<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------
FORM 10-Q
---------
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MAY 29, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER: 333-20759
-----------------
COMMEMORATIVE BRANDS, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 13-3915801
(State or other jurisdiction of (I.R.S. Employer Identification Number)
incorporation or organization)
7211 CIRCLE S ROAD
AUSTIN, TEXAS 78745
(Address of principal executive offices) (Zip Code)
REGISTRANT'S PHONE NUMBER, INCLUDING AREA CODE (512) 444-0571
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period
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.)
<PAGE>
COMMEMORATIVE BRANDS, INC.
FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED MAY 29, 1999
INDEX
<TABLE>
<CAPTION>
Page
<S> <C>
PART I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements and Notes
Consolidated Balance Sheets-
As of May 29, 1999 (unaudited) and August 29, 1998 (audited)......................................1
Consolidated Statements of Operations-
For the Three Months Ended May 29, 1999 and May 30, 1998
(all unaudited)...................................................................................2
Consolidated Statements of Operations-
For the Nine Months Ended May 29, 1999 and May 30, 1998
(all unaudited)...................................................................................3
Consolidated Statements of Stockholders' Equity-
For the Nine Months Ended May 29, 1999 (unaudited) and
for the Year Ended August 29, 1998 (audited)......................................................4
Consolidated Statements of Cash Flows -
For the Nine Months Ended May 29, 1999 and May 30, 1998
(all unaudited)...................................................................................5
Notes to Consolidated Financial Statements........................................................6-15
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operation..........16-21
PART II. OTHER INFORMATION
Item 1. Legal Proceedings................................................................................22
Item 2. Changes in Securities............................................................................22
Item 3. Defaults Upon Senior Securities..................................................................22
Item 4. Submission of Matters to a Vote of Security Holders..............................................22
Item 6. Exhibits and Reports on Form 8-K.................................................................22
SIGNATURES ...............................................................................................23
</TABLE>
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS AND NOTES
COMMEMORATIVE BRANDS, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
<TABLE>
<CAPTION>
May 29, August 29,
1999 1998
<S> <C> <C>
ASSETS (Unaudited) (Audited)
Current assets:
Cash and cash equivalents $ 1,566 $ 975
Accounts receivable, net 45,775 24,705
Inventories 12,715 14,299
Prepaid expenses and other current assets 8,761 10,517
------------- -----------
Total current assets 68,817 50,496
Property, plant and equipment, net 40,036 36,294
Trademarks, net 28,851 29,427
Goodwill, net 78,935 80,517
Other assets 7,708 7,071
------------- -----------
Total assets $ 224,347 $ 203,805
------------- -----------
------------- -----------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Bank overdraft $ 3,513 $ 3,138
Accounts payable and accrued expenses 32,812 22,116
Current portion of long-term debt 1,625 1,983
------------- -----------
Total current liabilities 37,950 27,237
Long-term debt, net of current portion 138,938 132,339
Other long-term liabilities 9,882 9,383
------------- -----------
Total liabilities 186,770 168,959
Commitments and contingencies
Stockholders' equity:
Preferred stock, $.01 par value, 750,000 shares authorized (in total)-
Series A, 100,000 shares issued and outstanding 1 1
Series B, 375,985 and 377,156 shares issued and outstanding 4 4
Common stock, $.01 par value, 750,000 shares authorized, 375,985 and
377,156 shares issued and outstanding 4 4
Additional paid-in capital 50,266 50,391
Retained earnings (deficit) (12,698) (15,554)
------------- -----------
Total stockholders' equity 37,577 34,846
------------- -----------
Total liabilities and stockholders' equity $ 224,347 $ 203,805
------------- -----------
------------- -----------
</TABLE>
The accompanying notes are an integral part
of these consolidated financial statements.
1
<PAGE>
COMMEMORATIVE BRANDS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except share and per share data)
(Unaudited)
<TABLE>
<CAPTION>
For Three Months For Three Months
Ended Ended
May 29, May 30,
1999 1998
----------------- -----------------
<S> <C> <C>
Net sales $ 50,685 $ 43,085
Cost of sales 22,153 20,131
----------------- -----------------
Gross profit 28,532 22,954
Selling, general and administrative expenses 22,180 18,891
----------------- -----------------
Operating income 6,352 4,063
Interest expense, net 3,652 3,755
----------------- -----------------
Income before provision for income taxes 2,700 308
Provision for income taxes 30 -
----------------- -----------------
Net income $ 2,670 $ 308
Preferred dividends (300) (300)
----------------- -----------------
Net income to common stockholders $ 2,370 $ 8
----------------- -----------------
----------------- -----------------
Basic and diluted earnings
per share $ 6.29 $ 0.02
----------------- -----------------
----------------- -----------------
Weighted average common shares outstanding
and common and common equivalent shares
outstanding 376,937 375,000
----------------- -----------------
----------------- -----------------
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
2
<PAGE>
COMMEMORATIVE BRANDS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except share and per share data)
(Unaudited)
<TABLE>
<CAPTION>
For Nine Months For Nine Months
Ended Ended
May 29, May 30,
1999 1998
----------------- -----------------
<S> <C> <C>
Net sales $ 135,186 $ 125,617
Cost of sales 58,290 57,124
----------------- -----------------
Gross profit 76,896 68,493
Selling, general and administrative expenses 61,746 54,009
----------------- -----------------
Operating income 15,150 14,484
Interest expense, net 11,304 11,131
----------------- -----------------
Income before provision for income taxes 3,846 3,353
Provision for income taxes 90 -
----------------- -----------------
Net income $ 3,756 $ 3,353
Preferred dividends (900) (900)
----------------- -----------------
Net income to common stockholders $ 2,856 $ 2,453
----------------- -----------------
----------------- -----------------
Basic and diluted earnings
per share $ 7.57 $ 6.54
----------------- -----------------
----------------- -----------------
Weighted average common shares outstanding and common and
common equivalent shares outstanding 377,083 375,000
----------------- -----------------
----------------- -----------------
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
3
<PAGE>
COMMEMORATIVE BRANDS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(In thousands, except share data)
<TABLE>
<CAPTION>
PREFERRED STOCK COMMON STOCK
ADDITIONAL RETAINED
PAID-IN EARNINGS
CAPITAL (DEFICIT) TOTAL
------------------------------------ --------------- ---------- --------- --------
SERIES A SERIES B $.01 PAR VALUE
$.01 PAR VALUE $.01 PAR VALUE
---------------- ---------------- --------------
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
------- ------ -------- ------ ------- ------ -------- -------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, August 30, 1997 100,000 $ 1 375,000 $ 4 375,000 $ 4 $ 50,161 $ (9,717) $40,453
Issuance of Common Stock - - - - 2,156 - 14 - 14
Issuance of Preferred Stock - - 2,156 - - - 216 - 216
Accrued Preferred Stock dividends - - - - - - - (1,200) (1,200)
Net loss - - - - - - - (4,637) (4,637)
------- ------ ------- ------ ------- ------ -------- -------- -------
Balance, August 29, 1998 100,000 1 377,156 4 377,156 4 50,391 (15,554) 34,846
Accrued Preferred Stock dividends - - - - - - - (900) (900)
Repurchase of Common Stock - - - - (1,171) - (8) - (8)
Repurchase of Preferred Stock - - (1,171) - - - (117) - (117)
Net loss - - - - - - - 3,756 3,756
------- ------ ------- ------ ------- ------ -------- -------- -------
Balance, May 29, 1999 100,000 $ 1 375,985 $ 4 375,985 $ 4 $50,266 $(12,698) $37,577
------- ------ -------- ------ ------- ------ -------- -------- -------
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
4
<PAGE>
COMMEMORATIVE BRANDS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
For Nine Months Ended
May 29, May 30,
1999 1998
CASH FLOWS FROM OPERATING ACTIVITIES:
----------------- ---------------
<S> <C> <C>
Net income $ 3,756 $ 3,353
Adjustments to reconcile net income to net cash
provided by (used in) operating activities-
Depreciation and amortization 5,320 5,033
Provision for doubtful accounts 360 531
Changes in assets and liabilities-
Increase in accounts receivables (21,430) (12,123)
Decrease (increase) in inventories 1,584 (558)
Decrease in prepaid expenses and other current assets 1,756 2,609
Increase in other assets (640) (996)
Increase in overdraft, accounts payable and accrued expenses,
and other long-term liabilities 10,670 797
--------------- ---------------
Net cash provided by (used in) operating activities 1,376 (1,354)
---------------- ---------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property, plant and equipment (6,901) (4,845)
---------------- ---------------
Net cash used in investing activities (6,901) (4,845)
----------------- ---------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repurchase of common and preferred stock (125) -
Payments on term loan facility (875) (375)
Revolving Credit and Gold Facilities borrowings, net 7,116 7,275
----------------- ---------------
Net cash provided by financing activities 6,116 6,900
6,117
NET INCREASE IN CASH AND
CASH EQUIVALENTS 591 701
CASH AND CASH EQUIVALENTS, beginning of period 975 2,174
---------------- ----------------
CASH AND CASH EQUIVALENTS, end of period $ 1,566 $ 2,875
---------------- ----------------
---------------- ----------------
SUPPLEMENTAL DISCLOSURE
Cash paid during the period for -
Interest $ 8,161 $ 7,857
---------------- ----------------
---------------- ----------------
Taxes $ 182 $ -
---------------- ----------------
---------------- ----------------
SUPPLEMENTAL DISCLOSURE OF NONCASH FINANCING ACTIVITIES
Accrued preferred stock dividends $ 900 $ 900
---------------- ----------------
---------------- ----------------
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
5
<PAGE>
COMMEMORATIVE BRANDS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
May 29, 1999
(Unaudited)
(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. The Company's
corporate office and primary manufacturing facilities are located in Austin,
Texas.
