-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Opj6z/A1QjwH09Wr/MjG8ryi4Wt+bQ2GfPQM0ETV0VvMhD5haihGsvPbQJ+r7BRw gyTA0RiJT+HaHVYQgWiQsA== 0000950134-02-014840.txt : 20021121 0000950134-02-014840.hdr.sgml : 20021121 20021121135159 ACCESSION NUMBER: 0000950134-02-014840 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 11 CONFORMED PERIOD OF REPORT: 20020831 FILED AS OF DATE: 20021121 FILER: COMPANY DATA: COMPANY CONFORMED NAME: AMERICAN ACHIEVEMENT CORP CENTRAL INDEX KEY: 0001168468 STANDARD INDUSTRIAL CLASSIFICATION: JEWELRY, PRECIOUS METAL [3911] IRS NUMBER: 314126506 STATE OF INCORPORATION: DE FISCAL YEAR END: 0831 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 333-84294 FILM NUMBER: 02835886 MAIL ADDRESS: STREET 1: 7211 CIRCLES S ROAD CITY: AUSTIN STATE: TX ZIP: 78745 10-K 1 d00714e10vk.txt FORM 10-K FOR FISCAL YEAR END AUGUST 31, 2002 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 --------------------- FORM 10-K --------------------- [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED AUGUST 31, 2002 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
AMERICAN ACHIEVEMENT CORPORATION (Exact name of registrant as specified in its charter) DELAWARE 13-4126506 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification Number) 7211 CIRCLE S ROAD AUSTIN, TEXAS 78745 (Address of principal executive offices) (Zip Code)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE (512) 444-0571 SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED ------------------- ----------------------------------------- None None
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: NONE Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ]. (Prior to April 8, 2002, registrant was not subject to such filing requirements.) Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X] (Not Applicable) The aggregate market value of the voting stock held by non-affiliates at August 31, 2002: $0.00 809,351 shares of common stock (Number of shares outstanding as of August 31, 2002) - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- AMERICAN ACHIEVEMENT CORPORATION FORM 10-K FOR THE FISCAL YEAR ENDED AUGUST 31, 2002 INDEX
PAGE ---- PART I Item 1. Business.................................................... 2 Item 2. Properties.................................................. 10 Item 3. Legal Proceedings........................................... 10 Item 4. Submission of Matters to a Vote of Security Holders......... 10 PART II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters......................................... 10 Item 6. Selected Financial Data..................................... 11 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations................................... 12 Item 7A. Quantitative and Qualitative Disclosures About Market Risks....................................................... 19 Item 8. Financial Statements and Supplementary Data................. 21 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.................................... 54 PART III Item 10. Directors and Executive Officers of the Registrant.......... 54 Item 11. Executive Compensation...................................... 56 Item 12. Security Ownership of Certain Beneficial Owners and Management.................................................. 61 Item 13. Certain Relationships and Related Transactions.............. 64 Item 14. Controls and Procedures..................................... 64 Item 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K......................................................... 65 Signatures............................................................ 66
1 SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS This annual report contains forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934. The words "believe," "estimate," "anticipate," "project," "intend," "expect" and similar expressions are intended to identify forward-looking statements. All forward-looking statements involve some risks and uncertainties. In light of these risks and uncertainties, the forward-looking events discussed in this report might not occur. Factors that may cause actual results or events to differ materially from those contemplated by the forward-looking statements include, among other things, the matters discussed under "Item 1. Business" and the following possibilities: - future revenues are lower than expected; - increase in payroll or other costs and/or shortage of an adequate base of employees; - loss of significant customers through bankruptcy, industry consolidation or other factors; - inability to obtain additional capital due to covenant restrictions or other factors, and/or increase in debt levels beyond our ability to support repayment; - costs or difficulties relating to the integration of businesses that we acquire are greater than expected; - expected cost savings or revenues from our acquisitions are not fully realized or realized within the expected time frame; - competitive pressures in the industry increase; - general economic conditions or conditions affecting our industry; - changes in the interest rate environment, and You are cautioned not to place undue reliance on forward-looking statements contained in this report as these speak only as of its date. We undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise except as required by law. PART 1 ITEM 1. BUSINESS GENERAL We are one of the leading manufacturers and suppliers of class rings, yearbooks, graduation products, achievement publications and recognition and affinity jewelry in the United States. Many of our products have leading market share positions that have been developed over many years and are marketed under well-known names such as ArtCarved, Balfour, Keepsake, Taylor Publishing and Who's Who Among American High School Students. Our Balfour and ArtCarved brand names, for example, have been identified with class rings for over 85 years and 45 years, respectively, and the Taylor Publishing brand name has been identified with yearbooks for over 60 years. We distribute our products through various distribution channels, including directly to students and through college bookstores, mass merchandisers, approximately 5,100 independent jewelry stores, many of the nation's largest jewelry chains and direct marketing. Based on the number of units sold, we believe that we were the second largest provider of class rings and yearbooks in the United States during the 2001-2002 school year. Our two principal business segments are: scholastic products and recognition and affinity products. Our scholastic products segment consists of three principal categories: class rings, yearbooks and graduation products, the last of which includes fine paper products and graduation accessories. The scholastic products segment serves the high school, college and, to a lesser extent, the elementary and junior high school markets and accounted for approximately 88% of our net sales for the year ended August 31, 2002. Recognition and affinity products include publications that recognize the academic achievement of top students at the high school and college levels, as well as the nation's most inspiring teachers, jewelry 2 commemorating family events such as the birth of a child, fan affinity jewelry and related products and professional sports championship rings such as World Series, Super Bowl and Stanley Cup rings. This segment accounted for approximately 12% of our net sales for the year ended August 31, 2002. In December 1996, Castle Harlan, Inc., a leading New York private equity firm, through its affiliate Castle Harlan Partners II (CHPII), acquired substantially all of the ArtCarved operations of CJC Holdings, Inc. and the Balfour operations of the L.G. Balfour Company, Inc. Castle Harlan's investment strategy has focused on building a scale competitor in the commemorative products industry that can provide an extensive range of products and services. On June 27, 2000, American Achievement Corporation (formerly known as Commemorative Brands Holding Corporation) was formed as a holding company for the Commemorative Brands, Inc. (CBI) operations and future acquisitions. Since then, we have made several strategic acquisitions and have introduced new, complementary products across our brands and product lines to enhance our market position. The following table summarizes our history and acquisition rationale.
COMPANY ACQUIRED ESTABLISHED ACQUISITION RATIONALE - ----------------- ------------- ----------- ----------------------------------------------- Balfour December 1996 1913 Established a leading position in the high school and college class ring markets and in the graduation products market, with a network of independent sales representatives who market products directly in-school. Also combined with ArtCarved to provide more efficient ring manufacturing. ArtCarved December 1996 1954 Combined with Balfour to further strengthen our position in both the high school and college class rings markets and to expand distribution to retail stores and college bookstores. Taylor Publishing July 2000 1939 Established a leadership position as a publisher of scholastic yearbooks. The addition of Taylor created a scale competitor to better capitalize on opportunities in the scholastic products market and provided us with significant cross-selling opportunities. ECI March 2001 1967 Established a leadership position in the achievement directory publishing niche. The acquisition also expanded our product offerings and further solidified our position in the high school and college commemorative products markets. Milestone July 2002 1993 Reinforces our position as a market leader in commemorative products, and brings a complementary line of clients and products to add to our pre-existing line in the college market.
3 BUSINESS SEGMENTS The following table presents an overview of our business segments, including the net sales of each segment for the year ended August 31, 2002.
BUSINESS SEGMENT PRIMARY PRODUCT LINES AND PRINCIPAL BRAND NAMES - ---------------------------- ------------------------------------------------------------ SCHOLASTIC PRODUCTS ($269.4 MILLION) Class rings ArtCarved, Balfour, Class Rings, Ltd., Keystone, Master Class Rings and R. Johns high school class rings; ArtCarved, Balfour, and Milestone college class rings. Yearbooks Taylor Publishing yearbooks primarily for high schools and colleges. Graduation products ArtCarved (college) and Balfour (high school) graduation products, including customized graduation announcements, name cards, thank-you stationery, diplomas, mini-diplomas, certificates, appreciation gifts, diploma covers and other fine paper accessory items. RECOGNITION AND AFFINITY PRODUCTS ($35.0 MILLION) Achievement publications Who's Who Among American High School Students, The National Dean's List, Who's Who Among America's Teachers, and Who's Who Among American High School Students -- Sports Edition. Jewelry Celebrations of Life, Generations of Love and Namesake personalized family jewelry; Balfour Sports licensed consumer sports jewelry; and Balfour and Keepsake professional sports championship jewelry.
OUR SCHOLASTIC PRODUCTS Our scholastic products business segment consists of three principal categories: class rings, yearbooks and graduation products, the last of which includes fine paper products and graduation accessories. Sales in this segment were approximately $269.4 million and comprised approximately 88% of our total net sales for the year ended August 31, 2002. The table below sets forth our principal product lines, brand names and distribution channels through which we sell our scholastic products.
PRODUCT LINES TRADE OR BRAND NAMES DISTRIBUTION CHANNEL - ----------------------------------- -------------------- ----------------------------------- High school class rings Balfour In-school ArtCarved Independent jewelry stores and jewelry chains R. Johns Independent jewelry stores Keystone Mass merchandisers Class Rings, Ltd. Master Class Rings College class rings ArtCarved College bookstores and direct marketing Balfour College bookstores Milestone Colleges and direct marketing Yearbooks Taylor Publishing In-school High school graduation products Balfour In-school College graduation products ArtCarved College bookstores
4 CLASS RINGS We manufacture class rings for high school and college students and, to a lesser extent, junior high school students. Our rings are marketed under some of the most recognized and respected brand names in the industry, including ArtCarved and Balfour. Our Balfour and ArtCarved brand names have been identified with class rings for over 85 years and 45 years, respectively. During the 2001-2002 school year, we sold rings to students at over 7,500 schools. We offer over 100 styles of class rings ranging from traditional to highly stylish and fashion-oriented designs. Our rings are available in precious or nonprecious metal, and most are available with a choice of more than 50 different types of stones in each of several different cuts. More than 400 designs can be placed on or under the stone and emblems of over 100 activities, sports or achievements can appear on the side of the rings in addition to school crests and mascots. As a result, students can design highly personal rings to commemorate their school experience. We manufacture all of our rings at our own facilities. Each ring is custom manufactured. We maintain an inventory of more than 650,000 unique proprietary ring dies that would be expensive and time consuming to replicate. The production process takes approximately two to eight weeks from receipt of the customer's order to product shipment, depending on style, option selections and new or custom tooling requirements. We use computer aided design software to quickly and cost-effectively convert new custom designs such as school seals, mascots and activities into physical tools capable of producing rings in large quantities. Rings are produced only upon the receipt of a customer order and deposit, which reduces credit risk. During the 2000-2001 school year, we launched our Balfour Identity high school class ring line, which is based on contemporary teen tastes and preferences. This product line also incorporates state-of-the-art tooling into its production platform, which has significantly reduced unit production costs. The same design strategy and production process has been extended to the majority of the Balfour high school product line, with the new designs and tooling available during the 2002-2003 school year. YEARBOOKS We sell yearbooks primarily to high school and college students. We also publish specialty military yearbooks, which, for example, commemorate naval tours of duty at sea, and yearbooks for elementary and junior high schools. Our Taylor Publishing brand name was established in 1939. During the 2001-2002 school year, we sold yearbooks to over 7,500 schools and believe that we were the second largest yearbook publisher in the United States. We publish yearbooks in our own facilities and believe that we are a technology leader. Since 1994, we have made significant expenditures on proprietary software and hardware to support electronic platforms for creating, transmitting and managing yearbook production and printing technology. We also offer full production support for off-the-shelf desktop publishing tools such as PageMaker and Quark Xpress. In addition, by upgrading our printing presses and further integrating digital technology to, among other things, increase the speed of output and automatically monitor ink flow and control color composition, we have been able to enhance print quality and reduce manufacturing costs. The foregoing technology upgrades and enhancements have enabled us to reduce manufacturing costs and improve on-time delivery, performance and print quality. GRADUATION PRODUCTS Graduation products include graduation announcements, name cards, thank-you stationery, memory books, diplomas, certificates, appreciation gifts, diploma covers and other graduation accessory items. All of our graduation products are customized in varying degrees and therefore have short production runs and cycles. Graduation products are manufactured in our own facilities. These products are offered through our independent high school class ring sales representatives and college bookstores. We have enhanced our college website to enable students to order graduation products on-line. We believe that, over time, this will increase sales of our graduation products and, in particular, personalized 5 college announcements that include a student's name, degree and other personal information in the text of the announcement. We also intend to leverage our existing channels of distribution and, in particular, our presence in college bookstores to further increase sales of these products. OUR RECOGNITION AND AFFINITY PRODUCTS Our recognition and affinity products segment consists of two categories: achievement publications and recognition and affinity jewelry. The latter category includes affinity group, personalized family, fan affinity sports and professional sports championship jewelry. Sales in this segment were approximately $35 million and comprised approximately 12% of our total net sales for the year ended August 31, 2002. The table below sets forth the principal product lines and brand names of our recognition and affinity products and the distribution channels through which we sell these products.
PRODUCT LINES TRADE OR BRAND NAMES DISTRIBUTION CHANNEL - ------------------------------ ------------------------------ ------------------------------ Achievement Publications Who's Who Among American Direct marketing High School Students The National Dean's List Who's Who Among America's Teachers Who's Who Among American High School Students -- Sports Edition Recognition and Affinity Jewelry: Affinity Group Jewelry Keepsake Direct to consumer R. Johns Personalized Family Celebrations of Life Independent jewelry stores Jewelry Generations of Love Jewelry chains and mass merchandisers Namesake Mass merchandisers Fan Affinity Sports Balfour Sports Mass merchandisers and catalog Jewelry Professional Sports Balfour Direct to consumer Championship Jewelry
ACHIEVEMENT PUBLICATIONS We produce the following four publications: Who's Who Among American High School Students. First published in 1967, this annual publication is the largest academic achievement publication in the nation honoring high-achieving high school students. The 1st edition recognized approximately 13,000 students from approximately 4,000 high schools. The current 36th edition honors approximately 850,000 students, from freshmen through seniors. Nominees represent over 22,000 of the nation's approximately 24,000 private, public and parochial high schools on the basis of academic achievement, class rank and extracurricular activities. The National Dean's List. First published in 1978, this publication is the largest annual recognition publication in the nation honoring exceptional college students. The 1st edition recognized over 25,000 students from approximately 700 universities. The most recent 25th edition honors approximately 200,000 high-achieving students, representing in excess of 2,500 colleges and universities throughout the country. Who's Who Among America's Teachers. First published in 1990, this publication pays tribute to the country's most inspiring teachers, who are nominated for inclusion by current and/or former Who's Who high school students. Published every two years, the 7th edition was published in 2002 and honored approximately 140,000 outstanding teachers. 6 Who's Who Among American High School Students -- Sports Edition. First published in August 2002, this publication recognized 20,000 high school accomplished athletes. We also sell related products consisting of plaques, certificates, gold and silver pins and charms, mugs, key chains, paper weights and other items commemorating a student's or teacher's inclusion in one of our achievement publications. The primary customer base for our achievement publications and related products are the students and teachers featured in the publications and their families. We have an established network of nomination sources built up over 30 years, which we utilize to recognize students and teachers from the majority of the private, public and parochial schools in the country. Students and teachers are not required to purchase publications in order to be included in them. Printing for our achievement publications is outsourced. RECOGNITION AND AFFINITY JEWELRY Recognition and affinity jewelry consist of the following product categories: Affinity Group Jewelry. Affinity group jewelry is sold to members of large groups and associations. The jewelry features emblems of, and otherwise commemorates accomplishments within, the group. For example, through our Keepsake brand, we provide affinity ring awards to the American Bowling Congress, including championship rings for bowlers who score a perfect "300" game. Through our R. Johns brand, we provide affinity rings to military personnel that recognize affiliation and completion of specialized training ranging from basic training to special forces. Personalized Family Jewelry. Our family jewelry products include rings commemorating children's birth dates, which feature a level of personalization, such as birthstones and names, that distinguishes us from our competitors. We also sell other personalized jewelry, such as necklaces and bracelets, designed to commemorate family events. We began our family jewelry business in 1997 and, by 2002, we had grown this business to $7.9 million in net sales by leveraging these products through our existing channels of distribution. We intend to further grow our family jewelry business through product extensions, including baby rings for scrapbooks, grandmother's products such as pins and pendants, daughter's rings and sweet 16 memorabilia. We provide personalized family jewelry under our Celebrations of Life, Generations of Love and Namesake brand names. Fan Affinity Sports Jewelry. We produce a variety of team affiliation products. For example, we manufacture Balfour Sports brand National Football League rings, pendants, paperweights and coasters containing team logos, mascots and colors. Professional Sports Championship Jewelry. We provide sports championship jewelry for professional teams and their members and have, for example, produced several Super Bowl, Stanley Cup and World Series rings, including the rings for the New York Yankees in 1996, 1998, 1999 and 2000 and the 1999 Japanese World Series ring. We provide sports championship jewelry under the Balfour brand. SALES AND MARKETING We have approximately 210 independent high school class ring and over 200 independent yearbook sales representatives, with an average tenure with our company of approximately 14 and 11 years, respectively. We also have approximately 30 employee college class ring sales representatives. We compensate our independent sales representatives on a commission basis. Most independent sales representatives also receive a monthly draw against commissions earned, although all expenses, including promotional materials made available by us, are the responsibility of the representative. Our independent sales representatives operate under exclusive contracts that contain non-compete arrangements. Employee sales representatives receive a combination of salary and sales incentives. At the high school level, class rings are sold through two channels of distribution: independent sales representatives selling directly to students and retail stores, which include independent jewelry stores, jewelry chains and mass merchandisers. We believe that we are the leading supplier of high school class rings to retail 7 stores. Our high school class rings are sold by approximately 5,100 independent jewelry retailers, many of the nation's largest jewelry chains, including Zales, Gordons and Sterling, and by mass merchants, including Wal-Mart. We sell different brands and product lines in retail stores in order to enable them to differentiate their products from those sold by us directly to students at schools. College rings are sold primarily through college bookstores by our employee sales representatives. Historically, college bookstores have been owned and operated by academic institutions. Over the last several years, an increasing number of college bookstores have been leased to contract operators, primarily Barnes and Noble Bookstores and Follett Corporation, with which we have longstanding relationships. Decisions to include our products are made on a national basis by the bookstore operator. Yearbooks are produced under an exclusive contract with the school for the academic year and are sold directly to students by the school. Under the terms of the contract, the school agrees to pay us a base price for producing the yearbook, which often increases before production as a result of enhancements to the contract specifications, such as additional color pages. Our independent yearbook sales representatives call on schools at the contract stage. Thereafter, they coordinate between the school's yearbook committee and our customer service and plant employees to ensure satisfactory quality and service. Graduation products are sold directly to students through our network of independent high school class ring sales representatives and in college bookstores through our network of employee sales representatives. Achievement publications are sold through direct marketing. Other affinity products are sold through a variety of distribution channels, including team stores, catalogs and retail stores. These products are sold to wholesale accounts through employee sales representatives. INTELLECTUAL PROPERTY We have trademarks, patents and licenses that in the aggregate are an important part of our business. However, we do not regard our business as being materially dependent upon any single trademark, patent or license. We have trademark registration applications pending and intend to pursue other registrations as appropriate to establish and preserve our intellectual property rights. We market our products under many trademarked brand names, some of which rank among the most recognized and respected names in the jewelry industry, including ArtCarved, Balfour, Celebrations of Life, Class Rings, Ltd., Generations of Love, Keepsake, Keystone, Master Class Rings, Namesake, R. Johns, Taylor Publishing, The National Dean's List, Who's Who Among American High School Students and Who's Who Among America's Teachers. Generally, a trademark registration will remain in effect so long as the trademark remains in use by the registered holder and any required renewals are obtained. We also own several patented ring designs and business process patents. We also have non-exclusive licensing arrangements with the National Football League and numerous colleges and universities under which we have the right to use the name and other trademarks and logos of the NFL and those schools, respectively, on our products. COMPETITION SCHOLASTIC PRODUCTS The class ring, yearbook and graduation products markets are highly concentrated and consist primarily of a few large national participants. We believe that we are the second largest competitor nationally within the scholastic products market (excluding photography). Our principal competitors in the class ring market are Jostens, Inc. and Herff Jones, Inc., which compete with us nationally across all product lines. Our principal competitors in the yearbook and graduation products markets are Jostens, Herff Jones and Walsworth Publishing Company. All competitors in the scholastic products industry compete primarily on the basis of quality, marketing, customer service and, to a lesser extent, price. RECOGNITION AND AFFINITY PRODUCTS We have limited competition for our student achievement publications, with only a small percentage of the high school and college students included in our publications also included in the publications of our 8 competitors. We have no direct competition in the teacher recognition market. Our affinity group jewelry products, fan affinity sports jewelry and products and our professional sports championship jewelry businesses compete with Jostens and, to a lesser extent, with various other companies. Our personalized family jewelry products compete mainly with A&A Jewelry and Bogarz. We compete with our affinity product competitors primarily on the basis of quality, marketing, customer service and price. RAW MATERIALS AND SUPPLIERS The principal raw materials that we purchase are gold and precious, semi-precious and synthetic stones that we use in our class rings and jewelry and paper and ink that we use in our yearbook and graduation products. Our raw materials are purchased from multiple suppliers at market prices, except that we purchase substantially all synthetic and semi-precious stones from a single supplier with multiple plants, which we believe supplies substantially all of these types of stones to almost all of the class ring manufacturers in the United States. Synthetic and semi-precious stones are available from other suppliers, although switching to these suppliers may result in additional costs to us. We periodically reset our prices to reflect the then current prices of raw materials. In addition, we engage in various hedging transactions to reduce the effects of fluctuations in the price of gold. We also purchase paper on an annual commitment basis so that we are able to estimate yearbook costs with greater certainty. ENVIRONMENTAL We are subject to federal, state and local laws, ordinances and regulations that establish various health and environmental quality standards and provide penalties for violations of those standards. Past and present manufacturing operations subject us to environmental laws that regulate the use, handling and contracting for disposal or recycling of hazardous or toxic substances, the discharge of particles into the air and the discharge of process wastewaters into sewers. We believe that we are in substantial compliance with all material environmental laws. We believe that we have adequate environmental insurance and indemnities to sufficiently cover any liabilities that may exist and that we do not currently face environmental liabilities that could have a material adverse affect on our financial position or results of operations. BACKLOG Because of the nature of our business, generally all orders (except yearbooks) are filled between two and eight weeks after the time of placement. We enter into yearbook contracts several months prior to delivery. While the base prices of the yearbooks are established at the time of order, the final prices of the yearbooks are often not calculated at that time since the content of the books generally change prior to publication. We estimate (calculated on the basis of the base price of yearbooks ordered) that the backlog of orders related to continuing operations was approximately $82.9 million as of August 31, 2002, almost exclusively related to student yearbooks. We expect substantially all of the backlog at August 31, 2002 to be filled in fiscal 2003. EMPLOYEES Given the seasonality of our business, the number of our employees fluctuates throughout the year, with the number typically being highest during September through May and lowest from June to August. As of August 31, 2002, we employed approximately 2,400 employees. Most of our hourly employees are members of two separate unions, although we believe that a significant number of these employees are non-dues paying members. Most of our hourly production and maintenance employees located at our Austin, Texas manufacturing facility are represented by the United Brotherhood of Carpenters and Joiners Union, and most of our hourly employees located at our Dallas, Texas manufacturing facility are represented by the Graphics Communication International Union. In June 2000, our subsidiary CBI and the United Brotherhood of Carpenters and Joiners Union signed a collective bargaining agreement that will expire in May 2003. Taylor and the Graphics Communication International Union signed two collective bargaining agreements that will expire in July 2003 and February 2004, respectively. 9 We have not experienced any significant work stoppages or employee-related problems that had a material impact on our operations. We consider our relationship with our employees to be good. ITEM 2. PROPERTIES Our principal headquarters and executive offices are located at 7211 Circle S Road, Austin, Texas. We believe that our facilities are suitable for their purpose and adequate to support our business. The extent of utilization of individual facilities varies due to the seasonal nature of our business. A summary of the physical properties that we use are as follows:
APPROXIMATE LOCATION TYPE OF PROPERTY LEASED OR OWNED SQUARE FOOTAGE - -------------- --------------------------- --------------- -------------- Austin, TX Administration (Achievement Leased 6,100 Publications) Austin, TX Corporate Headquarters Owned 20,000 Austin, TX Jewelry Manufacturing Owned 99,830 Austin, TX Warehouse Facility Leased 30,600 Dallas, TX Administration (Yearbooks), Owned 320,000 Pre-Press, Press, Bindery El Paso, TX Jewelry Manufacturing Leased 20,000 El Paso, TX Pre-Press Leased 52,000 Eston, PA Administration (Jewelry) Leased 4,136 Juarez, Mexico Jewelry Manufacturing Leased 20,000 Louisville, KY Fine Paper Manufacturing Leased 100,000 Malverne, PA Press, Bindery Leased 128,000 San Angelo, TX Pre-Press, Press, Bindery Leased 78,000
ITEM 3. LEGAL PROCEEDINGS The Company is not a party to any pending legal proceedings other than ordinary routine litigation incidental to the business. In management's opinion, adverse decisions on legal proceedings, in the aggregate, would not have a materially adverse impact on the Company's results of operations or financial position. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None. PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS There is no established public trading market for the Company's common stock, par value $0.01 per share ("Common Stock"). At August 31, 2002, there were 27 holders of record of the Common Stock. The Company has never declared dividends on its Common Stock. The Company is restricted from paying dividends by certain of its bank debt covenants and the indenture pursuant to which its senior subordinated notes were issued (see "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Liquidity and Capital Resources") and by provisions of the Company's outstanding class of preferred stock. The Company intends to retain any earnings for internal investment and debt reduction, and does not intend to declare dividends on its Common Stock in the foreseeable future. 10 ITEM 6. SELECTED FINANCIAL DATA The following table presents summary historical financial and other data for the Company and should be read in conjunction with the financial statements of the Company and the notes thereto and "Management's Discussion and Analysis of Financial Condition and Results of Operations" included in Item 7 herein.
FOR THE YEAR ENDED ----------------------------------------------------------------- AUGUST 31, AUGUST 25, AUGUST 26, AUGUST 28, AUGUST 29, 2002(6) 2001(1)(5) 2000(4) 1999 1998 ---------- ------------- ---------- ---------- ---------- (DOLLARS IN THOUSANDS) STATEMENT OF INCOME DATA: Net sales............................. $304,378 $281,053 $182,285 $168,865 $151,101 Cost of sales......................... 146,898 142,164 80,929 73,268 72,615 -------- -------- -------- -------- -------- Gross profit........................ 157,480 138,889 101,356 95,597 78,486 Selling, general and administrative expenses............................ 129,734 119,972 85,559 85,075 68,294 -------- -------- -------- -------- -------- Operating income.................... 27,746 18,917 15,797 10,522 10,192 Income (loss) before provision for income taxes........................ (1,063) (3,929) 106 (4,072) (4,637) (Provision) benefit for income taxes............................... 1,171 1,443 (333) (120) -- Gain (loss) on extinguishment of debt, net of taxes........................ (5,650) -- 6,695 -- -- Cumulative effect of change in accounting principle................ -- (1,835) -- -- -- Net income (loss)..................... (5,542) (4,321) 6,468 (4,192) (4,637) OTHER DATA: EBITDA(2)............................. $ 47,458 $ 36,503 $ 24,897 $ 17,698 $ 17,093 Interest expense...................... 26,026 22,846 15,691 14,594 14,829 Depreciation and amortization......... 19,712 17,586 9,100 7,176 6,901 Capital expenditures.................. 14,247 7,499 5,087 9,785 6,610 BALANCE SHEET DATA (AT END OF PERIOD): Total assets.......................... $401,626 $384,971 $326,553 $209,845 $203,805 Total debt(3)......................... 242,117 223,609 191,253 134,410 134,322 Total stockholders' equity............ 65,254 70,828 63,098 37,830 34,836
- --------------- (1) Includes the results of operations for ECI, from its acquisition on March 30, 2001. ECI sales are highly seasonal with most shipments generally occurring in the first four months of our fiscal year. (2) EBITDA represents earnings before interest expense, taxes, depreciation and amortization and excludes extraordinary gains and losses and other expense related to interest rate swaps. EBITDA does not represent net income or cash flows from operations, as these terms are defined under generally accepted accounting principles, and should not be considered as an alternative to net income as an indicator of our operating performance or to cash flows as a measure of liquidity. We have included information concerning EBITDA because we use such information as a method of assessing our cash flow and ability to service debt. The EBITDA measure presented herein is not necessarily comparable to similarly titled measures reported by other companies. (3) Excludes bank overdraft. (4) Includes the results of operations for Taylor Publishing, from its acquisition on July 27, 2000. (5) The restated consolidated financial statements for the year ended August 25, 2001, reflects (1) the Company's change in revenue recognition policy on certain sales to independent sales representatives in order to comply with the provisions of Securities and Exchange Commission Staff Accounting Bulletin No. 101, effective August 27, 2000, the beginning of the fiscal year, and (2) an income tax benefit related to a net operating loss carryback attributable to one of the Company's subsidiaries, which should have been recognized during the year ended August 25, 2001. (6) Includes the results of operations of Milestone Marketing, from its acquisition on July 15, 2002. 11 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion of our consolidated financial condition and results of operations should be read in conjunction with the information contained in our consolidated financial statements and the notes thereto. The following discussion includes forward-looking statements that involve certain risks and uncertainties. See "Disclosure Regarding Forward-Looking Statements." As discussed in Note 16 to the Consolidated Financial Statements included in Item 8, the financial statements for the year ended August 25, 2001 have been restated. The following Management's Discussion and Analysis reflects this restatement. OVERVIEW We are one of the leading manufacturers and suppliers of class rings, yearbooks, academic achievement publications and recognition and affinity jewelry in the United States. Our two principal business segments are: scholastic products and recognition and affinity products. The scholastic products segment serves the high school, college and, to a lesser extent, the elementary and junior high school markets and accounted for approximately 88% of our net sales for the fiscal year ended August 31, 2002. Our scholastic products segment consists of three principal categories: class rings, yearbooks and graduation products, the last of which includes fine paper products and graduation accessories. The recognition and affinity products segment accounted for approximately 12% of our net sales for the fiscal year ended August 31, 2002. This segment provides, among other things, publications that recognize the academic achievement of top students at the high school and college levels, as well as the nation's most inspiring teachers, jewelry commemorating family events such as the birth of a child, fan affinity jewelry and related products and professional sports championship rings such as World Series rings. COMPANY BACKGROUND Commemorative Brands, Inc., or CBI was initially formed by CHPII in March 1996 for the purpose of acquiring substantially all of the ArtCarved operations of CJC Holdings, Inc. and the Balfour operations of L.G. Balfour Company, Inc. These acquisitions were consummated on December 16, 1996. Until such date, CBI engaged in no business activities other than in connection with the completion of the acquisitions and the financing thereof. Our company was formed on June 27, 2000 to serve as a holding company for the CBI operations and future acquisitions. Upon formation, each share of CBI's issued and outstanding Common Stock was converted into one share of our Common Stock, and each share of CBI's issued and outstanding series B preferred stock was converted into one share of our series A preferred stock. The original holders of CBI's series A preferred stock continued to hold such shares. We changed our name from Commemorative Brands Holding Corporation to American Achievement Corporation on January 23, 2002. Taylor Acquisition. On February 11, 2000, CHPIII acquired Taylor, whose primary business is the designing and printing of student yearbooks. On July 27, 2000, we acquired all issued and outstanding shares of Taylor Senior Holding Corp., or TSHC, Taylor's parent, through the issuance of 320,929 shares of our common stock and 393,482 shares of our series A preferred stock (the "Taylor Acquisition"). The Taylor Acquisition was accounted for under the purchase method of accounting. Accordingly, our consolidated financial statements for 2000 include the results of operations for consolidated TSHC for the period from July 27, 2000 to August 26, 2000. ECI Acquisition. On March 30, 2001, we acquired all of the capital stock of ECI for a purchase price of approximately $58.7 million (the "ECI Acquisition"). ECI has been in the academic achievement publication business since 1967 and publishes such well-known titles as, Who's Who Among American High School Students, The National Dean's List and Who's Who Among America's Teachers. The ECI Acquisition was accounted for under the purchase method of accounting. As a result of this transaction, our consolidated financial statements for 2001 include the results of operations for ECI for the period from March 30, 2001 to August 25, 2001. 12 Milestone Acquisition. On July 9, 2002, we acquired all the issued and outstanding stock and warrants of Milestone Marketing Incorporated ("Milestone") for a purchase price of approximately $15.9 million (the "Milestone Acquisition"). Milestone is a specialty marketer of class rings and other graduation products to the college market. The Milestone Acquisition was accounted for under the purchase method of accounting. As a result of this transaction, our consolidated financial statements for 2002 include the results of operations for Milestone for the period from July 15, 2002 to August 31, 2002. CRITICAL ACCOUNTING POLICIES We prepare our consolidated financial statements in conformity with accounting principles generally accepted in the United States of America. As such, we are required to make certain estimates, judgments and assumptions that we believe are reasonable based upon the information available. These estimates and assumptions affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the periods presented. The significant accounting policies which we believe are the most critical to aid in fully understanding and evaluating our reported financial results include the following: Revenue Recognition. We recognize revenue when the earnings process is complete, evidenced by an agreement between AAC and the customer, delivery and acceptance has occurred, collectibility is reasonably assured and pricing is fixed and determinable. In accordance with the Securities and Exchange Commissions Staff Accounting Bulletin No. 101, the recognition of revenue and related gross profit on sales to independent sales representatives, along with commissions to independent sales representatives that are directly related to the revenue, are deferred until the independent sales representative delivers the product and title passes to the Company's end customer. Provisions for sales returns and warranty costs are recorded at the time of sale based on historical information and current trends. Sales Returns and Allowances. We make estimates of potential future product returns related to current period product revenue. We analyze historical returns, current economic trends and changes in customer demand and acceptance of our products when evaluating the adequacy of the sales returns and allowances. Significant management judgments and estimates must be made and used in connection with establishing the sales returns and allowances in any accounting period. Material differences could result in the amount and timing of our revenue for any period if we made different judgments or utilized different estimates. Allowance for Doubtful Accounts and Reserve on Sales Representative Advances. We make estimates of potentially uncollectible customer accounts receivable and receivables arising from sales representative draws paid in excess of earned commissions. Our reserves are based on an analysis of customer and salesperson accounts and historical write-off experience. Our analysis includes the age of the receivable, customer or salesperson creditworthiness and general economic conditions. We believe the results could be materially different if historical trends do not reflect actual results or if economic conditions worsened. 13 RESULTS OF OPERATIONS The following table sets forth selected information from our consolidated statements of operations expressed on an actual basis and as a percentage of net sales.
FOR THE YEAR ENDED ---------------------------------------------------------------- AUGUST 31, 2002 AUGUST 25, 2001 AUGUST 26, 2000 ------------------- ------------------- ------------------- % OF NET % OF NET % OF NET ACTUAL SALES ACTUAL SALES ACTUAL SALES -------- -------- -------- -------- -------- -------- (DOLLARS IN THOUSANDS) Net sales........................ $304,378 100.0% $281,053 100.0% $182,285 100.0% Cost of sales.................... 146,898 48.3 142,164 50.6 80,929 44.4 -------- ----- -------- ----- -------- ----- Gross profit................... 157,480 51.7 138,889 49.4 101,356 55.6 Selling, general and administrative expenses........ 129,734 42.6 119,972 42.7 85,559 46.9 -------- ----- -------- ----- -------- ----- Operating income............... 27,746 9.1 18,917 6.7 15,797 8.7 Interest expense, net............ 26,026 8.6 22,846 8.1 15,691 8.6 Other expense.................... 2,783 0.9 -- -- -- -- -------- ----- -------- ----- -------- ----- Income (loss) before provision for income taxes............ (1,063) (0.4) (3,929) (1.4) 106 0.1 (Provision) benefit for income taxes.......................... 1,171 0.4 1,443 0.5 (333) (0.2) Gain (loss) on extinguishment of debt, net of income taxes...... (5,650) (1.9) -- -- 6,695 3.7 Cumulative effect of change in accounting principle........... -- -- (1,835) (0.6) -- -- -------- ----- -------- ----- -------- ----- Net income (loss).............. $ (5,542) (1.8)% $ (4,321) (1.5)% $ 6,468 3.5% ======== ===== ======== ===== ======== =====
The following table sets forth sales by business segment expressed on an actual basis and as a percentage of net sales.
