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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
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[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE FISCAL YEAR ENDED AUGUST 29, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
COMMEMORATIVE BRANDS, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 13-3915801
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
7211 CIRCLE S ROAD
AUSTIN, TEXAS 78745
(Address of principal executive offices) (Zip Code)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE (512) 444-0571
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
None None
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
None
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period
that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes [ ]No [X].
(Effective December 31, 1997, registrant is no longer subject to such
filing requirements.)
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form
10-K or any amendment to this Form 10-K [X] (Not Applicable)
The aggregate market value of the voting stock held by non-affiliates at
August 29, 1998: $0.00
377,156 shares of common stock
(Number of shares outstanding as of November 27, 1998)
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COMMEMORATIVE BRANDS, INC.
FORM 10-K
FOR THE FISCAL YEAR ENDED AUGUST 29, 1998
INDEX
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PAGE
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PART I
Item 1. Business........................................................................................ 1
Item 2. Properties...................................................................................... 6
Item 3. Legal Proceedings............................................................................... 6
Item 4. Submission of Matters to a Vote of Security Holders............................................. 6
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters........................... 7
Item 6. Selected Financial Data......................................................................... 7
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.......... 12
Item 8. Financial Statements and Supplementary Data.................................................... 20
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure........... 20
PART III
Item 10. Directors and Executive Officers of the Registrant............................................. 21
Item 11. Executive Compensation......................................................................... 23
Item 12. Security Ownership of Certain Beneficial Owners and Management................................. 25
Item 13. Certain Relationships And Related Transactions................................................. 26
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K................................ 27
Signatures..................................................................................... 29
Financial Statements........................................................................... 31
Exhibit Index.................................................................................. 73
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PART I
ITEM 1. BUSINESS
GENERAL
Commemorative Brands, Inc. (the "Company") is a leading manufacturer of
class rings in the United States. The Company also supplies other
graduation-related scholastic products for the high school and college
markets and manufactures and markets recognition and affinity jewelry
designed to commemorate significant events, achievements and affiliations.
On December 16, 1996, the Company completed the acquisitions
("Acquisitions") of substantially all of the scholastic and recognition and
affinity products, assets and business of the ArtCarved ("ArtCarved") operations
of CJC Holdings, Inc. ("CJC") and the Balfour operations ("Balfour") of the L.
G. Balfour Company, Inc., a wholly-owned subsidiary of Town & Country
Corporation ("Town & Country").
The Company was formed as a Delaware corporation in March 1996, by Castle
Harlan Partners II, L.P., a Delaware limited partnership and private equity
investment fund, for the purpose of acquiring ArtCarved and Balfour, and until
December 16, 1996, engaged in no business or activities other than in connection
with the Acquisitions and the financing thereof.
PRODUCTS
Most of the Company's sales (approximately 88% of net sales during fiscal
1998) were derived from the sale of scholastic products, consisting of high
school and college class rings, graduation-related fine paper products and other
graduation accessories. The balance of the Company's sales (approximately 12% of
net sales during fiscal 1998) were derived from the sale of recognition and
affinity products, consisting of jewelry and other products which are designed
to enable purchasers to show affinity or support for their favorite teams, to
show pride in their affiliations and to help companies and other organizations
promote and recognize achievement.
The Company's largest product offerings are its high school and college
class rings. The Company offers over 200 styles of high school class rings
ranging from traditional to highly stylish and fashion oriented. Most of the
Company's high school class rings are available in gold or nonprecious metal,
and most are available with a choice of more than 50 different types of stones
in each of several different cuts. More than 400 designs can be placed on or
under the stone, and emblems of over 100 activities or sports can appear on the
sides. As a result, students have the ability to customize their rings by
designing highly personal and meaningful rings to commemorate their high school
education. During fiscal 1998, the Company's high school class rings generally
ranged in price to the student from approximately $50 for a nonprecious metal
ring up to approximately $500 for a gold ring with precious stones.
The Company's college class rings are similar to the Company's high school
class rings in terms of the variety of customization and personalization options
available. However, college rings tend to be larger than high school rings, and
many more college rings are ordered in 14- and 18-karat gold or with precious or
semiprecious stones. During fiscal 1998, the average selling price of the
college class ring was higher than that of the Company's high school class ring,
with prices generally ranging from approximately $100 for a nonprecious metal
ring to as much as $2,000 for a gold ring with precious stones.
The Company produces and markets a wide array of fine paper products,
including customized graduation announcements, name cards, thank-you stationery,
business cards, diplomas, mini-diplomas, certificates, appreciation covers,
diploma covers, and fine paper accessory items. Through its independent sales
representatives, the Company also markets certain graduation accessories that it
does not produce, such as T-shirts and pendants denoting class year, caps and
gowns, yearbooks, memory books and other scholastic products.
The Company manufactures and markets a variety of recognition and affinity
jewelry for specialty niche markets. The Company's "recognition" products are
designed to commemorate accomplishments and achievements in business, sporting
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or other endeavors, and "affinity" products are designed to express pride in
one's affiliations with a particular organization or support for one's
favorite teams and organizations. The Company's recognition and affinity
jewelry products are grouped into four primary categories. The personalized
family jewelry products consist of rings custom-made to include children's
names, birth dates and birthstones, and personalized jewelry such as
necklaces and bracelets designed to commemorate family celebrations and
holidays such as Mother's Day and Valentine's Day. The Company distinguishes
its personalized family jewelry from that of its competitors through
extensive personalization with family names, dates, crests and events. The
Company's licensed consumer sports jewelry includes rings, pins and pendants
containing team logos, mascots and colors, that are manufactured for fans to
express their support for their favorite professional or amateur sports team.
The Company's professional sports championship jewelry consists of similar
products but is designed for the championship individual or team to
commemorate its championship, accomplishments or achievements. The Company
offers sports championship jewelry for professional sports organizations
(including Super Bowl rings to the San Francisco 49ers in 1995 and World
Series rings to the New York Yankees in 1996) as well as jewelry for
individuals to commemorate American Bowling Congress-sanctioned perfect
games. Corporate recognition and reward jewelry includes jewelry awards for
employees of various corporations.
SALES AND MARKETING
The Company has a national presence in all three primary sales channels
for class rings and scholastic products: (i) the high school in-store sales
channel of independent retail jewelers, retail jewelry chains and mass
merchants; (ii) the high school in-school sales channel of independent sales
representatives; and (iii) the college on-campus sales organization
(primarily on-campus and local bookstores). No single customer of the Company
represented more than 5% of net sales in fiscal 1998.
The Company markets its class rings: (i) in-store to independent and
chain jewelers under the names ARTCARVED-Registered Trademark- and R.
JOHNS-Registered Trademark- and to mass merchants under the names
KEYSTONE-Registered Trademark-, MASTER CLASS RINGS-Registered Trademark- and
CLASS RINGS, LTD.-Registered Trademark-; (ii) in high schools under the
BALFOUR-Registered Trademark- name; and (iii) on college campuses under the
ARTCARVED-Registered Trademark-, BALFOUR-Registered Trademark- and
KEEPSAKE-Registered Trademark- names. The Company markets its
graduation-related fine paper and accessories under the BALFOUR-Registered
Trademark- and ARTCARVED-Registered Trademark- names directly to students
in-school and on college campuses through approximately 100 college
bookstores. The Company markets its licensed consumer sports jewelry and its
corporate recognition and reward jewelry under the BALFOUR-Registered
Trademark- name, its sports championship jewelry under the BALFOUR-Registered
Trademark- and KEEPSAKE-Registered Trademark- names and its personalized
family jewelry under the CELEBRATIONS OF LIFE-Registered Trademark-,
GENERATIONS OF LOVE-Registered Trademark- and NAME-SAKE-Registered
Trademark- names.
The Company is one of the leading suppliers of high school class rings
in the in-store channel based on net sales for fiscal 1998. A predecessor of
the Company introduced the concept of in-store sales for high school class
rings in 1963 as an alternative to traditional in-school sales. The Company
sells its high school class rings in-store to independent jewelry retailers,
large jewelry chains and to mass merchants. The Company was also the first
class ring manufacturer to sell class rings to mass merchants such as
Wal-Mart and Kmart, an area of strong sales growth within the class ring
industry over the last ten years. The Company utilizes distinct product
brands, product line characteristics and pricing for each of the in-store
sales channels. Advertising is particularly important in the in-store market
to inform students and parents that the retailer offers alternatives to the
products sold at school. The Company utilizes a combination of national,
regional, local and co-op print and local direct mail advertising for its
products depending on the type of retailer involved.
The Company also markets its products in high schools using the
BALFOUR-Registered Trademark- brand name through its independent sales
representatives, who offer both class rings and a variety of fine paper
products and graduation accessories directly to high school students. The
Company's in-school sales channel is supported through a sales organization
that consists of approximately 135 regional independent representatives who
work exclusively for the Company with respect to the types of products
represented by the Company's product lines.
The Company compensates its independent sales representatives on a
commission basis, and most independent sales representatives receive a
monthly draw against commissions earned, although all expenses, including
promotional materials made available by the Company, are the responsibility
of the representative. The Company's independent sales representatives
operate under contract with exclusive non-compete arrangements that prohibit
such representatives from selling competing products during the term of their
arrangement with the Company and for a period of time, generally two
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years, thereafter. Depending on geographical size and volume, independent
sales representatives may employ one or more additional sales representatives
in addition to part-time or full-time personnel.
The Company's college class rings are sold under the
ARTCARVED-Registered Trademark- brand name and under the BALFOUR-Registered
Trademark- brand name primarily through on-campus bookstores and, to a lesser
extent, through local bookstores, both of which typically also offer class
rings distributed by one or more of the Company's competitors. The college
bookstores display the Company's products, although approximately 85% of all
orders are taken by the Company's sales representatives at special events
periodically set up at the bookstore or campus student center. College class
ring sales are principally supported by sales promotions with school
newspaper advertising and direct mailings to students and parents. The
Company uses promotions to stimulate sales in the critical back-to-school,
pre-Christmas and pre-graduation periods. The Company differentiates itself
from its competitors through its high quality rings, innovative styles, quick
delivery times and promotional services that attract students to tables
containing product information. Beginning during the fourth quarter of fiscal
1997, the Company began to offer BALFOUR-Registered Trademark- fine paper
products through the more extensive ArtCarved college on-campus sales
channels. At August 29, 1998, BALFOUR-Registered Trademark- fine paper
products, primarily personalized college announcements and name cards, were
being sold in approximately 100 college bookstores.
Recognition and affinity products are sold either (i) to retail outlets
or directly to the group or organization, or (ii) by a combination of field
sales personnel and corporate sales personnel. The Company's
BALFOUR-Registered Trademark- licensed consumer sports jewelry and
CELEBRATIONS OF LIFE-Registered Trademark-, GENERATIONS OF LOVE-Registered
Trademark- and NAME-SAKE-Registered Trademark- personalized family jewelry
are primarily distributed to retail outlets and through merchandise
catalogues. The Company markets its BALFOUR-Registered Trademark- sports
championship jewelry directly to the championship team or organization or its
members and its KEEPSAKE-Registered Trademark- bowling rings directly to
individuals. Corporate recognition and reward programs are developed in
conjunction with corporate clients, who order and purchase products directly
from the Company.
In fiscal l997, the Company introduced the BALFOUR-Registered
Trademark- licensed consumer sports rings to Wal-Mart and, at August 29,
1998, this product line was being sold in more than 2,400 Wal-Mart stores. In
addition, the Company began selling BALFOUR-Registered Trademark- fine paper
products to college bookstores during fiscal 1997 and, at August 29, 1998,
such products were being sold in approximately 100 college bookstores.
INDUSTRY
Management believes there are three national competitors in the sale of
class rings and fine paper products (the Company, Jostens, Inc. and Herff
Jones, Inc.) and numerous regional producers. The class rings and fine paper
markets are highly competitive and numerous alternative suppliers for the
Company's products exist.
Consumers differentiate scholastic products on the basis of price,
quality, marketing and customer service. Customer service is particularly
important in the sale of class rings because of the high degree of
customization and the emphasis on timely delivery. Class rings with different
quality and price points are marketed through different channels and, within
the in-store sales channel, through different retailers.
Scholastic products are sold in retail stores and directly to students
in schools and on college campuses. Management estimates that, historically,
approximately 65% of high school class rings have been sold through the
in-school sales channel. In schools, administrators or student
representatives select the authorized supplier for their school. Suppliers
contact these administrators or student representatives through their sales
forces, which are generally comprised of independent sales representatives
who market products directly to high school students.
In addition to the in-school sales channel, the scholastic product
market is also characterized by a strong in-store distribution channel. In
1963, a predecessor of ArtCarved initiated the use of the in-store sales
channel, and management estimates that this segment represents, historically,
approximately 35% of high school class rings sold. The in-store channel
consists primarily of independent jewelry retailers, large jewelry chains and
mass merchants.
College class rings are sold primarily through on-campus bookstores
and, to a lesser extent, through local bookstores, both of which typically
also offer class rings distributed by one or more of the Company's major
national competitors.
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Historically, on-campus bookstores have been owned and operated by the
colleges and universities; however, during the last several years an
increasing number of campus bookstores have been leased to companies engaged
in retail bookstore operations, primarily Barnes & Noble Bookstores, Inc. and
Follett Corporation. The Company also sells its college class rings in
on-campus bookstores operated by Barnes & Noble Bookstores, Inc. and Follett
Corporation.
The market for the Company's recognition and affinity products is a
broad collection of market niches. It includes championship jewelry for
winners of professional sports championships as well as individual events.
The market for retail affinity products is well developed in the apparel
category but not with respect to non-apparel products (such as the Company's
licensed consumer sports jewelry). Management believes that the demand for
licensed consumer sports jewelry is influenced by trends in the popularity of
professional and amateur sports. An important success factor in the licensed
consumer jewelry business is obtaining the right to use and market a team
name and mascot.
PRODUCTION AND TECHNOLOGY
The Company produces high school and college class rings only upon the
receipt of a customer order and deposit, and each ring is custom
manufactured. The entire production process takes approximately two to eight
weeks from receipt of the customer's order to product shipment, depending on
tooling requirements. Consequently, only a limited amount of finished
products inventory is necessary, reducing the Company's exposure to
fluctuations in the price of the gold material content of its rings and the
Company's investment in working capital.
The Company employs advanced design and manufacturing techniques at its
jewelry manufacturing plants. The use of computer-aided design and
manufacturing equipment, computer integrated manufacturing, cell
manufacturing and the craftsmanship of the Company's highly-skilled jewelers
enable the Company to produce increasingly personalized and high quality
jewelry while maintaining critical delivery schedules.
The Company's fine paper manufacturing and distribution activities are
housed at a 100,000 square-foot facility in Louisville, Kentucky. Each fine
paper product requires a high level of customization and is characterized by
having short production runs. For a typical graduation product order, the
Company's salespeople meet with the next class of graduating seniors to chose
their graduation announcements and related designs in the spring of their
junior year or early fall of their senior year. Designs are chosen and
artwork is produced on the Company's computerized design systems.
RAW MATERIALS
The principal raw materials that the Company purchases are gold and
precious, semiprecious and synthetic stones. The cost (and, with respect to
precious, semiprecious and synthetic stones, the availability) of these
materials are affected by market conditions. Operating results during fiscal
1998 were not materially affected by market volatility. Any material increase
in the price of these raw materials could adversely impact the Company's cost
of sales.
The Company requires significant amounts of gold for the manufacture of
its jewelry. The Company finances the majority of its gold inventory
requirements through borrowings by the Company under its Revolving Credit and
Gold Facilities, described below. Management believes that it has sufficient
availability under its Revolving Credit and Gold Facilities to finance all of
its gold inventory requirements. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations-Liquidity and Capital
Resources" below. The Company reduces its exposure to fluctuations in the
price of gold in several ways. In the Company's in-school sales channel for
the sale of high school class rings, the Company resets its ring prices from
time to time on new ring sales to reflect the then current price of gold.
However, the Company does not have the same flexibility to reset its ring
prices in the in-store and on-campus sales channels for high school and
college rings, respectively, where rings are sold on the basis of seasonal
prices. In either of these two cases, the Company must bear the risk of a
change in the price of gold either from the time the order is placed or from
the time the price is set until the product is shipped. As a result, since
there may be a change in the price of gold during such periods, the Company
may from time to time engage in certain hedging transactions to reduce the
effects of fluctuations in the price of gold during these periods. As of
August 29, 1998, the Company had no hedges in place.
The Company also uses precious metals and precious, semiprecious and
synthetic stones in its products. The Company
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purchases substantially all synthetic and semiprecious stones from a single
supplier, located in Germany, which supplies semiprecious and synthetic
stones to almost all of the class ring manufacturers in the United States.
The Company believes that the loss of this source of synthetic and
semiprecious stones would adversely affect its business during the time
period in which alternate sources adapted production capabilities to meet
increased demand.
ENVIRONMENTAL MATTERS
The Company is subject to federal, state and local laws, ordinances and
regulations that establish various health and environmental quality standards
and provide penalties for violations of those standards. Past and present
manufacturing operations of the Company subject to environmental laws include
the use, handling, and contracting for disposal or recycling of hazardous or
toxic substances, the discharge of particles into the air, and the discharge
of process wastewaters into sewers. Management believes that the Company's
current operations are in substantial compliance with all material
environmental laws and that the Company does not currently face environmental
liabilities that would have a material adverse effect on the Company's
financial position or results of operations.
INTELLECTUAL PROPERTY
The Company markets its products under many trademarked brand names,
some of which rank among the most recognized and respected names in the
jewelry industry, including ARTCARVED-Registered Trademark-,
BALFOUR-Registered Trademark-, CELEBRATIONS OF LIFE-Registered Trademark-,
CLASS RINGS, LTD.-Registered Trademark-, GENERATIONS OF LOVE-Registered
Trademark-, KEEPSAKE-Registered Trademark-, KEYSTONE-Registered Trademark-,
MASTER CLASS RINGS-Registered Trademark-, NAME-SAKE-Registered Trademark-
and R. JOHNS-Registered Trademark-. Generally, a trademark registration will
remain in effect so long as the trademark remains in use by the registered
holder and any required renewals are obtained. The Company also holds several
patented ring designs. The Company's patents expire at varying dates, but
management does not believe that the loss of any one of which would have a
material adverse effect on the Company's financial position or results of
operations.
The Company has non-exclusive licensing arrangements with numerous
colleges and universities under which the Company has the right to use the
name and other trademarks and logos of these schools on the Company's
products. In addition, the Company has licensing agreements with certain
major professional sports organizations. Management does not believe that
there are any franchises or licenses the loss of which, individually, would
have a material adverse effect on the Company's financial position or results
of operations.
In 1988, CJC had granted to Lenox, Inc. a ten-year license to use the
KEEPSAKE-Registered Trademark- name for the sale of non-jewelry goods on a
royalty-free, worldwide and exclusive basis for non-jewelry products. This
license expired by its terms on April 28, 1998. ArtCarved has nonexclusive
licensing arrangements with two manufacturers in Canada for the
ARTCARVED-Registered Trademark- trademark and exclusive licensing
arrangements for the ARTCARVED-Registered Trademark- trademark to a retailer
in Central America.
During October 1997, the Company entered into a Trademark License
Agreement with Aurafin, Inc. ("Aurafin") pursuant to which the Company
granted to Aurafin the right to use the ARTCARVED-Registered Trademark-
trademark in connection with wedding rings, engagement rings and anniversary
bands for an initial term of ten years, which is automatically renewable for
additional successive five-year periods, unless terminated prior thereto.
Under the terms of the agreement, Aurafin will pay the Company royalties
based on decreasing marginal percentages of annual net sales of various
licensed products.
During December 1997, the Company entered into a Trademark License
Agreement with Frederick Goldman, Inc. ("Goldman") pursuant to which the
Company granted Goldman the right to use the KEEPSAKE-Registered Trademark-
trademark in connection with rings, bracelets, pendants, necklaces, earrings,
earring jackets, brooches, pins, neck chains, watches, and related services,
excluding licensor products. The agreement, which has an initial term of ten
(10) years which automatically renews for successive five-year periods,
assuming it is not otherwise terminated pursuant to its terms, provides for
royalty payments based on percentages of sales of various licensed products,
subject to an annual minimum royalty.
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EMPLOYEES
At August 29, 1998, the Company employed 1,809 individuals, of whom
approximately 1,345 were involved in manufacturing, operations and production
support, 323 were involved in customer service, marketing and sales and 141
were employed in various administrative and data processing functions. Many
employees engaged in manufacturing operations are highly skilled technicians
and craftspersons.
Other than 801 hourly production and maintenance employees (at August
29, 1998) at the Austin, Texas manufacturing facility, no employees of the
Company are represented by a labor union. The production and maintenance
workers are represented by the United Brotherhood of Carpenters and Joiners
Union (the "Union"). After the Company and its predecessor had operated
without an agreement for nearly three years, the Company and the Union signed
a collective bargaining agreement on April 24, 1997, which provided for wage
rate increases of $0.30 an hour on April 21, 1997,and $0.25 an hour on June
1, 1998 and provides for an additional wage rate increase of $0.20 an hour on
June 1, 1999. Neither the Company nor its predecessors have experienced any
work stoppages or significant employee-related problems at its Austin, Texas
manufacturing facility in the recent past. Management considers the
relationship between the Company and all of its employees to be satisfactory.
The Company employs two separate sales forces to support its in-store
retail products and its on-campus products, with approximately 50 salespeople
concentrating on in-store and approximately 35 full-time territory managers
(supplemented by approximately 80 to 90 part-time representatives during peak
buying seasons) concentrating on college campuses.
ITEM 2. PROPERTIES
The Company's headquarters and principal executive offices are located
at 7211 Circle S Road, Austin, Texas 78745. The Company's other principal
properties as of August 29, 1998, are as set forth below. Management believes
the Company's properties are in good condition.
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Primary Use Location Approximate Size Owned/Leased
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Administrative Offices Austin, Texas 20,000 Square Feet Owned
Jewelry Manufacturing Austin, Texas 99,830 Square Feet Owned
Jewelry Manufacturing Juarez, Mexico 20,000 Square Feet Leased
Jewelry Manufacturing North Attleboro, MA 35,000 Square Feet Leased
Fine Paper Manufacturing Louisville, KY 100,000 Square Feet Leased
Warehouse Facility Austin, Texas 50,060 Square Feet Leased
</TABLE>
ITEM 3. LEGAL PROCEEDINGS
There are no material pending legal proceedings to which the Company is a
party or to which any of its property is subject. The Company monitors all
claims, and the Company accrues for those, if any, which management believes are
probable of payment. The Company has no pending administrative proceedings
related to environmental matters involving governmental authorities.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On July 7, 1998 the stockholders of the Company voted on and approved the
Commemorative Brands, Inc. Incentive Stock Purchase Plan (the "Plan"). See
"Executive Compensation - Incentive Stock Purchase Plan" below.
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
There is no established public trading market for the Company's common
stock, par value $0.01 per share ("Common Stock"). At November 27, 1998, there
were four (4) holders of record of the Common Stock.
The Company has never declared dividends on its Common Stock. The Company
is restricted from paying dividends by certain of its bank debt covenants and
the indenture pursuant to which its senior subordinated notes were issued (see
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources") and by provisions of the Company's
outstanding classes of preferred stock. The Company intends to retain any
earnings for internal investment and debt reduction, and does not intend to
declare dividends on its Common Stock in the foreseeable future.
ITEM 6. SELECTED FINANCIAL DATA
This item is presented in three tables for the historical reporting
requirements. The Company began operations on December 16, 1996, by acquiring
and merging two predecessor companies with different fiscal year ends. Selected
historical data for the Company, ArtCarved, and Balfour are presented in tables
(A), (B) and (C), respectively.
TABLE (A)
The Company completed the Acquisitions of ArtCarved and Balfour on
December 16, 1996 and prior to such date engaged in no business activities other
than those in connection with the Acquisitions and financing thereof. The
following table presents summary historical financial and other data for the
Company and should be read in conjunction with the financial statements of the
Company and the notes thereto and "Management's Discussion and Analysis of
Financial Condition and Results of Operations" included in Item 7 herein. The
following information with respect to the Company as of and for the fiscal years
ended August 29, 1998 and August 30, 1997 has been derived from the audited
financial statements of the Company, which have been audited by Arthur Andersen
LLP, independent public accountants, as indicated in their report dated November
27, 1998 included herein. See "Financial Statements". The results of operations
for the Company for the fiscal year ended August 29, 1998 are not comparable to
the results of operations for the fiscal year ended August 30, 1997 because the
information presented for the fiscal year ended August 29, 1998 includes
business operations for a full twelve month period in contrast to the fiscal
year ended August 30, 1997 in which the Company had not been engaged in
significant business operations prior to the completion of the Acquisitions on
December 16, 1996. Due to the highly seasonal nature of the class ring business,
a significant amount of revenue and income were earned by the Company's
predecessors in the three and one-half month period ended December 16, 1996, due
to the back to school and pre-holiday season. See "Seasonality" below.
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TABLE (A)
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Fiscal Year Ended
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August 30, August 29,
1997(1) 1998
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(Dollars in thousands, except share data)
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STATEMENT OF INCOME DATA:
Net sales $ 87,600 $ 151,101
Cost of sales $ 45,189 $ 72,615
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Gross profit $ 42,411 $ 78,486
Selling, general and
administrative expenses $ 41,481 $ 68,294
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$ 10,192
Operating income $ 930
Income (loss) from continuing
operations $ (8,867) $ (4,637)
Net loss to common stockholders $ (9,717) $ (5,837)
Basic and diluted earnings
(loss) per share $ (25.91) $ (15.55)
OTHER DATA:
EBITDA (2) $ 5,025 $ 17,093
Depreciation and amortization $ 4,095 $ 6,901
Capital expenditures $ 3,493 $ 6,610
Cash flows provided by
(used in):
Operating activities $ (677) $ (3,749)
Investing activities $ (173,693) $ (6,552)
Financing activities $ 175,450 $ 9,102
BALANCE SHEET DATA (AT END OF
PERIOD):
Total assets $ 200,869 $ 203,805
Total long-term debt $ 125,450 $ 134,322
Total stockholders' equity $ 40,453 $ 34,846
</TABLE>
- ------------------------------------------------------------------------------
(1) The Company completed the Acquisitions of ArtCarved and Balfour on
December 16, 1996, and prior to such date, engaged in no business
activities other than those in connection with the Acquisitions and
financing thereof. Due to the highly seasonal nature of the class ring
business, a significant amount of revenues and income were earned by the
Company's predecessors in the three and one-half month period ended
December 16, 1996, due to the back to school and pre-holiday season.
(2) EBITDA represents operating income (loss) before depreciation and
amortization. EBITDA is not intended to, and does not, represent cash
flows as defined by generally accepted accounting principles and does not
necessarily indicate that cash flows are sufficient to fund all of the
Company's cash needs. EBITDA should not be considered in isolation or as a
substitute for or more meaningful than net income (loss), cash flows from
operating activities or other measures of liquidity determined in
accordance with generally accepted accounting principles. The Company has
presented EBITDA data because the Company understands that such
information is commonly used by investors to analyze and compare companies
on the basis of operating performance and to determine a company's ability
to service debt. The EBITDA measure presented herein is not necessarily
comparable to similarly titled measures reported by other companies.
-8-
<PAGE>
Table (B) Summary Historical Financial and Other Data - ArtCarved
The following table presents summary historical financial and other
data for ArtCarved and should be read in conjunction with the financial
statements of ArtCarved and the notes thereto and "Management's Discussion
and Analysis of Financial Condition and Results of Operations" included in
Item 7 herein. The following information with respect to ArtCarved for the
fiscal year ended August 31, 1996 and for the period from September 1, 1996
to December 16, 1996 has been derived from the audited financial statements
of ArtCarved, which have been audited by Arthur Andersen LLP, independent
public accountants, as indicated in their report dated October 24, 1997,
included in the Financial Statements included herein. See "Financial
Statements". The following information with respect to ArtCarved as of August
31, 1996 and December 16, 1996 and for the fiscal year ended August 26, 1995
has been derived from the audited financial statements of ArtCarved, which
have been audited by Arthur Andersen LLP as stated in their report dated
October 24, 1997, which is not included herein. The following information
with respect to ArtCarved as of August 27, 1994 and August 26, 1995 and for
the fiscal year ended August 27, 1994 has been derived from the audited
financial statements of ArtCarved, which have been audited by Arthur Andersen
LLP as stated in their report dated November 13, 1996, which is not included
herein. The results for the period September 1, 1996, to December 16, 1996,
are not necessarily indicative of the results to be expected for the full
fiscal year. The information presented below does not include adjustments
related to the ArtCarved acquisition.
<TABLE>
<CAPTION>
Table (B)
- ------------------------------------------------------------------------------------------------------
Fiscal Year Ended (1)
------------------------------------------------------
The Period
from September
1, 1996 -
August 27, August 26, August 31, December 16,
1994 1995 1996 1996
------------------------------------------------------
(Dollars in thousands)
<S> <C> <C> <C> <C>
STATEMENT OF INCOME DATA:
Net sales $ 69,820 $ 71,994 $ 70,671 $27,897
Cost of sales $ 30,572 $ 32,879 $ 32,655 $11,988
-------- -------- -------- -------
Gross profit $ 39,248 $ 39,115 $ 38,016 $15,909
Selling, general and administrative expenses $ 26,618 $ 28,224 $ 27,940 $ 9,862
Restructuring charges (2) $ - $ 3,244 $ - $ -
-------- -------- -------- -------
Operating income(3) $ 12,630 $ 7,647 $ 10,076 $ 6,047
OTHER DATA:
EBITDA (4) $ 17,324 $ 16,505 $ 15,091 $ 8,039
Depreciation and amortization $ 4,694 $ 5,614 $ 5,015 $ 1,992
Capital expenditures (5) $ 1,186 $ 1,120 $ 844 $ 195
Cash flows provided by (used in):
Operating activities $ 11,132 $ (3,164) $ 1,663 $ 1,498
Investing activities $ (1,186) $ (1,120) $ (844) $ (195)
Financing activities $ (9,946) $ 4,284 $ (819) $ 4,261
BALANCE SHEET DATA (AT END OF PERIOD):
Total assets $ 78,900 $ 75,955 $ 74,542 $86,065
Total long-term debt (6) $ 98,728 $ 99,900 $ 91,221 $80,144
Advances in equity (deficit) (6) $(51,504) $(53,186) $(28,524) $(6,464)
- -----------------------------------------------------------------------------------------------------
</TABLE>
-9-
<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 used the
proceeds from the sale of ArtCarved to repay its outstanding debt
obligations, the statement of income data, other data and the balance
sheet data include all of CJC's debt and related interest expense.
(2) For the fiscal year ended August 26, 1995, the restructuring charges of
$3.2 million consisted of the write-off of $2.9 million of capitalized
financing costs incurred in 1990 by CJC and $0.3 million of related
professional advisory fees incurred by CJC. The balance sheet data
includes all of CJC's debt and related interest expense, and therefore
all of the restructuring charges are allocated to ArtCarved assets.
(3) The results of operations for the period from September 1, 1996,
through December 16, 1996, are not comparable to the results of
operations for the fiscal years presented and are not necessarily
indicative of the results that could be expected for a full fiscal
year. Due to the highly seasonal nature of the class ring business, a
significant amount of revenues and income occurred in the three and
one-half month period ended December 16, 1996, due to the
back-to-school and pre-holiday season.
(4) EBITDA represents operating income (loss) before depreciation,
amortization and restructuring charges. EBITDA is not intended to, and
does not, represent cash flows as defined by generally accepted
accounting principles and does not necessarily indicate that cash flows
are sufficient to fund all of ArtCarved's cash needs. EBITDA should not
be considered in isolation or as a substitute for or more meaningful
than net income (loss), cash flows from operating activities or other
measures of liquidity determined in accordance with generally accepted
accounting principles. The Company has presented EBITDA data because
the Company understands that such information is commonly used by
investors to analyze and compare companies on the basis of operating
performance and to determine a company's ability to service debt. The
EBITDA measure presented herein is not necessarily comparable to
similarly titled measures reported by other companies.
(5) Historical capital expenditure levels are not necessarily indicative of
the future capital expenditure level for ArtCarved's ongoing operations
when merged with Balfour.
(6) The changes in total long-term debt and advances in equity (deficit)
from August 31, 1996, to December 16, 1996, are due to the sale of
CJC's non-ArtCarved operations.
Table (C) Summary Historical Financial and Other Data - Balfour
The following table presents summary historical financial and other data
for Balfour and should be read in conjunction with the financial statements of
Balfour and the notes thereto and "Management's Discussion and Analysis of
Financial Condition and Results of Operations" included in Item 7 herein. The
following information with respect to Balfour for the year ended February 25,
1996 and for the period ended December 16, 1996 has been derived from the
audited financial statements of Balfour, which have been audited by Arthur
Andersen LLP, independent public accountants, as indicated in their report dated
November 19, 1997, included herein. See "Financial Statements". The following
information with respect to Balfour as of February 25, 1996 and for the year
ended February 26, 1995 has been derived from the audited financial statements
of Balfour, which have been audited by Arthur Andersen LLP as stated in their
report dated November 19, 1997, which is not included herein. The following
information with respect to Balfour as of February 27, 1994 and February 26,
1995 and for the year ended February 27, 1994 has been derived from the audited
financial statements of Balfour and is not included herein. The results for the
period from February 26, 1996 to December 16, 1996 are not necessarily
indicative of the results that could be expected for the full fiscal year. The
information presented below does not include adjustments related to the Balfour
acquisition.
-10-
<PAGE>
<TABLE>
<CAPTION>
Table (C)
- ---------------------------------------------------------------------------------------------------------
Fiscal Year Ended (1)
----------------------------------------------------------------
The Period from
February 26, 1996 to
February 27, February 26, February 25, December 16,
1994 1995 1996 1996
----------------------------------------------------------------
(Dollars in thousands)
<S> <C> <C> <C> <C>
STATEMENT OF INCOME DATA:
Net sales $85,304 $77,491 $71,300 $60,233
Cost of sales $35,860 $35,406 $35,598 $29,350
------- ------- ------- -------
Gross profit $49,444 $42,085 $35,702 $30,883
Selling, general and administrative
expenses $43,350 $51,743 $33,496 $31,020
------- ------- ------- -------
Operating income (loss) $ 6,094 $(9,658) $ 2,206 $ (137)
OTHER DATA:
EBITDA (2) $ 7,993 $(7,680) $ 4,232 $ 1,396
Depreciation and amortization $ 1,899 $ 1,978 $ 2,026 $ 1,533
Capital expenditures (3) $ 1,820 $ 1,274 $ 530 $ 345
Adjusted net sales (4) $61,784 $64,891 $70,111 $59,384
Cash flows provided by (used in):
Operating activities $(2,413) $(7,077) $ 1,604 $(7,264)
Investing activities $(1,807) $(1,209) $ 421 $ 226
Financing activities $ 4,245 $ 8,286 $(1,970) $ 6,977
BALANCE SHEET DATA (AT END OF PERIOD):
Total assets $47,989 $45,236 $42,563 $45,127
Total long-term debt $ 6,136 $15,136 $13,166 $20,201
Total stockholders' equity $24,966 $14,024 $13,888 $11,735
- -----------------------------------------------------------------------------------------------
</TABLE>
(1) During the periods presented, Balfour was operated as a wholly owned
subsidiary of Town & Country and Town & Country administered certain
programs (such as health insurance, workmen's compensation and gold
consignment) and charged all directly identifiable costs to Balfour.
Indirect costs were not allocated to Balfour; however, management
believes these amounts are not significant for the periods presented.
(2) EBITDA represents operating income (loss) before depreciation,
amortization and restructuring charges. EBITDA is not intended to, and
does not, represent cash flows as defined by generally accepted
accounting principles and does not necessarily indicate that cash flows
are sufficient to fund all of Balfour's cash needs. EBITDA should not
be considered in isolation or as a substitute for or more meaningful
than net income (loss), cash flows from operating activities or other
measures of liquidity determined in accordance with generally accepted
accounting principles. The Company has presented EBITDA data because
the Company understands that such information is commonly used by
investors to analyze and compare companies on the basis of operating
performance and to determine a company's ability to service debt. The
EBITDA measure presented herein is not necessarily comparable to
similarly titled measures reported by other companies.
(3) Historical capital expenditure levels are not necessarily indicative of
the future capital expenditure level for Balfour's ongoing operations
when merged with ArtCarved.
-11-
<PAGE>
(4) Adjusted net sales represents, for all periods presented, net sales
excluding results from: (i) the direct distribution of licensed
consumer sports jewelry, which was discontinued in February 1995; (ii)
the fraternity jewelry product line, which was sold in March 1994; and
(iii) the service award recognition product line, which was sold in
April 1993. Although Balfour sold substantially all of the service
award recognition product line, Balfour continues to have sales of
service award recognition products, which management believes will not
be a significant percentage of net sales in future periods.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
For purposes of the discussion contained in this Item 7, unless the
context otherwise requires (i) the term "CBI" refers to Commemorative Brands,
Inc. prior to the consummation of the Acquisitions, (ii) the term "ArtCarved"
refers to the predecessor assets, businesses, and operations of CJC acquired by
CBI, (iii) the term "Balfour" refers to the predecessor class rings assets,
businesses and operations of L. G. Balfour Company, Inc. acquired by CBI, and
(iv) the term "the Company" refers to CBI consolidated with its subsidiaries as
combined with ArtCarved and Balfour after giving effect to the Acquisitions.
GENERAL
On December 16, 1996, CBI completed the Acquisitions. CBI was initially
formed by Castle Harlan Partners II, L.P., ("CHPII") a Delaware limited
partnership and private equity investment fund. In March 1996 for the purpose
of acquiring ArtCarved and Balfour. Until December 16, 1996, CBI engaged in
no business activities other than in connection with the Acquisitions and the
financing thereof.
The Company uses a 52/53 week fiscal year ending on the last Saturday of
August.
RESULTS OF OPERATIONS
The financial statements of the Company for the fiscal year ended August
29, 1998 reflect operations of the Company for the period from August 31, 1997
to August 29, 1998. The financial statements of the Company for the fiscal year
ended August 30, 1997 reflect operations for the period from December 16, 1996
(the date of consummation of the Acquisitions) to August 30, 1997. The financial
statements are presented for the predecessors, ArtCarved for the period from
September 1, 1996 through December 16, 1996 and Balfour for the period from
February 26, 1996 through December 16, 1996. See "Financial Statements". The
results of operations for the Company for the fiscal year ended August 29, 1998
are not comparable to the results of operations for the fiscal year ended August
30, 1997 because the information presented for the fiscal year ended August 29,
1998 includes business operations for a full twelve month period in contrast to
the fiscal year ended August 30, 1997 which includes no significant business
operations prior to December 16, 1996. Due to the highly seasonal nature of the
class ring business, a significant amount of revenue and income were earned by
the Company's predecessors in the three and one-half month period ended December
16, 1996, due to the back to school and pre-holiday season. The results of
operations of the Company for the fiscal year ended August 30, 1997, are not
comparable to the results of operations for the comparable prior periods for
each of the predecessor companies, because (i) CBI was not engaged in business
operations prior to December 16, 1996, and (ii) the information presented for
the predecessor companies includes the operations of such entities for a
twelve-month period in contrast to the approximately eight and one-half month
period of operations in the Company's fiscal year ended August 30, 1997.
The results of operations of the Company for the fiscal years ended
August 29, 1998 and August 30, 1997, were negatively impacted as a result of
the consolidation of the Attleboro and North Attleboro, Massachusetts
operations into the Austin, Texas facilities. Although, the consolidation of
the Attleboro and North Attleboro, Massachusetts operations in the Company's
Austin, Texas facilities was substantially completed in the fiscal year ended
August 29, 1998, there can be no assurance that the operations formerly
conducted by each of the Company's predecessors will be fully integrated
or as to the amount of any costs savings that may result from such
integration.
-12-
<PAGE>
ELIMINATION OF OCCUPANCY AND FIXED OVERHEAD COSTS - Two of the three
Balfour facilities were closed during fiscal 1997 and the occupancy and
overhead costs including duplicative facilities-related personnel associated
with these two facilities (the Attleboro, Massachusetts ring manufacturing
plant and the North Attleboro, Massachusetts administrative facility) were
eliminated. The closure of these facilities resulted in permanent cost
savings of approximately $1.5 million on an annual basis of which the full
$1.5 million of costs savings were realized during fiscal 1998 and
approximately $400,000 of cost savings were realized during fiscal 1997. The
third Balfour facility which contains the insignia plant and the Balfour
ring tooling operation, was not closed.