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 (the Acquisition) substantially all of the scholastic
and recognition and affinity product assets and businesses of the ArtCarved
Class Rings (ArtCarved) operations of CJC Holdings, Inc. (CJC), from CJC and of
L. G. Balfour Company, Inc. (Balfour) from Town & Country Corporation and, until
December 16, 1996, engaged in no business activities other than in connection
with the Acquisitions and the financing thereof.
The accompanying consolidated financial statements have been prepared
without audit pursuant to the rules and regulations of the Securities and
Exchange Commission. Certain information and footnote disclosures normally
included in financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted pursuant to such rules and
regulations, although the Company believes the disclosures are adequate to make
the information presented not misleading. In the opinion of management, all
adjustments (consisting only of normal recurring adjustments) necessary for a
fair presentation of the financial position and results of operations for the
periods presented have been included. Operating results for the nine months
ended May 29, 1999 are not necessarily indicative of the results that may be
expected for the fiscal year ending August 28, 1999.
(2) 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.
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.
6
<PAGE>
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 and 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:
<TABLE>
<CAPTION>
<S> <C>
Description Useful Life
- ----------- -----------
Land improvements 15 years
Buildings and improvements 10 to 25 years
Tools and dies 10 to 20 years
Machinery and equipment 2 to 10 years
</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 (including transaction costs) in excess of fair value of net tangible
and identifiable intangible assets acquired 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. If 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.
7
<PAGE>
OTHER ASSETS
Other assets includes deferred financing costs which are amortized on a
straight-line basis over the lives of the specific debt and ring samples which
are supplied to national chain stores and sales representatives by the Company
which are amortized on a straight-line basis over three years.
INCOME TAXES
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases. Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. Deferred tax assets are
recognized net of any valuation allowance. The effect on deferred tax assets and
liabilities of a change in tax rates is recognized in income in the period that
includes the enactment date.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company's financial instruments consist primarily of cash and cash
equivalents, accounts receivable, bank overdraft, accounts payable and long-term
debt (including current maturities). The carrying amounts of the Company's cash
and cash equivalents, accounts receivable, bank overdraft and accounts payable
approximate fair value due to their Short-Term nature. The fair value of the
Company's long-term debt approximates the recorded amount based on current rates
available to the Company for debt with the same or similar terms.
REVENUE RECOGNITION
Revenues from product sales are recognized at the time the product is
shipped.
CONCENTRATION OF CREDIT RISK
Credit is extended to various companies in the retail industry which may be
affected by changes in economic or other external conditions. The Company's
policy is to manage its exposure to credit risk through credit approvals and
limits.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from these estimates.
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 per share are the
same as the average market price of the Company's common stock during the
periods and do not exceed the exercise price of the options and warrants
outstanding (the options and warrants are not "in the money").
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
8
<PAGE>
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 the fiscal year ending
August 28, 1999. It revises employers' disclosures about pension and other
post-retirement benefit plans, but it does not change the measurement or
recognition of those plans.
SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities", which was amended by SFAS No. 137, is required to be adopted by the
Company in the first quarter of fiscal year 2001 (November 2000). 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.
(3) INVENTORIES
A summary of inventories is as follows (in thousands):
<TABLE>
<CAPTION>
May 29, August 29,
1999 1998
----------- -----------
<S> <C> <C>
Raw materials $ 7,281 $ 8,754
Work in process 3,677 3,139
Finished goods 1,757 2,406
----------- -----------
$ 12,715 $ 14,299
----------- -----------
----------- -----------
</TABLE>
Cost of sales includes depreciation and amortization of $1,810,000 and
$1,583,000, for the nine months ended May 29, 1999 and May 30, 1998,
respectively.
(4) LONG-TERM DEBT
Long-term debt consists of the following (in thousands):
<TABLE>
<CAPTION>
May 29, August 29,
1999 1998
----------- -------------
<S> <C> <C>
11% senior subordinated notes due 2007 $ 90,000 $ 90,000
Term loan facility 23,125 24,000
Revolving Credit and Gold Facilities 27,438 19,589
Short-Term revolving credit - 733
----------- ------------
Total debt $ 140,563 $ 134,322
Less: current portion (1,625) (1,983)
----------- ------------
Total long-term debt $ 138,938 $ 132,339
----------- ------------
----------- ------------
</TABLE>
11 PERCENT SENIOR SUBORDINATED NOTES
The Company's 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, at specified redemption prices
ranging from 105.5% of the principal amount thereof if redeemed during 2002 and
declining to 100% of the principal amount thereof if redeemed during the year
2005 or thereafter, plus accrued
9
<PAGE>
and unpaid interest and Liquidated Damages (as defined in the Indenture), if
any, thereon to the date of redemption. In the event the Company completes
one or more Public Equity Offerings (as defined in the Indenture) on or
before January 15, 2000, the Company may, in its discretion, use the net cash
proceeds to redeem up to 33-1/3% 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, 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 in the Indenture), 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 Agreement
(as defined below) 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 in the Indenture), the Company is
required to apply any Net Proceeds (as defined in the Indenture) 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 11% senior subordinated notes contain certain covenants that, among
other things, limit the ability of the Company 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 as of May 29, 1999 and
August 29, 1998.
REVOLVING CREDIT, TERM LOAN AND GOLD CONSIGNMENT AGREEMENT
The Company has a revolving credit, term loan and gold consignment
agreement which was entered into as of December 16, 1996 (as amended, the Bank
Agreement) with a group of banks pursuant to which the Company initially
borrowed $25 million under a term loan facility and from time-to-time may borrow
up to $35 million under a revolving credit and gold facility. Loans outstanding
under the Bank Agreement bear interest at either fixed or floating rates based
upon the interest rate option selected by the Company.
TERM LOAN FACILITY
The term loan facility (Term Loan) matures on December 16, 2003. The
Company may prepay the Term Loan at any time without penalties. 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 in the Revolving Credit and
Gold Facilities), with a sublimit of $5 million for letters of credit and $10
million for gold borrowings or consignment. Amounts of principal repaid on the
Term Loan may not be reborrowed.
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.