FOR THE YEAR ENDED --------------------------------------------------------------- AUGUST 31, 2002 AUGUST 25, 2001 AUGUST 26, 2000 ------------------- ------------------- ------------------- % OF NET % OF NET % OF NET ACTUAL SALES ACTUAL SALES ACTUAL SALES -------- -------- -------- -------- -------- -------- Scholastic Products............... $269,362 88.5% $258,435 92.0% $163,347 89.6% Recognition and Affinity Products........................ 35,016 11.5 22,618 8.0 18,938 10.4 -------- ----- -------- ----- -------- ----- Net sales......................... $304,378 100.0% $281,053 100.0% $182,285 100.0% ======== ===== ======== ===== ======== =====
YEAR ENDED AUGUST 31, 2002 COMPARED TO YEAR ENDED AUGUST 25, 2001 Net Sales. Net sales increased $23.3 million, or 8.3%, to $304.4 million in 2002, from $281.1 million in 2001. This increase was due primarily to the inclusion of $16.2 million of net sales from ECI in 2002, which was acquired on March 30, 2001, as compared to $0.7 million in 2001 and an increase in sales of other product lines. The following details the changes in net sales during such periods by business segment. Scholastic Products. Net sales increased $10.9 million, or 4.2% to $269.4 million in 2002 from $258.4 million in 2001. Of this increase, $5.2 million was due to increased unit volumes and selling prices of high school and college class rings and a $4.7 million increase in graduation products and yearbook revenues. The remaining increase was due to the July 15, 2002 acquisition of Milestone. 14 Recognition and Affinity Products. Net sales increased $12.4 million to $35.0 million in 2002 from $22.6 million in 2001. The increase was primarily the result of $16.2 million of net sales attributable to ECI, partially offset by lower sales of sports fan affinity jewelry. Gross Profit. Gross margin was 51.7% in 2002, a 2.3 percentage point increase from 49.4% in 2001. The gross margin increase in 2002 was partially the result of the inclusion of the ECI operations for this period. Excluding ECI, gross margin would have been 50.1% in 2002 compared to 49.4% in 2001. The 0.7 percentage point increase in gross margins was primarily the result of increased operating efficiencies. Selling, General and Administrative Expenses. Selling, general and administrative expenses increased $9.8 million, or 8.1%, to $129.7 million in 2002 from $120.0 million in 2001. As a percentage of net sales, selling, general and administrative expenses decreased 0.1 percentage points in 2002 compared to 2001. Included in selling, general and administrative expenses are two sub-categories: selling and marketing expenses and general and administrative expenses. Selling and marketing expenses increased $7.9 million to $90.6 million, or 29.8% of net sales, in 2002 from $82.7 million, or 29.4% of net sales, in 2001. General and administrative expenses in 2002 were $39.1 million, or 12.9% of net sales, as compared to $37.3 million, or 13.3% of net sales, in 2001. This decrease in general and administrative expenses as a percentage of revenue was a result of realization of the balance of the synergy savings related to Taylor Acquisition, partially offset by increased employee health insurance costs. Operating Income. As a result of the foregoing, operating income was $27.7 million, or 9.1% of net sales, in 2002 as compared with $18.9 million, or 6.7% of net sales, in 2001. The scholastic products segment reported operating income of $23.2 million in 2002 and $20.8 million in 2001. The recognition and affinity products segment reported operating income of $4.5 million in 2002 as compared with an operating loss of $1.9 million in 2001. This increase in the recognition and affinity product segment was primarily attributable to favorable impact of approximately $5.9 million from the ECI acquisition on March 30, 2001. Other Expense. Other expense was $2.8 million in 2002, of which $2.6 million was a result of the termination and reclassification of interest rate swaps that occurred in conjunction with the issuance of the Unsecured Notes and the entering into of our Senior Secured Credit Facility on February 20, 2002. The remaining interest rate swap agreement representing a notional amount of $25 million has been classified as a trading derivative. As such, changes in the fair value of this derivative resulted in a charge of $0.2 million for the period February 20, 2002 to August 31, 2002. As of August 31, 2002, the fair value of this derivative represented a liability of approximately $0.9 million. Interest Expense, Net. Net interest expense was $26.0 million in 2002 and $22.8 million in 2001. The average debt outstanding in 2002 and in 2001 was $225.7 million and $201.2 million, respectively. The weighted average interest rate of debt outstanding in 2002 and in 2001 was 11.5% and 11.4% respectively. Provision/(Benefit) for Income Taxes. For 2002 and 2001, the Company recorded income tax benefit of $1,171,000 and $1,443,000. The Company's benefit relates to the expected annual benefits from the net operating loss carryback generated in years ended August 31, 2002 and August 25, 2001 attributable to Taylor Senior Holding Corp. (TSHC). No net federal income tax benefit is reflected in the statement of operations for net operating losses to be carried forward since realization of the potential benefit of net operating loss carry-forwards is not considered to be more likely than not. Gain (Loss) on Extinguishments of Debt. In conjunction with the issuance of the senior unsecured notes and the senior revolving credit facility on February 20, 2002, the Company paid off the then outstanding term loans and revolver under the former credit facility and bridge notes to affiliates. As a result, a loss of $5.7 million was recognized relating to the write-off of unamortized deferred financing costs. Cumulative Effect of Change in Accounting Principle. The cumulative effect of change in accounting principle, representing a loss of $1.8 million, was recorded due to the adoption of SAB 101 as of August 27, 2000. Net Loss. As a result of the foregoing, we reported a net loss of $5.5 million in 2002 as compared to a net loss of $4.3 million in 2001. 15 YEAR ENDED AUGUST 25, 2001 COMPARED TO YEAR ENDED AUGUST 26, 2000 Net Sales. Net sales increased $98.8 million, or 54.2%, to $281.1 million in 2001 from $182.3 million in 2000. This improvement was primarily the result of the inclusion of Taylor for a full 12 months of operations in 2001 compared to only one month in 2000. The following details the changes in net sales during such periods by business segment. Scholastic Products. Net sales increased $95.1 million, or 58.2%, to $258.4 million in 2001 from $163.3 million in 2000, primarily as a result of the Taylor Acquisition with yearbook net sales increasing $94.7 million in 2001 as compared to 2000. The net sales for the high school segment in both class rings and graduation products increased $4.4 million as a result of increased prices and unit volume. This increase was partially offset by a decline in net sales of retail and college class rings of approximately $4.0 million. Recognition and Affinity Products. Net sales increased $3.7 million, or 19.4%, to $22.6 million in 2001 from $18.9 million in 2000. The increase was largely a result of the Taylor and ECI Acquisitions. This increase was partially offset by lower sales of personalized family jewelry and sports fan affinity jewelry. Gross Profit. Gross margin was 49.4% in 2001, a 6.2 percentage point decline from 55.6% in 2000. The gross margin decline in 2001 was primarily the result of the inclusion of a full 12 months of Taylor operations compared to only one month in 2000. Excluding Taylor and ECI, the 2001 gross margin would have been 57.1%, or 0.5 percentage points greater than 2000. This increase in margin in 2001 (excluding Taylor and ECI) was primarily the result of favorable material costs, a net price increase and favorable operating costs, each of which favorably impacted our class rings margins and increased manufacturing efficiencies for our graduation products. Selling, General and Administrative Expenses. Selling, general and administrative expenses increased $34.4 million, or 40.2%, to $120.0 million in 2001 from $85.6 million in 2000. As a percentage of net sales, however, selling, general and administrative expenses decreased 4.2 percentage points in 2001 as compared to 2000. Selling and marketing expenses increased $24.4 million to $82.7 million, or 29.4% of net sales, in 2001 from $58.3 million, or 32.0% of net sales, in 2000 largely as a result of the Taylor and ECI Acquisitions. Excluding Taylor and ECI effects, the selling and marketing expenses would have increased to 33.8% of net sales from 29.4% of net sales as a result of increased market expenses due to implementing additional growth initiatives. General and administrative expenses increased $9.9 million to $37.2 million, or 13.2% of net sales, in 2001 from $27.3 million, or 14.9% of net sales in 2000. This decrease in general and administrative expenses as a percentage of net sales was a result of partial synergy savings realized from the Taylor Acquisition and additional efficiency savings as a result of a computer system conversion in July 1999. Operating Income (Loss). As a result of the foregoing, operating income was $18.9 million, or 6.7% of net sales, in 2001 as compared with $15.8 million, or 8.7% of net sales, in 2000. The scholastic products segment reported operating income of $20.8 million in 2001 compared with $12.5 million in 2000. The recognition and affinity products segment reported operating loss of $1.9 million in 2001 compared with operating income of $3.3 million in 2000. Interest Expenses Net. Net interest expense was $22.8 million in 2001 compared with $15.7 million in 2000. The $7.1 million increase in interest expense was a result of the increase in debt outstanding as a result of the Taylor and ECI Acquisition. The average debt outstanding during 2001 and 2000 was $201.2 million and $138.6 million, respectively. The weighted average interest rate of debt outstanding as of August 25, 2001 and August 26, 2000 was 11.4% and 11.3%, respectively. Provision (Benefit) for Income Taxes. For 2001, the Company recorded an income tax benefit of $1,443,000. The Company's benefit relates to the expected benefit from the net operating loss carryback generated in the year ended August 25, 2001, attributable to TSHC. There is no federal income tax benefit for net operating loss carryforwards as a valuation allowance exists due to our historical net operating losses. For 2000, the Company recorded a tax provision of $333,000 on income before extraordinary loss and cumulative effect of change in accounting principle, relating primarily to state taxes. 16 Gain on Extinguishment of Debt, Net of Income Taxes. In 1996, our subsidiary CBI issued $90 million in aggregate principal amount of 11% senior subordinated notes (the "Subordinated Notes"). On July 27, 2000, TP Holding Corp., the direct parent of Taylor, purchased $48.6 million in principal amount of the Subordinated Notes at a purchase price equal to 82% of the principal amount of the notes. As a result of the Taylor Acquisition, the transaction was considered an extinguishment of debt and resulted in an extraordinary gain on the sale of the notes of approximately $6.7 million, net of tax. Cumulative effect of change in accounting principle. The cumulative effect of change in accounting principle, representing a loss of $1.8 million, was recorded due to the adoption of SAB 101 as of August 27, 2000. Net (Loss) Income. As a result of the foregoing, we reported net loss of $4.3 million in 2001 as compared to net income of $6.5 million in 2000. SEASONALITY The Company's scholastic product sales tend to be seasonal. Class ring sales are highest during October through December (which overlaps the Company's first and second fiscal quarters), when students have returned to school after the summer recess and orders are taken for class rings for delivery to students before the winter holiday season. Sales of the Company's fine paper products are predominantly made during February through April (which overlaps the Company's second and third fiscal quarters) for graduation in May and June. 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, thus reducing related shipment of products. Yearbook sales are highest during the months of May through June, as yearbooks are typically shipped to schools prior to the school's summer break. The Company's recognition and affinity product line sales are also seasonal. The majority of the sales of achievement publications are shipped in November of each year. The remaining recognition and affinity product line sales 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 Operating Activities. Operating activities provided cash flows of $23.3 million for fiscal 2002 as compared to $10.3 million in fiscal 2001. The $13.0 million increase in cash flows from operating activities between the two periods was primarily the result of an increase in operating cash from net income before depreciation, amortization and other non-cash charges of $3.9 million, a decrease in accounts receivable and income tax receivable of $14.5 million, a decrease in inventories of $0.5 million and a decrease in other assets of $1.9 million. These increases in cash flows were partially offset by an increase in prepaid expenses, other assets and deferred revenue of $6.7 million and a decrease in accounts payable, accrued expenses and other long-term liabilities of $1.0 million. Operating activities provided cash flows of $10.3 million for fiscal 2001 as compared to $9.4 million of cash used in operations for fiscal 2000. The $19.6 million increase in cash flows from operating activities between the two periods was primarily the result of an increase in operating cash from net income before depreciation, amortization and other non-cash charges of $7.6 million, an increase in bank overdraft, accounts payable, accrued expenses and other long-term liabilities of $22.0 million and an increase in inventories and other assets of $2.9 million, partially offset by a decrease in cash due to the change in accounts receivable of $13.7 million and a change in prepaids, other current assets and income tax receivable of $5.9 million. Investing Activities. Capital expenditures in 2002, 2001 and 2000 were $14.2 million, $7.5 million and $5.1 million, respectively. The increase in capital expenditures in 2002 of $6.7 million was primarily attributable to the purchase of two new printing presses at Taylor Publishing. The increase in capital expenditures in 2001 of $2.4 million as compared to 2000 was primarily attributable to capital expenditures related to the Taylor Acquisition and the increased tooling cost due to the new Balfour Identity high school 17 ring series. Also affecting investing activities in 2002, 2001 and 2000 were the Milestone Acquisition, the ECI Acquisition, and Taylor Acquisition. Financing Activities. Net cash provided from financing activities in 2002, 2001 and 2000 was $4.9 million, $48.4 million and $14.7 million, respectively. In February 2002, we issued $177.0 million of senior unsecured notes and entered into a new $40.0 million senior revolving credit facility. The Company paid off the then outstanding term loans and revolver under the former credit agreement, its bridge notes to affiliates and settled all but $25.0 million in notional amount of its interest rate swap agreements. In 2001, in connection with the acquisition of ECI, we entered into the second amended and restated credit agreement whereby we borrowed approximately $27.3 million to fund a portion of the acquisition. In addition, Castle Harlan Partners III (CHPIII) provided us with approximately $24.5 million in cash in return for the issuance of a bridge note representing an obligation of $8.5 million and the issuance of series A preferred stock and common stock for $16.0 million. In 2000, as a result of the acquisition of Taylor, Taylor Holding Corp.'s credit agreement was amended and restated to include CBI as a borrower. In addition, incremental borrowings of approximately $62.6 million were made to repay existing debt of CBI and to repurchase a portion of the outstanding Subordinated Notes. Capital Resources. In February 2002, we entered into a new $40.0 million senior revolving credit facility. As of August 31, 2002, $25.2 million under that facility was outstanding. In connection with the Taylor Acquisition, CBI signed a gold consignment financing agreement with a bank. Under its gold consignment financing agreement, CBI has the ability to have on consignment the lowest of (i) the dollar value of 27,000 troy ounces of gold, (ii) $10.1 million and (iii) a borrowing base, determined based upon a percentage of gold located at CBI's facilities and other approved locations, as specified by the agreement. Under the terms of the consignment arrangement, CBI does not own the consigned gold nor have risk of loss related to such inventory until the money is received by the bank from CBI in payment for the gold purchased. Accordingly, CBI does not include the values of consigned gold in its inventory or the corresponding liability for financial statement purposes. As a result, as of August 31, 2002 and August 25, 2001, CBI held approximately 14,830 ounces and 14,620 ounces, respectively, of gold valued at $4.6 million and $4.0 million, respectively, on consignment from the bank. Cash generated from operating activities and availability under our senior revolving credit facility and prior credit facilities which were paid off in February 2002 have been our principal sources of liquidity. Our liquidity needs arise primarily from debt service, working capital, capital expenditure and general corporate requirements. As of August 31, 2002, we had approximately $13.6 million available under our credit facility. We believe that cash flow from our operating activities combined with the availability of funds under our credit facility will be sufficient to support our operations and liquidity requirements for the foreseeable future. RECENT ACCOUNTING PRONOUNCEMENTS In June 2001, the Financial Accounting Standard Board ("FASB") issued SFAS No. 141, "Business Combinations" and SFAS No. 142, "Goodwill and Other Intangible Assets." SFAS No. 141 addresses financial accounting and reporting for business combinations. Under the new standard, all business combinations entered into after June 30, 2001 must be accounted for by the purchase method. SFAS No. 142 addresses financial accounting and reporting for acquired goodwill and other intangible assets. SFAS No. 142 requires that goodwill no longer be amortized, but instead requires a transitional goodwill impairment assessment and annual impairment tests thereafter. Any transitional impairment loss resulting from the adoption will be recognized as the effect of a change in accounting principle in the income statement. Amortization of goodwill was approximately $4.0 million for the year ended August 31, 2002. The Company adopted SFAS No. 142 on September 1, 2002 and is currently in the process of completing the transitional impairment assessment and calculating any impact on the financial statements. The Company must complete the first step of this test to determine if there is an impairment by February 2003 and, if there is an impairment, the Company must complete the final step and record any impairment by August 2003. SFAS No. 142 also requires that recognized intangible assets be amortized over their respective estimated useful lives. As part of the adoption, the Company is currently reassessing the useful lives and residual values of all 18 intangible assets. Any recognized intangible asset determined to have an indefinite useful life will not be amortized, but instead tested for impairment in accordance with the standard. In August 2001, the Financial Accounting Standards Board issued SFAS No. 143, "Accounting for Asset Retirement Obligations". This statement requires that the fair value of a liability for an asset retirement obligation be recognized in the period in which it is incurred if a reasonable estimate of fair value can be made. The associated asset retirement costs are capitalized as part of the carrying amount of the long-lived asset. SFAS No. 143 will become effective for the Company in fiscal year 2003. The Company is currently evaluating the provisions of SFAS No. 143, but does not believe that the adoption of SFAS No. 143 will have a significant impact on its financial statements. In October 2001, the Financial Accounting Standards Board issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long Lived Assets," which is effective for financial statements issued for fiscal years beginning after December 15, 2001. The Company is currently evaluating the provisions of SFAS No. 144. The financial statement impact of the adoption of SFAS No. 144 has not yet been determined. In April 2002, the Financial Accounting Standards Board issued SFAS No. 145, "Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections". This statement requires, among other things, that gains and losses on the early extinguishment of debt be classified as extraordinary only if they meet the criteria for extraordinary treatment set forth in Accounting Principles Board Opinion No. 30. The provisions of this statement related to classification of gains and losses on the early extinguishment of debt are effective for fiscal years beginning after May 15, 2002. The adoption of SFAS No. 145 will require the Company to reclassify certain extraordinary items into operating income (loss). In June 2002, the Financial Accounting Standards Board issued SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities." This Statement requires recording costs associated with exit or disposal activities at their fair values when a liability has been incurred. Under previous guidance, certain exit costs were accrued upon management's commitment to an exit plan, which is generally before an actual liability has been incurred. The provisions of this Statement are effective for exit or disposal activities that are initiated after December 31, 2002. The Company is currently considering the impact, if any, that this statement will have on the financial statements. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS Interest Rate Risk. We have market risk exposure from changes in interest rates on our variable rate debt. Our policy is to manage interest rate exposure through the use of a combination of fixed and floating rate debt instruments and through the use of interest rate swaps. Our senior revolving credit facility and our gold consignment agreement are variable rate facilities. The interest rates under those facilities are based on a floating benchmark rate (such as LIBOR or the Federal Funds rate) plus a fixed spread. Upon consummation of the issuance of our senior unsecured notes we terminated approximately $1.7 million of our existing swap agreements and interest rate swaps representing a notional amount of $25.0 million remained in place. Our derivatives and other financial instruments subject to interest rate risk consist of long-term debt (including current portion), an interest rate swap and notional amount under the gold consignment agreement. The net fair value of these financial instruments at August 31, 2002 represented a current liability of $0.9 million. If the interest rate on our variable debt increased or decreased by 1% in 2002, our interest expense would have changed by approximately $0.7 million for 2002. As of August 31, 2002, August 25, 2001 and August 26, 2000, the fair value of our debt approximated its carrying value and is estimated based on quoted market prices for comparable instruments. Semi-Precious Stones. We purchase the majority of our semi-precious stones from a single source supplier in Germany. We believe that all of our major competitors purchase their semi-precious stones from this same supplier. The purchases beginning fiscal 2002 are payable in Euros and in 2001 were payable in Deutsche Marks. During 2001, in order to hedge our foreign currency risks, we purchased a total of 19 $2.0 million in forward Deutsche Mark contracts with various maturity dates resulting in a net gain of $0.1 million. In 2000 and 2002 we did not purchase any forward contracts. Gold. We purchase all of our gold requirements from The Bank of Nova Scotia through our revolving credit and gold consignment agreement. We consign the majority of our gold from The Bank of Nova Scotia and pay for gold as the product is shipped to customers and as required by the terms of the gold consignment agreement. As of August 31, 2002, we had hedged our gold requirements for the fiscal year ending August 30, 2003 by covering the majority of our estimated gold requirements through the purchase of gold options. 20 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA INDEPENDENT AUDITORS' REPORT To the Board of Directors and Stockholders of American Achievement Corporation Austin, Texas We have audited the accompanying consolidated balance sheets of American Achievement Corporation and subsidiaries (the "Company") as of August 31, 2002 and August 25, 2001, and the related consolidated statements of operations, stockholders' equity, and cash flows for the years then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. The consolidated financial statements of the Company for the year ended August 26, 2000, were audited by other auditors who have ceased operations. Those auditors expressed an unqualified opinion on those financial statements in their report dated October 19, 2001. Those auditors reported on such financial statements prior to the restatement discussed in Note 16. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of the Company as of August 31, 2002, and August 25, 2001, and the results of their operations and their cash flows for the years then ended in conformity with accounting principles generally accepted in the United States of America. As discussed in Note 16, the accompanying 2001 consolidated financial statements have been restated. As discussed in Note 2, in 2001 the Company changed its method of recognizing revenue on sales to independent sales representatives. /s/ DELOITTE & TOUCHE LLP Austin, Texas November 1, 2002 21 THIS IS A COPY OF A PREVIOUSLY ISSUED REPORT According to the Securities and Exchange Commission's amendment of Rule 2-02 of Regulation S-X, the following report is a copy of a report previously issued by Arthur Andersen LLP, which has ceased operations, and has not been reissued by Arthur Andersen LLP. Arthur Andersen LLP reported on such financial statements prior to the restatement discussed in Note 16. REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To the Stockholders of American Achievement Corporation (f/k/a/ Commemorative Brands Holding Corporation): We have audited the accompanying consolidated balance sheets of American Achievement Corporation (a Delaware corporation, successor to Commemorative Brands Holding Corporation), and subsidiaries as of August 26, 2000, and August 25, 2001 and the related consolidated statements of operations, stockholders' equity and cash flows for the fiscal years ended August 28, 1999, August 26, 2000 and August 25, 2001. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of American Achievement Corporation and subsidiaries as of August 26, 2000, and August 25, 2001 and the results of the operations and their cash flows for the fiscal years ended August 28, 1999, August 26, 2000, and August 25, 2001 in conformity with accounting principles generally accepted in the United States. Our audit was made for the purpose of forming an opinion on the basic financial statements taken as a whole. The schedule listed in the index of financial statements on valuation and qualifying accounts is presented for purposes of complying with the Securities and Exchange Commission's rules and is not part of the basic financial statements. This schedule has been subjected to the auditing procedures applied in the audit of the basic financial statements and, in our opinion, fairly states in all material respects the financial data required to be set forth therein in relation to the basic financial statements taken as a whole. ARTHUR ANDERSEN LLP Austin, Texas October 19, 2001 22 AMERICAN ACHIEVEMENT CORPORATION CONSOLIDATED BALANCE SHEETS
AUGUST 31, AUGUST 25, 2002 2001 ---------- ------------------- (AS RESTATED -- SEE NOTE 16) (DOLLARS IN THOUSANDS, EXCEPT SHARE DATA) ASSETS CURRENT ASSETS: Cash and cash equivalents................................. $ 1,562 $ 2,636 Accounts receivable, net of allowance for doubtful accounts of $3,578, and $3,379, respectively........... 46,326 49,931 Income tax receivable..................................... 738 776 Inventories, net.......................................... 25,427 26,672 Prepaid expenses and other current assets, net............ 28,021 20,158 -------- -------- Total current assets................................. 102,074 100,173 PROPERTY, PLANT AND EQUIPMENT, net.......................... 66,592 64,842 TRADEMARKS, net of accumulated amortization of $5,485 and $3,942, respectively...................................... 41,855 42,299 GOODWILL, net of accumulated amortization of $15,634 and $11,655, respectively..................................... 159,308 147,497 OTHER ASSETS, net of accumulated amortization of $5,701 and $4,487.................................................... 31,797 30,160 -------- -------- Total assets......................................... $401,626 $384,971 ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Bank overdraft............................................ $ 4,324 $ 4,498 Accounts payable.......................................... 9,364 10,945 Customer deposits......................................... 23,649 24,180 Accrued expenses.......................................... 24,773 21,695 Deferred revenue.......................................... 6,515 6,799 Accrued interest.......................................... 4,138 2,240 Current portion of long-term debt......................... -- 12,900 -------- -------- Total current liabilities............................ 72,763 83,257 LONG-TERM DEBT, net of current portion...................... 242,117 210,709 OTHER LONG-TERM LIABILITIES................................. 4,642 4,527 -------- -------- Total liabilities.................................... 319,522 298,493 REDEEMABLE MINORITY INTEREST IN SUBSIDIARY.................. 16,850 15,650 COMMITMENTS AND CONTINGENCIES STOCKHOLDERS' EQUITY: Series A preferred stock, $.01 par value, 1,200,000 shares authorized, 1,006,847 shares and 1,001,347 shares issued and outstanding, respectively, liquidation preference of $100,685, and $100,135, respectively..... 10 10 Common stock, $.01 par value, 1,250,000 shares authorized 809,351 shares issued and outstanding.................. 8 8 Additional paid-in capital................................ 95,310 94,760 Accumulated deficit....................................... (27,941) (21,199) Accumulated other comprehensive loss...................... (2,133) (2,751) -------- -------- Total stockholders' equity........................... 65,254 70,828 -------- -------- Total liabilities and stockholders' equity........... $401,626 $384,971 ======== ========
The accompanying notes are an integral part of these consolidated financial statements. 23 AMERICAN ACHIEVEMENT CORPORATION CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEAR ENDED ------------------------------------- AUGUST 31, AUGUST 25, AUGUST 26, 2002 2001 2000 ---------- ----------- ---------- (AS RESTATED -- SEE NOTE 16) (DOLLARS IN THOUSANDS) Net sales................................................... $304,378 $281,053 $182,285 Cost of sales............................................... 146,898 142,164 80,929 -------- -------- -------- Gross profit.............................................. 157,480 138,889 101,356 Selling, general and administrative expenses................ 129,734 119,972 85,559 -------- -------- -------- Operating income.......................................... 27,746 18,917 15,797 Interest expense, net....................................... 26,026 22,846 15,691 Other expense............................................... 2,783 -- -- -------- -------- -------- (Loss) income before income taxes......................... (1,063) (3,929) 106 Benefit (provision) for income taxes...................... 1,171 1,443 (333) -------- -------- -------- Income (loss) before extraordinary item and cumulative effect of change in accounting principle............... 108 (2,486) (227) Extraordinary (loss) gain on extinguishment of debt, net of income taxes of $46 in 2000............................... (5,650) -- 6,695 Cumulative effect of change in accounting principle......... -- (1,835) -- -------- -------- -------- Net (loss) income......................................... (5,542) (4,321) 6,468 Preferred dividends......................................... (1,200) (1,200) (1,200) -------- -------- -------- Net (loss) income applicable to common stockholders....... $ (6,742) $ (5,521) $ 5,268 ======== ======== ========
The accompanying notes are an integral part of these consolidated financial statements. 24 AMERICAN ACHIEVEMENT CORPORATION CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
PREFERRED STOCK ---------------------------------------------------------- SERIES A SERIES B -------------------------------------- ----------------- AMERICAN ACHIEVEMENT CBI INC. "OLD" "NEW" CBI INC. "OLD" ----------------- ------------------ ----------------- SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT -------- ------ --------- ------ -------- ------ (DOLLARS IN THOUSANDS, EXCEPT SHARE DATA) BALANCE, August 28, 1999................................ 100,000 $ 1 -- $-- 460,985 $ 5 Reclassification of CBI Inc. "Old" Series A preferred stock to redeemable minority interest in subsidiary in connection with the July 27, 2000 Merger of CBI Inc. and American Achievement (Note 13)..................... (100,000) (1) -- -- -- -- Issuance of American Achievement "New" Series A......... Preferred and "New" Common in exchange for CBI Inc. "Old" Series B Preferred and "Old" Common.............. -- -- 460,985 5 (460,985) (5) Issuance of American Achievement "New" Common and "New" Series A Preferred in acquisition of Taylor............ -- -- 393,482 4 -- -- Accrued dividends on minority interest in CBI, Inc...... -- -- -- -- -- -- Net income and total comprehensive income............... -- -- -- -- -- -- -------- --- --------- --- -------- --- BALANCE, August 26, 2000................................ -- -- 854,467 9 -- -- -------- --- --------- --- -------- --- Comprehensive loss -- Net loss (as restated, see Note 16)..................... -- -- -- -- -- -- Adjustment to minimum pension liability................. -- -- -- -- -- -- Change in effective portion of derivative loss.......... -- -- -- -- -- -- Total comprehensive loss................................ -- -- -- -- -- -- Issuance of American Achievement Series B Preferred Stock.................................................. -- -- -- -- -- -- Exchange of Series B Preferred Stock for Series A and common stock........................................... -- -- 146,880 1 -- -- Accrued dividends on minority interest in CBI, Inc...... -- -- -- -- -- -- Exercise of Stock Options............................... -- -- -- -- -- -- -------- --- --------- --- -------- --- BALANCE, August 25, 2001 (as restated, see Note 16)..... -- -- 1,001,347 10 -- -- -------- --- --------- --- -------- --- Comprehensive loss -- Net loss................................................ -- -- -- -- -- -- Adjustment to minimum pension liability................. -- -- -- -- -- -- Change in effective portion of derivative loss.......... -- -- -- -- -- -- Reclassification into earnings for derivative termination............................................ -- -- -- -- -- -- Total comprehensive loss................................ -- -- -- -- -- -- Accrued dividends on minority interest in CBI, Inc...... -- -- -- -- -- -- Issuance of American Achievement Series A Preferred Stock.................................................. -- -- 5,500 -- -- -- -------- --- --------- --- -------- --- BALANCE, August 31, 2002................................ -- $-- 1,006,847 $10 -- $-- ======== === ========= === ======== === PREFERRED STOCK ------------------ SERIES B COMMON STOCK ------------------ ------------------------------------ AMERICAN AMERICAN ACHIEVEMENT ACHIEVEMENT "NEW" CBI INC. "OLD" "NEW" ADDITIONAL ------------------ ----------------- ---------------- PAID-IN SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT CAPITAL -------- ------ -------- ------ ------- ------ ---------- (DOLLARS IN THOUSANDS, EXCEPT SHARE DATA) BALANCE, August 28, 1999................................ -- $ -- 375,985 $ 4 -- -- $58,766 Reclassification of CBI Inc. "Old" Series A preferred stock to redeemable minority interest in subsidiary in connection with the July 27, 2000 Merger of CBI Inc. and American Achievement (Note 13)..................... -- -- -- -- -- -- (9,999) Issuance of American Achievement "New" Series A......... Preferred and "New" Common in exchange for CBI Inc. "Old" Series B Preferred and "Old" Common.............. -- -- (375,985) (4) 375,985 4 -- Issuance of American Achievement "New" Common and "New" Series A Preferred in acquisition of Taylor............ -- -- -- -- 320,929 3 29,993 Accrued dividends on minority interest in CBI, Inc...... -- -- -- -- -- -- -- Net income and total comprehensive income............... -- -- -- -- -- -- -- ------- ----- -------- --- ------- -- ------- BALANCE, August 26, 2000................................ -- -- -- -- 696,914 7 78,760 ------- ----- -------- --- ------- -- ------- Comprehensive loss -- Net loss (as restated, see Note 16)..................... -- -- -- -- -- -- -- Adjustment to minimum pension liability................. -- -- -- -- -- -- -- Change in effective portion of derivative loss.......... -- -- -- -- -- -- -- Total comprehensive loss................................ -- -- -- -- -- -- -- Issuance of American Achievement Series B Preferred Stock.................................................. 16,000 160 -- -- -- -- 15,840 Exchange of Series B Preferred Stock for Series A and common stock........................................... (16,000) (160) -- -- 112,137 1 158 Accrued dividends on minority interest in CBI, Inc...... -- -- -- -- -- -- -- Exercise of Stock Options............................... -- -- -- -- 300 -- 2 ------- ----- -------- --- ------- -- ------- BALANCE, August 25, 2001 (as restated, see Note 16)..... -- -- -- -- 809,351 8 94,760 ------- ----- -------- --- ------- -- ------- Comprehensive loss -- Net loss................................................ -- -- -- -- -- -- -- Adjustment to minimum pension liability................. -- -- -- -- -- -- -- Change in effective portion of derivative loss.......... -- -- -- -- -- -- -- Reclassification into earnings for derivative termination............................................ -- -- -- -- -- -- -- Total comprehensive loss................................ -- -- -- -- -- -- -- Accrued dividends on minority interest in CBI, Inc...... -- -- -- -- -- -- -- Issuance of American Achievement Series A Preferred Stock.................................................. -- -- -- -- -- -- 550 ------- ----- -------- --- ------- -- ------- BALANCE, August 31, 2002................................ -- $ -- -- $-- 809,351 $8 $95,310 ======= ===== ======== === ======= == ======= ACCUMULATED OTHER COMPREHENSIVE ACCUMULATED LOSS DEFICIT TOTAL ------------- ----------- -------- (DOLLARS IN THOUSANDS, EXCEPT SHARE DATA) BALANCE, August 28, 1999................................ $ -- $(20,946) $ 37,830 Reclassification of CBI Inc. "Old" Series A preferred (10,000) stock to redeemable minority interest in subsidiary in connection with the July 27, 2000 Merger of CBI Inc. and American Achievement (Note 13)..................... -- -- Issuance of American Achievement "New" Series A......... Preferred and "New" Common in exchange for CBI Inc. -- "Old" Series B Preferred and "Old" Common.............. -- -- Issuance of American Achievement "New" Common and "New" 30,000 Series A Preferred in acquisition of Taylor............ -- -- Accrued dividends on minority interest in CBI, Inc...... -- (1,200) (1,200) Net income and total comprehensive income............... -- 6,468 6,468 ------- -------- -------- BALANCE, August 26, 2000................................ -- (15,678) 63,098 ------- -------- -------- Comprehensive loss -- Net loss (as restated, see Note 16)..................... -- (4,321) (4,321) Adjustment to minimum pension liability................. (519) -- (519) Change in effective portion of derivative loss.......... (2,232) -- (2,232) ------- -------- -------- Total comprehensive loss................................ (2,751) (4,321) (7,072) Issuance of American Achievement Series B Preferred 16,000 Stock.................................................. -- -- Exchange of Series B Preferred Stock for Series A and -- common stock........................................... -- -- Accrued dividends on minority interest in CBI, Inc...... -- (1,200) (1,200) Exercise of Stock Options............................... -- -- 2 ------- -------- -------- BALANCE, August 25, 2001 (as restated, see Note 16)..... (2,751) (21,199) 70,828 ------- -------- -------- Comprehensive loss -- Net loss................................................ -- (5,542) (5,542) Adjustment to minimum pension liability................. (1,614) -- (1,614) Change in effective portion of derivative loss.......... (377) -- (377) Reclassification into earnings for derivative 2,609 termination............................................ 2,609 -- ------- -------- -------- Total comprehensive loss................................ 618 (5,542) (4,924) Accrued dividends on minority interest in CBI, Inc...... -- (1,200) (1,200) Issuance of American Achievement Series A Preferred 550 Stock.................................................. -- -- ------- -------- -------- BALANCE, August 31, 2002................................ $(2,133) $(27,941) $ 65,254 ======= ======== ========
