UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
| x | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended December 28, 2013
or
| ¨ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
| | | | | | |
| | | Commission File Number | | Exact Name of Registrant as Specified in its Charter; State of Incorporation; Address of Principal Executive Offices; and Telephone Number, Including Area Code | | I.R.S.
Employer
Identification No. |
| | 333-120386 | | VISANT CORPORATION (Incorporated in Delaware) | | 90-0207604 |
| | | | 357 Main Street Armonk, New York 10504 Telephone: (914)595-8200 | | |
Securities Registered Pursuant to Section 12(b) of the Act: None
Securities Registered Pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined by Rule 405 of the Securities Act. Yes ¨ No x
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act. Yes x No ¨
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 requirement for the past 90 days. Yes ¨ No ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that each registrant was required to submit and post such files). Yes x No ¨
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of the registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of thisForm 10-K or any amendment to thisForm 10-K. x
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” inRule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer ¨ Accelerated filer ¨ Non-accelerated filer x Smaller reporting company ¨
(Do not check if a smaller
reporting company)
Indicate by check mark whether the registrant is a shell company (as defined inRule 12b-2 of the Exchange Act). Yes ¨ No x
The common stock of the registrant is not publicly traded. Therefore, the aggregate market value is not readily determinable.
As of March 21, 2014, there were 1,000 shares of common stock, par value $.01 per share, of Visant Corporation outstanding (all of which are indirectly, beneficially owned by Visant Holding Corp.).
Documents incorporated by reference:None
The registrant has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding twelve months.
TABLE OF CONTENTS
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Annual Report on Form 10-K contains forward-looking statements including, without limitation, statements concerning the conditions in our industry, expectations with respect to future cost savings, our operations, our economic performance and financial condition, including, in particular, statements relating to our business and growth strategy and product development efforts. These forward-looking statements are not historical facts, but rather predictions and generally can be identified by use of statements that include such words as “may”, “might”, “will”, “should”, “estimate”, “project”, “plan”, “anticipate”, “expect”, “intend”, “outlook”, “believe” and other similar expressions that are intended to identify forward-looking statements and information. These forward-looking statements are based on estimates and assumptions by our management that, although we believe to be reasonable, are inherently uncertain and subject to a number of risks and uncertainties. These risks and uncertainties include, without limitation, those identified under, Part I, Item 1A.Risk Factors, in addition to those discussed elsewhere in this report.
The following list represents some, but not necessarily all, of the factors that could cause actual results to differ from historical results or those anticipated or predicted by these forward-looking statements:
| | • | | our substantial indebtedness and our ability to service the indebtedness; |
| | • | | our ability to implement our business strategy in a timely and effective manner; |
| | • | | competitive factors and pressures; |
| | • | | our ability to consummate acquisitions and dispositions on acceptable terms and to integrate acquisitions successfully and achieve anticipated synergies; |
| | • | | global market and economic conditions; |
| | • | | levels of customers’ advertising and marketing spending, including as may be impacted by economic factors and general market conditions; |
| | • | | fluctuations in raw material prices; |
| | • | | our reliance on a limited number of suppliers; |
| | • | | the seasonality of our businesses; |
| | • | | developments in technology and related changes in consumer behavior; |
| | • | | the loss of significant customers or customer relationships; |
| | • | | Jostens’ reliance on independent sales representatives; |
| | • | | our reliance on numerous complex information systems and associated security risks; |
| | • | | the amount of capital expenditures required at our businesses; |
| | • | | risks associated with doing business outside the United States; |
| | • | | the reliance of our businesses on limited production facilities; |
| | • | | actions taken by the U.S. Postal Service and changes in postal standards and their effect on our marketing services business, including as such changes may impact competition for our sampling systems; |
| | • | | environmental obligations and liabilities; |
| | • | | adverse outcome of pending or threatened litigation; |
| | • | | the enforcement of intellectual property rights; |
| | • | | the impact of changes in applicable law and regulations, including tax legislation; |
| | • | | the application of privacy laws and other related obligations and liabilities for our business; |
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| | • | | control by our stockholders; |
| | • | | changes in market value of the securities held in our pension plans; and |
| | • | | our dependence on members of senior management. |
We caution you not to place undue reliance on these forward-looking statements, and any such forward-looking statements are qualified in their entirety by reference to the following cautionary statements. All forward-looking statements speak only as of the date they are made, are based on current expectations and involve a number of assumptions, risks and uncertainties that could cause the actual results to differ materially from such forward-looking statements. We undertake no obligation to update publicly or revise any forward-looking statements in light of new information, future events or otherwise, except as required by law. Comparisons of results for current and prior periods are not intended to express any future trends or indications of future performance, unless expressed as such, and should only be viewed as historical data.
Available Information
We are subject to the informational requirements of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). We therefore file periodic reports and other information with the Securities and Exchange Commission (“SEC”). We make available free of charge on our Internet website athttp://www.visant.net our Annual Report onForm 10-K, Quarterly Reports onForm 10-Q and Current Reports onForm 8-K, and any amendments to those reports filed or furnished pursuant to Sections 13(a) or 15(d) of the Exchange Act that are filed with the SEC. These reports are available as soon as reasonably practicable after such material is electronically filed with, or furnished to, the SEC. From time to time, we may use our Internet website as a channel of distribution of material company information. Financial and other material information regarding us is routinely posted on our website and is readily accessible. The public may read and copy any materials we file with the SEC at the SEC’s Public Reference Room at 100 F Street, NE, Washington, DC 20549. Furthermore, the public may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. The reference to our website address does not constitute incorporation by reference of the information contained on the website, and the information contained on the website is not part of this document. In addition, the SEC maintains an Internet site athttp://www.sec.gov that contains periodic reports and other information regarding issuers that file electronically.
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PART I
Except where otherwise indicated or unless the context otherwise requires, any reference in this report to (1) the “Company”, “we”, “our”, or “us”, refers to Visant Corporation (“Visant”) together with its consolidated subsidiaries, (2) “Holdings”, “our parent” or “our parent company” refers to Visant Holding Corp. (“Holdco”) together with Visant and its consolidated subsidiaries, (3) “Visant Secondary” refers to Visant Secondary Holdings Corp., (4) “Jostens” refers to Jostens, Inc. and its subsidiaries, (5) “Lehigh” refers to The Lehigh Press LLC (formerly known as The Lehigh Press, Inc.), (6) “Arcade” refers to AKI, Inc. and its subsidiaries (other than Dixon), (7) “Dixon” refers to Dixon Direct LLC (formerly known as Dixon Direct Corp.), (8) “Neff” refers to Neff Holding Company together with Neff Motivation, Inc. and its subsidiaries, and (9) “Phoenix Color” refers to Phoenix Color Corp. and its subsidiaries. Visant Secondary holds 100% of the outstanding capital stock of Visant, and Holdco holds 100% of the outstanding capital stock of Visant Secondary. All references to a particular fiscal year are to the four fiscal quarters ended the Saturday nearest to December 31st.
Overview
We are a leading marketing and publishing services enterprise servicing the school affinity, direct marketing, fragrance, cosmetic and personal care sampling and packaging, and educational and trade publishing segments. Our parent company was created in October 2004 when affiliates of Kohlberg Kravis Roberts & Co. L.P. (“KKR”) and affiliates of DLJ Merchant Banking Partners III, L.P. (“DLJMBP III” and, together with KKR, the “Sponsors”) completed a series of transactions that combined Jostens, Von Hoffmann Corporation (“Von Hoffmann”) and Arcade (the “Transactions”). Visant was formed to create a platform of businesses with leading positions in attractive end market segments and to establish a highly experienced management team that could leverage a shared services infrastructure and capitalize on margin and growth opportunities. Since 2004, we have developed a unified marketing and publishing services organization with a leading and differentiated approach in each of our segments. Our management team has created and integrated central services and management functions and has reshaped the business to focus on the most attractive and highest growth market opportunities.
We sell our products and services to end customers through several different sales channels, including independent sales representatives and dedicated sales forces. Our sales and results of operations are impacted by a number of factors, including general economic conditions, seasonality, cost of raw materials, school population trends, the availability of school funding, product and service offerings and quality and price. Visant (formerly known as Jostens IH Corp.) was originally incorporated in Delaware in 2003.
Our business has expanded through a number of acquisitions. These acquisitions have most recently included the acquisition of the capital stock of SAS Carestia (“Carestia”) by Arcade on July 1, 2013. Headquartered in Grasse, France, Carestia is a producer of blotter cards, which are constructed for sampling fragrances, and other fragrance marketing solutions, as well as decorated packaging solutions.
On November 19, 2013, we announced that we had entered into a stock purchase agreement (the “Stock Purchase Agreement”) with American Achievement Group Holding Corp. (“American Achievement”) under which Jostens will acquire all of the outstanding equity interests in American Achievement, a provider of class rings, yearbooks, graduation products, achievement publications and affinity jewelry. American Achievement’s products are available through a variety of distribution methods, including direct sales to schools and students, national jewelry retailers, independent jewelry stores and mass merchandisers. Visant has guaranteed the payment and full performance of all obligations of Jostens under such agreement. The transaction is subject to regulatory review and other customary closing conditions.
We have demonstrated our ability over the last nine years since our inception to execute acquisitions and dispositions that have allowed us to complement and expand our core capabilities, accelerate into market segment adjacencies, as well as enabled us to divest non-core businesses and deleverage. We anticipate that we will continue to pursue this strategy of consummating complementary acquisitions to support expansion of our product offerings and services, including to address marketplace dynamics, developments in technology and changing consumer behaviors, broaden our geographic reach and capture opportunities for synergies, as well as availing ourselves of strategic opportunities and market conditions for transacting on businesses in the Visant portfolio.
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Our Segments
Our three reportable segments as of December 28, 2013 consisted of:
| | • | | Scholastic—provides services in conjunction with the marketing, sale and production of class rings and an array of graduation products and other scholastic affinity products to students and administrators primarily in high schools, colleges and other post-secondary institutions; |
| | • | | Memory Book—provides services in conjunction with the publication, marketing, sale and production of school yearbooks, memory books and related products that help people tell their stories and chronicle important events; and |
| | • | | Marketing and Publishing Services—provides services in conjunction with the development, marketing, sale and production of multi-sensory and interactive advertising sampling systems and packaging, primarily for the fragrance, cosmetic and personal care segments, and provides innovative products and related services to the direct marketing sector. The group also produces book components primarily for the educational and trade publishing segments. |
We experience seasonal fluctuations in our net sales and cash flow from operations, tied primarily to the North American school year. In particular, Jostens generates a significant portion of its annual net sales in the second quarter in connection with the delivery of caps, gowns and diplomas for spring graduation ceremonies and spring deliveries of school yearbooks, and a significant portion of its annual cash flow in the fourth quarter is driven by the receipt of customer deposits in our Scholastic and Memory Book segments. The net sales of our sampling and direct mail and commercial printed products have also historically reflected seasonal variations, and we generate a majority of the annual net sales in these businesses during the third and fourth quarters, including based on the timing of customers’ advertising campaigns which have traditionally been concentrated prior to the Christmas and spring holiday seasons. Net sales of textbook components are impacted seasonally by state and local schoolbook purchasing schedules, which commence in the spring and peak in the summer months preceding the start of the school year. The seasonality of each of our businesses requires us to allocate our resources to manage our manufacturing capacity, which often operates at full or near full capacity during peak seasonal demand periods. Based on the seasonality of our cash flow, we traditionally borrow under our revolving credit facility during the third quarter to fund general working capital needs during this period of time when schools are generally not in session and orders are not being placed, and repay the amount borrowed for general working capital purposes in the fourth quarter when customer deposits in the Scholastic and Memory Book segments are received and customers’ advertising campaigns in anticipation of the holiday season generally increase.
Our net sales include sales to certain customers for whom we purchase paper. The price of paper, a primary material across most of our products and services, has been volatile over time and may cause swings in our net sales and cost of sales. We generally are able to pass on increases in the cost of paper to our customers across most of our product lines at the time we are impacted by such increases.
The price of gold and other precious metals has been highly volatile since 2009, and we anticipate continued volatility in the price of gold for the foreseeable future driven by numerous factors, such as changes in supply and demand and investor sentiment. The volatility of metal prices has impacted, and could further impact, our jewelry sales metal mix. We have seen a continuing shift in jewelry metal mix from gold to lesser priced metals over the past several years, which we believe is in part attributable to the impact of significantly higher precious metal costs on our jewelry prices. To mitigate the continued volatility of precious metal costs and the impact on our manufacturing costs, we have entered into purchase commitments for gold which we believe will cover our needs for gold for fiscal 2014.
The continued uncertainty in market conditions and excess capacity that exists in the print and related services industry, as well as the variety of other advertising media with which we compete, have amplified competitive and pricing pressures, which we anticipate will continue for the foreseeable future. We continue to see the impact of restrictions on school budgets, which affects spending at the state and local levels, resulting in reduced spending for our Memory Book, Scholastic and elementary/high school publishing services products and services and heightened pricing pressure on our core Memory Book products and services. The continued cautious consumer spending environment also contributes to more constrained levels of spending on purchases in our Memory Book and Scholastic segments made directly by the student and parent. Funding constraints have impacted textbook adoption
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cycles, which are being extended in many states due to fiscal pressures, continuing to affect orders being placed by our Publishing Services customers and volume in our elementary/high school publishing services products and services. Trade book publishing has been impacted by the shift towards digital books, which has negatively impacted our publishing services business in terms of fewer printed copies of books as well as shorter print runs. To address changes in technology, consumer behavior and user preferences, we have continued to diversify, expand and improve our product and service offerings and the manner in which we sell our products and services, including through improved e-commerce tools.
We seek to distinguish ourselves based on our capabilities, innovative service offerings to our customers, quality and organizational and financial strength. In addition, to address the dynamics impacting our businesses, we have continued to implement efforts to reduce costs and drive operating efficiencies, including through the restructuring and integration of our operations and the rationalization of sales, administrative and support functions. We expect to initiate additional efforts focused on cost reduction and containment to address continued challenging marketplace conditions as well as competitive and pricing pressures demanding innovation and a lower cost structure.
For additional financial and other information about our operating segments, see Note 16,Business Segments, to our consolidated financial statements included elsewhere herein.
Scholastic
We are one of the leading providers of services in conjunction with the marketing, sale and production of class rings and an array of graduation products, such as caps, gowns, diplomas and announcements, graduation-related accessories and other scholastic affinity products. In the Scholastic segment, Jostens markets and sells through an in school channel, under which we primarily serve U.S. high schools, colleges and universities, marketing and selling products to students and administrators. Jostens relies primarily on a network of independent sales representatives to sell its scholastic products in school. However, Jostens also markets and sells its products through a retail channel (rings) and online. We provide a high level of customer service in the marketing and sale of class rings and related jewelry products and certain other graduation products. We also provide ongoing warranty service on our class and affiliation rings. In addition to its class ring offerings, Jostens also designs, manufactures, markets and sells championship rings for high schools and colleges and for professional sports teams and affinity rings for a variety of specialty markets. We also market, manufacture and sell an array of additional scholastic products, including chenille letters, varsity jackets, mascot mats, plaques and sports apparel in schools and to dealers through our Neff subsidiary.
Memory Book
Through our Jostens subsidiary, we are one of the leading sales and marketing organizations providing services in conjunction with the publication, marketing, sale and production of memory books and related products that help people tell their stories and chronicle important events. Jostens’ strong brand recognition is deeply rooted in its school-by-school relationships and in its consistent ability to deliver high quality products and services and innovate to meet market demands. Jostens primarily services U.S. high schools, colleges, universities, elementary schools and middle schools. Jostens generates the majority of its revenues from high school accounts. Jostens’ independent sales representatives and technical support employees assist students and faculty advisers with the planning and layout of yearbooks, including through the provision of online layout and editorial tools to assist the schools in the publication of the yearbook. With a new class of students each year and periodic faculty advisor turnover, Jostens’ independent sales representatives and customer service employees are the main point of continuity for the yearbook production process on a year-to-year basis.
Marketing and Publishing Services
The Marketing and Publishing Services segment includes operations in sampling, direct marketing and publishing services. Our sampling operations provide services in conjunction with the development, marketing, sale and production of multi-sensory and interactive advertising sampling systems and packaging, primarily for the fragrance, cosmetic and personal care segments. With over a 100-year history, Arcade pioneered our leading ScentStrip® product in 1980. Since then, we have developed an extensive portfolio of proprietary, patented and patent-pending technologies that can be incorporated into various conventional and online marketing programs designed to reach the consumer at home or in-store, including magazine and catalog inserts, statement enclosures,
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blow-ins, direct mail, direct sell and point-of-sale materials and gift-with-purchase/purchase-with-purchase programs. We also market, manufacture and sell highly decorated packaging solutions to the cosmetic and consumer products industries through the Color Optics operating division of Arcade and through Carestia. Our direct marketing operations specialize in high-quality, in-line printed products and can accommodate large marketing projects with a wide range of dimensional printed products and in-line finishing production, data processing and mailing services. Our products range from conventional direct marketing pieces to integrated offerings. Our personalized imaging capabilities can offer individualized messages to each recipient within a geographical area or demographic group for targeted marketing efforts. Our publishing services business produces book components, including book covers and jackets, and employs specialized techniques to create highly decorated covers.
Products
The following table presents our revenue by product.
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | In thousands | | For the year ended | |
| | | Revenue by product | | 2013 | | | % | | | 2012 | | | % | | | 2011 | | | % | |
Memory Book: | | Memory book and yearbook products and services | | $ | 330,797 | | | | 29.3 | % | | $ | 345,281 | | | | 29.9 | % | | $ | 362,380 | | | | 29.8 | % |
| | | | | | | |
Scholastic: | | Graduation and affinity products | | | 244,623 | | | | 21.7 | % | | | 253,341 | | | | 21.9 | % | | | 261,849 | | | | 21.5 | % |
| | Class ring and jewelry products | | | 187,272 | | | | 16.6 | % | | | 192,449 | | | | 16.7 | % | | | 212,818 | | | | 17.5 | % |
| | | | | | | |
| Marketing & Publishing Services: | | Sampling products and services | | | 194,844 | | | | 17.3 | % | | | 192,195 | | | | 16.6 | % | | | 174,831 | | | | 14.4 | % |
| | Book components | | | 91,315 | | | | 8.1 | % | | | 94,788 | | | | 8.2 | % | | | 108,784 | | | | 8.9 | % |
| | Direct marketing products and services | | | 78,852 | | | | 7.0 | % | | | 77,288 | | | | 6.7 | % | | | 97,130 | | | | 8.0 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Total revenue | | $ | 1,127,703 | | | | 100.0 | % | | $ | 1,155,342 | | | | 100.0 | % | | $ | 1,217,792 | | | | 100.0 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
Competition
Scholastic
Jostens’ competition in class rings consists of firms such as Herff Jones, Inc. (“Herff Jones”), American Achievement, which markets the Balfour and ArtCarved brands, and National Recognition Products (“NRP”), as well as a host of other companies, independent distributors, retailers and jewelry stores and online companies. Herff Jones and NRP distribute their ring products primarily within schools and online, while American Achievement distributes its ring products through multiple distribution channels including in school, online, independent and jewelry chain retailers, and mass merchandisers. Jostens distributes its ring products primarily within schools and through online offerings, and also maintains a retail channel. In the marketing and sale of other scholastic affinity products, we compete with a number of in school competitors that offer a suite of scholastic products, as well as numerous other competitors that offer one or more of the affinity and graduation products we market and sell, including through online and retail channels. Our customers make their buying decisions based on price, service, on-time delivery, product quality and product offerings, with particular importance given to assuring timely delivery of quality products.
