Commemorative Brands Inc.

(aka, American Achievement Corp.),

Austin, Texas

Robert Amter was appointed Chief Executive Officer of Commemorative Brands Inc.  Contract was for six months.  A Castle Harlan Inc. leveraged buy-out.

Situation:

$160 million in sales Commemorative is a leading manufacturer of high school and college class rings, custom recognition rings, and fine paper products including: graduation diplomas and announcements.  Principal brands: Balfour, ArtCarved, Keepsake.  Four manufacturing plants.  1,600 employees.

Prior to February 1999 and Robert Amter’s appointment as CEO, financial results were negative and declining and cash availability was critically low.

Income & Free Cash Flow Statements:

Fiscal Year, September – August        ..          …….First Half of Fiscal Year…….

9 months                     12 months                 6 months, September – February

(000$)                         FY1997                      FY1998                            1998                1999     % change

Net Sales                     $87,600                       $151,101                     $82,532           $84,501       +2%

Operating Profit                 930                       10,192                       10,421                    8,798       (16%)

% of Sales                        1.1%                            6.7%                         12.6%                      10.4%

Net Income (Loss)      (9,717)                        (5,837)                        2,445                     486       (80%)

% of Sales                        (11.1%)                      (3.9%)                          3.7%                      1.3%

Free Cash Flow            (9,115)                       (5,546)                        2,740                       (578)      (121%)

The first half of the fiscal year, September through February, are the company’s most profitable six months of the year.  Commemorative’s sales are seasonal.  Sales are highest in the first half of the year.

Problems:

» The purchase price was too high resulting in high interest payments that Commemorative’s cash flow cannot support.  Interest expense would be $14 million.  Operating profit had barely reached $10 million in the company’s history.

» No strategic focus.  The vital few priorities were never developed.  Commemorative was going in too many uncoordinated directions at once.  The company was working on trivia with no communication between the various functions of marketing, manufacturing and finance.  The major projects that were in process had been poorly evaluated and were “rush to judgment” decisions.

» Starting in 1997, Balfour’s Massachusetts manufacturing plant was moved into the ArtCarved plant in Austin, Texas.  This proved to be a costly mistake.  For both Balfour and ArtCarved: Delivery delays mounted.  Quality deteriorated.  Actual production costs increased.  Customers were dissatisfied.

Reasons consolidating the Balfour and ArtCarved plants was a mistake:

~ Balfour did not have a cost accounting system.  There were no routings, bills of material, labor reporting.  Without a cost accounting system, it is almost impossible to move a manufacturing plant and reassemble it correctly in a new location.

~ Critically important knowledge was lost when Balfour’s Massachusetts employees did not relocate to Texas.  Class ring manufacturing is essentially a craft.  Balfour’s tooling and equipment was in such poor shape highly knowledgeable employees were critical to make it work.

~ ArtCarved’s Texas plant was too small to house the Balfour operation.  The metaphor: “squeezing ten pounds into a one pound bag” is applicable in this case.  As a result, ArtCarved was negatively affected and experienced serious customer service problems and higher product costs.

» The Balfour computer system was poor.  It used an outdated Hewlett Packard computer and was heavily dependent on manual processing.  It was doubtful it could be made Y2K compliant.  Commemorative invested $8.5 million in a new system which duplicated the ArtCarved system.  The alternative to invest $2.5 million in a “vanilla”, off-the-shelf system with enhancements rather than duplicate the outdated ArtCarved system was rejected.

» The low cash availability and lack of strategic focus, resulted in low capital spending for manufacturing equipment.  Commemorative’s manufacturing process is craft oriented with high direct labor content and manual processing.  A relatively high direct labor skill level is needed which requires highly trained and long-term employees.

~ Austin, Texas’ unemployment rate was less than 2%, which means it was difficult to retain and replace hourly employees.  Commemorative has high hourly turnover.  This results in high rework, scrap and return costs.  It was essential for the company to invest in new manufacturing equipment to reduce direct labor content and job complexity.

» The Chief Executive Officer was not qualified.  He did not use cross-functional communication.  There were no discussions with all the functions in the room at the same time for issue resolution and problem solving.  This led to uncoordinated management.  Infighting.  No discipline.  No control.  Mistakes.  High costs.  Lower profits.  The company was indecisive and drifting.  Employees were demoralized.

» A serious cash availability shortage was created by:

~ The high interest payments.

~ The losses incurred consolidating the Balfour plant into the Texas plant.

~ The higher cost of developing a new Balfour computer system.

Results Achieved:

» Just five months after Amter was appointed Chief Executive Officer, Castle Harlan Inc. made an $8.5 million equity investment in the considerably improved company.

» The Bank increased its revolving loan and Commemorative’s cash availability.