The accompanying notes are an integral part of these consolidated financial statements. 25 AMERICAN ACHIEVEMENT CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEAR ENDED ------------------------------------- AUGUST 31, AUGUST 25, AUGUST 26, 2002 2001 2000 ---------- ----------- ---------- (AS RESTATED -- SEE NOTE 16) (DOLLARS IN THOUSANDS) CASH FLOWS FROM OPERATING ACTIVITIES: Net (loss) income......................................... $ (5,542) $ (4,321) $ 6,468 Adjustments to reconcile net (loss) income to net cash provided by (used in) operating activities Depreciation and amortization........................... 19,712 17,586 9,100 Loss (gain) on extinguishment of debt................... 5,650 -- (6,741) Amortization of debt discount and deferred financing fees.................................................. 1,355 1,534 -- Cumulative effect of change in accounting principle..... -- 1,835 -- Issuance of Preferred Stock in settlement of obligation............................................ (550) -- -- Unrealized loss on free-standing derivative............. 182 -- -- Provision for doubtful accounts......................... 145 383 630 Changes in assets and liabilities (Increase) decrease in receivables.................... 3,582 (10,093) 3,622 Decrease in inventories, net.......................... 1,380 881 151 Decrease (increase) in income tax receivable.......... 38 (776) -- (Increase) decrease in prepaid expenses and other current assets, net................................ (5,057) (5,437) (276) Increase in other assets.............................. (739) (2,620) (4,778) (Decrease) Increase in deferred revenue............... (284) 6,799 -- Increase (decrease) in accounts payable and accrued expenses and other long-term liabilities........... 3,438 4,485 (17,544) --------- -------- -------- Net cash provided by (used in) operating activities....................................... 23,310 10,256 (9,368) --------- -------- -------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchases of property, plant and equipment................ (14,247) (7,499) (5,087) Sale of property.......................................... 673 -- -- Sales of Publishing Segment............................... -- 47 -- Acquisitions, net of cash acquired........................ (15,502) (50,413) 905 --------- -------- -------- Net cash used in investing activities.............. (29,076) (57,865) (4,182) --------- -------- -------- CASH FLOWS FROM FINANCING ACTIVITIES: Payments on term loan facility............................ (121,400) -- -- Proceeds from debt issuance, net of debt issue cost....... 166,612 35,835 98,984 Proceeds from issuance of common and preferred stock...... -- 16,000 -- Exercise of stock option.................................. -- 2 -- Payment of bridge notes to affiliate...................... (28,383) (8,600) (62,638) Bank revolver borrowings, net............................. (8,684) 5,121 (21,660) Repayment of interest rate swaps.......................... (3,279) -- -- Decrease in bank overdraft................................ (174) -- -- --------- -------- -------- Net cash provided by financing activities.......... 4,692 48,358 14,686 --------- -------- -------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS........ (1,074) 749 1,136 CASH AND CASH EQUIVALENTS, beginning of fiscal year......... 2,636 1,887 751 --------- -------- -------- CASH AND CASH EQUIVALENTS, end of fiscal year............... $ 1,562 $ 2,636 $ 1,887 ========= ======== ======== SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: Cash paid during the fiscal year for -- Interest................................................ $ 24,001 $ 20,461 $ 17,730 ========= ======== ======== Taxes................................................... $ 802 $ 443 $ 226 ========= ======== ======== SUPPLEMENTAL DISCLOSURE OF NONCASH FINANCING ACTIVITIES: Accrued Dividends on CBI Inc. "Old" Series A Preferred.... $ 1,200 $ 1,200 $ 1,200 ========= ======== ======== Issuance of common and preferred stock in acquisition of Taylor Senior Holding................................... $ -- $ -- $ 30,000 ========= ======== ======== Issuance of preferred stock in settlement of obligation... $ 550 -- -- ========= ======== ========
The accompanying notes are an integral part of these consolidated financial statements. 26 AMERICAN ACHIEVEMENT CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. BACKGROUND AND ORGANIZATION American Achievement Corporation, a Delaware corporation (together with its subsidiaries, "AAC" or the "Company") is a manufacturer and supplier of class rings, yearbooks 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 also operates a division which sells achievement publications in the specialty directory publishing industry nationwide. The Company markets its products and services primarily in the United States and operates in two reporting segments, scholastic products and affinity products. The Company's corporate offices and primary manufacturing facilities are located in Austin and Dallas, Texas. Prior to July 27, 2000, the Company's operations consisted of Commemorative Brands, Inc. (CBI), owned 100% by Commemorative Brands Holding Corp. (CBHC). CBHC was formed on June 27, 2000 to serve as a holding company for CBI operations and future acquisitions. The Company changed its name from CBHC to American Achievement Corporation on January 23, 2002. AAC is owned primarily by Castle Harlan Partners II (CHPII) and Castle Harlan Partners III (CHPIII). On July 27, 2000, the Company acquired Taylor Senior Holding Corp. ("TSHC"), the parent company of Taylor Publishing Company ("Taylor") that produces the Company's yearbooks (the "Taylor Acquisition"). On March 30, 2001, the Company acquired Educational Communications, Inc. ("ECI") that produces the Company's academic achievement publications (the "ECI Acquisition"). On July 15, 2002, American Achievement acquired Milestone Marketing Incorporated ("Milestone"), a specialty marketer of class rings and other graduation products to the college market (the "Milestone Acquisition") (See Note 3). 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES FISCAL YEAR-END The Company uses a 52/53-week fiscal year ending on the last Saturday of August. CONSOLIDATION The consolidated financial statements include the accounts of American Achievement Corporation and its direct and indirect subsidiaries (the "Company"). All significant intercompany accounts and transactions have been eliminated in consolidation. The 11 5/8% Senior Unsecured Notes Due 2007 (the "Unsecured Notes") are guaranteed by every direct and indirect domestic subsidiary of the Company. The guarantees by the guarantor subsidiaries are full, unconditional, and joint and several. All of the guarantor subsidiaries are wholly-owned. American Achievement Corporation is a holding company with no independent assets or operations other than its investment in its subsidiaries. CHANGE IN ACCOUNTING PRINCIPLE Effective August 27, 2000, the Company changed its accounting method for recognizing revenue on certain sales to independent sales representatives, in order to comply with the provisions of Securities and Exchange Commission Staff Accounting Bulletin No. 101, Revenue Recognition in Financial Statements ("SAB 101"). Under SAB 101, the recognition of revenue and related gross profit on sales to independent sales representatives, along with commissions to independent sales representatives that are directly related to the revenue, should be deferred until the independent sales representative delivers the product and title passes to the Company's end customer. Previously, the Company recognized revenue from these transactions upon shipment of product to the independent sales representative, net of estimates for possible returns and allowances. The cumulative effect of the change in accounting principle resulted in an increase of $1.8 million 27 AMERICAN ACHIEVEMENT CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) to the net loss for the year ended August 25, 2001. This change had no impact on the Company's cash flows from operations. CASH AND CASH EQUIVALENTS Cash and cash equivalents include highly liquid investments with original maturities of three months or less. INVENTORIES Inventories, which include raw materials, labor and manufacturing overhead, are stated at the lower of cost or market using the first-in, first-out (FIFO) method. SALES REPRESENTATIVE ADVANCES AND RELATED RESERVE The Company advances funds to independent sales representatives as prepaid commissions against anticipated earnings. Such amounts are repaid by the independent 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 consolidated 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:
DESCRIPTION USEFUL LIFE - ----------- -------------- Buildings and improvements.................................. 10 to 25 years Tools and dies.............................................. 14 to 19 years Machinery and equipment..................................... 2 to 10 years
Maintenance, repairs and minor replacements are charged against operations 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. Depreciation expense recorded in the accompanying consolidated statements of operations is $11,941,000, $10,856,000 and $5,890,000 for the years ended August 31, 2002, August 25, 2001, and August 26, 2000, respectively. TRADEMARKS ECI's trademarks of $15.5 million at August 31, 2002 are being amortized over 20 years. CBI Inc.'s trademarks of $30.7 million are being amortized over 40 years. Milestone's trademark of $1.1 million, which was acquired after June 30, 2001, is not being amortized in accordance with Statement of Financial Accounting Standards No. 142 "Goodwill and Other Intangible Assets" (SFAS 142). Amortization expense recorded in the accompanying consolidated statements of operations amounted to $1,544,000, $1,092,000, and $768,000 for the years ended August 31, 2002, August 25, 2001 and August 26, 2000, respectively. GOODWILL Costs in excess of fair value of net tangible and identifiable intangible assets acquired are included in goodwill in the accompanying consolidated balance sheets. Goodwill, except the $15.7 million acquired in the Milestone acquisition, is being amortized on a straight-line basis over 40 years. Milestone's goodwill of $15.7 million is not being amortized in accordance with SFAS No. 142. The Company continually evaluates 28 AMERICAN ACHIEVEMENT CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 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. Amortization expense on goodwill recorded in the accompanying consolidated statements of operations is $4,013,000, $3,438,000 and $2,189,000 for the years ended August 31, 2002, August 25, 2001, and August 26, 2000, respectively. OTHER ASSETS Other assets include deferred financing costs, customer lists, work force in place, distribution contracts and ring samples supplied to national chain stores, jewelry stores and sales representatives of the Company. All amounts are amortized on a straight-line basis as follows:
DESCRIPTION USEFUL LIFE - ----------- ----------- Deferred financing costs.................................... 1-7 years Customer lists.............................................. 12 years Work force in place......................................... 7 years Ring samples................................................ 6 years Distribution contracts...................................... 10 years
Other assets, net consists of the following (in thousands):
AUGUST 31, AUGUST 25, 2002 2001 ---------- ---------- Deferred financing costs.................................... $10,151 $ 9,800 Ring samples................................................ 7,029 5,709 Work force in place......................................... 3,377 3,377 Customer lists.............................................. 14,672 14,672 Distribution contracts...................................... 1,400 Other....................................................... 869 1,089 ------- ------- $37,498 $34,647 Less -- accumulated amortization............................ (5,701) (4,487) ------- ------- Other assets, net......................................... $31,797 $30,160 ======= =======
Amortization expense on other assets recorded in the accompanying consolidated statements of operations is $2,200,000, $2,237,000 and $177,000 for the years ended August 31, 2002, August 25, 2001, and August 26, 2000, respectively. 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," addresses 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 changes 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 29 AMERICAN ACHIEVEMENT CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 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. INCOME TAXES In accordance with SFAS No. 109, "Accounting for 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 basis. 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 operations 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. DERIVATIVE FINANCIAL INSTRUMENTS The Company adopted SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities," beginning on August 27, 2000. SFAS No. 133 establishes accounting and reporting standards for derivative instruments and hedging activities. SFAS No. 133 requires that an entity recognize derivatives as either assets or liabilities on the balance sheet and measure those instruments at fair value. The accounting for changes in the fair value of a derivative depends on the intended use of the derivative and the resulting designation. The adoption of SFAS No. 133 did not have a material effect on the Company's financial statements. The Company designates its derivatives based upon criteria established by SFAS No. 133. For a derivative designated as a fair value hedge, the gain or loss is recognized in earnings in the period of change together with the offsetting loss or gain on the hedged item attributed to the risk being hedged. For a derivative designated as a cash flow hedge, the effective portion of the derivative's gain or loss is initially reported as a component of accumulated other comprehensive income (loss) and subsequently reclassified into earnings when the hedged exposure affects earnings. The ineffective portion of the gain or loss is reported in earnings immediately. Trading derivatives are reflected in other current liabilities at their fair value with any changes in fair value being reported in other income or expense. REVENUE RECOGNITION In December 1999, the Securities and Exchange Commission issued Staff Accounting Bulleting No. 101 (SAB 101), "Revenue Recognition in Financial Statements," which among other guidance, clarified the staff's views on various revenue recognition and reporting matters. As a result, the Company changed its method of accounting for certain sales transactions. Under its previous policy, the Company recognized revenue to the independent sales representatives upon shipment of the product from its production facility. Under the new accounting method, adopted retroactive to August 27, 2000, the first day of the Company's 2001 fiscal year, the Company changed its accounting method for recognizing revenue and related gross profit on sales to independent sales representatives, along with commissions to independent sales representatives that 30 AMERICAN ACHIEVEMENT CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) are directly related to the revenue until the independent sales representative delivers the product and title passes to the Company's end customer. The Company's revenues from product sales, excluding revenue through independent sales representatives, are recognized at the time the product is shipped, the risks and rewards of ownership have passed to the customer and collectibility is reasonably assured. Provisions for sales returns, warranty costs and rebate expenses are recorded at the time of sale based upon historical information and current trends. The Company recognizes revenues on its publishing operations based upon the completed contract method, and revenue is recognized when the products are shipped. RESERVE ON SALES REPRESENTATIVE ADVANCES The Company advances funds to new sales representatives in order to open up new sales territories or makes payments to predecessor sales representatives on behalf of successor sales representatives. Such amounts are repaid by the sales representatives through earned commissions on product sales. The Company provides reserves to cover those amounts that it estimates to be uncollectible. The following represents the activity associated with the reserve on sales representative advances:
ADDITIONS DEDUCTIONS ---------- ------------- BALANCE AT CHARGED TO BALANCE AT BEGINNING OF COSTS AND CHARGED TO END OF DESCRIPTION PERIOD EXPENSES OTHER ACCOUNTS(2) WRITE-OFFS(1) PERIOD - ----------- ------------ ---------- ----------------- ------------- ---------- Reserve on Sales........ Representative Advances.............. For the Year Ended August 26, 2000....... 1,245 412 3,449 (828) 4,278 August 25, 2001....... 4,278 1,473 -- (2,747) 3,004 August 31, 2002....... 3,004 2,499 -- (2,660) 2,843
- --------------- (1) Represents principally write-offs of terminated sales representative amounts and forgiveness of amounts by the Company. (2) Amounts charged to other accounts represents the reserve acquired from Taylor Publishing Company as of July 27, 2000. SEASONALITY The Company's scholastic product sales tend to be seasonal. Class ring sales are highest during October through December (which overlaps the Company's first and second fiscal quarters), when students have returned to school after the summer recess and orders are taken for class rings for delivery to students before the winter holiday season. Sales of the Company's fine paper products are predominately 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, thus reducing related shipment of products. Yearbook sales are highest during the months of May through June, as yearbooks are typically shipped to schools prior to the school's summer break. The Company's recognition and affinity product line sales are also seasonal. The majority of the sales of achievement publications are shipped in November of each year. The remaining recognition and affinity product line sales 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. 31 AMERICAN ACHIEVEMENT CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) CONCENTRATION OF CREDIT RISK Credit is extended to certain industries, such as educational and retail, 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. SHIPPING AND HANDLING FEES In accordance with Emerging Issues Task Force (EITF) Issue No. 00-10, "Accounting for Shipping and Handling Fees and Costs," the Company recognizes as revenue amounts billed to customers related to shipping and handling, with the related expense recorded as a component of cost of sales. SUPPLIER CONCENTRATION The Company purchases substantially all synthetic and semi-precious stones from a single supplier located in Germany. ADVERTISING The Company expenses advertising costs as incurred; however in accordance with Statement of Position 93-7 "Reporting on Advertising Costs" the Company defers certain advertising costs until the first time the advertising takes place. These deferred advertising costs are included in prepaid expenses and other current assets. Selling, general and administrative expenses for the Company include advertising expenses of $6,905,000, $3,551,000 and $2,942,000 for the years ended August 31,2002, August 25, 2001, and August 26, 2000, respectively. USE OF ESTIMATES The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements, as well as the reported amounts of revenues and expenses during the reporting period. Actual results could differ from these estimates. RECLASSIFICATIONS Certain reclassifications of prior-year balances have been made to conform to the current-year presentation. COMPREHENSIVE LOSS For measurement purposes for the Taylor Publishing Company Plan, the weighted average discount rate used in determining the accumulated benefit obligation was revised to 7.25 from 8.0 percent during the year ended August 31, 2002. Approximately $1,614,000 of the unrecognized loss on minimum pension liability is a result of the change in the estimated weighted average discount rate effective January 2002. As of August 31, 2002 the Company no longer held any derivatives considered to be cash flow hedges. RECENT ACCOUNTING PRONOUNCEMENTS In June 2001, the Financial Accounting Standards Board ("FASB") issued SFAS No. 141, "Business Combinations" and SFAS No. 142, "Goodwill and Other Intangible Assets." SFAS No. 141 addresses 32 AMERICAN ACHIEVEMENT CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) financial accounting and reporting for business combinations. Under the new standard, all business combinations entered into after June 30, 2001 must be accounted for by the purchase method. SFAS No. 142 addresses financial accounting and reporting for acquired goodwill and other intangible assets. SFAS No. 142 requires that goodwill no longer be amortized, but instead requires a transitional goodwill impairment assessment and prescribe impairment tests thereafter. Any transitional impairment loss resulting from the adoption of SFAS No. 142 is recognized as the effect of a change in accounting principle in the income statement. The Company is currently in the process of adopting SFAS No. 142 and of completing the transitional impairment assessment and calculating the impact on its financial statements. The Company must complete the first step of this test to determine if there is an impairment by February 2003 and, if there is an impairment, the Company must complete the final step and record any impairment by August 2003. SFAS No. 142 also requires that recognized intangible assets be amortized over their respective estimated useful lives. As part of the adoption, the Company is currently reassessing the useful lives and residual values of all intangible assets. Any recognized intangible asset determined to have an indefinite useful life will not be amortized, but instead tested for impairment in accordance with the standard. In August 2001, FASB issued SFAS No. 143, "Accounting for Asset Retirement Obligations". This statement requires that the fair value of a liability for an asset retirement obligation be recognized in the period in which it is incurred if a reasonable estimate of fair value can be made. The associated asset retirement costs are capitalized as part of the carrying amount of the long-lived asset. SFAS No. 143 will become effective for the Company in fiscal year 2003. The Company is currently evaluating the provisions of SFAS No. 143, but does not believe that the adoption of SFAS No. 143 will have a significant impact on its financial statements. In October 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets," that is effective for financial statements issued for fiscal years beginning after December 15, 2001. The Company is currently evaluating the provisions of SFAS No. 144. The financial statement impact of the adoption of SFAS No. 144 has not yet been determined. In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections". This statement requires, among other things, that gains and losses on the early extinguishments of debt be classified as extraordinary only if they meet the criteria for extraordinary treatment set forth in Accounting Principles Board Opinion No. 30. The provisions of this statement related to classification of gains and losses on the early extinguishments of debt are effective for fiscal years beginning after May 15, 2002. The adoption of SFAS No. 145 will require the Company to reclassify certain items from extraordinary items into operating income (loss). In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities." This Statement requires recording costs associated with exit or disposal activities at their fair values when a liability has been incurred. Under previous guidance, certain exit costs were accrued upon management's commitment to an exit plan, which is generally before an actual liability has been incurred. The provisions of this statement are effective for exit or disposal activities that are initiated after December 31, 2002. The Company is currently considering the impact, if any, that this statement will have on its financial statements. 3. SIGNIFICANT ACQUISITIONS Effective July 27, 2000, American Achievement, CBI Inc. and CB Acquisition entered into an agreement and plan of merger (the Merger Agreement). Under the terms of the Merger Agreement, upon the effective date of the merger, CBI Inc. merged with CB Acquisition, a wholly owned subsidiary of American Achievement. Following the merger, CB Acquisition ceased to exist and CBI Inc. remained the surviving majority-owned subsidiary of American Achievement. Upon consummation of the merger, each share of CBI Inc.'s issued and outstanding common stock was converted into one share of American Achievement common 33 AMERICAN ACHIEVEMENT CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) stock, and each share of CBI Inc.'s issued and outstanding Series B Preferred stock was converted into one share of American Achievement's Series A Preferred Stock. Immediately following the above transaction, American Achievement acquired all issued and outstanding shares of Taylor Senior Holding through the issuance of 320,929 shares of American Achievement common stock and 393,482 shares of American Achievement Series A Preferred Stock in exchange for the contribution by all the Taylor Senior Holding shareholders of all of their capital stock of Taylor Senior Holding which was originally purchased for $30.0 million. Taylor Senior Holding holds a 100 percent ownership interest in TP Holding Corp., which holds a 100 percent ownership interest in Taylor Publishing Company (TPC), its operating subsidiary. For accounting purposes, American Achievement has been deemed the acquirer. The acquisition of Taylor Senior Holding was accounted for using the purchase method and, accordingly, the purchase price has been allocated to assets acquired and liabilities assumed based upon estimated fair values. TPC's primary business is design and printing of student yearbooks. The estimated fair value of assets acquired and liabilities assumed relating to the Taylor Senior Holding acquisition is summarized below (in thousands): Working capital............................................. $ (5,590) Property, plant and equipment............................... 27,481 Other intangibles........................................... 18,616 Goodwill.................................................... 40,265 Other assets................................................ 608 Long-term liabilities....................................... (51,380) -------- $ 30,000 ========
Goodwill and other intangibles related to Taylor Senior Holding are amortized on a straight-line basis over their useful lives, which range from seven to 40 years. The Company incurred approximately $5 million in financing costs associated with the merger and the amended and restated credit agreement. These costs have been capitalized and are included in the accompanying consolidated balance sheet as of August 25, 2001. During the year ended August 25, 2001 these costs were recognized as an extraordinary charge in the statement of operations in connection with the retirement of the associated debt. Effective March 30, 2001, Honors Acquisition Corporation, a wholly owned subsidiary of American Achievement, purchased all the outstanding stock of ECI, for a total purchase price of $58.7 million. The acquisition of ECI was accounted for using the purchase method of accounting and, accordingly, the purchase price has been allocated to assets acquired and liabilities assumed based upon estimated fair values. Subsequent to the transaction, Honors Acquisition Corporation was dissolved into the Company, and ECI remained the surviving wholly owned subsidiary of the Company. ECI's primary business is the sales and marketing of achievement publications of the specialty directory publishing industry. 34 AMERICAN ACHIEVEMENT CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The estimated fair value of assets acquired and liabilities assumed relating to the ECI acquisition is summarized below (in thousands): Working capital............................................. $ 5,534 Property, plant and equipment............................... 400 Other intangibles........................................... 17,240 Goodwill.................................................... 35,492 Other long-term assets...................................... 44 ------- $58,710 =======
Goodwill and other intangibles related to ECI are amortized on a straight-line basis over their useful lives which range from three to 40 years. The Company incurred approximately $2.4 million in financing costs associated with the purchase agreement. These costs have been capitalized and are included in the accompanying consolidated balance sheet as of August 25, 2001. During the year ended August 31, 2002, these costs were recognized as an extraordinary charge in the statement of operations in conjunction with the retirement of the associated debt. Effective July 15, 2002, American Achievement purchased all the outstanding stock and warrants of Milestone for a total purchase price of $15.9 million. The acquisition of Milestone was accounted for using the purchase method of accounting and, accordingly, the purchase price has been allocated to assets acquired and liabilities assumed based upon the estimated fair values. Milestone is a specialty marketer of class rings and other graduation products to the college market. The estimated fair value of assets acquired and liabilities assumed relating to the Milestone acquisition, which is preliminary and subject to further refinements in accordance with accounting principles generally accepted in the United States of America, is summarized below (in thousands): Working capital............................................. $(2,413) Property, plant and equipment............................... 113 Other intangibles........................................... 2,500 Goodwill.................................................... 15,669 Other long-term assets...................................... 28 ------- $15,897 =======
Goodwill and trademarks related to Milestone are not amortized in accordance with SFAS No. 142 because the acquisition date is after June 30, 2001. As a result of these transactions, the consolidated financial statements of the Company as of August 31, 2002, include the results of operations of Milestone for the period from July 15, 2002, to August 31, 2002, and the results of operations for ECI, consolidated Taylor Senior Holding, and consolidated CBI for the year ended August 31, 2002. The consolidated financial statements of the Company as of August 25, 2001, include the results of operations of ECI for the period from March 30, 2001, to August 25, 2001, and the results of operations for consolidated Taylor Senior Holding and for consolidated CBI for the year ended August 25, 2001. The consolidated financial statements for the year ended August 26, 2000 include the results of operations for consolidated CBI for the year ended August 26, 2000 and for consolidated Taylor Senior Holding for the period from July 28, 2000 to August 26, 2000. The following unaudited pro forma data summarizes the results of operations for the years indicated as if both the Milestone and ECI acquisitions had been completed as of the year ended August 25, 2001 and the 35 AMERICAN ACHIEVEMENT CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Taylor acquisition as if it had been completed as of the beginning of the year ended August 26, 2000 (in thousands):
AUGUST 31, AUGUST 25, AUGUST 26 2002 2001 2000 ----------- ----------- ----------- (UNAUDITED) (UNAUDITED) (UNAUDITED) Net sales........................................ $310,275 $304,494 $290,219 (Loss) income before extraordinary item.......... (2,623) 2,068 (4,633) Net loss applicable to common stockholders....... (9,473) (967) 862
4. INVENTORIES, NET Net inventories consist of the following (in thousands):
AUGUST 31, AUGUST 25, 2002 2001 ---------- ---------- Raw materials............................................... $ 8,781 $ 8,545 Work in process............................................. 8,171 10,378 Finished goods.............................................. 8,653 8,007 Less -- Reserves............................................ (178) (258) ------- ------- $25,427 $26,672 ======= =======
5. PREPAID EXPENSES AND OTHER CURRENT ASSETS: Prepaid expenses and other current assets consist of the following (in thousands):
AUGUST 31, AUGUST 25, 2002 2001 ---------- ---------- Sales representative advances............................... $10,978 $10,433 Less -- reserve on sales representative advances.......... (2,843) (3,004) Deferred publication and ring costs......................... 5,503 2,563 Prepaid advertising and promotion materials................. 6,712 6,225 Other....................................................... 7,671 3,941 ------- ------- $28,021 $20,158 ======= =======
Included in other current assets as of August 31, 2002 and August 25, 2001, is approximately $970,000 and $215,000, respectively, paid for options to purchase gold. The outstanding options at August 31, 2002, expire in various amounts through May 28, 2003. The Company carries these gold options at the lower of cost or market. 36 AMERICAN ACHIEVEMENT CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 6. PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment, net consist of the following (in thousands):
AUGUST 31, AUGUST 25, 2002 2001 ---------- ---------- Land........................................................ $ 6,097 $ 6,315 Buildings and improvements.................................. 11,342 11,430 Tools and Dies.............................................. 28,960 26,795 Machinery and equipment..................................... 56,269 44,165 Construction in progress.................................... 2,517 2,843 -------- -------- Total................................................ 105,185 91,548 Less -- accumulated depreciation............................ (38,593) (26,706) -------- -------- Property, plant and equipment, net.......................... $ 66,592 $ 64,842 ======== ========
7. ACCOUNTS PAYABLE AND ACCRUED EXPENSES Accounts payable and accrued expenses consists of the following (in thousands):
AUGUST 31, AUGUST 25, 2002 2001 ---------- ---------- Commissions and royalties................................... $ 8,493 $ 7,833 Compensation and related costs.............................. 6,776 6,611 Other....................................................... 3,684 2,846 Acquisition-related liabilities............................. 1,078 1,494 Accrued sales and property taxes............................ 1,450 1,223 Accumulated postretirement medical benefit cost............. 2,542 1,000 Accrued management fees -- related party (see Note 11)...... 750 688 ------- ------- $24,773 $21,695 ======= =======
37 AMERICAN ACHIEVEMENT CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 8. LONG-TERM DEBT Long-term debt consists of the following (in thousands):
AUGUST 31, AUGUST 25, 2002 2001 ---------- ---------- 11 5/8% Senior unsecured notes due 2007 (net of unamortized discount of $1,413)....................................... $175,587 $ -- 11% Senior subordinated notes due 2007...................... 41,355 41,355 Senior secured credit facility.............................. 25,175 -- Former senior credit facility: Revolving credit facility................................. -- 33,859 Term Loan A............................................... -- 57,000 Term Loan B............................................... -- 64,400 Bridge notes to affiliates.................................. -- 26,995 -------- -------- Total debt........................................... 242,117 223,609 Less: current portion....................................... -- 12,900 -------- -------- Total long-term debt................................. $242,117 $210,709 ======== ========
11 5/8% Senior Unsecured Notes On February 20, 2002, the Company issued $177 million of senior unsecured notes (the "Unsecured Notes") due in 2007. The Unsecured Notes bear interest at a stated rate of 11 5/8%. The Unsecured Notes were issued at a discount of 0.872% resulting in net proceeds of approximately $175.5 million before considering financing costs. The effective rate of the Unsecured Notes after discount and deferred financing costs is approximately 13.0%. The Unsecured Notes rank pari passu with the Company's existing and future senior indebtedness, including obligations under the Company's Senior Secured Credit Facility (as defined below). The Unsecured Notes are guaranteed by the Company's domestic subsidiaries, and the guarantees rank pari passu with existing and future senior debt of the Company and its subsidiaries. The Unsecured Notes and the guarantees on the Unsecured Notes are effectively subordinated to any of the Company's secured debt. The Company may not redeem the Unsecured Notes until 2005, except that the Company may redeem up to 35 percent of the Unsecured Notes before the third anniversary of the issue date of the Unsecured Notes as long as (a) the Company pays a certain percentage of the principal amount of the Unsecured Notes, plus interest, (b) the Company redeems the Unsecured Notes within 90 days of completing a public equity offering and (c) at least 65 percent of the aggregate principal amount of the Unsecured Notes issued remains outstanding afterward. If a change in control, as defined in the indenture relating to the Unsecured Notes (the "AAC Indenture"), occurs, the Company must give the holders of the Unsecured Notes the opportunity to sell their Unsecured Notes to the Company at 101 percent of the principal amount of the Unsecured Notes, plus accrued interest. The Unsecured Notes contain customary negative covenants and restrictions on actions by the Company and its subsidiaries including, without limitation, restrictions on additional indebtedness, investments, asset dispositions outside the ordinary course of business, liens, and transactions with affiliates, among other restrictions (as defined in the AAC Indenture). In addition, the Unsecured Notes contain covenants, which restrict the declaration or payment of dividends by the Company and/or its subsidiaries (as defined in the AAC Indenture). The Unsecured Notes also require that the Company meet certain financial covenants 38 AMERICAN ACHIEVEMENT CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) including a minimum fixed charge coverage ratio (as defined in the AAC Indenture). The Company was in compliance with the Unsecured Notes covenants as of August 31, 2002. 11% Senior Subordinated Notes CBI's 11% senior subordinated notes (the "Subordinated Notes") mature on January 15, 2007. The Subordinated Notes are redeemable at the option of CBI in whole or in part, at any time on or after January 15, 2002, at specified redemption prices ranging from 105.5 percent of the principal amount thereof if redeemed during 2002 and declining to 100 percent of the principal amount thereof if redeemed during the year 2005 or thereafter, plus accrued and unpaid interest and Liquidated Damages as defined in the indenture relating to the Subordinated Notes, as amended (the "CBI Indenture"), if any, thereon to the date of redemption. The Company has not redeemed any of the Subordinated Notes as of August 31, 2002. In the event of a Change of Control (as defined in the CBI Indenture), each holder of the Subordinated Notes will have the right to require CBI to purchase all or any part of such holder's Subordinated Notes at a purchase price in cash equal to 101 percent of the aggregate principal amount thereof, plus accrued and unpaid interest and Liquidated Damages as defined in the debt agreement, if any, thereon to the date of purchase. In the event of an Asset Sale (as defined in the CBI Indenture), CBI is required to apply any Net Proceeds (as defined in the CBI 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 365 days and the amount not applied exceeds $5.0 million, CBI is required to make an offer to all holders of the Subordinated Notes to purchase an aggregate principal amount of Subordinated Notes equal to such excess amount at a purchase price in cash equal to 100 percent of the principal amount thereof, plus accrued and unpaid interest and Liquidated Damages, if any, thereon to the date of purchase. The Subordinated Notes contain certain covenants that, among other things, limit the ability of CBI to engage in certain business transactions such as mergers, consolidations or sales of assets that would decrease the value of CBI or cause an event of default. On July 27, 2000, TP Holding Corp., a subsidiary of the Company, purchased $48.6 million face amount of the Subordinated Notes for a total purchase price of approximately $45 million, comprised of $39.9 million, representing 82 percent of the face amount of the Subordinated Notes, plus accrued interest on the Subordinated Notes of approximately, $5.1 million. When the Company indirectly acquired TP Holdings through its acquisition of TP Holding's parent, Taylor Senior Holding, for accounting purposes, the transaction was considered an extinguishment of debt and resulted in an extraordinary pretax gain on the sale of the Subordinated Notes of approximately $6.7 million for the year ended August 26, 2000. Senior Secured Credit Facility In conjunction with the issuance of the Unsecured Notes, on February 20, 2002, the Company entered into a new $40 million senior revolving credit facility (the "Senior Secured Credit Facility") with various financial institutions, with all of the Company's current domestic subsidiaries as guarantors. Loans made pursuant to the Senior Secured Credit Facility are secured by a first priority security interest in substantially all of the Company's and the Company's domestic subsidiaries' assets and in all of the Company's domestic subsidiaries' capital stock. Availability under the Senior Secured Credit Facility is restricted to the lesser of (1) $40 million or (2) the Borrowing Base Amount as defined in the credit agreement under the Senior Secured Credit Facility (the "Credit Agreement"). Availability under the Senior Secured Credit Facility as of August 31, 2002 was approximately $13.6 million with $25.2 million borrowings outstanding. The Senior Secured Credit Facility matures on February 20, 2006. 39 AMERICAN ACHIEVEMENT CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Advances under the Senior Secured Credit Facility may be made as base rate loans or LIBOR loans at the Company's election (except for the initial loans which were base rate loans). Interest rates payable upon advances are based upon the base rate or LIBOR depending on the type of loan the Company chooses, plus an applicable margin based upon a consolidated leverage ratio of certain outstanding indebtedness to EBITDA (to be calculated in accordance with the terms specified in the Credit Agreement). The effective rate on borrowings for the year ended August 31, 2002 was approximately 7.3%. The Credit Agreement contains customary negative covenants and restrictions on actions by the Company and its subsidiaries including, without limitation, restrictions on indebtedness, declaration or payment of dividends, liens, and the gold consignment agreement, among other restrictions. In addition, the Credit Agreement requires that the Company meet certain financial covenants, ratios and tests, including capital expenditure limits, a maximum secured leverage ratio, a minimum interest coverage ratio, and a minimum fixed charge coverage ratio. The Company was in compliance with the Credit Agreement covenants as of August 31, 2002. Former Senior Credit Facility On March 30, 2001, in connection with the acquisition of ECI, as discussed in Note 3, the Company entered into the second amended and restated credit agreement with a syndication of banks (the Credit Agreement). This agreement governed the Company's revolving credit facility (Revolver), term loan A (Term A), and term loan B (Term B). The Credit Agreement was collateralized by substantially all of the assets of the Company's subsidiaries. American Achievement pledged 100 percent of its equity ownership in CBI Inc., Taylor Senior Holdings and ECI as collateral. The Company had the option of designating the interest rates that the Term A, Term B and Revolver would bear at either (a) a Base Rate plus a Base Rate Margin, as defined in the Credit Agreement, or (b) LIBOR plus a LIBOR Margin, as defined by the Credit Agreement. As of August 25, 2001, the Term A And Term B loans were designated as LIBOR loans with a weighted average interest rate of 7.3% and $17,000,000 and $16,859,000 of the revolver balances were designated as LIBOR and Base Rate loans, respectively, with an average interest rate of 8.5% and 7.3%, respectively. On October 13, 2000 and March 30, 2001, in accordance with the provisions of the Credit Agreement, the Company entered into interest rate swap agreements whereby it received a floating rate of interest and paid a fixed rate of interest, to be paid over the term of the swap agreement, representing $62.5 million, or 50% of the outstanding Term A and Term B loans. All ineffectiveness associated with the derivative over the remaining life of the Term A and Term B loans was included in earnings. Term A and B Loans -- as of August 25, 2001, the outstanding amounts due under Term A and Term B were approximately $57 million and $64 million, respectively. Under the provisions of the term loans as contained in the Credit Agreement, the Company was to make scheduled quarterly principal installments through the maturity date of each loan, July 31, 2005, and July 31, 2006, respectively. The Company paid the principal balance in full in connection with the issuance of the Unsecured Notes on February 20, 2002. Revolver -- As of August 25, 2001, the Company had approximately $33.9 million outstanding under the Revolver. The Company could borrow a maximum of $50 million under its' revolving credit agreement. The maximum revolving loan balance at any point in time was dependent upon a borrowing base calculation, as defined in the Credit Agreement, and was due in full as of July 31, 2006. The Revolver was paid in full in connection with the issuance of the Unsecured Notes on February 20, 2002. 40 AMERICAN ACHIEVEMENT CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Bridge Notes Due to an Affiliate TP Holding Corp., and American Achievement had subordinated bridge promissory notes (the Bridge Notes) due to Castle Harlan Partners III, L.P. (CHPIII), a stockholder of the Company, totaling approximately $26.9 million in principal and accrued interest as of August 25, 2001. The principal and accrued interest were due as of February 28, 2004. The Bridge Notes bore interest at 12 percent per annum, compounding monthly. The Bridge Notes were paid in full in connection with the issuance of the Unsecured Notes on February 20, 2002. Early Extinguishment of Debt In conjunction with the issuance of the Unsecured Notes and entrance into the Senior Secured Credit Facility, the Company paid off the then outstanding term loans and revolver under the former credit facility, the bridge notes to affiliates and settled all but $25.0 million in notional amount of the interest rate swap agreements. The Company recognized an extraordinary charge in February 2002 of approximately $5.3 million, net of income tax benefit, relating to the write-off of unamortized deferred financing costs and, due to the termination and reclassification of interest rate swaps, the Company recorded a charge to other expense for approximately $2.6 million. As a result of the early prepayment of certain debt obligations, the remaining interest rate swap agreement representing a notional amount of $25 million has been reclassified as a trading derivative. As such, changes in the fair value of this derivative are recognized in other income or expensed. As of August 31, 2002, the fair value of this derivative represented a liability of approximately $0.9 million and is included in current liabilities. The Company's long-term debt outstanding as of August 31, 2002 matures as follows (in thousands):