Memory Book
In the sale of yearbooks and memory books to schools and students, Jostens competes primarily with American Achievement (which markets under the Taylor Publishing brand), Herff Jones, Walsworth Publishing Company, Lifetouch Inc. and Friesens in school, as well as a host of other companies providing online memory book offerings. Each competes on the basis of price, service, quality, content creation tools, product customization and personalization, turnaround and on-time delivery. Customization and personalization capabilities, combined with creation tools and customer service, are important distinguishing factors in yearbook production.
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Marketing and Publishing Services
The Marketing and Publishing Services business competes primarily with Orlandi, Inc., Ileos, Klocke, Marietta and a number of more regional competitors in the fragrance and cosmetic sampling business. Our sampling system business also competes with numerous manufacturers of sampling products such as miniatures, vials, blotters, packets, sachets, blister packs and scratch and sniff products. The packaging portion of our Marketing and Publishing Services business competes with a host of packaging manufacturers, including Arkay, Hub Folding Carton and Curtis Packaging as well as regional competitors, but we believe we distinguish ourselves based on our highly customized capabilities and offerings as well as proprietary offerings through coordination with our sampling business. Our direct marketing products and services compete with numerous other marketing and advertising venues for limited marketing dollars that customers have available to allocate to various types of advertising, marketing and promotional efforts such as television and in-store promotions as well as other printed products produced by numerous national and regional printers and more recently, online offerings. We seek to differentiate ourselves based on our capabilities, innovative products and services, quality and organizational and financial strength. We compete primarily with Coral Graphics Services, Inc., RR Donnelley, Quad Graphics, Courier, Worzalla Publishing Company and Lake Books in the production and sale of book covers and components.
Raw Materials
The principal raw materials that Jostens purchases are gold and other precious metals, paper and precious, semi-precious and synthetic stones. The cost of precious metals and precious, semi-precious and synthetic stones is affected by market volatility. To manage the risk associated with changes in the prices of precious metals, we may from time to time enter into forward contracts to purchase gold, platinum and silver based upon the estimated quantity needed to satisfy projected customer demand. The price of gold and other precious metals has been highly volatile since 2009, and we anticipate continued volatility in the price of gold for the foreseeable future driven by numerous factors, such as changes in supply and demand and investor sentiment. The volatility of metal prices has impacted, and could further impact, our jewelry sales metal mix. Jostens purchases substantially all precious, semi-precious and synthetic stones from a single supplier located in Germany, whom we believe is also a supplier to Jostens’ major class ring competitors in the United States.
The principal raw materials purchased by the Marketing and Publishing Services business consist of paper, ink and adhesives. Paper costs generally flow through to the customer as paper is ordered for specific jobs, and we do not take significant commodity risk on paper. Our sampling system business utilizes specific grades of paper, foil and other laminates, which are each available from only a limited number of suppliers, which could affect availability and other terms. We enter into contractual arrangements with suppliers to obtain purchasing efficiencies on key raw materials.
We continue to monitor the impact of changes and volatility in the price of crude oil and other energy costs, which impact our ink and substrate suppliers and may impact our logistics and manufacturing costs. We believe that contractual arrangements with our logistics providers should allow us to continue to manage our logistics costs despite increases in energy prices. The impact of higher energy prices, particularly sharp volatility, however, may impact our operating costs and those of our customers.
Matters pertaining to our market risks are set forth under Part II, Item 7A.Quantitative and Qualitative Disclosures about Market Risk.
Backlog
Because of the nature of our business, orders are generally filled within a few months from the time of placement. However, Jostens typically obtains contracts in the second quarter of one year for student yearbooks to be fulfilled in the second and third quarters of the subsequent year. Orders for yearbooks under these contracts are primarily placed during the third and fourth quarters. Often the total revenue pertaining to a yearbook order is not established at the time of the order because the content of the book is not final. Subject to the foregoing qualifications, we estimate that the aggregate backlog of orders, related primarily to our Memory Book and Scholastic businesses, was approximately $366.8 million and $396.3 million as of the end of fiscal years 2013 and 2012, respectively. We expect most of the 2013 backlog to be confirmed and filled during the remainder of 2014.
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Environmental
Our operations are subject to a variety of federal, state, local and foreign laws and regulations governing emissions to air, discharge to water, the generation, handling, storage, transportation, treatment and disposal of hazardous substances and other materials, and employee health and safety matters, and from time to time, we may be involved in remedial and compliance efforts.
Intellectual Property
Our businesses rely on a combination of patents, copyrights, trademarks, confidentiality and licensing agreements and unpatented proprietary know-how and trade secrets to establish and protect the intellectual property rights we employ in our businesses. We also have trademarks registered in the United States and in jurisdictions around the world. We have a number of registered patents in the United States and abroad covering certain of the proprietary processes and products particularly as used in our Memory Book and Marketing and Publishing Services segments, and we have submitted patent applications for certain other manufacturing processes and products. Many of our processes and products and services are not, however, covered by any patent or patent application. As a result, our businesses may be adversely affected by competitors who independently develop equivalent or superior technologies, know-how, trade secrets or production methods or processes as compared to those employed by us. We are involved in proceedings from time to time in the course of our businesses to protect and enforce our intellectual property rights, and third parties from time to time may initiate proceedings against us asserting that our products or services infringe or otherwise violate their intellectual property rights.
Our company has ongoing research and development efforts and expects to seek additional intellectual property protection in the future covering results of its research and development. Pending patent applications filed by us may not result in patents being issued. Furthermore, the patents that we use in our businesses will expire over time. Similarly, patents now or hereafter owned by us may not afford protection against competitors with similar or superior technology. Our patents may be infringed upon, designed around by others, challenged by others or held to be invalid or unenforceable.
Employees
As of December 28, 2013, we had approximately 4,247 full-time employees. As of December 28, 2013, approximately 16 of Jostens’ full-time employees were represented under a collective bargaining agreement that expires in June 2016, and approximately 264 total full-time employees from our Marketing and Publishing Services segment were represented under collective bargaining agreements that expire in March 2015, October 2015 and December 2015. We routinely rely on seasonal employees to augment our workforce to meet our regular seasonal demand. Many of our seasonal employees return year after year, allowing us to enjoy the benefits of a well-trained seasonal workforce.
We consider our relations with our employees to be satisfactory.
International Operations
During 2013, our foreign sales were derived primarily from operations in Canada, Europe and Brazil. Local taxation and regulatory requirements, import duties, fluctuation in currency exchange rates and restrictions on expatriation of funds are among the risks attendant to our foreign operations.
For information on net sales from external customers attributed to the United States and outside the United States and on long-lived assets located in and outside the United States, see Note 16,Business Segments, to our consolidated financial statements included elsewhere herein.
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Our consolidated financial results of operations, financial condition and cash flows may be adversely affected by various risks. These risks include, but are not limited to, the principal factors listed below and other matters set forth in this Annual Report on Form 10-K. You should carefully consider all of these risks.
Risks Relating to Our Business
If we fail to implement our business strategy, our business, financial condition and results of operations could be materially and adversely affected.
Our future financial performance and success are dependent in large part upon our ability to implement our business strategy successfully. Our business strategy envisions several initiatives, including marketing and selling strategies to drive growth, moving into new product and service offerings and geographies, enhancing our core product and service offerings and continuing to improve operating efficiencies and asset utilization. We may not be able to implement our business strategy successfully or achieve the benefits of our business plan. If we are unable to do so, our long-term growth and profitability may be adversely affected. Even if we are able to implement some or all of the initiatives of our business plan successfully, our operating results may not improve to the extent we expect, or at all.
Implementation of our business strategy could also be affected by a number of factors beyond our control, such as increased competition, changes in demand and buying habits, legal and regulatory developments, conditions in the global economy and in the credit and capital markets, developments within the primary industries we serve and increased operating costs or expenses. In addition, to the extent we have misjudged the nature and extent of industry trends or our competition, we may have difficulty achieving our strategic objectives. We may also decide to alter or discontinue certain aspects of our business strategy at any time. Any failure to successfully implement our business strategy may adversely affect our business, results of operations, cash flows and financial condition and thus our ability to service our indebtedness.
We are subject to direct competition in each of our respective industries which may have a material and adverse effect on our business, financial condition and results of operations.
We face competition in our businesses from a number of companies, some of which have substantial financial and other resources. Our future financial performance will depend, in large part, on our ability to maintain an advantageous market position. It is possible that certain of our competitors may be able to adapt more quickly to new or emerging technologies and changes in customer preferences or to devote greater resources to the promotion and sale of their products than we can. We expect to meet significant competition from existing competitors with entrenched positions as well as from new entrants and channels of competition, both with respect to our existing product and service lines and new products and services. Further, competitors might expand their product or service offerings, either through internal product development or acquisitions of our direct competitors. These competitors could introduce products or services or establish prices for their products or services in a manner that could adversely affect our ability to compete or could otherwise result in downward pressure on pricing. To maintain a competitive advantage, we may need to increase our investment in product and service development, manufacturing capabilities and sales and marketing and will need to continue to improve our cost structure and operating efficiencies. Increases in competition could have a material and adverse effect on our business, results of operations, cash flows and financial condition.
We may not be able to consummate additional acquisitions and dispositions on acceptable terms or at all. Furthermore, we may not be able to integrate acquisitions successfully and achieve anticipated synergies, and the acquisitions and dispositions we pursue could disrupt our business and harm our financial condition and operating results.
As part of our business strategy, we expect to continue to pursue strategic acquisitions and dispositions in order to benefit from synergies, leverage our existing infrastructure, expand our geographic reach, broaden our product and service offerings and focus on our higher growth businesses. Acquisitions and dispositions could involve a number of risks and present financial, managerial and operational challenges, including:
| | • | | adverse developments with respect to our results of operations as a result of an acquisition which may require us to incur charges and/or substantial debt or liabilities; |
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| | • | | disruption of our ongoing business and diversion of resources and management attention from existing businesses and strategic matters; |
| | • | | difficulty with assimilation and integration of operations, technologies, products, personnel or financial or other systems; |
| | • | | increased expenses, including compensation expenses resulting from newly hired employees and/or workforce integration and restructuring; |
| | • | | disruptions in relationships with current and new personnel, customers and suppliers; |
| | • | | integration challenges related to implementing or improving internal controls, procedures and/or policies at a business that prior to the acquisition lacked the same level of controls, procedures and/or policies; |
| | • | | the assumption of certain known and unknown liabilities of the acquired business; |
| | • | | regulatory challenges or resulting delays; and |
| | • | | potential disputes (including with respect to indemnification claims) with the buyers of disposed businesses or with the sellers of acquired businesses, technologies, services or products. |
We may not be able to consummate acquisitions or dispositions on favorable terms or at all. Our ability to consummate acquisitions will be limited by our ability to identify appropriate acquisition candidates, to negotiate acceptable terms for purchase and our access to financial resources, including available cash and borrowing capacity. In addition, we could experience financial or other setbacks if we are unable to realize, or are delayed in realizing, the anticipated benefits resulting from an acquisition, if we incur greater than expected costs in achieving the anticipated benefits or if any material business that we acquire or invest in encounters problems or liabilities which we were not aware of or were more extensive than believed.
On November 19, 2013, we entered into a Stock Purchase Agreement with American Achievement under which, subject to regulatory review and other customary closing conditions, Jostens will acquire all of the outstanding equity interests in American Achievement at closing. Visant has guaranteed the payment and full performance of all obligations of Jostens under such agreement. Even if we successfully close the acquisition, we may not be able to realize anticipated synergies and opportunities. If anticipated synergies and opportunities are not realized, are materially delayed or require a materially greater outlay of financial and human resources than expected, our business, operating results, financial condition and ability to meet the covenants of our indebtedness could be harmed.
We have made certain assumptions relating to the acquisition of American Achievement in our forecasts that may prove to be materially inaccurate.
We have made certain assumptions relating to the expected level of cost savings, synergies and associated costs of the acquisition of American Achievement. Our assumptions relating to the expected level of cost savings, synergies and associated costs of the acquisition may be inaccurate based on the information available to us, including as the result of the failure to realize the expected benefits of the acquisition on the schedule anticipated or at all, unexpected disruptions, higher than expected transaction and integration costs and unknown liabilities, as well as general economic and business conditions that may adversely affect the combined company following the completion of the acquisition.
Economic weakness and uncertainty, as well as the effects of these conditions on our customers’ and suppliers’ businesses and their demand for our products and services, could have an adverse effect on our business and results of operations.
Our business and operating results continue to be affected by global economic conditions and, in particular, conditions in our customers’ and suppliers’ businesses and the market segments they serve. We have experienced and may continue to experience reduced demand for certain of our products and services. As a result of uncertainty about global economic conditions, including factors such as unemployment, bankruptcies, financial market volatility, sovereign debt issues, government budget deficits and other factors which continue to affect the global economy, our customers and suppliers may experience further deterioration of their businesses, suffer cash flow shortages or file for bankruptcy. In turn, existing or potential customers may delay or decline to purchase our products and related services, and our suppliers and customers may not be able to fulfill their obligations to us in a timely fashion.
Revenues, particularly in our Marketing and Publishing Services business, are dependent on the level of marketing and advertising spending by our customers. Demand for marketing and advertising tends to correlate with changes in the level of economic activity in the market segments our customers serve, and therefore continued weakness and uncertainty in the pace and extent of recovery in the global economy could negatively affect the demand for the products and related services that we provide these customers. Our educational textbook cover and component business depends on continued government funding for educational spending which impacts demand by our customers and may be affected by changes in or continued restrictions on local, state and/or federal funding and school budgets. Customers may view the purchase of certain of our Memory Book and Scholastic products as discretionary. As a result, a
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reduction in consumer discretionary spending or disposable income and/or adverse trends in the general economy (and consumer perceptions of those trends) may affect us more significantly than other industries. In addition, customer difficulties could result in increases in bad debt write-offs and increases to our allowance for doubtful accounts receivable. Further, our suppliers may experience similar conditions as our customers, which may impact their viability and their ability to fulfill their obligations to us. Negative changes in the global economy, including as a result of political unrest, a slow economic recovery or a prolonged period of uncertainty in the economic environment, could materially adversely affect our business, results of operations, cash flows and financial condition.
We are subject to fluctuations in the cost and availability of raw materials and the possible loss of suppliers.
We are dependent upon the availability of raw materials to produce our products. The principal raw materials that Jostens purchases are gold and other precious metals, paper and precious, semi-precious and synthetic stones. The price of gold and other precious metals has been highly volatile since 2009, and we anticipate continued volatility in the price of gold for the foreseeable future driven by numerous factors, such as changes in supply and demand and investor sentiment. From time to time, we may enter into forward contracts to purchase gold, platinum and silver based upon the estimated quantity needed to satisfy projected customer demand. The volatility of metal prices has impacted, and could further impact, our jewelry sales metal mix. Our Marketing and Publishing Services business primarily uses paper, ink and adhesives. Similarly, our sampling system business utilizes specific grades of paper, foil and other laminates in producing its sampling products. The price and availability of these raw materials are affected by numerous factors beyond our control. These factors include:
| | • | | the level of consumer demand for these materials and downstream products containing or using these materials; |
| | • | | the supply of these materials and the impact of industry consolidation; |
| | • | | foreign government regulation and taxes; |
| | • | | volatility in the capital and credit markets; |
| | • | | environmental conditions and regulations; and |
| | • | | political and global economic conditions. |
Any material increase in the price of these raw materials could adversely impact our cost of sales. When these fluctuations result in significantly higher raw material costs, our operating results are adversely affected to the extent we are unable to pass on these increased costs to our customers or to the extent they materially affect customer buying habits. Therefore, significant fluctuations in prices for gold, paper or precious, semi-precious and synthetic stones and other of our critical materials could have a material adverse effect on our business, results of operations, cash flows and financial condition.
We rely on a limited number of suppliers for certain of our raw materials and outside services. Global market and economic conditions may affect our suppliers and impact their viability and their ability to fulfill their obligations to us. Jostens purchases substantially all of its precious, semi-precious and synthetic stones from a single supplier located in Germany. We believe this supplier provides stones to almost all of the class ring manufacturers in the United States. If access to this supplier were lost or curtailed, we may not be able to secure alternative supply arrangements in a timely and cost-efficient fashion. Similarly, all of our ScentStrip® sampling systems, which account for a substantial portion of net sales from our sampling system business, utilize specific grades of paper for which we rely primarily on two domestic suppliers, with whom we do not have written supply agreements in place. A loss of this supply of paper could
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have a material adverse effect on our sampling system business, results of operations, cash flows and financial condition to the extent that we are unable to obtain the specific paper in sufficient quantities from other suppliers or elsewhere. Moreover, certain of our other primary label sampling systems utilize certain foil and other laminates that are presently sourced primarily from one supplier, with whom we do not have a written supply agreement in place. A significant deterioration in or loss of supply could have a material adverse effect on our business, results of operations, cash flows, financial condition and competitive advantage.
Certain of our businesses are dependent on fuel and natural gas in their operations. Prices of fuel and natural gas have shown volatility over time and in particular as of late. Higher prices and volatility could impact our operating expenses.
Any failure to obtain raw materials and certain services for our business on a timely basis at an affordable cost, or any significant delays or interruptions of supply, could have a material adverse effect on our business, results of operations, cash flows and financial condition.
We are subject to seasonality in our businesses tied to the North American school year and the inherent seasonality of our customers’ businesses.
