"--Repurchase at the Option of Holders"), (vii) waive a redemption or repurchase
payment with respect to any Note (other than a payment required by one of the
covenants described above under the caption "--Repurchase at the Option of
Holders") or (viii) make any change in the foregoing amendment and waiver
provisions. Without the consent of the Holders of at least 75% in principal
amount of the Notes then outstanding (including consents obtained in connection
with a purchase of, tender offer or exchange offer for, the Notes), no waiver or
amendment to the Indenture may make any change in the provisions described above
under the captions "--Subordination" and "--Repurchase at the Option of the
Holders" that adversely affect the rights of any Holder of Notes.
Notwithstanding the foregoing, without the consent of any Holder of Notes,
the Company and the Trustee may amend or supplement the Indenture or the Notes
to cure any ambiguity, defect or inconsistency, to provide for uncertificated
Notes in addition to or in place of certificated Notes, to provide for the
assumption of the Company's obligations to Holders of Notes in the case of a
merger or consolidation, to make any change that would provide any additional
rights or benefits to the Holders of Notes or that does not adversely affect the
legal rights under the
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Indenture of any such Holder, or to comply with requirements of the Commission
in order to effect or maintain the qualification of the Indenture under the
Trust Indenture Act.
Concerning the Trustee
The Indenture contains certain limitations on the rights of the Trustee,
should it become a creditor of the Company, to obtain payment of claims on
certain cases, or to realize on certain property received in respect of any such
claim as security or otherwise. The Trustee will be permitted to engage in other
transactions; however, if it acquires any conflicting interest it will be
required to (i) eliminate such conflict within 90 days, (ii) subject to the
consent of the Company, apply to the Commission for permission to continue or
(iii) resign.
The Holders of a majority in principal amount of the then outstanding Notes
will have the right to direct the time, method and place of conducting any
proceeding for exercising any remedy available to the Trustee, subject to
certain exceptions. The Indenture provides that in case an Event of Default
shall occur and be continuing (which shall not be cured or waived in conformity
with the Indenture), the Trustee will be required, in the exercise of its power,
to use the degree of care and skill of a prudent man under the circumstances in
the conduct of his own affairs. Subject to such provisions, the Trustee will be
under no obligation to exercise any of its rights or powers under the Indenture
at the request of any Holder of Notes, unless such Holder shall have offered to
the Trustee security and indemnity satisfactory to it against any loss,
liability or expense.
Book Entry, Delivery and Form
The certificates representing the Initial Notes were issued, and the
certificates representing the Exchange Notes will be issued, in fully registered
form (the "Global Note") without interest coupons and will be deposited with the
Trustee, as custodian for The Depositary Trust Company, New York, New York
("DTC") and registered in the name of a nominee of DTC for the accounts of
Euroclear and Cedel. Except as set forth below, the record ownership of the
Global Note may be transferred, in whole or in part, only to another nominee of
DTC or to a successor of DTC or its nominee.
Holders may hold their interests in the Global Note directly through DTC if
such holder is a participant in DTC, or indirectly through organizations which
are participants in DTC (the "Participants"). Transfers between Participants
will be effected in the ordinary way in accordance with DTC rules and will be
settled in immediately available funds. The laws of some states require that
certain persons take physical delivery of securities in definitive form.
Consequently, the ability to transfer beneficial interests in the Global Note to
such persons may be limited.
Foreign Persons may hold their interest in the Global Note directly through
Cedel or Euroclear, or indirectly through organizations that are participants in
Cedel or Euroclear. Cedel and Euroclear will hold interests in the Global Note
on behalf of their participants through DTC. Transfers between participants in
Euroclear and Cedel will be effected in the ordinary way in accordance with
their respective rules and operating procedures.
Holders who are not Participants may beneficially own interests in the
Global Note held by DTC only through Participants, including Euroclear and
Cedel, or certain banks, brokers, dealers, trust companies and other parties
that clear through or maintain a custodial relationship with a Participant,
either directly or indirectly ("Indirect Participants"). So long as Cede, as the
nominee of DTC, is the registered owner of the Global Note, Cede for all
purposes will be considered the sole holder of the Global Note. Except as
provided below, owners of beneficial interests in the Global Note will not be
entitled to have certificates registered in their names, will not receive or be
entitled to receive physical delivery of certificates in definitive form, and
will not be considered holders thereof.
Payment of the principal, Redemption Price and Purchase Price of, and
interest and Liquidated Damages (if any) on the Global Note will be made to
Cede, the nominee for DTC, as the registered owner of the Global Note, by wire
transfer of immediately available funds on each applicable payment date. Neither
the Company, the Trustee nor any paying agent will have any responsibility or
liability for any aspect of the records relating to or payments
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made on account of beneficial ownership interests in the Global Note or for
maintaining, supervising or reviewing any records relating to such beneficial
ownership interest.
The Company has been informed by DTC that, with respect to the principal,
Redemption Price and Purchase Price of, and interest and Liquidated Damages (if
any) on the Global Note, DTC's practice is to credit Participants' accounts on
the payment date therefor with payments in amounts proportionate to their
respective beneficial interests in the principal amount represented by the
Global Note, as shown on the records of DTC (adjusted as necessary so that such
payments are made with respect to whole Notes only), unless DTC has reason to
believe that it will not receive payment on such payment date. Payments by
Participant to owners of beneficial interests in the principal amount
represented by the Global Note held through such Participants will be the
responsibility of such Participants, as is now the case with securities held for
the accounts of customers registered in "street name."
Because DTC can only act on behalf of Participants, who in turn act on
behalf of Indirect Participants and certain banks, the ability of a person
having a beneficial interest in the principal amount represented by the Global
Note to pledge such interest to persons or entities that do not participate in
the DTC system, or otherwise take actions in respect of such interest, may be
affected by the lack of a physical certificate evidencing such interest.
Neither the Company nor the Trustee (or any registrar, paying agent or
conversion agent under the Indenture) will have any responsibility for the
performance of DTC or its Participants or Indirect Participants of their
respective obligations under the rules and procedures governing their
operations. DTC has advised the Company that it will take any action permitted
to be taken by a holder of Notes (including, without limitation, the
presentation of Notes for exchange as described below), only at the direction of
one or more Participants to whose account with DTC interests in the Global Note
are credited, and only in respect of the principal amount of the Notes
represented by the Global Note as to which such Participant or Participants has
or have given such direction.
DTC has advised the Company as follows: DTC is a limited purpose trust
company organized under the laws of the State of New York, a member of the
Federal Reserve System, a "clearing corporation" within the meaning of the
Uniform Commercial Code and a "clearing agency" registered pursuant to the
provisions of Section 17A of the Exchange Act. DTC was created to hold
securities for its Participants and to facilitate the clearance and settlement
of securities transactions between Participants through electronic book-entry
changes to accounts of its Participants, thereby eliminating the need for
physical movement of certificates. Participants include securities brokers and
dealers, banks, trust companies, and clearing corporations and may include
certain other organizations such as the Initial Purchasers. Certain of such
Participants (or their representatives), together with other entities, own DTC.
Indirect access to the DTC system is available to others such as banks, brokers,
dealers and trust companies that clear through, or maintain a custodian
relationship, with a Participant, either directly or indirectly.
Although DTC, Euroclear and Cedel have agreed to the foregoing procedures
in order to facilitate transfers of interests in the Global Note among
Participants of DTC, Euroclear and Cedel, they are under no obligation to
perform or continue to perform such procedures, and such procedures may be
discontinued at any time.
Certificated Securities
Exchange Notes exchanged for Initial Notes held in certificated form will
be issued in the form of definitive registered certificates (the "Certificated
Securities") and may not be represented by the Global Note. Subject to certain
conditions, any person having a beneficial interest in the Global Note may, upon
request to the Trustee, exchange such beneficial interest for Notes in the form
of Certificated Securities. Upon any such issuance, the Trustee is required to
register such Certificated Securities in the name of, and cause the same to be
delivered to, such person or persons (or the nominee of any thereof). In
addition, if (i) the Company notifies the Trustee in writing that the Depositary
is no longer willing or able to act as a depositary and the Company is unable to
locate a qualified successor within 90 days or (ii) the Company, at its option,
notifies the Trustee in writing that it elects to cause the issuance of Notes in
the form of Certificated Securities under the Indenture, then, upon surrender by
the Global Note holder of its Global Note, Notes in such form will be issued to
each person that the Global Note holder and the Depositary identify as being the
beneficial owner of the related Notes.
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Neither the Company nor the Trustee will be liable for any delay by the
Global Note holder or the Depositary in identifying the beneficial owners of
Notes and the Company and the Trustee may conclusively rely on, and will be
protected in relying on, instructions from the Global Note holder or the
Depositary for all purposes.
Same-Day Settlement and Payment
The Indenture requires that payments in respect of the Notes represented by
the Global Note, including principal, Redemption Price, Purchase Price, interest
and Liquidated Damages (if any), be made by wire transfer of immediately
available funds to the amounts specified by the Global Note Holder. With respect
to Certificated Notes, the Company will make all payments of principal, premium
(if any), interest and Liquidated Damages (if any) by wire transfer of
immediately available funds to the accounts specified by the Holders thereof or,
if no such account is specified, by mailing a check to each such Holder's
registered address. The Company expects that secondary trading in the
Certificated Notes will be settled in immediately available funds.
Registration Rights; Liquidated Damages
The Company and the Initial Purchasers entered into the Registration Rights
Agreement on December 16, 1996. The summary herein of certain provisions of the
Registration Rights Agreement does not purport to be complete and is subject to,
and is qualified in its entirety by reference to, all the provisions of the
Registration Rights Agreement, a copy of which has been filed as an exhibit to
the Registration Statement of which this Prospectus is a part. As a result of
the making of, and upon acceptance for exchange of all validly tendered Initial
Notes pursuant to the terms of, this Exchange Offer, the Company will have
fulfilled a covenant contained in the Registration Rights Agreement and,
accordingly, the Holders of the Initial Notes will have no further registration
or other rights under the Registration Rights Agreement.
Pursuant to the Registration Rights Agreement, the Company agreed to file
with the Commission within 45 days after the Issue Date, and use its best
efforts to cause to become effective within 120 days after the Issue Date, the
Exchange Offer Registration Statement with respect to the Exchange Notes and,
upon becoming effective, to offer the Holders of Transfer Restricted Securities
who are able to make certain representations the opportunity to exchange their
Transfer Restricted Securities for the Exchange Notes (the "Exchange Offer"). If
(i) the Company is not required to file the Exchange Offer Registration
Statement or permitted to consummate the Exchange Offer because the Exchange
Offer is not permitted by applicable law or Commission policy or (ii) any Holder
of Transfer Restricted Securities that is a QIB or an Accredited Investor
notifies the Company within the specified time period that (A) it is prohibited
by law or Commission policy from participating in the Exchange Offer or (B) that
it may not resell the Exchange Notes acquired by it in the Exchange Offer to the
public without delivering a prospectus and the prospectus contained in the
Exchange Offer Registration Statement is not appropriate or available for such
resales or (C) that it is a broker-dealer and owns Notes acquired directly from
the Company or an affiliate of the Company, the Company will use its best
efforts to file with the Commission a Shelf Registration Statement to cover
resales of the Notes by the Holders thereof who satisfy certain conditions
relating to the provision of information in connection with the Shelf
Registration Statement. The Company will use its best efforts to cause the
applicable registration statement to be declared effective as promptly as
possible by the Commission.
For purposes of the foregoing, "Transfer Restricted Securities" means each
Note until the earliest to occur of (i) the date on which such Note has been
exchanged for an Exchange Note in the Exchange Offer and is entitled to be
resold to the public by the Holder thereof without complying with the prospectus
delivery requirements of the Securities Act, (ii) the date on which such Note
has been effectively registered under the Securities Act and disposed of in
accordance with the Shelf Registration Statement or (iii) the date on which such
Note is distributed to the public pursuant to Rule 144 under the Securities Act
or by a Broker-Dealer pursuant to the "Plan of Distribution" contemplated by the
registration statement for such Exchange Offer Registration Statement (including
delivery of the Prospectus contained therein).
The Registration Rights Agreement provides that (i) the Company will file
an Exchange Offer Registration Statement with the Commission on or prior to 45
days after the Issue Date, (ii) the Company will use its best efforts to have
the Exchange Offer Registration Statement declared effective by the Commission
on or prior to 120 days
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after the Issue Date, (iii) unless the Exchange Offer would not be permitted by
applicable law or Commission policy, the Company will commence the Exchange
Offer and use its best efforts to issue on or prior to 30 days after the date on
which the Exchange Offer Registration Statement was declared effective by the
Commission, Exchange Notes in exchange for all Notes tendered prior thereto in
the Exchange Offer and (iv) if obligated to file the Shelf Registration
Statement, the Company will use its best efforts to file the Shelf Registration
Statement with the Commission on or prior to 30 days after such filing
obligation arises and to cause the Shelf Registration to be declared effective
by the Commission on or prior to 60 days after such obligation arises.
If (a) the Company fails to file any of the Registration Statements
required by the Registration Rights Agreement on or before the date specified
for such filing, (b) any of such Registration Statements is not declared
effective by the Commission on or prior to the date specified for such
effectiveness (the "Effectiveness Target Date"), or (c) the Company fails to
consummate the Exchange Offer within 30 business days of the Effectiveness
Target Date with respect to the Exchange Offer Registration Statement, or (d)
the Shelf Registration Statement or the Exchange Offer Registration Statement is
declared effective but thereafter ceases to be effective or usable in connection
with resales of Transfer Restricted Notes during the periods specified in the
Registration Rights Agreement (each such event referred to in clauses (a)
through (d) above a "Registration Default"), then the Company will pay
liquidated damages ("Liquidated Damages") to each Holder of Notes, with respect
to the first 90-day period immediately following the occurrence of such
Registration Default in an amount equal to $.05 per week per $1,000 principal
amount of Notes held by such Holder. The amount of the Liquidated Damages will
increase by an additional $.05 per week per $1,000 principal amount of Notes
with respect to each subsequent 90-day period until all Registration Defaults
have been cured, up to a maximum amount of Liquidated Damages of $.50 per week
per $1,000 principal amount of Notes. All accrued Liquidated Damages will be
paid by the Company on each Damages Payment Date to the Holder of record by wire
transfer of immediately available funds or by federal funds check. Following the
cure of all Registration Defaults, the accrual of Liquidated Damages will cease.
Holders of Notes will be required to make certain representations to the
Company (as described in the Registration Rights Agreement) in order to
participate in the Exchange Offer and will be required to deliver information to
be used in connection with the Shelf Registration Statement and to provide
comments on the Shelf Registration Statement within the time periods set forth
in the Registration Rights Agreement in order to have their Notes included in
the Shelf Registration Statement and benefit from the provisions regarding
Liquidating Damages set forth above.
Certain Definitions
Set forth below are certain defined terms used in the Indenture. Reference
is made to the Indenture for a full disclosure of all such terms, as well as any
other capitalized terms used herein for which no definition is provided.
"Acquired Debt" means with respect to any specified Person, (i)
Indebtedness of any other Person existing at the time such other Person is
merged with or into or becomes a Subsidiary of such specified Person or assumed
in connection with the acquisition of assets from such other Person, including,
without limitation, Indebtedness incurred in connection with, or in
contemplation of, such other Person merging with or into or becoming a
Subsidiary of such specified Person or such acquisition of assets, and (ii)
Indebtedness secured by a Lien encumbering any asset acquired by such specified
Person.
"Acquisition Subsidiary" means any Wholly Owned Subsidiary of the Company
or any of its Wholly Owned Subsidiaries which is newly formed in anticipation of
and in order to effectuate the acquisition by such entity of the capital stock
or assets of another Person; provided that the making of an Investment in such
Subsidiary by the Company or any other Subsidiary shall be made in compliance
with the covenant described under the caption "--Restricted Payments."
"Affiliate" means with respect to any specified Person, any other Person
directly or indirectly controlling or controlled by or under direct or indirect
common control with such specified Person. For purposes of this definition,
"control" (including, with correlative meanings, the term "controlling,"
"controlled by" and "under common control with"), as used with respect to any
Person, shall mean the possession, directly or indirectly, of the
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power to direct or cause the direction of the management or policies of such
Person, whether through the ownership of voting securities, by agreement or
otherwise; provided that beneficial ownership of 10% or more of the voting
securities of a Person shall be deemed to be control.
"Attributable Debt" means, in respect of a sale and leaseback transaction,
at the time of determination, the present value (discounted at the rate of
interest implicit in such transaction, determined in accordance with GAAP) of
the obligation of the lessee for net rental payments during the remaining term
of the lease included in such sale and leaseback transaction (including any
period for which such lease has been extended or may, at the option of the
lessee, be extended).
"Bank Credit Facility" means the Revolving Credit, Term Loan and Gold
Consignment Agreement among the Company, the Banks from time to time parties
thereto, and The First National Bank of Boston and Rhode Island Hospital Trust
National Bank, as agents for such Banks, together with the related documents
thereto (including, without limitation, any letters of credit issued pursuant
thereto, and any related guarantee agreements and security documents), in each
case as such agreements may be amended (including any amendment and restatement
thereof), supplemented or otherwise modified or replaced (including with other
lenders or consignors), from time to time and including any agreement extending
the maturity of, refinancing, modifying, increasing, substituting for or
otherwise restructuring (including, but not limited to, the inclusion of
additional or different or substitute lenders, consignors or bank agents
thereunder) all or any portion of the Indebtedness, including changing the
borrowing limits, under such agreements or any successor or replacement
agreements, regardless of whether the Bank Credit Facility or any portion
thereof was outstanding or in effect at the time of such replacement,
refinancing, increase, substitution, extension, restructuring, supplement or
modification.
"Capital Lease Obligation" means, at the time any determination thereof is
to be made, the amount of the liability in respect of a capital lease that would
at such time be required to be capitalized on a balance sheet in accordance with
GAAP.
"Capital Stock" means (i) in the case of a corporation, corporate stock,
(ii) in the case of a partnership, partnership interests (whether general or
limited), (iii) in the case of an association or any other business entity, any
and all shares, interests, participations, rights or other equivalents (however
designated) in the equity of such association or entity, and (iv) any other
interest or participation that confers on a Person the right to receive a share
of the profits and losses of, or distributions of assets of, the issuing Person.
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"Cash Equivalents" means (i) United States Dollars, (ii) securities issued
or directly and fully guaranteed or insured by the United States government or
any agency or instrumentality thereof having maturities of not more than six
months from the date of acquisition, (iii) demand and time deposits,
certificates of deposit and eurodollar time deposits with maturities of six
months or less from the date of acquisition, bankers' acceptances with
maturities not exceeding six months and overnight bank deposits, in each case
with any domestic commercial bank having capital and surplus in excess of $500
million and a Keefe Bank Watch Rating of "B" or better, (iv) repurchase
obligations with a term of not more than seven days for underlying securities of
the types described in clauses (ii) and (iii) above entered into with any
financial institution meeting the qualifications specified in clause (iii) above
and (v) commercial paper having the highest rating obtainable from Moody's
Investors Service, Inc. or Standard & Poor's and in each case maturing within
six months after the date of acquisition.
"Common Stock" means, with respect to any Person, Capital Stock of such
Person that does not rank prior, as to the payment of dividends or as to the
distribution of assets upon any voluntary or involuntary liquidation,
dissolution or winding up of such Person, to shares of Capital Stock of any
other class of such Person.
"Consolidated Cash Flow" means, with respect to any Person for any period,
the Consolidated Net Income of such Person for such period plus, to the extent
deducted in computing Consolidated Net Income: (i) an amount equal to any
extraordinary loss plus any net loss realized in connection with any Asset Sale
plus any loss realized on any extraordinary or non-recurring actuarial
assumption adjustment with regard to post-retirement medical and other benefits,
in each case for such periods, plus (ii) provision for taxes based on income or
profits of such Person and its Subsidiaries for such period, plus (iii)
consolidated interest expense of such Person and its Subsidiaries for such
period, whether paid or accrued and whether or not capitalized (including,
without limitation, amortization of original issue discount, non-cash interest
payments, the interest component of any deferred payment obligations, the
interest component of all payments associated with Capital Lease Obligations,
imputed interest with respect to Attributable Debt, commissions, discounts and
other fees and charges incurred in respect of letter of credit or bankers'
acceptance financings, and net payments (if any) pursuant to Hedging
Obligations), plus (iv) depreciation, amortization (including amortization of
goodwill, other intangibles and other assets) and other non-cash charges
(excluding any such non-cash charge to the extent that it represents an accrual
of or reserve for cash charges in any future period) of such Person and its
Subsidiaries for such period, in each case, on a consolidated basis and
determined in accordance with GAAP. Notwithstanding the foregoing, the provision
for taxes on the income or profits of, and the depreciation and amortization and
other non-cash charges of, a Subsidiary of the referent Person shall be added to
Consolidated Net Income to compute Consolidated Cash Flow only to the extent
(and in same proportion) that the Net Income of such Subsidiary was included in
calculating the Consolidated Net Income of such Person and only if a
corresponding amount would be permitted at the date of determination to be
dividended to the Company by such Subsidiary without prior governmental approval
(that has not been obtained), and without direct or indirect restriction
pursuant to, the terms of its charter and all agreements, instruments,
judgments, decrees, orders, statutes, rules and governmental regulations
applicable to that Subsidiary or its stockholders.
"Consolidated Net Income" means, with respect to any Person for any period,
the aggregate of the net income of such Person and its Subsidiaries for such
period, on a consolidated basis, determined in accordance with GAAP; provided
that there shall be excluded therefrom, without duplication:
(i) all items classified as extraordinary, unusual or nonrecurring
gains (but not losses);
(ii) any net loss or net income of any other Person (other than a
Subsidiary of such Person), except to the extent of the amount of dividends
or other distributions actually paid to such Person or its Subsidiaries by
such other Person during such period;
(iii) the net income of any Person acquired by such Person or a
Subsidiary thereof in a pooling-of-interests transaction for any period
prior to the date of such acquisition;
(iv) any gain or loss, net of taxes, realized on the termination of
any employee pension benefit plan;
(v) gains (but not losses) in respect of Asset Sales by such Person or
its Subsidiaries;
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(vi) the net income (but not net loss) of any Subsidiary of such
Person to the extent that the declaration or payment of dividends or
distributions to such Person is restricted by the terms of its constituent
documents or any agreement, instrument, contract, judgment, order, decree,
statute, rule, governmental regulation or otherwise, except for any
dividends or distributions actually paid by such Subsidiary to such Person
or other Subsidiary of such Person;
(vii) with regard to a Subsidiary of such Person (other than a Wholly
Owned Subsidiary of such Person), any aggregate net income (or loss) in
excess of such Person's pro rata share of such Subsidiary's net income (or
loss); and
(viii) the cumulative effect of any change in accounting principles.
"Consolidated Net Worth" means, with respect to any Person as of any date,
the consolidated stockholders' equity of such Person and its consolidated
Subsidiaries, as determined in accordance with GAAP, less, to the extent
included therein, all amounts, if any, attributable to Disqualified Stock.
"Default" means any event, occurrence or condition that, with the passage
of time, the giving of notice or both, would constitute an Event of Default.
"Designated Investment Stock" means any Capital Stock of the Company,
designated as such by the Board of Directors of the Company upon issuance for
use in the capitalization of an Acquisition Subsidiary of the Company, up to a
maximum net cash proceeds of $12.0 million.
"disposition" or "sale" or "transfer" or other words of similar meaning do
not include the granting or suffering of a Permitted Lien in order to secure
Indebtedness permitted by the Indenture, provided that no steps or actions have
been taken by the holder of such Permitted Lien to realize upon or dispose of
the assets subject thereto.
"Disqualified Stock" means any Capital Stock of any Person which, by its
terms, or upon the happening of any event or with the passage of time, matures
or is mandatorily redeemable, pursuant to a sinking fund obligation or
otherwise, or is redeemable at the option of the holder thereof, in whole or in
part, on or prior to 91 days after the maturity date of the Notes, or which is
exchangeable or convertible into debt securities of such Person, except to the
extent that such exchange or conversion rights cannot be exercised prior to 91
days after the maturity date of the Notes. Series A Preferred Stock is not
Disqualified Stock.
"Escrow Agreement" means the escrow or other similar arrangement referred
to in Exhibit D to the Balfour Purchase Agreement, as such may be amended.
"Existing Indebtedness" means all Indebtedness of the Company and its
Subsidiaries (other than under the Bank Credit Facility) in existence on the
Issue Date, until such amounts are repaid.
"Fixed Charge Coverage Ratio" means with respect to any specified Person
for any period, the ratio of the Consolidated Cash Flow of such Person for such
period to the Fixed Charges of such Person for such period.
In the event that such specified Person or any of its Subsidiaries incurs,
assumes, Guarantees, repays or redeems any Indebtedness (other than ordinary
course repayments of revolving credit borrowings under the Revolving Credit
Facility or payments in connection with the consignment of gold under the Gold
Facility) or such specified Person issues or redeems Disqualified Stock
subsequent to the commencement of the period for which the Fixed Charge Coverage
Ratio is being calculated but prior to the date on which the event for which the
calculation of the Fixed Charge Coverage Ratio is made (the "Calculation Date"),
then the Fixed Charge Coverage Ratio shall be calculated giving pro forma effect
to such incurrence, assumption, Guarantee, repayment or redemption of
Indebtedness or such issuance or redemption of Disqualified Stock (including
giving pro forma effect to the application of any cash net proceeds therefrom),
as if the same had occurred at the beginning of the applicable four-quarter
reference period.
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In addition, for purposes of making the computation referred to above, (i)
acquisitions that have been made by the specified Person or any of its
Subsidiaries, including through mergers or consolidations and including any
related financing transactions, during the four-quarter reference period or
subsequent to such reference period and on or prior to the Calculation Date
shall be deemed to have occurred on the first day of the four-quarter reference
period and Consolidated Cash Flow for such reference period shall be calculated
without giving effect to clause (iii) of the proviso set forth in the definition
of Consolidated Net Income, and (ii) the Consolidated Cash Flow attributable to
discontinued operations, as determined in accordance with GAAP, and operations
or businesses disposed of prior to the Calculation Date, shall be excluded, and
(iii) the Fixed Charges attributable to discontinued operations, as determined
in accordance with GAAP, and operations or businesses disposed of prior to the
Calculation Date, shall be excluded, but only to the extent that the obligations
giving rise to such Fixed Charges will not be obligations of the specified
Person or any of its Subsidiaries following the Calculation Date.
"Fixed Charges" means, with respect to any Person for any period, the sum
of (i) the consolidated interest expense of such Person and its Subsidiaries
(other than an Acquisition Subsidiary or any Subsidiary thereof) for such
period, whether paid or accrued and whether expensed or capitalized, determined
on a consolidated basis and in accordance with GAAP (including, without
limitation, amortization of original issue discount, non-cash interest payments,
the interest component of any deferred payment obligations, the interest
component of all Capital Lease Obligations, imputed interest with respect to
Attributable Debt, commissions, discounts and other fees and charges incurred in
respect of letter of credit or bankers' acceptance financings, and net payments
(if any) pursuant to Hedging Obligations), excluding, however, in the case of
the Company, obligations of the Company resulting from any extraordinary or
non-recurring actuarial adjustment assumptions with respect to post-retirement
medical and other benefits, and (ii) any interest expense on Indebtedness of
another Person that is Guaranteed by such Person or one of its Subsidiaries
(other than an Acquisition Subsidiary or any Subsidiary thereof) or secured by a
Lien on assets of such Person or one of its Subsidiaries (other than an
Acquisition Subsidiary or any Subsidiary thereof) (whether or not such Guarantee
or Lien is called upon) and (iii) the product of (a) all cash dividend payments
(and non-cash dividend payments in the case of a Person that is a Subsidiary) on
any series of Preferred Stock of such Person, times (b) a fraction, the
numerator of which is one and the denominator of which is one minus the then
current combined federal, state and local statutory tax rate of such Person,
expressed as a decimal, in each case, on a consolidated basis and in accordance
with GAAP.
"Foreign Subsidiary" means any Subsidiary formed under the laws of any
jurisdiction other than the United States of America or any state, territory,
possession or political subdivision thereof.
"FTC Order" means any order of the Federal Trade Commission requiring the
Company to sell certain Assets or to refrain from certain business activities or
lines of business.
"GAAP" means generally accepted accounting principles set forth in the
opinions and pronouncements of the Accounting Principles Board of the American
Institute of Certified Public Accountants and statements and pronouncements of
the Financial Accounting Standards Board or in such other statements by such
other entity as may be approved by a significant segment of the accounting
profession of the United States, as in effect on the Issue Date; provided,
however, that all financial statements of the Company (but not any other
financial information or ratios calculated pursuant hereto) provided by the
Company to the Holders of the Notes or the Trustee shall be prepared in
accordance with GAAP as in effect on the date of such report or other financial
information.
"Guarantee" means a guarantee (other than by endorsement of negotiable
instruments for collection in the ordinary course of business), direct or
indirect, in any manner (including, without limitation, letters of credit and
reimbursement agreements in respect thereof), of all or any part of any
Indebtedness.
"Hedging Obligations" means, with respect to any Person, the obligations of
such Person under interest rate swap agreements, interest rate cap agreements,
interest rate collar agreements, foreign currency exchange contracts, foreign
currency swaps, commodities futures and any other agreement designed to protect
such Person against fluctuations in interest rates, currency valuations or
commodity prices.
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"Indebtedness" means, with respect to any Person, without duplication (i)
any liability of such Person (a) for borrowed money, or under any reimbursement
obligation relating to a letter of credit, bankers' acceptance or note purchase
facility; (b) evidenced by a bond, note, debenture or similar instrument; (c)
for the balance deferred and unpaid of the purchase price for any property or
service or any obligation upon which interest charges or consignment fees are
customarily paid (except for trade payables (other than consignments) arising in
the ordinary course of business); (d) for the payment of money relating to a
lease that is required to be classified as a Capitalized Lease Obligation in
accordance with GAAP; or (e) for the maximum fixed repurchase price of any
Disqualified Stock of such Person plus accrued and unpaid dividends thereon;
(ii) any obligation of others secured by a Lien on any asset of such Person,
whether or not any obligation secured thereby has been assumed, by such Person;
(iii) any obligations of such Person under any Hedging Obligation; and (iv) any
Guarantee of such Person or any obligation of such Person which in economic
effect is a guarantee with respect to any Indebtedness of another Person.
For purposes of this definition, "maximum fixed repurchase price" of any
Disqualified Stock which does not have a fixed repurchase price shall be
calculated in accordance with the terms of such Disqualified Stock as if such
Disqualified Stock were purchased on any date on which Indebtedness shall be
required to be determined pursuant to the Indenture, and if such price is based
upon, or measured by, the fair market value of such Disqualified Stock, such
fair market value shall be determined in good faith by the board of directors of
the Person issuing such Disqualified Stock.
"Investment" by any Person means any direct or indirect loan, advance (or
other extension of credit) or capital contribution (by means of any transfer of
cash or other Property) to another Person or any other payments for Property or
services for the account or use of another Person, including without limitation
the following:
(i) the purchase or acquisition of any Capital Stock or other evidence
of beneficial ownership in another Person;
(ii) the purchase, acquisition or Guarantee of the Indebtedness of
another Person or the issuance of a "keep well" with respect thereto; and
(iii) the purchase or acquisition of the business or assets of another
Person;
but shall exclude:
(a) accounts receivable and other extensions of trade credit on
commercially reasonable terms in accordance with normal trade practices;
(b) the acquisition of property and assets from equipment suppliers
and other vendors in the ordinary course of business, provided that such
property and assets do not represent all or substantially all of the
production capacity of the supplier or other vendor; and
(c) the acquisition of assets, Capital Stock or other securities by
the Company for consideration consisting solely of the Capital Stock of the
Company other than Disqualified Stock.
"Issue Date" means the date on which the Notes are first authenticated and
delivered under the Indenture.
"Lien" means, with respect to any asset, any mortgage, lien, pledge,
charge, security interest or encumbrance of any kind in respect of such asset,
whether or not filed, recorded or otherwise perfected under applicable law
(including any conditional sale or other title retention agreement, any lease in
the nature thereof, any option or other agreement to sell or give a security
interest in and any filing of or agreement to give any financing statement under
the Uniform Commercial Code (or equivalent statutes) of any jurisdiction).
"Net Proceeds" means the sum of the aggregate cash proceeds received by the
Company or any of its Subsidiaries (other than an Acquisition Subsidiary or a
Subsidiary of an Acquisition Subsidiary) in respect of any Asset Sale
(including, without limitation, any cash received upon the sale or other
disposition of any non-cash
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consideration received in any Asset Sale), and any funds received by the Company
pursuant to the Escrow Agreement, net of (i) the direct costs relating to such
Asset Sale (including, without limitation, legal, accounting and investment
banking fees, and sales commissions) and any relocation, severance or shut-down
costs expenses incurred as a result thereof, (ii) taxes paid or payable as a
result thereof (after taking into account any available tax credits or
deductions and any tax sharing arrangements), (iii) amounts required to be
applied to the repayment of Indebtedness that is (a) secured by a Lien on the
asset or assets that were the subject of such Asset Sale, (b) Senior
Indebtedness, the repayment of which is required either pursuant to the terms
thereof, by applicable law, or in order to obtain a necessary consent to such
transaction, or (c) Indebtedness pari passu with the Notes, the repayment or
purchase of which is required pursuant to the terms thereof on a pro rata basis
with the Notes in the event of an Asset Sale, and (iv) any reserves established
in accordance with GAAP for adjustment in respect of the sale price of such
asset or assets or for any liabilities associated with such Asset Sale,
including, without limitation, pension and other post-employment benefit
liabilities, liabilities relating to environmental matters and liabilities under
any indemnification obligations associated with such Asset Sale; provided that
any reversal of any such reserve shall be added back in the determination of Net
Proceeds.
"Paying Agent" means Marine Midland Bank.
"Permitted Investments" means (a) any Investment in the Company or in a
Wholly Owned Subsidiary of the Company (other than an Acquisition Subsidiary or
a Subsidiary thereof); (b) any Investment in Cash or Cash Equivalents; (c) any
Investment by the Company or any Subsidiary of the Company in a Person, if as a
result of such Investment (i) such Person becomes a Wholly Owned Subsidiary of
the Company (other than an Acquisition Subsidiary or a Subsidiary thereof) or
(ii) such Person is merged, consolidated or amalgamated with or into, or
transfers or conveys substantially all of its assets to, or is liquidated into,
the Company or a Wholly Owned Subsidiary of the Company (other than an
Acquisition Subsidiary or a Subsidiary thereof); (d) any Investment made as a
result of the receipt of non-cash consideration from an Asset Sale that was made
pursuant to and in compliance with the covenant described above under the
caption "--Certain Covenants--Asset Sales"; (e) any obligations or shares of
Capital Stock received in connection with or as a result of bankruptcy, workout
or reorganization of the issuer of such obligations or shares of Capital Stock;
(f) any Investment received involuntarily; (g) any Investment existing on the
date of the Indenture; (h) Investments by the Company or any Subsidiary of the
Company in Permitted Lines of Business that do not exceed $5.0 million in the
aggregate at any one time outstanding; (i) Investments by any Acquisition
Subsidiary or any Subsidiary of an Acquisition Subsidiary in Permitted Lines of
Business (without regard to the aggregate amount thereof) but excluding any
Investment in Capital Stock or Indebtedness of the Company or any of its
Subsidiaries (other than an Acquisition Subsidiary or any Subsidiary thereof),
(j) Investments representing loans or advances made to employees in the ordinary
course of business not exceeding $500,000 at any one time; and (k) Investments
representing loans or advances made to independent sales representatives made in
the ordinary course of business.
"Permitted Liens" means (i) Liens on assets of the Company or its
Subsidiaries securing the Bank Credit Facility; (ii) Liens on assets of the
Company or its Subsidiaries securing Senior Indebtedness which is permitted by
the terms of the Indenture to be incurred; (iii) Liens securing Existing
Indebtedness; (iv) Liens in favor of the Company; (v) Liens on property of a
Person existing at the time such Person is merged into or consolidated with the
Company or any Subsidiary of the Company; provided that such Liens were not
incurred in contemplation of such merger or consolidation and do not extend to
any assets other than those of the Person merged into or consolidated with the
Company or any Subsidiary of the Company; (vi) Liens on property existing at the
time of acquisition thereof by the Company or any Subsidiary of the Company,
provided that such Liens were not incurred in contemplation of such acquisition
and do not extend to any assets other than those so acquired by the Company or
any Subsidiary of the Company; (vii) Liens to secure the performance of
statutory obligations, surety or appeal bonds, performance bonds or other
obligations of a like nature incurred in the ordinary course of business (or to
secure reimbursement obligations in respect of letters of credit issued in
connection with any of the foregoing obligations); (viii) Liens to secure
Indebtedness (including Capital Lease Obligations) permitted by clause (v) of
the second paragraph of the covenant entitled "Incurrence of Indebtedness and
Issuance of Preferred Stock" covering only the assets acquired with such
Indebtedness; (ix) Liens existing on the Issue Date; (x) Liens for taxes,
assessments or governmental charges or claims that are not yet delinquent or
that are being contested in good faith by appropriate proceedings promptly
instituted and diligently concluded, provided that any reserve or other
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appropriate provision as shall be required in conformity with GAAP shall have
been made therefor; (xi) Liens incurred in the ordinary course of business of
the Company or any Subsidiary of the Company with respect to obligations that do
not exceed $5.0 million at any one time outstanding and that (a) are not
incurred in connection with the borrowing of money or the obtaining of advances
or credit (other than trade credit in the ordinary course of business) and (b)
do not in the aggregate materially detract from the value of the property or
materially impair the use thereof in the operation of business by the Company or
such Subsidiary; (xii) Liens to secure any Indebtedness which is pari passu with
or subordinate in right of payment to the Notes, where (a) in the case of any
Lien securing Indebtedness that is pari passu in right of payment with the
Notes, all obligations with respect to the Notes are secured on an equal and
ratable basis with the Indebtedness so secured and (b) in the case of any Lien
securing Indebtedness that is subordinated in right of payment to the Notes, all
obligations with respect to the Notes are secured on a senior basis reflecting
the subordination of the Indebtedness so secured on terms substantially similar
to, or more favorable to senior creditors than, those contained in the
Indenture, in each case, until such time as such pari passu or subordinated
Indebtedness is no longer secured by such Lien, at which time such Lien securing
the Notes shall be automatically released; (xiii) Liens granted by an
Acquisition Subsidiary or a Subsidiary of an Acquisition Subsidiary to secure
Indebtedness incurred by such Acquisition Subsidiary or Subsidiary of an
Acquisition Subsidiary which is permitted by the terms of the Indenture.
"Permitted Line of Business" means (i) the scholastic, graduation-related
and commemorative products business, the fine paper and non-textbook graphics
products business, the recognition, affinity and insignia products business, and
such business activities as are incidental or related thereto, and (ii) such
other businesses as the Company or its Subsidiaries are engaged in on the Issue
Date.
"Permitted Refinancing Debt" means any Indebtedness of the Company or any
of its Subsidiaries issued in exchange for, or the net proceeds of which are
used to extend, refinance, renew, replace, defease or refund other Indebtedness
of the Company or any of its Subsidiaries (other than an Acquisition Subsidiary
or a Subsidiary of an Acquisition Subsidiary); provided that, except with
respect to Indebtedness incurred to repay, repurchase, redeem or defease all of
the outstanding Notes at one time: (i) the principal amount (or accreted value,
if applicable) of such Permitted Refinancing Debt does not exceed the principal
amount (or accreted value, if applicable) of the Indebtedness so extended,
refinanced, renewed, replaced, defeased or refunded (plus the amount of up to
six months of accrued and unpaid interest on such Indebtedness and reasonable
premiums, fees and expenses incurred in connection therewith); (ii) such
Permitted Refinancing Debt has a final maturity date later than the final
maturity date of, and has a Weighted Average Life to Maturity equal to or
greater than the Weighted Average Life to Maturity of, the Indebtedness being
extended, refinanced, renewed, replaced, defeased or refunded; (iii) if the
Indebtedness being extended, refinanced, renewed, replaced, defeased or refunded
is subordinated in right of payment to the Notes, such Permitted Refinancing
Debt has a final maturity date later than the final maturity date of, and is
subordinated in right of payment to, the Notes on terms at least as favorable to
the Holders of Notes as those contained in the documentation governing the
Indebtedness being extended, refinanced, renewed, replaced, defeased or
refunded; and (iv) such Indebtedness is incurred either by the Company or by the
Subsidiary who is the obligor on the Indebtedness being extended, refinanced,
renewed, replaced, defeased or refunded.
"Person" means any individual, corporation, limited or general partnership,
limited liability company, joint venture, association, joint stock company,
trust, unincorporated organization or government or any agency or political
subdivision thereof.
"Preferred Stock" means, with respect to any Person, all Capital Stock of
such Person of any class or classes (however designated, whether voting or
non-voting) that ranks prior, as to distribution in profit or liquidation, to
shares of Common Stock of such Person.
"Public Equity Offering" means any underwritten primary public offering of
the Common Stock or other Voting Stock of the Company, pursuant to an effective
registration statement (other than a registration statement on Form S-4, Form
S-8, or any successor or similar form) under the Securities Act.
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"Purchase Price" means the amount payable for the repurchase of any Note on
a Purchase Date, exclusive of accrued and unpaid interest and Liquidated Damages
(if any) thereon to the Purchase Date, unless otherwise specifically provided.
"Redemption Price" means the amount payable for the redemption of any Note,
exclusive of accrued and unpaid interest and Liquidated Damages (if any) thereon
to the date of redemption, unless otherwise specifically provided.
"Restricted Investment" means an Investment other than a Permitted
Investment.
"Senior Representative" means any trustee, agent or representative (if any)
for the holders of any Designated Senior Indebtedness.
"Series A Preferred Stock" means the Series A preferred stock of the
Company, par value $.01 per share.
"Significant Subsidiary" means any Subsidiary that would be a "significant
subsidiary" as defined in Article 1, Rule 1-02 of Regulation S-X, promulgated
pursuant to the Securities Act, as such Regulation is in effect on the date
hereof.
"Subsidiary" of any Person means any other Person, the majority of the
Voting Stock or other ownership interests having ordinary voting power to elect
a majority of the board of directors of which is directly or indirectly owned by
such Person.
"U.S. Government Securities" shall mean securities which are (i) direct
obligations of the United States of America for the payment of which its full
faith and credit is pledged or (ii) obligations of a Person controlled or
supervised by and acting as an agency or instrumentality of the United States of
America , the payment of which is unconditionally guaranteed as a full faith and
credit obligation by the United States of America, which, in either case, are
not callable or redeemable at the option of the issuer thereof, and shall also
include a depository receipt issued by a bank or trust company as custodian with
respect to any such U.S. Government Securities or a specific payment of interest
on or principal of any such U.S. Government Securities held by such custodian
for the account of the holder of a depository receipt; provided that (except as
required by law) such custodian is not authorized to make any deduction from the
amount payable to the holder of such depository receipt from any amount received
by the custodian in respect of the U.S. Government Securities or the specific
payment of interest on or principal of the U.S. Government Securities evidenced
by such depository receipt.
"Voting Stock" means, with respect to any Person, securities of any class
or classes of Capital Stock in such Person entitling the holders thereof
(whether at all times that such class of Capital Stock has voting power by
reason of the happening of any contingency) to vote in the election of members
of the board of directors or other governing body of such Person.
"Weighted Average Life to Maturity" means, when applied to any Indebtedness
at any date, the number of years obtained by dividing (i) the sum of the
products obtained by multiplying (a) the amount of each then remaining
installment, sinking fund, serial maturity or other required payments of
principal, including payment at final maturity, in respect thereof, by (b) the
number of years (calculated to the nearest one-twelfth) that will elapse between
such date and the making of such payment, by (ii) the then outstanding principal
amount of such Indebtedness.
"Wholly Owned Subsidiary" of any Person means a Subsidiary of such Person,
all of the outstanding Capital Stock or other ownership interests of which
(other than directors' qualifying shares or, in the case of a Foreign Subsidiary
of the Company, shares otherwise required by law to be owned by Persons
domiciled in the jurisdiction in which such Subsidiary is organized, up to a
maximum of 5% of the outstanding Capital Stock, Voting Stock or other ownership
interests of such Subsidiary) is at the time owned by (i) such Person or (ii)
one or more Wholly Owned Subsidiaries of such Person or (iii) such Person and
one or more Wholly Owned Subsidiaries of such Person.
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CERTAIN FEDERAL INCOME TAX CONSIDERATIONS
The following discussion sets forth the material U.S. federal income tax
consequences of the exchange of Initial Notes for Exchange Notes and of the
ownership and disposition of the Exchange Notes. The discussion does not deal
with all possible tax consequences relating to an investment in the Exchange
Notes. In particular, the discussion does not address the tax consequences under
state, local and foreign tax laws. In addition, the discussion does not address
U.S. federal income tax consequences to persons who do not hold the Exchange
Notes as capital assets. The discussion also does not address the tax treatment
of holders that may be subject to special tax rules, such as banks, insurance
companies, dealers in securities and holders whose functional currency is not
the dollar. Accordingly, each prospective investor should consult its own tax
advisor regarding the tax consequences to it of an investment in the Exchange
Notes. The following discussion is based upon provisions of the Internal Revenue
Code of 1986, as amended (the "Code"), and regulations, rulings and judicial
decisions as of the date of this Prospectus, and such authorities may be
repealed, revoked or modified so as to result in federal income tax consequences
different from those discussed below, possibly with retroactive effect. As used
herein, a U.S. Holder is a beneficial owner who is a citizen or resident of the
United States, a corporation, partnership or other entity created or organized
in or under the laws of the United States or any political subdivision thereof,
or an estate or trust the income of which is subject to U.S. federal income
taxation regardless of its source. A Non-U.S. Holder is a beneficial owner who
is not a U.S. Holder.
PERSONS CONSIDERING THE EXCHANGE OF INITIAL NOTES FOR EXCHANGE NOTES SHOULD
CONSULT THEIR OWN TAX ADVISORS WITH REGARD TO THE APPLICATION OF THE U.S.
FEDERAL INCOME TAX LAWS TO THEIR PARTICULAR SITUATIONS, AS WELL AS ANY TAX
CONSEQUENCES ARISING UNDER THE LAWS OF ANY STATE, LOCAL OR FOREIGN TAXING
JURISDICTION.
U.S. Holders
The Company has been advised by its counsel, Schulte Roth & Zabel LLP,
that, in their opinion, the exchange of Exchange Notes for Initial Notes
pursuant to the Exchange Offer will be disregarded for federal income tax
purposes, and each Exchange Note will be treated as a continuation of the
corresponding Initial Note. Accordingly, holders of Initial Notes will not
recognize gain or loss on the exchange, and will have a basis in the New Notes
equal to their basis in the Old Notes.
Interest on a Note will generally be taxable to a U.S. Holder as ordinary
income at the time it is paid or accrued in accordance with the U.S. Holder's
method of tax accounting. Upon the sale, exchange or retirement of a Note, a
U.S. Holder will recognize gain or loss equal to the difference between the
amount realized and the adjusted tax basis of the Note. Such gain or loss will
be capital gain or loss if such Holder holds the Note as a capital asset, and
will be long-term capital gain or loss if the Holder held the Note for more than
one year at the time of such sale, exchange or retirement. The deductibility of
capital losses is subject to limitations.
Non-U.S. Holders
Income, Withholding and Estate Tax
Under current U.S. federal income and estate tax law, and subject to the
discussion below concerning backup withholding:
(a) payments of principal, interest and premium on the Notes by the
Company or any paying agent to any Non-U.S. Holder will not be subject to
U.S. federal withholding tax, provided that, in the case of interest, (i)
(A) such Holder does not own, actually or constructively, 10 percent or
more of the total combined voting power of all classes of stock of the
Company entitled to vote, is not a controlled foreign corporation related,
directly or indirectly, to the Company through stock ownership, and is not
a bank receiving interest described in Section 881(c)(3)(A) of the Code and
(B) either (I) such Holder certifies to the person otherwise required to
withhold United States federal income tax from such interest, under
penalties of perjury, that it is not a United
114
<PAGE>
States person and provides its name and address or (II) a securities
clearing organization, bank or other financial institution that holds
customers' securities in the ordinary course of its trade or business (a
"financial institution") and holds the Note certifies to the person
otherwise required to withhold United States federal income tax from such
interest, under penalties of perjury, that such statement has been received
from such Holder by it or by a financial institution between it and such
Holder and furnishes the payer with a copy thereof; (ii) such Holder is
entitled to the benefits of an income tax treaty under which the interest
is exempt from United States federal withholding tax and such Holder or
such Holder's agent provides U.S. Internal Revenue Service ("IRS") Form
1001 claiming the exemption; or (iii) such Holder conducts a trade or
business in the United States to which the interest is effectively
connected and such Holder or such Holder's agent provides an IRS Form 4224
(in which case interest on the Note would be subject to U.S. income tax as
if such interest was earned by a U.S. Holder and, in the case of any such
Holder that is a corporation, would be subject to the so-called "Branch
Profits Tax" unless an applicable income tax treaty exempts such owner from
the imposition of such tax); provided that in each such case, the relevant
certification or IRS form is delivered pursuant to applicable procedures
and is properly transmitted to the person otherwise required to withhold
United States federal income tax and none of the persons receiving the
relevant certification or IRS form has actual knowledge that the
certification or any statement on the IRS form is false;
(b) a Non-U.S. Holder of a Note will not be subject to U.S. federal
income tax on gain realized on the sale, exchange or other disposition of
such Note, if (i) such gain is not effectively connected with a U.S. trade
or business and (ii) in the case of an individual, such holder is not
present in the United States for 183 days or more in the taxable year of
disposition and certain other requirements are met; and
(c) a Note held by an individual who is not a citizen or resident of
the United States at the time of his death will not be subject to U.S.
federal estate tax as a result of such individual's death, provided that
the individual does not own, actually or constructively, 10 percent or more
of the total combined voting power of all classes of stock of the Company
entitled to vote and, at the time of such individual's death, payments with
respect to such Note would not have been effectively connected to the
conduct by such individual of a trade or business in the United States.
If the conditions set forth in the preceding clause (a) are not satisfied,
payments of interest and premium on the Exchange Notes would be subject to a 30%
U.S. Federal Withholding Tax (or such lower rate as may apply pursuant to an
applicable treaty).
Proposed Regulations. On April 15, 1996, the IRS issued proposed Treasury
Regulations that revise the procedures, discussed in the preceding paragraph
(a), for securing an exemption from U.S. federal withholding tax (the "Proposed
Regulations"). If adopted in final form, the Proposed Regulations would apply to
payments made on the Notes after December 31, 1997. In general, the Proposed
Regulations would (a) provide additional methods for avoiding such withholding
in the case of payment of "portfolio interest" described in clause (i) of such
paragraph (a), (b) replace Forms 1001 and 4224 with a new Form W-8, and (c)
require beneficial owners who claim entitlement to the benefits of a United
States income tax treaty to include a taxpayer identification number that has
been certified by the IRS on such Form W-8. Additionally, in the case of Notes
held by a foreign partnership, the Proposed Regulations would require both that
the certification described in clause (a)(i)(B) above be provided by the
partners rather than by the foreign partnership and that the partnership provide
certain information, including a taxpayer identification number. A look-through
rule would apply in the case of tiered partnerships. There can be no assurance
that the Proposed Regulations will be adopted or as to the provisions that they
will include if they are adopted.
Backup Withholding and Information Reporting
In general, information reporting requirements will apply to payments of
principal, interest, and premium on the Notes, and to the proceeds of the sale,
exchange or retirement of a Note, other than to certain exempt recipients (such
as corporations). A 31% backup withholding tax will apply to such payments if
the holder fails to provide a taxpayer identification number or certificate of
exempt status, or fails to report in full dividend and interest income. Any
amounts withheld under backup withholding rules will be allowed as a refund or
credit against such holder's
115
<PAGE>
U.S. federal income tax liability provided the required information is furnished
to the IRS. Under current Treasury Regulations, backup withholding will not
apply to payments of (i) principal, premium or interest made outside the United
States on the Notes if the certifications described in paragraph (a)(i)(B) under
"U.S. Holders", above, are received, provided, in each case, that the Company or
such paying agent, as the case may be, does not have actual knowledge that the
payee is a U.S. person and (ii) dividends that are subject to withholding at the
30% rate (or lower treaty rate) discussed above.
PLAN OF DISTRIBUTION
Except as described below, a broker-dealer may not participate in the
Exchange Offer in connection with a distribution of the Exchange Notes. A
broker-dealer that participates in the Exchange Offer in connection with a
distribution of the Exchange Notes would be deemed an underwriter in connection
with such distribution, and such broker-dealer would be required to comply with
the registration and prospectus delivery requirements of the Securities Act in
connection with any such secondary resale transactions. Any broker-dealer who
holds Initial Notes that are Transfer Restricted Securities and that were
acquired for its own account as a result of market-making activities or other
trading activities (other than Transfer Restricted Securities acquired directly
from the Company or an affiliate of the Company), may exchange such Initial
Notes pursuant to the Exchange Offer; however, such broker-dealer may be deemed
to be an "underwriter" within the meaning of the Securities Act and must
therefore deliver a prospectus meeting the requirements of the Securities Act in
connection with any resales of the Exchange Notes received by such broker-dealer
in the Exchange Offer, which prospectus delivery requirement may be satisfied by
the delivery by such broker-dealer (other than an "affiliate" of the Company) of
the Prospectus contained in this Registration Statement. The Company has agreed
that for a period of one year from the date on which the Registration Statement
of which this Prospectus is a part is declared effective, it will make this
Prospectus, as amended or supplemented, available to any such broker-dealer for
use in connection with any such resale.
The Company will not receive any proceeds from any sale of Exchange Notes
by broker-dealers. Exchange Notes received by broker-dealers for their own
account pursuant to the Exchange Offer may be sold from time to time in one or
more transactions in the over-the-counter market, in negotiated transactions,
through the writing of options on the Exchange Notes or a combination of such
methods of resale, at market prices prevailing at the time of resale, at prices
related to such prevailing market prices or negotiated prices. Any such resale
may be made directly to purchasers or to or through brokers or dealers who may
receive compensation in the form of commissions or concessions from any such
broker-dealer and/or the purchasers of any such New Notes. Any broker-dealer
that resells New Notes that were received by it for its own account pursuant to
the Exchange Offer may be deemed to be an "underwriter" within the meaning of
the Securities Act and any profit on any such resale of Exchange Notes and any
commissions or concessions received by any such persons may be deemed to be
underwriting compensation under the Securities Act. The Letter of Transmittal
states that by acknowledging that it will deliver and by delivering a
prospectus, a broker-dealer will not be deemed to admit that it is an
"underwriter" within the meaning of the Securities Act.
For a period of one year from the date on which the Registration Statement
of which this Prospectus is a part is declared effective, the Company will
promptly send additional copies of this Prospectus and any amendment or
supplement to this Prospectus to any broker-dealer that requests such documents
in the Letter of Transmittal. The Company has agreed to pay all expenses
incident to the Exchange Offer other than certain applicable taxes and
commissions or concessions of any brokers or dealers.
The Company will indemnify the holders of the Initial Notes (including any
broker-dealers) against certain liabilities, including liabilities under the
Securities Act.
LEGAL MATTERS
The validity of the Notes offered hereby and certain legal matters will be
passed upon for the Company by Schulte Roth & Zabel LLP, New York, New York.
116
<PAGE>
EXPERTS
The balance sheet of CBI as of November 30, 1996 (and the accompanying
footnote) included in this Prospectus has been audited by Arthur Andersen LLP,
independent public accountants, and is included herein in reliance upon the
authority of said firm as experts in giving said report.
The financial statements of ArtCarved included in this Prospectus to the
extent and for the periods indicated in their report dated November 13, 1996
(except for the matter discussed in Note 12, for which the date is December 16,
1996), have been audited by Arthur Andersen LLP, independent public accountants,
and are included herein in reliance upon the authority of said firm as experts
in giving said report.
The financial statements of Balfour included in this Prospectus to the
extent and for the periods indicated in their report dated September 30, 1996
(except for the matter discussed in Note 10, for which the date is December 30,
1996), have been audited by Arthur Andersen LLP, independent public accountants,
and are included herein in reliance upon the authority of said firm as experts
in giving said report.
117
<PAGE>
INDEX TO FINANCIAL STATEMENTS
COMMEMORATIVE BRANDS, INC.
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
Report of Independent Public Accountants................................................................... F-2
Balance Sheet as of November 30, 1996 and Notes to Balance Sheet........................................... F-3
</TABLE>
CJC HOLDINGS, INC.
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
Report of Independent Public Accountants................................................................... F-4
Balance Sheets as of August 27, 1994, August 26, 1995, August 31, 1996 and
November 30, 1996 (Unaudited)............................................................................ F-5
Statements of Income (Loss) for the Years Ended August 27, 1994, August 26, 1995 and August 31, 1996 and to
the Three Months Ended November 25, 1995 (Unaudited) and
November 30, 1996 (Unaudited)............................................................................ F-6
Statements of Changes in Advances and Equity (Deficit) for the Years Ended August 27, 1994, August 26, 1995
and August 31, 1996 and to the Three Months Ended November 25, 1995 and November 30, 1996 (Unaudited).... F-7
Statements of Cash Flows for the Years Ended August 27, 1994, August 26, 1995
and August 31, 1996 and the Three Months Ended November 25, 1995 (Unaudited) and
November 30, 1996 (Unaudited)............................................................................ F-8
Notes to Financial Statements.............................................................................. F-9
</TABLE>
L.G. BALFOUR COMPANY, INC.
<TABLE>
<S> <C>
Report of Independent Public Accountants............................................. F-22
Balance Sheets as of February 27, 1994, February 26, 1995, February 25, 1996 and
November 24, 1996 (Unaudited)...................................................... F-23
Statement of Operations for the Years ended February 27, 1994, February 26, 1995 and
February 25, 1996 and for the Nine Months Ended November 26, 1995 (Unaudited) and
November 24, 1996 (Unaudited)...................................................... F-24
Statements of Stockholder's Equity for the Years Ended February 27, 1994, February
26, 1995, and February 25, 1996 and for the Nine Months Ended November 24, 1996
(Unaudited)........................................................................ F-25
Statements of Cash Flows for the Years Ended February 27, 1994, February 26, 1995 and
February 25, 1996 and for the Nine Months Ended November 26, 1995 (Unaudited) and
November 24, 1996 (Unaudited)...................................................... F-26
Notes to Financial Statements (Including Data Applicable to Unaudited Periods)....... F-27
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Stockholders of Commemorative Brands, Inc.:
We have audited the accompanying balance sheet of Commemorative Brands,
Inc. (a Delaware corporation and the "Company"), as of November 30, 1996. This
financial statement is the responsibility of the Company's management. Our
responsibility is to express an opinion on this financial statement based on our
audit.
We have conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also incudes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statement referred to above presents fairly,
in all material respects, the financial position of the Company as of November
30, 1996, in conformity with generally accepted accounting principles.
/s/ ARTHUR ANDERSEN LLP
Houston, Texas
March 24, 1997
F-2
<PAGE>
COMMEMORATIVE BRANDS, INC.
BALANCE SHEET
NOVEMBER 30, 1996
ASSETS
CURRENT ASSETS:
Cash........................................................... $10
---------
Total current assets......................................... 10
NONCURRENT ASSETS:............................................... -
---------
Total assets................................................. $10
---------
LIABILITIES AND STOCKHOLDERS EQUITY
LIABILITIES:..................................................... $-
Common Stock, $.01 par value, 1000 shares
authorized, 100 issued......................................... 10
Additional paid-in capital....................................... -
Retained earnings................................................ -
---------
Total stockholders' equity................................... 10
---------
Total liabilities and stockholders' equity....................... $10
=========
Castle Harlan Partners II, L.P. formed Commemorative Brands, Inc.
(formerly Scholastic Brands, Inc.) (the "Company") on March 28, 1996, for the
purpose of acquiring the class rings business of CJC Holdings, Inc.
("ArtCarved") and L.G. Balfour Company, Inc., a wholly-owned subsidiary of
Town & Country Corporation ("Balfour"). The Company had no business activity
from the date of incorporation (except for its formation, the negotiation of
the acquisitions and the financing thereof, and the initial funding of $10)
until it purchased the assets, rights, claims and contracts of ArtCarved and
Balfour on December 16, 1996 (the "Closing Date"). At that time, the
capitalization of the Company was as follows (in thousands):
Total debt (including current maturities):
Revolving Credit and Gold Facilities.......................... $ 11,201
Term Loan Facility............................................ 25,000
11% Senior Subordinated Notes due 2007 90,000
--------
Total debt...................................................... 126,201
--------
Stockholders' equity:
Preferred stock............................................... 47,500
Common Stock.................................................. 2,500
--------
Total stockholders' equity.................................... 50,000
--------
Total capitalization............................................ $176,201
========
- ----------
Includes $10.0 million of Series A Preferred Stock and $37.5 million of Series B
Preferred Stock.
F-3
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors,
CJC Holdings, Inc.:
We have audited the accompanying balance sheets of the class rings business
(the Business) of CJC Holdings, Inc. (a Texas corporation), as of August 27,
1994, August 26, 1995, and August 31, 1996, and the related statements of income
(loss), changes in advances and equity (deficit) and cash flows for each of the
three fiscal years ended August 31, 1996. These financial statements are the
responsibility of management. Our responsibility is to express an opinion on
these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
As discussed in Note 1, the Business has been a member of a group of
affiliated entities and, as disclosed in the financial statements, has many
transactions with other members of the group and is allocated certain costs
within the group. Because of these relationships, the terms of some or all of
the transactions and allocations between the Business and affiliated entities
included in the accompanying financial statements are not necessarily indicative
of those which would have resulted had the Business operated as a stand-alone
entity.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of the Business (as defined
above) as of August 27, 1994, August 26, 1995, and August 31, 1996, and the
results of its operations and its cash flows for each of the three fiscal years
in the period ended August 31, 1996, in conformity with generally accepted
accounting principles.
As discussed in Note 2 to the consolidated financial statements, effective
September 1, 1993, the Business changed its fiscal year to a 52/53-week fiscal
year.
/S/ ARTHUR ANDERSEN LLP
Houston, Texas
November 13, 1996
(except for the matter discussed in Note 12,
for which the date is December 16, 1996)
F-4
<PAGE>
CJC HOLDINGS, INC., CLASS RINGS BUSINESS
BALANCE SHEETS
AUGUST 27, 1994, AUGUST 26, 1995, AUGUST 31, 1996, AND NOVEMBER 30, 1996
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
AUGUST 27, AUGUST 26, AUGUST 31,
1994 1995 1996
----------- ----------- ----------- NOVEMBER 30,
1996
------------
(UNAUDITED)
<S> <C> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash............................................................. $ -- $ -- $ -- $ 4,456
Receivables--
Trade, net of allowance for doubtful accounts of $540, $630,
$633, and $701 $ 8,072 $ 9,312 $ 8,959 $ 14,248
Other.......................................................... 250 554 432 433
Inventories...................................................... 4,081 3,902 5,402 5,298
Prepaid expenses................................................. 2,209 2,495 2,115 784
----------- ----------- ----------- ------------
Total current assets....................................... 14,612 16,263 16,908 25,219
PROPERTY, PLANT AND EQUIPMENT, at cost, net of accumulated
depreciation of $11,373, $13,037 and $14,884...................... 12,692 12,148 11,149 10,848
TRADEMARKS, net of accumulated amortization of $4,275, $4,950 and
$5,626............................................................ 22,725 22,050 21,421 21,207
GOODWILL, net of accumulated amortization of $2,457, $2,846 and
$3,232............................................................ 13,059 12,670 12,284 12,186
IDENTIFIABLE INTANGIBLE ASSETS, net of accumulated amortization of
$2,846, $3,296 and $3,745......................................... 2,974 2,524 2,075 1,963
OTHER ASSETS, net of accumulated amortization of $15,575, $21,070
and $22,731....................................................... 12,838 10,300 10,705 11,970
----------- ----------- ----------- ------------
Total assets............................................... $ 78,900 $ 75,955 $ 74,542 $ 83,393
----------- ----------- ----------- ------------
----------- ----------- ----------- ------------
LIABILITIES, ADVANCES AND EQUITY (DEFICIT)
CURRENT LIABILITIES:
Accounts payable................................................. $ 2,649 $ 2,344 $ 1,953 $ 2,385
Accrued interest payable......................................... 12,708 10,229 1,429 2,345
Accrued expenses................................................. 1,705 2,054 2,088 4,312
Gold loan........................................................ 14,614 14,614 6,375 2,116
Current portion of long-term debt................................ -- 8,200 2,000 --
----------- ----------- ----------- ------------
Total current liabilities.................................. 31,676 37,441 13,845 11,158
LONG-TERM DEBT, net of current maturities.......................... 98,728 91,700 89,221 80,144
COMMITMENTS AND CONTINGENCIES
ADVANCES AND EQUITY (DEFICIT)...................................... (51,504) (53,186) (28,524) (7,909)
----------- ----------- ----------- ------------
Total liabilities, advances and equity (deficit)........... $ 78,900 $ 75,955 $ 74,542 $ 83,393
----------- ----------- ----------- ------------
----------- ----------- ----------- ------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-5
<PAGE>
CJC HOLDINGS, INC., CLASS RINGS BUSINESS
STATEMENTS OF INCOME (LOSS)
FOR THE YEARS ENDED AUGUST 27, 1994, AUGUST 26, 1995, AND AUGUST 31, 1996
AND FOR THE THREE MONTHS ENDED NOVEMBER 25, 1995 AND NOVEMBER 30, 1996
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
FISCAL YEAR ENDED FOR THE THREE MONTHS ENDED
------------------------------------- --------------------------
<S> <C> <C> <C> <C> <C>
AUGUST 27, AUGUST 26, AUGUST 31, NOVEMBER 25, NOVEMBER 30,
1994 1995 1996 1995 1996
----------- ----------- ----------- ------------ ------------
<CAPTION>
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
NET SALES....................................... $ 69,820 $ 71,994 $ 70,671 $ 21,923 $ 21,963
COST OF SALES................................... 30,572 32,879 32,655 9,209 9626
----------- ----------- ----------- ------------ ------------
Gross profit.............................. 39,248 39,115 38,016 12,714 12,337
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES.... (26,618) (28,224) (27,940) (8,484) (8,110)
RESTRUCTURING CHARGES........................... -- (3,244) -- -- --
----------- ----------- ----------- ------------ ------------
OPERATING INCOME................................ 12,630 7,647 10,076 4,230 4,227
INTEREST INCOME................................. 463 995 651 151 78
INTEREST EXPENSE................................ (11,969) (14,608) (12,558) (3,506) (2581)
----------- ----------- ----------- ------------ ------------
Income (loss) before income tax expense....... 1,124 (5,966) (1,831) 875 1,724
INCOME TAX EXPENSE.............................. (137) -- -- --
----------- ----------- ----------- ------------ ------------
NET INCOME (LOSS)............................... $ 987 $ (5,966) $ (1,831) $ 875 $ 1,724
----------- ----------- ----------- ------------ ------------
----------- ----------- ----------- ------------ ------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-6
<PAGE>
CJC HOLDINGS, INC., CLASS RINGS BUSINESS
STATEMENTS OF CHANGES IN ADVANCES AND EQUITY (DEFICIT)
FOR THE YEARS ENDED AUGUST 27, 1994, AUGUST 26, 1995, AND AUGUST 31, 1996
AND FOR THE THREE MONTHS ENDED NOVEMBER 30, 1996
(DOLLARS IN THOUSANDS)
<TABLE>
<S> <C>
BALANCE AT AUGUST 31, 1993........................................................ $ (27,931)
Net decrease in advances from parent.............................................. (24,560)
Net income for the year ended August 27, 1994..................................... 987
---------
BALANCE AT AUGUST 27, 1994........................................................ (51,504)
Net increase in advances from parent.............................................. 4,284
Net loss for the year ended August 26, 1995....................................... (5,966)
---------
BALANCE AT AUGUST 26, 1995........................................................ (53,186)
Net increase in advances from parent.............................................. 26,493
Net loss for the year ended August 31, 1996....................................... (1,831)
---------
BALANCE AT AUGUST 31, 1996........................................................ (28,524)
Net increase in advances from parent.............................................. 18,891
Net income for the three months ended November 30, 1996........................... 1,724
---------
BALANCE AT NOVEMBER 30, 1996 (Unaudited).......................................... $ (7,909)
---------
---------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-7
<PAGE>
CJC HOLDINGS, INC., CLASS RINGS BUSINESS
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED AUGUST 27, 1994, AUGUST 26, 1995, AND AUGUST 31, 1996
AND FOR THE THREE MONTHS ENDED NOVEMBER 25, 1995 AND NOVEMBER 30, 1996
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED
FOR THE YEARS ENDED
------------------------------------- --------------------------
<S> <C> <C> <C> <C> <C>
AUGUST 27, AUGUST 26, AUGUST 31, NOVEMBER 25, NOVEMBER 30,
1994 1995 1996 1995 1996
----------- ----------- ----------- ------------ ------------
<CAPTION>
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)................................... $ 987 $ (5,966) $ (1,831) $ 875 $ 1,724
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities--
Deferred income tax expense....................... 137 -- -- -- --
Depreciation...................................... 1,395 1,664 1,843 455 483
Amortization of other assets...................... 3,299 3,950 3,172 809 981
Provisions for doubtful accounts.................. 292 522 596 118 108
Discount accretion................................ 242 1,172 -- -- --
Restructuring charges............................. -- 3,244 -- -- --
Change in assets and liabilities:
Increase in receivables......................... (942) (2,066) (121) (5,542) (5,398)
(Increase) decrease in inventories.............. (992) 179 (1,500) (1,424) 104
(Increase) decrease in prepaid expenses......... (578) (286) 1,880 1,723 1,331
Increase in other assets........................ (4,179) (3,138) (2,113) (724) (1,822)
Increase (decrease) in accounts payable......... 533 (305) (391) 243 432
Increase (decrease) in accrued expenses......... 10,938 (2,134) 128 2954 3,140
----------- ----------- ----------- ------------ ------------
Net cash provided by (used in) operating
activities...................................... 11,132 (3,164) 1,663 (513) 1,083
----------- ----------- ----------- ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property, plant and equipment.......... (1,186) (1,120) (844) (52) (182)
----------- ----------- ----------- ------------ ------------
Net cash used in investing activities............. (1,186) (1,120) (844) (52) (182)
----------- ----------- ----------- ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net change in advances.............................. (24,560) 4,284 15,620 565 18,891
Note payments....................................... -- -- (16,439) -- (15,336)
Note borrowings..................................... 14,614 -- -- -- --
----------- ----------- ----------- ------------ ------------
Net cash provided by (used in) financing
activities...................................... (9,946) 4,284 (819) 565 3,555
----------- ----------- ----------- ------------ ------------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS......................................... -- -- -- -- 4,456
CASH AND CASH EQUIVALENTS, beginning of period........ -- -- -- -- --
----------- ----------- ----------- ------------ ------------
CASH AND CASH EQUIVALENTS, end of period.............. $ -- $ -- $ -- $ -- $ 4,456
----------- ----------- ----------- ------------ ------------
----------- ----------- ----------- ------------ ------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-8
<PAGE>
CJC HOLDINGS, INC., CLASS RINGS BUSINESS
NOTES TO FINANCIAL STATEMENTS
AUGUST 27, 1994, AUGUST 26, 1995, AUGUST 31, 1996
AND NOVEMEBER 30, 1996 (UNAUDITED)
1. DESCRIPTION OF BUSINESS AND BASIS OF FINANCIAL STATEMENT PRESENTATION:
The accompanying financial statements represent the class rings business
(the Business) of CJC Holdings, Inc. (CJC). Since the Business is not operated
nor accounted for as a separate entity for the periods presented in the
accompanying financial statements, it was necessary for management to make
allocations (carve-outs) for certain accounts to reflect the financial
statements of the Business. Management considers the allocations to be
reasonable and believes the accompanying financial statements materially
represent the operations of the Business on a stand-alone basis. Selling,
general and administrative expenses from the operations of the Business as shown
in the accompanying statements of income (loss) represent all the expenses
incurred by CJC excluding only the expenses directly related to the non-Business
operations of CJC. CJC has entered into an agreement to sell the assets of the
Business as defined (see Note 12), and CJC intends to use the sale proceeds to
repay its outstanding debt obligations. Accordingly, the debt obligations of CJC
to be repaid with the sale proceeds have been recorded on the accompanying
balance sheets with the offsetting charge included in the advances and equity
(deficit) account, and the accompanying statements of income (loss) of the
Business presented herein include all of CJC's debt-related interest expense on
such debt obligations. Interest income of CJC is included in the statements of
income (loss) since all excess cash balances are used to pay principal and
interest on debt obligations.