The Bank Agreement 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
10
<PAGE>
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 Agreement contains certain financial covenants that require the
Company to maintain certain minimum levels of (a) senior funded debt to earnings
before interest, taxes, depreciation and amortization (EBITDA, as defined in the
Bank Agreement), (b) consolidated EBITDA and (c) interest coverage. The
financial covenants were amended on November 27, 1998 and additional covenants
were added pursuant to which the Company agreed that it would not (i) permit its
Consolidated Net Worth (as defined in the Bank Agreement) as of March 30, 1999
to be less than $42 million, (ii) pay the management fee payable to Castle
Harlan, Inc. (see Note 8) unless at the time of payment (A) no Event of Default
(as defined under the Bank Agreement) shall have occurred and be continuing or
would result from the payment thereof; (B) the Short-Term Revolving Credit (see
"Short-Term Revolving Credit" below) shall have been paid in full; and (C) the
Company meets the requisite Modified Funded Debt Ratio (as defined in the Bank
Agreement) and (iii) permit or make certain capital expenditures for computer
conversion projects in excess of $6,500,000 in the aggregate during fiscal 1998
and 1999 and the first fiscal quarter of 2000. As of March 30, 1999, the
foregoing Consolidated Net Worth covenant was further amended by agreement among
the Company and the banks to extend the date by which the Company must meet the
test from March 30, 1999 to May 27, 1999 which was subsequently extended to June
28, 1999, and to increase the amount of required Consolidated Net Worth to be at
least $44.0 million (see Note 9).
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 May 29, 1999 and August
29, 1998.
Management believes that cash flows generated by existing operations and
its available borrowings under the Bank Agreement (including the overadvance)
will be sufficient to fund its ongoing operations (see Note 9).
Availability under the Revolving Credit and Gold Facilities is subject to a
borrowing base limitation (the Borrowing Base) based on the aggregate of certain
percentages of Eligible Receivables (as defined in the Revolving Credit and Gold
Facilities) and Eligible Inventory (as defined in the Revolving Credit and Gold
Facilities) of the Company. The Borrowing Base is recalculated each month. If
the aggregate amount of loans and other extensions of credit under the Revolving
Credit and Gold Facilities exceeds the Borrowing Base, the Company must
immediately repay or cash collateralize its obligations under the Revolving
Credit and Gold Facilities to the extent of such excess. At May 29, 1999, the
Company had $1,312,000 available under the Revolving Credit Facility and $73,000
available under the Gold Facility.
The Bank Agreement contains certain customary events of default, including
nonpayment, misrepresentation, breach of covenant, bankruptcy, ERISA, judgments,
change of control and cross defaults. In addition, the Bank Agreement provides
that it shall be an Event of Default if the Company or any of its subsidiaries
(other than its Mexican subsidiary) shall be enjoined or restrained from
conducting any material part of its business for more than 30 days.
CONSIGNED GOLD
Under the Company's gold consignment/loan arrangements, the Company has the
ability to have on consignment up to 26,000 ounces of gold or alternatively to
borrow up to $10 million for the purchase of gold. Under these arrangements, the
Company is limited to a maximum value of $10 million in consigned inventory
and/or gold loan funds. For the nine months ended May 29, 1999 and May 30, 1998,
the Company expensed approximately $181,000 and $205,000, 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 May 29, 1999 and August 29, 1998, the
Company held approximately 19,611 ounces and 13,846 ounces, respectively, valued
at $5.3 million and $3.8 million, respectively, of gold on consignment from one
of its lenders.
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SHORT-TERM REVOLVING CREDIT
On August 26, 1998, the Company obtained a Short-Term line of credit (as
amended, the Short-Term Revolving Credit), pursuant to which the Company may
borrow up to $8 million from BankBoston, N.A. (BankBoston), from time to time.
The Short-Term Revolving Credit was initially set to expire on March 31, 1999,
but on March 30, 1999 was extended through May 27, 1999 and as of May 27, 1999
was further extended through June 28, 1999. At May 29, 1999 and August 29, 1998,
the Company had $8,000,000 and $7,267,000, respectively, available under the
Short-Term Revolving Credit. Amounts outstanding under the Short-Term Revolving
Credit bear interest at either fixed or floating rates based upon the interest
rate option selected by the Company. The Short-Term Revolving Credit expired on
June 28, 1999. See Note 9.
The long-term debt outstanding as of May 29, 1999, matures as follows (in
thousands):
<TABLE>
<CAPTION>
Amount
Fiscal Year Ending Maturing
-----------
<S> <C>
1999 $ 375
2000 1,750
2001 2,500
2002 32,938
2003 8,500
Thereafter 94,500
-----------
$ 140,563
-----------
-----------
</TABLE>
The weighted average interest rate of debt outstanding under the Bank
Agreement as of May 29, 1999 and August 29, 1998, was 10.0% and 10.3%,
respectively. The weighted average interest rate under the Short-Term Revolving
Credit as of May 29, 1999 and August 29, 1998, was 7.8% and 8.5%, respectively.
(5) COMMITMENTS AND CONTINGENCIES
Certain Company facilities and equipment are leased under agreements
expiring at various dates through 2005.
The Company is a party to certain contracts with some of its sales
representatives whereby the representatives have purchased from their
predecessor the right to sell the Company's products in a territory. The
contracts generally provide that the value of these rights is primarily
determined by the amount of business achieved by a successor sales
representative and is therefore not determinable in advance of performance by
the successor sales representative.
The Company is not party to any pending legal proceedings other than
ordinary routine litigation incidental to the business. In management's opinion,
adverse decisions on those legal proceedings, in the aggregate, would not have a
materially adverse impact on the Company's results of operations, cash flows or
financial position.
(6) INCOME TAXES
For the nine months ended May 29, 1999 and May 30, 1998, the Company
expensed $90,000 and $0, respectively, related to state income taxes. There is
no federal income tax provision or benefit as a valuation allowance exists due
to the net operating losses incurred by the Company.
(7) 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. As of May 29, 1999, the Company had issued and outstanding 100,000 shares
of Series A Preferred, 375,985 shares of Series B Preferred and 375,985 shares
of Common Stock.
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<PAGE>
SERIES A PREFERRED STOCK (SERIES A PREFERRED)
The holders of shares of Series A Preferred are not entitled to voting
rights. Dividends on the Series A Preferred are payable in cash, when, as and if
declared by the board of directors of the Company, out of funds legally
available therefor, on a quarterly basis. Dividends on the Series A Preferred
accrue from the date of issuance (December 16, 1996) or the last date to which
dividends have been paid at a rate of 12% 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% 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% 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. 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.
So long as shares of the Series A Preferred and Series B Preferred remain
outstanding, the Company may not declare, pay or set aside for payment any
dividends on the Common Stock.
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 5.1% of the
outstanding shares of Common Stock on a fully diluted basis, which also includes
stock options), at an initial exercise price of $6.67 per share, at any time on
or after December 16, 1997, and on or before January 31, 2008.
In accordance with a subscription agreement entered into by the Company and
CHPII and certain of its affiliates (the Castle Harlan Group), the Company
granted the Castle Harlan Group certain registration rights with respect to the
shares of capital stock owned by them pursuant to which the Company agreed,
among other things, to effect the registration of such shares under the
Securities Act of 1933, as amended, at any time at the request of the Castle
Harlan Group. The Company also granted to the Castle Harlan Group unlimited
piggyback registration rights on certain registrations of shares of capital
stock by the Company.
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<PAGE>
STOCK-BASED COMPENSATION PLAN
The Company has a stock option plan (the 1997 Stock Option Plan), effective
as of July 29, 1997, for which a total of 69,954 shares of Common Stock have
been reserved for issuance and 47,741 of those shares were available for grant
to directors and employees of the Company as of May 29, 1999. 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.
INCENTIVE STOCK PURCHASE PLAN
On July 7, 1998 the stockholders of the Company unanimously approved and
adopted the Commemorative Brands, Inc. Incentive Stock Purchase Plan (the Plan).
Pursuant to the terms of the Plan, the Company may from time to time offer
shares of the Company's Series B Preferred Stock and Common Stock to employees,
consultants and independent sales representatives who are determined to be
eligible to purchase shares pursuant to the Plan by the Plan Administrator (as
defined in the Plan) upon such terms and at such prices as are set forth in the
Plan and as are determined by the Plan Administrator. To date, no shares have
been issued pursuant to the Plan.
