<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
--------------
FORM 10-Q
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/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MAY 27, 2000
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
COMMEMORATIVE BRANDS, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 13-3915801
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification Number)
7211 CIRCLE S ROAD
AUSTIN, TEXAS 78745
(Address of principal executive offices) (Zip Code)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE (512) 444-0571
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
None None
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
None
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period
that the registrant was required to file such reports), and (2) has
been subject to such filing requirements for the past 90 days. Yes / /
No /X/. (Effective December 31, 1997, registrant is no longer subject
to such filing requirements.)
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of registrant's knowledge, in definitive proxy
or information statements incorporated by reference in Part III of this
Form 10-Q or any amendment to this FORM 10-Q/X/ (Not Applicable)
The aggregate market value of the voting stock held by non-affiliates
at May 27, 2000: $0.00
375,985 shares of common stock
(Number of shares outstanding as of July 11, 2000)
<PAGE>
COMMEMORATIVE BRANDS, INC.
FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED MAY 27, 2000
INDEX
<TABLE>
<CAPTION>
Page
<S> <C>
PART I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements and Notes
Consolidated Balance Sheets-
As of May 27, 2000 (unaudited) and August 28, 1999 (audited)...................................1
Consolidated Statements of Operations-
For the Three Months Ended May 27, 2000 and May 29, 1999
(all unaudited) ..............................................................................2
Consolidated Statements of Operations-
For the Nine Months Ended May 27, 2000 and May 29, 1999
(all unaudited) ..............................................................................3
Consolidated Statements of Stockholders' Equity-
For the Nine Months Ended May 27, 2000 (unaudited) and for the
Year Ended August 28, 1999 (audited)...........................................................4
Consolidated Statements of Cash Flows -
For the Nine Months Ended May 27, 2000 and May 29, 1999
(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 - 22
Item 3. Quantitative and Qualitative Disclosures About Market Risk........................................22
PART II. OTHER INFORMATION
Item 1. Legal Proceedings .............................................................................23
Item 2. Changes in Securities.............................................................................23
Item 3. Defaults Upon Senior Securities...................................................................23
Item 4. Submission of Matters to a Vote of Security Holders...............................................23
Item 6. Exhibits and Reports on Form 8-K..................................................................23
SIGNATURES ................................................................................................24
Exhibit 11.1
</TABLE>
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS AND NOTES
COMMEMORATIVE BRANDS, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share data)
<TABLE>
<CAPTION>
May 27, 2000 August 28, 1999
------------------------- -----------------------
(unaudited) (audited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 2,026 $ 751
Accounts receivable, net 48,872 28,707
Inventories 14,760 13,804
Prepaid expenses and other current assets 8,957 9,900
------------------------- -----------------------
Total current assets 74,615 53,162
Property, plant and equipment, net 40,261 41,780
Trademarks, net 28,082 28,659
Goodwill, net 76,829 78,408
Other assets, net 6,841 7,836
------------------------- -----------------------
Total assets $ 226,628 $ 209,845
========================= =======================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Bank overdraft $ 4,057 $ 3,186
Accounts payable and accrued expenses 35,320 26,142
Current portion of long-term debt 2,250 1,750
------------------------- -----------------------
Total current liabilities 41,627 31,078
Long-term debt, net of current portion 131,223 132,660
Other long-term liabilities 9,352 8,277
------------------------- -----------------------
Total liabilities 182,202 172,015
------------------------- -----------------------
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, 460,985 shares issued and outstanding 5 5
Common stock, $.01 par value, 750,000 shares
authorized, 375,985 shares issued and outstanding 4 4
Additional paid-in capital 58,766 58,766
Retained deficit (14,350) (20,946)
------------------------- -----------------------
Total stockholders' equity 44,426 37,830
------------------------- -----------------------
Total liabilities and stockholders' equity $ 226,628 $ 209,845
========================= =======================
</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 the Three Months Ended
--------------------------------------
May 27, 2000 May 29, 1999
----------------- -----------------
<S> <C> <C>
Net sales $ 52,979 $ 50,685
Cost of sales 21,733 22,153
----------------- -----------------
Gross profit 31,246 28,532
Selling, general and administrative expenses 20,720 22,180
----------------- -----------------
Operating income 10,526 6,352
Interest expense, net 3,771 3,652
----------------- -----------------
Income before provision for income taxes 6,755 2,700
Provision for income taxes 126 30
----------------- -----------------
Net income $ 6,629 $ 2,670
Preferred dividends (300) (300)
----------------- -----------------
Net income to common stockholders $ 6,329 $ 2,370
================= =================
Basic and diluted earnings per share $ 16.83 $ 6.29
================= =================
Weighted average common shares outstanding and common and
common equivalent shares outstanding 375,985 376,937
================= =================
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
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<PAGE>