AMOUNT MATURING --------------- Fiscal Year Ending 2003...................................................... $ -- 2004...................................................... -- 2005...................................................... -- 2006...................................................... 25,175 2007...................................................... 216,942 Thereafter................................................ -- -------- $242,117 ========
The weighted average interest rate of debt outstanding as of August 31, 2002 and August 25, 2001 was 11.5% and 11.4%, respectively. 9. DERIVATIVE FINANCIAL INFORMATION As of August 25, 2001, the Company had interest rate swap agreements in place with the intent of managing its exposure to interest rate risk on its existing debt obligation. The Company had four outstanding agreements to effectively convert LIBOR-based variable rate debt to fixed rate debt based on a total notional amount of $62.5 million. On February 20, 2002, in conjunction with the issuance of the Unsecured Notes and entrance into the Senior Secured Credit Facility, the Company paid off the then outstanding term loans and revolver under the former credit facility, the bridge notes to affiliates, and settled all but $25 million in notional amount of the interest rate swap agreements. 41 AMERICAN ACHIEVEMENT CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) During the year ended August 25, 2001, the Company considered these swap agreements as cash flow hedging instruments. The Company recorded net receipts or payments under these agreements as an adjustment to interest expense, while the effective portion of changes in the fair value of the swap agreements was included in other comprehensive income. The net unrealized loss, on the interest rate swaps at August 25, 2001, was approximately $2.2 million and was included in other long-term liabilities in the Company's consolidated balance sheet and recorded net of tax effects as other comprehensive loss in the consolidated statement of stockholders' equity. The net gain or loss during 2001 related to the ineffective portion of the interest rate swap agreements was not material. During the year ended August 31, 2002, the company recorded a charge to other expense for approximately $2.6 million due to the termination of the interest rate swap agreements and the reclassification of the remaining interest rate swap agreement, representing a notional amount of $25 million, as a trading derivative. The trading derivative is recorded at its fair value, with any changes in fair value being reported in income, and matures in March 2003. The Company recorded a charge to other expense of approximately $0.2 million due to changes in fair value for the year ended August 31, 2002. 10. COMMITMENTS AND CONTINGENCIES LEASES Certain Company facilities and equipment are leased under agreements expiring at various dates through 2,018. The Company's commitments under the noncancellable portion of all operating leases as of August 31, 2002 are approximately as follows (in thousands): Fiscal Year Ending 2003...................................................... $2,700 2004...................................................... 1,900 2005...................................................... 1,200 2006...................................................... 700 2007...................................................... 400 ------ $6,900 ======
Lease and rental expense included in the accompanying consolidated statements of operations was $3,332,000 $2,939,000 and $937,000 for the years ended August 31, 2002, August 25, 2001 and August 26, 2000, respectively. PENDING LITIGATION The Company is not a party to any pending legal proceedings other than ordinary routine litigation incidental to the business. In management's opinion, adverse decisions on legal proceedings, in the aggregate, would not have a materially adverse impact on the Company's results of operations or financial position. Gold Consignment Agreement Under the Company's gold consignment financing arrangement, the Company has the ability to have on consignment the lowest of the dollar value of 27,000 troy ounces of gold, $10.1 million or a borrowing base, determined based upon a percentage of gold located at the Company's facilities and other approved locations, as specified by the agreement. For the years ended August 31, 2002, August 25, 2001 and August 26, 2000, the Company expensed consignment fees of approximately $258,000, $241,000 and $282,000, respectively. Under the terms of the consignment arrangement, the Company does not own the consigned gold nor does it have risk of loss related to such inventory until the money is received by the bank from the Company in payment for 42 AMERICAN ACHIEVEMENT CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) the gold purchased. Accordingly, the Company does not include the value of consigned gold in its inventory or the corresponding liability for financial statement purposes. As of August 31, 2002 and August 25, 2001, the Company held approximately 14,830 ounces and 14,620 ounces, respectively, of gold valued at $4.6 million and $4.0 million, respectively, on consignment from the bank. EMPLOYMENT CONTRACTS The Company has employment agreements with its executive officers, the terms of which expire at various times through August 2004. Unless terminated, one executive officer's employment agreement adds one day to the term for each day that passes, and accordingly, there are always two years remaining on the term. The remaining executive officers terms can be automatically extended for an additional one year term. Such agreements, which have been revised from time-to-time, provide for minimum salary levels, adjusted annually for cost-of-living changes, as well as for incentive bonuses for a certain executive that are payable if specific management goals are attained as discussed in Note 11. The aggregate commitment for future salaries as of August 31, 2002, excluding bonuses, was approximately $2,100,000. 11. EMPLOYEE COMPENSATION AND BENEFITS POSTRETIREMENT PENSION AND MEDICAL BENEFITS CBI Inc. provides certain healthcare and life insurance benefits for former employees of the L.G. Balfour Company who retired prior to December 31, 1990. L. G. Balfour Company, Inc., recognized the actuarial present value of the accumulated postretirement benefit obligation (APBO) of approximately $6.2 million at February 28, 1993, using the delayed recognition method over a period of 20 years. Certain hourly employees of TPC are covered by a defined benefit pension plan (TPC Plan) established by TPC. The benefits under the CBI Inc. and TPC Plans are based primarily on the employees' years of service and compensation near retirement. The funding policies for these plans are consistent with the funding requirements of federal laws and regulations. 43 AMERICAN ACHIEVEMENT CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The following table sets forth the funded status of each plan (in thousands):
AUGUST 31, 2002 AUGUST 25, 2001 ------------------------ ------------------------ TPC CBI INC. TPC CBI INC. PENSION POSTRETIREMENT PENSION POSTRETIREMENT ------- -------------- ------- -------------- Change in benefit obligation (in thousands): Obligation beginning of the year........ $ 9,471 $ 3,511 $ 8,866 $ 798 Service cost............................ 349 -- 323 -- Amendments.............................. -- -- -- 2,892 Interest Cost........................... 729 240 656 186 Actuarial loss (gain)................... (133) (4) 144 53 Benefit payments........................ (558) (406) (518) (418) Change in discount rate................. 993 -- -- -- ------- ------- ------- ------- Obligation, end of year................. $10,851 $ 3,341 $ 9,471 $ 3,511 ------- ------- ------- ------- Change in fair value of plan assets (in thousands): Fair value of plan assets, beginning of year.................................. $ 8,441 -- $ 8,492 -- Actual return of plan assets............ 14 437 -- Employer contributions.................. 1,005 406 60 418 Benefit payments........................ (558) (406) (518) (418) ------- ------- ------- ------- Fair value of plan assets, end of year.................................. $ 8,902 $ -- $ 8,471 -- ------- ------- ------- ------- Plan assets at fair value -- Unfunded accumulated benefit obligation in excess of plan assets............................. $(1,949) $(3,341) $(1,000) $(3,511) Unrecognized net loss (gain).......... -- (176) -- (174) Unrecognized prior service costs...... -- 2,022 -- 2,313 ------- ------- ------- ------- Accumulated postretirement benefit cost, current and long-term................. $(1,949) $(1,495) $(1,000) $(1,372) ======= ======= ======= =======
The net periodic postretirement benefit cost for the fiscal years ended August 31, 2002, August 25, 2001, and August 26, 2000, for CBI Inc. and for the years ended August 31, 2002 and August 25, 2001 and the period from July 27, 2000, to August 26, 2000, for TPC include the following components (in thousands):
AUGUST 31, 2002 AUGUST 25, 2001 AUGUST 26, 2000 ------------------------- ------------------------- ------------------------- TPC CBI INC. TPC CBI INC. TPC CBI INC. PENSION POST-RETIREMENT PENSION POST-RETIREMENT PENSION POST-RETIREMENT ------- --------------- ------- --------------- ------- --------------- Service costs, benefits attributed to service during the period..... $ 349 $ -- $ 323 $ -- $ 27 $ -- Interest cost...................... 729 240 656 186 57 63 Expected return on assets.......... (769) -- (743) -- (63) -- Amortization of unrecognized net loss (gain)...................... 1 (2) -- (6) -- (22) Amortization of unrecognized net prior service costs.............. -- 291 -- 1 -- (580) ----- ---- ----- ---- ---- ----- Net periodic postretirement benefit cost (income).................... $ 310 $529 $ 236 $181 $ 21 $(539) ===== ==== ===== ==== ==== =====
44 AMERICAN ACHIEVEMENT CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Amounts recognized in the consolidated balance sheet are as follows:
AUGUST 31, 2002 AUGUST 25, 2001 ------------------------- ------------------------- TPC CBI INC. TPC CBI INC. PENSION POSTRETIREMENT PENSION POSTRETIREMENT ------- --------------- ------- --------------- Accrued benefit liability.............. $ 1,949 $1,495 $1,000 $1,372 Accumulated other comprehensive loss... (2,133) -- (519) --
The weighted average discount rate used in determining the accumulated postretirement benefit obligation for CBI Inc. was 7.25 percent compounded annually for fiscal years 2002, 2001 and 2000. As the plan is unfunded, no assumption was needed as to the long-term rate of return on assets. For measurement purposes for the CBI Inc. plan, a 5 percent annual rate of increase in the per capita cost of covered healthcare benefits was assumed for fiscal years 2002, 2001 and 2000. The healthcare cost trend rate assumption has a significant effect on the amounts reported. Increasing (or decreasing) the assumed healthcare cost trend rate one percentage point in each year would increase (or decrease) the accumulated postretirement benefit obligation by $206,000 or 6 percent, and by $225,000, or 6 percent, as of August 26, 2002, and August 25, 2001, respectively, and the aggregate of the service and interest cost components of the net periodic postretirement benefit cost by $15,000, or 6 percent, and by $16,000, or 6 percent, for fiscal years 2002 and 2001, respectively. For the TPC Plan, the effect of one percentage point increase or decrease in the healthcare cost trend rate would not have had a material effect on either the obligation or the service or interest components of the net periodic benefit cost reported above. For measurement purposes for the TPC Plan, the weighted average discount rate used in determining the accumulated postretirement benefit obligation was 7.25 percent and 7.5 percent as of August 31, 2002, and August 25, 2001, respectively, the long-term rate of return on plan assets was 9.0 percent and the annual salary increases were assumed to be 4.5 percent as of August 31, 2002, and August 25, 2001. EXECUTIVE STOCK AWARD Pursuant to an employment agreement entered into between the Company and its chief executive officer in July 1999, the board of directors authorized the issuance of 5,500 shares of Series A preferred stock to the Company's chief executive officer as discretionary compensation in August 2001. Accordingly, the Company recorded a compensation charge of approximately $550,000 related to this award in 2001. These shares were issued to the Company's chief executive officer during the year ended August 31, 2002. CBI INC. DEFERRED COMPENSATION CBI Inc. has deferred compensation agreements with certain sales representatives and executives, which provide for payments upon retirement or death based on the value of life insurance policies or mutual fund shares at the retirement date. As of August 31, 2002, and August 25, 2001, CBI Inc. had accrued a total of approximately $149,000 and $212,000, respectively, related to these agreements. Such amounts, net of the current portion of approximately $63,000 and $149,000 as of August 31, 2002, and August 25, 2001, respectively, are included in other long-term liabilities in the accompanying consolidated balance sheets. TPC 401(K) PLAN TPC sponsored a qualified defined contribution 401(K) plan that covered substantially all nonunion employees of TPC. TPC matched 50 percent of nonunion participants' voluntary contributions up to a maximum of 4 percent of the participants' compensation. As of January 1, 2002, the TPC 401(K) plan was merged into the American Achievement Corporation 401(K) plan. TPC's contributions were approximately $199,000 and $459,000 for the years ended August 31, 2002 and August 25, 2001, respectively, and approximately $82,000 for the period from July 27, 2000 to August 26, 2000. 45 AMERICAN ACHIEVEMENT CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) CBI INC. 401(K) PLAN CBI Inc. sponsored a qualified defined contribution 401(K) plan that covered all eligible employees of CBI Inc. CBI matched 50 percent of participant's voluntary contributions up to a maximum of 4 percent of the participant's compensation. As of January 1, 2002, the CBI Inc. 401(K) plan was merged into the American Achievement Corporation 401(K) plan. CBI Inc. made contributions of approximately $60,000, $172,000 and $182,000 for the years ended August 31, 2002, August 25, 2001, and August 26, 2000, respectively. AMERICAN ACHIEVEMENT CORPORATION 401(K) PLAN Effective January 1, 2002, the TPC 401(K) Plan and the CBI Inc. 401(K) Plan were merged into the American Achievement Corporation 401(K) Plan. The plan covers substantially all nonunion employees of the Company. The plan matches 50 percent of participants' voluntary contributions up to a discretionary percent determined by the Company. The discretionary percentage in effect for fiscal 2002 was up to 3 percent for hourly employees and up to 4 percent for salaried and office hourly employees. AAC made contributions of approximately $516,000 for the year ended August 31, 2002. 12. INCOME TAXES The Company and its wholly-owned and majority owned domestic subsidiaries file a consolidated federal income tax return. The (provision) benefit for income taxes on income before extraordinary item and cumulative effect of change in accounting principle reflected in the consolidated statements of operations consists of the following (in thousands):
FISCAL YEAR ENDED ------------------------------------ AUGUST 31, AUGUST 25, AUGUST 26, 2002 2001 2000 ---------- ---------- ---------- Federal -- Current............................................. $1,444 $1,576 $ (45) Deferred............................................ -- -- 46 State -- Current............................................. (273) (133) (334) Deferred............................................ -- -- -- ------ ------ ------ $1,171 $1,443 $ (333) ====== ====== ======
The (provision) benefit for income taxes differs from the amount that would be computed if the income (loss) before income taxes were multiplied by the federal income tax rate (statutory rate) as follows (in thousands):
2002 2001 2000 ------- ------ ------- Computed tax (provision) benefit at statutory rate (34%).................................................. $ 361 $1,336 $ (36) State taxes, net of federal benefit...................... (180) (88) (221) Change in valuation allowance............................ 990 195 (76) ------- ------ ------- Total income tax (provision) benefit..................... $ 1,171 $1,443 $ (333) ======= ====== =======
46 AMERICAN ACHIEVEMENT CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Deferred tax assets and liabilities consist of the following (in thousands):
AUGUST 31, AUGUST 25, 2002 2001 ---------- ---------- Deferred tax assets Allowances and reserves................................... $ 2,070 $ 2,299 Net operating loss carryforwards.......................... 25,480 21,014 Accrued liabilities and other............................. 2,836 2,525 ------- ------- Total deferred tax assets................................. 30,386 25,838 Less valuation allowance.................................... (7,727) (6,906) ------- ------- Net deferred tax assets................................... 22,659 18,932 ------- ------- Deferred tax liabilities Depreciation.............................................. 7,807 6,644 Amortization of intangibles............................... 14,401 11,698 Prepaids and other........................................ 451 590 ------- ------- Total deferred tax liabilities............................ 22,659 18,932 ------- ------- Net deferred tax assets (liabilities)..................... $ -- $ -- ======= =======
For tax reporting purposes, the Company has a U.S. net operating loss carryforward of approximately $67.1 million as of August 31, 2002. Utilization of the net operating loss carryforwards is contingent on the Company's ability to generate income in the future. The net operating loss carryforwards will expire in various years through 2022 if not utilized. 13. STOCKHOLDERS' EQUITY: In connection with the Merger Agreement discussed in Note 3, the Company issued 460,985 shares of American Achievement "new" Series A preferred stock (American Achievement "New" Series A Preferred) in exchange for all issued and outstanding CBI Inc. "old" Series B preferred stock (CBI Inc. "Old" Series B Preferred). In addition, the Company issued 375,985 shares of American Achievement "new" common stock (American Achievement "New" Common) for all issued and outstanding CBI Inc. "old" common stock (CBI Inc. "Old" Common). The Company also issued 393,482 shares of American Achievement "New" Series A Preferred and 320,929 shares of American Achievement "New" Common to the stockholders of Taylor Senior Holding for all the outstanding shares of Taylor Senior Holding preferred and common stock contributed to the Company by the Taylor Senior Holding stockholders in connection with the acquisition. The original CBI Inc. "Old" Series A preferred stock (CBI Inc. "Old" Series A Preferred) of 100,000 shares remains issued and outstanding from the Company's subsidiary CBI Inc. and was unaffected by the Merger Agreement. As of July 27, 2000, and in connection with the merger, CBI Inc. "Old" Series A Preferred ownership now represents a minority interest including all accumulated accrued dividends. The minority interest is stated at liquidation value. The Company's board of directors has authorized the issuance of up to 1,200,000 shares of American Achievement "new" preferred stock, par value $.01 per share and 1,250,000 shares of American Achievement "New" Common, par value $.01 per share. AMERICAN ACHIEVEMENT "NEW" SERIES A PREFERRED STOCK The holders of American Achievement "New" Series A Preferred are entitled to one vote per share, voting together with the holders of the American Achievement "new" common stock as one class on all 47 AMERICAN ACHIEVEMENT CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) matters presented to the stockholders. No dividends accrue on the American Achievement "New" Series A Preferred. Dividends may be paid on the American Achievement "New" Series A Preferred if and when declared by the board of directors out of funds legally available therefore. The American Achievement "New" Series A Preferred is nonredeemable. In the event of any liquidation, dissolution or winding up of the Company, the holders of the American Achievement "New" Series A 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 American Achievement "New" Common of the Company, which totals approximately $100,685,000 and $100,135,000 at August 31, 2002, and August 25, 2001, respectively. So long as shares of the American Achievement "New" Series A Preferred remain outstanding, the Company may not declare, pay or set aside for payment any dividends on the American Achievement "New" Common. The Company's Senior Secured Credit Facility restricts the Company's ability to pay dividends on the American Achievement "New" Series A Preferred. During the year ended August 31, 2002, 5,500 shares of the Series A Preferred Stock of the Company were issued to the Company's chief executive officer pursuant to a bonus provided for in fiscal year 2001. Pursuant to an employment agreement entered into between the Company and its chief executive officer in July 1999, and as amended as of February 1, 2002, if the Company achieves a certain consolidated EBITDA target, as defined by the agreement, for the fiscal years commencing with the year ended 2002 and ending in fiscal year 2004, the chief executive officer is entitled to receive up to a total of $1 million in face value of the Company's Series A Preferred Stock during the period. As of August 31, 2002, the Company has accrued approximately $300,000 related to the employment agreement. AMERICAN ACHIEVEMENT SERIES B PREFERRED STOCK During the year ended August 25, 2001, the board of directors of the Company designated 25,000 shares of authorized American Achievement "New" preferred stock as Series B (American Achievement Series B Preferred) with the following preferences, rights and limitations. No American Achievement Series B Preferred was outstanding as of August 31, 2002 and August 25, 2001. During the year ended August 31, 2002, the board of directors cancelled Series B Preferred. COMMON STOCK The holders American Achievement "New" Common are entitled to one vote for each share held of record on all matters submitted to a vote of stockholders, including the election of directors, and vote together as one class with the holders of the preferred stock. Dividends may be paid on Achievement "New" Common if and when declared by the board of directors of the Company out of funds legally available therefore. The Company does not expect to pay dividends on the American Achievement "New" Common in the foreseeable future. So long as shares of the American Achievement "New" Series A Preferred remain outstanding, the Company may not declare, pay or set aside for payment any dividends on the American Achievement "New" Common. The Company's Senior Secured Credit Facility restricts the Company's ability to pay dividends on the American Achievement "New" Common. COMMON STOCK PURCHASE WARRANTS CBI Inc. had issued warrants, and the Company has assumed these obligations pursuant to the Merger Agreement. The warrants are exercisable to purchase an aggregate of 21,405 shares of American Achievement "New" Common. The warrants expire on January 31, 2008. 48 AMERICAN ACHIEVEMENT CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) SUBSCRIPTION AGREEMENT In accordance with a subscription agreement entered into by the Company and Castle Harlan Partners II, L.P. (CHPII), a stockholder of the Company, 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 it 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 On July 27, 2000, the effective date of the Merger Agreement, all outstanding options under CBI Inc.'s 1997 Stock Option Plan, whether vested or unvested, converted into an option to acquire on the same terms and conditions as were applicable under the 1997 Stock Option Plan, shares of the Company's "new" common stock at ratio of 1 to 1 at a purchase price based on fair value at the merger date, determined to be $7.02 per share. The 2000 Stock Option Plan became effective on July 27, 2000. Under the 2000 Stock Option Plan, a total of 122,985 shares of common stock has been reserved for issuance, and 50,902, 92,127 and 92,127 of those shares were available for grant to directors and employees of the Company as of August 31, 2002, August 25, 2001 and August 26, 2000, respectively. The 2000 Stock Option Plan provides for the granting of both incentive and nonqualified stock options. Options granted under the 2000 Stock Option Plan have a maximum term of 10 years and are exercisable under the terms of the respective option agreements at 110 percent of fair market value for all incentive stock options issued to employees and at fair market value of the common stock at the date of grant for all other options issued. Payment of the exercise price must be made in cash, a combination of cash and a note 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 2000 Stock Option Plan will be subject to a voting trust agreement. During the year ended August 28, 2000, the Company issued an option to purchase 12,524 shares of American Achievement "new" common stock to an executive whereby the terms of the option are the same as provided for in the 2000 Stock Option Plan with the exception that the option vests over a two-year period and expires in five years. During year ended August 31, 2002, the Company issued an option to purchase 12,500 shares of American Achievement "new" Common Stock to an executive where terms of the option are the same as provided for in the Company's 2000 Stock Option Plan, with the exception that the option vested on the date of grant. The Company applies Accounting Principles Board (APB) Opinion No. 25, "Accounting for Stock Issued to Employees," and related interpretations in accounting for the 2000 Stock Option Plan and the previously outstanding 1997 Stock Option Plan. Accordingly, no compensation cost has been recognized for its 2000 Stock Option Plan. Had compensation cost for the Company's stock-based compensation plan been determined based on the fair value at the grant date for awards consistent with the method of SFAS No. 123, "Accounting for Stock-Based Compensation," the Company's net income (loss) to holders of common stock years ended August 31, 2002, August 25, 2001, and August 26, 2000, would not have been materially impacted. Incentive stock options for 69,853 shares and 28,984 shares and nonqualified stock options for 2,230 and 1,874 shares of the Company's common stock were outstanding as of August 31, 2002, and August 25, 2001, respectively. The weighted average remaining contractual life of all outstanding options was 7.88 years at August 31, 2002. A summary of the status of the Company's 2000 Stock Option Plan as of August 31, 2002 49 AMERICAN ACHIEVEMENT CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) and August 25, 2001, and the 1997 Stock Option Plan as of August 26, 2000, and changes during the fiscal years then ended are presented below:
AUGUST 31, 2002 AUGUST 25, 2001 AUGUST 26, 2000 -------------------- -------------------- ------------------------------------------- SHARES OF WEIGHTED SHARES OF WEIGHTED SHARES OF WEIGHTED SHARES OF WEIGHTED "NEW" AVERAGE "NEW" AVERAGE "NEW" AVERAGE "OLD" AVERAGE COMMON EXERCISE COMMON EXERCISE COMMON EXERCISE COMMON EXERCISE STOCK PRICE STOCK PRICE STOCK PRICE STOCK PRICE --------- -------- --------- -------- --------- -------- --------- -------- Outstanding at beginning of fiscal year.............................. 30,858 $7.02 31,892 $7.02 -- $ -- 34,478 $6.67 Granted............................. 41,613 1.51 -- -- -- -- -- -- Exercised........................... -- -- (300) 7.02 -- -- -- -- Canceled............................ (388) 7.02 (734) 7.02 -- -- (2,586) 6.67 Conversion of options for change in underlying stock.................. -- -- -- -- 31,892 7.02 (31,892) 6.67 ------ ----- ------ ----- ------ ----- ------- ----- Outstanding at end of fiscal year... 72,083 $3.86 30,858 $7.02 31,892 $7.02 -- $ -- ====== ===== ====== ===== ====== ===== ======= ===== Options exercisable at year-end..... 43,358 $5.43 26,275 $7.02 15,478 $7.02 -- Weighted average fair value of options granted during the fiscal year ended........................ $0.76 $ -- $ -- $ --
The fair value of each grant was estimated on the date of the grant using the Black-Scholes option pricing model with the following weighted average assumptions used for grants in fiscal year 2002: dividend yield of nil; expected volatility of 27.99 percent; risk-free interest rate of 4.88%; and expected life of 10 years. The Black-Scholes option pricing model was developed for use in estimating the fair value of traded options, which have no vesting restrictions and are fully transferable. In addition, option pricing models require the input of highly subjective assumptions, including expected stock price volatility. Because the Company's stock options have characteristics significantly different from those of traded options and because changes in the subjective input assumptions can materially affect the fair value estimate, in management's opinion, the existing models do not necessarily provide a reliable single measure of the fair value of its stock options. Pursuant to an employment agreement entered into between the Company and its chief executive officer in July 1999, as amended on February 1, 2002, if the Company achieves certain EBITDA targets as defined by the agreement at any point from 2002 through 2004, the chief executive is entitled to receive up to a total of $1 million in face value of the Company's Series A Preferred Stock. In addition, the plan provided for the immediate issuance of an option to purchase 12,500 shares of the Company's common stock with a discretionary option to purchase shares. An option to purchase 12,500 shares was granted in 2002 pursuant to this plan. The executive is also entitled to receive discretionary bonuses as directed by the Board of Directors up to $300,000 annually, all of which is accrued as of August 31, 2002. 14. RELATED-PARTY TRANSACTIONS The Company entered into a management agreement on March 30, 2001, with Castle Harlan, Inc. (the Manager), pursuant to which the Manager agreed to provide business and organization strategy, financial and investment management and merchant and investment banking services to the Company and its subsidiaries. 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 agreement is for a term of 10 years, renewable automatically from year to year unless CHPIII or CHPII shall own less than 5 percent of the then-outstanding capital stock of the Company. Beginning fiscal year 2002, the Company is to pay a management fee equal to $3,000,000, unless otherwise prohibited by the Company's Senior Secured Credit Facility (see Note 8). The Company was subject to a similar management agreement with the Manager that was signed on July 27, 2000, and an agreement signed on December 16, 1996. Amounts paid under all management agreements totaled approxi- 50 AMERICAN ACHIEVEMENT CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) mately $2,638,000, $2,562,000 and $3,125,000 for the years ended August 31, 2002, August 25, 2001 and August 26, 2000, respectively. As of August 31, 2002, and August 25, 2001, the Company had accrued management fees of approximately $750,000 and $688,000, respectively. Management fees for investment banking services of approximately $557,000 were included in deferred financing costs related to the funding of the ECI Acquisition. During the year ended August 31, 2002, this cost was recognized as an extraordinary charge in the statement of operations in connection with the retirement of the associated debt. In connection with the Merger and the ECI Acquisition, the Company has a receivable from the Castle Harlan Group relating to the acquisition and merger expenses that were to be reimbursed to the Company. The amount of such receivables were approximately $26,000 and $130,000 as of August 31, 2002, and August 25, 2001, respectively. 15. BUSINESS SEGMENTS: The Company operates in two reportable business segments: scholastic products, and recognition and affinity products. The principal products sold in the scholastic segment are class rings, yearbooks and graduation products, which include fine paper products and graduation accessories. The scholastic segment primarily serves the high school and college markets. The recognition and affinity segment includes publications that recognize the academic achievement of top students at the high school and college levels, jewelry commemorating family events, fan affinity jewelry and related products, and professional sports championship rings. The accounting policies of the segments are the same as those described in the summary of significant accounting policies in Note 2. 51 AMERICAN ACHIEVEMENT CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The following is a summary of certain financial information relating to the two segments (in thousands):
RECOGNITION AND SCHOLASTIC AFFINITY TOTAL ---------- --------------- -------- Year ended August 31, 2002 Net sales....................................... $269,362 $35,016 $304,378 Interest expense, net........................... 19,371 6,655 26,026 Depreciation and amortization................... 15,547 4,165 19,712 Segment operating income........................ 23,272 4,474 27,746 Capital expenditures............................ 12,754 1,493 14,247 Segment assets.................................. 310,453 91,173 401,626 Year ended August 25, 2001 Net sales....................................... $258,435 $22,618 $281,053 Interest expense................................ 20,561 2,285 22,846 Depreciation and amortization................... 16,856 730 17,586 Segment operating income........................ 20,832 (1,915) 18,917 Capital expenditures............................ 6,744 755 7,499 Segment assets.................................. 354,444 30,527 384,971 Year ended August 26, 2000 Net sales....................................... $163,347 $18,938 $182,285 Interest expense................................ 14,122 1,569 15,691 Depreciation and amortization................... 8,191 909 9,100 Segment operating income........................ 12,484 3,313 15,797 Extraordinary gain, net......................... 6,025 670 6,695 Capital expenditures............................ 4,558 529 5,087 Segment assets.................................. 292,627 33,926 326,553
The Company's reportable segments are strategic business units that offer products to different consumer segments. Each segment is managed separately because each business requires different marketing strategies. The Company evaluates the performance of each segment based on the profit or loss from operations before income taxes, not including nonrecurring gains or losses. 16. RESTATEMENT OF FINANCIAL STATEMENTS Subsequent to the issuance of its financial statements for the year ended August 25, 2001, management determined that the Company should have (1) changed its revenue recognition on certain sales to independent sales representatives in order to comply with the provisions of Securities and Exchange Commission Staff Accounting Bulletin No. 101, effective August 27, 2000, and (2) recognized an income tax benefit related to a net operating loss carryback attributable to one of the Company's subsidiaries, during the year ended August 25, 2001. As a result, the consolidated financial statements for the year ended August 25, 2001 has been restated. 52 AMERICAN ACHIEVEMENT CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) A summary of the significant effects of the restatement is as follows (in thousands):
AS OF AUGUST 25, 2001 ------------------------------------ AS PREVIOUSLY REPORTED AS RESTATED ---------------------- ----------- Prepaids and other assets............................. $ 15,916 $ 20,158 Income tax receivable................................. -- 776 Total assets.......................................... $379,953 $384,971 Deferred revenue...................................... -- 6,799 Accumulated deficit................................... $(20,218) $(21,199) Stockholders equity................................... $ 71,809 $ 70,828
FOR THE YEAR ENDED AUGUST 25, 2001 ------------------------------------ AS PREVIOUSLY REPORTED AS RESTATED ---------------------- ----------- Net Sales............................................. $281,515 $281,053 Cost of sales......................................... $141,946 $142,164 Gross Profit.......................................... $139,569 $138,889 Selling, general and administrative expenses.......... $119,930 $119,972 (Provision) benefit for income taxes.................. $ (133) $ 1,443 Cumulative effect of change in accounting principle... -- $ (1,835) Net loss.............................................. $ (3,340) $ (4,321)
53 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE On April 25, 2002, American Achievement Corporation ("the Company") dismissed Arthur Andersen LLP ("Arthur Andersen" or "AA") as the Company's independent auditors. The dismissal of AA was recommended by the Audit Committee of the Company's Board of Directors and approved by the Company's Board of Directors. The Company engaged Deloitte & Touche LLP to serve as the Company's independent auditors for the fiscal year 2002. Arthur Andersen's reports on the Company's consolidated financial statements for each of the fiscal years ended August 25, 2001 and August 26, 2000 did not contain an adverse opinion or disclaimer of opinion, nor were they qualified or modified as to uncertainty, audit scope or accounting principles. During the fiscal years ended August 25, 2001 and August 26, 2000, and through April 25, 2002, there were no disagreements with Arthur Andersen on any matters of accounting principles or practices, financial statement disclosures, or auditing scope or procedures which, if not resolved to AA's satisfaction, would have caused them to make reference to the subject matter of the disagreements in connection with their report on the Company's consolidated financial statements for such years; and there were no reportable events as defined in Item 304(a)(1)(v) of Regulation S-K of the Securities Exchange Act of 1934. During the fiscal years ended August 26, 2000 and August 25, 2001, and through April 25, 2002, the Company did not consult with Deloitte & Touche, LLP regarding the application of accounting principles to a specified transaction, either completed or proposed, or the type of audit opinion that might be rendered on the Company's consolidated financial statements, or any other matters or reportable events as set forth in Items 304(a)(1)(v) of Regulation S-K. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The following table sets forth certain information regarding our directors, executive officers and other senior officers. Our directors are elected by the shareholders at our annual meeting and serve until the next annual meeting and the election and qualification of their successors.