All cash balances are intended to remain with CJC after sale of the assets.
No cash balances have been included in the accompanying balance sheets. All
amounts due to/from CJC for the Business's operations have been included in
advances and equity (deficit). Also, included in advances and equity (deficit)
are all intercompany accounts.
Although management considers the above allocation (carve-out) methods to be
reasonable, due to the relationship between the Business and other operations
and activities of CJC, the terms of some or all of the transactions and
allocations discussed above may not necessarily be indicative of that which
would have resulted had the Business been a stand-alone entity.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
FISCAL YEAR-END
Effective September 1, 1993, CJC (and the Business) changed its fiscal year
to a 52/53-week fiscal year ending on the last Saturday of August. This change
in accounting period did not have a material effect on the Business's financial
position or results of operations.
INVENTORIES
Inventories are valued at the lower of cost or market. Cost is determined by
the last-in, first-out (LIFO) method.
F-9
<PAGE>
CJC HOLDINGS, INC., CLASS RINGS BUSINESS
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
AUGUST 27, 1994, AUGUST 26, 1995, AUGUST 31, 1996
AND NOVEMEBER 30, 1996 (UNAUDITED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are stated at cost, net of accumulated
depreciation. Depreciation is provided principally using the straight-line
method based on estimated useful lives of the assets as follows:
<TABLE>
<CAPTION>
DESCRIPTION USEFUL LIFE
- ---------------------------------------------------------------------------- ----------------
<S> <C>
Land improvements........................................................... 15 years
Buildings and improvements.................................................. 10 to 25 years
Tools and dies.............................................................. 5 to 10 years
Machinery and equipment..................................................... 3 to 10 years
</TABLE>
Maintenance, repairs and minor replacements are charged against income as
incurred; major replacements and betterments are capitalized. The cost of assets
sold or retired and the related accumulated depreciation are removed from the
accounts at the time of disposition, and any resulting gain or loss is reflected
as other income or expense for the period.
INTANGIBLE ASSETS
Costs in excess of fair value of net tangible assets acquired and related
acquisition costs are included in goodwill and identifiable intangible assets in
the accompanying balance sheets. Intangible assets are being amortized on a
straight-line basis over their estimated lives, not exceeding 40 years.
OTHER ASSETS
Other assets include debt costs, software and software development costs,
and engineering and design costs. Debt costs are amortized over the lives of the
specific debt instruments, one to six years. Software and software development
have a useful life of three to five years, and engineering and design costs are
amortized over six years.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The Business' financial instruments consist primarily of cash and cash
equivalents, accounts receivable, accounts payable and long-term debt (including
current maturities). The carrying amounts of the Business' cash and cash
equivalents, accounts receivable and accounts payable approximate fair value due
to their short-term nature. The fair value of the Business' long-term debt is
estimated based on current rates offered to the Business for debt with the same
or similar terms.
CASH FLOWS
Total cash interest paid during the fiscal years 1994, 1995 and 1996 was
approximately $359,000, $15,905,000 and $12,464,000, respectively. Total cash
paid for income taxes during the fiscal years 1994, 1995 and 1996 was
approximately $159,000, $89,000 and $83,000, respectively. Noncash financing
activities during the year ended August 31, 1996, include $7,021,000 of accrued
interest, which was converted to New Subordinated Notes, and $7,500,000 of
Original Subordinated Notes and $1,873,000 of related accrued interest that were
both converted to Series 2 common stock (see Note 7).
F-10
<PAGE>
CJC HOLDINGS, INC., CLASS RINGS BUSINESS
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
AUGUST 27, 1994, AUGUST 26, 1995, AUGUST 31, 1996
AND NOVEMEBER 30, 1996 (UNAUDITED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
ACCOUNTING FOR INCOME TAXES
Effective September 1, 1992, CJC (and the Business) adopted Statement of
Financial Accounting Standards (SFAS) No. 109, "Accounting for Income Taxes,"
which requires the asset and liability method of accounting for income taxes.
Under the asset and liability method, deferred income taxes are recorded for the
tax consequences of applying currently enacted statutory tax rates applicable to
differences between the financial reporting and income tax basis of assets and
liabilities.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period.
RECLASSIFICATIONS
Certain reclassifications of amounts previously reported have been made to
conform to the current-year presentation.
SEASONALITY
The Business's sales are highly seasonal. Historically, the Business has
achieved its highest sales and income levels in its first fiscal quarter
(September through November), followed in descending order by the third, second
and fourth fiscal quarters. This is primarily due to the fall "back-to-school"
selling season for class rings. The third fiscal quarter includes the spring
semester school activities including graduation events, while the fourth fiscal
quarter (and the second fiscal quarter to a lesser extent) includes the periods
when school is not in session.
CONCENTRATION OF CREDIT RISK
Credit is extended to various companies in the retail industry which may be
affected by changes in economic or other external conditions. The Business's
policy is to manage its exposure to credit risk through credit approvals and
limits.
PENDING ACCOUNTING PRONOUNCEMENTS
In March 1995, the Financial Accounting Standards Board issued SFAS No. 121,
"Accounting for the Impairment of Long-Lived Assets to Be Disposed Of," which
will be effective for fiscal year 1997. The statement sets forth guidelines
regarding when to recognize an impairment of long-lived assets, including
goodwill and other intangible assets, and how to measure such impairment.
Management does not expect the adoption of SFAS No. 121 to have a significant
effect on the Business's financial statements.
F-11
<PAGE>
CJC HOLDINGS, INC., CLASS RINGS BUSINESS
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
AUGUST 27, 1994, AUGUST 26, 1995, AUGUST 31, 1996
AND NOVEMEBER 30, 1996 (UNAUDITED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
INTERIM FINANCIAL STATEMENTS
The financial statements for the three months ended November 25, 1995, and
November 30, 1996, are unaudited. In management's opinion, these unaudited
financial statements have been prepared on the same basis as the audited
financial statements and include all adjustments, consisting only of normal
recurring adjustments, necessary for the fair statement of the financial data
for such periods. The unaudited results for the three months ended November 30,
1996, are not necessarily indicative of the results expected for the entire
fiscal year.
3. RESTRUCTURING CHARGES:
During fiscal 1995, the Business provided for restructuring charges totaling
$3,244,000. Charges include professional advisory fees and the write-down of
previously incurred financing costs.
4. INVENTORIES:
Inventory components are as follows (in thousands):
<TABLE>
<CAPTION>
AUGUST 27, AUGUST 26, AUGUST 31, NOVEMBER 30,
1994 1995 1996 1996
----------- ----------- ----------- -------------
<S> <C> <C> <C> <C>
(UNAUDITED)
Raw materials.................................................. $ 2,150 $ 2,699 $ 4,007 $ 3,601
Work in process................................................ 1,253 890 1,010 1,155
Finished goods................................................. 678 313 385 542
----------- ----------- ----------- ------
$ 4,081 $ 3,902 $ 5,402 $ 5,298
----------- ----------- ----------- ------
----------- ----------- ----------- ------
</TABLE>
Inventories are priced using the dollar-value LIFO link-chain method. The
carrying value of LIFO inventories at August 27, 1994, August 26, 1995, August
31, 1996 and November 30, 1996, was approximately $519,000, $356,000, $355,000,
and $132,000, respectively, greater than costs as determined by the first-in,
first-out method.
The cost elements of inventory include raw materials, labor and overhead and
other manufacturing and production costs. Included in raw materials are supplies
inventory of approximately $916,000, $486,000, $451,000 and $459,000 at August
27, 1994, August 26, 1995, August 31, 1996, and November 30, 1996, respectively.
See Note 6 for discussion of gold inventory.
Cost of sales includes depreciation and amortization of approximately
$1,562,000, $1,674,000, $1,709,000 and $541,000 for the fiscal years 1994, 1995,
1996 and the three months ended November 30, 1996, respectively.
F-12
<PAGE>
CJC HOLDINGS, INC., CLASS RINGS BUSINESS
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
AUGUST 27, 1994, AUGUST 26, 1995, AUGUST 31, 1996
AND NOVEMEBER 30, 1996 (UNAUDITED)
5. PROPERTY, PLANT AND EQUIPMENT:
Property, plant and equipment is as follows (in thousands):
<TABLE>
<CAPTION>
AUGUST 27, AUGUST 26, AUGUST 31, NOVEMBER 30,
1994 1995 1996 1996
----------- ----------- ----------- ------------
<S> <C> <C> <C> <C>
(UNAUDITED)
Land and improvements.......................................... $ 4,742 $ 4,742 $ 4,742 $ 4,742
Building and improvements...................................... 4,922 5,089 5,172 5,363
Tools and dies................................................. 6,241 6,241 6,241 6,241
Machinery and equipment........................................ 8,160 9,113 9,878 9,869
----------- ----------- ----------- ------------
24,065 25,185 26,033 26,215
Less--Accumulated depreciation................................. (11,373) (13,037) (14,884) (15,367)
----------- ----------- ----------- ------------
$ 12,692 $ 12,148 $ 11,149 $ 10,848
----------- ----------- ----------- ------------
----------- ----------- ----------- ------------
</TABLE>
6. GOLD LOAN:
As a means of hedging against gold market price fluctuations and financing
its needs for gold in the manufacturing process, CJC had historically entered
into a fee-bearing gold consignment agreement with a bank (the Consignor).
During the term of the consignment agreement, title to the gold covered by the
consignment remained with the Consignor. CJC had a credit facility with a bank
which provided for a $25,000,000 letter-of-credit facility which could be
utilized to request letters of credit pursuant to the gold consignment
agreement. The consignment agreement expired in June 1994 and was not renewed.
In connection with the expiration of the gold consignment agreement, the
Consignor presented to the bank a draft for payment under the letter of credit
in the amount of $14,614,255, and such draft was honored by the bank in that
amount. The amount invoiced CJC was for 38,053 ounces of gold at a price of
$384.05 per ounce. At August 27, 1994, August 26, 1995, August 31, 1996, and
November 30, 1996 there are 7,439, 9,327, 10,555 and 10,319 ounces of gold,
respectively, with an approximate market value of $2,851,000, $3,573,000,
$4,079,000, and $3,849,000, respectively, included in the Business's balance
sheets. Although a substantial amount of gold is held by other operations of CJC
and serves as collateral for the loan, the entire Gold Loan is to be paid with
the proceeds from the asset sale and, therefore, the full amount of the loan is
included in the Business's balance sheets. See Note 7 for a discussion regarding
the refinancing of the Gold Loan.
F-13
<PAGE>
CJC HOLDINGS, INC., CLASS RINGS BUSINESS
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
AUGUST 27, 1994, AUGUST 26, 1995, AUGUST 31, 1996
AND NOVEMEBER 30, 1996 (UNAUDITED)
7. LONG-TERM DEBT:
Long-term debt consists of the following (in thousands):
<TABLE>
<CAPTION>
AUGUST 27, AUGUST 26, AUGUST 31, NOVEMBER 30,
1994 1995 1996 1996
----------- ----------- ----------- ------------
<S> <C> <C> <C> <C>
(UNAUDITED)
Senior secured notes........................................... $ 64,900 $ 64,900 $ 56,700 $ 45,623
Senior subordinated notes, net of unamortized discount of
$1,172, $--, $-- and $--, respectively....................... 33,828 35,000 34,521 34,521
----------- ----------- ----------- ------------
98,728 99,900 91,221 80,144
Less--Current portion.......................................... -- (8,200) (2,000) --
----------- ----------- ----------- ------------
Long-term debt................................................. $ 98,728 $ 91,700 $ 89,221 $ 80,144
----------- ----------- ----------- ------------
----------- ----------- ----------- ------------
</TABLE>
The following is a summary of scheduled debt maturities by fiscal year (in
thousands):
<TABLE>
<S> <C>
1997............................................................... $ 2,000
1998............................................................... 4,000
1999............................................................... 10,677
2000............................................................... 40,023
2001............................................................... --
Thereafter......................................................... 34,521
---------
$ 91,221
---------
---------
</TABLE>
In November 1995, CJC's board of directors, shareholders and principal
creditors approved its Restructuring Plan and the Plan and Agreement of Merger
(as defined) whereby CJC's common and preferred shareholders agreed to a
recapitalization, and holders of senior secured, senior subordinated notes and
the Gold Loan agreed to restructure their debt obligations. On March 12, 1996,
the Restructuring Agreement was consummated. It is anticipated that the debt
obligations discussed below will be paid with the proceeds of the asset sale of
the Business and, therefore, they are included in the Business's financial
statements.
The significant components of the restructuring and recapitalization are as
follows:
a. New capital stock consisting of 30,000,000 authorized shares of
common stock designated as either Series 1, Series 2 or Series 3, as
defined, of CJC Newco, Inc. (Newco), was authorized and issued in the
following order:
(1) The holder of CJC's Series A preferred stock received an
aggregate of 100 percent or 8,750,000 shares of the Series 1 common
stock, such number to be reduced by that number of shares of Series 1
common stock to be issued to the subordinated noteholders.
(2) A holder of CJC's senior subordinated notes due 1998 and 1999
(the Original Subordinated Notes), pursuant to the restructuring,
received 4,410,000 shares of the Series 1 common stock in lieu of debt of
CJC. Holders of CJC's Original Subordinated Notes also received 94,000
shares of the Series 1 common stock as compensation for a payment-in-kind
(PIK), nondefault
F-14
<PAGE>
CJC HOLDINGS, INC., CLASS RINGS BUSINESS
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
AUGUST 27, 1994, AUGUST 26, 1995, AUGUST 31, 1996
AND NOVEMEBER 30, 1996 (UNAUDITED)
7. LONG-TERM DEBT: (CONTINUED)
rate interest option, as defined, contained in CJC's new senior
subordinated notes due 2002 (the New Subordinated Notes). In addition,
974,000 shares of the Series 1 common stock authorized to be issued to
the holders of CJC's New Subordinated Notes were not issued as of the
Restructuring Date but were reserved for issuance in accordance with the
terms of the New Subordinated Note agreement and the new shareholders'
agreement.
(3) The holders of CJC's Series B preferred stock received an
aggregate of 1,249,020 shares of Series 2 common stock. Each such holder
received 11.67 shares of Series 2 common stock for each previously held
share of Series B preferred stock.
(4) Previous holders of CJC's common stock received an aggregate of
9,992,317 shares of Series 3 common stock. Each such holder received 4.20
shares of Series 3 common stock for each previously held share of common
stock.
(5) Holders of CJC's warrants issued in 1990 received new warrants to
purchase 3,023,623 shares of Series 3 common stock. These warrants
expired on June 30, 1996. All other existing warrants, rights or options
outstanding immediately prior the to Merger were canceled and
extinguished.
Effective June 30, 1996, the Series 3 shares were redeemed at $0.001
per share.
b. Holders of CJC's Floating Rate Senior Secured Notes, Series A due
1996 (the Series A Notes), and holders of CJC's 12.12 percent Senior Secured
Notes, Series B-2 due 1998 (the Series B Notes, and together with the Series
A Notes, the Original Senior Notes), received all accrued interest on the
unpaid principal amount of such notes. Pursuant to the terms of a Senior
Note Purchase Agreement, the holders of the Series A Notes received New
Series A Notes and the holders of Series B Notes received New Series B
Notes.
The New Series A Notes were issued in the aggregate principal amount of
$14,677,000, the outstanding principal balance on the Restructuring Data.
The New Series A Notes are mandatorily redeemable under certain
circumstances. The maturity date of the New Series A Notes shall be July 15,
1999, and such notes bear interest at the Eurodollar Rate, as defined, plus
2.25 percent. In addition, the principal of the New Series A Notes will be
repaid in installments of $2.0 million on each semiannual period currently
anticipated to commence no later than July 15, 1997. Interest on the New
Series A Notes is due on the 15th day of each quarter, beginning April 15,
1996.
The New Series B Notes were issued in the aggregate principal amount of
$42,023,000, the outstanding principal balance on the Restructuring Date.
The New Series B Notes are mandatorily redeemable under certain
circumstances. The maturity date of the New Series B Notes shall be July 15,
2000 and bear interest at the rate of 12.12 percent. The New Series B Notes
shall be payable in full at maturity. After the New Series A Notes have been
repaid in full, the $2.0 million semiannual principal repayments shall be
applied to the New Series B Notes. Interest on the New Series B Notes shall
be due on the 15th day of each quarter beginning April 15, 1996. Finally,
the holders of the New Series B Notes may be entitled to certain
"make-whole" payments on the original amount issued once the New Series A
Notes have been repaid in full or replaced. The New Series A Notes and New
Series B Notes shall be secured by substantially all of CJC's assets.
F-15
<PAGE>
CJC HOLDINGS, INC., CLASS RINGS BUSINESS
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
AUGUST 27, 1994, AUGUST 26, 1995, AUGUST 31, 1996
AND NOVEMEBER 30, 1996 (UNAUDITED)
7. LONG-TERM DEBT: (CONTINUED)
Under the terms of the New Series A Notes and New Series B Notes, CJC,
among other restrictions, will be required to maintain a current ratio, as
defined (excluding current maturities of Funded Debt), of 3.2 to 1.0 for the
period March 12, 1996, to February 28, 1998, and 2.5 to 1.0 for the period
March 1, 1998, to maturity, minimum shareholders' equity (deficit), as
defined, of $(8,000,000) for the period March 12, 1996, to June 30, 1996,
$(9,000,000) for the period July 1, 1996, to May 31, 1997, $(10,000,000) for
the period June 1, 1997, to November 30, 1997, and beginning to increase to
$(5,000,000) until maturity, and an interest coverage ratio, as defined, of
1.25 to 1.0 for the period March 12, 1996, to February 28, 1998, 1.50 to 1.0
for the period March 1, 1998, to August 31, 1999, and 1.75 to 1.0 for the
period September 1, 1999, to maturity. CJC will also have certain
limitations relating to additional debt, liens, mergers, asset sales
transactions, restricted investments and payments of dividends and is
obligated to make certain reports periodically to the lenders. As of August
31, 1996, CJC was in compliance with these covenants.
c. Holders of CJC's Original Subordinated Notes in the amount of
$35,000,000 were issued either (1) New Subordinated Notes having an
aggregate principal amount equal to the unpaid principal under the Original
Subordinated Notes plus accrued interest through June 30, 1995, as well as
shares of Series 1 common stock as described in a.(2) above, or (2) New
Subordinated Notes having an aggregate principal amount equal to 50 percent
of the unpaid principal under the Original Subordinated Notes plus accrued
interest through June 30, 1995, as well as shares of Series 1 common stock
as described in a.(2) above. One holder elected to convert 50 percent of its
Original Subordinated Notes (principal amount of $7,500,000 plus accrued
interest through June 30, 1995, of approximately $1,873,000) into Series 1
common stock.
The New Subordinated Notes have a maturity of July 15, 2002, with
certain Mandatory Prepayments, as defined, based upon Net Cash Proceeds, as
defined. The New Subordinated Notes are subordinate to the New Senior Notes
and the New Gold Notes. The New Subordinated Notes have loan covenants that
are substantially identical to the New Senior Notes. Finally, the holders of
the New Subordinated Notes may be entitled to certain "make-whole" payments
on the original amount issued if both the New Senior Notes and New
Subordinated Notes are repaid in full prior to March 1997.
d. Each Gold Loan holder shall receive a new promissory note evidencing
the existing obligation having a maturity date of February 28, 1997 (the New
Gold Notes). The New Gold Notes shall be issued in an aggregate principal
amount of $8,641,125, the outstanding principal balance on the Restructuring
Date. The New Gold Notes shall bear interest at the lesser of the (1)
Alternate Base Rate, as defined, plus 1.5 percent or (2) the Highest Lawful
Rate, as defined. Principal payments under the New Gold Notes are $2,267,000
and $6,374,125 for fiscal years 1996 and 1997, respectively. CJC shall
prepay the New Gold Notes using available Net Cash Proceeds, as defined. The
New Gold Notes shall be secured by substantially all of CJC's assets.
In connection with the New Gold Notes, CJC purchased options for 24,053
ounces of gold, exercisable at $384.05 per ounce. The total premiums for
fiscal 1996 relating to these options were approximately $238,000. As of
August 31, 1996, CJC has options on 17,800 ounces of gold outstanding which
expire March 28, 1997. CJC is required to purchase the options under the New
Gold Notes to
F-16
<PAGE>
CJC HOLDINGS, INC., CLASS RINGS BUSINESS
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
AUGUST 27, 1994, AUGUST 26, 1995, AUGUST 31, 1996
AND NOVEMEBER 30, 1996 (UNAUDITED)
7. LONG-TERM DEBT: (CONTINUED)
hedge the collateral against changing gold prices. CJC does not engage in
gold option speculation. CJC has not recorded any significant gains or
losses related to such options as the price of gold has not fluctuated
significantly.
Under the terms of the New Gold Notes, CJC, among other restrictions,
will be required to maintain a current ratio, as defined (excluding current
maturities of Funded Debt), of 3.2 to 1.0, minimum shareholders' equity
(deficit), as defined, of $(8,000,000) for the period March 12, 1996, to
June 30, 1996, and $(9,000,000) for the period July 1, 1996, to maturity,
and an interest coverage ratio, as defined, of 1.25 to 1.0. CJC will also
have certain limitations relating to additional debt, liens, mergers, asset
sales transactions, restricted investments and payments of dividends and is
obligated to make certain reports periodically to the lenders. As of August
31, 1996, CJC was in compliance with these covenants.
Management believes the carrying amount of long-term debt, including the
current maturities, approximated fair value as of August 31, 1996, based upon
current rates offered for debt with the same or similar debt terms.
Subsequent to year-end, CJC was not in compliance with certain financial
covenants and, accordingly, applied for and has been granted a necessary waiver
through October 31, 1996, and an amendment with respect to such covenants from
its lenders.
8. INCOME TAXES:
For federal income tax purposes, the Business's operating results have been
included in CJC's consolidated federal income tax return. For financial
reporting purposes, the Business has provided federal income taxes as if it were
a stand-alone entity. However, since the Business is not a taxpaying entity with
respect to federal income taxes, deferred income taxes payable have been
included in the advances and equity (deficit) in the accompanying balance
sheets.
As discussed in Note 2, CJC (and the Business) adopted SFAS No. 109 as of
the beginning of fiscal year 1993. Under SFAS 109, deferred tax assets and
liabilities are computed based on the difference between the financial reporting
and income tax bases of assets and liabilities applying currently enacted
statutory tax rates. The components of deferred taxes of the Business are
comprised of the following (in thousands):
F-17
<PAGE>
CJC HOLDINGS, INC., CLASS RINGS BUSINESS
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
AUGUST 27, 1994, AUGUST 26, 1995, AUGUST 31, 1996
AND NOVEMEBER 30, 1996 (UNAUDITED)
8. INCOME TAXES: (CONTINUED)
<TABLE>
<CAPTION>
AUGUST 27, AUGUST 26, AUGUST 31,
1994 1995 1996
----------- ----------- -----------
<S> <C> <C> <C>
Current deferred taxes--
Gross assets................................................................ $ 597 $ 1,835 $ 1,969
Gross liabilities........................................................... (508) (385) (328)
----------- ----------- -----------
Total, net.............................................................. 89 1,450 1,641
----------- ----------- -----------
Noncurrent deferred taxes--
Gross assets................................................................ 1,947 2,741 2,862
Gross liabilities........................................................... (1,586) (1,318) (1,067)
Less--Valuation allowance................................................... (450) (2,873) (3,436)
----------- ----------- -----------
Total, net.............................................................. (89) (1,450) (1,641)
----------- ----------- -----------
Net deferred income taxes..................................................... $ -- $ -- $ --
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
The significant increase in the valuation allowance as of August 26, 1995,
is due to the increase in deferred tax assets arising from the restructuring
charges being reserved.
The tax effect of significant temporary differences representing deferred
tax assets and liabilities is as follows (in thousands):
<TABLE>
<CAPTION>
AUGUST 27, AUGUST 26, AUGUST 31,
1994 1995 1996
----------- ----------- -----------
<S> <C> <C> <C>
UNICAP........................................................................ $ 597 $ 587 $ 658
Net operating loss and tax credit carryforwards............................... 1,947 2,741 2,862
Depreciation and amortization................................................. (1,586) (1,318) (1,067)
Deferred advertising.......................................................... (399) (385) (328)
Other, net.................................................................... (109) 1,248 1,311
----------- ----------- -----------
Net deferred tax asset........................................................ 450 2,873 3,436
Less--Valuation allowance..................................................... (450) (2,873) (3,436)
----------- ----------- -----------
Net deferred tax liability.................................................... $ -- $ -- $ --
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
The income tax provision for the fiscal year 1994, 1995 and 1996 consisted
of the following (in thousands):
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
-------------------------------
1994 1995 1996
--------- --------- ---------
<S> <C> <C> <C>
Current................................................................................. $ -- $ -- $ --
Deferred................................................................................ -- -- --
State Income taxes...................................................................... (137) -- --
--------- --------- ---------
$ (137) $ -- $ --
--------- --------- ---------
--------- --------- ---------
</TABLE>
F-18
<PAGE>
CJC HOLDINGS, INC., CLASS RINGS BUSINESS
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
AUGUST 27, 1994, AUGUST 26, 1995, AUGUST 31, 1996
AND NOVEMEBER 30, 1996 (UNAUDITED)
8. INCOME TAXES: (CONTINUED)
The following represents a reconciliation between tax computed by applying
the 35 percent statutory income tax rate to income (loss) before income taxes
and reported income tax expense for the years ended August 27, 1994, August 26,
1995, and August 31, 1996 (in thousands):
<TABLE>
<CAPTION>
1994 1995 1996
--------- --------- ---------
<S> <C> <C> <C>
Pretax book income (loss)......................................................... 35.0% (35.0)% (35.0)%
Permanent differences............................................................. (8.7) 1.0 3.2
--------- --------- ---------
Addition to (utilization of) operating loss carryforwards......................... (26.3) 34.0 31.8
--------- --------- ---------
--% --% --%
--------- --------- ---------
--------- --------- ---------
</TABLE>
Since the Business's financial results have been included in CJC's
consolidated federal income tax return, the Business's federal net operating tax
losses and other credits have been included in CJC's income tax return. As a
result, any carryovers of such losses or credits which might have existed had
the Business reported on a stand-alone basis will not be available to the
Business after the sale to Class Rings, Inc. is completed.
9. COMMITMENTS AND CONTINGENCIES:
Various lawsuits and claims arising in the ordinary course of business are
pending or threatened against CJC. While plaintiffs to these matters are seeking
recoveries from CJC and other relief, management believes that the ultimate
resolution of these matters will not have a material effect on CJC's financial
position or results of operations.
10. LEASES:
The Business leases certain of its manufacturing and office facilities and
equipment, under various noncancelable operating leases. Expenses under all
operating leases for the fiscal years ended August 27, 1994, August 26, 1995,
and August 31, 1996, were approximately $784,000, $577,000 and $577,000,
respectively. Future minimum payments under noncancelable operating leases with
initial or remaining terms of one year or more are as follows at August 31,
1996.
<TABLE>
<S> <C>
Fiscal 1997....................................................... $ 383,000
Fiscal 1998....................................................... 241,000
Fiscal 1999....................................................... 241,000
Fiscal 2000....................................................... 32,000
Fiscal 2001....................................................... --
---------
$ 897,000
---------
---------
</TABLE>
F-19
<PAGE>
CJC HOLDINGS, INC., CLASS RINGS BUSINESS
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
AUGUST 27, 1994, AUGUST 26, 1995, AUGUST 31, 1996
AND NOVEMEBER 30, 1996 (UNAUDITED)
11. EMPLOYEE BENEFIT PLANS:
DEFINED BENEFIT PLAN
CJC adopted an employee benefit plan for substantially all hourly class ring
employees. The benefits were based on the employee's years of service. CJC's
funding policy was to make contributions equal to or greater than the
requirements prescribed by the Employee Retirement Income Security Act of 1974.
The plan was frozen in 1989 and, effective September 5, 1995, the plan was
terminated. Upon receiving a favorable determination on termination, dated
December 1, 1995, all assets of the plan were distributed.
The following components of net periodic pension income are presented for
the hourly class ring employees' plan for the fiscal years ended August 27,
1994, August 26, 1995 and August 31, 1996:
<TABLE>
<CAPTION>
1994 1995 1996
---------- ---------- ----------
<S> <C> <C> <C>
Service cost, benefits earned during the year................................. $ -- $ -- $ --
Interest cost of projected benefit obligation................................. 64,000 69,200 --
Actual return on plan assets.................................................. (43,900) (51,800) --
Net amortization and deferral................................................. (40,300) (50,800) --
---------- ---------- ----------
Net periodic pension income................................................... $ (20,200) $ (33,400) $ --
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
Assumptions used in accounting for the pension plan for the fiscal years
ended August 27, 1994, and August 26, 1995, are as follows:
<TABLE>
<CAPTION>
1994 1995
--------- ---------
<S> <C> <C>
Discount rate................................................................. 7.85% 7.30%
Rate of increase in compensation levels....................................... N/A N/A
Expected long-term rate of return on assets................................... 8.75 7.30
</TABLE>
The following table sets forth the hourly class ring employees' plan's
funded status and the amount recognized in the Business's balance sheets at
August 27, 1994, August 26, 1995, and August 31, 1996, for the pension plan:
<TABLE>
<CAPTION>
1994 1995 1996
------------ ------------- ------------
<S> <C> <C> <C>
Actuarial present value of benefit obligations--
Accumulated benefit obligations, including vested benefits of
$855,000, $1,139,000 and $-- at August 27, 1994, August 26, 1995,
and August 31, 1996, respectively.................................. $ (882,000) $ (1,139,000) $ --
------------ ------------- ------------
Projected benefit obligation........................................... $ (882,000) $ (1,139,000) --
Plan assets at fair value.............................................. 1,101,000 1,139,000 --
------------ ------------- ------------
Plan assets in excess of projected benefit obligation.................. 219,000 -- --
Unrecognized net loss (gain)........................................... (219,000) -- --
Prior service cost not yet recognized in net periodic
pension cost......................................................... -- -- --
------------ ------------- ------------
Prepaid pension cost................................................... $ -- $ -- $ --
------------ ------------- ------------
------------ ------------- ------------
</TABLE>
F-20
<PAGE>
CJC HOLDINGS, INC., CLASS RINGS BUSINESS
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
AUGUST 27, 1994, AUGUST 26, 1995, AUGUST 31, 1996
AND NOVEMEBER 30, 1996 (UNAUDITED)
11. EMPLOYEE BENEFIT PLANS: (CONTINUED)
401(K) PLAN
CJC has a defined contribution plan that is available to all employees.
Employees are eligible to make contributions to the plan after one year of
employment. CJC does not make contributions to the plan but pays substantially
all administrative fees related to the plan.
12. SALE OF CLASS RINGS BUSINESS:
On December 16, 1996, (closing date) CJC completed the sale of substantially
all of the properties, assets, rights, claims and contracts of CJC associated
with the Business to Commemorative Brands, Inc. (formerly Scholastic Brands,
Inc. which was formerly Class Rings, Inc.) (CBI). In consideration for the
Business, CBI paid CJC in cash the sum of $97.8 million plus an amount equal to
the Adjusted Working Capital (as defined in the ArtCarved Purchase Agreement) of
ArtCarved as of the closing date. Based upon the estimated Adjusted Working
Capital of ArtCarved of $17.0 million, the ArtCarved Purchase Price was
approximately $114.8 million, subject to adjustment upon final determinations of
the Adjusted Working Capital.
F-21
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Stockholder of
L.G. Balfour Company, Inc.:
We have audited the accompanying balance sheets of L.G. Balfour Company,
Inc. (a Delaware corporation and the Company), a wholly owned subsidiary of Town
& Country Corporation (a Massachusetts corporation and the Parent), as of
February 27, 1994, February 26, 1995 and February 25, 1996, and the related
statements of operations, stockholder's equity and cash flows for the years
ended February 27, 1994, February 26, 1995 and February 25, 1996. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of L.G. Balfour Company, Inc.,
as of February 27, 1994, February 26, 1995 and February 25, 1996, and the
results of its operations and its cash flows for the years ended February 27,
1994, February 26, 1995 and February 25, 1996, in conformity with generally
accepted accounting principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. The Company relies on funding from its
Parent to support operations and there is no assurance that the Parent will be
able to continue to provide financial support to the Company. Therefore, there
is substantial doubt about the Company's ability to continue as a going concern.
The Parent's plans with regard to these matters, which primarily relate to the
sale of the Company, are discussed in Notes 1 and 10. The financial statements
do not include any adjustments that might result from the outcome of this
uncertainty.
/S/ ARTHUR ANDERSEN LLP
Boston, Massachusetts
September 30, 1996 (except for the
matter discussed in Note 10,
for which the date is December 30, 1996)
F-22
<PAGE>
L.G. BALFOUR COMPANY, INC.
BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
FEBRUARY 27, FEBRUARY 26, FEBRUARY 25, NOVEMBER 24,
1994 1995 1996 1996
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
(UNAUDITED)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents (Note 1)..................... $ 25 $ 25 $ 80 $ 59
Accounts receivable, less allowance for doubtful
accounts of $1,961, $5,866, $711 and $871 at February
27, 1994, February 26, 1995, February 25, 1996 and
November 24, 1996, respectively...................... 17,374 14,427 15,362 20,605
Accounts receivable--affiliates........................ 104 6 62 --
Inventories (Note 1)................................... 9,382 11,685 10,791 9,472
Prepaid expenses and other current assets (Note 7)..... 3,641 3,149 2,483 2,447
------------ ------------ ------------ ------------
Total current assets............................... 30,526 29,292 28,778 32,583
PROPERTY, PLANT AND EQUIPMENT, net (Note 1).............. 13,478 12,285 10,399 9,324
INTANGIBLE ASSETS (Note 1)............................... 2,986 2,842 2,698 2,590
OTHER ASSETS............................................. 999 817 688 553
------------ ------------ ------------ ------------
$ 47,989 $ 45,236 $ 42,563 $ 45,050
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Bank overdraft......................................... $ 1,866 $ 1,986 $ 1,829 $ 708
Current portion of long-term debt
(Note 2)............................................. 78 217 245 257
Accounts payable--trade................................ 3,022 1,756 1,551 2,079
Accounts payable--affiliates........................... 447 40 43 123
Accrued expenses (Note 6).............................. 9,896 11,079 11,212 9,307
------------ ------------ ------------ ------------
Total current liabilities.......................... 15,309 15,078 14,880 12,474
DUE TO PARENT, NET (Note 9).............................. 6,014 14,516 12,767 19,148
LONG-TERM DEBT, less current portion (Note 2)............ 44 403 154 --
DEFERRED COMPENSATION, less current portion (Note 8)..... 1,656 1,215 874 826
------------ ------------ ------------ ------------
Total liabilities.................................. 23,023 31,212 28,675 32,448
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
COMMITMENTS AND CONTINGENCIES (Note 5)
STOCKHOLDER'S EQUITY:
Capital stock.......................................... 4 4 4 4
Additional paid-in capital............................. 75,970 75,970 75,970 75,970
Accumulated deficit.................................... (51,008) (61,950) (62,086) (63,372)
------------ ------------ ------------ ------------
Total stockholders' equity......................... 24,966 14,024 13,888 12,602
------------ ------------ ------------ ------------
$ 47,989 $ 45,236 $ 42,563 $ 45,050
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-23
<PAGE>
L.G. BALFOUR COMPANY, INC.
STATEMENTS OF OPERATIONS
(IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE NINE MONTHS
FOR THE YEARS ENDED ENDED
---------------------------------------- --------------------------
<S> <C> <C> <C> <C> <C>
FEBRUARY 27, FEBRUARY 26, FEBRUARY 25, NOVEMBER 26, NOVEMBER 24,
1994 1995 1996 1995 1996
------------ ------------ ------------ ------------ ------------
<CAPTION>
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
NET SALES................................. $ 85,304 $ 77,491 $ 71,300 $ 53,413 $ 55,521
COST OF SALES............................. 35,860 35,406 35,598 27,160 27,021
------------ ------------ ------------ ------------ ------------
Gross profit........................ 49,444 42,085 35,702 26,253 28,500
------------ ------------ ------------ ------------ ------------
EXPENSES:
Selling................................. 36,220 42,891 27,788 20,695 22,899
General and administrative (Note 4)..... 7,130 8,852 5,708 5,136 5,011
------------ ------------ ------------ ------------ ------------
Total expenses...................... 43,350 51,743 33,496 25,831 27,910
------------ ------------ ------------ ------------ ------------
OTHER (INCOME) EXPENSE:
Payroll tax refund (Note 5)............. -- (574) -- -- --
Gain on sale of facility (Note 1)....... -- -- (418) (418) --
Interest expense (Note 8)............... 673 700 583 450 432
Interest on due to Parent, net (Note
9).................................... 683 1,093 1,986 1,401 1,384
------------ ------------ ------------ ------------ ------------
Net other expense................... 1,356 1,219 2,151 1,433 1,816
------------ ------------ ------------ ------------ ------------
Income (loss) before provision for
income taxes...................... 4,738 (10,877) 55 (1,011) (1,226)
PROVISION FOR INCOME TAXES
(Notes 1 and 3)......................... 50 65 191 144 60
------------ ------------ ------------ ------------ ------------
Net income (loss)................... $ 4,688 $ (10,942) $ (136) $ (1,155) $ (1,286)
------------ ------------ ------------ ------------ ------------
------------ ------------ ------------ ------------ ------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-24
<PAGE>
L.G. BALFOUR COMPANY, INC.
STATEMENTS OF STOCKHOLDER'S EQUITY
(IN THOUSANDS)
<TABLE>
<CAPTION>
TOTAL
ADDITIONAL STOCK-
PAID-IN ACCUMULATED HOLDER'S
CAPITAL STOCK CAPITAL DEFICIT EQUITY
----------------- ----------- ------------ ------------
<S> <C> <C> <C> <C>
BALANCE, FEBRUARY 28, 1993................................. $ 4 $ 75,970 $ (55,696) $ 20,278
Net income............................................... -- 4,688 4,688
--
----------- ------------ ------------
BALANCE, FEBRUARY 27, 1994................................. $ 4 75,970 (51,008) 24,966
Net loss................................................. -- (10,942) (10,942)
--
----------- ------------ ------------
BALANCE, FEBRUARY 26, 1995................................. $ 4 75,970 (61,950) 14,024
Net loss................................................. -- (136) (136)
--
----------- ------------ ------------
BALANCE, FEBRUARY 25, 1996................................. $ 4 75,970 (62,086) 13,888
Net loss................................................. -- (1,286) (1,286)
--
----------- ------------ ------------
BALANCE, NOVEMBER 24, 1996 (Unaudited)..................... $ 4 $ 75,970 $ (63,372) $ 12,602
--
--
----------- ------------ ------------
----------- ------------ ------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-25
<PAGE>
L.G. BALFOUR COMPANY, INC.
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE
FOR THE YEARS ENDED NINE MONTHS ENDED
------------------------------------------ ----------------------------
<S> <C> <C> <C> <C> <C>
FEBRUARY 27, FEBRUARY 26, FEBRUARY 25, NOVEMBER 26, NOVEMBER 24,
1994 1995 1996 1995 1996
------------- ------------ ------------- ------------- -------------
<CAPTION>
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)............................... $ 4,688 $ (10,942) $ (136) $ (1,155) $ (1,286)
Adjustments to reconcile net income (loss) to
net cash provided by (used in) operating
activities--
Depreciation and amortization................. 1,899 1,978 2,026 1,548 1,460
(Gain) loss on sale of property, plant and
equipment................................... 25 89 (417) (417) --
Change in assets and liabilities--
(Increase) decrease in accounts receivable.. (5,759) 3,045 (991) (4,736) (5,181)
(Increase) decrease in inventories.......... (1,351) (2,303) 894 (1,085) 1,319
(Increase) decrease in prepaid expenses and
other current assets...................... 1,278 492 666 787 36
(Increase) decrease in other assets......... 2,559 182 129 52 135
Increase (decrease) in bank overdraft and
accounts payable, net..................... 1,931 (1,553) (359) 714 (513)
Increase (decrease) in accrued expenses..... (6,444) 2,376 133 (1,386) (2,312)
Increase (decrease) in deferred
compensation.............................. (1,239) (441) (341) (150) (48)
------ ------------ ------ ------------- -------------
Net cash provided by (used in) operating
activities.............................. (2,413) (7,077) 1,604 (5,828) (6,390)
------ ------------ ------ ------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of fixed assets:............. 13 65 951 951 440
Capital expenditures............................ (1,820) (1,274) (530) (320) (252)
------ ------------ ------ ------------- -------------
Net cash provided by (used in) investing
activities.............................. (1,807) (1,209) 421 631 188
------ ------------ ------ ------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from (payments on) borrowings from
Parent, net................................... 4,213 8,502 (1,749) 5,364 6,381
Borrowings (payments) on capital leases......... 32 (216) (221) (163) (200)
------ ------------ ------ ------------- -------------
Net cash provided by (used in) financing
activities.............................. 4,245 8,286 (1,970) 5,201 6,181
------ ------------ ------ ------------- -------------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS..................................... 25 -- 55 4 (21)
CASH AND CASH EQUIVALENTS, beginning of year...... -- 25 25 25 80
------ ------------ ------ ------------- -------------
CASH AND CASH EQUIVALENTS, end of year............ $ 25 $ 25 $ 80 $ 29 $ 59
------ ------------ ------ ------------- -------------
------ ------------ ------ ------------- -------------
SUPPLEMENTAL CASH FLOW DATA:
Cash paid during the year for--
Interest...................................... $ 20 $ 72 $ 52 $ 42 $ 23
------ ------------ ------ ------------- -------------
------ ------------ ------ ------------- -------------
Taxes......................................... $ 78 $ 65 $ 191 $ 191 $ 42
------ ------------ ------ ------------- -------------
------ ------------ ------ ------------- -------------
SUPPLEMENTAL DISCLOSURES OF NONCASH INVESTING AND
FINANCING ACTIVITIES (Note 1)
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-26
<PAGE>
L.G. BALFOUR COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS
(INCLUDING DATA APPLICABLE TO UNAUDITED PERIODS)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
GENERAL
The accompanying financial statements are for L.G. Balfour Company, Inc.
(the Company), a wholly owned subsidiary of Town & Country Corporation (the
Parent). This subsidiary is engaged in the production and distribution of high
school and college class rings on a made-to-order basis. The Company markets
directly to students on campus and at campus book stores and offers a variety of
graphics products, including graduation announcements, diplomas and memory
books, and novelty items, such as T-shirts, key chains and pendants. During
fiscal 1994 and 1995, the Company operated a licensed sports products direct
mail distribution business. During the fourth quarter of fiscal 1995, the
Company began selling the licensed sports products through retail as opposed to
direct mail distribution channels.
The Company relies on funding from the Parent to support operations.This
funding is primarily obtained by the Parent through borrowings under its debt
obligations. Compliance with the financial covenants under its debt obligations
are measured quarterly. There can be no assurance that the Parent will remain in
compliance with the financial covenants included in its working capital
facility, Senior Secured and Senior Subordinated Notes and can continue to
provide funding to support the Company's operations through fiscal year 1997.
The financial statements do not include any adjustments that might result from
the outcome of this uncertainty.
In addition, substantially all of the Company's assets have been pledged as
collateral against the Parent's debt obligations.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents include highly liquid investments with original
maturities of three months or less; the carrying amount approximates fair market
value because of the short-term maturities of these investments.
REVENUE RECOGNITION
Revenues from product sales are recognized as the time the product is
shipped.
IMPAIRMENT OF LONG-LIVED ASSETS
In March 1995, the Financial Accounting Standards Board issued SFAS No. 121,
ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED ASSETS AND FOR LONG-LIVED ASSETS TO
BE DISPOSED OF. This statement deals with accounting for the impairment of
long-lived assets, certain identifiable intangibles and goodwill related to
assets to be held and used, and for long-lived assets and certain identifiable
intangibles to be disposed of.
This statement requires that long-lived assets (e.g., property and equipment
and intangibles) be reviewed for impairment whenever events or changes in
circumstances, such as change in market value, indicate that the assets'
carrying amounts may not be recoverable. In performing the review for
recoverability, if future undiscounted cash flows (excluding interest charges)
from the use and ultimate disposition of the assets are less than their carrying
values, an impairment loss is recognized. Impairment losses are to be measured
based on the fair value of the asset.
On February 26, 1996, the Company adopted SFAS No. 121, which did not have a
material impact on the Company's financial position or results of operations.
F-27
<PAGE>
L.G. BALFOUR COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INCLUDING DATA APPLICABLE TO UNAUDITED PERIODS)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company's financial instruments consist primarily of cash and cash
equivalents, accounts receivable, bank overdraft, accounts payable, long-term
debt (including current maturities) and due to Parent, net. The carrying amounts
of the Company's cash and cash equivalents, accounts receivable, bank overdraft
and accounts payable approximate fair value due to their short-term nature. See
Notes 2 and 9 for fair value information pertaining to the Company's long-term
debt and due to Parent, net. In fiscal 1995, in connection with its licensed
sports products direct mail distribution business, the Company determined that
its actual collection rate of sales was significantly less than previously
estimated. Overall, the Company provided approximately 22% (the average
provision rate) for allowances for uncollectible amounts relating to sales of
products through this distribution channel. In fiscal 1995, the Company provided
additional reserves to take into account its change in estimate regarding the
realizability of these receivables, which resulted in a charge of approximately
$2.6 million over the average provision rate.
INVENTORIES
Inventories, which include materials, labor and manufacturing overhead, are
stated at the lower of cost or market using the first-in, first-out (FIFO)
method.
Inventories consisted of the following:
<TABLE>
<CAPTION>
FEBRUARY 27, FEBRUARY 26, FEBRUARY 25, NOVEMBER 24,
1994 1995 1996 1996
------------ ------------- ------------- ------------
<S> <C> <C> <C> <C>
(UNAUDITED)
Raw materials......................................... $ 3,158,000 $ 4,020,000 $ 3,851,000 $3,766,000
Work-in-process....................................... 4,197,000 3,897,000 3,622,000 2,978,000
Finished goods........................................ 2,027,000 3,768,000 3,318,000 2,728,000
------------ ------------- ------------- ------------
$ 9,382,000 $ 11,685,000 $ 10,791,000 $9,472,000
------------ ------------- ------------- ------------
------------ ------------- ------------- ------------
</TABLE>
The effects of gold price fluctuations are mitigated by the use of a
consignment program with bullion dealers. As the gold selling price for orders
is confirmed, the Company's Parent purchases the gold requirements at the then
current market prices; any additional requirements for gold are held as
consignee. This technique enables the Company to match the price it pays for
gold with the price it charges its customers. The Company pays a fee, which is
subject to periodic change, for the value of the gold it holds on consignment
during the period prior to sale. For the years ended February 27, 1994, February
26, 1995 and February 25, 1996, these fees totaled approximately $200,000 each
year and for the nine month periods ended November 26, 1995 and November 24,
1996, these fees totaled $162,000 and $214,000, respectively.
The Company does not include the value of consigned gold in inventory or the
corresponding liability in borrowings for financial statement purposes. As of
February 27, 1994, February 26, 1995, February 25, 1996 and November 24, 1996,
the Company held approximately 15,027 ounces valued at $5.7 million, 12,298
ounces valued at $4.6 million, 12,212 ounces valued at $4.9 million and 13,431
ounces valued at $5.1 million, respectively, of gold on consignment under its
Parent's domestic gold agreements. The lenders under the Parent's domestic gold
consignment agreements have a first priority security interest in the gold
content of inventory.
F-28
<PAGE>
L.G. BALFOUR COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INCLUDING DATA APPLICABLE TO UNAUDITED PERIODS)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
ADVERTISING
The Company expenses the costs of advertising as incurred, except for
certain direct-response advertising costs, which are capitalized and amortized
over their expected period of future benefits.
For the years ended February 27, 1994, February 26, 1995 and February 25,
1996 and for the nine-month periods ended November 26, 1995 and November 24,
1996, advertising expense was approximately $9,022,000, $10,565,000, $2,465,000,
$1,797,000 and $2,321,000, respectively. At February 27, 1994, February 26,
1995, February 25, 1996 and November 24, 1996, approximately $2,644,000, $0, $0
and $0, respectively, of direct response advertising costs were capitalized and
included in prepaid expenses and other current assets.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are stated at cost. Maintenance and repair
items and charged to expense when incurred; renewals and betterments are
capitalized. When property, plant and equipment are retired or sold, their costs
and related accumulated depreciation are removed from the accounts, and any
resulting gain or loss is included in income. Included in other income in the
accompanying statement of operations for the nine-month period ended November
26, 1995 and year ended February 25, 1996 is a $418,000 gain associated with the
sale of one of the Company's manufacturing facilities.
The Company provides for depreciation, principally using the straight-line
method, at rates adequate to depreciate the applicable assets over their
estimated useful lives, which range from 3 to 30 years.
PROPERTY, PLANT AND EQUIPMENT CONSISTED OF THE FOLLOWING:
<TABLE>
<CAPTION>
USEFUL LIFE FEBRUARY 27, FEBRUARY 26, FEBRUARY 25, NOVEMBER 24,
RANGES 1994 1995 1996 1996
------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
(UNAUDITED)
Real estate................................. 10-20 Years $ 7,720,000 $ 7,629,000 $ 6,875,000 $ 5,271,000
Furniture and fixtures...................... 3-7 Years 268,000 817,000 820,000 878,000
Tools and dies.............................. 3-15 Years 7,700,000 7,700,000 7,700,000 7,700,000
Equipment................................... 3-8 Years 6,675,000 6,957,000 7,119,000 7,361,000
Leasehold improvements...................... 4-20 Years -- 629,000 931,000 931,000
------------- ------------- ------------- -------------
Property, plant and equipment, gross.... 22,363,000 23,732,000 23,445,000 22,141,000
Less--Accumulated depreciation (Note 4)..... 8,885,000 11,447,000 13,046,000 12,817,000
------------- ------------- ------------- -------------
Property, plant and equipment, net...... $ 13,478,000 $ 12,285,000 $ 10,399,000 $ 9,324,000
</TABLE>
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the
F-29
<PAGE>
L.G. BALFOUR COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INCLUDING DATA APPLICABLE TO UNAUDITED PERIODS)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
USE OF ESTIMATES (CONTINUED)
reported amounts of revenues and expenses during the reporting periods. Actual
results could differ from those estimates.
INCOME TAXES
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases. Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. Deferred tax assets are
recognized net of any valuation allowance. The effect on deferred tax assets and
liabilities of a change in tax rates is recognized in income in the period that
includes the enactment date. The Company and its Parent have a tax-allocation
agreement. The Company's results of operations are included in the consolidated
federal return of the Parent. The agreement calls for the provisions (benefits)
and payments (refunds) to be made as if the Company were to file its own
separate company tax returns.
LONG-TERM INTANGIBLE ASSETS
The excess $5,612,000 of purchase price over the values assigned to the net
assets acquired is being amortized using the straight-line method over
approximately 40 years. The Company continually evaluates whether events and
circumstances have occurred that indicate that the remaining estimated useful
life of goodwill may warrant revision or that the remaining balance of goodwill
may not be recoverable. When factors indicate that goodwill should be evaluated
for possible impairment, the Company uses an estimate of the related business
units' undiscounted operating income over the remaining life of the goodwill, as
well as the pending sale of the Company (see Note 10), in measuring whether the
goodwill is recoverable. Accumulated amortization was approximately $2,626,000,
$2,770,000, $2,914,000 and $3,022,000 at February 27, 1994, February 26, 1995,
February 25, 1996 and November 24, 1996, respectively.
SALES REPRESENTATIVE ADVANCES AND RESERVE FOR SALES REPRESENTATIVE ADVANCES
The Company advances funds to new sales representatives in order to open up
new sales territories or makes payments to predecessor sales representatives on
behalf of successor sales representatives (Note 5). Such amounts are repaid by
the sales representatives through earned commissions on product sales. The
Company provides reserves to cover those amounts which it estimates to be
uncollectible (Note 7).
SUPPLEMENTAL DISCLOSURES OF NONCASH INVESTING AND FINANCING ACTIVITIES
During fiscal 1994 and 1995 and the nine-month period ended November 24,
1996, the Company had fixed asset additions of approximately $90,000, $700,000
and $58,000, respectively, funded by increases in capital lease obligations.
INTERIM FINANCIAL STATEMENTS
The financial statements for the nine months ended November 26, 1995 and
November 24, 1996 are unaudited. In management's opinion, these unaudited
financial statements have been prepared on the
F-30
<PAGE>
L.G. BALFOUR COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INCLUDING DATA APPLICABLE TO UNAUDITED PERIODS)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
INTERIM FINANCIAL STATEMENTS (CONTINUED)
same basis as the audited financial statements and include all adjustments,
consisting only of normal recurring adjustments, necessary for the fair
statement of the financial data for such periods. The unaudited results for the
nine months ended November 24, 1996 are not necessarily indicative of the
results expected for the entire fiscal year.
(2) LONG-TERM DEBT
Long-term debt consists of the following:
<TABLE>
<CAPTION>
FEBRUARY 27, FEBRUARY 26, FEBRUARY 25, NOVEMBER 24,
1994 1995 1996 1996
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
(UNAUDITED)
Lease obligation for office furniture and equipment, payable in
monthly installments with interest of 9.67%.................. $ -- $ 620,000 $ 399,000 $ 218,000
Other obligations.............................................. 122,000 -- -- 39,000
------------ ------------ ------------ ------------
122,000 620,000 399,000 257,000
Less--Current portion.......................................... 78,000 217,000 245,000 257,000
------------ ------------ ------------ ------------
$ 44,000 $ 403,000 $ 154,000 $ --
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
</TABLE>
The Company's management believes, based on the short-term nature of the
Company's debt and because interest rates approximate the Company's incremental
borrowing rate, that the carrying value approximates fair value.
(3) INCOME TAXES
The components of the provision for income taxes are as follows:
<TABLE>
<CAPTION>
FOR THE NINE MONTHS ENDED
--------------------------
FEBRUARY 27, FEBRUARY 26, FEBRUARY 25, NOVEMBER 26, NOVEMBER 24,
1994 1995 1996 1995 1996
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
(UNAUDITED)
Current--
Federal................................. $ -- $ -- $ -- $ -- $ --
State................................... 50,000 65,000 191,000 144,000 60,000
------------ ------------ ------------ ------------ ------------
Total provision..................... $ 50,000 $ 65,000 $ 191,000 $ 144,000 $ 60,000
------------ ------------ ------------ ------------ ------------
------------ ------------ ------------ ------------ ------------
</TABLE>
F-31
<PAGE>
L.G. BALFOUR COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INCLUDING DATA APPLICABLE TO UNAUDITED PERIODS)
(3) INCOME TAXES (CONTINUED)
The Company's effective tax rate differs from the federal statutory rate of
35% for the years ended February 27, 1994, February 26, 1995 and February 25,
1996 and for the nine months ended November 26, 1995 and November 24, 1996 due
to the following (in thousands):
<TABLE>
<CAPTION>
FOR THE
NINE MONTHS ENDED
--------------------------------
<S> <C> <C> <C> <C> <C>
FEBRUARY 27, FEBRUARY 26, FEBRUARY 25, NOVEMBER 26, NOVEMBER 24,
1994 1995 1996 1995 1996
------------- ------------ --------------- --------------- ---------------
<CAPTION>
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Computed tax provision (benefit) at statutory
rate............................................ $ 1,658 $ (3,807) $ 20 $ (354) $ (429)
Increases resulting from State taxes.............. 50 65 191 144 60
Items not deductible for income tax purposes...... 68 64 64 48 48
(Utilization) deferral of net operating losses.... (1,726) 3,743 (84) 306 381
------ ------------ ----- ----- -----
$ 50 $ 65 $ 191 $ 144 $ 60
------ ------------ ----- ----- -----
------ ------------ ----- ----- -----
</TABLE>
<TABLE>
<CAPTION>
FEBRUARY 27, FEBRUARY 26, FEBRUARY 25, NOVEMBER 24,
1994 1995 1996 1996
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
(UNAUDITED)
Deferred tax assets--
Accounts receivable reserves................................. $ 1,174 $ 2,190 $ 883 $ 856
Accrual for loss on assets held for sale or disposal......... 1,873 742 561 --
Inventories.................................................. 526 525 452 373
Other........................................................ 594 1,345 1,570 1,347
Net operating loss carryforwards............................. 6,790 12,042 14,554 14,502
------------ ------------ ------------ ------------
Total gross deferred tax assets.......................... 10,957 16,844 18,020 17,078
Less--Valuation allowance...................................... 8,344 14,356 16,069 15,529
------------ ------------ ------------ ------------
Net deferred tax assets.................................. $ 2,613 $ 2,488 $ 1,951 $ 1,549
------------ ------------ ------------ ------------
Deferred tax liabilities--
Property, plant and equipment, principally due to differences
in depreciation............................................ $ 2,613 $ 2,488 $ 1,951 $ 1,549
------------ ------------ ------------ ------------
Total deferred tax liabilities........................... 2,613 2,488 1,951 1,549
Net deferred tax asset (liability)....................... $ -- $ -- $ -- $ --
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
</TABLE>
The valuation allowance relates to uncertainty surrounding the realizability
of the deferred tax assets, principally the net operating loss carryforwards.
For tax reporting purposes, the Company has U.S. net operating loss
carryforwards of approximately $36.3 million as of November 24, 1996, subject to
Internal Revenue Service (IRS) review and approval and certain IRS limitations
on net operating loss utilization. Utilization of the net operating loss
carryforwards is contingent on the Company's ability to generate income in the
future. The net operating loss carryforwards will expire from 2006 to 2012 if
not utilized.
F-32
<PAGE>
L.G. BALFOUR COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INCLUDING DATA APPLICABLE TO UNAUDITED PERIODS)
(4) LOSS ON ASSETS HELD FOR SALE OR DISPOSAL
In fiscal 1993, the Company's management decided to make changes with
respect to certain of its operations. As a result of this decision, the Company
recognized a pretax charge of $14.5 million in the fourth quarter of fiscal 1993
to reserve for the losses associated with the disposal of certain inventory and
fixed assets, including property, plant and equipment of approximately $12.9
million and intangible assets of approximately $1.6 million no longer considered
necessary to its future business plans. At February 26, 1995, the disposals had
been substantially completed and the remaining reserve of approximately $1.8
million was intended to cover the net book value and demolition costs associated
with the disposition of a manufacturing facility. At February 25, 1996, the
remaining reserve was approximately $1.4 million. In fiscal 1996, due to a
change in estimates for demolishing the facility, the Company reduced the
reserve by approximately $400,000, which is included as a reduction of general
and administrative expenses in the accompanying statement of operations. At
February 26, 1995 and February 25, 1996, approximately $1.2 million of the
reserve is included in accumulated depreciation as an offset against property,
plant and equipment (Note 1), and the remaining reserve is included in accrued
expenses in the accompanying balance sheets. During the nine-month period ended
November 24, 1996, the Company completed the demolition and sale of the
manufacturing facility and reduced the reserve by approximately $150,000, which
is included as a reduction of general and administrative expenses in the
accompanying statement of operations. Additionally, the remaining reserve of
approximately $1.2 million was utilized to write-off the associated property,
plant and equipment as opposed to being included in accumulated depreciation as
an offset, against property, plant and equipment as described above.
(5) COMMITMENTS AND CONTINGENCIES
Certain Company facilities and equipment are leased under agreements
expiring at various dates through 2009. The Company's commitments under the
noncancelable portion of all operating leases for the next five years and in
total thereafter at February 25, 1996 are approximately as follows:
<TABLE>
<CAPTION>
TOTAL
YEAR COMMITMENT
- ---------------------------------------------------------------------- ------------
<S> <C>
1997.................................................................. $1,086,000
1998.................................................................. 1,069,000
1999.................................................................. 1,037,000
2000.................................................................. 1,057,000
2001.................................................................. 1,073,000
Thereafter............................................................ 7,579,000
</TABLE>
There were no significant additions, deletions or modifications to the
Company's commitments under the noncancelable portion of all operating leases
from February 25, 1996 through November 24, 1996.
Lease and rental expense included in the accompanying statements of
operations amounted to approximately $184,000, $483,000 and $920,000 for the
years ended February 27, 1994, February 26, 1995 and February 25, 1996,
respectively, and approximately $673,000 and $866,000 for the nine month periods
ending November 26, 1995 and November 24, 1996, respectively.
The Company is a party to certain contracts with some of its sales
representatives whereby the representatives have purchased the right to sell the
Company's products in a territory from their predecessor. The contracts
generally provide that the value of these rights is primarily determined by the
F-33
<PAGE>
L.G. BALFOUR COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INCLUDING DATA APPLICABLE TO UNAUDITED PERIODS)
(5) COMMITMENTS AND CONTINGENCIES (CONTINUED)
amount of business achieved by a successor sales representative and is therefore
not determinable in advance of performance by the successor sales
representative.
Substantially all of the Company's assets have been pledged as collateral
against the Parent's debt obligations.
During fiscal 1995, the Company received an IRS tax refund of approximately
$574,000 (including interest), which is reflected in other income in the
accompanying statement of operations. This amount represents a favorable
settlement related to payroll taxes paid by the Company for individuals
determined to be independent contractors.
The Company is not party to any pending legal proceedings other than
ordinary routine litigation incidental to the business. In management's opinion,
adverse decisions on those legal proceedings, in the aggregate, would not have a
materially adverse impact on the Company's results of operations or financial
position.
(6) ACCRUED EXPENSES
The principal components of accrued expenses are approximately as follows:
<TABLE>
<CAPTION>
FEBRUARY 27, FEBRUARY 26, FEBRUARY 25, NOVEMBER 24,
1994 1995 1996 1996
------------ ------------- ------------- ------------
<S> <C> <C> <C> <C>
(UNAUDITED)
Compensation and related costs............................... $ 1,854,000 $ 1,926,000 $ 2,442,000 $ 1,857,000
Sales and use tax............................................ 969,000 794,000 503,000 687,000
Commissions and royalties.................................... 1,479,000 2,900,000 2,296,000 2,710,000
Customer deposits............................................ 4,243,000 4,199,000 4,717,000 2,756,000
Current portion of deferred compensation (Note 8)............ 414,000 380,000 355,000 344,000
Other........................................................ 937,000 880,000 899,000 953,000
------------ ------------- ------------- ------------
Total accrued expenses................................. $ 9,896,000 $ 11,079,000 $ 11,212,000 $ 9,307,000
------------ ------------- ------------- ------------
------------ ------------- ------------- ------------
</TABLE>
(7) PREPAID EXPENSES AND OTHER CURRENT ASSETS
Prepaid expenses and other current assets consisted of approximately the
following:
<TABLE>
<CAPTION>
FEBRUARY 27, FEBRUARY 26, FEBRUARY 25, NOVEMBER 24,
1994 1995 1996 1996
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
(UNAUDITED)
Sales representative advances (Note 1)...................... $ 4,056,000 $ 5,169,000 $ 4,571,000 $ 2,386,000
Reserve on sales representative advances (Note 1)........... (3,295,000) (2,305,000) (2,497,000) (733,000)
Prepaid advertising (Note 1)................................ 2,644,000 -- -- --
Other....................................................... 236,000 285,000 409,000 794,000
------------- ------------- ------------- -------------
$ 3,641,000 $ 3,149,000 $ 2,483,000 $ 2,447,000
------------- ------------- ------------- -------------
------------- ------------- ------------- -------------
</TABLE>
F-34
<PAGE>
L.G. BALFOUR COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INCLUDING DATA APPLICABLE TO UNAUDITED PERIODS)
(8) EMPLOYEE BENEFIT PLANS
POSTEMPLOYMENT MEDICAL BENEFITS
In December 1990, the Financial Accounting Standards Board issued SFAS No.
106, EMPLOYERS' ACCOUNTING FOR POSTRETIREMENT BENEFITS OTHER THAN PENSIONS,
which requires that the accrual method of accounting for certain postretirement
benefits be adopted. Adoption is required for fiscal years beginning after
December 1992. The Company provides certain health care and life insurance
benefits for employees who retired prior to December 31, 1990. The Company
adopted this statement in fiscal 1994 and is recognizing the actuarial present
value of the accumulated postretirement benefit obligation (APBO) of
approximately $6.2 million using the delayed recognition method over a period of
20 years. Prior to adopting SFAS No. 106, the cost of providing these benefits
was expensed as incurred and amounted to approximately $508,000 for the year
ended February 28, 1993.
The following table sets forth the plan status (in thousands):
<TABLE>
<CAPTION>
FEBRUARY 27, FEBRUARY 26, FEBRUARY 25,
1994 1995 1996
------------ ------------ ------------
<S> <C> <C> <C>
Accumulated postretirement benefit obligation--
Retired employees..................................................... $ (6,477) $ (6,088) $ (5,710)
Active employees...................................................... -- -- --
------------ ------------ ------------
Total............................................................. (6,477) (6,088) (5,710)
Plan assets at fair value............................................... -- -- --
------------ ------------ ------------
Unfunded accumulated benefit obligation in excess of plan
assets.......................................................... (6,477) (6,088) (5,710)
Unrecognized net gain................................................... -- (73) (336)
Unrecognized transition obligation...................................... 6,162 5,810 5,487
------------ ------------ ------------
Accrued postretirement medical benefit cost....................... $ (315) $ (351) $ (559)
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
As of November 24, 1996, there was $738,000 accrued for postretirement
medical benefit costs.
F-35
<PAGE>
L.G. BALFOUR COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INCLUDING DATA APPLICABLE TO UNAUDITED PERIODS)
(8) EMPLOYEE BENEFIT PLANS (CONTINUED)
The net periodic postretirement benefit costs for the years ending February
27, 1994, February 26, 1995 and February 25, 1996 and for the nine-month periods
ended November 26, 1995 and November 24, 1996 included the following components
(in thousands):
<TABLE>
<CAPTION>
FOR THE
NINE MONTHS
ENDED
---------------
<S> <C> <C> <C> <C>
FEBRUARY 27, FEBRUARY 26, FEBRUARY 25, NOVEMBER 26,
1994 1995 1996 1995
--------------- --------------- --------------- ---------------
<CAPTION>
(UNAUDITED)
<S> <C> <C> <C> <C>
Service costs--benefits attributed to service
during the period............................... $ -- $ -- $ -- $ --
Interest cost..................................... 494 474 444 356
Actuarial assumptions............................. -- -- -- --
Amortization of unrecognized transition
obligation...................................... 324 323 323 242
----- ----- ----- -----
Net periodic postretirement benefit cost.... $ 818 $ 797 $ 767 $ 598
----- ----- ----- -----
----- ----- ----- -----
<CAPTION>
<S> <C>
NOVEMBER 24,
1996
---------------
<S> <C>
Service costs--benefits attributed to service
during the period............................... $ --
Interest cost..................................... 326
Actuarial assumptions............................. --
Amortization of unrecognized transition
obligation...................................... 242
-----
Net periodic postretirement benefit cost.... $ 568
-----
-----
</TABLE>
For measurement purposes, a 9% annual rate of increase in the per capita
cost of covered health care benefits is assumed for fiscal 1996; the rate was
assumed to decrease gradually to 6% for fiscal 2000 and remain at that level
thereafter. The health care cost trend rate assumption has a significant effect
on the amounts reported. To illustrate, increasing the assumed health care cost
trend rate one percentage point each year would increase the APBO as of February
25, 1996 by $380,000 or 7%, and the aggregate of the service and interest cost
components of the net periodic postretirement benefit cost for fiscal 1996 by
$30,000 or 4%.