MANUFACTURING INTEGRATION - The move of the Balfour ring manufacturing
operation was substantially completed in June, 1997. Expanded manufacturing
capacity in Austin was adequate to absorb the additional production of the
Balfour rings. However, difficulties were encountered in the efficient
manufacture of the Balfour rings. Certain of the costs savings achieved by the
Company by the reduction of duplicative personnel were offset by additional
labor and overhead incurred to manufacture Balfour rings. Manufacturing
inefficiencies were primarily caused by:
- People - The specific Balfour product knowledge that was "lost"
due to Massachusetts employees electing not to relocate to Texas
resulted in higher than normal training expenses and additional
costs to temporarily place former Balfour employees (manager and
supervisors) in the Texas plant.
- Tooling - Because Balfour ring tooling is older and more
complicated to use than the ArtCarved ring tooling, the Company
experienced higher than normal training costs and lower levels of
efficiencies than the mold operations at the Balfour Attleboro
ring plant.
- Systems - The Balfour computer system is heavily dependent on
manual processing and human interaction. Difficulties were
experienced in the transfer of user knowledge and system
documentation. Therefore, labor costs in excess of those
anticipated by management were incurred to enter, schedule, track
and ship the Balfour rings.
During January 1998, the Company began a major computer project which,
among other things, will convert the more inefficient Balfour computer
systems to the more efficient ArtCarved systems, unifying the Company's
computer system thereby reducing computer operation and maintenance costs,
streamlining and making the Company's order entry system and process more
accurate, and eliminating any "Year 2000" problems that may be inherent in
the Company's existing computer systems. Management believes that this
computer conversion project will be completed by July 1999, although there
can be no assurance that it will be completed by that date.
THE COMPANY
TWELVE MONTHS ENDED AUGUST 29, 1998 ("FISCAL 1998") AS COMPARED TO
THE TWELVE MONTHS ENDED AUGUST 30, 1997 ("FISCAL 1997")
The results of operations for the Company for fiscal 1998, are not
comparable to the results of operations for fisca1 1997 because the information
presented for fiscal 1998 includes business operations for a full twelve-month
period in contrast to fiscal 1997 which includes no significant business
operations prior to December 16, 1996.
NET SALES - Net sales increased $63.5 million, or 72.5%, to $151.1
million for fiscal 1998, as compared to $87.6 million in fiscal 1997. This
increase in net sales is primarily a result of the fact that fiscal 1998
includes a full twelve months of business operations in contrast to fiscal
1997 which includes only approximately eight and one-half months of business
operations. Due to the highly seasonal nature of the class ring business,
approximately 35% of the Company's fiscal 1997 sales were recognized by the
Company's predecessors in the three and one-half month period ended December
16, 1997. This period included the back-to-school period and the pre-holiday
season. Approximately 18% of the company's increase in net sales was a result
of increases in sales volume of high school and college rings and an increase
in the sales volume of the personalized family jewelry product segment of
recognition and affinity products.
-13-
<PAGE>
GROSS PROFIT - Gross profit increased $36.1 million, or 85.1%, to $78.5
million for fiscal 1998, as compared to $42.4 million for fiscal 1997 which
was primarily a result of the fact that fiscal 1998 includes a full twelve
months of business operations in contrast to fiscal 1997 which includes only
approximately eight and one-half months of business operations. As a
percentage of net sales, gross profit was 51.9% for fiscal 1998, compared to
48.4% for fiscal 1997. Cost of sales for fiscal 1997 includes an incremental
charge of $4.7 million related to an increase in inventory valuation at the
time of the Acquisitions in accordance with purchase price accounting which
was expensed to cost of sales as the related inventory was sold. Gross profit
for fiscal 1997, excluding this $4.7 million charge, would have been 53.8% of
sales.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES - Selling, general and
administrative expenses increased $26.8 million, or 64.6%, to $68.3 million
for fiscal 1998, compared to $41.5 million for fiscal 1997. The increase was
primarily a result of the fact that fiscal 1998 includes a full twelve months
of business operations in contrast to fiscal 1997 which includes only
approximately eight and one-half months of business operations. As a
percentage of net sales, selling, general and administrative expenses
decreased to 45.2% for fiscal 1998, compared to 47.4% for fiscal 1997. The
decrease was a result of decreased marketing expenditures offset by an
increase in general and administrative expenses as a percentage of net sales
as a result of the increased expense incurred in the consolidation of the
Massachusetts operations with the Texas operations.
OPERATING INCOME - As a result of the foregoing, operating income
increased $9.3 million to $10.2 million for fiscal 1998 compared to $0.9
million for fiscal 1997 which was primarily a result of the fact that fiscal
1998 includes a full twelve months of business operations in contrast to
fiscal 1997 which includes only approximately eight and on-half months of
business operations. As a percentage of net sales, operating income increased
to 6.7% for fiscal 1998 compared to 1.1% for fiscal 1997.
INTEREST EXPENSE, NET - Interest expense, net, was $14.8 million for
fiscal 1998 and $9.8 million for fiscal 1997 primarily consisting of interest on
the Bank Credit Facility which had an average outstanding balance of $46.6
million and $32.7 million for fiscal 1998 and 1997, respectively, at rates
ranging from 8.5% to 10.5% and interest on the $90.0 million of notes, at a rate
of 11%.
PROVISION FOR INCOME TAXES - For fiscal 1998 and fiscal 1997, no
provisions or benefits were recorded as management believes the net operating
losses and carry-forwards incurred by the Company in prior periods will be
sufficient to cover any tax liability.
NET INCOME (LOSS) - As a result of the foregoing, net loss decreased
$4.2 million to a net loss of $4.6 million for fiscal 1998 compared to a net
loss of $8.9 million for fiscal 1997 which was primarily a result of the fact
that fiscal 1998 includes a full twelve months of business operations in
contrast to fiscal 1997 which includes only approximately eight and one-half
months of business operations.
PREFERRED DIVIDENDS - Preferred dividends were $1.2 million for
fiscal 1998 and $0.9 million for fiscal 1997. No dividends were paid in
fiscal 1998 or fiscal 1997.
NET LOSS TO COMMON STOCKHOLDERS - As a result of the foregoing, net
loss to common stockholders decreased an aggregate of $3.9 million to a net
loss to common stockholders of $5.8 million for fiscal 1998 compared to a net
loss to common stockholders of $9.7 million for fiscal 1997 which was
primarily a result of the fact that fiscal 1998 includes a full twelve months
of business operations in contrast to fiscal 1997 which includes only
approximately eight and one-half months of business operations.
ARTCARVED
THE PERIOD FROM SEPTEMBER 1, 1996 THROUGH DECEMBER 16, 1996 ("THE
ARTCARVED PERIOD THROUGH DECEMBER 16, 1996")
The results of operations for the ArtCarved period through December 16,
1996, are not comparable to the results of operations for the fiscal year ended
August 31, 1996, and are not necessarily indicative of the results that could be
expected for a full fiscal year. Due to the highly seasonal nature of the class
ring business, a significant amount of revenues and income were earned in the
three and one-half month period ended December 16, 1996, due to the
back-to-school and pre-holiday season.
-14-
<PAGE>
NET SALES - Net sales for the ArtCarved period through December 16, 1996,
were $27.9 million.
GROSS PROFIT - Gross profit for the ArtCarved period through December
16, 1996, was $15.9 million, or 57.0% of net sales.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES - Selling, general and
administrative expenses for the ArtCarved period through December 16, 1996,
were $9.9 million, or 35.4% of net sales.
OPERATING INCOME - As a result of the foregoing, operating income
was $6.0 million or 21.7% of net sales for the ArtCarved period through
December 16, 1996.
INTEREST EXPENSE, NET - Interest expense, net, for the ArtCarved period
through December 16, 1996, was $2.9 million. Average interest rates on debt
during the ArtCarved period through December 16, 1996, were approximately
11.9% for ArtCarved long-term debt and 9.75% for the ArtCarved gold loan.
INCOME TAX PROVISION - There was no income tax provision for the
ArtCarved period through December 16, 1996, due to available federal net
operating tax losses and other credit carry forwards of CJC that eliminated
the need for a tax provision.
NET INCOME (LOSS) - As a result of the foregoing, net income for the
ArtCarved period through December 16, 1996, was $3.2 million, or 11.4% of net
sales.
TWELVE MONTHS ENDED AUGUST 31, 1996 ("FISCAL 1996")
NET SALES. Net sales for fiscal 1996 were $70.7 million.
GROSS PROFIT. Gross profit for fiscal 1996 was $38.0 million, or 53.8%
of net sales.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES - Selling, general and
administrative expenses for fiscal 1996 were $27.9 million, or 39.5% of net
sales.
OPERATING INCOME. As a result of the foregoing, for fiscal 1996
operating income was $10.1 million, or 14.3% of net sales.
INTEREST EXPENSE, NET. Interest expense, net, for fiscal 1996 was
$11.9 million.
INCOME TAX PROVISION. There was no income tax provision in fiscal 1996,
due to available federal net operating tax losses and other credit carry
forwards of CJC that eliminated the need for a federal tax provision.
NET INCOME (LOSS). As a result of the foregoing, net loss for fiscal
1996 was $1.8 million.
BALFOUR
THE PERIOD FROM FEBRUARY 26, 1996 THROUGH DECEMBER 16, 1996 ("THE BALFOUR
PERIOD THROUGH DECEMBER 16, 1996")
NET SALES - Net sales for the Balfour period through December 16, 1996,
were $60.2 million.
GROSS PROFIT - Gross profit for the Balfour period through December 16,
1996, was $30.9 million, or 51.3% of net sales.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES - Selling, general and
administrative expenses for the Balfour period through December 16, 1996, were
$31.0 million, or 51.5% of net sales.
-15-
<PAGE>
OPERATING INCOME (LOSS) - As a result of the foregoing, operating loss
for the Balfour period through December 16, 1996, was $0.1 million, or 0.2%
of net sales.
INTEREST EXPENSE, NET - Interest expense, net, for the Balfour period
through December 16, 1996 was $2.0 million, substantially on account of
intercompany debt at a rate of 11.5%.
INCOME TAX EXPENSE - There was no income tax provision due to available
federal net operating tax losses and other credit carry forwards at Town &
Country that eliminated the need for a federal tax provision. The $63,000
provision for income taxes represents the state income taxes for the Balfour
period through December 16, 1996.
NET INCOME (LOSS) - As a result of the foregoing, net loss for the
Balfour period through December 16, 1996, was $2.2 million, or 3.6% of net
sales.
TWELVE MONTHS ENDED FEBRUARY 25, 1996 (THE "1996 PERIOD")
NET SALES. Net sales for the 1996 period were $71.3 million.
GROSS PROFIT. Gross profit for the 1996 period was $35.7 million, or
50.1% of net sales.
SELLING GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses for the 1996 period were $33.5 million or 47.0% of net
sales.
OPERATING INCOME (LOSS). As a result of the foregoing, operating income
for the 1996 period was $2.2 million or 3.1% of net sales.
INTEREST EXPENSE, NET. Interest expense, net for the 1996 period was $2.6
million which related primarily to intercompany debt. Town & Country charged
Balfour an interest rate of 11.5% in the 1996 period.
INCOME TAX EXPENSE. There was no federal income tax provision in the 1996
period due to available federal net operating tax losses and other tax credit
carry forwards of Town & Country that eliminated the need for a federal tax
provision. The income tax expense represents a provision for state income taxes
in the 1996 period.
NET INCOME (LOSS). As a result of the foregoing, net loss for the 1996
period was $0.1 million.
SEASONALITY
The Company's scholastic product sales tend to be seasonal. Class ring
sales are highest during October through December (which overlaps the Company's
first and second fiscal quarters), when students have returned to school after
the summer recess and orders are taken for class rings for delivery to students
before the winter holiday season. Sales of the Company's fine paper products are
predominantly made during February through April (which overlaps the Company's
second and third fiscal quarters) for graduation in May and June. ArtCarved and
Balfour historically experienced operating losses during the period of the
Company's fourth fiscal quarter, which includes the summer months when school is
not in session. The Company's recognition and affinity product line is not
seasonal in any material respect, although sales generally are highest during
the winter holiday season and in the period prior to Mother's Day. As a result,
the effects of seasonality of the class ring business on the Company are
tempered by the Company's relatively broad product mix. As a result of the
foregoing, the Company's working capital requirements tend to exceed its
operating cash flows from July through December.
LIQUIDITY AND CAPITAL RESOURCES
As of August 29, 1998, the Company had $35.0 million available under the
Revolving Credit and Gold Facilities (as defined below) and an $8.0 million
short term line of credit expiring March 31, 1999 (the "Short Term Revolving
Credit"). The Company had $19,589,000 outstanding under the Revolving Credit
Facility, $3,786,000 outstanding under the Gold Facility and $733,000
outstanding under the Short Term Revolving Credit as of August 29, 1998. At
August 29, 1998 the Company had no availability under its Revolving Credit,
$6,214,000 available under its Gold Facility and $7,267,000
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<PAGE>
available under its Short Term Revolving Credit. Management believes that
cash flows generated by existing operations and its available borrowings
under its Bank Credit Facility and Short Term Revolving Credit will be
sufficient to fund its ongoing operations. The Company's liquidity needs
arise primarily from debt service on the Bank Credit Facility, the Short Term
Revolving Credit and the Notes (as defined below), working capital and
capital expenditure requirements and payments required under a Management
Agreement with Castle Harlan, Inc. ("CHP Management Fee") (see "Certain
Relationships and Related Transactions").
The Company's cash flows from operating activities for the fiscal year
ended August 29, 1998, were primarily the net result of decreased
receivables, increased inventories, increased prepaid expenses and other
current assets, increased other assets and decreased overdraft, accounts
payable and accrued expenses. The decreased receivables were primarily the
result of the acceleration of the cash collections from the Balfour sales
representatives, the increased inventories were primarily the result of
increased units in the factory in fiscal 1998, the increase in prepaid
expenses and other assets resulted primarily from an increase in prepaid
marketing expenses and draws paid in advance to the Balfour representatives.
The Company's cash flows from operating activities for the fiscal year ended
August 30, 1997, were primarily the net result of decreased accounts
receivable, decreased inventories, increased prepaid expenses and other
current and noncurrent assets and decreased overdraft, accounts payable and
accrued expenses. The decrease in accounts receivable, inventories, accounts
payable and accrued expenses were primarily due to the fact that the period
included in fiscal 1997 began on December 17, 1996, the day following the
date of the consummation of the Acquisitions, when inventory and receivables
were at a high point of the year. The majority of the higher than average
prepaid expenses and other current assets is primarily due to advances to
sales representatives and prepaid advertising being higher at this time of
year before the busy season begins. The majority of the increase in other
assets relates to transaction fees and expenses arising from the Acquisitions.
Also affecting cash usage in fiscal 1997 and fiscal 1998 are the
one-time costs associated with the closing of the Attleboro facilities,
moving expenses and set-up expenses in Austin. As of August 29, 1998 and
August 30, 1997, $11.3 million and $9.3 million, respectively, of the costs
had been incurred with the remaining balance of $0.8 million in reserves for
remaining expenses associated with the metal stamping and tooling operations
currently operating in Attleboro. The Company's projected capital
expenditures for the fiscal year 1999 are $9.5 million for manufacturing
equipment, tools and dies, software development, and the Balfour computer
project.
The following summarizes certain provisions of the bank credit
agreement governing the Revolving Credit, Term Loan and Gold Consignment
Agreement as amended, (the "Bank Credit Facility"), dated as of December 16,
1996, by and among the Company, as borrower, BankBoston (formerly known as
The First National Bank of Boston and successor by merger to Rhode Island
Hospital Trust National Bank), Rhode Island Hospital Trust National Bank
("RIHT", and together with BankBoston, as agent, the "Agents") and the
financial institutions party thereto, and the Company's Short Term Revolving
Credit.
The Bank Credit Facility consists of a senior secured credit facility
of up to $60,000,000, including (i) a $25,000,000 term loan facility (the
"Term Loan Facility"), (ii) a $25,000,000 revolving credit facility (with a
letter of credit sublimit of $5,000,000) (the "Revolving Credit Facility")
and (iii) a $10,000,000 gold consignment and revolving credit facility (the
"Gold Facility" and, together with the Revolving Credit Facility, the
"Revolving Credit and Gold Facilities").
The Term Loan Facility of $24,000,000 matures on December 16, 2003. The
Company may prepay the Term Loan Facility at any time, and must repay the
Term Loan Facility in 28 consecutive quarterly installments, which commenced
March 31, 1997. The final installment of principal of the Term Loan Facility
is due and payable on December 16, 2003. In addition, subject to certain
exceptions set forth in the Bank Credit Agreement, the Company must make
mandatory prepayments of the Term Loan Facility from certain asset sales,
equity issuances, and 50% of Consolidated Excess Cash Flow (as defined).
Availability under the Revolving Credit and the Gold Facilities
is subject to a borrowing base limitation (the "Borrowing Base") based on the
aggregate of certain percentages of Eligible Receivables (as defined) and
Eligible Inventory (as defined) of the Company. The Borrowing Base is
recalculated each month. If the aggregate amount of loans and other
extensions of credit under the Revolving Credit and the Gold
Facilities exceeds the Borrowing Base, the Company must immediately prepay or
cash collateralize its obligations under the Revolving Credit Facility to the
extent of such excess.
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<PAGE>
At August 29, 1998, the Company had no availability under its Revolving
Credit Facility and $6,214,000 available under its Gold Facility.
The Gold Facility consists of (a) a purchase and consignment facility,
pursuant to which BankBoston, as gold agent, on behalf of the lenders under
the Gold Facility, will purchase amounts of gold inventory for the Company
and consign such amounts to the Company, (b) a consignment facility, pursuant
to which the gold agent, on behalf of the lenders under the Gold Facility,
will obtain and consign amounts of gold to the Company and (c) a revolving
loan facility.
Loans outstanding under the Bank Credit Facility bear interest at
either fixed or floating rates based upon the interest rate option selected
by the Company. The weighted average interest rate of debt outstanding at
August 29, 1998 and August 30, 1997, was 10.3% and10.5%, respectively.
The Revolving Credit and Gold Facilities may be borrowed, repaid and
reborrowed from time to time until December 16, 2001, subject to certain
conditions on the date of any such borrowing. Amounts of principal repaid on
the Term Loan Facility may not be reborrowed.
The Bank Credit Facility is secured by a first priority lien on
substantially all assets of the Company, including all accounts receivable,
inventory, equipment, general intangibles, real estate, buildings and
improvements and the outstanding stock of its subsidiaries. The Company's
U.S. subsidiary, CBI North America, Inc., has guaranteed the Company's
obligations and granted a similar security interest.
The Bank Credit Facility contains certain customary affirmative and
negative covenants, including, among other things, requirements that the
Company (i) periodically deliver certain financial information (including
monthly borrowing base, consigned metal and receivables aging reports), (ii)
not merge or make certain asset sales, (iii) not permit certain liens to
exist on its assets, (iv) not incur additional debt or liabilities except as
may be permitted under the terms of the Bank Credit Facility (v) not make
capital expenditures in excess of limits set forth in the Bank Credit
Facility (vi) not declare or make certain dividend payments, (vii) not make
certain investments or consummate certain acquisitions, (viii) not enter into
any consignment transactions as consignee (except for deliveries of
diamonds), (ix) not create a new subsidiary, (x) not establish any new bank
account, and (xi) establish concentration accounts with BankBoston and direct
all of its depositary banks to transfer all amounts deposited (on a daily
basis) to such concentration accounts (for application in accordance with the
Bank Credit Facility). In addition, the Company must comply with certain
financial covenants, including maintaining a specified minimum interest
coverage ratio of Consolidated EBITDA to Consolidated Interest Expense,
maximum Consolidated Senior Funded Debt to Consolidated EBITDA, minimum
Consolidated EBITDA (as those terms are defined in the Bank Credit Facility)
in amounts set forth in the Bank Credit Facility. Furthermore, the covenants
were amended on November 27, 1998, and additional covenants were added in
which the Company must not permit its Consolidated Net Worth (as defined) as
of March 30, 1999 to be less than $42,000,000, not pay the CHP Management Fee
unless at the time of payment (A) no Event of Default shall have occurred and
be continuing or would result from the payment thereof; (B) the Short Term
Revolving Credit shall have been paid in full; and (C) the Company meets the
requisite Modified Funded Debt Ratio (as defined in the Bank Credit Facility)
and will not permit or make certain capital expenditures for computer
conversion projects in excess of $6,500,000 in the aggregate during fiscal
1998 and 1999 and the first fiscal quarter of 2000. Most of the covenants
apply to the Company and its subsidiaries. The Company was in compliance with
all of its covenants under the Bank Credit Facility as of August 29, 1998 and
August 30, 1997. However, the Company may enter into additional transactions
which may require further amendments in the upcoming year. Management
believes the Company can maintain compliance pursuant to the amended Bank
Credit Facility throughout the next year.
The Bank Credit Facility contains certain customary events of default,
including nonpayment, misrepresentation, breach of covenant, bankruptcy,
ERISA, judgments, change of control and cross defaults. In addition, the Bank
Credit Facility provides that it shall be an Event of Default if the Company
or any of its subsidiaries (other than its Mexican subsidiary) shall be
enjoined or restrained from conducting any material part of its business for
more than 30 days.
On August 26, 1998, the Company obtained the Short Term Revolving
Credit from BankBoston pursuant to which the Company may, from time to time,
borrow up to $8,000,000 from BankBoston, until March 31, 1999. At August 29,
1998, the Company had $7,267,000 available under the Short Term Revolving
Credit. Amounts outstanding under the Short Term Revolving Credit bear
interest at either fixed or floating rates based upon the interest rate
option selected by the
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<PAGE>
Company. All amounts borrowed under the Short Term Revolving Credit are due
and payable on March 31, 1999. Any Event of Default under the Bank Credit
Facility will also constitute an Event of Default under the Short Term
Revolving Credit. Pursuant to the terms of the Company's Bank Credit
Facility, the Company is prohibited from repaying the outstanding principal
on the Short Term Revolving Credit unless at the time of such repayment and
both before and after giving effect to such payment, no Default or Event of
Default exists under the Bank Credit Facility and the Borrowing Base exceeds
all outstanding amounts under the Bank Credit Facility by at least $2
million. The Short Term Revolving Credit is unsecured. All of the Company's
obligations under the Short Term Revolving Credit are guaranteed by CHPII.
The Company has agreed to indemnify CHPII and pay CHPII upon demand any
amounts that CHPII must pay pursuant to such guaranty. The Short Term
Revolving Credit constitutes Designated Senior Indebtedness for purposes of
the Indenture.
The Company's $90,000,000 aggregate principal amount of 11% Senior
Subordinated Notes ("the Notes") mature on January 15, 2007. The Notes are
redeemable at the option of the Company, in whole or in part, at any time on
or after January 15, 2002, plus accrued and unpaid interest and Liquidated
Damages (as defined), if any, thereon to the date of redemption. In the event
the Company completes one or more Public Equity Offerings (as defined) on or
before January 15, 2000, the Company may, in its discretion, use the net cash
proceeds to redeem up to 33 1/3% of the original principal amount of the
Notes at a redemption price equal to 111% of the principal amount thereof,
plus accrued and unpaid interest and Liquidated Damages, if any, thereon to
the date of redemption, with the net proceeds of one or more Public Equity
Offerings, provided that at least 66-2/3% of the original principal amount of
the Notes remains outstanding immediately after each such redemption.
In the event of a Change of Control (as defined), each holder of the
Notes will have the right to require the Company to purchase all or any part
of such holder's Notes at a purchase price in cash equal to 101% of the
aggregate principal amount thereof, plus accrued and unpaid interest and
Liquidated Damages, if any, thereon to the date of purchase. The Bank Credit
Facility prohibits the Company from purchasing any Notes upon a Change of
Control, and certain Change of Control events with respect to the Company
would constitute a default thereunder.
In the event of an Asset Sale (as defined), the Company is required to
apply any Net Proceeds (as defined) to permanently reduce senior
indebtedness, to acquire another business or long-term assets or to make
capital expenditures. To the extent such amounts are not so applied within
thirty days and the amount not applied exceeds $5.0 million, the Company is
required to make an offer to all holders of the Notes to purchase an
aggregate principal amount of Notes equal to such excess amount at a purchase
price in cash equal to 100% of the principal amount thereof, plus accrued and
unpaid interest and Liquidated Damages, if any, thereon to the date of
purchase.
The Indenture, dated as of December 16, 1996, between the Company and
Marine Midland Bank, as trustee (the "Indenture") pursuant to which the Notes
were issued contains certain covenants that, among other things, limit the
ability of the Company and its subsidiaries to (a) incur additional
indebtedness and issue preferred stock, (b) pay dividends or make certain
other restricted payments, (c) enter into transactions with affiliates, (d)
create certain liens, (e) make certain asset dispositions, and (f) merge or
consolidate with, or transfer substantially all of its assets to, another
person. The Company was in compliance with the Indenture covenants at August
29, 1998 and August 30, 1997.
YEAR 2000 COMPLIANCE
The Company has conducted a review of its computer systems,
applications and equipment and has contacted external parties (such as
suppliers) regarding their preparedness for year 2000 to identify the systems
that could be affected by the "Year 2000" problem and is making certain
investments in its software applications and systems to ensure that the
Company's systems and applications function properly to and through the year
2000. The Company expects its Year 2000 conversion project to be completed by
July 1999, although there can be no assurance that it can be completed by
that date. Failure to meet this schedule could have a material impact on the
operations of the Company. The cost to the Company of the Year 2000 project
as well as the related potential effect on the Company's earnings are not
expected to have a material adverse impact on the financial position, cash
flows or results of operations of the Company.
The materiality of the costs of the project and the date when the Company
believes it will complete the Year 2000 project are based on management's best
estimates, which were derived utilizing numerous assumptions of future events,
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including the continued availability of certain resources and other factors.
However, there can be no guarantee that these estimates will be achieved, and
actual results could differ materially from those anticipated. Specific
factors that might cause such material differences include, but are not
limited to, the availability and cost of personnel trained in this area, the
ability to locate and correct all relevant computer codes and similar
uncertainties.
DISCLOSURE REGARDING FORWARD LOOKING STATEMENTS
This report includes forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended. Although management believes
that the expectations reflected in such forward looking statements are based
upon reasonable assumptions, the Company can give no assurance that these
expectations will be achieved. Any change in the following factors may impact
the achievement of results in forward-looking statements: the price of gold
and precious, semiprecious and synthetic stones; the Company's access to
students and consumers in schools; the seasonality of the Company's business;
regulatory and accounting rules; the Company's relationship with its
independent sales representatives; fashion and demographic trends; general
economic, business and market trends and events, especially during peak
buying seasons for the Company's products; the Company's ability to respond
to customer change orders and delivery schedules; development and operating
costs; competitive pricing changes; successful completion of management
initiatives designed to achieve operating efficiencies; and completion of
Year 2000 compliance projects with respect to internal and external
computer-based systems. The foregoing factors are not exhaustive. New factors
may emerge or changes may occur that impact the Company's operations and
businesses. Forward-looking statements attributable to the Company or persons
acting on behalf of the Company are expressly qualified on the foregoing or
such other factors as may be applicable.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements of the Company and the predecessor financial
statements of ArtCarved and Balfour are included as part of this report. (See
page 30.)
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
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PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The following table sets forth in alphabetical order each person who
was an executive officer or director of the Company as of August 29, 1998:
<TABLE>
<CAPTION>
NAME POSITION
- ---- --------
<S> <C>
EXECUTIVE OFFICERS AND DIRECTORS:
Jeffrey H. Brennan President, Chief Executive Officer and Director
John K. Castle Director
Richard H. Fritsche* Vice President and Chief Financial Officer
William J. Lovejoy Director
David B. Pittaway Director
Zane Tankel Director
Edward O. Vetter Director
</TABLE>
*Mr. Fritsche's employment with the Company was terminated as of August
29, 1998.
For a description of the Company's employment arrangements with Messrs.
Brennan and Fritsche (hereinafter, the "Named Executive Officers") see
"Executive Compensation --Employment Agreements". No family relationship
exists between any of the executive officers or between any of them and any
director of the Company.
JEFFREY H. BRENNAN (54) has been President, Chief Executive Officer and
a director of the Company since December 16, 1996, and prior thereto was
President and Chief Executive Officer of CJC from September 1995 through
December 1996. He also held the position of Chief Financial Officer of CJC
from August 1988 to December 1996 and served as a director of CJC from
December 1988 through December 1996. Before joining CJC in August 1988, Mr.
Brennan served in various financial management positions with Baker Hughes
Incorporated, a provider of oilfield services, supplies and equipment.
JOHN K. CASTLE (57) has been a director of the Company since December
16, 1996, and has been Chairman of Castle Harlan, Inc., a private
merchant bank, since 1987. Mr. Castle is Chairman of Castle Harlan Partners
II GP, Inc., which is the general partner of Castle Harlan Partners II,
L.P., the Company's controlling stockholder. Mr. Castle is also Chairman
and Chief Executive Officer of Branford Castle Holdings, Inc. and Chairman
of Castle Harlan Partners III GP, Inc., the general partner of the general
partner of Castle Harlan Partners III, L.P. Immediately prior to forming
Castle Harlan, Inc., Mr. Castle was President and Chief Executive
Officer and a director of Donaldson, Lufkin and Jenrette, Inc., one of the
nation's leading investment banking firms. Mr. Castle is a director of
Sealed Air Corporation, Morton's Restaurant Group, Inc. and Universal
Compression, Inc.; a Managing Director of Statia Terminals Group,
N.V.; and a member of the corporation of the Massachusetts Institute of
Technology. Mr. Castle is also a Trustee of the New York and Presbyterian
Hospitals, Inc., the Whitehead Institute of Biomedical Research and New
York Medical College (for 11 years serving as Chairman of the Board).
Formerly, Mr. Castle was a Director of the Equitable Life Assurance Society
of the United States.
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<PAGE>
WILLIAM J. LOVEJOY (31) has been a director of the Company since December
16, 1996, and served as Secretary of the Company from April 1996 through
December 1996. Mr. Lovejoy is a Vice President of Castle Harlan, Inc., a private
merchant bank, with which he has been associated since December 1994. From June
to August of 1992 and from August 1993 to November 1994, Mr. Lovejoy was a
management consultant at The Boston Consulting Group, Inc. From 1991 to 1993 he
attended Harvard Business School, and prior to that worked as an analyst at
Wasserstein Perella & Co., Inc. Mr. Lovejoy also serves as a director of
Homestead Insurance Company.
DAVID B. PITTAWAY (47) has been a director of the Company since December
16, 1996, and was President, Treasurer and the sole director of the Company from
April 1996 through December 1996. Mr. Pittaway has been Vice President and
Secretary of Castle Harlan, Inc., a private merchant bank, since February 1987
and Managing Director since February 1992. Mr. Pittaway is Secretary of Castle
Harlan Partners II GP, Inc., which is the general partner of the general partner
of Castle Harlan Partners II, L.P., the Company's controlling stockholder. Mr.
Pittaway is also Secretary of Castle Harlan Partners III GP, Inc., the general
partner of the general partner of Castle Harlan Partners III, L.P. Mr. Pittaway
has been Vice President and Secretary of Branford Castle, Inc., an investment
company, since October 1986; Vice President, Chief Financial Officer and a
director of Branford Chain, Inc., a marine wholesale company, since June 1987; a
director of Morton's Restaurant Group, Inc., a public restaurant company and of
Charlie Browns Acquisition Corp; and Managing Director of Statia Terminals
Group, N.V., a holder of marine terminals. Prior to 1987, Mr. Pittaway was Vice
President of Strategic Planning and Assistant to the President of Donaldson
Lufkin & Jenrette. Inc. from 1985.
ZANE TANKEL (58) has been a director of the Company since December 16,
1996, and has been Chairman and Chief Executive Officer of Zane Tankel
Consultants, Inc., a sales company, since 1990. In 1994, Mr. Tankel formed Apple
Metro, Inc., a restaurant franchisee for the New York metropolitan area, for the
franchiser Applebee's Neighborhood Grill & Bar. He is presently Chairman and
Chief Executive Officer of Apple Metro, Inc. In 1995, Mr. Tankel was elected
chairman of the Federal Law Enforcement Foundation, which aids the federal law
enforcement community in times of crisis, and was elected to the Board of
Directors of the Metropolitan Presidents Organization, the New York chapter of
the World Presidents Organization, with which Mr. Tankel has been associated
since 1977. Mr. Tankel is also on the advisory board to the Boys Choir of Harlem
and has also served on the Board of Directors of Beverly Hills Securities
Corporation, a wholesale mortgage brokerage company, from 1987 until its sale in
January 1994. In addition, Mr. Tankel founded Saga Communications, Inc. in 1988.
EDWARD O. VETTER (78) has been a director of the Company since January
28, 1998 and has served as President of Edward O. Vetter & Associates, a
private management consulting firm, since 1978 and has also served as a
Trustee for the Massachusetts Institute of Technology since 1979. Mr. Vetter
also served from 1987 to 1991 as Chairman of the Texas Department of
Commerce, from 1979 to 1983 as Energy Advisor to the Governor of Texas and
from 1976 to 1977 as U.S. Undersecretary of Commerce, serving as Director of
Overseas Private Investment Corporation and as Director of Pension Benefit
Guaranty Corporation. From 1952 through 1975, Mr. Vetter was employed by
Texas Instruments, Inc. in various capacities and was the Executive
Vice-President and Chief Financial Officer at the time of his retirement in
1975. Formerly, Mr. Vetter has served as a director of AMR Corporation,
Champion International, Cabot Corporation, Dual Drilling Company, and Bell
Packaging Company.
The Board of Directors has established two committees, a Compensation
Committee and an Audit Committee. The Compensation Committee reviews general
policy matters relating to compensation and benefits of employees and
officers of the Company. The Audit Committee recommends the firm to be
appointed as independent accountants to audit the Company's financial
statements, discusses the scope and results of the audit with the independent
accountants, reviews with management and the independent accountants the
Company's interim and year-end operating results, considers the adequacy of
the internal controls and audit procedures of the Company and reviews the
non-audit services to be performed by the independent accountants. The
Compensation Committee consists of Messrs. Castle, Pittaway and Tankel and
the Audit Committee consists of Messrs. Pittaway, Lovejoy and Vetter.
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ITEM 11. EXECUTIVE COMPENSATION
The table below summarizes the total value of compensation received by
the Named Executive Officers who received compensation which exceeded
$100,000 during fiscal 1998.
<TABLE>
<CAPTION>
SUMMARY COMPENSATION TABLE
Long Term
Annual Compensation Compensation
------------------- --------------------------------
Awards Payouts
------ -------
Securities
Name and Underlying LTIP All Other
Principal Position Year Salary($) Bonus($) Options(#)(1) Payouts Compensation($)
------------------ ---- --------- -------- ------------- ------- ---------------
<S> <C> <C> <C> <C> <C> <C>
George Agle(2)
Former Chairman of the 1998 -0- -0- -0- -0- 300,000(2)
Board 1997 207,692 50,000 -0- -0- -0-
Jeffrey H. Brennan
President and Chief 1998 195,292 -0- -0- -0- -0-
Executive Officer 1997 131,538 -0- 8,617 -0- -0-
Richard H. Fritsche(3)
Vice President and Chief 1998 118,309 50,000 -0- -0- 27,894(4)
Financial Officer 1997 79,618 -0- 1,723 -0- 46,940(4)
</TABLE>
- ------------------------
(1) The right to exercise the underlying options granted pursuant to the
Company's Amended and Restated 1997 Stock Option Plan (the "Plan") vest
at the rate of 25% per year at the end of the second through fifth year
following the grant. As of August 29, 1998, there were no options
exercisable under the Plan. Unless otherwise terminated earlier in
accordance with the terms of the Plan, the options expire ten years from
the date of grant.
(2) Mr. Agle's employment with the Company was terminated as of March 31,
1997. Payments to Mr. Agle continued in accordance with the terms of
his employment agreement through September 25, 1998.
(3) Mr. Fritsche's employment with the Company was terminated as of August
29, 1998. Payments to Mr. Fritsche after such date continued to
be made in accordance with the terms of his employment agreement. Mr.
Fritsche's options under the Plan terminated effective August 29, 1998
upon the termination of his employment.
(4) Consists of reimbursement for relocation expenses.
No stock options under the Plan were granted to or exercised by any of
the named executives or officers during fiscal 1998. Options to purchase an
aggregate of 937 shares were granted to each of Messrs. Tankel and Vetter
pursuant to the Plan during fiscal 1998.
Effective January 1, 1998, directors who are neither managers of the
Company nor affiliates of CHPII, are entitled to receive a fee of $25,000 per
year for their services as a director. In addition, all directors are
reimbursed for expenses incurred by them in attending meetings of the Board
of Directors or any committee thereof.
The Company has entered into indemnification agreements with each of
its directors that, among other things, require the Company to indemnify such
directors to the fullest extent permitted by law and to advance to the
directors all related expenses, subject to reimbursement if it is
subsequently determined that indemnification is not permitted. The Company
has also agreed to indemnify and advance all expenses incurred by directors
seeking to enforce their rights under the indemnification agreements, and to
cover directors under the Company's directors' and officers' liability
insurance.
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<PAGE>
EMPLOYMENT CONTRACTS
Pursuant to the purchase agreement related to the acquisition of
Balfour, the Company agreed to employ Mr. Agle effective as of December 16,
1996, at an annual base salary of $300,000 plus a bonus of $50,000 payable
under certain circumstances. In addition, the Company agreed to assume
Balfour's obligations under Mr. Agle's employment agreement with Balfour to
pay Mr. Agle a severance payment equal to 18 months of his yearly salary
payable on a monthly basis in the event he voluntarily terminated employment
with the Company under certain circumstances or was terminated without cause.
Mr. Agle's employment by the Company ended as of March 31, 1997, whereupon
Mr. Agle was paid a $50,000 bonus and the Company commenced making severance
payments to Mr. Agle in accordance with the foregoing. All payments due to
Mr. Agle under his employment agreement were completed on September 25, 1998.
The Company entered into an employment agreement with Jeffrey H.
Brennan, effective as of December 16, 1996, pursuant to which Mr. Brennan
serves as Chief Executive Officer of the Company at an annual base salary of
$190,000 per year for an initial term of four years, which will automatically
be extended for additional one-year terms on December 15th of each succeeding
year thereafter unless earlier terminated by the Company by not less than 60
days' prior notice. Mr. Brennan will be entitled to participate in all
employee benefit plans and programs (including any incentive bonus plans and
incentive stock option plans) maintained by the Company from time to time for
the benefit of its employees. In addition, Mr. Brennan's employment agreement
provides that, in the event Mr. Brennan's employment is terminated by the
Company without Cause (as defined) or by Mr. Brennan with Good Reason (as
defined), Mr. Brennan will be entitled to receive bi-weekly severance
payments during the two-year period following his termination in an amount
equal to the average of his bi-weekly base compensation in effect within the
two years preceding his termination. Mr. Brennan has agreed not to compete
with the Company in the United States for a period of one year after the
termination of his employment under his employment agreement.
The Company entered into an employment agreement with Richard H.
Fritsche, effective as of December 16, 1996, pursuant to which Mr. Fritsche
was to serve as an executive of the Company at an annual base salary of
$115,000 per year for an initial term of three years, which could be
automatically extended for additional one year terms on December 15th of each
succeeding year thereafter unless earlier terminated by the Company by not
less than 60 days' prior notice. Mr. Fritsche's employment pursuant to his
employment agreement was terminated on August 29, 1998. In accordance with
Mr. Fritsche's employment agreement, Mr. Fritsche is entitled to receive
bi-weekly severance payments during the 18-month period following his
termination in an amount equal to the average of his bi-weekly base
compensation in effect within the two years preceding his termination. Mr.
Fritsche has agreed not to compete with the Company in the United States for
a period of one year after the termination of his employment under his
employment agreement.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
No member of the Compensation Committee is an employee of the Company.