We experience seasonal fluctuations in our net sales and cash flow from operations tied primarily to the North American school year. We recorded approximately 40% of our annual net sales for fiscal year 2013 during the second quarter of our fiscal year and a majority of our annual cash flow from operations during the fourth quarter of our fiscal year. In particular, Jostens generates a significant portion of its annual net sales in the second quarter in connection with the delivery of caps, gowns and diplomas for spring graduation ceremonies and spring deliveries of school yearbooks, and a significant portion of its annual cash flow in the fourth quarter is driven by the receipt of customer deposits in our Scholastic and Memory Book segments. The net sales of our sampling and direct mail and commercial printed products have also historically reflected seasonal variations, and we generate a majority of the annual net sales in these businesses during the third and fourth quarters, including based on the timing of customers’ advertising campaigns which have traditionally been concentrated prior to the Christmas and spring holiday seasons. Net sales of textbook components are impacted seasonally by state and local schoolbook purchasing schedules, which commence in the spring and peak in the summer months preceding the start of the school year. Significant amounts of inventory are acquired by publishers prior to those periods in order to meet customer delivery requirements.
The seasonality of each of our businesses requires us to manage our working capital carefully over the course of the year. If we fail to manage our working capital effectively in response to seasonal fluctuations, we may be unable to offset the results from any such period with results from other periods, which could impair our ability to service our debt. These seasonal fluctuations also require us to allocate our resources to manage our manufacturing capacity, which often operates at full or near full capacity during peak seasonal demand periods. If we fail to monitor production and distribution accurately during these peak seasonal periods and are unable to satisfy our customers’ delivery requirements, we could jeopardize our relationships with our customers.
A substantial decrease or interruption in business from our significant customers could adversely affect our business, financial condition and results of operations.
We have significant customer concentration within our Marketing and Publishing Services segment. Our top five customers in our sampling system business, for example, represented approximately 28% of our net sales within our Marketing and Publishing Services segment for 2013. We do not generally have long-term contracts for committed volume with our sampling customers. Our top five customers in our cover and component business represented approximately 15% of our net sales within our Marketing and Publishing Services segment for 2013. Customers in our cover and component business include the three major educational textbook publishers, Pearson, Houghton Mifflin Harcourt and McGraw-Hill, all of whom have written agreements with us for committed volume. Any significant cancellation, deferral or reduction in the quantity or type of product sold to these principal Marketing and Publishing Services customers or a significant number of smaller customers, including as a result of our failure to perform, the impact of economic weakness and challenges on their businesses, a change in buying habits, further industry consolidation or the impact of the shift to alternative methods of content delivery to customers, could have a material adverse effect on the business, results of operations, cash flows and financial condition of our Marketing and Publishing Services business.
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Many of our customer sales arrangements are conducted by purchase order on an order-by-order basis or are terminable at will at the option of either party. A substantial decrease or interruption in business from our significant customers could result in write-offs or in the loss of future business and could have a material adverse effect on our business, results of operations, cash flows and financial condition.
Jostens relies on relationships with schools, school administrators and students for the sale of its products. Jostens’ failure to deliver high quality products in a timely manner or failure to respond to changing consumer preferences could jeopardize its customer relationships. Significant customer losses at our Jostens business could have a material adverse effect on our business, results of operations, cash flows and financial condition.
Changes in Jostens’ relationships with its independent sales representatives may adversely affect our business, financial condition and results of operations.
The success of our Jostens business is highly dependent upon the efforts and abilities of Jostens’ network of independent sales representatives. Many of Jostens’ relationships with customers and schools are cultivated and maintained by its independent sales representatives. Jostens’ independent sales representatives typically operate under one- to three-year contracts for the sale of Jostens products and services. These contracts are generally terminable upon 90 days’ notice from the end of the current contract year and contain post-termination restrictive covenants. Jostens’ sales representatives may fail to renew their contracts with Jostens due to factors outside of our control. If Jostens were to experience a significant change in the terms of its relationship with, or loss of, its independent sales representatives or material disruption or disputes arising out of the engagement or termination of its representatives, such an occurrence could have a material adverse effect upon our business, results of operations, cash flows and financial condition.
Our businesses depend on numerous complex information systems, and any failure to successfully maintain and secure these systems or implement new systems could materially harm our operations.
Our businesses depend upon numerous information systems to collect, process, transmit and store operational, financial and customer information and to support a variety of business processes and activities. We are also increasingly dependent on our information technology systems for business transactions with our customers, including ordering and e-commerce efforts. Security breaches and other disruptions to our information systems could interfere with our operations, and could compromise information that we collect, process, transmit or store. We may not be able to enhance existing information systems or implement new information systems that can successfully integrate our business efforts. Furthermore, we may experience unanticipated delays, complications and expenses in acquiring licenses for certain systems or implementing, integrating and operating such systems. In addition, our information systems may require modifications, improvements or replacements that may involve substantial expenditures and may necessitate interruptions in operations during periods of implementation. Implementation of these systems is further subject to our ability to access and license certain proprietary software in certain cases and in other cases the availability of information technology and other skilled personnel to assist us in developing and implementing systems. Any failure to implement, maintain and secure commercially viable information systems successfully at our businesses could have an adverse effect on our business, results of operations, cash flows and financial condition.
We may be required to make significant capital expenditures for our businesses in order to remain technologically and economically competitive.
We are required to invest capital in order to expand and update our capabilities in our businesses. We expect our capital expenditure requirements in the Jostens business to continue to relate primarily to capital improvements and growth initiatives, including digital and e-commerce initiatives and information technology. Our capital expenditure requirements in the Marketing and Publishing Services segment primarily relate to efforts to maintain efficiency and innovation and technological advancement in order to remain competitive. Changing competitive conditions or the emergence of any significant technological advances utilized by competitors could require us to invest significant capital in additional production technology in order to remain competitive. If we are unable to fund any such investment, including as a result of constraints in the availability of capital, or otherwise fail to invest in new technologies, our business, results of operations, cash flows and financial condition could be materially and adversely affected.
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Our businesses are subject to changes arising from developments in technology and changes in consumer behavior facilitated by these developments that could render our products obsolete or reduce product consumption.
Emerging technologies, including those involving the Internet, social networking and alternative methods of content delivery, have resulted in new distribution channels and new products and services being provided that compete with our products and services. As a result of these factors, our ability to compete effectively and our growth and future financial performance depend on our ability to develop and market new products and services to address the new technologies and distribution channels, while enhancing existing products, services and distribution channels, in order to incorporate the latest technological advances and accommodate changing customer and consumer preferences and demands, including through the use of the Internet, social networking or alternative methods of content delivery. Accepted methods for delivery of media content that serve as an alternative to obtaining products or services from us may impact our business. Alternative content delivery that replaces traditional print formats, such as printed magazines and books, may also impact demand for products and services in our Marketing and Publishing Services segment which are designed for use in traditional print formats.
If we fail to anticipate or respond adequately to changes in technology, consumer behavior and user preferences and demands or are unable to finance the capital expenditures necessary, or develop an ability to respond to such changes, our business, results of operations, cash flows and financial condition could be materially and adversely affected.
There are risks associated with doing business outside the United States.
Certain of our businesses sell products and services outside the United States, and a number of our businesses have expanded or have contemplated to expand their physical operations outside the United States. Accordingly, we are subject to increased risks inherent in conducting business outside the United States, including the impact of complying with varying local economic, governmental, political, regulatory, tax and currency requirements which are often complex and subject to variation and unexpected change, interactions with third parties in the countries in which we operate, labor practices and difficulties in staffing and managing foreign operations and the risks and costs associated with the importation and exportation of goods. A determination that our operations or activities are not, or were not, in compliance with applicable laws or regulations, including those of the respective host country, could result in legal proceedings and the imposition of substantial fines, the interruption of business and the loss of supplier, vendor or other third-party relationships, and as a result our results of operations could be adversely affected.
Any disruption at our principal production facilities could adversely affect our results of operations.
We are dependent on certain key production facilities. Our sampling systems, book component, jewelry and graduation products are each produced in dedicated facilities. Any disruption of production capabilities due to unforeseen events at any of our key dedicated facilities could adversely affect our business, results of operations, cash flows and financial condition.
Actions taken by the U.S. Postal Service, including the approval of alternative sampling products for use in periodicals without a postal surcharge, could have a material adverse effect on our business.
Postal costs are a significant component of many of our marketing and advertising customers’ cost structures. Postal rate and format or postal system changes can influence the number of pieces and types of products that our customers mail. We do not directly bear the cost of higher postal rates and changes in postal classifications. Demand for products distributed by mail, however, could be adversely affected by continued increases in postal rates or further changes in the postal system. Any resulting decline in the volume of products mailed would have an adverse effect on our business.
Sampling products are subject to regulation by the U.S. Postal Service (the “USPS”) for inclusion in periodicals mailed at periodical postage rates. Our USPS-approved “flat” sampling systems have historically enjoyed significant advantage over alternative sampling devices, such as miniatures, vials, packettes, sachets and blisterpacks, because the inclusion of these alternative products in periodicals may not be viable for mailing or result in an increase from periodical postage rates to the higher third-class rates for a periodical’s entire circulation. Periodical sampling inserts delivered to consumers through the USPS are currently an important part of our sampling business. In 2010, the USPS approved certain alternative types of sampling products such as packettes for use in periodicals without requiring a postal surcharge, subject to the samples meeting certain conditions and restrictions, including with respect to combined weight, structure and placement in the periodical. We have not seen any impact on our business as a result of the change
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in standards and believe that the attributes of our advanced sampling technology and “flat” sampling devices continue to have competitive advantages over such other sampling devices. If such alternative sampling devices were to have widespread acceptance for mailing in periodicals or if the USPS were to make additional modifications to postal standards negatively affecting our sampling products, however, our sampling business, results of operations, cash flows and financial condition could be adversely affected.
A deterioration in labor relations or labor availability could have an adverse impact on our operations.
As of December 28, 2013, we had approximately 4,247 full-time employees. As of December 28, 2013, approximately 16 of Jostens’ full-time employees were represented under a collective bargaining agreement that expires in June 2016, and approximately 264 total full-time employees from our Marketing and Publishing Services segment were represented under collective bargaining agreements that expire in March 2015, October 2015 and December 2015. We routinely rely on seasonal employees to augment our workforce to meet our regular seasonal demand. Many of our seasonal employees return year after year, allowing us to enjoy the benefits of a well-trained seasonal workforce.
We may not be able to negotiate future labor agreements on satisfactory terms. If any of the employees covered by the collective bargaining agreements were to engage in a strike, work stoppage or other slowdown, we could experience disruptions to our operations and/or higher ongoing labor costs, which could adversely affect our business, results of operations, cash flows and financial condition. In addition, if other of our employees were to become unionized, we could experience further disruptions to our operations and/or higher ongoing labor costs, which could adversely affect our business, results of operations, cash flows and financial condition. Given the seasonality of our businesses, we utilize a high percentage of seasonal and temporary employees to maximize efficiency and manage our costs. If these seasonal or temporary employees were to become unavailable to us on acceptable terms, we may not be able to find replacements in a timely or cost effective manner, which could adversely impact our business, financial condition and results of operations.
We are subject to environmental obligations and liabilities that could impose substantial costs upon us and may adversely affect our financial results and our ability to service our debt.
Our operations are subject to a variety of federal, state, local and foreign laws and regulations governing emissions to air, discharge to water, the generation, handling, storage, transportation, treatment and disposal of hazardous substances and other materials, and employee health and safety matters.
Also, as an owner and operator of real property and a generator of hazardous substances, we may be subject to environmental cleanup liability, regardless of fault, pursuant to the Comprehensive Environmental Response, Compensation and Liability Act or analogous state laws, as well as to claims for harm to health or property or for natural resource damages arising out of contamination or exposure to hazardous substances. Some of our current or past operations have involved metalworking and plating, printing and other activities that have resulted in or could result in environmental conditions giving rise to liabilities.
We are subject to risks that our intellectual property may not be adequately protected, and we may be adversely affected by the intellectual property rights of others.
We rely on a combination of patents, copyrights, trademarks, confidentiality and licensing agreements and other methods to establish and protect our intellectual property, know-how and trade secrets, particularly in our Memory Book and Marketing and Publishing Services segments, which derive a substantial portion of revenue from proprietary processes or products. We generally enter into confidentiality agreements with customers, vendors, employees, consultants and potential acquisition candidates to protect our know-how, trade secrets and other proprietary information. However, these measures and our patents and trademarks may not afford complete protection of our intellectual property, and it is possible that third parties may copy or otherwise obtain and use our proprietary information and technology without authorization or may otherwise infringe, impair, misappropriate, dilute or violate our intellectual property rights. In addition, a portion of our manufacturing processes involved in the production of our products and services are not covered by any patent or patent application. Furthermore, the patents that we use in our businesses will expire over time. Our ongoing research and development efforts may not result in new proprietary processes or products. Our competitors may independently develop equivalent or superior know-how, trade secrets or other proprietary processes or production methods as compared to those employed by us.
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In addition, we are involved in proceedings from time to time in the course of our businesses to protect and enforce our intellectual property rights. Third parties may initiate proceedings against us asserting that our products or services infringe or otherwise violate their intellectual property rights. Our intellectual property rights may not have the value that we believe them to have, and our products or processes may be found to infringe, impair, misappropriate, dilute or otherwise violate the intellectual property rights of others. Further, we may not prevail in proceedings to enforce our intellectual property rights, and the results or costs of any such proceedings may have a material adverse effect on our business, results of operations, cash flows and financial condition. Any proceedings concerning intellectual property could be protracted and costly, are inherently unpredictable and could have a material adverse effect on our business, financial condition and results of operations regardless of their outcome. The expense involved in protecting our intellectual property has been and could continue to be significant.
Changes in the rules and regulations to which we and our customers are subject may impact demand for our products and services.
We and many of our customers are subject to various government regulations, including applicable rules and regulations governing importation/exportation and product safety and the regulation of hazardous substances as well as protecting the privacy of consumer data. Continually evolving and changing regulations, both in the United States and abroad, may impact our and our customers’ businesses and could reduce demand, or increase the cost, for the related products and services.
We are subject to privacy and other related obligations and liabilities that could impose substantial costs upon us and may adversely affect our business or our financial results.
Several of our businesses use, process and store customer or consumer information that may include confidential, commercially sensitive or personally identifiable information. Privacy laws and similar regulations in many jurisdictions where we or our customers do business, as well as contractual provisions, require that we take steps to safeguard this information. Our failure to comply with any of these laws, regulations or contractual provisions or to adequately safeguard this information could adversely affect our reputation and business and subject us to significant liability in the event such information were to be disclosed in breach of our obligations.
The controlling stockholders of Holdco, which are affiliates of KKR and DLJMBP III, may have interests that conflict with other investors.
Holdco, our indirect parent, is controlled by an affiliate of KKR and by DLJMBP III and certain of its affiliates. On a collective basis, the Sponsors indirectly control our affairs and policies. Circumstances may occur in which the interests of the Sponsors could be in conflict with the interests of our debtholders. In addition, the Sponsors may have an interest in pursuing acquisitions, divestitures or other transactions that, in their judgment, could enhance their equity investment, even though such transactions might involve risks to our debtholders if the transactions resulted in our becoming more leveraged or significantly changed the nature of our business operations or strategy. In addition, if we encounter financial difficulties, or we are unable to pay our debts as they mature, the interests of the Sponsors may conflict with those of our debtholders. In that situation, for example, our debtholders might want Holdco to raise additional equity from the Sponsors or other investors for capital contributions to us to reduce our leverage and pay our debts, while the Sponsors might not be in a position to increase their investment in Holdco or have their ownership diluted and instead choose to take other actions, such as selling our assets. Additionally, the Sponsors and certain of
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their affiliates are in the business of making investments in companies and currently hold, and may from time to time in the future acquire, interests in businesses that directly or indirectly compete with certain portions of our business or are suppliers or customers of ours. Further, if they pursue acquisitions or make further investments in our industries, those acquisition and investment opportunities may not be available to us. So long as the Sponsors continue to indirectly own a significant amount of Holdco’s equity, even if such amount is less than 50%, they will continue to be able to influence or effectively control us.
Changes in regulatory market factors and declines in the market value of the securities held by our pension plans could materially reduce the funded status of our plans and affect the level of pension expense and required pension contributions.
The funded status of our pension plans is dependent upon many factors, including return on invested assets, the level of certain market interest rates used in determining the value of our obligations and changes to regulatory requirements, each of which can affect our assumptions and have an impact on our cash funding requirements under our plans. Declines in the market value of the securities held by the plans due to changes in financial markets could materially reduce the asset values under our plans. Such changes in asset values in combination with regulatory and other market factors may affect the level of pension income associated with the pension plans that we have historically realized and increase the level of pension expense and obligate us to make significant pension contributions in future years.
We are dependent upon certain members of our senior management.
We are substantially dependent on the personal efforts, relationships and abilities of certain members of our senior management, including Marc L. Reisch, our Chairman, President and Chief Executive Officer. The loss of the services of members of senior management could have a material adverse effect on our company.
Risks Relating to Our Indebtedness
Our high level of indebtedness could adversely affect our cash flow and our ability to operate our business, limit our ability to react to changes in the economy or industry dynamics and prevent us from meeting our obligations with respect to our indebtedness.
We are highly leveraged. As of December 28, 2013, total indebtedness for Visant and its guarantors was $1,884.8 million, including $1,140.4 million under the Credit Facilities (as defined below), $736.7 million principal amount outstanding under the 10.00% Senior Notes due 2017 (the “Senior Notes”) and $7.7 million of outstanding borrowings under capital lease and equipment financing arrangements and exclusive of $11.5 million of standby letters of credit outstanding and $11.9 million of original issue discount related to the Term Loan Credit Facility (as defined below). As of December 28, 2013, Visant had availability of $163.5 million (net of standby letters of credit of $11.5 million) under its $175.0 million revolving credit facility expiring in 2015 (the “Revolving Credit Facility”) and cash and cash equivalents totaling $96.0 million. Total outstanding indebtedness (inclusive of letters of credit) for Visant and its guarantors represented approximately 151.0% of its total consolidated capitalization at December 28, 2013.