The weighted average discount rate used in determining APBO was 8.0% in
fiscal 1994, 1995 and 1996.
Interest cost associated with the accumulated postretirement benefit
obligation is included as a component of interest expense in the statements of
operations.
DEFERRED COMPENSATION
The Company has deferred compensation agreements with certain sales
representatives and executives, which provide for payments upon retirement or
death based on the value of life insurance policies or mutual fund shares at the
retirement date. The cost of the Company's liability under these compensation
agreements for the years ended February 27, 1994, February 26, 1995 and February
25, 1996 was approximately $156,000, $156,000 and $50,000, respectively, and for
the nine-month periods ended November 26, 1995 and November 24, 1996 was
approximately $50,000 and $79,000, respectively.
EMPLOYEE STOCK PURCHASE PLAN
On January 25, 1988, the Board of Directors of the Parent adopted the 1988
Employee Stock Purchase Plan (the Stock Purchase Plan) for 500,000 shares of the
Parent Class A Common Stock. Under the Stock Purchase Plan, each eligible
participating employee is deemed to have been granted an option to
F-36
<PAGE>
L.G. BALFOUR COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INCLUDING DATA APPLICABLE TO UNAUDITED PERIODS)
(8) EMPLOYEE BENEFIT PLANS (CONTINUED)
purchase shares of the Parent's Class A Common Stock on a semiannual basis at a
price equal to 90% of the market value on the last day of the period.
(9) RELATED PARTY TRANSACTIONS
The Parent administers certain programs (health insurance, workmen's
compensation, gold consignment, etc.) and charges all directly identifiable
costs to the Company. The Parent does not charge or allocate any indirect costs;
however, management believes these amounts are not significant in fiscal 1994,
1995 and 1996 and for the nine-month periods ending November 26, 1995 and
November 24, 1996.
The net amount due to Parent of $6,014,000, $14,516,000, $12,767,000 and
$19,148,000 at February 27, 1994, February 26, 1995, February 25, 1996 and
November 24, 1996, respectively, represent advances to fund operating needs and
include the charges discussed previously. The Parent charged or credited the
Company interest on a monthly basis at a rate of 11% in fiscal 1994 and 1995 and
11.5% in fiscal 1996 and for the nine-month period ending November 24, 1996.
Included in the accompanying statements of operations are net interest charges
of $683,000, $1,093,000 and $1,986,000 in fiscal 1994, 1995 and 1996,
respectively, and $1,401,000 and $1,384,000 for the nine-month periods ended
November 26, 1995 and November 24, 1996, respectively.
As the net amount due to Parent has no specified maturity date and the
Parent has no present intention to demand repayment, management believes that
estimating its fair market value is not practicable.
(10) PENDING SALE
The Parent company, having reviewed the Company's performance, concluded
that it would be in the best interest of the Parent's investors and creditors to
consider opportunities to sell the Company.
On May 20, 1996 (the "Original Agreement"), the Parent entered into an
agreement to sell the assets and liabilities of the Company (the "Balfour
Acquisition") and Gold Lance, Inc. (the "Gold Lance Acquisition"), another class
ring manufacturing subsidiary of the Parent, constituting substantially all of
the operations of the Company and Gold Lance, Inc. to Commemorative Brands, Inc.
("CBI" and formerly Class Rings, Inc. and Scholastic Brands, Inc.), a new
company formed by Castle Harlan Partners II, L.P. ("CHP II"). The Original
Agreement was amended on November 21, 1996 (the "Modified Agreement"), to
exclude the Gold Lance Acquisition, among other things. Separately, CBI entered
into an agreement with CJC Holdings, Inc. ("CJC") to acquire its class ring and
recognition and affinity businesses.
On September 6, 1996, CBI, CHP II and the Parent entered into an Agreement
Containing Consent Order (the "Consent Agreement") with the Federal Trade
Commission (the "FTC"). Pursuant to the Consent Agreement, CBI has agreed, among
other things, not to acquire any assets of or interests in Gold Lance, Inc.,
which CBI had originally contracted to buy together with the Company. Also,
pursuant to the Consent Agreement, the Parent and Gold Lance, Inc. agreed, among
other things, not to sell any assets to CBI, other than pursuant to the Balfour
Acquisition, or to acquire any interest in CBI. On October 8, 1996, the FTC
placed the Consent Agreement and the proposed order on the public record for a
period of 60 days for the receipt and consideration of comments or views from
any interested person.
F-37
<PAGE>
L.G. BALFOUR COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INCLUDING DATA APPLICABLE TO UNAUDITED PERIODS)
(10) PENDING SALE (CONTINUED)
On December 16, 1996, the Parent completed the sale of certain assets and
liabilities of the Company (the "Closing"). At Closing, the Parent received cash
equal to the purchase price of $44 million, plus $3.4 million in working capital
adjustments from January 28, 1996 to the date of Closing, plus $4.9 million
representing the value of gold on-hand as of the date of Closing less $14
million placed in escrow pending final FTC approval. Following the expiration of
the public comment period described above, final approval from the FTC was
received on December 20, 1996. The $14 million in escrowed funds were
subsequently released and paid to the Parent on December 30, 1996. The working
capital and gold values are contingent upon pending reconciliations to be
completed within 45 days from the date of closing for working capital and 90
days for the value of gold on-hand.
F-38
<PAGE>
No person has been authorized to give any information or to make any
representations not in this Prospectus, and, if given or made, such other
information or representations must not be relied upon as having been authorized
by the Company. This Prospectus does not constitute an offer to sell or a
solicitation of an offer to buy any of the Notes to any person in any
jurisdiction in which it would be unlawful to make such an offer or solicitation
to such person. Neither the delivery of this Prospectus nor any sale made
hereunder shall under any circumstances, create any implication that the
information contained herein is correct as of any date subsequent to the date
hereof.
____________________
TABLE OF CONTENTS
Page
----
Available Information ............................. i
Prospectus Summary ................................ 1
Risk Factors ...................................... 15
Use of Proceeds ................................... 20
The Exchange Offer................................. 20
Capitalization .................................... 28
Unaudited Pro Forma Combined Financial
Statements and Other Data .................... 30
Selected Historical Financial and Other Data....... 39
Management's Discussion and Analysis of
Financial Condition and Results of
Operations ................................... 43
Business .......................................... 53
Management ........................................ 69
Principal Stockholders ............................ 73
Certain Relationships and Related
Transactions ................................. 74
The Acquisitions .................................. 74
Description of Capital Stock ...................... 75
Description of the Bank Credit Facility ........... 77
Description of Notes .............................. 80
Certain Federal Income
Tax Considerations ........................... 110
Plan of Distribution .............................. 112
Legal Matters ..................................... 113
Experts ........................................... 113
Index to Financial Statements ..................... F-1
COMMEMORATIVE BRANDS, INC.
Offer to exchange $90,000,000
of new
11% Senior Subordinated Notes
due 2007
for $90,000,000 of any and all outstanding 11% Senior
Subordinated Notes
due 2007
Marine Midland Bank
Exchange Agent
40 Broadway
New York, New York 10005
Attention: Corporate Trust Administration
Telephone: (212) 658-1000
Telecopier: (212) 658-6425
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 20. Indemnification of Directors and Officers
Section 102(b)(7) of the Delaware General Company Law (the "DGCL") permits
a provision in the certificate of incorporation of each Company organized
thereunder, such as the Company, eliminating or limiting the personal liability,
with certain exceptions, of a director to the Company or its stockholders for
monetary damages for certain breaches of fiduciary duty as a director. Article
FIFTH of the Company's Restated Certificate of Incorporation, as amended,
eliminates the personal liability of directors to the fullest extent permitted
by law. Specifically, the directors of the Company will not be personally liable
for monetary damages for breach of the director's fiduciary duty as a director,
except for liability (i) for any breach of the director's duty of loyalty to the
Company or its stockholders, (ii) for acts or omissions not in good faith or
which involve intentional misconduct or a knowing violation of law, (iii) for
unlawful payments of dividends or unlawful stock repurchases or redemptions as
provided in Section 174 of the DGCL, or (iv) for any transaction from which the
director derived an improper personal benefit.
Section 145 of the DGCL grants a Delaware Company, such as the Company,
the power to indemnify a director, officer, employee or agent against reasonable
expenses (including attorneys' fees) incurred by him in connection with any
proceeding brought by or on behalf of the Company and against judgments, fines,
settlements and reasonable expenses (including attorneys' fees) incurred by him
in connection with any other proceeding, if (a) he acted in good faith and in a
manner he reasonably believed to be in or not opposed to the best interests of
the Company, and (b) in the case of any criminal proceeding, he had no
reasonable cause to believe his conduct was unlawful. Except as ordered by a
court, however, no indemnification is to be made in connection with any
proceeding brought by or in the right of the Company where the person involved
is adjudged to be liable to the Company.
Section 1 of Article VI of the Company's Restated By-Laws provides that,
unless otherwise determined by the Board of Directors, the Company shall, to the
fullest extent permitted by the DGCL (including, without limitation, Section 145
thereof) or other provisions of the laws of Delaware relating to indemnification
of directors, officers, employees and agents, as the same may be amended and
supplemented from time to time, indemnify any and all such persons whom it shall
have power to indemnify under the DGCL or such other provisions of law.
Section 2 of Article VI of the Company's Restated By-Laws provides that,
without limiting the generality of Section 1 of Article VI, to the fullest
extent permitted, and subject to the conditions imposed, by law, and pursuant to
Section 145 of the DGCL, unless otherwise determined by the Board of Directors,
the Company shall indemnify any person who was or is a party or is threatened to
be made a party to any threatened, pending or completed action, suit or
proceeding whether civil, criminal, administrative or investigative (other than
an action by or in the right of the Company) by reason of the fact that such
person is or was a director, officer, employee or agent of the Company, or is or
was serving at the request of the Company as a director, officer, employee or
agent of another Corporation, partnership, joint venture, trust or other
enterprise against reasonable expenses (including attorneys' fees), judgments,
fines and amounts paid in settlement actually and reasonably incurred by him in
connection with such action, suit or proceeding if such person acted in good
faith and in a manner he reasonably believed to be in or not opposed to the best
interests of the Company, and, with respect to any criminal action or
proceeding, had no reasonable cause to believe his conduct was unlawful; and
that the Company shall indemnify any person who was or is a party or is
threatened to be made a party to any threatened, pending or completed action or
suit by or in the right of the Company to procure a judgment in its favor by
reason of the fact that such person is or was a director, officer, employee or
agent of the Company, or is or was serving at the request of the Company as a
director, officer, employee or agent of another Company, partnership, joint
venture, trust or other enterprise against reasonable expenses (including
attorneys' fees) actually and reasonably incurred by him in connection with the
defense or settlement of such action or suit if such person acted in good faith
and in a manner he reasonably believed to be in or not opposed to the best
interests of the Company, except as otherwise provided by law.
II-1
<PAGE>
Section 3 of Article VI of the Company's Restated By-Laws provides that,
to the fullest extent permitted by law, indemnification may be granted, and
expenses may be advanced, to the persons described in Section 145 of the DGCL or
other provisions of the laws of Delaware relating to indemnification and
advancement of expenses, as from time to time may be in effect, by (i) a
resolution of stockholders, (ii) a resolution of the Board of Directors, or
(iii) an agreement providing for such indemnification and advancement of
expenses.
Section 4 of Article VI of the Company's Restated By-Laws provides that,
it is the intent of Article VI to require the Company, unless otherwise
determined by the Board of Directors, to indemnify the persons referred to
therein for judgments, fines, penalties, amounts paid in settlement and
reasonable expenses (including attorneys' fees), and to advance expenses to such
persons, in each and every circumstance in which such indemnification and such
advancement of expenses could lawfully be permitted by express provision of
By-Laws, and the indemnification and expense advancement provided by this
Article VI shall not be limited by the absence of an express recital of such
circumstances. The indemnification and advancement of expenses provided by, or
granted pursuant to, the Company's Restated By-Laws shall not be deemed
exclusive of any other rights to which a person seeking indemnification or
advancement of expenses may be entitled, whether as a matter of law, under any
provision of the Restated Certificate of Incorporation of the Company, the
Restated By-Laws, by agreement, by vote of stockholders or disinterested
directors of the Company or otherwise, both as to action in his official
capacity and as to action in another capacity while holding such office.
Section 5 of Article VI of the Company's Restated By-Laws provides that
indemnification pursuant to the Restated By-Laws shall inure to the benefit of
the heirs, executors, administrators and personal representatives of those
entitled to indemnification.
The indemnification and advancement of expenses provided by or granted
pursuant to Article VI of the Company's By-Laws are not exclusive of any other
rights to which those seeking indemnification or advancement of expenses may be
entitled under any By-Law, agreement, contract, vote of stockholders or
disinterested directors or pursuant to the direction (howsoever embodied) of any
court of competent jurisdiction or otherwise, both as to action in his official
capacity and as to action in another capacity while holding such office, it
being the policy of the Company that indemnification of the persons specified in
Article VI shall be made to the fullest extent permitted by law.
The Company has purchased and maintains insurance on behalf of any person
who is or was a director, officer, employee or agent of the Company, or is or
was a director or officer of the Company serving at the request of the Company
as a director, officer, employee or agent of another Company, partnership, joint
venture, trust, employee benefit plan or other enterprise against any liability
asserted against him and incurred by him in any such capacity, or arising out of
his status as such, whether or not the Company would have the power or the
obligation to indemnify him against such liability under the provisions of
Article VI of the Company's By-Laws.
The Company has entered into indemnification agreements with each of its
directors and officers which require the Company to indemnify the directors and
officers to the fullest extent permitted by law, and to advance to directors and
officers all related expenses, subject to reimbursement if it is subsequently
determined that indemnification is not permitted. The Company must also
indemnify and advance all expenses incurred by directors and officers seeking to
enforce their rights under the indemnification agreements, and cover directors
and officers under the Company's directors' and officers' liability insurance.
See "Management--Compensation of Directors" contained in this Prospectus
comprising part of this Registration Statement.
II-2
<PAGE>
Item 21. Exhibits and Financial Statement Schedules
(a) Exhibits
**2.1 Asset Purchase Agreement, dated as of May 20, 1996 ("ArtCarved
Purchase Agreement"), among the Company and CJC Holdings, Inc.
("CJC"), and CJC North America, Inc. ("CJCNA").
**2.2 First Amendment to the ArtCarved Purchase Agreement, dated as
of November 21, 1996, among the Company, CJC and CJCNA.
**2.3 Letter Agreement amending the ArtCarved Purchase Agreement,
dated December 16, 1996, among the Company, CJC and CJCNA.
**2.4 Amended and Restated Asset Purchase Agreement, dated as of
November 21, 1996 ("Balfour Purchase Agreement"), among the
Company, Town & Country Corporation ("T&C"), L.G. Balfour
Company, Inc. ("Balfour"), and Gold Lance, Inc.
**2.5 Letter Agreement amending the Balfour Purchase Agreement,
dated December 16, 1996, by and among the Company, T&C,
Balfour and Gold Lance.
**3.1 Certificate of Incorporation of the Company, as amended.
**3.2 Certificate of Designations, Preferences and Rights of Series
A Preferred Stock of the Company, effective December 13, 1996,
together with a Certificate of Correction thereof.
**3.3 Certificate of Designations, Preferences and Rights of Series
B Preferred Stock of the Company, effective December 13, 1996.
**3.4 Restated By-Laws of the Company, as amended.
**4.1 Indenture, dated as of December 16, 1996, between the Company
and Marine Midland Bank, as trustee (including the form of
Note).
4.2 Form of Note (included as part of Indenture).
**4.3 Registration Rights Agreement, dated as of December 16, 1996,
among the Company and Lehman Brothers Inc. and BT Securities
Corporation (the "Initial Purchasers").
***5.1 Opinion of Schulte Roth & Zabel LLP as to the legality of the
securities being registered.
*8.1 Opinion of Schulte Roth & Zabel LLP regarding certain
federal income tax matters.
*10.1 Revolving Credit, Term Loan and Gold Consignment Agreement,
dated as of December 16, 1996, among the Company, the lending
institutions listed therein and The First National Bank of
Boston and Rhode Island Hospital Trust National Bank, as
Agents for the Banks.
**10.2 Purchase Agreement, dated December 10, 1996, among the Company
and the Initial Purchasers.
**10.3 Employment Agreement, dated as of December 16, 1996, by and
between the Company and Jeffrey H. Brennan.
- -----------
* Filed herewith
** Previously filed
*** To be filed by amendment
**** Not Applicable
II-3
<PAGE>
**10.4 Employment Agreement, dated as of December 16, 1996, by and
between the Company and Richard H. Fritsche.
**10.5 Employment arrangements between the Company and Balfour with
respect to George Agle
***10.6 Form of Indemnification Agreement between the Company and
(i) each director and (ii) certain officers.
*10.7 Subscription Agreement, dated as of December 16, 1996, by
and among the Company, Castle Harlan Partners II, L.P.,
Dresdner Bank AG, Grand Cayman Branch and Castle Harlan
Offshore Partners, L.P.; as amended by instruments of
accession, dated as of December 17, 1996, by each of
Branford Castle Holdings, Inc., Leonard M. Harlan, David B.
Pittaway and David H. Chow.
**12 Computation of Ratios.
****21 Subsidiaries of the Company.
*23.1 Consent of Arthur Andersen LLP.
*23.2 Consent of Arthur Andersen LLP.
***23.4 Consent of Schulte Roth & Zabel LLP (included in the opinion
of Schulte Roth & Zabel LLP under Exhibit 5.1).
*24 Powers of Attorney (included in the signature pages of the
Registration Statement).
**25 Statement on Form T-1 of Eligibility of Trustee (bound
separately).
****27 Financial Data Schedule.
*99.1 Form of Letter of Transmittal.
**99.2 Form of Notice of Guaranteed Delivery.
***99.3 Form of Exchange Agency Agreement to be entered into between
the Company and Marine Midland Bank.
- -----------
* Filed herewith
** Previously filed
*** To be filed by amendment
**** Not Applicable
Item 22. Undertakings
Insofar as indemnification for liabilities under the Securities Act of
1933 may be permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions, or otherwise, the registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the registrant of expenses incurred
or paid by a director, officer or controlling person of the registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
The undersigned registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act of 1933, each filing of the
registrant's annual report pursuant to Section 13(a) or 15(d) of the Securities
Exchange Act of 1934 (and, where applicable, each filing of an employee benefit
plan's annual report pursuant to Section 15(d) of the Securities Exchange Act of
1934) that is incorporated by reference in the registration statement shall be
deemed to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to be
the initial bona fide offering thereof.
The undersigned registrant hereby undertakes to respond to requests for
information that is incorporated by reference into the Prospectus pursuant to
Items 4, 10(b), 11 or 13 of this Form, within one business day of receipt of
such request, and to send the incorporated documents by first class mail or
other equally prompt means. This
II-4
<PAGE>
includes information contained in documents filed subsequent to the effective
date of the registration statement through the date of responding to the
request.
The undersigned registrant hereby undertakes to supply by means of a
post-effective amendment all information concerning a transaction, and the
company being acquired involved therein, that was not the subject of and
included in the registration statement when it became effective.
II-5
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
hereby has duly caused this Registration Statement to be signed on its behalf by
the undersigned, thereunto duly authorized in the City of New York, State of New
York, on March 31, 1997.
COMMEMORATIVE BRANDS, INC.
By: /s/ Jeffrey H. Brennan
---------------------------------
Name: Jeffrey H. Brennan
Title: President and Chief Executive Officer
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints each of Jeffrey H. Brennan and Richard H.
Fritsche his or her true and lawful attorney-in-fact and agent with the full
power and substitution, for him in any and all capacities, to sign any and all
amendments (including post-effective amendments) or supplements to this
Registration Statement and to file the same, with all the exhibits thereto and
other documents in connection therewith, with the Securities and Exchange
Commission, granting unto each said attorney-in-fact and agent full power and
authority to do and perform each and every act and thing necessary and
appropriate to be done with respect to this Registration Statement or any
amendments or supplements hereto, including without limitation to make any and
all state securities law or blue sky filings, hereby ratifying and confirming
all that each said attorney-in-fact and agent, or his substitutes, may lawfully
do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.
Signature Title Date
--------- ----- ----
/s/ George E. Agle Chairman of the Board March 31, 1997
- ------------------------- and Director
George E. Agle
/s/ Jeffrey H. Brennan President, Chief Executive March 31, 1997
- ------------------------- Officer and Director
Jeffrey H. Brennan
/s/ Richard H. Fritsche Chief Financial Officer March 31, 1997
- ------------------------- and Principal Accounting
Richard H. Fritsche Officer
/s/ John K. Castle Director March 31, 1997
- -------------------------
John K. Castle
/s/ William J. Lovejoy Director March 31, 1997
- -------------------------
William J. Lovejoy
II-6
<PAGE>
/s/ David B. Pittaway Director March 31, 1997
- -------------------------
David B. Pittaway
/s/ Zane Tankel Director March 31, 1997
- -------------------------
Zane Tankel
II-7
<PAGE>
Exhibit Index
**2.1 Asset Purchase Agreement, dated as of May 20, 1996 ("ArtCarved
Purchase Agreement"), among the Company and CJC Holdings, Inc.
("CJC"), and CJC North America, Inc. ("CJCNA").
**2.2 First Amendment to the ArtCarved Purchase Agreement, dated as
of November 21, 1996, among the Company, CJC and CJCNA.
**2.3 Letter Agreement amending the ArtCarved Purchase Agreement,
dated December 16, 1996, among the Company, CJC and CJCNA.
**2.4 Amended and Restated Asset Purchase Agreement, dated as of
November 21, 1996 ("Balfour Purchase Agreement"), among the
Company, Town & Country Corporation ("T&C"), L.G. Balfour
Company, Inc. ("Balfour"), and Gold Lance, Inc.
**2.5 Letter Agreement amending the Balfour Purchase Agreement,
dated December 16, 1996, by and among the Company, T&C,
Balfour and Gold Lance.
**3.1 Certificate of Incorporation of the Company, as amended.
**3.2 Certificate of Designations, Preferences and Rights of Series
A Preferred Stock of the Company, effective December 13, 1996,
together with a Certificate of Correction thereof.
**3.3 Certificate of Designations, Preferences and Rights of Series
B Preferred Stock of the Company, effective December 13, 1996.
**3.4 Restated By-Laws of the Company, as amended.
**4.1 Indenture, dated as of December 16, 1996, between the Company
and Marine Midland Bank, as trustee (including the form of
Note).
4.2 Form of Note (included as part of Indenture).
**4.3 Registration Rights Agreement, dated as of December 16, 1996,
among the Company and Lehman Brothers Inc. and BT Securities
Corporation (the "Initial Purchasers").
***5.1 Opinion of Schulte Roth & Zabel LLP as to the legality of the
securities being registered.
*8.1 Opinion of Schulte Roth & Zabel LLP regarding certain
federal income tax matters.
*10.1 Revolving Credit, Term Loan and Gold Consignment Agreement,
dated as of December 16, 1996, among the Company, the lending
institutions listed therein and The First National Bank of
Boston and Rhode Island Hospital Trust National Bank, as
Agents for the Banks.
**10.2 Purchase Agreement, dated December 10, 1996, among the Company
and the Initial Purchasers.
**10.3 Employment Agreement, dated as of December 16, 1996, by and
between the Company and Jeffrey H. Brennan.
- -----------
* Filed herewith
** Previously filed
*** To be filed by amendment
**** Not Applicable
<PAGE>
**10.4 Employment Agreement, dated as of December 16, 1996, by and
between the Company and Richard H. Fritsche.
**10.5 Employment arrangements between the Company and Balfour with
respect to George Agle
***10.6 Form of Indemnification Agreement between the Company and
(i) each director and (ii) certain officers.
*10.7 Subscription Agreement, dated as of December 16, 1996, by
and among the Company, Castle Harlan Partners II, L.P.,
Dresdner Bank AG, Grand Cayman Branch and Castle Harlan
Offshore Partners, L.P.; as amended by instruments of
accession, dated as of December 17, 1996, by each of
Branford Castle Holdings, Inc., Leonard M. Harlan, David B.
Pittaway and David H. Chow.
**12 Computation of Ratios.
****21 Subsidiaries of the Company.
*23.1 Consent of Arthur Andersen LLP.
*23.2 Consent of Arthur Andersen LLP.
***23.4 Consent of Schulte Roth & Zabel LLP (included in the opinion
of Schulte Roth & Zabel LLP under Exhibit 5.1).
*24 Powers of Attorney (included in the signature pages of the
Registration Statement).
**25 Statement on Form T-1 of Eligibility of Trustee (bound
separately).
****27 Financial Data Schedule.
*99.1 Form of Letter of Transmittal.
**99.2 Form of Notice of Guaranteed Delivery.
***99.3 Form of Exchange Agency Agreement to be entered into between
the Company and Marine Midland Bank.
- -----------
* Filed herewith
** Previously filed
*** To be filed by amendment
**** Not Applicable
March 31, 1997
Commemorative Brands, Inc.
7211 Circle S Road
Austin, Texas 78745
Re: Registration Statement on Form S-4
Registration No. 333-20759
Dear Ladies and Gentlemen:
In connection with the above-captioned Registration Statement on
Form S-4 (the "Registration Statement") filed by Commemorative Brands, Inc.
("CBI"), with the Securities and Exchange Commission pursuant to the Securities
Act of 1933, as amended (the "Act"), and the rules and regulations thereunder
(the "Rules"), we have been requested to render our opinion as to the matters
set forth in the Registration Statement under the caption "Certain Federal
Income Tax Considerations". Capitalized terms used and not otherwise defined
herein shall have the meanings ascribed to them in the Registration Statement.
In rendering our opinion, we have reviewed copies of the
Registration Statement (including the exhibits and amendments thereto) with
respect to CBI's offer to exchange up to $90,000,000 aggregate principal amount
of its 11% Senior Subordinated Notes due 2007 for a like principal amount of its
11% Senior Subordinated Notes due 2007 outstanding on the date hereof. We have
also made such other investigations of fact and law and have examined the
originals, or copies identified to our satisfaction, of such other documents as
in our judgment are necessary or appropriate to render the opinion expressed
below.
Based upon the foregoing, we confirm our opinion set forth in the
Registration Statement under the heading "Certain Federal Income Tax
Considerations".
The opinion set forth above is based on the Internal Revenue Code
of 1986, as amended, administrative rulings, judicial decisions, Treasury
Regulations and other applicable
<PAGE>
Commemorative Brands, Inc.
March 31, 1997
Page 2
authorities, all as in effect on the date hereof. The statutory provisions,
regulations and interpretations upon which our opinion is based are subject to
change. Any such change could apply retroactively and could affect the validity
of our opinion. We assume no responsibility to advise you of any subsequent
changes in existing law or facts, nor do we assume any responsibility to update
this opinion with respect to any matters set forth herein.
We hereby consent to the filing of this opinion as an exhibit to
the Registration Statement, or any amendment thereto pursuant to Rule 462 under
the Act, and to the reference to us under the heading "Legal Matters" in the
Prospectus included in the Registration Statement or any such amendment. In
giving this consent, we do not hereby agree that we come within the category of
persons whose consent is required by the Act or the Rules.
Very truly yours,
SCHULTE ROTH & ZABEL LLP
REVOLVING CREDIT, TERM LOAN AND
GOLD CONSIGNMENT AGREEMENT
DATED as of December 16, 1996
by and among
SCHOLASTIC BRANDS, INC.
The BANKS listed on Schedule 1 hereto, and
THE FIRST NATIONAL BANK OF BOSTON, and
RHODE ISLAND HOSPITAL TRUST NATIONAL BANK, as Agents for the Banks
<PAGE>
TABLE OF CONTENTS
1. DEFINITIONS AND RULES OF INTERPRETATION. ...............................1
1.1. Definitions. .................................................1
1.2. Rules of Interpretation. .....................................30
2. THE DOLLAR FACILITY - REVOLVING CREDIT LOANS. ..........................31
2.1. Commitment to Lend. ..........................................31
2.2. Commitment Fee. ..............................................31
2.3. Reduction of Total Revolver Commitment. ......................31
2.4. The Revolving Credit Notes. ..................................32
2.5. Interest on Revolving Credit Loans. ..........................32
2.6. Requests for Revolving Credit Loans; Conversion Options. .....32
2.7. Funds for Revolving Credit Loans. ............................32
2.8. Maturity. ....................................................32
2.9. Optional Repayments of Revolving Credit Loans. ...............33
3. THE DOLLAR FACILITY - THE TERM LOAN. ...................................33
3.1. Commitment to Lend. ..........................................33
3.2. The Term Notes. ..............................................33
3.3. Schedule of Installment Payments of Principal of Term Loan. ..33
3.4. Optional Prepayment of Term Loan. ............................34
3.5. Interest on Term Loan. .......................................34
3.6. Mandatory Prepayments of the Term Loan. ......................34
3.6.1. Excess Cash Flow Prepayment. ........................34
3.6.2. Asset Disposition Prepayment. .......................35
3.6.3. New Issuance Prepayment. ............................35
4. THE DOLLAR FACILITY - LETTERS OF CREDIT. ...............................35
4.1. Letter of Credit Commitments...................................35
4.1.1. Commitment to Issue Letters of Credit. ..............35
4.1.2. Letter of Credit Applications. ......................36
4.1.3. Terms of Letters of Credit. .........................36
4.1.4. Reimbursement Obligations of Dollar Banks. ..........37
4.1.5. Participations of Dollar Banks. .....................37
4.2. Reimbursement Obligation of the Borrower. ....................37
4.3. Letter of Credit Payments. ...................................38
4.4. Obligations Absolute. ........................................38
4.5. Reliance by Issuer. ..........................................39
4.6. Letter of Credit Fees. .......................................39
5. THE GOLD FACILITY - CONSIGNMENTS . .....................................40
5.1. Commitment To Make Consignments; Title To Consigned
Precious Metal. ..............................................40
5.2. Consignment Fees; Gold Fronting Fees. ........................42
5.2.1. Consignment Fees. ...................................42
5.2.2. Gold Fronting Fees. .................................42
<PAGE>
-ii-
5.2.3. Payment of Fees. ....................................43
5.3. Requests For Consignments. ...................................43
5.4. Payment on Account of Repurchase or Redelivery of
Consigned Precious Metal. ....................................44
5.5. Conversion Options. ..........................................47
5.6. Repurchase at Maturity. ......................................48
5.7. True Consignment. ............................................48
6. THE GOLD FACILITY - THE GOLD LOANS.......................................48
6.1. Commitment to Lend. ..........................................48
6.2. The Gold Notes. ..............................................49
6.3. Interest on Gold Loans. ......................................50
6.4. Requests for Gold Loans; Conversion Options. .................50
6.5. Funds for Gold Loans. ........................................50
6.6. Repayment of Gold Loans at Maturity. .........................50
6.7. Optional Repayments. .........................................50
7. CERTAIN COMMON PROVISIONS RELATING.......................................50
TO THE GOLD FACILITY. ......................................................50
7.1. Commitment Fee. ..............................................50
7.2. Reduction of Total Gold Commitment and Gold Fronting
Commitment. ... .............................................50
8. CERTAIN GENERAL PROVISIONS. ............................................51
8.1. Interest on Loans. ...........................................51
8.2. Borrowing Base and Consignment Limitations. ..................51
8.3. Requests for Loans. ..........................................52
8.4. Conversion Options. ..........................................53
8.4.1. Conversion to Different Type of Loan. ...............53
8.4.2. Continuation of Type of Loan. .......................53
8.4.3. Eurodollar Rate Loans. ..............................54
8.5. Funds for Loans. .............................................54
8.5.1. Funding Procedures. .................................54
8.5.2. Advances by Applicable Agent. .......................55
8.6. Settlements; Failure to Make Funds Available. ................55
8.7. Optional Repayments of Loans. ................................57
8.8. Repayments of Loans and Repurchases of Consigned Precious
Metals Prior to Event of Default. ...........................58
8.9. Repayments of Loans and Repurchases of Consigned Precious
Metals and Distribution of Collateral Proceeds After
Event of Default. .............................. ............59
8.10. Closing Fee. ................................................60
8.11. Agents' Fee. ................................................60
8.12. Funds for Payments. .........................................60
8.12.1. Payments to Agents. ................................60
8.12.2. No Offset, etc. ....................................61
8.12.3. Withholding Forms. .................................61
<PAGE>
-iii-
8.12.4. Exclusions. ........................................62
8.13. Computations. ...............................................62
8.14. Inability to Determine Eurodollar Rate or Consignment
Fixed Rate. . .............................................63
8.15. Illegality of Eurodollar Rate Loans or Consignment
Fixed Rate Amounts. ........................................63
8.16. Additional Costs, etc. ......................................64
8.17. Capital Adequacy. ...........................................66
8.18. Certificate. ................................................66
8.19. Indemnity. ..................................................67
8.20. Interest After Default. .....................................68
8.21. Performance Adjustments. ....................................69
8.22. Replacement of Banks. .......................................70
9. COLLATERAL SECURITY AND GUARANTIES. ....................................70
9.1. Security of Borrower and Capital Stock of the Borrower. ......70
9.2. Guaranties and Security of Subsidiaries. .....................70
10. REPRESENTATIONS AND WARRANTIES. .......................................71
10.1. Corporate Authority. ........................................71
10.1.1. Incorporation; Good Standing. ......................71
10.1.2. Authorization. .....................................71
10.1.3. Enforceability. ....................................71
10.2. Governmental Approvals. .....................................72
10.3. Title to Properties; Leases. ................................72
10.4. Financial Statements and Projections. .......................72
10.4.1. Financial Statements. ..............................72
10.4.2. Projections. .......................................73
10.5. No Material Changes, etc.; Solvency. ........................73
10.5.1. No Material Changes, etc. ..........................73
10.5.2. Solvency. ..........................................74
10.6. Franchises, Patents, Copyrights, etc. .......................74
10.7. Litigation. .................................................74
10.8. No Materially Adverse Contracts, etc. .......................74
10.9. Compliance with Other Instruments, Laws, etc. ...............74
10.10. Tax Status. ................................................75
10.11. No Event of Default. .......................................75
10.12. Holding Company and Investment Company Acts. ...............75
10.13. Absence of Financing Statements, etc. ......................75
10.14. Perfection of Security Interest. ...........................75
10.15. Certain Transactions. ......................................76
10.16. Employee Benefit Plans. ....................................76
10.16.1. In General. .......................................76
10.16.2. Terminability of Welfare Plans. ...................76
10.16.3. Guaranteed Pension Plans. .........................77
10.16.4. Multiemployer Plans. ..............................77
<PAGE>
-iv-
10.17. Regulations U and X. .......................................77
10.18. Environmental Compliance. ..................................78
10.19. Subsidiaries, etc. .........................................80
10.20. Bank Accounts. .............................................80
10.21. Acquisition Documents. .....................................80
11. AFFIRMATIVE COVENANTS OF THE BORROWER. ................................80
11.1. Punctual Payment. ...........................................80
11.2. Maintenance of Office. ......................................80
11.3. Records and Accounts. .......................................81
11.4. Financial Statements, Certificates and Information. .........81
11.5. Notices. ....................................................83
11.5.1. Defaults. ..........................................83
11.5.2. Environmental Events. ..............................83
11.5.3. Notification of Claim against Collateral. ..........84
11.5.4. Notice of Litigation and Judgments. ................84
11.6. Corporate Existence; Maintenance of Properties. .............84
11.7. Insurance. ..................................................85
11.8. Taxes. ......................................................86
11.9. Inspection of Properties and Books, etc. ....................86
11.9.1. General. ...........................................86
11.9.2. Collateral Reports. ................................87
11.9.3. Appraisals. ........................................87
11.9.4. Communications with Accountants. ...................87
11.9.5. Environmental Assessments. .........................88
11.10. Compliance with Laws, Contracts, Licenses, and Permits. ....88
11.11. Employee Benefit Plans. ....................................89
11.12. Use of Proceeds. ...........................................89
11.13. Additional Mortgaged Property. .............................89
11.14. Bank Accounts. .............................................89
11.15. Inventory Restrictions. ....................................90
11.16. Further Assurances. ........................................90
12. CERTAIN NEGATIVE COVENANTS OF THE BORROWER. ...........................91
12.1. Restrictions on Indebtedness. ...............................91
12.2. Restrictions on Liens. ......................................94
12.3. Restrictions on Investments. ................................95
12.4. Distributions. ..............................................97
12.5. Merger, Consolidation and Disposition of Assets. ............98
12.5.1. Mergers and Acquisitions. ..........................98
12.5.2. Disposition of Assets. .............................98
12.6. Sale and Leaseback. .........................................99
12.7. Compliance with Environmental Laws. .........................99
12.8. Indenture and Subordinated Notes. ...........................99
12.9. Employee Benefit Plans. .....................................100
12.10. Bank Accounts. .............................................100
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12.11. Consignment Transactions. ..................................101
12.12. Transactions with Affiliates. ..............................101
12.13. Subsidiaries. ..............................................101
12.14. Limitations on Mexican Subsidiary. .........................101
13. FINANCIAL COVENANTS OF THE BORROWER. ..................................102
13.1. Senior Funded Debt to EBITDA. ...............................102
13.2. Consolidated EBITDA. ........................................102
13.3. Capital Expenditures. .......................................102
13.4. Interest Coverage. ..........................................103
14. CLOSING CONDITIONS. ...................................................103
14.1. Loan Documents, etc. ........................................103
14.2. Certified Copies of Charter Documents. ......................103
14.3. Corporate Action. ...........................................104
14.4. Incumbency Certificate. .....................................104
14.5. Validity of Liens. ..........................................104
14.6. Perfection Certificate and UCC Search Results. ..............104
14.7. Certificates of Insurance. ..................................104
14.8. FNBB Concentration Accounts; Agency Account Agreements. .....105
14.9. Borrowing Base Report; Consigned Precious Metal Report;
Monthly Inventory Report. ..................................105
14.10. Accounts Receivable Aging Report. ..........................105
14.11. Opinions of Counsel. .......................................105
14.12. Payment of Fees. ...........................................105
14.13. Payoff Letters. ............................................105
14.14. Consummation of Equity Investment and Subordinated Note
Issuance. ..................................................106
14.15. Financial Statements. ......................................106
14.16. Survey and Taxes; Appraisal. ...............................106
14.17. Title Insurance. ...........................................106
14.18. Environmental Reports. .....................................106
14.19. Landlord Consents. .........................................107
14.20. Closing of Acquisitions. ...................................107
14.21. Consolidated EBITDA. .......................................107
14.22. Governmental Regulation. ...................................107
14.23. Proceedings and Documents. .................................108
15. CONDITIONS TO ALL BORROWINGS. .........................................108
15.1. Representations True; No Event of Default. ..................108
15.2. Borrowing Base Report; Consigned Precious Metal Report. .....108
16. EVENTS OF DEFAULT; ACCELERATION; ETC. .................................109
16.1. Events of Default and Acceleration. .........................109
16.2. Termination of Commitments. .................................112
16.3. Remedies. ...................................................112
17. SETOFF. ...............................................................112
18. THE AGENTS. ...........................................................113
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18.1. Authorization. ..............................................113
18.2. Employees and Agents. .......................................114
18.3. No Liability. ...............................................114
18.4. No Representations. .........................................114
18.5. Payments. ...................................................115
18.5.1. Payments to Agents. ................................115
18.5.2. Distribution by Agents. ............................115
18.5.3. Delinquent Banks. ..................................116
18.5.4 Payments Under Confirmation of Swap Agreement. ......116
18.6. Holders of Notes. ...........................................117
18.7. Indemnity. ..................................................117
18.8. Agents as Banks. ............................................117
18.9. Resignation. ................................................117
18.10. Notification of Defaults and Events of Default. ............118
18.11. Duties in the Case of Enforcement. .........................118
19. EXPENSES. .............................................................118
20. INDEMNIFICATION. ......................................................119
21. SURVIVAL OF COVENANTS, ETC. ...........................................120
22. ASSIGNMENT AND PARTICIPATION. .........................................121
22.1. Conditions to Assignment by Banks. ..........................121
22.2. Certain Representations and Warranties; Limitations;
Covenants. ... .............................................121
22.3. Register. ...................................................123
22.4. New Notes. ..................................................123
22.5. Participations. .............................................124
22.6. Disclosure. .................................................124
22.7. Assignee or Participant Affiliated with the Borrower. .......124
22.8. Miscellaneous Assignment Provisions. ........................125
22.9. Assignment by Borrower. .....................................125
23. NOTICES, ETC. .........................................................125
24. GOVERNING LAW. ........................................................126
25. HEADINGS. .............................................................127
26. COUNTERPARTS. .........................................................127
27. ENTIRE AGREEMENT, ETC. ................................................127
28. WAIVER OF JURY TRIAL. .................................................127
29. CONSENTS, AMENDMENTS, WAIVERS, ETC. ...................................128
30. SEVERABILITY. .........................................................128
31. CONFIDENTIALITY. ......................................................129
<PAGE>
EXHIBITS AND SCHEDULES
Exhibit A Form of Agency Account Agreement
Exhibit B Form of Borrowing Base Report
Exhibit C Form of Cash Collateral Agreement
Exhibit D Form of Consigned Precious Metal Report
Exhibit E Form of Revolving Credit Note
Exhibit F Form of Term Note
Exhibit G Form of Consignment Request
Exhibit H Form of Gold Note
Exhibit I Form of Loan Request
Exhibit J Form of Compliance Certificate
Exhibit K Form of Supplement to Schedule 2
Exhibit L Form of Assignment and Acceptance
Schedule 1 Banks, Commitments, Commitment Percentages, Gold
Commitments, Gold Commitment Percentages
Schedule 2 Borrower Permitted Inventory Locations
Schedule 3 Consolidated EBITDA for Prior Periods
Schedule 4 Mortgaged Properties
Schedule 10.3 Titles to Properties; Leases
Schedule 10.6 Franchises, Patents, Copyrights, etc.
Schedule 10.7 Litigation
Schedule 10.16 ERISA Matters
Schedule 10.18 Environmental Compliance
Schedule 10.19 Subsidiaries
Schedule 10.20 Bank Accounts
Schedule 12.1 Existing Indebtedness
Schedule 12.2 Existing Liens
Schedule 12.3 Existing Investments
<PAGE>
BD&G LLP DRAFT
12/15/96
REVOLVING CREDIT, TERM LOAN AND
GOLD CONSIGNMENT AGREEMENT
This REVOLVING CREDIT, TERM LOAN AND GOLD CONSIGNMENT AGREEMENT is made as
of December 16, 1996, by and among (a) SCHOLASTIC BRANDS, INC., a Delaware
corporation having its principal place of business at 7211 Circle S Road,
Austin, Texas 78745 (the "Borrower"); (b) THE FIRST NATIONAL BANK OF BOSTON, a
national banking association, RHODE ISLAND HOSPITAL TRUST NATIONAL BANK, a
national banking association and the other lending institutions listed on
Schedule 1; and (c) THE FIRST NATIONAL BANK OF BOSTON and RHODE ISLAND HOSPITAL
TRUST NATIONAL BANK as agents for themselves and such other lending
institutions.
1. DEFINITIONS AND RULES OF INTERPRETATION.
1.1. Definitions. The following terms shall have the meanings set forth in
this ss.1 or elsewhere in the provisions of this Credit Agreement referred to
below:
Accounts Receivable. All rights of the Borrower or any of its Subsidiaries
to payment for goods sold, leased or otherwise marketed in the ordinary course
of business and all rights of the Borrower or any of its Subsidiaries to payment
for services rendered in the ordinary course of business and all sums of money
or other proceeds due thereon pursuant to transactions with account debtors,
except for that portion of the sum of money or other proceeds due thereon that
relate to sales, use or property taxes in conjunction with such transactions,
recorded on books of account in accordance with generally accepted accounting
principles.
Acquisition Documents. (a) The Asset Purchase Agreement dated as of May 20,
1996 among the Borrower and the CJC Sellers, as amended by Amendment No. 1
thereto dated November 20, 1996, (b) the Amended and Restated Asset Purchase
Agreement dated as of November 20, 1996 among the Borrower, the Balfour Sellers
and certain other parties, and (c) all other agreements and documents required
to be entered into or delivered pursuant to any of the foregoing documents or in
connection with the Acquisitions, each in the form delivered to the Agents on or
prior to the Closing Date.
Acquisitions. The acquisition by the Borrower from the CJC Sellers and the
Balfour Sellers, respectively, of the assets and business of the Class Ring
division of CJC Holdings, Inc. and the assets and business of L G. Balfour Inc.
pursuant to the Acquisition Documents.
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Affiliate. Any Person that would be considered to be an affiliate of the
Borrower under Rule 144(a) of the Rules and Regulations of the Securities and
Exchange Commission, as in effect on the date hereof, if the Borrower were
issuing securities. Notwithstanding the foregoing, the Agents (in their
capacities as agents and in their individual capacities as Banks) shall not be
Affiliates of the Borrower and no individual shall be an Affiliate solely by
reason of his or her being a director, officer or employee of Castle Harlan,
Inc., the Borrower or any of its Subsidiaries.
Agency Account Agreement. Any Agency Account Agreement in the form of
Exhibit A attached hereto (or a form otherwise approved by the Dollar Agent in
its sole discretion) entered into by the Borrower, the Dollar Agent and a
depository institution reasonably satisfactory to the Agents.
Agents. For the Dollar Facility, FNBB; for the Gold Facility, RIHT.
Agents' Special Counsel. Bingham, Dana & Gould LLP or such other counsel as
may be approved by the Agents.
Applicable Agent. With respect to the Dollar Facility, the Revolving Credit
Loans, the Letters of Credit, the Term Loan or the Dollar Banks, the Dollar
Agent; with respect to the Gold Facility, the Consignments, the Gold Loans or
the Gold Banks, the Gold Agent.
Applicable Banks. With respect to the Dollar Facility, the Revolving Credit
Loans, the Letters of Credit, the Term Loan or the Dollar Agent, the Dollar
Banks; with respect to the Gold Facility, the Consignments, the Gold Loans or
the Gold Agent, the Gold Banks.
Asset Disposition Prepayment. See ss.3.6.2.
Assignment and Acceptance. See ss.22.1.
Balance Sheet Date. August 31, 1996.
Balfour Sellers. Town & Country Corporation and L.G. Balfour Company, Inc.
Banks. Collectively, the Dollar Banks and the Gold Banks.
Base Rate. The higher of (i) the annual rate of interest announced from
time to time by FNBB at its head office in Boston, Massachusetts, as its "base
rate" and (ii) one-half of one percent (1/2%) above the Federal Funds Effective
Rate. For the purposes of this definition, "Federal Funds Effective Rate" shall
mean for any day, the rate per annum equal to the weighted average of the rates
on overnight federal funds transactions with members of the Federal Reserve
System arranged by federal funds brokers, as published for such day (or, if such
day is not a Business Day, for
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the next preceding Business Day) by the Federal Reserve Bank of New York, or, if
such rate is not so published for any day that is a Business Day, the average of
the quotations for such day on such transactions received by FNBB from three
funds brokers of recognized standing selected by FNBB.
Base Rate Applicable Margin. At all times (a) from the Closing Date through
the first Performance Adjustment Date (i) with respect to Revolving Credit Loans
or Gold Loans which are Base Rate Loans, one and one quarter percent (1-1/4%)
and (ii) with respect to any portion of the Term Loan which is a Base Rate Loan,
one and three quarters percent (1-3/4%), and (b) after the first Performance
Adjustment Date, the percentage determined by reference to the provisions of
ss.8.21.
Base Rate Loans. Revolving Credit Loans, Gold Loans and all or any portion
of the Term Loan bearing interest calculated by reference to the Base Rate.
Borrower. As defined in the preamble hereto.
Borrower Permitted Inventory Locations. The manufacturing facilities and
distribution centers of the Borrower located in the United States of America and
listed on Schedule 2 hereto, as such Schedule 2 may be supplemented from time to
time in accordance with the provisions of ss.11.4(i).
Borrower's Precious Metal. Precious Metal owned by the Borrower and which
qualifies as Eligible Inventory, excluding Consigned Precious Metal and Precious
Metal otherwise held by the Borrower on consignment other than pursuant to the
Gold Facility.
Borrowing Base. At the relevant time of reference thereto, an amount
determined by the Dollar Agent by reference to the most recent Borrowing Base
Report delivered to the Banks and the Agents pursuant to ss.11.4(f), which is
equal to the sum of, without duplication:
(a) 90% of the Fair Market Value of the Precious Metal content of
Eligible Inventory held by the Borrower at Borrower Permitted Inventory
Locations, plus
(b) 70% of the Fair Market Value of the Precious Metal content of
Eligible Inventory held by, or in transit to or from, Specified Refiners
(net of any amounts advanced by such Specified Refiners to the Borrower and
included in Eligible Inventory held by the Borrower at Borrower Permitted
Inventory Locations), plus
(c) 80% of the Fair Market Value of Silver and Platinum contained in
Eligible Inventory and held by the Borrower at Borrower Permitted Inventory
Locations, plus
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(d) 50% of the net book value (determined on a first-in first-out
basis at lower of cost or market) of non-precious metals contained in
Eligible Inventory and held by the Borrower at Borrower Permitted Inventory
Locations, plus
(e) 30% of the net book value (determined on a first-in first-out
basis at lower of cost or market) of the value of precious and
semi-precious stones contained in Eligible Inventory and held by the
Borrower at Borrower Permitted Inventory Locations, plus
(f) 30% of the net book value (determined on a first-in first-out
basis at lower of cost or market) of Eligible Inventory consisting of raw
material paper products or graphics inventory (excluding work-in-process
and finished goods inventory) and held by the Borrower at Borrower
Permitted Inventory Locations, plus
(g) the lesser of (i) 40% of the Fair Market Value of the Precious
Metal content of Eligible Inventory constituting samples held in the
ordinary course of business by sales representatives or at retail locations
and (ii) $1,000,000; plus
(h) 80% of Eligible Accounts Receivable for which invoices have been
issued and are payable.
Borrowing Base Report. A Borrowing Base Report signed by the chief
financial officer or treasurer of the Borrower and in substantially the form of
Exhibit B hereto.
Business Day. Any day on which banking institutions in Boston,
Massachusetts and Providence, Rhode Island, are open for the transaction of
banking business and, in the case of Eurodollar Rate Loans, also a day which is
a Eurodollar Business Day.
Capital Assets. Fixed and/or capital assets, both tangible (such as land,
buildings, fixtures, samples, tools and die, software, software development,
machinery and equipment) and intangible (such as software, patents, copyrights,
trademarks, franchises and good will); provided that Capital Assets shall not
include any item customarily charged directly to expense or depreciated over a
useful life of twelve (12) months or less in accordance with generally accepted
accounting principles.
Capital Expenditures. Amounts paid or indebtedness incurred by the Borrower
or any of its Subsidiaries in connection with the purchase or lease by the
Borrower or any of its Subsidiaries of Capital Assets that would be required to
be capitalized and shown on the balance sheet of such Person in accordance with
<PAGE>
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generally accepted accounting principles; provided, that the term Capital
Expenditures shall not include (a) expenditures made in connection with the
replacement, substitution or restoration of assets to the extent financed (i)
from insurance proceeds paid on account of the loss of or damage to the assets
being replaced or restored or (ii) with awards of compensation arising from the
taking by eminent domain or condemnation of the assets being replaced, and (b)
the purchase price of equipment that replaces, or is purchased simultaneously
with the trade-in of, existing equipment to the extent that the gross amount of
such purchase price is reduced by the sale price of such equipment, or the
credit granted by the seller of such equipment for the equipment being traded in
at such time.
Capitalized Leases. Leases under which the Borrower or any of its
Subsidiaries is the lessee or obligor, the discounted future rental payment
obligations under which are required to be capitalized on the balance sheet of
the lessee or obligor in accordance with generally accepted accounting
principles.
Cash Collateral Agreement. The Cash Collateral Agreement to be entered into
on or prior to the Closing Date between the Borrower and the Collateral Agent
pursuant to ss.4.2 and ss.8.8(c) hereof, such Cash Collateral Agreement to be in
the form of Exhibit C attached hereto.
CERCLA. See ss.10.18.
CH Management Fees. Amounts due by the Borrower to Castle Harlan, Inc. for
management services.
CJC Business. The class ring business of CJC Holdings, Inc.
CJC Sellers. CJC Holdings, Inc. and CJC North America, Inc.
Closing Date. The first date on which the conditions set forth in ss.14
have been satisfied and any Revolving Credit Loans are to be made, the Term Loan
is to be made, any Gold Loans are to be made, any Consignments are to be made or
any Letter of Credit is to be issued hereunder.
Code. The Internal Revenue Code of 1986.
Collateral. All of the property, rights and interests of the Borrower and
its Subsidiaries that are or are intended to be subject to the security
interests and mortgages created by the Security Documents.
Collateral Agent. FNBB, in its capacity as collateral agent for the benefit
of Banks and the Agents under and with respect to the Security Documents.
Commitment. With respect to each Dollar Bank, the amount set forth on Part
1 of Schedule 1 hereto as the amount of such Dollar Bank's commitment to make
<PAGE>
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Revolving Credit Loans to, and to participate in the issuance, extension and
renewal of Letters of Credit for the account of, the Borrower, as the same may
be reduced from time to time; or if such commitment is terminated pursuant to
the provisions hereof, zero.
Commitment Percentage. With respect to each Dollar Bank, the percentage set
forth on Part 1 of Schedule 1 hereto as such Dollar Bank's percentage of the
aggregate Commitments of all of the Dollar Banks.
Confirmation of Swap Agreement. The Confirmation of Swap Agreement dated or
to be dated on or prior to the Closing Date, between the Borrower and the Gold
Agent and in form and substance satisfactory to each of the Banks, the Agents
and the Borrower, pursuant to which the Borrower and the Gold Agent have made
certain arrangements in order to fix the price of Consigned Precious Metal
following an Event of Default.
Consigned Precious Metal. Precious Metal (a) located at Borrower Permitted
Inventory Locations or at Specified Refiners, (b) Delivered to the Borrower or
subject to a Purchase and Consignment and, in each case, consigned by the Gold
Agent (on behalf of the Gold Banks) to the Borrower pursuant to the terms of
this Credit Agreement and (c) for which the Gold Banks have not received payment
or which has not been Redelivered to the Gold Agent.
Consigned Precious Metal Report. A Consigned Precious Metal Report signed
by the chief financial officer or treasurer of the Borrower and in substantially
the form of Exhibit D hereto.
Consignment. A Delivery or Purchase and Consignment of Precious Metal by
the Gold Agent (on behalf of the Gold Banks) to the Borrower pursuant to the
terms of this Credit Agreement.
Consignment Advance Rate Percentage. Ninety five percent (95%).
Consignment Base Rate. A rate determined by RIHT from time to time in its
sole discretion plus the Eurodollar Applicable Margin from time to time
applicable to Gold Loans, which rate may be changed by RIHT following seven (7)
days' prior written notice to the Borrower and the other Gold Banks.
Consignment Base Rate Amounts. Consigned Precious Metal which is accruing a
Consignment Fee and Gold Fronting Fee calculated by reference to the Consignment
Base Rate.
Consignment Conversion Request. A notice given by the Borrower to the Gold
Agent of the Borrower's election to convert or continue Consigned Precious
Metals in accordance with ss.5.5.
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Consignment Dollar Cap. As defined in the definition of Consignment Limit.
Consignment Fees. Consignment fees on Consigned Precious Metal at the rates
set forth in ss.5.2.2.
Consignment Fixed Rate. With respect to any Interest Period, the amount
equal to (a) the greater of (i) the Eurodollar Rate for such Interest Period
minus the average of rates quoted to RIHT as the London Interbank Bullion Rates
as displayed on Reuter's gold loan screen or, if Reuter's gold loan screen is
not available, as set by RIHT, for Precious Metal forwards for such period (the
"Contango Rate"), and (ii) zero (0), plus (b) the Eurodollar Applicable Margin
from time to time applicable to Gold Loans.
Consignment Fixed Rate Amounts. Consigned Precious Metal which is accruing
a Consignment Fee and Gold Fronting Fee calculated by reference to the
Consignment Fixed Rate.
Consignment Limit. The lesser of (a) 26,000 troy ounces of Precious Metal
(the "Consignment Ounce Cap") or (b) Consigned Precious Metal having a Fair
Market Value equal to $10,000,000.00 minus the aggregate outstanding amount of
Gold Loans, after giving effect to all amounts requested (the "Consignment
Dollar Cap").
Consignment Ounce Cap. As defined in the definition of Consignment Limit.
Consignment Participation. See ss.5.4(b).
Consignment Premium. See ss.5.1(f).
Consignment Request. See ss.5.3.
Consolidated or consolidated. With reference to any term defined herein,
shall mean that term as applied to the accounts of the Borrower and its
Subsidiaries, consolidated in accordance with generally accepted accounting
principles.
Consolidated Adjusted EBITDA. With respect to the Borrower and its
Subsidiaries and any particular fiscal period, Consolidated EBITDA for such
period adjusted to include all extraordinary cash items of income or loss
(whether or not reflected in Consolidated EBITDA) and exclude all extraordinary
non-cash items of income or loss (whether or not reflected in Consolidated
EBITDA). Consolidated Adjusted EBITDA shall not, however, include extraordinary
items of income to the extent such items are duplicative of Net Proceeds in
connection with asset dispositions under ss.3.6.2.
Consolidated EBITDA. With respect to the Borrower and its Subsidiaries and
any particular fiscal period, the consolidated earnings (or loss) from
operations of the
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Borrower and its Subsidiaries for such period determined in accordance with
generally accepted accounting principles, after eliminating therefrom all
extraordinary nonrecurring items of income (including gains on the sale of
assets and earnings from the sale of discontinued business lines), and after all
expenses (including, without limitation, all CH Management Fees only to the
extent paid in cash) and other proper charges but before payment or provision
for (a) any income taxes, Consolidated Total Interest Expense or Consignment
Fees or Gold Fronting Fees for such period, (b) depreciation for such period,
(c) amortization for such period, (d) all other noncash charges for such period,
(e) to the extent deducted from consolidated earnings from operations, the
aggregate of all amounts paid (not to exceed $1,250,000 for all such amounts
paid during the 1997 fiscal year, $650,000 for all such amounts paid during the
1998 fiscal year, $250,000 for all such amounts paid during the 1999 fiscal year
and $0 during any fiscal year thereafter and not, in any event, to exceed
$1,642,000 in the aggregate for all such amounts) during such period relating to
the consolidation of the businesses in connection with the Acquisitions to form
the Borrower and its Subsidiaries, (f) the aggregate amount of all noncash
extraordinary losses (not to exceed $1,000,000 in the aggregate for all such
noncash extraordinary losses during any fiscal year) during such period, (g) the
aggregate amount of any reductions to consolidated earnings from operations
during such period attributable to any write-up of the Borrower's current assets
consisting of inventory in connection with the Acquisitions, and (h) a portion
of all extraordinary nonrecurring losses during such period relating to the
Acquisitions not to exceed $500,000 in the aggregate for all such amounts during
all fiscal periods and not to exceed in any such period the aggregate amount of
any extraordinary nonrecurring items of cash income during such period, if any,
all determined in accordance with generally accepted accounting principles. Each
of the parties hereto agrees that the amount of Consolidated EBITDA for
specified periods prior to the Closing Date shall be as set forth on Schedule 3
hereto for all purposes under this Credit Agreement.
Consolidated Excess Cash Flow. With respect to the Borrower and its
Subsidiaries and any particular fiscal period, an amount equal to (a)
Consolidated Adjusted EBITDA for such period less (b) the sum of (without
duplication) (i) all taxes (including interest and penalties) paid in cash
during such period (without duplication of any such amounts paid in prior
periods), plus (ii) the amount of Capital Expenditures made during such period
to the extent permitted to be made hereby, plus (iii) any payments of the
principal of the Term Loan made during such period other than payments made
pursuant to ss.3.6.1 hereof, plus (iv) any mandatory payments of principal with
respect to any Indebtedness of the Borrower and its Subsidiaries pursuant to any
other agreement or instrument to which any of the Borrower or its Subsidiaries
is a party relating to the borrowing of money or in respect of Capitalized
Leases, plus (v) Consolidated Total Interest Expense (excluding any accrued and
unpaid dividends on the Borrower's Series A Preferred Stock (or, as the case may
be, any accrued and unpaid dividends or interest with respect to any Permitted
Preferred Stock Replacement) during such period), plus (vi)
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to the extent not deducted from Consolidated Adjusted EBITDA, (A) the amount of
CH Management Fees paid during such period, plus (B) the aggregate of all
amounts paid (not to exceed $5,368,000 for all such amounts paid during the 1997
fiscal year, $940,000 for all such amounts paid during the 1998 fiscal year,
$665,000 for all such amounts paid during the 1999 fiscal year or $0 for all
other fiscal years and not, in any event, to exceed $5,473,000 in the aggregate
for all such amounts) during such period relating to the consolidation of the
businesses in connection with the Acquisitions to form the Borrower and its
Subsidiaries, plus (C) the amount of deferred compensation and post retirement
medical benefits paid in cash during such period relating to obligations
existing as of the Closing Date, not to exceed in the aggregate in any fiscal
year $300,000 for all such deferred compensation and $700,000 for all such post
retirement medical benefits, plus (vii) dividends on the Borrower's Series A
Preferred Stock (or, as the case may be, dividends or interest with respect to
any Permitted Preferred Stock Replacement) paid during such period.
Consolidated Senior Funded Debt. With respect to any fiscal period, an
amount equal to the Consolidated Total Funded Debt for such period minus the
average aggregate principal amount of the Subordinated Notes outstanding during
such period.
Consolidated Total Funded Debt. With respect to any fiscal period, an
amount equal to the average aggregate principal amount outstanding during such
period in respect of all Indebtedness of the Borrower and its Subsidiaries
pursuant to any agreement or instrument to which any of the Borrower or its
Subsidiaries is a party relating to the borrowing of money or the obtaining of
credit (including, without limitation, Obligations under this Credit Agreement
and all Indebtedness in respect of the Subordinated Notes) or in respect of
Capitalized Leases.
Consolidated Total Interest Expense. For any period, the aggregate amount
of interest required to be paid or accrued by the Borrower and its Subsidiaries
during such period in accordance with generally accepted accounting principles,
whether such interest was or is required to be reflected as an item of expense
or capitalized, including amortization of debt discount and premium and payments
consisting of interest in respect of Capitalized Leases and including commitment
fees, agency fees, facility fees, Consignment Fees, Gold Fronting Fees,
Consignment Premiums, balance deficiency fees and similar fees or expenses in
connection with the borrowing of money, Precious Metal or, Hedging Agreements,
and including all dividends accrued (together with all such dividends paid
during such period, but only to the extent such dividends were not accrued
during any prior period) on the Borrower's Series A Preferred Stock (or, as the
case may be, all accrued or (to the extent not accrued during any prior period)
paid dividends or interest with respect to any Permitted Preferred Stock
Replacement) during such period (without duplication of amounts from prior
periods). For purposes of determining, at any time of reference, the
Consolidated Total Interest Expense for periods prior to the Closing
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Date, Consolidated Total Interest Expense shall be calculated by annualizing the
amount of Consolidated Total Interest Expense actually required to be paid or
accrued by the Borrower and its Subsidiaries during the period elapsed since the
Closing Date at such time of reference, but Consolidated Total Interest Expense
shall otherwise be calculated in a manner consistent with this definition.
Contango Rate. As defined in the definition of Consignment Fixed Rate.
Conversion Request. A notice given by the Borrower to the Dollar Agent with
respect to Dollar Facility Loans and to the Gold Agent with respect to Gold
Loans, of the Borrower's election to convert or continue a Dollar Facility Loan
or, as the case may be, a Gold Loan, in each case in accordance with ss.ss.2.6,
3.5, 6.4 and 8.4.
Copyright Memorandum. The Memorandum of Grant of Security Interest in
Copyrights, dated or to be dated on or prior to the Closing Date, made by the
Borrower in favor of the Collateral Agent and in form and substance satisfactory
to the Banks, the Collateral Agent and the Agents.
Credit Agreement. This Revolving Credit, Term Loan and Gold Consignment
Agreement, including the Schedules and Exhibits hereto.
Default. See ss.16.1.
Delinquent Bank. See ss.18.5.3.
Deliver(ed) or Delivery. Either actual shipment, creating the right in the
Borrower to demand actual shipment through a writing, instrument or a statement
of account, or the Gold Agent's crediting Precious Metal to the account of the
Borrower with one or more third parties when no physical movement thereof is
contemplated by the parties.
Depository Bank. Any depository institution which receives deposits
directly or indirectly of amounts from the Borrower and its Subsidiaries.
Distribution. The declaration or payment of any dividend on or in respect
of any shares of any class of capital stock of the Borrower, other than
dividends payable solely in shares of common stock of the Borrower; the
purchase, redemption, or other retirement of any shares of any class of capital
stock of the Borrower, directly or indirectly through a Subsidiary of the
Borrower or otherwise; the return of capital by the Borrower to its shareholders
as such; or any other distribution on or in respect of any shares of any class
of capital stock of the Borrower.
Dollar Agent. FNBB, acting as agent for the Dollar Banks.
<PAGE>
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Dollar Agent's Head Office. The Dollar Agent's head office located at 100
Federal Street, Boston, Massachusetts 02110, or at such other location as the
Dollar Agent may designate from time to time.
Dollar Banks. FNBB and the other lending institutions listed on Part 1 of
Schedule 1 hereto and any other Person who becomes an assignee of any rights and
obligations of a Dollar Bank pursuant to ss.22.
Dollar Facility. The Dollar Banks' commitments to make Dollar Facility
Loans and the Dollar Agent's agreement to issue, extend and renew Letters of
Credit.
Dollar Facility Loans. The Revolving Credit Loans and the Term Loan.
Dollars or $. Dollars in lawful currency of the United States of America.
Domestic Lending Office. Initially, the office of each Bank designated as
such in Schedule 1 hereto; thereafter, such other office of such Bank, if any,
located within the United States that will be making or maintaining Base Rate
Loans.
Drawdown Date. The date on which any Loan is made or is to be made, and the
date on which any Loan is converted or continued in accordance with ss.ss.2.6,
3.5, 6.4 or 8.4.
Eligible Assignee. Any of (i) a commercial bank or finance company
organized under the laws of the United States, or any State thereof or the
District of Columbia, and having total assets in excess of $1,000,000,000; (ii)
a savings and loan association or savings bank organized under the laws of the
United States, or any State thereof or the District of Columbia, and having a
net worth of at least $100,000,000, calculated in accordance with generally
accepted accounting principles; (iii) a commercial bank organized under the laws
of any other country which is a member of the Organization for Economic
Cooperation and Development (the "OECD"), or a political subdivision of any such
country, and having total assets in excess of $1,000,000,000, provided that such
bank is acting through a branch or agency located in the country in which it is
organized or another country which is also a member of the OECD; (iv) the
central bank of any country which is a member of the OECD; and (v) if, but only
if, any Event of Default has occurred and is continuing, any other bank,
insurance company, commercial finance company or other financial institution or
other Person approved by the Agents, such approval not to be unreasonably
withheld.
Eligible Accounts Receivable. The aggregate of the unpaid portions of
Accounts Receivable of the Borrower and its Subsidiaries (other than the Mexican
Subsidiary) which are parties to the Guaranty (net of any credits, rebates,
offsets, holdbacks or other adjustments payable to third parties that are
adjustments to such Accounts Receivable but without deducting therefrom any
commissions payable to
<PAGE>
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sales representatives) (a) that the Borrower reasonably and in good faith
determine to be collectible; (b) that are with account debtors that (i) are not
Affiliates of the Borrower, (ii) purchased the goods or services giving rise to
the relevant Account Receivable in an arm's length transaction, (iii) are not
insolvent or involved in any case or proceeding, whether voluntary or
involuntary, under any bankruptcy, reorganization, arrangement, insolvency,
adjustment of debt, dissolution, liquidation or similar law of any jurisdiction
and (iv) are, in the Agents' reasonable judgment, creditworthy; (c) that are in
payment of obligations that have been fully performed and are not subject to
dispute or any other similar claims that would reduce the cash amount payable
therefor; (d) that are not subject to any pledge, security interest or other
lien or encumbrance other than those created by the Loan Documents and other
than any Permitted Liens pursuant to ss.ss.12.2(b) and (e) hereof which are
subordinate and junior to the interest of the Collateral Agent therein; (e) in
which the Collateral Agent has a valid and perfected first priority security
interest; (f) that are not Overdue Receivables; (g) that are not due from an
account debtor located in Indiana, Minnesota or New Jersey unless the Borrower
(i) has received a certificate of authority to do business and is in good
standing in such state or (ii) has filed a notice of business activities report
with the appropriate office or agency of such state for the current year; (h)
that are not due from any single account debtor if more than (i) with respect to
Accounts Receivable owing by independent sales representatives of the division
of the Borrower previously constituting the "Scholastic Division" of the Balfour
Sellers, fifty percent (50%) of the aggregate amount of all Accounts Receivable
owing from such account debtor would otherwise not be Eligible Accounts
Receivable, (ii) with respect to Accounts Receivable of the Borrower generated
in connection with the division of the Borrower previously constituting the
"Specialty Division" of the Balfour Sellers, twenty percent (20%) of the
aggregate amount of all Accounts Receivable owing from such account debtor would
otherwise not be Eligible Accounts Receivable, and (iii) with respect to
Accounts Receivable owing by any Specified Account Debtors thirty-five percent
(35%) of the aggregate amount of all Accounts Receivable owing from such
Specified Account Debtor would otherwise not be Eligible Accounts Receivable;
(i) that are payable in Dollars; (j) that are not payable from an office outside
of the United States; and (k) that are not secured by a letter of credit unless
the Collateral Agent has a prior, perfected security interest in such letter of
credit.