COMMEMORATIVE BRANDS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except share and per share data)
(unaudited)
<TABLE>
<CAPTION>
For the Nine Months Ended
May 27, 2000 May 29, 1999
----------------- -----------------
<S> <C> <C>
Net sales $ 138,567 $ 135,186
Cost of sales 58,965 58,290
----------------- -----------------
Gross profit 79,602 76,896
Selling, general and administrative expenses 60,384 61,746
----------------- -----------------
Operating income 19,218 15,150
Interest expense, net 11,536 11,304
----------------- -----------------
Income before provision for income taxes 7,682 3,846
Provision for income taxes 186 90
----------------- -----------------
Net income $ 7,496 $ 3,756
Preferred dividends (900) (900)
----------------- -----------------
Net income to common stockholders $ 6,596 $ 2,856
================= =================
Basic and diluted earnings per share $ 17.54 $ 7.57
================= =================
Weighted average common shares outstanding and common and
common equivalent shares outstanding 375,985 377,083
================= =================
</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>
Additional
paid-in Retained
Preferred Stock Common Stock capital deficit Total
----------------------------------------- ----------------- ---------- ----------- ---------
Series A Series B
-------------------- -------------------
Shares Amount Shares Amount Shares Amount
---------- --------- --------- --------- --------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, August 29, 1998 (audited) 100,000 $ 1 377,156 $ 4 377,156 $ 4 $ 50,391 $ (15,554) $ 34,846
Repurchase of Common Stock - - - - (1,171) - (7) - (7)
Issuance of Preferred Stock - - 83,829 1 - - 8,382 - 8,383
Accrued Preferred Stock Dividends - - - - - - - (1,200) (1,200)
Net loss - - - - - - - (4,192) (4,192)
---------- --------- --------- --------- --------- ------- ---------- ----------- ---------
Balance, August 28, 1999 (audited) 100,000 $ 1 460,985 $ 5 375,985 $ 4 $ 58,766 $ (20,946) $ 37,830
Accrued Preferred Stock Dividends - - - - - - - (900) (900)
Net income - - - - - - - 7,496 7,496
---------- --------- --------- --------- --------- ------- ---------- ----------- ---------
Balance, May 27, 2000 (unaudited) 100,000 $ 1 460,985 $ 5 375,985 $ 4 $ 58,766 $ (14,350) $ 44,426
========== ========= ========= ========= ========= ======= ========== =========== =========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
-4-
<PAGE>
COMMEMORATIVE BRANDS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(unaudited)
<TABLE>
<CAPTION>
CASH FLOWS FROM OPERATING ACTIVITIES: For the Nine Months Ended
--------------------------------
May 27, May 29,
2000 1999
--------------- ---------------
<S> <C> <C>
Net income $ 7,496 $ 3,756
Adjustments to reconcile net income to net cash provided by operating
activities-
Depreciation and amortization 6,260 5,320
Provision for doubtful accounts 930 360
Changes in assets and liabilities-
Increase in accounts receivables (21,095) (21,430)
Decrease (increase) in inventories (956) 1,584
Decrease in prepaid expenses and other current assets 943 1,756
Decrease (increase) in other assets 992 (640)
Increase in bank overdraft, accounts payable, accrued expenses 10,224 10,670
and other long-term liabilities
--------------- ---------------
Net cash provided by operating activities 4,794 1,376
--------------- ---------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property, plant and equipment (2,582) (6,901)
--------------- ---------------
Net cash used in investing activities (2,582) (6,901)
--------------- ---------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repurchase of common and preferred stock - (125)
Payments on term loan facility, net (1,250) (875)
Revolver borrowings, net 313 7,116
--------------- ---------------
Net cash provided by (used in) financing activities (937) 6,116
--------------- ---------------
NET INCREASE IN CASH AND CASH EQUIVALENTS 1,275 591
CASH AND CASH EQUIVALENTS, beginning of period 751 975
--------------- ---------------
CASH AND CASH EQUIVALENTS, end of period $ 2,026 $ 1,566
=============== ===============
SUPPLEMENTAL DISCLOSURE
Cash paid during the period for -
Interest $ 8,631 $ 8,161
=============== ===============
Taxes $ 188 $ 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
(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 Acquisitions) substantially all of the scholastic
and recognition and affinity product assets and businesses of the ArtCarved
Class Rings (ArtCarved) operations of CJC Holdings, Inc. (CJC) from CJC and
certain assets and liabilities of L.G. Balfour Company, Inc. (Balfour) from Town
and 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 27, 2000 are not necessarily indicative of the results that may be
expected for the fiscal year ending August 26, 2000.
(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 or makes payments to predecessor sales representatives on
behalf of successor sales representatives. Such amounts are repaid by the sales
representatives through earned commissions on product sales. The Company
provides reserves to cover those amounts which it estimates to be uncollectible.
These amounts are included in prepaid expenses and other current assets in the
accompanying balance sheets.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are stated at cost, net of accumulated
depreciation. Depreciation is provided principally using the straight-line
method based on estimated useful lives of the assets as follows:
<TABLE>
<CAPTION>
DESCRIPTION USEFUL LIFE
----------- -----------
<S> <C>
Land improvements 15 years
Buildings and improvements 10 to 25 years
Tools and dies 10 to 20 years
Machinery and equipment 2 to 10 years
</TABLE>
Maintenance, repairs and minor replacements are charged against income as
incurred; major replacements and betterments are capitalized. The cost of assets
sold or retired and the related accumulated depreciation are removed from the
accounts at the time of disposition, and any resulting gain or loss is reflected
as other income or expense for the period.
TRADEMARKS
The value of trademarks was determined based on a third-party appraisal and is
being amortized on a straight-line basis over 40 years.