(8) RELATED - PARTY TRANSACTIONS
The Company had agreed to indemnify CHPII pursuant to an indemnification
agreement, dated August 26, 1998 for any amounts that may be incurred by CHPII
under CHPII's guaranty of the Company's obligations under the Short-Term
Revolving Credit (see Note 4). The indemnification agreement was terminated as
of June 28, 1999 (see Note 9).
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, former 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 was due and payable in full on June 16, 2003, and which
bore interest at the rate of 5.77% per annum, payable annually on the 15th of
June. Mr. Brennan granted to the Company a security interest in the shares
acquired by him and his interest in the voting trust into which the shares were
deposited as collateral security for the repayment in full of the promissory
note. As of May 11, 1999, in connection with the termination of Mr. Brennan's
employment, the Company repurchased for $25,000 in cash plus the return and
cancellation of Mr. Brennan's $75,000 promissory note, all of the shares
purchased by Mr. Brennan at the purchase price paid by him therefor. In
connection with the purchase by another officer of the Company of shares on June
30, 1998, the Company 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 $25,000 loan was repaid in full to
the Company on February 15, 1999. The balance of $100,000 was 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 was 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
14
<PAGE>
management fee in the Event of a Default by the Company in the payment of
principal, Redemption Price or Purchase Price (both as defined in the
Indenture), Interest, or Liquidated Damages (if any) on the Notes. The Bank
Agreement prohibits payment of the management fee unless at the time of
payment (i) no Event of Default (as defined in the Bank Agreement) shall have
occurred and is continuing or would result from the payment of the management
fee; (ii) the Short-Term Revolving Credit shall have been paid in full; and
(iii) the Company meets the requisite Modified Funded Debt Ratio (as defined
in the Bank Agreement). The management fee for the nine months ended May 29,
1999 has been accrued but not paid, and is included in accounts payable and
accrued expenses. The Short-Term Revolving Credit was terminated on June 28,
1999 (see Note 9).
(9) SUBSEQUENT EVENTS
As of June 28, 1999, (a) the Short-Term Revolving Credit was terminated
and (b) the banks under the Company's Bank Agreement agreed to further amend the
Bank Agreement to, among other things, (i) delete the Consolidated Net Worth
covenant, (ii) amend certain other financial covenants and (iii) provide for
additional loans to the Company of up to $4 million in excess of the
availability under the Borrowing Base for a period of up to 120 days expiring on
December 30, 1999; PROVIDED that the funds held in a cash collateral account
that had been pledged to secure the CHPII guaranty of the Company's obligations
under the Short-Term Revolving Credit be converted into $8.5 million face amount
of Series B Preferred or other capital stock of the Company having terms
acceptable to the banks. Upon the conversion of the funds in the cash collateral
account into shares of Series B Preferred, the guarantee obligations of CHPII
and the indemnification obligations of the Company were satisfied and released.
15
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
For purposes of the discussion contained in this Item 2, unless the
context otherwise requires (i) the term "CBI" refers to Commemorative Brands,
Inc. prior to the consummation of the Acquisitions, (ii) the term "ArtCarved"
refers to the predecessor assets, businesses, and operations of CJC acquired by
CBI, (iii) the term "Balfour" refers to the predecessor class rings assets,
businesses and operations of L. G. Balfour Company, Inc. acquired by CBI, and
(iv) the term "the Company" refers to CBI consolidated with its subsidiaries as
combined with ArtCarved and Balfour after giving effect to the Acquisitions.
On December 16, 1996, CBI completed the Acquisitions. CBI was initially
formed by Castle Harlan Partners II, L.P. ("CHPII"), a Delaware limited
partnership and private equity investment fund, in March 1996 for the purpose of
acquiring ArtCarved and Balfour. Until December 16, 1996, CBI engaged in no
business activities other than in connection with the Acquisitions and the
financing thereof.
The Company uses a 52/53 week fiscal year ending on the last Saturday of
August.
RESULTS OF OPERATIONS
The results of operations of the Company for the nine months ended May 29,
1999 and May 30, 1998, were negatively impacted by the excess costs and
inefficiencies incurred as a result of the additional labor and overhead that
were necessary as a result of the complications that arose from the integration
of the different order entry and manufacturing processes required to manufacture
Balfour rings following the consolidation of the former Balfour Attleboro and
North Attleboro, Massachusetts operations into the Company's Austin, Texas
facilities. Although the consolidation of the Attleboro and North Attleboro,
Massachusetts operations into the Company's Austin, Texas facilities was
substantially completed in the fiscal year ended August 29, 1998, there can be
no assurance that the operations formerly conducted by each of the Company's
predecessors will be fully integrated or as to the amount of any cost savings
that may ultimately result from such integration.
During January 1998, the Company began a computer project which, among
other things, is intended to (i) convert the more inefficient Balfour computer
systems to the more efficient ArtCarved systems, (ii) unify the Company's
computer system thereby reducing computer operation and maintenance costs,
streamlining and making the Company's order entry system and process more
accurate, and (iii) eliminate 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 September 1999, although there can be no
assurance that it will be completed by that date.
THE COMPANY
THREE MONTHS ENDED MAY 29, 1999 AS COMPARED TO THE THREE MONTHS ENDED MAY
30, 1998
NET SALES - Net sales increased $7.6 million, or 17.6%, to $50.7 million
for the three months ended May 29, 1999, as compared to $43.1 million for the
three months ended May 30, 1998. The increase in net sales was a result of an
8.4% increase in net sales of class rings in the high school in-school sales
channel, high school in-store sales channel and college bookstore sales channel,
a 4.9% increase in the net sales of recognition and affinity jewelry directly
related to an increase in sales of mothers' rings, and a 4.3% increase in the
net sales of fine paper products, which primarily resulted from an increase in
sales of product as a result of the increased number of sales representatives.
Of the 8.4% increase in the sales of class rings, 6.6% was the result of
increased unit sales in the high school in-school sales channel which
principally resulted from an increased numbers of sales representatives.
GROSS PROFIT - Gross profit increased $5.5 million, or 24.3%, to $28.5
million for the three months ended May 29, 1999, as compared to $23.0 million
for the three months ended May 30, 1998. As a percentage of net sales, gross
profit was 56.3% for the three months ended May 29, 1999 compared to 53.3% for
the three months ended May 30, 1998. The increase in gross profit was primarily
a result of increased unit sales in the high school in-school sales channel,
sales of mothers' rings and sales of fine paper products. The increase in gross
profit as a percentage of net sales was primarily due to (1) the change in the
product mix of sales of class rings in the high school in-school channel to
higher profit items and (2) efficiencies gained in overhead absorption as a
result of
16
<PAGE>
increased units sold in the high school in-school sales channel and increased
sales of mothers' rings.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES - Selling, general and
administrative expenses increased $3.3 million, or 17.4%, to $22.2 million for
the three months ended May 29, 1999, compared to $18.9 million for the three
months ended May 30, 1998. As a percentage of net sales, selling, general and
administrative expenses remained the same at 43.8% for the three months ended
May 29, 1999 and the three months ended May 30, 1998. Selling expenses as a
percentage of sales were greater in the three months ended May 29, 1999 than
during the same period in the prior year as a result of increased commissions to
sales representatives due to increased unit sales in the high school in-school
sales channel and a change in product mix experienced in the sales of in-school
class rings and of fine paper products which was partly offset by a decrease in
general and administrative expenses.
OPERATING INCOME - As a result of the foregoing, operating income
increased $2.3 million to $6.4 million for the three months ended May 29, 1999
compared to $4.1 million for the three months ended May 30, 1998. As a
percentage of net sales, operating income increased to 12.5% for the three
months ended May 29, 1999 compared to 9.4% for the three months ended May 30,
1998.
INTEREST EXPENSE, NET - Interest expense, net, was $3.7 million for the
three months ended May 29, 1999 and $3.8 million for the three months ended May
30, 1998. The interest expense was attributable to interest on the Bank
Agreement under which the average outstanding balance increased to $49.8 million
for the three months ended May 29, 1999 from $42.0 million for the three months
ended May 30, 1998, at rates ranging from 7.8% to 9.5%. Interest on the $90.0
million of senior subordinated notes remained constant at a rate of 11%.