Eligible Inventory. With respect to the Borrower, inventory owned by the
Borrower or consigned pursuant to this Credit Agreement; provided that Eligible
Inventory shall not include any inventory (a) held on consignment (other than
inventory consigned pursuant to the Gold Facility), or not otherwise owned by
the Borrower, or of a type no longer sold by the Borrower, (b) which is damaged
or not immediately saleable or subject to any legal encumbrance other than
Permitted Liens, (c) which is not in the possession of the Borrower or a
Specified Refiner (except for (i) samples held in the ordinary course of
business by sales representatives or at retail locations solely to the extent
includable in the Borrowing Base pursuant to clause (g)
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of the definition of Borrowing Base and (ii) Precious Metal in transit between
the Borrower and a Specified Refiner), (d) which is held by the Borrower on
property leased by the Borrower, unless the Agents have received a waiver from
the lessor of such leased property and, if any, sublessor thereof in form and
substance satisfactory to the Agents, (e) as to which appropriate Uniform
Commercial Code financing statements showing the Borrower as debtor and the
Collateral Agent as secured party have not been filed in the proper filing
office or offices in order to perfect the Collateral Agent's security interest
therein, (f) which has been shipped to a customer of the Borrower regardless of
whether such shipment is on a consignment basis, or (g) which the Agents
reasonably deem to be obsolete or not marketable. Notwithstanding the
requirements of this definition, the Agents may in their discretion, but shall
not be obligated to, include as Eligible Inventory inventory held in the
ordinary course of business by Specified Refiners or samples inventory held by
sales representatives or at retail locations notwithstanding that one or more of
the eligibility criteria set forth in this definition may not be met.
Employee Benefit Plan. Any employee benefit plan within the meaning of
ss.3(3) of ERISA maintained or contributed to by the Borrower, other than a
Guaranteed Pension Plan or a Multiemployer Plan.
Environmental Laws. See ss.10.18(a).
Environmental Reports. See ss.10.18.
EPA. See ss.10.18(b).
ERISA. The Employee Retirement Income Security Act of 1974.
ERISA Affiliate. Any Person which is treated as a single employer with the
Borrower under ss.414 of the Code.
ERISA Reportable Event. A reportable event with respect to a Guaranteed
Pension Plan within the meaning of ss.4043 of ERISA and the regulations
promulgated thereunder as to which the requirement of notice has not been
waived.
Eurocurrency Reserve Rate. For any day with respect to a Eurodollar Rate
Loan or Consignment Fixed Rate Amount, the maximum rate (expressed as a decimal)
at which any lender subject thereto would be required to maintain reserves under
Regulation D of the Board of Governors of the Federal Reserve System (or any
successor or similar regulations relating to such reserve requirements) against
"Eurocurrency Liabilities" (as that term is used in Regulation D), if such
liabilities were outstanding. The Eurocurrency Reserve Rate shall be adjusted
automatically on and as of the effective date of any change in the Eurocurrency
Reserve Rate.
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Eurodollar Applicable Margin. At all times (a) from the Closing Date
through the first Performance Adjustment Date (i) with respect to Revolving
Credit Loans or Gold Loans which are Eurodollar Rate Loans, three percent (3%)
and (ii) with respect to any portion of the Term Loan which is a Eurodollar Rate
Loan, three and one-half percent (3-1/2%), and (b) after the first Performance
Adjustment Date, the percentage determined by reference to the provisions of
ss.8.21.
Eurodollar Business Day. Any day on which commercial banks are open for
international business (including dealings in Dollar deposits) in London or such
other eurodollar interbank market as may be selected (a) with respect to Dollar
Facility Loans which are also Eurodollar Rate Loans, by the Dollar Agent, in its
sole discretion acting in good faith or (b) with respect to Gold Loans which are
also Eurodollar Rate Loans or with respect to Consignment Fixed Rate Amounts, by
the Gold Agent, in its sole discretion acting in good faith.
Eurodollar Lending Office. Initially, the office of each Bank designated as
such in Schedule 1 hereto; thereafter, such other office of such Bank, if any,
that shall be making or maintaining Eurodollar Rate Loans.
Eurodollar Rate. For any Interest Period with respect to a Eurodollar Rate
Loan or for purposes of determining the Consignment Fixed Rate, the rate of
interest equal to (a) the rate of interest for the Applicable Agent (rounded
upwards to the nearest 1/16 of one percent) of the rate at which such Applicable
Agent's Eurodollar Lending Office is offered Dollar deposits two Eurodollar
Business Days prior to the beginning of such Interest Period in the interbank
eurodollar market where the eurodollar and foreign currency and exchange
operations of such Eurodollar Lending Office are customarily conducted, for
delivery on the first day of such Interest Period for the number of days
comprised therein and in an amount comparable to the amount of the Eurodollar
Rate Loan or Consignment Fixed Rate Amount of the Applicable Agent to which such
Interest Period applies, divided by (b) a number equal to 1.00 minus the
Eurocurrency Reserve Rate, if applicable.
Eurodollar Rate Loans. Revolving Credit Loans, Gold Loans and all or any
portion of the Term Loan bearing interest calculated by reference to the
Eurodollar Rate.
Event of Default. See ss.16.1.
Excess Cash Flow Prepayment. See ss.3.6.1.
Extension of Credit. The making of any Loan or Consignment or the issuance,
extension or renewal of any Letter of Credit.
Fair Market Value. On any day, with respect to the calculation of the
Dollar value of Precious Metal, Platinum or Silver (a) with respect to Precious
Metal or
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Platinum, the Dollar per ounce Second London Fixing for Gold or, as the
case may be, Platinum, for such day, and (b) with respect to Silver, the Dollar
per ounce London Fixing for Silver for such day, in each case times the number
of ounces of Precious Metal, Platinum or, as the case may be, Silver, for which
such Dollar value is being calculated. If no such price is available for a
particular day, the Fair Market Value for such day shall be the price for the
immediately preceding day for which such price is available. In the event that
the London Bullion Brokers shall discontinue or alter its usual practice of
quoting a price in Dollars for gold, the Fair Market Value for such day shall be
RIHT's Spot Value for that day.
Fee Letter. See ss.8.10.
FNBB. The First National Bank of Boston, a national banking association, in
its individual capacity.
FNBB Concentration Accounts. See ss.11.14(a).
generally accepted accounting principles. (i) When used in ss.13, whether
directly or indirectly through reference to a capitalized term used therein,
means (A) principles that are consistent with the principles promulgated or
adopted by the Financial Accounting Standards Board and its predecessors, in
effect for the fiscal year ended on the Balance Sheet Date, and (B) to the
extent consistent with such principles, the accounting practice of the CJC
Sellers or the Balfour Sellers (with respect to the business acquired from the
Balfour Sellers) reflected in their financial statements for the year ended on
the Balance Sheet Date, and (ii) when used in general, other than as provided
above, means principles that are (A) consistent with the principles promulgated
or adopted by the Financial Accounting Standards Board and its predecessors, as
in effect from time to time, and (B) consistently applied with past financial
statements of the Borrower adopting the same principles, provided that in each
case referred to in this definition of "generally accepted accounting
principles" a certified public accountant would, insofar as the use of such
accounting principles is pertinent, be in a position to deliver an unqualified
opinion (other than a qualification regarding changes in generally accepted
accounting principles) as to financial statements in which such principles have
been properly applied.
Gold Agent. RIHT, acting as agent for the Gold Banks.
Gold Agent's Head Office. The Gold Agent's head office located at One
Hospital Trust Plaza, Providence, Rhode Island 02903, or at such other location
as the Gold Agent may designate from time to time.
Gold Banks. RIHT and any other lending institution listed on Part 2 of
Schedule 1 hereto and any other Person who becomes an assignee of any rights and
obligations of a Gold Bank pursuant to ss.22.
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Gold Commitment. With respect to each Gold Bank, the Dollar amount set
forth on Part 2 of Schedule 1 hereto as the amount of such Gold Bank's
commitment to make Consignment Participations in the Consignments of Precious
Metal made by the Gold Agent or to make Gold Loans, as the same may be reduced
from time to time; or, if such commitment is terminated pursuant to the
provisions hereof, zero.
Gold Commitment Percentage. With respect to each Gold Bank, the percentage
set forth on Part 2 of Schedule 1 hereto as such Gold Bank's percentage of the
aggregate Gold Commitments of all of the Gold Banks.
Gold Drawdown Date. The date on which any Delivery or any Purchase and
Consignment is made or is to be made.
Gold Facility. The Gold Agent's commitment to make Consignments and the
Gold Banks' commitments to make Consignment Participations therein and to make
Gold Loans.
Gold Fronting Fees. Gold fronting fees payable to the Gold Agent on
Consigned Precious Metal at the rates set forth in ss.5.2.2.
Gold Fronting Commitment. The Gold Agent's commitment to make Consignments
of Precious Metal to the Borrower in an aggregate amount not to exceed the
Consignment Limit, as the same may be reduced from time to time or terminated
pursuant to the provisions hereof.
Gold Loans. Revolving credit loans made or to be made by the Gold Banks to
the Borrower pursuant to ss.6.1.
Gold Maturity Date. December 16, 2001.
Gold Note Record. A Record with respect to a Gold Note.
Gold Notes. See ss.6.2.
Guaranteed Pension Plan. Any employee pension benefit plan within the
meaning of ss.3(2) of ERISA maintained or contributed to by the Borrower or any
ERISA Affiliate the benefits of which are guaranteed on termination in full or
in part by the PBGC pursuant to Title IV of ERISA, other than a Multiemployer
Plan.
Guaranty. The Guaranty, dated or to be dated on or prior to the Closing
Date, made by each Subsidiary of the Borrower (other than the Mexican
Subsidiary) in favor of the Banks, the Collateral Agent and the Agents pursuant
to which each such Subsidiary of the Borrower guaranties to the Banks, the
Collateral Agent and the Agents the payment and performance of the Obligations
and in form and substance satisfactory to the Banks, the Collateral Agent and
the Agents.
<PAGE>
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Hazardous Substances. See ss.10.18(b).
Hedging Agreement. Any swap, cap, collar, floor, option or other hedging
agreement in respect of interest rates, currency exchange rates or commodities.
Indebtedness. All obligations, contingent and otherwise, that in accordance
with generally accepted accounting principles should be classified upon the
obligor's balance sheet as liabilities, or to which reference should be made by
footnotes thereto, including in any event and whether or not so classified: (i)
all debt and similar monetary obligations, whether direct or indirect; (ii) all
liabilities secured by any mortgage, pledge, security interest, lien, charge or
other encumbrance existing on property owned or acquired subject thereto,
whether or not the liability secured thereby shall have been assumed; and (iii)
all guarantees (the amount of any such Indebtedness represented by a guarantee
to be taken at the lesser of (A) the principal amount of the obligations
guaranteed and still outstanding and (B) the maximum amount for which the
guaranteeing Person may be liable pursuant to the terms of the instrument
embodying such Indebtedness), endorsements and other contingent obligations
whether direct or indirect in respect of indebtedness of others, including any
obligation to supply funds to or in any manner to invest in, directly or
indirectly, the debtor, to purchase indebtedness, or to assure the owner of
indebtedness against loss, through an agreement to purchase goods, supplies, or
services for the purpose of enabling the debtor to make payment of the
indebtedness held by such owner or otherwise, and the obligations to reimburse
the issuer in respect of any letters of credit. Notwithstanding anything herein
to the contrary, "Indebtedness" shall not include any Trade and OCB Liabilities.
Indenture. The Indenture dated as of December 16, 1996 between the Borrower
and Marine Midland Bank, as trustee.
Installment Amount. See ss.8.19(a).
Interest Payment Date. (i) As to any Base Rate Loan, the last day of the
calendar month which includes the Drawdown Date thereof; and (ii) as to any
Eurodollar Rate Loan in respect of which the Interest Period is (A) 3 months or
less, the last day of such Interest Period and (B) more than 3 months, the date
that is 3 months from the first day of such Interest Period and, in addition,
the last day of such Interest Period.
Interest Period. With respect to each Dollar Facility Loan, Gold Loan or
Consignment Fixed Rate Amount, (a) initially, the period commencing on the
Drawdown Date of such Loan (or, as the case may be, the Gold Drawdown Date of
the Consignments with respect to such Consignment Fixed Rate Amounts) and ending
on the last day of one of the periods set forth below, as selected by the
Borrower in a Loan Request (or, as the case may be, Consignment Request with
respect to Consignment Fixed Rate Amounts) (i) for any Base Rate Loan, the
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calendar month; and (ii) for any Eurodollar Rate Loan or Consignment Fixed Rate
Amount, 1, 2, 3 or 6 months; and (b) thereafter, each period commencing on the
last day of the next preceding Interest Period applicable to such Loan or
Consignment Fixed Rate Amount and ending on the last day of one of the periods
set forth above, as selected by the Borrower in a Conversion Request or
Consignment Conversion Request; provided that all of the foregoing provisions
relating to Interest Periods are subject to the following:
(A) if any Interest Period with respect to a Eurodollar Rate Loan or
Consignment Fixed Rate Amount would otherwise end on a day that is not a
Eurodollar Business Day, that Interest Period shall be extended to the next
succeeding Eurodollar Business Day unless the result of such extension
would be to carry such Interest Period into another calendar month, in
which event such Interest Period shall end on the immediately preceding
Eurodollar Business Day;
(B) if any Interest Period with respect to a Base Rate Loan would end
on a day that is not a Business Day, that Interest Period shall end on the
next succeeding Business Day;
(C) if the Borrower shall fail to give notice as provided in
ss.ss.2.6, 3.5, 6.4 or 8.4, the Borrower shall be deemed to have requested
a conversion of the affected Eurodollar Rate Loan or Consignment Fixed Rate
Amount to a Base Rate Loan or Consignment Base Rate Amount, as applicable,
on the last day of the then current Interest Period with respect thereto;
(D) any Interest Period relating to any Eurodollar Rate Loan or
Consignment Fixed Rate Amount that begins on the last Eurodollar Business
Day of a calendar month (or on a day for which there is no numerically
corresponding day in the calendar month at the end of such Interest Period)
shall end on the last Eurodollar Business Day of a calendar month;
(E) any Interest Period relating to any Revolving Credit Loan that is
a Eurodollar Rate Loan that would otherwise extend beyond the Revolver
Maturity Date shall end on the Revolver Maturity Date;
(F) any Interest Period relating to (i) any Gold Loan that is a
Eurodollar Rate Loan or (ii) any Consigned Precious Metal that is a
Consignment Fixed Rate Amount, that would otherwise extend beyond the Gold
Maturity Date shall end on the Gold Maturity Date; and
(G) any Interest Period relating to any portion of the Term Loan that
is a Eurodollar Rate Loan that would otherwise extend beyond the Term Loan
Maturity Date shall end on the Term Loan Maturity Date.
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Investments. All (a) expenditures made and all liabilities incurred
(contingently or otherwise) for the acquisition of stock or Indebtedness of any
Person, (b) loans, advances and capital contributions to any Person, or (c)
guaranties (or other commitments as described under Indebtedness) of obligations
of any Person. In determining the aggregate amount of Investments outstanding at
any particular time: (i) the amount of any Investment represented by a guaranty
shall be taken at not less than the principal amount of the obligations
guaranteed and still outstanding; (ii) there shall be included as an Investment
all interest accrued with respect to Indebtedness constituting an Investment
unless and until such interest is paid; (iii) there shall be deducted in respect
of each such Investment any amount received as a return of capital (but only by
repurchase, redemption, retirement, repayment, liquidating dividend or
liquidating distribution); (iv) there shall not be deducted in respect of any
Investment any amounts received as earnings on such Investment, whether as
dividends, interest or otherwise, except that accrued interest included as
provided in the foregoing clause (ii) may be deducted when paid; and (v) there
shall not be deducted from the aggregate amount of Investments any decrease in
the value thereof.
Issuance Prepayment Termination Date. The earlier of (a) payment in full of
the Term Loan and (b) the earliest date (in no event earlier than five Business
Days after the Borrower shall have delivered to the Agents and the Banks
quarterly or annual financial statements and computations of the Consolidated
EBITDA and Consolidated Total Funded Debt for the applicable period with
reference to which the occurrence of the Issuance Prepayment Termination Date is
being asserted and in no event prior to delivery of the financial statements and
computations for the fiscal period ending on February 28, 1998) upon which the
Borrower and its Subsidiaries shall have had a ratio of Consolidated Senior
Funded Debt for the period of four consecutive fiscal quarters most recently
ended prior to such asserted Issuance Prepayment Termination Date to
Consolidated EBITDA for the period of four consecutive fiscal quarters most
recently ended prior to such asserted Issuance Prepayment Termination Date of
less than 3.5 to 1.0.
Letter of Credit. See ss.4.1.1.
Letter of Credit Application. See ss.4.1.1.
Letter of Credit Fees. See ss.4.6.
Letter of Credit Participation. See ss.4.1.4.
Loan Documents. This Credit Agreement, the Notes, the Guaranty, the Letter
of Credit Applications, the Letters of Credit, the Fee Letter and the Security
Documents.
Loan Request. See ss.8.3(a).
<PAGE>
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Loans. The Revolving Credit Loans, the Term Loan and the Gold Loans.
Local Accounts. Depository accounts in depository institutions for, or on
behalf of, any of the Borrower or its Subsidiaries and listed on Schedule 10.20
hereto (as such may be amended from time to time in accordance with ss.13.10
hereof).
Majority Banks. As of any date, the Banks (other than Delinquent Banks)
whose aggregate portions of the outstanding amount of the Term Loan and whose
aggregate Commitments or, as the case may be, Gold Commitments together
constitute at least sixty-six and two thirds percent (66-2/3%) of the Total
Commitment; provided, however, that if the Commitments or the Gold Commitments
shall have been terminated, then the Majority Banks shall be the Banks whose
aggregate portions of the Outstanding Facility Amounts together constitute at
least sixty-six and two thirds percent (66-2/3%) of the Outstanding Facility
Amounts.
Maximum Drawing Amount. The maximum aggregate amount that the beneficiaries
may at any time draw under outstanding Letters of Credit, as such aggregate
amount may be reduced from time to time pursuant to the terms of the Letters of
Credit.
Mexican Stock Pledge Agreement. The Stock Pledge Agreement (Mexican), dated
or to be dated on or prior to the Closing Date, between the Borrower and the
Collateral Agent and in form and substance satisfactory to the Banks, the
Collateral Agent and the Agents.
Mexican Subsidiary. Pulidos de Juarez, S.A. de C.V., a corporation
organized under the laws of Mexico.
Mortgaged Property. Any Real Estate which is subject to any Mortgage.
Mortgages. The several mortgages and deeds of trust, dated or to be dated
on or prior to the Closing Date, from the Borrower and its Subsidiaries to the
Collateral Agent with respect to the fee and leasehold interests of the Borrower
and its Subsidiaries in certain of the Real Estate described on Schedule 4
hereto and in form and substance reasonably satisfactory to the Banks, the
Collateral Agent and the Agents.
Multiemployer Plan. Any multiemployer plan within the meaning of ss.3(37)
of ERISA maintained or contributed to by the Borrower or any ERISA Affiliate.
Net Proceeds. With respect to any sale or other disposition of any asset by
any Person or any issuance of common equity securities of such Person, the
excess of (i) the gross cash proceeds received by such Person from the sale or
disposition of any such asset, or, as the case may be, the issuance of any such
common equity securities of such Person, plus, as and when received, all cash
payments received
<PAGE>
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subsequent to such sale or disposition or such issuance representing (A) any
deferred purchase price therefor or (B) any cash proceeds from the sale or other
disposition of any cash equivalents (or any deferred purchase price obligations)
received therefor over (ii) the sum of (A) a reasonable reserve for any
liabilities payable incident to such sale or disposition or such issuance, (B)
the reasonable direct costs and expenses incurred by such Person in connection
with such sale or disposition or such issuance (including, without limitation,
reasonable brokerage, legal, investment banking, accounting, consulting, survey,
title and recording fees and commissions), (C) all payments actually made on any
Indebtedness (other than the Obligations) or other obligations which are secured
by any assets subject to such sale or disposition which are required to be
repaid out of the proceeds from such transaction and (D) actual tax payments
made or to be made in connection therewith.
New Issuance Prepayment. See ss.3.6.3.
New Lending Office. See ss.8.12.4.
New Notes. See ss.12.8.
Non-U.S. Bank. See ss.8.12.3.
Notes. The Term Notes, the Gold Notes and the Revolving Credit Notes.
Obligations. All indebtedness, obligations and liabilities of any of the
Borrower and its Subsidiaries to any of the Banks, the Agents and the Collateral
Agent, individually or collectively, existing on the date of this Credit
Agreement or arising thereafter, direct or indirect, joint or several, absolute
or contingent, matured or unmatured, liquidated or unliquidated, secured or
unsecured, arising by contract, operation of law or otherwise, arising or
incurred under this Credit Agreement or any of the other Loan Documents, or
under any Hedging Agreement entered into between any of the Borrower and its
Subsidiaries and either of the Agents, or in respect of any of the Loans or
Consignments made or Reimbursement Obligations incurred or any of the Notes, the
Guaranty, any Letter of Credit Application, Letter of Credit or other
instruments at any time evidencing any thereof.
Operating Accounts. See ss.8.3(b).
outstanding. With respect to the Loans, the aggregate unpaid principal
thereof as of any date of determination; with respect to Consignments, the
aggregate Fair Market Value or number of troy ounces of Consigned Precious Metal
which, as of any date of determination, has not been paid for by the Borrower or
Redelivered.
Outstanding Facility Amounts. The sum of (a) the outstanding amount of the
Revolving Credit Loans (after giving effect to all amounts requested)
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plus (b) the outstanding amount of the Gold Loans (after giving effect to all
amounts requested) plus (c) the Fair Market Value of Consigned Precious Metal
(after giving effect to all Consignments requested) plus (d) the Maximum Drawing
Amount and all Unpaid Reimbursement Obligations.
Overdue Receivables. Accounts Receivable of the Borrower that are
outstanding for more than (a) with respect to Accounts Receivable owing by
independent sales representatives of the division of the Borrower previously
constituting the "Scholastic Division" of the Balfour Sellers, (i) during the
months of July, August, November and December of any year (and during the month
of June of 1997), one hundred eighty (180) days past the earlier to occur of (A)
the date of the respective invoices therefor and (B) the date of shipment
thereof in the case of goods or the end of the calendar month following the
provision thereof in the case of services, and (ii) at any other time, one
hundred twenty (120) days past the earlier to occur of (A) the date of the
respective invoices therefor and (B) the date of shipment thereof in the case of
goods or the end of the calendar month following the provision thereof in the
case of services, (b) with respect to Accounts Receivable owing by Walmart
Stores, the earlier to occur of (i) one hundred fifty (150) days past the date
of shipment of the goods relating thereto and (ii) one hundred twenty (120) days
past the due date for payment thereon, (c) with respect to Accounts Receivable
owing by any of the Specified Account Debtors classified as "60 Day Term
Specified Account Debtors" on the Specified Account Debtor Letter, the earlier
to occur of (i) one hundred twenty (120) days past the date of shipment of the
goods relating thereto and (ii) sixty (60) days past the due date for payment
thereon, (d) with respect to Accounts Receivable owing by any of the Specified
Account Debtors classified as "90 Day Term Specified Account Debtors" on the
Specified Account Debtor Letter, the earlier to occur of (i) one hundred fifty
(150) days past the date of shipment of the goods relating thereto and (ii)
sixty (60) days past the due date for payment thereon, (e) with respect to
Accounts Receivable owing by any of the Specified Account Debtors classified as
"120 Day Term Specified Account Debtors" on the Specified Account Debtor Letter,
the earlier to occur of (i) one hundred fifty (150) days past the date of
shipment thereof and (ii) thirty (30) days past the due date for payment
thereon, (f) sixty (60) days past the due date for payment thereon with respect
to Accounts Receivable (A) owed by college students who have purchased goods on
an installment sale basis with full payment to be due within eight (8) months of
the date of sale, (B) owed by high school students who have purchased goods on
an installment sale basis with full payment to be due within six (6) months of
the date of sale, or (C) generated in connection with the Borrower's
"Recognition Products" division where the account debtor has purchased goods on
an installment sale basis with full payment to be due within ten (10) months of
the date of sale, provided, that the aggregate amount of any such Accounts
Receivable owing by college or high school students or generated in connection
with the Borrower's "Recognition Products" division constituting Eligible
Accounts Receivable shall in no event exceed $5,000,000 at any time, and (g)
with respect to all other Accounts Receivable of the Borrower, the earlier to
occur of (i) ninety (90) days past the earlier
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to occur of (A) the date of the respective invoices therefor and (B) the date of
shipment thereof in the case of goods or the end of the calendar month following
the provision thereof in the case of services and (ii) sixty (60) days past the
due date for payment thereon.
Patent Assignment. The Patent Collateral Assignment and Security Agreement,
dated or to be dated on or prior to the Closing Date, made by the Borrower in
favor of the Collateral Agent and in form and substance satisfactory to the
Banks, the Collateral Agent and the Agents.
PBGC. The Pension Benefit Guaranty Corporation created by ss.4002 of ERISA
and any successor entity or entities having similar responsibilities.
Perfection Certificates. The Perfection Certificates as defined in the
Security Agreement.
Performance Adjustment. See ss.8.21.
Performance Adjustment Date. See ss.8.21.
Permitted Common Stock Repurchases. Repurchases of the Borrower's common
stock which are made concurrently with the issuance by the Borrower of
additional common stock to employees or sales representatives so long as the
Borrower receives a cash purchase price in respect of any such additional common
stock from such employees or sales representatives in an amount equal to the
aggregate amount of cash to be paid in order to effect such repurchases of
common stock.
Permitted Employee Stock Repurchases. Repurchases of common stock of the
Borrower theretofore issued to employees or independent sales representatives of
the Borrower so long as the aggregate amount paid by the Borrower in cash with
respect thereto shall not exceed $500,000 during any fiscal year.
Notwithstanding the foregoing, (a) any unused portion of any such amount for
common stock repurchases in any fiscal year may be used in the succeeding fiscal
year (but not any other fiscal year) and any such amounts carried forward to a
succeeding fiscal year shall be used for common stock repurchases in such
succeeding fiscal year prior to using any portion of the amount permitted for
such succeeding fiscal year, and (b) after using the entire permitted cash
amount available for such common stock repurchases in any fiscal year, the
Borrower may also issue promissory notes to employees and sales representatives
to effect such repurchases of common stock so long as such promissory notes are
issued on terms which are subordinate in all respects to the Obligations and so
long as no payments, redemptions or repurchases of any kind may be made with
respect to any such promissory notes prior to the irrevocable payment in full in
cash of all of the Obligations and the termination of all of the Commitments,
Gold Commitments and the Gold Fronting Commitment.
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Permitted Liens. Liens, security interests and other encumbrances permitted
by ss.12.2.
Permitted Preferred Stock Dividends. Payments of cash dividends in respect
of the Borrower's Series A Preferred Stock as set forth in the Borrower's
Certificate of Incorporation as in effect on the date hereof or any Permitted
Preferred Stock Replacement constituting preferred stock, provided that (a) the
Borrower and its Subsidiaries shall have had, for the period of four consecutive
fiscal quarters most recently ended prior to the payment of any such dividend, a
ratio of Consolidated EBITDA to Consolidated Total Interest Expense equal to at
least 2.25:1.0, (b) no Event of Default shall have occurred and be continuing
and none would result from the making of such dividend, (c) such dividends shall
be payable at a rate not to exceed one percent (1%) per annum in excess of the
interest rate payable in respect of the Subordinated Notes, and (d) the Borrower
shall provide the Agents, prior to the making of any such dividend payment, with
a statement certified by the principal financial or accounting officer of the
Borrower setting forth in reasonable detail computations evidencing the
calculation described in clause (a) above.
Permitted Preferred Stock Replacement. (a) Indebtedness incurred by the
Borrower, (b) additional common stock issued by the Borrower or (c) preferred
stock issued by the Borrower, in each case in connection with, and solely to the
extent of, the replacement of a portion of the Borrower's existing Series A
Preferred Stock in an aggregate principal amount not in excess of $10,000,000
(plus the amount of accrued dividends on such existing Series A Preferred Stock)
at any time outstanding, provided that (i) in the case of any such Indebtedness,
the Borrower and its Subsidiaries shall have had for the period of four
consecutive fiscal quarters most recently ended prior to the incurrence of such
Indebtedness, a ratio of Consolidated EBITDA to Consolidated Total Interest
Expense equal to at least 2.5:1.0, (ii) in the case of any such Indebtedness,
such Indebtedness shall be subordinated in all other respects to the Obligations
on terms substantially identical to, or no more favorable to the holders thereof
than, the terms of the Subordinated Notes (except that the interest rate payable
thereon may exceed the rate payable in respect of the Subordinated Notes by no
more than one percent (1%) per annum), and (iii) in the case of any such
preferred stock, such preferred stock shall have rights, preferences and terms
no more adverse to the interests of the Banks and the Agents than the existing
Series A Preferred Stock and shall accrue dividends at a rate not in excess of
the rate payable on such existing Series A Preferred Stock as of the date
hereof, and (d) the Borrower shall provide the Agents, prior to the incurrence
of such Indebtedness or, as the case may be, the issuance of such common stock
or preferred stock, with a statement certified by the principal financial or
accounting officer of the Borrower setting forth in reasonable detail
computations evidencing the calculation described in clause (a) above.
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Person. Any individual, corporation, partnership, trust, unincorporated
association, business, or other legal entity, and any government or any
governmental agency or political subdivision thereof.
Precious Metal. Gold measured in troy ounces having a fineness of not less
than .9995, without regard to whether such gold is alloyed or unalloyed, in
bullion form or contained in or processed into other materials which contain
elements other than gold.
Purchase and Consignment. Purchases from, and consignments to, the Borrower
of Borrower's Precious Metal made or to be made by the Gold Agent (on behalf of
the Gold Banks) pursuant to ss.5.1(a).
Purchase Price. See ss.5.1(b).
Real Estate. All real property at any time owned or leased (as lessee or
sublessee) by the Borrower or any of its Subsidiaries.
Record. The grid attached to a Note, or the continuation of such grid, or
any other similar record, including computer records, maintained by any Bank
with respect to any Loan referred to in such Note.
Redeliver(ed) or Redelivery. The delivery by the Borrower to the Gold
Agent's Head Office, at the Borrower's sole risk and expense, of Precious Metal
in bullion form of a type and quality which is acceptable to the Gold Agent.
Reemployment Period. See ss.8.19(a).
Register. See ss.22.3.
Reimbursement Obligation. The Borrower's obligation to reimburse the Dollar
Agent and the Dollar Banks on account of any drawing under any Letter of Credit
as provided in ss.4.2.
Replaced Bank. See ss.8.22.
Replacement Bank. See ss.8.22.
Revolver Maturity Date. December 16, 2001.
Revolving Credit Loans. Revolving credit loans made or to be made by the
Dollar Banks to the Borrower pursuant to ss.2.
Revolving Credit Note Record. A Record with respect to a Revolving Credit
Note.
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Revolving Credit Notes. See ss.2.4.
RIHT. Rhode Island Hospital Trust National Bank, a national banking
association, in its individual capacity.
Sales Representative Inventory Locations. The locations of the inventory
held by sale representatives of the Borrower in the United States of America and
disclosed in writing to the Agents, as such list of locations may be
supplemented from time to time in accordance with the provisions of ss.11.4(i).
Security Agreement. The Security Agreement, dated or to be dated on or
prior to the Closing Date, among the Borrower, its Subsidiaries (other than the
Mexican Subsidiary) and the Collateral Agent and in form and substance
satisfactory to the Banks, the Collateral Agent and the Agents.
Security Documents. The Security Agreement, the Mortgages, the Stock Pledge
Agreement, the Trademark Assignment, the Trademark Security Agreement, the
Patent Assignment, the Copyright Memorandum, the Mexican Stock Pledge Agreement,
the Cash Collateral Agreement, all Agency Account Agreements, the Confirmation
of Swap Agreement, and the Swap Agreement.
Sellers. Collectively, the CJC Sellers and the Balfour Sellers.
Settlement. The making of, or receiving of payments, in immediately
available funds, by the Dollar Banks or, as the case may be, the Gold Banks, to
the extent necessary to cause each Applicable Bank's actual share of the
outstanding amount of Revolving Credit Loans (after giving effect to any Loan
Request) or, as the case may be, of Gold Loans (after giving effect to any Loan
Request) to be equal to each Dollar Bank's Commitment Percentage of the
outstanding amount of such Revolving Credit Loans (after giving effect to any
Loan Request) or, as the case may be, each Gold Bank's Gold Commitment
Percentage of the outstanding amount of such Gold Loans (after giving effect to
any Loan Request), in any case where, prior to such event or action, the actual
share is not so equal.
Settlement Amount. See ss.8.6(a).
Settlement Date. (a) The Drawdown Date relating to any Loan Request, (b)
Friday of each week, or if Friday is not a Business Day, the Business Day
immediately following such Friday, (c) the Business Day immediately following
either Agent becoming aware of the existence of an Event of Default, (d) any
Business Day on which (i) the amount of Revolving Credit Loans outstanding from
FNBB plus FNBB's Commitment Percentage of the sum of the Maximum Drawing Amount
and any Unpaid Reimbursement Obligations is equal to or greater than FNBB's
Commitment Percentage of the Total Revolver Commitment, or, as the case may be,
(ii) the amount of Gold Loans outstanding from RIHT plus RIHT's Gold
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Commitment Percentage of the Fair Market Value of Consigned Precious Metal
outstanding is equal to or greater than RIHT's Gold Commitment Percentage of the
Total Gold Commitment, (e) the Business Day immediately following any Business
Day on which the amount of Loans outstanding increases or decreases by more than
$5,000,000 as compared to the previous Settlement Date, (f) any day on which any
conversion of a Base Rate Loan to a Eurodollar Rate Loan occurs, or (g) any
Business Day on which (i) the amount of outstanding Revolving Credit Loans or,
as the case may be, Gold Loans decreases and (ii) the amount of the Applicable
Agent's Loans outstanding equals Zero Dollars ($0).
Settling Bank. See ss.8.6(a).
Specified Account Debtors. The account debtors of the Borrower specifically
disclosed in writing to the Agents and the Banks pursuant to a letter from the
Borrower to the Agents and the Banks delivered as of the Closing Date (the
"Specified Account Debtor Letter") so long as the Agents shall not have notified
the Borrower in writing that the Agents shall have determined in their
discretion that any such Person shall no longer constitute a Specified Account
Debtor or shall constitute a Specified Account Debtor under a different heading
as set forth on the Specified Account Debtor Letter.
Specified Account Debtor Letter. See the definition of Specified Account
Debtors.
Specified Refiner. Any refiner of Precious Metal inventory of the Borrower
designated by the Borrower and approved by the Agents so long as the Agents
shall not have notified the Borrower in writing that the Agents shall have
determined in their sole reasonable discretion that any such refiner shall no
longer constitute a Specified Refiner due to a change in the creditworthiness of
such refiner or a change in the Agents' trading relationship with such refiner.
Spot Value: At any time, with respect to the calculation of the Dollar
value of Precious Metal, (a) in all cases in which the Borrower is purchasing
Precious Metal or in which the value of Consigned Precious Metal for purposes of
the Consignment Limit is being calculated, RIHT's "ask" spot quotation for
Precious Metal at such time times the number of ounces of such Precious Metal
and (b) in all cases in which Gold Banks are purchasing Precious Metal, RIHT's
"bid" spot quotation for Precious Metal at such time times the number of ounces
of such Precious Metal.
Stock Pledge Agreement. The Stock Pledge Agreement, dated or to be dated on
or prior to the Closing Date, between the Borrower and the Collateral Agent and
in form and substance satisfactory to the Banks, the Collateral Agent and the
Agents.
Subordinated Notes. The Borrower's (a) 11% Senior Subordinated Notes due
2006 issued by the Borrower pursuant to the Indenture, as in effect on the
Closing
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Date and as amended in accordance with the provisions of ss.12.8 hereof, or any
replacement thereof entered into by the Borrower in accordance with the
provisions of ss.12.8.
Subsidiary. Any corporation, association, trust, or other business entity
of which the designated parent shall at any time own directly or indirectly
through a Subsidiary or Subsidiaries at least a majority (by number of votes) of
the outstanding Voting Stock.
Survey. In relation to each Mortgaged Property (other than the Real Estate
of the Borrower located in Kentucky), an instrument survey of such Mortgaged
Property dated as of a date subsequent to December 8, 1996, which shall show the
location of all buildings, structures, easements and utility lines on such
Mortgaged Property, shall show that all buildings and structures are within the
lot lines of such Mortgaged Property, shall not show any encroachments by
others, shall show the zoning district or districts in which such Mortgaged
Property is located in a flood hazard district as established by the Federal
Emergency Management Agency or any successor agency or is located in any flood
plain, flood hazard or wetland protection district established under federal,
state or local law.
Surveyor Certificate. In relation to each Mortgaged Property for which a
Survey has been conducted, a certificate executed by the surveyor who prepared
such Survey dated subsequent to December 8, 1996, as of a recent date and
containing such information relating to such Mortgaged Property as the
Collateral Agent or the Title Insurance Company may require.
Swap Agreement. The ISDA Master Agreement dated or to be dated on or prior
to the Closing Date, between the Borrower and the Gold Agent and in form and
substance satisfactory to each of the Borrower, the Banks and the Agents.
Taxes. See ss.8.12.2.
Term Loan. The term loan made or to be made by the Dollar Banks to the
Borrower in the aggregate principal amount of $25,000,000.00 pursuant to ss.3.1.
Term Loan Maturity Date. December 16, 2003.
Term Notes. See ss.3.2.
Term Note Record. A Record with respect to a Term Note.
Title Policy. In relation to each Mortgaged Property, an ALTA standard form
title insurance policy issued by the Title Insurance Company (with such
reinsurance or co-insurance as the Collateral Agent may require, any such
reinsurance to be with direct access endorsements) in such amount as may be
determined by the Collateral
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Agent insuring the priority of the Mortgage of such Mortgaged Property and that
the Borrower or one of its Subsidiaries holds marketable fee simple, or, as the
case may be, leasehold title to such Mortgaged Property, subject only to the
encumbrances permitted by such Mortgage and which shall not contain exceptions
for mechanics liens, persons in occupancy or matters which would be shown by a
survey (except as may be permitted by such Mortgage), shall not insure over any
matter except to the extent that any such affirmative insurance is acceptable to
the Collateral Agent in its reasonable discretion, and shall to the extent
available contain such endorsements and affirmative insurance as the Collateral
Agent in its reasonable discretion may require, including but not limited to (i)
comprehensive endorsement, (ii) variable rate of interest endorsement, (iii)
usury endorsement, (iv) revolving credit endorsement, (v) tie-in endorsement,
(vi) doing business endorsement and (vii) ALTA form 3.1 zoning endorsement.
Total Commitment. The sum of the Total Revolver Commitment, the Total Gold
Commitment and the then outstanding principal amount of the Term Loan.
Total Gold Commitment. The sum of the Gold Commitments of the Gold Banks,
as in effect from time to time.
Total Revolver Commitment. The sum of the Commitments of the Dollar Banks,
as in effect from time to time.
Trade and OCB Liabilities. All liabilities of the Borrower and its
Subsidiaries incurred in the ordinary course of business not incurred through
(a) the borrowing of money, or (b) the obtaining of credit except for credit on
an open account basis customarily extended and in fact extended in connection
with normal purchases of goods and services.
Trademark Assignments. The Trademark Assignment, dated or to be dated on or
prior to the Closing Date, made by the Borrower in favor of the Collateral Agent
and in form and substance satisfactory to the Banks, the Collateral Agent and
the Agents.
Trademark Security Agreement. The Trademark Collateral Security and Pledge
Agreement, dated or to be dated on or prior to the Closing Date, between the
Borrower and the Collateral Agent and in form and substance satisfactory to the
Banks, the Collateral Agent and the Agents.
Type. As to any Revolving Credit Loan, Gold Loan or all or any portion of
the Term Loan, its nature as a Base Rate Loan or a Eurodollar Rate Loan.
Uniform Customs. With respect to any Letter of Credit, the Uniform Customs
and Practice for Documentary Credits (1993 Revision), International Chamber of
Commerce Publication No. 500 or any successor version thereto adopted by the
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Dollar Agent in the ordinary course of its business as a letter of credit issuer
and in effect at the time of issuance of such Letter of Credit.
Unpaid Reimbursement Obligation. Any Reimbursement Obligation for which the
Borrower does not reimburse the Dollar Agent and the Dollar Banks on the date
specified in, and in accordance with, ss.4.2.
Voting Stock. Stock or similar interests, of any class or classes (however
designated), the holders of which are at the time entitled, as such holders, to
vote for the election of a majority of the directors (or persons performing
similar functions) of the corporation, association, trust or other business
entity involved, whether or not the right so to vote exists by reason of the
happening of a contingency.
1.2. Rules of Interpretation.
(a) A reference to any document or agreement shall include such
document or agreement as amended, modified or supplemented from time to
time in accordance with its terms and the terms of this Credit Agreement.
(b) The singular includes the plural and the plural includes the
singular.
(c) A reference to any law includes any amendment or modification to
such law.
(d) A reference to any Person includes its permitted successors and
permitted assigns.
(e) Accounting terms not otherwise defined herein have the meanings
assigned to them by generally accepted accounting principles applied on a
consistent basis by the accounting entity to which they refer.
(f) The words "include", "includes" and "including" are not limiting.
(g) All terms not specifically defined herein or by generally accepted
accounting principles, which terms are defined in the Uniform Commercial
Code as in effect in the Commonwealth of Massachusetts, have the meanings
assigned to them therein, with the term "instrument" being that defined
under Article 9 of the Uniform Commercial Code.
(h) Reference to a particular "ss." refers to that section of this
Credit Agreement unless otherwise indicated.
(i) The words "herein", "hereof", "hereunder" and words of like import
shall refer to this Credit Agreement as a whole and not to any particular
section or subdivision of this Credit Agreement.
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2. THE DOLLAR FACILITY - REVOLVING CREDIT LOANS.
2.1. Commitment to Lend. Subject to the terms and conditions set forth in
this Credit Agreement, each of the Dollar Banks severally agrees to lend to the
Borrower and the Borrower may borrow, repay, and reborrow from time to time
between the Closing Date and the Revolver Maturity Date upon notice by the
Borrower to the Dollar Agent given in accordance with ss.8.3, such sums as are
requested by the Borrower up to a maximum aggregate amount outstanding (after
giving effect to all amounts requested) at any one time equal to such Dollar
Bank's Commitment minus such Dollar Bank's Commitment Percentage of the sum of
the Maximum Drawing Amount and all Unpaid Reimbursement Obligations, provided
that the sum of the outstanding amount of the Revolving Credit Loans (after
giving effect to all amounts requested) plus the Maximum Drawing Amount and all
Unpaid Reimbursement Obligations shall not at any time exceed the Total Revolver
Commitment. The Revolving Credit Loans shall be made pro rata in accordance with
each Dollar Bank's Commitment Percentage. Each request for a Revolving Credit
Loan hereunder shall constitute a representation and warranty by the Borrower
that the conditions set forth in ss.14 and ss.15, in the case of the initial
Revolving Credit Loans to be made on the Closing Date, and ss.15, in the case of
all other Revolving Credit Loans, have been satisfied on the date of such
request.
2.2. Commitment Fee. The Borrower agrees to pay to the Dollar Agent for the
accounts of the Dollar Banks in accordance with their respective Commitment
Percentages a commitment fee calculated at the rate of one half of one percent
(1/2%) per annum on the average daily amount during each calendar quarter or
portion thereof from the Closing Date to the Revolver Maturity Date by which the
Total Revolver Commitment minus the sum of the Maximum Drawing Amount and all
Unpaid Reimbursement Obligations exceeds the outstanding amount of Revolving
Credit Loans during such calendar quarter. The commitment fee shall be payable
quarterly in arrears on the first day of each calendar quarter for the
immediately preceding calendar quarter commencing on the first such date
following the date hereof, with a final payment on the Revolver Maturity Date or
any earlier date on which the Commitments shall terminate.
2.3. Reduction of Total Revolver Commitment. The Borrower shall have the
right at any time and from time to time upon five (5) Business Days prior
written notice to the Dollar Agent to reduce by $500,000.00 or an integral
multiple thereof or terminate entirely the Total Revolver Commitment, whereupon
the Commitments of the Dollar Banks shall be reduced pro rata in accordance with
their respective Commitment Percentages of the amount specified in such notice
or, as the case may be, terminated. Promptly after receiving any notice of the
Borrower delivered pursuant to this ss.2.3, the Dollar Agent will notify the
Dollar Banks of the substance thereof. Upon the effective date of any such
reduction or termination, the Borrower shall pay to the Dollar Agent for the
respective accounts of the Dollar Banks the full
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amount of any commitment fee then accrued on the amount of the reduction. No
reduction or termination of the Commitments may be reinstated.
2.4. The Revolving Credit Notes. The Revolving Credit Loans shall be
evidenced by separate promissory notes of the Borrower in substantially the form
of Exhibit E hereto (each a "Revolving Credit Note"), dated as of the Closing
Date and completed with appropriate insertions. One Revolving Credit Note shall
be payable to the order of each Dollar Bank in a principal amount equal to such
Dollar Bank's Commitment or, if less, the outstanding amount of all Revolving
Credit Loans made by such Dollar Bank, plus interest accrued thereon, as set
forth below. The Borrower irrevocably authorizes each Dollar Bank to make or
cause to be made, at or about the time of the Drawdown Date of any Revolving
Credit Loan or at the time of receipt of any payment of principal on such Dollar
Bank's Revolving Credit Note, an appropriate notation on such Dollar Bank's
Revolving Credit Note Record reflecting the making of such Revolving Credit Loan
or (as the case may be) the receipt of such payment. The outstanding amount of
the Revolving Credit Loans set forth on such Dollar Bank's Revolving Credit Note
Record shall be prima facie evidence of the principal amount thereof owing and
unpaid to such Dollar Bank, but the failure to record, or any error in so
recording, any such amount on such Dollar Bank's Revolving Credit Note Record
shall not limit or otherwise affect the obligations of the Borrower hereunder or
under any Revolving Credit Note to make payments of principal of or interest on
any Revolving Credit Note when due.
2.5. Interest on Revolving Credit Loans. Except as otherwise provided in
ss.8.20, the Revolving Credit Loans shall bear interest in accordance with the
provisions of ss.8.1 hereof.
2.6. Requests for Revolving Credit Loans; Conversion Options. The Borrower
shall request Revolving Credit Loans by providing to the Dollar Agent Loan
Requests for Revolving Credit Loans in accordance with the requirements of
ss.8.3(a) hereof. The Dollar Agent may, in its sole discretion and without
conferring with the Dollar Banks, make Revolving Credit Loans to the Borrower in
accordance with the provisions of ss.8.3(b) hereof. The Borrower shall be
permitted to convert Revolving Credit Loans to Revolving Credit Loans of
different Types in accordance with the provisions of ss.8.4 hereof, and such
provisions of ss.8.4 shall apply mutatis mutandis with respect to the Revolving
Credit Loans so that the Borrower will have the same interest rate options with
respect to the Revolving Credit Loans as they would be entitled to with respect
to the Gold Loans and the Term Loan.
2.7. Funds for Revolving Credit Loans. The provisions of ss.8.5 and ss.8.6
with respect to the funding procedures and Settlement procedures for the Loans
shall apply to the Revolving Credit Loans.
2.8. Maturity. The Borrower promises to pay on the Revolver Maturity Date,
and there shall become absolutely due and payable on the Revolver Maturity
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Date, all of the Revolving Credit Loans outstanding on such date, together with
any and all accrued and unpaid interest thereon.
2.9. Optional Repayments of Revolving Credit Loans. The Borrower shall have
the right, at its election, to repay the outstanding Revolving Credit Loans in
accordance with the provisions of ss.8.7 hereof.
3. THE DOLLAR FACILITY - THE TERM LOAN.
3.1. Commitment to Lend. Subject to the terms and conditions set forth in
this Credit Agreement, each Dollar Bank agrees to lend to the Borrower the
amount of its Commitment Percentage of the principal amount of $25,000,000.00.
3.2. The Term Notes. The Term Loan shall be evidenced by separate
promissory notes of the Borrower in substantially the form of Exhibit F hereto
(each a "Term Note"), dated the Closing Date and completed with appropriate
insertions. One Term Note shall be payable to the order of each Dollar Bank in a
principal amount equal to such Dollar Bank's Commitment Percentage of the Term
Loan and representing the obligation of the Borrower to pay to such Dollar Bank
such principal amount or, if less, the outstanding amount of such Dollar Bank's
Commitment Percentage of the Term Loan, plus interest accrued thereon, as set
forth below. The Borrower irrevocably authorizes each Dollar Bank to make or
cause to be made a notation on such Dollar Bank's Term Note Record reflecting
the original principal amount of such Dollar Bank's Commitment Percentage of the
Term Loan and, at or about the time of such Dollar Bank's receipt of any
principal payment on such Dollar Bank's Term Note, an appropriate notation on
such Dollar Bank's Term Note Record reflecting such payment. The aggregate
unpaid amount set forth on such Dollar Bank's Term Note Record shall be prima
facie evidence of the principal amount thereof owing and unpaid to such Dollar
Bank, but the failure to record, or any error in so recording, any such amount
on such Dollar Bank's Term Note Record shall not affect the obligations of the
Borrower hereunder or under any Term Note to make payments of principal of and
interest on any Term Note when due.
3.3. Schedule of Installment Payments of Principal of Term Loan. The
Borrower promises to pay to the Dollar Agent for the account of the Dollar Banks
the principal amount of the Term Loan in twenty-eight (28) consecutive quarterly
installment payments, twenty-seven (27) of which shall be payable on each
calendar quarter ending date and each in the amount set forth in the table below
opposite the period in such table during which such calendar quarter ending date
occurs, with a final payment on the Term Loan Maturity Date in an amount equal
to the unpaid balance of the Term Loan:
Amount of
Period: Quarterly Payment:
------ -----------------
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January 1, 1997 - December 31, 1997 $125,000.00
January 1, 1998 - December 31, 1998 $250,000.00
January 1, 1999 - December 31, 1999 $375,000.00
January 1, 2000 - December 31, 2000 $500,000.00
January 1, 2001 - December 31, 2001 $750,000.00
January 1, 2002 - December 31, 2002 $2,000,000.00
January 1, 2003 - September 30, 2003 $2,250,000.00
3.4. Optional Prepayment of Term Loan. The Borrower shall have the right at
any time to prepay the Term Loan in accordance with the provisions of ss.8.7.
Any prepayment of principal of the Term Loan shall be applied ratably against
the remaining scheduled installments of principal due on the Term Loan. No
amount repaid with respect to the Term Loan may be reborrowed.
3.5. Interest on Term Loan. Except as otherwise provided in ss.8.20, the
outstanding amount of the Term Loan shall bear interest in accordance with the
provisions of ss.8.1. The Borrower shall notify the Dollar Agent, such notice to
be irrevocable, at least two (2) Business Days prior to the Drawdown Date of the
Term Loan if all or any portion of the Term Loan is to bear interest at the
Eurodollar Rate. After the Term Loan has been made, the provisions of ss.8.4
shall apply mutatis mutandis with respect to all or any portion of the Term Loan
so that the Borrower may have the same interest rate options with respect to all
or any portion of the Term Loan as it would be entitled to with respect to the
Revolving Credit Loans and the Gold Loans. The Borrower shall select each
Interest Period with respect to the Term Loan so as not to require a payment or
prepayment of any Eurodollar Rate Loan prior to the end of the applicable
Interest Period with respect to such Eurodollar Rate Loan.
3.6. Mandatory Prepayments of the Term Loan.
3.6.1. Excess Cash Flow Prepayment. The Borrower shall pay to the
Dollar Agent, for the accounts of the Dollar Banks (each, an "Excess Cash
Flow Prepayment"), annually in arrears on February 15 of each year
(commencing on February 15, 1998), an amount equal to fifty percent (50%)
of the Consolidated Excess Cash Flow, if any, for such immediately
preceding fiscal year. Each such Excess Cash Flow Prepayment shall be
applied ratably against the remaining scheduled installments of principal
due on the Term Loan; provided, however, that a portion of the Excess Cash
Flow Prepayment (if any) scheduled to be made on February 15, 1999, not to
exceed
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$1,500,000, shall be applied instead to repay the outstanding Revolving
Credit Loans with the remainder of such Excess Cash Flow Prepayment, if
any, to be applied ratably against the remaining scheduled installments of
principal due on the Term Loan.
3.6.2. Asset Disposition Prepayment. The Borrower shall pay to the
Dollar Agent, for the accounts of the Dollar Banks (each, an "Asset
Disposition Prepayment"), within thirty (30) days after the completion by
the Borrower of any asset dispositions pursuant to ss.12.5.2(j), an amount
equal to one hundred percent (100%) of the Net Proceeds received by the
Borrower in connection with such asset disposition solely to the extent
that the aggregate amount of Net Proceeds received by the Borrower shall
exceed (a) for all such asset dispositions undertaken pursuant to
ss.12.5.2(j) during the period prior to the first anniversary of the
Closing Date, $500,000 and (b) for all such asset dispositions undertaken
pursuant to ss.12.5.2(j) during any one year period after the first
anniversary of the Closing Date from one anniversary of the Closing Date to
the next anniversary of the Closing Date, $250,000. Each such Asset
Disposition Prepayment shall be applied ratably against the remaining
scheduled installments of principal due on the Term Loan. The Borrower
shall also use any proceeds from the sale of assets mandated by the Federal
Trade Commission, to the extent such sale is permitted by ss.12.5.2(f), to
prepay the principal amount of the Term Loan as set forth in such
ss.12.5.2(f).
3.6.3. New Issuance Prepayment. The Borrower shall pay to the Dollar
Agent, for the accounts of the Dollar Banks (each, a "New Issuance
Prepayment"), within ten (10) days after the completion by the Borrower of
any issuance of additional common equity securities (other than issuances
of common stock to employees or independent sales representatives of the
Borrower and other than any Permitted Preferred Stock Replacement), an
amount equal to one hundred percent 100% of the Net Proceeds received by
the Borrower in connection with any such issuance by the Borrower of equity
securities or warrants or subscription rights for equity securities;
provided however, that no such New Issuance Prepayments shall be required
from and after the occurrence of the Issuance Prepayment Termination Date.
Each such New Issuance Prepayment shall be applied ratably against the
remaining scheduled installments of principal due on the Term Loan.
4. THE DOLLAR FACILITY - LETTERS OF CREDIT.
4.1. Letter of Credit Commitments.
4.1.1. Commitment to Issue Letters of Credit. Subject to the terms and
conditions hereof and the execution and delivery by the Borrower of a
letter of credit application on the Dollar Agent's customary form (a
"Letter of
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Credit Application"), the Dollar Agent on behalf of the Dollar Banks and in
reliance upon the agreement of the Dollar Banks set forth in ss.4.1.4 and
upon the representations and warranties of the Borrower contained herein,
agrees, in its individual capacity, to issue, extend and renew for the
account of the Borrower one or more standby or documentary letters of
credit (individually, a "Letter of Credit"), in such form as may be
requested from time to time by the Borrower and agreed to by the Dollar
Agent; provided, however, that, after giving effect to such request, (a)
the sum of the aggregate Maximum Drawing Amount and all Unpaid
Reimbursement Obligations shall not exceed $5,000,000.00 at any one time
and (b) the sum of (i) the Maximum Drawing Amount on all Letters of Credit,
(ii) all Unpaid Reimbursement Obligations, and (iii) the amount of all
Revolving Credit Loans outstanding shall not exceed the Total Revolver
Commitment. Notwithstanding the foregoing, the Dollar Agent shall have no
obligation to issue any Letter of Credit to support or secure any
Indebtedness of the Borrower or any of its Subsidiaries to the extent that
such Indebtedness was incurred prior to the proposed issuance date of such
Letter of Credit, unless in any such case the Borrower demonstrates to the
satisfaction of the Dollar Agent that (x) such prior incurred Indebtedness
were then fully secured by a prior perfected and unavoidable security
interest in collateral provided by the Borrower or such Subsidiary to the
proposed beneficiary of such Letter of Credit or (y) such prior incurred
Indebtedness were then secured or supported by a letter of credit issued
for the account of the Borrower or such Subsidiary and the reimbursement
obligation with respect to such letter of credit was fully secured by a
prior perfected and unavoidable security interest in collateral provided to
the issuer of such letter of credit by the Borrower or such Subsidiary.
4.1.2. Letter of Credit Applications. Each Letter of Credit
Application shall be completed to the satisfaction of the Dollar Agent. In
the event that any provision of any Letter of Credit Application shall be
inconsistent with any provision of this Credit Agreement, then the
provisions of this Credit Agreement shall, to the extent of any such
inconsistency, govern.
4.1.3. Terms of Letters of Credit. Each Letter of Credit issued,
extended or renewed hereunder shall, among other things, (a) provide for
the payment of sight drafts for honor thereunder when presented in
accordance with the terms thereof and when accompanied by the documents
described therein, and (b) have an expiry date (i) no later than the date
which is fourteen (14) days (or, if the Letter of Credit is confirmed by a
confirmer or otherwise provides for one or more nominated persons,
forty-five (45) days) prior to the Revolver Maturity Date, (ii) no more
than one (1) year from the issue date thereof with respect to standby
Letters of Credit, and (iii) no more than one hundred twenty (120) days
from the issue date thereof with respect to
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documentary Letters of Credit. Each Letter of Credit so issued, extended or
renewed shall be subject to the Uniform Customs.
4.1.4. Reimbursement Obligations of Dollar Banks. Each Dollar Bank
severally agrees that it shall be absolutely liable, without regard to the
occurrence of any Default or Event of Default or any other condition
precedent whatsoever, to the extent of such Dollar Bank's Commitment
Percentage, to reimburse the Dollar Agent on demand for the amount of each
draft paid by the Dollar Agent under each Letter of Credit to the extent
that such amount is not reimbursed by the Borrower pursuant to ss.4.2 (such
agreement for a Dollar Bank being called herein the "Letter of Credit
Participation" of such Dollar Bank).
4.1.5. Participations of Dollar Banks. Each such payment made by a
Dollar Bank shall be treated as the purchase by such Dollar Bank of a
participating interest in the Borrower's Reimbursement Obligation under
ss.4.2 in an amount equal to such payment. Each Dollar Bank shall share in
accordance with its participating interest in any interest which accrues
pursuant to ss.4.2.
4.2. Reimbursement Obligation of the Borrower. In order to induce the
Dollar Agent to issue, extend and renew each Letter of Credit and the Dollar
Banks to participate therein, the Borrower hereby agrees to reimburse or pay to
the Dollar Agent, for the account of the Dollar Agent or (as the case may be)
the Dollar Banks, with respect to each Letter of Credit issued, extended or
renewed by the Dollar Agent hereunder,
(a) except as otherwise expressly provided in ss.4.2(b) and (c), on
each date that any draft presented under such Letter of Credit is honored
by the Dollar Agent, or the Dollar Agent otherwise makes a payment with
respect thereto, (i) the amount paid by the Dollar Agent under or with
respect to such Letter of Credit, and (ii) the amount of any taxes, fees,
charges or other reasonable costs and expenses whatsoever incurred by the
Dollar Agent or any Dollar Bank in connection with any payment made by the
Dollar Agent or any Dollar Bank under, or with respect to, such Letter of
Credit,
(b) upon the reduction (but not termination) of the Total Revolver
Commitment to an amount less than the Maximum Drawing Amount, an amount
equal to such difference, which amount shall be held by the Dollar Agent
for the benefit of the Dollar Banks and the Dollar Agent as cash collateral
for all Reimbursement Obligations pursuant to the Cash Collateral
Agreement, and
(c) upon the termination of the Total Revolver Commitment, or the
acceleration of the Reimbursement Obligations with respect to all Letters
of
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Credit in accordance with ss.16, an amount equal to the then Maximum
Drawing Amount on all Letters of Credit, which amount shall be held by
Dollar Agent as cash collateral for all Reimbursement Obligations pursuant
to the Cash Collateral Agreement.
Each such payment shall be made to the Dollar Agent at the Dollar Agent's Head
Office in immediately available funds. Interest on any and all amounts remaining
unpaid by the Borrower under this ss.4.2 at any time from the date such amounts
become due and payable (whether as stated in this ss.4.2, by acceleration or
otherwise) until payment in full (whether before or after judgment) shall be
payable to the Dollar Agent on demand at the rate specified in ss.8.20 for
overdue principal on the Revolving Credit Loans.
4.3. Letter of Credit Payments. If any draft shall be presented or other
demand for payment shall be made under any Letter of Credit, the Dollar Agent
shall notify the Borrower of the date and amount of the draft presented or
demand for payment and of the date and time when it expects to pay such draft or
honor such demand for payment. If the Borrower fails to reimburse the Dollar
Agent as provided in ss.4.2 on or before the date that such draft is paid or
other payment is made by the Dollar Agent, the Dollar Agent may at any time
thereafter notify the Dollar Banks of the amount of any such Unpaid
Reimbursement Obligation. No later than 3:00 p.m. (Boston time) on the Business
Day next following the receipt of such notice, each Dollar Bank shall make
available to the Dollar Agent, at its Head Office, in immediately available
funds, such Dollar Bank's Commitment Percentage of such Unpaid Reimbursement
Obligation, together with an amount equal to the product of (i) the average,
computed for the period referred to in clause (iii) below, of the weighted
average interest rate paid by the Dollar Agent for federal funds acquired by the
Dollar Agent during each day included in such period, times (ii) the amount
equal to such Dollar Bank's Commitment Percentage of such Unpaid Reimbursement
Obligation, times (iii) a fraction, the numerator of which is the number of days
that elapse from and including the date the Dollar Agent paid the draft
presented for honor or otherwise made payment to the date on which such Dollar
Bank's Commitment Percentage of such Unpaid Reimbursement obligation shall
become immediately available to the Dollar Agent, and the denominator of which
is 360. The responsibility of the Dollar Agent to the Borrower and the Dollar
Banks shall be only to determine that the documents (including each draft)
delivered under each Letter of Credit in connection with such presentment shall
be in conformity in all material respects with such Letter of Credit.
4.4. Obligations Absolute. The Borrower's obligations under this ss.4 shall
be absolute and unconditional under any and all circumstances and irrespective
of the occurrence of any Default or Event of Default or any condition precedent
whatsoever or any setoff, counterclaim or defense to payment which the Borrower
may have or have had against the Dollar Agent, any Dollar Bank or any
beneficiary of a Letter of
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Credit in the absence of the Dollar Agent's gross negligence or willful
misconduct. The Borrower further agrees with the Dollar Agent and the Dollar
Banks that the Dollar Agent and the Dollar Banks shall not be responsible for,
and the Borrower's Reimbursement Obligations under ss.4.2 shall not be affected
by, among other things, the validity or genuineness of documents or of any
endorsements thereon, even if such documents should in fact prove to be in any
or all respects invalid, fraudulent or forged, or any dispute between or among
the Borrower, the beneficiary of any Letter of Credit or any financing
institution or other party to which any Letter of Credit may be transferred or
any claims or defenses whatsoever of the Borrower against the beneficiary of any
Letter of Credit or any such transferee in the absence of the Dollar Agent's
gross negligence or willful misconduct. The Dollar Agent and the Dollar Banks
shall not be liable for any error, omission, interruption or delay in
transmission, dispatch or delivery of any message or advice, however
transmitted, in connection with any Letter of Credit. The Borrower agrees that
any action taken or omitted by the Dollar Agent or any Dollar Bank under or in
connection with each Letter of Credit and the related drafts and documents, if
done in good faith, shall be binding upon the Borrower and shall not result in
any liability on the part of the Dollar Agent or any Dollar Bank to the Borrower
if done in the absence of gross negligence or willful misconduct and in
accordance with the standards of care specified in the Uniform Commercial Code
of the Commonwealth of Massachusetts.
4.5. Reliance by Issuer. To the extent not inconsistent with ss.4.4, the
Dollar Agent shall be entitled to rely, and shall be fully protected in relying
upon, any Letter of Credit, draft, writing, resolution, notice, consent,
certificate, affidavit, letter, cablegram, telegram, telecopy, telex or teletype
message, statement, order or other document believed by it to be genuine and
correct and to have been signed, sent or made by the proper Person or Persons
and upon advice and statements of legal counsel, independent accountants and
other experts selected by the Dollar Agent in the absence of the Dollar Agent's
gross negligence or willful misconduct. The Dollar Agent shall be fully
justified in failing or refusing to take any action under this Credit Agreement
unless it shall first have received such advice or concurrence of the Majority
Banks as it reasonably deems appropriate or it shall first be indemnified to its
reasonable satisfaction by the Dollar Banks against any and all liability and
expense which may be incurred by it by reason of taking or continuing to take
any such action. The Dollar Agent shall in all cases be fully protected in
acting, or in refraining from acting, under this Credit Agreement in accordance
with a request of the Majority Banks, and such request and any action taken or
failure to act pursuant thereto shall be binding upon the Dollar Banks and all
future holders of the Revolving Credit Notes or of a Letter of Credit
Participation.
4.6. Letter of Credit Fees. The Borrower shall pay to the Dollar Agent a
fee (in each case, a "Letter of Credit Fee") in respect of Letters of Credit on
the average daily Maximum Drawing Amount at a rate per annum equal to (a) with
respect to each standby Letter of Credit, the Eurodollar Applicable Margin per
annum from
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time to time applicable to Revolving Credit Loans and (b) with respect to each
documentary Letter of Credit, the Eurodollar Applicable Margin per annum from
time to time applicable to Revolving Credit Loans minus 1%, such Letter of
Credit Fees being payable quarterly in arrears on the first day of each calendar
quarter and on the Revolver Maturity Date. A portion of such Letter of Credit
Fees equal to 1/4% per annum shall be payable to the Dollar Agent for its own
account and the remainder of such Letter of Credit Fees shall be payable to the
Dollar Agent for the ratable accounts of the Dollar Banks in accordance with
their respective Commitment Percentages. The Borrower shall also pay to the
Dollar Agent, at such time or times as such charges are customarily made by the
Dollar Agent, the Dollar Agent's customary issuance fees or amendment fees, as
the case may be, and the Dollar Agent's customary time negotiation fees per
document examination or other administrative fees.
5. THE GOLD FACILITY - CONSIGNMENTS .
5.1. Commitment To Make Consignments; Title To Consigned Precious Metal.
(a) Subject to the terms and conditions set forth in this Credit
Agreement, the Gold Agent agrees, at the option of the Borrower, to
Deliver, or make Purchases and Consignments of, from time to time between
the Closing Date and the Gold Maturity Date upon notice by the Borrower to
the Gold Agent given in accordance with ss.5.3, such amounts of Precious
Metal as are requested by the Borrower up to a maximum aggregate amount of
Consigned Precious Metal outstanding (after giving effect to all amounts
requested) equal to the Total Gold Commitment minus the aggregate amount of
all outstanding Gold Loans; provided that the sum of the outstanding amount
of troy ounces or, as the case may be, Fair Market Value of Consigned
Precious Metal which the Borrower requests that the Gold Agent purchase or
Deliver, when added to the amount of troy ounces or, as the case may be,
the Fair Market Value of Consigned Precious Metal outstanding, shall not
exceed the Consignment Ounce Cap, in the case of amounts of troy ounces of
Consigned Precious Metal, or the Consignment Dollar Cap, in the case of the
Fair Market Value of Consigned Precious Metal.
(b) The purchase price (the "Purchase Price") paid by the Gold Agent
for Consigned Precious Metal in respect of each Purchase and Consignment
shall be the Fair Market Value of Precious Metal two (2) Business Days
prior to the Gold Drawdown Date of any Purchase and Consignment.
(c) Each request for a Consignment hereunder shall constitute a
representation and warranty by the Borrower that the conditions set forth
in ss.14 and ss.15, in the case of the initial Consignment to be made on
the Closing
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Date, and ss.15, in the case of all other Consignments, have been satisfied
on the date of such request.
(d) Upon receipt of the documents required by ss.ss.14 and 15 and the
satisfaction of the other conditions set forth therein, to the extent
applicable, the Gold Agent will make available to the Borrower at the Gold
Agent's Head Office (or such other location agreed to by the Gold Agent and
the Borrower) (i) in the case of a Delivery, the amount of Precious Metal
requested to be Delivered, and (ii) in the case of a Purchase and
Consignment, the Purchase Price for such Purchase and Consignment and, at
such time, the Gold Agent shall be deemed to have taken title to such
Borrower's Precious Metal. Thereafter, title to such Precious Metal shall
remain in the Gold Agent and shall not vest in the Borrower until the Gold
Agent has received payment for such Consigned Precious Metal in accordance
with the requirements of ss.5.4 or ss.5.6, as applicable. The Gold Agent
may Deliver Precious Metal to the Borrower at the Gold Agent's Head Office
or, at the option of the Borrower and with the consent of the Gold Agent,
at Borrower Permitted Inventory Locations, in each case at the Borrower's
sole expense (including insurance with respect thereto). At all times
following the Gold Drawdown Date relating to each Consignment, the Borrower
shall bear the entire risk of loss, theft, damage or destruction of the
Consigned Precious Metal from any cause whatsoever, whether or not insured,
and the Borrower agrees to hold the Consigned Precious Metal in trust for
the Gold Agent, and to indemnify and hold harmless the Gold Agent against
any and all liabilities, damages, losses, costs, expenses, suits, claims,
demands or judgments of any nature (including, without limitation,
reasonable attorneys' fees and expenses) arising from or connected with any
loss, theft, damage or destruction of the Consigned Precious Metal.