IMPAIRMENT OF LONG-LIVED ASSETS
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,"
deals with accounting for the impairment of long-lived assets, certain
identifiable intangibles and goodwill related to assets to be held and used, and
for long-lived assets and certain identifiable intangibles to be disposed of.
This statement requires that long-lived assets (e.g., property, plant and
equipment and intangibles) be reviewed for impairment whenever events or changes
in circumstances, such as change in market value, indicate that the assets'
carrying amounts may not be recoverable. In performing the review for
recoverability, if future undiscounted cash flows (excluding interest charges)
from the use and ultimate disposition of the assets are less than their carrying
values, an impairment loss is recognized. Impairment losses are to be measured
based on the fair value of the asset. When factors indicate that long-lived
assets should be evaluated for possible impairment, the Company uses an estimate
of the related product lines' undiscounted cash flows over the remaining lives
of the assets in measuring whether the assets are recoverable.
GOODWILL
Costs in excess of fair value of net tangible and identifiable intangible assets
acquired are included in goodwill in the accompanying balance sheets. Goodwill
is being amortized on a straight-line basis over 40 years. The Company
continually evaluates whether events and circumstances have occurred that
indicate that the remaining estimated useful life of goodwill may warrant
revision or that the remaining balance of goodwill may not be recoverable. When
factors indicate that goodwill should be evaluated for possible impairment, the
Company would use an estimate of the related product lines' undiscounted cash
flows over the remaining life of the goodwill in measuring whether the goodwill
is recoverable.
-7-
<PAGE>
OTHER ASSETS
Other assets include deferred financing costs which are amortized over the lives
of the specific debt and ring samples supplied to national chain stores and
sales representatives by the Company which are amortized on a straight-line
basis over six 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.
SEASONALITY
The Company's scholastic product sales tend to be seasonal. The Company
generally recognizes sales upon shipment of product. 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 somewhat 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.
-8-
<PAGE>
NEW ACCOUNTING PRONOUNCEMENTS
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 27, August 28,
2000 1999
---------------- -----------------
(unaudited) (audited)
<S> <C> <C>
Raw materials $ 7,631 $ 8,079
Work in process 2,332 1,987
Finished goods 4,797 3,738
---------------- -----------------
$ 14,760 $ 13,804
================ =================
</TABLE>
Cost of sales includes depreciation and amortization of $1,990,000 and
$1,810,000, for the nine months ended May 27, 2000 and May 29, 1999,
respectively.
(4) LONG-TERM DEBT
Long-term debt consists of the following (in thousands):
<TABLE>
<CAPTION>
May 27, August 28,
2000 1999
----------------- ----------------
(unaudited) (audited)
<S> <C> <C>
11% senior subordinated notes due 2007 $ 90,000 $ 90,000
Term loan facility 21,500 22,750
Bank revolver 21,973 21,660
----------------- ----------------
Total debt $ 133,473 $ 134,410
Less: current portion 2,250 1,750
----------------- ----------------
Total long-term debt $ 131,223 $ 132,660
================= ================
</TABLE>
11% 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 principle amount thereof if redeemed during the year
2005 or thereafter, plus accrued and unpaid interest and Liquidated Damages (as
defined in the Indenture), if any, thereon to the date of 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.
-9-
<PAGE>
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 (a) to incur additional indebtedness
and issue preferred stock, (b) to pay dividends or make certain other restricted
payments, (c) to enter into transactions with affiliates, (d) to create certain
liens, (e) to make certain asset dispositions and (f) to merge or consolidate
with, or transfer substantially all of its assets to, another person. The
Company is in compliance with the Indenture covenants as of May 27, 2000.
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 penalty. The Company must repay
specified amounts of the Term Loan in 28 consecutive quarterly installments,
which commenced March 31, 1997. Amounts of principal prepaid on the Term Loan
may not be reborrowed. The Company is in compliance with the terms of the Term
Loan as of May 27, 2000.
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 borrowing or consignment.
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 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 or maximum, as applicable, levels of (a) senior
funded debt to earnings before interest, taxes, depreciation and amortization
(EBITDA, as defined), (b) consolidated EBITDA and (c) interest coverage. The
Bank Agreement contains financial covenants pursuant to which the Company agreed
that it would not (i) permit its Consolidated Net Worth (as defined
-10-
<PAGE>
in the Bank Agreement) as of June 28, 1999 to be less than $44 million, (ii) pay
the management fee payable to Castle Harlan, Inc. unless at the time of payment
(A) no Event of Default (as defined in the Bank Agreement) shall have occurred
and be continuing or would result from the payment thereof; (B) the short-term
line of credit shall have been paid in full; and (C) the Company meets the
requisite Modified Funded Debt Ratio (as defined in the Bank Agreement) and
(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 June 28, 1999, (a) the short-term line of 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 and retain certain other financial covenants (as defined
above) and (iii) provide for overadvance loans to the Company of up to $4
million in excess of the availability under the Borrowing Base (as defined
below) for a period of up to 120 days expiring on November 30, 1999; provided
that the funds held in a cash collateral account that had been pledged by CHPII
to secure the CHPII guaranty of the Company's obligations under the short-term
line of 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 on June 28, 1999, the guarantee obligations of CHPII and the
indemnification obligations of the Company were satisfied and released.
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 27, 2000.