Our substantial indebtedness could have important consequences. For example, it could:
| | • | | make it more difficult for us to satisfy our obligations with respect to our indebtedness, and any failure to comply with the obligations of any of our debt instruments, including financial and other restrictive covenants, could result in an event of default under agreements governing our indebtedness; |
| | • | | require us to dedicate a substantial portion of our cash flow to pay principal and interest on our debt, which will reduce the funds available for working capital, capital expenditures, acquisitions and other general corporate purposes; |
| | • | | limit our flexibility in planning for and reacting to changes in our businesses and in the industries in which we operate; |
| | • | | make us more vulnerable to adverse changes in general economic, industry and competitive conditions and adverse changes in government regulation; |
| | • | | limit our ability to borrow additional amounts for working capital, capital expenditures, acquisitions, debt service requirements, execution of our business strategy and other purposes; and |
| | • | | place us at a disadvantage compared to our competitors who have less debt. |
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Any of the above listed factors could materially adversely affect our business, results of operations, cash flows and financial condition. Furthermore, our interest expense could increase if interest rates increase, because the entire amount of our debt under our Revolving Credit Facility and approximately $640.4 million of the $1,140.4 million term loan B facility maturing in 2016 (the “Term Loan Credit Facility” and together with the Revolving Credit Facility, the “Credit Facilities”) bears interest at a variable rate, subject to adjustment based on a leverage-based pricing grid. In 2011, we entered into pay-fixed/receive-floating interest rate swap transactions (the “Swap Transactions”) in an aggregate initial notional principal amount of $600.0 million with respect to our variable rate term loan indebtedness under the Credit Facilities. Each of the Swap Transactions was effective January 3, 2012, has a maturity date of July 5, 2016, and is designed to mitigate the effect of increases in interest rates between the effective date of the Swap Transactions and their maturity or earlier termination. If we do not have sufficient earnings to service our debt, we may be required to refinance all or part of our existing debt, sell assets, borrow more money or sell securities, none of which we can guarantee we will be able to do.
In addition, we may be able to incur significant additional indebtedness in the future. For example, we may seek to obtain additional term loans under the Term Loan Credit Facility, or under a new term facility, in either case in an aggregate principal amount of up to $300.0 million, which additional term loans will have the same security and guarantees as the Term Loan Credit Facility. Although the indenture governing the Senior Notes and the credit agreement governing the Credit Facilities contain restrictions on the incurrence of additional indebtedness, those restrictions are subject to a number of important qualifications and exceptions, and under certain circumstances, the indebtedness incurred in compliance with those restrictions could be substantial. The Credit Facilities, for example, allow us to incur (1) an unlimited amount of “purchase money” indebtedness to finance capital expenditures permitted to be made under the Credit Facilities and to finance the acquisition, construction or improvement of fixed or capital assets, (2) an unlimited amount of indebtedness to finance acquisitions permitted under the Credit Facilities and (3) additional indebtedness, including indebtedness at subsidiaries that are not guarantors of the Senior Notes. All of those borrowings would be senior secured indebtedness and, as a result, would be effectively senior to the Senior Notes and the subsidiary guarantees by the guarantors to the Senior Notes. To the extent we incur additional indebtedness, the risks described above will increase.
To service our indebtedness, we will require a significant amount of cash. Our ability to generate cash depends on many factors beyond our control, and any failure to meet our debt service obligations could harm our business, results of operations, cash flows and financial condition.
We are a highly leveraged company and require a significant amount of cash to meet our debt service obligations. Our annual payment obligations for 2013 with respect to existing indebtedness consisted of approximately $138.3 million of interest payments on the Senior Notes and the Term Loan Credit Facility and an aggregate of $4.9 million of principal payments under our capital lease and equipment financing obligations. Our ability to make required interest payments and payments with respect to the principal amount of our debt obligations primarily depends upon our future operating performance. As a result, prevailing economic conditions and financial, business and other factors, many of which are beyond our control, will affect our ability to make these payments. Economic weakness and uncertainty, including decreases in spending by or changes in buying habits of the customers we serve, may significantly impact our ability to generate funds from operations.
If we do not generate sufficient cash flow from operations to satisfy our debt service obligations, we may have to undertake alternative financing plans, such as refinancing our indebtedness, selling assets, reducing or delaying capital investments or seeking to raise additional capital. Our ability to refinance our debt or undertake alternative financing plans will depend on the credit markets and our financial condition at such time. Any refinancing of our debt could be on less favorable terms, including being subject to higher interest rates. In addition, the terms of our existing or future debt instruments may restrict certain of our alternatives. Our inability to generate sufficient cash flow to satisfy our debt service obligations, or to refinance our obligations on commercially reasonable terms, would have an adverse effect, which could be material, on our business, results of operations, cash flows and financial condition, as well as on our ability to satisfy our obligations in respect of our indebtedness.
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Repayment of our debt, including the Senior Notes and the Credit Facilities, is dependent on cash flow generated by our subsidiaries.
Visant is a holding company, and all of its assets are owned by its subsidiaries. Repayment of our indebtedness is dependent on the generation of cash flow by our subsidiaries and their ability to make such cash available to Visant, by dividend, debt repayment or otherwise. Visant’s non-guarantor subsidiaries do not have any obligation to pay amounts due on the Senior Notes or to make funds available for that purpose. Visant’s non-guarantor subsidiaries may not be able, or may not be permitted, to make distributions to enable Visant to make payments in respect of its indebtedness, including the Senior Notes. Each of Visant’s subsidiaries is a distinct legal entity, and legal and contractual restrictions may limit Visant’s ability to obtain cash from its subsidiaries. While the indenture governing the Senior Notes and the Credit Facilities limit the ability of Visant’s subsidiaries to incur consensual restrictions on their ability to pay dividends or make other intercompany payments to Visant, these limitations are subject to qualifications and exceptions. In addition, Visant’s guarantor subsidiaries may have their obligations under the guarantees of the Senior Notes reduced to insignificant amounts pursuant to the terms of the guarantees or subordinated if the guarantees are held to violate applicable fraudulent conveyance laws. If Visant does not receive distributions from its subsidiaries, it may be unable to make required principal and interest payments on its indebtedness, including the Credit Facilities and the Senior Notes.
Restrictive covenants in our and our subsidiaries’ debt instruments may restrict our current and future operations, particularly our ability to respond to changes in our business or to take certain actions. Failure to comply with these covenants may result in the acceleration of our indebtedness.
The Credit Facilities and the indenture governing the Senior Notes contain, and any future indebtedness of Visant or of its subsidiaries would likely contain, a number of restrictive covenants that impose significant operating and financial restrictions, including restrictions on our ability to engage in acts that may be in our long-term best interests.
The Credit Facilities include financial covenants, including requirements that Visant maintain a minimum interest coverage ratio and not exceed a maximum total leverage ratio, and these financial covenants will become more restrictive over time. In addition, the Credit Facilities limit our ability to make capital expenditures and require that we use a portion of excess cash flow and proceeds of certain asset sales that are not reinvested in our business to repay indebtedness under the Credit Facilities.
The Credit Facilities and the indenture governing the Senior Notes also include covenants restricting, among other things, our ability to: create liens; incur indebtedness (including guarantees, debt incurred by direct or indirect subsidiaries, and obligations in respect of foreign currency exchange and other hedging arrangements); pay dividends, or make redemptions and repurchases with respect to capital stock; prepay, or make redemptions and repurchases with respect to subordinated indebtedness; make loans and investments; engage in mergers, acquisitions, asset sales, sale/leaseback transactions and transactions with affiliates and change the business conducted by us.
Any default under the agreements governing our indebtedness, including a default under the Credit Facilities, that is not waived by the required lenders or holders of such indebtedness, and the remedies sought by the holders of such indebtedness, could prevent us from paying principal, premium, if any, and interest on the Senior Notes and could substantially decrease the market value of the Senior Notes. If we are unable to generate sufficient cash flow or are otherwise unable to obtain funds necessary to meet required payments of principal, premium, if any, and interest on our indebtedness, or if we otherwise fail to comply with the various covenants in the agreements governing our indebtedness, including the covenants contained in the Credit Facilities, we would be in default under the terms of the agreements governing such indebtedness. If any such default occurs, the lenders under the Credit Facilities may elect to declare all outstanding borrowings, together with accrued interest and other fees, to be immediately due and payable, enforce their security interest or require us to apply all of our available cash to repay these borrowings, any of which would result in an event of default under the Senior Notes. The lenders under the Credit Facilities will also have the right in these circumstances to terminate any commitments they have to provide further borrowings.
| ITEM 1B. | UNRESOLVED STAFF COMMENTS |
The Company has no unresolved written comments from the staff of the SEC regarding its periodic or current reports under the Exchange Act.
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A summary of the material physical properties we currently use are as follows:
| | | | | | | | | | |
Segment | | Facility Location (1) | | Approximate
Sq. Ft. | | | Interest | |
Scholastic | | Santiago, Dominican Republic | | | 140,000 | | | | Leased | |
| | Laurens, South Carolina | | | 98,000 | | | | Owned | |
| | Shelbyville, Tennessee | | | 87,000 | | | | Owned | |
| | Denton, Texas | | | 70,000 | | | | Owned | |
| | Greenville, Ohio | | | 69,000 | | | | Owned | |
| | Eagan, Minnesota | | | 34,000 | | | | Leased | |
| | Owatonna, Minnesota | | | 30,000 | | | | Owned | |
| | | |
Memory Book | | Clarksville, Tennessee | | | 575,000 | | | | Owned | |
| | Visalia, California | | | 96,000 | | | | Owned | |
| | Sedalia, Missouri | | | 26,000 | | | | Leased | |
| | | |
Marketing and Publishing Services | | Broadview, Illinois | | | 212,000 | | | | Owned | |
| | Hagerstown, Maryland | | | 200,000 | | | | Owned | |
| | Dixon, Illinois | | | 160,000 | | | | Owned | |
| | Chattanooga, Tennessee | | | 124,000 | | | | Owned | |
| | Rockaway, New Jersey | | | 84,000 | | | | Leased | |
| | Hagerstown, Maryland | | | 50,000 | | | | Owned | |
| | Chattanooga, Tennessee | | | 45,000 | | | | Owned | |
| | Chattanooga, Tennessee | | | 29,500 | | | | Owned | |
| | Wujiang City, China | | | 26,000 | | | | Leased | |
| | Mouans Sartoux, France | | | 20,000 | | | | Leased | |
| | Grasse, France | | | 8,000 | | | | Leased | |
| (1) | Excludes immaterial properties, properties held for sale and warehouse and ancillary facilities supporting our operations. |
We also lease key administrative and sales offices in Armonk, New York (Visant headquarters), Minneapolis, Minnesota (Jostens headquarters), Winnipeg, Manitoba (Jostens Canada), New York, New York (Phoenix Color) and New York, New York, Paris, France and São Paulo, Brazil (Arcade). In addition, we lease other sales and administrative office space. In management’s opinion, all buildings, machinery and equipment are suitable for their purposes and are maintained on a basis consistent with sound operations. The extent of utilization of individual facilities varies significantly due to the seasonal nature of our business.
We are party from time to time to litigation arising in the ordinary course of business. This litigation may include actions related to petitions for reorganization under the U.S. bankruptcy laws filed by our customers or suppliers resulting in claims against us for the return of certain pre-petition payments that may be deemed preferential. We regularly analyze current information and, as necessary, provide accruals for probable and estimable liabilities on the eventual disposition of these matters. We do not believe that the disposition of these matters will have a material adverse effect on our business, financial condition and results of operations.
| ITEM 4. | MINE SAFETY DISCLOSURES |
Not applicable.
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PART II
| ITEM 5. | MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES |
Visant is an indirect, wholly-owned subsidiary of Holdco. Our Sponsors hold shares of the Class A (the “Class A Common Stock”) and Class C Common Stock (the “Class C Common Stock”) of Holdco, and additionally our equity-based incentive compensation plans are based on the appreciation of the Class A Common Stock of Holdco. There is no established public trading market for Visant or Holdco common stock. As of March 21, 2014, there were outstanding: 1,000 shares of common stock, par value $.01 per share, of Visant (all of which are indirectly, beneficially owned by Holdco); 5,953,710 shares of Class A Common Stock, par value $.01 per share (held by 26 stockholders of record); and one share of Class C Common Stock, par value $.01 per share (held by one stockholder of record). See Part III, Item 12.Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters, for further discussion of the ownership of Holdco. Visant may from time to time pay cash dividends on its common stock. However, each of the Credit Facilities and the indenture relating to the Senior Notes contains covenants that impose substantial restrictions on Visant’s ability to pay dividends or make distributions to Holdco.
Recent Sales of Unregistered Securities
Neither Visant’s nor Holdco’s equity securities are registered pursuant to Section 12 of the Exchange Act. For the fourth fiscal quarter ended December 28, 2013, neither we nor Holdco issued or sold any equity securities.
| ITEM 6. | SELECTED FINANCIAL DATA |
The Company’s selected historical financial data for fiscal years ended December 28, 2013, December 29, 2012, December 31, 2011, January 1, 2011, and January 2, 2010 have been derived from our audited historical consolidated financial statements.
The data presented below should be read in conjunction with the consolidated financial statements and related notes included herein and Part II, Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
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| | | | | | | | | | | | | | | | | | | | |
| | | Visant Corporation and Subsidiaries | |
In millions, except for ratios | | 2013 | | | 2012 | | | 2011 | | | 2010 | | | 2009 | |
Statement of Operations Data: | | | | | | | | | | | | | | | | | |
Net sales | | $ | 1,127.7 | | | $ | 1,155.3 | | | $ | 1,217.8 | | | $ | 1,240.9 | | | $ | 1,255.3 | |
Cost of products sold | | | 543.4 | | | | 549.5 | | | | 572.6 | | | | 576.9 | | | | 588.8 | |
| | | | | | | | | | | | | | | | | | | | |
Gross profit | | | 584.3 | | | | 605.9 | | | | 645.2 | | | | 664.0 | | | | 666.5 | |
Selling and administrative expenses | | | 405.9 | | | | 426.4 | | | | 449.8 | | | | 461.2 | | | | 451.3 | |
(Gain) loss on disposal of fixed assets | | | (0.8 | ) | | | (1.6 | ) | | | (0.9 | ) | | | 0.3 | | | | (1.4 | ) |
Special charges (1) | | | 20.6 | | | | 75.9 | | | | 44.4 | | | | 4.7 | | | | 14.5 | |
| | | | | | | | | | | | | | | | | | | | |
Operating income | | | 158.6 | | | | 105.2 | | | | 151.9 | | | | 197.8 | | | | 202.2 | |
(Gain) loss on repurchase and redemption of debt (2) | | | — | | | | (0.9 | ) | | | — | | | | 9.7 | | | | — | |
Interest expense, net | | | 155.3 | | | | 158.9 | | | | 164.1 | | | | 91.3 | | | | 55.3 | |
| | | | | | | | | | | | | | | | | | | | |
Provision for income taxes | | | 2.3 | | | | 5.8 | | | | 2.6 | | | | 40.7 | | | | 56.2 | |
| | | | | | | | | | | | | | | | | | | | |
Net income (loss) | | $ | 1.1 | | | $ | (58.6 | ) | | $ | (14.9 | ) | | $ | 56.2 | | | $ | 90.7 | |
| | | | | | | | | | | | | | | | | | | | |
Statement of Cash Flows: | | | | | | | | | | | | | | | | | | | | |
Net cash provided by operating activities | | $ | 101.6 | | | $ | 111.7 | | | $ | 122.5 | | | $ | 204.7 | | | $ | 207.1 | |
Net cash used in investing activities | | | (48.5 | ) | | | (50.7 | ) | | | (53.7 | ) | | | (60.4 | ) | | | (44.4 | ) |
Net cash used in financing activities | | | (16.9 | ) | | | (36.6 | ) | | | (92.5 | ) | | | (197.0 | ) | | | (167.0 | ) |
| | | | | | | | | | | | | | | | | | | | |
Other Financial Data: | | | | | | | | | | | | | | | | | | | | |
Ratio of earnings to fixed charges (3) | | | 1.0x | | | | — | | | | — | | | | 2.0x | | | | 3.5x | |
Depreciation and amortization | | $ | 89.5 | | | $ | 104.5 | | | $ | 106.1 | | | $ | 104.6 | | | $ | 102.5 | |
Adjusted EBITDA (4) | | | 284.8 | | | | 298.1 | | | | 327.7 | | | | 340.1 | | | | 330.2 | |
Capital expenditures | | | 34.3 | | | | 52.1 | | | | 55.5 | | | | 50.2 | | | | 46.1 | |
| | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | |
| | | | | |
In millions | | 2013 | | | 2012 | | | 2011 | | | 2010 | | | 2009 | |
Balance Sheet Data (at period end): | | | | | | | | | | | | | | | | | | | | |
Cash and cash equivalents | | $ | 96.0 | | | $ | 60.2 | | | $ | 36.0 | | | $ | 60.2 | | | $ | 113.1 | |
Property and equipment, net | | | 189.1 | | | | 203.7 | | | | 210.1 | | | | 214.5 | | | | 210.8 | |
Total assets | | | 1,906.3 | | | | 1,926.4 | | | | 2,044.5 | | | | 2,144.0 | | | | 2,187.2 | |
Total debt | | | 1,872.9 | | | | 1,884.4 | | | | 1,917.6 | | | | 1,988.7 | | | | 826.3 | |
Stockholder’s (deficit) equity | | | (532.7 | ) | | | (642.6 | ) | | | (558.6 | ) | | | (510.2 | ) | | | 739.8 | |
| | | | | | | | | | | | | | | | | | | | |
| (1) | Special charges for the fiscal year ended December 28, 2013 included: (a) $8.6 million of costs in the Marketing and Publishing Services segment consisting of a non-cash charge of $8.2 million related to the write-off of a tradename no longer in use, and $0.4 million of severance and related benefit costs associated with reductions in force; (b) $2.6 million of costs in the Scholastic segment consisting of $2.5 million of severance and related benefit costs associated with reductions in force and a non-cash charge of $0.1 million related to asset impairment charges associated with facility consolidations; and (c) $1.7 million of costs in the Memory Book segment consisting of $1.0 million of severance and related benefit costs associated with reductions in force and a non-cash charge of $0.7 million related to asset impairment charges associated with the consolidation of our Topeka, Kansas facility. Also included in special charges for the twelve months ended December 28, 2013 was $7.7 million related to the mutual termination of a multi-year marketing and sponsorship arrangement entered into by Jostens in 2007. Special charges for the fiscal year ended December 29, 2012 included: (a) $58.0 million of costs in the Marketing and Publishing Services segment consisting of a $55.3 million non-cash impairment charge associated with the write-down of goodwill, $2.1 million of severance and related benefit costs and $0.5 million of non-cash asset related impairment charges associated with facility consolidations; (b) $10.1 million of costs in the Scholastic segment including an $8.9 million non-cash impairment charge associated with the write-down of goodwill and $1.2 million of severance and related benefit costs associated with reductions in force; and (c) $7.8 million of costs in the Memory Book segment including $6.5 million of severance and related benefit costs associated with reductions in force and approximately $1.3 million of non-cash asset impairment charges associated with the consolidation of our Topeka, Kansas facility. Special charges for the fiscal year ended December 31, 2011 included: (a) $35.3 million of costs in the Marketing and Publishing Services segment consisting of $31.9 million of non-cash impairment charges associated with the write-down of goodwill in the amount of $24.9 million and |