PROVISION FOR INCOME TAXES - For the three months ended May 29, 1999 and
May 30, 1998, the Company expensed $30,000 and $0, respectively, related to
state income taxes. There is no federal income tax provision or benefit as a
valuation allowance exists due to the net operating losses incurred by the
Company.
NET INCOME - As a result of the foregoing, net income increased $2.4
million to $2.7 million for the three months ended May 29, 1999 compared to a
net income of $0.3 million for the three months ended May 30, 1998.
PREFERRED DIVIDENDS - Preferred dividends of $0.3 million were accrued for
the three months ended May 29, 1999 and for the three months ended May 30, 1998.
No cash dividends were paid in the three months ended May 29, 1999 or in the
three months ended May 30, 1998.
NET INCOME TO COMMON STOCKHOLDERS - As a result of the foregoing, net
income to common stockholders increased an aggregate of $2.4 million to $2.4
million for the three months ended May 29, 1999 compared to net income to common
stockholders of $0 for the three months ended May 30, 1998.
NINE MONTHS ENDED MAY 29, 1999 AS COMPARED TO THE NINE MONTHS ENDED MAY
30, 1998
NET SALES - Net sales increased $9.6 million, or 7.6%, to $135.2 million
for the nine months ended May 29, 1999, as compared to $125.6 million for the
nine months ended May 30, 1998. The increase in net sales was the result of a
3.5% increase in net sales of class rings, a 2.2% increase in sales of fine
paper products, and a 1.9% increase in the sales of recognition and affinity
jewelry. Net sales in the high school in-school sales channel increased 4.6% as
a result of increased unit sales of 3.1% which resulted primarily from an
increase in the number of sales representatives and a 1.5% increase in net sales
as a result of the change in product mix, offset by a 0.9% decrease in net sales
of rings in the high school in-store sales channel and the college bookstores
sales channel. The increase in sales of fine paper products resulted primarily
from an increase in the number of sales representatives and a majority of the
increase in the sales of recognition and affinity jewelry was primarily
attributable to increased sales of mothers' rings.
GROSS PROFIT - Gross profit increased $8.4 million, or 12.3%, to $76.9
million for the nine months ended May 29, 1999, as compared to $68.5 million for
the nine months ended May 30, 1998. As a percentage of net sales, gross profit
was 56.9% for the nine months ended May 29, 1999 compared to 54.5% for the nine
months ended May 30, 1998. Of the 2.4% increase in gross profit as a percentage
of net sales, 2.0% of the increase was primarily due to labor and overhead
efficiencies in both the ring manufacturing plant and the fine paper
manufacturing plant. The remaining 0.4% of the gross profit increase was due to
the change in product mix of the
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<PAGE>
sales in the high school in-school channel of both ring products and graphic
products to the higher profit margin units.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES - Selling, general and
administrative expenses increased $7.7 million, or 14.3%, to $61.7 million for
the nine months ended May 29, 1999, compared to $54.0 million for the nine
months ended May 30, 1998. As a percentage of net sales, selling, general and
administrative expenses increased to 45.7% for the nine months ended May 29,
1999, compared to 43.0% for the nine months ended May 30, 1998. The 2.7%
increase in selling, general and administrative expenses, as a percentage of net
sales primarily resulted from increased commissions due to the increased number
of units sold and the change in sales mix in the high school class rings
in-school channel and fine paper products to products with higher commissions.
OPERATING INCOME - As a result of the foregoing, operating income
increased $0.7 million to $15.2 million for the nine months ended May 29, 1999
compared to $14.5 million for the nine months ended May 30, 1998. As a
percentage of net sales, operating income decreased to 11.2% for the nine months
ended May 29, 1999 compared to 11.5% for the nine months ended May 30, 1998.
INTEREST EXPENSE, NET - Interest expense, net, was $11.3 million for the
nine months ended May 29, 1999 and $11.1 million for the nine months ended May
30, 1998. The increase in interest expense resulted primarily from increased
interest on the Bank Agreement which increased to an average outstanding balance
of $47.9 million from $37.7 million for the nine months ended May 29, 1999 and
May 30, 1998, respectively, at rates ranging from 7.8% to 10.3%. Interest on the
$90.0 million of senior subordinated notes remained constant at a rate of 11%.
PROVISION FOR INCOME TAXES - For the nine months ended May 29, 1999 and
May 30, 1998, the Company expensed $90,000 and $0, respectively, related to
state income taxes. There is no federal income tax provision or benefit as a
valuation allowance exists due to the net operating losses incurred by the
Company.
NET INCOME - As a result of the foregoing, net income increased $0.4
million to $3.8 million for the nine months ended May 29, 1999 compared to net
income of $3.4 million for the nine months ended May 30, 1998.
PREFERRED DIVIDENDS - Preferred dividends of $0.9 million were accrued for
the nine months ended May 29, 1999 and for the nine months ended May 30, 1998.
No cash dividends were paid in the nine months ended May 29, 1999 or in the nine
months ended May 30, 1998.
NET INCOME TO COMMON STOCKHOLDERS - As a result of the foregoing, net
income to common stockholders increased an aggregate of $0.4 million to $2.9
million for the nine months ended May 29, 1999 compared to $2.5 million for the
nine months ended May 30, 1998.
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. The Company
has 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 May 29, 1999, the Company had a $35.0 million aggregate borrowing
limit under its Revolving Credit and Gold Facilities and an $8.0 million
short-term line of credit expiring March 31, 1999 (subsequently extended to June
28, 1999) (as extended, the "Short-Term Revolving Credit"). The Company had
$27,438,000 outstanding
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<PAGE>
under the Revolving Credit Facility, $5,267,000 outstanding under the Gold
Facility and no borrowings outstanding under the Short-Term Revolving Credit
at May 29, 1999. At May 29, 1999, the Company had $1,312,000 available under
its Revolving Credit Facility, $73,000 available under its Gold Facility and
$8,000,000 available under its Short-Term Revolving Credit. The Company's
liquidity needs arise primarily from debt service on the Bank Agreement and
the Notes (defined in Note 4 and Note 9 to the Consolidated financial
statements), working capital and capital expenditure requirements, and
payments required under a Management Agreement with Castle Harlan, Inc. ("CHP
Management Fee") (see Note 8, Related-Party Transactions).
As of June 28, 1999, (a) the Short-Term Revolving Credit was terminated
and (b) the banks under the Company's Bank Agreement agreed to further amend the
Bank Agreement to, among other things, (i) delete the Consolidated Net Worth
covenant, (ii) amend certain other financial covenants and (iii) provide for
additional loans to the Company of up to $4 million in excess of the
availability under the Borrowing Base for a period of up to 120 days expiring on
December 30, 1999; provided that the funds held in a cash collateral account
that had been pledged to secure a CHPII guaranty of the Company's obligations
under the Short-Term Revolving Credit be converted into $8.5 million face amount
of Series B Preferred or other capital stock of the Company having terms
acceptable to the banks. See Note 9.
Management believes that cash flows generated by existing operations and
its available borrowings under its Bank Agreement including the $4 million
overadvance will be sufficient to fund its ongoing operations.
Operating activities provided cash of $1.4 million for the nine months
ended May 29, 1999 as a result of net income of $3.8 million, adjusted to
eliminate expenses for non-cash items of $5.7 million and partially offset by
changes in assets and liabilities of $8.1 million. The $8.1 million of cash used
by changes in assets and liabilities resulted from increases in accounts
receivable of $21.4 million and other assets of $0.6 million, which were offset
by decreases in inventories of $1.6 million, prepaid expenses and other current
assets of $1.8 million and increases in bank overdraft, accounts payable,
accrued expenses and other long-term liabilities of $10.7 million. These
fluctuations generally reflect the seasonality of the Company's business. The
seasonal fluctuations usually result in higher sales during the first three
fiscal quarters of the year and correspondingly higher levels of accounts
receivable, and bank overdraft, accounts payable and accrued expenses. In
addition, inventories decreased as of the end of the third fiscal quarter as a
result of less finished goods and raw materials due to low volume of ring sales
in the fourth fiscal quarter of the year. Prepaid and other current assets
usually decline during the first three fiscal quarters as a result of the
amortization of prepaid advertising expenses that are paid for in the fourth
fiscal quarter of the year. The increase in other assets for the nine months
ended May 29, 1999 was a result of an increase in the manufacture of samples for
new sales representatives. The increase in bank overdraft, accounts payable,
accrued expenses and other long-term liabilities was an increase of $5.3 million
in commissions owed to sales representatives, an increase of customer deposits
of approximately $1.2 million, an increase of $1.1 million in accrued payroll
and bonuses, an increase of $0.9 million in accrued preferred dividends and an
increase of $2.5 million in accrued interest, offset by $0.3 million decrease in
accounts payable.