NAME AGE POSITION - ---- --- -------- David G. Fiore....................... 55 President, Chief Executive Officer and Director Sherice P. Bench..................... 42 Chief Financial Officer, Secretary and Treasurer Charlyn A. Daugherty................. 53 Senior Vice President -- Jewelry Operations Parke H. Davis....................... 59 Senior Vice President -- Retail Sales Donald A. Percenti................... 45 Senior Vice President -- Scholastic Products John K. Castle....................... 61 Director David B. Pittaway.................... 50 Director William M. Pruellage................. 29 Director Edward O. Vetter..................... 81 Director Zane Tankel.......................... 62 Director
DAVID G. FIORE became our President and Chief Executive Officer and a director in July 2000, and since August 1999 had been President and CEO and a director of CBI, one of our subsidiaries. Prior to joining CBI, Mr. Fiore was the President and CEO of Reliant Building Products, Inc. from 1992 to 1998. From 1988 to 1992, Mr. Fiore was the President and CEO of CalTex Industries, Inc. and held the positions of Division General Manager, VP of Manufacturing and Director of Marketing with the Atlas Powder Company from 1977 to 1988. SHERICE P. BENCH has been our Secretary and Treasurer since July 2000 and became our Chief Financial Officer in August 2001. From July 2000 to August 2001, Ms. Bench was CFO of CBI. From 1996 to July 54 2000, Ms. Bench was Vice President and Controller of CBI. From 1989 to 1996, Ms. Bench was Vice President Finance and Controller for CJC Holdings, the prior owner of ArtCarved. Prior to that time, Ms. Bench was employed as an audit manager with Arthur Andersen LLP. CHARLYN A. DAUGHERTY has been Senior Vice President -- Jewelry Operations since 1999. From 1996 to 1999, she was Vice President -- Manufacturing of CBI and from 1989 to 1996, Ms. Daugherty was President -- Manufacturing Division of CJC Holdings. From 1989 to 1990, Ms. Daugherty was Vice President -- Operations of CIC Holdings. PARKE H. DAVIS has been Senior Vice President -- Retail Sales since 1996. From 1991 to 1996, Mr. Davis was President -- Class Ring Division of CJC Holdings and before that served as its President -- Keepsake Division and its President -- College Class Ring Sales. DONALD A. PERCENTI has been Senior Vice President -- Scholastic Products since 1996. From 1991 to 1996, he was Vice President -- Sales and Marketing of L.G. Balfour Company. From 1977 to 1991, Mr. Percenti was employed by Balfour in various capacities. JOHN K. CASTLE has been director of our company since its formation in July 2000 and was a director of CBI from 1996 to 2000. Mr. Castle is Chairman and Chief Executive Officer of Castle Harlan, Inc. Mr. Castle is also Chairman and CEO of Branford Castle, Inc., an investment holding company. Immediately prior to forming Branford Castle in 1986, Mr. Castle was President and Chief Executive Officer and a Director of Donaldson, Lufkin, & Jenrette, Inc., one of the nation's leading investment banking firms. Mr. Castle is a Director of various private equity companies, and is a member of the corporation of the Massachusetts Institute of Technology. Mr. Castle is also a Trustee of New York Presbyterian Hospital and the Whitehead Institute of Biomedical Research. He also served as a Trustee of New York Medical College for 22 years and was Chairman of its Board for 11 years. Previously, Mr. Castle was a Director of the Equitable Life Assurance Society of the United States, Sealed Air Corporation, Universal Compression Holdings, Inc., and Statia Terminals Group, N.V. He was educated at the Massachusetts Institute of Technology (S.B.) and the Harvard Business School (M.B.A. with High Distinction and Baker Scholar). DAVID B. PITTAWAY has been a director of our company since its formation in July 2000. Mr. Pittaway was President and Treasurer of CBI from its formation in April 1996 through December 1996, and was a director of CBI from April 1996 to July 2000. Mr. Pittaway is a Senior Managing Director of Castle Harlan, Inc. and has been with the firm since its inception in 1987. Prior to joining Castle Harlan, Mr. Pittaway was Vice President, Strategic Planning, and Assistant to the President of Donaldson, Lufkin, & Jenrette, Inc. Before joining DLJ, he was a management consultant in strategic planning with Bain & Company in Boston, Mass., and previously was an attorney with Morgan, Lewis & Bockius, specializing in labor relations. He is also a Board Member of McCormick & Schmick's Holding Corp., Morton's Restaurant Group, Inc., Charlie Brown's, Inc., Luther's Bar-B-Q, Inc., Wilshire Restaurant Group, Inc., Equipment Support Services, Inc., and Branford Chain, Inc. He is a graduate of the University of Kansas (B.A. with Highest Distinction), and has both an M.B.A. with High Distinction (Baker Scholar) and a J.D. from Harvard University. WILLIAM M. PRUELLAGE has been a director since our formation in July 2000. Mr. Pruellage is a Vice President of Castle Harlan, Inc. Mr. Pruellage is also a board member of Universal Compression, Inc., Verdugt Holdings, LLC and Wilshire Restaurant Group, Inc. Prior to joining Castle Harlan in 1997, Mr. Pruellage worked in the Mergers and Acquisition group of Merrill Lynch & Co., where he assisted clients in strategic planning and corporate mergers. Mr. Pruellage graduated Summa Cum Laude from Georgetown University with a double major in Finance and International Business. He is a member of the Beta Gamma Sigma Honor Society. EDWARD O. VETTER has been a director since our formation in July 2000 and was a director of CBI from 1998 to that time. Mr. Vetter has served as President of Edward O. Vetter & Associates, a private management consulting firm, since 1978 and has also served as a Trustee for the Massachusetts Institute of Technology since 1979 and is currently a Trustee Emeritus. Mr. Vetter also served from 1987 to 1991 as Chairman of the Texas Department of Commerce, from 1979 to 1983 as Energy Advisor to the Governor of Texas and from 1976 to 1977 as U.S. Undersecretary of Commerce, serving as Director of Overseas Private 55 Investment Corporation and as Director of Pension Benefit Guaranty Corporation. From 1952 through 1975, Mr. Vetter was employed by Texas Instruments, Inc. in various capacities and was the Executive Vice President and Chief Financial Officer at the time of his retirement in 1975. Formerly, Mr. Vetter has served as a director of AMR Corporation, Champion International, Cabot Corporation, Dual Drilling Company, Bell Packaging Company, and Pioneer Natural Resources. ZANE TANKEL has been a director since our formation in July 2000 and has been Chairman and CEO of Zane Tankel Consultants, Inc., a sales company, since 1990. In 1994, Mr. Tankel formed Apple Metro, Inc., a restaurant franchisee for the New York metropolitan area, for the franchisor Applebee's Neighborhood Grill & Bar. He is presently Chairman and CEO of Apple Metro, Inc. In 1995-1996, Mr. Tankel was elected Chairman of the Federal Law Enforcement Foundation, which aids the federal law enforcement community in times of crisis and is currently on the board. He was the past chapter chairman of the Young Presidents' Organization and is presently a member of the Board of Directors of the Metropolitan Presidents Organization, the New York chapter of the World Presidents Organization. Mr. Tankel served on the Board of Directors of Beverly Hills Securities Corporation, a wholesale mortgage brokerage company, until its sale in January 1994. ITEM 11. EXECUTIVE COMPENSATION The following table sets forth the cash and non-cash compensation for 2002, 2001 and 2000 awarded to or earned by the chief executive officer and the four other most highly compensated executive officers. SUMMARY COMPENSATION TABLE
ANNUAL COMPENSATION LONG-TERM COMPENSATION ------------------------------------- ---------------------------------- RESTRICTED SECURITIES OTHER ANNUAL STOCK UNDERLYING LTIP ALL OTHER NAME AND PRINCIPAL POSITION YEAR(1) SALARY BONUS COMPENSATION(2) AWARDS OPTIONS(#) PAYOUTS COMPENSATION(3) - --------------------------- ------- -------- -------- --------------- ----------- ---------- ------- --------------- (DOLLARS IN THOUSANDS) David G. Fiore.......... 2002 $361,617 $300,000 -- $936,088 22,500 $0 -- President and Chief 2001 $311,695 $160,000 -- 0 12,524 $0 -- Executive Officer 2000 $312,753 $300,000 -- 0 0 $0 -- Sherice P. Bench........ 2002 $182,019 $115,000 -- 0 7,966 $0 -- Chief Financial Officer 2001 $164,076 $ 39,600 -- 0 0 $0 -- 2000 $155,769 $ 99,000 -- 0 1,034 $0 -- Charlyn A. Daugherty.... 2002 $185,292 $106,000 -- 0 6,243 $0 -- Senior Vice President -- 2001 $175,538 $ 43,750 -- 0 0 $0 -- Jewelry Operations 2000 $174,615 $113,225 -- 0 2,757 $0 -- Parke H. Davis.......... 2002 $200,769 $108,000 -- 0 6,243 $0 -- Senior Vice President -- 2001 $184,000 $ 33,300 -- 0 0 $0 -- Retail Sales 2000 $180,981 $109,210 -- 0 2,757 $0 -- Donald A. Percenti...... 2002 $217,693 $111,000 -- 0 6,243 $0 -- Senior Vice President -- 2001 $197,808 $ 54,000 -- 0 0 $0 -- Scholastic Products 2000 $195,192 $121,600 -- 0 2,757 $0 --
- --------------- (1) Our 2002 fiscal year ended on August 31, 2002. Fiscal year 2001 ended on August 25, 2001 and fiscal year 2000 ended on August 26, 2000. Executive compensation for 2000, 2001, and 2002 is for the twelve months ended December 31 of each year and based on current compensation. (2) The perquisites and other personal benefits, securities or property received by the named executive officers did not exceed $50,000 or 10% of the total annual salary and bonus reported for the named executive officers in cash of 2000, 2001 and 2002. In 2002, we have paid $386,088 in taxes associated with the receipt by Mr. Fiore in 2002 of 5,500 shares of our series A preferred stock. We do not expect any additional perquisites and other benefits to be payable by us for the remainder of fiscal 2002. 56 (3) Each of the named executive officers have term life insurance policies equal to two-times their base salary in fiscal 2002 and one-times their base salary in fiscal 2001 and fiscal 2000 with a benefit payable to a beneficiary selected by the named executive officer upon his or her death. We have paid the annual premiums on such policies in each of 2002, 2001 and 2000. The annual premium does not exceed $910 for any named executive officer. No named executive officer is entitled to any cash surrender value in such policies. (4) During 2002 due to the increased concerns after September 11, 2001, and the increased travel requirements. Mr. Fiore, Mrs. Bench and thirteen other officers and executives of the Company, AAC purchased a travel accident policy covering Mr. Fiore and Mrs. Bench in the amount of $2,500,000 each and $250,000 each for the other 13 named executives for a total three year premium of $4,777. The beneficiaries of the policy are to be named by the employee, and no named executive is entitled to any cash surrender value in such policies. EMPLOYMENT AGREEMENTS David G. Fiore. Mr. Fiore has an employment agreement with us, pursuant to which he serves as our Chief Executive Officer and President and as a member of our Board of Directors. The initial term of his employment agreement was for two years from August 2, 1999. Unless otherwise terminated, Mr. Fiore's employment agreement adds one day to the term for each day that passes, and accordingly, there are always two years remaining on the term. The employment agreement provides Mr. Fiore with an annual base salary of no less than $300,000. Under his employment agreement, Mr. Fiore's salary is subject to such increases as our Board of Directors may determine from time to time. Mr. Fiore's employment agreement provides for various bonuses to be paid to him. Mr. Fiore is paid an annual bonus up to $200,000, determined by our Board of Directors, based upon the achievement of certain EBITDA targets. Mr. Fiore is also entitled to long-term incentive bonuses in the form of various stock grants if we achieve certain EBITDA targets as provided for in his employment agreement. These stock grants are fully vested when granted. At the discretion of the compensation committee of our Board of Directors, we also may pay Mr. Fiore a discretionary bonus each year in an amount of up to $100,000. Mr. Fiore's employment agreement provides that in the event his employment is terminated without "substantial cause" or he terminates his employment for "good reason" (each as defined in his employment agreement), he will be entitled to receive his salary for the remainder of the term under the employment agreement, plus the portion of the annual bonus actually earned through the date of termination, plus the long-term incentive bonus. Mr. Fiore and covered family members will also be entitled to health benefits for 24 months, or until they become covered under a new employee health plan at no cost to Mr. Fiore. Mr. Fiore's employment agreement further provides that he may terminate his employment six months after a "change in control" (as defined in his employment agreement). Upon such termination, Mr. Fiore will be paid $450,000. Sherice P. Bench. Ms. Bench has an employment agreement with CBI, effective as of December 16, 1996, and as of August 31, 2002 serves as our chief financial officer at an annual salary of $180,000. The initial term of her employment agreement was for two years, which can be automatically extended for additional one year terms on December 15th of each succeeding year thereafter unless earlier terminated by us upon not less than 60 days' prior notice. The current term of her employment agreement expires on December 15, 2002. Ms. Bench is entitled to participate in such employee benefit programs, plans and policies (including incentive bonus plans and incentive stock option plans) as we maintain and as may be established for our employees from time-to-time on the same basis as other executive employees are entitled to participate. Ms. Bench's employment agreement provides that in the event her employment is terminated without "substantial cause" (as defined in her employment agreement), she will be entitled to receive 39 bi-weekly severance payments equal to the average of her bi-weekly compensation in effect within the two years preceding her termination, accrued but unused vacation, and any accrued bonus. She will also be entitled to 57 elect the continuation of health benefits at our cost. Ms. Bench's employment agreement does not provide her with any payments that are contingent upon a "change in control." Other Employment Agreements. Charlyn A. Daugherty, Donald A. Percenti and Parke H. Davis each have an employment agreement with CBI and Ronald Brostrom and G. Page Singletary have employment agreements with Milestone Marketing Incorporated. The initial term of each respective employment agreement was for three years, which can be automatically extended for additional one year terms on December 15th of each succeeding year thereafter unless earlier terminated by us upon not less than 60 days' prior notice for Ms. Daugherty and Messrs. Davis and Percenti and on the 15th of July for Messrs. Brostrom and Singletary. The current term of each of their employment agreements expires on December 15, 2002 for Ms. Daugherty, Messrs. Davis and Percenti, and on July 15, 2005 for Messrs. Brostrom and Singletary. Ms. Daugherty and Messrs. Davis, Percenti, Brostrom and Singletary are entitled to participate in such employee benefit programs, plans and policies (including incentive bonus plans and incentive stock option plans) as we maintain and as may be established for our employees from time-to-time on the same basis as other executive employees are entitled to participate. Each of the above-described employment agreements for Ms. Daugherty, Messrs. Davis and Percenti provide that in the event of their termination of employment without "cause" (as defined in each of their respective employment agreements), the terminated employee will be entitled to receive 18 months of severance payments equal to the average of such employee's bi-weekly compensation in effect within the two years preceding their termination, accrued but unused vacation and any accrued bonuses. In the event the employment of Messrs. Brostrom or Singletary is terminated without "cause", he will receive bi-weekly severance payments equal to his bi-weekly compensation as of the date of termination until the end of the initial term or one year from date of termination, accrued but unused vacation, and any accrued bonus. Such employee will also be entitled to elect the continuation of health benefits at our cost. None of the above-described employment agreements provide any payments that are contingent upon a "change of control." 2000 STOCK OPTION PLAN We have adopted a 2000 Stock Option Plan, which provides for the granting of incentive stock options and nonqualified stock options to our employees and directors and the employees and directors of our subsidiaries. The number of shares of common stock available to be awarded under the option plan is 122,985. As of November 1, 2002, options to purchase 99,333 shares of common stock had been granted. The option plan is administered by the compensation committee of our board of directors, which has the discretion to select which employees and directors will receive awards of options under the plan as well as the amount of such grant. Each option will expire on the date determined by the compensation committee of our board of directors, which will not be later than ten years from the date of grant. Options granted under the option plan generally vest 25% per year over a four year period. The exercise price for incentive stock options is the fair market value of the stock on the date that the option is granted. If the option holder's employment is terminated for any reason, all options that are not exercisable as of the date of termination will expire, and those options that are exercisable may be exercised until the option grant period has expired. Under the option plan, we have certain rights to repurchase from an option holder the common stock issued upon exercise of the option upon termination of the option holder's employment. Stock options were granted to Mr. Fiore, Ms. Bench, Ms. Daugherty, Messrs. Davis and Percenti during fiscal year 2002 of 12,500, 3,966, 2,243, 2,243 and 2,243, respectively. None of the foregoing individuals exercised any stock options in fiscal year 2002. Subsequent to August 31, 2002 stock options were granted to Mr. Fiore, Ms. Bench, Ms. Daugherty, Messrs. Davis and Percenti in the amount of 10,000, 4,000, 4,000, 4,000 and 4,000 shares, respectively. 58 The following table sets forth option grants for the CEO and the four named executive officers during the year ended August 31, 2002. OPTIONS GRANTS IN YEAR ENDED AUGUST 31, 2002
INDIVIDUAL GRANTS -------------------------------------------------- PERCENT OF TOTAL POTENTIAL REALIZABLE VALUE AT NUMBER OF OPTIONS ASSUMED ANNUAL RATES OF SECURITIES GRANTED TO STOCK PRICE APPRECIATION FOR UNDERLYING EMPLOYEES EXERCISE OF OPTION TERM OPTIONS IN FISCAL BASE PRICE EXPIRATION ----------------------------- NAME GRANTED YEAR 2002 ($/SH) DATE 5%($) 10%($) ---- ---------- ---------- ----------- ---------- ------------- ------------- (A) (B) (C) (D) (E) (F) (G) David G. Fiore, CEO............. 12,500 30.0% 1.51 2/20/12 30,745 48,457 Sherice P. Bench................ 3,966 9.5% 1.51 2/20/12 9,755 15,533 Charlyn A. Daugherty............ 2,243 5.4% 1.51 2/20/12 5,517 8,785 Parke H. Davis.................. 2,243 5.4% 1.51 2/20/12 5,517 8,785 Donald A. Percenti.............. 2,243 5.4% 1.51 2/20/12 5,517 8,785
COMPENSATION OF DIRECTORS; BOARD COMMITTEES Directors who are neither members of our management nor affiliates of Castle Harlan each receive a fee of $25,000 per year, paid quarterly, for their services as a director. The Board of Directors has established two committees, a compensation committee and an audit committee. The compensation committee reviews general policy matters relating to compensation and benefits. The audit committee recommends the firm to be appointed as independent accountants to audit our financial statements, discusses the scope and results of the audit with the independent accountants, reviews with management and the independent accountants our interim and year-end operating results, considers the adequacy of our internal control and audit procedures and reviews the non-audit services to be performed by the independent accountants. The compensation committee consists of Messrs. Castle, Pittaway and Tankel and the audit committee consists of Messrs. Pittaway, Pruellage and Vetter. Our certificate of incorporation and by-laws provides that we indemnify our officers and directors to the fullest extent permitted by the Delaware General Corporation Law, which is referred to in this prospectus as the DGCL. Under Section 145 of the DGCL, a corporation may indemnify its directors, officers, employees and agents and its former directors, officers, employees and agents and those who serve, at the corporation's request, in such capacities with another enterprise, against expenses, including attorneys' fees, as well as judgments, fines and settlements in nonderivative lawsuits, actually and reasonably incurred in connection with the defense of any action, suit or proceeding in which they or any of them were or are made parties or are threatened to be made parties by reason of their serving or having served in that capacity. The DGCL provides, however, that the person must have acted in good faith and in a manner that he or she reasonably believed to be in, or not opposed to, the best interests of the corporation and, in the case of a criminal action, he or she must have had no reasonable cause to believe his or her conduct was unlawful. In addition, the DGCL does not permit indemnification in an action or suit by or in the right of the corporation where he or she has been adjudged liable to the corporation, unless, and only to the extent that, a court determines that he or she fairly and reasonably is entitled to indemnity for costs the court deems proper in light of liability adjudication. Indemnification is mandatory to the extent a claim, issue or matter has been successfully defended. The certificate of incorporation and the DGCL also prohibit limitations on officer or director liability for acts or omissions which resulted in a violation of a statute prohibiting dividend declarations, payments to stockholders after dissolution and particular types of loans. The effect of these provisions is to eliminate the rights of our company and our stockholders, through stockholders' derivative suits on behalf of our company, to recover monetary damages against an officer or director for breach of a fiduciary duty as an officer or director, except in the situations described above. 59 Insofar as indemnification for liabilities arising under the Securities Act may be permitted to directors or officers of our company pursuant to the foregoing provisions, we have been informed that, in the opinion of the SEC, this indemnification is against public policy as expressed in the Securities Act and is therefore unenforceable. COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION No member of the compensation committee is our employee. There are no compensation committee interlocks (i.e., no executive officer of ours serves as a member of the board of directors or the compensation committee of another entity which has an executive officer serving on our board of directors or the compensation committee). 60 ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The following table sets forth certain information regarding the beneficial ownership of our voting securities as of November 1, 2002, with respect to (i) each person or entity who is the beneficial owner of more than 5% of any class of our voting securities, (ii) each of our directors, (iii) each of the named executive officers, and (iv) all directors and executive officers as a group.
NUMBER OF PERCENTAGE OF NUMBER OF SHARES PERCENTAGE OF SHARES OF TOTAL COMMON OF SERIES A TOTAL SERIES A NAME AND ADDRESS OF BENEFICIAL OWNER(1) COMMON STOCK STOCK (%) PREFERRED PREFERRED (%) - --------------------------------------- ------------ ------------- ---------------- -------------- Castle Harlan Partners III, L.P.(2)(3).......................... 431,055 53.2 537,867 53.4 Castle Harlan Partners II, L.P.(2)(4).......................... 372,015 46.0 456,799 45.4 John K. Castle(2)(5).................. 803,070 99.2 994,667 98.8 David B. Pittaway(2).................. 1,005 * 1,126 * Zane Tankel(2)........................ 938 * 938 * Edward O. Vetter(2)................... 400 * 400 * William M. Pruellage(2)............... 0 0.0 0 0.0 David G. Fiore(6)(7).................. 35,024 4.2 5,500 * Sherice P. Bench(6)(8)................ 1,034 * 0 * Charlyn A. Daugherty(6)(9)............ 3,085 * 328 * Parke H. Davis(6)(9).................. 2,945 * 188 * Donald A. Percenti(6)(9).............. 3,226 * 469 * Directors and executive officers as a group (10 persons, including those listed above)....................... 850,727 99.7 1,003,616 99.7
- --------------- * Denotes beneficial ownership of less than one percent of the class of capital stock. (1) Beneficial ownership is determined in accordance with the rules of the Securities and Exchange Commission. Beneficial ownership includes shares of common stock and series A preferred stock that any person has the right to acquire within 60 days after August 31, 2002. Shares of common stock and series A preferred stock not outstanding but deemed beneficially owned because a person or group has the right to acquire them within 60 days are treated as outstanding only for purposes of determining the percentage owned by that person or group. For purposes of this table, all fractional shares have been rounded to the nearest whole share. Except as indicated in the footnotes to this table, each stockholder named in the table has sole voting and investment power with respect to the shares set forth opposite such stockholder's name. (2) The address for each indicated stockholder or director identified in the table is c/o Castle Harlan, Inc., 150 East 58th Street, New York, New York 10155. (3) Includes 17,983 shares of common stock and 22,438 shares of series A preferred stock held by related entities, all of which may be deemed to be beneficially owned by Castle Harlan Partners III, L.P. Castle Harlan Partners III, L.P. disclaims beneficial ownership of these shares. (4) Includes 41,175 shares of common stock and 50,559 shares of series A preferred stock held by related entities, all of which may be deemed to be beneficially owned by Castle Harlan Partners II, L.P. Castle Harlan Partners II, L.P. disclaims beneficial ownership of these shares. (5) John K. Castle, one of our directors, is the controlling stockholder of Castle Harlan Partners III, G.P., Inc., the general partner of the general partner of Castle Harlan Partners III, L.P., and as such may be deemed to be a beneficial owner of the shares owned by Castle Harlan Partners III, L.P. and its affiliates. Mr. Castle disclaims beneficial ownership of such shares in excess of his proportionate partnership share of Castle Harlan Partners III, L.P. and its affiliates. In addition, Mr. Castle is the controlling stockholder of Castle Harlan Partners II G.P., Inc., the general partner of the general partner of Castle Harlan Partners II, L.P., and as such may be deemed to be a beneficial owner of the shares owned by Castle 61 Harlan Partners II, L.P. and its affiliates. Mr. Castle disclaims beneficial ownership of such shares in excess of his proportionate partnership share of Castle Harlan Partners II, L.P. and its affiliates. (6) The address for each indicated director or executive officer identified in the table is c/o American Achievement Corporation, 7211 Circle S Road, Austin, Texas 78745. (7) Mr. Fiore was granted options to purchase 25,024 shares of our common stock, which have vested pursuant to our 2000 Stock Option Plan. (8) Ms. Bench was granted options to purchase 1,034 shares of our common stock, which have vested pursuant to our 2000 Stock Option Plan. (9) Ms. Daugherty and Messrs. Davis and Percenti were each granted options to purchase 2,757 shares of our common stock, which have vested pursuant to our 2000 Stock Option Plan. DESCRIPTION OF CAPITAL STOCK Our authorized capital stock consists of 1,250,000 shares of common stock, par value $0.01 per share, of which 809,351 shares are issued and outstanding, and 1,250,000 shares of preferred stock, par value $0.01 per share. Of the amount of authorized preferred stock, 1,200,000 shares of our preferred stock are designated series A preferred stock and 1,006,847 shares are issued and outstanding. COMMON STOCK The holders of our common stock are entitled to one vote per share on all matters submitted to a vote of stockholders, including the election of directors, and vote together as a class with the holders of the series A preferred stock. Dividends may be paid on the common stock, when declared by our board of directors. We do not expect to pay dividends on the common stock in the foreseeable future. PREFERRED STOCK Our Board of Directors has the authority, by adopting resolutions, to issue shares of preferred stock in one or more series, with the designations and preferences for each series set forth in the adopting resolutions. Our certificate of incorporation authorizes our Board of Directors to determine, among other things, the rights, preferences and limitations pertaining to each series of preferred stock. Series A Preferred Stock Ranking. The series A preferred stock is senior to all of our capital stock as to dividend payments and distributions upon liquidation, dissolution or winding up. Dividends. Dividends on the series A preferred stock are payable in cash, when, as and if declared by our board of directors. All such declared dividends are paid pro rata to the holders of series A preferred stock. Accrued and unpaid dividends on the series A preferred stock do not bear interest or dividends. Redemption. We do not have the right to redeem the series A preferred stock. Liquidation. Upon the liquidation, dissolution or winding up of our company, the holders of the series A preferred stock are entitled to receive payment at a liquidation value of $100 per share plus all accrued and unpaid dividends on the series A preferred stock, prior to the payment of any distributions to the holders of our common stock. Restrictions on Payment of Other Dividends. So long as any share of the series A preferred stock remains outstanding, we may not declare, pay or set aside for payment dividends or other distributions with respect to any other shares of our capital stock ranking, as to dividend rights and rights upon liquidation, dissolution or winding up, junior to the series A preferred stock, other than dividends payable in common stock or in another stock ranking junior to the series A preferred stock as to dividend rights and rights on liquidation, dissolution and winding up. 62 Voting. The holders of our series A preferred stock are entitled to one vote per share of series A preferred stock on all matters submitted to a vote of stockholders, including the election of directors, and vote together as a class with the holders of the common stock. We are not permitted to amend, alter or repeal any of the provisions of our certificate of incorporation or bylaws, or merge with or into or consolidate with any other entity, as to affect adversely any of the preferences, rights, powers or privileges of the series A preferred stock or its holders, without first obtaining the approval of at least a majority of the outstanding shares of series A preferred stock voting separately as one class. WARRANTS We have outstanding warrants to purchase 21,405 shares of our common stock at an exercise price of $6.67 per share. The warrants expire on January 31, 2008 and if exercised in full represent less than 1.2% of our common stock on a fully diluted basis. Of this amount, warrants to purchase 19,820 shares of common stock are held by CHPIII and warrants to purchase 1,585 shares of common stock are held by Deutsche Banc Alex. Brown Inc., formerly Deutsche Bank Securities, Inc. CBI SERIES A PREFERRED STOCK Of CBI's authorized preferred stock, 100,000 shares of preferred stock are designated series A preferred stock, which is referred to as the "CBI A Preferred", all of which are issued and outstanding and held by CHPIII. Ranking. The CBI A Preferred is senior to all other capital stock of CBI as to dividend payments and distribution upon liquidation, dissolution or winding up. Dividends. Dividends on the CBI A Preferred are payable in cash, when and if declared by the board of directors of CBI on a quarterly basis. Dividends accrue from the date of issuance, which was 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 of such dividends. Any dividends which are declared are payable pro rata to the holders. No dividends or interest accrue on any accrued and unpaid dividends. The notes and our credit facility each restrict CBI's ability to pay dividends on the CBI A Preferred. Redemption. The CBI A Preferred is not subject to mandatory redemption but is redeemable at any time at the option of CBI; however, the notes offered hereby and our new credit facility will each restrict CBI's ability to redeem the CBI A Preferred. Liquidation. Upon the liquidation, dissolution or winding up of CBI, the holders of the CBI A Preferred are entitled to receive payment at a liquidation value of $100 per share plus all accrued and unpaid dividends on the CBI A Preferred, prior to the payment of any distributions to the holders of CBI's other capital stock. Restrictions on Payment of Other Dividends. So long as any share of the CBI A Preferred remains outstanding, CBI may not declare, pay or set aside for payment dividends or other distributions with respect to any other shares of its capital stock ranking, as to dividend rights and rights upon liquidation, dissolution or winding up, junior to the CBI A Preferred, other than dividends payable in common stock or in another stock ranking junior to the CBI A Preferred as to dividend rights and rights on liquidation, dissolution and winding up. Voting. Generally, the holders of the CBI A Preferred are not entitled to any voting rights. However, CBI is not permitted to amend, alter or repeal any of the provisions of its certificate of incorporation or bylaws, or merge with or into or consolidate with any other entity, as to affect adversely any of the preferences, rights, powers or privileges of the CBI A Preferred or its holders, without first obtaining the approval of at least a majority of the outstanding shares of CBI A Preferred voting separately as one class. 63 The following table sets forth the equity compensation plan information for the year ended August 31, 2002. EQUITY COMPENSATION PLAN INFORMATION
NUMBER OF SECURITIES REMAINING AVAILABLE FOR NUMBER OF SECURITIES FUTURE ISSUANCE UNDER TO BE ISSUED UPON WEIGHTED-AVERAGE EQUITY COMPENSATION EXERCISE OF EXERCISE PRICE OF PLANS (EXCLUDING OUTSTANDING OPTIONS, OUTSTANDING OPTIONS, SECURITIES REFLECTED IN PLAN CATEGORY WARRANTS AND RIGHTS WARRANTS AND RIGHTS COLUMN(A)) - ------------- -------------------- -------------------- ----------------------- (A) (B) (C) Equity compensation plans approved by security holders...................... 72,083 $3.84 25,743 ------ ----- ------ Equity compensation plans not approved by security holders................... -- -- -- ------ ----- ------ Total............................ 72,083 $3.84 25,743
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS We entered into a management agreement dated March 30, 2001 with Castle Harlan, pursuant to which Castle Harlan agreed to provide business and organizational strategy, financial and investment management and merchant and investment banking services to us upon the terms and conditions set forth in the management agreement. As compensation for such services, we agreed to pay Castle Harlan $3.0 million per year, which amount is payable quarterly in arrears. The agreement is for a term of ten years, renewable automatically from year to year thereafter unless Castle Harlan and its affiliates then own less than 5% of our then outstanding capital stock. We have agreed to indemnify Castle Harlan against liabilities, costs, charges and expenses relating to its performance of its duties, other than such of the foregoing resulting from Castle Harlan's gross negligence or willful misconduct. On February 11, 2000, CHPIII acquired Taylor, whose primary business is the designing and printing of student yearbooks. On July 27, 2000, we acquired from CHPIII all of the issued and outstanding shares of TSHC, Taylor's parent, through the issuance of 320,929 shares of our common stock and 393,482 shares of our series A preferred stock. ITEM 14. CONTROLS AND PROCEDURES As of a date within 90 days of the date of this report (the "Evaluation Date"), we carried out an evaluation, under the supervision and with the participation of our management, including our President and Chief Executive Officer and our Chief Financial Officer, of the effectiveness of the design and operation of our disclosure control and procedures pursuant to Rule 13a-14 under the Securities Exchange Act of 1934, as amended (the "Exchange Act"). Based upon this evaluation, our President and Chief Executive Officer and our Chief Financial Officer concluded that, as of the Evaluation Date, our disclosure controls and procedures were adequate to ensure that information required to be disclosed by us in the reports filed or submitted by us under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms. Additionally, our President and Chief Executive Officer and Chief Financial Officer determined, as of a date within 90 days of the date of this report, that there were no significant changes in our internal controls or in other factors that could significantly affect our internal controls subsequent to the date of their evaluation. 64 ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (a) Exhibits and Financial Statement Schedules The following documents are filed as part of this report. 1. Consolidated Financial Statements. See "Index to Consolidated Financial Statements" -- Item 8. 2. Exhibits. See "Exhibit Index." (b) Reports on Form 8-K A Form 8-K dated May 24, 2002 and filed May 29, 2002 announcing the dismissal of Arthur Andersen LLP as our independent public accountants and the engagement of Deloitte & Touche LLP as our new independent public accountants. A Form 8-K dated July 15, 2002 and filed July 30, 2002 announcing the acquisition of all the issued and outstanding stock and warrants of Milestone Marketing Incorporated. A Form 8-K/A filed 10/1/02 to amend Item 7 of Form 8-K dated July 15, 2002 to include the required financial statements of Milestone Marketing Incorporated and the required pro forma financial information for which it was impracticable to provide at the time the Form 8-K was initially filed. 65 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. AMERICAN ACHIEVEMENT CORPORATION By: /s/ DAVID G. FIORE ------------------------------------ David G. Fiore Chief Executive Officer By: /s/ SHERICE P. BENCH ------------------------------------ Sherice P. Bench Chief Financial Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities indicated on November 21, 2002. /s/ DAVID G. FIORE Chief Executive Officer ------------------------------------------------------ David G. Fiore /s/ JOHN K. CASTLE Director ------------------------------------------------------ John K. Castle /s/ DAVID B. PITTAWAY Director ------------------------------------------------------ David B. Pittaway /s/ ZANE TANKEL Director ------------------------------------------------------ Zane Tankel /s/ EDWARD O. VETTER Director ------------------------------------------------------ Edward O. Vetter /s/ WILLIAM PRUELLAGE Director ------------------------------------------------------ William Pruellage
66 CERTIFICATION ACCOMPANYING PERIODIC REPORT PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002 (18 U.S.C. SEC. 1350) I, David G. Fiore, President and Chief Executive Officer of American Achievement Corporation, certify that: 1. I have reviewed this annual report on Form 10-K of American Achievement Corporation; 2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report; 3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have; a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the "Evaluation Date"); and c) presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this annual report whether there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: November 21, 2002 /s/ DAVID G. FIORE -------------------------------------- Name: David G. Fiore Title: President and Chief Executive Officer CERTIFICATION ACCOMPANYING PERIODIC REPORT PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002 (18 U.S.C. SEC. 1350) I, Sherice P. Bench, Chief Financial Officer of American Achievement Corporation, certify that: 1. I have reviewed this annual report on Form 10-K of American Achievement Corporation; 2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which statements were made, not misleading with respect to the period covered by this annual report; 3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have: (a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared; (b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the "Evaluation Date"); and (c) presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions): (a) all significant deficiencies in the design or operation of internal controls which could adversely effect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and (b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this annual report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: November 21, 2002 /s/ SHERICE P. BENCH -------------------------------------- Name: Sherice P. Bench Title: Chief Financial Officer EXHIBIT INDEX
EXHIBIT NO. DESIGNATION - ----------- ----------- 2.1 The Stock Purchase Agreement, dated as of July 9, 2002, by and among American Achievement Corporation, Milestone Marketing Incorporated, and its stockholders and warrant holders* 3.1 Certificate of Incorporation of American Achievement Corporation with all amendments (f/k/a Commemorative Brands Holding Corp.)** 3.2 By-Laws of American Achievement Corporation (f/k/a Commemorative Brands Holding Corp.)** 3.3 Certificate of Incorporation of Commemorative Brands, Inc. with all amendments (f/k/a Scholastic Brands, Inc., Class Rings, Inc. and Keepsake Jewelry, Inc.)** 3.4 By-Laws of Commemorative Brands, Inc. (f/k/a Scholastic Brands, Inc., Class Rings, Inc. and Keepsake Jewelry, Inc.)** 3.5 Certificate of Incorporation of CBI North America, Inc. with all amendments (f/k/a SBI North America, Inc.)** 3.6 By-Laws of CBI North America, Inc. with all amendments (f/k/a SBI North America, Inc.)** 3.7 Certificate of Incorporation of Taylor Senior Holding Corp.** 3.8 By-Laws of Taylor Senior Holding Corp.** 3.9 Amended and Restated Certificate of Incorporation of TP Holding Corp. (f/k/a TP Acquisition Corp.)** 3.10 By-Laws of TP Holding Corp. (f/k/a TP Acquisition Corp.)** 3.11 Certificate of Incorporation of Taylor Publishing Company with all amendments (f/k/a Taylor Publishing Company of Delaware)** 3.12 By-Laws of Taylor Publishing Company (f/k/a Taylor Publishing Company of Delaware)** 3.13 Certificate of Limited Partnership of Taylor Production Services Company, L.P.** 3.14 Taylor Production Services Company, L.P. Limited Partnership Agreement** 3.15 Articles of Incorporation of Educational Communications, Inc. with all amendments (f/k/a Merit Publishing Company)** 3.16 By-Laws of Educational Communications, Inc.** 3.17 Articles of Incorporation of Milestone Marketing Incorporated with all amendments 3.18 By-Laws of Milestone Marketing Incorporated 3.19 Articles of Incorporation of Milestone Management, Inc. 3.20 By-Laws of Milestone Management, Inc. 3.21 Articles of Incorporation of Milestone Traditions Inc. 3.22 By-Laws of Milestone Traditions Inc. 4.1 Indenture, dated as of February 20, 2002, among American Achievement Corporation, The Bank of New York, as Trustee, and the Guarantors** 4.2 Form of 11 5/8 Senior Notes due 2007 (included in Exhibit 4.1)** 4.3 Registration Rights Agreement, dated as of February 20, 2002, among American Achievement Corporation, the Guarantors and the Initial Purchasers** 4.4 Form of Guarantee (included in Exhibit 4.1)** 4.5 Form of Indenture dated as of December 16, 1996 between Commemorative Brands, Inc. and HSBC Bank USA (f/k/a Marine Midland Bank)** 4.6 Form of First Supplemental Indenture, dated as of July 21, 2000, between Commemorative Brands, Inc. and HSBC Bank USA (f/k/a Marine Midland Bank)** 10.1 Credit Agreement, dated as of February 20, 2002, among American Achievement Corporation, as the Borrower, the Lenders party thereto and The Bank of Nova Scotia, as the Administrative Agent for the Lenders** 10.2 Gold Consignment Agreement dated July 27, 2000 between Commemorative Brands, Inc. and The Bank of Nova Scotia**
EXHIBIT NO. DESIGNATION - ----------- ----------- 10.3 Subsidiary Pledge and Security Agreement, dated as of February 20, 2002, made by American Achievement Corporation in favor of The Bank of Nova Scotia, as administrative agent for each of the Secured Parties (as defined therein)** 10.4 Borrower Pledge and Security Agreement, dated as of February 20, 2002, made by each domestic subsidiary of American Achievement Corporation from time to time party hereto in favor of The Bank of Nova Scotia, as administrative agent for each of the Secured Parties (as defined therein)** 10.5 Subsidiary Guaranty, dated as of February 20, 2002, made by each subsidiary of American Achievement Corporation from time to time party hereto in favor of The Bank of Nova Scotia, as administrative agent for each of the Secured Parties (as defined therein)** 10.6 Form of The Management Agreement dated as of March 30, 2001, among American Achievement Corporation, its Subsidiaries listed therein and Castle Harlan, Inc.** 10.7 Letter Agreement, dated as of October 11, 2000, amended as of November 3, 2000, between Scotiabank and TP Holdings Corp., regarding (i) USD 27,500,000.00MM Interest Rate Swap Transaction (Ref: S24041) and (ii)USD 25,000,000.00MM Interest Rate Swap Transaction (Ref: S24042)** 10.8 Employment Agreement, dated as of July 13, 1999 by and between Commemorative Brands, Inc. and David G. Fiore** 10.9 First Amendment to the Employment Agreement by and between Commemorative Brands, Inc. and David G. Fiore dated February 1, 2002** 10.10 Employment Agreement, dated as of December 16, 1996 by and between Commemorative Brands, Inc. and Sherice P. Bench, as amended** 10.11 Employment Agreement, dated as of December 16, 1996 by and between Commemorative Brands, Inc. and Donald J. Percenti** 10.12 Employment Agreement, dated as of December 16, 1996 by and between Commemorative Brands, Inc. and Charlyn A. Cook** 10.13 American Achievement Corporation 2000 Stock Option Plan (f/k/a Commemorative Brands Holding corp. 2000 Stock Option Plan)** 12.1 Statement regarding Computation of Ratios of Earnings to Fixed Charges 16 Letter from Arthur Andersen LLP to the Securities and Exchange Commission dated May 24, 2002*** 21 Subsidiaries of American Achievement Corporation 99.1 CEO Certification Accompanying Period Report Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 99.2 CFO Certification Accompanying Period Report Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