(e) The Borrower irrevocably authorizes the Gold Agent, at or about
the time of the Gold Drawdown Date of any Consignment or at the time of any
payment or Redelivery with respect to Consigned Precious Metal, to make an
appropriate notation in the records of the Gold Agent customarily
maintained by the Gold Agent reflecting the making of such Consignment or
the receipt of such payment or Redelivery. The outstanding amount of
Consigned Precious Metal set forth in the records of the Gold Agent
customarily maintained by the Gold Agent shall be prima facie evidence of
the amount thereof owing and unpaid or not Redelivered, but the failure to
record or any error in so recording any such amount in the records of the
Gold Agent shall not limit or otherwise affect the obligations of the
Borrower hereunder to make payments or Redeliveries in accordance with the
terms hereof.
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(f) In connection with each Consignment, and as a condition to the
making of any Consignment by the Gold Agent, the Borrower shall pay to the
Gold Agent a per toy ounce premium to be set by the Gold Agent based upon
prevailing market conditions (the "Consignment Premium"). In the case of
any Delivery hereunder, such Consignment Premium shall be payable upon the
making of such Delivery by the Gold Agent. In the case of any Purchase and
Consignment hereunder, such Consignment Premium shall be deducted from the
amount of the Purchase Price paid by the Gold Agent to the Borrower in
respect thereof.
5.2. Consignment Fees; Gold Fronting Fees.
5.2.1. Consignment Fees. Except as otherwise provided in ss.8.20, with
respect to Consigned Precious Metal, the Borrower agrees to pay to the Gold
Agent, for the accounts of the Gold Banks in accordance with their
respective Gold Commitment Percentages, a Consignment Fee equal to:
(a) for each day with respect to Consignment Base Rate Amounts,
the product of (i) the difference of (A) the Consignment Base Rate
minus (B) one half of one percent (1/2%) times (ii) a fraction, the
numerator of which is one (1) and the denominator of which is three
hundred and sixty (360) times (iii) the Fair Market Value of Consigned
Precious Metal outstanding on such day which are Consignment Base Rate
Amounts.
(b) for each day during each Interest Period with respect to
Consignment Fixed Rate Amounts, the product of (i) the difference of
(A) the Consignment Fixed Rate applicable to such Interest Period
minus (B) one half of one percent (1/2%) times (ii) a fraction, the
numerator of which is one (1) and the denominator of which is three
hundred and sixty (360) times (iii) the Fair Market Value (as of such
date) of Consigned Precious Metal outstanding for such Interest Period
which are Consignment Fixed Rate Amounts.
5.2.2. Gold Fronting Fees. Except as otherwise provided in ss.8.20,
with respect to Consigned Precious Metal, the Borrower agrees to pay to the
Gold Agent, for its own account, a Gold Fronting Fee equal to:
(a) for each day with respect to Consignment Base Rate Amounts,
the product of (i) one half of one percent (1/2%) times (ii) a
fraction, the numerator of which is one (1) and the denominator of
which is three hundred and sixty (360) times (iii) the Fair Market
Value of Consigned Precious Metal outstanding on such day which are
Consignment Base Rate Amounts.
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(b) for each day during each Interest Period with respect to
Consignment Fixed Rate Amounts, the product of (i) one half of one
percent (1/2%) times (ii) a fraction, the numerator of which is one
(1) and the denominator of which is three hundred and sixty (360)
times (iii) the Fair Market Value (as of such date) of Consigned
Precious Metal outstanding for such Interest Period which are
Consignment Fixed Rate Amounts.
5.2.3 Payment of Fees. The Consignment Fee and the Gold Fronting Fee
with respect to Consignment Base Rate Amounts shall be payable monthly in
arrears on the first Business Day of each calendar month, commencing on the
first such date following the Closing Date, with a final payment on the
Gold Maturity Date or any earlier date on which the Total Gold Commitment
shall terminate. The Consignment Fee and Gold Fronting Fee with respect to
Consignment Fixed Rate Amounts shall be payable as to any Consignment Fixed
Rate Amounts in respect of which the applicable Interest Period is (y) 3
months or less, on the last day of such Interest Period, and (z) more than
3 months, on the date that is 3 months from the first day of such Interest
Period and, in addition, on the last day of such Interest Period.
5.3. Requests For Consignments. The Borrower shall give to the Gold Agent
written notice in the form of Exhibit G hereto (or telephonic notice confirmed
in a writing in the form of Exhibit G hereto) of each Consignment requested
hereunder (a "Consignment Request") no later than 10:00 a.m. one (1) Business
Day prior to the proposed Gold Drawdown Date of any Consignment Base Rate Amount
or three (3) Business Days prior to the proposed Gold Drawdown Date of any
Consignment Fixed Rate Amount; provided, that solely with respect to Deliveries
to be made at Specified Refiner locations by the making of a book entry transfer
of Precious Metal to the Borrower's account with such Specified Refiner, the
Borrower shall be permitted to provide such Consignment Request to the Gold
Agent no later than 2:00 p.m. on the proposed Gold Drawdown Date of any such
Delivery. Each such Consignment Request shall specify (a) the nature of the
Consignment as a Delivery or a Purchase and Consignment, (b) the number of troy
ounces of (i) Precious Metal to be Delivered or, as the case may be (ii)
Borrower's Precious Metal to be purchased and consigned, (c) the proposed Gold
Drawdown Date of such Consignment, (d) whether such Consignment is to be a
Consignment Fixed Rate Amount or a Consignment Base Rate Amount, (e) if such
Consignment is to be a Consignment Fixed Rate Amount, the Interest Period
applicable to such Consignment, and (f) if such Consignment is to be a Delivery,
whether such Delivery is to be made to the Borrower at the Gold Agent's Head
Office or at a Borrower Permitted Inventory Location (with each such Consignment
Request to specify such Borrower Permitted Inventory Location). Each Consignment
Request shall be irrevocable and binding on the Borrower and shall obligate the
Borrower to either (i) in the case of any Purchase and Consignment, sell and
take on consignment such
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Borrower's Precious Metal on the proposed Gold Drawdown Date or (ii) in the case
of any Delivery, take Delivery of such Precious Metal on the proposed Gold
Drawdown Date. Each Consignment Request for Consignment Base Rate Amounts shall
be in a minimum aggregate amount of 100 troy ounces or an integral multiple of
one hundred (100) in excess thereof, and each Consignment Request for
Consignment Fixed Rate Amounts shall be in a minimum aggregate amount of five
thousand (5,000) troy ounces or an integral multiple of one thousand (1000) in
excess thereof.
5.4. Payment on Account of Repurchase or Redelivery of Consigned Precious
Metal.
(a) Notwithstanding the provisions of ss.6.1(b), upon the occurrence
and during the continuance of an Event of Default (other than an Event of
Default described in ss.16.1(g) or (h)) and upon notice from the Gold Agent
to the Borrower, unless the Borrower shall, on the date of dispatch of such
notice, immediately Redeliver to the Gold Agent an amount of Borrower's
Precious Metal (measured in troy ounces) equal to all outstanding Consigned
Precious Metal, the Borrower shall be deemed to have purchased from the
Gold Agent, on the date of dispatch of such notice, all outstanding
Consigned Precious Metal at the then applicable Spot Value thereof, and the
Gold Agent, on behalf of the Gold Banks (based upon each Gold Bank's Gold
Commitment Percentage of such outstanding Consigned Precious Metal
immediately prior to such conversion), shall simultaneously be deemed to
have made Gold Loans to the Borrower in amounts equal to the Spot Value of
Consigned Precious Metal. Such Gold Loans deemed to have been made by the
Gold Agent on behalf of the Gold Banks shall be treated as Gold Loans made
pursuant to ss.8.3(b) hereof for all purposes under this Credit Agreement
(including, without limitation, the provisions of ss.8.6 hereof relating to
Settlements).
(b) Upon the occurrence and during the continuance of an Event of
Default described in Section 16.1(g) or (h), each Gold Bank severally
agrees to purchase from the Gold Agent a participating interest in all
outstanding Consigned Precious Metal (if any) equal to such Gold Bank's
Gold Commitment Percentage of the Fair Market Value of Consigned Precious
Metal as of the date of such Event of Default (a "Consignment
Participation"). Not later than 11:00 a.m. (Boston time) on the Business
Day following such Event of Default described in Section 16.1(g) or (h),
each of the Gold Banks will make available to the Gold Agent, at the Gold
Agent's Head Office, in immediately available funds, an amount in Dollars
equal to such Gold Bank's Consignment Participation. If any Bank makes
available to the Gold Agent such amount on a date after such date, such
Gold Bank shall pay to the Gold Agent on demand an amount equal to the
product of (i) the average computed
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for the period referred to in clause (iii) below, of the weighted average
interest rate paid by the Gold Agent for federal funds acquired by the Gold
Agent during each day included in such period, times (ii) the amount owed
by such Gold Bank to the Gold Agent, times (iii) a fraction, the numerator
of which is the number of days that elapse from and including such date the
amounts were owed to the Gold Agent to the date on which the amounts due
pursuant to the Consignment Participation shall become immediately
available to the Gold Agent, and the denominator of which is 360. A
statement of the Gold Agent submitted to such Gold Bank with respect to any
amounts owing under this paragraph shall be prima facie evidence of the
amount due and owing to the Gold Agent by such Gold Bank. The failure or
refusal of any Gold Bank to make available to the Gold Agent at the
aforesaid time and place its Consignment Participation shall not relieve
any other Gold Bank from its several obligations hereunder to make
available to the Gold Agent its Consignment Participation.
(c) If, on any date, the Fair Market Value of Consigned Precious Metal
shall exceed the Consignment Dollar Cap, the Gold Agent shall calculate the
amount of Consigned Precious Metal (measured in troy ounces and calculated
by reference to the Fair Market Value thereof on the date of determination)
of such excess, and the Borrower shall either (i) pay to the Gold Agent an
amount in Dollars equal to the Fair Market Value (on the Business Day
following the date of determination) of such excess, and the Gold Agent
shall be deemed to have sold to the Borrower an amount of Consigned
Precious Metal equal to such excess, or (ii) Redeliver to the Gold Agent
Consigned Precious Metal in quantities (measured in troy ounces) equal to
such excess. If, on any date of determination, the number of troy ounces of
Consigned Precious Metal shall exceed the Consignment Ounce Cap, the
Borrower shall either (i) repurchase from the Gold Agent such excess at the
Fair Market Value thereof on the Business Day following the date of
determination, or (ii) Redeliver to the Gold Agent Consigned Precious Metal
in quantities (measured in troy ounces) equal to such excess. If, on any
date of determination, the Fair Market Value of Consigned Precious Metal
exceeds the Consignment Advance Rate Percentage multiplied by the Fair
Market Value of the sum of (A) Consigned Precious Metal plus (B) Borrower's
Precious Metal, the Borrower shall pay to the Gold Agent an amount in
Dollars equal to the Fair Market Value (on the Business Day following the
date of determination) of such excess, and the Gold Agent shall be deemed
to have sold to the Borrower an amount of Consigned Precious Metal equal to
such excess.
(d) In connection with any sale of Consigned Precious Metal by the
Borrower (other than as part of a Purchase and Consignment pursuant to the
terms hereof), the Borrower shall immediately either (i) pay to the Gold
Agent
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an amount in Dollars equal to the Fair Market Value (on the Business Day
following the date of such sale) of such Consigned Precious Metal, (ii)
Redeliver to the Gold Agent an amount of Borrower's Precious Metal
(measured in troy ounces) equal to such sold Consigned Precious Metal, or
(iii) Replace such Consigned Precious Metal, so long as no Event of Default
has occurred and is continuing, with additional Precious Metal (which
replacement, if the Borrower shall not have purchased such sold Consigned
Precious Metal pursuant to clause (i) hereof or Redelivered Borrower's
Precious Metal pursuant to clause (ii) hereof, shall be automatic upon such
sale) which shall constitute Consigned Precious Metal in quantities equal
to any Consigned Precious Metal sold. At all times following the occurrence
and during the continuance of an Event of Default, upon any sale by the
Borrower of Precious Metal which prior to the Borrower's purchase thereof
pursuant to ss.5.4(a) constituted Consigned Precious Metal, the Borrower
shall hold the proceeds of such sale in trust for the Gold Agent, on behalf
of the Gold Banks, and shall immediately deliver to the Gold Agent the
proceeds of such sale to be applied to the Obligations in accordance with
ss.8.9 hereof. Prior to the occurrence of an Event of Default and absent
other instruction by the Borrower, the Gold Agent shall apply Dollar
amounts received to reduction of Consigned Precious Metal, for application
first to Consignment Base Rate Amounts and then to Consignment Fixed Rate
Amounts.
(e) At any time before the Gold Maturity Date, the Borrower may, at
its election, purchase any or all Consigned Precious Metal from the Gold
Agent in whole or in part, without penalty, provided that any full or
partial repurchase of the outstanding amount of Consignment Fixed Rate
Amounts of Consigned Precious Metal pursuant to this ss.5.4(e) may be made
only on the last day of the Interest Period relating thereto. The Borrower
shall give the Gold Agent prior written notice, no later than one-half hour
prior to the Second London Fixing for Gold on any Business Day, of any
proposed repurchase of Consigned Precious Metal specifying the amount of
Consigned Precious Metal to be so repurchased and the proposed date of
repurchase, which notice shall be irrevocable and binding on the Borrower
and shall obligate the Borrower to repurchase such Consigned Precious Metal
on the proposed date of repurchase. Each such repurchase of Consignment
Base Rate Amounts shall be in a minimum amount of one hundred (100) troy
ounces or an integral multiple of one hundred (100) in excess thereof, with
accrued Consignment Fees and Gold Fronting Fees on the Consignment Base
Rate Amounts so purchased being due on the earliest to occur of a Default
or Event of Default and the first day of the calendar month following the
calendar month in which such purchase is made, and each such purchase of
Consignment Fixed Rate Amounts shall be in a minimum amount of five
thousand (5,000) troy ounces or an integral multiple of one thousand (1000)
troy ounces in excess thereof and shall be accompanied by a payment of all
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accrued but unpaid Consignment Fees and Gold Fronting Fees on the amount so
purchased. Each such repurchase shall be at a price equal to, at the
Borrower's option, (i) the Fair Market Value of Precious Metal two Business
Days prior to the date of the Borrower's purchase of Consigned Precious
Metal, or (ii) the Spot Value on the date of the Gold Agent's receipt of
the written notice described above, and, prior to the occurrence of an
Event of Default, shall be applied to effect a reduction of Consigned
Precious Metal, for application first to Consignment Base Rate Amounts and
then to Consignment Fixed Rate Amounts; provided, however, that, in lieu of
paying in Dollars the Fair Market Value, or Spot Value, as the case may be,
of such Consigned Precious Metal, the Borrower may, at its option,
Redeliver to the Gold Agent Borrower's Precious Metal in an amount
(measured in troy ounces) equal to the amount of Consigned Precious Metal
being purchased.
(f) All purchases of Consignment Fixed Rate Amounts prior to the end
of an Interest Period shall obligate the Borrower to pay any breakage costs
associated with such Consignment Fixed Rate Amounts in accordance with
ss.8.19 hereof.
5.5. Conversion Options.
(a) The Borrower may elect from time to time to have the Consignment
Fee and the Gold Fronting Fee applicable to portions of Consigned Precious
Metal outstanding calculated based upon either the Consignment Base Rate or
Consignment Fixed Rate, provided that (i) with respect to any such
conversion of Consigned Precious Metal, the Borrower shall give the Gold
Agent prior written notice of such election no later than one-half hour
prior to the Second London Fixing for Gold on any Business Day; and (ii)
with respect to any such conversion of a Consignment Fixed Rate Amount into
a Consignment Base Rate Amount or another Consignment Fixed Rate Amount,
such conversion shall only be made on the last day of the Interest Period
with respect thereto. All or any part of outstanding Consigned Precious
Metal may be converted into a Consignment Fixed Rate Amount or Consignment
Base Rate Amount as provided herein, provided that any partial conversion
of Consignment Base Rate Amounts shall be for Precious Metal in a minimum
amount at least equal to one hundred (100) troy ounces or an integral
multiple of one hundred (100) in excess thereof and any partial conversion
of Consignment Fixed Rate Amounts shall be for Precious Metal in an amount
equal to five thousand (5,000) troy ounces or an integral multiple of one
thousand (1000) in excess thereof. Each conversion request relating to the
conversion of Consigned Precious Metal to a Consignment Fixed Rate Amount
shall be irrevocable by the Borrower.
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(b) Prior to the occurrence and continuance of an Event of Default,
Consigned Precious Metal may be continued as Consignment Fixed Rate Amounts
upon the expiration of an Interest Period with respect thereto by
compliance by the Borrower with the notice provisions contained in
ss.5.5(a); provided that no Consignment Fixed Rate Amounts may be continued
as such when any Event of Default has occurred and is continuing, but shall
be converted to a Consignment Base Rate Amounts on the last day of the
first Interest Period relating thereto ending during the continuance of any
Event of Default if the Gold Agent in its discretion elects not to permit
such continuation. In the event that the Borrower fails to provide any such
notice with respect to the continuation of any Consignment Fixed Rate
Amounts as such, then such Consignment Fixed Rate Amounts shall be
automatically converted to a Consignment Base Rate Amounts on the last day
of the first Interest Period relating thereto.
(c) Any conversion to or from Consignment Fixed Rate Amounts shall be
in such amounts and be made pursuant to such elections so that, after
giving effect thereto, the aggregate principal amount of all Consignment
Fixed Rate Amounts having the same Interest Period shall not be less than
five thousand (5,000) troy ounces or a whole multiple of one thousand
(1000) troy ounces in excess thereof.
5.6. Repurchase at Maturity. The Borrower promises to (a) purchase from the
Gold Agent all Consigned Precious Metal on the Gold Maturity Date, and there
shall become absolutely due and payable on the Gold Maturity Date an amount in
Dollars equal to the Spot Value as of the Gold Maturity Date of the outstanding
amount of Consigned Precious Metal (measured in troy ounces), together with any
and all accrued and unpaid Consignment Fees, Gold Fronting Fees and other
amounts accrued thereon, or (b) Redeliver to the Gold Agent Precious Metal in an
amount (measured in troy ounces) equal to all Consigned Precious Metal
outstanding, together with payment of all other amounts owed under the Gold
Facility.
5.7. True Consignment. This Credit Agreement is intended to be a true
consignment agreement, where, following a Consignment, the Gold Agent shall have
title to the Consigned Precious Metal until sold by the Borrower. If,
notwithstanding the foregoing sentence, it is determined for any reason that the
consignment created hereby is one intended as security or that the consignment
is a sale or return or other sale, the Consigned Precious Metal shall constitute
Collateral under the terms of the Security Agreement, and the terms of the
Security Agreement shall govern the Banks' security interest therein.
6. THE GOLD FACILITY - THE GOLD LOANS.
6.1. Commitment to Lend.
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(a) Subject to the terms and conditions set forth in this Credit
Agreement, each of the Gold Banks severally agrees to lend to the Borrower
and the Borrower may borrow, repay, and reborrow from time to time between
the Closing Date and the Gold Maturity Date upon notice given in accordance
with ss.6.4, such sums as are requested by the Borrower up to a maximum
aggregate amount outstanding (after giving effect to all amounts requested)
at any one time equal to the Dollar amount of such Gold Bank's Gold
Commitment minus such Gold Bank's Gold Commitment Percentage of the Fair
Market Value of Consigned Precious Metal outstanding; provided that the
aggregate amount of Gold Loans which the Borrower requests, when added to
the principal amount of Gold Loans outstanding, shall not exceed the Dollar
amount of the Total Gold Commitment minus the Fair Market Value of
Consigned Precious Metal. Gold Loans shall be made pro rata in accordance
with each Gold Bank's Gold Commitment Percentage. Each request for a Gold
Loan hereunder shall constitute a representation and warranty by the
Borrower that the conditions set forth in ss.14 and ss.15, in the case of
the initial Gold Loan, if any, to be made on the Closing Date, and ss.15,
in the case of all other Gold Loans, have been satisfied on the date of
such request.
(b) Notwithstanding anything herein contained to the contrary, the
Borrower shall not be entitled to borrow any Gold Loans on any date on
which the sum of the outstanding amount of Revolving Credit Loans plus the
Maximum Drawing Amount and all Unpaid Reimbursement Obligations is less
than the Total Revolver Commitment.
6.2. The Gold Notes. The Gold Loans shall be evidenced by separate
promissory notes of the Borrower in substantially the form of Exhibit H hereto
(each a "Gold Note"), dated as of the Closing Date and completed with
appropriate insertions. One Gold Note shall be payable to the order of each Gold
Bank in a principal amount equal to the Dollar amount of such Gold Bank's Gold
Commitment or, if less, the outstanding amount of all Gold Loans made by such
Gold Bank, plus interest accrued thereon, as set forth below. The Borrower
irrevocably authorizes each Gold Bank to make or cause to be made, at or about
the time of the Drawdown Date of any Gold Loans made by such Gold Bank or at the
time of receipt of any payment of principal on such Gold Bank's Gold Note, an
appropriate notation on such Gold Bank's Gold Note Record reflecting the making
of such Gold Loan or (as the case may be) the receipt of such payment. The
outstanding amount of the Gold Loans set forth on such Gold Bank's Gold Note
Record shall be prima facie evidence of the principal amount thereof owing and
unpaid to such Gold Bank, but the failure to record, or any error in so
recording, any such amount on such Gold Bank's Gold Note Record shall not limit
or otherwise affect the obligations of the Borrower hereunder or under any Gold
Note to make payments of principal of or interest on any Gold Note when due.
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6.3. Interest on Gold Loans. Except as otherwise provided in ss.8.20, the
Gold Loans shall bear interest in accordance with the provisions of ss.8.1
hereof.
6.4. Requests for Gold Loans; Conversion Options. The Borrower shall
request Gold Loans by providing to the Gold Agent Loan Requests for Gold Loans
in accordance with the requirements of ss.8.3(a) hereof. The Gold Agent may, in
its sole discretion and without conferring with the Gold Banks, make Gold Loans
to the Borrower in accordance with the provisions of ss.8.3(b) hereof. The
Borrower shall be permitted to convert Gold Loans to Gold Loans of different
Types in accordance with the provisions of ss.8.4 hereof, and such provisions of
ss.8.4 shall apply mutatis mutandis with respect to the Gold Loans so that the
Borrower may have the same interest rate options with respect to the Gold Loans
as they would be entitled to with respect to the Revolving Credit Loans and the
Term Loan.
6.5. Funds for Gold Loans. The provisions of ss.8.5 and ss.8.6 with respect
to the funding procedures and Settlement procedures for the Loans shall apply to
the Gold Loans.
6.6. Repayment of Gold Loans at Maturity. The Borrower promises to pay on
the Gold Maturity Date, and there shall become absolutely due and payable on the
Gold Maturity Date, all of the Gold Loans outstanding on such date, together
with any and all accrued and unpaid interest thereon.
6.7. Optional Repayments. The Borrower shall have the right, at its
election, to repay Gold Loans in accordance with the provisions of ss.8.7
hereof.
7. CERTAIN COMMON PROVISIONS RELATING
TO THE GOLD FACILITY.
7.1. Commitment Fee. The Borrower agrees to pay to the Gold Agent, for the
accounts of the Gold Banks in accordance with their respective Gold Commitment
Percentages, a commitment fee calculated at the rate of one-half of one percent
(1/2%) per annum on the average daily amount during each calendar quarter or
portion thereof from the Closing Date to the Gold Maturity Date by which the
Dollar amount of the Total Gold Commitment exceeds the sum of the Fair Market
Value of Consigned Precious Metal plus the aggregate outstanding amount of Gold
Loans during such calendar quarter. The commitment fee shall be payable
quarterly in arrears on the first day of each calendar quarter for the
immediately preceding calendar quarter commencing on the first such date
following the date hereof, with a final payment on the Gold Maturity Date or any
earlier date on which the Gold Commitments and the Gold Fronting Commitment
shall terminate.
7.2. Reduction of Total Gold Commitment and Gold Fronting Commitment. The
Borrower shall have the right at any time and from time to time upon five (5)
Business Days' prior written notice to the Gold Agent to reduce by
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$500,000.00 or an integral multiple thereof or terminate entirely the Total Gold
Commitment and the Gold Fronting Commitment, whereupon the Gold Commitments of
the Gold Banks shall be reduced pro rata in accordance with their respective
Gold Commitment Percentages of the amount specified in such notice or, as the
case may be, terminated and the Gold Fronting Commitment shall be reduced by the
amount specified in such notice or, as the case may be, terminated. Promptly
after receiving any notice of the Borrower delivered pursuant to this ss.7.2,
the Gold Agent will notify the Gold Banks of the substance thereof. Upon the
effective date of any such reduction or termination, the Borrower shall, at its
option, (a) purchase from the Gold Agent all Consigned Precious Metal
outstanding in excess of such reduced Total Gold Commitment by paying to the
Gold Agent an amount equal to the Fair Market Value as of such date of the
amount of such excess Consigned Precious Metal, together with the full amount of
any Consignment Fee, Gold Fronting Fee and commitment fee then accrued on the
amount of the reduction, or (b) Redeliver to the Gold Agent Borrower's Precious
Metal in an amount (measured in troy ounces) equal to all Consigned Precious
Metal outstanding in excess of such reduced Total Gold Commitment, together with
the full amount of any Consignment Fee, Gold Fronting Fee and commitment fee
then accrued on the amount of the reduction. No reduction or termination of the
Gold Commitments and the Gold Fronting Commitment may be reinstated.
8. CERTAIN GENERAL PROVISIONS.
8.1. Interest on Loans. Except as otherwise provided in ss.8.20,
(a) Each Base Rate Loan shall bear interest for the period commencing
with the Drawdown Date thereof and ending on the last day of the Interest
Period with respect thereto at a rate per annum equal to the sum of (i) the
Base Rate plus (ii) the Base Rate Applicable Margin.
(b) Each Eurodollar Rate Loan shall bear interest for the period
commencing with the Drawdown Date thereof and ending on the last day of the
Interest Period with respect thereto at a rate per annum equal to the sum
of (i) the Eurodollar Rate plus (ii) the Eurodollar Applicable Margin.
(c) The Borrower promises to pay interest on each Loan in arrears on
each Interest Payment Date with respect thereto.
8.2. Borrowing Base and Consignment Limitations. (a) The Banks shall
have no obligation to make any Extension of Credit if, at any time the
Outstanding Facility Amounts, after giving effect to such Extension of
Credit, would exceed the Borrowing Base. The Borrowing Base shall be
determined by the Agents by reference to the most recent Borrowing Base
Report delivered on a timely basis to the Agents in accordance with
ss.11.4(f).
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(b) The Gold Agent shall not have any obligation to make any
Consignments if, at any time, the Fair Market Value of Consigned Precious
Metal (after giving effect to all amounts requested) exceeds the
Consignment Advance Rate Percentage multiplied by the Fair Market Value of
the sum of (i) Consigned Precious Metal plus (ii) Borrower's Precious
Metal. The amounts of Consigned Precious Metal and of Borrower's Precious
Metal shall be determined by the Agents by reference to the most recent
Consigned Precious Metal Report delivered on a timely basis to the Agents
in accordance with ss.11.4(f).
8.3. Requests for Loans. (a) The Borrower shall give to the Applicable
Agent written notice in the form of Exhibit I hereto (or telephonic notice
confirmed in a writing in the form of Exhibit I hereto) of each Loan
requested hereunder (a "Loan Request") no less than (i) one (1) Business
Day prior to the proposed Drawdown Date of any Base Rate Loan and (ii) two
(2) Eurodollar Business Days prior to the proposed Drawdown Date of any
Eurodollar Rate Loan. Each such notice shall specify (A) the principal
amount of the Loan requested, (B) the proposed Drawdown Date of such Loan,
(C) the Interest Period for such Loan, (D) the nature of such Loan as a
Dollar Facility Loan or a Gold Loan, and (E) the Type of such Loan.
Promptly upon receipt of any such notice, the Applicable Agent shall notify
each of the Applicable Banks thereof. Each Loan Request shall be
irrevocable and binding on the Borrower and shall obligate the Borrower to
accept the Loan requested from the Applicable Banks on the proposed
Drawdown Date. Each Loan Request for a Base Rate Loan shall be in a minimum
aggregate amount of $500,000.00 or an integral multiple thereof, and each
Loan Request for a Eurodollar Rate Loan shall be in a minimum aggregate
amount of $500,000.00 or an integral multiple of $500,000.00 in excess
thereof.
(b) Notwithstanding the notice and minimum amount requirements set
forth in ss.8.3(a) but otherwise in accordance with the terms and
conditions of this Credit Agreement, the Applicable Agent may, in its sole
discretion and without conferring with the Applicable Banks, make Revolving
Credit Loans or, as the case may be, Gold Loans, to the Borrower (i) by
entry of credits to the Borrower's operating account(s) (No(s). 523-02282)
(the "Operating Accounts") with the Dollar Agent to cover checks or other
charges which the Borrower has drawn or made against such account, (ii) in
payment of any amounts due and payable by the Borrower hereunder (the
Borrower hereby consenting to the automatic making of such Loans by the
Applicable Agent in payment of any such amounts, and the Applicable Agent
hereby agreeing to give notice to the Borrower promptly after the making of
any such Loans in payment of any such amounts), or (iii) in an amount as
otherwise requested by the Borrower. The Borrower hereby requests and
authorizes the Applicable Agent to make from time to time such Revolving
Credit Loans or, as the case
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may be, Gold Loans by means of appropriate entries of such credits
sufficient to cover checks and other charges then presented. The Borrower
acknowledges and agrees that the making of such Loans shall, in each case,
be subject in all respects to the provisions of this Credit Agreement as if
they were Loans covered by a Loan Request including, without limitation,
the limitations set forth in ss.ss.2.1 and 6.1 and the requirements that
the applicable provisions of ss.ss.14 (in the case of Loans made on the
Closing Date) and ss.15 be satisfied. All actions taken by either Agent
pursuant to the provisions of this ss.8.3(b) shall be conclusive and
binding on the Borrower absent such Agent's gross negligence or willful
misconduct. Loans made pursuant to this ss.8.3(b) shall be Base Rate Loans
until converted in accordance with the provisions of the Credit Agreement
and, prior to a Settlement, such interest shall be for the account of the
Applicable Agent.
8.4. Conversion Options.
8.4.1. Conversion to Different Type of Loan. The Borrower may elect
from time to time to convert any outstanding Loan to a Loan of another
Type, provided that (a) with respect to any such conversion of a Loan to a
Base Rate Loan, the Borrower shall give the Applicable Agent at least one
(1) Business Day's prior written notice of such election; (b) with respect
to any such conversion of a Base Rate Loan to a Eurodollar Rate Loan, the
Borrower shall give the Applicable Agent at least two (2) Eurodollar
Business Days' prior written notice of such election; (c) with respect to
any such conversion of a Eurodollar Rate Loan into a Base Rate Loan, such
conversion shall only be made on the last day of the Interest Period with
respect thereto, and (d) no Loan may be converted into a Eurodollar Rate
Loan when any Event of Default has occurred and is continuing. On the date
on which such conversion is being made each Applicable Bank shall take such
action, if any, as is necessary to transfer its Commitment Percentage or
Gold Commitment Percentage, as the case may be, of such Loans to its
Domestic Lending Office or its Eurodollar Lending Office, as the case may
be. All or any part of outstanding Loans of any Type may be converted into
a Loan of another Type as provided herein, provided that (y) any partial
conversion of any Loan to a Base Rate Loan shall be in an aggregate
principal amount of $500,000.00 or an integral multiple thereof and (z) any
partial conversion of any Loan to a Eurodollar Rate Loan shall be in an
aggregate principal amount of $500,000.00 or a whole multiple of
$500,000.00 in excess thereof. Each Conversion Request relating to the
conversion of a Loan to a Eurodollar Rate Loan shall be irrevocable by the
Borrower.
8.4.2. Continuation of Type of Loan. Any Loan of any Type may be
continued as a Loan of the same Type upon the expiration of an Interest
Period with respect thereto by compliance by the Borrower with the notice
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provisions contained in ss.8.4.1; provided that no Eurodollar Rate Loan may
be continued as such when any Event of Default has occurred and is
continuing, but shall be converted to a Base Rate Loan on the last day of
the first Interest Period relating thereto ending during the continuance of
any Event of Default if the Applicable Agent in its discretion elects not
to permit such continuation. In the event that the Borrower fails to
provide any such notice with respect to the continuation of any Eurodollar
Rate Loan as such, then such Eurodollar Rate Loan shall be automatically
converted to a Base Rate Loan on the last day of the first Interest Period
relating thereto. The Applicable Agent shall notify the Applicable Banks
promptly when any such automatic conversion contemplated by this ss.8.4 is
scheduled to occur.
8.4.3. Eurodollar Rate Loans. Any conversion to or from Eurodollar
Rate Loans shall be in such amounts and be made pursuant to such elections
so that, after giving effect thereto, the aggregate principal amount of all
Eurodollar Rate Loans having the same Interest Period shall not be less
than $500,000.00 or a whole multiple of $500,000.00 in excess thereof. At
no time shall there be more than seven (7) Eurodollar Rate Loans
outstanding. Notwithstanding anything contained herein to the contrary,
until the earlier of (a) January 16, 1997 and (b) the date on which the
FNBB and RIHT's share of the Total Commitment is not more than $20,000,000,
Consignment Fixed Rate Amounts and Eurodollar Rate Loans shall not have
Interest Periods longer than seven (7) days and all such Interest Periods
shall be concurrent (and FNBB and RIHT hereby agree to provide the Borrower
with Interest Periods with a duration of seven (7) days, with interest to
be paid on the last day of each calendar month following the end of each
such Interest Period).
8.5. Funds for Loans.
8.5.1. Funding Procedures. Not later than 11:00 a.m. (Boston time) on
the proposed Drawdown Date of any Loans, each of the Applicable Banks will
make available to the Applicable Agent, at its Head Office, in immediately
available funds, the amount of such Applicable Bank's Commitment Percentage
or Gold Commitment Percentage, as the case may be, of the amount of the
requested Loans. Upon receipt from each Applicable Bank of such amount, and
upon receipt of the documents required by ss.ss.14 and 15 and the
satisfaction of the other conditions set forth therein, to the extent
applicable, the Applicable Agent will make available to the Borrower the
aggregate amount of such Loans made available to the Applicable Agent by
the Applicable Banks. The failure or refusal of any Applicable Bank to make
available to the Applicable Agent at the aforesaid time and place on any
Drawdown Date the amount of its Commitment Percentage or Gold Commitment
Percentage, as the case may be, of the requested Loans shall not relieve
any other Applicable Bank from its several obligation hereunder to
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make available to the Applicable Agent the amount of such other Applicable
Bank's Commitment Percentage or Gold Commitment Percentage, as the case may
be, of any requested Loans.
8.5.2. Advances by Applicable Agent. The Applicable Agent may, unless
notified to the contrary by any Applicable Bank prior to a Drawdown Date,
assume that such Applicable Bank has made available to the Applicable Agent
on such Drawdown Date the amount of such Applicable Bank's Commitment
Percentage or Gold Commitment Percentage, as the case may be, of the Loans
to be made on such Drawdown Date, and the Applicable Agent may (but it
shall not be required to), in reliance upon such assumption, make available
to the Borrower a corresponding amount. If any Applicable Bank makes
available to the Applicable Agent such amount on a date after such Drawdown
Date, such Applicable Bank shall pay to the Applicable Agent on demand an
amount equal to the product of (i) the average computed for the period
referred to in clause (iii) below, of the weighted average interest rate
paid by the Applicable Agent for federal funds acquired by the Applicable
Agent during each day included in such period, times (ii) the amount of
such Applicable Bank's Commitment Percentage or Gold Commitment Percentage,
as the case may be, of such Loans, times (iii) a fraction, the numerator of
which is the number of days that elapse from and including such Drawdown
Date to the date on which the amount of such Applicable Bank's Commitment
Percentage or Gold Commitment Percentage, as the case may be, of such Loans
shall become immediately available to the Applicable Agent, and the
denominator of which is 360. A statement of the Applicable Agent submitted
to such Applicable Bank with respect to any amounts owing under this
paragraph shall be prima facie evidence of the amount due and owing to the
Applicable Agent by such Applicable Bank. If the amount of such Applicable
Bank's Commitment Percentage or Gold Commitment Percentage, as the case may
be, of such Loans is not made available to the Applicable Agent by such
Applicable Bank within three (3) Business Days following such Drawdown
Date, the Applicable Agent shall be entitled to recover such amount from
the Borrower promptly after demand, with interest thereon at the rate per
annum applicable to the Loans made on such Drawdown Date.
8.6. Settlements; Failure to Make Funds Available. (a) On each Settlement
Date, the Applicable Agent shall, not later than 11:00 a.m. (Boston time),
give telephonic or facsimile notice (i) to the Applicable Banks and the
Borrower of the respective outstanding amount of Loans made by the
Applicable Agent on behalf of the Applicable Banks from the immediately
preceding Settlement Date through the close of business on the prior day
and the amount of any Eurodollar Rate Loans to be made (following the
giving of notice pursuant to ss.8.3(a)(ii)) on such date pursuant to a Loan
Request and (ii) to the Applicable Banks of the amount (a "Settlement
Amount") that each
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Applicable Bank (the "Settling Bank") shall pay to effect a Settlement of
any Loan. A statement of the Applicable Agent submitted to the Applicable
Banks and the Borrower or to the Applicable Banks with respect to any
amounts owing under this ss.8.6 shall be prima facie evidence of the amount
due and owing. The Settling Bank shall, not later than 3:00 p.m. (Boston
time) on such Settlement Date, effect a wire transfer of immediately
available funds to the Applicable Agent in the amount of the Settlement
Amount. All funds advanced by any Applicable Bank as a Settling Bank
pursuant to this ss.8.6 shall for all purposes be treated as a Loan made by
such Settling Bank to the Borrower and all funds received by any Bank
pursuant to this ss.8.6 shall for all purposes be treated as repayment of
amounts owed with respect to Loans made by such Bank. In the event that any
bankruptcy, reorganization, liquidation, receivership or similar cases or
proceedings in which the Borrower is a debtor prevent a Settling Bank from
making any Loan to effect a Settlement as contemplated hereby, such
Settling Bank will make such disposition and arrangements with the other
Applicable Banks with respect to such Loans, either by way of purchase of
participations, distribution, pro tanto assignment of claims, subrogation
or otherwise as shall result in each Applicable Bank's share of the
outstanding Revolving Credit Loans or, as the case may be, Gold Loans being
equal, as nearly as may be, to such Dollar Bank's Commitment Percentage of
the outstanding amount of the Revolving Credit Loans, or as the case may
be, such Gold Bank's Commitment Percentage of the outstanding amount of
Gold Loans.
(b) The Applicable Agent may, unless notified to the contrary by any
Applicable Bank prior to a Settlement Date, assume that such Applicable
Bank has made or will make available to the Applicable Agent on such
Settlement Date the amount of such Applicable Bank's Settlement Amount, and
the Applicable Agent may (but it shall not be required to), in reliance
upon such assumption, make available to the Borrower a corresponding
amount. If any Applicable Bank makes available to the Applicable Agent such
amount on a date after such Settlement Date, such Applicable Bank shall pay
to the Applicable Agent on demand an amount equal to the product of (i) the
average computed for the period referred to in clause (iii) below, of the
weighted average interest rate paid by the Applicable Agent for federal
funds acquired by such Applicable Agent during each day included in such
period, times (ii) the amount of such Settlement Amount, times (iii) a
fraction, the numerator of which is the number of days that elapse from and
including such Settlement Date to the date on which the amount of such
Settlement Amount shall become immediately available to such Applicable
Agent, and the denominator of which is 360. A statement of the Applicable
Agent submitted to such Applicable Bank with respect to any amounts owing
under this paragraph shall be prima facie evidence of the amount due and
owing to the Applicable Agent by such Applicable Bank. If such Applicable
Bank's
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Settlement Amount is not made available to the Applicable Agent by such
Applicable Bank within three (3) Business Days following such Settlement
Date, the Applicable Agent shall be entitled to recover such amount from
the Borrower promptly after demand, with interest thereon at the rate per
annum applicable to the Revolving Credit Loans or, as the case may be, the
Gold Loans as of such Settlement Date.
(c) The failure or refusal of any Applicable Bank to make available to
the Applicable Agent at the aforesaid time and place on any Settlement Date
the amount of its Settlement Amount (i) shall not relieve any other
Applicable Bank from its several obligations hereunder to make available to
the Applicable Agent the amount of such other Applicable Bank's Settlement
Amount and (ii) shall not impose upon such other Applicable Bank any
liability with respect to such failure or refusal or otherwise increase the
Commitment or, as the case may be, the Gold Commitment, of such other
Applicable Bank.
8.7. Optional Repayments of Loans. (a) The Borrower shall have the right,
at its election, to repay the outstanding amount of any Loan, as a whole or
in part, at any time without penalty or premium, provided that any full or
partial prepayment of the outstanding amount of any Eurodollar Rate Loans
pursuant to this ss.8.7 may be made only on the last day of the Interest
Period relating thereto. The Borrower shall give the Agent, no later than
11:00 a.m., Boston time, at least two (2) Business Days prior written
notice of any proposed prepayment pursuant to this ss.8.7 of Base Rate
Loans, and three (3) Eurodollar Business Days notice of any proposed
prepayment pursuant to this ss.8.7 of Eurodollar Rate Loans, in each case
specifying the proposed date of prepayment of Loans, the nature of the Loan
as a Revolving Credit Loan, the Term Loan or a Gold Loan and the principal
amount to be prepaid. Each such partial prepayment of the Loans shall be in
a minimum amount of $500,000.00 or an integral multiple of $100,000.00 in
excess thereof, shall be accompanied by the payment of accrued interest on
the principal prepaid to the date of prepayment and shall be applied, in
the absence of instruction by the Borrower, first to the principal of Base
Rate Loans and then to the principal of Eurodollar Rate Loans. Each partial
prepayment shall be allocated among the Applicable Banks, in proportion, as
nearly as practicable, to the respective unpaid principal amount of each
Applicable Bank's Notes, with adjustments to the extent practicable to
equalize any prior repayments not exactly in proportion.
(b) Notwithstanding the notice and minimum amount requirements set
forth in ss.8.7(a) but otherwise in accordance with the terms and
conditions of this Credit Agreement, the Applicable Agent may, in its sole
discretion at the Borrower's request, apply amounts held in the FNBB
Concentration Accounts
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in payment of any Loans made to the Borrower by such Applicable Agent
pursuant to ss.8.3(b) hereof, subject to the procedures for Settlement set
forth in ss.8.6.
8.8. Repayments of Loans and Repurchases of Consigned Precious Metals Prior
to Event of Default. (a) So long as the provisions ofss.8.9 are not applicable,
(i) all funds and cash proceeds in the form of money, checks and like items
received in the FNBB Concentration Accounts as contemplated by ss.11.14 shall be
credited, on the same Business Day on which the Dollar Agent determines that
good collected funds have been received, and, prior to the receipt of good
collected funds, on a provisional basis until final receipt of good collected
funds, to the Operating Accounts, (ii) all funds and cash proceeds in the form
of a wire transfer received in the FNBB Concentration Accounts as contemplated
by ss.11.14 shall be credited on the same Business Day as the Dollar Agent's
receipt of such amounts (or up to such later date as the Dollar Agent determines
that good collected funds have been received), to the Operating Accounts, and
(iii) all funds and cash proceeds in the form of an automated clearing house
transfer received in the FNBB Concentration Accounts as contemplated by ss.11.14
shall be credited on the next Business Day following the Dollar Agent's receipt
of such amounts (or up to such later date as the Dollar Agent determines that
good collected funds have been received), to the Operating Accounts. For
purposes of the foregoing provisions of this ss.8.8(a) the Dollar Agent shall
not be deemed to have received any such cash proceeds on any day unless received
by the Dollar Agent before 2:30 p.m. (Boston time) on such day. The Borrower
further acknowledges and agrees that any such provisional credit or credit in
respect of wire transfers shall be subject to reversal if final collection in
good funds of the related item is not received by the Dollar Agent in accordance
with the Dollar Agent's customary procedures and practices for collecting
provisional or wire transfer items.
(b) If at any time (i) the Outstanding Facility Amounts exceed the
Borrowing Base, or (ii) the Fair Market Value of Consigned Precious Metal
exceeds the Consignment Advance Rate Percentage multiplied by the Fair Market
Value of the sum of (A) Consigned Precious Metal plus (B) Borrower's Precious
Metal, the Borrower shall immediately pay the amount of such excess to the
Agents for the respective accounts of the Banks for application, so long as the
provisions of ss.8.9 are not applicable, as follows:
(i) first, to pay amounts then due and payable under the Dollar
Facility and the Gold Facility;
(ii) second, to reduce Gold Loans which are Base Rate Loans;
(iii) third, to reduce Gold Loans which are Eurodollar Rate Loans;
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(iv) fourth, to reduce Revolving Credit Loans which are Base Rate
Loans;
(v) fifth, to reduce Revolving Credit Loans which are Eurodollar Rate
Loans;
(vi) sixth, to the Borrower's Operating Accounts.
All prepayments of the Loans pursuant to this ss.8.8(b) shall be allocated
among the Banks making such Loans, in proportion, as nearly as practicable,
to the respective unpaid principal amount of such Loans outstanding, with
adjustments to the extent practicable to equalize any prior payments or
repayments not exactly in proportion. Prior to any Settlement Date, all
prepayments of the Loans shall be applied in accordance with this
ss.8.8(b), first to outstanding Loans of the Applicable Agent.
8.9. Repayments of Loans and Repurchases of Consigned Precious Metals and
Distribution of Collateral Proceeds After Event of Default. If any Event of
Default shall have occurred and be continuing, the Agents may and, upon the
request of the Majority Banks, shall, apply and distribute any amounts held by
the Agents or the Collateral Agent in any accounts (including without limitation
the Borrower's Operating Accounts and the FNBB Concentration Accounts) or any
other amounts otherwise received by the Collateral Agent, either Agent or any
Bank, whether pursuant to ss.5.4(d), ss.11.14 or ss.16.4 or otherwise with
respect to the realization upon any of the Collateral, as follows (the Borrower
hereby authorizing and consenting to such application):
(a) First, to the payment of, or (as the case may be) the
reimbursement of the Agents and the Collateral Agent for or in respect of
all reasonable costs, expenses, disbursements and losses which shall have
been incurred or sustained by the Agents and the Collateral Agent in
connection with the collection of such monies by the Agents, for the
exercise, protection or enforcement by the Collateral Agent of all or any
of the rights, remedies, powers and privileges of the Collateral Agent, for
the benefit of the Agents and the Banks, under this Credit Agreement or any
of the other Loan Documents or in respect of the Collateral or in support
of any provision of adequate indemnity to the Agents and the Collateral
Agent against any taxes or liens which by law shall have, or may have,
priority over the rights of the Agents and the Collateral Agent to such
monies;
(b) Second, to all other Obligations in such order or preference as
the Majority Banks may determine; provided, however, that distributions in
respect of (i) such Obligations shall be made pari passu among Obligations
with respect to the Agents' fees payable pursuant to ss.8.11 and all other
Obligations and (ii) Obligations owing to the Banks with respect to each
type
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of Obligation such as interest, principal, fees and expenses, shall be made
among the Banks pro rata, with the value of the Gold Banks' claims in
respect of Consigned Precious Metal equal to the Gold Loans made pursuant
to ss.5.4 (and solely for purposes of so determining the pro rata portion
of each Gold Bank's claim in respect of Consigned Precious Metal following
an Event of Default described in ss.ss.16.1(g) or (h), the amount of the
Obligations owed to the Gold Banks shall be an amount equal to the
Effective Date Value, as such term is defined in the Confirmation of Swap
Agreement); and provided, further, that the Agents may in their discretion
make proper allowance to take into account any Obligations not then due and
payable;
(c) Third, upon payment and satisfaction in full or other provisions
for payment in full satisfactory to each of the Banks and the Agents of all
of the Obligations, to the payment of any obligations required to be paid
pursuant to ss.9-504(1)(c) of the Uniform Commercial Code of the
Commonwealth of Massachusetts; and
(d) Fourth, the excess, if any, shall be returned to the Borrower or
to such other Persons as are entitled thereto.
8.10. Closing Fee. The Borrower agrees to pay to the Dollar Agent a closing
fee according to the terms of a separate fee letter entered into on or prior to
the Closing Date (the "Fee Letter") among the Borrower and the Agents.
8.11. Agents' Fee. The Borrower agrees to pay to the Agents, for each
Agent's own account, an Agents' fee according to the terms of the Fee Letter.
8.12. Funds for Payments.
8.12.1. Payments to Agents. All payments of principal, interest,
Reimbursement Obligations, commitment fees, Letter of Credit Fees and any
other amounts due hereunder or under any of the other Loan Documents with
respect to the Dollar Facility shall be made to the Dollar Agent, for the
respective accounts of the Dollar Banks and the Dollar Agent, at the Dollar
Agent's Head Office or at such other location in the Boston, Massachusetts,
area that the Dollar Agent may from time to time designate, in each case in
immediately available funds in Dollars. Each Redelivery and all payments of
principal, interest, commitment fees, Consignment Fees, Gold Fronting Fees,
Consignment Premiums, and any other amounts due hereunder or under any of
the other Loan Documents with respect to the Gold Facility shall be made to
the Gold Agent, for the respective accounts of the Gold Banks and the Gold
Agent, at the Gold Agent's Head Office or at such other location as the
Gold Agent may from time to time designate, in each case in immediately
available funds in Dollars or, as applicable, troy ounces.
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8.12.2. No Offset, etc. (a) All payments by the Borrower hereunder and
under any of the other Loan Documents shall be made (except as otherwise
expressly provided in this ss.8.12.2) without setoff or counterclaim and
free and clear of and without deduction for any taxes, levies, imposts,
duties, charges, fees, deductions, withholdings, compulsory loans,
restrictions or conditions of any nature now or hereafter imposed or levied
by any jurisdiction or any political subdivision thereof or taxing or other
authority therein (but excluding (i) any tax imposed on or measured by the
net income or profits of a Bank pursuant to the laws of the jurisdiction in
which it is organized or qualified to do business or the jurisdiction in
which the principal office or applicable lending office of such Bank or
Agent is located or any subdivision thereof or therein and (ii) any
franchise taxes, branch taxes, taxes on doing business or taxes on the
overall capital or net worth of any Bank or Agent pursuant to the laws of
the jurisdiction in which it is organized or the jurisdiction in which the
principal office or applicable lending office of such Bank or Agent is
located or any subdivision thereof or therein) unless the Borrower is
compelled by law to make such deduction or withholding (all such
non-excluded taxes, levies, imposts, duties, fees, assessments or other
charges being referred to collectively as "Taxes"). If any such Tax is
imposed upon the Borrower with respect to any amount payable by it
hereunder or under any of the other Loan Documents, the Borrower will pay
to the Agents, for the account of the Banks or (as the case may be) the
Agents, on the date on which such amount is due and payable hereunder or
under such other Loan Document, such additional amount in Dollars as shall
be necessary to enable the Banks or the Agents to receive the same net
amount which the Banks or the Agents would have received on such due date
had no such obligation been imposed upon the Borrower. The Borrower will
deliver promptly to the Agents certificates or other valid vouchers for all
taxes or other charges deducted from or paid with respect to payments made
by the Borrower hereunder or under such other Loan Document.
8.12.3. Withholding Forms. Each Bank that is not incorporated or
organized under the laws of the United States of America or a state thereof
or the District of Columbia (a "Non-U.S. Bank") agrees that it will deliver
to each of the Borrower and the Agents, within ten (10) days after the
Closing Date, or, in the case of any Non-U.S. Bank that becomes a Bank
pursuant to an Assignment and Acceptance, on the date of such Assignment
and Acceptance, two duly completed copies of United States Internal Revenue
Service Form 1001 or 4224 (or a successor form) certifying that such
Non-U.S. Bank is entitled to receive all payments under this Credit
Agreement and the Notes without deduction or withholding of any United
States federal income taxes. Each Non-U.S. Bank that so delivers a Form
1001 or 4224 further undertakes to deliver to each of the Borrower and the
Agents two additional copies of such form (or a successor form) on or
before the date that
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such form expires or becomes obsolete or promptly after the occurrence of
any event requiring a change in the most recent form so delivered by it,
and such amendments thereto or extensions or renewals thereof as may be
reasonably requested by the Borrower or the Agents, in each case certifying
that such Non-U.S. Bank is entitled to receive payments under this Credit
Agreement and the Notes without deduction or withholding of any United
States federal income taxes, unless an event (including any change in
treaty, law, or regulation) has occurred prior to the date on which any
such delivery would otherwise be required that renders all such forms
inapplicable or that would prevent such Non-U.S. Bank from duly completing
and delivering any such form with respect to it and such Non-U.S. Bank
advises the Borrower and the Agents that it is not capable of receiving
payments without any deduction or withholding of United States federal
income tax.
8.12.4. Exclusions. The Borrower shall not be required to pay any
additional amounts to any Non-U.S. Bank in respect of United States federal
withholding tax pursuant to ss.8.12.2 above to the extent that (i) the
obligation to withhold amounts with respect to United States federal
withholding tax existed on the date such Non-U.S. Bank became a party to
this Credit Agreement or, with respect to payments to a different lending
office designated by the Non-U.S. Bank as its applicable lending office (a
"New Lending Office"), the date such Non-U.S. Bank designated such New
Lending Office with respect to a Loan; provided, however, that this clause
(i) shall not apply to any transferee or New Lending Office as a result of
an assignment, transfer or designation made at the request of the Borrower;
and provided further, however, that this clause (i) shall not apply to the
extent the indemnity payment or additional amounts any transferee, or Bank
through a New Lending Office, would be entitled to receive without regard
to this clause (i) do not exceed the indemnity payment or additional
amounts that the Person making the assignment or transfer to such
transferee, or Bank making the designation of such New Lending Office,
would have been entitled to receive in the absence of such assignment,
transfer or designation; or (ii) the obligation to pay such additional
amounts would not have arisen but for a failure by such Non-U.S. Bank to
comply with the provisions of ss.8.12.3 above. Each Bank agrees to use
reasonable efforts (consistent with legal and regulatory restrictions) to
change its Domestic Lending Office or Eurodollar Lending Office to avoid or
to minimize any amounts otherwise payable under ss.8.12.2 hereof solely if
such change can be made in a manner so that such Bank, in its sole
determination, suffers no legal, economic or regulatory disadvantage.
8.13. Computations. All computations of interest on the Loans and of
commitment fees, Letter of Credit Fees, Consignment Fees, Gold Fronting Fees or
other fees shall, unless otherwise expressly provided herein, be based on a
360-day
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year and paid for the actual number of days elapsed. Except as otherwise
provided in the definition of the term "Interest Period" with respect to
Eurodollar Rate Loans and Consignment Fixed Rate Amounts, whenever a payment
hereunder or under any of the other Loan Documents becomes due on a day that is
not a Business Day, the due date for such payment shall be extended to the next
succeeding Business Day, and, with respect to payments of principal, interest
shall accrue thereon during such extension. The outstanding amount of the Loans
and Consigned Precious Metal as reflected on the Revolving Credit Note Records,
the Term Note Records, the Gold Note Records and the other records maintained by
the Agents and each Bank from time to time shall be considered correct and
binding on the Borrower in the absence of demonstrable error.
8.14. Inability to Determine Eurodollar Rate or Consignment Fixed Rate. In
the event, prior to the commencement of any Interest Period relating to any
Eurodollar Rate Loan or Consignment Fixed Rate Amount, the Dollar Agent, in the
case of Dollar Facility Loans, or the Gold Agent, in the case of Gold Loans or
Consignments, shall determine in good faith that adequate and reasonable methods
do not exist for ascertaining (a) the Eurodollar Rate that would otherwise
determine the rate of interest to be applicable to any Eurodollar Rate Loan
during any Interest Period or (b) the Eurodollar Rate or the Contango Rate that
would otherwise determine the rate of interest to be applicable to any
Consignment Fixed Rate Amount during any Interest Period, such Agent shall
forthwith give notice of such determination and the basis therefor (which shall
be conclusive and binding on the Borrower and the Applicable Banks) to the
Borrower and the Applicable Banks. In such event (x) any Loan Request or
Conversion Request with respect to Eurodollar Rate Loans or Consignment Request
with respect to Consignment Fixed Rate Amounts shall be automatically withdrawn
and, shall be deemed a request for Base Rate Loans or Consignment Base Rate
Amounts, as applicable, (y) each Eurodollar Rate Loan or Consignment Fixed Rate
Amount, as applicable, will automatically, on the last day of the then current
Interest Period relating thereto, become a Base Rate Loan or Consignment Base
Rate Amount, as applicable and (z) the obligations of the Applicable Banks to
make Eurodollar Rate Loans or Consignment Fixed Rate Amounts shall be suspended
until such Applicable Agent determines that the circumstances giving rise to
such suspension no longer exist, whereupon such Applicable Agent shall so notify
the Borrower and the Applicable Banks.
8.15. Illegality of Eurodollar Rate Loans or Consignment Fixed Rate
Amounts.
(a) Notwithstanding any other provisions herein, if any change in any
present law, regulation, treaty or directive or any future law, regulation,
treaty or directive or any change in the interpretation or application of
any thereof shall make it unlawful for any Bank to make or maintain
Eurodollar Rate Loans, such Bank shall forthwith give notice of such
circumstances to the
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Borrower and the other Applicable Banks and thereupon (i) the commitment of
such Bank to make Eurodollar Rate Loans or convert Loans of another Type to
Eurodollar Rate Loans shall forthwith be suspended and (ii) such Bank's
Loans then outstanding as Eurodollar Rate Loans, if any, shall be converted
automatically to Base Rate Loans on the last day of each Interest Period
applicable to such Eurodollar Rate Loans or within such earlier period as
may be required by law. The Borrower hereby agrees promptly to pay the
Applicable Agent, for the account of such Bank, within ten (10) days of
demand by such Bank, any additional amounts necessary to compensate such
Bank for any reasonable costs incurred by such Bank in making any
conversion in accordance with this ss.8.15, including any interest or fees
payable by such Bank to lenders of funds obtained by it in order to make or
maintain its Eurodollar Rate Loans hereunder.
(b) Notwithstanding any other provisions herein, if any change in any
present law, regulation, treaty or directive or any future law, regulation,
treaty or directive or any change in the interpretation or application of
any thereof shall make it unlawful for any Gold Bank to make or maintain
Consignment Fixed Rate Amounts, such Gold Bank shall forthwith give notice
of such circumstances to the Borrower and the other Gold Banks and
thereupon (i) the commitment of such Gold Bank to make Consignment Fixed
Rate Amounts or convert Consigned Precious Metal into Consignment Fixed
Rate Amounts shall forthwith be suspended, and (ii) such Gold Bank's
Consigned Precious Metal then outstanding as Consignment Fixed Rate
Amounts, if any, shall be converted automatically to Consignment Base Rate
Amounts on the last day of each Interest Period applicable to such
Consignment Fixed Rate Amounts or within such earlier period as may be
required by law. The Borrower hereby agrees promptly to pay the Gold Agent,
for the account of such Gold Bank, within ten (10) days of demand by such
Gold Bank, any additional amounts necessary to compensate such Gold Bank
for any reasonable costs incurred by such Gold Bank in making any
conversion in accordance with this ss.8.15, including any interest or fees
payable by such Gold Bank to lenders of funds obtained by it in order to
make or maintain its Consignment Fixed Rate Amounts hereunder.
8.16. Additional Costs, etc. If any changes in applicable law, which
expression, as used herein, includes statutes, rules and regulations thereunder
and interpretations thereof by any competent court or by any governmental or
other regulatory body or official charged with the administration or the
interpretation thereof and requests, directives, instructions and notices at any
time or from time to time hereafter made upon or otherwise issued to any Bank or
either Agent by any central bank or other fiscal, monetary or other authority
(whether or not having the force of law), shall:
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(a) subject any Bank or either Agent to any tax, levy, impost, duty,
charge, fee, deduction or withholding of any nature with respect to this
Credit Agreement, the other Loan Documents, any Letters of Credit, such
Bank's Commitment, Gold Commitment, the Consignments or the Loans (other
than taxes based upon or measured by the income or profits of such Bank or
such Agent and other taxes specifically excluded from ss.8.12.2 hereof), or
(b) materially change the basis of taxation (except for changes in
taxes on income or profits and other taxes specifically excluded from
ss.8.12.2 hereof) of payments to any Bank of the principal of or the
interest on any Loans or any other amounts payable to any Bank or either
Agent under this Credit Agreement or any of the other Loan Documents, or
(c) impose or increase or render applicable (other than to the extent
specifically provided for elsewhere in this Credit Agreement) any special
deposit, reserve, assessment, liquidity, capital adequacy or other similar
requirements (whether or not having the force of law) against assets held
by, or deposits in or for the account of, or loans by, or letters of credit
issued by, or commitments of an office of any Bank, or
(d) impose on any Bank or either Agent any other conditions or
requirements with respect to this Credit Agreement, the other Loan
Documents, any Letters of Credit, the Loans, the Consignments, such Bank's
Commitment or Gold Commitment, or any class of loans, letters of credit or
commitments of which any of the Loans, Consignments or such Bank's
Commitment or Gold Commitment forms a part, and the result of any of the
foregoing is
(i) to increase the cost to any Bank of making, funding, issuing,
renewing, extending or maintaining any of the Loans, any Consignment
or such Bank's Commitment or Gold Commitment or any Letter of Credit,
or
(ii) to reduce the amount of principal, interest, Reimbursement
Obligation or other amount payable to such Bank or either Agent
hereunder on account of such Bank's Commitment, Gold Commitment, any
Letter of Credit, any Consignment or any of the Loans, or
(iii) to require such Bank or either Agent to make any payment or
to forego any interest or Reimbursement Obligation or other sum
payable hereunder, the amount of which payment or foregone interest or
Reimbursement Obligation or other sum is calculated by reference to
the gross amount of any sum receivable or deemed received by such Bank
or either Agent from the Borrower hereunder,
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then, and in each such case, the Borrower will, within fifteen (15) days after
demand made by such Bank or (as the case may be) such Agent at any time and from
time to time and as often as the occasion therefor may arise, pay to such Bank
or such Agent such additional amounts as will be sufficient to compensate such
Bank or such Agent for such additional cost, reduction, payment or foregone
interest or Reimbursement Obligation or other sum.
8.17. Capital Adequacy. If after the date hereof any Bank or either Agent
determines that (a) the adoption of or change in any law, governmental rule,
regulation, policy, guideline or directive (whether or not having the force of
law) regarding capital requirements for banks or bank holding companies or any
change in the interpretation or application thereof by a court or governmental
authority with appropriate jurisdiction, or (b) compliance by such Bank or such
Agent or any corporation controlling such Bank or such Agent with any such newly
adopted or change in any applicable law, governmental rule, regulation, policy,
guideline or directive (whether or not having the force of law) of any such
entity regarding capital adequacy, has the effect of reducing the return on such
Bank's or such Agent's commitment with respect to any Loans or any Consignments
to a level below that which such Bank or such Agent could have achieved but for
such adoption, change or compliance (taking into consideration such Bank's or
such Agent's then existing policies with respect to capital adequacy and
assuming full utilization of such entity's capital) by any amount deemed by such
Bank or (as the case may be) such Agent to be material, then such Bank or such
Agent may notify the Borrower of such fact. To the extent that the amount of
such reduction in the return on capital is not reflected in the Base Rate or the
amount of Consignment Fees or Gold Fronting Fees, as applicable, the Borrower
agrees to pay such Bank or (as the case may be) such Agent for the amount of
such reduction in the return on capital as and when such reduction is determined
upon presentation by such Bank or (as the case may be) such Agent of a
certificate in accordance with ss.8.18 hereof. Each Bank shall allocate such
cost increases among its customers in good faith and on an equitable basis.
8.18. Certificate. A certificate setting forth any additional amounts
payable pursuant to ss.ss.8.16 or 8.17 and an explanation of such amounts which
are due, submitted by any Bank or either Agent to the Borrower, shall be
conclusive, absent manifest error, that such amounts are due and owing. Such
certificate shall include a written confirmation that all increases in costs for
which reimbursement is sought shall have been allocated equitably among all
similarly situated customers of such Bank or Agent. The Borrower will not be
required to compensate any Bank or Agent for any amounts pursuant to ss.ss.8.16
or 8.17 incurred by such Bank or Agent more than ninety (90) days prior to such
Bank's or Agent's request therefore given to the Borrower. The Borrower agrees
to pay such Bank or either Agent the amount shown as due on such certificate
within fifteen (15) days after receipt by the Borrower thereof. The Banks and
the Agents agree to act in a commercially reasonable manner
<PAGE>
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in order, to the extent reasonably possible, to minimize or avoid incurrence of
additional costs under ss.ss.8.16 or 8.17.
8.19. Indemnity. (a) The Borrower agrees to indemnify each Bank and to
hold each Bank harmless from and against any loss, cost or expense
(excluding loss of anticipated profits) that such Bank may sustain or incur
by reason of the liquidation or re-employment of deposits or other funds
obtained by it in order to maintain any Eurodollar Rate Loans as a
consequence of (i) default by the Borrower in payment of the principal
amount of or any interest on any Eurodollar Rate Loans as and when due and
payable, including any such loss or expense arising from interest or fees
payable by such Bank to lenders of funds obtained by it in order to
maintain its Eurodollar Rate Loans, (ii) default by the Borrower in making
a borrowing or conversion after the Borrower have given (or are deemed to
have given) a Loan Request, notice (in the case of all or any portion of
the Term Loan pursuant to ss.3.5), Conversion Request or Consignment
Conversion Request relating thereto in accordance with ss.ss.2.6, 3.5, 5.5,
5.4, 8.3 or 8.4 or (iii) the making of any payment of a Eurodollar Rate
Loan or the making of any conversion of any such Loan to a Base Rate Loan
on a day that is not the last day of the applicable Interest Period with
respect thereto, the amount of such losses, costs and expenses payable to
any such Bank being determined in the following manner:
(i) First, such Bank shall determine the amount by which (A) the
total amount of interest which would have otherwise accrued hereunder
on each Eurodollar Rate Loan so paid or not paid, borrowed or, as the
case may be, converted, during the period beginning on the date of
such payment or failure to pay, borrow or convert and ending on the
last day of the Interest Period relating to such Eurodollar Rate Loan
(the "Reemployment Period"), with such interest to be calculated on
the basis of the Eurodollar Rate applicable to such Interest Period
(not including the Eurodollar Applicable Margin), exceeds (B) the
total amount of interest which would accrue and become payable to such
Bank, during the Reemployment Period, if such Bank were to reemploy,
at or about the time of such payment or failure to pay, borrow or
convert, the principal so paid by lending to a prime bank in the
eurodollar interbank market selected by such Bank in its sole
discretion, deposits of Dollars in an amount equal (as nearly as may
be) to the amount of principal so paid or not paid, borrowed or
converted for a number of days comparable to the Reemployment Period.
Each such amount is hereafter referred to as an "Installment Amount";
(ii) Second, each Installment Amount shall be treated as payable
on the last day of the Interest Period relating to such
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Eurodollar Rate Loan had such Eurodollar Rate Loan not been prepaid or
such failure to repay, borrow or convert such Eurodollar Rate Loan not
occurred; and
(iii) Third, the amount to be paid on each such date shall be the
present value of the Installment Amount determined by discounting the
amount thereof from the date on which such Installment Amount is to be
treated as payable, at the same annual interest rate as that payable
upon the eurodollar deposit designated as aforesaid by such Bank.
(b) The Borrower agrees to indemnify the Gold Agent and each Gold Bank
and to hold the Gold Agent and each Gold Bank harmless from and against any
loss, cost or expense (excluding loss of anticipated profits) that the Gold
Agent or such Gold Bank may sustain or incur by reason of the liquidation
or re-employment of deposits or other funds obtained by it in order to
maintain any Consignment Fixed Rate Amount or Consignment Participation in
a Consignment Fixed Rate Amount as a consequence of (i) default by the
Borrower in making a purchase or Redelivery in respect of any Consignment
Fixed Rate Amount or in making any payment of Consignment Fees or Gold
Fronting Fees on any Consignment Fixed Rate Amount as and when due and
payable, including any such loss or expense arising from interest or fees
payable by the Gold Agent or such Gold Bank to lenders of funds obtained by
it in order to maintain its Consignments or Consignment Participations,
(ii) default by the Borrower in making a Consignment as a Consignment Fixed
Rate Amount, or a conversion to a Consignment Fixed Rate Amount after the
Borrower has given (or is deemed to have given) a Consignment Request or a
conversion request relating thereto in accordance with ss.5.3 or ss.5.5 or
(iii) the making of any payment of a Consignment Fixed Rate Amount or the
making of any conversion of any such Consignment Fixed Rate Amount to a
Consignment Base Rate Amount on a day that is not the last day of the
applicable Interest Period with respect thereto, including interest or fees
payable by the Gold Agent or such Gold Bank to lenders of funds obtained by
it in order to maintain any such Consignments.