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 weekly. If the
aggregate amount of loans and other extensions of credit under the Revolving
Credit and Gold Facilities exceeds the Borrowing Base, the Company must
immediately prepay or cash collateralize its obligations under the Revolving
Credit and Gold Facilities to the extent of such excess. At May 27, 2000, the
Company had a total of $12,900,000 available under the Revolving Credit Facility
and 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 27, 2000 and May 29, 1999,
the Company expensed consignment fees of approximately $226,000 and $181,000,
respectively. 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 any corresponding liability for financial statement purposes. As
of May 27, 2000, and August 28, 1999, the Company held approximately 21,511
ounces and 18,911 ounces, respectively, valued at $5.8 million and $4.8 million,
respectively, of gold on consignment from one of its lenders.
-11-
<PAGE>
The long-term debt outstanding as of May 27, 2000, matures as follows (in
thousands):
<TABLE>
<CAPTION>
Amount
Fiscal Year Ending Maturing
----------------
(unaudited)
<S> <C>
2000 $ 500
2001 2,750
2002 29,223
2003 11,000
2004 -
Thereafter 90,000
----------------
$ 133,473
================
</TABLE>
The weighted average interest rate of debt outstanding as of May 27, 2000 and
August 28, 1999 was 10.6% and 10.2%, respectively.
The Company's management believes the carrying amount of long-term debt,
including the current maturities, approximates fair value as of May 27, 2000 and
August 28, 1999, based upon current rates offered for debt with the same or
similar debt terms.
(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
predecessors the right to sell the Company's products in a territory. The
contracts generally provide that the value of these rights is primarily
determined by the amount of business achieved by a successor sales
representative and is therefore not determinable in advance of performance by
the successor sales representative.
The Company is not party to any pending legal proceedings other than ordinary
routine litigation incidental to the business. In management's opinion, adverse
decisions on those legal proceedings, in the aggregate, would not have a
materially adverse impact on the Company's results of operations or financial
position.
(6) INCOME TAXES
For the nine months ended May 27, 2000 and the nine months ended May 29, 1999,
the Company expensed $186,000 and $90,000, respectively, related to state income
taxes. No net federal income tax benefit is reflected in the income statement
since the potential benefit of net operating losses incurred by the Company has
been offset by a valuation allowance.
(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 27, 2000, the Company had issued and outstanding 100,000 shares of Series
A Preferred, 460,985 shares of Series B Preferred and 375,985 shares of Common
Stock.
SERIES A PREFERRED STOCK (SERIES A PREFERRED)
The holders of shares of Series A Preferred are generally not entitled to voting
rights except in certain limited circumstances. 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
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<PAGE>
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.
On June 28, 1999, the Company issued 85,000 shares of Series B Preferred Stock
to CHP II for $8.5 million in cash, representing funds previously 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.
According to the terms of an employment agreement, the Company was to have
issued 6,600 shares of Series B Preferred Stock valued at approximately $100 per
share to a former executive of the Company upon the termination of his agreement
in August 1999. As of May 27, 2000, the issuance of these shares has been
deferred.
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 4.96% of the
outstanding shares of Common Stock on a fully diluted basis), at an initial
exercise price of $6.67 per share, at any time on or after December 16, 1997,
and on or before January 31, 2008.
-13-
<PAGE>
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 at any time at the request of the Castle Harlan Group.
The Company also granted to the Castle Harlan Group unlimited piggyback
registration rights on certain registrations of shares of capital stock by the
Company.
STOCK-BASED COMPENSATION PLAN
The Company has a stock option plan (the 1997 Stock Option Plan), effective as
of July 29, 1997, for which a total of 69,954 shares of Common Stock have been
reserved for issuance and 36,985 of those shares were available for grant to
directors and employees of the Company as of May 27, 2000. 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 (Stock Purchase
Plan). Pursuant to the terms of Stock Purchase Plan, the Company may from time
to time offer shares of the Company's Class B Preferred Stock and Common Stock
to employees, consultants and independent sales representatives who are
determined to be eligible to purchase shares pursuant to Stock Purchase Plan by
the Plan Administrator (as defined in Stock Purchase Plan) upon such terms and
at such prices as are set forth in Stock Purchase Plan and as are determined by
the Plan Administrator.
(8) RELATED - PARTY TRANSACTIONS
The Company agreed to indemnify CHPII pursuant to an indemnification agreement,
dated August 26, 1998 for any amount 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 4).
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 that
officer 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 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
-14-
<PAGE>
Group then owns less than 5% of the then outstanding capital stock of the
Company. The Company has agreed to indemnify the Manager against liabilities,
costs, charges and expenses relating to the Manager's performance of its duties,
other than such of the foregoing resulting from the Manager's gross negligence
or willful misconduct. The Bank Agreement prohibits payment of the CHP
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 CHP Management Fee; (ii) the Short-Term Revolving Credit
shall have been repaid in full; and (iii) the Company meets the requisite
Modified Funded Debt Ratio (as defined in the Bank Agreement). The Indenture
also prohibits payment of the CHP Management Fee in the Event of a Default by
the Company in the payment of principal, Redemption Price or Purchase Price
(both as defined in the Indenture), interest or Liquidated Damages (if any) on
the Notes. The CHP Management Fee (as defined in the Indenture) for the nine
months ended May 27, 2000 and the fiscal year ended August 28, 1999 has been
accrued but not paid, and is included in accounts payable and accrued expenses.