- --------------- * Incorporated by reference to the corresponding Exhibit number of the Company's Current Report on Form 8-K, dated July 30, 2002. ** Incorporated by reference to the corresponding Exhibit number of the Company's Amended Registration Statement on Form S-4/A, dated April 5, 2002. *** Incorporated by reference to the corresponding Exhibit number of the Company's Current Report on Form 8-K, dated May 29, 2002. EX-3.17 3 d00714exv3w17.txt ARTICLES OF INCORPORATION OF MILESTONE MARKETING EXHIBIT 3.17 ARTICLES OF INCORPORATION-FOR PROFIT OF MILESTONE MARKETING INCORPORATED -------------------------------- NAME OF CORPORATION A TYPE OF CORPORATION INDICATED BELOW Indicate type of domestic corporation: [X] Business-stock (15 Pa.C.S. Section 1306) [ ] Management (15 Pa.C.S. Section 2702) [ ] Business-nonstock (15 Pa.C.S. Section 2102) [ ] Professional (15 Pa.C.S. Section 2903) [ ] Business-statutory close (15 Pa.C.S. Section 2303) [ ] Insurance (15 Pa.C.S. Section 3101) [ ] Cooperative (15 Pa.C.S. Section 7102)
DSCB:15-1306/2102/2303/2702/2903/3101/7102A (Rev 91) In compliance with the requirements of the applicable provisions of 15 Pa.C.S. (relating to corporations and unincorporated associations) the undersigned, desiring to incorporate a corporation for profit hereby, state(s) that: 1. The name of the corporation is: Milestone Marketing Incorporated -------------------------------------------- 2. The (a) address of this corporation's initial registered office in this Commonwealth or (b) name of its commercial registered office provider and the county of venue is: (a) 1700 Market St., 29th Fl., Philadelphia, PA 19103 Philadelphia ------------------------------------------------------------------------ Number and Street City State Zip County (b) c/o: ------------------------------------------------------------------- Name of Commercial Registered Office Provider County For a corporation represented by a commercial registered office provider, the county in (b) shall be deemed the county in which the corporation is located for venue and official publication purposes. 3. The corporation is incorporated under the provisions of the Business Corporation Law of 1983. 4. The aggregate number of shares authorized is: 1,000 (other provisions, if ----- any, attach 8 1/2 x 11 sheet) 5. The name and address, including number and street, if any, of each incorporator is: Name Address R. Seth Hudson 1700 Market St., 29th Fl., Philadelphia, PA 19103 --------------------- ------------------------------------------------- --------------------- ------------------------------------------------- 6. The specified effective date, if any, is: ---------------------------------- month day year hour, if any DSCB:15-1306/2102/2303/2702/2903/3101/7102A (Rev 91)-2 7. Additional provisions of the articles, if any, attach an 8 1/2 x 11 sheet. 8. Statutory close corporation only: Neither the corporation nor any shareholder shall make an offering of any of its shares of any class that would constitute a "public offering" within the meaning of the Securities Act of 1933 (15 U.S.C. Section 77a et seq.). 9. Cooperative corporations only: (Complete and strike out inapplicable term) The common bond of membership among its members/shareholders is: ---------- -------------------------------------------------------------------------- IN TESTIMONY WHEREOF, the incorporator(s) has (have) signed these Articles of Incorporation this 10TH day of DECEMBER, 1993. /s/ R. SETH HUDSON - --------------------------------------- ------------------------------------- (Signature) (Signature) R. Seth Hudson 2 ARTICLES OF AMENDMENT-DOMESTIC BUSINESS CORPORATION DSCB:15-1915 (Rev 91) In compliance with the requirements of 15 Pa.C.S. Section 1915 (relating to articles of amendment), the undersigned business corporation, desiring to amend its Articles, hereby states that: 1. The name of the corporation is: MILESTONE MARKETING INCORPORATED --------------------------------------------- 2. The (a) address of this corporation's current registered office in this Commonwealth or (b) name of its commercial registered office provider and the county of venue is (the Department is hereby authorized to correct the following information to conform to the records of the Department): (a) 1700 Market St., 29th Fl., Philadelphia, PA 19103 Philadelphia ------------------------------------------------------------------------- Number and Street City State Zip County (b) c/o: -------------------------------------------------------------------- Name of Commercial Registered Office Provider County For a corporation represented by a commercial registered office provider, the county in (b) shall be deemed the county in which the corporation is located for venue and official publication purposes. 3. The statue by or under which it was incorporated is: 15 Pa.C.S. Section 1306 ------------------------ 4. The date of its incorporation is: 12/13/93 ---------------- 5. (Check, and if appropriate complete, one of the following): [X] The amendment shall be effective upon filing these Articles of Amendment in the Department of State. [ ] The amendment shall be effective on: at ---------------- ---------------- Date Hour 6. (Check one of the following): [ ] The amendment was adopted by the shareholders (or members) pursuant to 15 Pa.C.S. Section 1914(a) and (b). [X] The amendment was adopted by the board of directors pursuant to 15 Pa.C.S. Section 1914(c). 7. (Check, and if appropriate complete, one of the following): [X] The amendment adopted by the corporation, set forth in full, is as follows: Paragraph 2 is deleted in its entirety and the following is inserted in lieu thereof: "The address of this corporation's registered office in this Commonwealth is 229 Willow Avenue, Wayne, Pennsylvania 19087." [ ] The amendment adopted by the corporation as set forth in full in Exhibit A attached hereto and made a part hereof. DSCB:15-1915 (Rev 91)-2 8. (CHECK IF THE AMENDMENT RESTATES THE ARTICLES): The restated Articles of Incorporation supersede the original Articles and all amendments thereto. IN TESTIMONY WHEREOF, the undersigned corporation has caused these Articles of Amendment to be signed by a duly authorized officer thereof this 6TH day of JANUARY, 1994. MILESTONE MARKETING INCORPORATED -------------------------------- (Name of Corporation) BY: /s/ RONALD A. BROSTROM -------------------------------------- (Signature) TITLE: President ----------------------------------- 2 EX-3.18 4 d00714exv3w18.txt BY-LAWS OF MILESTONE MARKETING INC. EXHIBIT 3.18 BYLAWS OF MILESTONE MARKETING INCORPORATED (a Pennsylvania corporation) ARTICLE I OFFICES AND FISCAL YEAR Section 1.01 Registered Office. The registered office of the corporation in Pennsylvania shall be at 229 Willow Avenue, Wayne PA 19087 until otherwise established by an amendment of the articles or by the board of directors and a record of such change is filed with the Department of State in the manner provided by law. Section 1.02 Other Office. The corporation may also have offices at such other places within or without Pennsylvania as the board of directors may from time to time appoint or the business of the corporation may require. Section 1.03 Fiscal Year. The fiscal year of the corporation shall begin the 1st day of January in each year. ARTICLE II NOTICE - WAIVERS - MEETINGS GENERALLY Section 2.01 Manner of Giving Notice. (a) General rule. Whenever written notice is required to be given to any person under the provisions of the Business Corporation Law or by the Articles or these bylaws, it may be given to the person either personally or by sending a copy thereof by first class or express mail, postage prepaid, or by telegram (with messenger service specified), telex or TWX (with answerback received) or courier service, charges prepaid, or by facsimile transmission, to the address (or to the telex, TWX or facsimile number) of the person appearing on the books of the corporation or, in the case of directors, supplied by the directors to the corporation for the purpose of notice. If the notice is sent by mail, telegraph or courier service, it shall be deemed to have been given to the person entitled thereto when deposited in the United States mail or with a telegraph office or courier service for delivery to that person or, in the case of telex or TWX, when dispatched or, in the case of facsimile, when received. A notice of meeting shall specify the place, day and hour of the meeting and any other information required by any other provision of the Business Corporation Law, the articles or these bylaws. (b) Adjourned shareholder meetings. When a meeting of shareholders is adjourned; it shall not be necessary to give any notice of the adjourned meeting or of the business to be transacted at an adjourned meeting, other than by announcement at the meeting at which the adjournment is taken, unless the board fixes a new record date for the adjourned meeting or these bylaws require notice of the business to be transacted and such notice has not previously been given. Section 2.02 Notice of Meetings of Board of Directors. Notice of a regular meeting of the board of directors need not be given. Notice of every special meeting of the board of directors shall be given to each director by telephone or in writing at least 24 hours (in the case of notice by telephone, telex, TWX or facsimile transmission) or 48 hours (in the case of notice by telegraph, courier service or express mail) or five days (in the case of notice by first class mail) before the time at which the meeting is to be held. Every such notice shall state the time and place of the meeting. Neither the business to be transacted at, nor the purpose of, any regular or special meeting of the board need be specified in a notice of a meeting. Section 2.03 Notice of Meetings of Shareholders. (a) General rule. Written notice of every meeting of the shareholders shall be given by, or at the direction of, the secretary to each shareholder of record entitled to vote at the meeting at least: (1) ten days prior to the day named for a meeting called to consider a fundamental transaction under 15 Pa.C.S. Chapter 19 regarding amendments of articles of incorporation, mergers, consolidations, share exchanges, sale of assets, divisions, conversions, liquidations and dissolution; or (2) five days prior to the day named for the meeting in any other case. If the secretary neglects or refuses to give notice of a meeting, the person or persons calling the meeting may do so. In the case of a special meeting of shareholders, the notice shall specify the general nature of the business to be transacted, and in all cases the notice shall comply with the express requirements of this section. The corporation shall not have a duty to augment the notice. (b) Notice of action by shareholders on bylaws. In the case of a meeting of shareholders that has as one of its purposes action on the bylaws, written notice shall be given to each shareholder that the purpose, or one of the purposes, of the meeting is to consider the adoption, amendment or repeal of the bylaws. There shall be included in, or enclosed with, the notice a copy of the proposed amendment or a summary of the changes to be effected thereby. 2 Section 2.04 Waiver of Notice. (a) Written waiver. Whenever any written notice is required to be given under the provisions of the Business Corporation Law, the articles or these bylaws, a waiver thereof in writing, signed by the person or persons entitled to the notice, whether before or after the time stated therein, shall be deemed equivalent to the giving of the notice. Except as otherwise required by this subsection, neither the business to be transacted at, nor the purpose of, a meeting need be specified in the waiver of notice of the meeting. In the case of a special meeting of shareholders, the waiver of notice shall specify the general nature of the business to be transacted. (b) Waiver by attendance. Attendance of a person at any meeting shall constitute a waiver of notice of the meeting except where a person attends a meeting for the express purpose of objecting, at the beginning of the meeting, to the transaction of any business because the meeting was not lawfully called or convened. Section 2.05 Modification of Proposal Contained in Notice. Whenever the language of a proposed resolution is included in a written notice of a meeting required to be given under the provisions of the Business Corporation Law or the articles or these bylaws, the meeting considering the resolution may without further notice adopt it with such clarifying or other amendments as do not enlarge its original purpose. Section 2.06 Exception to Requirement of Notice. (a) General rule. Whenever any notice or communication is required to be given to any person under the provisions of the Business Corporation Law or by the articles or these bylaws or by the terms of any agreement or other instrument or as a condition precedent to taking any corporate action and communication with that person is then unlawful, the giving of the notice or communication to that person shall not be required. (b) Shareholders without forwarding addresses. Notice or other communications shall not be sent to any shareholder with whom the corporation has been unable to communicate for more than 24 consecutive months because communications to the shareholder are returned unclaimed or the shareholder has otherwise failed to provide the corporation with a current address. Whenever the shareholder provides the corporation with a current address, the corporation shall commence sending notices and other communications to the shareholder in the same manner as to other shareholders. Section 2.07 Use of Conference Telephone and Similar Equipment. One or more persons may participate in a meeting of the board of directors or the shareholders of the corporation by means of conference telephone or similar communications equipment by means of which all persons participating in the meeting can hear each other. Participation in a meeting pursuant to this section shall constitute presence in person at the meeting. 3 ARTICLE III SHAREHOLDERS Section 3.01 Place of Meeting. All meetings of the shareholders of the corporation shall be held at the registered office of the corporation unless another place is designated by the board of directors in the notice of a meeting. Section 3.02 Annual Meeting. The board of directors may fix the date and time of the annual meeting of the shareholders, but if no such date and time is fixed by the board, the meeting for any calendar year shall be held on the 2nd January in such year, if not a legal holiday under the laws of Pennsylvania, and, if a legal holiday, then on the next succeeding business day, not a Saturday, at 10:00 o'clock A.M., and at said meeting the shareholders then entitled to vote shall elect directors and shall transact such other business as may properly be brought before the meeting. If the annual meeting shall not have been called and held within six months after the designated time, any shareholder may call the meeting at any time thereafter. Except as otherwise provided in the articles, at least one meeting of the shareholders shall be held in each calendar year for the election of directors. Section 3.03 Special Meetings. (a) Call of special meetings. Special meetings of the shareholders may be called at any time: (1) by the board of directors; or (2) unless otherwise provided in the articles, by shareholders entitled to cast at least 20% of the vote that all shareholders are entitled to cast at the particular meeting. (b) Fixing of time for meeting. At any time, upon written request of any person who has called a special meeting, it shall be the duty of the secretary to fix the time of the meeting which shall be held not more than 60 days after the receipt of the request. If the secretary neglects or refuses to fix a time of the meeting, the person or persons calling the meeting may do so. Section 3.04 Quorum and Adjournment. (a) General rule. A meeting of shareholders of the corporation duly called shall not be organized for the transaction of business unless a quorum is present. The presence of shareholders entitled to cast at least a majority of the votes that all shareholders are entitled to cast on a particular matter to be acted upon at the meeting shall constitute a quorum for the purposes of consideration and action on the matter. Shares of the corporation owned, directly or indirectly, by it and controlled, directly or indirectly, by the board of directors of this corporation, as such, shall not be counted in determining the total number of outstanding shares for quorum purposes at any given time. 4 (b) Withdrawal of a quorum. The shareholders present at a duly organized meeting can continue to do business until adjournment notwithstanding the withdrawal of enough shareholders to leave less than a quorum. (c) Adjournment for lack of quorum. If a meeting cannot be organized because a quorum has not attended, those present may, except as provided in the Business Corporation Law, adjourn the meeting to such time and place as they may determine. (d) Adjournments generally. Any meeting at which directors are to be elected shall be adjourned only from day to day, or for such longer periods not exceeding 15 days each as the shareholders present and entitled to vote shall direct, until the directors have been elected. Any other regular or special meeting may be adjourned for such period as the shareholders present and entitled to vote shall direct. (e) Electing directors at adjourned meeting. Those shareholders entitled to vote who attend a meeting called for the election of directors that has been previously adjourned for lack of a quorum, although less than a quorum as fixed in this section, shall nevertheless constitute a quorum for the purpose of electing directors. (f) Other action in absence of quorum. Those shareholders entitled to vote who attend a meeting of shareholders that has been previously adjourned for one or more periods aggregating at least 15 days because of an absence of a quorum, although less than a quorum as fixed in this section, shall nevertheless constitute a quorum for the purpose of acting upon any matter set forth in the notice of the meeting if the notice states that those shareholders who attend the adjourned meeting shall nevertheless constitute a quorum for the purpose of acting upon the matter. Section 3.05 Action by Shareholders. (a) General rule. Except as otherwise provided in the Business Corporation Law or the articles or these bylaws, whenever any corporate action is to be taken by vote of the shareholders of the corporation, it shall be authorized upon receiving the affirmative vote of a majority of the votes cast by all shareholders entitled to vote thereon. (b) Interested shareholders. Any merger or other transaction authorized under 15Pa.C.S. Subchapter 19C between the corporation or subsidiary thereof and a shareholder of this corporation, or any voluntary liquidation authorized under 15 Pa.C.S. Subchapter 19F in which a shareholder is treated differently from other shareholders of the same class (other than any dissenting shareholders), shall require the affirmative vote of the shareholders entitled to cast at least a majority of the votes that all shareholders other than the interested shareholder are entitled to cast with respect to the transaction, without counting the vote of the interested shareholder. For the purposes of the preceding sentence, interested shareholder shall include the shareholder who is a party to the transaction or who is treated differently from other shareholders and any person, or group of persons, that is acting jointly or in concert with the interested shareholder and any person who, directly or indirectly, controls, is controlled by or is under common control with the interested shareholder. An interested shareholder shall not include any person who, in good faith and not for the purpose of 5 circumventing this subsection, is an agent, bank, broker, nominee or trustee for one or more other persons, to the extent that the other person or persons are not interested shareholders. (c) Exceptions. Subsection (b) shall not apply to a transaction: (1) that has been approved by a majority vote of the board of directors without counting the vote of directors who: (i) are directors or officers of, or have a material equity interest in, the interested shareholder; or (ii) were nominated for election as a director by the interested shareholder, and first elected as a director, within 24 months of the date of the vote on the proposed transaction; or (2) in which the consideration to be received by the shareholders for shares of any class of which shares are owned by the interested shareholder is not less than the highest amount paid by the interested shareholder in acquiring shares of the same class. (d) Additional approvals. The approvals required by subsection (b) shall be in addition to, and not in lieu of, any other approval required by the Business Corporation Law, the articles or these bylaws, or otherwise. Section 3.06 Organization. At every meeting of the shareholders, the chairman of the board, if there be one, or, in the case of vacancy in office or absence of the chairman of the board, one of the following officers present in the order stated: the vice chairman of the board, if there be one, the president, the vice presidents in their order of rank and seniority, or a person chosen by vote of the shareholders present, shall act as chairman of the meeting. The secretary or, in the absence of the secretary, an assistant secretary, or in the absence of both the secretary and assistant secretaries, a person appointed by the chairman of the meeting, shall act as secretary. Section 3.07 Voting Rights of Shareholders. Unless otherwise provided in the articles, every shareholder of the corporation shall be entitled to one vote for every share standing in the name of the shareholder on the books of the corporation. Section 3.08 Voting and Other Action by Proxy. (a) General rule. (1) Every shareholder entitled to vote at a meeting of shareholders or to express consent or dissent to corporate action in writing without a meeting may authorize another person to act for the shareholder by proxy. (2) The presence of, or vote or other action at a meeting of shareholders, or the expression of consent or dissent to corporate action in writing, by a 6 proxy of a shareholder shall constitute the presence of, or vote or action by, or written consent or dissent of the shareholder. (3) Where two or more proxies of a shareholder are present, the corporation shall, unless otherwise expressly provided in the proxy, accept as the vote of all shares represented thereby the vote cast by a majority of them and, if a majority of the proxies cannot agree whether the shares represented shall be voted or upon the manner of voting the shares, the voting of the shares shall be divided equally among those persons. (b) Execution and filing. Every proxy shall be executed in writing by the shareholder or by the duly authorized attorney-in-fact of the shareholder and filed with the secretary of the corporation. A telegram, telex, cablegram, datagram or similar transmission from a shareholder or attorney-in-fact, or a photographic, facsimile or similar reproduction of a writing executed by a shareholder or attorney-in-fact: (1) may be treated as properly executed for purposes of this section; and (2) shall be so treated if it sets forth a confidential and unique identification number or other mark furnished by the corporation to the shareholder for the purposes of a particular meeting or transaction. (c) Revocation. A proxy, unless coupled with an interest, shall be revocable at will, notwithstanding any other agreement or any provision in the proxy to the contrary, but the revocation of a proxy shall not be effective until written notice thereof has been given to the secretary of the corporation. An unrevoked proxy shall not be valid after three years from the date of its execution unless a longer time is expressly provided therein. A proxy shall not be revoked by the death or incapacity of the maker unless, before the vote is counted or the authority is exercised, written notice of the death or incapacity is given to the secretary of the corporation. (d) Expenses. Unless otherwise restricted in the articles, the corporation shall pay the reasonable expenses of solicitation of votes, proxies or consents of shareholders by or on behalf of the board of directors or its nominees for election to the board, including solicitation by professional proxy solicitors and otherwise. Section 3.09 Voting by Fiduciaries and Pledgees. Shares of the corporation standing in the name of a trustee or other fiduciary and shares held by an assignee for the benefit of creditors or by a receiver may be voted by the trustee, fiduciary, assignee or receiver. A shareholder whose shares are pledged shall be entitled to vote the shares until the shares have been transferred into the name of the pledgee, or a nominee of the pledgee, but nothing in this section shall affect the validity of a proxy given to a pledgee or nominee. 7 Section 3.10 Voting by Joint Holders of Shares. (a) General rule. Where shares of the corporation are held jointly or as tenants in common by two or more persons, as fiduciaries or otherwise: (1) if only one or more of such persons is present in person or by proxy, all of the shares standing in the names of such persons shall be deemed to be represented for the purpose of determining a quorum and the corporation shall accept as the vote of all the shares the vote cast by a joint owner or a majority of them; and (2) if the persons are equally divided upon whether the shares held by them shall be voted or upon the manner of voting the shares, the voting of the shares shall be divided equally among the persons without prejudice to the rights of the joint owners or the beneficial owners thereof among themselves. (b) Exception. If there has been filed with the secretary of the corporation a copy, certified by an attorney at law to be correct, of the relevant portions of the agreement under which the shares are held or the instrument by which the trust or estate was created or the order of court appointing them or of an order of court directing the voting of the shares, the persons specified as having such voting power in the document latest in date of operative effect so filed, and only those persons, shall be entitled to vote the shares but only in accordance therewith. Section 3.11 Voting by Corporations. (a) Voting by corporate shareholders. Any corporation that is a shareholder of this corporation may vote by any of its officers or agents, or by proxy appointed by any officer or agent, unless some other person, by resolution of the board of directors of the other corporation or provision of its articles or bylaws, a copy of which resolution or provision certified to be correct by one of its officers has been filed with the secretary of this corporation, is appointed its general or special proxy in which case that person shall be entitled to vote the shares. (b) Controlled shares. Shares of this corporation owned, directly or indirectly, by it and controlled, directly or indirectly, by the board of directors of this corporation, as such, shall not be voted at any meeting and shall not be counted in determining the total number of outstanding shares for voting purposes at any given time. Section 3.12 Determination of Shareholders of Record. (a) Fixing record date. The board of directors may fix a time prior to the date of any meeting of shareholders as a record date for the determination of the shareholders entitled to notice of, or to vote at, the meeting, which time, except in the case of an adjourned meeting, shall be not more than 90 days prior to the date of the meeting of shareholders. Only shareholders of record on the date fixed shall be so entitled notwithstanding any transfer of shares on the books of the corporation after any record date fixed as provided in this subsection. The board of directors may similarly fix a record date for the determination of shareholders of record for any other purpose. When a determination of shareholders of 8 record has been made as provided in this section for purposes of a meeting, the determination shall apply to any adjournment thereof unless the board fixes a new record date for the adjourned meeting. (b) Determination when a record date is not fixed. If a record date is not fixed: (1) The record date for determining shareholders entitled to notice of or to vote at a meeting of shareholders shall be at the close of business on the date next preceding the day on which notice is given or, if notice is waived, at the close of business on the day immediately preceding the day on which the meeting is held. (2) The record date for determining shareholders entitled to express consent or dissent to corporate action in writing without a meeting, when prior action by the board of directors is not necessary, to call a special meeting of the shareholders or propose an amendment of the articles, shall be the close of business on the day on which the first written consent or dissent, request for a special meeting or petition proposing an amendment of the articles is filed with the secretary of the corporation. (3) The record date for determining shareholders for any other purpose shall be at the close of business on the day on which the board of directors adopts the resolution relating thereto. Section 3.13 Voting Lists. (a) General rule. The officer or agent having charge of the transfer books for shares of the corporation shall make a complete list of the shareholders entitled to vote at any meeting of shareholders, arranged in alphabetical order, with the address of and of the number of shares held by each. The list shall be produced and kept open at the time and place of the meeting and shall be subject to the inspection of any shareholder during the whole time of the meeting for the purposes thereof. (b) Effect of list. Failure to comply with the requirements of this section shall not effect the validity of any action taken at a meeting prior to a demand at the meeting by any shareholder entitled to vote thereat to examine the list. The original share register or transfer book, or a duplicate thereof kept in this Commonwealth, shall be prima facie evidence as to who are the shareholders entitled to examine the list or share register or transfer book or to vote at any meeting of shareholders. Section 3.14 Judges of Election. (a) Appointment. In advance of any meeting of shareholders of the corporation, the board of directors may appoint judges of election, who need not be shareholders, to act at the meeting or any adjournment thereof. If judges of election are not so appointed, the presiding officer of the meeting may, and on the request of any shareholder shall, appoint judges 9 of election at the meeting. The number of judges shall be one or three. A person who is a candidate for office to be filled at the meeting shall not act as a judge. (b) Vacancies. In case any person appointed as a judge fails to appear or fails or refuses to act, the vacancy may be filled by appointment made by the board of directors in advance of the convening of the meeting or at the meeting by the presiding officer thereof. (c) Duties. The judges of election shall determine the number of shares outstanding and the voting power of each, the shares represented at the meeting, the existence of a quorum, the authenticity, validity and effect of proxies, receive votes or ballots, hear and determine all challenges and questions in any way arising in connection with the right to vote, count and tabulate all votes, determine the result and do such acts as may be proper to conduct the election or vote with fairness to all shareholders. The judges of election shall perform their duties impartially, in good faith, to the best of their ability and as expeditiously as is practical. If there are three judges of election, the decision, act or certificate of a majority shall be effective in all respects as the decision, act or certificate of all. (d) Report. On request of the presiding officer of the meeting, or of any shareholder, the judge shall make a report in writing of any challenge or question or matter determined by them, and execute a certificate of any fact found by them. Any report or certificate made by them shall be prima facie evidence of the facts stated therein. Section 3.15 Consent of Shareholders in Lieu of Meeting. (a) Unanimous written consent. Any action required or permitted to be taken at a meeting of the shareholders or of a class of shareholders may be taken without a meeting if, prior or subsequent to the action, a consent or consents thereto by all of the shareholders who would be entitled to vote at a meeting for such purpose shall be filed with the secretary of the corporation. (b) Partial written consent. Any action required or permitted to be taken at a meeting of the shareholders or of a class of shareholders may be taken without a meeting upon the written consent of shareholders who would have been entitled to cast the minimum number of votes that would be necessary to authorize the action at a meeting at which all shareholders entitled to vote thereon were present and voting. The consents shall be filed with the secretary of the corporation. The action shall not become effective until after at least ten days' written notice of the action has been given to each shareholder entitled to vote thereon who has not consented thereto. Section 3.16 Minors as Security Holders. The corporation may treat a minor who holds shares or obligations of the corporation as having capacity to receive and to empower others to receive dividends, interest, principal and other payments or distributions, to vote or express consent or dissent and to make elections and exercise rights relating to such shares or obligations unless, in the case of payments or distributions on shares, the corporate officer responsible for maintaining the list of shareholders or the transfer agent of the corporation or, in 10 the case of payments or distributions on obligations, the treasurer or paying officer or agent has received written notice that the holder is a minor. ARTICLE IV BOARD OF DIRECTORS Section 4.01 Powers; Personal Liability. (a) General rule. Unless otherwise provided by statute all powers vested by law in the corporation shall be exercised by or under the authority of, and the business and affairs of the corporation shall be managed under the direction of, the board of directors. (b) Standard of care; justifiable reliance. A director shall stand in a fiduciary relation to the corporation and shall perform his or her duties as a director, including duties as a member of any committee of the board upon which the director may serve, in good faith, in a manner the director reasonably believes to be in the best interests of the corporation and with such care, including reasonable inquiry, skill and diligence, as a person of ordinary prudence would use under similar circumstances. In performing his or her duties, a director shall be entitled to rely in good faith on information, opinions, reports or statements, including financial statements and other financial data, in each case prepared or presented by any of the following: (1) One or more officers or employees of the corporation whom the director reasonably believes to be reliable and competent in the matters presented. (2) Counsel, public accountants or other persons as to matters which the director reasonably believes to be within the professional or expert competence of such person. (3) A committee of the board upon which the director does not serve, duly designated in accordance with law, as to matters within its designated authority, which committee the director reasonably believes to merit confidence. A director shall not be considered to be acting in good faith if the director has knowledge concerning the matter in question that would cause his or her reliance to be unwarranted. (c) Consideration of factors. In discharging the duties of their respective positions, the board of directors, committees of the board and individual directors may, in considering the best interests of the corporation, consider the effects of any action upon employees, upon suppliers and customers of the corporation and upon communities in which offices or other establishments of the corporation are located, and all other pertinent factors. The consideration of those factors shall not constitute a violation of subsection (b). 11 (d) Presumption. Absent breach of fiduciary duty, lack of good faith or self-dealing, actions taken as a director or any failure to take any action shall be presumed to be in the best interests of the corporation. (e) Personal liability of directors. (1) A director shall not be personally liable, as such, for monetary damages for any action taken, or any failure to take any action, unless: (i) the director has breached or failed to perform the duties of his or her office under this section; and (ii) the breach or failure to perform constitutes self-dealing, willful misconduct or recklessness. (2) The provisions of paragraph (1) shall not apply to the responsibility or liability of a director pursuant to any criminal statute, or the liability of a director for the payment of taxes pursuant to local, State or Federal law. (f) Notation of dissent. A director who is present at a meeting of the board of directors, or of a committee of the board, at which action on any corporate matter is taken shall be presumed to have assented to the action taken unless his or her dissent is entered in the minutes of the meeting or unless the director files a written dissent to the action with the secretary of the meeting before the adjournment thereof or transmits the dissent in writing to the secretary of the corporation immediately after the adjournment of the meeting. The right to dissent shall not apply to a director who voted in favor of the action. Nothing in this section shall bar a director from asserting that minutes of the meeting incorrectly omitted his or her dissent if, promptly upon receipt of a copy of such minutes, the director notifies the secretary in writing, of the asserted omission or inaccuracy. Section 4.02 Qualification and Selection of Directors. (a) Qualifications. Each director of the corporation shall be a natural person of full age who need not be a resident of Pennsylvania or a shareholder of the corporation. (b) Election of directors. Except as otherwise provided in these bylaws, directors of the corporation shall be elected by the shareholders. In elections for directors, voting need not be by ballot, except upon demand made by a shareholder entitled to vote at the election and before the voting begins. The candidates receiving the highest number of votes from each class or group of classes, if any, entitled to elect directors separately up to the number of directors to be elected by the class or group of classes shall be elected. If at any meeting of shareholders, directors of more than one class are to be elected, each class of directors shall be elected in a separate election. (c) Cumulative voting. Unless the articles provide for straight voting, in each election of directors every shareholder entitled to vote shall have the right to multiply the number of votes to which the shareholder may be entitled by the total number of directors to be 12 elected in the same election by the holders of the class or classes of shares of which his or her shares are a part and the shareholders may cast the whole number of his or her votes for one candidate or may distribute them among two or more candidates. Section 4.03 Number and Term of Office. (a) Number. The board of directors shall consist of such number of directors, not less than two nor more than two, as may be determined from time to time by resolution of the board of directors. (b) Term of office. Each director shall hold office until the expiration of the term for which he or she was elected and until a successor has been selected and qualified or until his or her earlier death, resignation or removal. A decrease in the number of directors shall not have the effect of shortening the term of any incumbent director. (c) Resignation. Any director may resign at any time upon written notice to the corporation. The resignation shall be effective upon receipt thereof by the corporation or at such subsequent time as shall be specified in the notice of resignation. Section 4.04 Vacancies. (a) General rule. Vacancies in the board of directors, including vacancies resulting from an increase in the number of directors, may be filled by a majority vote of the remaining members of the board though less than a quorum, or by a sole remaining director, and each person so selected shall be a director to serve for the balance of the unexpired term, and until a successor has been selected and qualified or until his or her earlier death, resignation or removal. (b) Action by resigned directors. When one or more directors resign from the board effective at a future date, the directors then in office, including those who have so resigned, shall have power by the applicable vote to fill the vacancies, the vote thereon to take effect when the resignations become effective. Section 4.05 Removal of Directors. (a) Removal by the shareholders. The entire board of directors, or any class of the board, or any individual director may be removed from office without assigning any cause by the vote of shareholders, or of the holders of a class or series of shares, entitled to elect directors, or the class of directors. In case the board or a class of the board or any one or more directors are so removed, new directors may be elected at the same meeting. The board of directors may be removed at any time with or without cause by the unanimous vote or consent of shareholders entitled to vote thereon. (b) Removal by the board. The board of directors may declare vacant the office of a director who has been judicially declared of unsound mind or who has been convicted of an offense punishable by imprisonment for a term of more than one year or if, 13 within 60 days after notice of his or her selection, the director does not accept the office either in writing or by attending a meeting of the board of directors. (c) Removal of directors elected by cumulative voting. An individual director shall not be removed (unless the entire board or class of the board is removed) if sufficient votes are cast against the resolution for his removal which, if cumulatively voted at an annual or other regular election of directors, would be sufficient to elect one or more directors to the board or to the class. Section 4.06 Place of Meetings. Meetings of the board of directors may be held at such place within or without Pennsylvania as the board of directors may from time to time appoint or as may be designated in the notice of the meeting. Section 4.07 Organization of Meetings. At every meeting of the board of directors, the chairman of the board, if there be one, or, in the case of a vacancy in the office or absence of the chairman of the board, one of the following officers present in the order stated: the vice chairman of the board, if there be one, the president, the vice presidents in their order of rank and seniority, or a person chosen by a majority of the directors present, shall act as chairman of the meeting. The secretary or, in the absence of the secretary, an assistant secretary, or, in the absence of the secretary and the assistant secretaries, any person appointed by the chairman of the meeting, shall act as secretary. Section 4.08 Regular Meetings. Regular meetings of the board of directors shall be held at such time and place as shall be designated from time to time by resolution of the board of directors. Section 4.09 Special Meetings. Special meetings of the board of directors shall be held whenever called by the chairman or by two or more of the directors. Section 4.10 Quorum of and Action by Directors. (a) General rule. A majority of the directors in office of the corporation shall be necessary to constitute a quorum for the transaction of business and the acts of a majority of the directors present and voting at a meeting at which a quorum is present shall be the acts of the board of directors. (b) Action by written consent. Any action required or permitted to be taken at a meeting of the directors may be taken without a meeting if, prior or subsequent to the action, a consent or consents thereto by all of the directors in office is filed with the secretary of the corporation. Section 4.11 Executive and Other Committees. (a) Establishment and powers. The board of directors may, by resolution adopted by a majority of the directors in office, establish one or more committees to consist of one or more directors of the corporation. Any committee, to the extent provided in the resolution of the board of directors, shall have and may exercise all of the powers and authority 14 of the board of directors except that a committee shall not have any power or authority as to the following: (1) The submission to shareholders of any action requiring approval of shareholders under the Business Corporation Law. (2) The creation or filling of vacancies in the board of directors. (3) The adoption, amendment or repeal of these bylaws. (4) The amendment or repeal of any resolution of the board that by its terms is amendable or repealable only by the board. (5) Action on matters committed by a resolution of the board of directors to another committee of the board. (b) Alternate committee members. The board may designate one or more directors as alternate members of any committee who may replace any absent or disqualified member at any meeting of the committee or for the purposes of any written action by the committee. In the absence or disqualification of a member and alternate member or members of a committee, the member or members thereof present at any meeting and not disqualified from voting, whether or not constituting a quorum, may unanimously appoint another director to act at the meeting in the place of the absent or disqualified member. (c) Term. Each committee of the board shall serve at the pleasure of the board. (d) Committee procedures. The term "board of directors" or "board," when used in any provision of these bylaws relating to the organization or procedures of or the manner of taking action by the board of directors, shall be construed to include and refer to any executive or other committee of the board. Section 4.12 Compensation. The board of directors shall have the authority to fix compensation of directors for their services as directors and a director may be a salaried officer of the corporation. ARTICLE V OFFICERS Section 5.01 Officers Generally. (a) Number, qualification and designation. The officers of the corporation shall be a president, a secretary, a treasurer, and such other officers as may be elected in accordance with the provisions of Section 5.03. Officers may but need not be directors or shareholders of the corporation. The president and secretary shall