8.20. Interest After Default. During the continuance of an Event of Default
under ss.ss.16.1(a) or (b) hereof (a) the principal of the Loans, whether or not
due, the Fair Market Value of Consigned Precious Metal, whether or not due to be
purchased or Redelivered by the Borrower in accordance with the requirements of
ss.5.4, and (to the extent permitted by applicable law) interest on the Loans
and Consignment Fees and Gold Fronting Fees shall bear interest, compounded
monthly and payable on demand, at a rate per annum equal to two percent (2%)
above the rate of interest or, as the case may be, Consignment Fees or Gold
Fronting Fees otherwise applicable thereto pursuant to ss.8.1 or, as the case
may be, ss.5.2 until such amounts shall be paid in full (after as well as before
judgment), and (b) all other amounts payable hereunder
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or under any of the other Loan Documents shall bear interest at a rate per annum
equal to two percent (2%) above the Base Rate until such amounts shall be paid
in full (after as well as before judgment).
8.21. Performance Adjustments. Based upon, and following receipt by the
Banks of (a) beginning with the Borrower's financial statements as hereafter
described for the fiscal quarter of the Borrower ending on or about February 28,
1998, (i) with respect to the first three fiscal quarters of each fiscal year,
the Borrower's quarterly unaudited consolidated financial statements pursuant to
ss.11.4(b) and (ii) with respect to the last fiscal quarter of each fiscal year,
the Borrower's annual audited consolidated financial statements pursuant to
ss.11.4(a), and (b) a certificate of the chief financial officer of the Borrower
setting forth calculations of the financial information set forth below, the
Base Rate Applicable Margin and the Eurodollar Applicable Margin shall be
subject to possible adjustment in accordance with the provisions of this
paragraph (each such adjustment, a "Performance Adjustment"). Performance
Adjustments shall be effective (the date of the effectiveness of any Performance
Adjustment, a "Performance Adjustment Date") with respect to adjustments to the
Base Rate Applicable Margin and the Eurodollar Applicable Margin, three (3)
Business Days following receipt by the Agents of the relevant quarterly
unaudited or annual audited financial statements and the certificate of the
chief financial officer of the Borrower, each as described above. The Eurodollar
Applicable Margin and the Base Rate Applicable Margin with respect to any period
following any Performance Adjustment Date until the next succeeding Performance
Adjustment Date shall be as set forth in the table below on the line furthest
down in such table with respect to which, for the period of four consecutive
fiscal quarters most recently ended prior to such possible Performance
Adjustment Date, both (A) the Borrower's ratio of (1) Consolidated Total Funded
Debt for such period to (2) Consolidated EBITDA for such period shall be within
the range set forth on such line in such table, and (B) the Borrower's ratio of
(1) Consolidated EBITDA for such period to (2) Consolidated Total Interest
Expense for such period shall be within the range set forth on such line in such
table:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------
Base Rate
Ratio of Eurodollar Applicable
Ratio of EBITDA Applicable Margin Eurodollar Margin for Base Rate
Total Funded to Total for Revolving Applicable Revolving Credit Applicable
Debt to Interest Credit Loans and Margin for Loans and Margin for
EBITDA Expense Gold Loans Term Loan Gold Loans Term Loan
------ ------- ---------- --------- ---------- ---------
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
greater less than 3.00% 3.50% 1.25% 1.75%
than or or equal
equal to to
4.25:1.0 1.75:1.0
- ----------------------------------------------------------------------------------------------------------------
<PAGE>
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- ----------------------------------------------------------------------------------------------------------------
greater greater 2.75% 3.25% 1.00% 1.50%
than or than
equal to 1.75:1.0
4.0:1.0 but less
but less than or
than equal to
4.25:1.0 2.0:1.0
- ----------------------------------------------------------------------------------------------------------------
less greater 2.50% 3.00% 0.75% 1.25%
than than
4.0:1.0 2.0:1.0
- ----------------------------------------------------------------------------------------------------------------
</TABLE>
8.22. Replacement of Banks. If any Bank becomes a Delinquent Bank, if any
Bank delivers a certificate pursuant to ss.8.18, if any Bank requires the
Borrower to pay any additional amounts to it pursuant to ss.8.12.2, or if any
Bank fails to consent to a waiver or amendment which requires the consent of all
of the Banks (hereinafter such Bank shall be referred to as a "Replaced Bank"),
then in such case, the Borrower may, upon at least five (5) Business Days'
notice to the Agents and such Replaced Bank, designate a replacement lender (a
"Replacement Bank") for such Replaced Bank, which Replacement Bank shall be
reasonably acceptable to the Agents. Such Replaced Bank shall thereafter assign,
subject to its receipt (unless a later date for the remittance thereof shall be
agreed to by the Replaced Bank) of all amounts owed to such Replaced Bank
hereunder, all (but not less than all) of its rights and obligations hereunder
pursuant to an Assignment and Acceptance and pursuant to the terms of ss.22
hereof. Upon the effectiveness of such Assignment and Acceptance, the
Replacement Bank shall become a Bank hereunder and the Replaced Bank shall be
released from its obligations hereunder, in each case to the extent provided in
ss.22.1 hereof.
9. COLLATERAL SECURITY AND GUARANTIES.
9.1 Security of Borrower and Capital Stock of the Borrower. The Obligations
shall be secured by a perfected first priority security interest (subject only
to Permitted Liens entitled to priority under applicable law) in all of the
assets of the Borrower (including, without limitation, in all shares of capital
stock of the Borrower's Subsidiaries owned by the Borrower other than the
Mexican Subsidiary and in 66-2/3% of the shares of the capital stock of the
Mexican Subsidiary), whether now owned or hereafter acquired, pursuant to the
terms of the Security Documents to which the Borrower is a party.
9.2. Guaranties and Security of Subsidiaries. The Obligations shall also be
guaranteed pursuant to the terms of the Guaranty. The obligations of the
Borrower's Subsidiaries (other than the Mexican Subsidiary) under the Guaranty
shall be in turn secured by a perfected first priority security interest
(subject only to Permitted Liens entitled to priority under applicable law) in
all of the assets of each such Subsidiary (including, without limitation, all
shares of capital stock of each such Subsidiary's Subsidiaries, if any, owned by
such Subsidiary), whether now owned or hereafter
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acquired, pursuant to the terms of the Security Documents to which such
Subsidiary is a party.
10. REPRESENTATIONS AND WARRANTIES.
The Borrower represents and warrants to the Banks and the Agents as
follows:
10.1. Corporate Authority.
10.1.1. Incorporation; Good Standing. Each of the Borrower and its
Subsidiaries (i) is a corporation duly organized, validly existing and in
good standing under the laws of its state of incorporation, (ii) has all
requisite corporate power to own its property and conduct its business as
now conducted and as presently contemplated, and (iii) is in good standing
as a foreign corporation and is duly authorized to do business in each
jurisdiction where such qualification is necessary except where a failure
to be so qualified would not have a materially adverse effect on the
business or financial condition of the Borrower and its Subsidiaries taken
as a whole.
10.1.2. Authorization. The execution, delivery and performance of this
Credit Agreement and the other Loan Documents to which the Borrower or any
of its Subsidiaries is or is to become a party and the transactions
contemplated hereby and thereby (i) are within the corporate authority of
such Person, (ii) have been duly authorized by all necessary corporate
proceedings, (iii) do not conflict with or result in any breach or
contravention of any provision of law, statute, rule or regulation to which
the Borrower or any of its Subsidiaries is subject or any judgment, order,
writ, injunction, license or permit applicable to the Borrower or any of
its Subsidiaries, except to the extent the same would not reasonably be
expected to have a material adverse effect on the business or financial
condition of the Borrower and its Subsidiaries taken as a whole and (iv) do
not conflict with any provision of the corporate charter or bylaws of, or,
except to the extent the same would not reasonably be expected to have a
material adverse effect on the business or financial condition of the
Borrower and its Subsidiaries taken as a whole, any agreement or other
instrument binding upon, the Borrower or any of its Subsidiaries.
10.1.3. Enforceability. The execution and delivery of this Credit
Agreement and the other Loan Documents to which the Borrower or any of its
Subsidiaries is or is to become a party will result in valid and legally
binding obligations of such Person enforceable against it in accordance
with the respective terms and provisions hereof and thereof, except as
enforceability is limited by bankruptcy, insolvency, reorganization,
moratorium or other laws relating to or affecting generally the enforcement
of creditors' rights and except to the extent that availability of the
remedy of specific performance or
<PAGE>
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injunctive relief is subject to the discretion of the court before which
any proceeding therefor may be brought. To the actual knowledge of the
Borrower, the execution and delivery of each of the Acquisition Documents
to which the Borrower or any of its Subsidiaries is or is to become a party
will result in valid and legally binding obligations of such Person
enforceable against it in accordance with the respective terms and
provisions thereof, except as enforceability is limited by bankruptcy,
insolvency, reorganization, moratorium or other laws relating to or
affecting generally the enforcement of creditors' rights and except to the
extent that availability of the remedy of specific performance or
injunctive relief is subject to the discretion of the court before which
any proceeding therefor may be brought.
10.2. Governmental Approvals. The execution, delivery and performance by
the Borrower or any of its Subsidiaries of this Credit Agreement and the other
Loan Documents and Acquisition Documents to which the Borrower or any of its
Subsidiaries is or is to become a party and the transactions contemplated hereby
and thereby do not require the approval or consent of, or filing with, any
governmental agency or authority other than those already obtained or those to
be made when and as required in the ordinary course of business and not
affecting the validity of the Borrower's or any such Subsidiary's obligations
under the Loan Documents.
10.3. Title to Properties; Leases. Except as indicated on Schedule 10.3
hereto, as of the Closing Date the Borrower and its Subsidiaries own all of the
assets reflected in the pro-forma consolidated balance sheet of the Borrower and
its Subsidiaries as at the Closing Date, subject to no rights of others,
including any mortgages, leases, conditional sales agreements, title retention
agreements, liens or other encumbrances except Permitted Liens.
10.4 Financial Statements and Projections.
10.4.1. Financial Statements. There has been furnished to each of the
Banks (a) balance sheets of the CJC Business and L.G. Balfour Company, Inc.
as at the Balance Sheet Date, the statements of income (loss) of the CJC
Business and the statements of operations of L.G. Balfour Company, Inc.
for, in the case of the CJC Business, the fiscal year then ended, and in
the case of L.G. Balfour Company, Inc., the six-month period then ended,
certified by Arthur Andersen LLP, (b) balance sheets of the CJC Business
and L.G. Balfour Company, Inc. as at their respective fiscal year end dates
for the last three fiscal years prior to the Closing Date, the statements
of income (loss) of the CJC Business and the statements of operations of
L.G. Balfour Company, Inc. for the respective fiscal years then ended,
certified by Arthur Andersen LLP, and (c) an unaudited pro-forma combined
balance sheet of the Borrower and its Subsidiaries as at August 31, 1996
after giving effect to the transactions contemplated hereby and the
Acquisitions. Such balance sheets,
<PAGE>
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statements of income (loss) and statements of operations have been prepared
in accordance with generally accepted accounting principles in all material
respects and fairly present in all material respects the financial
condition of the CJC Business or, as applicable, L.G. Balfour Company,
Inc., as at the close of business on the date thereof and the results of
operations for the applicable fiscal period then ended. There are no
contingent liabilities of the businesses of the CJC Business or, as
applicable, L.G. Balfour Company, Inc., acquired pursuant to the
Acquisitions, as of such date involving material amounts, known to the
officers of the Borrower as of the Closing Date, which were not disclosed
in such balance sheets and the notes related thereto or in the reports of
Arthur Andersen LLP.
10.42. Projections. The projections of the annual operating budgets of
the Borrower and its Subsidiaries on a consolidated basis, balance sheets
and cash flow statements for the 1997 to 2002 fiscal years have been
delivered to each Bank. As of the Closing Date, the projections are based
upon reasonable estimates of the Borrower of the results of operations and
other information projected therein, it being recognized that such
projections do not constitute a warranty as to the future performance of
the Borrower or its Subsidiaries, and that actual results may vary from
projected results.
10.5. No Material Changes, etc.; Solvency.
10.5.1. No Material Changes, etc. From the Balance Sheet Date until
the Closing Date, there has occurred no materially adverse change in the
financial condition or business of the Sellers acquired by the Borrower
pursuant to the Acquisitions to the extent reflected in the consolidated
balance sheet of the CJC Business or, as applicable, L.G. Balfour Company,
Inc., as at the Balance Sheet Date, or the consolidated statement of income
for the fiscal year then ended, other than changes in the ordinary course
of business that have not had any materially adverse effect either
individually or in the aggregate on the business or financial condition of
the CJC Sellers or, as applicable, the Balfour Sellers. Since the Closing
Date there has occurred no materially adverse change in the financial
condition or business of the Borrower and its Subsidiaries as shown on or
reflected in the pro-forma combined balance sheet of the Borrower and its
Subsidiaries as at August 31, 1996 assuming on a pro forma basis completion
of the transactions contemplated hereby and in connection with the
Acquisitions, other than changes in the ordinary course of business that
have not had any materially adverse effect either individually or in the
aggregate on the business or financial condition of the Borrower or any of
its Subsidiaries. Since the Balance Sheet Date, the Borrower has not made
any Distribution except as permitted pursuant to ss.12.4 hereof.
<PAGE>
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10.5.2. Solvency. Both before and after giving effect to the
transactions contemplated by this Credit Agreement, the other Loan
Documents and the Acquisition Documents, the Borrower and its
Subsidiaries on a consolidated basis are Solvent. As used herein,
"Solvent" shall mean that the Borrower and its Subsidiaries (i) have
assets having a fair value in excess of their liabilities, (ii) have
assets having a fair value in excess of the amount required to pay
their liabilities on existing debts as such debts become absolute and
matured, and (iii) have, and expect to continue to have, access to
adequate capital for the conduct of their business and the ability to
pay their debts from time to time incurred in connection with the
operation of their business as such debts mature.
10.6. Franchises, Patents, Copyrights, etc. Except as set forth on Schedule
10.6 hereof, each of the Borrower and its Subsidiaries possesses all franchises,
patents, copyrights, trademarks, trade names, licenses and permits, and rights
in respect of the foregoing, adequate for the conduct of its business
substantially as now conducted without known conflict as of the Closing Date
with any rights of others.
10.7. Litigation. Except as set forth in Schedule 10.7 hereto, as of the
Closing Date there are no actions, suits, proceedings or investigations of any
kind pending or threatened against the Borrower or any of its Subsidiaries
before any court, tribunal or administrative agency or board that are reasonably
likely to be adversely determined and that, if adversely determined, could,
either in any case or in the aggregate, reasonably be expected to materially
adversely affect the financial condition or business of the Borrower and its
Subsidiaries or materially impair the right of the Borrower and its
Subsidiaries, considered as a whole, to carry on business substantially as now
conducted by them, or which question the validity of this Credit Agreement or
any of the other Loan Documents or any of the Acquisition Documents.
10.8. No Materially Adverse Contracts, etc. Neither the Borrower nor any of
its Subsidiaries is subject to any charter, corporate or other legal
restriction, or any judgment, decree, order, rule or regulation that has or is
expected in the future to have a materially adverse effect on the business or
financial condition of the Borrower and its Subsidiaries taken as a whole.
Neither the Borrower nor any of its Subsidiaries is a party to any contract or
agreement that has or is expected, in the judgment of the Borrower's officers,
to have any materially adverse effect on the business or financial condition of
the Borrower and its Subsidiaries taken as a whole.
10.9. Compliance with Other Instruments, Laws, etc. Neither the Borrower
nor any of its Subsidiaries is in violation of any provision of its charter
documents, bylaws, or any agreement or instrument to which it may be subject or
by which it or any of its properties may be bound or any decree, order,
judgment, statute, license, rule or regulation, in any of the foregoing cases in
a manner that
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could reasonably be expected to result in the imposition of substantial
penalties or materially and adversely affect the financial condition, properties
or business of the Borrower and its Subsidiaries taken as a whole.
10.10. Tax Status. The Borrower and its Subsidiaries (a) have made or filed
all federal and state income and sales and all other material tax returns,
reports and declarations required by any jurisdiction to which any of them is
subject, and (b) have paid all taxes and other governmental assessments and
charges shown or determined to be due on such returns, reports and declarations,
except those being contested in good faith and by appropriate proceedings or to
the extent that the failure to do so could not reasonably be expected to have a
material adverse effect on the business or financial condition of the Borrower
and its Subsidiaries taken as a whole.
10.11. No Event of Default. No Default or Event of Default has occurred and
is continuing.
10.12. Holding Company and Investment Company Acts. Neither the Borrower
nor any of its Subsidiaries is a "holding company", or a "subsidiary company" of
a "holding company", or an affiliate" of a "holding company", as such terms are
defined in the Public Utility Holding Company Act of 1935; nor is it an
"investment company", or an "affiliated company" or a "principal underwriter" of
an "investment company", as such terms are defined in the Investment Company Act
of 1940.
10.13. Absence of Financing Statements, etc. Except with respect to
Permitted Liens, the Borrower has not signed or become a party to any financing
statement, security agreement, chattel mortgage, real estate mortgage or other
document filed or recorded with any filing records, registry or other public
office, that purports to cover, affect or give notice of any present or possible
future lien on, or security interest in, any assets or property of the Borrower
or any of its Subsidiaries or any rights relating thereto.
10.14. Perfection of Security Interest. All filings, assignments, pledges
and deposits of documents or instruments have been made and all other actions
have been taken that are necessary or advisable, under applicable law, to
establish and perfect the Collateral Agent's security interest in the
Collateral. The Collateral and the Collateral Agent's rights with respect to the
Collateral are not subject to any setoff, claims, withholdings or other defenses
except for Permitted Liens and except for offsets or defenses of customers of
the Borrower or any of its Subsidiaries arising in the ordinary course of
business, which offsets and defenses could not reasonably be expected to have a
material adverse effect on the business or financial condition of the Borrower
and its Subsidiaries taken as a whole. The Borrower or a Subsidiary of the
Borrower party to the Security Agreement is the owner of the Collateral free
from
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any lien, security interest, encumbrance and any other claim or demand, except
for Permitted Liens.
10.15. Certain Transactions. Except for (a) arm's length transactions
pursuant to which one of the Borrower or any of its Subsidiaries makes payments
in the ordinary course of business upon terms no less favorable than the
Borrower or such Subsidiary could obtain from third parties, (b) payment of the
CH Management Fee to the extent permitted by ss.12.4 and ss.12.12 hereof, (c)
transactions with Oakley Insurance Group regarding the Borrower's insurance
policies and coverage upon terms not materially less favorable to the Borrower
or such Subsidiary than it could obtain in a comparable arm's-length transaction
with a party other than Oakley Insurance Group, (d) transactions among the
Borrower and its Subsidiaries, (e) any Permitted Employee Stock Repurchases, (f)
any Permitted Common Stock Repurchase, (g) any Permitted Preferred Stock
Replacement, and (h) transactions constituting Investments permitted by
ss.ss.12.3(h) or (o) hereof, none of the officers, directors, or employees of
the Borrower or any of its Subsidiaries is presently a party to any transaction
with the Borrower or any of its Subsidiaries (other than for services as
employees, officers and directors), including any contract, agreement or other
arrangement providing for the furnishing of services to or by, providing for
rental of real or personal property to or from, or otherwise requiring payments
to or from any officer, director or such employee or, to the knowledge of the
Borrower, any corporation, partnership, trust or other entity in which any
officer, director, or any such employee has a substantial interest or is an
officer, director, trustee or partner.
10.16. Employee Benefit Plans.
10.16.1. In General. Each Employee Benefit Plan and each Guaranteed
Pension Plan has been maintained and operated in compliance in all material
respects with the provisions of ERISA and, to the extent applicable, the
Code, including but not limited to the provisions thereunder respecting
prohibited transactions and the bonding of fiduciaries and other persons
handling plan funds as required by ss.412 of ERISA. Borrower has heretofore
delivered to the Agents the most recently completed annual report, Form
5500, with all required attachments, and actuarial statement required to be
submitted under ss.103(d) of ERISA, with respect to each Guaranteed Pension
Plan.
10.16.2. Terminability of Welfare Plans. Except as set forth on
Schedule 10.16, no Employee Benefit Plan which is an employee welfare
benefit plan within the meaning of ss.3(1) or ss.3(2)(B) of ERISA, provides
benefit coverage subsequent to termination of employment except as required
by Title I, Part 6 of ERISA or applicable state insurance laws. Except as
set forth on Schedule 10.16, the Borrower may terminate each such Plan at
any
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time (or at any time subsequent to the expiration of any applicable
bargaining agreement) in the discretion of the Borrower without liability
to any Person other than for claims arising prior to termination.
10.16.3. Guaranteed Pension Plans. Each contribution required to be
made to a Guaranteed Pension Plan, whether required to be made to avoid the
incurrence of an accumulated funding deficiency, the notice or lien
provisions of ss.302(f) of ERISA, or otherwise, has been timely made. No
waiver of an accumulated funding deficiency or extension of amortization
periods has been received with respect to any Guaranteed Pension Plan, and
neither the Borrower nor any ERISA Affiliate is obligated to or has posted
security in connection with an amendment of a Guaranteed Pension Plan
pursuant to ss.307 of ERISA or ss.401(a)(29) of the Code. No liability to
the PBGC (other than required insurance premiums, all of which have been
paid) has been incurred by the Borrower or any ERISA Affiliate with respect
to any Guaranteed Pension Plan, and there has not occurred any ERISA
Reportable Event (other than an Event as to which the requirement of 30
days notice has been waived), or any other event or condition which
presents a material risk of termination of any Guaranteed Pension Plan by
the PBGC. Based on the latest valuation of each Guaranteed Pension Plan
(which in each case occurred within twelve months of the date of this
representation) and on the actuarial methods and assumptions employed for
that valuation, the aggregate benefit liabilities of all such Guaranteed
Pension Plans within the meaning of ss.4001 of ERISA did not exceed the
aggregate value of the assets of all such Plans, disregarding for this
purpose the benefit liabilities and assets of any Guaranteed Pension Plan
with assets in excess of benefit liabilities, by more than $500,000.00.
10.16.4. Multiemployer Plans. Neither the Borrower nor any ERISA
Affiliate has incurred any material liability (including secondary
liability) to any Multiemployer Plan as a result of a complete or partial
withdrawal from such Multiemployer Plan under ss.4201 of ERISA or as a
result of a sale of assets described in ss.4204 of ERISA. Neither the
Borrower nor any ERISA Affiliate has been notified that any Multiemployer
Plan is in reorganization or insolvent under and within the meaning of
ss.4241 or ss.4245 of ERISA or is at risk of entering reorganization or
becoming insolvent, or that any Multiemployer Plan intends to terminate or
has been terminated under ss.4041A of ERISA.
10.17. Regulations U and X. The proceeds of the Loans and the Consignments
shall be used to finance the Acquisitions and for operating expenses, payment of
CH Management Fees, Capital Expenditures, payments in respect of Indebtedness
and for other working capital and general
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corporate purposes. The Borrower will obtain Letters of Credit solely for
working capital and general corporate purposes. No portion of any Loan or
proceeds from any Consignment is to be used, and no portion of any Letter of
Credit is to be obtained, for the purpose of purchasing or carrying any "margin
security" or "margin stock" as such terms are used in Regulations U and X of the
Board of Governors of the Federal Reserve System, 12 C.F.R. Parts 221 and 224.
10.18. Environmental Compliance. To the best knowledge of the Borrower and
its Subsidiaries, based upon reasonable inquiries to the Sellers and based upon
Phase I environmental site assessments conducted by the Borrower on its Austin,
Texas and Louisville, Kentucky facilities and the review of the 1994 site
assessment conducted by L.G. Balfour Company, Inc. with respect to the North
Attleboro, Massachusetts facilities (collectively, the "Environmental Reports"):
(a) none of the Borrower, its Subsidiaries or any operator of the Real
Estate or any operations thereon is in violation, or alleged violation, of
any judgment, decree, order, law, license, rule or regulation pertaining to
environmental matters, including without limitation, those arising under
the Resource Conservation and Recovery Act, the Comprehensive Environmental
Response, Compensation and Liability Act of 1980 as amended ("CERCLA"), the
Superfund Amendments and Reauthorization Act of 1986, the Federal Clean
Water Act, the Federal Clean Air Act, the Toxic Substances Control Act, or
any state or local statute, regulation, ordinance, order or decree relating
to health, safety or the environment (hereinafter "Environmental Laws"),
which violation would reasonably be expected to have a material adverse
effect on the environment or the business or financial condition of the
Borrower and its Subsidiaries taken as a whole;
(b) neither the Borrower nor any of its Subsidiaries has received
notice from any third party including, without limitation, any federal,
state or local governmental authority, (i) that any one of them has been
identified by the United States Environmental Protection Agency ("EPA") as
a potentially responsible party under CERCLA with respect to a site listed
on the National Priorities List, 40 C.F.R. Part 300 Appendix B; (ii) that
any hazardous waste, as defined by 42 U.S.C. ss.6903(5), any hazardous
substances as defined by 42 U.S.C. ss.9601(14), any pollutant or
contaminant as defined by 42 U.S.C. ss.9601(33) and any toxic substances,
oil or hazardous materials or other chemicals or substances regulated by
any Environmental Laws ("Hazardous Substances") have been generated,
transported or disposed at any site where a federal, state or local agency
or other third party has conducted or has ordered that the Borrower or any
of its Subsidiaries conduct a remedial investigation, removal or other
response action pursuant to any Environmental Law; or (iii) that it is or
shall be a named party to any claim, action, cause of action, complaint, or
legal or administrative proceeding (in each case, contingent or otherwise)
arising out of any third party's incurrence of costs, expenses, losses
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or damages of any kind whatsoever in connection with the release of
Hazardous Substances, in any case except to the extent that the foregoing
would not reasonably be expected to have a material adverse effect on the
business or financial condition of the Borrower and its Subsidiaries taken
as a whole;
(c) except as set forth on Schedule 10.18 attached hereto and except
to the extent not reasonably expected to have a material adverse effect on
the business or financial condition of the Borrower and its Subsidiaries
taken as a whole: (i) no portion of the Real Estate has been used for the
handling, processing, storage or disposal of Hazardous Substances except in
accordance with applicable Environmental Laws; and no underground tank or
other underground storage receptacle used to store Hazardous Substances is
located on any portion of the Real Estate; (ii) in the course of any
activities conducted by the Borrower, its Subsidiaries or operators of its
properties, no Hazardous Substances have been generated or are being used
on the Real Estate except in accordance with applicable Environmental Laws;
(iii) there have been no releases (i.e. any past or present releasing,
spilling, leaking, pumping, pouring, emitting, emptying, discharging,
injecting, escaping, disposing or dumping) or threatened releases of
Hazardous Substances on, upon, into or from the properties of the Borrower
or any of its Subsidiaries, which releases would have a material adverse
effect on the value of any of the Real Estate; (iv) to the best of the
Borrower's knowledge, there have been no releases on, upon, from or into
any real property in the vicinity of any of the Real Estate which, through
soil or groundwater contamination, may have come to be located on, and
which would have a material adverse effect on the value of, the Real
Estate; and (v) in addition, any Hazardous Substances that have been
generated on any of the Real Estate have been transported offsite only by
carriers having an identification number issued by the EPA, treated or
disposed of only by treatment or disposal facilities maintaining valid
permits as required under applicable Environmental Laws, which transporters
and facilities have been and are, to the best of the Borrower's knowledge,
operating in compliance with such permits and applicable Environmental
Laws; and
(d) None of the Borrower and its Subsidiaries, any Mortgaged Property
or any of the other Real Estate is subject to any applicable environmental
law requiring the performance of Hazardous Substances site assessments, or
the removal or remediation of Hazardous Substances, or the giving of notice
to any governmental agency or the recording or delivery to other Persons of
an environmental disclosure document or statement by virtue of the
transactions set forth and contemplated in the Loan Documents or the
Acquisition Documents, or as a condition to the recording of any Mortgage
or to the effectiveness of any other transactions contemplated hereby.
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10.19. Subsidiaries, etc. Except as set forth on Schedule 10.19 hereto, the
Borrower has no Subsidiaries. Except as set forth on Schedule 10.19 hereto,
neither the Borrower nor any Subsidiary of the Borrower is engaged in any joint
venture or partnership with any other Person.
10.20. Bank Accounts. Schedule 10.20 (as such may be amended from time to
time in accordance with ss.12.10 hereof) sets forth the account numbers and
location of all bank accounts of each of the Borrower and its Subsidiaries.
10.21. Acquisition Documents. The Borrower has heretofore furnished to the
Agents true, complete and correct copies of the Acquisition Documents (including
schedules, exhibits and annexes thereto). Except as set forth on Schedule 10.6
hereto, the Acquisition Documents have not subsequently been amended,
supplemented, or modified and constitute the complete understanding among the
parties thereto in respect of the matters and transactions covered thereby. The
representations and warranties of the Borrower contained in the Acquisition
Documents were true and correct in all material respects when made or deemed to
be made except as would not have a materially adverse effect on the business or
financial condition of the Borrower and its Subsidiaries taken as a whole, and
the Agents may rely on such representations and warranties as if they were
incorporated herein on the Closing Date. The requirements of ss.14.20 have been
satisfied as of the Closing Date.
11. AFFIRMATIVE COVENANTS OF THE BORROWER.
The Borrower covenants and agrees that, so long as any Loan, Unpaid
Reimbursement Obligation, Letter of Credit, amount of Consigned Precious Metal
or Note is outstanding or any Bank has any obligation to make any Loans or
Consignments or the Dollar Agent has any obligation to issue, extend or renew
any Letters of Credit:
11.1. Punctual Payment. The Borrower will duly and punctually pay, purchase
or Redeliver, or cause to be paid, purchased or Redelivered, the principal and
interest on the Loans, all Consigned Precious Metal, all Reimbursement
Obligations, the Letter of Credit Fees, the commitment fees, the Consignment
Fees, the Gold Fronting Fees, the Consignment Premiums, the Agents' fee and all
other amounts provided for in this Credit Agreement and the other Loan Documents
to which the Borrower or any of its Subsidiaries is a party, all in accordance
with the terms of this Credit Agreement and such other Loan Documents.
11.2. Maintenance of Office. The Borrower will maintain its chief executive
office in Austin, Texas, or at such other place in the United States of America
as the Borrower shall designate upon written notice to the Agents, where
notices, presentations and demands to or upon the Borrower in respect of the
Loan Documents to which the Borrower is a party may be given or made.
<PAGE>
11.3. Records and Accounts. The Borrower will (a) keep, and cause each of
its Subsidiaries to keep, true and accurate records and books of account in
accordance with generally accepted accounting principles and (b) maintain
adequate accounts and reserves for all taxes (including income taxes),
depreciation, depletion, obsolescence and amortization of its properties and the
properties of its Subsidiaries, contingencies, and other reserves in accordance
with generally accepted accounting principles.
11.4. Financial Statements, Certificates and Information. The Borrower will
deliver to each of the Banks:
(a) as soon as practicable, but in any event not later than ninety
(90) days after the end of each fiscal year of the Borrower, the
consolidated balance sheet of the Borrower and its Subsidiaries as of the
end of such year, and the related consolidated statement of income and
consolidated statement of cash flow for such year, each setting forth in
comparative form the figures for the previous fiscal year and all such
consolidated statements to be in reasonable detail, prepared in accordance
with generally accepted accounting principles, and certified by Arthur
Andersen LLP or by other independent certified public accountants
satisfactory to the Agents, reported on without a "going concern" or like
qualification or exception, or qualification indicating that the scope of
the audit was inadequate to permit such independent certified public
accountants to certify such financial statements without such
qualification, together with a written statement from such accountants to
the effect that they have read a copy of this Credit Agreement, and that,
in making the examination necessary to said certification, nothing shall
have come to their attention indicating that any Default or Event of
Default shall exist, or, if such accountants shall have obtained knowledge
of any then existing Default or Event of Default they shall disclose in
such statement any such Default or Event of Default; provided that such
accountants shall not be liable to the Banks for failure to obtain
knowledge of any Default or Event of Default;
(b) as soon as practicable, but in any event not later than (i) with
respect to the first two fiscal quarters of the Borrower ending after the
Closing Date, fifty (50) days after the end of each such two fiscal
quarters of the Borrower and (ii) with respect to any other fiscal quarters
of the Borrower, forty-five (45) days after the end of each such fiscal
quarter of the Borrower, copies of the unaudited consolidated balance sheet
of the Borrower and its Subsidiaries as at the end of such quarter, and the
related consolidated statement of income and consolidated statement of cash
flow for the portion of the Borrower's fiscal year then elapsed, all in
reasonable detail and prepared in accordance with generally accepted
accounting principles, together with a certification by the principal
financial or accounting officer of the Borrower that the information
contained in such financial statements fairly
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presents the financial position of the Borrower and its Subsidiaries on the
date thereof (subject to year-end adjustments);
(c) as soon as practicable, but in any event not later than (i) with
respect to the first three months ending after the Closing Date, forty (40)
days after the end of each such three months and (ii) with respect to any
other month in each fiscal year, thirty (30) days after the end of each
such month in each fiscal year of the Borrower, unaudited monthly
consolidated financial statements of the Borrower and its Subsidiaries for
such month prepared in accordance with generally accepted accounting
principles, together with a certification by the principal financial or
accounting officer of the Borrower that the information contained in such
financial statements fairly presents the financial condition of the
Borrower and its Subsidiaries on the date thereof (subject to quarterly and
year-end adjustments);
(d) simultaneously with the delivery of the financial statements
referred to in subsections (a) and (b) above, a statement certified by the
principal financial or accounting officer of the Borrower in substantially
the form of Exhibit J hereto and setting forth in reasonable detail
computations evidencing compliance with the covenants contained in ss.13
and (if applicable) reconciliations to reflect changes in generally
accepted accounting principles since the Balance Sheet Date;
(e) contemporaneously with the filing or mailing thereof, copies of
all material of a financial nature filed with the Securities and Exchange
Commission or sent to the stockholders of the Borrower;
(f) within (i) during the period through June 30, 1997, thirty (30)
days after the end of each calendar month, and (ii) during the period after
June 30, 1997, fifteen (15) days after the end of each calendar month, or
at such earlier time as the Agents may reasonably request, (A) a Borrowing
Base Report setting forth the Borrowing Base as at the end of such calendar
month or other date so requested by the Agents, and (B) a Consigned
Precious Metal Report setting forth (1) the amount of Consigned Precious
Metal and Borrower's Precious Metal as of the end of such calendar month or
other date so requested by the Agents, and (2) a calculation of the
Consignment Advance Rate Percentage multiplied by the Fair Market Value of
the sum of (y) Borrower's Precious Metal plus (z) Consigned Precious Metal
as of the end of such calendar month or other date so requested by the
Agents, in each case together with supporting schedules and documentation,
with each such Borrowing Base Report and Consigned Precious Metal Report to
be accompanied by a certification by the principal financial or accounting
officer of the Borrower that the information contained therein is true and
accurate in all material respects;
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(g) within thirty (30) days after the end of each calendar month, an
Accounts Receivable aging report;
(h) on or prior to September 30 of each calendar year, projections of
the Borrower and its Subsidiaries updating those projections delivered to
the Banks and referred to in ss.10.4.2 or, if applicable, updating any
later such projections delivered in response to a request pursuant to this
ss.11.4(h);
(i) (i) prior to the opening by the Borrower of any location at which
Eligible Inventory or Consigned Precious Metal is to be located, a
supplement to Schedule 2 hereto in the form of Exhibit K hereto, listing
any additions or deletions to the list of Borrower Permitted Inventory
Locations, which supplement, together with Schedule 2 hereto and any prior
supplements, shall be deemed to constitute Schedule 2 for all purposes of
this Credit Agreement, and (ii) as soon as practicable, but in any event
not later than ten (10) days after the end of each fiscal quarter of the
Borrower, a supplemental listing of any additions or deletions to the list
of sales representative locations at which any inventory is to be located,
which supplemental listings, together with the list of Sales Representative
Inventory Locations disclosed in writing to the Agents on the Closing Date
and any prior such supplemental listings, shall be deemed to constitute the
list of Sales Representative Inventory Locations for all purposes of this
Credit Agreement;
(j) from time to time such other financial data and information
(including accountants' management letters) as either Agent or any Bank may
reasonably request.
11.5 Notices.
11.5.1. Defaults. The Borrower will, promptly after obtaining actual
knowledge thereof, notify each of the Agents and each of the Banks in
writing of the occurrence of any Default or Event of Default. If any Person
shall give any notice or take any other action in respect of a claimed
default (whether or not constituting an Event of Default) under this Credit
Agreement or under the Subordinated Notes, the Borrower shall, promptly
after obtaining actual knowledge thereof, give written notice thereof to
each of the Agents and each of the Banks, describing the notice or action
and the nature of the claimed default.
11.5.2. Environmental Events. The Borrower will give notice to each of
the Agents and each of the Banks promptly and in any event within ten (10)
days of (a) the receipt of any written notice of any violation by the
Borrower or any of its Subsidiaries of any Environmental Law that the
Borrower or any of its Subsidiaries reports in writing or is reportable by
such Person in writing (or for which any written report supplemental to any
oral
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report is made) to any federal, state or local environmental agency and (b)
its becoming aware thereof, of any written inquiry, proceeding,
investigation, or other action, including a notice from any agency of
potential environmental liability, of any federal, state or local
environmental agency or board, that has the potential to materially affect
the business or financial condition of the Borrower and its Subsidiaries
taken as a whole, or the Collateral Agent's mortgages, deeds of trust or
security interests in any material Collateral covered by the Security
Documents.
11.5.3. Notification of Claim against Collateral. The Borrower will,
promptly and in any event within five (5) Business Days following its
becoming aware thereof, notify each of the Collateral Agent, the Agents and
each of the Banks in writing of any setoff, claims (including, with respect
to the Real Estate, environmental claims), withholdings or other defenses
to which any of the Collateral, or the Collateral Agent's rights with
respect to the Collateral, are subject to the extent that any such setoff,
claims, withholdings or other defenses could reasonably be expected to
result in liability to the Borrower and its Subsidiaries in excess of
$250,000. The Borrower will, immediately upon receiving notice thereof,
notify each of the Collateral Agent, the Agents and each of the Banks in
writing of any proposed sale or transfer of any Borrower Permitted
Inventory Location by the owner thereof.
11.5.4. Notice of Litigation and Judgments. The Borrower will, and
will cause each of its Subsidiaries to, give notice to each of the Agents
and each of the Banks in writing within fifteen (15) days of becoming aware
of any litigation or proceedings threatened in writing or any pending
litigation and proceedings affecting the Borrower or any of its
Subsidiaries or to which the Borrower or any of its Subsidiaries is or
becomes a party involving an uninsured claim against the Borrower or any of
its Subsidiaries that could reasonably be expected to have a materially
adverse effect on the Borrower or and its Subsidiaries taken as a whole and
stating the nature and status of such litigation or proceedings. The
Borrower will, and will cause each of its Subsidiaries to, give notice to
each of the Agents and each of the Banks, in writing, in form and detail
satisfactory to the Agents, within ten (10) days of any judgment not
covered by insurance, final or otherwise, against the Borrower or any of
its Subsidiaries in an amount in excess of $500,000.00.
11.6. Corporate Existence; Maintenance of Properties.
(a) The Borrower will do or cause to be done all things necessary to
preserve and keep in full force and effect its corporate existence, rights
and franchises and those of its Subsidiaries and will not, and will not
cause or permit any of its Subsidiaries to, convert to a limited liability
company.
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(b) The Borrower (i) will cause all of its properties and those of its
Subsidiaries necessary in the conduct of its business or the business of
its Subsidiaries to be maintained and kept in good condition, repair and
working order, ordinary wear and tear excepted, and supplied with all
necessary equipment, (ii) will cause to be made all necessary repairs,
renewals, replacements, betterments and improvements thereof, all as in the
judgment of the Borrower may be necessary so that the business carried on
in connection therewith may be properly conducted at all times, and (iii)
will, and will cause each of its Subsidiaries to, continue to engage
primarily in the businesses now conducted by them; provided that nothing in
this ss.11.6 shall prevent the Borrower from discontinuing the operation
and maintenance of any of its properties or any of those of its
Subsidiaries if such discontinuance is, in the judgment of the Borrower,
desirable in the conduct of its or their business and that do not in the
aggregate materially adversely affect the business of the Borrower and its
Subsidiaries on a consolidated basis.
11.7. Insurance.
(a) The Borrower will, and will cause each of its Subsidiaries to,
maintain with financially sound and reputable insurers insurance with
respect to its properties and business against such casualties and
contingencies as shall be in accordance with the general practices of
businesses engaged in similar activities in similar geographic areas and in
amounts, containing such terms, in such forms and for such periods as may
be reasonable and prudent and in accordance with the terms of the Security
Agreement. The Borrower will, and will cause each of its Subsidiaries to,
maintain insurance on the Mortgaged Properties in accordance with the terms
of the Mortgages.
(b) Contemporaneously with the execution of this Credit Agreement, and
within fifteen (15) days of any date when any additional or replacement
insurance coverage is obtained, the Borrower will, and will cause each of
its Subsidiaries to, deliver to the Agents true copies of certificates of
insurance with respect to such additional insurance or replacement policies
and, upon request and to the extent not previously delivered to the Agents,
copies of the original insurance policies evidencing such additional or
replacement insurance, which certificates and policies (i) in the case of
property and casualty policies, shall contain an endorsement or rider
naming the Collateral Agent, for the benefit of the Collateral Agent, the
Agents and the Banks, as a mortgagee, loss payee and additional insured, as
their interests may appear, with the proceeds in respect of any such
property and casualty policies being payable to the Collateral Agent or, as
the case may be, the Borrower or a Subsidiary of the Borrower, in
accordance with the provisions of the Security Agreement and the Mortgages,
and (ii) in the case of liability policies, shall contain an endorsement or
rider naming the Collateral Agent, for the benefit
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of the Collateral Agent, the Agents and the Banks, as an additional
insured, with each such policy providing that such insurance shall not be
cancelled or amended without thirty (30) days prior written notice to the
Collateral Agent, if applicable, and each of the Agents.
11.8. Taxes. The Borrower will, and will cause each of its Subsidiaries to,
duly pay and discharge, or cause to be paid and discharged, before the same
shall become overdue, all taxes, assessments and other governmental charges
imposed upon it and its real properties, sales and activities, or any part
thereof, or upon the income or profits therefrom, as well as all claims for
labor, materials, or supplies that if unpaid might by law become a lien or
charge upon any of its property and that if unpaid could reasonably be expected
to result in a material adverse effect upon the business or financial condition
of the Borrower and its Subsidiaries taken as a whole; provided that any such
tax, assessment, charge, levy or claim need not be paid if the validity or
amount thereof shall currently be contested in good faith by appropriate
proceedings and if the Borrower or such Subsidiary shall have set aside on its
books adequate reserves with respect thereto; and provided further that the
Borrower and each Subsidiary of each of the Borrower will pay all such taxes,
assessments, charges, levies or claims within three (3) Business Days following
the commencement of proceedings to foreclose any lien that may have attached as
security therefor unless such proceeding shall have been stayed by appropriate
proceedings within such three (3) Business Day period and such stay shall remain
in effect.
11.9. Inspection of Properties and Books, etc.
11.9.1 General. The Borrower shall permit the Banks, through the
Agents or, upon reasonable notice thereof given by any of the Banks,
through any of the Banks' other designated representatives, to visit and
inspect any of the properties of the Borrower or any of its Subsidiaries,
to examine the books of account of the Borrower or any of its Subsidiaries
(and to make copies thereof and extracts therefrom), other than materials
protected by the attorney-client privilege and materials which the Borrower
or any of its Subsidiaries may not disclose without violation of a written
confidentiality obligation binding upon it, to discuss the affairs,
finances and accounts of the Borrower or any of its Subsidiaries with, and
to be advised as to the same by, its and their officers, and to conduct
examinations and verifications of the components of the Borrowing Base, the
other assets of the Borrower or any of its Subsidiaries and all systems and
procedures of the Borrower or any of its Subsidiaries, including those
relating to cash management and those relating to gold tracking and
valuation, all at such reasonable times and intervals as either of the
Agents or any Bank may reasonably request, provided that prior to the
occurrence and continuance of an Event of Default, the Borrower shall
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not be required to permit more than four (4) such visits and inspections
provided for in this ss.11.9.1.
11.9.2. Collateral Reports. No more frequently than three times each
calendar year, or more frequently as determined by the Agents if an Event
of Default shall have occurred and be continuing, upon the request of the
Agents, the Borrower will obtain and deliver to the Agents a report of an
independent collateral auditor or appraiser satisfactory to the Agents
(which may be affiliated with one of the Banks) with respect to the
Accounts Receivable and inventory components included in the Borrowing Base
and the amounts of Borrower's Precious Metal and Consigned Precious Metal
held by the Borrower, which report shall indicate (a) whether or not the
information set forth in the Borrowing Base Report and the Consigned
Precious Metal Report most recently delivered is accurate and complete in
all material respects based upon a review by such auditors of the Accounts
Receivable and inventory (including verification as to the value, location
and respective types) or (b) in the case of an appraisal report by a
collateral appraiser (which appraisal reports of the type described in this
clause (b) only shall be required solely after the occurrence and during
the continuance of an Event of Default) shall state the then current fair
market value, orderly liquidation and forced liquidation values of all or
any portion of the Accounts Receivable and inventory owned by the Borrower
and its Subsidiaries and of the Borrower's Precious Metal and Consigned
Precious Metal. All such collateral reports shall be conducted and made at
the expense of the Borrower.
11.9.3. Appraisals. If an Event of Default shall have occurred and be
continuing, upon the request of the Agents, the Borrower will obtain and
deliver to the Agents appraisal reports in form and substance and from
appraisers reasonably satisfactory to the Agents, stating (i) the then
current fair market, orderly liquidation and forced liquidation values of
all or any portion of the equipment or real estate owned by the Borrower or
any of its Subsidiaries and (ii) the then current business value of the
Borrower and its Subsidiaries. All such appraisals shall be conducted and
made at the expense of the Borrower.
11.9.4. Communications with Accountants. The Borrower authorizes the
Agents and, if accompanied by the Agents, the Banks, upon notice to the
Borrower (and giving the Borrower the opportunity to participate therein),
to communicate directly with the Borrower's independent certified public
accountants and authorizes such accountants to disclose to the Agents and
the Banks any and all financial statements and other supporting financial
documents and schedules including copies of any management letter with
respect to the business, financial condition and other affairs of the
Borrower and its Subsidiaries. At the request of the Agents, the Borrower
shall deliver
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a letter addressed to such accountants instructing them to comply with the
provisions of this ss.11.9.4
11.9.5. Environmental Assessments. Whether or not an Event of Default
shall have occurred (but prior to the occurrence and continuance of an
Event of Default only at the expense of the Collateral Agent and the
Banks), the Collateral Agent may, from time to time, in its discretion for
the purpose of assessing and ensuring the value of any Mortgaged Property,
obtain one or more environmental assessments or audits of such Mortgaged
Property prepared by a hydrogeologist, an independent engineer or other
qualified consultant or expert approved by the Collateral Agent to evaluate
or confirm (i) whether there has been a release of any Hazardous Materials
at such Mortgaged Property and (ii) whether the use and operation of such
Mortgaged Property complies with all Environmental Laws. Environmental
assessments may include without limitation detailed visual inspections of
such Mortgaged Property including any and all storage areas, storage tanks,
drains, dry wells and leaching areas, and the taking of soil samples,
surface water samples and ground water samples, as well as such other
investigations or analyses as the Agent reasonably deems appropriate. All
such environmental assessments shall be at the expense of the Borrower
(except as otherwise provided in the first sentence of this paragraph).
11.10. Compliance with Laws, Contracts, Licenses, and Permits. The Borrower
will, and will cause each of its Subsidiaries to, comply with (a) the applicable
laws and regulations wherever its business is conducted, including all
Environmental Laws, (b) the provisions of its charter documents and by-laws, (c)
all agreements and instruments by which it or any of its properties may be
bound, and (d) all applicable decrees, orders, and judgments, except for any
failure to so comply with any of the matters described in the foregoing clauses
(a), (c) and (d) which is not reasonably expected to result in a material
adverse effect on the business or financial condition of the Borrower and its
Subsidiaries taken as a whole. If any authorization, consent, approval, permit
or license from any officer, agency or instrumentality of any government shall
become necessary or required in order that the Borrower or any of its
Subsidiaries may fulfill any of its obligations hereunder or any of the other
Loan Documents or any of the Acquisition Documents to which the Borrower or such
Subsidiary is a party, the Borrower will, or (as the case may be) will cause
such Subsidiary to, immediately take or cause to be taken all reasonable steps
within the power of the Borrower or such Subsidiary to obtain such
authorization, consent, approval, permit or license and furnish the Agents and
the Banks with evidence thereof if the failure to obtain such authorization,
consent, approval, permit or license could reasonably be expected to have a
material adverse effect upon the business or financial condition of the Borrower
and its Subsidiaries taken as a whole.
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11.11. Employee Benefit Plans. The Borrower will (a) promptly upon request
of the Agents, furnish to the Agents a copy of the most recent actuarial
statement required to be submitted under ss.103(d) of ERISA and Annual Report,
Form 5500, with all required attachments, in respect of each Guaranteed Pension
Plan and (b) promptly upon receipt or dispatch, furnish to the Agents any
notice, report or demand sent or received in respect of a Guaranteed Pension
Plan under ss.ss.302, 4041, 4042, 4043, 4063, 4066 and 4068 of ERISA, or in
respect of a Multiemployer Plan, under ss.ss.4041A, 4202, 4219, 4242, or 4245 of
ERISA.
11.12. Use of Proceeds. The Borrower will use the proceeds of the Loans and
the Consignments solely for financing the Acquisitions and for operating
expenses, payment of the CH Management Fees, Capital Expenditures, payments in
respect of Indebtedness and for other working capital and general corporate
purposes. The Borrower will obtain Letters of Credit solely for working capital
and general corporate purposes.
11.13. Additional Mortgaged Property. If, after the Closing Date, the
Borrower or any of its Subsidiaries (except for the Mexican Subsidiary) acquires
or leases for a term in excess of five (5) years real estate used as a
manufacturing or warehouse facility, the Borrower shall, or shall cause such
Subsidiary to, deliver promptly to the Collateral Agent a fully executed
mortgage or deed of trust over such real estate, in form and substance similar
to the Mortgages being delivered on the Closing Date, together with title
insurance policies (for amounts that correspond to the value of any such
property), surveys, evidences of insurances with the Collateral Agent named as
loss payee and additional insured, legal opinions and other documents and
certificates similar to those being delivered concurrently herewith with respect
to such real estate.
11.14. Bank Accounts.
(a) On or prior to the Closing Date, the Borrower will, and will cause
each of its Subsidiaries (other than the Mexican Subsidiary) to, (i)
establish depository accounts (the "FNBB Concentration Accounts") under the
control of the Dollar Agent for the benefit of the Banks and the Agents, in
the name of the Borrower or such Subsidiary, (ii) direct all Depository
Banks (other than as set forth on Schedule 10.20 hereto with respect to a
temporary account with Citibank, N.A.), pursuant to Agency Account
Agreements satisfactory to the Agents with each of such Depository Banks,
to cause all funds held in each such Depository Bank to be transferred on a
daily basis to, and only to, the FNBB Concentration Account or such other
location as the Dollar Agent shall designate; provided that so long as no
Event of Default shall have occurred and be continuing, the Borrower or
such Subsidiary shall not be required to cause to be transferred amounts
deposited in two accounts with Texas Commerce Bank designated as the "SBI
Operations Account" and the
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"SBI Expense Reports (ACH only)", respectively, of up to $800,000 in the
aggregate for both such accounts at any time, (iii) cause all proceeds of
Accounts Receivable of the Borrower to be deposited only into the FNBB
Concentration Account or depository accounts with Depository Banks which
are parties to an Agency Account Agreement requiring such proceeds to be
transferred to the FNBB Concentration Account, and (iv) at all times ensure
that, within five (5) days following the Borrower's or any of its
Subsidiaries' receipt of any cash or cash equivalents or any other proceeds
of Collateral, all such amounts (except to the limited extent provided in
the proviso in clause (ii) above) shall have been deposited in the FNBB
Concentration Accounts.
(b) The Borrower will, and will cause each of its Subsidiaries to,
obtain Agency Account Agreements (whereby such depository institution
shall, among other things, waive any right to set-off, other than for
service charges and returns incurred in connection therewith) from each
Depository Bank (other than as set forth on Schedule 10.20 hereto with
respect to a temporary account with Citibank, N.A.).
(c) The Borrower hereby agrees that all amounts belonging to the
Borrower or any of its Subsidiaries and received by the Dollar Agent in the
FNBB Concentration Account will be the sole and exclusive property of the
Collateral Agent, for the accounts of the Banks and the Agents, to be
applied in accordance with ss.8.8(b) and ss.8.9 as set forth therein.
11.15. Inventory Restrictions. The Borrower shall cause, and shall cause
each of its Subsidiaries to cause, Precious Metal and all other inventory to be
located at all times solely at Borrower Permitted Inventory Locations, Specified
Refiners and Sales Representative Inventory Locations (except for (a) samples
held in the ordinary course of business by sales representatives or at retail
locations, (b) Precious Metal in transit between the Borrower and a Specified
Refiner or Precious Metal or other inventory in transit between Borrower
Permitted Inventory Locations, (c) inventory in transit to be sold, transferred
or otherwise disposed of to the extent permitted by ss.12.5.2 hereof prior to
the transferee's taking title thereto, and (d) inventory in other locations
having a value not to exceed $2,000,000 at any time). The Borrower shall also
cause, and shall cause each of its Subsidiaries to cause, Precious Metal and all
other inventory, to be sold or otherwise disposed of in the ordinary course of
the Borrower's or such Subsidiary's business, consistent with past practices or
as required pursuant to the terms of this Credit Agreement.
11.16. Further Assurances. The Borrower will, and will cause each of its
Subsidiaries to, cooperate with the Banks, the Collateral Agent and the Agents
and execute such further instruments and documents as any of the Banks, the
Collateral Agent or the Agents shall reasonably request to carry out the
transactions contemplated by this Credit Agreement and the other Loan Documents.
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12. CERTAIN NEGATIVE COVENANTS OF THE BORROWER.
The Borrower covenants and agrees that, so long as any Loan, Unpaid
Reimbursement Obligation, Letter of Credit, amount of Consigned Precious Metal
or Note is outstanding or any Bank has any obligation to make any Loans or
Consignments or the Dollar Agent has any obligation to issue, extend or renew
any Letters of Credit:
12.1. Restrictions on Indebtedness. The Borrower will not, and will
not permit any of its Subsidiaries to, create, incur, assume, guarantee or
be or remain liable, contingently or otherwise, with respect to any
Indebtedness other than:
(a) Indebtedness to the Banks, the Agents and the Collateral
Agent arising under any of the Loan Documents;
(b) Indebtedness consisting of the guaranty by the Borrower of
rental payment obligations of the Mexican Subsidiary under real
property leases so long as the aggregate amount of rental payment
obligations so guarantied by the Borrower shall not exceed $200,000 in
any fiscal year;
(c) Indebtedness in respect of taxes, assessments, environmental,
governmental or other regulatory charges, fines, penalties or levies
and claims for labor, materials and supplies to the extent that
payment therefor shall not at the time be required to be made in
accordance with the provisions of ss.11.8;
(d) Indebtedness in respect of judgments or awards not resulting
in an Event of Default under ss.16.1(i) hereof, but only so long as
execution is not levied thereunder on any property the fair market
value of which is $250,000 or more in the aggregate or $150,000 or
more in any single instance;
(e) endorsements for collection, deposit or negotiation and
warranties of products or services (including without limitation
product liability claims), in each case incurred in the ordinary
course of business;
(f) Indebtedness evidenced by the Subordinated Notes (including
without limitation any Liquidated Damages (as defined in the
Indenture) referred to in the Indenture);
(g) obligations under Capitalized Leases not exceeding $1,000,000
in aggregate amount at any time outstanding;
(h) Indebtedness incurred in connection with the acquisition
after the date hereof of any real or personal property by the Borrower
or such Subsidiary, provided that the aggregate principal amount of
such Indebtedness
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of the Borrower and its Subsidiaries shall not exceed the aggregate
amount of $1,000,000 at any one time;
(i) Indebtedness existing on the date hereof and listed and
described on Schedule 12.1 hereto;
(j) Indebtedness (i) of any Subsidiary of the Borrower which is
party to the Guaranty owing to the Borrower or of the Borrower to such
Subsidiary of the Borrower, or (ii) of the Mexican Subsidiary owing to
the Borrower or of the Borrower owing to the Mexican Subsidiary in an
aggregate amount for all such Indebtedness of the Mexican Subsidiary
to the Borrower (exclusive of Indebtedness permitted by ss.12.1(b)),
when combined with all other Investments in the Mexican Subsidiary
permitted by ss.12.3(f)(iii), not to exceed $1,000,000 at any time
outstanding;
(k) Indebtedness consisting of Permitted Employee Stock
Repurchases (including any promissory notes issued by the Borrower to
repurchase common stock of employees and sales representatives of the
Borrower solely to the extent permitted in the definition of Permitted
Employee Stock Repurchases);
(l) Indebtedness consisting of a Permitted Preferred Stock
Replacement;
(m) Indebtedness of the Borrower under Hedging Agreements entered
into by the Borrower in the ordinary course of business and not for
speculative purposes in order to fix or hedge the Borrower's currency
risk in connection with its purchase of foreign currencies so long as
the Borrower shall not enter into such Hedging Agreements to hedge in
the aggregate at any one time in excess of $4,000,000 worth of foreign
currencies;
(n) Indebtedness of the Borrower under Hedging Agreements entered
into by the Borrower in the ordinary course of business and not for
speculative purposes in order to fix or hedge the Borrower's commodity
risk in connection with its purchase of Precious Metal so long as such
Hedging Agreements (i) consist of options or (ii) are entered into
with the Gold Agent or any of the Banks;
(o) Indebtedness consisting of guaranties of Indebtedness of
employees for moving, entertainment, travel and other similar expenses
solely to the extent permitted as Investments under ss.12.3(h)
(p) Indebtedness consisting of guaranties of Indebtedness of
sales representatives to finance the acquisition of sales territories
to the extent permitted as Investments under ss.12.3(o);
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(q) Indebtedness in respect of operating leases and in respect of
the payment of royalties or other similar obligations under license
agreements which license agreements are generally consistent with and
related to the past practices and business of the Borrower;
(r) Indebtedness in respect of employee benefits, whether current
or retired employees, including, without limitation, accrued expenses,
pension liabilities, deferred compensation, bonus plans, medical,
dental and other plans providing benefits for employees;
(s) Indebtedness arising out of or related to (i) the
Acquisitions or (ii) the consolidation of the businesses acquired from
the Balfour Sellers or the CJC Sellers pursuant to the Acquisitions
(including without limitation, increased severance payments, working
capital adjustments, fees and costs), in each case solely to the
extent that such Indebtedness is not related to the borrowing of money
or the obtaining of credit;
(t) Indebtedness consisting of the CH Management Fee and any
deferred portion thereof to the extent permitted pursuant to ss.12.4
and 12.12 hereof;
(u) Indebtedness consisting of accrued Permitted Preferred Stock
Dividends or accrued dividends on any Permitted Preferred Stock
Replacement;
(v) Indebtedness consisting of obligations to Specified Refiners
solely in respect of amounts of Precious Metal credited or consigned
to the Borrower in exchange for unrefined Precious Metal sent by the
Borrower to such Specified Refiners;
(w) Indebtedness in respect of performance, bid or advance
payment bonds incurred in connection with bids on school ring
contracts in an aggregate amount not to exceed $400,000 outstanding at
any time;
(x) Indebtedness of the Borrower and its Subsidiaries other than
that permitted elsewhere in this ss.12.1 in an aggregate principal
amount not to exceed (i) at all times prior to January of 1999,
$1,000,000 at any time outstanding and (ii) at all times during and
after January of 1999, $5,000,000 at any time outstanding; and
(y) Indebtedness of the Borrower with respect to that certain
Master Lease Agreement, No. 136331, dated as of August 2, 1994,
between Town & Country Corporation and Computer Sales International,
Inc. not to exceed $225,000.
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12.2. Restrictions on Liens. The Borrower will not, and will not permit any
of its Subsidiaries to, (i) create or incur or suffer to be created or incurred
or to exist any lien, encumbrance, mortgage, pledge, charge, restriction or
other security interest of any kind upon any of its property or assets of any
character whether now owned or hereafter acquired, or upon the income or profits
therefrom; (ii) transfer any of such property or assets or the income or profits
therefrom for the purpose of subjecting the same to the payment of Indebtedness
or performance of any other obligation in priority to payment of its general
creditors; (iii) acquire, or agree or have an option to acquire, any property or
assets upon conditional sale or other title retention or purchase money security
agreement, device or arrangement; or (iv) except to the extent permitted in
ss.12.5.2 hereof, sell, assign, pledge or otherwise transfer any accounts,
contract rights, general intangibles, chattel paper or instruments, with or
without recourse; provided that the Borrower and any of its Subsidiaries may
create or incur or suffer to be created or incurred or to exist:
(a) liens in favor of the Borrower on all or part of the assets
of Subsidiaries of the Borrower securing Indebtedness owing by
Subsidiaries of the Borrower to the Borrower, or liens in favor of a
Subsidiary of the Borrower (other than the Mexican Subsidiary) on all
or part of the assets of the Borrower securing Indebtedness owing by
the Borrower to such Subsidiary, in each case (i) to the extent such
Indebtedness is permitted by ss.12.1(j) and (ii) such indebtedness is
subordinated to the Obligations on terms and conditions reasonably
satisfactory to the Agents;
(b) liens to secure taxes, assessments and other government
charges in respect of obligations not overdue or liens on properties
to secure claims for labor, material or supplies in respect of
obligations not overdue;
(c) deposits or pledges made in connection with, or to secure
payment of, workmen's compensation, statutory obligations, trade
contracts, leases, insurance contracts, unemployment insurance, old
age pensions or other social security obligations, surety and appeal
bonds and performance bonds and other similar obligations, in each
case arising in the ordinary course of business and not involving the
borrowing of money;
(d) liens on properties in respect of judgments or awards, the
Indebtedness with respect to which is permitted by ss.12.1(d);
(e) liens of carriers, warehousemen, mechanics and materialmen,
and other like liens, (i) in existence less than 120 days from the
date of creation thereof in respect of obligations not overdue or (ii)
with respect to which the obligations related thereto are contested by
any of the Borrower or its Subsidiaries in good faith or by
appropriate proceedings and the Borrower or such Subsidiary shall have
set aside on its books adequate reserves with respect thereto or the
Borrower or such Subsidiary will in good faith
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commence appropriate proceedings to contest such obligation; provided
that no proceedings in foreclosure or for the sale of any property the
fair market value of which is $250,000 or more in aggregate or
$150,000 or more in any single instance of the Borrower and its
Subsidiaries on account of any such liens shall have been commenced;
(f) encumbrances on Real Estate consisting of easements, rights
of way, zoning restrictions, restrictions on the use of real property
and defects and irregularities in the title thereto, landlord's or
lessor's liens under leases to which the Borrower or any of its
Subsidiaries is a party, and other minor liens or encumbrances none of
which in the opinion of the Borrower interferes materially with the
use of the property affected in the ordinary conduct of the business
of the Borrower and its Subsidiaries, which defects do not
individually or in the aggregate have a materially adverse effect on
the business of the Borrower individually or of the Borrower and its
Subsidiaries on a consolidated basis;
(g) liens existing on the date hereof and listed on Schedule 12.2
hereto;
(h) purchase money security interests in or purchase money
mortgages on real or personal property acquired after the date hereof
to secure purchase money Indebtedness in an amount permitted by
ss.12.1(h), incurred in connection with the acquisition of such
property, which security interests or mortgages cover only the real or
personal property so acquired;
(i) liens and encumbrances on each Mortgaged Property as and to
the extent permitted by the Mortgage applicable thereto;
(j) liens in favor of the Collateral Agent, for the benefit of
the Banks, the Agents and the Collateral Agent, under the Loan
Documents;
(k) any interest or title of a lessor of property leased to the
Borrower or such Subsidiary, or any encumbrance on any such interest
or title of such lessor, to the extent such lease is permitted hereby;
and
(l) consignments of inventory by the Borrower entered into in the
ordinary course of business, consistent with past practices.
12.3. Restrictions on Investments. The Borrower will not, and will not
permit any of its Subsidiaries to, make or permit to exist or to remain
outstanding any Investment except Investments in:
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(a) marketable direct or guaranteed obligations of the United
States of America or any agency or instrumentality thereof that mature
within one (1) year from the date of purchase by the Borrower or such
Subsidiary;
(b) demand deposits, certificates of deposit, bankers acceptances
and time deposits of United States banks having total assets in excess
of $1,000,000,000;
(c) securities commonly known as "commercial paper" issued by a
corporation organized and existing under the laws of the United States
of America or any state thereof that at the time of purchase have been
rated and the ratings for which are not less than "P 1" if rated by
Moody's Investors Services, Inc., and not less than "A 1" if rated by
Standard and Poor's;
(d) repurchase agreements secured by any one or more of the
Investments permitted by paragraphs (a), (b) or (c) above, provided,
that the Borrower holds the underlying documents and such documents
are pledged to the Collateral Agent for the benefit of the Collateral
Agent, the Banks and the Agents as collateral security for the
Obligations (or if such repurchase agreements have been purchased for
the account of the Borrower by a financial institution, such financial
institution enters into an agency agreement with the Collateral Agent
in form and substance satisfactory to the Collateral Agent);
(e) Investments existing on the date hereof and listed on
Schedule 12.3 hereto;
(f) Investments (i) with respect to Indebtedness permitted by
ss.12.1(j) so long as such entities remain Subsidiaries of the
Borrower, (ii) in Subsidiaries of the Borrower (other than the Mexican
Subsidiary) so long as such entities remain Subsidiaries of the
Borrower, (iii) in the Mexican Subsidiary which, when combined with
the amount of Indebtedness of the Mexican Subsidiary to the Borrower
permitted by ss.12.1(j) hereof (but exclusive of Indebtedness
permitted by ss.12.1(b) hereof) shall not exceed $1,000,000 in the
aggregate at any time, and (iv) consisting of the guaranty by the
Borrower of rental payment obligations of the Mexican Subsidiary to
the extent permitted by ss.12.1(b) hereof;
(g) Investments consisting of the Guaranty;
(h) Investments consisting of loans, guaranties and advances to
employees for moving, entertainment, travel and other similar expenses
in the ordinary course of business not to exceed (i) $1,500,000 in the
aggregate or $250,000 in the case of any single employee at any time
during the period through the date which is eighteen months following
the date hereof and (ii)
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$500,000 in the aggregate or $250,000 in the case of any single
employee at any time thereafter;
(i) Investments consisting of Permitted Employee Stock
Repurchases or Permitted Common Stock Repurchases;
(j) Investments (including debt obligations, stock, securities
and other obligations) to the extent received in connection with the
bankruptcy, reorganization or workout of any suppliers or customers of
the Borrower or such Subsidiary in settlement of delinquent
obligations of, and other disputes with, such suppliers or customers
arising in the ordinary course of business;
(k) Investments consisting of the extension of trade credit by
the Borrower and its Subsidiaries in the ordinary course of business
not involving (i) the borrowing of money, or (ii) the obtaining of
credit except for credit on an open account basis customarily extended
and in fact extended in connection with normal sales of goods and
services;
(l) Investments constituting Capital Expenditures solely to the
extent otherwise permitted by the terms of this Credit Agreement;
(m) Investments consisting of promissory notes and other similar
non-cash consideration received as proceeds of asset dispositions
permitted by ss.12.5.2;
(n) Investments consisting of Hedging Agreements entered into by
the Borrower to the extent permitted by ss.12.1 hereof;
(o) Investments consisting of guaranties of Indebtedness of, or
loans or advances to, sales representatives of the Borrower to finance
the acquisition of sales territories to the extent that the aggregate
amount of such Investments shall not exceed $1,000,000 at any time
outstanding; and
(p) Investments consisting of the guaranty by Subsidiaries of the
Borrower of the Borrower's obligations in respect of the Subordinated
Notes, such guaranty being subordinated to the Obligations on the same
basis as the obligations of the Borrower in respect of the
Subordinated Notes.
12.4. Distributions. The Borrower will not make any Distributions except,
so long as no Event of Default shall have occurred and be continuing and none
would result from the making thereof, (a) payment of the CH Management Fee in an
aggregate amount not to exceed $1,500,000 during any fiscal year of the
Borrower, provided that any portion of such amount not paid during any fiscal
year may be paid in any subsequent fiscal year, (b) Permitted Employee Stock
Repurchases, (c)
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Permitted Preferred Stock Dividends, (d) any Permitted Preferred Stock
Replacement, and (e) any Permitted Common Stock Repurchases.
12.5. Merger, Consolidation and Disposition of Assets.
12.5.1. Mergers and Acquisitions. The Borrower will not, and will not
permit any of its Subsidiaries to, become a party to any merger or
consolidation (other than an agreement to effect any such merger or
consolidation, the closing of which is conditioned upon the payment in full
in cash of all of the Obligations), or agree to or effect any asset
acquisition or stock acquisition (other than the acquisition of assets in
the ordinary course of business consistent with past practices) except the
merger or consolidation of one or more of the Subsidiaries of the Borrower
with and into the Borrower, or the merger or consolidation of two or more
Subsidiaries of the Borrower.