-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 assets, businesses and operations of CJC Holdings, Inc. acquired
by CBI (iii) the term "Balfour" refers to the Balfour operation of the L. G.
Balfour Company, Inc. acquired by CBI, and (iv) the term "the Company" refers to
CBI consolidated with its subsidiaries as combined with ArtCarved and Balfour
after giving effect to the Acquisitions.
GENERAL
On December 16, 1996, CBI completed the Acquisitions. CBI was initially
formed by Castle Harlan Partners II, L.P. ("CHPII"), a Delaware limited
partnership and private equity investment fund, in March 1996 for the purpose of
acquiring ArtCarved and Balfour. Until December 16, 1996, CBI engaged in no
business activities other than in connection with the Acquisitions and the
financing thereof.
The Company uses a 52/53 week fiscal year ending on the last Saturday
of August.
RESULTS OF OPERATIONS
The results of operations of the Company for the nine months ended May
27, 2000 and May 29, 1999 were negatively impacted as a result of the
consolidation of the Attleboro and North Attleboro, Massachusetts operations
into the Austin, Texas facilities. 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. The
consolidation of these Massachusetts-based operations into the Texas facilities
was expected to yield cost savings to the combined Balfour and ArtCarved
operations as compared to their predecessor's historical costs from, among other
things, reduced occupancy, overhead and labor expenses. To date, the company has
realized cost savings of approximately $1.5 million per year in reduced
occupancy and overhead costs. The full anticipated cost savings from the
consolidation of facilities has not been realized, however, mainly due to the
following ongoing circumstances:
- People - The specific Balfour product knowledge that was
"lost" due to Massachusetts employees electing not to relocate
to Texas which resulted in production inefficiencies, higher
than normal training expenses and additional costs to
temporarily place former Balfour employees (manager and
supervisors) in the Texas plant. In addition, labor costs in
the Austin, Texas area have increased faster than anticipated
as a result of the tightening of the labor market in the
Austin area.
- Tooling - Because Balfour ring tooling is older and more
complicated to use than the ArtCarved ring tooling, the
Company continues to experience higher than normal training
costs and lower levels of efficiency than that achieved at the
ArtCarved ring plant.
- Systems - The Balfour computer system was heavily dependent on
manual processing and human interaction. The Company
experienced difficulties in the transfer of user knowledge and
system documentation as a result of employees electing not to
relocate to Texas as discussed above. As a result, the Company
has incurred labor costs in excess of those anticipated by
management to enter, schedule, produce, track and ship the
Balfour rings.
During January 1998, the Company began a major computer project, which
was implemented in July 1999. The project converted the more inefficient Balfour
computer systems to the more efficient ArtCarved systems, unifying the Company's
computer systems thereby reducing computer operation and maintenance costs, and
making the Company's order entry system and process more accurate and
streamlined.
As some of the labor and tooling costs are imbedded in the Balfour
manufacturing process, management does not anticipate that significant cost
reductions can be accomplished in the near term without significant changes in
the
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<PAGE>
tooling and manufacturing processes of Balfour products. Management continues to
assess more efficient manufacturing and tooling techniques, which may in the
future, yield additional cost savings, but may require additional capital
investment.
THE COMPANY
THREE MONTHS ENDED MAY 27, 2000 AS COMPARED TO THE THREE MONTHS ENDED
MAY 29, 1999.
NET SALES - Net sales increased $2.3 million, or 4.5%, to $53.0 million for the
three months ended May 27, 2000, as compared to $50.7 million for the three
months ended May 29, 1999. The increase in net sales was the result of a 7.6%
increase in net sales of fine paper products. Partially offsetting the increase
was a decline of 2.3% in net sales of class rings and 0.8% in net sales of
recognition and affinity jewelry. Of the increase in net sales of fine paper
products, 4.7% was as a result of timing of shipments of fine paper products
with the remaining 2.9% increase being the result of a price increase and
increased volume. The majority of the class ring decline was a result of earlier
receipt of orders and shipments of in-school high school rings.
GROSS PROFIT - Gross Profit increased $2.7 million, or 9.5% to $31.2 million for
the three months ended May 27, 2000 as compared to $28.5 million for the three
months ended May 29, 2000. As a percentage of net sales, gross profit increased
to 59.0% for the three months ended May 27, 2000 as compared to 56.3% for the
three months ended May 29, 1999. The 2.7% increase in gross profit as a
percentage of net sales was mainly the result of improvements in fine paper
products gross margins as a percentage of net sales by 3.8% as a result of a
change in timing of shipments of fine paper products and manufacturing
improvements. The increase was offset by a 0.8% decline in gross margin as a
percentage of net sales of class rings as a result of the unit shipment decline
and a 0.3% decline in gross margin as a percentage of net sales in recognition
and affinity jewelry.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES - Selling, general and
administrative expenses decreased $1.5 million, or 6.6% to $20.7 million for the
three months ended May 27, 2000, as compared to $22.2 million for the three
months ended May 29, 1999. As a percentage of net sales, selling, general and
administrative expenses decreased to 39.1% for the three months ended May 27,
2000, as compared to 43.8% for the three months ended May 29, 1999. The 4.7%
decrease in selling, general and administrative expenses as a percentage of net
sales was a result of cost cutting changes initiated during March 1999, a
reduction in computer operations and maintenance costs as a result of the
implementation of the computer project in July 1999, and a reduction in
consultant costs.