be natural persons of full age. The treasurer may be a corporation, but if a natural person shall be of full age. The board 15 of directors may elect from among the members of the board a chairman of the board and a vice chairman of the board who shall be officers of the corporation. Any number of offices may be held by the same person. (b) Resignations. Any officer may resign at any time upon written notice to the corporation. The resignation shall be effective upon receipt thereof by the corporation or at such subsequent time as may be specified in the notice of resignation. (c) Bonding. The corporation may secure the fidelity of any or all of its officers by bond or otherwise. (d) Standard of care. Except as otherwise provided in the articles, an officer shall perform his or her duties as an officer in good faith, in a manner he or she reasonably believes to be in the best interests of the corporation and with such care, including reasonable inquiry, skill and diligence, as a person of ordinary prudence would use under similar circumstances. A person who so performs his or her duties shall not be liable by reason of having been an officer of the corporation. Section 5.02 Election and Term of Office. The officers of the corporation, except those elected by delegated authority pursuant to Section 5.03, shall be elected annually by the board of directors, and each such officer shall hold office for a term of one year and until a successor has been selected and qualified or until his or her earlier death, resignation or removal. Section 5.03 Subordinate Officers, Committees and Agents. The board of directors may from time to time elect such other officers and appoint such committees, employees or other agents as the business of the corporation may require, including one or more assistant secretaries, and one or more assistant treasurers, each of whom shall hold office for such period, have such authority, and perform such duties as are provided in these bylaws or as the board of directors may from time to time determine. The board of directors may delegate to any officer or committee the power to elect subordinate officers and to retain or appoint employees or other agents, or committees thereof and to prescribe the authority and duties of such subordinate officers, committees, employees or other agents. Section 5.04 Removal of Officers and Agents. Any officer or agent of the corporation may be removed by the board of directors with or without cause. The removal shall be without prejudice to the contract rights, if any, of any person so removed. Election or appointment of an officer or agent shall not of itself create contract rights. Section 5.05 Vacancies. A vacancy in any office because of death, resignation, removal, disqualification, or any other cause, shall be filled by the board of directors or by the officer or committee to which the power to fill such office has been delegated pursuant to Section 5.03, as the case may be, and if the office is one for which these bylaws prescribe a term, shall be filled for the unexpired portion of the term. Section 5.06 Authority. All officers of the corporation, as between themselves and the corporation, shall have such authority and perform such duties in the management of the corporation as may be provided by or pursuant to resolution or orders of the board of directors or 16 in the absence of controlling provisions in the resolutions or orders of the board of directors, as may be determined by or pursuant to these bylaws. Section 5.07 The Chairman of the Board. The chairman of the board if there be one, or in the absence of the chairman, the vice chairman of the board, shall preside at all meetings of the shareholders and of the board of directors and shall perform such other duties as may from time to time be requested by the board of directors. Section 5.08 The President. The president shall be the chief executive officer of the corporation and shall have general supervision over the business and operations of the corporation, subject however, to the control of the board of directors. The president shall sign, execute, and acknowledge, in the name of the corporation, deeds, mortgages, contracts or other instruments authorized by the board of directors, except in cases where the signing and execution thereof shall be expressly delegated by the board of directors, or by these bylaws, to some other officer or agent of the corporation; and, in general, shall perform all duties incident to the office of president and such other duties as from time to time may be assigned by the board of directors. Section 5.09 The Secretary. The secretary or an assistant secretary shall attend all meetings of the shareholders and of the board of directors and shall record all votes of the shareholders and of the directors and the minutes of the meetings of the shareholders and of the board of directors and of committees of the board in a book or books to be kept for that purpose; shall see that notices are given and records and reports properly kept and filed by the corporation as required by law; shall be the custodian of the seal of the corporation and see that it is affixed to all documents to be executed on behalf of the corporation under its seal; and, in general, shall perform all duties incident to the office of secretary, and such other duties as may from time to time be assigned by the board of directors or the president. Section 5.10 The Treasurer. The treasurer or an assistant treasurer shall have or provide for the custody of the funds or other property of the corporation; shall collect and receive or provide for the collection and receipt of moneys earned by or in any manner due to or received by the corporation; shall deposit all funds in his or her custody as treasurer in such banks or other places of deposit as the board of directors may from time to time designate; shall, whenever so required by the board of directors, render an account showing all transactions as treasurer and the financial condition of the corporation; and, in general, shall discharge such other duties as may from time to time be assigned by the board of directors or the president. Section 5.11 Salaries. The salaries of the officers elected by the board of directors shall be fixed from time to time by the board of directors or by such officer as may be designated by resolution of the board. The salaries or other compensation of any other officers, employees and other agents shall be fixed from time to time by the officer or committee to which the power to elect such officers or to retain or appoint such employees or other agents has been delegated pursuant to Section 5.03. No officer shall be prevented from receiving such salary or other compensation by reason of the fact that the officer is also a director of the corporation. Section 5.12 Disallowed Compensation. Any payments made to an officer or employee of the corporation such as a salary, commission, bonus, interest, rent, travel or 17 entertainment expense incurred by him, which shall be disallowed in whole or in part as a deductible expense by the Internal Revenue Service, shall be reimbursed by such officer or employee to the corporation to the full extent of such disallowance. It shall be the duty of the directors, as a Board, to enforce payment of each such amount disallowed. In lieu of payment by the officer or employee, subject to the determination of the directors, proportionate amounts may be withheld from future compensation payments until the amount owed to the corporation has been recovered. ARTICLE VI CERTIFICATES OF STOCK, TRANSFER, ETC. Section 6.01 Share Certificates. Certificates for shares of the corporation shall be in such form as approved by the board of directors, and shall state that the corporation is incorporated under the laws of Pennsylvania, the name of the person to whom issued, and the number and class of shares and the designation of the series (if any) that the certificate represents. The share register or transfer books and blank share certificates shall be kept by the secretary or by any transfer agent or registrar designated by the board of directors for that purpose. Section 6.02 Issuance. The share certificates of the corporation shall be numbered and registered in the share register or transfer books of the corporation as they are issued. They shall be signed by the president or a vice president and by the secretary or an assistant secretary or the treasurer or an assistant treasurer, and shall bear the corporate seal, which may be a facsimile, engraved or printed; but where such certificate is signed by a transfer agent or a registrar the signature of any corporate officer upon such certificate may be a facsimile, engraved or printed. In case any officer who has signed, or whose facsimile signature has been placed upon, any share certificate shall have ceased to be such officer because of death, resignation or otherwise, before the certificate is issued, it may be issued with the same effect as if the officer had not ceased to be such at the date of its issue. The provisions of this Section 6.02 shall be subject to any inconsistent or contrary agreement at the time between the corporation and any transfer agent or registrar. Section 6.03 Transfer. Transfers of shares shall be made on the share register or transfer books of the corporation upon surrender of the certificate therefor, endorsed by the person named in the certificate or by an attorney lawfully constituted in writing. No transfer shall be made inconsistent with the provisions of the Uniform Commercial Code, 13 Pa.C.S. Section 8101 et seq., and its amendments and supplements. Section 6.04 Record Holder of Shares. The corporation shall be entitled to treat the person in whose name any share or shares of the corporation stand on the books of the corporation as the absolute owner thereof, and shall not be bound to recognize any equitable or other claim to, or interest in, such share or shares on the part of any other person. Section 6.05 Lost, Destroyed or Mutilated Certificates. The holder of any shares of the corporation shall immediately notify the corporation of any loss, destruction or mutilation of the certificate therefor, and the board of directors may, in its discretion, cause a 18 new certificate or certificates to be issued to such holder, in case of mutilation of the certificate, upon the surrender of the mutilated certificate or, in case of loss or destruction of the certificate, upon satisfactory proof of such loss or destruction and, if the board of directors shall so determine, the deposit of a bond in such form and in such sum, and with such surety or sureties, as it may direct. ARTICLE VII INDEMNIFICATION OF DIRECTORS, OFFICERS AND OTHER AUTHORIZED REPRESENTATIVES Section 7.01 Scope of Indemnification. (a) General rule. The corporation shall indemnify an indemnified representative against any liability incurred in connection with any proceeding in which the indemnified representative may be involved as a party or otherwise by reason of the fact that such person is or was serving in an indemnified capacity, including, without limitation, liabilities resulting from any actual or alleged breach or neglect of duty, error, misstatement or misleading statement, negligence, gross negligence or act giving rise to strict or products liability, except: (1) where such indemnification is expressly prohibited by applicable law; (2) where the conduct of the indemnified representative has been finally determined pursuant to Section 7.06 or otherwise: (i) to constitute willful misconduct or recklessness within the meaning of 15 Pa.C.S. Section 513(b) and 1746(b) and 42 Pa.C.S. Section 8365(b) or any superseding provision of law sufficient in the circumstances to bar indemnification against liabilities arising from the conduct; or (ii) to be based upon or attributable to the receipt by the indemnified representative from the corporation of a personal benefit to which the indemnified representative is not legally entitled; or (3) to the extent such indemnification has been finally determined in a final adjudication pursuant to Section 7.06 to be otherwise unlawful. (b) Partial payment. If an indemnified representative is entitled to indemnification in respect of a portion, but not all, of any liabilities to which such person may be subject, the corporation shall indemnify such indemnified representative to the maximum extent for such portion of the liabilities. (c) Presumption. The termination of a proceeding by judgment, order, settlement or conviction or upon a plea of nolo contendere or its equivalent shall not of itself create a presumption that the indemnified representative is not entitled to indemnification. 19 (d) Definitions. For purposes of this Article: (1) "indemnified capacity" means any and all past, present and future service by an indemnified representative in one or more capacities as a director, officer, employee or agent of the corporation, or, at the request of the corporation, as a director, officer, employee, agent, fiduciary or trustee of another corporation, partnership, joint venture, trust, employee benefit plan or other entity or enterprise; (2) "indemnified representative" means any and all directors and officers of the corporation and any other person designated as an indemnified representative by the board of directors of the corporation (which may, but need not, include any person serving at the request of the corporation, as a director, officer, employee, agent, fiduciary or trustee of another corporation, partnership, joint venture, trust, employee benefit plan or other entity or enterprise): (3) "liability" means any damage, judgment, amount paid in settlement, fine, penalty, punitive damages, excise tax assessed with respect to an employee benefit plan, or cost or expense, of any nature (including, without limitation, attorneys' fees and disbursements); and (4) "proceeding" means any threatened, pending or completed action, suit, appeal or other proceeding of any nature, whether civil, criminal, administrative or investigative, whether formal or informal, and whether brought by or in the right of the corporation, a class of its security holders or otherwise. Section 7.02 Proceedings Initiated by Indemnified Representatives. Notwithstanding any other provision of this Article the corporation shall not indemnify under this Article an indemnified representative for any liability incurred in a proceeding initiated (which shall not be deemed to include counter-claims or affirmative defenses) or participated in as an intervenor or amicus curiae by the person seeking indemnification unless such initiation of or participation in the proceeding is authorized, either before or after its commencement, by the affirmative vote of a majority of the directors in office. This section does not apply to a reimbursement of expenses incurred in successfully prosecuting or defending an arbitration under Section 7.06 or otherwise successfully prosecuting or defending the rights of an indemnified representative granted by or pursuant to this Article. Section 7.03 Advancing Expenses. The corporation shall pay the expenses (including attorneys' fees and disbursements) incurred in good faith by an indemnified representative in advance of the final disposition of a proceeding described in Section 7.01 or the initiation of or participation in which is authorized pursuant to Section 7.02 upon receipt of an undertaking by or on behalf of the indemnified representative to repay the amount if it is ultimately determined pursuant to Section 7.06 that such person is not entitled to be indemnified by the corporation pursuant to this Article. The financial ability of an indemnified representative to repay an advance shall not be a prerequisite to the making of such advance. Section 7.04 Securing of Indemnification Obligations. To further effect, satisfy or secure the indemnification obligations provided herein or otherwise, the corporation may 20 maintain insurance, obtain a letter of credit, act as self-insurer, create a reserve, trust, escrow, cash collateral or other fund or account, enter into indemnification agreements, pledge or grant a security interest in any assets or properties of the corporation, or use any other mechanism or arrangement whatsoever in such amounts, at such costs, and upon such other terms and conditions as the board of directors shall deem appropriate. Absent fraud, the determination of the board of directors with respect to such amounts, costs, terms and conditions shall be conclusive against all security holders, officers and directors and shall not be subject to voidability. Section 7.05 Payment of Indemnification. An indemnified representative shall be entitled to indemnification within 30 days after a written request for indemnification has been delivered to the secretary of the corporation. Section 7.06 Arbitration. (a) General rule. Any dispute related to the right to indemnification, contribution or advancement of expenses as provided under this Article, except with respect to indemnification for liabilities arising under the Securities Act of 1933 that the corporation has undertaken to submit to a court for adjudication, shall be decided only by arbitration in the metropolitan area in which the principal executive offices of the corporation are located at the time, in accordance with the commercial arbitration rules then in effect of the American Arbitration Association, before a panel of three arbitrators, one of whom shall be selected by the corporation, the second of whom shall be selected by the indemnified representative and third of whom shall be selected by the other two arbitrators. In the absence of the American Arbitration Association, or if for any reason arbitration under the arbitration rules of the American Arbitration Association cannot be initiated, or if one of the parties fails or refuses to select an arbitrator or if the arbitrators selected by the corporation and the indemnified representative cannot agree on the selection of the third arbitrator within 30 days after such time as the corporation and the indemnified representative have each been notified of the selection of the other's arbitrator, the necessary arbitrator or arbitrators shall be selected by the presiding judge of the court of general jurisdiction in such metropolitan area. (b) Burden of proof. The party or parties challenging the right of an indemnified representative to the benefits of this Article shall have the burden of proof. (c) Expenses. The corporation shall reimburse an indemnified representative for the expenses (including attorneys' fees and disbursements) incurred in successfully prosecuting or defending such arbitration. (d) Effect. Any award entered by the arbitrators shall be final, binding and nonappealable and judgment may be entered thereon by any party in accordance with applicable law in any court of competent jurisdiction, except that the corporation shall be entitled to interpose as a defense in any such judicial enforcement proceeding any prior final judicial determination adverse to the indemnified representative under Section 7.01(a)(2) in a proceeding not directly involving indemnification under this Article. This arbitration provision shall be specifically enforceable. 21 Section 7.07 Contribution. If the indemnification provided for in this Article or otherwise is unavailable for any reason in respect of any liability or portion thereof, the corporation shall contribute to the liabilities to which the indemnified representative may be subject in such proportion as is appropriate to reflect the intent of this Article or otherwise. Section 7.08 Mandatory Indemnification of Directors, Officers, etc. To the extent that an authorized representative of the corporation has been successful on the merits or otherwise in defense of any action or proceeding referred to in 15 Pa.C.S. Section 1741 or 1742 or in defense of any claim, issue or matter therein, such person shall be indemnified against expenses (including attorneys' fees and disbursements) actually and reasonably incurred by such person in connection therewith. Section 7.09 Contract Rights; Amendment or Repeal. All rights under this Article shall be deemed a contract between the corporation and the indemnified representative pursuant to which the corporation and each indemnified representative intend to be legally bound. Any repeal, amendment or modification hereof shall be prospective only and shall not affect any rights or obligations then existing. Section 7.10 Scope of Article. The rights granted by this Article shall not be deemed exclusive of any other rights to which those seeking indemnification, contribution or advancement of expenses may be entitled under any statute, agreement, vote of shareholders or disinterested directors or otherwise both as to action in an indemnified capacity and as to action in any other capacity. The indemnification, contribution and advancement of expenses provided by or granted pursuant to this Article shall continue as to a person who has ceased to be an indemnified representative in respect of matters arising prior to such time, and shall inure to the benefit of the heirs, executors, administrators and personal representatives of such a person. Section 7.11 Reliance of Provisions. Each person who shall act as an indemnified representative of the corporation shall be deemed to be doing so in reliance upon the rights provided in this Article. Section 7.12 Interpretation. The provisions of this Article are intended to constitute bylaws authorized by 15 Pa.C.S. Section 513 and 1746 and 42 Pa.C.S. Section 8365. ARTICLE VIII MISCELLANEOUS Section 8.01 Corporate Seal. The corporation seal shall have inscribed thereon the name of the corporation, the year of its organization and the words "Corporate Seal, Pennsylvania". Section 8.02 Checks. All checks, notes, bills of exchange or other orders in writing shall be signed by such person or persons as the board of directors or any person authorized by resolution of the board of directors may from time to time designate. 22 Section 8.03 Contracts. (a) General rule. Excepts as otherwise provided in the Business Corporation Law in the case of transactions that require action by the shareholders, the board of directors may authorize any officer or agent to enter into any contract or to execute or deliver any instrument on behalf of the corporation, and such authority may be general or confined to specific instances. (b) Statutory form of execution of instruments. Any note, mortgage, evidence of indebtedness, contract or other document, or any assignment or endorsement thereof, executed or entered into between the corporation and any other person, when signed by one or more officers or agents having actual or apparent authority to sign it, or by the president or vice president and secretary or assistant secretary or treasurer or assistant treasurer of the corporation, shall be held to have been properly executed for and in behalf of the corporation, without prejudice to the rights of the corporation against any person who shall have executed the instrument in excess of his or her actual authority. Section 8.04 Interested Directors or Officers; Quorum. (a) General rule. A contract or transaction between the corporation and one or more of its directors or officers or between the corporation and another corporation, partnership, joint venture, trust or other enterprise in which one or more of its directors or officers are directors or officers or have a financial or other interest, shall not be void or voidable solely for that reason, or solely because the director or officer is present at or participates in the meeting of the board of directors that authorizes the contract or transaction, or solely because his, her or their votes are counted for that purpose, if: (1) the material facts as to the relationship or interest and as to the contract or transaction are disclosed or are known to the board of directors and the board authorizes the contract or transaction by the affirmative votes of a majority of the disinterested directors even though the disinterested directors are less than a quorum; (2) the material facts as to his or her relationship or interest and as to the contract or transaction are disclosed or are known to the shareholders entitled to vote thereon and the contract or transaction is specifically approved in good faith by vote of those shareholders; or (3) the contract or transaction is fair as to the corporation as of the time it is authorized, approved or ratified by the board of directors or the shareholders. (b) Quorum. Common or interested directors may be counted in determining the presence of a quorum at a meeting of the board which authorizes a contract or transaction specified in subsection (a). Section 8.05 Deposits. All funds of the corporation shall be deposited from time to time to the credit of the corporation in such banks, trust companies or other depositaries 23 as the board of directors may approve or designate, and all such funds shall be withdrawn only upon checks signed by such one or more officers or employees as the board of directors shall from time to time determine. Section 8.06 Corporate Records. (a) Required records. The corporation shall keep complete and accurate books and records of account, minutes of the proceedings of the incorporators, shareholders and directors and a share register giving the names and addresses of all shareholders and the number and class of shares held by each. The share register shall be kept at either the registered office of the corporation in Pennsylvania or at its principal place of business wherever situated or at the office of its registrar or transfer agent. Any books, minutes or other records may be in written form or any other form capable of being converted into written form within a reasonable time. (b) Right of inspection. Every shareholder shall, upon written verified demand stating the purpose thereof, have a right to examine, in person or by agent or attorney, during the usual hours for business for any proper purpose, the share register, books and records of account, and records of the proceedings of the incorporators, shareholders and directors and to make copies or extracts therefrom. A proper purpose shall mean a purpose reasonably related to the interest of the person as a shareholder. In every instance where an attorney or other agent is the person who seeks the right of inspection, the demand shall be accompanied by a verified power of attorney or other writing that authorizes the attorney or other agent to so act on behalf of the shareholder. The demand shall be directed to the corporation at its registered office in Pennsylvania or at its principal place of business wherever situated. Section 8.07 Financial Reports. Unless otherwise agreed between the corporation and a shareholder, the corporation shall furnish to its shareholders annual financial statements, including at least a balance sheet as of the end of each fiscal year and a statement of income and expenses for the fiscal year. The financial statements shall be prepared on the basis of generally accepted accounting principles, if the corporation prepares financial statements for the fiscal year on that basis for any purpose, and may be consolidated statements of the corporation and one or more of its subsidiaries. The financial statements shall be mailed by the corporation to each of its shareholders entitled thereto within 120 days after the close of each fiscal year and, after the mailing and upon written request, shall be mailed by the corporation to any shareholder or beneficial owner entitled thereto to whom a copy of the most recent annual financial statements has not previously been mailed. Statements that are audited or reviewed by a public accountant shall be accompanied by the report of the accountant; in other cases, each copy shall be accompanied by a statement of the person in charge of the financial records of the corporation: (1) Stating his reasonable belief as to whether or not the financial statements were prepared in accordance with generally accepted accounting principles and, if not, describing the basis of presentation. 24 (2) Describing any material respects in which the financial statements were not prepared on a basis consistent with those prepared for the previous year. Section 8.08 Amendment of Bylaws. These bylaws may be amended or repealed, or new bylaws may be adopted, either (i) by vote of the shareholders at any duly organized annual or special meeting of shareholders, or (ii) with respect to those matters that are not by statute committed expressly to the shareholders and regardless of whether the shareholders have previously adopted or approved the bylaw being amended or repealed, by vote of a majority of the board of directors of the corporation in office at any regular or special meeting of directors. Any change in these bylaws shall take effect when adopted unless otherwise provided in the resolution effecting the change. See Section 2.03(b) (relating to notice of action by shareholders on bylaws). * * * * * * * * * * 25 EX-3.19 5 d00714exv3w19.txt ARTICLES OF INCORPORATION OF MILESTONE MANAGEMENT EXHIBIT 3.19 ARTICLES OF INCORPORATION-FOR PROFIT OF MILESTONE MANAGEMENT, INC. [XX] Business Stock (15Pa.C.S.1306) [ ] Professional (15Pa.C.S.2903) [ ] Business Nonstock (15Pa.C.S.2102) [ ] Management (15Pa.C.S.2702) [ ] Business-Statutory Close [ ] Insurance (15Pa.C.S.3101) (Pa.C.S.2303) [ ] Cooperative (15Pa.C.S.7102) In compliance with the requirements of the applicable provisions of 15 Pa.C.S. (relating to corporations and unincorporated associations) the undersigned, desiring to incorporate a corporation for profit hereby, state(s) that: 1. The name of the corporation is: MILESTONE MANAGEMENT, INC. 2. The address of this corporation's initial registered office in this Commonwealth or name of its commercial registered office provider and the county of venue is: Eric A. Weiss 30 Sugar Maple Drive Newtown Square, PA 19073 Delaware County 3. The corporation is incorporated under the provisions of the Business Corporation Law of 1988. 4. The aggregate number of shares authorized is: 1500 @ no par value 5. The name and address, including number and street, if any, of each incorporator is: Lisa L. Davidson 319 Market Street Harrisburg, PA 17101 6. The specified effective date, if any, is: 7. Additional provisions of the articles, if any, attach an 8 1/2 x 11 sheet. 8. Statutory close corporation only: Neither the corporation nor any shareholder shall make an offering of any of its shares of any class that would constitute a "public offering" within the meaning of the Securities Act of 1933 (15 U.S.C. 77a et seq.) Page 2 ARTICLES OF INCORPORATION 9. Cooperative corporations only: (Complete and strike out inapplicable term) The common bond of membership among its members/shareholders is: IN TESTIMONY WHEREOF, the incorporator has signed these Articles of Incorporation on November 24, 1998. /s/ LISA L. DAVIDSON - ----------------------------- EX-3.20 6 d00714exv3w20.txt BY-LAWS OF MILESTONE MANAGEMENT, INC. EXHIBIT 3.20 BYLAWS OF MILESTONE MANAGEMENT, INC. (a Pennsylvania corporation) ---------- ARTICLE I SHAREHOLDERS 1. Share Certificates. Certificates representing shares shall set forth thereon the statements prescribed by Section 1528 of the Business Corporation Law of 1988 and by any other applicable provision of law, shall be executed, by facsimile or otherwise, by the President or a Vice-President and by the Secretary or an Assistant Secretary or the Treasurer or an Assistant Treasurer, or by any other officer or officers authorized to do so by the Board of Directors. 2. Fractional Share Interests or Scrip. The corporation may but shall not be required to create and issue fractions of a share, either represented by a certificate or uncertificated, which, unless otherwise provided in the articles of incorporation, shall represent proportional interests in all the voting rights, preferences, limitations, and special rights, if any, of full shares. If the corporation creates but does not provide for the issuance of fractions of a share, it shall: (1) arrange for the disposition of fractional interests by those entitled thereto; (2) pay in money the fair value of fractions of a share determined at the time and in the manner provided in the plan, amendment, or resolution of the Board providing for the creation of the fractional interests; or (3) issue scrip or other evidence of ownership, in registered form (either represented by a certificate or uncertificated) or in bearer form (represented by a certificate), entitling the holder to receive a full share upon the surrender of the scrip or other evidence of ownership aggregating a full share, or the transfer of uncertificated scrip aggregating a full share, but which shall not, unless otherwise provided therein or with respect thereto, entitle the holder to exercise any voting right, to receive dividends or to participate in any of the assets of the corporation in the event of liquidation. The scrip or other evidence of ownership may be issued subject to the condition that it shall become void if not exchanged for full shares before a specified date, or subject to the condition that the shares for which the scrip or evidence of ownership is exchangeable may be sold and the proceeds thereof distributed to the holders of the scrip or evidence of ownership, or subject to any other conditions that the corporation deems advisable. 3. Share Transfers. Upon compliance with provisions restricting the transferability of shares, if any, transfers of shares of the corporation shall be made only on the transfer books for shares of the corporation by the record holder thereof, or by his attorney hereunto authorized by power of attorney duly executed and filed with the Secretary of the corporation or with a transfer agent or a registrar, if any, and on surrender of the certificate or certificates for such shares properly endorsed and the payment of all taxes due thereon. 4. Record Date for Shareholders. The corporation may fix a time prior to the date of any meeting of shareholders as a record date for the determination of the shareholders entitled to notice of, or to vote at, the meeting, which time, except in the case of an adjourned meeting, shall be not more than ninety days prior to the date of the meeting of shareholders. Only shareholders of record on the date fixed shall be so entitled notwithstanding any transfer of shares on the books of the corporation after any record date fixed as provided in this Section. The Board of Directors may similarly fix a record date for the determination of shareholders of record for any other purpose. When a determination of shareholders of record has been made as provided in this Section for purposes of a meeting, the determination shall apply to any adjournment thereof unless the Board fixes a new record date for the adjourned meeting. If a record date is not fixed: (1) the record date for determining shareholders entitled to notice of or to vote at a meeting of shareholders shall be at the close of business on the day next preceding the day on which notice is given or, if notice is waived, at the close of business on the day immediately preceding the day on which the meeting is held; (2) the record date for determining shareholders entitled to express consent or dissent to corporate action in writing without a meeting, when prior action by the Board of Directors is not necessary, shall be the close of business on the day on which the first written consent or dissent is filed with the secretary of the corporation; (3) the record date for determining shareholders for any other purpose shall be at the close of business on the day on which the Board of Directors adopts the resolution relating thereto. 5. Certification by Nominee. The Board of Directors may adopt a procedure pursuant to the provisions of Section 1763 of the Business Corporation Law of 1988 whereby a shareholder may certify in writing to the corporation that all or a portion of the shares registered in the name of the shareholder are held for the account of a specified person or persons. 6. Meaning of Certain Terms. As used herein in respect of the right to notice of a meeting of shareholders or a waiver thereof or to participate or vote thereat or to consent or dissent in writing in lieu of a meeting, as the case may be, the term "share" or "shares" or "shareholder" or "shareholders" refers to an outstanding share or shares and to a holder or holders of record of outstanding shares when the corporation is authorized to issue only the class of shares, and said reference is also intended to include any outstanding share or shares that any holder or holders of record of outstanding shares of any class upon which or upon whom the articles of incorporation confer such rights where there are two or more classes or series of shares or upon which or upon whom the Business Corporation Law of 1988 confers such rights notwithstanding that the articles of incorporation may provide for more than one class or series of shares, one or more of which are limited or denied such rights thereunder. 7. Shareholder Meetings. Time. The annual meeting shall be held on the date fixed, from time to time, by the directors, provided, that at least one meeting of the shareholders shall be held in each calendar year for the election of directors. A special meeting shall be held on the date fixed by 2 the directors except when the Business Corporation Law of 1988 confers the right to fix the date upon a shareholder or shareholders. An adjournment or adjournments of any duly organized annual or special meeting may be taken, provided, that any meeting at which directors are to be elected shall be adjourned only from day to day or for such longer periods not exceeding fifteen days each as the shareholders who are present and entitled to vote shall direct, until the directors have been elected. Place. Annual meetings and special meetings shall be held at such place, within or without the Commonwealth of Pennsylvania, as the directors may, from time to time, fix. Whenever the directors shall fail to fix such place, or, whenever shareholders entitled to call a special meeting shall call the same, the meeting shall be held at the registered office of the corporation in the Commonwealth of Pennsylvania. Call. The annual meeting may be called by the directors or the President or by any officer instructed by the directors or the President to call the meeting, or if, in any calendar year, an annual meeting shall not be called by the directors or by any authorized officer and shall not be held, any shareholder may call any such meeting at any time thereafter. A special meeting may be called by the directors or the President or by any officer instructed by the directors or the President to call the meeting or by the shareholders whenever the Business Corporation Law of 1988 confers such right upon them. Notice or Actual or Constructive Waiver of Notice. Written notice of every meeting of the shareholders shall be given by, or at the direction of, the Secretary or other authorized person and shall state the place, day, and hour of the meeting and any other information required by any provision of the Business Corporation Law of 1988. The notice of a special meeting shall state the general nature of the business to be transacted. In all cases, the notice shall comply with the express requirements of the Business Corporation Law of 1988. Whenever the language of a proposed resolution is included in a written notice of a meeting required to be given under the provisions of the Business Corporation Law of 1988 or the articles of incorporation or these Bylaws the shareholders' meeting considering the resolution may without further notice adopt it with such clarifying or other amendments as do not enlarge its original purpose. Written notice of any meeting shall be given to a shareholder personally or by sending a copy thereof by first class or express mail, postage prepaid, or by telegram (with messenger service specified, telex or TWX (with answerback received) or courier service, charges prepaid, or by facsimile transmission, to his address (or to his telex, TWX, or facsimile number) appearing on the books of the corporation, at least five days before the date of the meeting, unless any provision of the Business Corporation Law of 1988 shall prescribe a greater elapsed period of time. If the corporation is not a closely held corporation as defined by Section 1103 of the Business Corporation Law of 1988 and if it gives notice by mail of any regular or special meeting of the shareholders (or any other notice required by the Business Corporation Law of 1988 or by the articles of incorporation or these Bylaws to be given to all shareholders or to all holders of a class or series of shares) at least twenty days prior to the day named for the meeting or any corporate or shareholder action specified in the notice, the corporation may use any class of postpaid mail. If a meeting is adjourned it shall not be necessary to give any notice of the adjourned meeting or of the business to be transacted at an adjourned meeting, other than by announcement at the meeting at which such adjournment is 3 taken, unless the Board of Directors fixes a new record date for the adjourned meeting or the Business Corporation Law of 1988 requires notice of the business to be transacted and such notice has not been previously given. Whenever any written notice is required to be given to any shareholder or shareholders under the Business Corporation Law of 1988 or the articles of incorporation or these Bylaws, a waiver thereof in writing, signed by the shareholder or shareholders, whether before or after the time stated therein, shall be deemed equivalent to the giving of the notice. Neither the business to be transacted at, nor the purpose of, a meeting need be specified in the waiver of notice of the meeting. The attendance of a shareholder at a meeting shall constitute a waiver of notice by him except where he attends the meeting for the express purpose of objecting, at the beginning of the meeting, to the transaction of any business because the meeting was not lawfully called or convened. Voting Lists. The officer or agent having charge of the transfer books for shares of the corporation shall make, before each meeting of shareholders, a complete list of the shareholders entitled to vote at the meeting, arranged in alphabetical order, with the address of and the number of shares held by each. The list shall be produced and kept open at the time and place of the meeting, and shall be subject to the inspection of any shareholder during the whole time of the meeting for the purposes thereof, except as otherwise provided by the Business Corporation Law of 1988. The original share register or transfer book, or a duplicate thereof kept in the Commonwealth of Pennsylvania, shall be prima facie evidence as to who are the shareholders entitled to examine the list or share register or transfer book, or to vote at any meeting of shareholders. Conduct Of Meeting. Meetings of the shareholders shall be presided over by one of the following officers in the order of seniority and if present and acting - the Chairman of the Board, if any, the Vice-Chairman of the Board, if any, the President, a Vice-President, or, if none of the foregoing is in office and present and acting, by a chairman to be chosen by the shareholders. The Secretary of the corporation, or in his absence, an Assistant Secretary, shall act as secretary of every meeting, but if neither the Secretary nor an Assistant Secretary is present the Chairman of the meeting shall appoint a secretary of the meeting. Proxy Representation. Every shareholder entitled to vote at a meeting of shareholders or to express consent or dissent to corporate action in writing without a meeting may authorize another person to act for him by proxy. The presence of, or vote or other action of a meeting of shareholders, or the expression of consent or dissent to corporate action in writing, by a proxy of a shareholder shall constitute the presence of, or vote or action by, or written consent or dissent of the shareholder for the purposes of this Section. Where two or more proxies of a shareholder are present, the corporation shall, unless otherwise expressly provided in the proxy, accept as the vote of all shares represented thereby the vote cast by a majority of them and, if a majority of the proxies cannot agree whether the shares represented shall be voted or upon the manner of voting the shares, the voting of the shares shall be divided equally among those persons. Except as may otherwise be permitted by the Business Corporation Law of 1988, every proxy shall be executed in writing by the shareholder or by his duly authorized attorney-in-fact and filed with the Secretary of the corporation. A proxy, unless coupled with an interest, shall be revocable at will, notwithstanding any other agreement or any provision in the proxy to the contrary, but the revocation of a proxy shall not be effective until written notice thereof has 4 been given to the Secretary of the corporation. An unrevoked proxy shall not be valid after three years from the date of execution unless a longer time is expressly provided therein. A proxy shall not be revoked by the death or incapacity of the maker unless, before the vote is counted or the authority is exercised, written notice of the death or incapacity is given to the Secretary of the corporation. A proxy may be made irrevocable regardless of whether the interest with which it is coupled is an interest in the share itself or an interest in the corporation generally. Judges Of Election. In advance of any meeting of shareholders, the Board of Directors may appoint judges of election, who need not be shareholders, to act at the meeting or any adjournment thereof. If judges of election are not so appointed, the presiding officer of the meeting may, and on the request of any shareholder shall, appoint judges of election at the meeting. The number of judges shall be one or three. A person who is a candidate for office to be filled at the meeting shall not act as a judge. In case any person appointed as a judge fails to appear or fails or refuses to act, the vacancy may be filled by appointment made by the Board of Directors in advance of the convening of the meeting or at the meeting by the presiding officer thereof. The judges of election shall determine the number of shares outstanding and the voting power of each, the shares represented at the meeting, the existence of a quorum, the authenticity, validity, and effect of proxies, receive votes or ballots, hear and determine all challenges and questions in any way arising in connection with the right to vote, count and tabulate all votes, determine the result and to such acts as may be proper to conduct the election or vote with fairness to all shareholders. The judges of election shall perform their duties impartially, in good faith, to the best of their ability and as expeditiously as is practical. If there are three judges of election, the decision, act or certificate of a majority shall be effective in all respects as the decision, act, or certificate of all. On request of the presiding officer of the meeting, or of any shareholder, the judges shall make a report in writing of any challenge or question or matter determined by them, and execute a certificate of any fact found by them. Any report or certificate made by them shall be prima facie evidence of the facts stated therein. Quorum. A shareholders' meeting duly called shall not be organized for the transaction of business unless a quorum is present. The presence at a duly organized meeting of the shareholders entitled to cast at least a majority of the votes that all shareholders are entitled to cast on a particular matter shall constitute a quorum for the purpose of considering the matter. The shareholders so present can continue to do business until adjournment notwithstanding the withdrawal of enough shareholders to leave less than a quorum. If a meeting cannot be organized because a quorum has not attended, those present may adjourn the meeting to such time and place as they may determine, provided, however, that those shareholders entitled to vote who attend a meeting of shareholders at which directors are to be elected that has been previously adjourned for lack of a quorum, shall nevertheless constitute a quorum for the purpose of electing directors, although less than a quorum as fixed in this Section, and provided that those shareholders entitled to vote who attend a meeting of shareholders that has been previously adjourned for one or more periods aggregating at least fifteen days because of an absence of a quorum, although less than a quorum as fixed in this Section, shall nevertheless constitute a quorum for the purpose of acting upon any matter set forth in the notice of the 5 meeting if the notice states that those shareholders who attend the adjourned meeting shall nevertheless constitute a quorum for the purpose of acting upon the matter. Voting. Except in elections for directors, and except as the Business Corporation Law of 1988 shall otherwise provide, whenever any corporate action is to be taken by vote of the shareholders, it shall be authorized upon requiring the affirmative vote of a majority of the votes cast by all the shareholders entitled to vote thereon and, if any shareholders are entitled to vote as a class, upon receiving the affirmative vote of a majority of the votes cast by the shareholders entitled to vote as a class. In each election for directors, the candidates receiving the highest number of votes shall be elected. 