12.5.2. Disposition of Assets. The Borrower will not, and will not
permit any of its Subsidiaries to, become a party to or agree to or effect
any disposition of assets, other than (a) dispositions of assets and
consignments for sale of inventory by the Borrower or such Subsidiary or
other title retention arrangements, in each case entered into in the
ordinary course of business, consistent with past practices of the Sellers;
(b) transfers of assets resulting from any casualty or condemnation of such
assets so long as the same could not reasonably be expected to have a
material adverse effect on the business or financial condition of the
Borrower and its Subsidiaries taken as a whole and such amounts are used to
purchase replacement assets subject to the Collateral Agent's security
interest; (c) an agreement to effect the disposition of all or
substantially all of the assets of the Borrower or such Subsidiary, the
closing of which is conditioned upon the payment in full in cash of all of
the Obligations; (d) the sale or discount of overdue accounts receivable
arising in the ordinary course of business, but only in connection with the
compromise or collection thereof and only to the extent that the Collateral
Agent's security interest in such accounts receivable continues to apply to
all proceeds from the sale of such accounts receivable; (e) the sale or
other disposition of any Investments permitted to be made by ss.12.3
hereof; (f) the sale of assets by the Borrower to the extent mandated by
the Federal Trade Commission, such assets having a fair market value not
exceeding $14,000,000 in the aggregate, so long as (i) the Borrower
receives cash proceeds from such sales (either from direct proceeds of such
sales or from escrow arrangements made in connection with the Acquisitions)
equal to the fair market value of such assets, and (ii) such proceeds are
used, within two (2) Business Days of receipt by the Borrower thereof, to
prepay the principal amount of the Term Loan, such prepayment to be applied
to the remaining installments on the Term Loan in the inverse order of
their maturity; (g) the licensing of intellectual property for terms not in
excess of five (5) years other
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than in connection with the sale of the business of the Borrower or such
Subsidiary that do not result in a reduction in assets of the Borrower or
such Subsidiary under generally accepted accounting principles so long as
such licensing shall not substantially impair or affect the operation of
the business of the Borrower and its Subsidiaries as a whole, (h) the
licensing or granting of rights to sales representatives to sell products
of the Borrower in the ordinary course of the Borrower's business, (i)
dispositions of obsolete or worn out machinery and equipment of the
Borrower and dispositions of machinery and equipment in connection with the
consolidation of the businesses acquired by the Borrower pursuant to the
Acquisitions, and (j) the sale or other disposition of other assets having
a fair market value not to exceed (i) for all such asset dispositions
undertaken during the period prior to the first anniversary of the Closing
Date, $500,000 in the aggregate and (ii) for all such asset dispositions
undertaken during any one year period after the first anniversary of the
Closing Date from one anniversary of the Closing Date to the next
anniversary of the Closing Date, $250,000 in the aggregate.
12.6. Sale and Leaseback. The Borrower will not, and will not permit any of
its Subsidiaries to, enter into any arrangement, directly or indirectly, whereby
the Borrower or any Subsidiary of the Borrower shall sell or transfer any
property owned by it in order then or thereafter to lease such property or lease
other property that the Borrower or any Subsidiary of the Borrower intends to
use for substantially the same purpose as the property being sold or
transferred.
12.7. Compliance with Environmental Laws. The Borrower will not, and will
not permit any of its Subsidiaries to, except, in each case, in compliance with
all applicable Environmental Laws (a) use any of the Real Estate or any portion
thereof for the handling, processing, storage or disposal of Hazardous
Substances, (b) cause or permit to be located on any of the Real Estate any
underground tank or other underground storage receptacle for Hazardous
Substances, (c) generate any Hazardous Substances on any of the Real Estate, (d)
conduct any activity at any Real Estate or use any Real Estate in any manner so
as to cause a release (i.e. releasing, spilling, leaking, pumping, pouring,
emitting, emptying, discharging, injecting, escaping, leaching, disposing or
dumping) or threatened release of Hazardous Substances on, upon or into the Real
Estate or (e) otherwise conduct any activity at any Real Estate or use any Real
Estate in any manner that would violate any Environmental Law or bring such Real
Estate in violation of any Environmental Law, in any case where the same could
reasonably be expected to have a material adverse effect on the business or
financial condition of the Borrower and its Subsidiaries taken as a whole.
12.8. Indenture and Subordinated Notes. The Borrower will not amend,
supplement or otherwise modify the terms of the Indenture or any of the
Subordinated Notes or prepay, redeem, cause the defeasance of or repurchase any
of
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the Subordinated Notes; provided, however, the Borrower may amend or modify the
Subordinated Notes or refinance, refund or replace the Subordinated Notes with
new notes (any such amended, modified or new notes resulting from any such
amendment, modification, refinancing, refunding or replacement being herein
referred to as the "New Notes") so long as (a) such New Notes are on
substantially identical terms as the Subordinated Notes (including without
limitation, terms relating to subordination and covenants), provided that such
New Notes may have a longer maturity, lower interest rates, less restrictive
covenants, slower sinking fund payments and lower prepayment premiums and (b)
the Agents shall have reviewed such New Notes prior to their issuance. The
Borrower will not, and will not permit its Subsidiaries to, incur any additional
Indebtedness which would constitute "Designated Senior Indebtedness" as such
term is defined in the Indenture.
12.9. Employee Benefit Plans. The Borrower will not:
(a) engage in any non-exempt "prohibited transaction" within the
meaning of ss.406 of ERISA or ss.4975 of the Code which could reasonably be
expected to result in a material liability for the Borrower or any of its
Subsidiaries; or
(b) permit any Guaranteed Pension Plan to incur an "accumulated
funding deficiency", as such term is defined in ss.302 of ERISA, whether or
not such deficiency is or may be waived; or
(c) fail, or permit any ERISA Affiliate to fail, to contribute to any
Guaranteed Pension Plan to an extent which, or terminate any Guaranteed
Pension Plan in a manner which, could reasonably be expected to result in
the imposition of a lien or encumbrance on the assets of the Borrower or
any of its Subsidiaries pursuant to ss.302(f) or ss.4068 of ERISA; or
(d) amend, or permit any ERISA Affiliate to amend, any Guaranteed
Pension Plan in circumstances requiring the posting of security pursuant to
ss.307 of ERISA or ss.401(a)(29) of the Code; or
(e) permit or take any action which would result in the aggregate
benefit liabilities (with the meaning of ss.4001 of ERISA) of all
Guaranteed Pension Plans exceeding the value of the aggregate assets of
such Plans, disregarding for this purpose the benefit liabilities and
assets of any such Plan with assets in excess of benefit liabilities, by
more than $500,000.00.
12.10. Bank Accounts. The Borrower will not, and will not permit any of its
Subsidiaries (other than the Mexican Subsidiary) to, (a) establish any bank
accounts other than those listed on Schedule 10.20 (as such may be amended from
time to time to include new depository accounts with existing or new depository
institutions acceptable to the Agents which have executed and delivered Agency
Account
<PAGE>
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Agreements in the form of Exhibit A hereto covering such new depository
accounts) without the Agents' prior written consent, (b) violate directly or
indirectly any bank agency or lock box agreement in favor of the Collateral
Agent for the benefit of the Banks, the Agents and the Collateral Agent with
respect to such account.
12.11. Consignment Transactions. Except pursuant to this Credit Agreement,
the Borrower will not, nor will the Borrower permit or suffer any of its
Subsidiaries to, enter into any consignment transactions as the consignee or
buyer thereunder, including consignments of Precious Metal, except for (a)
deliveries of diamonds to the Borrower on "approval" in the ordinary course of
business and (b) deliveries by Specified Refiners of refined Precious Metal to
the Borrower as credits against amounts of unrefined Precious Metal sent by the
Borrower to such Specified Refiners for refining in the ordinary course of
business to the extent such delivery of Precious Metal to the Borrower is deemed
to be done on a consignment basis.
12.12. Transactions with Affiliates. The Borrower will not, nor will the
Borrower permit or suffer any of its Subsidiaries to, conduct any transactions
among themselves or with any Affiliates of the Borrower, other than (a) so long
as no Event of Default shall have occurred and be continuing and none would
result from the making thereof, payment of the CH Management Fee in an aggregate
amount not to exceed $1,500,000 during any fiscal year of the Borrower, provided
that any portion of such amount not paid during any fiscal year may be paid in
any subsequent fiscal year, (b) transactions with Oakley Insurance Group
regarding the Borrower's insurance policies and coverage upon terms not
materially less favorable to the Borrower or such Subsidiary than it could
obtain in a comparable arm's-length transaction with a party other than Oakley
Insurance Group, (c) a Permitted Preferred Stock Replacement, (d) transactions
among the Borrower and its Subsidiaries, (e) any Permitted Employee Stock
Repurchases, (f) any Permitted Common Stock Repurchase, (g) transactions
constituting Investments permitted by ss.ss.12.3(h) or (o) hereof, and (h)
transactions in the ordinary course of the Borrower's or such Subsidiary's
business, consistent with past practices, and upon terms not materially less
favorable to the Borrower or such Subsidiary than it could obtain in a
comparable arm's-length transaction with a party other than the Borrower, such
Subsidiary or such Affiliate.
12.13. Subsidiaries. The Borrower will not create any Subsidiaries in
addition to the existing Subsidiaries listed on Schedule 10.19 hereto.
12.14. Limitations on Mexican Subsidiary. The Borrower will not permit the
Mexican Subsidiary to own assets having an aggregate book value in excess of
$1,000,000.
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13. FINANCIAL COVENANTS OF THE BORROWER.
The Borrower covenants and agrees that, so long as any Loan, Unpaid
Reimbursement Obligation, Letter of Credit, amount of Consigned Precious Metal
or Note is outstanding or any Bank has any obligation to make any Loans or
Consignments or the Dollar Agent has any obligation to issue, extend or renew
any Letters of Credit:
13.1. Senior Funded Debt to EBITDA. The Borrower will not permit the ratio
of (a) Consolidated Senior Funded Debt for any period of (i) four consecutive
complete fiscal quarters occurring after the Closing Date and ending during any
period set forth in the table below or (ii) if shorter, the period since the
Closing Date ending on a fiscal quarter ending date occurring during any period
set forth in the table below, to (b) Consolidated EBITDA for any period of four
consecutive fiscal quarters then ended to exceed the ratio set forth opposite
such period in such table:
Period Ratio
------ -----
2/28/97 - 8/31/97 3.00:1.00
11/30/97 - 2/28/98 2.75:1.00
5/31/98 - 2/28/99 2.50:1.00
5/31/99 and thereafter 2.25:1.00
13.2. Consolidated EBITDA. The Borrower will not permit Consolidated EBITDA
for any period of four consecutive fiscal quarters ending during any period set
forth in the table below to be less than the amount set forth opposite such
period in such table:
Period Amount
------ ------
2/28/97 - 8/31/97 $15,750,000
11/30/97 $19,000,000
2/28/98 $20,000,000
5/31/98 - 8/31/98 $20,600,000
11/30/98 $21,500,000
2/28/98 - 8/31/99 $22,000,000
11/30/99 - 8/31/00 $22,700,000
11/30/00 - 8/31/01 $23,500,000
11/30/01 - 8/31/02 $24,000,000
11/30/02 - 8/31/03 $24,500,000
11/30/03 and thereafter $25,000,000
13.3. Capital Expenditures. The Borrower will not make, or permit any
Subsidiary of the Borrower to make, Capital Expenditures during any fiscal year
set forth in the table below (or the portion thereof, in the case of the fiscal
year in which the Closing Date occurs) that exceed, in the aggregate, the amount
set forth opposite such fiscal year in such table:
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Fiscal Year Amount
----------- ------
1997 $4,395,000
1998 $3,700,000
1999 $3,500,000
2000 $3,500,000
2001 $3,500,000
2002 $3,500,000
2003 $3,500,000
2004 $3,500,000
13.4. Interest Coverage. The Borrower will not permit the ratio of (i)
Consolidated EBITDA (excluding amortization of deferred financing costs incurred
in connection with the closing of the transactions contemplated by the Loan
Documents and the Acquisition Documents) for any period of four consecutive
fiscal quarters ending during any period set forth in the table below, to (ii)
Consolidated Total Interest Expense (excluding amortization of deferred
financing costs incurred in connection with the closing of the transactions
contemplated by the Loan Documents and the Acquisition Documents) for such
period, to be less than the ratio set forth opposite such period in such table:
Period Ratio
------ -----
2/28/97 - 8/31/97 1.00:1.00
11/30/97 1.20:1.00
2/28/98 - 8/31/98 1.30:1.00
11/30/98 1.40:1.00
2/28/99 - 8/31/00 1.50:1.00
11/30/00 - 8/31/01 1.60:1.00
11/30/01 and thereafter 1.75:1.00
14. CLOSING CONDITIONS.
The obligations of the Applicable Banks to make the initial Revolving
Credit Loans, the initial Gold Loans, the initial Consignments and the Term Loan
and of the Dollar Agent to issue any initial Letters of Credit shall be subject
to the satisfaction of the following conditions precedent on or prior to
December 31, 1996:
14.1. Loan Documents, etc. Each of the Loan Documents shall have been duly
executed and delivered by the respective parties thereto, shall be in full force
and effect and shall be in form and substance satisfactory to each of the Banks.
Each Bank shall have received a fully executed copy of each such document.
14.2. Certified Copies of Charter Documents. Each of the Banks shall have
received from the Borrower and each of its Subsidiaries a copy, certified by a
duly authorized officer of such Person to be true and complete on the Closing
Date,
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of each of (a) its charter or other incorporation documents as in effect on such
date of certification, and (b) its by-laws as in effect on such date.
14.3. Corporate Action. All corporate action necessary for the valid
execution, delivery and performance by the Borrower and each of its Subsidiaries
of this Credit Agreement and the other Loan Documents to which it is or is to
become a party shall have been duly and effectively taken, and evidence thereof
satisfactory to the Banks shall have been provided to each of the Banks.
14.4. Incumbency Certificate. Each of the Banks shall have received from
the Borrower and each of its Subsidiaries an incumbency certificate, dated as of
the Closing Date, signed by a duly authorized officer of the Borrower or such
Subsidiary, and giving the name and bearing a specimen signature of each
individual who shall be authorized: (a) to sign, in the name and on behalf of
the Borrower or such Subsidiary, each of the Loan Documents to which the
Borrower or such Subsidiary is or is to become a party; (b) in the case of the
Borrower, to make Loan Requests, Consignment Requests, Conversion Requests and
Consignment Conversion Requests and to apply for Letters of Credit; and (c) to
give notices and to take other action on its behalf under the Loan Documents.
14.5. Validity of Liens. The Security Documents shall be effective to
create in favor of the Collateral Agent a legal, valid and enforceable first
(except for Permitted Liens entitled to priority under applicable law) security
interest in and lien upon the Collateral. All filings, recordings, deliveries of
instruments and other actions necessary or desirable in the opinion of the
Collateral Agent and the Agents to protect and preserve such security interests
shall have been duly effected including, without limitation, all notices
required to be filed under Section 9-114 or Section 9-312(3) of the Uniform
Commercial Code in effect in the Commonwealth of Massachusetts or any then
applicable jurisdiction. The Collateral Agent shall have received evidence
thereof in form and substance satisfactory to the Collateral Agent, the Agent
and the Banks.
14.6. Perfection Certificate and UCC Search Results. The Collateral Agent
shall have received from each of the Borrower and its Subsidiaries a completed
and fully executed Perfection Certificate and the results of current UCC
searches with respect to the Collateral, indicating no liens other than
Permitted Liens and otherwise in form and substance satisfactory to the
Collateral Agent, the Agent and the Banks. The Agents shall have received and
shall be satisfied with the form and substance of all consignment financing
statements filed or to be filed on behalf of trade vendors as consignors.
14.7. Certificates of Insurance. The Agents shall have received (a) a
certificate of insurance from an independent insurance broker dated as of the
Closing Date, identifying insurers, types of insurance, insurance limits, and
policy terms, and otherwise describing the insurance obtained in accordance with
the provisions of the
<PAGE>
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Security Agreement and (b) certified copies of all policies evidencing such
insurance (or certificates therefore signed by the insurer or an agent
authorized to bind the insurer).
14.8. FNBB Concentration Accounts; Agency Account Agreements. The Borrower
shall have established the FNBB Concentration Accounts, and the Agents shall
have received an Agency Account Agreement, in form and substance reasonably
satisfactory to the Agents, from each Depository Bank, in each case concerning
the Collateral Agent's interest for the benefit of the Banks, the Agents and the
Collateral Agent, in the depository accounts maintained by the Borrower with
such Depository Banks.
14.9. Borrowing Base Report; Consigned Precious Metal Report; Monthly
Inventory Report. The Agents shall have received from the Borrower the initial
Borrowing Base Report and the initial Consigned Precious Metal Report, in each
case prepared on the basis of the best available data (taking into account that
the Acquisitions are being consummated simultaneously with the closing of the
transactions contemplated hereby), each dated as of the Closing Date.
14.10. Accounts Receivable Aging Report. The Agents shall have received
from the Borrower the most recent Accounts Receivable aging report of the
Borrower dated as of a date which shall be no more than thirty (30) days prior
to the Closing Date and the Borrower shall have notified the Agents in writing
on the Closing Date of any material deviation from the Accounts Receivable
values reflected in such Accounts Receivable aging report and shall have
provided the Agents with such supplementary documentation as the Agents may
reasonably request.
14.11. Opinions of Counsel. Each of the Banks, the Collateral Agent and the
Agents shall have received (a) a favorable legal opinion addressed to the Banks,
the Collateral Agent and the Agents, dated as of the Closing Date, in form and
substance satisfactory to the Banks and the Agents, from Schulte, Roth & Zabel,
counsel to the Borrower and its Subsidiaries; and (b) copies of each of all
legal opinions delivered upon the consummation of the Acquisitions by counsel to
the respective parties to the Acquisition Documents, each in form and substance
satisfactory to the Banks and the Administrative Agent, and each accompanied by
a reliance letter with respect thereto in favor of the Banks, the Collateral
Agent and the Agents.
14.12. Payment of Fees. The Borrower shall have paid to the Banks or the
Agents, as appropriate, the closing fee, and the Agents' fee pursuant to
ss.ss.8.10 and 8.11.
14.13. Payoff Letters. The Agents shall have received a payoff letter from
each of (a) State Street Bank and Trust Company, as successor to The Connecticut
Bank and Trust Company, National Association, and V. Kreuscher (the "Trustees"),
<PAGE>
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as trustees under a Trust Agreement securing an aggregate principal amount of
$130,000,000 and payable to Texas Commerce Bank, (b) Foothill Capital
Corporation ("Foothill") and (c) Fleet Bank, indicating the amount of the loan
and consignment obligations of the CJC Sellers and the Balfour Sellers,
respectively, to such parties to be discharged on the Closing Date and an
acknowledgment by each of such parties that upon receipt of such funds they will
forthwith execute and deliver evidence to the Agents of the filing of all
termination statements and take such other actions as may be necessary to
discharge all mortgages, deeds of trust and security interests and consignment
rights granted by the CJC Sellers and the Balfour Sellers, respectively, in
favor of such parties.
14.14. Consummation of Equity Investment and Subordinated Note Issuance.
The stockholders of the Borrower shall have contributed an aggregate amount of
equity to the Borrower not less than $50,000,000 in connection with the
Acquisitions and the initial capitalization of the Borrower. The Borrower shall
also have issued the Subordinated Notes, and such issuance shall have yielded
net cash proceeds to the Borrower in an aggregate amount of $83,000,000. The
Subordinated Notes shall have been issued on terms and conditions satisfactory
in all respects to the Agents and the Banks.
14.15. Financial Statements. The Agents and the Banks shall have received
the financial statements required to be delivered to them by ss.10.4.
14.16. Survey and Taxes; Appraisal. The Collateral Agent shall have
received (i) updated Surveys of the Mortgaged Properties (other than the
Borrower's Kentucky facility) together with a Surveyor Certificate relating
thereto and (ii) evidence of payment of real estate taxes and municipal charges
on all Real Estate not delinquent on or before the Closing Date. The Agents
shall have received an appraisal in form and substance satisfactory to them from
an appraiser satisfactory to them with respect to the Sellers' machinery and
equipment and with respect to the Borrower's facilities located on Lots 1-8
Lenox Industrial Park Subdivision in Austin, Texas.
14.17. Title Insurance. The Collateral Agent shall have received Title
Policies covering the Mortgaged Properties (or commitments to issue such
policies, with all conditions to issuance of each Title Policy deleted by an
authorized agent of the Title Insurance Company) together with proof of payment
of all fees and premiums for such policies, from the Title Insurance Company and
in amounts satisfactory to the Collateral Agent, insuring the interest of the
Collateral Agent and each of the Banks as mortgagee under the Mortgages.
14.18. Environmental Reports. The Agents shall have received, for the
purpose of assessing and ensuring the value of any Mortgaged Property, the
Environmental Reports.
<PAGE>
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14.19. Landlord Consents. The Borrower and its Subsidiaries shall have
delivered to the Collateral Agent all consents required for the Collateral Agent
to receive, as part of the Security Documents, a collateral assignment of each
material leasehold of personal property, and a mortgage of the Borrower's
leasehold interest in the real property located at 7101 Intermodal Drive,
Louisville, Kentucky, together with such estoppel certificates or landlord's
consents with respect to each material leasehold of real property of the
Borrower as the Collateral Agent may request. Except for a landlord's consent
and estoppel, it is understood that in no event shall any other consents or
documents be required, including without limitation, any other collateral
assignment or mortgage be required in respect of any property of the Borrower
located in Massachusetts.
14.20. Closing of Acquisitions. Each of the Acquisition Documents shall
have been duly executed and delivered by the respective parties thereto, shall
be in full force and effect and shall be in form and substance reasonably
satisfactory to each of the Agents and the Banks. The Agents shall have received
a fully executed copy of each such document. The Acquisitions shall have been
duly consummated on or prior to the Closing Date in accordance with the terms of
the Acquisition Documents. The Agents shall have received evidence, reasonably
satisfactory to them, of the completion by the parties to the Acquisition
Documents of all actions to be taken prior to or concurrently with the closing
of the transactions contemplated thereby pursuant to the terms thereof,
including without limitation, the satisfaction or, to the extent consented to in
writing by the Agents, waiver, of all conditions to closing set forth in the
Acquisition Documents and the payment by each applicable party thereto of all
amounts required to be paid at closing. The Agents shall have received evidence,
reasonably satisfactory to them, that all consents and approvals necessary to
complete the Acquisitions shall have been obtained and such consents and
approvals shall be in form and substance reasonably satisfactory to the Agents.
Without limiting the foregoing, the Agents shall have received evidence,
reasonably satisfactory to them, of the receipt of all necessary governmental or
regulatory approvals, including, without limitation, the satisfaction of all
requirements under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as
amended, and the regulations promulgated thereunder.
14.21. Consolidated EBITDA. The Sellers shall have had Consolidated EBITDA,
on a pro forma basis for the period of twelve months ending on the last day of
the October 1996 fiscal month equal to at least $18,000,000.
14.22. Governmental Regulation. Each Bank shall have received such
statements in substance and form reasonably satisfactory to such Bank as such
Bank shall require for the purpose of compliance with any applicable regulations
of the Comptroller of the Currency or the Board of Governors of the Federal
Reserve System.
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14.23. Proceedings and Documents. All proceedings in connection with the
transactions contemplated by this Credit Agreement, the other Loan Documents and
all other documents incident thereto shall be satisfactory in substance and in
form to the Banks and to the Agents and the Agents' Special Counsel, and the
Banks, the Agents and such counsel shall have received all information and such
counterpart originals or certified or other copies of such documents as the
Agents or such Banks may reasonably request.
15. CONDITIONS TO ALL BORROWINGS.
The obligations of the Applicable Banks to make any Loans, including the
initial Revolving Credit Loans, Gold Loans and the Term Loan, or any
Consignments, including the initial Consignments, and of the Dollar Agent to
issue, extend or renew any Letter of Credit, in each case whether on or after
the Closing Date, shall also be subject to the satisfaction of the following
conditions precedent:
15.1. Representations True; No Event of Default. Each of the
representations and warranties of any of the Borrower and its Subsidiaries
contained in this Credit Agreement, the other Loan Documents or in any document
or instrument delivered pursuant to or in connection with this Credit Agreement
shall be true in all material respects as of the date as of which they were made
and shall also be true in all material respects at and as of the time of the
making of such Loan or Consignment or the issuance, extension or renewal of such
Letter of Credit, with the same effect as if made at and as of that time (except
to the extent of changes resulting from transactions contemplated or permitted
by this Credit Agreement and the other Loan Documents and changes occurring in
the ordinary course of business that singly or in the aggregate are not
materially adverse, and to the extent that such representations and warranties
relate expressly to an earlier date) and no Default or Event of Default shall
have occurred and be continuing.
15.2. Borrowing Base Report; Consigned Precious Metal Report. The Agents
and the Banks shall have received the most recent Borrowing Base Report required
to be delivered to the Agents and the Banks in accordance with ss.11.4(f) and
the most recent Consigned Precious Metal Report required to be delivered to the
Agents and the Banks in accordance with ss.11.4(f), and if requested by the
Applicable Agent, updates to such most recent Borrowing Base Report or, as the
case may be, Consigned Precious Metal Report which solely provide information as
to updated sales and receipts as of a date within five (5) days of the Drawdown
Date or, as the case may be, the Gold Drawdown Date of such Loan or such
Consignment or of the date of issuance, extension or renewal of such Letter of
Credit. It is understood and agreed that the Borrower may furnish to the Agents
and the Banks from time to time an updated Borrowing Base Report or Consigned
Precious Metal Report, in which case availability under the Dollar Facility
and/or the Gold Facility shall be determined based upon such updated reports.
<PAGE>
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16. EVENTS OF DEFAULT; ACCELERATION; ETC.
16.1. Events of Default and Acceleration. If any of the following events
("Events of Default" or, if the giving of notice or the lapse of time or both is
required, then, prior to such notice or lapse of time, "Defaults") shall occur:
(a) the Borrower shall fail to pay any principal of the Loans or any
Reimbursement Obligation or fail to purchase and pay for or Redeliver
Consigned Precious Metal when the same shall become due and payable or
required, whether at the stated date of maturity or any accelerated date of
maturity or at any other date fixed for payment or Redelivery;
(b) the Borrower or any of its Subsidiaries shall fail to pay any
interest on the Loans or Consignment Fees or Gold Fronting Fees or
Consignment Premiums on Consigned Precious Metal, the commitment fees, any
Letter of Credit Fee, the Agents' fee, or other sums due hereunder or under
any of the other Loan Documents, within one (1) Business Day after the same
shall become due and payable, whether at the stated date of maturity or any
accelerated date of maturity or at any other date fixed for payment;
(c) the Borrower shall fail to comply with any of its covenants
contained in ss.ss.11.4(a), (b), (c), (d), (f), (g), (h), or (i) or
ss.ss.11.5.1, 11.6(a), 11.12, 11.14, 11.15, 12 or 13;
(d) the Borrower or any of its Subsidiaries shall fail to perform any
material term, covenant or agreement contained herein or in any of the
other Loan Documents (other than those specified elsewhere in this ss.16.1)
for thirty (30) days after written notice of such failure has been given to
the Borrower by the Agents;
(e) any material representation or warranty of the Borrower or any of
its Subsidiaries in this Credit Agreement or any of the other Loan
Documents or in any other document or instrument delivered pursuant to or
in connection with this Credit Agreement shall prove to have been false in
any material respect upon the date when made or deemed to have been made or
repeated;
(f) the Borrower or any of its Subsidiaries shall (i) fail to pay at
maturity, or within any applicable period of grace, (A) any obligation in
respect of the Subordinated Notes or (B) any other obligation for borrowed
money or credit received or in respect of any Capitalized Leases, in each
case under this clause (B) in excess of $1,000,000.00, or (ii) fail to
observe or perform any material term, covenant or agreement contained (A)
in the Indenture or the Subordinated Notes or (B) in any agreement by which
it is bound, evidencing or securing borrowed money or credit received or in
respect of any Capitalized Leases, in each case under this clause (B) in
excess
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of $1,000,000.00, for such period of time as would permit (assuming the
giving of appropriate notice if required) the holder or holders thereof or
of any obligations issued thereunder to accelerate the maturity thereof;
(g) the Borrower or any of its Subsidiaries (other than the Mexican
Subsidiary) shall make an assignment for the benefit of creditors, or admit
in writing its inability to pay or generally fail to pay its debts as they
mature or become due, or shall petition or apply for the appointment of a
trustee or other custodian, liquidator or receiver of the Borrower or any
of its Subsidiaries (other than the Mexican Subsidiary) or of any
substantial part of the assets of the Borrower or any of its Subsidiaries
(other than the Mexican Subsidiary) or shall commence any case or other
proceeding relating to the Borrower or any of its Subsidiaries (other than
the Mexican Subsidiary) under any bankruptcy, reorganization, arrangement,
insolvency, readjustment of debt, dissolution or liquidation or similar law
of any jurisdiction, now or hereafter in effect, or shall take any action
to authorize or in furtherance of any of the foregoing, or if any such
petition or application shall be filed or any such case or other proceeding
shall be commenced against the Borrower or any of its Subsidiaries (other
than the Mexican Subsidiary) and the Borrower or any of its Subsidiaries
(other than the Mexican Subsidiary) shall indicate its approval thereof,
consent thereto or acquiescence therein or such petition or application
shall not have been dismissed within forty-five (45) days following the
filing thereof;
(h) a decree or order is entered appointing any such trustee,
custodian, liquidator or receiver or adjudicating the Borrower or any of
its Subsidiaries (other than the Mexican Subsidiary) bankrupt or insolvent,
or approving a petition in any such case or other proceeding, or a decree
or order for relief is entered in respect of the Borrower or any Subsidiary
of the Borrower (other than the Mexican Subsidiary) in an involuntary case
under federal bankruptcy laws as now or hereafter constituted;
(i) there shall remain in force, undischarged, unsatisfied and
unstayed, for more than thirty days, whether or not consecutive, any final
judgment against the Borrower or any of its Subsidiaries that, with other
outstanding final judgments, undischarged, against the Borrower or any of
its Subsidiaries exceeds in the aggregate $1,000,000.00;
(j) if any of the Loan Documents shall be cancelled, terminated,
revoked or rescinded or the Collateral Agent's security interests,
mortgages or liens in a substantial portion of the Collateral shall cease
to be perfected, or shall cease to have the priority contemplated by the
Security Documents, in each case otherwise than in accordance with the
terms thereof or with the express prior written agreement, consent or
approval of the Banks, or any
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action at law, suit or in equity or other legal proceeding to cancel,
revoke or rescind any of the Loan Documents shall be commenced by or on
behalf of the Borrower or any of its Subsidiaries party thereto or any of
their respective stockholders, or any court or any other governmental or
regulatory authority or agency of competent jurisdiction shall make a
determination that, or issue a judgment, order, decree or ruling to the
effect that, any one or more of the Loan Documents is illegal, invalid or
unenforceable in accordance with the terms thereof;
(k) if the Borrower or any ERISA Affiliate shall incur any liability
to the PBGC or a Guaranteed Pension Plan pursuant to Title IV of ERISA in
an aggregate amount exceeding $1,000,000; if the Borrower or any ERISA
Affiliate shall be assessed withdrawal liability pursuant to Title IV of
ERISA by a Multiemployer Plan requiring aggregate annual payments exceeding
$1,000,000, or if any of the following shall occur with respect to a
Guaranteed Pension Plan: (i) an ERISA Reportable Event, or a failure to
make a required installment or other payment (within the meaning of
ss.302(f)(1) of ERISA), provided the Agents determine in their reasonable
discretion that such event (A) could be expected to result in liability of
the Borrower to the PBGC or the Plan in an aggregate amount exceeding
$1,000,000 and (B) could constitute grounds for the termination of such
Plan by the PBGC, for the appointment by the appropriate United States
District Court of a trustee to administer such Plan or for the imposition
of a lien in favor of the Guaranteed Pension Plan; (ii) the appointment by
a United States District Court of a trustee to administer such Plan; or
(iii) the institution by the PBGC of proceedings to terminate such Plan;
(l) the Borrower or any of its Subsidiaries (other than the Mexican
Subsidiary) shall be enjoined, restrained or in any way prevented by the
order of any court or any administrative or regulatory agency from
conducting any material part of its business and such order shall continue
in effect for more than thirty (30) days; or
(m) Castle Harlan Partners II L.P. and its affiliates shall at any
time, legally or beneficially own less than 51% of the shares of the Voting
Stock of the Borrower or shall at any time cease to be able to elect at
least a majority of the members of the board of directors of the Borrower;
then, and in any such event (i) the Borrower shall purchase all Consigned
Precious Metal in accordance with the provisions of ss.5.4 hereof and (ii) so
long as the same may be continuing, the Agents may, and upon the request of the
Majority Banks shall, by notice in writing to the Borrower declare all amounts
owing with respect to this Credit Agreement, the Notes and the other Loan
Documents and all Reimbursement Obligations to be, and they shall thereupon
forthwith become,
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immediately due and payable without presentment, demand, protest or other notice
of any kind, all of which are hereby expressly waived by the Borrower; provided
that in the event of any Event of Default specified in ss.ss.16.1(g) or 16.1(h),
all such amounts shall become immediately due and payable automatically and
without any requirement of notice from the Agents or any Bank.
16.2. Termination of Commitments. If any one or more of the Events of
Default specified in ss.16.1(g) or ss.16.1(h) shall occur, any unused portion of
the credit hereunder shall forthwith terminate and each of the Banks shall be
relieved of all further obligations to make Loans and Consignments to the
Borrower and the Dollar Agent shall be relieved of all further obligations to
issue, extend or renew Letters of Credit. If any other Event of Default shall
have occurred and be continuing, the Agents may and, upon the request of the
Majority Banks, shall, by notice to the Borrower, terminate the unused portion
of the credit hereunder, and upon such notice being given such unused portion of
the credit hereunder shall terminate immediately and each of the Banks shall be
relieved of all further obligations to make Loans and Consignments and the
Dollar Agent shall be relieved of all further obligations to issue, extend or
renew Letters of Credit. No termination of the credit hereunder shall relieve
the Borrower or any of its Subsidiaries of any of the Obligations.
16.3. Remedies. In case any one or more of the Events of Default shall have
occurred and be continuing, and whether or not the Banks shall have accelerated
the maturity of the Loans pursuant to ss.16.1, each Bank, if owed any amount
with respect to the Loans, Consignments or the Reimbursement Obligations, may,
with the consent of the Majority Banks but not otherwise, proceed to protect and
enforce its rights by suit in equity, action at law or other appropriate
proceeding, whether for the specific performance of any covenant or agreement
contained in this Credit Agreement and the other Loan Documents or any
instrument pursuant to which the Obligations to such Bank are evidenced,
including as permitted by applicable law the obtaining of the ex parte
appointment of a receiver, and, if such amount shall have become due, by
declaration or otherwise, proceed to enforce the payment thereof or any other
legal or equitable right of such Bank. No remedy herein conferred upon any Bank
or the Agents or the holder of any Note or of any rights in the Consigned
Precious Metal or the purchaser of any Letter of Credit Participation is
intended to be exclusive of any other remedy and each and every remedy shall be
cumulative and shall be in addition to every other remedy given hereunder or now
or hereafter existing at law or in equity or by statute or any other provision
of law.
17. SETOFF.
Regardless of the adequacy of any collateral, during the continuance of any
Event of Default, any deposits or other sums credited by or due from any of the
Banks to the Borrower and any securities or other property of the Borrower in
the possession of such Bank may, upon notice thereof given to the Borrower, be
applied
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to or set off by such Bank against the payment of Obligations and any and all
other liabilities, direct, or indirect, absolute or contingent, due or to become
due, now existing or hereafter arising, of the Borrower to such Bank. Each of
the Banks agrees with each other Bank that (a) if an amount to be set off is to
be applied to Indebtedness of the Borrower to such Bank, other than Indebtedness
evidenced by the Notes held by such Bank or constituting Reimbursement
Obligations owed to, or, as the case may be, constituting obligations in respect
of Consigned Precious Metal owed to, such Bank, such amount shall be applied
ratably to such other Indebtedness and to the Indebtedness evidenced by all such
Notes held by such Bank or constituting Reimbursement Obligations owed to, or,
as the case may be, constituting obligations in respect of Consigned Precious
Metal owed to, such Bank, and (b) if such Bank shall receive from the Borrower,
whether by voluntary payment, exercise of the right of setoff, counterclaim,
cross action, enforcement of the claim evidenced by the Notes held by, or
constituting Reimbursement Obligations owed to, or, as the case may be,
constituting obligations in respect of Consigned Precious Metal owed to, such
Bank by proceedings against the Borrower at law or in equity or by proof thereof
in bankruptcy, reorganization, liquidation, receivership or similar proceedings,
or otherwise, and shall retain and apply to the payment of the Note or Notes
held by, or Reimbursement Obligations owed to, or, as the case may be,
constituting obligations in respect of Consigned Precious Metal owed to, such
Bank any amount in excess of its ratable portion of the payments received by all
of the Applicable Banks with respect to the Notes held by, and Reimbursement
Obligations owed to, or, as the case may be, constituting obligations in respect
of Consigned Precious Metal owed to, all of the Applicable Banks, such Bank will
make such disposition and arrangements with the other Banks with respect to such
excess, either by way of distribution, pro tanto assignment of claims,
subrogation or otherwise as shall result in each Bank receiving in respect of
the Notes held by it or Reimbursement obligations owed it, or, as the case may
be, obligations in respect of Consigned Precious Metal owed to it, its
proportionate payment as contemplated by this Credit Agreement; provided that if
all or any part of such excess payment is thereafter recovered from such Bank,
such disposition and arrangements shall be rescinded and the amount restored to
the extent of such recovery, but without interest.
18. THE AGENTS.
18.1. Authorization.
(a) Each of the Agents and the Collateral Agent is authorized to take
such action on behalf of each of the Applicable Banks and to exercise all
such powers as are hereunder and under any of the other Loan Documents and
any related documents delegated to such Agent or Collateral Agent, together
with such powers as are reasonably incident thereto, provided that no
duties or
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responsibilities not expressly assumed herein or therein shall be implied
to have been assumed by the Agents or the Collateral Agent.
(b) The relationship between the Agents and each of the Banks is that
of an independent contractor. The use of the terms "Agent" and "Collateral
Agent" is for convenience only and is used to describe, as a form of
convention, the independent contractual relationship between the Agents and
each of the Banks. Nothing contained in this Credit Agreement nor the other
Loan Documents shall be construed to create an agency, trust or other
fiduciary relationship between the Agents and any of the Banks.
(c) As independent contractors empowered by the Banks to exercise
certain rights and perform certain duties and responsibilities hereunder
and under the other Loan Documents, each of the Agents and the Collateral
Agent is nevertheless a "representative" of the Banks, as that term is
defined in Article 1 of the Uniform Commercial Code, for purposes of
actions for the benefit of the Banks, the Collateral Agent and the Agents
with respect to all collateral security and guaranties contemplated by the
Loan Documents. Such actions include the designation of the Collateral
Agent as "secured party", "mortgagee" or the like on all financing
statements and other documents and instruments, whether recorded or
otherwise, relating to the attachment, perfection, priority or enforcement
of any security interests, mortgages or deeds of trust in collateral
security intended to secure the payment or performance of any of the
Obligations, all for the benefit of the Banks, the Agents and the
Collateral Agent.
18.2. Employees and Agents. The Agents may exercise their powers and
execute its duties by or through employees or agents and shall be entitled
to take, and to rely on, advice of counsel concerning all matters
pertaining to its rights and duties under this Credit Agreement and the
other Loan Documents. The Agents may utilize the services of such Persons
as the Agents in their sole discretion may reasonably determine, and all
reasonable fees and expenses of any such Persons shall be paid by the
Borrower.
18.3. No Liability. Neither the Agents nor any of their shareholders,
directors, officers or employees nor any other Person assisting them in
their duties nor any agent or employee thereof, shall be liable for any
waiver, consent or approval given or any action taken, or omitted to be
taken, in good faith by them hereunder or under any of the other Loan
Documents, or in connection herewith or therewith, or be responsible for
the consequences of any oversight or error of judgment whatsoever, except
that the Agents or such other Person, as the case may be, may be liable for
losses due to its willful misconduct or gross negligence.
18.4. No Representations. The Agents shall not be responsible for the
execution or validity or enforceability of this Credit Agreement, the
Notes, the
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Letters of Credit, any of the other Loan Documents or any instrument at any
time constituting, or intended to constitute, collateral security for the
Notes or the obligations in respect of Consigned Precious Metal, or for the
value of any such collateral security or for the validity, enforceability
or collectability of any such amounts owing with respect to the Notes or
the obligations in respect of Consigned Precious Metal, or for any recitals
or statements, warranties or representations made herein or in any of the
other Loan Documents or in any certificate or instrument hereafter
furnished to it by or on behalf of the Borrower or any of its Subsidiaries,
or be bound to ascertain or inquire as to the performance or observance of
any of the terms, conditions, covenants or agreements herein or in any
instrument at any time constituting, or intended to constitute, collateral
security for the Notes or the obligations in respect of Consigned Precious
Metal or to inspect any of the properties, books or records of the Borrower
or any of its Subsidiaries. The Agents shall not be bound to ascertain
whether any notice, consent, waiver or request delivered to it by the
Borrower or any holder of any of the Notes or of any right in respect of
Consigned Precious Metal shall have been duly authorized or is true,
accurate and complete. The Agents have not made nor do they now make any
representations or warranties, express or implied, nor do they assume any
liability to the Banks, with respect to the credit worthiness or financial
conditions of the Borrower or any of its Subsidiaries. Each Bank
acknowledges that it has, independently and without reliance upon either of
the Agents or any other Bank, and based upon such information and documents
as it has deemed appropriate, made its own credit analysis and decision to
enter into this Credit Agreement.
18.5. Payments.
18.5.1. Payments to Agents. A payment or Redelivery by the
Borrower to the Applicable Agent hereunder or any of the other Loan
Documents for the account of any Applicable Bank shall constitute a
payment or, as applicable, Redelivery, to such Applicable Bank. Each
of the Agents agrees promptly to distribute to each Applicable Bank
such Applicable Bank's pro rata share of payments received by such
Agent for the account of the such Applicable Banks except as otherwise
expressly provided herein or in any of the other Loan Documents.
18.5.2. Distribution by Agents. If in the opinion of either of
the Agents the distribution of any amount received by it in such
capacity hereunder, under the Notes or under any of the other Loan
Documents might involve it in liability, it may refrain from making
distribution until its right to make distribution shall have been
adjudicated by a court of competent jurisdiction. If a court of
competent jurisdiction shall adjudge that any amount received and
distributed by either of the Agents is to be repaid, each Person to
whom any such distribution shall have been made shall either repay to
such Agent its proportionate share of the amount so adjudged to be
repaid
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or shall pay over the same in such manner and to such Persons as shall
be determined by such court.
18.5.3. Delinquent Banks. Notwithstanding anything to the
contrary contained in this Credit Agreement or any of the other Loan
Documents, any Bank that fails (i) to make available to the Applicable
Agent its pro rata share of any Loan or Consignment or to purchase any
Letter of Credit Participation or (ii) to comply with the provisions
of ss.17 with respect to making dispositions and arrangements with the
other Applicable Banks, where such Bank's share of any payment
received, whether by setoff or otherwise, is in excess of its pro rata
share of such payments due and payable to all of the Applicable Banks,
in each case as, when and to the full extent required by the
provisions of this Credit Agreement, shall be deemed delinquent (a
"Delinquent Bank") and shall be deemed a Delinquent Bank until such
time as such delinquency is satisfied. A Delinquent Bank shall be
deemed to have assigned any and all payments due to it from the
Borrower, whether on account of outstanding Loans, Consigned Precious
Metal, Unpaid Reimbursement Obligations, interest, Consignment Fees,
Gold Fronting Fees, other fees or otherwise, to the remaining
nondelinquent Applicable Banks for application to, and reduction of,
their respective pro rata shares of all outstanding Dollar Facility
Loans and Unpaid Reimbursement Obligations or, as the case may be,
Consigned Precious Metal and Gold Loans. The Delinquent Bank hereby
authorizes the Applicable Agent to distribute such payments to the
nondelinquent Applicable Banks in proportion to their respective pro
rata shares of all outstanding Dollar Facility Loans and Unpaid
Reimbursement Obligations or, as the case may be, Consigned Precious
Metal and Gold Loans. A Delinquent Bank shall be deemed to have
satisfied in full a delinquency when and if, as a result of
application of the assigned payments to all outstanding Dollar
Facility Loans and Unpaid Reimbursement Obligations or, as the case
may be, Consigned Precious Metal and Gold Loans, of the nondelinquent
Applicable Banks, the Applicable Banks' respective pro rata shares of
all outstanding Dollar Facility Loans and Unpaid Reimbursement
Obligations or, as the case may be, Consigned Precious Metal and Gold
Loans, have returned to those in effect immediately prior to such
delinquency and without giving effect to the nonpayment causing such
delinquency.
18.5.4. Payments Under Confirmation of Swap Agreement. Each of
the Gold Banks agrees to pay to the Gold Agent an amount equal to its
Gold Commitment Percentage of any amounts owed by the Gold Agent to
the Borrower pursuant to the terms of the Confirmation of Swap
Agreement, and each of the Gold Banks agrees that the Gold Agent may
deduct any such amounts from amounts which the Gold Agent receives
from the Borrower on account of any Obligations owed to such Gold Bank
or, to the extent that the
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Gold Agent has offset such amounts against the Obligations, by offset
to the Obligations owed to such Gold Bank.
18.6. Holders of Notes. The Agents may deem and treat the payee of any Note
or the purchaser of any Letter of Credit Participation as the absolute owner or
purchaser thereof for all purposes hereof until it shall have been furnished in
writing with a different name by such payee or by a subsequent holder, assignee
or transferee.
18.7. Indemnity. The Banks ratably agree hereby to indemnify and hold
harmless each of the Applicable Agents (including, without limitation, the
Dollar Agent acting in its capacity as the Collateral Agent) from and against
any and all claims, actions and suits (whether groundless or otherwise), losses,
damages, costs, expenses (including any expenses for which such Agent has not
been reimbursed by the Borrower as required by ss.19), and liabilities of every
nature and character arising out of or related to this Credit Agreement, the
Notes, or any of the other Loan Documents or the transactions contemplated or
evidenced hereby or thereby, or such Agent's actions taken hereunder or
thereunder, except to the extent that any of the same shall be directly caused
by such Agent's willful misconduct or gross negligence.
18.8. Agents as Banks. In their individual capacities, each of FNBB and
RIHT shall have the same obligations and the same rights, powers and privileges
in respect to its Commitment or, as the case may be, Gold Commitment and Gold
Fronting Commitment and the Loans made by it, and as the holder of any of the
Notes or of any obligations in respect of Consigned Precious Metal and as the
purchaser of any Letter of Credit Participations, as it would have were it not
also an Agent.
18.9. Resignation. Either or both of the Agents may resign at any time by
giving sixty (60) days' prior written notice thereof to the Banks and the
Borrower. Upon any such resignation, the Majority Banks shall have the right to
appoint a successor Dollar Agent or, as the case may be, Gold Agent. Unless a
Default or an Event of Default shall have occurred and be continuing, such
successor Agent shall be reasonably acceptable to the Borrower. If no successor
Agent shall have been so appointed by the Majority Banks and shall have accepted
such appointment within thirty (30) days after the retiring Agent's giving of
notice of resignation, then the retiring Agent may, on behalf of the Applicable
Banks, appoint a successor Applicable Agent, which shall be a financial
institution having a rating of not less than A or its equivalent by Standard &
Poor's, a division of McGraw-Hill, Inc. Upon the acceptance of any appointment
as an Agent hereunder by a successor Agent, such successor Agent shall thereupon
succeed to and become vested with all the rights, powers, privileges and duties
of the retiring Agent, and the retiring Agent shall be discharged from its
duties and obligations hereunder. After any retiring Agent's resignation, the
provisions of this Credit Agreement and the other Loan Documents
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shall continue in effect for its benefit in respect of any actions taken or
omitted to be taken by it while it was acting as Agent.
18.10. Notification of Defaults and Events of Default. Each Bank hereby
agrees that, upon learning of the existence of a Default or an Event of Default,
it shall promptly notify the Agents thereof. The Agents hereby agree that upon
receipt of any notice under this ss.18.10 they shall promptly notify the other
Banks of the existence of such Default or Event of Default.
18.11. Duties in the Case of Enforcement. In case one of more Events of
Default have occurred and shall be continuing, and whether or not acceleration
of the Obligations shall have occurred, the Collateral Agent shall, if (a) so
requested by the Majority Banks and (b) the Banks have provided to the
Collateral Agent such additional indemnities and assurances against expenses and
liabilities as the Collateral Agent may reasonably request, proceed to enforce
the provisions of the Security Documents authorizing the sale or other
disposition of all or any part of the Collateral and exercise all or any such
other legal and equitable and other rights or remedies as it may have in respect
of such Collateral. The Majority Banks may direct the Collateral Agent in
writing as to the method and the extent of any such sale or other disposition,
the Banks hereby agreeing to indemnify and hold the Collateral Agent, harmless
from all liabilities incurred in respect of all actions taken or omitted in
accordance with such directions, provided that the Collateral Agent need not
comply with any such direction to the extent that the Collateral Agent
reasonably believes the Collateral Agent's compliance with such direction to be
unlawful or commercially unreasonable in any applicable jurisdiction.
19. EXPENSES.
The Borrower agrees to pay (a) the reasonable costs of producing and
reproducing this Credit Agreement, the other Loan Documents and the other
agreements and instruments mentioned herein, (b) any taxes (including taxes
incurred in connection with the purchase, consignment and repurchase of
Consigned Precious Metal and including any interest and penalties in respect
thereto) payable by either of the Agents, the Collateral Agent or any of the
Banks (other than taxes not constituting Taxes and other than taxes based upon
either of the Agent's, the Collateral Agent's or any Bank's net income or
profits) on or with respect to the transactions contemplated by this Credit
Agreement (the Borrower hereby agreeing to indemnify each of the Agents, the
Collateral Agent and each Bank with respect thereto), (c) the reasonable fees,
expenses and disbursements of the Agents' Special Counsel or any local counsel
to the Agents incurred in connection with the preparation, administration or
interpretation of the Loan Documents and other instruments mentioned herein,
each closing hereunder, and amendments, modifications, approvals, consents or
waivers hereto or hereunder, (d) the reasonable fees, expenses and disbursements
of each of the Agents and the Collateral Agent
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incurred by such Agent or the Collateral Agent in connection with the
preparation, administration or interpretation of the Loan Documents and other
instruments mentioned herein, including all title insurance premiums and
surveyor, engineering and appraisal charges, (e) any fees, costs, expenses and
bank charges, including bank charges for returned checks, incurred by the Agents
in establishing, maintaining or handling agency accounts, lock box accounts and
other accounts for the collection of any of the Collateral; (f) all reasonable
out-of pocket expenses incurred by the Agents, the Collateral Agent or, after
the occurrence and during the continuance of an Event of Default, any Bank, in
connection with periodic field examinations, monitoring of Collateral and other
assets, sale of Precious Metal Redelivered by the Borrower and otherwise in
maintaining and monitoring the transactions contemplated hereby, and in each
case in accordance with the terms of this Credit Agreement; (g) all reasonable
out-of-pocket expenses (including without limitation reasonable attorneys' fees
and costs, which attorneys may be employees of any Bank, the Collateral Agent or
either of the Agents, and reasonable consulting, accounting, appraisal,
investment banking and similar professional fees and charges) incurred by any
Bank, the Collateral Agent or either Agent in connection with (i) the
enforcement of or preservation of rights under any of the Loan Documents against
the Borrower or any of its Subsidiaries or the administration thereof after the
occurrence and during the continuance of an Event of Default and (ii) any
litigation, proceeding or dispute whether arising hereunder or otherwise, in any
way related to any Bank's, the Collateral Agent's or either Agent's relationship
with the Borrower or any of its Subsidiaries and (h) all reasonable fees,
expenses and disbursements of the Collateral Agent or the Agents incurred in
connection with UCC searches, UCC filings or mortgage recordings. The covenants
of this ss.19 shall survive payment or satisfaction of all other Obligations.
20. INDEMNIFICATION.
The Borrower agrees to indemnify and hold harmless each of the Agents, the
Collateral Agent and the Banks from and against any and all claims, actions and
suits whether groundless or otherwise, and from and against any and all
liabilities, losses, damages and reasonable expenses of every nature and
character (other than those arising solely out of the gross negligence or
willful misconduct of any of the Banks or the Agents) arising out of this Credit
Agreement or any of the other Loan Documents or the transactions contemplated
hereby including, without limitation, (a) any actual or proposed use by the
Borrower or any of its Subsidiaries of the proceeds of any of the Loans,
Consignments or Letters of Credit, (b) the reversal or withdrawal of any
provisional credits granted by the either Agent upon the transfer of funds to
the FNBB Concentration Account from bank agency or lock box accounts or in
connection with the provisional honoring of checks or other items, (c) any
actual or alleged infringement of any patent, copyright, trademark, service mark
or similar right of the Borrower or any of its Subsidiaries comprised in the
Collateral, (d) the Borrower or any of its Subsidiaries entering into or
performing this Credit Agreement
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or any of the other Loan Documents, (e) with respect to the Borrower and its
Subsidiaries and their respective properties and assets, the violation of any
Environmental Law, the presence, disposal, escape, seepage, leakage, spillage,
discharge, emission, release or threatened release of any Hazardous Substances
or any action, suit, proceeding or investigation brought or threatened with
respect to any Hazardous Substances (including, but not limited to, claims with
respect to wrongful death, personal injury or damage to property), or (f) any
sales, use, transfer, documentary and stamp taxes (but excluding any taxes based
upon or measured by the income or profits of any Bank or either Agent) and any
recording and filing fees paid by the Agents, the Collateral Agent or the Banks
and which arise by reason of the transactions contemplated hereby, by the
Consignments or by any of the Loan Documents, in each case including, without
limitation, the reasonable fees and disbursements of counsel and allocated costs
of internal counsel incurred in connection with any such investigation,
litigation or other proceeding, but excluding any losses, damages or expenses
arising solely out of the gross negligence or willful misconduct of the Person
seeking to be indemnified. In litigation, or the preparation therefor, the
Banks, the Collateral Agent and the Agents shall be entitled to select their own
counsel and, in addition to the foregoing indemnity, the Borrower agrees to pay
promptly the reasonable fees and expenses of such counsel. If, and to the extent
that the obligations of the Borrower under this ss.20 are unenforceable for any
reason, the Borrower hereby agrees to make the maximum contribution to the
payment in satisfaction of such obligations which is permissible under
applicable law. The covenants contained in this ss.20 shall survive payment or
satisfaction in full of all other Obligations.
21. SURVIVAL OF COVENANTS, ETC.
All covenants, agreements, representations and warranties made herein, in
the Notes, in any of the other Loan Documents or in any documents or other
papers delivered by or on behalf of the Borrower or any of its Subsidiaries
pursuant hereto shall be deemed to have been relied upon by the Banks, the
Collateral Agent and each of the Agents, notwithstanding any investigation
heretofore or hereafter made by any of them, and shall survive the making by the
Banks of any of the Loans or Consignments and the issuance, extension or renewal
of any Letters of Credit, as herein contemplated, and shall continue in full
force and effect so long as any Letter of Credit or any amount due under this
Credit Agreement or the Notes or any of the other Loan Documents remains
outstanding or any Bank has any obligation to make any Loans or Consignments or
the Dollar Agent has any obligation to issue, extend or renew any Letter of
Credit, and for such further time as may be otherwise expressly specified in
this Credit Agreement. All statements contained in any certificate or other
paper delivered to any Bank, the Collateral Agent or either of the Agents at any
time by or on behalf of the Borrower or any of its Subsidiaries pursuant hereto
or in connection with the transactions contemplated hereby shall
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constitute representations and warranties by the Borrower or such Subsidiary
hereunder.
22. ASSIGNMENT AND PARTICIPATION.
22.1. Conditions to Assignment by Banks. Except as provided herein, each
Bank may assign to one or more Eligible Assignees all or a portion of its
interests, rights and obligations under this Credit Agreement (including all or
a portion of its Commitment Percentage and Commitment or Gold Commitment and
Gold Commitment Percentage, as the case may be, and the same portion of the
Loans or Fair Market Value of Consigned Precious Metal at the time owing to it,
the Notes held by it and its participating interest in the risk relating to any
Letters of Credit); provided that (a) each of the Agents and, unless an Event of
Default shall have occurred and be continuing, the Borrower, shall have given
its prior written consent to such assignment, which consent, in the case of the
Borrower, will not be unreasonably withheld, (b) each such assignment shall be
of a constant, and not a varying, percentage of all the assigning Bank's rights
and obligations under the Dollar Facility or, as the case may be, the Gold
Facility, (c) each assignment shall be an assignment of the entire amount of the
assigning Bank's rights and obligations under the Loan Documents or shall be in
an amount that is at least equal to $5,000,000 (including for this purpose (i)
all amounts assigned by a given assignor to a given assignee in a single
assignment or series of simultaneous assignments, whether in respect of the
Dollar Facility or the Gold Facility or both, and (ii) all amounts assigned by a
given assignor and any of its affiliates to a given assignee and any of its
affiliates), (d) after giving effect to each such assignment, the assigning
Bank, if not assigning its entire interest under the Loan Documents, shall
retain an interest in the Obligations equal to at least $5,000,000 in the
aggregate among the Dollar Facility and the Gold Facility, (e) the parties to
such assignment shall execute and deliver to the Agents, for recording in the
Register (as hereinafter defined), an Assignment and Acceptance, substantially
in the form of Exhibit L hereto (an "Assignment and Acceptance"), together with
any Notes subject to such assignment, and (f) the assignee thereunder
constituting a Non-U.S. Bank shall provide the forms required by ss.8.12.3
hereof on or prior to the date of such assignment. Upon such execution,
delivery, acceptance and recording, from and after the effective date specified
in each Assignment and Acceptance, which effective date shall be at least five
(5) Business Days after the execution thereof, (i) the assignee thereunder shall
be a party hereto and, to the extent provided in such Assignment and Acceptance,
have the rights and obligations of a Bank hereunder, and (ii) the assigning Bank
shall, to the extent provided in such assignment and upon payment to the Agents
of the registration fee referred to in ss.22.3, be released from its obligations
under this Credit Agreement.
22.2. Certain Representations and Warranties; Limitations; Covenants. By
executing and delivering an Assignment and Acceptance, the parties
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to the assignment thereunder confirm to and agree with each other and the other
parties hereto as follows:
(a) other than the representation and warranty that it is the legal
and beneficial owner of the interest being assigned thereby free and clear
of any adverse claim, the assigning Bank makes no representation or
warranty, express or implied, and assumes no responsibility with respect to
any statements, warranties or representations made in or in connection with
this Credit Agreement or the execution, legality, validity, enforceability,
genuineness, sufficiency or value of this Credit Agreement, the other Loan
Documents or any other instrument or document furnished pursuant hereto or
the attachment, perfection or priority of any security interest or
mortgage;
(b) the assigning Bank makes no representation or warranty and assumes
no responsibility with respect to the financial condition of the Borrower
and its Subsidiaries or any other Person primarily or secondarily liable in
respect of any of the Obligations, or the performance or observance by the
Borrower and its Subsidiaries or any other Person primarily or secondarily
liable in respect of any of the Obligations of any of their obligations
under this Credit Agreement or any of the other Loan Documents or any other
instrument or document furnished pursuant hereto or thereto;
(c) such assignee confirms that it has received a copy of this Credit
Agreement, together with copies of the most recent financial statements
referred to in ss.10.4 and ss.11.4 and such other documents and information
as it has deemed appropriate to make its own credit analysis and decision
to enter into such Assignment and Acceptance;
(d) such assignee will, independently and without reliance upon the
assigning Bank, the Agents or any other Bank and based on such documents
and information as it shall deem appropriate at the time, continue to make
its own credit decisions in taking or not taking action under this Credit
Agreement;
(e) such assignee represents and warrants that it is an Eligible
Assignee;
(f) such assignee appoints and authorizes the Agents and the
Collateral Agent to take such action as agents on its behalf and to
exercise such powers under this Credit Agreement and the other Loan
Documents as are delegated to the Agents and the Collateral Agent by the
terms hereof or thereof, together with such powers as are reasonably
incidental thereto;
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(g) such assignee agrees that it will perform in accordance with their
terms all of the obligations that by the terms of this Credit Agreement are
required to be performed by it as a Bank;
(h) such assignee represents and warrants that it is legally
authorized to enter into such Assignment and Acceptance;
(i) if applicable, such assignee acknowledges that it has made
arrangements with the assigning Bank satisfactory to such assignee with
respect to its pro rata share of Letter of Credit Fees in respect of
outstanding Letters of Credit;
(j) such assignee represents and warrants that as of the date of such
Assignment and Acceptance, it is not entitled to any additional amounts
payable under ss.ss.8.16 or 8.17 of this Credit Agreement and as of such
date no Tax would be imposed upon any amounts payable to such assignee
hereunder; and
(k) such assignee agrees to be bound by the provisions of ss.31
hereof.
23.3. Register. The Agents shall maintain a copy of each Assignment and
Acceptance delivered to them and a register or similar list (the "Register") for
the recordation of the names and addresses of the Banks and as applicable, the
Commitment Percentage or the Gold Commitment Percentage of, and principal amount
of the Loans, owing to, Consignments made by, and Letter of Credit
Participations purchased by, the Banks from time to time. The entries in the
Register shall be conclusive, in the absence of manifest error, and the
Borrower, the Agents and the Banks may treat each Person whose name is recorded
in the Register as a Bank hereunder for all purposes of this Credit Agreement.
The Register shall be available for inspection by the Borrower and the Banks at
any reasonable time and from time to time upon reasonable prior notice. Upon
each such recordation, the assigning Bank agrees to pay to the Applicable Agent
a registration fee in the sum of $3,000.
22.4. New Notes. Upon their receipt of an Assignment and Acceptance
executed by the parties to such assignment, together with each Note subject to
such assignment, the Agents shall (a) record the information contained therein
in the Register, and (b) give prompt notice thereof to the Borrower and the
Banks (other than the assigning Bank). Within five (5) Business Days after
receipt of such notice, the Borrower, at its own expense, shall execute and
deliver to the Agents, against receipt of each surrendered Note, a new Note or
Notes to the order of such Eligible Assignee in an amount equal to the amount
assumed by such Eligible Assignee pursuant to such Assignment and Acceptance
and, if the assigning Bank has retained some portion of its obligations
hereunder, a new Note or Notes to the order of the assigning Bank in an amount
equal to the amount retained by it hereunder. Such new
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Notes shall provide that they are replacements for the surrendered Notes, shall
be in an aggregate principal amount equal to the aggregate principal amount of
the surrendered Notes, shall be dated the effective date of such Assignment and
Acceptance and shall otherwise be substantially in the form of the assigned
Notes. The surrendered Notes shall be cancelled and returned to the Borrower.
22.5. Participations. Each Bank may sell participations to one or more
banks or other entities in all or a portion of such Bank's rights and
obligations under this Credit Agreement and the other Loan Documents; provided
that (a) each such participation shall be in an amount of not less than
$5,000,000.00, (b) any such sale or participation shall not affect the rights
and duties of the selling Bank hereunder to the Borrower and (c) the only rights
granted to the participant pursuant to such participation arrangements with
respect to waivers, amendments or modifications of the Loan Documents shall be
the rights to approve waivers, amendments or modifications that would reduce the
principal of or the interest rate on any Loans, reduce the Fair Market Value of
Consigned Precious Metal or Consignment Fees or Gold Fronting Fees, extend the
term or increase the amount of the Commitment or Gold Commitment of such Bank as
it relates to such participant, reduce the amount of any commitment fees or
Letter of Credit Fees to which such participant is entitled or extend any
regularly scheduled payment date for principal or interest or any scheduled
payment or Redelivery date for Consigned Precious Metal or Consignment Fees.
22.6 Disclosure. The Borrower agrees that, in addition to disclosures made
in accordance with standard and customary banking practices, any Bank may
disclose information obtained by such Bank pursuant to this Credit Agreement to
assignees or participants and potential assignees or participants hereunder;
provided that such assignees or participants or potential assignees or
participants shall agree, subject to the provisions of ss.31 hereof (a) to treat
in confidence such information unless it otherwise becomes public knowledge, (b)
not to disclose such information to a third party, except as required by law or
legal process (provided that notice of such law or process shall be promptly
furnished to the Borrower unless such notice is legally prohibited), and (c) not
to make use of such information for purposes of transactions unrelated to such
contemplated assignment or participation. Each of the Agents agrees to likewise
treat such information in confidence (subject to the provisions of ss.31
hereof).
22.7 Assignee or Participant Affiliated with the Borrower. If any assignee
Bank is an Affiliate of the Borrower, then any such assignee Bank shall have no
right to vote as a Bank hereunder or under any of the other Loan Documents for
purposes of granting consents or waivers or for purposes of agreeing to
amendments or other modifications to any of the Loan Documents or for purposes
of making requests to the Agents pursuant to ss.16.1 or ss.16.2, and the
determination of the Majority Banks shall for all purposes of this Credit
Agreement and the other Loan
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Documents be made without regard to such assignee Bank's interest in any of the
Loans, Consigned Precious Metal or Reimbursement Obligations. If any Bank sells
a participating interest in any of the Loans, Consigned Precious Metal or
Reimbursement Obligations to a participant, and such participant is the Borrower
or an Affiliate of the Borrower, then such transferor Bank shall promptly notify
the Agents of the sale of such participation. A transferor Bank shall have no
right to vote as a Bank hereunder or under any of the other Loan Documents for
purposes of granting consents or waivers or for purposes of agreeing to
amendments or modifications to any of the Loan Documents or for purposes of
making requests to the Agents pursuant to ss.16.1 or ss.16.2 to the extent that
such participation is beneficially owned by the Borrower or any Affiliate of the
Borrower, and the determination of the Majority Banks shall for all purposes of
this Credit Agreement and the other Loan Documents be made without regard to the
interest of such transferor Bank in the Loans, Consigned Precious Metal or
Reimbursement Obligations to the extent of such participation.
22.8. Miscellaneous Assignment Provisions. Any assigning Bank shall retain
its rights to be indemnified pursuant to ss.19 with respect to any claims or
actions arising prior to the date of such assignment. If any assignee Bank is
not incorporated under the laws of the United States of America or any state
thereof, it shall, prior to the date on which any interest or fees are payable
hereunder or under any of the other Loan Documents for its account, deliver to
the Borrower and the Agents certification as to its exemption from deduction or
withholding of any United States federal income taxes. Anything contained in
this ss.22 to the contrary notwithstanding, any Bank may at any time pledge all
or any portion of its interest and rights under this Credit Agreement (including
all or any portion of its Notes) to any of the twelve Federal Reserve Banks
organized under ss.4 of the Federal Reserve Act, 12 U.S.C. ss.341. No such
pledge or the enforcement thereof shall release the pledgor Bank from its
obligations hereunder or under any of the other Loan Documents.
22.9. Assignment by Borrower. The Borrower shall not assign or transfer any
of its rights or obligations under any of the Loan Documents without the prior
written consent of each of the Banks.
23. NOTICES, ETC.
Except as otherwise expressly provided in this Credit Agreement, all
notices and other communications made or required to be given pursuant to this
Credit Agreement or the Notes or any Letter of Credit Applications shall be in
writing and shall be delivered in hand, mailed by United States registered or
certified first class mail, postage prepaid, sent by overnight courier, or sent
by telegraph, telecopy, facsimile or telex and confirmed by delivery via courier
or postal service, addressed as follows:
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(a) if to the Borrower, at 7211 Circle S Road, Austin, Texas 78745,
Attention: President, or at such other address for notice as the Borrower
shall last have furnished in writing to the Person giving the notice, and
at c/o Castle Harlan Partners II, L.P., 150 East 58th Street, New York, New
York 10155, Attention: David P. Pittaway, in each case with a copy to
Schulte Roth & Zabel, LLP, 900 Third Avenue, New York, New York 10022,
Attention: Janet C. Walden, Esq.;
(b) if to the Dollar Agent, the Collateral Agent or FNBB, at 100
Federal Street, Boston, Massachusetts 02110, Attention: James S. Ward, Vice
President, or such other address for notice as the Dollar Agent, the
Collateral Agent or, as the case may be, FNBB shall last have furnished in
writing to the Person giving the notice;
(c) if to the Gold Agent or RIHT, at One Hospital Trust Plaza, R-
W09-01, Providence, Rhode Island 02903, Attention: Denis Hamboyan, Senior
Vice President, or such other address for notice as the Gold Agent or, as
the case may be, RIHT shall last have furnished in writing to the Person
giving the notice; and
(d) if to any Bank, at such Bank's address set forth on Schedule 1
hereto, or such other address for notice as such Bank shall have last
furnished in writing to the Person giving the notice.
Any such notice or demand shall be deemed to have been duly given or made
and to have become effective (i) if delivered by hand, overnight courier or
facsimile to a responsible officer of the party to which it is directed, at the
time of the receipt thereof by such officer or the sending of such facsimile and
(ii) if sent by registered or certified first-class mail, postage prepaid, on
the third Business Day following the mailing thereof.
24. GOVERNING LAW.
THIS CREDIT AGREEMENT AND, EXCEPT AS OTHERWISE SPECIFICALLY PROVIDED
THEREIN, EACH OF THE OTHER LOAN DOCUMENTS ARE CONTRACTS UNDER THE LAWS OF THE
COMMONWEALTH OF MASSACHUSETTS AND SHALL FOR ALL PURPOSES BE CONSTRUED IN
ACCORDANCE WITH AND GOVERNED BY THE LAWS OF SAID COMMONWEALTH OF MASSACHUSETTS
(EXCLUDING THE LAWS APPLICABLE TO CONFLICTS OR CHOICE OF LAW). THE BORROWER
AGREES THAT ANY SUIT FOR THE ENFORCEMENT OF THIS CREDIT AGREEMENT OR ANY OF THE
OTHER LOAN DOCUMENTS MAY BE BROUGHT IN THE COURTS OF THE COMMONWEALTH OF
MASSACHUSETTS OR ANY FEDERAL COURT SITTING THEREIN AND CONSENTS TO THE
NONEXCLUSIVE
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JURISDICTION OF SUCH COURT AND SERVICE OF PROCESS IN ANY SUCH SUIT BEING MADE
UPON THE BORROWER BY MAIL AT THE ADDRESS SPECIFIED IN ss.23. THE BORROWER HEREBY
WAIVES ANY OBJECTION THAT IT MAY NOW OR HEREAFTER HAVE TO THE VENUE OF ANY SUCH
SUIT OR ANY SUCH COURT OR THAT SUCH SUIT IS BROUGHT IN AN INCONVENIENT COURT.