There are no compensation committee interlocks (i.e., no executive officer of
the Company serves as a member of the board of directors or the compensation
committee of another entity which has an executive officer serving on the
Company's Board or the Compensation Committee.)
MANAGEMENT OPTIONS
The Board of Directors of the Company approved the Commemorative
Brands, Inc. Amended and Restated 1997 Stock Option Plan (the "Option Plan")
effective July 29, 1997, as amended December 9, 1997, pursuant to which
approximately 15% of the Common Stock of the Company on a fully diluted basis
(after giving effect to the issuance of the shares of Common Stock underlying
such options) or 69,954 shares of Common Stock have been reserved for
issuance upon exercise of future stock options under the Option Plan. The
Option Plan provides for the granting of both incentive and nonqualified
stock options. On July 29, 1997, the Board approved the grant of 34,470
options to management employees at an exercise price of $6.67. No options
were granted to management in fiscal 1998. On January 28, 1998 the Board
approved the grant of 937 nonqualified options to each of Messrs. Tankel and
Vetter, at an exercise price of $6.67. The Compensation Committee is
responsible for monitoring the Option Plan. All Common Stock issued upon
exercise of options granted pursuant to the Option Plan will be subject to a
voting trust agreement.
-24-
<PAGE>
INCENTIVE STOCK PURCHASE PLAN
On July 7, 1998 the stockholders of the Company unanimously approved
the Commemorative Brands, Inc. Incentive Stock Purchase Plan (the "Stock
Purchase Plan"). Pursuant to the terms of the Stock Purchase Plan, the
Company may from time to time offer shares of the Company's Class B Preferred
Stock and Common Stock to employees, consultants and independent sales
representatives who are determined to be eligible to purchase shares pursuant
to the Stock Purchase Plan by the Plan Administrator (as defined in the Stock
Purchase Plan) upon such terms and at such prices as are set forth in the
Stock Purchase Plan and as are determined by the Plan Administrator.
On July 20, 1998, the Company commenced an offering pursuant to the
Stock Purchase Plan of up to an aggregate of 18,750 shares of each of the
Company's Common Stock and Series B Preferred Stock to eligible employees,
consultants and independent sales representatives. The offering is currently
scheduled to terminate on December 22, 1998.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information known by the Company
regarding the beneficial ownership of the Company's voting securities as of
August 29, 1998, with respect to (i) each person or entity who is the
beneficial owner of more than 5% of any class of the Company's voting
securities, (ii) each of the Company's directors, (iii) each of the Named
Executive Officers, and (iv) all directors and executive officers as a group.
<TABLE>
<CAPTION>
NUMBER OF PERCENTAGE NUMBER OF PERCENTAGE
SHARES OF OF TOTAL SHARES OF OF TOTAL
COMMON COMMON SERIES B SERIES B
NAME AND ADDRESS OF BENEFICIAL OWNER (1) STOCK STOCK PREFERRED PREFERRED
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Castle Harlan Partners II, L.P.(2) 330,840 87.7 330,840 87.7
Castle Harlan Offshore Partners, L.P.(2) (3) 20,804 5.5 20,804 5.5
John K. Castle (2) (3) (4) 377,156 100.0 377,156 100.0
William J. Lovejoy (2) -- -- -- --
David B. Pittaway (2) 469 * 469 *
Zane Tankel (2) 938 * 938 *
Edward O. Vetter(2) 400 * 400 *
Jeffrey H. Brennan (5) 937 * 937 *
Richard H. Fritsche (5)(6) 234 * 234 *
Directors and executive officers as a group
(9 persons, including those listed above)(5) 377,156 100.0 377,156 100.0
</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 such stockholder's name except for John K. Castle who, in his
capacity as voting trust, has sole voting power on such shares, but
disclaims any economic interest in any shares so held.
(2) The address for each such stockholder or director identified above is
c/o Castle Harlan, Inc., 150 East 58th Street, New York, New York
10155.
(3) Affiliates of CHPII include among others, Castle Harlan Offshore
Partners, L.P. ("Offshore"), Dresdner Bank AG, Grand Cayman Branch
Managed Account (the "Managed Account") and the limited partners of the
sole general partner of CHPII. Castle Harlan, Inc. acts as the
investment manager for CHPII, Offshore and the Managed Account,
pursuant to separate investment management agreements. Castle Harlan
Associates, L.P. ("CHALP") is the sole general partner of each of CHPII
and Offshore, therefore, may be deemed to be a beneficial owner of the
shares owned by each of those two partnerships. Castle Harlan Partners
II GP, Inc. is the sole general partner of CHALP and, therefore, may be
deemed to be a beneficial owner of the shares owned by CHALP. Castle
Harlan, Inc., as the investment manager for each of CHPII, Offshore and
the Managed Account (the owner of 18,483 shares of common stock and
18,483 shares of Series B Preferred Stock representing 4.9% of the
total outstanding common stock and 4.9% of the total Series B Preferred
Stock,), may be deemed to be beneficial owner of the shares owned by
such entities.
-25-
<PAGE>
(4) John K. Castle is a director of the Company and is the controlling
stockholder of Castle Harlan Partners II GP, Inc., the general partner
of the general partner of CHPII, and as such may be deemed to be a
beneficial owner of the shares owned by CHPII and its affiliates. Mr.
Castle disclaims beneficial ownership of such shares in excess of his
proportionate partnership share. In addition, Mr. Castle serves as
voting trustee under a voting trust agreement (the "Voting Trust
Agreement") with certain officers and directors of the Company, and
limited partners of CHALP and a corporate entity of which Mr. Castle is
Chairman, Chief Executive Officer and principal stockholder. As such
voting trustee, Mr. Castle may be deemed the beneficial owner of the
shares of Common Stock and Series B Preferred beneficially held by such
persons and entities (which amounts are included in the numbers set
forth above). Mr. Castle disclaims any economic interest in such
shares.
(5) The address for each individual identified above is c/o Commemorative
Brands, Inc., 7211 Circle S Road. Austin, Texas 78745.
(6) Following termination of Mr. Fritsche's employment on August 29, 1998,
Mr. Fritsche requested pursuant to the terms of the Stock Purchase and
Subscription Agreement, dated as of June 30, 1998, by and between the
Company and Mr. Fritsche, that the Company repurchase his shares at
the Fair Market Value (as defined in the Agreement) thereof.
In the Spring of 1998, Mr. Edward O. Vetter and Mr. Zane Tankel, both
directors of the Company, purchased an aggregate of 400 and 938 shares,
respectively, of Series B Preferred Stock and 400 and 938 shares,
respectively, of Common Stock from certain members of the Castle Harlan Group
(as defined below) at a purchase price of $100 per share of Series B
Preferred Stock and $6.67 per share of Common Stock. Concurrently with such
purchases, Messrs. Vetter and Tankel deposited their shares into the voting
trust created by the Voting Trust Agreement, of which John K. Castle is
voting trustee.
During June 1998, the company sold 937 newly issued shares of Series B
Preferred Stock and 937 newly issued shares of Common Stock to Jeffrey H.
Brennan, the Chief Executive Officer and President and director of the
Company, and 234 newly issued shares of Series B Preferred Stock and 234
newly issued shares of Common Stock to Richard H. Fritsche, former Vice
President and Chief Financial Officer of the Company. The Company also sold
an aggregate of 985 newly issued shares of Series B Preferred Stock and 985
shares of Common Stock to three other officers of the Company. All such sales
were effected at a purchase price of $100 per share of Series B Preferred
Stock and $6.67 per share of Common Stock. Each of the foregoing purchases of
shares by officers of the Company are subject to stock purchase agreements
that give the Company the right to repurchase such shares or the officer the
right to require the Company to repurchase such shares upon termination of
employment under certain circumstances. Concurrently with such purchases, the
officers placed all of the shares acquired by them into the voting trust
created by the Voting Trust Agreement, of which John K. Castle is voting
trustee.
In accordance with a subscription agreement entered into by the Company
and certain of CHPII's affiliates (together, the "Castle Harlan Group") in
conjunction with the Acquisitions, the Company granted to the Castle Harlan
Group and their permitted transferees, including Messrs. Vetter and Tankel,
certain registration rights with respect to the shares of its capital stock
owned by them, pursuant to which the Company agreed, among other things, to
effect the registration of such shares under the Securities Act at any time
at the request of the Castle Harlan Group and Messrs. Vetter and Tankel and
granted to the Castle Harlan Group and Messrs. Vetter and Tankel unlimited
piggyback registration rights on certain registrations of shares by the
Company.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The Company entered into a Management Agreement dated December 16,
1996, with Castle Harlan, Inc. (the "Manager"), pursuant to which the Manager
agreed to provide business and organizational strategy, financial and
investment management and merchant and investment banking services to the
Company upon the terms and conditions set forth therein. As compensation for
such services, the Company agreed to pay the Manager $1.5 million per year,
which amount has been paid in advance for the first year and is payable
quarterly in arrears thereafter. The agreement is for a term of 10 years,
renewable automatically from year to year thereafter unless the Castle Harlan
Group then owns less than 5% of the then outstanding capital stock of the
Company. The Company has agreed to indemnify the Manager against liabilities,
costs, charges and expenses relating to the Manager's performance of its
duties, other than such of the foregoing resulting from the Manager's gross
negligence or willful misconduct. The Bank Credit Facility prohibits payment
of the CHP Management Fee unless at the time of payment (i) no Event of Default
(as defined in the Bank Credit Facility) shall have occurred and is
-26-
<PAGE>
continuing or would result from the payment of the management fee; (ii) the
Short Term Revolving Credit shall have been repaid in full; and (iii) the
Company meets the requisite Modified Funded Debt Ratio (as defined in the
Bank Credit Facility). The Indenture also prohibits payment of the CHP
Management Fee in the event of a default by the Company in the payment of
principal, Redemption Price, Purchase Price (both as defined in the
Indenture), interest, or Liquidated Damages (if any) on the Notes.
On June 30, 1998, the Company sold shares of Common Stock and Series B
Preferred Stock to certain executive officers of the Company including
Jeffrey H. Brennan, President and Chief Executive Officer of the Company and
Richard Fritsche, formerly Chief Financial Officer. In conjunction therewith,
the Company lent Mr. Brennan $75,000 to purchase shares of the Company's
stock pursuant to a promissory note in the original principal amount of
$75,000, which amount is due and payable in full on June 16, 2003, and which
bears interest at the rate of 5.77% per annum, payable annually on the 15th
of June. Mr. Brennan has granted to the Company a security interest in the
937 shares of Common Stock and Series B Preferred Stock acquired by him and
his interest in the voting trust into which the shares have been deposited as
collateral security for the repayment in full of the promissory note. The
Company also lent another officer of the Company the sum of $25,000 to
purchase shares of the Company's stock on substantially identical terms as
the promissory note issued by Mr. Brennan.
The Company has agreed to indemnify CHPII pursuant to an
indemnification agreement, dated August 26, 1998 for any amounts that may be
incurred by CHPII under CHPII's guaranty of the Company's obligations under
the Short Term Revolving Credit. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations - Liquidity and Capital
Resources."
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
The following documents have been filed as a part of this report or
where noted incorporated by reference:
(a) (1) and (2) The response to this portion of Item 14 is submitted
as a separate section of this report. (See page 30.)
(b) The Company has not filed any reports on Form 8-K over
the last quarter of the period covered by this report.
(a) (3) and (c) The following exhibits are filed as a part of the report:
<TABLE>
<CAPTION>
EXHIBIT NO. DESIGNATION
---------- -----------
<C> <S>
2.1(a) Asset purchase Agreement dated as of May 20, 1996
("ArtCarved Purchase Agreement"), among the Company, CJC
and CJC North America, Inc. ("CJCNA").
2.2(a) First Amendment to the ArtCarved Purchase Agreement dated
as of November 21, 1996, among the Company, CJC and CJCNA.
2.3(a) Letter Agreement amending the ArtCarved Purchase Agreement
dated December 16, 1996, among the Company, CJC and CJCNA.
2.4(a) Amended and Restated Asset Purchase Agreement dated as of
November 21, 1996 ("Balfour Purchase Agreement"), among the
Company, Town & Country, L. G. Balfour Company, Inc., and
Gold Lance, Inc.
2.5(a) Letter Agreement amending the Balfour Purchase Agreement dated
December 16, 1996, by and among the Company, Town & Country,
L. G. Balfour Company, Inc. and Gold Lance.
3.1(a) Certificate of Incorporation of the Company, as amended.
3.2(a) Certificate of Designations, Preferences and Rights of
Series A Preferred Stock of the Company, effective
December 13, 1996, together with a Certificate of
Correction thereof.
3.3(a) Certificate of Designations, Preferences and Rights of
Series B Preferred Stock of 3.3(a) the Company effective
December 13, 1996.
3.4(a) Restated by-laws of the Company, as amended.
3.5 Certificate of Increase of Series B Preferred Stock dated
June 10, 1998. Filed herewith.
4.1(a) Indenture dated as of December 16, 1996, between the
Company and Marine Midland Bank, as trustee (including the
form of Note).
</TABLE>
-27-
<PAGE>
<TABLE>
<C> <S>
4.2(a) Form of Note (Included as part of Indenture).
4.3(a) Registration Rights Agreement dated as of December 16, 1996,
among the Company, Lehman Brothers Inc. and BT Securities
Corporation.
4.4 Amended and Restated Stockholders' and Subscription
Agreement, dated as of April 29, 1998, by and among the
Company, CHPII, Dresdner Bank AG, Grand Cayman Branch,
Offshore, John K. Castle, as Voting Trustee, and the
individuals party thereto. Filed herewith.
4.5(b) Amended and restated 1997 Stock Option Plan of the
Company. Incorporated by reference to the corresponding
Exhibit of the Company's Annual Report - Form 10K
(File No. 333-20759) dated August 30, 1997.
9.1 Voting Trust Agreement, as amended and restated as of
April 29, 1998, among the Company, certain stockholders of
the Company party thereto and John K. Castle, as
Voting Trustee. Filed herewith.
10.1(a) Revolving Credit, Term Loan and Gold Consignment Agreement
dated as of December 16, 1996, among the Company, the
lending institutions listed therein and The First National
Bank of Boston and Rhode Island Hospital Trust National
Bank, as Agents for the Banks.
10.2(a) Purchase Agreement dated December 10,1 996, among the Company
and the Initial Purchasers.
10.3(a)(b) Employment Agreement dated as of December 16, 1996, between the
Company and Jeffrey H. Brennan.
10.4(a)(b) Employment Agreement dated as of December 16, 1996, between the
Company and Richard H. Fritsche.
10.5(a)(b) Employment arrangements between the Company and Balfour with
respect to George Agle.
10.6(a)(b) Form of Indemnification Agreement between the Company and
(i) each director and (ii) certain officers.
10.7 Management Agreement dated as of December 17, 1996, between the
Company and Castle Harlan, Inc. Incorporated by reference to the
corresponding Exhibit of the Company's Annual Report on Form 10-K
(File No. 333-20759) dated August 30, 1997.
10.8 First Amendment to Revolving Credit, Term Loan and Gold Consignment
Agreement, dated March 16, 1998 - incorporated by reference to Exhibit 10.1
to the Company's Quarterly Report on Form 10-Q (File No. 333-20759) dated
February 28, 1998.
10.9 Second Amendment to Revolving Credit, Term Loan and Gold Consignment
Agreement, dated July 10, 1998 - incorporated by reference to Exhibit 10.1
to the Company's Quarterly Report on Form 10-Q (File No. 333-20759) dated
May 30, 1998.
10.10 Incentive Stock Purchase Plan, effective as of July 7, 1998. Filed herewith.
10.11 Third Amendment to Revolving Credit, Term Loan and Gold Consignment Agreement,
dated August 26, 1998. Filed herewith.
10.12 Revolving Credit Note, dated as of August 26, 1998, issued by the Company and
payable to the order of BankBoston, N.A. Filed herewith.
10.13 Indemnity Agreement, dated August 26, 1998, by and between the Company and CHPII.
Filed herewith.
10.14 Fourth Amendment to Revolving Credit, Term Loan and Gold Consignment Agreement,
dated November 27, 1998. Filed herewith.
11.1 Statement re: Computation of per share earnings. Filed herewith.
27.1 Financial Data Schedule. Filed herewith.
</TABLE>
- ----------------------
(a) Incorporated by reference to the corresponding Exhibit number of the
Company's Registration Statement on Form S-4 (Registration No. 333-20759),
dated April 11, 1997.
(b) Management contract or compensatory plan or arrangement.
-28-
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
COMMEMORATIVE BRANDS, INC.
By:/s/ Sherice P. Bench
------------------------------------------
(Signature)
Sherice P. Bench
Vice President Finance and Principal
Accounting Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant in the indicated capacities on November 27, 1998.
<TABLE>
<S> <C>
/s/ Jeffrey H. Brennan President, Chief Executive Officer and Director
----------------------------------
Jeffrey H. Brennan
/s/ John K. Castle Director
----------------------------------
John K. Castle
/s/ William J. Lovejoy Director
----------------------------------
William J. Lovejoy
/s/ David B. Pittaway Director
----------------------------------
David B. Pittaway
/s/ Zane Tankel Director
----------------------------------
Zane Tankel
/s/ Edward O. Vetter Director
----------------------------------
Edward O. Vetter
</TABLE>
-29-
<PAGE>
SUPPLEMENTAL INFORMATION TO BE FURNISHED WITH REPORTS FILED PURSUANT TO
SECTION 15(d) OF THE ACT BY REGISTRANTS WHICH HAVE NOT REGISTERED SECURITIES
PURSUANT TO SECTION 12 OF THE ACT:
The Company has not sent to any of the Company's security holders either (i)
an annual report covering the Company's last fiscal year or (ii) any proxy
statement, form of proxy or other proxy material with respect to any annual
or other meeting of security holders.
-30-
<PAGE>
FINANCIAL STATEMENTS
Index to Financial Statements
<TABLE>
<CAPTION>
Page
<S> <C>
Consolidated Financial Statements of Commemorative Brands, Inc. and Subsidiaries
Report of Independent Public Accountants......................................................... 32
Consolidated Balance Sheets as of August 29, 1998 and August 30, 1997............................ 33
Consolidated Statements of Operations for the Fiscal Years Ended August 29, 1998 and
August 30, 1997......................................................................... 34
Consolidated Statements of Stockholders' Equity for the Fiscal Years Ended August 29, 1998 and
August 30, 1997......................................................................... 35
Consolidated Statements of Cash Flows for the Fiscal Years Ended August 29, 1998 and
August 30, 1997......................................................................... 36
Notes to Consolidated Financial Statements....................................................... 37
Financial Statements of CJC Holdings, Inc., Class Rings Business (ArtCarved)
Report of Independent Public Accountants......................................................... 52
Statements of Income (Loss) for the Fiscal Year Ended August 31, 1996,
and for the Period from September 1, 1996, through December 16, 1996.................... 53
Statements of Changes in Advances and Equity (Deficit) for the Fiscal Year Ended
August 31, 1996, and for the Period from September 1,
1996, through December 16, 1996......................................................... 54
Statements of Cash Flows for the Fiscal Year Ended August 31, 1996,
and for the Period from September 1, 1996, through December 16, 1996.................... 55
Notes to Financial Statements.................................................................... 56
Financial Statements of L. G. Balfour Company, Inc.
Report of Independent Public Accountants......................................................... 63
Statements of Operations for the Year Ended February 25, 1996, and for the Period
Ended December 16, 1996................................................................. 64
Statements of Stockholder's Equity for the Year Ended February 25, 1996, and
for the Period Ended December 16, 1996.................................................. 65
Statements of Cash Flows for the Year Ended February 25, 1996, and for the
Period Ended December 16, 1996.......................................................... 66
Notes to Financial Statements.................................................................... 67
</TABLE>
-31-
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Stockholders of
Commemorative Brands, Inc.:
We have audited the accompanying consolidated balance sheets of Commemorative
Brands, Inc. (a Delaware corporation), and subsidiaries as of August 29, 1998
and August 30, 1997, and the related consolidated statements of operations,
stockholders' equity and cash flows for the fiscal years ended August 29,
1998 and August 30, 1997. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these consolidated financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of
Commemorative Brands, Inc., and subsidiaries, as of August 29, 1998 and
August 30, 1997, and the results of their operations and their cash flows for
the fiscal years ended August 29, 1998 and August 30, 1997, in conformity
with generally accepted accounting principles.
Houston, Texas
November 27, 1998
-32-
<PAGE>
COMMEMORATIVE BRANDS, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
<TABLE>
<CAPTION>
August 29, August 30,
1998 1997
---------------- --------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 975 $ 2,174
Accounts receivable, net of allowance for doubtful accounts of $2,356
and $3,750, respectively 24,705 26,444
Inventories 14,299 11,767
Prepaid expenses and other current assets 10,517 8,522
---------------- --------------
Total current assets 50,496 48,907
Property, plant and equipment, net 36,294 33,460
Trademarks, net of accumulated amortization of $1,313
and $543, respectively 29,427 30,197
Goodwill, net of accumulated amortization of $3,844 and
$1,426, respectively 80,517 82,935
Other assets 7,071 5,370
---------------- --------------
Total assets $ 203,805 $ 200,869
================ ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Bank overdraft $ 3,138 $ 4,188
Accounts payable and accrued expenses 22,116 20,893
Current portion of long-term debt 1,983 750
---------------- --------------
Total current liabilities 27,237 25,831
Long-term debt, net of current portion 132,339 124,700
Other long-term liabilities 9,383 9,885
---------------- --------------
Total liabilities 168,959 160,416
Commitments and contingencies
Stockholders' equity:
Preferred stock, $.01 par value, 750,000 shares authorized (in total)-
Series A, 100,000 shares issued and outstanding 1 1
Series B, 377,156 and 375,000 shares issued and outstanding 4 4
Common Stock, $.01 par value, 750,000 shares authorized, 377,156 and
375,000 shares issued and outstanding 4 4
Additional paid-in capital 50,391 50,161
Retained earnings (deficit) (15,554) (9,717)
---------------- --------------
Total stockholders' equity 34,846 40,453
---------------- --------------
Total liabilities and stockholders' equity $ 203,805 $ 200,869
================ ==============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
-33-
<PAGE>
COMMEMORATIVE BRANDS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except share data)
<TABLE>
<CAPTION>
August 29, August 30,
1998 1997
----------------- -----------------
<S> <C> <C>
Net sales $ 151,101 $ 87,600
Cost of sales 72,615 45,189
----------------- -----------------
Gross profit 78,486 42,411
Selling, general and administrative expenses 68,294 41,481
----------------- -----------------
Operating income 10,192 930
Interest expense, net 14,829 9,797
----------------- -----------------
Loss before provision for income taxes (4,637) (8,867)
Provision for income taxes - -
----------------- -----------------
Net loss $ (4,637) $ (8,867)
Preferred dividends (1,200) (850)
----------------- -----------------
Net loss to common stockholders $ (5,837) $ (9,717)
================= =================
Basic and diluted loss per share $ (15.55) $ (25.91)
================= =================
Weighted average common shares outstanding and common and
common equivalent shares outstanding 375,323 375,000
================= =================
</TABLE>
- ----------------------------------------
Commemorative Brands, Inc. completed the acquisitions of ArtCarved
and Balfour on December 16, 1996, and prior to such date engaged in no
business activities other than those in connection with the
Acquisitions and financing thereof.
The accompanying notes are an integral part of these consolidated
financial statements.
-34-
<PAGE>
COMMEMORATIVE BRANDS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(In thousands, except share data)
<TABLE>
<CAPTION>
Preferred Stock Common Stock
------------------------------------------------------ -------------------------
Series A Series B
------------------------- ------------------------
Shares Amount Shares Amount Shares Amount
------------ ------------- ------------ ------------ ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Balance, March 28, 1996
(date of formation) - $ - - $ - - $ -
Issuance of Common Stock - - - - 375,000 4
Issuance of Preferred Stock 100,000 1 375,000 4 - -
Accrued Preferred Stock dividends - - - - - -
Net loss - - - - - -
------------ ------------- ------------ ------------ ----------- -------------
Balance, August 30, 1997 100,000 1 375,000 4 375,000 4
Issuance of Common Stock - - - - 2,156 -
Issuance of Preferred Stock - - 2,156 - - -
Accrued Preferred Stock dividends - - - - - -
Net loss - - - - - -
------------ ------------- ------------ ------------ ----------- -------------
Balance, August 29, 1998 100,000 $ 1 377,156 $ 4 377,156 $ 4
============ ============= ============ ============ =========== =============
<CAPTION>
Additional Retained
paid-in earnings
capital (deficit) Total
------------ ------------ ------------
<S> <C> <C> <C>
Balance, March 28, 1996 $ - $ - $ -
(date of formation)
Issuance of Common Stock 2,666 - 2,670
Issuance of Preferred Stock 47,495 - 47,500
Accrued Preferred Stock dividends - (850) (850)
Net loss - (8,867) (8,867)
------------ ------------ ------------
Balance, August 30, 1997 50,161 (9,717) 40,453
Issuance of Common Stock 14 - 14
Issuance of Preferred Stock 216 - 216
Accrued Preferred Stock dividends - (1,200) (1,200)
Net loss - (4,637) (4,637)
------------ ------------ ------------
Balance, August 29, 1998 $ 50,391 $ (15,554) $ 34,846
============ ============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
-35-
<PAGE>
COMMEMORATIVE BRANDS, INC.
STATEMENTS OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
For the Fiscal Year Ended
-------------------------------
August 29, August 30,
1998 1997
------------- ------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss
Adjustments to reconcile net loss to net cash $ (4,637) $ (8,867)
used in operating activities-
Depreciation and amortization
Provision for doubtful accounts 6,901 4,095
Changes in assets and liabilities- 706 632
Decrease in receivables
Decrease (increase) in inventories 1,033 8,187
Increase in prepaid expenses and other current assets (2,532) 4,557
Increase in other assets (1,995) (3,237)
Decrease in bank overdraft, accounts payable and accrued (1,696) (1,567)
expenses and other
long-term liabilities (1,529) (4,477)
------------- ------------
Net cash used in operating activities (3,749) (677)
------------- ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property, plant and equipment
Cash paid for the acquisitions of ArtCarved and Balfour, including (6,552) (3,493)
transaction costs - (170,200)
------------- ------------
Net cash used in investing activities (6,552) (173,693)
------------- ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from debt issuance - 120,200
Proceeds from issuance of common and preferred stock 230 50,000
Payments on term loan facility, net (750) -
Revolver borrowings, net 9,622 5,250
------------- ------------
Net cash provided by financing activities 9,102 175,450
------------- ------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (1,199) 1,080
CASH AND CASH EQUIVALENTS, beginning of period 2,174 1,094
------------- ------------
CASH AND CASH EQUIVALENTS, end of period $ 975 $ 2,174
============= ============
SUPPLEMENTAL DISCLOSURE
Cash paid during the period for -
Interest $ 14,039 $ 7,568
============= ============
Taxes $ 186 43
============= ============
SUPPLEMENTAL DISCLOSURE OF NONCASH FINANCING ACTIVITIES
Accrued preferred stock dividends $ 1,200 $ 850
============= ============
</TABLE>
- ----------------------------------------
Commemorative Brands, Inc. completed the acquisitions of ArtCarved and
Balfour on December 16, 1996, and prior to such date, engaged in no
business activities other than those in connection with the
Acquisitions and financing thereof.
The accompanying notes are an integral part of these consolidated
financial statements.
-36-
<PAGE>
COMMEMORATIVE BRANDS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) BACKGROUND AND ORGANIZATION
Commemorative Brands, Inc., a Delaware corporation (together with its
subsidiaries, CBI or the Company), is a manufacturer and supplier of class
rings and other graduation-related scholastic products for the high school
and college markets and manufactures and markets recognition and affinity
jewelry designed to commemorate significant events, achievements and
affiliations. CBI was initially formed in March 1996 by Castle Harlan
Partners II, L.P. (CHPII), a Delaware limited partnership and private equity
investment fund, for the purpose of acquiring ArtCarved and Balfour (as
defined below) and, until December 16, 1996, engaged in no business
activities other than in connection with the Acquisitions (as defined below)
and the financing thereof. The Company's scholastic product line consists of
high school and college class rings (the Company's predominate product
offering) and graduation-related fine paper products such as announcements,
name cards and diplomas. The Company is a leading manufacturer of class rings
in the United States with its corporate office and primary manufacturing
facilities located in Austin, Texas.
(2) MERGERS AND ACQUISITIONS
On December 16, 1996, the Company completed the acquisitions (the Acquisitions)
of substantially all of the scholastic and recognition and affinity product
assets and businesses of the ArtCarved Class Rings (ArtCarved) operations of CJC
Holdings, Inc. (CJC), from CJC and certain assets and liabilities of L. G.
Balfour Company, Inc. (Balfour), from Town & Country Corporation (Town &
Country).
In consideration for ArtCarved, CBI paid CJC, in cash, the sum of $115.1 million
and assumed certain related liabilities. In consideration for Balfour, CBI paid
Town & Country, in cash, the sum of $45.9 million and assumed certain related
liabilities. In addition, CBI purchased the gold on consignment to L. G. Balfour
Company, Inc. as of the closing date for a cash purchase price of approximately
$5.4 million.
The following represents the allocation of the purchase prices for ArtCarved and
Balfour to their respective assets and liabilities based on third-party
appraisals and management's estimate of fair values. The allocation of the
purchase prices (including transaction costs) for the Acquisitions is as set
forth below (in thousands):
<TABLE>
<CAPTION>
ArtCarved Balfour
----------------- ----------------
<S> <C> <C>
Current assets $ 23,220 $ 35,497
Property, plant and equipment 17,039 15,042
Goodwill 64,127 17,885
Trademarks 17,740 13,000
Other long-term assets 1,687 171
Accounts payable and accrued expenses (6,066) (22,334)
Other long-term liabilities - (6,808)
----------------- ----------------
$ 117,747 $ 52,453
================= ================
</TABLE>
The Company has closed and exited substantially all of the Balfour operations
and moved them from Attleboro, Massachusetts, to Austin, Texas.
-37-
<PAGE>
(3) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
FISCAL YEAR-END
CBI uses a 52/53-week fiscal year ending on the last Saturday of August.
CONSOLIDATION
The consolidated financial statements include the accounts of the Company and
its subsidiaries. All material intercompany accounts and transactions have been
eliminated in consolidation.
BUSINESS CONDITIONS
The results of operations of the Company for the fiscal year ended August 29,
1998 and August 30, 1997 were negatively impacted as a result of the
consolidation of the Attleboro and North Attleboro, Massachusetts operations
into the Austin, Texas facilities. The consolidation and integration of
operations required substantial time and cost due to complications arising from
the integration of the different order entry and manufacturing processes
required for the Balfour ring product line. The time to train new personnel to
implement the Balfour class ring operations was extensive and resulted in ring
manufacturing headcount levels higher than those experienced by the predecessor
companies through fiscal 1998. The consolidation of the Attleboro and North
Attleboro, Massachusetts operations in Austin, Texas facilities occurred during
the fiscal year ended August 30, 1997 and the integration of these operations
was substantially completed in the fiscal year ended August 29, 1998. There can
be no assurance that the operations formerly conducted by the each of the
Company's predecessors will be fully integrated or as to the amount of any costs
savings that may result from such integration.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents include highly liquid investments with original
maturities of three months or less.
INVENTORIES
Inventories, which include raw materials, labor and manufacturing overhead, are
stated at the lower of cost or market using the first-in, first-out (FIFO)
method.
ADVERTISING
The Company incurs advertising and promotion costs that are directly related to
a product in advance of the sale occurring. These amounts are included in
prepaid expenses and other current assets and are amortized over the period in
which the sale of products occurs.
SALES REPRESENTATIVE ADVANCES AND RESERVE FOR SALES REPRESENTATIVE ADVANCES
The Company advances funds to new sales representatives in order to open up new
sales territories or makes payments to predecessor sales representatives on
behalf of successor sales representatives. Such amounts are repaid by the sales
representatives through earned commissions on product sales. The Company
provides reserves to cover those amounts which it estimates to be uncollectible.
These amounts are included in prepaid expenses and other current assets in the
accompanying balance sheets.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are stated at cost, net of accumulated
depreciation. Depreciation is provided principally using the straight-line
method based on estimated useful lives of the assets as follows:
-38-
<PAGE>
<TABLE>
<CAPTION>
- ------------------------------------------------ ----------------------------
Description Useful Life
- ------------------------------------------------ ----------------------------
- ------------------------------------------------ ----------------------------
<S> <C>
Land improvements 15 years
- ------------------------------------------------ ----------------------------
- ------------------------------------------------ ----------------------------
Buildings and improvements 10 to 25 years
- ------------------------------------------------ ----------------------------
- ------------------------------------------------ ----------------------------
Tools and dies 10 to 20 years
- ------------------------------------------------ ----------------------------
- ------------------------------------------------ ----------------------------
Machinery and equipment 2 to 10 years
- ------------------------------------------------ ----------------------------
</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.
TRADEMARKS
The value of trademarks was determined based on a third-party appraisal and is
being amortized on a straight-line basis over 40 years.
IMPAIRMENT OF LONG-LIVED ASSETS
In March 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (SFAS) No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of." This statement
deals with accounting for the impairment of long-lived assets, certain
identifiable intangibles and goodwill related to assets to be held and used, and
for long-lived assets and certain identifiable intangibles to be disposed of.
This statement requires that long-lived assets (e.g., property, plant and
equipment and intangibles) be reviewed for impairment whenever events or changes
in circumstances, such as change in market value, indicate that the assets'
carrying amounts may not be recoverable. In performing the review for
recoverability, if future undiscounted cash flows (excluding interest charges)
from the use and ultimate disposition of the assets are less than their carrying
values, an impairment loss is recognized. Impairment losses are to be measured
based on the fair value of the asset. When factors indicate that long-lived
assets should be evaluated for possible impairment, the Company uses an estimate
of the related product lines' undiscounted cash flows over the remaining lives
of the assets in measuring whether the assets are recoverable.
GOODWILL
Costs in excess of fair value of net tangible and identifiable intangible
assets acquired and related acquisition costs are included in goodwill in the
accompanying balance sheets. Goodwill is being amortized on a straight-line
basis over 40 years. The Company continually evaluates whether events and
circumstances have occurred that indicate that the remaining estimated useful
life of goodwill may warrant revision or that the remaining balance of
goodwill may not be recoverable. When factors indicate that goodwill should
be evaluated for possible impairment, the Company would use an estimate of
the related product lines' undiscounted cash flows over the remaining life of
the goodwill in measuring whether the goodwill is recoverable.
OTHER ASSETS
Other assets include deferred financing costs which are amortized over the lives
of the specific debt and ring samples to national chain stores and sales
representatives which are amortized over three years.
INCOME TAXES
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases. Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. Deferred tax assets are
recognized net of any valuation allowance. The effect on deferred tax assets and
liabilities of a change in tax rates is recognized in income in the period that
includes the enactment date.
-39
<PAGE>
FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company's financial instruments consist primarily of cash and cash
equivalents, accounts receivable, bank overdraft, accounts payable and long-term
debt (including current maturities). The carrying amounts of the Company's cash
and cash equivalents, accounts receivable, bank overdraft and accounts payable
approximate fair value due to their short-term nature. The fair value of the
Company's long-term debt approximates the recorded amount based on current rates
available to the Company for debt with the same or similar terms.
REVENUE RECOGNITION
Revenues from product sales are recognized at the time the product is shipped.
CONCENTRATION OF CREDIT RISK
Credit is extended to various companies in the retail industry which may be
affected by changes in economic or other external conditions. The Company's
policy is to manage its exposure to credit risk through credit approvals and
limits.
ADVERTISING EXPENSE
Selling, general and administrative expenses for the Company include
advertising expenses of $3,506,000 and $2,752,000 for the fiscal years ended
August 29, 1998 and August 30, 1997 (see Note 1).
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from these estimates.
SEASONALITY
The Company's scholastic product sales tend to be seasonal. Class ring sales
are highest during October through December (which overlaps the Company's
first and second fiscal quarters), when students have returned to school
after the summer recess and orders are taken for delivery of class rings to
students before the winter holiday season. Sales of the Company's fine paper
products are predominantly made during February through April (which overlaps
the Company's second and third fiscal quarters) for graduation in May and
June. ArtCarved and Balfour historically experienced operating losses during
the period of the Company's fourth fiscal quarter, which includes the summer
months when school is not in session. The Company's recognition and affinity
product line is not seasonal in any material respect, although sales
generally are highest during the winter holiday season and in the period
prior to Mother's Day. As a result, the effects of seasonality of the class
ring business on the Company are tempered by the Company's relatively broad
product mix. As a result of the foregoing, the Company's working capital
requirements tend to exceed its operating cash flows from July through
December.
NEW ACCOUNTING PRONOUNCEMENTS
In March 1997, the Financial Accounting Standards Board issued SFAS No. 128,
"Earnings Per Share." SFAS No. 128 revises the standards for computing earnings
per share currently prescribed by Accounting Principles Board (APB) Opinion No.
15. SFAS No. 128 retroactively revises the presentation of earnings per share in
the financial statements. The Company adopted SFAS No. 128 for the fiscal year
ended August 29, 1998. Basic and diluted earnings (loss) per share are the same
as the Company has losses from continuing operations and the computation for
diluted earnings (loss) per share would be antidilutive.
The Company adopted SFAS No. 129, "Disclosure of Information about Capital
Structure", for the fiscal year ended August 29, 1998. It requires an entity
to explain in summary form within its financial statements the pertinent
rights and privileges of the various securities outstanding. This information
is included primarily in Notes 9 and 13.
-40-
<PAGE>
SFAS No. 130, "Reporting Comprehensive Income", is required to be adopted by the
Company for the fiscal year ending August 28, 1999, and the statement requires
the presentation of comprehensive income in an entity's financial statements.
Comprehensive income represents all changes in equity of an entity during the
reporting period, including net income and charges directly to equity which are
excluded from net income. This statement is not anticipated to have any impact
on the Company's disclosures as the Company currently does not enter into any
transactions which result in charges (or credits) directly to equity (such as
additional minimum pension liability changes, currency translation adjustments,
unrealized gains and losses on available-for-sale securities, etc.).
SFAS No. 131, "Disclosures about Segments of an Enterprise and Related
Information," is required to be adopted by the Company for the fiscal year
ending August 28, 1999. SFAS No. 131 provides revised disclosure guidelines for
segments of an enterprise based on a management approach to defining operating
segments. The Company currently operates in only one industry segment and
analyzes operations on a companywide basis; therefore, the statement is not
expected to impact the Company's disclosures.
SFAS No. 132, "Employers Disclosure about Pensions and Other Postretirement
Benefits", is required to be adopted by the Company for fiscal year 1999. It
revises employers' disclosures about pension and other postretirement benefit
plans. It does not change the measurement or recognition of those plans.
SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities",
is required to be adopted by the Company in the first quarter of fiscal year
2000 (November 1999). It establishes accounting and reporting standards for
derivative instruments, including certain derivative instruments embedded in
other contracts and for hedging activities. It requires that an entity
recognize all derivatives as either assets or liabilities in the balance
sheet and measure those instruments at fair value. Management believes that
the adoption of this standard will not have a material effect on the
Company's financial position or results of operations.
(4) INVENTORIES
A summary of inventories is as follows (in thousands):
<TABLE>
<CAPTION>
August 29, August 30,
1998 1997
----------------- ----------------
<S> <C> <C>
Raw materials $ 8,754 $ 8,769
Work in process 3,139 1,877
Finished goods 2,406 1,121
----------------- ----------------
$ 14,299 $ 11,767
================= ================
</TABLE>
Cost of sales includes depreciation and amortization of $2,188,000 and
$1,439,000, for the fiscal years ended August 29, 1998 and August 30, 1997,
respectively.
In accordance with purchase price accounting, at the purchase date (December 16,
1996), the inventory balance was increased by $4.7 million to record inventory
at fair market value. During the fiscal year ended August 30, 1997, this amount
was expensed to cost of sales.