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| | other indefinite-lived intangible assets in the amount of $7.0 million, $1.0 million of severance and related benefit costs and $2.4 million of non-cash asset related impairment charges associated with the closure of our Milwaukee, Wisconsin facility; (b) $6.6 million of costs in the Memory Book segment consisting of $4.3 million of severance and related benefit costs associated with reductions in force and approximately $2.2 million of non-cash asset related impairment charges, in each case associated with the consolidation of our Clarksville, Tennessee and State College, Pennsylvania facilities; (c) $2.2 million of severance and related benefit costs in the Scholastic segment associated with reductions in force in connection with the consolidation of certain diploma operations; and (d) $0.3 million of severance and related benefit costs associated with the elimination of certain corporate management positions. Special charges for the fiscal year ended January 1, 2011 included $2.4 million and $0.6 million related to cost reduction initiatives in our Scholastic and Memory Book segments, respectively, and $1.7 million of costs related to cost reduction initiatives and facility consolidations in the Marketing and Publishing Services segment. Included in these costs was approximately $0.2 million in the aggregate of non-cash asset impairment charges in our Scholastic and Marketing and Publishing Services segments. Special charges for the fiscal year ended January 2, 2010 included: (a) $8.4 million in the Memory Book segment consisting of approximately $4.0 million of severance and related benefits for associated headcount reductions with respect to Jostens’ Winston-Salem, North Carolina facility closure and certain other reductions in force and $4.1 million of non-cash facility related asset impairment charges related to facility consolidation activity, (b) $1.5 million in costs in the Scholastic segment consisting of $1.0 million of cost reduction initiatives and $0.5 million of non-cash asset impairment charges related to the closure of Jostens’ Attleboro, Massachusetts facility; and (c) $4.6 million of costs related to facility consolidation activity and other reductions in force in the Marketing and Publishing Services segment which included $2.6 million of severance and related benefits for associated headcount reductions, $1.4 million of non-cash costs related to asset impairment charges and $0.6 million of other facility consolidation costs. |
| (2) | For the fiscal year ended December 29, 2012, Visant recognized a gain on repurchase and redemption of debt of $0.9 million in connection with the repurchase of $13.3 million in aggregate principal amount of Senior Notes in December 2012. For the fiscal year ended January 1, 2011, Visant recognized a loss on repurchase and redemption of debt of $9.7 million in connection with the refinancing consummated by Visant on September 22, 2010 (the “Refinancing”). Visant repurchased its then outstanding 7.625% senior subordinated notes due 2012 (the “Senior Subordinated Notes”) pursuant to a cash tender offer (the “Tender Offer”) and satisfied and discharged the remaining Senior Subordinated Notes by delivering to the trustee amounts sufficient to pay the redemption price, plus accrued and unpaid interest up to, but not including, the date of redemption pursuant to notice given by Visant with respect to the Senior Subordinated Notes. In connection with these transactions, Visant recorded $1.1 million of consent payments paid to holders of the Senior Subordinated Notes who tendered by the early tender date under the Tender Offer and $8.6 million of non-cash unamortized deferred financing costs. |
| (3) | For the purpose of calculating the ratio of earnings to fixed charges, earnings represent income before income taxes plus fixed charges. Fixed charges consist of interest expense (including capitalized interest) on all indebtedness plus amortization of debt issuance costs and the portion of rental expense that we believe is representative of the interest component of rental expense. |
| (4) | Adjusted EBITDA is defined as net income plus net interest expense, income taxes, depreciation and amortization, excluding certain non-recurring items. Adjusted EBITDA excludes certain items that are also excluded for purposes of calculating required covenant ratios and compliance under the Credit Facilities and the indenture governing the Senior Notes. As such, Adjusted EBITDA is a material component of these covenants. Non-compliance with the financial ratio maintenance covenants contained in the Credit Facilities could result in the requirement to immediately repay all amounts outstanding thereunder, while non-compliance with the debt incurrence ratio in the indenture governing the Senior Notes would prohibit us and our restricted subsidiaries from being able to incur additional indebtedness other than pursuant to specified exceptions. Adjusted EBITDA is not a presentation made in accordance with generally accepted accounting principles in the United States of America (GAAP), is not a measure of financial condition or profitability, and should not be considered as an alternative to (a) net income (loss) determined in accordance with GAAP or (b) operating cash flows determined in accordance with GAAP. Additionally, Adjusted EBITDA is not intended to be a measure of free cash flow for management’s discretionary use, as it does not consider certain cash requirements such as interest payments, tax payments and debt service requirements. Because not all companies use identical calculations, this presentation of Adjusted EBITDA may not be comparable to similarly titled measures of other companies. |
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The following sets forth a reconciliation of net income (loss) to Adjusted EBITDA:
| | | | | | | | | | | | | | | | | | | | |
| | | Visant Corporation and Subsidiaries | |
In millions | | 2013 | | | 2012 | | | 2011 | | | 2010 | | | 2009 | |
Net income (loss) | | $ | 1.1 | | | $ | (58.6 | ) | | $ | (14.9 | ) | | $ | 56.2 | | | $ | 90.7 | |
Interest expense, net | | | 155.3 | | | | 158.9 | | | | 164.1 | | | | 91.3 | | | | 55.3 | |
Provision for income taxes | | | 2.3 | | | | 5.8 | | | | 2.6 | | | | 40.7 | | | | 56.2 | |
Depreciation and amortization expense | | | 89.5 | | | | 104.5 | | | | 106.1 | | | | 104.5 | | | | 102.5 | |
| | | | | | | | | | | | | | | | | | | | |
EBITDA | | | 248.2 | | | | 210.6 | | | | 257.9 | | | | 292.7 | | | | 304.7 | |
Special charges (a) | | | 20.6 | | | | 75.9 | | | | 44.4 | | | | 4.7 | | | | 14.5 | |
(Gain) loss on repurchase and redemption of debt (b) | | | — | | | | (0.9 | ) | | | — | | | | 9.7 | | | | — | |
(Gain) loss on disposal of fixed assets (c) | | | (0.8 | ) | | | (1.6 | ) | | | (0.9 | ) | | | 0.3 | | | | (1.4 | ) |
Stock-based compensation (d) | | | 1.5 | | | | 1.1 | | | | 7.0 | | | | 13.4 | | | | — | |
Costs of legal proceedings and associated resolution (e) | | | — | | | | — | | | | — | | | | 9.3 | | | | 2.4 | |
Other (f) | | | 15.3 | | | | 13.0 | | | | 19.3 | | | | 10.0 | | | | 10.0 | |
| | | | | | | | | | | | | | | | | | | | |
Adjusted EBITDA | | $ | 284.8 | | | $ | 298.1 | | | $ | 327.7 | | | $ | 340.1 | | | $ | 330.2 | |
| | | | | | | | | | | | | | | | | | | | |
| (a) | Consists of restructuring costs and special charges incurred for fiscal years 2013, 2012, 2011, 2010 and 2009 in connection with a variety of initiatives and, for fiscal years 2013, 2012 and 2011, $8.2 million, $64.2 million and $31.9 million, respectively, of non-cash impairment charges associated with the write-down of goodwill and certain intangible assets in the Marketing and Publishing Services, Scholastic and Memory Book segments. |
| (b) | For the fiscal year ended December 29, 2012, Visant recognized a gain on repurchase and redemption of debt of $0.9 million in connection with the repurchase of $13.3 million in aggregate principal amount of Senior Notes in December 2012. For the fiscal year ended January 1, 2011, Visant recognized a loss on repurchase and redemption of debt of $9.7 million in connection with the Refinancing. Visant repurchased its Senior Subordinated Notes pursuant to the Tender Offer and satisfied and discharged the remaining Senior Subordinated Notes by delivering to the trustee amounts sufficient to pay the redemption price, plus accrued and unpaid interest up to, but not including, the date of redemption pursuant to notice given by Visant with respect to the Senior Subordinated Notes. In connection with these transactions, Visant recorded $1.1 million of consent payments paid to holders of the Senior Subordinated Notes who tendered by the early tender date under the Tender Offer and $8.6 million of non-cash unamortized deferred financing costs. |
| (c) | Represents a gain on disposal of fixed assets for fiscal year 2013. For fiscal years 2012, 2011 and 2009, reflects a gain on the donation of redundant facilities to local governments in connection with our consolidation efforts. Represents a loss on disposal of fixed assets for fiscal year 2010. |
| (d) | Consists of stock-based compensation expense related to all equity and phantom equity awards granted, including awards modified, repurchased or cancelled based on fair values of the awards at the grant date. |
| (e) | Reflects non-recurring costs incurred during the fiscal year ended January 1, 2011 and the fiscal year ended January 2, 2010 in connection with our defense and prosecution of previously disclosed legal proceedings and actions taken to resolve such matters. |
| (f) | Other charges for the fiscal year ended December 28, 2013 included $7.0 million of non-recurring employment expenses related to certain executive transitions, $3.8 million of management fees, $1.6 million of acquisition-related costs, $1.0 million of costs related to the relocation of certain manufacturing equipment and the consolidation of certain facilities in the Memory Book segment, $0.3 million of non-recurring professional fees and $1.7 million of other costs that are non-recurring in nature. Other charges for the fiscal year ended December 29, 2012 included $3.7 million and $2.4 million of costs related to the relocation of certain manufacturing equipment and consolidation of certain facilities in the Memory Book and Marketing and Publishing Services segments, respectively. In addition, in the Scholastic segment, there were $0.6 million of non-cash costs associated with the donation to the local industrial development authority of the former Unadilla, Georgia facility. Also included were $3.7 million of management fees, $0.9 million of non-recurring professional fees and $1.6 million of other costs that are non-recurring in nature. Other charges for the fiscal year ended December 31, 2011 |
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| | included $7.4 million of costs related to the relocation of certain manufacturing equipment and facility consolidation in connection with the closure of certain facilities in the Scholastic and Memory Book segments, $3.6 million of management fees, $2.4 million of consulting fees and $1.9 million of other costs that are non-recurring in nature. Other charges for the fiscal year ended January 1, 2011 included $3.5 million of management fees, $2.5 million of costs related to the relocation of certain manufacturing equipment and facility consolidation in connection with the closure of certain facilities in the Scholastic and Marketing and Publishing Services segments, $0.4 million of acquisition-related costs, $0.7 million of non-recurring inventory costs associated with our strategic decision to no longer sell certain products in the Scholastic segment and $2.9 million of other costs that are non-recurring in nature. Other charges for the fiscal year ended January 2, 2010 included $6.0 million of consolidation costs in connection with the closure of certain facilities, $3.4 million of management fees, $0.5 million of additional rent in connection with the relocation of certain operating facilities and $0.1 million of other costs that are non-recurring in nature. |
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| ITEM 7. | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
The following discussion contains forward-looking statements that involve numerous risks and uncertainties. Our actual results could differ materially from those discussed in the forward-looking statements as a result of these risks and uncertainties, including those set forth in this report under “Cautionary Note Regarding Forward-Looking Statements” and “Risk Factors”. You should read the following discussion in conjunction with Part II, Item 6. Selected Financial Data and the consolidated financial statements and related footnotes included herein.
Presentation
Except where otherwise indicated, management’s discussion and analysis of our financial condition and results of operations is provided with respect to Visant and its subsidiaries. Visant is an indirect, wholly owned subsidiary of Holdco.
Company Background
On October 4, 2004, an affiliate of KKR and affiliates of DLJMBP III completed the Transactions, which created a marketing and publishing services enterprise through the consolidation of Jostens, Von Hoffmann and Arcade. The Transactions were accounted for as a combination of interests under common control.
As of March 21, 2014, affiliates of KKR and DLJMBP III held approximately 49.2% and 41.1%, respectively, of Holdco’s voting interest, while each continued to hold approximately 44.8% of Holdco’s economic interest. As of March 21, 2014, the other co-investors held approximately 8.4% of the voting interest and approximately 9.2% of the economic interest of Holdco, and members of management held approximately 1.3% of the voting interest and approximately 1.2% of the economic interest of Holdco (exclusive of exercisable options).
Overview
Our Company
We are a leading marketing and publishing services enterprise servicing the school affinity, direct marketing, fragrance, cosmetic and personal care sampling and packaging, and educational and trade publishing segments. Visant was formed to create a platform of businesses with leading positions in attractive end market segments and to establish a highly experienced management team that could leverage a shared services infrastructure and capitalize on margin and growth opportunities. Since 2004, we have developed a unified marketing and publishing services organization with a leading and differentiated approach in each of our segments. Our management team has created and integrated central services and management functions and has reshaped the business to focus on the most attractive and highest growth market opportunities.
We have demonstrated our ability over the last nine years since our inception to execute acquisitions and dispositions that have allowed us to complement and expand our core capabilities, accelerate into market segment adjacencies, as well as enabled us to divest non-core businesses and deleverage. We anticipate that we will continue to pursue this strategy of consummating complementary acquisitions to support expansion of our product offerings and services, including to address marketplace dynamics, developments in technology and changing consumer behaviors, broaden our geographic reach and capture opportunities for synergies, as well as availing ourselves of strategic opportunities and market conditions for transacting on businesses in the Visant portfolio.
Our Segments
Our three reportable segments as of December 28, 2013 consisted of:
| | • | | Scholastic—provides services in conjunction with the marketing, sale and production of class rings and an array of graduation products and other scholastic affinity products to students and administrators primarily in high schools, colleges and other post-secondary institutions; |
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| | • | | Memory Book—provides services in conjunction with the publication, marketing, sale and production of school yearbooks, memory books and related products that help people tell their stories and chronicle important events; and |
| | • | | Marketing and Publishing Services—provides services in conjunction with the development, marketing, sale and production of multi-sensory and interactive advertising sampling systems and packaging, primarily for the fragrance, cosmetic and personal care segments, and provides innovative products and related services to the direct marketing sector. The group also produces book components primarily for the educational and trade publishing segments. |
For additional financial and other information about our operating segments, see Note 16,Business Segments, to the consolidated financial statements.
We sell our products and services to end customers through several different sales channels, including independent sales representatives and dedicated sales forces. Visant (formerly known as Jostens IH Corp.) was originally incorporated in Delaware in 2003.
Acquisitions
Our business has expanded through a number of acquisitions. These acquisitions have most recently included the acquisition of the capital stock of Carestia by Arcade on July 1, 2013. Headquartered in Grasse, France, Carestia is a producer of blotter cards, which are constructed for sampling fragrances, and other fragrance marketing solutions, as well as decorated packaging solutions.
On November 19, 2013, we announced that we had entered into a Stock Purchase Agreement with American Achievement under which Jostens will acquire all of the outstanding equity interests in American Achievement, a provider of class rings, yearbooks, graduation products, achievement publications and affinity jewelry. Visant has guaranteed the payment and full performance of all obligations of Jostens under such agreement. The transaction is subject to regulatory review and other customary closing conditions.
General
We experience seasonal fluctuations in our net sales and cash flow from operations, tied primarily to the North American school year. In particular, Jostens generates a significant portion of its annual net sales in the second quarter in connection with the delivery of caps, gowns and diplomas for spring graduation ceremonies and spring deliveries of school yearbooks, and a significant portion of its annual cash flow in the fourth quarter is driven by the receipt of customer deposits in our Scholastic and Memory Book segments. The net sales of our sampling and direct mail and commercial printed products have also historically reflected seasonal variations, and we generate a majority of the annual net sales in these businesses during the third and fourth quarters, including based on the timing of customers’ advertising campaigns which have traditionally been concentrated prior to the Christmas and spring holiday seasons. Net sales of textbook components are impacted seasonally by state and local schoolbook purchasing schedules, which commence in the spring and peak in the summer months preceding the start of the school year. The seasonality of each of our businesses requires us to allocate our resources to manage our manufacturing capacity, which often operates at full or near full capacity during peak seasonal demand periods. Based on the seasonality of our cash flow, we traditionally borrow under our Revolving Credit Facility during the third quarter to fund general working capital needs during this period of time when schools are generally not in session and orders are not being placed, and repay the amount borrowed for general working capital purposes in the fourth quarter when customer deposits in the Scholastic and Memory Book segments are received and customers’ advertising campaigns in anticipation of the holiday season generally increase.
Our net sales include sales to certain customers for whom we purchase paper. The price of paper, a primary material across most of our products and services, has been volatile over time and may cause swings in our net sales and cost of sales. We generally are able to pass on increases in the cost of paper to our customers across most of our product lines at the time we are impacted by such increases.
The price of gold and other precious metals has been highly volatile since 2009, and we anticipate continued volatility in the price of gold for the foreseeable future driven by numerous factors, such as changes in supply and demand and investor sentiment. The volatility of metal prices has impacted, and could further impact, our jewelry sales
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metal mix. We have seen a continuing shift in jewelry metal mix from gold to lesser priced metals over the past several years, which we believe is in part attributable to the impact of significantly higher precious metal costs on our jewelry prices. To mitigate continued volatility and the impact on our manufacturing costs, we have entered into purchase commitments for gold which we believe will cover our needs for gold for fiscal 2014.
The continued uncertainty in market conditions and excess capacity that exists in the print and related services industry, as well as the variety of other advertising media with which we compete, have amplified competitive and pricing pressures, which we anticipate will continue for the foreseeable future. We continue to see the impact of restrictions on school budgets, which affects spending at the state and local levels, resulting in reduced spending for our Memory Book, Scholastic and elementary/high school publishing services products and services and heightened pricing pressure on our core Memory Book products and services. The continued cautious consumer spending environment also contributes to more constrained levels of spending on purchases in our Memory Book and Scholastic segments made directly by the student and parent. Funding constraints have impacted textbook adoption cycles, which are being extended in many states due to fiscal pressures, continuing to affect volume in our elementary/high school publishing services products and services. Trade book publishing has been impacted by the shift towards digital books, which has negatively impacted our publishing services business in terms of fewer printed copies of books as well as shorter print runs. To address changes in technology, consumer behavior and user preferences, we have continued to diversify, expand and improve our product and service offerings and the manner in which we sell our products and services, including through improved e-commerce tools.