Comparing the nine months ended May 29, 1999 with the nine months ended
May 30, 1998, the Company's operating activities provided cash of $1.4 million
for the nine months ended May 29, 1999 and used $1.4 million for the nine months
ended May 30, 1998. Changes in assets and liabilities used cash of $10.3 million
for the nine months ended May 30, 1998 and $8.1 million for the nine months
ended May 29, 1999, a decrease in cash used of $2.2 million. For the nine months
ended May 29, 1999, accounts receivable increased $9.3 million more than the
nine months ended May 30, 1998 mainly due to the increase in net sales for the
three months ended May 29, 1999 of $7.6 million. Inventories decreased $2.1
million more during the nine months ended May 29, 1999 than the nine months
ended May 30, 1998 as a result of changes in product mix and the Company
producing product more efficiently and quickly in the current year. During the
period ended May 30, 1998, the Company reduced its prepaid expenses and other
current assets by $2.6 million, whereas prepaid expenses and other current
assets only decreased by $1.8 million for the nine months ended May 29, 1999.
The difference in prepaid expenses and other current assets between the two
years resulted from a reduction in advances to sales representatives paid in
advance of commissions earned in the current year. The increase in bank
overdraft, accounts payable, accrued expenses and other long-term liabilities of
approximately $9.9 million for the nine months ended May 29, 1999 compared to
the nine months ended May 30, 1998 was a result of an increase of approximately
$5.6 million in accounts payable, an increase of $2.2 million in commissions
owed to sales representatives resulting from increased sales of rings in the
high school in-school sales channel and increased sales of fine paper products,
an
19
<PAGE>
increase of $1.2 million in accrued payroll and bonuses, an increase of $1.2
million in accrued preferred dividends and an increase of $1.7 million in
other accrued expenses partially offset by a $2.0 million decrease in
long-term liabilities related to SFAS No. 106.
The Company used $2.1 million more cash in the nine months ended May 29,
1999 than in the nine months ended May 30, 1998 for investing activities. The
increase reflects the capital expenditures made by the Company for its computer
system and related costs.
For a description of the Company's debt, please see Note 4 and Note 9 to
the consolidated financial statements included herein.
YEAR 2000 COMPLIANCE
YEAR 2000 ISSUE. Many software applications, hardware and equipment and
embedded chip systems identify dates using only the last two digits of the year.
These products may be unable to distinguish between dates in the year 2000 and
dates in the year 1900. That inability (referred to as the "Year 2000" issue),
if not addressed, could cause applications, equipment or systems to fail or to
provide incorrect information after December 31, 1999, or, when using dates
after December 31, 1999. This in turn could have an adverse effect on the
Company due to the Company's direct dependence on its own applications,
equipment and systems and indirect dependence on those of other entities with
which the Company must interact.
COMPLIANCE PROGRAM. In order to address the Year 2000 issue, the Company
has conducted a review of its computer systems, applications and equipment and
has contacted external parties (such as suppliers) regarding their preparedness
for year 2000 to identify the systems that could be affected by the Year 2000
problem and is making certain investments in its software applications and
systems to ensure that the Company's systems and applications function properly
to and through the year 2000.
COMPANY STATE OF READINESS. The awareness phase of the Year 2000 project
has begun with a corporate-wide awareness program which will continue to be
updated throughout the life of the project. The assessment phase of the project
involves, among other things, efforts to obtain representations and assurances
from third parties, including third party vendors, that their hardware and
equipment, embedded chip systems and software being used by or impacting the
Company or any of its business units are or will be modified to be Year 2000
compliant. However, the Company does not expect that responses from such third
parties will be conclusive. As a result, management cannot predict the potential
consequences if these or other third parties are not Year 2000 compliant. The
exposure associated with the Company's interaction with third parties is also
currently being evaluated.
The Company expects its Year 2000 conversion project to be completed by
September 1999, although there can be no assurance that it can be completed by
that date. Failure to meet this schedule could have a material impact on the
operations of the Company.
COSTS TO ADDRESS YEAR 2000 COMPLIANCE ISSUES. While the total cost to the
Company of the Year 2000 project is still being evaluated, management currently
estimates that the costs to be incurred by the Company will range from $0.5
million to $1.0 million. The materiality of the costs of the project and the
date when the Company believes it will complete the Year 2000 project are based
on management's best estimates, which were derived utilizing numerous
assumptions of future events, including the continued availability of certain
resources and other factors. However, there can be no guarantee that these
estimates will be achieved, and actual results could differ materially from
those anticipated. Specific factors that might cause such material differences
include, but are not limited to, the availability and cost of personnel trained
in this area, the ability to locate and correct all relevant computer codes and
similar uncertainties. Through May 29, 1999, the Company has expended $198,000
related to its Year 2000 compliance assessment.
RISK OF NON-COMPLIANCE AND CONTINGENCY PLAN. The major applications which
pose the greatest Year 2000 risks for the Company if implementation of the Year
2000 compliance program is not successful are order
20
<PAGE>
management applications, production applications, financial applications and
related third party software. Potential problems if the Year 2000 compliance
program is not successful include the Company's inability to produce product,
loss of customers and the inability to perform its other financial and
accounting functions.
The goal of the Year 2000 project is to ensure that all of the critical
systems and processes which are under the direct control of the Company remain
functional. However, because certain systems and processes may be interrelated
with systems outside of the control of the Company, there can be no assurance
that all implementations will be successful. Accordingly, as part of the Year
2000 project, contingency and business plans will be developed to respond to any
failures as they may occur. Such contingency and business plans are scheduled to
be completed during calendar 1999. Management does not expect the costs to the
Company of the Year 2000 project to have a material adverse effect on the
Company's financial position, results of operations or cash flows. However,
based on information available at this time, the Company cannot conclude that
any failure of the Company or third parties to achieve Year 2000 compliance will
not adversely affect the Company.
DISCLOSURE REGARDING FORWARD LOOKING STATEMENTS
This report includes forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended. Although management believes that
the expectations reflected in such forward looking statements are based upon
reasonable assumptions, the Company can give no assurance that these
expectations will be achieved. Any change in the following factors may impact
the achievement of results in forward-looking statements: the price of gold and
precious, semiprecious and synthetic stones; the Company's access to students
and consumers in schools; the seasonality of the Company's business; regulatory
and accounting rules; the Company's relationship with its independent sales
representatives; fashion and demographic trends; general economic, business and
market trends and events, especially during peak buying seasons for the
Company's products; the Company's ability to respond to customer change orders
and delivery schedules; development and operating costs; competitive pricing
changes; successful completion of management initiatives designed to achieve
operating efficiencies; and completion of Year 2000 compliance projects with
respect to internal and external computer-based systems. The foregoing factors
are not exhaustive. New factors may emerge or changes may occur that impact the
Company's operations and businesses. Forward-looking statements attributable to
the Company or persons acting on behalf of the Company are expressly qualified
on the foregoing or such other factors as may be applicable.
21
<PAGE>
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
There are no materials pending legal proceedings to which the Company is a
party or to which any of its property is subject. The Company monitors all
claims, and the Company accrues for those, if any, which management believes are
probable of payment. The Company has no pending administrative proceedings
related to environmental matters involving governmental authorities.
ITEM 2. CHANGES IN SECURITIES
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
3.6 Certificate of Increase of Series B Preferred Stock dated
June 25, 1999.
10.18 Waiver and Sixth Amendment to Revolving Credit, Term Loan
and Gold Consignment Agreement.
10.19 Seventh Amendment to Revolving Credit, Term Loan, and
Gold Consignment Agreement.