-41-
<PAGE>
(5) PREPAID EXPENSES AND OTHER CURRENT ASSETS
Prepaid expenses and other current assets consist of the following (in
thousands):
<TABLE>
<CAPTION>
August 29, August 30,
1998 1997
----------------- --------------
<S> <C> <C>
Sales representatives advances $ 4,771 $ 4,491
Reserve on sales representatives
advances (1,041) (1,528)
Current deferred tax asset 3,178 2,557
Prepaid advertising and promotion
materials 2,694 1,999
Prepaid management fees - 325
Other 915 678
----------------- --------------
$ 10,517 $ 8,522
================= ==============
</TABLE>
(6) PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consists of the following (in thousands):
<TABLE>
<CAPTION>
August 29, August 30,
1998 1997
----------------- ----------------
<S> <C> <C>
Land $ 2,000 $ 2,000
Buildings and improvements 5,123 4,614
Tools and dies 20,377 18,715
Machinery and equipment 14,320 9,364
Construction in progress 307 882
----------------- ----------------
Total $ 42,127 $ 35,575
Accumulated depreciation (5,833) (2,115)
----------------- ----------------
Property, plant and equipment, net $ 36,294 $ 33,460
================= ================
</TABLE>
Depreciation expense (included in cost of sales and selling, general and
administrative expenses) recorded in the accompanying statement of operations is
$3,776,000 and $2,115,000 for the fiscal years ended August 29, 1998 and August
30, 1997, respectively.
(7) OTHER ASSETS
Other assets consist of the following (in thousands):
<TABLE>
<CAPTION>
August 29, August 30,
1998 1997
----------------- -----------------
<S> <C> <C>
Deferred financing costs $ 4,646 $ 4,398
Ring samples 3,155 1,221
Other 215 143
----------------- -----------------
$8,016 $ 5,762
Accumulated amortization (945) (392)
----------------- -----------------
Other assets, net $ 7,071 $ 5,370
================= =================
</TABLE>
-42-
<PAGE>
(8) ACCOUNTS PAYABLE AND ACCRUED EXPENSES
The principle components of accounts payable and accrued expenses are as follows
(in thousands):
<TABLE>
<CAPTION>
August 29, August 30,
1998 1997
----------------- ---------------
<S> <C> <C>
Accounts payable $ 8,682 $ 5,484
Commissions and royalties 3,362 3,265
Compensation and related costs 2,283 2,476
Accrued interest payable 1,872 1,808
Customer deposits 1,179 1,539
Severance costs 847 1,303
Other 3,891 5,018
----------------- ---------------
$ 22,116 $ 20,893
================= ===============
</TABLE>
(9) LONG-TERM DEBT
Long-term debt consists of the following (in thousands):
<TABLE>
<CAPTION>
August 29, August 30,
1998 1997
----------------- -----------------
<S> <C> <C>
11% senior subordinated notes due 2007 $ 90,000 $ 90,000
Term loan facility 24,000 24,750
Bank revolver 19,589 10,700
Short-term revolving credit 733 -
----------------- -----------------
Total debt $ 134,322 $ 125,450
Less-current portion 1,983 750
----------------- -----------------
Total long-term debt $ 132,339 $ 124,700
================= =================
</TABLE>
11 PERCENT SENIOR SUBORDINATED NOTES
The Company's 11 percent senior subordinated notes mature on January 15, 2007.
The notes are redeemable at the option of the Company, in whole or in part, at
any time on or after January 15, 2002, plus accrued and unpaid interest and
Liquidated Damages (as defined), if any, thereon to the date of redemption. In
the event the Company completes one or more Public Equity Offerings (as defined)
on or before January 15, 2000, the Company may, in its discretion, use the net
cash proceeds to redeem up to 33-1/3 percent of the original principal amount of
the notes at a redemption price equal to 111 percent of the principal amount
thereof, plus accrued and unpaid interest and liquidated damages, if any,
thereon to the date of redemption, with the net proceeds of one or more public
equity offerings, provided that at least 66-2/3 percent of the original
principal amount of the notes remains outstanding immediately after each such
redemption.
The 11 percent senior subordinated notes contain certain covenants that, among
other things, limit the ability of the Company (a) to incur additional
indebtedness and issue preferred stock, (b) to pay dividends or make certain
other restricted payments, (c) to enter into transactions with affiliates, (d)
to create certain liens, (e) to make certain asset dispositions and (f) to merge
or consolidate with, or transfer substantially all of its assets to, another
person. The Company was in compliance with all debt covenants as of August 29,
1998 and August 30, 1997.
REVOLVING CREDIT, TERM LOAN AND GOLD CONSIGNMENT AGREEMENT
The Company has a revolving credit, term loan and gold consignment agreement,
which was entered into as of December 16, 1996 as amended, (the Bank Agreement)
with a group of banks pursuant to which the Company initially borrowed $25
million under a term loan facility and from time-to-time may borrow up to $35
million under a revolving credit and gold facility. Loans outstanding under the
Bank Agreement bear interest at either fixed or floating rates based upon the
interest rate option selected by the Company.
-43-
<PAGE>
TERM LOAN FACILITY
The term loan facility (Term Loan) matures on December 16, 2003. The Company may
prepay the Term Loan at any time. The Company must repay specified amounts of
the Term Loan in 28 consecutive quarterly installments which commenced March 31,
1997.
REVOLVING CREDIT AND GOLD FACILITIES
The revolving credit and gold facilities (Revolving Credit and Gold
Facilities) permit borrowings of up to a maximum aggregate principal amount
of $35 million based upon availability under a borrowing base based on
eligible receivables and eligible inventory (each as defined), with a
sublimit of $5 million for letters of credit and $10 million for gold
borrowing or consignment.
The Bank Agreement contains certain financial covenants that require the Company
to maintain certain minimum levels of (a) senior funded debt to earnings before
interest, taxes, depreciation and amortization (EBITDA, as defined), (b)
consolidated EBITDA and (c) interest coverage. Furthermore, the covenants were
amended on November 27, 1998, and additional covenants were added in which the
Company must not permit its Consolidated Net Worth (as defined in the Bank
Agreement) as of March 30, 1999 to be less than $42 million, not pay the
management fee unless at the time of payment (A) no Event of Default shall have
occurred and be continuing or would result from the payment thereof; (B) the
Short Term Revolving Credit shall have been paid in full; and (C) the Company
meets the requisite Modified Funded Debt Ratio (as defined in the Bank
Agreement) and will not permit or make certain capital expenditures for computer
conversion projects in excess of $6,500,000 in the aggregate during fiscal 1998
and 1999 and the first fiscal quarter of 2000. The Bank Agreement also contains
covenants which, among other things, limit the ability of the Company and its
subsidiaries to (a) incur additional indebtedness, (b) acquire and dispose of
assets, (c) create liens, (d) make capital expenditures, (e) pay dividends on or
redeem shares of the Company's capital stock, and (f) make certain investments.
The Company was in compliance with all debt covenants under the Bank Agreement
as of August 29, 1998 and August 30, 1997. However, the Company may enter into
additional transactions which may require further amendments in the upcoming
year. Management believes the Company can maintain compliance pursuant to the
amended Bank Agreement throughout the next year.
Availability under the Revolving Credit and Gold Facilities is subject to a
borrowing base limitation (the Borrowing Base) based on the aggregate of
certain percentages of Eligible Receivables (as defined) and Eligible
Inventory (as defined) of the Company. The Borrowing Base is recalculated
each month. If the aggregate amount of loans and other extensions of credit
under the Revolving Credit and Gold Facilities exceeds the Borrowing Base,
the Company must immediately prepay or cash collateralize its obligations
under the Revolving Credit and Gold Facilities to the extent of such excess.
At August 29, 1998, the Company had no availability under the revolving
credit facility and $6,214,00 available under the gold facility.
SHORT TERM REVOLVING CREDIT
On August 26, 1998, the Company obtained a short-term line of credit (Short
Term Revolving Credit) pursuant to which the Company may, from time to time,
borrow up to $8,000,000 from BankBoston, N.A. (BankBoston) until March 31,
1999. At August 29, 1998, the Company had $7,267,000 available under the
Short Term Revolving Credit. Amounts outstanding under the Short Term
Revolving Credit bear interest at either fixed or floating rates based upon
the interest rate option selected by the Company. All amounts borrowed
pursuant to the Short Term Revolving Credit are due and payable on March 31,
1999. Any Events of Default under the Bank Agreement will also constitute an
Event of Default under the Short Term Revolving Credit. Pursuant to the terms
of the Company's Bank Agreement, the Company is prohibited from repaying the
outstanding principal of the Short Term Revolving Credit unless at the time
of repayment both before and after giving effect to such repayment, no
Default or Event of Default (as defined in the Bank Agreement) exists under
the Bank Agreement and the Borrowing Base exceeds all outstanding amounts
under the Bank Agreement by at least $2 million. The Short Term Revolving
Credit is unsecured. All of the Company's obligations under the Short Term
Revolving Credit are guaranteed by CHPII. The Company has agreed to indemnify
CHPII and pay CHPII upon demand any amounts that CHPII must pay pursuant to
the guaranty. The Short Term Revolving Credit constitutes Designated Senior
Indebtedness for purposes of the Indenture.
-44-
<PAGE>
The long-term debt outstanding as of August 29, 1998, matures as follows (in
thousands):
<TABLE>
<CAPTION>
Fiscal Year Ending Amount Maturing
-----------------
<S> <C>
1999 $ 1,983
2000 1,750
2001 2,500
2002 25,089
2003 8,500
Thereafter 94,500
-----------------
$ 134,322
=================
</TABLE>
The weighted average interest rate of debt outstanding as of August 29, 1998
and August 30, 1997 was 10.3 percent and 10.5 percent respectively.
CONSIGNED GOLD
Under the Company's gold consignment/loan arrangements, the Company has the
ability to have on consignment up to 26,000 ounces of gold approximating $10
million or alternatively to borrow up to $10 million for the purchase of gold.
Under these arrangements, the Company is limited to a maximum value of $10
million in consigned inventory and/or gold loan funds. For the fiscal years
ended August 29, 1998 and August 30, 1997 (see Note 1), the Company expensed
approximately $230,000 and $203,000 respectively, in connection with consignment
fees. Under the terms of the consignment arrangement, the Company does not own
the consigned gold until it is shipped in the form of a ring to a customer.
Accordingly, the Company does not include the value of consigned gold in
inventory or the corresponding liability for financial statement purposes. As of
August 29, 1998 and August 30, 1997 the Company held approximately 13,846 ounces
and 16,265 ounces, respectively, valued at $3.8 million and $5.3 million,
respectively, of gold on consignment from one of its lenders.
The Company's management believes the carrying amount of long-term debt,
including the current maturities, approximates fair value as of August 29, 1998
and August 30, 1997, based upon current rates offered for debt with the same or
similar debt terms.
(10) COMMITMENTS AND CONTINGENCIES
Certain Company facilities and equipment are leased under agreements expiring at
various dates through 2005. The Company's commitments under the noncancelable
portion of all operating leases for the next five years and thereafter as of
August 29, 1998, are approximately as follows (in thousands):
<TABLE>
<CAPTION>
Fiscal Year Ending Commitment
-----------------
<S> <C>
1999 $ 1,268
2000 1,028
2001 693
2002 164
2003 101
Thereafter 67
-----------------
$ 3,321
=================
</TABLE>
Lease and rental expense included in selling, general and administrative
expenses in the accompanying statement of operations amounts to approximately
$773,000 and $1,056,000 for the fiscal years ended August 29, 1998 and August
30, 1997, respectively (see Note 1).
The Company is a party to certain contracts with some of its sales
representatives whereby the representatives have purchased from their
predecessor the right to sell the Company's products in a territory. The
contracts generally provide that
-45-
<PAGE>
the value of these rights is primarily determined by the amount of business
achieved by a successor sales representative and is therefore not
determinable in advance of performance by the successor sales representative.
The Company is not party to any pending legal proceedings other than ordinary
routine litigation incidental to the business. In management's opinion,
adverse decisions on those legal proceedings, in the aggregate, would not
have a materially adverse impact on the Company's results of operations or
financial position.
(11) EMPLOYEE COMPENSATION AND BENEFITS
POSTRETIREMENT MEDICAL BENEFITS
In December 1990, the Financial Accounting Standards Board issued SFAS No. 106,
"Employers' Accounting for Postretirement Benefits Other Than Pensions," which
requires that the accrual method of accounting for certain postretirement
benefits be adopted. The Company provides certain health care and life insurance
benefits for employees who retired prior to December 31, 1990. L. G. Balfour
Company, Inc., adopted this statement in fiscal 1994 and recognized the
actuarial present value of the accumulated postretirement benefit obligation
(APBO) of approximately $6.2 million at February 29, 1993, using the delayed
recognition method over a period of 20 years. Prior to adopting SFAS No. 106,
the cost of providing these benefits was expensed as incurred.
At the purchase date (December 16, 1996), CBI assumed this pre-existing
liability and recorded the APBO of $5.5 million in purchase accounting.
The following table sets forth the plan status (in thousands):
<TABLE>
<CAPTION>
August 29, August 30,
1998 1997
----------------- -----------------
<S> <C> <C>
Accumulated postretirement benefit
obligation
Retired employees $ (1,456) $ (5,559)
Active employees - -
----------------- -----------------
Total $ (1,456) $ (5,559)
Plan assets at fair value - -
----------------- -----------------
Unfunded accumulated benefit
obligation in excess of plan
assets $ (1,456) $ (5,559)
Unrecognized net gain (187) 125
Unrecognized prior service
costs (1,739) -
----------------- -----------------
Accumulated post retirement medical
benefit cost, current and long-term $ (3,382) $ (5,434)
================= =================
</TABLE>
The net periodic postretirement benefit cost for the fiscal years ended
August 29, 1998 and August 30, 1997 (see Note 1), includes the following
components (in thousands):
<TABLE>
<CAPTION>
August 29, August 30,
1998 1997
---------------- ----------------
<S> <C> <C>
Service costs, benefits attributed to service
during the period $ - $ -
Interest cost 100 302
Actual return on assets - -
Recognition of transition obligation - -
Net amortization and deferral (619) -
---------------- ----------------
Net periodic postretirement benefit
cost (income) $ (519) $ 302
================ ================
</TABLE>
For measurement purposes, a 5.0% annual rate of increase in the per-capital
cost of covered health care benefits was assumed. The health care cost trend
rate assumption has a significant effect on the amounts reported.
The weighted average discount rate used in determining the accumulated
postretirement benefit obligation was 7.25 percent and 8.0 percent compounded
annually for fiscal 1998 and 1997, respectively. As the plan is unfunded, no
assumption was needed as to the long-term rate of return on assets.
-46-
<PAGE>
DEFERRED COMPENSATION
The Company has deferred compensation agreements with certain sales
representatives and executives, which provide for payments upon retirement or
death based on the value of life insurance policies or mutual fund shares at
the retirement date.
(12) INCOME TAXES
For the fiscal years ended August 29, 1998 and August 30, 1997, the net
current and deferred provision and/or benefit is $0 as a valuation allowance
exists due to the net operating losses incurred by the Company.
The Company's effective tax rate differs from the federal statutory rate of
34 percent for the fiscal years ended August 29, 1998 and August 30, 1997,
due to the following (in percentages):
<TABLE>
<CAPTION>
August 29, 1998 August 30, 1997
----------------- -----------------
<S> <C> <C>
Computed tax benefit at
statutory rate (34.0)% (34.0)%
State taxes (5.0) (5.0)
Change in assets and
liabilities, net 4.6 14.4
Increase in valuation
allowance 34.4 24.6
----------------- -----------------
Total effective tax rate 0.0% 0.0%
================= =================
</TABLE>
Deferred tax assets and liabilities as of August 29, 1998 and August 30, 1997,
consist of the following (in thousands):
Deferred tax assets -
<TABLE>
<CAPTION>
August 29, 1998 August 30, 1997
----------------- -----------------
<S> <C> <C>
Allowances and reserves $ 1,947 $ 1,557
Net operating loss
carryforwards 10,995 6,445
Other 1,248 1,000
----------------- -----------------
Total gross deferred tax
assets $ 14,190 $ 9,002
Less - Valuation allowance (3,776) (2,180)
----------------- -----------------
Net deferred tax assets $ 10,414 $ 6,822
----------------- -----------------
</TABLE>
Deferred tax liabilities -
<TABLE>
<S> <C> <C>
Property, plant and equipment,
principally due to differences
in depreciation $ 3,536 $ 829
Goodwill basis difference 6,878 5,993
----------------- -----------------
Total deferred tax liabilities $ 10,414 $ 6,822
----------------- -----------------
Net deferred tax assets
(liabilities) $ - $ -
================= =================
</TABLE>
The valuation allowance has been established due to uncertainty surrounding
the realizability of the deferred tax assets, principally the net operating
loss carryforwards.
For tax reporting purposes, the Company has U.S. net operating loss
carryforwards of approximately $28.2 million and $16.5 million as of August
29, 1998 and August 30, 1997, respectively. Utilization of the net operating
loss carryforwards is contingent on the Company's ability to generate income
in the future. The net operating loss carryforwards will expire in years 2017
and 2018 if not utilized.
-47-
<PAGE>
(13) STOCKHOLDERS' EQUITY
The Company is authorized to issue 750,000 shares of preferred stock, par value
$.01 per share, and 750,000 shares of Common Stock, par value $.01 per share.
The Company currently has issued and outstanding 100,000 shares of Series A
Preferred, 377,156 shares of Series B Preferred and 377,156 shares of Common
Stock.
SERIES A PREFERRED STOCK (SERIES A PREFERRED)
The holders of shares of Series A Preferred are not entitled to voting rights.
Dividends on the Series A Preferred are payable in cash, when, as and if
declared by the board of directors of the Company, out of funds legally
available therefor, on a quarterly basis, commencing on January 31, 1997.
Dividends on the Series A Preferred accrue at a rate of 12 percent per annum,
whether or not such dividends have been declared and whether or not there shall
be funds legally available for the payment thereof. Any dividends which are
declared shall be paid pro rata to the holders. No dividends or interest shall
accrue on any accrued and unpaid dividends. The Company's 11 percent senior
subordinated notes and bank debt restrict the Company's ability to pay dividends
on the Series A Preferred.
The Series A Preferred is not subject to mandatory redemption. The Series A
Preferred is redeemable at any time at the option of the Company; however, the
Company's 11 percent senior subordinated notes and bank debt restrict the
Company's ability to redeem the Series A Preferred. In the event of any
liquidation, dissolution or winding up of the Company, the holders of the Series
A Preferred shall receive payment of the liquidation value of $100 per share
plus all accrued and unpaid dividends prior to the payment of any distributions
to the holders of the Series B Preferred or the holders of the common stock of
the Company (Common Stock). So long as shares of the Series A Preferred remain
outstanding, the Company may not declare, pay or set aside for payment dividends
on, or redeem or otherwise repurchase any shares of, the Series B Preferred or
Common Stock.
SERIES B PREFERRED STOCK (SERIES B PREFERRED)
The holders of shares of Series B Preferred are entitled to one vote per share,
voting together with the holders of the Common Stock as one class on all matters
presented to the shareholders generally. No dividends accrue on the Series B
Preferred.
Dividends may be paid on the Series B Preferred if and when declared by the
board of directors of the Company out of funds legally available therefor. The
Series B Preferred is nonredeemable. In the event of any liquidation,
dissolution or winding up of the Company, the holders of the Series B Preferred
shall receive payment of the liquidation value of $100 per share plus any
accrued and unpaid dividends prior to the payment of any distributions to the
holders of the Common Stock of the Company. So long as shares of the Series B
Preferred remain outstanding, the Company may not declare, pay or set aside for
payment any dividends on the Common Stock.
COMMON STOCK
The holders of Common Stock are entitled to one vote for each share held of
record on all matters submitted to a vote of shareholders, including the
election of directors, and vote together as one class with the holders of the
Series B Preferred.
Dividends may be paid on the Common Stock if and when declared by the board of
directors of the Company out of funds legally available therefor. The Company
does not expect to pay dividends on the Common Stock in the foreseeable future.
COMMON STOCK PURCHASE WARRANTS
The Company has issued warrants, exercisable to purchase an aggregate of 21,405
shares of Common Stock (or an aggregate of approximately 5.4 percent of the
outstanding shares of Common Stock on a fully diluted basis), at an initial
exercise price of $6.67 per share, at any time on or after December 16, 1997,
and on or before January 31, 2008.
In accordance with a subscription agreement entered into by the Company and
CHPII and certain of its affiliates (the Castle Harlan Group), the Company
granted the Castle Harlan Group certain registration rights with respect to the
shares of capital
-48-
<PAGE>
stock owned by them pursuant to which the Company agreed, among other things,
to effect the registration of such shares under the Securities Act of 1933 at
any time at the request of the Castle Harlan Group. The Company also granted
to the Castle Harlan Group unlimited piggyback registration rights on certain
registrations of shares of capital stock by the Company.
STOCK-BASED COMPENSATION PLAN
The Company has a stock option plan (the 1997 Stock Option Plan), effective as
of July 29, 1997, for which a total of 69,954 shares of Common Stock have been
reserved for issuance; 36,109 of those shares were available for grant to
directors and employees of the Company as of August 29, 1998. The 1997 Stock
Option Plan provides for the granting of both incentive and nonqualified stock
options. Options granted under the 1997 Stock Option Plan have a maximum term of
10 years and are exercisable under the terms of the respective option agreements
at fair market value of the Common Stock at the date of grant. Payment of the
exercise price must be made in cash or in whole or in part by delivery of shares
of the Company's Common Stock. All Common Stock issued upon exercise of options
granted pursuant to the 1997 Stock Option Plan will be subject to a voting trust
agreement.
The Company applies APB Opinion No. 25, "Accounting for Stock Issued to
Employees," and related interpretations in accounting for the 1997 Stock Option
Plan. Accordingly, no compensation cost has been recognized for its 1997 Stock
Option Plan. Had compensation cost for the Company's stock-based compensation
plan been determined based on the fair value at the grant date for awards under
the plan consistent with the method of SFAS No. 123, "Accounting for Stock-Based
Compensation," the Company's net loss and net loss per share for the year ended
August 30, 1997 and August 29, 1998 would have been increased to the pro forma
amounts indicated below (in thousands, except per share amounts):
<TABLE>
<CAPTION>
August 29, 1998 August 30, 1997
------------------- -----------------
<S> <C> <C> <C>
Net loss to common stockholders As reported $(5,837) $(9,717)
Pro forma (5,862) (9,719)
Basic and diluted loss per share As reported (15.55) (25.91)
Pro forma (15.62) (25.92)
</TABLE>
Compensation expense for options is reflected over the vesting period;
therefore, future compensation expense may be greater as additional options
are granted.
Incentive stock options for 31,971 shares and 34,470 shares and nonqualified
stock options for 1,874 shares and -0- shares of the Company's Common Stock
were outstanding as of August 29, 1998 and August 30, 1997, respectively. A
summary of the status of the Company's 1997 Stock Option Plan as of August
29, 1998 and August 30, 1997, and changes during the fiscal years then ended
are presented below:
<TABLE>
<CAPTION>
August 29, 1998 August 30, 1997
--------------------------------- ----------------------------------
Weighted Weighted
Average Average
Exercise Exercise
Fixed Options Shares Price Shares Price
- -------------------------------- ------------- --------------- -------------- ----------------
<S> <C> <C> <C> <C>
Outstanding at beginning of
fiscal year 34,470 $ 6.67 - $ -
Granted 1,874 6.67 34,470 6.67
Exercised - - - -
Canceled (2,499) 6.67 - -
------------- --------------- -------------- ----------------
Outstanding at end of fiscal year 33,845 $ 6.67 34,470 $ 6.67
============= =============== ============== ================
Options exercisable at year-end - -
Weighted average fair value of
options granted during the
fiscal year ended $ 3.60 $ 3.71
</TABLE>
-49-
<PAGE>
The fair value of each grant was estimated on the date of the grant using the
Black-Scholes option pricing model with the following weighted average
assumptions used for grants in 1998 and 1997 respectively: dividend yield of
nil in both fiscal years; expected volatility of 27.36 percent and 29.30
percent, respectively; risk-free interest rate of 6.01 percent and 6.14
percent respectively; and expected life of 10 years in both fiscal years. The
Black-Scholes option pricing model was developed for use in estimating the
fair value of traded options, which have no vesting restrictions and are
fully transferable. In addition, option pricing models require the input of
highly subjective assumptions, including expected stock price volatility.
Because the Company's stock options have characteristics significantly
different from those of traded options and because changes in the subjective
input assumptions can materially affect the fair value estimate, in
management's opinion, the existing models do not necessarily provide a
reliable single measure of the fair value of its stock options.
INCENTIVE STOCK PURCHASE PLAN
On July 7, 1998 the stockholders of the Company unanimously approved and adopted
the Commemorative Brands, Inc. Incentive Stock Purchase Plan (the Plan).
Pursuant to the terms of the Plan, the Company may from time to time offer
shares of the Company's Class B Preferred Stock and Common Stock to employees,
consultants and independent sales representatives who are determined to be
eligible to purchase shares pursuant to the Plan by the Plan Administrator (as
defined in the Plan) upon such terms and at such prices as are set forth in the
Plan and as are determined by the Plan Administrator.
On July 20, 1998, the Company commenced an offering of up to an aggregate of
18,750 shares of each of the Company's Common Stock and Series B Preferred Stock
to eligible employees, consultants and independent sales representatives. The
offering is currently scheduled to terminate on December 22, 1998.
(14) RELATED - PARTY TRANSACTIONS
The Company has agreed to indemnify CHPII pursuant to an indemnification
agreement, dated August 26, 1998 for any amounts that may be incurred by
CHPII under CHPII's guaranty of the Company's obligations under the Short
Term Revolving Credit.
On June 30, 1998, the Company sold shares of Common Stock and Series B
Preferred Stock to certain executive officers of the Company including
Jeffrey H. Brennan, President and Chief Executive Officer of the Company. In
conjunction therewith, the Company lent Mr. Brennan $75,000 to purchase
shares of the Company's stock pursuant to a promissory note in the original
principal amount of $75,000, which is due and payable in full on June 16,
2003, and which bears interest at the rate of 5.77% per annum, payable
annually on the 15th of June. Mr. Brennan has granted to the Company a
security interest in the shares acquired by him and his interest in the
voting trust into which the shares have been deposited as collateral security
for the repayment in full of the promissory note. The Company also lent
another officer of the Company the sum of $25,000 to purchase shares of the
Company's stock on substantially identical terms as the promissory note
issued by Mr. Brennan. The balance of $100,000 is included in prepaid
expenses and other current assets on the accompanying balance sheet as of
August 29,1998.
The Company entered into a management agreement dated December 16, 1996 (the
Management Agreement), with Castle Harlan, Inc. (the Manager), pursuant to
which the Manager agreed to provide business and organizational strategy,
financial and investment management and merchant and investment banking
services to the Company upon the terms and conditions set forth therein. As
compensation for such services, the Company agreed to pay the Manager $1.5
million per year, which amount has been paid in advance for the first year
and is payable quarterly in arrears thereafter. The agreement is for a term
of 10 years, renewable automatically from year to year thereafter unless the
Castle Harlan Group then owns less than 5 percent of the then outstanding
capital stock of the Company. The Company has agreed to indemnify the Manager
against liabilities, costs, charges and expenses relating to the Manager's
performance of its duties, other than such of the foregoing resulting from
the Manager's gross negligence or willful misconduct. The Indenture prohibits
payment of the management fee in the Event of a Default by the Company in the
payment of principal, Redemption Price, Purchase Price, (both as defined in
the Indenture), Interest, or Liquidated Damages (if any) on the Notes. The
Bank Agreement prohibits payment of the management fee unless at the time
of payment (i) no Event of Default (as defined in the Bank Agreement) shall
have occurred and is continuing or would result from the payment of the
management fee; (ii) the Short Term Revolving Credit shall have
-50-
<PAGE>
been paid in full; and (iii) the Company meets the requisite Modified Funded
Debt Ratio (as defined in the Bank Agreement).
(15) QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
Summarized quarterly financial data for the Company for the fiscal year ended
August 29, 1998, is as follows:
<TABLE>
<CAPTION>
Third Quarter
First Quarter Second quarter Ended Fourth Quarter
Ended November Ended February May 30, Ended
30, 1997 28, 1998 1998 August 29, 1998
---------------- ---------------- ---------------- ----------------
<S> <C> <C> <C> <C>
(In thousands, except share data)
Net sales $ 38,364 $ 44,168 $ 43,085 $ 25,484
---------------- ---------------- ---------------- ----------------
Gross profit $ 21,138 $ 24,401 $ 22,954 $ 9,993
---------------- ---------------- ---------------- ----------------
Net income (loss) $ 978 $ 2,067 $ 308 $ (7,990)
---------------- ---------------- ---------------- ----------------
Net income (loss) to common
stockholders $ 678 $ 1,767 $ 8 $ (8,290)
---------------- ---------------- ---------------- ----------------
Basic and diluted earnings (loss) per
share $ 1.81 $ 4.71 $ 0.02 $ (22.03)
---------------- ---------------- ---------------- ----------------
Weighted average common shares
outstanding and common and common
equivalent shares outstanding 375,000 375,000 375,000 376,294
---------------- ---------------- ---------------- ----------------
</TABLE>
Summarized quarterly financial data for the Company for the fiscal year ended
August 30, 1997, is as follows:
<TABLE>
<CAPTION>
Second Quarter Third Quarter
Ended Ended Fourth Quarter
March 1, May 31, Ended
1997 1997 August 30, 1997
----------------- ---------------- ----------------
(In thousands, except share data)
<S> <C> <C> <C>
Net sales $ 24,751 $ 36,927 $ 25,922
----------------- ---------------- ----------------
Gross profit $ 10,509 $ 18,423 $ 13,479
----------------- ---------------- ----------------
Net income (loss) $ (3,861) $ (874) $ (4,132)
----------------- ---------------- ----------------
Net income (loss) to common
stockholders $ (4,111) $ (1,174) $ (4,432)
----------------- ---------------- ----------------
Basic and diluted earnings (loss) per
share $ (10.96) $ (3.13) $ (11.82)
----------------- ---------------- ----------------
Weighted average common shares
outstanding and common and common
equivalent shares outstanding 375,000 375,000 375,000
================= ================ ================
</TABLE>
Commemorative Brands, Inc., completed the Acquisitions of ArtCarved and Balfour
on December 16, 1996, and prior to such date, engaged in no business activities
other than those in connection with the Acquisitions and financing thereof.
The Company's scholastic product sales tend to be seasonal. Class ring sales
are highest during October through December (which overlaps the Company's
first and second fiscal quarters), when students have returned to school
after the summer recess and orders are taken for delivery of class rings to
students before the winter holiday season. Sales of the Company's fine paper
products are predominantly made during February through April (which overlaps
the Company's second and third fiscal quarters) for graduation in May and
June. ArtCarved and Balfour historically experienced operating losses during
the period of the Company's fourth fiscal quarter, which includes the summer
months when school is not in session. The Company's recognition and affinity
product line is not seasonal in any material respect, although sales
generally are highest during the winter holiday season and in the period
prior to Mother's Day. As a result, the effects of seasonality of the class
ring business on the Company are tempered by the Company's relatively broad
product mix. As a result of the foregoing, the Company's working capital
requirements tend to exceed its operating cash flows from July through
December.
-51-
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Stockholders of
Commemorative Brands, Inc.:
We have audited the accompanying statements of income (loss), changes in
advances and equity (deficit) and cash flows of the class rings business
(ArtCarved) of CJC Holdings, Inc. (a Texas corporation), for the fiscal year
ended August 31, 1996, and for the period from September 1, 1996, through
December 16, 1996. These financial statements are the responsibility of
Artcarved's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the results of ArtCarved's (as defined above) operations
and its cash flows for the fiscal year ended August 31, 1996, and for the period
from September 1, 1996, through December 16, 1996, in conformity with generally
accepted accounting principles.
Houston, Texas
October 24, 1997
-52-
<PAGE>
CJC HOLDINGS, INC., CLASS RINGS BUSINESS (ARTCARVED)
STATEMENTS OF INCOME (LOSS)
(In Thousands)
<TABLE>
<CAPTION>
For the Period
From
September 1,
Fiscal Year 1996,
Ended Through
August 31, December 16,
1996 1996
----------------- ------------------
<S> <C> <C>
NET SALES $ 70,671 $ 27,897
COST OF SALES 32,655 11,988
----------------- ------------------
Gross profit 38,016 15,909
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES (27,940) (9,862)
----------------- ------------------
Operating income 10,076 6,047
INTEREST INCOME 651 94
INTEREST EXPENSE (12,558) (2,970)
----------------- ------------------
Income (loss) before income tax provision (1,831) 3,171
INCOME TAX PROVISION - -
----------------- ------------------
Net income (loss) $ (1,831) $ 3,171
----------------- ------------------
----------------- ------------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
-53-
<PAGE>
CJC HOLDINGS, INC., CLASS RINGS BUSINESS (ARTCARVED)
STATEMENTS OF CHANGES IN ADVANCES AND EQUITY (DEFICIT)
(In Thousands)
<TABLE>
<S> <C>
BALANCE AT AUGUST 26, 1995 $ (53,186)
Net increase in advances from parent 26,493
Net loss for the fiscal year ended August 31, 1996 (1,831)
------------
BALANCE AT AUGUST 31, 1996 (28,524)
Net increase in advances from parent 18,889
Net income for the period from September 1, 1996, through December 16, 1996 3,171
------------
BALANCE AT DECEMBER 16, 1996 $ (6,464)
------------
------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
-54-
<PAGE>
CJC HOLDINGS, INC., CLASS RINGS BUSINESS (ARTCARVED)
STATEMENTS OF CASH FLOWS
(In Thousands)
<TABLE>
<CAPTION>
For the Period
For the Fiscal from September
Year Ended 1, 1996 through
August 31, 1996 December 16, 1996
----------------- -------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ (1,831) $ 3,171
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities-
Depreciation 1,843 649
Amortization 3,172 1,343
Provisions for doubtful accounts 596 144
Discount accretion - -
Restructuring charges - -
Change in assets and liabilities-
Increase in receivables (121) (6,951)
(Increase) decrease in inventories (1,500) 124
(Increase) decrease in prepaid expenses and
other current assets 1,880 1,378
Increase in other assets (2,113) (3,270)
Increase (decrease) in accounts payable (391) 1,424
Increase (decrease) in accrued expenses 128 3,486
----------------- -------------------
Net cash provided by operating activities 1,663 1,498
----------------- -------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property, plant and equipment (844) (195)
----------------- -------------------
Net cash used in investing activities (844) (195)
----------------- -------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net change in advances from parent 15,620 18,889
Note payments (16,439) (14,628)
----------------- -------------------
Net cash provided by (used in) financing activities (819) 4,261
----------------- -------------------
NET INCREASE IN CASH AND CASH EQUIVALENTS - 5,564
CASH AND CASH EQUIVALENTS, beginning of period - -
----------------- -------------------
CASH AND CASH EQUIVALENTS, end of period $ - $ 5,564
----------------- -------------------
----------------- -------------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
-55-
<PAGE>
CJC HOLDINGS, INC., CLASS RINGS BUSINESS (ARTCARVED)
NOTES TO FINANCIAL STATEMENTS
(1) DESCRIPTION OF BUSINESS AND BASIS OF FINANCIAL STATEMENT PRESENTATION
The accompanying financial statements represent the class rings business
(ArtCarved or the Company) of CJC Holdings, Inc. (CJC). Since ArtCarved is not
operated nor accounted for as a separate entity for the periods presented in the
accompanying financial statements, it was necessary for management to make
allocations (carve-outs) for certain accounts to reflect the financial
statements of ArtCarved. Management considers the allocations to be reasonable
and believes the accompanying financial statements materially represent the
operations of ArtCarved on a stand-alone basis. Selling, general and
administrative expenses from the operations of ArtCarved as shown in the
accompanying statements of income (loss) represent all the expenses incurred by
CJC excluding only the expenses directly related to the non-ArtCarved operations
of CJC. CJC sold the assets of ArtCarved and CJC used the sale proceeds to repay
its outstanding debt obligations. Accordingly, the debt obligations of CJC
repaid with the sale proceeds have been recorded on the accompanying balance
sheet with the offsetting charge included in the advances and equity (deficit)
account, and the accompanying statements of income (loss) of ArtCarved presented
herein include all of CJC's debt-related interest expense on such debt
obligations. Interest income of CJC is included in the statements of income
(loss) since all excess cash balances are used to pay principal and interest on
debt obligations.
All cash balances remained with CJC after sale of the assets. No cash balances
have been included in cash and cash equivalents in the accompanying statements
of cash flows. All amounts due to/from CJC for ArtCarved's operations have been
included in advances and equity (deficit). Also, included in advances and equity
(deficit) are all intercompany accounts.
Although management considers the above allocation (carve-out) methods to be
reasonable, due to the relationship between ArtCarved and other operations and
activities of CJC, the terms of some or all of the transactions and allocations
discussed above may not necessarily be indicative of that which would have
resulted had ArtCarved been a stand-alone entity.
On December 16, 1996, Commemorative Brands, Inc. (CBI), completed the
acquisitions (the Acquisitions) of substantially all of the scholastic and
recognition and affinity product assets and businesses of ArtCarved of CJC from
CJC and certain assets and liabilities of L. G. Balfour Company, Inc. (Balfour),
from Town & Country Corporation (Town & Country). In consideration for
ArtCarved, CBI paid CJC in cash the sum of $115.1 million and assumed certain
related liabilities.
RESULTS OF OPERATIONS
The results of operations for the period from September 1, 1996, through
December 16, 1996, are not comparable to the results of operations for the
fiscal year ended August 31, 1996, and are not necessarily indicative of the
results that could be expected for a full fiscal year. Due to the highly
seasonal nature of the class ring business, a significant amount of revenues and
income occurred in the three and one-half month period ended December 16, 1996,
related to the back-to-school and pre-holiday season.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
FISCAL YEAR-END
ArtCarved uses a 52/53-week fiscal year ending on the last Saturday of August.
INVENTORIES
ArtCarved's inventories, which include raw materials, labor and overhead and
other manufacturing and production costs, are stated at the lower of cost or
market using the dollar-value last-in, first-out (LIFO) link-chain method.
-56-
<PAGE>
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.
GOODWILL AND INTANGIBLE ASSETS
Costs in excess of fair value of net tangible assets acquired and related
acquisition costs are included in goodwill and identifiable intangible assets in
the accompanying balance sheets. Intangible assets are being amortized on a
straight-line basis over their estimated lives, not exceeding 40 years.
OTHER ASSETS
Other assets include debt costs, software and software development costs, and
engineering and design costs. Debt costs are amortized over the lives of the
specific debt instruments of one to six years. Software and software development
costs have a useful life of three to five years, and engineering and design
costs are amortized over six years.
FAIR VALUE OF FINANCIAL INSTRUMENTS
ArtCarved's financial instruments consist primarily of cash and cash
equivalents, accounts receivable, accounts payable and long-term debt
(including current maturities). The carrying amounts of ArtCarved's cash and
cash equivalents, accounts receivable and accounts payable approximate fair
value due to their short-term nature. The fair value of ArtCarved's long-term
debt is estimated based on current rates offered to ArtCarved for debt with
the same or similar terms.
CASH FLOWS
Total cash interest paid during the fiscal year 1996 and for the period from
September 1, 1996, to December 16, 1996, was approximately $12,464,000 and
$4,405,000, respectively. Total cash paid for income taxes during the fiscal
year 1996 and for the period from September 1, 1996, to December 16, 1996,
was approximately $83,000 and $-, respectively. Noncash financing activities
during the year ended August 31, 1996, include $7,021,000 of accrued
interest, which was converted to new subordinated notes, and $7,500,000 of
original subordinated notes and $1,873,000 of related accrued interest that
were both converted to Series 2 common stock.
ACCOUNTING FOR INCOME TAXES
Effective September 1, 1992, CJC (and ArtCarved) adopted Statement of
Financial Accounting Standards (SFAS) No. 109, "Accounting for Income Taxes,"
which requires the asset and liability method of accounting for income taxes.
Under the asset and liability method, deferred income taxes are recorded for
the tax consequences of applying currently enacted statutory tax rates
applicable to differences between the financial reporting and income tax
bases of assets and liabilities.
-57-
<PAGE>
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from these estimates.
SEASONALITY
ArtCarved's sales are highly seasonal. Historically, ArtCarved has achieved
its highest sales and income levels in its first fiscal quarter (September
through November), followed in descending order by the third, second and
fourth fiscal quarters. This is primarily due to the fall "back-to-school"
selling season for class rings. The third fiscal quarter includes the spring
semester school activities including graduation events, while the fourth
fiscal quarter (and the second fiscal quarter to a lesser extent) includes
the periods when most schools are not in session.