We seek to distinguish ourselves based on our capabilities, innovative service offerings to our customers, quality and organizational and financial strength. In addition, to address the dynamics impacting our businesses, we have continued to implement efforts to reduce costs and drive operating efficiencies, including through the restructuring and integration of our operations and the rationalization of sales, administrative and support functions. We expect to initiate additional efforts focused on cost reduction and containment to address continued challenging marketplace conditions as well as competitive and pricing pressures demanding innovation and a lower cost structure.
Restructuring Activity and Other Special Charges
For the year ended December 28, 2013, we recorded $11.6 million of restructuring costs and $8.9 million of other special charges. Included in these charges were (a) $8.6 million of costs in the Marketing and Publishing Services segment consisting of a non-cash charge of $8.2 million related to the write-off of a tradename no longer in use, and $0.4 million of severance and related benefit costs associated with reductions in force; (b) $2.6 million of costs in the Scholastic segment consisting of $2.5 million of severance and related benefit costs associated with reductions in force and a non-cash charge of $0.1 million related to asset impairment charges associated with facility consolidations; and (c) $1.7 million of costs in the Memory Book segment consisting of $1.0 million of severance and related benefit costs associated with reductions in force and a non-cash charge of $0.7 million related to asset impairment charges associated with the consolidation of our Topeka, Kansas facility. Also included in special charges for the twelve months ended December 28, 2013 was $7.7 million related to the mutual termination of a multi-year marketing and sponsorship arrangement entered into by Jostens in 2007. The associated employee headcount reductions were 123, 21 and 18 in the Scholastic, Marketing and Publishing Services and Memory Book segments, respectively.
Restructuring accruals of $7.5 million and $2.9 million as of each of December 28, 2013 and December 29, 2012, respectively, are included in other accrued liabilities in the Consolidated Balance Sheets. These accruals as of December 28, 2013 included amounts provided for the termination of the multi-year marketing and sponsorship arrangement entered into by Jostens in 2007 and severance and related benefit costs related to headcount reductions in each segment.
On a cumulative basis through December 28, 2013, we incurred $29.3 million of costs related to the termination of the multi-year marketing and sponsorship arrangement entered into by Jostens in 2007 and employee severance and related benefit costs related to the 2011, 2012 and 2013 initiatives, which affected an aggregate of 1,064 employees. We paid $21.8 million in cash related to these initiatives as of December 28, 2013.
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Changes in the restructuring accruals during fiscal 2013 were as follows:
| | | | | | | | | | | | | | | | |
In thousands | | 2013
Initiatives | | | 2012
Initiatives | | | 2011
Initiatives | | | Total | |
Balance at December 29, 2012 | | $ | — | | | $ | 2,918 | | | $ | 13 | | | $ | 2,931 | |
Restructuring charges | | | 11,195 | | | | 436 | | | | 2 | | | | 11,633 | |
Severance paid | | | (3,828 | ) | | | (3,225 | ) | | | (15 | ) | | | (7,068 | ) |
| | | | | | | | | | | | | | | | |
Balance at December 28, 2013 | | $ | 7,367 | | | $ | 129 | | | $ | — | | | $ | 7,496 | |
| | | | | | | | | | | | | | | | |
We expect the majority of the remaining severance and related benefits associated with the 2013 and 2012 initiatives to be paid by the end of fiscal 2014 and the costs associated with the termination of the multi-year marketing and sponsorship arrangement entered into by Jostens in 2007 to be paid by the end of 2016.
Other Factors Affecting Comparability
Our fiscal year ends on the Saturday closest to December 31st, and, as a result, a 53rd week is added approximately every sixth year. Our 2013 fiscal year ended on December 28, 2013. Fiscal years 2013, 2012, 2011, 2010 and 2009 each consisted of 52 weeks. Our 2014 fiscal year will include a 53rd week.
Critical Accounting Policies and Estimates
In the ordinary course of business, management makes a number of estimates and assumptions relating to the reporting of results of operations and our financial condition in the preparation of our financial statements in conformity with accounting principles generally accepted in the United States. We believe that the following discussion addresses our most critical accounting policies, which are those that are most important to the portrayal of our financial condition and results and require management’s judgment about the effect of matters that are uncertain.
On an ongoing basis, management evaluates its estimates and assumptions, including those related to revenue recognition, the continued value of goodwill and other intangibles, the recoverability of long-lived assets, pension and other postretirement benefits and income tax. Management bases its estimates and assumptions on historical experience, the use of independent third-party specialists and various other factors that are believed to be reasonable at the time the estimates and assumptions are made. Actual results may differ from these estimates and assumptions under different circumstances or conditions.
Revenue Recognition
We recognize revenue when the earnings process is complete, evidenced by an agreement between us and the customer, delivery and acceptance has occurred, collectability is probable and pricing is fixed or determinable. Revenue is recognized (1) when products are shipped (if shipped free on board “FOB” shipping point), (2) when products are delivered (if shipped FOB destination) or (3) as services are performed as determined by contractual agreement, but in all cases only when risk of loss has transferred to the customer and we have no further performance obligations.
Goodwill and Indefinite-Lived Intangible Assets
Goodwill is measured as the excess of the cost of an acquired entity over the fair value assigned to identifiable assets acquired and liabilities assumed. We are required to test goodwill and other intangible assets with indefinite lives for impairment annually, or more frequently if impairment indicators occur. The impairment test requires management to make judgments in connection with identifying reporting units, assigning assets and liabilities to reporting units, assigning goodwill and other indefinite-lived intangible assets to reporting units and determining the fair value of each reporting unit.
As part of the annual impairment analysis for each reporting unit, we engaged a third-party appraisal firm to assist in the determination of the estimated fair value of each unit. This determination included estimating the fair value using both the income and market approaches. The income approach requires management to estimate a number of factors for each reporting unit, including projected future operating results, economic projections, anticipated future cash flows and discount rates. The market approach estimates fair value using comparable marketplace fair value data from within a
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comparable industry grouping. Where applicable, we weighted both the income and market approach equally to estimate the concluded fair value of each reporting unit. The projections are based on management’s best estimate given recent financial performance, market trends, strategic plans and other available information. Changes in these estimates and assumptions could materially affect the determination of fair value and/or impairment for each reporting unit.
The most recent impairment testing was completed as of the beginning of the fourth quarter of fiscal year 2013. As part of such impairment test, we first evaluated the recoverability of goodwill at the reporting unit level by comparing the estimated fair value of each reporting unit to its carrying value. Based on this Step 1 test, the fair value of each reporting unit tested for impairment was in excess of its carrying value with the exception of our publishing services reporting unit, which is included in our Marketing and Publishing Services segment. Accordingly, we proceeded to perform Step 2 of the impairment test on the publishing services reporting unit’s goodwill which had a carrying value of $57.0 million. In performing the Step 2 analysis, it was determined that the implied fair value of the publishing services reporting unit’s goodwill was in excess of its carrying value, and, accordingly, no impairment charge was recognized. The fair value of each of the other reporting units tested for impairment was substantially in excess of its carrying value. Unforeseen events, however, could adversely affect the reported value of goodwill and indefinite-lived intangible assets, which at the end of fiscal 2013 and 2012 totaled approximately $1,180.1 million and $1,180.4 million, respectively.
In the fourth quarter of fiscal 2013, we made a strategic decision to no longer use a certain tradename in our Marketing and Publishing Services segment. In connection with this decision, we recorded an $8.2 million non-cash charge, which is reflected in the results of the Marketing and Publishing Services segment.
Income Taxes
As part of the process of preparing our consolidated financial statements, we are required to estimate our income taxes in each of the jurisdictions in which we operate. This process involves estimating our actual current tax liability together with assessing temporary differences resulting from differing treatment of items (such as, for example, capital assets) for tax and accounting purposes. These temporary differences result in deferred tax assets and liabilities, which are included in our Consolidated Balance Sheets. We must then assess the likelihood that any deferred tax assets will be recovered from taxable income of the appropriate character within the carryback or carryforward periods, and to the extent that recovery is not likely, a valuation allowance must be established. Significant management judgment is required in determining the provision for income taxes, deferred tax assets and liabilities and any valuation allowance recorded against deferred tax assets.
On a consolidated basis, we have established a tax valuation allowance of $2.5 million as of the end of fiscal year 2013 related to foreign tax credit and foreign net operating loss carryforwards, because we believe the tax benefits are not likely to be fully realized. The decrease in the tax valuation allowance from the fiscal year 2012 balance was due primarily to the expiration of $1.1 million of foreign tax credit carryforwards from 2003. As described in Note 13,Income Taxes, to our consolidated financial statements for the year ended December 28, 2013, we repatriated a total of $3.7 million of earnings from our foreign subsidiaries during fiscal year 2013. Due to our consolidated loss for U.S. income tax purposes as of December 28, 2013, no foreign tax credits were utilized for the 2013 fiscal year.
Significant judgment is also required in determining and evaluating our tax reserves. Tax reserves are established for uncertain tax positions which are potentially subject to challenge by applicable taxing authorities. We review our tax reserves as facts and circumstances change. Although the resolution of issues currently under tax audit is uncertain, based on currently available information, we believe the ultimate outcomes will not have a material adverse effect on our financial statements.
Pension and Other Postretirement Benefits
Jostens sponsors certain defined benefit pension plans for certain of its employees and those of Visant. Participation in such plans was closed to employees hired after December 31, 2005, other than for certain union employees. Effective January 1, 2008 and July 1, 2008, respectively, the pension plans covering Jostens’ hourly employees subject to Jostens’ two collective bargaining agreements were closed to new hires. Jostens also provides certain medical and life insurance benefits for eligible retirees. This plan was closed after December 31, 2005, other than for certain union employees and certain employees grandfathered into the plan on the basis of their age and tenure with Jostens as of December 31, 2005. Eligible employees from Lehigh also participate in a noncontributory defined
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benefit pension plan, which was merged with a Jostens plan effective December 31, 2004. Effective December 31, 2006, Lehigh closed participation for hourly employees hired after December 31, 2006 (currently there are no active hourly employees in such plan accruing benefits) and froze the plan for salaried and office administrative employees. Lehigh and Arcade also contribute to multi-employer pension plans for certain employees covered by collective bargaining agreements. Contribution amounts are determined by the respective collective bargaining agreement subject to escalation, and we do not administer or control the funds in any way.
Jostens also maintains an unfunded supplemental retirement plan (the “Jostens ERISA Excess Plan”) that gives additional credit for years of service as a Jostens’ sales representative to those salespersons who were hired as employees of Jostens prior to October 1, 1991, calculating the benefits as if such years of service were credited under Jostens’ tax-qualified, non-contributory pension plan for salaried employees (“Plan D”). Benefits specified in Plan D may exceed the level of benefits that may be paid from a tax-qualified plan under the Internal Revenue Code of 1986, as amended (the “Code”). The Jostens ERISA Excess Plan also pays benefits that would have been provided under Plan D but cannot because they exceed the level of benefits that may be paid from a tax-qualified plan under the Code. We also maintain non-contributory, unfunded supplemental retirement plans for certain executive officers.
Effective December 31, 2012, Visant’s qualified and non-qualified pension plans for non-bargained, active employees and its executive supplemental retirement agreements for executive officers were amended to freeze the accrual of additional benefits related to future service and compensation under the plans. Effective December 31, 2013, Visant’s qualified pension plan for bargained employees at Jostens’ Owatonna, Minnesota location was amended to freeze the accrual of additional benefits related to future service and compensation under the plan. Benefits accrued as of December 31, 2012 and December 31, 2013, respectively, were not affected. Employees will continue to accrue service during their employment solely for purposes of vesting in pension benefits accrued as of December 31, 2012 and December 31, 2013, as applicable, which were not yet vested upon the freeze based on the applicable multiple year service requirement for vesting. In addition, the freeze does not impact retirees currently receiving pension benefits or employees who have separated service with vested pension benefits.
The Financial Accounting Standards Board (“FASB”) issued accounting guidance related to pensions and postretirement benefits that requires management to use three key assumptions when computing estimated annual pension expense. These assumptions are the discount rate applied to the projected benefit obligation, the expected return on plan assets and the rate of expected compensation increases. Of the three key assumptions, only the discount rate is based on external market indicators, such as the yield on currently available high-quality, fixed-income investments or annuity settlement rates. The discount rate used to value the pension obligation at any year-end is used for expense calculations the next year. For the rates of expected return on assets and compensation increases, management uses estimates based on experience as well as future expectations. Due to the long-term nature of pension liabilities, management attempts to choose rates for these assumptions that will have long-term applicability.
The following is a summary of the three key assumptions that were used in determining 2013 pension expense, along with the impact of a 1% change in each assumed rate. Amounts appearing in parentheses indicate the amount by which annual pension expense would be reduced by a 1% change in the assumed rate. Modification of these assumptions does not impact the funding requirements for the qualified pension plans.
| | | | | | | | | | | | |
In thousands | | Rate | | | Impact of
1% increase | | | Impact of
1% decrease | |
Discount rate (1) | | | 4.19 | % | | $ | (173 | ) | | $ | (25 | ) |
Expected return on plan assets (2) | | | 8.50 | % | | $ | (2,583 | ) | | $ | 2,583 | |
Rate of compensation increases (3) | | | 3.40 | % | | $ | — | | | $ | — | |
| (1) | A discount rate of 4.19% was used for both the qualified and non-qualified pension plans. |
| (2) | The expected long-term rate of return on plan assets was 8.50%. |
| (3) | The average compensation rate was 3.40% for the Jostens salaried employee plans. |
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For the fiscal year ended December 28, 2013, we were not required to make any contributions to the qualified pension plans and contributed $2.7 million and $0.1 million to the non-qualified pension plans and postretirement welfare plans, respectively. Due to the funded status and exhaustion of the credit balances of the qualified plans, we will be required to make contributions under our qualified pension plans in 2014, estimated to be in an aggregate amount of $5.3 million.
Results of Operations
The following table sets forth selected information derived from our Consolidated Statements of Operations and Comprehensive Income (Loss) for fiscal years 2013, 2012 and 2011. In the text below, amounts and percentages have been rounded and are based on the amounts in our consolidated financial statements.
| | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | % Change | | | % Change | |
| | | Visant Corporation and Subsidiaries | | | between | | | between | |
| | | | | | | | | | | | 2012 and | | | 2011 and | |
In thousands | | 2013 | | | 2012 | | | 2011 | | | 2013 | | | 2012 | |
Net sales | | $ | 1,127,703 | | | $ | 1,155,342 | | | $ | 1,217,792 | | | | (2.4 | %) | | | (5.1 | %) |
Gross profit | | | 584,302 | | | | 605,852 | | | | 645,181 | | | | (3.6 | %) | | | (6.1 | %) |
% of net sales | | | 51.8 | % | | | 52.4 | % | | | 53.0 | % | | | | | | | | |
Selling and administrative expenses | | | 405,962 | | | | 426,376 | | | | 449,801 | | | | (4.8 | %) | | | (5.2 | %) |
% of net sales | | | 36.0 | % | | | 36.9 | % | | | 36.9 | % | | | | | | | | |
Gain on disposal of fixed assets | | | (835 | ) | | | (1,629 | ) | | | (910 | ) | | | NM | | | | NM | |
Special charges | | | 20,561 | | | | 75,905 | | | | 44,413 | | | | NM | | | | NM | |
Operating income | | $ | 158,614 | | | $ | 105,200 | | | $ | 151,877 | | | | 50.8 | % | | | (30.7 | %) |
% of net sales | | | 14.1 | % | | | 9.1 | % | | | 12.5 | % | | | | | | | | |
Interest expense, net | | | 155,268 | | | | 158,924 | | | | 164,136 | | | | (2.3 | %) | | | (3.2 | %) |
Gain on repurchase and redemption of debt | | | — | | | | (947 | ) | | | — | | | | NM | | | | NM | |
Provision for income taxes | | | 2,265 | | | | 5,823 | | | | 2,625 | | | | (61.1 | %) | | | 121.8 | % |
Net income (loss) | | $ | 1,081 | | | $ | (58,600 | ) | | $ | (14,884 | ) | | | 101.8 | % | | | (293.7 | %) |
NM = Not meaningful | | | | | | | | | | | | | | | | | | | | |
Our business is managed on the basis of three reportable segments: Scholastic, Memory Book and Marketing and Publishing Services. The following table sets forth selected segment information derived from our Consolidated Statements of Operations and Comprehensive Income (Loss) for fiscal years 2013, 2012 and 2011. For additional financial information about our operating segments, see Note 16,Business Segments, to the consolidated financial statements.
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | % Change | | % Change |
| | | Visant Corporation and Subsidiaries | | | between | | between |
| | | | | | | | | | | | 2012 and | | 2011 and |
In thousands | | 2013 | | | 2012 | | | 2011 | | | 2013 | | 2012 |
Net sales | | | | | | | | | | | | | | | | |
Scholastic | | $ | 431,895 | | | $ | 445,790 | | | $ | 474,667 | | | (3.1%) | | (6.1%) |
Memory Book | | | 331,339 | | | | 346,070 | | | | 362,380 | | | (4.3%) | | (4.5%) |
Marketing and Publishing Services | | | 365,011 | | | | 364,297 | | | | 380,774 | | | 0.2% | | (4.3%) |
Inter-segment eliminations | | | (542 | ) | | | (815 | ) | | | (29 | ) | | NM | | NM |
| | | | | | | | | | | | | | | | |
| | $ | 1,127,703 | | | $ | 1,155,342 | | | $ | 1,217,792 | | | (2.4%) | | (5.1%) |
| | | | | | | | | | | | | | | | |
Operating income (loss) | | | | | | | | | | | | | | | | |
Scholastic | | $ | 39,481 | | | $ | 25,260 | | | $ | 34,948 | | | 56.3% | | (27.7%) |
Memory Book | | | 101,920 | | | | 92,284 | | | | 103,137 | | | 10.4% | | (10.5%) |
Marketing and Publishing Services | | | 17,213 | | | | (12,344 | ) | | | 13,792 | | | 239.4% | | (189.5%) |
| | | | | | | | | | | | | | | | |
| | $ | 158,614 | | | $ | 105,200 | | | $ | 151,877 | | | 50.8% | | (30.7%) |
| | | | | | | | | | | | | | | | |
NM = Not meaningful | | | | | | | | | | | | | | | | |
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Year Ended December 28, 2013 Compared to the Year Ended December 29, 2012
Net Sales. Consolidated net sales decreased $27.6 million, or 2.4%, to $1,127.7 million for the fiscal year ended December 28, 2013 compared to $1,155.3 million for the prior year comparable period.