27. Financial Data Schedule for the period ended
May 29, 1999.
(b) The Company did not file any reports on Form 8-K during the nine
months ended May 29, 1999.
22
<PAGE>
COMMEMORATIVE BRANDS, INC.
SIGNATURES
Commemorative Brands, Inc. has duly caused this report to be signed on its
behalf by the undersigned thereunto duly authorized.
COMMEMORATIVE BRANDS, INC.
By: /s/Sherice P. Bench
------------------------------
SHERICE P. BENCH
VICE PRESIDENT FINANCE AND
PRINCIPAL ACCOUNTING OFFICER
DATE: JULY 13, 1999
23
<PAGE>
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. A Certificate of Increase of Series B Preferred Stock
increasing by 50,000 the number of shares of the Corporation designated as
Series B Preferred Stock was filed by the Corporation with the Secretary of
State of Delaware on June 10, 1998; and
3. 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 75,000 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 25th day of June,
1999.
COMMEMORATIVE BRANDS, INC.
By: /s/ Clyde W. Walls
Name: Clyde W. Walls
Title: Vice President, Secretary and Treasurer
<PAGE>
WAIVER AND SIXTH AMENDMENT TO REVOLVING CREDIT,
TERM LOAN AND GOLD CONSIGNMENT AGREEMENT
This Waiver and Sixth Amendment dated as of May 27, 1999 (the "Amendment")
is made pursuant to 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 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 13.5 OF THE CREDIT AGREEMENT. SECTION
13.5 of the Credit Agreement is hereby amended in its entirety to read as
follows:
"Section 13.5 CONSOLIDATED NET WORTH. The Borrower will not permit
Consolidated Net Worth on June 28, 1999 to be less than $44,000,000. On
June 29, 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 2. WAIVER TO SECTION 12.15 OF THE CREDIT AGREEMENT. The Banks
and the Agent hereby agree to waive the Borrower's compliance with Section
12.15 of the Credit Agreement to the extent necessary to permit the Borrower
to extend the maturity date of the Short Term Revolving Credit Note;
PROVIDED, HOWEVER the maturity date of the Short Term Revolving Credit Note
shall be on or after June 29, 1999.
Section 3. 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 4. 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
<PAGE>
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 5. 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.
Section 6. 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 7. 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).
-2-
<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: 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 BRANDOW
-------------------------------------------
NAME: ROBERT BRANDOW
TITLE: MANAGING DIRECTOR
LASALLE NATIONAL BANK
BY: /s/ CHARLES CORBISIERO
-------------------------------------------
NAME: CHARLES CORBISIERO
TITLE: CORPORATE BANKING OFFICER
BANK AUSTRIA CREDITANSTALT CORPORATE FINANCE, INC.
(f/k/a CREDITANSTALT-BANKVEREIN)
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
FLEET PRECIOUS METALS INC.
BY: /s/ MICHAEL F. O'NEILL
-------------------------------------------
NAME: MICHAEL F. O'NEILL
TITLE: BANKING OFFICER
-3-
<PAGE>
HELLER FINANCIAL, INC.
BY: /s/ JOHN A. FINNERTY
-------------------------------------------
NAME: JOHN A. FINNERTY
TITLE: SENIOR VICE PRESIDENT
FLEET BUSINESS CREDIT CORPORATION
(f/k/a SANWA BUSINESS CREDIT CORPORATION)
BY: /s/ MICHAEL F. O'NEILL
-------------------------------------------
NAME: MICHAEL F. O'NEILL
TITLE: VICE PRESIDENT
UNION BANK OF CALIFORNIA, N.A.
BY: /s/ EMILY DENNY MCKNIGHT
-------------------------------------------
NAME: EMILY DENNY MCKNIGHT
TITLE: VICE PRESIDENT
-4-
<PAGE>
SEVENTH AMENDMENT TO REVOLVING CREDIT,
TERM LOAN AND GOLD CONSIGNMENT AGREEMENT
Seventh Amendment dated as of June 28, 1999 (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 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 "Borrowing Base" is hereby amended in
its entirety to read as follows:
"BORROWING BASE. At the relevant
time of reference thereto, an amount determined by the
Dollar Agent by reference to the most recent Borrowing Base
Report delivered to the Banks and the Agents pursuant to
Section 11.4(f), which is equal to the sum of, without
duplication:
(a) 90% of the Fair Market Value of the Precious Metal
content of Eligible Inventory held by the Borrower at
Borrower Permitted Inventory Locations, PLUS
(b) 70% of the Fair Market Value of the Precious Metal
content of Eligible Inventory held by, or in transit to or
from, Specified Refiners (net of any amounts advanced by
such Specified Refiners to the Borrower and included in
Eligible Inventory held by the Borrower at Borrower
Permitted Inventory Locations), PLUS
(c) 80% of the Fair Market Value of Silver and Platinum
contained in Eligible Inventory and held by the Borrower at
Borrower Permitted Inventory Locations, PLUS
<PAGE>
(d) 50% of the net book value (determined on a first-in
first-out basis at lower of cost or market) of non-precious
metals contained in Eligible Inventory and held by the
Borrower at Borrower Permitted Inventory Locations, PLUS
(e) 30% of the net book value (determined on a first-in
first-out basis at lower of cost or market) of the value of
precious and semi-precious stones contained in Eligible
Inventory and held by the Borrower at Borrower Permitted
Inventory Locations, PLUS
(f) 30% of the net book value (determined on a first-in
first-out basis at lower of cost or market) of Eligible
Inventory consisting of raw material paper products or
graphics inventory (excluding work-in-process and finished
goods inventory) and held by the Borrower at Borrower
Permitted Inventory Locations, PLUS
(g) the lesser of (i) 40% of the Fair Market Value of the
Precious Metal content of Eligible Inventory constituting
samples held in the ordinary course of business by sales
representatives or at retail locations and (ii) $1,000,000,
PLUS
(h) 80% of Eligible Accounts Receivable for which
invoices have been issued and are payable, PLUS
(i) the Overadvance Amount, MINUS
(j) $500,000, MINUS
(k) Reserves."
(b) The definition of "Consolidated Net Worth" is hereby
deleted in its entirety.
(c) The definition of "Consolidated Total Assets" is hereby
deleted in its entirety.
(d) The definition of "Consolidated Total Liabilities" is
hereby deleted in its entirety.
(e) SECTION 1.1 of the Credit Agreement is hereby further
amended by inserting the following definitions in the appropriate
alphabetical order:
"OVERADVANCE AMOUNT. $4,000,000 until the Overadvance
Termination Date and at all times thereafter $0."
"OVERADVANCE DATE. The date on which the Overadvance Amount
is first utilized by the Borrower."
-2-
<PAGE>
"OVERADVANCE TERMINATION DATE. The earlier to occur
of (i) one hundred twenty (120) days after the Overadvance Date and
(ii) December 30, 1999."
"RESERVES. As determined by the Agent, such amounts as the
Agent may from time to time establish and revise (a) to reflect events,
conditions, contingencies or risks which do or may (i) adversely affect
either (A) any Collateral, the rights of the Agent or any of the Banks
in any Collateral or its value or (B) the security interest and other
rights of the Agent or any of the Banks in the Collateral (including
the enforceability, perfection and priority thereof) or (ii) adversely
affect in any material respect the assets (other than any Collateral)
or business or financial condition of any of the Borrower or any of its
Subsidiaries or (b) to reflect the belief of the Agent that any
Borrowing Base Report or other collateral report or financial
information furnished by or on behalf of the Borrower to the Agent or
any of the Banks is or may have been incomplete, inaccurate or
misleading in any material respect."
Section 2. AMENDMENT TO SECTION 8.1 OF THE CREDIT AGREEMENT.
SECTION 8.1 of the Credit Agreement is hereby amended in its entirety
to read as follows:
"8.1 INTEREST ON LOANS. Except as otherwise provided in Section 8.20,
(a) Each Base Rate Loan shall bear interest for the period
commencing with the Drawdown Date thereof and ending on the last day of
the Interest Period with respect thereto at a rate per annum equal to
the sum of (i) the Base Rate PLUS (ii) the Base Rate Applicable Margin.