OPERATING INCOME - As a result of the foregoing, operating income increased $4.2
million to $10.5 million for the three months ended May 27, 2000, as compared to
$6.4 million for the three months ended May 29, 1999. As a percentage of net
sales, operating income increased to 19.9% for the three months ended May 27,
2000, as compared to 12.5% for the three months ended May 29, 1999.
INTEREST EXPENSE - Net interest expense was $3.8 million for the three months
ended May 27, 2000, as compared to $3.7 million for the three months ended May
29, 1999. Interest expense remained approximately the same as the prior year as
a result of the combination of higher interest rates on the average outstanding
balance under the Revolving Credit Facility and Term Loan and a decrease of the
average outstanding balance to $42.7 million in the three months ended May 27,
2000 as compared to $49.8 million in the three months ended May 29, 1999.
Interest rates ranged from 7.9% to 10.75% for the three months ended May 27,
2000 and the three months ended May 29, 1999. Interest on the $90.0 million of
senior subordinated rates is at a fixed rate of 11%.
PROVISION FOR INCOME TAXES - For both the three months ended May 27, 2000 and
the three months ended May 29, 1999, the Company expensed $126,000 and $30,000,
respectively, related to state income taxes. No net federal income tax benefit
is reflected in the income statement since the potential benefit of net
operating losses incurred by the Company has been offset by a valuation
allowance.
NET INCOME - As a result of the foregoing, the net income increased $3.9 million
to $6.6 million for the three months
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<PAGE>
ended May 27, 2000, as compared to net income of $2.7 million for the three
months ended May 29, 1999.
PREFERRED DIVIDENDS - Preferred dividends of $0.3 million were accrued for the
three months ended May 27, 2000 and for the three months ended May 29, 1999. No
cash dividends were paid for the three months ended May 27, 2000 or the three
months ended May 29, 1999.
NET INCOME TO COMMON STOCKHOLDERS - As a result of the foregoing, net income to
common stockholders increased an aggregate of $3.9 million to $6.3 million for
the three months ended May 27, 2000 as compared to $2.4 million for the three
months ended May 29, 1999.
NINE MONTHS ENDED MAY 27, 2000 AS COMPARED TO THE NINE MONTHS ENDED MAY
29, 1999.
NET SALES - Net sales increased $3.4 million, or 2.5%, to $138.6 million for the
nine months ended May 27, 2000, as compared to $135.2 million for the nine
months ended May 29, 1999. The increase in net sales was the result of a 2.0%
increase in net sales of high school class rings, a 1.1% increase in net sales
of fine paper products and a 0.1% increase in recognition and affinity jewelry
offset by a 0.7% decrease in net sales of college class rings. The increase in
high school class rings was primarily the result of a price increase and changes
in the product mix of the in-school sales channel. The increase in net sales of
fine paper products was primarily the result of price increases and increased
volume. The increase in recognition and affinity jewelry was primarily a result
of increased net sales of personalized family jewelry offset by declining net
sales of consumer sports jewelry. The decline in college class rings was a
result of a shortfall in both units and average price per unit due to increased
competition and the changing marketplace.
GROSS PROFIT - Gross Profit increased $2.7 million, or 3.5% to $79.6 million for
the nine months ended May 27, 2000 from $76.9 million for the nine months ended
May 29, 2000. As a percentage of net sales, gross profit increased to 57.4% for
the nine months ended May 27, 2000 as compared to 56.9% for the nine months
ended May 29, 1999. The 0.5% increase in gross profit as a percentage of net
sales was mainly the result of a 1.2% increase in gross margin as a percentage
of net sales as a result of increased net selling prices and changes in product
mix of class rings and a 0.1% increase in gross margin as a percentage of net
sales in fine paper products. The increase was offset by a 0.8% declining margin
as a percentage of net sales in recognition and affinity jewelry as a result of
the Company's decreased focus in consumer sports jewelry.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES - Selling, general and
administrative expenses decreased $1.3 million, or 2.2% to $60.4 million for the
nine months ended May 27, 2000, as compared to $61.7 million for the nine months
ended May 29, 1999. As a percentage of net sales, selling, general and
administrative expenses decreased to 43.5% for the nine months ended May 27,
2000, as compared to 45.7% for the nine months ended May 29, 1999. The 2.2%
decrease in selling, general and administrative expenses as a percentage of net
sales was a result of cost cutting changes initiated during March 1999, a
reduction in computer operations and maintenance costs as a result of the
implementation of the computer project in July 1999, and a reduction in
consultant costs.
OPERATING INCOME - As a result of the foregoing, operating income increased $4.0
million to $19.2 million for the nine months ended May 27, 2000, as compared to
$15.2 million for the nine months ended May 29, 1999. As a percentage of net
sales, operating income increased to 13.9% for the nine months ended May 27,
2000, as compared to 11.2% for the nine months ended May 29, 1999.
INTEREST EXPENSE - Net interest expense was $11.5 million for the nine months
ended May 27, 2000 and $11.3 million for the nine months ended May 29, 1999.