25. HEADINGS.
The captions in this Credit Agreement are for convenience of reference only
and shall not define or limit the provisions hereof.
26. COUNTERPARTS.
This Credit Agreement and any amendment hereof may be executed in several
counterparts and by each party on a separate counterpart, each of which when
executed and delivered shall be an original, and all of which together shall
constitute one instrument. In proving this Credit Agreement it shall not be
necessary to produce or account for more than one such counterpart signed by the
party against whom enforcement is sought.
27. ENTIRE AGREEMENT, ETC.
The Loan Documents and any other documents executed in connection herewith
or therewith express the entire understanding of the parties with respect to the
transactions contemplated hereby. Neither this Credit Agreement nor any term
hereof may be changed, waived, discharged or terminated, except as provided in
ss.29.
28. WAIVER OF JURY TRIAL.
The Borrower hereby waives its right to a jury trial with respect to any
action or claim arising out of any dispute in connection with this Credit
Agreement, the Notes or any of the other Loan Documents, any rights or
obligations hereunder or thereunder or the performance of which rights and
obligations. Except as prohibited by law, the Borrower hereby waives any right
it may have to claim or recover in any litigation referred to in the preceding
sentence any special, exemplary, punitive or consequential damages or any
damages other than, or in addition to, actual damages. The Borrower (a)
certifies that no representative, agent or attorney of any Bank, the Collateral
Agent or either of the Agents has represented, expressly or otherwise, that such
Bank, the Collateral Agent or such Agent would not, in the event of litigation,
seek to enforce the foregoing waivers and (b) acknowledges that the Agents, the
Collateral Agent and the Banks have been induced to enter into this Credit
Agreement, the other Loan Documents to which it is a party by, among other
things, the waivers and certifications contained herein.
<PAGE>
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29. CONSENTS, AMENDMENTS, WAIVERS, ETC.
Any consent or approval required or permitted by this Credit Agreement to
be given by all of the Banks may be given, and any term of this Credit
Agreement, the other Loan Documents or any other instrument related hereto or
mentioned herein may be amended, and the performance or observance by the
Borrower or any of its Subsidiaries of any terms of this Credit Agreement, the
other Loan Documents or such other instrument or the continuance of any Default
or Event of Default may be waived (either generally or in a particular instance
and either retroactively or prospectively) with, but only with, the written
consent of the Borrower and the written consent of the Majority Banks.
Notwithstanding the foregoing (a) without the written consent of the Borrower
and the written consent of each Bank affected thereby, the rate of interest on
the Notes (other than interest accruing pursuant to ss.8.20 following the
effective date of any waiver by the Majority Banks of the Default or Event of
Default relating thereto) may not be decreased, the definitions of Revolver
Maturity Date, Gold Maturity Date or Term Loan Maturity Date may not be changed,
no rates of interest may be decreased, the basis for calculation of Consignment
Fees or Gold Fronting Fees may not be decreased, the amounts of the Commitments
of the Dollar Banks may not be increased, the amounts of the Gold Commitments of
the Gold Banks may not be increased, the amounts of the commitment fees and the
Letter of Credit Fees (including those payable for the Dollar Agent's own
account) hereunder may not be decreased, and the advance rates set forth in the
definitions of Borrowing Base and Consignment Advance Rate Percentage may not be
increased; (b) the definition of Majority Banks may not be amended without the
written consent of all of the Banks; (c) the amount of the Agents' fees and
ss.18 may not be amended without the written consent of each of the Agents; and
(d) all or substantially all of the Collateral may not be released without the
consent of all of the Banks. No waiver shall extend to or affect any obligation
not expressly waived or impair any right consequent thereon. No course of
dealing or delay or omission on the part of either of the Agents or any Bank in
exercising any right shall operate as a waiver thereof or otherwise be
prejudicial thereto. No notice to or demand upon the Borrower shall entitle the
Borrower to other or further notice or demand in similar or other circumstances.
30. SEVERABILITY.
The provisions of this Credit Agreement are severable and if any one clause
or provision hereof shall be held invalid or unenforceable in whole or in part
in any jurisdiction, then such invalidity or unenforceability shall affect only
such clause or provision, or part thereof, in such jurisdiction, and shall not
in any manner affect such clause or provision in any other jurisdiction, or any
other clause or provision of this Credit Agreement in any jurisdiction.
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31. CONFIDENTIALITY.
Each of the Agents and the Banks agrees that it will treat in confidence
the information obtained pursuant to this Credit Agreement and will not, without
the consent of the Borrower, disclose such information to any third party other
than any employee, director, agent, attorney, accountant or other professional
advisor of such Bank or the Agents who is advised of the confidential nature of
such information. Notwithstanding the foregoing, the Borrower hereby authorizes
each of the Agents and the Banks to disclose information obtained pursuant to
this Credit Agreement (i) to the Agents or any other Bank; (ii) to other banks
or financial institutions who are Eligible Assignees, participants or potential
Eligible Assignees or participants in the Obligations made or to be made
hereunder in accordance with ss.22 hereof and who agree to be bound by the
provisions of this ss.31; (iii) in response to any request or order of any court
or other governmental or regulatory authority having jurisdiction over the
Agents or such Bank or as may be otherwise be required pursuant to any
requirement of any requirement of law (provided that notice of any subpoena or
court order (but not any regulatory request) shall be promptly furnished to the
Borrower unless such notice to the Borrower is legally prohibited); and (iv)
where such information has been publicly disclosed other than in breach of this
Credit Agreement. The agreements contained in this ss.31 shall survive payment
or satisfaction in full of all of the Obligations.
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IN WITNESS WHEREOF, the undersigned have duly executed this Credit
Agreement as a sealed instrument as of the date first set forth above.
SCHOLASTIC BRANDS, INC.
By: /s/
--------------------------------
Name:
Title:
THE FIRST NATIONAL BANK OF
BOSTON, individually and as Agent
By: /s/
--------------------------------
Name:
Title:
RHODE ISLAND HOSPITAL TRUST
NATIONAL BANK, individually and as
Agent
By: /s/
--------------------------------
Name:
Title:
SCHOLASTIC BRANDS, INC.
SUBSCRIPTION AGREEMENT
SUBSCRIPTION AGREEMENT, dated as of December 16, 1996, by and among
Scholastic Brands, Inc., a Delaware corporation (the "Company"), Castle Harlan
Partners II, L.P., a Delaware limited partnership ("CHP"), Dresdner Bank AG,
Grand Cayman Branch ("Dresdner"), and Castle Harlan Offshore Partners, L.P., a
Delaware limited partnership ("Offshore"), and each of the persons who shall,
after the date hereof, acquire Warrants or shares of Common Stock or Preferred
Stock (as hereinafter defined) and join in and become a party to this Agreement
by executing and delivering to the Company an Instrument of Accession in the
form of Exhibit A hereto (CHP, Dresdner, Offshore and each such person who
executes and delivers an Instrument of Accession, as provided in Section 4(a)
hereof, are hereinafter sometimes referred to collectively as the "Stockholders"
and individually as a "Stockholder").
WHEREAS, the Company has been formed to acquire substantially all
of the assets of the scholastic products and recognition and affinity products
businesses of each of CJC Holdings, Inc., a Texas corporation ("CJC"), and L.G.
Balfour Company ("Balfour"), a Delaware corporation;
WHEREAS, prior to the execution and delivery of this Agreement, (i)
the Company, CJC and certain subsidiaries of CJC have entered into an Asset
Purchase Agreement, dated as of May 20, 1996, and amended as of November 21,
1996 (the "CJC Purchase Agreement"), pursuant to which the Company will acquire
the scholastic and recognition and affinity businesses of CJC, and (ii) the
Company, Balfour and Balfour's sole stockholder have entered into an Asset
Purchase Agreement, dated as of May 20, 1996, and amended and restated as of
November 21, 1996 (the "Balfour Purchase Agreement"), pursuant to which the
Company will acquire the scholastic and recognition and affinity businesses of
Balfour;
WHEREAS, CHP, Dresdner and Offshore have funds available to them
for the purpose of investing in the Company for the acquisition of the
above-mentioned businesses; and
WHEREAS, the Stockholders wish to subscribe for Warrants, Common
Stock and Preferred Stock as specified in Section 2 hereof, and for a purchase
price consisting of cash;
NOW, THEREFORE, the parties hereto hereby agree as follows:
1. Capitalization. The capitalization of the Company currently
consists of (i) 750,000 shares of preferred stock, par value $.01 per share, of
which 100,000 shares have been designated Series A Preferred Stock (the "Series
A Preferred Stock") and of which 375,000 shares have been designated Series B
Preferred Stock (the "Series B Preferred Stock" and, together with the Series A
Preferred Stock, the "Preferred Stock"), none of which have been issued, and
(ii) 750,000 shares of Common Stock, par value $.01 per share (the "Common
Stock"), 100 shares of which have been issued to CHP. The terms of the Common
Stock and the
<PAGE>
Preferred Stock are set forth in the Certificate of Incorporation, as amended
(including, without limitation, by Certificates of Designations for the Series A
Preferred Stock and the Series B Preferred Stock) of the Company, which has been
furnished to each of the Stockholders.
2. Subscription.
(a) Each of the Stockholders, subject to the terms and
conditions hereof, severally hereby subscribes for such number of Common Stock
Purchase Warrants of the Company exercisable for shares of Common Stock and
shares of Common Stock, Series A Preferred Stock and Series B Preferred Stock
for such purchase price, as is set forth opposite such Stockholder's name on
Exhibit B hereto. Payment for said Warrants and shares shall be made in full to
the Company at the Closing (as defined in the Purchase Agreements) in cash, by
certified check payable to the Company or by wire transfer, against receipt of a
Warrant or Warrants and a certificate or certificates registered in the name or
names indicated on Exhibit B hereto, representing the number of Warrants and
shares of Common Stock and Preferred Stock so purchased by such Stockholder, and
such shares shall be validly issued, fully paid and non-assessable. Concurrently
with the issuance of such shares to the Stockholders, CHP shall return, and the
Company shall cancel, the certificate representing 100 shares of Common Stock
heretofore issued to CHP. The Common Stock, Preferred Stock and Warrants issued
pursuant to this Agreement, and the shares of Common Stock issuable upon
exercise of the Warrants ("Warrant Shares") are sometimes collectively referred
to herein as the "Company Securities."
(b) At the time an Instrument of Accession is delivered to
the Company, Exhibit B hereto shall be amended to reflect accurately either (i)
the amount of capital contributed to the Company by each additional Stockholder,
and the number of shares of Common Stock and Preferred Stock issued to such
Stockholder or (ii) in the case of a transfer of Company Securities by a
Stockholder, the number of Warrants and/or shares of Common and/or Preferred
Stock owned by such Stockholder and its transferee. The representations set
forth in Section 3 hereof shall be deemed reconfirmed and remade by each such
Stockholder in connection with the issuance or transfer of any Warrants or
shares of Common Stock or Preferred Stock to such Stockholder after the date
hereof.
(c) References herein to Warrants and shares of Common
Stock and Preferred Stock held or owned by the Stockholders shall include the
Warrants and shares of Common Stock and Preferred Stock issued to or acquired by
Stockholders after the date hereof, whether by exercise of any warrants or
options, purchase or otherwise.
3. Stockholders' Representations.
(a) Each Stockholder severally represents and warrants that
he, she or it has acquired the Company Securities for investment for his, her or
its own account and not with a view to, or for resale in connection with, the
distribution or other disposition thereof in violation of the Securities Act of
1933, as amended (the "Securities Act"). Each Stockholder severally agrees that
he, she or it will not, directly or indirectly, offer, transfer, sell, pledge,
hypothecate or otherwise dispose of any Company Securities (or solicit any
offers to buy, purchase, or otherwise acquire or take a pledge of any Company
Securities), except in
2
<PAGE>
compliance with the Securities Act of 1933, as amended (the "Securities Act"),
the rules and regulations promulgated thereunder, applicable state securities
laws and the provisions of this Agreement. Each Stockholder severally represents
and warrants that no other person or entity has any interest, beneficial or
otherwise, in the Company Securities subscribed for and to be held by him, her
or it.
(b) Each Stockholder severally acknowledges that he, she or
it has been advised that (i) the Company Securities are not registered under the
Securities Act, and the Company has no obligation to effectuate any such
registration, (ii) the Company Securities must be held indefinitely and the
Stockholder must continue to bear the economic risk of the investment in the
Company Securities unless it is subsequently registered under the Securities Act
or an exemption from such registration is available, (iii) Rule 144 promulgated
under the Securities Act is not presently available with respect to the sale of
any securities of the Company, and the Company has no obligation nor any
intention to make such Rule available, (iv) when and if any of the Company
Securities may be disposed of without registration in reliance on Rule 144, the
amounts that may be disposed of may be limited in accordance with the terms and
conditions of such Rule, (v) if the Rule 144 exemption is not available, public
sale without registration will require compliance with Regulation D or some
other exemption under the Securities Act, (vi) restrictive legends will be
placed on the certificates representing the Company Securities and (vii) a
notation will be made in the appropriate records of the Company indicating that
the Company Securities are subject to restrictions on transfer and, if the
Company should at some time in the future engage the services of a stock
transfer agent, appropriate stop-transfer restrictions will be issued to such
transfer agent with respect to the Company Securities.
(c) Each Stockholder agrees with each other Stockholder and
the Company that if any Company Securities are disposed of by him, her or it (i)
in reliance upon Rule 144 under the Securities Act, he, she or it shall deliver
to the Company at or prior to the time of such disposition an executed copy of
Form 144 (if required by Rule 144) and such other documentation as the Company
may reasonably require in connection with such disposition or (ii) in reliance
on Rule 144 or pursuant to another exemption from registration under the
Securities Act, he, she or it shall deliver to the Company a legal opinion,
reasonably satisfactory to the Company, as to the availability of and compliance
with such exemption.
(d) Each Stockholder severally represents and warrants that
(i) he, she or it can afford to hold the Company Securities for an indefinite
period and to suffer the complete loss of his, her or its investment in the
Company Securities, (ii) he, she or it understands and has taken cognizance of
all the risk factors related to his, her or its acquisition of the Company
Securities and (iii) his, her or its knowledge and experience in financial and
business matters is such that he, she or it is capable of evaluating the merits
and risks of acquiring the Company Securities.
4. Restrictions on Transfer.
(a) Except as provided in Sections 4 and 5 hereof, the
Stockholders shall not transfer or otherwise dispose of any Common Stock (other
than Warrant Shares the
3
<PAGE>
transfer or other disposition of which shall be governed by paragraphs (e) and
(f) below) or Series B Preferred Stock (collectively referred to herein as the
"Limited Transfer Securities") owned by such Stockholders, or any interest
therein, and any attempt by such Stockholders to effect a transfer or
disposition in violation of this Section 4 or Section 5 hereof shall be void and
ineffective for all purposes. The words "transfer" and "dispose" include the
making of any sale, exchange, assignment, gift, security interest, pledge or
other encumbrance, or any contract therefor, any voting trust or other agreement
or arrangement with respect to the transfer of voting rights or any other
beneficial interest in the Limited Transfer Securities, the creation of any
other claim thereto or any other transfer or disposition whatsoever, whether
voluntary or involuntary, affecting the right, title, interest or possession in
or to the Limited Transfer Securities.
Subject to the last sentence of this paragraph, nothing in this
Section 4 or in Section 5 hereof shall prevent the transfer or other disposition
of the Limited Transfer Securities: (i) to a personal representative or to one
or more members of any Stockholder's family or to trusts or similar entities for
their benefit, (ii) to any other Stockholder or to any person or entity
controlling, controlled by, or under common control with, any Stockholder, (iii)
upon any liquidation or any other distribution to the partners or any other
holders of a beneficial interest in any Stockholder or (iv) between or among CHP
and/or any of its affiliates; provided, however, that such transferee(s) shall
take such Limited Transfer Securities, subject to and be fully bound by this
Agreement with the same effect as if he, she or it were a party hereto and shall
execute and deliver to the Company an Instrument of Accession in the form of
Exhibit A hereto and references herein to Common Stock or Preferred Stock held
or owned by any Stockholder shall be deemed to include Common Stock or Preferred
Stock held or owned by any such transferee(s) (and the transferee shall be
deemed a Stockholder for purposes of this Agreement). As used in this Agreement,
the term "personal representative" shall mean the executor or executors of the
will or administrator or administrators of the estate, the heirs, legatees or
other beneficiaries thereunder and all other legal representatives (by operation
of law or otherwise) of a holder of Limited Transfer Securities. Notwithstanding
the foregoing, however, no such transfer shall be made, unless consented to by
the Company, to any person, group or entity that may be deemed to be a
competitor of the Company (as reasonably determined by the Board of Directors).
(b) Whenever this Agreement shall terminate as to any
Company Securities pursuant to Section 7(b) hereof, the Stockholders owning such
shares shall be entitled to receive, promptly upon presentment to the Company of
the certificate or certificates evidencing the same, a certificate or
certificates not bearing the restrictive legend provided for in Section 4(c)
hereof, provided, however, that if such termination occurs as a result of a
transfer pursuant to Rule 144A as permitted by Section 7(b)(ii) hereof, only the
first two sentences of such legend shall be removed.
(c) The parties hereto agree that each stock certificate
representing Common Stock or Preferred Stock issued to any holder bound by the
terms hereof shall bear the following legend:
SHARES OF THE COMPANY REPRESENTED BY THIS
CERTIFICATE ARE SUBJECT TO A SUBSCRIPTION
4
<PAGE>
AGREEMENT DATED AS OF DECEMBER 16, 1996, WHICH CONTAINS
PROVISIONS REGARDING THE RESTRICTIONS ON THE TRANSFER OF SUCH
SHARES AND OTHER MATTERS. A COPY OF SUCH AGREEMENT IS
AVAILABLE FOR INSPECTION AT THE PRINCIPAL OFFICE OF THE
COMPANY. THE SHARES REPRESENTED BY THIS CERTIFICATE WERE NOT
REGISTERED UNDER, AND ARE SUBJECT TO, THE SECURITIES ACT OF
1933, AS AMENDED (THE "SECURITIES ACT"), AND MAY NOT BE SOLD,
TRANSFERRED OR ASSIGNED EXCEPT PURSUANT TO AN EFFECTIVE
REGISTRATION UNDER THE SECURITIES ACT OR IN A TRANSACTION
EXEMPT FROM REGISTRATION UNDER THE SECURITIES ACT.
(d) The parties hereto agree that each Warrant issued to
any holder bound by the terms hereof shall bear the legend required by the terms
of the Warrant.
(e) The Warrants, the Warrant Shares and the shares of
Series A Preferred Stock may not be sold, assigned, pledged, hypothecated,
encumbered or in any manner transferred or disposed of, in whole or in part,
except pursuant to an effective registration under the Securities Act or in a
transaction exempt from registration under the Securities Act and in compliance
with the provisions of the state securities or Blue Sky laws and the terms and
conditions hereof. The Company may require a legal opinion, reasonably
satisfactory to the Company, as to the availability of and compliance with such
exemptions and the state securities or Blue Sky laws.
(f) Pursuant to this Agreement, each initial Stockholder
subscribed for and purchased an equal number of shares of Series A Preferred
Stock and Warrant to purchase shares of Common Stock. Until the first
anniversary of this Agreement (the "Exercise Date"), that portion of each
Warrant representing the right to purchase one share of Common Stock shall
attach to, and be transferable only in connection with, one share of Series A
Preferred Stock purchased by each Stockholder pursuant hereto. Until the
Exercise Date, any proposed transfer of shares of Series A Preferred Stock or
Warrants must satisfy the transfer restrictions contained in paragraph (e) above
and in the Warrants and such securities may only be transferred together such
that an equal number of shares of Series A Preferred Stock and Warrants
exercisable for such number of shares of Common Stock shall be transferred
(subject to the adjustment provisions contained in the Warrant). On and after
the Exercise Date, the Warrants and shares of Series A Preferred Stock shall be
separately transferable, (i) in the case of the Warrants, subject to any
transfer restrictions contained or referenced in the Warrant, and (ii) in the
case of the Series A Preferred Stock, subject to the transfer restrictions
contained in paragraphs (b), (c) and (e) of this Section 4.
5
<PAGE>
5. Registration Rights.
(a) Registration Upon Request. If the Company shall be
requested in writing at any time or from time to time by any of CHP, Dresdner
and Offshore (hereinafter the "Initiating Stockholder"), to effect the
registration under the Securities Act of a number of shares of Common Stock or
Preferred Stock (which request shall specify the aggregate number of shares of
Common Stock and Preferred Stock intended to be offered and sold by the
Initiating Stockholder, shall describe the nature or method of the proposed
offer and sale thereof and shall contain an undertaking by the Initiating
Stockholder to cooperate with the Company in order to permit the Company to
comply with all applicable requirements of the Securities Act and the rules and
regulations thereunder and to obtain acceleration of the effective date of the
registration statement), the Company shall (i) promptly notify each of the
remaining Stockholders of such proposed registration, and (ii) use its best
efforts to effect, as expeditiously as possible, the registration (and to keep
such registration continuously effective until all of the shares covered thereby
have been distributed) on an appropriate form under the Securities Act of the
Common Stock and Preferred Stock which the Company has been requested to
register by the Initiating Stockholder and each other Stockholder requesting
registration by notice to the Company within 20 days of delivery of the
Company's notice, subject to the limitations set forth in Section 5(c)(1)
hereof.
If the Initiating Stockholder so elects, the offering of all or a
portion of such Common Stock and Preferred Stock pursuant to the registration
shall be in the form of an underwritten offering and the managing underwriter or
underwriters selected for such offering shall be selected by the Initiating
Stockholder and reasonably acceptable to the Company. The Initiating Stockholder
shall provide the Company with notice of the identify of the managing
underwriter or underwriters it has selected a reasonable time prior to the
commencement of any such underwritten offering.
(b) Piggyback Registration.
(1) If the Company at any time proposes to register
any of its shares of Common Stock or Preferred Stock under the Securities Act
(other than a registration effected solely to implement an employee benefit
plan, or a merger, acquisition or exchange offer as to which Rule 145
promulgated under the Securities Act is applicable), whether or not for sale for
its own account, it shall give prompt written notice to the Stockholders of each
such intended registration by the Company and the Stockholders shall be entitled
to request that the Company include in any such registration any number of
shares of Common Stock then owned by the Stockholders subject to the limitations
set forth in Section 5(c)(1) hereof.
(2) Upon the written request of any Stockholder made
within 20 days after the giving by the Company of any such notice of intention
to register (which request shall specify the number of shares of Common Stock
and Preferred Stock intended to be disposed of by such Stockholder), the Company
shall use its best efforts to effect the registration under the Securities Act
of all shares of Common Stock and Preferred Stock which the Company has been so
requested to register by such Stockholder (subject to the restrictions set forth
in
6
<PAGE>
Section 5(c)(1) hereof); provided, however, that (i) if at any time after giving
written notice of its intention to register any Common Stock or Preferred Stock
and prior to the effective date of the registration statement filed in
connection with such registration, the Company shall determine for any reason
not to register such Common Stock or Preferred Stock, the Company may, at its
election, give written notice of such determination to each such Stockholder
and, thereupon, shall be relieved of its obligation to register any shares of
Common Stock or Preferred Stock on behalf of such Stockholder in connection with
such registration and (ii) if such registration involves an underwritten
offering, such Stockholder shall sell its shares of Common Stock or Preferred
Stock to the underwriters selected by the Company on the same terms and
conditions as apply to the Company.
(c) General Provisions.
(1) If a registration pursuant to Section 5(a) or (b)
hereof involves an underwritten offering and the managing underwriter advises
the Company in writing that, in its opinion, the number of securities requested
to be included in such registration exceeds the number that can be sold in such
offering, then the Company shall include in such registration (i) first, the
securities the Company proposes to sell, and (ii) second, the number of shares
of Common Stock and Preferred Stock requested by each Stockholder and any other
selling stockholder of the Company to be included in such registration that, in
the opinion of such underwriters, can be sold, such amount to be allocated pro
rata among the Stockholders requesting registration in accordance with the
number of shares of Common Stock and Preferred Stock owned by such Stockholder.
(2) Each Stockholder shall furnish the Company such
information regarding such Stockholder and the distribution of its shares of
Common Stock and Preferred Stock as the Company may from time to time reasonably
request in writing in connection with the registration statement (and the
prospectus contained therein).
(3) In the case of a registration pursuant to Section 5(a)
or (b) hereof, the Company shall have the right to designate the managing
underwriter in any underwritten offering.
(4) All expenses incident to the Company's performance of
or compliance with this Section 5, including all registration and filing fees,
fees and expenses of compliance with securities or blue sky laws (including
reasonable fees and disbursements of counsel in connection with blue sky
qualifications of the shares of Common Stock and Preferred Stock), rating agency
fees, printing expenses, messenger and delivery expenses, the fees and expenses
incurred in connection with the listing of the securities to be registered on
securities exchanges or NASDAQ, fees and disbursements of counsel for the
Company and its independent certified public accountants, the fees and expenses
of any special experts retained by the Company in connection with such
registration and the fees and expenses of other persons retained by the Company
(all such expenses being herein called "Registration Expenses"), will be borne
by the Company. Except as provided above, the Company will not have any
responsibility for any of the expenses of any Stockholder incurred in connection
with any registration
7
<PAGE>
hereunder, including, without limitation, underwriting discounts or commissions
attributable to the sale of shares of Common Stock and Preferred Stock and
counsel fees for a Stockholder.
(5) (i) In connection with any registration of shares of Common
Stock of any Stockholder pursuant to Section 5(a) or (b) hereof, the Company
agrees to indemnify, to the full extent permitted by law, each Stockholder
against all losses, claims, damages, liabilities and expenses (including
reasonable attorneys' fees and disbursements) caused by (i) any untrue or
alleged untrue statement of a material fact contained in any registration
statement, prospectus or preliminary prospectus (including any amendment or
supplement thereto) or (ii) any omission or alleged omission to state therein a
material fact required to be stated therein or necessary to make the statements
therein, in the light of the circumstances under which they were made, not
misleading, or (iii) any act or failure to act or any alleged act or alleged
failure to act by any such person in connection with, or relating in any manner
to, the offering contemplated by such registration statement, prospectus or
preliminary prospectus (including any amendment or supplement thereto), and
which is included as part of or referred to in any loss, claim, damage,
liability or expense arising out of or based upon matters covered by clause (i)
or (ii) above (provided, that the Company shall not be liable under this clause
(iii) to the extent that it is determined in a final judgment by a court of
competent jurisdiction that such loss, claim, damage, liability or expense
resulted directly from such acts or failures to act undertaken or omitted to be
taken by such person through its gross negligence or willful misconduct) except
insofar as the same are caused by or contained in any information with respect
to any Stockholder furnished in writing to the Company by the Stockholder
expressly for use therein or by the Stockholder's failure to deliver to a
prospective purchaser a copy of the registration statement or prospectus or any
amendments or supplements thereto after the Company has furnished the
Stockholder with a sufficient number of copies of the same.
(ii) In connection with any registration in which the
Stockholders are participating, the Stockholders will furnish to the Company in
writing such information with respect to it as the Company reasonably requests
for use in connection with any such registration statement, prospectus or
preliminary prospectus and each such Stockholder, severally and not jointly,
agrees to indemnify, to the full extent permitted by law, the Company, its
directors and officers and each person who controls the Company (within the
meaning of the Securities Act) and, in connection with an underwritten offering,
each underwriter, its directors and officers and each person who controls the
underwriters (within the meaning of the Securities Act) against any losses,
claims, damages, liabilities and expenses (including reasonable attorneys' fees
and disbursements) caused by (i) any untrue or alleged untrue statement of a
material fact contained in any registration statement, prospectus or preliminary
prospectus (including any amendment or supplement thereto) or (ii) any omission
or alleged omission to state therein a material fact required to be stated
therein or necessary to make the statements therein, in the light of the
circumstances under which they were made, not misleading, or (iii) any act or
failure to act or any alleged act or alleged failure to act by any such person
in connection with, or relating in any manner to, the offering contemplated by
such registration statement, prospectus or preliminary prospectus (including any
amendment or supplement thereto), and which is included as part of or referred
to in any loss, claim, damage, liability or expense arising out of or based upon
matters covered by clause (i) or (ii) above (provided, that
8
<PAGE>
the Stockholder shall not be liable under this clause (iii) to the extent that
it is determined in a final judgment by a court of competent jurisdiction, that
such loss, claim, damage, liability or expense resulted directly from such acts
or failures to act undertaken or omitted to be taken by such person through its
gross negligence or willful misconduct) to the extent, but only to the extent,
that such untrue statement or omission is contained in any information with
respect to any Stockholder so furnished in writing by the Stockholder expressly
for use therein.
(iii) Any person entitled to indemnification hereunder
agrees to give prompt written notice to the indemnifying party after the receipt
by such person of any written notice of the commencement of any action, suit,
proceeding or investigation or threat thereof made in writing for which such
person will claim indemnification or contribution pursuant to this Agreement
and, unless in the reasonable judgment of such indemnified party a conflict of
interest may exist between such indemnified party and indemnifying party with
respect to such claim, permit the indemnifying party to assume the defense of
such claim with counsel reasonably satisfactory to such indemnified party. If
the indemnifying party is not entitled to, or elects not to, assume the defense
of a claim, it will not be obligated to pay the fees and expenses of more than
one counsel with respect to such claim, unless in the reasonable judgment of any
indemnified party a conflict of interest may exist between such indemnified
party and any other of such indemnified parties with respect to such claim, in
which event the indemnifying party shall be obligated to pay the fees and
expenses of such additional counsel or counsels. The indemnifying party will not
be subject to any liability for any settlement made without its consent.
(iv) If the indemnification provided for in this Section
5(c)(5) from the indemnifying party is unavailable to an indemnified party
hereunder in respect of any losses, claims, damages, liabilities or expenses
referred to therein, then the indemnifying party, in lieu of indemnifying such
indemnified party, shall contribute to the amount paid or payable by such
indemnified party as a result of such losses, claims, damages, liabilities or
expenses in such proportion as is appropriate to reflect the relative fault of
the indemnifying party and indemnified parties in connection with the actions
which resulted in such losses, claims, damages, liabilities or expenses, as well
as any other relevant equitable considerations. The relative fault of such
indemnifying party and indemnified parties shall be determined by reference to,
among other things, whether any action in question, including any untrue or
alleged untrue statement of a material fact or omission or alleged omission to
state a material fact, has been made by, or relates to information supplied by,
such indemnifying party or indemnified parties, and the parties' relative
intent, knowledge, access to information and opportunity to correct or prevent
such action. The amount paid or payable by a party as a result of the losses,
claims, damages, liabilities and expenses referred to above shall be deemed to
include, subject to the limitations set forth in Section 5(c)(5)(iii), any legal
or other fees or expenses reasonably incurred by such other party in connection
with any investigation or proceeding.
The parties hereto agree that it would not be just and equitable if
contribution pursuant to this Section 5(c)(5)(iv) were determined by pro rata
allocation or by any other method of allocation which does not take into account
the equitable considerations referred to in the immediately preceding paragraph.
No person guilty of fraudulent misrepresentation
9
<PAGE>
(within the meaning of Section 11(f) of the Securities Act) shall be entitled to
contribution from any person who was not guilty of such fraudulent
misrepresentation.
If indemnification is available under this Section 5(c)(5), the
indemnifying parties shall indemnify the indemnified party to the full extent
provided in Sections 5(c)(5)(i) and 5(c)(5)(ii) without regard to the relative
fault of said indemnifying party or indemnified party or any other equitable
consideration provided for in this Section 5(c)(5)(iv).
6. Management Services. At the Closing, the Company, and Castle
Harlan, Inc. are concurrently entering into a management agreement.
7. Termination.
(a) Termination as to Stockholder. This Agreement shall terminate
as to any Stockholder at such time as the Stockholder shall not hold any Company
Securities; provided, however, that the provisions of this Agreement shall
continue in effect for the purpose of enforcing all obligations and undertakings
having theretofore become operative.
(b) Termination as to Securities. This Agreement shall terminate
as to any particular shares when (i) a registration statement with respect to
the sale of such shares shall have become effective under the Securities Act and
such shares shall have been disposed of in accordance with such registration
statement, (ii) they shall have been distributed to the public pursuant to Rule
144 (or any successor provision) or to a transferee in any transaction pursuant
to Rule 144A (or any successor provision) under the Securities Act, (iii) they
shall have been otherwise transferred, and subsequent disposition of them shall
not require registration or qualification of them under the Securities Act or
any state securities or blue sky law then in full force and effect or (iv) they
shall have ceased to be outstanding.
(c) Termination of Agreement. This Agreement shall remain in
effect until the earlier to occur of (i) the Agreement being terminated as to
all Company Securities and Stockholders pursuant to paragraphs (a) and (b) of
this Section 7, (ii) except for the provisions of Section 5, at a time when CHP,
Dresdner and Offshore (together with their affiliates) shall cease to own more
than 15% of the total number of shares of Common Stock of the Company then
outstanding or (iii) except for the provisions of Section 5 hereof, upon the
consummation of an underwritten initial public offering of the securities of the
Company.
8. Further Action. Each party hereto agrees to execute and deliver
any instrument and take any action that may reasonably be requested by any other
party for the purpose of effectuating the provisions of this Agreement.
9. Assignment. Except as otherwise provided in this Section 9 or in
Section 4 hereof, no right under this Agreement shall be assignable and any
attempted assignment in violation of this provision shall be void. The Company
shall have the right to assign its rights and obligations hereunder to any
successor entity (including any entity acquiring substantially all of the assets
of the Company), whereupon references herein to the Company shall be deemed to
be to such successor. This Agreement, and the rights and obligations of the
parties hereunder,
10
<PAGE>
shall be binding upon and inure to the benefit of any and all transferees of
Company Securities subject hereto (except where expressly provided herein that
such transferred Common Stock and Preferred Stock is free of all rights and
restrictions imposed hereby), the successors, permitted assigns, personal
representatives and all other legal representatives, in whatsoever capacity, by
operation of law or otherwise, of the parties hereto, in each case with the same
force and effect as if the foregoing persons were named herein as parties
hereto.
10. Enforcement. The parties hereto recognize that irreparable damage
will result in the event that this Agreement shall not be specifically enforced.
If any dispute arises concerning the disposition of any Company Securities
hereunder, the parties hereto agree that an injunction may be issued restraining
such disposition pending determination of such controversy and that no bond or
other security may be required in connection therewith. If any dispute arises
concerning the right or obligation of the Stockholders or the Company to
purchase or sell any Company Securities subject hereto, such right or obligation
shall be enforceable by a decree of specific performance. Such remedies shall,
however, not be exclusive and shall be in addition to any other remedy which the
parties may have.
11. Miscellaneous Provisions.
(a) Applicable Law. This Agreement shall be governed by, and
construed and enforced in accordance with and subject to, the laws of the State
of Delaware applicable to agreements made and to be performed entirely within
such State.
(b) Notices. Any notice or other communication required or which
may be given hereunder shall be in writing and shall be delivered personally,
telecopied with confirmed receipt, sent by certified, registered, or express
mail, postage prepaid, or sent by a national next-day delivery service to the
parties at the following addresses or at such other addresses as shall be
specified by the parties by like notice, and shall be deemed given when so
delivered personally or telecopied, or if mailed, 2 days after the date of
mailing, or, if by national next-day delivery service, on the day after delivery
to such service as follows:
(i) if to the Company, to it:
c/o Castle Harlan, Inc.
150 East 58th Street
37th Floor
New York, New York 10155
Telecopier No.: 212-207-8042
Attention: Mr. David B. Pittaway
11
<PAGE>
with a copy to:
Schulte Roth & Zabel LLP
900 Third Avenue
New York, New York 10022
Telecopier No.: 212-593-5955
Attention: Janet C. Walden, Esq.
(ii) if to any Stockholder to him, her or it at his, her or
its address set forth on Exhibit B hereto.
(c) Entire Agreement; Amendments and Waivers. This Agreement sets
forth the entire understanding of the parties with respect to the subject matter
hereof, subject to any written agreements that may exist as between certain of
the Stockholders with respect to acquisition or disposition of the Company
Securities on a pari passu basis or otherwise. The failure of any party to seek
redress for the violation of or to insist upon the strict performance of any
term of this Agreement shall not constitute a waiver of such term and such party
shall be entitled to enforce such term without regard to such forbearance. This
Agreement may be amended, each party hereto may take any action herein
prohibited or omit to take action herein required to be performed by it, and any
breach of or compliance with any covenant, agreement, warranty or representation
may be waived, only by the written consent or written waiver of the Company and
the Stockholders then owning at least 51% of the Common Stock then owned by all
of the Stockholders, and then such consent or waiver shall be effective only in
the specific instance and for the specific purpose for which given; provided,
however, that the consent of a Stockholder shall be required if any such
amendment or waiver will have a material adverse effect on the rights or
interests of such Stockholder.
(d) Severability. If any term, provision, covenant or restriction
of this Agreement, or any part thereof, is held by a court of competent
jurisdiction or any foreign federal, state, county or local government or any
other governmental, regulatory or administrative agency or authority to be
invalid, void, unenforceable or against public policy for any reason, the
remainder of the terms, provisions, covenants and restrictions of this Agreement
shall remain in full force and effect and shall in no way be affected, impaired
or invalidated.
(e) Counterparts. This Agreement may be executed in two or more
counterparts, each of which shall be deemed an original but all of which
together shall constitute one and the same instrument.
(f) Headings. The headings in this Agreement are for reference
purposes only and shall not in any way affect the meaning or interpretations of
the Agreement.
12
<PAGE>
IN WITNESS WHEREOF, the undersigned have executed this Agreement as of
the date first set forth above.
STOCKHOLDERS:
CASTLE HARLAN PARTNERS II, L.P.
By: Castle Harlan, Inc.,
its Investment Manager
By: /s/ David B. Pittaway
--------------------------------------
Name: David B. Pittaway
DRESDNER BANK AG, GRAND CAYMAN BRANCH
By: Castle Harlan, Inc.,
its Investment Manager
By: /s/ David B. Pittaway
--------------------------------------
Name: David B. Pittaway
CASTLE HARLAN OFFSHORE
PARTNERS, L.P.
By: Castle Harlan, Inc.,
its Investment Manager
By: /s/ David B. Pittaway
--------------------------------------
Name: David B. Pittaway
COMPANY:
SCHOLASTIC BRANDS, INC.
By: /s/ David B. Pittaway
--------------------------------------
Name: David B. Pittaway
13
<PAGE>
INSTRUMENT OF ACCESSION
The undersigned, Branford Castle Holdings, Inc., as a condition
precedent to becoming the owner or holder of record of (1) Common Stock Purchase
Warrants exercisable for One Hundred Forty-Two and 824/1000 (142.824) shares of
Common Stock, par value $.01 per share ("Common Stock"), of Commemorative
Brands, Inc., a Delaware corporation formerly known as Scholastic Brands, Inc.
(the "Company"), (2) one thousand eight hundred ninety-four (1894) shares of
Common Stock of the Company, (3) five hundred five and 930/1000 (505.930) shares
of Series A Preferred Stock, par value $.01 per share, of the Company and (4)
one thousand eight hundred ninety-four (1894) shares of Series B Preferred
Stock, par value $.01 per share, of the Company, hereby agrees to become a
Stockholder, party to and bound by that certain Subscription Agreement dated as
of December 16, 1996, by and among the Company and certain stockholders of the
Company. This Instrument of Accession shall take effect and shall become an
integral part of the said Subscription Agreement immediately upon execution and
delivery to the Company of this Instrument.
IN WITNESS WHEREOF, this INSTRUMENT OF ACCESSION has been duly
executed by or on behalf of the undersigned as of the date below written.
Signature: BRANFORD CASTLE
HOLDINGS, INC.
By: /s/ John Castle
----------------------------------
Address: ___________________________
___________________________
___________________________
Date: December 17, 1996
Accepted:
By: /s/ Jeffrey Brennan
------------------------------
Date: December 17, 1996
<PAGE>
INSTRUMENT OF ACCESSION
The undersigned, Leonard M. Harlan, as a condition precedent
to becoming the owner or holder of record of (1) Common Stock Purchase Warrants
exercisable for seventy-one and 450/1000 (71.450) shares of Common Stock, par
value $.01 per share ("Common Stock"), of Commemorative Brands, Inc., a Delaware
corporation formerly known as Scholastic Brands, Inc. (the "Company"), (2) nine
hundred forty-seven (947) shares of Common Stock of the Company, (3) two hundred
fifty-three and 100/1000 (253.100) shares of Series A Preferred Stock, par value
$.01 per share, of the Company and (4) nine hundred forty-seven (947) shares of
Series B Preferred Stock, par value $.01 per share, of the Company, hereby
agrees to become a Stockholder, party to and bound by that certain Subscription
Agreement dated as of December 16, 1996, by and among the Company and certain
stockholders of the Company. This Instrument of Accession shall take effect and
shall become an integral part of the said Subscription Agreement immediately
upon execution and delivery to the Company of this Instrument.
IN WITNESS WHEREOF, this INSTRUMENT OF ACCESSION has been duly
executed by or on behalf of the undersigned as of the date below written.
Signature: /s/ Leonard M. Harlan
-----------------------------------
Address: c/o Castle Harlan, Inc.
150 East 58th Street
New York, NY 10155
Date: December 17, 1996
Accepted:
By: /s/ Jeffrey H. Brennan
------------------------------
Date: December 17, 1996
<PAGE>
INSTRUMENT OF ACCESSION
The undersigned, David B. Pittaway, as a condition precedent
to becoming the owner or holder of record of (1) no Common Stock Purchase
Warrants exercisable for no shares of Common Stock, par value $.01 per share
("Common Stock"), of Commemorative Brands, Inc., a Delaware corporation formerly
known as Scholastic Brands, Inc. (the "Company"), (2) four hundred sixty-nine
(469) shares of Common Stock of the Company, (3) no shares of Series A Preferred
Stock, par value $.01 per share, of the Company and (4) four hundred sixty-nine
(469) shares of Series B Preferred Stock, par value $.01 per share, of the
Company, hereby agrees to become a Stockholder, party to and bound by that
certain Subscription Agreement dated as of December 16, 1996, by and among the
Company and certain stockholders of the Company. This Instrument of Accession
shall take effect and shall become an integral part of the said Subscription
Agreement immediately upon execution and delivery to the Company of this
Instrument.
IN WITNESS WHEREOF, this INSTRUMENT OF ACCESSION has been duly
executed by or on behalf of the undersigned as of the date below written.
Signature: /s/ David B. Pittaway
-----------------------------------
Address: c/o Castle Harlan, Inc.
150 East 58th Street
New York, NY 10155
Date: December 17, 1996
Accepted:
By: /s/ Jeffrey H. Brennan
------------------------------
Date: December 17, 1996
<PAGE>
INSTRUMENT OF ACCESSION
The undersigned, David H. Chow, as a condition precedent to
becoming the owner or holder of record of (1) no Common Stock Purchase Warrants
exercisable for no shares of Common Stock, par value $.01 per share ("Common
Stock"), of Commemorative Brands, Inc., a Delaware corporation formerly known as
Scholastic Brands, Inc. (the "Company"), (2) two hundred thirty-four (234)
shares of Common Stock of the Company, (3) no shares of Series A Preferred
Stock, par value $.01 per share, of the Company and (4) two hundred thirty-four
(234) shares of Series B Preferred Stock, par value $.01 per share, of the
Company, hereby agrees to become a Stockholder, party to and bound by that
certain Subscription Agreement dated as of December 16, 1996, by and among the
Company and certain stockholders of the Company. This Instrument of Accession
shall take effect and shall become an integral part of the said Subscription
Agreement immediately upon execution and delivery to the Company of this
Instrument.
IN WITNESS WHEREOF, this INSTRUMENT OF ACCESSION has been duly
executed by or on behalf of the undersigned as of the date below written.
Signature: /s/ David H. Chow
----------------------------------
Address: c/o Castle Harlan, Inc.
150 East 58th St.
New York, NY 10155
Date: December 17, 1996
Accepted:
By: /s/ Jeffrey H. Brennan
--------------------------------
Date: December 17, 1996
EXHIBIT 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our
report and to all references to our firm included in or made a part of this
registration statement.
Houston, Texas
March 31, 1997
EXHIBIT 23.2
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our
report and to all references to our firm included in or made a part of this
registration statement.
Houston, Texas
March 31, 1997
FORM OF LETTER OF TRANSMITTAL EXHIBIT 99.1
THE EXCHANGE OFFER WILL EXPIRE AT 5 P.M., EASTERN STANDARD
TIME, ON ________________________, 1996, UNLESS EXTENDED (THE "EXPIRATION
DATE"). TENDERS MAY BE WITHDRAWN PRIOR TO 5 P.M., EASTERN STANDARD TIME, ON THE
EXPIRATION DATE.
ISSUER:
COMMEMORATIVE BRANDS, INC.
7211 Circle S Road
Austin, Texas 78745
Telephone: (512) 444-0571
Attention: Jeffrey H. Brennan, President and Chief Executive Officer
LETTER OF TRANSMITTAL
FOR 11% SENIOR SUBORDINATED NOTES DUE 2007
EXCHANGE AGENT:
MARINE MIDLAND BANK
By Facsimile:
(212) 658-2298
Attention: Corporate Trust Operations
Confirm by telephone:
(212) 658-6524
By Registered or Certified Mail:
Marine Midland Bank
140 Broadway, A Level
New York, New York 10005-1180
Attention: Corporate Trust Operations
By Hand:
Marine Midland Bank
140 Broadway, A Level
New York, New York 10005-1180
Attention: Corporate Trust Operations
By Overnight Courier:
Marine Midland Bank
140 Broadway, A Level
New York, New York 10005-1180
Attention: Corporate Trust Operations
DELIVERY OF THIS INSTRUMENT TO AN ADDRESS OTHER THAN AS SET FORTH ABOVE
DOES NOT CONSTITUTE A VALID DELIVERY.
-1-
<PAGE>
The undersigned acknowledges receipt of the Prospectus dated _________
__, 1997 (the "Prospectus") of Commemorative Brands, Inc. (the "Company" or the
"Issuer") and this Letter of Transmittal for 11% Senior Subordinated Notes Due
2007, which may be amended from time to time (this "Letter"). The Prospectus and
Letter together constitute the Issuer's offer to exchange $1,000 in principal
amount of its 11% Senior Subordinated Notes Due 2007 ("Exchange Notes"), for
each $1,000 in principal amount of its outstanding 11% Senior Subordinated Notes
Due 2007 that were issued and sold in a transaction exempt from registration
under the Securities Act of 1933, as amended ("Initial Notes").
The undersigned has completed, executed and delivered this Letter to
indicate the action he or she desires to take with respect to the Exchange
Offer.
All holders of Initial Notes who wish to tender their Initial Notes
must, prior to the Expiration Date: (1) complete, sign, date and mail or
otherwise deliver this Letter to the Exchange Agent, in person or to the address
set forth above; and (2) tender his or her Initial Notes or, if a tender of
Initial Notes is to be made by book-entry transfer to the account maintained by
the Exchange Agent at The Depository Trust Company (the "Book-Entry Transfer
Facility"), confirm such book-entry transfer (a "Book-Entry Confirmation"), in
each case in accordance with the procedures for tendering described in the
Instructions to this Letter. Holders of Initial Notes whose certificates are not
immediately available, or who are unable to deliver their certificates or
Book-Entry Confirmation and all other documents required by this Letter to be
delivered to the Exchange Agent on or prior to the Expiration Date, must tender
their Initial Notes according to the guaranteed delivery procedures set forth
under the caption "The Exchange Offer - Tender Procedure" in the Prospectus.
(See Instruction 1).
The Instructions included with this Letter must be followed in their
entirety. Questions and requests for assistance or for additional copies of the
Prospectus or this Letter may be directed to the Exchange Agent, at the address
listed above, or Jeffrey H. Brennan, President and Chief Executive Officer of
the Company, at (512) 444-0571, 7211 Circle S Road, Austin, Texas 78745.
-2-
<PAGE>
PLEASE READ THE ENTIRE LETTER OF TRANSMITTAL, INCLUDING
THE INSTRUCTIONS TO THIS LETTER, CAREFULLY
BEFORE CHECKING ANY BOX BELOW
Capitalized terms used in this Letter and not defined herein shall have
the respective meanings ascribed to them in the Prospectus.
List in Box 1 below the Initial Notes of which you are the holder. If
the space provided in Box 1 is inadequate, list the certificate numbers and
principal amount of Initial Notes on a separate SIGNED schedule and affix that
schedule to this Letter.
BOX 1
TO BE COMPLETED BY ALL TENDERING HOLDERS
<TABLE>
<CAPTION>
Name(s) and Address(es) of Principal Amount of
Registered Holder(s)
(Please Fill in if Blank) Certificate Principal Amount of Initial Notes
Numbers(s) (1) Initial Notes Tendered (2)
- ---------------------------------- ------------------------------- -------------------------------- ------------------------------
<S> <C>
Totals:
</TABLE>
(1) Need not be completed if Initial Notes are being tendered by book-entry
transfer.
(2) Unless otherwise indicated, the entire principal amount of Initial
Notes represented by a certificate or Book-Entry Confirmation delivered
to the Exchange Agent will be deemed to have been tendered.
-3-
<PAGE>
Ladies and Gentlemen:
Upon the terms and subject to the conditions of the Exchange
Offer, the undersigned tenders to the Issuer the principal amount of Initial
Notes indicated above. Subject to, and effective upon, the acceptance for
exchange of the Initial Notes tendered with this Letter, the undersigned hereby
exchanges, assigns and transfers to, or upon the order of, the Issuer all right,
title and interest in and to the Initial Notes tendered.
The undersigned hereby irrevocably constitutes and appoints
the Exchange Agent as the undersigned's agent and attorney-in-fact to cause the
Initial Notes to be assigned, transferred and exchanged. The undersigned
represents and warrants that it has full power and authority to tender,
exchange, assign and transfer the Initial Notes and to acquire Exchange Notes
issuable upon the exchange of such tendered Initial Notes, and that, when the
same are accepted for exchange, the Issuer will acquire good and unencumbered
title to the tendered Initial Notes, free and clear of all liens, restrictions,
charges and encumbrances and not subject to any adverse claim. The undersigned
also warrants that it will, upon request, execute and deliver any additional
documents deemed by the Issuer to be necessary or desirable to complete the
exchange, assignment and transfer of tendered Initial Notes or transfer
ownership of such Initial Notes on the account books maintained by a book-entry
transfer facility. The undersigned further agrees that acceptance of any
tendered Initial Notes by the Issuer and the issuance of Exchange Notes in
exchange therefore shall constitute performance in full by the Issuer of certain
of its obligations under the Registration Rights Agreement. All authority
conferred by the undersigned will survive the death or incapacity of the
undersigned and every obligation of the undersigned shall be binding upon the
heirs, legal representatives, successors, assigns, executors and administrators
of such undersigned.
The undersigned hereby certifies that it is not an "affiliate"
of the Issuer within the meaning of Rule 405 under the Securities Act and that
it is acquiring the Exchange Notes offered hereby in the ordinary course of such
undersigned's business and that such undersigned has no arrangement or
understanding with any person to participate in the distribution of such
Exchange Notes. The undersigned hereby acknowledges that it is not engaged in,
and does not intend to engage in, a distribution of Exchange Notes. The
undersigned, if it is a broker-dealer holding Initial Notes acquired for its own
account, hereby acknowledges that it will deliver a prospectus meeting the
requirements of the Securities Act in connection with any resale of such
Exchange Notes. By so acknowledging and by delivering a prospectus, a
broker-dealer will not be deemed to admit that it is an "underwriter" within the
meaning of the Securities Act. The Prospectus, as it may be amended or
supplemented from time to time, may be used by a broker-dealer in connection
with resales of Exchange Notes received in exchange for Initial Notes where such
Initial Notes were acquired by such broker-dealer as a result of market-making
activities or other trading activities. The Issuer will make the Prospectus
available to any broker-dealer for use in connection with any such resale for a
period of one year from the date in which the Registration Statement is a part
is declared effective.
The undersigned understands that the Issuer may accept the
undersigned's tender by delivering written notice of acceptance to the Exchange
Agent, at which time the undersigned's right to withdraw such tender will
terminate.
All authority conferred or agreed to be conferred by this
Letter shall survive the death or incapacity of the undersigned, and every
obligation of the undersigned under this Letter shall be binding upon the
undersigned's heirs, personal representatives, successors and assigns. Tenders
may be withdrawn only in accordance with the procedures set forth in the
Instructions contained in this Letter.
-4-
<PAGE>
Unless otherwise indicated under "Special Delivery
Instructions" below, the Exchange Agent will deliver Exchange Notes (and, if
applicable, a certificate for any Initial Notes not tendered but represented by
a certificate also encompassing Initial Notes which are tendered) to the
undersigned at the address set forth in Box 1.
-5-
<PAGE>
The undersigned acknowledges that the Exchange Offer is
subject to the more detailed terms set forth in the Prospectus and, in case of
any conflict between the terms of the Prospectus and this Letter, the Prospectus
shall prevail.
[ ] CHECK HERE IF TENDERED INITIAL NOTES ARE BEING DELIVERED BY
BOOK-ENTRY TRANSFER MADE TO THE ACCOUNT MAINTAINED BY THE EXCHANGE
AGENT WITH THE BOOK-ENTRY TRANSFER FACILITY AND COMPLETE THE FOLLOWING:
Name of Tendering Institution:________________________________________
Account Number:_______________________________________________________
Transaction Code Number:______________________________________________
[ ] CHECK HERE IF TENDERED INITIAL NOTES ARE BEING DELIVERED PURSUANT TO
A NOTICE OF GUARANTEED DELIVERY PREVIOUSLY SENT TO THE EXCHANGE AGENT
AND COMPLETE THE FOLLOWING:
Name(s) of Registered Owner(s):_______________________________________
Date of Execution of Notice of Guaranteed Delivery:___________________
Window Ticket Number (if available):__________________________________
Name of Institution which Guaranteed Delivery:________________________
-6-
<PAGE>
PLEASE READ THE ACCOMPANYING INSTRUCTIONS CAREFULLY
BOX 2
PLEASE SIGN HERE
WHETHER OR NOT INITIAL NOTES ARE BEING
PHYSICALLY TENDERED HEREBY
X _________________________________________________ ______________
X _________________________________________________ ______________
SIGNATURE(S) OF OWNER(S) OR AUTHORIZED DATE
SIGNATORY
Area Code and Telephone Number:________________________________________________
This box must be signed by registered holder(s) of Initial Notes as their
name(s) appear(s) on certificates(s) for Initial Notes, or by person(s)
authorized to become registered holder(s) by endorsement and documents
transmitted with this Letter. If signature is by a trustee, executor,
administrator, guardian, officer or other person acting in a fiduciary or
representative capacity, such person must set forth his or her full title below.
(See Instruction 3)
Name(s)________________________________________________________________________
_______________________________________________________________________________
(PLEASE PRINT)
Capacity_______________________________________________________________________
Address________________________________________________________________________
_____________________________________________________________(INCLUDE ZIP CODE)
Signature(s) Guaranteed _____________________________
by an Eligible Institution: (AUTHORIZED SIGNATURE)
(If required by Instruction 3) _____________________________
(TITLE)
_____________________________
(NAME OF FIRM)
-7-
<PAGE>
BOX 3
TO BE COMPLETED BY ALL TENDERING HOLDERS
PAYOR'S NAME: MARINE MIDLAND BANK
<TABLE>
<S> <C> <C>
SUBSTITUTE PART 1 - Please provide your TIN in the Social Security Number or
FORM W-9 space at right and certify by signing and Employer Identification Number
DEPARTMENT OF dating below. _______________________________
THE TREASURY
INTERNAL REVENUE
SERVICE
=====================================================================================
PAYOR'S REQUEST PART 2 - Check the box if you are NOT subject to backup withholding
under the provisions FOR TAXPAYER of Section 2406(a) (1) (C) of the
Internal Revenue Code because (1) you have not been IDENTIFICATION notified that
you are subject to back-up withholding as a result of failure to report all
NUMBER (TIN) interest or dividends or (2) the Internal Revenue Service has
notified you that you are no longer subject to back-up withholding.
[ ]
=====================================================================================
CERTIFICATION - UNDER THE PENALTIES OF PERJURY, I
CERTIFY THAT THE INFORMATION PROVIDED ON THIS FORM IS
TRUE, CORRECT, AND COMPLETE.
SIGNATURE____________________________DATE_______________
=====================================================================================
PART 3 - Check if Awaiting TIN [ ]
</TABLE>
-8-
<PAGE>
BOX 4
To be completed ONLY if certificates for Initial Notes in a principal amount not
exchanged, or Exchange Notes, are to be issued in the name of someone other than
the person whose signature appears in Box 2, or if Initial Notes delivered by
book-entry transfer which are not accepted for exchange are to be returned by
credit to an account maintained at the Book-Entry Transfer Facility other than
the account indicated above.
Issue and deliver: (check appropriate boxes)
[ ] Initial Notes not tendered
[ ] Exchange Notes to: Name______________________________________
(PLEASE PRINT)
Address___________________________________
__________________________________________
Please complete the Substitute Form W-9 at Box 3
_________________________________________________
(TAX I.D. or SOCIAL SECURITY NUMBER)
BOX 5
SPECIAL DELIVERY INSTRUCTIONS
(SEE INSTRUCTIONS 3 AND 4)
To be completed ONLY if certificates for Initial Notes in a principal amount not
exchanged, or Exchange Notes, are to be sent to someone other than the person
whose signature appears in Box 2 or to an address other than that shown in Box
1.
Deliver: (check appropriate boxes)
[ ] Initial Notes not tendered
[ ] Exchange Notes to: Name______________________________________
(PLEASE PRINT)
Address___________________________________
__________________________________________
-9-
<PAGE>
INSTRUCTIONS
FORMING PART OF THE TERMS AND
CONDITIONS OF THE EXCHANGE OFFER
1. DELIVERY OF THIS LETTER AND CERTIFICATES. Certificates for
Initial Notes or a Book-Entry Confirmation, as the case may be, as well as a
properly completed and duly executed copy of this Letter and any other documents
required by this Letter, must be received by the Exchange Agent at one of its
addresses set forth herein on or before the Expiration Date. The method of
delivery of this Letter, certificates for Initial Notes or a Book-Entry
Confirmation, as the case may be, and any other required documents is at the
election and risk of the tendering holder, but except as otherwise provided
below, the delivery will be deemed made when actually received by the Exchange
Agent. If delivery is by mail, the use of registered mail with return receipt
requested, properly insured, is suggested.
Holders whose Initial Notes are not immediately available or
who cannot deliver their Initial Notes or Book-Entry Confirmation, as the case
may be, and all other required documents to the Exchange Agent before the
Expiration Date may tender their Initial Notes pursuant to the guaranteed
delivery procedures set forth in the Prospectus. Pursuant to such procedure: (i)
tender must be made by or through an Eligible Institution (as defined in the
Prospectus under the caption "The Exchange Offer Tender Procedure"); (ii) on or
prior to the Expiration Date, the Exchange Agent must have received from the
Eligible Institution a properly completed and duly executed Notice of Guaranteed
Delivery by letter, telegram or facsimile transmission (receipt confirmed by
telephone and an original delivered by guaranteed overnight courier) (x) setting
forth the name and address of the holder, the names in which the Initial Notes
are registered and, if possible, the certificate numbers of the Initial Notes to
be tendered, (y) stating that the tender is being made thereby and (z)
guaranteeing that, within three New York Stock Exchange trading dates after the
date of execution of such Notice of Guaranteed Delivery by an Eligible
Institution, this Letter together with the Initial Notes, in proper form for
transfer (or a confirmation of book-entry transfer of such Initial Notes into
the Exchange Agent's account at the book-entry transfer facility and any other
documents required by this Letter will be deposited by the Eligible Institution
with the Exchange Agent; and (iii) the certificates for all tendered Initial
Notes or a Book-Entry Confirmation, as the case may be, as well as all other
documents required by this Letter, must be received by the Exchange Agent within
five New York Stock Exchange trading days after the date of execution of such
Notice of Guaranteed Delivery, all as provided in the Prospectus under the
caption "The Exchange Offer - Tender Procedure".
All questions as to the validity, form, eligibility (including
time of receipt) and acceptance for exchange of any tender of Initial Notes will
be determined by the Issuer, whose determination will be final and binding. The
Issuer reserves the absolute right to reject any Initial Notes not properly
tendered or the acceptances for exchange of which may, in the opinion of the
Issuer's counsel, be unlawful. The Issuer also reserves the absolute right to
waive any of the conditions of the Exchange Offer or any defect or irregularity
in the tender of any Initial Notes. Unless waived, any defects or irregularities
in connection with tenders of Initial Notes for exchange must be cured within
such reasonable period of time as the Issuer shall determine. None of the
Issuer, the Exchange Agent or any other person will be under any duty to give
notification of any defects or irregularities in tenders or incurs any liability
for failure to give any such notification. Tenders will not be deemed to be made
until such irregularities have been cured or waived.
All tendering holders, by execution of this Letter, waive any
right to receive notice of acceptance of their Initial Notes.
-10-
<PAGE>
2. PARTIAL TENDERS; WITHDRAWALS. If less than the entire
principal amount of any Initial Note evidenced by a submitted certificate or a
Book-Entry Confirmation is tendered, the tendering holder must fill in the
principal amount tendered in the fourth column in Box 1 above. All of the
Initial Notes represented by a Book-Entry Confirmation delivered to the Exchange
Agent will be deemed to have been tendered unless otherwise indicated. A
certificate for Initial Notes not tendered will be sent to the holder, unless
otherwise provided in Box 5, as soon as practicable after the Expiration Date,
in the event that less than the entire principal amount of Initial Notes
represented by a submitted certificate is tendered (or, in the case of Initial
Notes tendered by book-entry transfer, such non-exchanged Initial Notes will be
credited to an account maintained by the holder with the Book-Entry Transfer
Facility).
If not yet accepted, a tender pursuant to the Exchange Offer
may be withdrawn prior to the Expiration Date. To be effective with respect to
the tender of Initial Notes, a notice of withdrawal must: (i) be received by the
Exchange Agent at its address set forth in this Letter and, with respect to a
facsimile transmission, must be confirmed by telephone and an original delivered
by guaranteed overnight delivery, before the Issuer notifies the Exchange Agent
that it has accepted the tender of Initial Notes pursuant to the Exchange Offer;
(ii) specify the person named in this Letter as having tendered Initial Notes to
be withdrawn; (iii) contain the certificate numbers of the Initial Notes to be
withdrawn and the principal amount of Initial Notes to be withdrawn, (iii) a
statement that the holder of the Initial Notes to be withdrawn is withdrawing
his, her or its election to have such Initial Notes exchanged, (iv) the name of
the registered Holder of the Initial Notes to be withdrawn and (v) be signed by
the holder in the same manner as the original signature on this Letter
(including any required signature guarantees) or be accompanied by evidence
satisfactory to the Company that the person withdrawing the tender has succeeded
to the beneficial ownership of the Initial Notes being withdrawn. The Exchange
Agent will return the properly withdrawn Initial Notes promptly following
receipt of notice of withdrawal. If Initial Notes have been tendered pursuant to
the procedure for book-entry transfer, any notice of withdrawal must specify the
name and number of the account at the book-entry transfer facility procedure.
All Questions as to the validity of notices of withdrawal, including time of
receipt, will be determined by the Issuer, and such determination will be final
and binding on all parties.
3. SIGNATURES ON THIS LETTER; ASSIGNMENTS; GUARANTEE OF
SIGNATURES. If this Letter is signed by the holder(s) of Initial Notes tendered
hereby, the signature must correspond with the name(s) as written on the face of
the certificate(s) for such Initial Notes, without alteration, enlargement or
any change whatsoever.
If any of the Initial Notes tendered hereby are owned by two
or more joint owners, all owners must sign this Letter. If any tendered Initial
Notes are held in different names on several certificates, it will be necessary
to complete, sign and submit as many separate copies of this Letter as there are
names in which certificates are held.
If this Letter is signed by the holder of record and (i) the
entire principal amount of the holder's Initial Notes are tendered; and/or (ii)
untendered Initial Notes, if any, are to be issued to the holder of record, then
the holder of record need not endorse any certificates for tendered Initial
Notes, nor provide a separate bond power. In any other case, the holder of
record must transmit a separate bond power with this Letter.
If this Letter or any certificate or assignment is signed by
trustees, executors, administrators, guardians, attorneys-in-fact, officers of
corporations or others acting in a fiduciary or representative capacity, such
persons should so indicate when signing and proper evidence satisfactory to the
Issuer of their authority to so act must be submitted, unless waived by the
Issuer.
-11-
<PAGE>
Signatures on this Letter must be guaranteed by an Eligible
Institution, unless Initial Notes are tendered: (i) by a holder who has not
completed the Box entitled "Special Issuance Instructions" or "Special Delivery
Instructions" on this Letter; or (ii) for the account of an Eligible
Institution. In the event that the signatures in this Letter or a notice of
withdrawal, as the case may be, are required to be guaranteed, such guarantees
must be by an eligible guarantor institution which is a member of The Securities
Transfer Agents Medallion Program (STAMP), The New York Stock Exchanges
Medallion Signature Program (MSP) or The Stock Exchanges Medallion Program
(SEMP) (collectively, "Eligible Institutions"). If Initial Notes are registered
in the name of a person other than the signer of this Letter, the Initial Notes
surrendered for exchange must be endorsed by, or be accompanied by a written
instrument or instruments of transfer or exchange, in satisfactory form as
determined by the Issuer, in its sole discretion, duly executed by the
registered holder with the signature thereon guaranteed by an Eligible
Institution.
4. SPECIAL ISSUANCE AND DELIVERY INSTRUCTIONS. Tendering
holders should indicate, in Box 4 or 5, as applicable, the name and address to
which the Exchange Notes or certificates for Initial Notes not exchanged are to
be issued or sent, if different from the name and address of the person signing
this Letter. In the case of issuance in a different name, the Tax Identification
Number ("TIN") of the person named must also be indicated. Holders tendering
Initial Notes by book-entry transfer may request that Initial Notes not
exchanged be credited to such account maintained at the Book-Entry Transfer
Facility as such holder may designate.
5. TAX IDENTIFICATION NUMBER. Federal income tax law requires
that a holder whose tendered Initial Notes are accepted for exchange must
provide the Exchange Agent (as payor) with his or her correct TIN, which, in the
case of a holder who is an individual, is his or her social security number. If
the Exchange Agent is not provided with the correct TIN, the holder may be
subject to a $50 penalty imposed by the Internal Revenue Service. In addition,
delivery to the holder of the Exchange Notes pursuant to the Exchange Offer may
be subject to back-up withholding. (If withholding results in overpayment of
taxes, a refund may be obtained.) Exempt holders (including, among others, all
corporations and certain foreign individuals) are not subject to these back-up
withholding and reporting requirements. See the enclosed Guidelines for
Certification of Taxpayer Identification Number on Substitute Form W-9 for
additional instructions.
Under federal income tax laws, payments that may be made by
the Issuer on account of Exchange Notes issued pursuant to the Exchange Offer
may be subject to back-up withholding at a rate of 31%. In order to prevent
back-up withholding, each tendering holder must provide his or her correct TIN
by completing the "Substitute Form W-9" referred to above, certifying that the
TIN provided is correct (or that the holder is awaiting a TIN) and that: (i) the
holder has not been notified by the Internal Revenue Service that he or she is
subject to back-up withholding as a result of failure to report all interest or
dividends; or (ii) the Internal Revenue Service has notified the holder that he
or she is no longer subject to back-up withholding; or (iii) in accordance with
the Guidelines, such holder is exempt from back-up withholding. If the Initial
Notes are in more than one name or are not in the name of the actual owner,
consult the enclosed guidelines for information on which TIN to report.
6. TRANSFER TAXES. Holders who tender their Initial Notes for
exchange will not be obligated to pay any transfer taxes in connection
therewith, except that Holders who instruct the Issuer to register Exchange
Notes in the name of, or request that Initial Notes not tendered or tendered but
not accepted in the Exchange Offer be returned to, a person other than the
registered tendering Holder will be responsible for the payment of any
applicable transfer tax thereon.
-12-
<PAGE>
Except as provided in this Instruction 6, it will not be
necessary for transfer tax stamps to be affixed to the certificates listed in
this Letter.
7. WAIVER OF CONDITIONS. The Issuer reserves the right
to amend or waive, in whole or in part, any of the specified conditions in the
Exchange Offer in the case of any Initial Notes tendered, based on the
reasonable judgment of the Issuer.
8. MUTILATED, LOST, STOLEN OR DESTROYED CERTIFICATES.
Any holder whose certificates for Initial Notes have been mutilated, lost,
stolen or destroyed should contact the Exchange Agent at the address indicated
above, for further instructions.
9. REQUESTS FOR ASSISTANCE OR ADDITIONAL COPIES.
Questions relating to the procedure for tendering, as well as requests for
additional copies of the Prospectus or this Letter, may be directed to the
Exchange Agent.
IMPORTANT: This Letter (together with certificates
representing tendered Initial Notes or a Book-Entry Confirmation and all other
required documents) must be received by the Exchange Agent on or before the
Expiration Date (as defined in the Prospectus).
-13-