REVENUE RECOGNITION
Revenues from product sales are recognized at the time the product is shipped.
ADVERTISING EXPENSE
Selling, general and administrative expenses for ArtCarved include
advertising expense in the following amounts for the statements of income
(loss) presented (in thousands):
<TABLE>
<S> <C>
Period from September 1, 1996, to December 16, 1996 $1,222
Fiscal year ended August 31, 1996 $2,989
</TABLE>
(4) RECEIVABLES
Credit is extended to various companies in the retail industry which may be
affected by changes in economic or other external conditions. ArtCarved's policy
is to manage its exposure to credit risk through credit approvals and limits.
(5) INVENTORIES
Cost of sales includes depreciation and amortization of the following amounts in
the accompanying statements of income (loss) (in thousands):
<TABLE>
<S> <C>
Period from September 1, 1996, to December 16, 1996 $ 691
Fiscal year ended August 31, 1996 $1,709
</TABLE>
Inventories are priced using the dollar-value LIFO link-chain method.
(6) PROPERTY, PLANT AND EQUIPMENT
Depreciation expense (included in cost of sales and selling, general and
administrative expenses) recorded in the accompanying statements of income
(loss) is as follows (in thousands):
<TABLE>
<S> <C>
Period from September 1, 1996 to December 16, 1996 $ 770
Fiscal year ended August 31, 1996 $2,026
</TABLE>
(7) GOLD LOAN
As a means of hedging against gold market price fluctuations and financing its
needs for gold in the manufacturing process,
-58-
<PAGE>
CJC had historically entered into a fee-bearing gold consignment agreement
with a bank (the Consignor). During the term of the consignment agreement,
title to the gold covered by the consignment agreement remained with the
Consignor. CJC had a credit facility with a bank which provided for a
$25,000,000 letter-of-credit facility which could be utilized to request
letters of credit pursuant to the gold consignment agreement. The consignment
agreement expired in June 1994 and was not renewed. In connection with the
expiration of the gold consignment agreement, the Consignor presented to the
bank a draft for payment under the letter of credit in the amount of
$14,614,255, and such draft was honored by the bank in that amount. The
amount invoiced CJC was for 38,053 ounces of gold at a price of $384.05 per
ounce. Although a substantial amount of gold is held by other operations of
CJC and serves as collateral for the loan, the entire gold loan was paid with
the proceeds from the asset sale and, therefore, the full amount of the loan
is included in ArtCarved's balance sheet.
(8) LONG-TERM DEBT
In November 1995, CJC's board of directors, shareholders and principal
creditors approved its restructuring plan and the plan and agreement of
merger (as defined) whereby CJC's common and preferred shareholders agreed to
a recapitalization and holders of senior secured, senior subordinated notes
and the gold loan agreed to restructure their debt obligations. On March 12,
1996, the restructuring agreement was consummated. The debt obligations
discussed below were paid with the proceeds of the asset sale of ArtCarved
and, therefore, are included in ArtCarved's financial statements.
The significant components of the restructuring and recapitalization are as
follows:
a. New capital stock consisting of 30,000,000 authorized shares of common
stock designated as either Series 1, Series 2 or Series 3, as defined,
of CJC Newco, Inc. (Newco), was authorized and issued in the following
order:
(i) The holder of CJC's Series A preferred stock received an
aggregate of 100 percent or 8,750,000 shares of the Series 1
common stock, such number to be reduced by that number of
shares of Series 1 common stock to be issued to the
subordinated noteholders.
(ii) A holder of CJC's senior subordinated notes due 1998 and 1999
(the Original Subordinated Notes), pursuant to the
restructuring, received 4,410,000 shares of the Series 1
common stock in lieu of debt of CJC. Holders of CJC's Original
Subordinated Notes also received 94,000 shares of the Series 1
common stock as compensation for a payment-in-kind (PIK),
nondefault rate interest option, as defined, contained in
CJC's new senior subordinated notes due 2002 (the New
Subordinated Notes). In addition, 974,000 shares of the Series
1 common stock authorized to be issued to the holders of CJC's
New Subordinated Notes were not issued as of the restructuring
date but were reserved for issuance in accordance with the
terms of the New Subordinated Note agreement and the new
shareholders' agreement.
(iii) The holders of CJC's Series B preferred stock received an
aggregate of 1,249,020 shares of Series 2 common stock. Each
such holder received 11.67 shares of Series 2 common stock for
each previously held share of Series B preferred stock.
(iv) Previous holders of CJC's common stock received an aggregate
of 9,992,317 shares of Series 3 common stock. Each such holder
received 4.20 shares of Series 3 common stock for each
previously held share of common stock. Effective June 30,
1996, the Series 3 shares were redeemed at $0.001 per share.
(v) Holders of CJC's warrants issued in 1990 received new warrants
to purchase 3,023,623 shares of Series 3 common stock. These
warrants expired on June 30, 1996. All other existing
warrants, rights or options outstanding immediately prior to
the merger were canceled and extinguished.
b. Holders of CJC's floating rate senior secured notes, Series A due 1996
(the Series A Notes), and holders of CJC's 12.12 percent senior
secured notes, Series B-2 due 1998 (the Series B Notes) (collectively,
the Original Senior Notes), received all accrued interest on the unpaid
principal amount of such notes. Pursuant to the terms of a senior note
purchase agreement, the holders of the Series A Notes received New
Series A Notes and the holders of Series B Notes received New Series B
Notes.
-59-
<PAGE>
The New Series A Notes were issued in the aggregate principal amount of
$14,677,000, the outstanding principal balance on the restructuring
date. The New Series A Notes are mandatorily redeemable under certain
circumstances. The maturity date of the New Series A Notes shall be
July 15, 1999, and such notes bear interest at the Eurodollar Rate, as
defined, plus 2.25 percent. In addition, the principal of the New
Series A Notes will be repaid in installments of $2.0 million on each
semiannual period currently anticipated to commence no later than July
15, 1997. Interest on the New Series A Notes is due on the fifteenth
day of each quarter, beginning April 15, 1996.
The New Series B Notes were issued in the aggregate principal amount of
$42,023,000, the outstanding principal balance on the restructuring
date. The New Series B Notes are mandatorily redeemable under certain
circumstances. The maturity date of the New Series B Notes shall be
July 15, 2000, and such notes bear interest at the rate of 12.12
percent. The New Series B Notes shall be payable in full at maturity.
After the New Series A Notes have been repaid in full, the $2.0 million
semiannual principal repayments shall be applied to the New Series B
Notes. Interest on the New Series B Notes shall be due on the fifteenth
day of each quarter beginning April 15, 1996. Finally, the holders of
the New Series B Notes may be entitled to certain "make-whole" payments
on the original amount issued once the New Series A Notes have been
repaid in full or replaced. The New Series A Notes and New Series B
Notes shall be secured by substantially all of CJC's assets.
Under the terms of the New Series A Notes and New Series B Notes, CJC,
among other restrictions, will be required to maintain a current ratio,
as defined (excluding current maturities of funded debt), of 3.2 to 1.0
for the period March 12, 1996, to February 28, 1998, and 2.5 to 1.0 for
the period March 1, 1998, to maturity, minimum shareholders' equity
(deficit), as defined, of $(8,000,000) for the period March 12, 1996,
to June 30, 1996, $(9,000,000) for the period July 1, 1996, to May 31,
1997, $(10,000,000) for the period June 1, 1997, to November 30, 1997,
and beginning to increase to $(5,000,000) until maturity, and an
interest coverage ratio, as defined, of 1.25 to 1.0 for the period
March 12, 1996, to February 28, 1998, 1.50 to 1.0 for the period March
1, 1998, to August 31, 1999, and 1.75 to 1.0 for the period September
1, 1999, to maturity. CJC will also have certain limitations relating
to additional debt, liens, mergers, asset sales transactions,
restricted investments and payments of dividends and is obligated to
make certain reports periodically to the lenders. As of August 31,
1996, CJC was in compliance with these covenants.
c. Holders of CJC's Original Subordinated Notes in the amount of
$35,000,000 were issued either (i) New Subordinated Notes having an
aggregate principal amount equal to the unpaid principal under the
Original Subordinated Notes plus accrued interest through June 30,
1995, as well as shares of Series 1 common stock as described in a(ii)
above, or (ii) New Subordinated Notes having an aggregate principal
amount equal to 50 percent of the unpaid principal under the Original
Subordinated Notes plus accrued interest through June 30, 1995, as well
as shares of Series 1 common stock as described in a.(ii) above. One
holder elected to convert 50 percent of its Original Subordinated Notes
(principal amount of $7,500,000 plus accrued interest through June 30,
1995, of approximately $1,873,000) into Series 1 common stock.
The New Subordinated Notes have a maturity of July 15, 2002, with
certain mandatory prepayments, as defined, based upon net cash
proceeds, as defined. The New Subordinated Notes are subordinate to the
New Senior Notes and the New Gold Notes. The New Subordinated Notes
have loan covenants that are substantially identical to the New Senior
Notes. Finally, the holders of the New Subordinated Notes may be
entitled to certain "make-whole" payments on the original amount issued
if both the New Senior Notes and New Subordinated Notes are repaid in
full prior to March 1997.
d. Each gold loan holder shall receive a new promissory note evidencing
the existing obligation having a maturity date of February 28, 1997
(the New Gold Notes). The New Gold Notes shall be issued in an
aggregate principal amount of $8,641,125, the outstanding principal
balance on the restructuring date. The New Gold Notes shall bear
interest at the lesser of (i) the alternate base rate, as defined,
plus 1.5 percent or (ii) the highest lawful rate, as defined.
Principal payments under the New Gold Notes are $2,267,000 and
$6,374,125 for fiscal years 1996 and 1997, respectively. CJC shall
prepay the New Gold Notes using available net cash proceeds, as
defined. The New Gold Notes shall be secured by substantially all of
CJC's assets.
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<PAGE>
In connection with the New Gold Notes, CJC purchased options for
24,053 ounces of gold, exercisable at $384.05 per ounce. The total
premiums for fiscal 1996 relating to these options were approximately
$238,000. As of August 31, 1996, CJC has options on 17,800 ounces of
gold outstanding which expire March 28, 1997. CJC is required to
purchase the options under the New Gold Notes to hedge the collateral
against changing gold prices. CJC does not engage in gold option
speculation. CJC has not recorded any significant gains or losses
related to such options as the price of gold has not fluctuated
significantly.
Under the terms of the New Gold Notes, CJC, among other restrictions,
will be required to maintain a current ratio, as defined (excluding
current maturities of funded debt), of 3.2 to 1.0, minimum
shareholders' equity (deficit), as defined, of $(8,000,000) for the
period March 12, 1996, to June 30, 1996, and $(9,000,000) for the
period July 1, 1996, to maturity, and an interest coverage ratio, as
defined, of 1.25 to 1.0. CJC will also have certain limitations
relating to additional debt, liens, mergers, asset sales transactions,
restricted investments and payments of dividends and is obligated to
make certain reports periodically to the lenders. As of August 31,
1996, CJC was in compliance with these covenants.
Management believes the carrying amount of long-term debt, including the current
maturities, approximates fair value as of August 31, 1996, based upon current
rates offered for debt with the same or similar debt terms.
Subsequent to year-end, CJC was not in compliance with certain financial
covenants and, accordingly, applied for and has been granted a necessary waiver
through October 31, 1996, and an amendment with respect to such covenants from
its lenders. As discussed in Note 1, all outstanding debt obligations of CJC
were repaid with the sale proceeds from CBI shortly after the Acquisitions
occurred.
(9) COMMITMENTS AND CONTINGENCIES
ArtCarved leased certain of its manufacturing and office facilities and
equipment under various noncancelable operating leases. Expenses under all
operating leases for the fiscal year ended August 31, 1996, and for the period
from September 1, 1996, to December 16, 1996, are approximately $577,000 and
$208,000, respectively.
ArtCarved is not party to any pending legal proceedings other than ordinary
routine litigation incidental to the business. In management's opinion, adverse
decisions on those legal proceedings, in the aggregate, would not have a
materially adverse impact on ArtCarved's results of operations or financial
position.
(10) INCOME TAXES
For the fiscal year ended August 31, 1996, and for the period from September 1,
1996, to December 16, 1996, no current or deferred provision or benefit exists
for ArtCarved due to the available operating tax losses and other credit
carryforwards of CJC.
The following represents a reconciliation between tax computed by applying the
35 percent statutory income tax rate to income (loss) before income taxes and
reported income tax expense for the fiscal year ended August 31, 1996 and the
period from September 1, 1996, to December 16, 1996:
<TABLE>
<CAPTION>
Period From
Fiscal Year Ended September 1, 1996,
August 31, to December 16,
1996 1996
----------------- --------------------
<S> <C> <C>
Pretax book income (loss) (35.0)% 35.0%
Permanent differences 3.2 -
Addition to (utilization of)
operating loss carryforwards 31.8 (35.0)
----------------- --------------------
-% -%
----------------- --------------------
----------------- --------------------
</TABLE>
-61-
<PAGE>
Since ArtCarved's financial results have been included in CJC's consolidated
federal income tax return, ArtCarved federal net operating tax losses and
other credits have been included in CJC's income tax return. As a result, any
carryovers of such losses or credits which might have existed had ArtCarved
reported on a stand-alone basis are not available to ArtCarved as ArtCarved
was purchased in a business combination by CBI.
(11) EMPLOYEE BENEFIT PLANS
DEFINED BENEFIT PLAN
CJC adopted an employee benefit plan for substantially all hourly class ring
employees. The benefits were based on the employee's years of service. CJC's
funding policy was to make contributions equal to or greater than the
requirements prescribed by the Employee Retirement Income Security Act of 1974.
The plan was frozen in 1989 and, effective September 5, 1995, the plan was
terminated. Upon receiving a favorable determination on termination, dated
December 1, 1995, all assets of the plan were distributed.
CJC has a defined contribution plan that is available to all employees.
Employees are eligible to make contributions to the plan after one year of
employment. CJC does not make contributions to the plan but pays substantially
all administrative fees related to the plan.
The following components of net periodic pension income are presented for the
hourly class ring employees plan for the fiscal year ended August 31, 1996:
<TABLE>
<CAPTION>
Fiscal Year
Ended
August 31,
1996
------------------
<S> <C>
Service cost, benefits earned during the year $ -
Interest cost of projected benefit obligation -
Actual return on plan assets -
Net amortization and deferral -
-------------
Net periodic pension income $ -
-------------
</TABLE>
Assumptions used in accounting for the pension plan for the fiscal year ended
August 31, 1996, are as follows:
<TABLE>
<S> <C>
Discount rate 7.30%
Rate of increase in compensation levels N/A
Expected long-term rate of return on assets 7.30%
</TABLE>
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.
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<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To L.G. Balfour Company, Inc.:
We have audited the accompanying statements of operations, stockholder's
equity and cash flows of L.G. Balfour Company, Inc. (the Company) (a Delaware
corporation), a wholly owned subsidiary of Town & Country Corporation (the
Parent) (a Massachusetts corporation), for the year ended February 25, 1996,
and for the period from February 26, 1996 to December 16, 1996. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the results of L. G. Balfour Company, Inc.'s
operations and its cash flows for the year ended February 25, 1996, and for
the period from February 26, 1996 to December 16, 1996, in conformity with
generally accepted accounting principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. The Company relies on funding from
its Parent to support operations. The Parent is in violation under its
various debt agreements and has filed a voluntary petition for relief under
Chapter 11 Title 11 of the United States Bankruptcy Code on November 18,
1997; thus, there is no assurance that the Parent will be able to continue to
provide financial support to the Company. Therefore, there is substantial
doubt about the Company's ability to continue as a going concern. The
Parent's plans with regard to these matters, which primarily relate to the
sale of the Company, are discussed in Notes 1 and 8. The financial statements
do not include any adjustments that might result from the outcome of this
uncertainty.
Boston, Massachusetts
November 19, 1997
-63-
<PAGE>
L.G. BALFOUR COMPANY, INC.
Statements of Operations
(In Thousands)
<TABLE>
<CAPTION>
For the Period
For the From February
Year Ended 26, 1996 to
February 25, December 16,
1996 1996(a)
----------------- --------------
<S> <C> <C>
Net Sales $ 71,300 $ 60,233
Cost of Sales 35,598 29,350
----------------- --------------
Gross profit 35,702 30,883
----------------- --------------
Expenses:
Selling 27,788 25,203
General and administrative (Note 3) 5,708 5,817
----------------- --------------
Total expenses 33,496 31,020
----------------- --------------
Other (Income) Expense:
Gain on sale of facility (Note 1) (418) -
Interest expense (Note 6) 583 454
Interest on Due to Parent, net (Note 7) 1,986 1,499
----------------- --------------
Net other expense 2,151 1,953
----------------- --------------
Income (loss) before provision for income taxes 55 (2,090)
Provision for Income Taxes (Notes 1 and 2) 191 63
----------------- --------------
Net Loss $ (136) $ (2,153)
----------------- --------------
----------------- --------------
</TABLE>
(a) EXCLUDES THE FINANCIAL IMPACT OF THE SALE OF CERTAIN ASSETS AND LIABILITIES
OF THE COMPANY DISCUSSED IN NOTE 8.
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
-64-
<PAGE>
L.G. BALFOUR COMPANY, INC.
Statements of Stockholder's Equity
(In Thousands)
<TABLE>
<CAPTION>
TOTAL
ADDITIONAL ACCUMULATED STOCKHOLDER'S
CAPITAL STOCK PAID-IN CAPITAL DEFICIT EQUITY
------------------ ------------------ ---------------- -----------------
<S> <C> <C> <C> <C>
Balance, February 26, 1995 $ 4 $ 75,970 $ (61,950) $ 14,024
Net loss - - (136) (136)
------------------ ------------------ ---------------- -----------------
Balance, February 25, 1996 4 75,970 (62,086) 13,888
Net Loss - - (2,153) (2,153)
------------------ ------------------ ---------------- -----------------
Balance, December 16, 1996 $ 4 $ 75,970 $ (64,239) $ 11,735
================== ================== ================ =================
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
-65-
<PAGE>
L.G. BALFOUR COMPANY, INC.
Statements of Cash Flows
(In Thousands)
<TABLE>
<CAPTION>
FOR THE PERIOD
FOR THE YEAR FROM FEBRUARY 26,
ENDED 1996 TO
FEBRUARY 25, DECEMBER 16,
1996 1996
-------------- ------------------
<S> <C> <C>
Cash Flows from Operating Activities:
Net loss $ (136) $ (2,153)
Adjustments to reconcile net loss to net cash provided by
(used in) operating activities-
Depreciation and amortization 2,026 1,533
Gain on sale of property, plant and equipment (417) -
Changes in assets and liabilities-
Increase in accounts receivable (991) (6,049)
Decrease in inventories 894 1,774
Decrease in prepaid expenses and other current assets 666 189
Decrease in other assets 129 160
Decrease in bank overdraft and accounts payable, net (359) (234)
Increase (decrease) in accrued expenses 133 (2,442)
Decrease in deferred compensation (341) (42)
-------------- ---------------
Net cash provided by (used in) operating activities 1,604 (7,264)
-------------- ---------------
Cash Flows from Investing Activities:
Proceeds from sale of fixed assets 951 571
Capital expenditures (530) (345)
-------------- ---------------
Net cash provided by investing activities 421 226
-------------- ---------------
Cash Flows from Financing Activities:
Proceeds from (payments on) borrowings from Parent, net (1,749) 7,177
Payments on capital leases (221) (200)
-------------- ---------------
Net cash provided by (used in) financing activities (1,970) 6,977
-------------- ---------------
Net Increase (Decrease) in Cash and Cash Equivalents 55 (61)
Cash and Cash Equivalents, beginning of period 25 80
Cash and Cash Equivalents, end of period $ 80 $ 19
-------------- ---------------
Supplemental Cash Flow Data:
Cash paid during the period for-
Interest $ 52 $ 23
-------------- ---------------
Taxes $ 191 $ 42
-------------- ---------------
Supplemental Disclosures of Noncash Investing and Financing
Activities (Note 1)
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
-66-
<PAGE>
L.G. BALFOUR COMPANY, INC.
Notes to Financial Statements
(1) Summary of Significant Accounting Policies
GENERAL
The accompanying financial statements are for L.G. Balfour Company,
Inc. (the Company), a wholly owned subsidiary of Town & Country
Corporation (the Parent), for the year ended February 25, 1996 and for
the period from February 26, 1996 to December 16, 1996. The
accompanying statement of operations for the period from February 26,
1996 to December 16, 1996, does not include the financial impact of the
sale of certain assets and liabilities of the Company discussed at Note
8. Subsequent to December 16, 1996, substantially all of the normal
operations of the Company ceased. This subsidiary is engaged in the
production and distribution of high school and college class rings on a
made-to-order basis. The Company markets directly to students on campus
and at campus book stores and offers a variety of graphics products,
including graduation announcements, diplomas and memory books, and
novelty items, such as T-shirts, key chains and pendants. In addition,
the Company sells licensed sports products through retail distribution
channels.
The Company relies on funding from the Parent to support operations.
The Parent is in violation under its various debt agreements and has
filed a voluntary petition for relief under Chapter 11 Title 11 of the
Untied States Bankruptcy Code on November 18, 1997; thus, there is no
assurance that the Parent will be able to continue to provide financial
support to the Company. Therefore, there is substantial doubt about the
Company's ability to continue as a going concern. The financial
statements do not include any adjustments that might result from the
outcome of this uncertainty.
In addition, substantially all of the Company's assets have been
pledged as collateral against the Parent's debt obligations.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents include highly liquid investments with
original maturities of three months or less; the carrying amount
approximates fair market value because of the short-term maturities of
these investments.
REVENUE RECOGNITION
Revenues from product sales are recognized at the time the product is
shipped.
IMPAIRMENT OF LONG-LIVED ASSETS
In March 1995, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards (SFAS) No. 121, ACCOUNTING
FOR THE IMPAIRMENT OF LONG-LIVED ASSETS AND FOR LONG-LIVED ASSETS TO BE
DISPOSED OF. This statement deals with accounting for the impairment of
long-lived assets, certain identifiable intangibles and goodwill
related to assets to be held and used, and for long-lived assets and
certain identifiable intangibles to be disposed of.
SFAS No. 121 requires that long-lived assets (e.g., property and
equipment and intangibles) be reviewed for impairment whenever events
or changes in circumstances, such as change in market value, indicate
that the assets' carrying amounts may not be recoverable. In performing
the review for recoverability, if future undiscounted cash flows
(excluding interest charges) from the use and ultimate disposition of
the assets are less than their carrying values, an impairment loss is
recognized. Impairment losses are to be measured based on the fair
value of the asset.
On February 26, 1996, the Company adopted SFAS No. 121, which did not
have a material impact on the
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<PAGE>
Company's financial position or results of operations.
INVENTORIES
Inventories, which include materials, labor and manufacturing overhead,
are stated at the lower of cost or market using the first-in, first-out
(FIFO) method.
The effects of gold price fluctuations are mitigated by the use of a
consignment program with bullion dealers. As the gold selling price for
orders is confirmed, the Company's Parent purchases the gold
requirements at the then current market prices; any additional
requirements for gold are held as consignee. This technique enables the
Company to match the price it pays for gold with the price it charges
its customers. The Company pays a fee, which is subject to periodic
change, for the value of the gold it holds on consignment during the
period prior to sale. For the year ended February 25, 1996, these fees
totaled approximately $200,000, and for the period from February 26,
1996 to December 16, 1996, these fees totaled $233,000.
ADVERTISING
The Company expenses the costs of advertising as incurred. For the
year ended February 25, 1996 and for the period from February 26, 1996
to December 16, 1996, advertising expense was approximately $2,465,000
and $2,795,000, respectively.
PROPERTY, PLANT AND EQUIPMENT
The Company provides for depreciation, principally using the
straight-line method, at rates adequate to depreciate the applicable
assets (recorded at cost) over their estimated useful lives, which
range from 3 to 20 years. Maintenance and repair items are charged to
expense when incurred; renewals and betterments are capitalized. When
property, plant and equipment are retired or sold, their costs and
related accumulated depreciation are removed from the accounts, and any
resulting gain or loss is included in income. Included in other income
in the accompanying statement of operations for fiscal 1996 is a
$418,000 gain associated with the sale of one of the Company's
manufacturing facilities.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the
date of the financial statements and the reported amounts of revenues
and expenses during the reporting periods. Actual results could differ
from those estimates.
INCOME TAXES
The Company and its Parent have a tax-allocation agreement. The
Company's results of operations are included in the consolidated
federal tax return of the Parent. The agreement calls for the
provisions (benefits) and payments (refunds) to be made as if the
Company were to file its own separate company tax returns.
AMORTIZATION OF LONG-TERM INTANGIBLE ASSETS
The excess $5,612,000 of purchase price over the values assigned to the
net assets acquired is being amortized using the straight-line method
over approximately 40 years. The Company continually evaluates whether
events and circumstances have occurred that indicate that the remaining
estimated useful life of goodwill may warrant revision or that the
remaining balance of goodwill may not be recoverable. When factors
indicate that goodwill should be evaluated for possible impairment, the
Company uses an estimate of the related business units' undiscounted
operating income over the remaining life of the goodwill, as well as
the sale of the Company (see Note 8), in measuring whether the goodwill
is recoverable.
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<PAGE>
SUPPLEMENTAL DISCLOSURES OF NONCASH INVESTING AND FINANCING ACTIVITIES
During the period from February 26, 1996 to December 16, 1996, the
Company had fixed asset additions of approximately $58,000, funded
by increases in capital lease obligations.
(2) Income Taxes
The components of the provision for income taxes are as follows:
<TABLE>
<CAPTION>
FOR THE YEAR FOR THE PERIOD
ENDED FROM FEBRUARY
FEBRUARY 25, 26, 1996 TO
1996 DECEMBER 16,
1996
----------------- -------------------
<S> <C> <C>
Current-
Federal $ - $ -
State 191,000 63,000
----------------- -------------------
Total Provision $ 191,000 $ 63,000
================= ===================
</TABLE>
The Company's effective tax rate differs from the federal statutory rate
of 34% for the year ended February 25, 1996, and for the period from
February 26, 1996 to December 16, 1996, due to the following (in thousands):
<TABLE>
<CAPTION>
FOR THE PERIOD
FOR THE YEAR FROM FEBRUARY
ENDED 26, 1996 TO
FEBRUARY 25, DECEMBER 16,
1996 1996
------------------- ------------------
<S> <C> <C>
Computed tax provision (benefit)
at statutory rate $ 19 $ (711)
Increases resulting from state taxes 191 63
Items not deductible for income tax purposes 65 32
(Utilization) deferral of net operating losses (84) 679
------------------- ------------------
$ 191 $ 63
=================== ==================
</TABLE>
For tax reporting purposes, the Company has U.S. net operating loss
carryforwards of approximately $38.3 million as of December 16, 1996,
subject to Internal Revenue Service (IRS) review and approval and
certain IRS limitations on net operating loss utilization. Utilization
of the net operating loss carryforwards is contingent on the Company's
ability to generate income in the future. The net operating loss
carryforwards will expire from 2006 to 2012 if not utilized.
(3) Loss on Assets Held for Sale or Disposal
In fiscal 1993, the Company's management decided to make changes with
respect to certain of its operations. As a result of this decision, the
Company recognized a pretax charge of $14.5 million in the fourth
quarter of fiscal 1993 to reserve for the losses associated with the
disposal of certain inventory and fixed assets, including property,
plant and equipment of approximately $12.9 million and intangible
assets of approximately $1.6 million no longer considered necessary to
its future business plans. In fiscal 1996, due to a change in estimates
for demolishing the facility, the Company reduced the recorded reserve
by approximately $400,000, which is included as a reduction of general
and administrative expenses in the accompanying statement of
operations. During the period from February 26, 1996 to December 16,
1996, the Company completed the demolition and sale of the
manufacturing facility and reduced the recorded reserve by
approximately $150,000, which is included as a reduction of general and
administrative expenses in the accompanying statement of operations.
-69-
<PAGE>
(4) Commitments and Contingencies
Certain Company facilities and equipment are leased under agreements
expiring at various dates through 2009 (see Note 8). Lease and rental
expense included in the accompanying statements of operations amounted
to approximately $920,000 for the year ended February 25, 1996, and
approximately $866,000 for the period from February 26, 1996 to
December 16, 1996.
(5) Reserve on Sales Representative Advances
The Company advances funds to new sales representatives in order to
open up new sales territories or makes payments to predecessor sales
representatives on behalf of successor sales representatives. Such
amounts are repaid by the sales representatives through earned
commissions on product sales. The Company provides reserves to cover
those amounts that it estimates to be uncollectible. The following
represents the activity associated with the reserve on sales
representative advances:
<TABLE>
<CAPTION>
Valuation and Qualifying Accounts
-----------------------------------------------------------------------------------------
Column C
Column A Column B Additions Column D Column E
-------- -------- --------- -------- --------
Balance at Charged to Balance at
Beginning Costs and Deductions-- End of
For the Period Ended Description of Period Expenses Describe* Period
--------------------- ----------- ------------ ---------- ----------- ----------
<S> <C> <C> <C> <C> <C>
Reserve on Sales
Twelve Months Ended Representative
February 25, 1996 Advances $2,305,000 $ 659,900 $ 467,900 $2,497,000
Period from February 26, Reserve on Sales
1996 to December 16, Representative
1996 Advances $2,497,000 $ 502,800 $ 2,255,800 $ 744,000
*REPRESENTS WRITE-OFF OF TERMINATED SALES REPRESENTATIVES AMOUNT AND FORGIVENESS OF AMOUNTS BY THE COMPANY.
</TABLE>
(6) Employee Benefit Plans
POSTEMPLOYMENT MEDICAL BENEFITS
In December 1990, the Financial Accounting Standards Board issued SFAS
No. 106, EMPLOYERS' ACCOUNTING FOR POSTRETIREMENT BENEFITS OTHER THAN
PENSIONS, which requires that the accrual method of accounting for
certain postretirement benefits be adopted. The Company provides
certain health care and life insurance benefits for employees who
retired prior to December 31, 1990. The Company adopted this statement
in fiscal 1994 and is recognizing the actuarial present value of the
accumulated postretirement benefit obligation (APBO) of approximately
$6.2 million at February 27, 1994 using the delayed recognition method
over a period of 20 years (see Note 8).
-70-
<PAGE>
The net periodic postretirement benefit costs for the year ending
February 25, 1996, and for the period from February 26, 1996 to
December 16, 1996, included the following components (in thousands):
<TABLE>
<CAPTION>
FOR THE PERIOD
FOR THE YEAR FROM FEBRUARY
ENDED 26, 1996 TO
FEBRUARY 25, DECEMBER 16,
1996 1996
------------------ ----------------
<S> <C> <C>
Service costs--benefits attributed to service
during the period $ - $ -
Interest cost 444 344
Actuarial assumptions - -
Amortization of unrecognized transition obligation 323 255
------------------ ----------------
Net periodic postretirement benefit cost $ 767 $ 599
================== ================
</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 1996.
Interest cost associated with the accumulated postretirement benefit
obligation is included as a component of interest expense in the
statements of operations.
DEFERRED COMPENSATION
The Company has deferred compensation agreements with certain sales
representatives and executives, which provide for payments upon
retirement or death based on the value of life insurance policies or
mutual fund shares at the retirement date. The deferred compensation
expense for the year ended February 25, 1996 was approximately $50,000,
and for the period from February 26, 1996 to December 16, 1996 was
approximately $79,000.
(7) Related Party Transactions
The Parent administers certain programs (health insurance, workmen's
compensation, gold consignment, etc.) and charges all directly
identifiable costs to the Company. The Parent does not charge or
allocate any indirect costs; however, management believes these amounts
are not significant in fiscal 1996 and for the period from February 26,
1996 to December 16, 1996.
The Parent charged or credited the Company interest on its advances on
a monthly basis at a rate of 11.5% in fiscal 1996 and for the period
from February 26, 1996 to December 16, 1996. Included in the
accompanying statements of operations are net interest charges of
$1,986,000 in fiscal 1996, and $1,499,000 for the period from February
26, 1996 to December 16, 1996.
-71-
<PAGE>
(8) Sale
The Parent, having reviewed the Company's performance, concluded that
it would be in the best interest of the Parent's investors and
creditors to consider opportunities to sell the Company.
On May 20, 1996 (the Original Agreement), the Parent entered into an
agreement to sell certain assets and liabilities of the Company (the
Balfour Acquisition) and Gold Lance, Inc. (the Gold Lance Acquisition),
another class ring manufacturing subsidiary of the Parent, constituting
substantially all of the operations of the Company and Gold Lance, Inc.
to Commemorative Brands, Inc. (CBI and formerly Class Rings, Inc. and
Scholastic Brands, Inc.), a new company formed by Castle Harlan
Partners II, L.P. (CHPII). The Original Agreement was amended on
November 21, 1996 (the Modified Agreement), to exclude the Gold Lance
Acquisition, among other things. Separately, CBI entered into an
agreement with CJC Holdings, Inc. (CJC) to acquire its class ring and
recognition and affinity businesses.
On September 6, 1996, CBI, CHPII and the Parent entered into an
Agreement Containing Consent Order (the Consent Agreement) with the
Federal Trade Commission (the FTC). Pursuant to the Consent Agreement,
CBI has agreed, among other things, not to acquire any assets of or
interests in Gold Lance, Inc., which CBI had originally contracted to
buy together with the Company. Also, pursuant to the Consent Agreement,
the Parent and Gold Lance, Inc. agreed, among other things, not to sell
any assets to CBI, other than pursuant to the Balfour Acquisition, or
acquire any interest in CBI. In October 1996, the FTC, which had been
reviewing the transaction since May 1996, gave preliminary approval to
the Modified Agreement. Final FTC approval was received on December 26,
1996.
On December 16, 1996, the Parent completed the sale of certain assets
and liabilities of the Company (the Closing). At the Closing, the
Parent received cash equal to the purchase price of $44 million, plus
$3.0 million in working capital adjustment from January 28, 1996 to the
date of closing, less $14 million, which was placed in escrow pending
final FTC approval. CBI also assumed a liability of $4.9 million
representing the value of gold on hand as of the Closing. All of the
$4.9 million in gold value acquired by CBI was on consignment at the
closing date and was neither reflected as an asset or a liability on
the Company's balance sheet. The Closing also included the assumption
by CBI of a liability related to unamortized postretirement medical
benefit obligations, consisting of approximately $5.2 million. This
liability did not appear on the Company's balance sheet in the past, as
the Company had been recognizing it on the delayed recognition method
allowed by SFAS No. 106, EMPLOYERS' ACCOUNTING FOR POSTRETIREMENT
BENEFITS OTHER THAN PENSIONS (see Note 6). Additionally, CBI assumed an
operating lease obligation for a facility in Louisville, Kentucky which
runs through August 2, 2005 at an average yearly rental cost of
approximately $419,000 (see Note 4). On December 31, 1996, the Parent
received the $14 million in escrowed funds. On April 25, 1997, a
settlement was reached in which the Parent paid CBI $1.1 million to
finalize the purchase price and resolve certain other items.
The Closing did not include the assumption by CBI of a leased facility
in North Attleboro, Massachusetts. On April 24, 1997 (the Lease
Amendment Date), the lease was amended, reducing the amount of space
and the period of time for which the Company is obligated. The
Company's future lease obligation for this facility from the Lease
Amendment Date is $16,806 per month from May 17, 1997 through July 31,
1999. The previous lease required yearly payments ranging from $605,000
to $699,000 through May 31, 2009 (see Note 4).
-72-
<PAGE>
EXHIBIT INDEX
The following exhibits are filed as a part of the report:
<TABLE>
<CAPTION>
Exhibit No. Designation
- ----------- -----------
<C> <S>
2.1(a) Asset purchase Agreement dated as of May 20, 1996 ("ArtCarved Purchase Agreement"),
among the Company, CJC and CJC North America, Inc. ("CJCNA").
2.2(a) First Amendment to the ArtCarved Purchase Agreement dated as of November 21, 1996,
among the Company, CJC and CJCNA.
2.3(a) Letter Agreement amending the ArtCarved Purchase Agreement dated December 16, 1996,
among the Company, CJC and CJCNA.
2.4(a) Amended and Restated Asset Purchase Agreement dated as of November 21, 1996
("Balfour Purchase Agreement"), among the Company, Town & Country, L. G. Balfour
Company, Inc., and Gold Lance, Inc.
2.5(a) Letter Agreement amending the Balfour Purchase Agreement dated December 16, 1996,
by and among the Company, Town & Country, L. G. Balfour Company, Inc. and Gold
Lance.
3.1(a) Certificate of Incorporation of the Company, as amended.
3.2(a) Certificate of Designations, Preferences and Rights of Series A Preferred Stock of
the Company, effective December 13, 1996, together with a Certificate of Correction
thereof.
3.3(a) Certificate of Designations, Preferences and Rights of Series B Preferred Stock of
the Company effective December 13, 1996.
3.4(a) Restated by-laws of the Company, as amended.
3.5 Certificate of Increase of Series B Preferred Stock dated June 10, 1998. Filed
herewith.
4.1(a) Indenture dated as of December 16, 1996, between the Company and Marine Midland
Bank, as trustee (including the form of Note).
4.2(a) Form of Note (Included as part of Indenture).
4.3(a) Registration Rights Agreement dated as of December 16, 1996, among the Company,
Lehman Brothers Inc. and BT Securities Corporation.
4.4 Amended and Restated Stockholders' and Subscription Agreement, dated as of
April 29, 1998, by and among the Company, CHPII, Dresdner Bank AG, Grand Cayman
Branch, Offshore, John K. Castle, as Voting Trustee, and the individuals party
thereto. Filed herewith.
4.5(b) Amended and restated 1997 Stock Option Plan of the Company. Incorporated by
reference to the corresponding Exhibit of the Company's Annual Report - Form 10K
(File No. 333-20759) dated August 30, 1997.
9.1 Voting Trust Agreement, as amended and restated as of April 29, 1998, among the
Company, certain stockholders of the Company party thereto and John K. Castle, as
Voting Trustee. Filed herewith.
10.1(a) Revolving Credit, Term Loan and Gold Consignment Agreement dated as of
December 16, 1996, among the Company, the lending institutions listed therein and
The First National Bank of Boston and Rhode Island Hospital Trust National Bank, as
Agents for the Banks.
10.2(a) Purchase Agreement dated December 10, 1996, among the Company and the Initial
Purchasers.
10.3(a)(b) Employment Agreement dated as of December 16, 1996, between the Company and Jeffrey
H. Brennan.
10.4(a)(b) Employment Agreement dated as of December 16, 1996, between the Company and Richard
H. Fritsche.
10.5(a)(b) Employment arrangements between the Company and Balfour with respect to George Agle.
10.6(a)(b) Form of Indemnification Agreement between the Company and (i) each director and
(ii) certain officers.
-73-
<PAGE>
10.7 Management Agreement dated as of December 17, 1996, between the Company and Castle
Harlan, Inc. Incorporated by reference to the corresponding Exhibit of the
Company's Annual Report on Form 10-K (File No. 333-20759) dated August 30, 1997.
10.8 First Amendment to Revolving Credit, Term Loan and Gold Consignment Agreement,
dated March 16, 1998 - incorporated by reference to Exhibit 10.1 to the Company's
Quarterly Report on Form 10-Q (File No. 333-20759) dated February 28, 1998.
10.9 Second Amendment to Revolving Credit, Term Loan and Gold Consignment Agreement,
dated July 10, 1998 - incorporated by reference to Exhibit 10.1 to the Company's
10.10 Quarterly Report on Form 10-Q (File No. 333-20759) dated May 30, 1998.
Incentive Stock Purchase Plan, effective as of July 7, 1998. Filed herewith.
10.11 Third Amendment to Revolving Credit, Term Loan and Gold Consignment Agreement,
dated August 26, 1998. Filed herewith.
10.12 Revolving Credit Note, dated as of August 26, 1998, issued by the Company and
payable to the order of BankBoston, N.A. Filed herewith.
10.13 Indemnity Agreement, dated August 26, 1998, by and between the Company and CHPII.
Filed herewith.
10.14 Fourth Amendment to Revolving Credit, Term Loan and Gold Consignment Agreement,
dated November 27, 1998. Filed herewith.