(b) Each Eurodollar Rate Loan shall bear interest for the
period commencing with the Drawdown Date thereof and ending on the last
day of the Interest Period with respect thereto at a rate per annum
equal to the sum of (i) the Eurodollar Rate PLUS (ii) the Eurodollar
Applicable Margin.
(c) The Borrower promises to pay interest on each Loan in
arrears on each Interest Payment Date with respect thereto.
Notwithstanding the foregoing, to the extent that the Outstanding Facility
Amounts exceed the Borrowing Base MINUS the Overadvance Amount, Revolving Credit
Loans equal to the amount of such excess shall bear interest at a rate per annum
equal to the sum of (i) the Base Rate PLUS (ii) three percent (3%)."
Section 3. ADDITION TO SECTION 10 OF THE CREDIT AGREEMENT. The
following new SECTION 10.22 is hereby added to the Credit Agreement:
"10.22. YEAR 2000 PROBLEM. The Borrower and its
Subsidiaries have reviewed the areas within their businesses and
operations which could be adversely affected by, and have developed a
program which shall be in effect on or before September 30, 1999 to
address the "Year 2000 Problem" (i.e. the risk that computer
applications used by the
-3-
<PAGE>
Borrower or any of its Subsidiaries may be unable to recognize and
perform properly date-sensitive functions involving certain dates prior
to and any date after December 31, 1999). Based upon such review, the
Borrower reasonably believes that the "Year 2000 Problem" will not have
any materially adverse effect on the business or financial condition of
the Borrower or any of its Subsidiaries. In addition, the Borrower
shall, within 30 days after written request by the Agent, provide to
the Banks a written report summarizing in reasonable detail the
Borrower's actions to comply with this covenant and the results of such
actions."
Section 4. AMENDMENT TO SECTION 11.4 OF THE CREDIT AGREEMENT. SECTION
11.4(b) of the Credit Agreement is hereby amended in its entirety to read as
follows:
"(b) as soon as practicable, but in any event not later
than (i) with respect to the fiscal quarters of the Borrower ending in
May and ending in November, forty (40) days after the end of each such
fiscal quarters of the Borrower and (ii) with respect to any other
fiscal quarters of the Borrower, forty-five (45) days after the end of
each such fiscal quarters of the Borrower, copies of the unaudited
consolidated balance sheet of the Borrower and its Subsidiaries as at
the end of such quarter, and the related consolidated statement of
income and consolidated statement of cash flow for the portion of the
Borrower's fiscal year then elapsed, all in reasonable detail and
prepared in accordance with generally accepted accounting principles,
together with a certification by the principal financial or accounting
officer or treasurer of the Borrower that the information contained in
such financial statements fairly presents the financial position of the
Borrower and its Subsidiaries on the date thereof (subject to year-end
adjustments);
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) 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, HOWEVER, subject
to (i), (ii) and (iii) above, 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
-4-
<PAGE>
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 6. 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>
8/31/99 3.30:1.00
11/30/99 3.50:1.00
2/28/00 - 8/31/00 3.30:1.00
11/30/00 and thereafter 2.30:1.00
</TABLE>
Section 7. 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>
8/31/99 $17,000,000
11/30/99 $15,091,000
2/28/00 $17,064,000
5/31/00 $20,206,000
8/31/00 $21,877,000
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 8. AMENDMENT TO SECTION 13.3 OF THE CREDIT AGREEMENT. SECTION
13.3 of the Credit Agreement is hereby amended by replacing the table
appearing therein with the following table: July 12, 1999
<TABLE>
<CAPTION>
Fiscal Year Amount
<S> <C>
1999 $5,750,000
2000 $5,100,000
2001 and thereafter $3,500,000
</TABLE>
-5-
<PAGE>
Section 9. 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>
8/31/99 1.00:1.00
11/30/99 - 2/28/00 1.00:1.00
5/31/00 1.10:1.00
8/31/00 1.25:1.00
11/30/00 - 8/31/01 1.60:1.00
11/30/01 and thereafter 1.75:1.00
</TABLE>
Section 10. AMENDMENT TO SECTION 13.5 OF THE CREDIT AGREEMENT. SECTION
13.5 of the Credit Agreement is hereby amended in its entirety to read as
follows:
[Intentionally omitted].
Section 11. 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;
(b) an amendment fee of $143,000 paid by the Borrower for
the PRO RATA account of each Bank based on such Bank's percentage of the
Total Commitment; and
(c) evidence that the Borrower has received not less than
$8,500,000 of additional equity on terms and conditions satisfactory to the
Agent.
Section 12. 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 13. 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.
Section 14. RELEASE. The Borrower, on its own behalf and on behalf of
its successors and assigns, hereby waives, releases and discharges the Agent
and each Bank and all of the affiliates of the Agent and each Bank, and all
of the directors, officers, employees, attorneys and agents of
-6-
<PAGE>
the Agent, each Bank and such affiliates, from any and all claims, demands,
actions or causes of action (known and unknown) arising out of or in any way
relating to the Loan Documents and any documents, agreements, dealings or
other matters connected with the Credit Agreement, in each case to the extent
arising (x) on or prior to the date hereof or (y) out of, or relating to,
actions, dealings or matters occurring on or prior to the date hereof. The
waivers, releases, and discharges in this SECTION 13 shall be effective
regardless of whether the conditions to this Amendment are satisfied and
regardless of any other event that may occur or not occur after the date
hereof.
Section 15. 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 16. 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 17. 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).
-7-
<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: 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. BRANDOW
---------------------------
NAME: ROBERT J. BRANDOW
TITLE: MANAGING DIRECTOR
LASALLE BANK NATIONAL ASSOCIATION
BY: /s/ DAVID P. GIBSON
---------------------------
NAME: DAVID P. GIBSON
TITLE: VICE PRESIDENT
BANK AUSTRIA CREDITANSTALT CORPORATE FINANCE, INC.
(f/k/a CREDITANSTALT-BANKVEREIN)
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
<PAGE>
FLEET PRECIOUS METALS INC.
BY: /s/ MICHAEL F. O'NEILL
---------------------------
NAME: MICHAEL F. O'NEILL
TITLE: BANKING OFFICER
HELLER FINANCIAL, INC.
BY: /s/ JOHN FINNERTY
---------------------------
NAME: JOHN FINNERTY
TITLE: SENIOR VICE PRESIDENT
FLEET BUSINESS CREDIT CORPORATION
(f/k/a SANWA BUSINESS CREDIT CORPORATION)
BY: /s/ MICHAEL F. O'NEILL
---------------------------
NAME: MICHAEL F. O'NEILL
TITLE: VICE PRESIDENT
UNION BANK OF CALIFORNIA, N.A.
BY: /s/ EMILY DENNY MCKNIGHT
---------------------------
NAME: EMILY DENNY MCKNIGHT
TITLE: VICE PRESIDENT
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM
COMMEMORATIVE BRANDS, INC. CONSOLIDATED FINANCIAL STATEMENTS FOR THE QUARTERLY
PERIOD ENDED MAY 29, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> AUG-28-1999
<PERIOD-START> AUG-30-1998
<PERIOD-END> MAY-29-1999
<CASH> 1,566
<SECURITIES> 0
<RECEIVABLES> 48,427
<ALLOWANCES> (2,652)
<INVENTORY> 12,715
<CURRENT-ASSETS> 68,817
<PP&E> 49,028
<DEPRECIATION> (8,992)
<TOTAL-ASSETS> 224,347
<CURRENT-LIABILITIES> 37,950
<BONDS> 138,938
0
5
<COMMON> 4
<OTHER-SE> 37,568
<TOTAL-LIABILITY-AND-EQUITY> 224,347
<SALES> 135,186
<TOTAL-REVENUES> 135,186
<CGS> 58,290
<TOTAL-COSTS> 58,290
<OTHER-EXPENSES> 61,746
<LOSS-PROVISION> 360
<INTEREST-EXPENSE> 11,304
<INCOME-PRETAX> 3,846
<INCOME-TAX> 90
<INCOME-CONTINUING> 3,756
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,856
<EPS-BASIC> 7.57
<EPS-DILUTED> 7.57
</TABLE>