Net sales for the Scholastic segment for the fiscal year ended December 28, 2013 decreased by $13.9 million, or 3.1%, to $431.9 million compared to $445.8 million for the fiscal year ended December 29, 2012. This decrease was primarily attributable to lower volume in our high school jewelry and announcement products. Partially offsetting the decrease was the shift of approximately $4.0 million of jewelry sales to the 2013 fiscal year from the fall of 2012 due to the timing of orders.
Net sales for the Memory Book segment were $331.3 million for the fiscal year ended December 28, 2013, a decrease of 4.3%, compared to $346.1 million for the fiscal year ended December 29, 2012. This decrease was primarily attributable to 3.6% lower yearbook volume.
Net sales for the Marketing and Publishing Services segment increased to $365.0 million for the fiscal year ended December 28, 2013 compared to $364.3 million for the fiscal year ended December 29, 2012. This increase included sales attributable to our acquisition of Carestia, a leader in fragrance sampling in Europe, which closed on July 1, 2013. Excluding the impact attributable to the acquisition of Carestia, net sales declined $9.5 million compared to the fiscal year ended December 29, 2012, primarily due to lower sampling volume in North America, partially offset by higher revenues from our Latin American sampling operations and our direct mail operations.
Gross Profit. Consolidated gross profit decreased $21.6 million, or 3.6%, to $584.3 million for the fiscal year ended December 28, 2013 from $605.9 million for the fiscal year ended December 29, 2012. As a percentage of net sales, gross profit margin decreased slightly to 51.8% for fiscal year 2013 from 52.4% for the comparative prior year period. Excluding the impact attributable to our acquisition of Carestia, gross profit margin decreased to 52.1% for the year ended December 28, 2013 from 52.4% for the comparative period in 2012. The decrease in gross profit margin was primarily due to the impact of lower sales in our sampling operations as described in the preceding paragraph.
Selling and Administrative Expenses. Selling and administrative expenses decreased $20.4 million, or 4.8%, to $406.0 million for the fiscal year ended December 28, 2013 from $426.4 million for fiscal year 2012. Included in the fiscal 2013 amount was an aggregate of $7.0 million of non-recurring employment expense related to certain executive transitions and lower depreciation and amortization of $15.6 million. Excluding the impact of the non-recurring employment expense and lower depreciation and amortization, selling and administrative expenses for the year ended December 28, 2013 decreased approximately $11.8 million compared to the year ended December 29, 2012, which was primarily the result of a decrease in sales commissions driven by lower overall sales volumes in our Memory Book and Scholastic segments and cost reduction initiatives taken during fiscal years 2012 and 2013.
Special Charges. For the year ended December 28, 2013, we recorded $11.6 million of restructuring costs and $8.9 million of other special charges. Included in these charges were (a) $8.6 million of costs in the Marketing and Publishing Services segment consisting of a non-cash charge of $8.2 million related to the write-off of a tradename no longer in use, and $0.4 million of severance and related benefit costs associated with reductions in force; (b) $2.6 million of costs in the Scholastic segment consisting of $2.5 million of severance and related benefit costs associated with reductions in force and a non-cash charge of $0.1 million related to asset impairment charges associated with facility consolidations; and (c) $1.7 million of costs in the Memory Book segment consisting of $1.0 million of severance and related benefit costs associated with reductions in force and a non-cash charge of $0.7 million related to asset impairment charges associated with the consolidation of our Topeka, Kansas facility. Also included in special charges for the twelve months ended December 28, 2013 was $7.7 million related to the mutual termination of a multi-year marketing and sponsorship arrangement entered into by Jostens in 2007. The associated employee headcount reductions were 123, 21 and 18 in the Scholastic, Marketing and Publishing Services and Memory Book segments, respectively.
For the year ended December 29, 2012, we recorded $9.8 million of restructuring costs and $66.1 million of other special charges. Included in these charges were $58.0 million of costs in the Marketing and Publishing Services segment consisting of $55.3 million of non-cash impairment charges associated with the write-down of goodwill and
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$0.5 million of non-cash asset related impairment charges. Also included in such charges were $2.2 million of severance and related benefit costs. Special charges in the Scholastic segment included $8.9 million of non-cash impairment charges associated with the write-down of goodwill and $1.2 million of severance and related benefit costs associated with reductions in force. Special charges in the Memory Book segment included $7.8 million of costs consisting of $6.4 million of severance and related benefit costs associated with reductions in force and approximately $1.4 million of non-cash asset related impairment charges, in each case associated with the consolidation of its Clarksville, Tennessee and Topeka, Kansas facilities. The associated employee headcount reductions were 389, 60 and 39 in the Memory Book, Marketing and Publishing Services, and Scholastic segments, respectively.
Operating Income. As a result of the foregoing, our consolidated operating income increased $53.4 million to $158.6 million for the fiscal year ended December 28, 2013 compared to $105.2 million for the comparable period in 2012. As a percentage of net sales, operating income was 14.1% and 9.1% for the fiscal years ended December 28, 2013 and December 29, 2012, respectively.
Net Interest Expense. Net interest expense was comprised of the following:
| | | | | | | | |
In thousands | | 2013 | | | 2012 | |
Visant Corporation and Subsidiaries: | | | | | | | | |
Interest expense | | $ | 142,094 | | | $ | 145,778 | |
Amortization of debt discount, premium and deferred financing costs | | | 13,248 | | | | 13,225 | |
Interest income | | | (74 | ) | | | (79 | ) |
| | | | | | | | |
Interest expense, net | | $ | 155,268 | | | $ | 158,924 | |
| | | | | | | | |
Net interest expense decreased $3.6 million to $155.3 million for the fiscal year ended December 28, 2013 compared to $158.9 million for the comparative prior year period, primarily due to lower average borrowings.
Provision For Income Taxes. Our consolidated effective income tax rate was 67.7% and (11.0%) for the fiscal years ended December 28, 2013 and December 29, 2012, respectively. In 2012, the rate reflected the significant impact of a non-deductible goodwill write-off which reduced the effective rate substantially. Our effective tax rates for both 2013 and 2012 were significantly impacted by the unfavorable effects of foreign earnings repatriations. For 2013, the smaller base of pre-tax income, against which reconciling tax rate effects are measured, resulted in tax rate percentage effects that are not comparable or meaningful on a year-over-year basis. For 2014, we estimate a consolidated effective tax rate between 38% and 43% before the impact of any resolution of outstanding income tax audits or other nonrecurring items.
Net Income (Loss). As a result of the foregoing, net income was $1.1 million for the fiscal year ended December 28, 2013 compared to a net loss of $58.6 million for the fiscal year ended December 29, 2012.
Year Ended December 29, 2012 Compared to the Year Ended December 31, 2011
Net Sales. Consolidated net sales decreased $62.5 million, or 5.1%, to $1,155.3 million for the fiscal year ended December 29, 2012 compared to $1,217.8 million for the prior year comparable period.
Net sales for the Scholastic segment for the fiscal year ended December 29, 2012 decreased by $28.9 million, or 6.1%, to $445.8 million compared to $474.7 million for the fiscal year ended December 31, 2011. This decrease was primarily attributable to lower overall volume in jewelry and announcement products, as well as a shift in jewelry sales metal mix to lower priced metals. In addition, approximately $4.0 million of sales shifted to the first half of 2013 from the fourth quarter of 2012 due to the timing of deliveries to the end customer. This decrease was offset somewhat by higher prices in jewelry products due to higher metal costs.
Net sales for the Memory Book segment were $346.1 million for the fiscal year ended December 29, 2012, a decrease of 4.5%, compared to $362.4 million for the fiscal year ended December 31, 2011. This decrease was primarily attributable to lower volume.
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Net sales for the Marketing and Publishing Services segment decreased $16.5 million, or 4.3%, to $364.3 million for the fiscal year ended December 29, 2012, compared to $380.8 million for the fiscal year ended December 31, 2011. This decrease was primarily attributable to lower volume in our publishing services and direct mail operations partially offset by higher volume in our sampling operations.
Gross Profit. Consolidated gross profit decreased $39.3 million, or 6.1%, to $605.9 million for the fiscal year ended December 29, 2012 from $645.2 million for the fiscal year ended December 31, 2011. As a percentage of net sales, gross profit margin decreased slightly to 52.4% for fiscal year 2012 from 53.0% for the comparative prior year period. This decrease in gross profit margin was primarily due to the impact of lower overall sales and increased pension expense.
Selling and Administrative Expenses. Selling and administrative expenses decreased $23.4 million, or 5.2%, to $426.4 million for the fiscal year ended December 29, 2012 from $449.8 million for fiscal year 2011. This decrease was mainly due to lower overall commissions and stock-based compensation expense. As a percentage of net sales, selling and administrative expenses were 36.9% for each of fiscal years 2012 and 2011.
Special Charges. For the year ended December 29, 2012, we recorded $9.8 million of restructuring costs and $66.1 million of other special charges. Included in these charges were $58.0 million of costs in the Marketing and Publishing Services segment consisting of $55.3 million of non-cash impairment charges associated with the write-down of goodwill and $0.5 million of non-cash asset related impairment charges. Also included in such charges were $2.2 million of severance and related benefit costs. Special charges in the Scholastic segment included $8.9 million of non-cash impairment charges associated with the write-down of goodwill and $1.2 million of severance and related benefit costs associated with reductions in force. Special charges in the Memory Book segment included $7.8 million of costs consisting of $6.4 million of severance and related benefit costs associated with reductions in force and approximately $1.4 million of non-cash asset related impairment charges, in each case associated with the consolidation of its Clarksville, Tennessee and Topeka, Kansas facilities. The associated employee headcount reductions were 389, 60 and 39 in the Memory Book, Marketing and Publishing Services, and Scholastic segments, respectively.
For the year ended December 31, 2011, we recorded $7.9 million of restructuring costs and $36.5 million of other special charges. Included in these charges were $35.3 million of costs in the Marketing and Publishing Services segment consisting of $31.9 million of non-cash impairment charges associated with the write-down of goodwill in the amount of $24.9 million and other indefinite-lived intangible assets in the amount of $7.0 million and $1.0 million of severance and related benefit costs and $2.4 million of non-cash asset related impairment charges associated with the closure of our Milwaukee, Wisconsin facility. Special charges in the Memory Book segment included $6.6 million of costs consisting of $4.4 million of severance and related benefit costs associated with reductions in force and approximately $2.2 million of non-cash asset related impairment charges, in each case associated with the consolidation of our Clarksville, Tennessee and State College, Pennsylvania facilities. Special charges in the Scholastic segment included $2.2 million of severance and related benefit costs associated with reductions in force in connection with the consolidation of certain diploma operations. Also included in special charges were $0.3 million of severance and related benefit costs associated with the elimination of certain corporate management positions. The associated employee headcount reductions were 242, 137 and 46 in the Memory Book, Scholastic and Marketing and Publishing Services segments, respectively.
Operating Income. As a result of the foregoing, our consolidated operating income decreased $46.7 million to $105.2 million for the fiscal year ended December 29, 2012 compared to $151.9 million for the comparable period in 2011. As a percentage of net sales, operating income was 9.1% and 12.5% for the fiscal years ended December 29, 2012 and December 31, 2011, respectively.
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Net Interest Expense. Net interest expense was comprised of the following:
| | | | | | | | |
In thousands | | 2012 | | | 2011 | |
Visant Corporation and Subsidiaries: | | | | | | | | |
Interest expense | | $ | 145,778 | | | $ | 149,323 | |
Amortization of debt discount, premium and deferred financing costs | | | 13,225 | | | | 14,910 | |
Interest income | | | (79 | ) | | | (97 | ) |
| | | | | | | | |
Interest expense, net | | $ | 158,924 | | | $ | 164,136 | |
| | | | | | | | |
Net interest expense decreased $5.2 million to $158.9 million for the fiscal year ended December 29, 2012 compared to $164.1 million for the comparative prior year period, primarily due to lower average borrowings.
Provision For Income Taxes. Our consolidated effective income tax rate was (11.0%) and (21.4%) for the fiscal years ended December 29, 2012 and December 31, 2011, respectively. The effective tax rates for both 2012 and 2011 were significantly impacted by the unfavorable effect of the nondeductible goodwill impairment charges taken during each of the years. Foreign earnings repatriations also had unfavorable impacts on the effective tax rates for both annual periods. Comparisons of percentage changes year-over-year is not meaningful when the pre-tax income base for comparison changes significantly year-to-year. The impact of changes in the effective tax rate at which we expected deferred tax assets and liabilities to be realized or settled in the future was unfavorable in 2012 compared with a favorable tax rate impact in 2011. The change in effective deferred tax rates reflects our 2011 state income tax returns and the effects of certain changes in state tax laws.
Net Loss. As a result of the foregoing, we incurred a net loss for the fiscal year ended December 29, 2012 of $58.6 million compared to a net loss of $14.9 million for the fiscal year ended December 31, 2011.
Liquidity and Capital Resources
The following table presents cash flow activity for applicable periods noted below and should be read in conjunction with our Consolidated Statements of Cash Flows. The following presentation is solely with respect to Visant and its subsidiaries.
| | | | | | | | | | | | |
In thousands | | 2013 | | | 2012 | | | 2011 | |
Net cash provided by operating activities | | $ | 101,594 | | | $ | 111,741 | | | $ | 122,529 | |
Net cash used in investing activities | | | (48,473 | ) | | | (50,652 | ) | | | (53,684 | ) |
Net cash used in financing activities | | | (16,942 | ) | | | (36,606 | ) | | | (92,527 | ) |
Effect of exchange rate changes on cash | | | (333 | ) | | | (301 | ) | | | (501 | ) |
| | | | | | | | | | | | |
Increase (decrease) in cash and cash equivalents | | $ | 35,846 | | | $ | 24,182 | | | $ | (24,183 | ) |
| | | | | | | | | | | | |
Full Fiscal Year 2013
In 2013, cash provided by operating activities was $101.6 million compared with $111.7 million for the comparable prior year period. The decrease in cash from operating activities of $10.1 million was attributable to lower cash earnings, primarily due to lower overall sales.
Net cash used in investing activities for 2013 was $48.5 million compared with $50.7 million for the comparative 2012 period. The decrease was primarily driven by lower capital expenditures for purchases of property, plant and equipment of $17.8 million in 2013 versus the comparable 2012 period, partially offset by increased cash used in acquisitions of $16.9 million. Our capital expenditures relating to purchases of property, plant and equipment were $34.3 million and $52.1 million for 2013 and 2012, respectively.
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Net cash used in financing activities for 2013 was $16.9 million compared with $36.6 million for the comparable 2012 period. Net cash used in financing activities for each of 2013 and 2012 primarily consisted of $16.9 million and $38.7 million in long-term debt repayments, respectively.
During 2013, Visant transferred approximately $0.6 million of cash through Visant Secondary to Holdco to allow Holdco to settle equity with certain former managers.
Full Fiscal Year 2012
In 2012, cash provided by operating activities was $111.7 million compared with $122.5 million for the comparable prior year period. The decrease in cash from operating activities of $10.8 million was attributable to lower cash earnings, primarily due to lower overall sales.
Net cash used in investing activities for 2012 was $50.7 million compared with $53.7 million for the comparative 2011 period. The $3.0 million change was primarily driven by decreased acquisition activity of $4.7 million and lower capital expenditures for purchases of property, plant and equipment of $3.4 million in 2012 versus the comparable 2011 period. These decreases in cash used in investing activities were partially offset by lower proceeds from the sale of property, plant and equipment of $2.0 million in 2012. Our capital expenditures relating to purchases of property, plant and equipment were $52.1 million and $55.5 million for 2012 and 2011, respectively.
Net cash used in financing activities for 2012 was $36.6 million compared with $92.5 million for the comparable 2011 period. Net cash used in financing activities for 2012 primarily consisted of $38.7 million of long-term debt repayments. Net cash used in financing activities for 2011 primarily consisted of $76.3 million of long-term debt repayments and $16.6 million related to debt financing costs and related expenses in connection with the repricing of the Term Loan Credit Facility in March 2011.
On December 17, 2012, Visant made a voluntary pre-payment of $22.0 million on the outstanding Term Loan Credit Facility and repurchased for retirement in privately negotiated transactions $13.3 million in aggregate principal amount of Senior Notes.
Contractual Obligations
The following table shows due dates and amounts of our contractual obligations for future payments as of December 28, 2013:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Payments due by calendar year | |
In thousands | | Total | | | 2014 | | | 2015 | | | 2016 | | | 2017 | | | 2018 | | | Thereafter | |
Notes outstanding | | $ | 736,670 | | | $ | — | | | $ | — | | | $ | — | | | $ | 736,670 | | | $ | — | | | $ | — | |
Term loans | | | 1,140,406 | | | | — | | | | — | | | | 1,140,406 | | | | — | | | | — | | | | — | |
Operating leases | | | 24,993 | | | | 6,641 | | | | 5,319 | | | | 4,551 | | | | 3,687 | | | | 2,320 | | | | 2,475 | |
Capital leases | | | 3,888 | | | | 2,607 | | | | 585 | | | | 276 | | | | 276 | | | | 144 | | | | — | |
Equipment financing arrangements | | | 4,074 | | | | 2,374 | | | | 1,121 | | | | 534 | | | | 45 | | | | — | | | | — | |
Precious metals forward contracts | | | 15,771 | | | | 15,771 | | | | — | | | | — | | | | — | | | | — | | | | — | |
Benefit obligations (qualified) (1) | | | 14,800 | | | | 5,300 | | | | 7,200 | | | | 2,300 | | | | — | | | | — | | | | — | |
Benefit obligations (unqualified) (2) | | | 25,465 | | | | 2,793 | | | | 2,704 | | | | 2,845 | | | | 2,569 | | | | 2,469 | | | | 12,085 | |
Interest expense (3) | | | 482,827 | | | | 136,703 | | | | 136,387 | | | | 136,070 | | | | 73,667 | | | | — | | | | — | |
Management agreements (4) | | | 25,510 | | | | 3,944 | | | | 4,062 | | | | 4,184 | | | | 4,309 | | | | 4,439 | | | | 4,572 | |
Contractual capital equipment purchases | | | 826 | | | | 826 | | | | — | | | | — | | | | — | | | | — | | | | — | |
Promissory notes to former employees | | | 890 | | | | 526 | | | | 364 | | | | — | | | | — | | | | — | | | | — | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Total contractual cash obligations (5) | | $ | 2,476,120 | | | $ | 177,485 | | | $ | 157,742 | | | $ | 1,291,166 | | | $ | 821,223 | | | $ | 9,372 | | | $ | 19,132 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| (1) | Amounts represent projected future benefit payments to our funded qualified pension plans based on current assumptions. The estimated amount of our contributions to our funded qualified pension plans beyond 2014 is reflected but will be subject to change based on future asset and liability experience. Actual obligations may differ. |
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| (2) | Amounts represent projected future benefit payments for our unfunded non-qualified pension plans and postretirement welfare plans based on current assumptions. |
| (3) | Projected interest expense related to the variable rate term loans is based on market rates as of the end of 2013. |
| (4) | In October 2004, Holdco entered into a management agreement with KKR and DLJMBP III to provide management and advisory services to us. Holdco agreed to pay an annual fee of $3.0 million, effective October 2004, subject to 3% annual increases. Since the agreement does not have an expiration date other than in connection with the Sponsors no longer owning us, the obligation as presented above only reflects one additional year of management fees beyond 2018. |
| (5) | Our gross unrecognized tax benefit obligation at December 28, 2013 was $8.1 million of which $1.3 million is payable in 2014. It is not presently possible to estimate the years in which part or all of the balance would result in a cash disbursement. Also outstanding as of December 28, 2013 was $11.5 million in the form of letters of credit against the Revolving Credit Facility. |
Liquidity
We use cash generated from operations primarily for debt service obligations and capital expenditures and to fund other working capital requirements. In assessing our liquidity, we review and analyze our current cash on-hand, the number of days our sales are outstanding and capital expenditure commitments. Our ability to make scheduled payments of principal, or to pay the interest on, or to refinance our indebtedness, or to fund planned capital expenditures will depend on our future operating performance. Future principal debt payments are expected to be paid out of cash flows from operations, cash on-hand and, if consummated, future financings. Based upon the current level of operations, management expects our cash flows from operations along with availability under the Credit Facilities will provide sufficient liquidity to fund our obligations, including our projected working capital requirements, debt interest and retirement obligations and related costs, and capital spending for the foreseeable future. We expect to fund our acquisition of American Achievement with cash, new secured borrowings and the incurrence of other additional indebtedness. Please see, Part III, Item 13,Certain Relationships and Related Transactions, and Director Independence – Transactions with Sponsors – Other. To the extent we make future acquisitions, we may require new sources of funding, including additional debt or equity financing or some combination thereof, subject to the limitations of our existing debt instruments.