Interest expense remained approximately the same as the prior year as a result
of the combination of higher interest rates on the average outstanding balance
under the Revolving Credit Facility and Term Loan and a decrease of the average
outstanding balance to $45.1 million for the nine months ended May 27, 2000, as
compared to $47.9 million for the nine months ended May 29, 1999. Interest rates
ranged from 7.9% to 10.75% for the nine months ended May 27, 2000 and the nine
months ended May 29, 1999. Interest on the $90.0 million of senior subordinated
rates is fixed at a rate of 11%.
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<PAGE>
PROVISION FOR INCOME TAXES - For both the nine months ended May 27, 2000 and the
nine months ended May 29, 1999, the Company expensed $186,000 and $90,000,
respectively, related to state income taxes. No net federal income tax benefit
is reflected in the income statement since the potential benefit of net
operating losses incurred by the Company has been offset by a valuation
allowance.
NET INCOME - As a result of the foregoing, the net income increased $3.7 million
to $7.5 million for the nine months ended May 27, 2000, as compared to net
income of $3.8 million for the nine months ended May 29, 1999.
PREFERRED DIVIDENDS - Preferred dividends of $0.9 million were accrued for the
nine months ended May 27, 2000 and for the nine months ended May 29, 1999. No
cash dividends were paid for the nine months ended May 27, 2000 or the nine
months ended May 29, 1999.
NET INCOME TO COMMON STOCKHOLDERS - As a result of the foregoing, net income to
common stockholders increased an aggregate of $3.7 million to $6.6 million for
the nine months ended May 27, 2000, as compared to $2.9 million for the nine
months ended May 29, 1999.
SEASONALITY
The Company's scholastic product sales tend to be seasonal. The Company
generally recognizes sales upon shipment of product. Class ring sales are
highest during October through December (which overlaps the Company's first and
second fiscal quarters), when students have returned to school after the summer
recess and orders are taken for class rings for delivery to students before the
winter holiday season. Sales of the Company's fine paper products are
predominantly made during February through April (which overlaps the Company's
second and third fiscal quarters) for graduation in May and June. 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 the seasonality of the class ring business on the Company are somewhat
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 27, 2000, the Company had a $35.0 million line of credit
under the Revolving Credit and Gold Facilities (each as defined and more fully
discussed in Note 4 to the Consolidated Financial Statements). The Company had
$21,973,000 outstanding under the Revolving Credit Facility and $5,836,000
outstanding under the Gold Facility at May 27, 2000. At May 27, 2000, the
Company had $12,900,000 available under its Revolving Credit Facility and its
Gold Facility.
The Company's liquidity needs arise primarily from debt service on the
Bank Agreement and the Notes (each as defined and more fully discussed in Note 4
to the Consolidated Financial Statements), working capital and capital
expenditure requirements, and payments required under a management agreement
with Castle Harlan, Inc. (the "CHP Management Fee"), which has been accrued but
not paid in the nine months ended May 27, 2000 and fiscal year 1999 in
accordance with the terms of the Bank Agreement (see Note 4 to the Consolidated
Financial Statements). Because of the difficulties in the consolidation of the
Balfour operations and the seasonality of the Company's business, the Company
will continue to have limited capital resources and limited flexibility in
meeting the Company's cash requirements at certain times during the year.
As of June 28, 1999 (a) the $8.0 million short-term line of credit that
the Company had secured from the Banks 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 overadvance 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 November 30, 1999; provided that
the funds held in a cash collateral
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<PAGE>
account that had been pledged by CHPII to secure a CHPII guaranty of the
Company's obligations under the short-term line of 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 termination of the short-term
line of credit and 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. See Note
4 to the Consolidated Financial Statements.
Operating activities provided cash of $4.8 million for the nine
months ended May 27, 2000 as a result of net income of $7.5 million, adjusted
to eliminate expenses for non-cash items of $7.2 million, offset by changes
in liabilities in excess of changes in assets of $9.9 million. The $9.9
million of cash used in changes in assets and liabilities resulted from
increases in receivables of $21.1 million and increases in inventories of
$1.0 million offset by decreases in prepaid expenses and other current assets
of $1.0 million, decreases in other assets of $1.0 million and increases in
bank overdraft, accounts payable, accrued expenses and other long-term
liabilities of $10.2 million. These fluctuations generally reflect the
seasonality of the Company's business. The seasonal fluctuations usually
result in higher sales during the first nine months of the fiscal year and
correspondingly higher levels of accounts receivable, inventories and bank
overdraft, accounts payable and accrued expenses. Prepaid expenses and other
current assets usually decline during the first nine months of the fiscal
year as a result of the amortization of prepaid advertising expenses that are
paid for in the fourth fiscal quarter of the year. The decrease in other
assets for the nine months ended May 27, 2000 was a result of a reduction in
samples. The increase in bank overdraft, accounts payable, accrued expenses
and other long-term liabilities was due to an increase of $2.9 million in
commissions and royalties, an increase of $2.7 million in accrued interest,
an increase of $2.2 million in accrued bonuses and compensation, an increase
of customer deposits of $2.1 million, an increase of $1.1 million in accrued
management fees, $0.9 million in bank overdraft and an increase of $0.1
million in accrued sales and property taxes, offset by a decrease of $1.4
million in accounts payable and a decrease of $0.4 million in other accrued
expenses.