» After 3 months as Chief Executive Officer, profits improved considerably:

Year-To-Date (000$)             Sales               Operating Profit                      % of Sales

March – May 1998                 $43,085                    $4,063                                     9.4%

March – May 1999                 50,685                      6,352                                        12.5%

% increase                              +18%                          +56%

» After 6 months as CEO, profit and cash flow were improved significantly:

   Year-To-Date (000$)             Sales               Operating Profit                      % of Sales

            March – August 1998             $68,569                    $(229)                                 (0.3%)

   March – August 1999               75,807                      1,724                                    2.3%

               % increase                              +11%                      +1,853%

 Operating Cash Flow (Deficit)                                  Working Capital                         

            March – August 1998                  $(18)                      At February 1999          $60,938

   March – August 1999                    621                      At August 1999               53,162

      % improvement                     +539%                        % improvement                 13%

March through August is Commemorative’s second fiscal half year.  Always the lowest in sales because of the seasonality of its industry.   Always the lowest in profitability because the fourth quarter is never profitable because of low sales as high schools and colleges are closed in the summer.

» To achieve this profit improvement implemented a cross-functional, bottoms-up management communication process for establishing priorities and problem solving which resulted in:

~ Restored morale and self confidence of key employees and demonstrated that their efforts are important and make a difference.

~ This stopped the company from its indecisive drifting and working on trivia into a management team that developed and had ownership.

The 5 vital priorities needed to improve Commemorative:

– Develop and maintain disciplined focus.

– Fix the Austin and Kentucky manufacturing operations.

– Simplify the company’s operations.

– Reduce all costs and spending.  Improve profitability.

– Maintain the sales and customer base.

Results Achieved:

~ Just four weeks after becoming Chief Executive Officer; implemented 75 cost reduction and profit improvement tasks which saved $6 million annually.

~ Implemented a successful, competitive ArtCarved Retail price point and marketing program strategy to halt the five year sales erosion. This strategy was developed with a Retail Council consisting of ArtCarved company salespersons and independent retailers.

~ Stopped the widely scattered and undisciplined selling price approvals by implementing day-to-day hands-on controls. Instituted annual pricing review process for all products and customers which had not been in-place prior to February 1999.

~ Increased Balfour class ring and fine paper product prices for the first time in three years.

~ Installed a strict purchase requisition approval process to reduce spending.

~ For the first time in two years manufacturing produced and shipped class and mothers’ day rings on schedule which improved manufacturing overhead absorption and reduced costs.

~ Manufacturing’s improvements in customer service resulted in satisfied sales reps and customers for the first time in two years.

~ Simplified the manufacturing process with reductions in the number of stock keeping units from 6,000 to 4,800.  Further simplifying manufacturing was the moratorium on  new product development and the elimination of all speculative bidding.

~ Communicated, in face-to-face meetings, the company’s five priorities to all 1,600 employees three times in six months to obtain awareness and ownership of Commemorative’s priorities and goals.

~ Simplified and delayered the salaried organization:

Reduced salaried headcount by 74 for a $3 million annual saving.

Moved the cost accounting department into the manufacturing plant from an old warehouse, three miles from the plant.  Increased the staffing from two to three degreed cost accountants.

Moved the vice president of manufacturing into the manufacturing plant from the headquarters office building.  Moved the finance department into the headquarters building from the warehouse three miles away to get them involved in the company.

Reorganized the Kentucky Graphics Plant’s customer service department. Corrected working relationships of senior managers.

Reorganized the quality assurance department.  Quality control inspectors had reported to production supervisors which produced poor quality.

» Prior to February 1999, in addition to being unhappy with Commemorative’s profitability, the Bank was dissatisfied with the reliability and accuracy of the company’s financial forecasts.  Using the cross-functional, bottoms-up management process, developed a financial forecast the Bank was able to rely on month-to-month.  Commemorative met or exceeded the forecast every month.

» Locked in gold prices by purchasing options.  The options were below Commemorative’s historical and forecast costs.  For the first time in the company’s history, eliminated its vulnerability to gold price fluctuations.  Gold is one of Commemorative’s key raw materials.

» The flow of production was reorganized around brand names and into separate work cells.  Started upgrading equipment to produce consistent quality and reduce scrap.

» Implemented a new class ring project.  This was a $6 million product line project I had put on hold due to cash constraints and further marketing and financial analysis.

» Started a product line expansion by initiating acquisition discussions with the owners of two companies.  Acquisition of either company would allow complete closure of a money losing Commemorative plant and reduce fixed overhead.  This acquisition is within the company’s core and would yield a profitable sales expansion in a complementary product line.

~~~~~~~~~~~~~~~~~~~~~~~~~~~~~

Financial results while Robert Amter was Chief Executive Officer for six months in 1999:

….6 months YTD Actual, March thru August….

(000$)                                     1998                1999                % Improvement

Net Sales                                 $68,569           $75,807              +11%

Gross Profit                            32,947              41,120                +25%

% to Sales                               48.0%             54.2%

Operating Profit (Loss)           (229)              1,724              +1,853%

% to Sales                               (0.3%)              2.3%

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Operating Cash Flow (Deficit)     ($18)                 $621           +539%

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……………Actual…………..

Asset Performance (000$)                 Feb. 1999        Aug. 1999       % Improvement

                  Working Capital                             $60, 938         $ 53,162                 13%

As % Annual Sales                  38.0%             33.1%

Inventory                                           14,670             13,804                    6%

As % Annual Sales                   9.2%               8.6%

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Enterprise Value (000$)                       $70,000           $106,000

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