11.1 Statement re: Computation of per share earnings. Filed herewith.
27.1 Financial Data Schedule. Filed herewith.
</TABLE>
- ----------------------
(a) Incorporated by reference to the corresponding Exhibit number of the
Company's Registration Statement on Form S-4 (Registration No.
333-20759), dated April 11, 1997.
(b) Management contract or compensatory plan or arrangement.
-74-
<PAGE>
Exhibit 3.5
COMMEMORATIVE BRANDS, INC.
CERTIFICATE OF INCREASE
OF
SERIES B PREFERRED STOCK
The undersigned, being the duly elected and acting vice-president,
secretary and treasurer of COMMEMORATIVE BRANDS, INC., a corporation
organized and existing under and by virtue of the General Corporation Law of
the State of Delaware (the "Corporation"), DOES HEREBY CERTIFY THAT:
1. A Certificate of Designations of Series B Preferred Stock setting
forth the Powers, Preferences, Rights, Qualifications, Limitations and
Restrictions of Such Preferred Stock was filed by the Corporation with the
Secretary of State of Delaware on December 13, 1996; and
2. Pursuant to Section 151 of the Delaware General Corporation Law,
the Board of Directors of the Corporation duly adopted the following
resolution by unanimous written consent dated June 2, 1998:
RESOLVED that, pursuant to the authority vested in the Board of
Directors of the Corporation by the provisions of the Certificate of
Incorporation of the Corporation, as amended, the number of shares of
the Corporation to be designated as Series B Preferred Stock is hereby
increased by 50,000 shares (the "Additional Series B Shares"); and
such Additional Series B Shares shall have the same Powers,
Preferences, Rights, Qualifications, Limitations and Restrictions as
the Series B Preferred Stock so designated prior to the date hereof as
set forth in that certain Certificate of Designations of Series B
Preferred Stock filed by the Corporation with the Secretary of State
of the State of Delaware on December 13, 1996.
IN WITNESS WHEREOF, the undersigned has duly executed this Certificate
of Increase on behalf of the Corporation this 10th day of June, 1998.
COMMEMORATIVE BRANDS, INC.
By: /s/ Clyde W. Walls
-------------------------------------------
Name: Clyde W. Walls
Title: Vice-President, Secretary and Treasurer
<PAGE>
Exhibit 4.4
COMMEMORATIVE BRANDS, INC.
AMENDED AND RESTATED STOCKHOLDERS'
AND SUBSCRIPTION AGREEMENT
AMENDED AND RESTATED STOCKHOLDERS' AND SUBSCRIPTION AGREEMENT (this
"Agreement"), dated as of April 29, 1998, by and among Commemorative Brands,
Inc., a Delaware corporation formerly known as Scholastic Brands, Inc. (the
"Company"), Castle Harlan Partners II, L.P., a Delaware limited partnership
("CHP"), Castle Harlan Offshore Partners, L.P., a Delaware limited
partnership ("Offshore"), Dresdner Bank AG, Grand Cayman Branch ("Dresdner"),
each of the other Stockholders listed on EXHIBIT A hereto (each, an
"Individual Stockholder" and collectively, the "Individual Stockholders"),
and John K. Castle, in his capacity as Voting Trustee under the Amended and
Restated Voting Trust Agreement, dated the date hereof (the "Voting Trust
Agreement"), among the Individual Stockholders and John K. Castle, as Voting
Trustee, and each of the persons who shall, after the date hereof, acquire
securities of the Company 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 B hereto (CHP, Offshore, Dresdner, the Individual
Stockholders, Castle, 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, on December 16, 1996, the Company acquired (the
"Acquisition") 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; and
WHEREAS, in connection with the Acquisition, CHP, Offshore and
Dresdner subscribed for and purchased an aggregate of 375,000 shares of the
Company's Common Stock, 100,000 shares of the Company's Series A Preferred
Stock, 375,000 shares of the Company's Series B Preferred Stock and certain
warrants to purchase the Company's Common Stock pursuant to that certain
Subscription Agreement, dated as of December 16, 1996, by and between CHP,
Offshore, Dresdner and the Company (the "Original Subscription Agreement");
and
WHEREAS, thereafter CHP, Offshore and Dresdner sold an aggregate of
3,544 shares of the Company's Series B Preferred Stock and an aggregate of
3,544 shares of the Company's Common Stock held by them to Branford Castle
Holdings, Inc., Leonard M. Harlan, David B. Pittaway and David H. Chow, who
thereupon became parties to the Original Subscription Agreement upon their
execution and delivery of Instruments of Accession thereto on December 17,
1996; and
<PAGE>
WHEREAS, the Company has heretofore repurchased from CHP, Offshore
and Dresdner all of the outstanding shares of the Company's Series A
Preferred Stock and warrants of the Company originally acquired by them
pursuant to the Original Subscription Agreement; and
WHEREAS, concurrently herewith, Mr. Zane Tankel is acquiring from
CHP, Offshore, Dresdner, Branford and Harlan an aggregate of 938 shares of
the Company's Series B Preferred Stock and 938 shares of the Company's Common
Stock, and Mr. Edward O. Vetter is acquiring from CHP, Offshore, Dresdner,
Branford and Harlan, an aggregate of 400 shares of the Company's Series B
Preferred Stock and 400 shares of the Company's Common Stock; and
WHEREAS, the Stockholders and the Company wish to amend and restate
in its entirety the Original Subscription Agreement in the manner set forth
in this Stockholders' Agreement;
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"), all of which shares are currently outstanding, 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"), of which 375,000 shares have been issued and are currently outstanding,
and (ii) 750,000 shares of Common Stock, par value $.01 per share (the "Common
Stock"), of which 375,000 shares have been issued and are currently outstanding,
21,405 shares are currently reserved for issuance upon exercise of the Company's
outstanding Common Stock Purchase Warrants and 39,101 shares are currently
reserved for issuance upon exercise of certain employee stock options. The terms
of the Common Stock and the 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, copies of which have been furnished to each of the Stockholders.
2. OWNERSHIP OF SHARES.
(a) Each of the Stockholders currently beneficially owns or
proposes to acquire such number of shares of Common Stock and Series B
Preferred Stock as is set forth opposite such Stockholder's name on EXHIBIT A
hereto, such shares being all of the securities of the Company currently held
and proposed to be acquired by such Stockholder. The shares of Common Stock
and Series B Preferred Stock beneficially owned by the Stockholders as of the
date hereof, and any shares of Common Stock or Preferred Stock which any such
Stockholder may acquire after the date hereof, or any other shares of capital
stock of the Company or warrants, options, or rights to acquire any shares of
capital stock of the Company (and the shares of capital stock issuable upon
exercise of any such warrants, options or rights) which shall at any time be
issued in exchange for or on account of the Common Stock or the Preferred
Stock or which any such Stockholder may otherwise acquire after the date
hereof, are sometimes collectively referred to herein as the "Company
Securities."
2
<PAGE>
(b) At any time an Instrument of Accession is delivered to
the Company, EXHIBIT A 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 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 any shares of Common
Stock or Preferred Stock to such Stockholder after the date hereof.
(c) References herein to shares of Common Stock and Preferred
Stock held or owned by any Stockholder shall include the shares of Common
Stock and Preferred Stock issued to or acquired by any Stockholder 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 or will acquire 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
compliance with 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, except to
the extent provided in the Voting Trust Agreement, no other person or entity
has any interest, beneficial or otherwise, in the Company Securities held or
to be acquired 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 they are subsequently registered under the
Securities Act or an exemption from such registration is available, (iii)
Rule 144 promulgated under the Securities Act is not currently 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
3
<PAGE>
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.
(e) Each Stockholder severally represents and warrants that
(i) he, she or it has full power and authority to execute and deliver this
Agreement and to perform such Stockholder's obligations hereunder, (ii) this
Agreement has been duly authorized, executed, and delivered by such
Stockholder and is valid and binding and enforceable in accordance with its
terms; (iii) the execution and delivery of this Agreement and the performance
of such Stockholder's obligations hereunder will not violate or conflict
with, or cause a breach of or a default under, any provision of any governing
instrument or any law, decree or regulation applicable to such Stockholder or
any contract or instrument to which such Stockholder is a party or by which
such holder or any of his, her or its properties or assets is bound, and (iv)
no consent, approval, or authorization of or any filing with any authority or
other person which has not been obtained or made is required to be obtained
or made in connection with the execution and delivery of this Agreement by
such Stockholder.
4. RESTRICTIONS ON TRANSFER.
(a) Except as provided in Sections 4, 5 and 6 hereof, no
Stockholder shall transfer or otherwise dispose of any Company Securities
owned by such Stockholder, or any interest therein, and any attempt by such
Stockholder to effect a transfer or disposition in violation of this Section
4 or Sections 5 or 6 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 Company 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 Company
Securities.
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Subject to the last sentence of this paragraph, nothing in
this Section 4 or in Sections 5 or 6 hereof shall prevent the transfer or
other disposition of the Company Securities: (i) to a personal representative
or to one or more members of any Stockholder's family or to trusts or similar
entities established 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 related account or fund
managed by Castle Harlan, Inc. and/or any person or entity directly or
indirectly controlling, controlled by, or under common control with, CHP or
any such account or fund; PROVIDED, HOWEVER, that such transferee(s) shall
take such Company Securities subject to, and shall 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 B hereto and references herein to Company Securities held or
owned by any Stockholder shall be deemed to include Company Securities 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 Company 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 Stockholder 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 AN AMENDED AND RESTATED STOCKHOLDERS' AND
SUBSCRIPTION AGREEMENT DATED AS OF APRIL 29, 1998, 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
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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 any Company Securities
other than the Common Stock or the Preferred Stock which may at any time be
issued to any holder bound by the terms hereof shall bear a similar legend or
such other the legend as may be required by the terms of such securities.
5. CERTAIN PURCHASE RIGHTS.
(a) DRAG-ALONG RIGHT. (i) If, before the consummation of
an Initial Public Offering (as hereinafter defined), CHP, alone or together
with one or more of the other Stockholders (collectively, the "Majority
Stockholders"), proposes to sell any or all of the shares of Common Stock
and/or Preferred Stock owned by them in a bona fide transaction to an
unaffiliated third party (regardless of whether such disposition is by means
of a sale of such shares of Common Stock and/or Preferred Stock, a merger of
the Company in which the shares of Common Stock and/or Preferred Stock are
converted into the right to receive cash, or a sale of all or substantially
all of the assets of the Company and a subsequent distribution of the
proceeds therefrom), the Majority Stockholders shall be entitled, by delivery
of 30 days' prior written notice to all of the other Stockholders, specifying
the name and address of the proposed parties to such transaction and the
terms thereof, to require each such Stockholder to sell the same percentage
of the shares Common Stock and/or Preferred Stock held by him, her or it for
the equivalent consideration per share and otherwise upon the same terms as
such Majority Stockholders in the proposed transaction.
(ii) The closing of any transaction pursuant to
this Section 5(b) shall be held at such time and place as the Majority
Stockholders shall reasonably specify. At such closing, the selling
Stockholders shall deliver stock certificates representing the shares of
Common Stock and/or Preferred Stock to be sold, duly endorsed for transfer
and accompanied by all requisite stock transfer taxes, if any, against
payment of the purchase price therefor, and the shares of Common Stock and/or
Preferred Stock to be transferred shall be free and clear of any liens,
charges, claims or encumbrances (other than restrictions imposed pursuant to
applicable federal and state securities laws), and each selling Stockholder
shall so represent and warrant. Each selling Stockholder shall further
represent and warrant that he, she or it is the beneficial owner of such
shares of Common Stock and/or Preferred Stock and shall make such additional
representations and warranties as shall be customary in transactions of a
similar nature.
(b) TAG ALONG RIGHTS. If, before the consummation of an
Initial Public Offering, CHP proposes to sell, in a single transaction or a
series of related transactions (to the same purchaser or affiliated
purchasers) either (i) more than 30% of the shares of Common Stock and/or 30%
of the shares of Preferred Stock held by it on the date hereof or (ii) any
other percentage of the shares of Common Stock or Preferred Stock held by it
if as a result of such
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proposed sale of Common Stock and/or Preferred Stock CHP, together with any
related account or fund managed by Castle Harlan, Inc., and any person or
entity that directly or indirectly controls or is controlled by or is under
direct or indirect common control with CHP or any such account or fund, shall
no longer have the right to vote shares of Common and Preferred Stock
representing in the aggregate more than 50% of the total voting power of the
Company, in a transaction in which the Majority Stockholders have not
exercised their rights under Section 5(b) hereof, the other Stockholders
shall be offered, as provided below, a single opportunity in connection with
such proposed sale to sell their shares of Common Stock or Preferred Stock
(or combination thereof to the extent such sale by CHP includes both Common
Stock and Preferred Stock) on the same terms and conditions as those received
by CHP. CHP shall give no less than 30 days' prior written notice of the
proposed sale and its terms to the other Stockholders, provided that the
Company shall transmit such offer and perform or cause to be performed such
administrative actions as may be necessary in order to provide for the
processing of the transactions contemplated thereby without charge. Each
Stockholder which elects to accept the offer by written notice to the Company
within 30 days after notice of the transaction is given shall have the
opportunity to sell to the purchaser in such sale that number of shares of
Common Stock and/or Preferred Stock owned by such Stockholder as shall equal
the product of (x) the percentage of all shares of Common Stock and/or
Preferred Stock, as applicable, owned by such Stockholder as of the last day
of such 30 day period, multiplied by (y) the number of shares of Common Stock
and/or Preferred Stock, as applicable, which the purchaser has offered to
acquire from CHP. The number of shares of Common Stock or Preferred Stock to
be sold by CHP shall be reduced proportionately to the extent necessary to
provide for the sale of shares of Common Stock and/or Preferred Stock by the
other Stockholders.
(c) CERTAIN DEFINITIONS. For purposes of this
Agreement, the terms: (i) "Fully-Diluted Basis" shall mean the sum of,
without duplication, (A) all shares of voting equity securities of the
Company outstanding at the time of determination, plus (B) all shares of
voting equity securities of the Company issuable upon the exercise of any
option, warrant or similar right outstanding at the time of determination,
whether or not then exercisable, plus (C) all shares of voting equity
securities of the Company issuable upon the exercise of any conversion or
exchange right contained in any security convertible into or exchangeable for
shares of voting equity securities of the Company; and (ii) "Initial Public
Offering" shall mean the first offering by the Company to the general public
of Common Stock of the Company pursuant to a registration statement filed
with, and declared effective by, the Securities and Exchange Commission (the
"SEC") upon the consummation of which the Common Stock is listed on a United
States securities exchange or included in the NASDAQ Stock Market System,
other than a registration on Form S-4 or S-8 (or its equivalent).
(d) CERTAIN EXEMPT TRANSACTIONS. The provisions of this
Section 5 shall not apply to (i) any transfer between or among CHP and/or any
related account or fund managed by Castle Harlan, Inc. and/or any entity or
person that directly or indirectly controls or is controlled by or is under
direct or indirect common control with CHP or any such related account or
fund at a price not in excess of such person's or entity's original cost or
(ii) any transfer to the partners or other equity holders of CHP or any other
entity to which CHP shall have transferred such shares in accordance with
clause (i) of this Section 5(d) as part of a
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distribution by CHP or such other entity, provided that in each such case,
such transferee agrees to be bound by the provisions of this Agreement.
6. 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, Offshore
or Dresdner (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 6(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 6(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
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<PAGE>
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 Section 6(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 6(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 6(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 6, 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
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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 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 or Preferred Stock of any Stockholder pursuant to Section
6(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
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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 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 6(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 6(c)(5)(iii), any legal or
other fees or expenses reasonably incurred by such other party in connection
with any investigation or proceeding.
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The parties hereto agree that it would not be just and
equitable if contribution pursuant to this Section 6(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 (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
6(c)(5), the indemnifying parties shall indemnify the indemnified party to
the full extent provided in Sections 6(c)(5)(i) and 6(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 6(c)(5)(iv).
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 6, at a time when CHP, Dresdner and Offshore (together with their
affiliates) shall cease to own more than 10% of the total number of shares of
Common Stock of the Company then outstanding or (iii) except for the
provisions of Section 6 hereof, upon the consummation of an Initial Public
Offering (as defined in Section 5(c) above) by 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
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be to such successor. This Agreement, and the rights and obligations of the
parties hereunder, 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, two (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
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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 A hereto.
(c) ENTIRE AGREEMENT; AMENDMENTS AND WAIVERS. This
Agreement amends, restates and supersedes in its entirety the Original
Subscription Agreement, dated December 16, 1996, among the Company and the
Stockholders party thereto and sets forth the entire understanding of the
parties with respect to the subject matter hereof, subject to any other
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.
IN WITNESS WHEREOF, the undersigned have executed this
Agreement as of the date first set forth above.
14
<PAGE>
STOCKHOLDERS:
CASTLE HARLAN PARTNERS II, L.P.
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
DRESDNER BANK AG, GRAND
CAYMAN BRANCH
By: Castle Harlan, Inc.,
its Investment Manager
By: /s/ David B. Pittaway
-----------------------------------
Name: David B. Pittaway
BRANFORD CASTLE HOLDINGS, INC.
By: /s/ John K. Castle
-----------------------------------
Name: John K. Castle
15
<PAGE>
/s/ Leonard M. Harlan
--------------------------------------
Leonard M. Harlan
/s/ David B. Pittaway
--------------------------------------
David B. Pittaway
/s/ David Chow
--------------------------------------
David Chow
/s/ Zane Tankel
--------------------------------------
Zane Tankel
/s/ Edward O. Vetter
--------------------------------------
Edward O. Vetter
/s/ John K. Castle
--------------------------------------
John K. Castle, as Voting Trustee
COMPANY:
COMMEMORATIVE BRANDS, INC.
By: /s/ Jeffrey H. Brennan
-----------------------------------
Name: Jeffrey H. Brennan
16
<PAGE>
EXHIBIT A
As of April 29, 1998
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------
Shares of
Stockholder's Name and Address Shares of Common Stock Series B Preferred Stock
- ---------------------------------------------------------------------------------------------------
<S> <C> <C>
Castle Harlan Partners II, L.P.
c/o Castle Harlan, Inc.
150 East 58th Street 330,840 330,840
New York, New York 10155
Attention: Howard Weiss
- ---------------------------------------------------------------------------------------------------
Castle Harlan Offshore
Partners, L.P.
c/o Castle Harlan, Inc. 20,804 20,804
150 East 58th Street
New York, NY 10155
Attention: Howard Weiss
- ---------------------------------------------------------------------------------------------------
Dresdner Bank AG, Grand
Cayman Branch
c/o Castle Harlan, Inc. 18,483 18,483
150 East 58th Street
New York, NY 10155
Attention: Howard Weiss
- ---------------------------------------------------------------------------------------------------
Branford Castle Holdings, Inc.
c/o Castle Harlan, Inc.
150 East 58th Street 1,888 1,888
New York, NY 10155
Attention: John K. Castle
- ---------------------------------------------------------------------------------------------------
Leonard M. Harlan
c/o Castle Harlan, Inc.
150 East 58th Street 944 944
New York, NY 10155
- ---------------------------------------------------------------------------------------------------
A-1
<PAGE>
- ---------------------------------------------------------------------------------------------------
Shares of
Stockholder's Name and Address Shares of Common Stock Series B Preferred Stock
- ---------------------------------------------------------------------------------------------------
David B. Pittaway
c/o Castle Harlan, Inc.
150 East 58th Street 469 469
New York, NY 10155
- ---------------------------------------------------------------------------------------------------
David H. Chow
c/o Castle Harlan, Inc.
150 East 58th Street 234 234
New York, NY 10155
- ---------------------------------------------------------------------------------------------------
Zane Tankel
P.O. Box 824
Rio Vista Drive 938 938
Alpine, NJ 07620
- ---------------------------------------------------------------------------------------------------
Edward O. Vetter
Edward O. Vetter &
Associates, Inc. 400 400
5333 Walnut Hill Lane
Dallas, TX 75229
- ---------------------------------------------------------------------------------------------------
</TABLE>
A-2
<PAGE>
EXHIBIT B
INSTRUMENT OF ACCESSION
The undersigned, __________________________, as a condition precedent
to becoming the owner or holder of record of (1) __________ (________) shares
of Common Stock, par value $.01 per share, of the Company, and (2)
_____________ (________) 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 Amended and Restated Stockholders' and Subscription
Agreement, dated as of April , 1998 (the "Stockholders' Agreement"), 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
Stockholders' 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:
---------------------------
Address:
---------------------------
---------------------------
---------------------------
Date:
---------------------------
Accepted:
By:
---------------------------
Date:
-------------------------
B-1
<PAGE>
Exhibit 9.1
VOTING TRUST AGREEMENT
as amended and restated as of April 29, 1998
Voting Trust Agreement, dated as of December 17, 1996, as
amended and restated as of April 29, 1998, among Commemorative Brands, Inc.,
a Delaware corporation formerly known as Scholastic Brands, Inc. (the
"Company"), and each of Branford Castle Holdings, Inc., Leonard M. Harlan,
David B. Pittaway and David H. Chow (which or who together with their
respective legal representatives, successors and assigns as permitted
hereunder, are hereinafter collectively referred to as the "Initial
Stockholders"), and Zane Tankel and Edward O. Vetter (who together with their
legal representatives, successors and assigns as permitted hereunder, are
hereinafter referred to as the "Additional Stockholders") and such additional
persons as may hereafter agree to become subject to this Agreement pursuant
to a Joinder Agreement substantially in the form of EXHIBIT A hereto (who
together with the Initial Stockholders and the Additional Stockholders, are
hereinafter collectively referred to as the "Stockholders") and John K.
Castle and any successor appointed as provided in this Agreement, as Voting
Trustee (the "Voting Trustee").
RECITALS
The Company is duly organized and validly existing under the
laws of the State of Delaware. As of December 17, 1996, the Initial
Stockholders transferred to the Voting Trustee an aggregate of (i) 3,544
shares of the issued and outstanding Common Stock, par value $0.01 per share,
of the Company (the "Common Stock"), and (ii) 3,544 shares of the issued and
outstanding Series B Preferred Stock, par value $0.01 per shares, of the
Company (the "Series B Preferred Stock"), and, as of the date hereof, the
Additional Stockholders desire to transfer to the Voting Trustee an aggregate
of (i) 1,338 shares of Common Stock and (ii) 1,338 shares of Series B
Preferred Stock.
In consideration of the premises and of the mutual undertakings
of the parties hereinafter set forth, a voting trust (the "Trust") in respect
of the shares of Common Stock and Series B Preferred Stock of the Company now
or from time to time hereafter owned by the Stockholders (such shares being
hereinafter collectively referred to herein as the "Shares") is hereby
created and established, subject to the following terms and conditions, to
all and every one of which the parties hereto expressly assent and agree.
1. DEPOSIT OF SHARES.
(a) TRANSFER OF SHARES. Each Stockholder has transferred and
assigned and agrees that he or it will transfer and assign, or cause to be
transferred and assigned, to the Voting Trustee all of the Shares of the Company
now or hereafter owned by him or it and will deposit or cause to be deposited
hereunder, with the Voting Trustee, the certificates for such Shares, all of
which certificates, if not registered in the name of the Voting Trustee, shall
be duly endorsed in blank or accompanied by proper instruments of assignment and
transfer thereof duly executed in blank.
<PAGE>
(b) ALL CAPITAL STOCK. The provisions of this Agreement shall
apply to any and all Shares of the Company that (i) may be issued in respect of,
in exchange for, or in substitution of any Shares transferred to the Voting
Trustee pursuant to paragraph (a) hereof, or (ii) are hereafter acquired by any
Stockholder at any time, and each Stockholder agrees that until the termination
of this Agreement no Shares of the Company shall be held by such Stockholder,
but all such Shares shall be deposited with the Voting Trustee in accordance
with the terms and conditions of this Agreement.
2. VOTING TRUST CERTIFICATES.
(a) ISSUE OF CERTIFICATES. Subject to the provisions of
Section 4 hereof, the Voting Trustee shall from time to time issue to each
Stockholder, with respect to the Shares of the Company owned by such Stockholder
and so deposited hereunder, a Voting Trust Certificate or Voting Trust
Certificates, each in the form of EXHIBIT A hereto, for the number of Shares
equal to that deposited by such Stockholder, which Certificate or Certificates
shall refer to the provisions of this Agreement and be registered on the books
of the Trust in such Stockholder's name.
(b) TRANSFER OF CERTIFICATES. Voting Trust Certificates shall,
to the extent permitted by law and the terms of this Agreement, be transferable
in the same manner as negotiable instruments; PROVIDED, HOWEVER, that ownership
of such Voting Trust Certificates shall be transferable on the books of the
Trust by the holders of record thereof only upon (i) the surrender of such
Certificates, properly endorsed by the registered holders, and (ii) delivery to
the Voting Trustee (A) by the proposed transferee, of a valid undertaking, in
form and substance satisfactory to the Voting Trustee, to become, and such
transferee becomes, bound by the terms of this Agreement pursuant to a Joinder
Agreement substantially in the form of EXHIBIT B hereto, and (B) by the proposed
transferor, of an opinion of counsel or no action letter as provided in Section
4 hereof.
3. STOCKHOLDERS' AGREEMENTS.
(a) LIMITATIONS ON TRANSFER. All Voting Trust Certificates
issued hereunder shall be subject to the limitations on transfer with respect to
the Shares now or hereafter transferred to the Voting Trustee hereunder that are
contained in any Stockholders', Purchase or Subscription Agreement between or
among the Company and its Stockholders with respect to such Shares, copies of
which Agreements will be maintained on file with the Company.
(b) NOTICES. Any notice required to be given by any
Stockholder to the Company or others under any Stockholders', Purchase or
Subscription Agreement with respect to the purchase or sale of any Shares
transferred hereunder shall be given to the Voting Trustee who shall promptly
transmit such notice to the Company, and the Company shall thereafter give all
notices required under such Stockholders', Purchase or Subscription Agreement to
be given to others, including the other stockholders of the Company.
4. REGISTRATION OF CERTIFICATES.
CERTIFICATES NOT REGISTERED. The Voting Trustee will not
register the Voting Trust Certificates under the Securities Act of 1933, as
amended (the "Securities Act"), or under the
-2-
<PAGE>
securities laws of any state in reliance upon each Stockholder's
representation hereby made that such Stockholder will hold the Voting Trust
Certificates subject to all applicable provisions of the Securities Act and
such state laws and all applicable rules and regulations promulgated
thereunder, and will not offer, sell, transfer or otherwise dispose of said
Voting Trust Certificates or any part thereof unless such Stockholder shall
have first obtained (i) an opinion of counsel, in form and substance
satisfactory to the Voting Trustee, to the effect that such disposition will
not result in a violation of any federal or state law applicable to the offer
and sale of securities, or (ii) written advice from the Securities and
Exchange Commission that it will take no action with respect to any such
proposed disposition of said Voting Trust Certificates.
5. REPLACEMENT OF CERTIFICATES.
ISSUE OF REPLACEMENT CERTIFICATES. In case any Voting Trust
Certificate shall be mutilated, lost, destroyed or stolen, the Voting Trustee
may issue and deliver in exchange therefor and upon cancellation of the
mutilated Voting Trust Certificate, or in lieu of the lost, destroyed or stolen
Voting Trust Certificate, a new Voting Trust Certificate or Voting Trust
Certificates representing a like number of Shares, upon the production of
evidence of such loss, destruction or theft, satisfactory to the Voting Trustee,
and upon receipt of an indemnity satisfactory to the Voting Trustee, and upon
compliance also with such other reasonable conditions as the Voting Trustee may
prescribe.
6. STOCK CERTIFICATES HELD BY VOTING TRUSTEES.
(a) SURRENDER OF CERTIFICATES. The certificates for Shares of
the Company deposited with the Voting Trustee shall, if not registered in the
name of the Voting Trustee, be surrendered to the Company and canceled and new
certificates therefor issued to and in the name of the Voting Trustee. Notation
shall be made on the face of all certificates issued in the name of the Voting
Trustee that they are issued pursuant to this Agreement, and such fact shall
also be noted in the records of stock ownership of the Company.
(b) SHARES HELD IN TRUST. All Shares deposited with the Voting
Trustee hereunder shall be held in trust for the Stockholders and their
respective heirs, executors, administrators and assigns, and used and applied by
the Voting Trustee and his successors in office for the purposes of and in
accordance with this Agreement and shall remain subject to the Subscription
Agreement.
(c) TRANSFER OF SHARES. The Voting Trustee may cause any
Shares at any time held by him under this Agreement to be transferred to any
name or names other than the name of the Voting Trustee herein named, if such
transfer becomes necessary by reason of any change in the person holding the
office of Voting Trustee as hereinafter provided.
7. DIVIDENDS; SUBSCRIPTION RIGHTS.
(a) DIVIDENDS. The Company is hereby authorized and directed,
and the Company hereby agrees, to pay all distributions and dividends that are
paid in cash, stock (other than voting stock) or other property directly to the
registered holder of the Voting Trust Certificate
-3-
<PAGE>
evidencing the Shares on which such distributions or dividends are declared.
All shares of voting stock issued as dividends on Shares that are subject to
this Agreement shall also be subject to this Agreement. The stock
certificates for such shares shall be issued in the name of and delivered to
the Voting Trustee to be held hereunder, subject to all of the provisions
hereof, and the Voting Trustee shall issue additional Voting Trust
Certificates in respect of such shares to the Stockholders entitled thereto.
(b) DISTRIBUTIONS OF CAPITAL STOCK. In case the Company shall
at any time issue any stock or other securities to which the holders of the
capital stock of the Company shall be entitled to subscribe by way of preemptive
right or otherwise, or any Stockholder shall be otherwise entitled (including,
without limitation, pursuant to the Stockholders' Agreement) to purchase any
shares of capital stock of the Company, the Voting Trustee shall promptly give
notice of such right so to subscribe or purchase and of the terms thereof to
such Stockholder at such Stockholder's address registered with the Voting
Trustee; and such Stockholder upon providing the Voting Trustee with funds in
the requisite amount, shall have the right, subject to such reasonable
regulations as may be prescribed by the Voting Trustee, to instruct the Voting
Trustee to subscribe for or purchase such stock or other securities, or any part
thereof; and to the extent that such Stockholder shall fail to exercise such
rights the Voting Trustee shall be entitled, in its absolute discretion, to
permit such rights so to subscribe or purchase to lapse. Upon receiving proper
instructions in writing, the Voting Trustee shall subscribe for or purchase such
stock or other securities (but only out of funds provided by such Stockholder
for the purpose) and shall distribute the same to such Stockholder, except that
any shares of voting stock of the Company, when so subscribed for or purchased
and received by the Voting Trustee, shall not be distributed but shall be held
hereunder, subject to all the provisions hereof, and the Voting Trustee shall
issue new or additional Voting Trust Certificates in respect of such shares to
such Stockholder.
8. ACTIONS BY VOTING TRUSTEE.
(a) PROXY. A proxy may be given to any person other than the
Voting Trustee provided that such proxy may be voted only in accordance with
specific instructions given by the Voting Trustee.
(b) AGENTS. The Voting Trustee may at any time or from time to
time appoint an agent or agents and may delegate to such agent or agents the
performance of any administrative duty of the Voting Trustee, including, without
limitation, the appointment of a domestic bank or other institution to act as
custodian of the Shares of the Company held by it hereunder. The fees of such
agent or agents shall constitute an expense of the Voting Trustee.
9. LIABILITY OF VOTING TRUSTEE; INDEMNIFICATION.
(a) NO LIABILITY. The Voting Trustee assumes no liability as a
stockholder, his interest hereunder being that of trustee only. In voting the
stock represented by the stock certificates held by it hereunder (which he may
do either in person or by proxy as aforesaid), the Voting Trustee will vote and
act in all matters in accordance with his best good faith judgment and the terms
of this Agreement; but he assumes no responsibility or liability in respect of
any action taken by him or taken in pursuance of his vote so cast, and the
Voting Trustee shall not incur any
-4-
<PAGE>
responsibility as trustee or otherwise by reason of any error of fact or law,
mistake of judgment, or of any matter or thing done or suffered or omitted to
be done under this Agreement, except for his own individual gross negligence
or willful misconduct.
(b) AGENTS. The Voting Trustee shall not be answerable for the
default or misconduct of any agent or attorney appointed by him in pursuance
hereof if such agent or attorney shall have been selected with reasonable care.
(c) EXPENSES. The Voting Trustee shall not be entitled to any
compensation for his services but shall be reimbursed by the Stockholders for
any reasonable expenses (other than counsel, advisors' and agents' fees) paid or
incurred in the administration of the trust hereunder.
(d) INDEMNITY. The Stockholders hereby jointly and severally
agree that they will at all times protect, indemnify and save harmless the
Voting Trustee from any loss, cost or expense of any kind or character
whatsoever incurred in connection with this Trust except those, if any, arising
from the gross negligence or willful misconduct of the Voting Trustee, and will
at all times themselves undertake, assume full responsibility for, and pay all
costs and expenses of any suit or litigation of any character, including any
proceedings before any governmental agency, with respect to the Shares or this
Agreement and, if the Voting Trustee shall be made a party thereto, the
Stockholders will pay all costs and expenses, including counsel fees, to which
the Voting Trustee may be subject by reason thereof. The Voting Trustee may
consult with counsel and other advisors, and the opinions of such counsel and
advisors shall be full and complete authorization and protection in respect of
any action taken or omitted or suffered by the Voting Trustee hereunder in good
faith and in accordance with such opinions.
(e) SURVIVAL. Notwithstanding any other provision hereof, the
provisions of this Section 9 shall survive the termination of this Agreement.
10. VOTING DISCRETION.
(a) VOTING DISCRETION. Except as otherwise provided herein,
until the termination of this Agreement and the actual delivery of stock
certificates in exchange for Voting Trust Certificates hereunder, the Voting
Trustee shall possess and shall be entitled in his discretion, not subject to
any review, to exercise in person or by proxy, in respect of any and all Shares
at any time deposited under this Agreement, all rights and powers of every name
and nature, including the right to vote thereon or to consent to any and every
act of the Company, in the same manner and to the same extent as if he were the
absolute owner of such stock in his own right.
(b) PERMITTED ACTIONS. Without limiting the generality of the
foregoing paragraph (a), the Voting Trustee is specifically authorized to vote
for or consent to any of the following:
(i) the election, removal or replacement of directors of the
Company;
(ii) the sale or disposal in the normal course of business of
any part or parts of the property, assets or business of the Company;
-5-
<PAGE>
(iii) any changes or amendments in or to the Certificate of
Incorporation or By-laws of the Company;
(iv) any loans to officers, directors or stockholders of the
Company;
(v) any indemnification of officers, directors or agents of
the Company;
(vi) the entering into or submitting of a bid in connection
with the negotiation of or application for any contract that the Company may
not enter into or submit without the approval of the stockholders;
(vii) any other action that, by the terms of the General
Corporation Law of the State of Delaware or the Certificate of Incorporation
or By-laws of the Company, permits or requires a vote of the holders of the
capital stock of the Company; and
(viii) any action with respect to any of the foregoing that
any stockholder might lawfully take.
11. TERMINATION OF THIS AGREEMENT.
(a) TERMINATION. This Agreement shall terminate with respect
to any Shares of the Company (i) as to which a registration statement shall have
been filed pursuant to the Securities Act promptly upon the effectiveness
thereof or (ii) sold, transferred or disposed of by any Stockholder as provided
in and subject to compliance with the terms and conditions of any applicable
Stockholders', Purchase or Subscription Agreement between or among such
Stockholder and the Company and/or other Stockholders of the Company.
(b) IRREVOCABLE. Subject to the foregoing paragraph (a),
during the term of this Agreement the Trust hereby created shall be irrevocable
and no Shares of the Company held by the Voting Trustee pursuant to the terms of
this Agreement shall be transferred to or upon the order of the holder of a
Voting Trust Certificate evidencing the beneficial ownership thereof prior to
the termination of this Agreement.
(c) TERMINATION BY LAW. Unless terminated sooner (i) pursuant
to paragraph (a) hereof as to all Shares held by the Voting Trustee, or (ii) by
operation of law, this Agreement shall terminate without any action of or notice
by or to the Voting Trustee, the Company or the Stockholders when Castle Harlan
Partners II, L.P. ("CHP II"), (x) fails to maintain voting control over at least
25% of the Shares or (y) owns less than 20% of the original voting equity
position acquired by CHP II pursuant to the Subscription Agreement, dated as of
December 16, 1996, among CHP II and the Company and the other stockholders party
thereto.
12. DELIVERY OF STOCK CERTIFICATES UPON TERMINATION OF THIS AGREEMENT.
(a) STOCK CERTIFICATES. Upon termination of this Agreement,
the Voting Trustee, in exchange for and upon surrender of any Voting Trust
Certificates then outstanding, shall, in
-6-
<PAGE>
accordance with the terms hereof, deliver certificates for capital stock of
the Company of the series or class and in the amount called for by such
Voting Trust Certificate and either registered in the name of the holder
thereof or duly endorsed in blank or accompanied by proper instruments of
assignment and transfer thereof duly executed in blank to the holder thereof,
and the Voting Trustee may require the holder of such Voting Trust
Certificate to surrender the same for such exchange.
(b) OBLIGATIONS OF TRUSTEE. After any termination of this
Agreement as above provided with respect to all Shares, and delivery by the
Voting Trustee of any stock or other property then held hereunder in exchange
for outstanding Voting Trust Certificates as provided in this Section 12, all
further obligations or duties of the Voting Trustee under this Agreement or any
provision hereof shall cease.
13. RESIGNATION; SUCCESSOR TRUSTEE.
The Voting Trustee may resign at any time by providing the
Company and each Stockholder with written notice to such effect thirty (30) days
prior to the effective date of such resignation. If for any reason John K.
Castle shall cease to serve as Voting Trustee hereunder, his immediate successor
in such capacity shall be Leonard M. Harlan; PROVIDED that (i) the person
serving as Voting Trustee may at any time, and from time to time, replace or
designate the successor to John K. Castle and (ii) each such successor shall be
an officer of Castle Harlan, Inc. or an officer of Castle Harlan GP, Inc. Each
such successive designated person shall, upon assuming the duties hereunder upon
a vacancy occurring in the office of Voting Trustee, be the Voting Trustee.
14. INTERESTS ALLOWED AS VOTING TRUSTEE.
The Voting Trustee may be a creditor or stockholder of the
Company and may act as a director, officer or employee of, or consultant or
advisor to, the Company and receive compensation therefor. In addition, the
Voting Trustee and any firm of which he may be a member, and any of his
affiliates, may contract with the Company or have a pecuniary interest in any
matter or transaction to which the Company may be a party, or in which the
Company may be in any way concerned.
15. EFFECT OF AGREEMENT UPON REPRESENTATIVES, SUCCESSORS AND ASSIGNS.
This Agreement shall inure to the benefit of and be binding
upon the Voting Trustee and each Stockholder and their respective legal
representatives, successors and assigns.
-7-
<PAGE>
16. MISCELLANEOUS.
(a) DELIVERY TO STOCKHOLDERS. The Voting Trustee shall deliver
to each Stockholder all information received by the Voting Trustee from the
Company or from other stockholders of the Company.
(b) NOTICES. All notices to be given to the owners of Voting
Trust Certificates shall be given by mailing the same in a sealed postpaid
envelope to the registered owners of Voting Trust Certificates addressed to
their respective addresses as shown on the books of the Trust, and any notice
whatsoever when mailed by or on behalf of the Voting Trustee to such registered
owners of Voting Trust Certificates as herein provided shall have the same
effect as though personally served on all holders of Voting Trust Certificates.
All notices to be given to the Voting Trustee shall be given by serving a copy
thereof upon him personally or by mailing the same in a sealed postpaid envelope
addressed to him at his address set forth below or to such other address as he
shall from time to time in writing designate.
(c) FILING OF AGREEMENT. Until the termination of this
Agreement, one original counterpart hereof shall be filed at each of (i) the
principal office of the Company and (ii) the registered office of the Company in
the State of Delaware, and each such counterpart shall be open to the inspection
of any holder of any Voting Trust Certificate or any stockholder of the Company
daily during business hours.
(d) AMENDMENT. If at any time it is deemed advisable for the
parties hereto to amend or revoke this Agreement, it may be amended or revoked
by an agreement executed by the Voting Trustee, the Company and the holder or
holders of all of the Voting Trust Certificates.