Comparing the nine months ended May 27, 2000 with the nine months ended
May 29, 1999, the Company's operating activities provided cash of $4.8 million
for the nine months ended May 27, 2000 and provided $1.4 million for the nine
months ended May 29, 1999. Changes in assets and liabilities used cash of $9.9
million for the nine months ended May 27, 2000 and used $8.1 million for the
nine months ended May 29, 1999, a decrease in cash provided of $1.8 million. For
the nine months ended May 27, 2000 the increase in accounts receivable was $0.3
million less than the increase in accounts receivable for the nine months ended
May 29, 1999. Inventories increased $2.5 million during the nine months ended
May 27, 2000 more than the nine months ended May 29, 1999 as a result of
increased volume for class rings, personalized family products and fine paper
products. Prepaid expenses and other current assets decreased $0.9 million
during the nine months ended May 27, 2000 as compared to decreasing $1.8 million
during the nine months ended May 29, 1999. The net decrease of $0.8 million was
a result of a decrease in prepaid advertising for the nine months ended May 27,
2000 as a result of the cost cutting initiatives during March 1999. Other assets
decreased $0.9 million during the nine months ended May 27, 2000, but increased
$0.6 million during the nine months ended May 29, 1999, a total difference of
$1.7 million. The net decrease during the nine months ended May 27, 2000 was due
to a reduction in samples outstanding and amortization of transaction costs. The
net increase during the nine months ended May 29, 1999 was due to an increase in
the manufacture of samples to support increased sales volume. For the nine
months ended May 27, 2000, the increase in bank overdraft, accounts payable,
accrued expenses and other long-term liabilities was approximately $0.4 million
less than the increase in these accounts for the nine months ended May 27, 2000
as a result of a $2.6 million decrease in commissions and royalties and a $0.6
million decrease in accounts payable offset by an increase of $1.1 million in
accrued bonuses and compensation, an increase of $0.8 million in customer
deposits, an increase of $0.5 million in bank overdraft and an increase of $0.4
million in other accrued expenses.
The Company used $2.6 million for investing activities for the nine
months ended May 27, 2000, a $4.3 million decrease over the nine months ended
May 29, 1999. The decrease reflects the capital expenditures made by the Company
for the conversion of the Balfour computer systems to the ArtCarved system
during the nine months ended May 29, 1999. As a result of the completion of the
system conversion, the Company's projected capital expenditures for fiscal 2000
are expected to decline from $9.8 million for fiscal 1999 to approximately $5.1
million for fiscal 2000 for manufacturing equipment, tools and dies and software
development.
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<PAGE>
YEAR 2000 COMPLIANCE
OUTCOME OF YEAR 2000. The Company experienced no significant Year 2000
problems or issues on or after January 1, 2000. Based on information available
at this time, the Company cannot conclude that any failure of third parties to
achieve Year 2000 compliance will not adversely affect the Company. The
following describes the Company's Year 2000 plan that was implemented.
COMPLIANCE PROGRAM. In order to address the Year 2000 issue, the
Company conducted a review of its computer systems, applications and equipment
and 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 made certain investments in its software applications and systems to
ensure that the Company's systems and applications would function properly to,
throughout and beyond the Year 2000.
COMPANY STATE OF READINESS. The awareness phase of the Year 2000
project began with a corporate-wide awareness program. The assessment phase of
the project involved, 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 by
Year 2000 compliant. However, the Company does not consider responses from such
third parties to be conclusive. As a result, management cannot predict any
future potential consequences if these or other third parties are not Year 2000
compliant. Management believes the exposure associated with the Company's
interaction with third parties is minimal.
The Company completed its Year 2000 conversion project in December
1999. All major applications were implemented and testing completed.
COSTS TO ADDRESS YEAR 2000 COMPLIANCE ISSUES. The total cost to the
Company of the Year 2000 project was approximately $0.6 million.
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 was not successful was order management
applications, production applications, financial applications and related third
party software. Potential problems if the Year 2000 compliance program were not
successful would have included 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 was to ensure that all of the
critical systems and processes which are under the direct control of the Company
remained 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 were developed to respond
to any failures as they may occur. Such contingency and business plans were
completed in early November 1999.
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 or adverse development, including
the following factors may impact the achievement of results in or accuracy of
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; the Company's
cash flows;
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<PAGE>
and the Company's ability to draw down funds under its current bank financings
and to enter into new bank financings. The foregoing factors are not exhaustive.
New factors may emerge or changes may occur that impact the Company's operations
and businesses. Forward-looking statements attributable to the Company or
persons acting on behalf of the Company are expressly qualified on the foregoing
or such other factors as may be applicable.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
There have been no material changes in our market risk during the nine months
ended May 27, 2000. For additional information, refer to page 19 of our Annual
Report for the fiscal year ended August 28, 1999.
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<PAGE>
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
There are no material pending legal proceedings to which the Company is
a party or to which any of its property is subject. The Company monitors all
claims, and the Company accrues for those, if any, which management believes may
be adversely decided against the Company and result in money damages to a third
party. 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
11.1 State Re: Computation of Per Share Earnings
27. Financial Data Schedule for the period ended May 27, 2000.
(b) The Company did not file any reports on Form 8-K during the
nine months ended May 27, 2000.
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<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
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