8. Telephone Participation. One or more shareholders may participate in a meeting of the shareholders by means of conference telephone or similar communications equipment by means of which all shareholders participating in the meeting can hear each other. 9. Informal Action. Any action required or permitted to be taken at a meeting of the shareholders or of a class of shareholders may be taken without a meeting upon the written consent of shareholders who would have been entitled to cast the minimum number of votes that would be necessary to authorize the action at a meeting at which all shareholders entitled to vote thereon were present and voting. The consents shall be filed with the Secretary of the corporation. Action taken by less than all of the shareholders entitled to vote thereon, or less than all of a class of shareholders entitled to vote thereon, shall not become effective until after at least ten days' written notice of the action has been given to each shareholder entitled to vote thereon who has not consented thereto. 10. Financial Statements. The Board of Directors shall furnish the shareholders with the financial statements specified in Section 1554 of the Business Corporation Law of 1988, except as otherwise provided by that Section. ARTICLE II BOARD OF DIRECTORS 1. Functions Generally. Unless otherwise provided by statute, all powers enumerated in Section 1502 of, and elsewhere in, the Business Corporation Law of 1988 or otherwise vested by law in a business corporation shall be exercised by or under the authority of and the business and affairs of the corporation shall be managed under the direction of, a Board of Directors. The Board of Directors shall have the authority to fix the compensation of directors for their services and a director may be a salaried officer of the corporation. 2. Qualifications and Number. Each director shall be a natural person of full age. A director need not be a shareholder, a citizen of the United States, or a resident of the Commonwealth of Pennsylvania. The initial Board of Directors shall consist of _____ persons. Except for the first Board of Directors, such number may be fixed from time to time by action of the shareholders or of the directors, or, if the number is not so fixed, the number shall be ______. The number of directors may be increased or decreased by action of shareholders or of the directors. 6 3. Election and Term. The first Board of Directors shall consist of the directors selected by the incorporator. Each initial director shall hold office until the first annual meeting of shareholders and until his successor has been selected and qualified or until his earlier death, resignation, or removal. Thereafter, each director who is selected at an annual meeting of shareholders, and each director who is selected in the interim to fill vacancies and newly created directorships, shall hold office until the next annual meeting of shareholders and until his successor has been elected and qualified or until his earlier death, resignation, or removal. A decrease in the number of directors shall not have the effect of shortening the term of any incumbent director. 4. Meetings. Time. Meetings shall be held at such time as the Board shall fix, except that the first meeting of a newly elected Board shall be held as soon after its election as the directors may conveniently assemble. Place. Meetings shall be held at such place within or without the Commonwealth of Pennsylvania as shall be fixed by the Board. Call. No call shall be required for regular meetings for which the time and place have been fixed. Special meetings may be called by or at the direction of the Chairman of the Board, if any, of the President, or of a majority of the directors in office. Notice or Actual or Constructive Waiver. No notice shall be required for regular meetings for which the time and place have been fixed. Written, oral, or any other mode of notice of the time and place shall be given for special meetings in sufficient time for the convenient assembly of the directors thereat. The notice of any meeting need not specify the business to be transacted at, or the purpose of, the meeting. Any requirement of furnishing a written notice shall be waived by any director who signs a waiver of notice in writing before or after the time stated therein, or who attends the meeting except for the express purpose of objecting, at the beginning of the meeting, to the transaction of any business because the meeting was not lawfully called or convened. Quorum and Action. A majority of the directors in office shall be necessary to constitute a quorum for the transaction of business. A majority of the directors present, whether or not a quorum is present, may adjourn a meeting to another time and place. Except as herein otherwise provided, and except as may be otherwise provided by the Business Corporation Law of 1988, acts of a majority of the directors present and voting at a meeting at which a quorum is present shall be the acts of the Board of Directors. When a meeting is adjourned, it shall not be necessary to give any notice of the adjourned meeting or of the business to be transacted at an adjourned meeting, other than by announcement at the meeting at which such adjournment is taken. Chairman of the Meeting. The Chairman of the Board, if any and if present and acting, shall preside at all meetings. Otherwise, the President, if present and acting, or any other director chosen by the Board, shall preside. 7 5. Removal of Directors by Shareholders. The entire Board of Directors or any individual director may be removed from office in accordance with the provisions of Section 1726 of the Business Corporation Law of 1988. In case the entire Board or any one or more directors be so removed, new directors may be elected at the same meetings. 6. Committees. The Board of Directors may, by resolution adopted by a majority of the directors in office establish one or more committees, each committee to consist of one or more of the directors of the corporation. The Board may designate one or more directors as alternate members of any committee, who may replace any absent or disqualified member at any meeting of the committee or for the purposes of any written action by the committee. Any such committee, to the extent provided in such resolution, shall have and may exercise all of the powers and authority of the Board of Directors, except that a committee shall not have any power or authority as to any matter in respect of which the Business Corporation Law of 1988 prohibits the delegation of power or authority to a committee. In the absence or disqualification of a member and alternate member or members of a committee or committees, the member or members thereof present at any meeting and not disqualified from voting, whether or not he or they constitute a quorum, may unanimously appoint another director to act at the meeting in the place of the absent or disqualified member. No provision of this Article shall be construed as purporting to negate the provisions of subsection (c) of Section 1731 of the Business Corporation Law of 1988. 7. Informal Action. Any action required or permitted to be taken at a meeting of the Board of Directors may be taken without a meeting if, prior to or subsequent to the action, a consent or consents thereto by all of the directors in office is filed with the Secretary of the corporation. 8. Telephone Participation. One or more directors may participate in a meeting of the Board of Directors by means of conference telephone or similar communications equipment by means of which all persons participating in the meeting can hear each other. ARTICLE III OFFICERS The corporation shall have a President, a Secretary, and a Treasurer, and may have such other officers and assistant officers as the Board of Directors shall authorize from time to time. The President and the Secretary shall be natural persons of full age. The Treasurer may be a corporation, but, if a natural person, shall be of full age. The Board of Directors shall elect and fix the compensation of all officers and assistant officers. Unless the Board shall otherwise require, it shall not be necessary for any of the officers of the corporation to be directors. Any number of offices may be held by the same person. The Board of Directors may secure the fidelity of any or all of the officers by bond or otherwise. The Board of Directors, as soon as may be after its election in each year, shall elect or appoint a President, a Secretary, and a Treasurer, and from time to time may appoint one or more Vice Presidents and such Assistant Secretaries, Assistant Treasurers, and such other officers, agents, and employees as it may deem proper. The term of office of all officers shall be 8 one year and until their respective successors are elected and qualify or until their earlier death, resignation, or removal. All officers, as between themselves and the corporation, shall have such authority and perform such duties in the management of the corporation as may be determined by or pursuant to resolutions or orders of the Board of Directors. Any officer or agent may be removed by the Board of Directors with or without cause. The Board of Directors may fill any vacancy resulting from removal or otherwise. ARTICLE IV REGISTERED OFFICE - CORPORATE RECORDS Subject to Section 109 of the Associations Code, the address of the initial registered office of the corporation in the Commonwealth of Pennsylvania is set forth in the original articles of incorporation. The corporation shall keep at its registered office in the Commonwealth of Pennsylvania or principal place of business wherever situated or at the office of its registrar or transfer agent a share register giving the names and addresses of all shareholders and the number and class of shares held by each. ARTICLE V CORPORATE SEAL The corporate seal shall have inscribed thereon the name of the corporation and shall be in such form and contain such other words and/or figures as the Board of Directors shall determine or the law require. ARTICLE VI FISCAL YEAR The fiscal year of the corporation shall be fixed, and shall be subject to change, by the Board of Directors. ARTICLE VII CONTROL OVER BYLAWS After the adoption of the initial Bylaws by the incorporator, and except as otherwise required by the provisions of the Business Corporation Law of 1988, the authority to adopt, amend, and repeal the Bylaws is expressly vested in the Board of Directors, subject to the power of the shareholders to change such action. 9 EX-3.21 7 d00714exv3w21.txt ARTICLES OF INCORPORATION OF MILESTONE TRADITIONS EXHIBIT 3.21 ARTICLES OF INCORPORATION-FOR PROFIT OF MILESTONE TRADITIONS INC. [XXXXX] Business Stock (15Pa.C.S.1306) [ ] Professional (15Pa.C.S.2903) [ ] Business Nonstock (15Pa.C.S.2102) [ ] Management (15Pa.C.S.2702) [ ] Business-Statutory Close [ ] Insurance (15Pa.C.S.3101) (Pa. C.S. 2303) [ ] Cooperative (15Pa.C.S.7102) In compliance with the requirements of the applicable provisions of 15 Pa.C.S. (relating to corporations and unincorporated associations) the undersigned, desiring to incorporate a corporation for profit, hereby state(s) that: 1. The name of the corporation is: MILESTONE TRADITIONS INC. 2. The address of this corporation's initial registered office in this Commonwealth or name of its commercial registered office provider and the county of venue is: ERIC A. WEISS 30 SUGAR MAPLE DRIVE NEWTOWN SQUARE, PA 19073 DELAWARE COUNTY 3. The corporation is incorporated under the provisions of the Business Corporation Law of 1988. 4. The aggregate number of shares authorized is: 100 SHARES AT NO PAR VALUE 5. The name and address, including number and street, if any, of each incorporator is: WENDY SMITH 319 MARKET STREET HARRISBURG, PA 17101 6. The specified effective date, if any, is: 7. Additional provisions of the articles, if any, attach an 8 1/2 x 11 sheet. Page 2 ARTICLES OF INCORPORATION MILESTONE TRADITIONS INC. 8. Statutory close corporation only: Neither the corporation nor any shareholder shall make an offering of any of its shares of any class that would constitute a "public offering" within the meaning of the Securities Act of 1933 (15 U.S.C. 77a et seq.) 9. Cooperative corporations only: (Complete and strike out inapplicable term) The common bond of membership among its members/shareholders is: IN TESTIMONY WHEREOF, the incorporator has signed these Articles of Incorporation on November 16, 1998. /s/ WENDY SMITH - ----------------------------- EX-3.22 8 d00714exv3w22.txt BY-LAWS OF MILESTONE TRADITIONS INC. EXHIBIT 3.22 BYLAWS OF MILESTONE TRADITIONS, INC. (a Pennsylvania corporation) ---------- ARTICLE I SHAREHOLDERS 1. Share Certificates. Certificates representing shares shall set forth thereon the statements prescribed by Section 1528 of the Business Corporation Law of 1988 and by any other applicable provision of law, shall be executed, by facsimile or otherwise, by the President or a Vice-President and by the Secretary or an Assistant Secretary or the Treasurer or an Assistant Treasurer, or by any other officer or officers authorized to do so by the Board of Directors. 2. Fractional Share Interests or Scrip. The corporation may but shall not be required to create and issue fractions of a share, either represented by a certificate or uncertificated, which, unless otherwise provided in the articles of incorporation, shall represent proportional interests in all the voting rights, preferences, limitations, and special rights, if any, of full shares. If the corporation creates but does not provide for the issuance of fractions of a share, it shall: (1) arrange for the disposition of fractional interests by those entitled thereto; (2) pay in money the fair value of fractions of a share determined at the time and in the manner provided in the plan, amendment, or resolution of the Board providing for the creation of the fractional interests; or (3) issue scrip or other evidence of ownership, in registered form (either represented by a certificate or uncertificated) or in bearer form (represented by a certificate), entitling the holder to receive a full share upon the surrender of the scrip or other evidence of ownership aggregating a full share, or the transfer of uncertificated scrip aggregating a full share, but which shall not, unless otherwise provided therein or with respect thereto, entitle the holder to exercise any voting right, to receive dividends or to participate in any of the assets of the corporation in the event of liquidation. The scrip or other evidence of ownership may be issued subject to the condition that it shall become void if not exchanged for full shares before a specified date, or subject to the condition that the shares for which the scrip or evidence of ownership is exchangeable may be sold and the proceeds thereof distributed to the holders of the scrip or evidence of ownership, or subject to any other conditions that the corporation deems advisable. 3. Share Transfers. Upon compliance with provisions restricting the transferability of shares, if any, transfers of shares of the corporation shall be made only on the transfer books for shares of the corporation by the record holder thereof, or by his attorney thereunto authorized by power of attorney duly executed and filed with the Secretary of the corporation or with a transfer agent or a registrar, if any, and on surrender of the certificate or certificates for such shares properly endorsed and the payment of all taxes due thereon. 4. Record Date for Shareholders. The corporation may fix a time prior to the date of any meeting of shareholders as a record date for the determination of the shareholders entitled to notice of, or to vote at, the meeting, which time, except in the case of an adjourned meeting, shall be not more than ninety days prior to the date of the meeting of shareholders. Only shareholders of record on the date fixed shall be so entitled notwithstanding any transfer of shares on the books of the corporation after any record date fixed as provided in this Section. The Board of Directors may similarly fix a record date for the determination of shareholders of record for any other purpose. When a determination of shareholders of record has been made as provided in this Section for purposes of a meeting, the determination shall apply to any adjournment thereof unless the Board fixes a new record date for the adjourned meeting. If a record date is not fixed: (1) the record date for determining shareholders entitled to notice of or to vote at a meeting of shareholders shall be at the close of business on the day next preceding the day on which notice is given or, if notice is waived, at the close of business on the day immediately preceding the day on which the meeting is held; (2) the record date for determining shareholders entitled to express consent or dissent to corporate action in writing without a meeting, when prior action by the Board of Directors is not necessary, shall be the close of business on the day on which the first written consent or dissent is filed with the Secretary of the corporation; (3) the record date for determining shareholders for any other purpose shall be at the close of business on the day on which the Board of Directors adopts the resolution relating thereto. 5. Certification by Nominee. The Board of Directors may adopt a procedure pursuant to the provisions of Section 1763 of the Business Corporation Law of 1988 whereby a shareholder may certify in writing to the corporation that all or a portion of the shares registered in the name of the shareholder are held for the account of a specified person or persons. 6. Meaning of Certain Terms. As used herein in respect of the right to notice of a meeting of shareholders or a waiver thereof or to participate or vote thereat or to consent or dissent in writing in lieu of a meeting, as the case may be, the term "share" or "shares" or "shareholder" or "shareholders" refers to an outstanding share or shares and to a holder or holders of record of outstanding shares when the corporation is authorized to issue only one class of shares, and said reference is also intended to include any outstanding share or shares and any holder or holders of record of outstanding shares of any class upon which or upon whom the articles of incorporation confer such rights where there are two or more classes or series of shares or upon which or upon whom the Business Corporation Law of 1988 confers such rights notwithstanding that the articles of incorporation may provide for more than one class or series of shares, one or more of which are limited or denied such rights thereunder. 7. Shareholder Meetings. Time. The annual meeting shall be held on the date fixed, from time to time, by the directors, provided, that at least one meeting of the shareholders shall be held in each calendar year for the election of directors. A special meeting shall be held on the date fixed by 2 the directors except when the Business Corporation Law of 1988 confers the right to fix the date upon a shareholder or shareholders. An adjournment or adjournments of any duly organized annual or special meeting may be taken, provided, that any meeting at which directors are to be elected shall be adjourned only from day to day or for such longer periods not exceeding fifteen days each as the shareholders who are present and entitled to vote shall direct, until the directors have been elected. Place. Annual meetings and special meetings shall be held at such place, within or without the Commonwealth of Pennsylvania, as the directors may, from time to time, fix. Whenever the directors shall fail to fix such place, or, whenever shareholders entitled to call a special meeting shall call the same, the meeting shall be held at the registered office of the corporation in the Commonwealth of Pennsylvania. Call. The annual meeting may be called by the directors or the President or by any officer instructed by the directors or the President to call the meeting, or if, in any calendar year, an annual meeting shall not be called by the directors or by any authorized officer and shall not be held, any shareholder may call any such meeting at any time thereafter. A special meeting may be called by the directors or the President or by any officer instructed by the directors or the President to call the meeting or by the shareholders whenever the Business Corporation Law of 1988 confers such right upon them. Notice or Actual or Constructive Waiver of Notice. Written notice of every meeting of the shareholders shall be given by, or at the direction of, the Secretary or other authorized person and shall state the place, day, and hour of the meeting and any other information required by any provision of the Business Corporation Law of 1988. The notice of a special meeting shall state the general nature of the business to be transacted. In all cases, the notice shall comply with the express requirements of the Business Corporation Law of 1988. Whenever the language of a proposed resolution is included in a written notice of a meeting required to be given under the provisions of the Business Corporation Law of 1988 or the articles of incorporation or these Bylaws the shareholders' meeting considering the resolution may without further notice adopt it with such clarifying or other amendments as do not enlarge its original purpose. Written notice of any meeting shall be given to a shareholder personally or by sending a copy thereof by first class or express mail, postage prepaid, or by telegram (with messenger service specified, telex or TWX (with answerback received) or courier service, charges prepaid, or by facsimile transmission, to his address (or to his telex, TWX, or facsimile number) appearing on the books of the corporation, at least five days before the date of the meeting, unless any provision of the Business Corporation Law of 1988 shall prescribe a greater elapsed period of time. If the corporation is not a closely held corporation as defined by Section 1103 of the Business Corporation Law of 1988 and if it gives notice by mail of any regular or special meeting of the shareholders (or any other notice required by the Business Corporation Law of 1988 or by the articles of incorporation or these Bylaws to be given to all shareholders or to all holders of a class or series of shares) at least twenty days prior to the day named for the meeting or any corporate or shareholder action specified in the notice, the corporation may use any class of postpaid mail. If a meeting is adjourned it shall not be necessary to give any notice of the adjourned meeting or of the business to be transacted at an adjourned meeting, other than by announcement at the meeting at which such adjournment is taken, unless the Board of Directors fixes a new record date for the adjourned meeting or the 3 Business Corporation Law of 1988 requires notice of the business to be transacted and such notice has not been previously given. Whenever any written notice is required to be given to any shareholder or shareholders under the Business Corporation Law of 1988 or the articles of incorporation or these Bylaws, a waiver thereof in writing, signed by the shareholder or shareholders, whether before or after the time stated therein, shall be deemed equivalent to the giving of the notice. Neither the business to be transacted at, nor the purpose of, a meeting need be specified in the waiver of notice of the meeting. The attendance of a shareholder at a meeting shall constitute a waiver of notice by him except where he attends the meeting for the express purpose of objecting, at the beginning of the meeting, to the transaction of any business because the meeting was not lawfully called or convened. Voting Lists. The officer or agent having charge of the transfer books for shares of the corporation shall make, before each meeting of shareholders, a complete list of the shareholders entitled to vote at the meeting, arranged in alphabetical order, with the address of and the number of shares held by each. The list shall be produced and kept open at the time and place of the meeting, and shall be subject to the inspection of any shareholder during the whole time of the meeting for the purposes thereof, except as otherwise provided by the Business Corporation Law of 1988. The original share register or transfer book, or a duplicate thereof kept in the Commonwealth of Pennsylvania, shall be prima facie evidence as to who are the shareholders entitled to examine the list or share register or transfer book, or to vote at any meeting of shareholders. Conduct of Meeting. Meetings of the shareholders shall be presided over by one of the following officers in the order of seniority and if present and acting - the Chairman of the Board, if any, the Vice-Chairman of the Board, if any, the President, a Vice-President, or, if none of the foregoing is in office and present and acting, by a chairman to be chosen by the shareholders. The Secretary of the corporation, or in his absence, an Assistant Secretary, shall act as secretary of every meeting, but if neither the Secretary nor an Assistant Secretary is present the Chairman of the meeting shall appoint a secretary of the meeting. Proxy Representation. Every shareholder entitled to vote at a meeting of shareholders or to express consent or dissent to corporate action in writing without a meeting may authorize another person to act for him by proxy. The presence of, or vote or other action at a meeting of shareholders, or the expression of consent or dissent to corporate action in writing, by a proxy of a shareholder shall constitute the presence of, or vote or action by, or written consent or dissent of the shareholder for the purposes of this Section. Where two or more proxies of a shareholder are present, the corporation shall, unless otherwise expressly provided in the proxy, accept as the vote of all shares represented thereby the vote cast by a majority of them and, if a majority of the proxies cannot agree whether the shares represented shall be voted or upon the manner of voting the shares, the voting of the shares shall be divided equally among those persons. Except as may otherwise be permitted by the Business Corporation Law of 1988, every proxy shall be executed in writing by the shareholder or by his duly authorized attorney-in-fact and filed with the Secretary of the corporation. A proxy, unless coupled with an interest, shall be revocable at will, notwithstanding any other agreement or any provision in the proxy to the contrary, but the revocation of a proxy shall not be effective until written notice thereof has been given to the Secretary of the corporation. An unrevoked proxy shall not be valid after three years from the date of execution unless a longer time is expressly provided 4 therein. A proxy shall not be revoked by the death or incapacity of the maker unless, before the vote is counted or the authority is exercised, written notice of the death or incapacity is given to the Secretary of the corporation. A proxy may be made irrevocable regardless of whether the interest with which it is coupled is an interest in the share itself or an interest in the corporation generally. Judges of Election. In advance of any meeting of shareholders, the Board of Directors may appoint judges of election, who need not be shareholders, to act at the meeting or any adjournment thereof. If judges of election are not so appointed, the presiding officer of the meeting may, and on the request of any shareholder shall, appoint judges of election at the meeting. The number of judges shall be one or three. A person who is a candidate for office to be filled at the meeting shall not act as a judge. In case any person appointed as a judge fails to appear or fails or refuses to act, the vacancy may be filled by appointment made by the Board of Directors in advance of the convening of the meeting or at the meeting by the presiding officer thereof. The judges of election shall determine the number of shares outstanding and the voting power of each, the shares represented at the meeting, the existence of a quorum, the authenticity, validity, and effect of proxies, receive votes or ballots, hear and determine all challenges and questions in any way arising in connection with the right to vote, count and tabulate all votes, determine the result and do such acts as may be proper to conduct the election or vote with fairness to all shareholders. The judges of election shall perform their duties impartially, in good faith, to the best of their ability and as expeditiously as is practical. If there are three judges of election, the decision, act, or certificate of a majority shall be effective in all respects as the decision, act, or certificate of all. On request of the presiding officer of the meeting, or of any shareholder, the judges shall make a report in writing of any challenge or question or matter determined by them, and execute a certificate of any fact found by them. Any report or certificate made by them shall be prima facie evidence of the facts stated therein. Quorum. A shareholders' meeting duly called shall not be organized for the transaction of business unless a quorum is present. The presence at a duly organized meeting of the shareholders entitled to cast at least a majority of the votes that all shareholders are entitled to cast on a particular matter shall constitute a quorum for the purpose of considering the matter. The shareholders so present can continue to do business until adjournment notwithstanding the withdrawal of enough shareholders to leave less than a quorum. If a meeting cannot be organized because a quorum has not attended, those present may adjourn the meeting in such time and place as they may determine, provided, however, that those shareholders entitled to vote who attend a meeting of shareholders at which directors are to be elected that has been previously adjourned for lack of a quorum, shall nevertheless constitute a quorum for the purpose of electing directors, although less than a quorum as fixed in this Section, and provided that those shareholders entitled to vote who attend a meeting of shareholders that has been previously adjourned for one or more periods aggregating at least fifteen days because of an absence of a quorum, although less than a quorum is fixed in this Section, shall nevertheless constitute a quorum for purpose of acting upon any matter set forth in the notice of the meeting if 5 the notice states that those shareholders who attend the adjourned meeting shall nevertheless constitute a quorum for the purpose of acting upon the matter. Voting. Except in elections for directors, and except as the Business Corporation Law of 1988 shall otherwise provide, whenever any corporate action is to be taken by vote of the shareholders, it shall be authorized upon requiring the affirmative vote of a majority of the votes cast by all the shareholders entitled to vote thereon and, if any shareholders are entitled to vote as a class, upon receiving the affirmative vote of a majority of the votes cast by the shareholders entitled to vote as a class. In each election for directors, the candidates receiving the highest number of votes shall be elected. 8. Telephone Participation. One or more shareholders may participate in a meeting of the shareholders by means of conference telephone or similar communications equipment by means of which all shareholders participating in the meeting can hear each other. 9. Informal Action. Any action required or permitted to be taken at a meeting of the shareholders or of a class of shareholders may be taken without a meeting upon the written consent of shareholders who would have been entitled to cast the minimum number of votes that would be necessary to authorize the action at a meeting at which all shareholders entitled to vote thereon were present and voting. The consents shall be filed with the Secretary of the corporation. Action taken by less than all of the shareholders entitled to vote thereon, or less than all of a class of shareholders entitled to vote thereon, shall not become effective until after at least ten days' written notice of the action has been given to each shareholder entitled to vote thereon who has not consented thereto. 10. Financial Statements. The Board of Directors shall furnish the shareholders with the financial statements specified in Section 1554 of the Business Corporation Law of 1988, except as otherwise provided by that Section. ARTICLE II BOARD OF DIRECTORS 1. Functions Generally. Unless otherwise provided by statute, all powers enumerated in Section 1502 of, and elsewhere in, the Business Corporation Law of 1988 or otherwise vested by law in a business corporation shall be exercised by or under the authority and the business and affairs of the corporation shall be managed under the direction of, a Board of Directors. The Board of Directors shall have the authority to fix the compensation of directors for their services and a director may be a salaried officer of the corporation. 2. Qualifications and Number. Each director shall be a natural person of full age. A director need not be a shareholder, a citizen of the United States, or a resident of the Commonwealth of Pennsylvania. The initial Board of Directors shall consist of persons. Except for the first Board of Directors, such number may be fixed from time to time by action of the shareholders or of the directors, or, if the number is not so fixed, the number shall be _______. The number of directors may be increased or decreased by action of shareholders or of the directors. 6 3. Election and Term. The first Board of Directors shall consist of the directors selected by the incorporator. Each initial director shall hold office until the first annual meeting of shareholders and until his successor has been selected and qualified or until his earlier death, resignation, or removal. Thereafter, each director who is selected at an annual meeting of shareholders, and each director who is selected in the interim to fill vacancies and newly created directorships, shall hold office until the next annual meeting of shareholders and until his successor has been elected and qualified or until his earlier death, resignation, or removal. A decrease in the number of directors shall not have the effect of shortening the term of any incumbent director. 4. Meetings. Time. Meetings shall be held at such time as the Board shall fix, except that the first meeting of a newly elected Board shall be held as soon after its election as the directors may conveniently assemble. Place. Meetings shall be held at such place within or without the Commonwealth of Pennsylvania as shall be fixed by the Board. Call. No call shall be required for regular meetings for which the time and place have been fixed. Special meetings may be called by or at the direction of the Chairman of the Board, if any, of the President, or of a majority of the directors in office. Notice or Actual or Constructive Waiver. No notice shall be required for regular meetings for which the time and place have been fixed. Written, oral, or any other mode of notice of the time and place shall be given for special meetings in sufficient time for the convenient assembly of the directors thereat. The notice of any meeting need not specify the business to be transacted at, or the purpose of, the meeting. Any requirement of furnishing a written notice shall be waived by any director who signs a waiver of notice in writing before or after the time stated therein, or who attends the meeting except for the express purpose of objecting, at the beginning of the meeting, to the transaction of any business because the meeting was not lawfully called or convened. Quorum and Action. A majority of the directors in office shall be necessary to constitute a quorum for the transaction of business. A majority of the directors present, whether or not a quorum is present, may adjourn a meeting to another time and place. Except as herein otherwise provided, and except as may be otherwise provided by the Business Corporation Law of 1988, acts of a majority of the directors present and voting at a meeting at which a quorum is present shall be the acts of the Board of Directors. When a meeting is adjourned, it shall not be necessary to give any notice of the adjourned meeting or of the business to be transacted at an adjourned meeting, other than by announcement at the meeting at which such adjournment is taken. Chairman of the Meeting. The Chairman of the Board, if any and if present and acting, shall preside at all meetings. Otherwise, the President, if present and acting, or any other director chosen by the Board, shall preside. 7 5. Removal of Directors by Shareholders. The entire Board of Directors or any individual director may be removed from office in accordance with the provisions of Section 1726 of the Business Corporation Law of 1988. In case the entire Board or any one or more directors be so removed, new directors may be elected at the same meetings. 6. Committees. The Board of Directors may, by resolution adopted by a majority of the directors in office establish one or more committees, each committee to consist of one or more of the directors of the corporation. The Board may designate one or more directors as alternate members of any committee, who may replace any absent or disqualified member at any meeting of the committee or for the purposes of any written action by the committee. Any such committee, to the extent provided in such resolution, shall have and may exercise all of the powers and authority of the Board of Directors, except that a committee shall not have any power or authority as to any matter in respect of which the Business Corporation Law of 1988 prohibits the delegation of power or authority to a committee. In the absence or disqualification of a member and alternate member or members of a committee or committees, the member or members thereof present at any meeting and not disqualified from voting, whether or not he or they constitute a quorum, may unanimously appoint another director to act at the meeting in the place of the absent or disqualified member. No provision of this Article shall be construed as purporting to negate the provisions of subsection(c) of Section 1731 of the Business Corporation Law of 1988. 7. Informal Action. Any action required or permitted to be taken at a meeting of the Board of Directors may be taken without a meeting if, prior to or subsequent to the action, a consent or consents thereto by all of the directors in office is filed with the Secretary of the corporation. 8. Telephone Participation. One or more directors may participate in a meeting of the Board of Directors by means of conference telephone or similar communications equipment by means of which all persons participating in the meeting can hear each other. ARTICLE III OFFICERS The corporation shall have a President, a Secretary, and a Treasurer, and may have such other officers and assistant officers as the Board of Directors shall authorize from time to time. The President and the Secretary shall be natural persons of full age. The Treasurer may be a corporation, but, if a natural person, shall be of full age. The Board of Directors shall elect and fix the compensation of all officers and assistant officers. Unless the Board shall otherwise require, it shall not be necessary for any of the officers of the corporation to be directors. Any number of offices may be held by the same person. The Board of Directors may secure the fidelity of any or all of the officers by bond or otherwise. The Board of Directors, as soon as may be after its election in each year, shall elect or appoint a President, a Secretary, and a Treasurer, and from time to time may appoint one or more Vice Presidents and such Assistant Secretaries, Assistant Treasurers, and such other officers, agents, and employees as it may deem proper. The term of office of all officers shall be 8 one year and until their respective successors are elected and qualify or until their earlier death, resignation, or removal. All officers, as between themselves and the corporation, shall have such authority and perform such duties in the management of the corporation as may be determined by or pursuant to resolutions or orders of the Board of Directors. Any officer or agent may be removed by the Board of Directors with or without cause. The Board of Directors may fill any vacancy resulting from removal or otherwise. ARTICLE IV REGISTERED OFFICE - CORPORATE RECORDS Subject to Section 109 of the Associates Code, the address of the initial registered office of the corporation in the Commonwealth of Pennsylvania is set forth in the original articles of incorporation. The corporation shall keep at its registered office in the Commonwealth of Pennsylvania or principal place of business wherever situated or at the office of its registrar or transfer agent a share register giving the names and addresses of all shareholders and the number and class of shares held by each. ARTICLE V CORPORATE SEAL The corporate seal shall have inscribed thereon the name of the corporation and shall be in such form and contain such other words and/or figures as the Board of Directors shall determine or the law require. ARTICLE VI FISCAL YEAR The fiscal year of the corporation shall be fixed, and shall be subject to change, by the Board of Directors. ARTICLE VII CONTROL OVER BYLAWS After the adoption of the initial Bylaws by the incorporator, and except as otherwise required by the provisions of the Business Corporation Law of 1988, the authority to adopt, amend, and repeal the Bylaws is expressly vested in the Board of Directors, subject to the power of the shareholders to change such action. 9 EX-12.1 9 d00714exv12w1.txt COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES EXHIBIT 12.1 CALCULATION OF RATIO OF EARNINGS TO FIXED CHARGES (DOLLARS IN THOUSANDS) (UNAUDITED)
Fiscal Years Ended -------------------------------------------- August 31, August 25, August 28, 2002 2001 2000 ------------ ------------ ------------ (As Restated) Net income (loss) before income taxes $ (1,063) $ (3,929) $ 106 Fixed charges:(1) Interest charges 26,026 22,846 15,691 Interest portion of lease expense 833 735 309 ------------ ------------ ------------ Total fixed charges 26,859 23,581 16,000 Net income from operations before income taxes and fixed charges $ 25,796 $ 19,652 $ 16,106 ============ ============ ============ Ratio of earnings to fixed charges(2) -- -- 1.0x
(1) During the periods presented the Company had no preferred stock outstanding that required a cash payment. Therefore, the ratio of earnings to combined fixed charges and preference dividends was the same as the ratio of earnings to fixed charges for each of the periods presented. (2) For purposes of computing this ratio, earnings consist of income (loss} before taxes on income and fixed charges. Fixed charges consist of interest expense, amortization of deferred debt issuance costs and the portion of rental expense that includes an interest factor. For the fiscal years ended August 31, 2002 and August 25, 2001, earnings before fixed charges were insufficient to cover fixed charges by approximately $1.1 million and $3.9 mullion, respectively. EX-21 10 d00714exv21.txt SUBSIDIARIES OF AMERICAN ACHIEVEMENT CORPORATION EXHIBIT 21 SUBSIDIARIES OF AMERICAN ACHIEVEMENT CORPORATION Commemorative Brands, Inc. CBI North America, Inc. Taylor Senior Holdings Corp. Taylor Publishing Company TP Holding Corp. Taylor Production Services, L.P. Educational Communications, Inc. Milestone Marketing Incorporated Milestone Traditions Inc. Milestone Management, Inc. EX-99.1 11 d00714exv99w1.txt CEO CERTIFICATION PURSUANT TO SECTION 906 EXHIBIT 99.1 CERTIFICATION ACCOMPANYING PERIODIC REPORT PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 (18 U.S.C. SEC. 1350) I, David G. Fiore, President and Chief Executive Officer of American Achievement Corporation (the "Company"), hereby certify that: (1) The Annual Report of the Company on Form 10-K for the period year August 31, 2002 (the "Report") fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company as of the dates and for the periods expressed in the Report. Date: November 21, 2002 /s/ DAVID G. FIORE -------------------------------------- Name: David G. Fiore Title: President and Chief Executive Officer EX-99.2 12 d00714exv99w2.txt CFO CERTIFICATION PURSUANT TO SECTION 906 EXHIBIT 99.2 CERTIFICATION ACCOMPANYING PERIODIC REPORT PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 (18 U.S.C. SEC.1350) I, Sherice P. Bench, Chief Financial Officer of American Achievement Corporation (the "Company"), hereby certify that: (1) The Annual Report of the Company on Form 10-K for the year ended August 31, 2002 (the "Report") fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company as of the dates and for the periods expressed in the Report. Date: November 21, 2002 /s/ SHERICE P. BENCH -------------------------------------- Name: Sherice P. Bench Title: Chief Financial Officer -----END PRIVACY-ENHANCED MESSAGE-----