(e) ACKNOWLEDGMENT OF OBLIGATIONS. The Voting Trustee accepts
the trust created hereby subject to all the terms and conditions herein
contained and agrees that he will exercise the powers and perform the duties of
Voting Trustee as set forth herein according to his best judgment.
(f) ENTIRE AGREEMENT. This Agreement contains the entire
agreement among the parties hereto and supersedes all prior agreements and
understandings, oral and written, among the parties hereto with respect to the
subject matter hereof.
(g) SECTION HEADINGS. The section headings contained herein
are included for convenience of reference only and shall not constitute a part
of this Agreement for any purpose.
(h) COUNTERPARTS. This Agreement may be executed in
counterparts, each of which shall be deemed to be an original and all of which
together shall be deemed to be one and the same instrument.
(i) APPLICABLE LAW. This Agreement shall be governed by, and
construed in accordance with, the laws of the State of Delaware applicable to
contracts to be performed entirely within such State.
-8-
<PAGE>
(j) SEVERABILITY. Any section, clause, sentence, provision,
subparagraph or paragraph of this Agreement held by a court of competent
jurisdiction to be invalid, illegal or ineffective shall not impair, invalidate
or nullify the remainder of this Agreement, but the effect thereof shall be
confined to the section, clause, sentence, provision, subparagraph, or paragraph
so held to be invalid, illegal or ineffective.
IN WITNESS WHEREOF, the parties hereto have duly executed this
Agreement as of the day and year first above written.
VOTING TRUSTEE: COMPANY:
COMMEMORATIVE BRANDS, INC.
/s/ John K. Castle
- ------------------------------
John K. Castle
c/o Castle Harlan, Inc. By: /s/ Jeffrey H. Brennan
150 East 58th Street ------------------------------
37th Floor Name: Jeffrey H. Brennan
New York, New York 10155 Title: President
STOCKHOLDERS:
BRANFORD CASTLE HOLDINGS, INC.
By: /s/ John K. Castle /s/ David H. Chow
---------------------------- ------------------------------
Name: John K. Castle David H. Chow
Title: President
/s/ Leonard M. Harlan /s/ Zane Tankel
---------------------------- ------------------------------
Leonard M. Harlan Zane Tankel
/s/ David B. Pittaway /s/ Edward O. Vetter
---------------------------- ------------------------------
David B. Pittaway Edward O. Vetter
-9-
<PAGE>
EXHIBIT A
THIS VOTING TRUST CERTIFICATE HAS BEEN ISSUED WITHOUT REGISTRATION
UNDER THE SECURITIES ACT OF 1933, AS AMENDED, AND NO INTEREST THEREIN MAY BE
TRANSFERRED EXCEPT IN COMPLIANCE, ESTABLISHED TO SATISFACTION OF THE ISSUER,
WITH SAID ACT AND THE RULES AND REGULATIONS PROMULGATED THEREUNDER BY THE
SECURITIES AND EXCHANGE COMMISSION.
THIS VOTING TRUST CERTIFICATE AND THE SECURITIES REPRESENTED HEREBY
ARE SUBJECT TO RESTRICTIONS ON TRANSFER PURSUANT TO A SUBSCRIPTION AGREEMENT
ON FILE WITH THE COMPANY.
VOTING TRUST CERTIFICATE
COMMEMORATIVE BRANDS, INC.
NO. V-
-----------------------
Class: Common Stock
Shares:
---------------------
Class: Series B Preferred
Shares:
---------------------
This certificate is evidence that _________________ has deposited
(i) ________ shares of Common Stock, $0.01 par value per share, of
Commemorative Brands, Inc., a Delaware corporation formerly known as
Scholastic Brands, Inc. (the "Company"), and (ii) ____ shares of Series B
Preferred Stock, $0.01 par value per share, of the Company, with the Voting
Trustee hereinafter named in accordance with the terms of the Voting Trust
Agreement (the "Agreement") dated as of December 17, 1996, as amended and
restated as of April 29, 1998, among the Company, each of the Stockholders
listed on the signature pages thereof and the person whose name appears below
as Voting Trustee (the "Trustee").
This certificate and the interest represented hereby is
transferable on the books of the Trust only in accordance with the terms of
the Agreement and any holder of this Certificate takes the same subject to
all of the terms and conditions of such Agreement.
IN WITNESS WHEREOF, the Trustee has signed this certificate as
of the ___ day of ___________.
VOTING TRUSTEE
------------------------------------
John K. Castle
<PAGE>
EXHIBIT B
JOINDER AGREEMENT
To Each of the Parties
Referred to in the Voting Trust Agreement
c/o John K. Castle, Voting Trustee
Castle Harlan, Inc.
150 East 58th Street
37th Floor
New York, NY 10155
Gentlemen:
Upon issuance to the undersigned of Voting Trust Certificate No. V-__,
pursuant to the Voting Trust Agreement dated as of December 17, 1996, as amended
and restated as of April 29, 1998 (the "Voting Trust Agreement"), among
Commemorative Brands, Inc., a Delaware corporation (the "Company"), each of the
stockholders of the Company party thereto and John K. Castle, as Voting Trustee,
against deposit by the undersigned in the Voting Trust created thereby of all of
the undersigned's shares of Common Stock, par value $.01 per share, and Series B
Preferred Stock, par value $.01 per share, of the Company, the undersigned
agrees that the undersigned shall become a party to the Voting Trust Agreement
and shall be fully bound by and subject to all of the covenants, terms and
provisions (including restrictions on transfer) of the Voting Trust Agreement
and shall be entitled to all of the rights and benefits of a "Stockholder" under
the Voting Trust Agreement as though an original party thereto.
------------------------------
Dated: ______________, _____
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Exhibit 10.10
COMMEMORATIVE BRANDS, INC.
INCENTIVE STOCK PURCHASE PLAN
SECTION 1. ESTABLISHMENT. Commemorative Brands, Inc. hereby
establishes a restricted incentive stock purchase plan for the benefit of its
employees, consultants and independent sales representatives, as described
herein, which shall be known as the "Commemorative Brands, Inc. Incentive
Stock Purchase Plan".
SECTION 2. DEFINITIONS. Whenever used herein, the following
terms shall have the meanings set forth below:
(a) "Affiliate" means, with respect to any Person, any other Person
directly or indirectly controlling (including, but not limited
to, all directors and officers of such Person), controlled by, or
under direct or indirect common control with, such Person. A
Person shall be deemed to control a corporation if such Person
has, directly or indirectly, the power to (i) vote ten percent
(10%) or more of the securities having ordinary voting power for
the election of directors of such corporation or (ii) direct or
cause the direction of the management and policies of such
corporation, whether through the ownership of voting securities,
by contract or otherwise.
(b) "Board" means the Board of Directors of Corporation.
(c) "Cause" means with respect to a Grantee
(i) a finding by the Plan Administrator that the Grantee
engaged in a criminal act involving moral turpitude, or
any criminal act or willful misconduct, which in either
case, is inconsistent with his or her employment
responsibilities or contractual relationship with the
Corporation or any or its Affiliates;
(ii) the Grantee's willful and continued failure substantially
to comply with any reasonable policy, standard or
regulation established by the Board or any senior officer
of the Corporation or any of its Subsidiaries or
substantially to comply with any reasonable order, advice
or direction of the Board or any senior officer of the
Corporation or any of its Subsidiaries or substantially to
perform his or her duties, other than due to the Disability
of such Grantee; or
(iii) acts of dishonesty, fraud or theft by the Grantee resulting
in or intending to result in personal gain or enrichment.
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(d) "Change in Control" means any public offering of stock, merger,
tender offer, consolidation or sale of all or substantially all
of the stock or assets of the Corporation, or related series of
such events, as a result of which designees of Castle Harlan
Partners II, L.P. and its Affiliates cease to constitute a
majority of the Board.
(e) "Committee" means, if applicable, the committee appointed by the
Board under Section 5 to administer the Plan.
(f) "Common Stock" means the common stock, par value $.01 per share,
of the Corporation.
(g) "Corporation" means Commemorative Brands, Inc., a Delaware
corporation and any successor thereof.
(h) "Disability" means, with respect to a Grantee, a determination by
the Plan Administrator that a Grantee suffers from a physical or
mental condition which prevents such Grantee from engaging in his
or her current position or in another position commensurate with
his or her current position taking into consideration his or her
education, training, and experience for a period of three
consecutive months or for any 120 days in a 360 day period.
(i) "Fair Market Value" means, as of any date, with respect to any
class of stock that is (a) listed on a United States securities
exchange, the last sales price of such stock on such day on the
largest United States securities exchange on which such stock
shall have traded on such day, or if such day is not a day on
which such United States securities exchange was open for
trading, on the immediately preceding day on which such
securities exchange was open, (b) not listed on a United States
securities exchange but which is included in the NASDAQ Stock
Market System (including the NASDAQ National Market), the last
sales price on such system of such stock on such day, or if such
day is not a trading day, on the immediately preceding trading
day, or (c) neither listed on a United States securities exchange
nor included in the NASDAQ Stock Market System, the fair market
value of such stock as determined from time to time by the Plan
Administrator in its sole discretion.
(j) "Grantee" means any eligible person (as described in Section 4)
who shall have been offered or granted the right to acquire
restricted Shares under the Plan.
(k) "Initial Public Offering" means the first offering by the
Corporation to the public generally of Common Stock pursuant to a
registration statement filed with, and declared effective by, the
Securities and Exchange Commission, other than on Forms S-4 or
S-8 (or the equivalent thereof), upon the consummation of which
shares of Common Stock are listed on a
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United States securities exchange or included in the NASDAQ
Stock Market System.
(l) "Period of Restriction" means the period during which restricted
Shares acquired hereunder are subject to certain repurchase
rights and rights of first refusal and other restrictions on
transfer as described in Sections 14, 15, 16 and 17 hereof which,
except as otherwise provided by the Plan or by a separate
agreement between the Grantee and the Plan Administrator, shall
be a period beginning on the date on which the Grantee was
provided the right to purchase the Shares and ending on the
earlier to occur of (i) the date, if any, upon which the
Corporation undergoes a Change in Control or (ii) the date, if
any, upon which the Corporation consummates an Initial Public
Offering. The Plan Administrator shall have discretion to
otherwise limit or eliminate the Period of Restriction with
respect to Shares purchased or acquired by any Grantee.
(m) "Person" means any individual, partnership, firm, trust,
corporation or other similar entity.
(n) "Plan" means the Commemorative Brands, Inc. Incentive Stock
Purchase Plan as described herein or as from time to time
hereafter amended.
(o) "Plan Administrator" means the Board or, if delegated by the
Board pursuant to Section 5, the Committee.
(p) "Series B Preferred Stock" means the Series B Preferred Stock,
par value $.01 per share, of the Corporation.
(q) "Shares" means, collectively, shares of the Series B Preferred
Stock and Common Stock.
(r) "Subsidiaries" means corporations or other entities 50% percent
or more of the equity of which is owned, directly or indirectly,
by the Corporation.
SECTION 3. PURPOSE. The purpose of the Plan is to enable the
Corporation to retain and motivate those employees, consultants and
independent sales representatives who provide valuable service to the
Corporation or its Subsidiaries, and to provide such employees, consultants
and independent sales representatives with a means of acquiring or increasing
a proprietary interest in the Corporation so that they will have an increased
incentive to work toward the attainment of the long term growth and profit
objectives of the Corporation and its Subsidiaries.
SECTION 4. ELIGIBLE PERSONS. Any employee, consultant or
independent sales representative of the Corporation or any of its
Subsidiaries selected by the Plan Administrator shall be eligible to acquire
restricted Shares under the Plan. In selecting employees, consultants and
independent sales representatives for eligibility, the Plan Administrator
shall consider (i) in the case of employees, their level of responsibility,
(ii) in the case of consultants, the benefits they provide to the Corporation
or its Subsidiaries, and (iii) in the case of independent sales
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representatives, the level of sales historically achieved by such
representatives or other benefits they provide to the Corporation or its
Subsidiaries. The Plan Administrator may also consider (i) whether such
prospective Grantee has theretofore received an opportunity to purchase or
acquire Shares, (ii) the length of such person's historical tenure or
relationship with the Corporation and its Subsidiaries (iii) the interest of
the Corporation in further securing the Corporation's relationship with such
prospective Grantee, (iv) whether the sale of Shares to such Grantee can be
effected in compliance with, but without registration under, federal or state
securities laws and (v) such other criteria as the Plan Administrator deems
reasonable. No restricted Shares shall be purchased or acquired by a Grantee
until such Grantee consents in writing to abide by the restrictions imposed
on the Shares acquired by him or her.
SECTION 5. ADMINISTRATION. The Plan shall be administered by
the Plan Administrator. The Plan Administrator shall initially be the Board;
PROVIDED, HOWEVER, that the Board may delegate its authority to administer
the Plan, including, but not limited to, the right to determine the specific
allocation of Shares and eligibility to purchase or otherwise acquire Shares
under the Plan, to a Committee consisting of at least three (3) members. The
decision of a majority of the members of the Board or, if applicable, the
Committee shall constitute the decision of the Board or, if applicable, the
Committee, and the Board or, if applicable, the Committee may act either at a
meeting at which a majority of the members are present or by a written
consent signed by all members of the Board or, if applicable, the Committee.
The Plan Administrator shall have the sole, final and conclusive authority to
determine, consistent with and subject to the provisions of the Plan:
(a) the individuals to be selected as eligible persons under
Section 4;
(b) the eligible persons to whom the right to purchase or otherwise
acquire restricted Shares will be granted, allocated or offered
under the Plan;
(c) the time when such grants, allocations or offers shall be made
hereunder;
(d) the number of Shares to be covered under each such grant,
allocation or offer;
(e) the purchase price of any restricted Shares available for
purchase under the Plan; and
(f) the terms and conditions of the respective agreements or
documents by which such grants shall be evidenced, offers or
allocations made or purchases effected.
The Plan Administrator shall also have authority to prescribe, amend and
rescind rules and regulations relating to the Plan, and to make all other
determinations necessary or advisable in the administration, of the Plan.
SECTION 6. NUMBER OF SHARES SUBJECT TO THE PLAN. The total
number of Shares that may be made available for issuance under the Plan shall
not exceed 5% of the total voting power of the Corporation. The Shares
issuable under the Plan shall include Shares previously re-acquired by the
Corporation or re-acquired simultaneously with the making of grants or
effecting
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of sales pursuant hereto under the Plan, for the purpose of providing
additional Shares to be available for issuance under the Plan. In addition
to the foregoing limitations, the aggregate purchase price attributable to
offers of Shares outstanding under the Plan at any time PLUS securities sold
under the Plan during the preceding twelve months, shall not exceed the
greater of (a) $500,000 and (b) 15% of the Corporation's total assets
measured as of the end of the preceding fiscal year, and in no event shall
the aggregate purchase price exceed $5,000,000.
SECTION 7. UNUSED SHARES. In the event any Shares subject to
grants or offers made under the Plan are not acquired or are repurchased by
the Corporation pursuant to Section 14, 15 or 16 hereof, such Shares shall
again become available for issuance under the Plan.
SECTION 8. ADJUSTMENTS IN CAPITALIZATION. In the event of any
change in the outstanding Shares by reason of a Share dividend, Share split,
recapitalization, merger, consolidation, combination, Share rights plan or
exchange of Shares or other similar corporate change, the aggregate number of
Shares issuable under the Plan shall be appropriately adjusted by the Plan
Administrator, whose determination shall be conclusive. In such event, the
Plan Administrator shall also have discretion to make appropriate adjustments
in the price of Shares subject to the Corporation's repurchase rights under
Sections 14 and 15 hereof and in the number and type of Shares subject to
restricted Share purchase rights then outstanding under the Plan pursuant to
the terms of such rights or otherwise. Without limiting the generality of
the foregoing, if the Company's Series B Preferred Stock and or Common Stock
is recapitalized into multiple classes of preferred stock or common stock,
the kind of Shares subject to the Plan shall be converted into, and shall
thereafter be, those shares of preferred stock and/or common stock intended
for broad general ownership rather than any class of special, super-voting or
other control stock.
SECTION 9. RESTRICTED SHARE ALLOCATION. The Plan Administrator
may, consistent with the other provisions of the Plan, make available for
purchase or acquisition under the Plan restricted Shares to any eligible
persons described in Section 4. Such grants, allocations or offers shall be
subject to the following terms and conditions and to such other terms and
conditions not inconsistent herewith as the Plan Administrator, in its sole
discretion, may deem appropriate in each case:
(a) OFFERING. From time to time, the Plan Administrator may make
available for purchase or acquisition under the Plan restricted
Shares. The offering shall specify the eligible person or
persons to purchase Shares and shall specify the number of Shares
available for purchase by each such eligible person; PROVIDED,
HOWEVER, that (i) if for any offering the Corporation receives
elections to purchase a number of Shares that exceeds the
aggregate number of Shares available for purchase under such
offering, the allocation of Shares for the individuals who have
elected to purchase Shares shall be reduced by the Plan
Administrator in a manner determined by the Plan Administrator,
in its sole discretion, so that the total number of Shares
purchased does not exceed the total number of Shares subject to
the offering and (ii) if for any offering the Corporation
receives elections to purchase a number of Shares that is less
than the aggregate number of Shares offered to eligible persons
in the Offering, the Plan Administrator
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may, in its sole discretion, reallocate and reoffer such
unpurchased Shares in any manner that the Plan Administrator,
in its sole discretion, determines to be appropriate. The Plan
Administrator shall, at the time of each offering, specify the
duration of the offering.
(b) SHARE PRICE. The price per Share to be paid for Shares in an
offering shall be equal to the price set by the Plan
Administrator for such offering.
(c) PURCHASE. In order to purchase or acquire Shares under any
offering pursuant to the Plan, the Grantee must send written
notice to the Corporation and take such other action and execute
and deliver such other documents or agreements as may be required
by the terms of the offering. The purchase price for the Shares
to be purchased must be paid by the Grantee in full in cash at
the time designated in the Offering.
(d) CERTIFICATES. The certificate or certificates for the Shares (or
for interests in any voting trust with respect thereto) issuable
under the Plan shall be issued as promptly as practicable after
such purchase. A Grantee shall not have any rights as a
stockholder with respect to the Shares (or a beneficiary with
respect to any voting trust in respect thereof) until the date of
issuance of a certificate to him or her for such Shares (or for
interests in any voting trust with respect thereto). In no case
may a fraction of a Share be purchased or issued under the Plan.
(e) ADDITIONAL TERMS. The Plan Administrator may make any offering
of Shares hereunder subject to such additional terms and
conditions as it deems appropriate to comply with federal or
state securities laws or otherwise in the best interests of the
Corporation.
SECTION 10. RESTRICTIONS ON TRANSFERABILITY. Unless and until
the Corporation's rights to repurchase the Shares purchased hereunder shall
have terminated as provided in Sections 14 and 15 hereof, no Shares acquired
under the Plan may be sold, transferred, pledged, assigned or otherwise
alienated or hypothecated other than to the Company. Thereafter and until
the earlier to occur of a Change in Control or an Initial Public Offering, no
Shares acquired under the Plan may be sold or transferred except in strict
compliance with the terms of the Plan and subject to the terms thereof. All
rights granted to a Grantee under the Plan shall be exercisable during the
Grantee's lifetime only by the Grantee or the guardians or legal
representatives of the Grantee. Upon the death of a Grantee, the personal
representative or beneficiary of the Grantee may exercise the Grantee's
rights, and shall be bound by the Grantee's obligations, under the Plan.
SECTION 11. SHARES SUBJECT TO VOTING TRUST. The Plan
Administrator may, in its sole discretion, require that in any offering of
Shares hereunder, a Grantee who purchases or acquires Shares shall, as a
condition precedent to the right of such Grantee to purchase or acquire such
Shares, execute and become a party to any stockholders' agreement or voting
trust agreement with respect to the Company's Shares as the Plan
Administrator, in its sole discretion, deems advisable and to deposit such
Shares in any voting trust described therein.
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SECTION 12. REMOVAL OF RESTRICTIONS. Except as otherwise
provided in Section 14, 15, 16 or 17 hereof or in any other legally binding
document governing such Shares (including, but not limited to the
Corporation's Certificate of Incorporation, as amended, or By-Laws, as
amended, or any Voting Trust Agreement or Stockholders' Agreement),
restricted Shares acquired under Section 9 shall become freely transferable
by the Grantee after the last day of the Period of Restriction.
SECTION 13. OTHER RESTRICTIONS. The Board or the Plan
Administrator may impose such other or additional restrictions on any Shares
issued pursuant to the Plan as it may deem advisable.
SECTION 14. EFFECT OF TERMINATION OF EMPLOYMENT OR CONSULTANCY
OR INDEPENDENT SALES REPRESENTATIVE STATUS WITHOUT CAUSE OR DUE TO DEATH,
TOTAL DISABILITY OR RETIREMENT. In the event a Grantee terminates his or her
employment or, if applicable, his or her association with the Corporation as
a consultant or independent sales representative because of death, Disability
or retirement or the Grantee's employment or association with the Corporation
as a Consultant or independent sales representative is terminated by the
Corporation without Cause during the Period of Restriction, the Corporation,
or its permitted assigns, shall have the right to repurchase, in whole or in
part, such Grantee's Shares within the 180 calendar day period following such
Grantee's termination of employment or association with the Corporation at
the then Fair Market Value thereof. The purchase of the Shares pursuant to
the foregoing may, at the discretion of the Plan Administrator, and subject
to any applicable debt restrictions binding on the Corporation, be paid for
either in cash or partly in cash with the balance payable under a note to be
issued by the Corporation to the Grantee having such terms as the Plan
Administrator in its sole discretion deems appropriate. If the Corporation
or its permitted assigns elects to repurchase such Grantee's Shares, then
from and after the date that the Corporation or its permitted assigns shall
have tendered to such Grantee, or his or her representative, the
consideration payable for such repurchase, all rights and privileges incident
to the ownership of such Shares (including, but not limited to, the right to
receive dividends thereon) shall cease, except the right to receive the
purchase price therefor plus a sum equal to dividends, if any, declared but
remaining unpaid on the date of purchase, without interest, and from and
after such date the Corporation shall be at liberty to cancel the certificate
or certificates representing such Shares upon the books of the Corporation.
If neither the Corporation nor its permitted assigns elects to exercise the
right granted in the foregoing sentences, the Corporation's right to
repurchase such Grantee's Shares shall automaically terminate. The
Corporation may, at its option, assign any of its rights to repurchase under
this Section 14 to Castle Harlan Partners II, L.P. ("CHPII") or any of its
Affiliates. Notwithstanding anything contained herein to the contrary, the
repurchase rights provided under this Section 14 are not intended, and should
not be construed, to supersede any existing and ongoing rights of first
refusal that the Corporation may have with respect to the Shares under
Section 16 hereof or outside of the Plan.
SECTION 15. OTHER TERMINATION OF EMPLOYMENT OR CONSULTANCY OR
INDEPENDENT SALES REPRESENTATIVE STATUS. In the event that a Grantee's
employment or, if applicable, his or her association with the Corporation as
a consultant or independent sales representative is terminated by the
Corporation for Cause, or by the Grantee for reasons other than death,
Disability or retirement during the Period of Restriction, then any Shares
still subject to restrictions at the date of such termination shall be made
available to the Corporation, or its permitted assigns, for
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repurchase, in whole or in part, for the 180 calendar day period commencing
at the date such Grantee's employment or association is terminated for a
price equal to the lesser of (a) the then current Fair Market Value of such
Shares and (b) the purchase price paid therefor by the Grantee; PROVIDED,
HOWEVER, that if after the initial purchase of the Shares by the Grantee
there has been a change in the capitalization of the Corporation described in
Section 8 hereof, the repurchase price shall be appropriately adjusted by the
Plan Administrator, if necessary, consistent with such change in
capitalization. The Corporation shall exercise its repurchase rights by
notifying the Grantee of the number of Shares which the Corporation desires
to repurchase and by providing payment equal to the repurchase price for such
Shares within the one hundred eighty (180) calendar day period. The purchase
of the Shares by the Corporation pursuant to the foregoing, may, at the
discretion of the Plan Administrator and subject to any applicable debt
restrictions binding on the Corporation, be paid for either in cash or
partially in cash with the balance payable under a note issued by the
Corporation having such terms as the Plan Administrator, in its sole
discretion, deems appropriate. If the Corporation or its permitted assigns
elects to purchase such Grantee's Shares, then from and after the date that
the Corporation shall have tendered the purchase price payable therefor to
the Grantee or his or her representative, all rights and privileges incident
to the ownership of such Shares (including, but not limited to the right to
receive dividends thereon) shall cease, except the right to receive the
purchase price therefor plus a sum equal to dividends, if any, declared but
remaining unpaid on the date of purchase, without interest, and from and
after such date the Corporation shall be at liberty to cancel the certificate
or certificates representing such Shares upon the books of the Corporation.
If neither the Corporation, nor its permitted assigns, elects to exercise the
right granted in the foregoing sentences, the Corporation's right to
repurchase such Grantee's Shares shall automatically terminate. The
Corporation may, at its option, assign any of its rights to repurchase under
this Section 15 to CHPII or any of its Affiliates. Ntwithstanding anything
contained herein to the contrary, the repurchase rights provided under this
Section 15 are not intended, and should not be construed, to supersede any
existing and ongoing rights of first refusal that the Corporation may have
with respect to the Shares under Section 16 hereof or outside of the Plan.
SECTION 16. RIGHT OF FIRST REFUSAL. (a) If at any time any
Grantee wishes to transfer any Shares held by him or her, to the extent
permissible hereunder, then such Grantee must deliver to the Corporation and
CHPII a written notice of his or her desire to so transfer (a "Notice of
Intention") such Shares, accompanied by a copy of a bona-fide third party
offer (an "Offer") relating to such transfer, setting forth such Grantee's
desire to make such transfer pursuant to the terms of the Offer, the number
of shares of Common Stock and Series B Preferred Stock proposed to be
transferred (the "Offered Shares") and the price (the "Offer Price") at which
such Grantee proposes to transfer such stock. Shares of Common Stock and
Series B Preferred Stock may only be transferred in units consisting of one
share of Series B Preferred Stock and one share of Common Stock each.
(b) Upon receipt of the Notice of Intention, the Corporation shall
have the right to purchase at the price specified in the Notice of Intention,
all or any portion of the Offered Shares, exercisable by the delivery of
notice to such Grantee (the "Notice of Exercise"), with a copy to CHPII,
within 30 days from the date of receipt of the Notice of Intention. In the
event the Corporation elects not to exercise its right to purchase the
Offered Shares (or if the Corporation fails to provide the Notice of Exercise
within such 30-day period), CHPII or its
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Affiliates may exercise the right set forth in this Section 16 to purchase
the Offered Shares by providing a Notice of Exercise within 45 days after the
date of its receipt of the Notice of Intention. The rights of the
Corporation and CHPII and its Affiliates pursuant to this Section 16 shall
terminate if not exercised within 30 days, in the case of the Corporation, or
45 days, in the case of CHPII and its Affiliates, after receipt of the Notice
of Intention.
(c) In the event the Corporation or CHPII or any of its Affiliates
exercises its rights to purchase all or a portion of the Offered Shares, then
such Grantee must sell the Offered Shares to the Corporation or CHPII or its
Affiliate, as applicable, after not less than 30 days and not more than 60
days from the date of the delivery of the Notice of Exercise received by such
Grantee.
(d) If the Notice of Intention has been duly given and the
Corporation and CHPII and its Affiliates elect not to exercise their rights
or wish to exercise their rights only as to a portion of the Offered Shares,
then the Grantee shall have the right for a period of up to 60 days from the
expiration of the 45 day period commencing on the date of delivery of the
Notice of Intention (unless such Grantee is notified prior to such date by
both the Corporation and CHPII that neither intends to exercise its rights
under this Section 16 in which case the Grantee shall have the right for a
period of up to 60 days from the date it has been so notified by both the
Corporation and CHPII) to sell the Offered Shares (or any portion thereof not
purchased by the Corporation or CHPII) to any such third party for a price
not less than the Offer Price and on the same terms and conditions as
provided in the Notice of Intention; provided, that upon consummation of such
sale, such third party is required to execute (i) an appropriate agreement
with the Company agreeing to be bound by all of the restrictions on such
Shares contained in the Plan, including, without limitation, Sections 16 and
17 thereof, and any other agreement between the Company and the Grantee with
respect to the Shares and (ii) an appropriate supplement to the Voting Trust
Agreement agreeing to become a party to, and to be bound by the terms and
provisions of, the Voting Trust Agreement.
(e) In the event the Corporation and CHPII and its Affiliates do
not exercise their rights under this Section 16 to purchase the Offered
Shares and the Grantee shall not have sold the Offered Shares to the third
party within the above-provided 60-day period, then such Grantee shall not be
permitted to give another Notice of Intention for a period of 180 days from
the last day of such 60-day period.
SECTION 17. RIGHTS TO COMPEL SALE. (a) In the event that at
any time CHPII proposes to sell (a "Compelled Sale") to an unaffiliated third
party (a "Compelled Sale Purchaser") any of the shares of Series B Preferred
Stock or Common Stock and any other equity securities (including, without
limitation, warrants, options and preferred stock) of the Corporation (each,
an "Investment Unit" and collectively, "Investment Units") held by it, then
CHPII, at its option, may require a Grantee to sell the same percentage or
all of the Investment Units then held by such Grantee, to the Compelled Sale
Purchaser, for the equivalent consideration per Investment Unit (a "Compelled
Sale Offer Price(s)") and otherwise on the same terms and conditions upon
which CHP sells its Investment Units.
(b) If CHP elects to exercise its right to compel a sale pursuant
to this Section 17, CHPII shall deliver a written notice (a "Compelled Sale
Notice") of the Compelled
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Sale to each Grantee and the Corporation at least twenty (20) days prior to
the consummation of any such sale, setting forth the Compelled Sale Offer
Price(s), the identity of the Compelled Sale Purchaser and the other terms
and conditions thereof. The closing of the Compelled Sale shall take place
on such date and at such time as CHPII specifies to the Grantee. Each Grantee
shall deliver to CHPII in escrow, not less than five Business Days before the
proposed date of consummation of the Compelled Sale Offer, the duly endorsed
certificate or certificates representing the requisite number of the
Investment Units owned by such Grantee, together with a limited power of
attorney authorizing CHPII to transfer such Investment Units to the Compelled
Sale Purchaser pursuant to the terms of the Compelled Sale Offer at the
Compelled Sale Offer Price(s), and in accordance with the provisions hereof.
(c) The closing of the Compelled Sale shall take place on such
date and at such time as CHPII specifies to the Grantee. Immediately after
completion of any such sale pursuant to this Section 17, CHPII shall notify
the Corporation and each Grantee of such completion and shall furnish such
evidence of such sale (including time of completion) and the terms thereof as
the Corporation or any Grantee may reasonably request. CHPII shall
substantially concurrently with such closing also remit to each Grantee the
proceeds of such sale attributable to the sale of such Grantee's Investment
Units immediately upon receipt thereof.
(d) No Grantee required to sell Investment Units pursuant to a
Compelled Sale Offer shall be required to make any representation or warranty
in connection with such Compelled Sale Offer other than as to such Grantee's
ownership and authority to transfer, free and clear of all liens, claims,
encumbrances and rights of third parties, the Investment Units proposed to be
sold by it.
SECTION 18. CERTIFICATE LEGEND. Each certificate representing
restricted Shares granted pursuant to the Plan, or interests in any voting
trust with respect thereto, shall bear, in addition to any other legend
provided for herein, the following legend:
"THE SECURITIES EVIDENCED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED
UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR ANY STATE SECURITIES
LAWS, AND, ACCORDINGLY, MAY NOT BE OFFERED OR SOLD UNLESS THE
REGISTRATION PROVISIONS OF SUCH LAWS HAVE BEEN COMPLIED WITH OR THE
COMPANY RECEIVES AN OPINION OF COUNSEL SATISFACTORY TO IT THAT SUCH
REGISTRATION IS NOT REQUIRED.
"THE SALE, TRANSFER, PLEDGE OR OTHER DISPOSITION OF THE SECURITIES
EVIDENCED BY THIS CERTIFICATE OR OF ANY INTEREST THEREIN, WHETHER
VOLUNTARY, INVOLUNTARY, OR BY OPERATION OF LAW, IS SUBJECT TO CERTAIN
RESTRICTIONS ON TRANSFER AND REPURCHASE RIGHTS AND RIGHTS OF FIRST
REFUSAL SET FORTH IN THE INCENTIVE STOCK PURCHASE PLAN (THE "PLAN") OF
COMMEMORATIVE BRANDS, INC. (THE "COMPANY") AND CERTAIN AGREEMENTS
EXECUTED IN CONNECTION THEREWITH. NO TRANSFER, SALE, ASSIGNMENT,
10
<PAGE>
PLEDGE, HYPOTHECATION OR OTHER DISPOSITION OF THE SECURITIES EVIDENCED
BY THIS CERTIFICATE OR ANY INTEREST THEREIN MAY BE MADE EXCEPT IN
ACCORDANCE WITH AND SUBJECT TO THE PROVISIONS OF THE PLAN AND SUCH
AGREEMENTS. COPIES OF THE PLAN AND SUCH AGREEMENTS ARE ON FILE WITH
THE COMPANY."
At the end of the Period of Restriction, the Grantee or its permitted
transferees, if any, shall be entitled to have the legend required by this
Section 18 (other than to the extent it refers to any then existing
restrictions under applicable federal and state securities laws) removed from
such Share certificate(s) or Voting Trust certificates with respect thereto.
SECTION 19. DIVIDENDS AND OTHER DISTRIBUTIONS. During the
Period of Restriction, Grantees holding restricted Shares granted hereunder
shall be entitled to receive all dividends and other distributions, if any,
paid with respect to those Shares while they are so held. If any such
dividends or distributions are paid in Shares, such Shares shall be subject
to the same restrictions on transferability and other terms and restrictions
as the restricted Shares with respect to which they were paid.
SECTION 20. NO RIGHT TO CONTINUED SERVICE. Nothing in the Plan
or in any agreement entered into pursuant hereto shall confer on any person
any right to continue in the employ or service of, or to continue his or her
other association with, the Corporation or any Subsidiary or affect any
rights the Corporation or the stockholders of the Corporation or any of their
respective Subsidiaries or Affiliates may have to terminate his or her
employment, services or association at any time.
SECTION 21. AMENDMENT AND TERMINATION. The Board may at any
time amend, modify, alter, or terminate the Plan; PROVIDED, HOWEVER, that no
such amendment, modification, alteration or termination shall adversely
affect any Shares which have already been offered and/or purchased before the
date such amendment, modification, alteration or termination is approved.
SECTION 22. INDEMNIFICATION. No person who is or shall have
been a member of the Board or any Committee of the Board shall be personally
liable by reason of any action taken or any agreement made or any other
contract or other instrument executed by such member or on such member's
behalf in connection with the administration or interpretation of the Plan or
for any mistake of judgment made in good faith. The Corporation will
indemnify and hold harmless each current and former employee, officer or
director of the Corporation to whom any duty or power relating to the
administration or interpretation of the Plan may be allocated or delegated
from and against any loss, cost, liability or expense that may be imposed
upon or reasonably incurred by him or her in connection with or resulting
from any claim, action, suit, or proceeding to which he or she may be a party
or in which he or she may be involved by reason of any action taken or
failure to act under the Plan, other than any such loss, cost, liability or
expense arising out of or caused by such person's own fraud or bad faith, and
against and from any and all amounts paid by him or her in settlement thereof
with the Corporation's approval or paid by him or her in satisfaction of a
judgment in any such action, suit or proceeding against him or her, provided
he or she shall give the Corporation an opportunity, at its own expense, to
handle and
11
<PAGE>
defend the same before he or she undertakes to handle and defend it on his or
her behalf. The foregoing right of indemnification shall not be exclusive of
any other rights of indemnification to which such persons may be entitled
under the Corporation's Certificate of Incorporation, as amended, or By-Laws,
as amended, as a matter of law, or otherwise, or any power that the
Corporation may have to indemnify them or hold them harmless.
SECTION 23. GOVERNING LAW. The Plan, and all grants and other
documents delivered hereunder, shall be construed in accordance with and
governed by the laws of the state of Delaware.
SECTION 24. EXPENSES OF PLAN. The expenses of administering
the Plan shall be borne by the Corporation.
SECTION 25. SUCCESSORS. The Plan shall be binding upon the
successors and assigns of the Eligible Persons.
SECTION 26. WITHHOLDING. Whenever the Corporation proposes or
is required to issue or transfer Shares under the Plan, the Corporation shall
have the right to require the Grantee or his or her legal representative to
remit to the Corporation any amount sufficient to satisfy any federal, state
and/or local withholding tax requirements prior to the delivery of any
certificate or certificates for such Shares.
SECTION 27. EFFECTIVE DATE. This Plan shall be effective as of
July 7, 1998.
12
<PAGE>
Exhibit 10.11
THIRD AMENDMENT TO REVOLVING CREDIT,
TERM LOAN AND GOLD CONSIGNMENT AGREEMENT
Third Amendment dated as of August 26, 1998 (the "Amendment")
amending that certain Revolving Credit, Term Loan and Gold Consignment
Agreement dated as of December 16, 1996 (as amended and in effect from time
to time, the "Credit Agreement"), by and among COMMEMORATIVE BRANDS, INC.
(f/k/a Scholastic Brands, Inc.), a Delaware corporation (the "Borrower"),
BANKBOSTON, N.A. (f/k/a The First National Bank of Boston and successor by
merger to Rhode Island Hospital Trust National Bank), RHODE ISLAND HOSPITAL
TRUST NATIONAL BANK, a national banking association, and the other financial
institutions listed on Schedule 1 to the Credit Agreement (collectively, the
"Banks"); and BANKBOSTON, N.A. as agent for itself and the Banks.
Capitalized terms used herein and which are not otherwise defined shall have
the respective meanings ascribed thereto in the Credit Agreement.
WHEREAS, the Borrower and the Banks have agreed to modify certain
terms and conditions of the Credit Agreement as specifically set forth in
this Amendment;
NOW, THEREFORE, in consideration of the premises and the mutual
agreements contained herein and for other good and valuable consideration,
the receipt and sufficiency of which are hereby acknowledged, the parties
hereto hereby agree as follows:
SECTION 1. AMENDMENT TO SECTION 1.1 OF THE CREDIT AGREEMENT.
Section 1.1 of the Credit Agreement is hereby amended by inserting the
following definitions in the appropriate alphabetical order:
"SHORT TERM REVOLVING CREDIT NOTE. That certain Revolving Credit
Note dated as of the date hereof, by and between the Borrower and
BankBoston, N.A. in the aggregate principal amount of $8,000,000 which loan
is to be guaranteed by Castle Harlan Partners II, L.P."
SECTION 2. AMENDMENT TO SECTION 11.4 OF THE CREDIT AGREEMENT.
Section 11.4(f) of the Credit Agreement is hereby amended in its entirety to
read as follows:
"(f) (i) within 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
<PAGE>
Consigned Precious Metal Report to be accompanied by a certification by
the principal financial or accounting officer or treasurer of the Borrower
that the information contained therein is true and accurate in all material
respects, (ii) not later than Wednesday of each week, or at such earlier
time as the Agents may reasonably request, (A) an update of the most
recently delivered Borrowing Base Report updating the Borrowing Base as at
the end of the previous week or other date so requested by the Agents in
form reasonably acceptable to the Agents, and (B) an update of the
Consigned Precious Metal Report in form reasonably acceptable to the Agents
setting forth (1) the amount of Consigned Precious Metal and Borrower's
Precious Metal as of the end of such week 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 week or other
date so requested by the Agents, in each case together with supporting
schedules and documentation, with each such updated Borrowing Base Report
and Consigned Precious Metal Report to be accompanied by a certification by
the principal financial or accounting officer or treasurer of the Borrower
that the information contained therein is true and accurate in all material
respects based upon the information then available to him/her and (iii) on
each Business Day a report aggregating the Borrower's sales, cash receipts
and such other information as may reasonably be requested by the Agent, in
a form reasonably acceptable to the Agent;"
SECTION 3. AMENDMENT TO SECTION 11.4 OF THE CREDIT AGREEMENT.
Section 11.4 of the Credit Agreement is hereby further amended by adding at
the end thereof the following new paragraphs (k) and (l):
"(k) on or prior to October 31, 1998 the report of the
Borrower's consultant hired to evaluate ways to improve the manufacturing
efficiencies of the Borrower, in form reasonably satisfactory to the Agent;
and
(l) on or prior to September 30, 1998, the Borrower's fiscal
1998 business plan, in form reasonably satisfactory to Agent."
SECTION 4. AMENDMENT TO SECTION 12.1 OF THE CREDIT AGREEMENT.
Section 12.1 of the Credit Agreement is hereby amended by adding paragraph
(z) to read as follows:
"(z) Indebtedness evidenced by the Short Term Revolving Credit
Note (including, without limitation Indebtedness under any indemnification
agreement (an "Indemnification Agreement") with any guarantor of such Short
Term Revolving Credit Note to the extent that it does not conflict with the
provisions of the underlying guarantee)."
SECTION 5. AMENDMENT TO SECTION 12.12 OF THE CREDIT AGREEMENT.
Section 12.12 of the Credit Agreement is hereby amended in its entirety to
read as follows:
"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
-2-
<PAGE>
Default shall have occurred and be continuing and none would result from
the making thereof and the Short Term Revolving Credit Note has been paid
in full, 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 Sections 12.3(h) or
(o) hereof, (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 and (i) entering into
an Indemnification Agreement."
SECTION 6. ADDITION TO SECTION 12 OF THE CREDIT AGREEMENT. The
following new Section 12.15 is hereby added to the Credit Agreement:
"Section 12.15. SHORT TERM REVOLVING CREDIT NOTE. The Borrower
will not amend, supplement, or otherwise modify the terms of the Short Term
Revolving Credit Note or prepay, redeem, cause the defeasance of or
repurchase the Short Term Revolving Credit Note; PROVIDED, HOWEVER, so long
as no Default or Event of Default has occurred and is continuing, the
Borrower may make regularly scheduled payments of interest on account of
the Short Term Revolving Credit Note; PROVIDED, FURTHER, the Borrower may
make principal payments on account of the Short Term Revolving Credit Note
so long as (a) no Default or Event of Default exist or would exist after
the making of such payment and (b) both before and immediately after the
making of such payment, an amount equal to the Borrowing Base MINUS
$2,000,000 exceeds the Outstanding Facility."
SECTION 7. CONDITIONS TO EFFECTIVENESS. This Amendment shall
not become effective until the Agent receives a counterpart of this
Amendment, executed by the each of the Borrower, the Agent and the Majority
Banks.
SECTION 8. REPRESENTATIONS AND WARRANTIES. The representations
and warranties of the Borrower contained in the Credit Agreement were true
and correct when made and continue to be true and correct on and as of the
date hereof as if made on the date hereof except to the extent of changes
resulting from transactions contemplated or permitted by the Credit Agreement
and to the extent that such representations and warranties relate expressly
to an earlier date. No Default or Event of Default has occurred and is
continuing.
SECTION 9. RATIFICATION, ETC. Except as expressly amended
hereby, the Credit Agreement and all documents, instruments and agreements
related thereto, including, but not limited to the Security Documents, are
hereby ratified and confirmed in all respects and shall continue in full
force and effect. The Credit Agreement and this Amendment shall be read and
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<PAGE>
construed as a single agreement. All references in the Credit Agreement or
any related agreement or instrument to the Credit Agreement shall hereafter
refer to the Credit Agreement as amended hereby.
SECTION 10. NO WAIVER. Nothing contained herein shall
constitute a waiver of, impair or otherwise affect any Obligations, any other
obligation of the Borrower or any rights of the Agent or the Banks consequent
thereon.
SECTION 11. COUNTERPARTS. This Amendment may be executed in one
or more counterparts, each of which shall be deemed an original but which
together shall constitute one and the same instrument.
SECTION 12. GOVERNING LAW. THIS AMENDMENT SHALL BE GOVERNED BY,
AND CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE COMMONWEALTH OF
MASSACHUSETTS (WITHOUT REFERENCE TO CONFLICT OF LAWS).
SECTION 13. DESIGNATED SENIOR INDEBTEDNESS. The Indebtedness
evidenced by the Short Term Revolving Credit Note constitutes, and the
Borrower hereby specifically designates such Indebtedness as, Designated
Senior Indebtedness for purposes of the Indenture. The Agent hereby consents
to such designation.
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<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Amendment
as a document under seal as of the date first above written.
COMMEMORATIVE BRANDS, INC. (f/k/a Scholastic
Brands, Inc.)
BY: /s/ C.W. Walls
---------------------------------------------
NAME: C.W. Walls
TITLE: Vice-President/Treasurer
BANKBOSTON, N.A. (f/k/a The First National Bank
of Boston and successor by merger to Rhode
Island Hospital Trust National Bank), individually
and as Agent
BY: /s/ Robert J. Brandon
---------------------------------------------
NAME: Robert J. Brandon
TITLE: Director
LASALLE NATIONAL BANK
BY: /s/ David P. Gibson
---------------------------------------------
NAME: David P. Gibson
TITLE: Vice President
CREDITANSTALT CORPORATE
FINANCE, INC.
BY: /s/ John G. Taylor
---------------------------------------------
NAME: John G. Taylor
TITLE: Senior Associate
BY: /s/ Robert M. Biringer
---------------------------------------------
NAME: Robert M. Biringer
TITLE: Executive Vice President
-5-
<PAGE>
FLEET PRECIOUS METALS INC.
BY: /s/ Stephen F. O'Sullivan
---------------------------------------------
NAME: Stephen F. O'Sullivan
TITLE: Vice President
BY: /s/ Karen M. Sheil
---------------------------------------------
NAME: Karen M. Sheil
TITLE: Vice President
HELLER FINANCIAL, INC.
BY: /s/ Julia F. Maslanka
---------------------------------------------
NAME: Julia F. Maslanka
TITLE: Vice President
SANWA BUSINESS CREDIT
CORPORATION
BY: /s/ Peter W. Skavla
---------------------------------------------
NAME: Peter W. Skavla
TITLE: Vice President
UNION BANK OF CALIFORNIA, N.A.
BY: /s/ Gretchen Wile
---------------------------------------------
NAME: Gretchen Wile
TITLE: Loan Officer
-6-
<PAGE>
Exhibit 10.12
REVOLVING CREDIT NOTE
$8,000,000.00 dated as of August 26, 1998
FOR VALUE RECEIVED, the undersigned, COMMEMORATIVE BRANDS, INC., a
Delaware corporation (the "Borrower"), by this promissory note (hereinafter
called "this Note"), absolutely and unconditionally promises to pay to the
order of BANKBOSTON, N.A., a national banking association organized and
existing under the laws of The United States of America (together with its
successors in title and assigns, the "Lender"), at its head office at 100
Federal Street, Boston, Massachusetts 02110, on March 31, 1999 (the "Maturity
Date"), the principal sum of EIGHT MILLION DOLLARS (the "Maximum Amount"), or
so much thereof as shall have been advanced by the Lender to the Borrower by
way of loans under this Note and shall remain outstanding, and to pay
interest on the principal sum outstanding hereunder from time to time from
the date hereof until the said principal sum or the unpaid portion thereof
shall have become due and payable as hereinafter provided. This Note
evidences, among other things, the obligation of the Borrower to repay loans
made hereunder by the Lender to the Borrower.
From time to time prior to the maturity of this Note (whether upon
demand, acceleration or otherwise) the Lender shall, upon request by the
Borrower, make loans to the Borrower subsequent to the date hereof, and the
Borrower may borrow, repay and reborrow the funds available hereunder,
PROVIDED that (a) the aggregate principal amount of all loans outstanding
hereunder shall in no event exceed the Maximum Amount, (b) payments may only
be made to the extent that they do not violate the provisions of the Credit
Agreement (as hereinafter defined) and (c) the Lender shall have no
obligation to make any loans if an Event of Default (as hereinafter defined)
has occurred, other than an Event of Default which is cured by using the
proceeds borrowed under this Note to make a payment of the obligations under
the Credit Agreement. All loans made by the Lender to the Borrower pursuant
to this Note and all repayments of principal made hereunder shall be recorded
by the Lender on the schedule annexed hereto.
The entire unpaid principal (not at the time overdue) of this Note
outstanding shall bear interest at an annual rate which shall at all times be
equal to the Base Rate (as hereinafter defined) in effect from time to time
during the period beginning on the date hereof and ending on the date on
which the entire unpaid principal amount of this Note shall be paid in full.
Interest shall be payable monthly in arrears on the first day of each
calendar month for the immediately preceding calendar month commencing on the
first such day following the date of this Note, and with a final payment on
the Maturity Date. Notwithstanding the foregoing, and so long as an Event of
Default has not occurred, the Borrower may elect to have a portion of the
outstanding principal amount of this Note bear interest at the Eurodollar
Rate (as defined in the Credit
<PAGE>
Agreement) PLUS 0.75% for Interest Periods (as defined in the Credit
Agreement) of 1, 2 or 3 months. The Borrower will follow the procedures for
requesting Eurodollar Loans under the Credit Agreement if it wishes to have a
portion of the principal under this Note bear interest based upon the
Eurodollar Rate. The Borrower agrees that the provisions of the Credit
Agreement relating to Eurodollar Rate Loans would govern the portions of
principal under this Note which bear interest based upon the Eurodollar Rate.
On the Maturity Date, there shall become absolutely due and payable
by the Borrower hereunder, and the Borrower hereby promises to pay to the
holder hereof, a payment in an amount equal to the outstanding Obligations
(as hereinafter defined) under this Note, plus any and all accrued and unpaid
interest and all other amounts owing to the Lender; PROVIDED, HOWEVER,
without any way limiting the Lender's rights to call on the Guaranty (as
hereinafter defined), payments may only be made by the Borrower on this Note
to the extent that they do not violate the provisions of the Credit Agreement.
The Obligations of the Borrower hereunder are guaranteed by Castle
Harlan Partners II, L.P. ("CHP") pursuant to the terms of a guaranty dated as
of the date hereof (as amended and in effect from time to time, the
"Guaranty"). Except for the rights of the Lender to call on the Guaranty and
any collateral securing the Guaranty, this Note shall be unsecured with
regards to the assets of the Borrower and shall have no claim to the
Collateral (as defined in the Credit Agreement).
At the option of the holder, this Note shall become immediately due
and payable, without notice, presentment or demand, upon the occurrence of
any of the following "Events of Default":
1. if the Borrower shall fail to pay any installment of principal
due with respect to this Note on or before the due date thereof;
2. if the Borrower shall fail to pay any interest or other amounts
due with respect to this Note within one Business Day of the due
date thereof;
3. any "Event of Default" shall occur under and as defined in the
Revolving Credit, Term Loan and Gold Consignment Agreement dated
December 16, 1996 by and between the Borrower, the Lender and
other parties thereto (as amended and in effect from time to
time, or if terminated as in effect immediately prior to
termination, the "Credit Agreement"), or CHP fails to perform
any term, covenant or agreement contained in the Guaranty;
4. if the Borrower shall fail to deliver to the Lender the financial
statements required to be delivered by the Borrower to the
lenders under the Credit Agreement on the dates so required;
5. if the Borrower makes or made any material representation or
warranty, statement or information in any documents or financial
statements delivered to the Lender for the purpose of inducing
the Lender to make or
2
<PAGE>
maintain the loan under this Note, and such representation,
warranty, statement or information shall prove to have been
false in any material respect on the date when made or deemed
to have been made.
Each overdue amount (whether of principal, interest or otherwise)
payable on or in respect of this Note or the indebtedness evidenced hereby
shall (to the extent permitted by applicable law) bear interest, from the
date on which such amount shall have first become due and payable in
accordance with the terms hereof to the date on which such amount shall be
paid to the holder of this Note (whether before or after judgment), at the
annual rate of interest which shall (to the extent permitted by applicable
law) at all times be two percent (2%) above the Base Rate (as hereinafter
defined) in effect from time to time. The unpaid interest accrued on each
overdue amount in accordance with the foregoing terms of this paragraph shall
become absolutely due and payable by the Borrower to the holder hereof on
demand by the holder of this Note at any time. Interest on each overdue
amount will continue to accrue, as provided by the foregoing terms of this
paragraph, and will (to the extent permitted by applicable law) be compounded
monthly until the obligations of the Borrower in respect of the payment of
such overdue amount shall be discharged (whether before or after judgment).
The Borrower further agrees to pay to the Lender a commitment fee
calculated at one-fourth of one percent (1/4%) per annum on the average daily
amount during each calendar month or portion thereof from the date of this
Note to the Maturity Date by which the Maximum Amount exceeds the outstanding
principal amount of loans outstanding under this Note. The commitment fee
shall be payable monthly in arrears on the first day of each calendar month
for the immediately preceding calendar month commencing on the first such day
following the date of this Note, and with a final payment on the Maturity
Date.
The Borrower agrees to reimburse the Lender, on demand, whether or
not all or any of the transactions contemplated by the Note are ultimately
consummated, for all its reasonable out-of-pocket expenses, including but not
limited to (a) the reasonable attorney's fees and disbursements of the
Lender's Special Counsel (as hereinafter defined) and disbursements, incurred
or expended in connection with the preparation, negotiation and
interpretation of this Note or any ancillary documentation contemplated
thereby, or any amendment thereof, or the making of loans under this Note and
(b) all attorneys' fees relating to the enforcement of any obligations under
this Note or the satisfaction of any indebtedness of the Borrower hereunder,
or in connection with any litigation proceeding or dispute hereunder in any
way related to the credit.
Each payment of principal, interest or other sums payable on or in
respect of this Note or the indebtedness evidenced hereby shall be made by
the Borrower directly to the Lender in U.S. Dollars, for the account of the
holder of this Note, at the Lender's Head Office, not later than 3:00 p.m.,
Boston time, on the due date of such payment, and in immediately available
and freely transferable funds.
All payments on or in respect of this Note or the indebtedness
evidenced hereby shall be made to the holder of this Note without set-off or
counterclaim.
3
<PAGE>
This Note evidences the obligations of the Borrower (a) to repay
the principal amount of all loans made by the Lender to the Borrower
hereunder, (b) to pay interest, as herein provided, on the principal amount
hereof remaining unpaid from time to time and (c) other amounts which may
become due and payable hereunder as herein provided (the "Obligations").
For all purposes of this Note, the following terms shall have the
respective meanings set forth below:
(a) "Base Rate" means the greater of (i) annual rate of interest from
time to time announced by BankBoston, N.A. at its head office as
its base rate or (ii) the rate equal to the weighted average of
the published rates on overnight Federal Funds transactions with
members of the Federal Reserve System plus 1/2%.
(b) "Business Day" means a day on which banks are open for business
in Boston, Massachusetts.
(c) "holder" means the Lender in possession of this Note or any other
person who is at the time the lawful holder in possession of this
Note.
(d) "Lender's Head Office" means the head office of the Lender
located at 100 Federal Street, Boston, Massachusetts 02110.
(e) "Lender's Special Counsel" means Bingham Dana LLP.
To the extent permitted by the terms of the Credit Agreement, the
Borrower will have the right to prepay at any time the unpaid principal of
this Note in full or in part.
Any partial payment of the indebtedness evidenced by this Note
shall be applied by the holder hereof (a) first, to the payment of all of the
interest due and payable on the unpaid principal of this Note at the time of
such partial payment, (b) then, to the payment of all (if any) other amounts
(except principal) due and payable at the time of such partial payment on or
in respect of this Note or the indebtedness evidenced by this Note, and (c)
finally, to the repayment or (as the case may be) the prepayment of the
unpaid principal of this Note due and payable at the time of such partial
payment.
On the Maturity Date or such earlier date as this Note may mature
(whether upon demand, acceleration or otherwise), all of the interest accrued
on the unpaid principal of this Note and all (if any) other amounts payable
on or in respect of this Note or the indebtedness evidenced hereby (without
regard to the length of any interest period in effect), the entire unpaid
principal of this Note, all of the interest accrued on the unpaid principal
of this Note and all (if any) other amounts payable on or in respect of this
Note or the indebtedness evidenced hereby (without regard to the length of
any interest period in effect), shall forthwith become and be due and payable
to the holder of this Note without presentment, further demand, protest,
notice of protest or any other formalities of any kind, all of which are
hereby expressly and irrevocably waived by the Borrower.
4
<PAGE>
All computations of interest payable as provided in this Note shall
be made by the holder hereof on the basis of the actual number of days
elapsed divided by 360. The holder of this Note shall determine the Base Rate
in effect from time to time. Any change in the Base Rate shall, for all
purposes of this Note, become effective on, and from the beginning of, the
day on which such change shall first be made public by the Lender in
accordance with the Lender's usual practice.
If any sum would, but for the provisions of this paragraph, become
due and payable on or in respect of this Note or the indebtedness evidenced
hereby on a day which is not a Business Day, then such sum shall become due
and payable on the Business Day next succeeding the day on which such sum
would otherwise have become due and payable hereunder, and interest payable
hereunder to the holder hereof shall be adjusted by the holder hereof
accordingly.
The failure of the holder of this Note to exercise all or any of
its rights, remedies, powers or privileges hereunder in any instance shall
not constitute a waiver thereof in that or in any other instance.
The Borrower hereby irrevocably waives notice of acceptance,
presentment, notice of nonpayment, protest, notice of protest, suit and all
other conditions precedent in connection with the delivery, acceptance,
collection and/or enforcement of this Note or any collateral or security
therefor. The Borrower hereby absolutely and irrevocably consents and submits
to the jurisdiction of the Courts of the Commonwealth of Massachusetts and of
any Federal Court located in the said Commonwealth in connection with any
actions or proceedings brought against the Borrower by the holder hereof
arising out of or relating to this Note.
The Borrower represents and warrants to the Lender that: (a) the
Borrower is a corporation duly organized, validly existing and in good
standing under the laws of State of Delaware; (b) the Borrower has adequate
corporate power and authority and full legal right to carry on the business
in which it is presently engaged and will be engaged upon consummation of the
transactions contemplated hereby; and (c) all necessary corporate action has
been taken to execute and deliver this Note and to make the borrowings
hereunder.
The Borrower hereby agrees, at the Borrower's own expense, to
execute and deliver, from time to time, any and all further, or other,
instruments, and to perform such acts, as the Lender may reasonably request
to effect the transactions contemplated by this Note and to provide to the
Lender the benefits of all rights, authorities and remedies conferred upon
the Lender by the terms of this Note.
The Borrower shall use the proceeds of the loans made by the Lender
to the Borrower pursuant to this Note (a) to repay existing indebtedness of
the Borrower and (b) for working capital purposes of the Borrower.
This Note may be assigned by the Lender upon the prior written
consent of the Borrower, which consent shall not be unreasonably withheld.
5
<PAGE>
The indebtedness evidenced by this Note constitutes, and the
Borrower hereby specifically designates such indebtedness as, Designated
Senior Indebtedness for purposes of the Indenture dated as of December 16,
1996, between the Borrower and Marine Midland Bank, N.A., as trustee, with
respect to the 11% Senior Subordinated Notes due 2007.
THIS NOTE IS INTENDED TO TAKE EFFECT AS A SEALED INSTRUMENT. THIS
NOTE AND THE OBLIGATIONS OF THE BORROWER HEREUNDER SHALL BE GOVERNED BY AND
INTERPRETED AND DETERMINED IN ACCORDANCE WITH THE LAWS OF THE COMMONWEALTH OF
MASSACHUSETTS.
IN WITNESS WHEREOF, this PROMISSORY NOTE has been duly executed by
the undersigned, COMMEMORATIVE BRANDS, INC., as of the day and in the year
first above written.
The Borrower:
COMMEMORATIVE BRANDS, INC.
Witness: /s/ Sherice P. Bench By: /s/ C. W. Walls
August 26, 1998 Title: Treasurer
6
<PAGE>
Exhibit 10.13
COMMEMORATIVE BRANDS, INC.
7211 CIRCLE S ROAD
AUSTIN, TEXAS 78745-6603
August 26, 1998
Castle Harlan Partners II, L.P.
c/o Castle Harlan, Inc.
150 East 58th Street
New York, New York 10155
Re: GUARANTY OF OBLIGATIONS OF COMMEMORATIVE BRANDS, INC.
Ladies and Gentlemen:
Reference is made to (i) the Guaranty, dated as of August 26, 1998
(as amended or otherwise modified from time to time, the "GUARANTY"), made by
Castle Harlan Partners II, L.P. (the "GUARANTOR") in favor of BankBoston,
N.A., a national banking association (the "LENDER"), pursuant to which the
Guarantor guaranteed a portion of the obligations of Commemorative Brands,
Inc. (the "BORROWER") under the Revolving Credit Note, dated as of August 26,
1998 (as amended or otherwise modified from time to time, the "NOTE"), by the
Borrower in favor of the Lender and (ii) the Cash Collateral Agreement, dated
as of August 26, 1998 (as amended or otherwise modified from time to time,
the "CASH COLLATERAL AGREEMENT"), by and between the Guarantor and the Lender
pursuant to which the Guarantor has pledged cash as collateral to secure the
Guaranty. Any capitalized term used herein and not defined shall have the
meaning assigned to it in the Note.
In consideration of the execution and delivery of the Guaranty by
the Guarantor and the Guarantor's pledge of the collateral pursuant to the
Cash Collateral Agreement, the Borrower and the Guarantor hereby agree as
follows:
1. The Borrower agrees irrevocably, absolutely and
unconditionally to pay to the Guarantor from time to time, on demand, (a) all
amounts (whether for principal, interest, fees, expenses or otherwise) paid
from time to time by the Guarantor under the Guaranty or the Cash Collateral
Agreement, (b) any and all expenses (including counsel fees and expenses)
incurred by the Guarantor in enforcing its rights under this Letter Agreement
and (c) interest at an annual rate which shall at all times be equal to the
rate payable under the Note on all outstanding amounts owed by the Borrower
under this Letter Agreement, from the date of such demand until paid in full
(collectively, the "OBLIGATIONS").
<PAGE>
August 26, 1998
Page 2
2. The Borrower agrees to pay all of the Obligations strictly
in accordance with the terms of this Letter Agreement, regardless of any law,
regulation or order now or hereafter in effect in any jurisdiction affecting
any of such terms or the rights of the Guarantor under the Guaranty. The
Borrower's liability hereunder shall be absolute and unconditional,
irrespective of (a) any lack of validity or enforceability of the Note, the
Guaranty, the Cash Collateral Agreement or any agreement, document or
instrument relating thereto (collectively, the "LOAN DOCUMENTS"), (b) any
change in the time, manner or place of payment of, or in any other term in
respect of, any or all of the Obligations, or any amendment or waiver of or
consent to any departure from any Loan Document, (c) any other circumstances
which might otherwise constitute a defense available to, or a discharge of,
the Borrower in respect of any obligations under the Note or other Loan
Documents or of the Guarantor under the Guaranty or the Cash Collateral
Agreement or (d) the absence of any action on the part of the Guarantor to
obtain payment of the Obligations from the Borrower or any other person or
entity.
3. All payments made by the Borrower to the Guarantor under
this Letter Agreement shall be made without defense, set off or counterclaim
in same day funds to the Guarantor at its address set forth above, or at such
other address as the Guarantor shall specify in writing.
4. The Borrower hereby waives (a) promptness and diligence,
(b) notice of acceptance, notice of the incurrence of any obligation by the
Borrower under the Note or other Loan Documents, and notice of payment by the
Guarantor under the Guaranty, (c) notice of any actions taken by the Lender
under any Loan Document, (d) all other notices, demands and protests, and all
other formalities of every kind in connection with the enforcement of the
Guarantor's rights under this Letter Agreement, the omission of or delay in
which, but for this paragraph, might constitute grounds for relieving the
Borrower of its obligations hereunder, and (e) any requirement that the
Guarantor exhaust any right or take any action against the Borrower, any
affiliate or any other person or entity.
5. No failure on the part of the Guarantor to exercise, and no
delay in exercising, any right hereunder shall operate as a waiver thereof,
nor shall any single or partial exercise of any right preclude any other or
further exercise thereof or the exercise of any other right. The rights of
the Guarantor hereunder are not conditional or contingent on any requirement
by the Guarantor to exercise any of its rights against the Borrower or any
other person or entity. The rights and remedies of the Guarantor provided
herein are cumulative and are in addition to, and not exclusive of, any
rights and remedies provided by law.
6. This Letter Agreement shall (a) remain in full force and
effect until all obligations of the Guarantor under the Guaranty and Cash
Collateral Agreement shall have been terminated in accordance with its terms
thereunder, and (b) continue to be effective or reinstated, as the case may
be, if at any time any payment made by the Borrower to the Lender is
rescinded
<PAGE>
August 26, 1998
Page 3
or must otherwise be returned by the Lender upon the insolvency or bankruptcy
or the Borrower or otherwise, all as if such payment had not been made.
7. This Letter Agreement shall be binding upon and shall inure
to the benefit of the parties hereto and their respective successors and
assigns.
8. This Letter Agreement shall be governed by, and construed
and enforced in accordance with, the laws of the State of New York applicable
to contracts made and performed in such State.
Very truly yours,
COMMEMORATIVE BRANDS, INC., as
borrower
By: /s/ C.W. Walls
------------------------------------
Name: Clyde W. Walls
Title: Treasurer
CONSENTED AND AGREED TO THIS
26th DAY OF AUGUST, 1998
CASTLE HARLAN PARTNERS II, L.P.,
as guarantor
By: Castle Harlan Associates, L.P.
By: Castle Harlan Partners II GP, Inc.
By: /s/ Howard Weiss
------------------------------------
Name: Howard Weiss
Title: Treasurer
<PAGE>
Exhibit 10.14
FOURTH AMENDMENT TO REVOLVING CREDIT,
TERM LOAN AND GOLD CONSIGNMENT AGREEMENT
Fourth Amendment dated as of November 27, 1998 (the "Amendment")
amending that certain Revolving Credit, Term Loan and Gold Consignment
Agreement dated as of December 16, 1996 (as amended and in effect from time
to time, the "Credit Agreement"), by and among COMMEMORATIVE BRANDS, INC.
(f/k/a Scholastic Brands, Inc.), a Delaware corporation (the "Borrower"),
BANKBOSTON, N.A. (f/k/a The First National Bank of Boston and successor by
merger to Rhode Island Hospital Trust National Bank), RHODE ISLAND HOSPITAL
TRUST NATIONAL BANK, a national banking association, and the other financial
institutions listed on SCHEDULE 1 to the Credit Agreement (collectively, the
"Banks"); and BANKBOSTON, N.A. as agent for itself and the Banks.
Capitalized terms used herein and which are not otherwise defined shall have
the respective meanings ascribed thereto in the Credit Agreement.
WHEREAS, the Borrower and the Banks have agreed to modify certain terms
and conditions of the Credit Agreement as specifically set forth in this
Amendment;
NOW, THEREFORE, in consideration of the premises and the mutual
agreements contained herein and for other good and valuable consideration,
the receipt and sufficiency of which are hereby acknowledged, the parties
hereto hereby agree as follows:
SECTION 1. AMENDMENT TO SECTION 1 OF THE CREDIT AGREEMENT. SECTION
1.1 of the Credit Agreement is hereby amended as follows:
(a) The definition of "Consolidated EBITDA" is hereby amended in
its entirety to read as follows:
"CONSOLIDATED EBITDA. With respect to the Borrower and its
Subsidiaries and any particular fiscal period, the consolidated
earnings (or loss) from operations of the 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) 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, (f)
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 (g) a portion of all
<PAGE>
-2-
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."
(b) The definition of "Permitted Common Stock Repurchases" is hereby
deleted in its entirety and replaced with the following definition of "Permitted
Capital Stock Repurchases":
"PERMITTED CAPITAL STOCK REPURCHASES. Repurchases of the Borrower's
capital stock which are made concurrently with the issuance by the Borrower
of additional capital stock of the same class to employees or sales
representatives so long as the Borrower receives a cash purchase price in
respect of any such additional capital 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 capital stock."
(c) The definition of "Permitted Employee Stock Repurchases" is
hereby amended in its entirety to read as follows:
"PERMITTED EMPLOYEE STOCK REPURCHASES. Repurchases of capital 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 capital 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
capital 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 capital
stock repurchases in any fiscal year, the Borrower may also issue
promissory notes to employees and sales representatives to effect such
repurchases of capital 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."
<PAGE>
-3-
(d) SECTION 1.1 of the Credit Agreement is hereby further amended by
inserting the following definitions in the appropriate alphabetical order:
"CONSOLIDATED DEBT SERVICE. With respect to the Borrower and its
Subsidiaries on a consolidated basis for any period, an amount equal
to the sum of (i) Consolidated Total Interest Expense of the Borrower
and its Subsidiaries for such period, PLUS (ii) all regularly
scheduled payments of principal of Indebtedness of the Borrower and
its Subsidiaries (including payments of the principal component of
Capitalized Leases and payments of principal on any purchase money
Indebtedness) made or (without duplication) required to be made during
such period.
CONSOLIDATED NET WORTH. The excess of Consolidated Total Assets
minus Consolidated Total Liabilities, LESS, to the extent otherwise
includable in the computations of Consolidated Net Worth, any
subscriptions receivable."
CONSOLIDATED OPERATING CASH FLOW. With respect to the Borrower
and its Subsidiaries on a consolidated basis for any period, an amount
equal to (i) the sum of (A) Consolidated EBITDA for such period, LESS
(ii) the sum of (A) cash payments for all taxes paid during such
period, PLUS (B) to the extent not already deducted in the
determination of Consolidated EBITDA, Capital Expenditures made during
such period.
CONSOLIDATED TOTAL ASSETS. All assets of the Borrower and its
Subsidiaries determined on consolidated basis in accordance with
generally accepted accounting principles.
CONSOLIDATED TOTAL LIABILITIES. All liabilities of the Borrower
and its Subsidiaries determined on a consolidated basis in accordance
with generally accepted accounting principles.
MODIFIED FUNDED DEBT RATIO. The ratio of (a) Consolidated EBITDA
for the four fiscal quarters of the Borrower ended immediately prior
to the date of any CH Management Fee payment LESS the CH Management
Fee proposed to be made TO (b) Consolidated Debt Service for the four
fiscal quarters of the Borrower ended immediately prior to the date of
any CH Management Fee payment."
SECTION 3. AMENDMENT TO SECTION 12.1 OF THE CREDIT AGREEMENT. Section
12.1(k) of the Credit Agreement is hereby amended in its entirety to read as
follows:
"(k) Indebtedness consisting of Permitted Employee Stock
Repurchases (including any promissory notes issued by the Borrower to
repurchase capital stock of employees and sales representatives of the
<PAGE>
-4-
Borrower solely to the extent permitted in the definition of Permitted
Employee Stock Repurchases);"
SECTION 4. AMENDMENT TO SECTION 12.12 OF THE CREDIT AGREEMENT. Section
12.12 of the Credit Agreement is hereby amended in its entirety to read as
follows:
"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) payment of the CH Management Fee in an
aggregate amount not to exceed $1,500,000 during any fiscal year of
the Borrower so long as the Agent has received certificates from the
Borrower, in form and substance satisfactory to the Agent, evidencing
that (i) no Event of Default shall have occurred and be continuing and
none would result from the making thereof and (ii) the Short Term
Revolving Credit Note has been paid in full and (iii) the Modified
Funded Debt Ratio is greater than 1.10:1.00, 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
Capital Stock Repurchase, (g) transactions constituting Investments
permitted by Sections 12.3(h) or (o) hereof, (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 and (i) entering into an
Indemnification Agreement."
SECTION 5. AMENDMENT TO SECTION 13.1 OF THE CREDIT AGREEMENT. SECTION
13.1 of the Credit Agreement is hereby amended by replacing the table appearing
therein with the following table:
<TABLE>
<CAPTION>
PERIOD RATIO
------ -----
<S> <C>
11/30/98 3.50:1.00
2/28/99 3.50:1.00
5/31/99 - 8/31/99 3.10:1.00
11/30/99 and thereafter 2.25:1.00
</TABLE>
<PAGE>
-5-
SECTION 6. AMENDMENT TO SECTION 13.2 OF THE CREDIT AGREEMENT. SECTION
13.2 of the Credit Agreement is hereby amended by replacing the table appearing
therein with the following table:
<TABLE>
<CAPTION>
PERIOD AMOUNT
------ ------
<S> <C>
11/30/98 $15,750,000
2/28/99 $16,500,000
5/31/99 $19,000,000
8/31/99 $20,000,000
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
</TABLE>
SECTION 7. AMENDMENT TO SECTION 13.3 OF THE CREDIT AGREEMENT. SECTION
13.3 of the Credit Agreement is hereby amended in its entirety to read as
follows:
"13.3. CAPITAL EXPENDITURES. (a) The Borrower will not make, or
permit any Subsidiary of the Borrower to make, Capital Expenditures
(other than Computer Conversion 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:
<TABLE>
<CAPTION>
FISCAL YEAR AMOUNT
----------- ------
<S> <C>
1998 $4,500,000
1999 $5,500,000
2000 $3,500,000
2001 $3,500,000
2002 $3,500,000
2003 $3,500,000
2004 $3,500,000
</TABLE>
(b) The Borrower will not make, or permit any Subsidiary of the
Borrower to make, Computer Conversion Capital Expenditures (i) during
the period consisting of fiscal years 1998 and 1999 and the first
fiscal quarter of fiscal year 2000 that exceed, in the aggregate,
$6,500,000 or (ii) during any fiscal period other than fiscal years
1998 and 1999 and the first fiscal quarter of fiscal year 2000;
PROVIDED, HOWEVER, that if during any fiscal year the amount of
Capital Expenditures permitted by Section 13.3(a) above for such
fiscal year is not so utilized, such unutilized amount may be utilized
during such fiscal year only (and not during any other fiscal year) to
make Computer Conversion Capital Expenditures."
<PAGE>
-6-
SECTION 8. AMENDMENT TO SECTION 13.4 OF THE CREDIT AGREEMENT. SECTION
13.4 of the Credit Agreement is hereby amended by replacing the table appearing
therein with the following table:
<TABLE>
<CAPTION>
PERIOD RATIO
------ -----
<S> <C>
11/30/98 1.05:1.00
2/28/99 1.05:1.00
5/31/99 1.15:1:00
8/31/99 1.20:1:00
11/30/99-8/31/00 1.50:1.00
11/30/00 - 8/31/01 1.60:1.00
11/30/01 and thereafter 1.75:1.00
</TABLE>
SECTION 9. ADDITION TO SECTION 13 OF THE CREDIT AGREEMENT. The
following new SECTION 13.5 is hereby added to the Credit Agreement:
"SECTION 13.5 CONSOLIDATED NET WORTH. The Borrower will not
permit Consolidated Net Worth on March 30, 1999 to be less than $42,000,000.
On March 31, 1999 the Borrower will deliver a certificate setting forth in
reasonable detail computations evidencing compliance with this Section 13.5
in form and substance satisfactory to the Agent."
SECTION 10. CONDITIONS TO EFFECTIVENESS. This Amendment shall not
become effective until the Agent receives the following:
(a) a counterpart of this Amendment, executed by the each of the
Borrower, the Agent and the Majority Banks; and
(b) an amendment fee of $150,000 paid by the Borrower for the PRO
RATA account of each Bank based on such Bank's percentage of the Total
Commitment.
SECTION 11. REPRESENTATIONS AND WARRANTIES. The representations and
warranties of the Borrower contained in the Credit Agreement were true and
correct when made and continue to be true and correct on and as of the date
hereof as if made on the date hereof except to the extent of changes
resulting from transactions contemplated or permitted by the Credit Agreement
and to the extent that such representations and warranties relate expressly
to an earlier date. No Default or Event of Default has occurred and is
continuing.
SECTION 12. RATIFICATION, ETC. Except as expressly amended hereby,
the Credit Agreement and all documents, instruments and agreements related
thereto, including, but not limited to the Security Documents, are hereby
ratified and confirmed in all respects and shall continue in full force and
effect. The Credit Agreement and this Amendment shall be read and construed
as a single agreement. All references in the Credit Agreement or any related
agreement or instrument to the Credit Agreement shall hereafter refer to the
Credit Agreement as amended hereby.
<PAGE>
-7-
SECTION 13. NO WAIVER. Nothing contained herein shall constitute a
waiver of, impair or otherwise affect any Obligations, any other obligation
of the Borrower or any rights of the Agent or the Banks consequent thereon.
SECTION 14. COUNTERPARTS. This Amendment may be executed in one or
more counterparts, each of which shall be deemed an original but which
together shall constitute one and the same instrument.
SECTION 15. GOVERNING LAW. THIS AMENDMENT SHALL BE GOVERNED BY, AND
CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE COMMONWEALTH OF MASSACHUSETTS
(WITHOUT REFERENCE TO CONFLICT OF LAWS).
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Amendment as a
document under seal as of the date first above written.
COMMEMORATIVE BRANDS, INC. (f/k/a Scholastic
Brands, Inc.)
BY:
-------------------------------
NAME:
TITLE:
BANKBOSTON, N.A. (f/k/a The First National Bank
of Boston and successor by merger to Rhode
Island Hospital Trust National Bank), individually
and as Agent
BY:
-------------------------------
NAME:
TITLE:
LASALLE NATIONAL BANK
BY:
-------------------------------
NAME:
TITLE:
CREDITANSTALT CORPORATE
FINANCE, INC.
BY:
-------------------------------
NAME:
TITLE:
BY:
-------------------------------
NAME:
TITLE:
<PAGE>
FLEET PRECIOUS METALS INC.
BY:
-------------------------------
NAME:
TITLE:
BY:
-------------------------------
NAME:
TITLE:
HELLER FINANCIAL, INC.
BY:
-------------------------------
NAME:
TITLE:
SANWA BUSINESS CREDIT
CORPORATION
BY:
-------------------------------
NAME:
TITLE:
UNION BANK OF CALIFORNIA, N.A.
BY:
-------------------------------
NAME:
TITLE:
<PAGE>
Exhibit 11.1
Commemorative Brands, Inc.
Statement Re: Computation of Per Share Earnings
<TABLE>
<CAPTION>
Fiscal Year Ended Fourth Quarter Ended
----------------------------- --------------------------
August 29, August 30, August 29, August 30,
1998 1997 1998 1997
---------- ---------- ---------- ----------
(In thousands, except share data)
<S> <C> <C> <C> <C>
Net income (loss) to common
stockholders $ (5,837) $ (9,717) $ (8,290) $ (4,432)
---------- ---------- ---------- ----------
Weighted average common shares
outstanding 375,323 375,000 376,294 375,000
---------- ---------- ---------- ----------
Weighted average common and common
equivalent shares outstanding 375,323 375,000 376,294 375,000
---------- ---------- ---------- ----------
Basic earnings (loss) per share $ (15.55) $ (25.91) $ (22.03) $ (11.82)
---------- ---------- ---------- ----------
Diluted earnings (loss) per share $ (15.55) $ (25.91) $ (22.03) $ (11.82)
---------- ---------- ---------- ----------
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED FINANCIAL STATEMENTS FROM THE COMPANY'S REPORT ON FORM 10K FOR THE
FISCAL YEAR ENDED AUGUST 29, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE
TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> AUG-29-1998
<PERIOD-START> AUG-31-1997
<PERIOD-END> AUG-29-1998
<CASH> 975
<SECURITIES> 0
<RECEIVABLES> 27,061
<ALLOWANCES> (2,356)
<INVENTORY> 14,299
<CURRENT-ASSETS> 50,496
<PP&E> 42,127
<DEPRECIATION> (5,833)
<TOTAL-ASSETS> 203,805
<CURRENT-LIABILITIES> (27,237)
<BONDS> (134,322)
0
0
<COMMON> (4)
<OTHER-SE> (34,842)
<TOTAL-LIABILITY-AND-EQUITY> (203,805)
<SALES> (151,101)
<TOTAL-REVENUES> (151,101)
<CGS> 72,615
<TOTAL-COSTS> 72,615
<OTHER-EXPENSES> 83,123
<LOSS-PROVISION> 706
<INTEREST-EXPENSE> 14,829
<INCOME-PRETAX> 4,637
<INCOME-TAX> 0
<INCOME-CONTINUING> 4,637
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 5,837
<EPS-PRIMARY> (15.55)
<EPS-DILUTED> (15.55)
</TABLE>