We experience seasonal fluctuations in our net sales and cash flow from operations, tied primarily to the North American school year. In particular, Jostens generates a significant portion of its annual net sales in the second quarter in connection with the delivery of caps, gowns and diplomas for spring graduation ceremonies and spring deliveries of school yearbooks, and a significant portion of its annual cash flow in the fourth quarter is driven by the receipt of customer deposits in our Scholastic and Memory Book segments. The net sales of our sampling and direct mail and commercial printed products have also historically reflected seasonal variations, and we generate a majority of the annual net sales in these businesses during the third and fourth quarters, including based on the timing of customers’ advertising campaigns which have traditionally been concentrated prior to the Christmas and spring holiday seasons. Based on the seasonality of our cash flow, we traditionally borrow under our Revolving Credit Facility during the third quarter to fund general working capital needs during this period of time when schools are generally not in session and orders are not being placed, and repay the amount borrowed for general working capital purposes in the fourth quarter when customer deposits in the Scholastic and Memory Book segments are received and customers’ advertising campaigns in anticipation of the holiday season generally increase.
We have substantial debt service requirements and are highly leveraged. As of December 28, 2013, we had total indebtedness of $1,884.8 million, including $1,140.4 million outstanding under the Term Loan Credit Facility, $736.7 million aggregate principal amount outstanding under the Senior Notes and $7.7 million of outstanding borrowings under capital lease and equipment financing arrangements and exclusive of $11.5 million of standby letters of credit outstanding and $11.9 million of original issue discount related to the Term Loan Credit Facility. Our cash and cash equivalents as of December 28, 2013 totaled $96.0 million. We had no outstanding borrowings under the Revolving Credit Facility as of December 28, 2013 (other than the $11.5 million outstanding in the form of standby letters of credit). As of December 28, 2013, we were in compliance with the financial covenants under our outstanding material debt obligations, including our consolidated total debt to consolidated EBITDA covenant. Our principal sources of liquidity are cash flows from operating activities and available borrowings under the Credit Facilities, which included $163.5 million of available borrowings (net of standby letters of credit) under the $175.0 million Revolving Credit Facility as of December 28, 2013.
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Our liquidity and our ability to fund our capital requirements will depend on the credit markets and our financial condition. The extent of any impact of credit market conditions on our liquidity and ability to fund our capital requirements or to undertake future financings will depend on several factors, including our operating cash flows, credit conditions, our credit ratings and credit capacity, the cost of financing and other general economic and business conditions that are beyond our control. If those factors significantly change or other unexpected factors adversely affect us, our business may not generate sufficient cash flows from operations or we may not be able to obtain future financings to meet our liquidity needs. Any refinancing of our debt could be on less favorable terms, including higher interest rates. In addition, the terms of existing or future debt instruments may restrict certain of our alternatives. We anticipate that, to the extent additional liquidity is necessary to fund our operations or make acquisitions, it would be funded through revolver borrowings, the incurrence of other indebtedness, additional equity issuances or a combination of these potential sources of liquidity. The possibility of consummating any such financing will be subject to conditions in the capital markets at such time. We may not be able to obtain this additional liquidity when needed on terms acceptable to us or at all.
As market conditions warrant, we and our Sponsors, including KKR and DLJMBP III and their affiliates, have and may from time to time in the future redeem or repurchase debt securities, in privately negotiated or open market transactions, by tender offer, exchange offer or otherwise subject to the terms of applicable contractual restrictions. We cannot give any assurance as to whether or when such repurchases or exchanges will occur and at what price.
On March 8, 2013, Visant made an aggregate payment of $12.0 million on the outstanding Term Loan Credit Facility, inclusive of a voluntary pre-payment of $1.3 million and a payment of $10.7 million under the excess cash flow provisions of the Term Loan Credit Facility.
Off-Balance Sheet Arrangements
Precious Metals Consignment Arrangement
We are party to a precious metals consignment agreement with a major financial institution under which we currently have the ability to obtain up to the lesser of a certain specified quantity of precious metals and $57.0 million in dollar value of consigned inventory. Under these arrangements, we do not take title to consigned inventory until payment. Accordingly, we do not include the value of consigned inventory or the corresponding liability in our consolidated financial statements. The value of consigned inventory at December 28, 2013 and December 29, 2012 was $15.6 million and $32.8 million, respectively. The agreement does not have a stated term, and it can be terminated by either party upon 60 days written notice. Additionally, we incurred expenses for consignment fees related to this facility of $0.8 million for fiscal 2013 and $1.1 million for each of fiscal 2012 and 2011. The obligations under the consignment agreement are guaranteed by Visant.
Other than our precious metals consignment arrangement and general operating leases, we have no off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that, in any case, are material to investors.
Recently Adopted Accounting Pronouncements
In May 2011, the FASB issued Accounting Standards Update 2011-04 (“ASU 2011-04”) which generally provides a uniform framework for fair value measurements and related disclosures between GAAP and the International Financial Reporting Standards (“IFRS”). Additional disclosure requirements in ASU 2011-04 include: (1) for Level 3 fair value measurements, quantitative information about unobservable inputs used, a description of the valuation processes used by the entity and a qualitative discussion about the sensitivity of the measurements to changes in the unobservable inputs, (2) for an entity’s use of a nonfinancial asset that is different from the asset’s highest and best use, the reason for the difference, (3) for financial instruments not measured at fair value but for which disclosure of fair value is required, the fair value hierarchy level in which the fair value measurements were determined and (4) the disclosure of all transfers between Level 1 and Level 2 of the fair value hierarchy. ASU 2011-04 became effective for interim and annual periods beginning on or after December 15, 2011. Our adoption of this guidance did not have a material impact on our financial statements.
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In June 2011, the FASB issued Accounting Standards Update 2011-05 (“ASU 2011-05”) which revises the manner in which entities present comprehensive income in their financial statements. This new guidance amends existing guidance by allowing only two options for presenting the components of net income and other comprehensive income: (1) in a single continuous financial statement, referred to as the statement of comprehensive income, or (2) in two separate but consecutive financial statements, consisting of an income statement followed by a separate statement of other comprehensive income. Also, items that are reclassified from other comprehensive income to net income must be presented on the face of the financial statements. ASU 2011-05 became effective for fiscal years, and interim periods within those years, beginning after December 15, 2011. Our adoption of this guidance did not have a material impact on our financial statements.
In September 2011, the FASB issued Accounting Standards Update 2011-08 (“ASU 2011-08”) which gives entities testing goodwill for impairment the option of performing a qualitative assessment before calculating the fair value of a reporting unit in Step 1 of the goodwill impairment test. If an entity determines, on the basis of qualitative factors, that the fair value of a reporting unit is, more likely than not, less than the carrying amount for such reporting unit, then the two-step goodwill impairment test would be required. Otherwise, further goodwill impairment testing would not be required. Companies are not required to perform the qualitative assessment for any reporting unit in any period and may proceed directly to Step 1 of the goodwill impairment test. A company that validates its conclusion by measuring fair value can resume performing the qualitative assessment in any subsequent period. ASU 2011-08 became effective for annual and interim goodwill impairment tests performed with respect to fiscal years beginning after December 15, 2011. Our adoption of this guidance did not have a material impact on our financial statements.
In September 2011, the FASB issued Accounting Standards Update 2011-09 (“ASU 2011-09”) which amends ASC 715-80 by increasing the quantitative and qualitative disclosures an employer is required to provide about its participation in significant multiemployer plans that offer pension or other postretirement benefits. The objective of ASU 2011-09 is to enhance the transparency of disclosures about (1) the significant multiemployer plans in which an employer participates, (2) the level of the employer’s participation in those plans, (3) the financial health of the plans and (4) the nature of the employer’s commitments to the plans. ASU 2011-09 is effective for fiscal years ending after December 15, 2011. Our adoption of this guidance did not have a material impact on our financial statements.
In December 2011, the FASB issued Accounting Standards Update 2011-12 (“ASU 2011-12”) which defers certain provisions of ASU 2011-05. One provision of ASU 2011-05 required entities to present reclassification adjustments out of accumulated other comprehensive income by component in both the statement in which net income is presented and the statement in which other comprehensive income is presented (for both interim and annual financial statements). This requirement is indefinitely deferred under ASU 2011-12 and will be further deliberated by the FASB at a future date. During the deferral period, all entities are required to comply with existing requirements for reclassification adjustments in Accounting Standards Codification 220, Comprehensive Income, which indicates that “an entity may display reclassification adjustments on the face of the financial statement in which comprehensive income is reported, or it may disclose reclassification adjustments in the notes to the financial statements.” The effective date of ASU 2011-12 for public entities is for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2011. Our adoption of this guidance did not have a material impact on our financial statements.
On July 27, 2012, the FASB issued Accounting Standards Update 2012-02 (“ASU 2012-02”) which amends the guidance on testing indefinite-lived intangible assets, other than goodwill, for impairment. Under ASU 2012-02, an entity testing an indefinite-lived intangible asset, other than goodwill, for impairment has the option of performing a qualitative assessment before calculating the fair value of the asset. Although ASU 2012-02 revises the examples of events and circumstances that an entity should consider in interim periods, it does not revise the requirements to test (1) indefinite-lived intangible assets annually for impairment and (2) between annual tests if there is a change in events or circumstances. ASU 2012-02 is effective for annual and interim impairment tests performed for fiscal years beginning after September 15, 2012, with early adoption permitted. Our adoption of this guidance did not have a material impact on our financial statements.
On January 31, 2013, the FASB issued Accounting Standards Update 2013-01 (“ASU 2013-01”), which clarifies the scope of the offsetting disclosure requirements. Under ASU 2013-01, the disclosure requirements would apply to derivative instruments accounted for in accordance with Accounting Standards Codification 815, Derivatives and Hedging (“ASC 815”), including bifurcated embedded derivatives, repurchase agreements and reverse repurchase agreements, and securities borrowing and securities lending arrangements that are either offset on the balance sheet or subject to an enforceable master netting arrangement or similar agreement. ASU 2013-01 became effective for interim and annual periods beginning on or after January 1, 2013. Retrospective application is required for all comparative periods presented. Our adoption of this guidance did not have a material impact on our financial statements.
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On February 5, 2013, the FASB issued Accounting Standards Update 2013-02 (“ASU 2013-02”), which amends existing guidance by requiring additional disclosure either on the face of the income statement or in the notes to the financial statements of significant amounts reclassified out of accumulated other comprehensive income. ASU 2013-02 became effective for interim and annual periods beginning on or after December 15, 2012, to be applied on a prospective basis. Our adoption of this guidance did not have a material impact on our financial statements.
On February 28, 2013, the FASB issued Accounting Standards Update 2013-04 (“ASU 2013-04”), which requires entities to measure obligations resulting from joint and several liability arrangements, for which the total amount of the obligation is fixed at the reporting date, as the sum of (1) the amount the reporting entity agreed to pay on the basis of its arrangement among its co-obligors and (2) any additional amount the reporting entity expects to pay on behalf of its co-obligors. Required disclosures include a description of the joint and several arrangement and the total outstanding amount of the obligation for all joint parties. ASU 2013-04 is effective for interim and annual periods beginning on or after December 15, 2013 and should be applied retrospectively to obligations with joint and several liabilities existing at the beginning of an entity’s fiscal year of adoption. Early adoption is permitted. We are currently evaluating the impact and disclosure under this guidance but do not expect this standard to have a material impact, if any, on our financial statements.
On March 4, 2013, the FASB issued Accounting Standards Update 2013-05 (“ASU 2013-05”), which indicates that the entire amount of a cumulative translation adjustment (“CTA”) related to an entity’s investment in a foreign entity should be released when there has been (1) the sale of a subsidiary or group of net assets within a foreign entity, and the sale represents the substantially complete liquidation of the investment in the foreign entity, (2) a loss of controlling financial interest in an investment in a foreign entity or (3) a step acquisition for a foreign entity. ASU 2013-05 does not change the requirement to release a pro rata portion of the CTA of the foreign entity into earnings for a partial sale of an equity method investment in a foreign entity. This guidance is effective for fiscal years, and interim periods within those fiscal years, beginning on or after December 15, 2013. We are currently evaluating the impact and disclosure under this guidance but do not expect this standard to have a material impact, if any, on our financial statements.
On July 17, 2013, the FASB issued Accounting Standards Update 2013-10 (“ASU 2013-10”), which amends ASC 815 to allow entities to use the federal funds effective swap rate, in addition to U.S. Treasury rates and LIBOR, as a benchmark interest rate in accounting for fair value and cash flow hedges in the United States. ASU 2013-10 also eliminates the provision in ASC 815 which prohibited the use of different benchmark rates for similar hedges except in rare and justifiable circumstances. ASU 2013-10 is effective prospectively for qualifying new hedging relationships entered into on or after July 17, 2013 and for hedging relationships redesignated on or after that date. Our adoption of this guidance did not have a material impact on our financial statements.
On July 18, 2013, the FASB issued Accounting Standards Update 2013-11 (“ASU 2013-11”), which provides guidance on the financial statement presentation of unrecognized tax benefits (“UTB”) when a net operating loss (“NOL”) carryforward, a similar tax loss or a tax credit carryforward exists. Under ASU 2013-11, an entity must present a UTB, or a portion of a UTB, in its financial statements as a reduction to a deferred tax asset (“DTA”) for a NOL carryforward, a similar tax loss or a tax credit carryforward, except when (1) a NOL carryforward, a similar tax loss or a tax credit carryforward is not available as of the reporting date under the governing tax law to settle taxes that would result from the disallowance of the tax position or (2) the entity does not intend to use the DTA for this purpose. If either of these conditions exists, an entity should present a UTB in the financial statements as a liability and should not net the UTB with a DTA. This guidance is effective for fiscal years beginning after December 15, 2013, with early adoption permitted. The amendment should be applied to all UTBs that exist as of the effective date. Entities may choose to apply the amendments retrospectively to each prior reporting period presented. We are currently evaluating the impact and disclosure under this guidance but do not expect this standard to have a material impact, if any, on our financial statements.
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| ITEM 7A. QUANTITATIVE | AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK |
Market Risk
We are subject to market risk associated with changes in interest rates, foreign currency exchange rates and commodity prices. To reduce any one of these risks, we may at times use financial instruments. All hedging transactions are authorized and executed under defined company policies and procedures, which prohibit the use of financial instruments for trading purposes.
Interest Rate Risk
We are subject to market risk associated with changes in LIBOR and other variable interest rates in connection with the Credit Facilities. If short-term interest rates or LIBOR averaged 10% more or less, interest expense would have changed by less than $0.1 million for 2013, and $0.1 million for each of 2012 and 2011.
Foreign Currency Exchange Rate Risk
We are exposed to market risks from changes in exchange rates of the currencies in the countries in which we do business. Although operating in local currencies may limit the impact of currency rate fluctuations on the operating results of our non-U.S. operations, fluctuations in such rates may affect the translation of these results into our consolidated financial statements. We currently have foreign operations primarily in Canada, Europe and Brazil where substantially all transactions are denominated in Canadian dollars, Euros and Real, respectively. From time to time, we enter into forward foreign currency exchange contracts to hedge certain purchases of inventory denominated in foreign currencies. We may also periodically enter into forward foreign currency exchange contracts to hedge certain exposures related to selected transactions that are relatively certain as to both timing and amount and to hedge a portion of the production costs expected to be denominated in foreign currencies. The purpose of these hedging activities is to minimize the impact of foreign currency fluctuations on our results of operations and cash flows. We consider our market risk in such activities to be immaterial.
Commodity Price Risk
We are subject to market risk associated with changes in the price of precious metals. To mitigate our commodity price risk, we enter into forward contracts from time to time to purchase gold, platinum and silver, in each case, based upon the estimated quantity needed to satisfy projected customer demand. We periodically prepare a sensitivity analysis to estimate our exposure to market risk on our open precious metal forward purchase contracts. We considered the market rate risk of approximately $3.7 million and $2.0 million with respect to such contracts as of the end of 2013 and 2012, respectively, to be immaterial. Market risk was estimated as the potential loss in fair value resulting from a hypothetical 10% adverse change in fair value and giving effect to the increase or decrease in fair value over our aggregate forward contract commitment.
| ITEM 8. | FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA |
The financial statements are set forth herein commencing onpage F-1 of this Report and are incorporated herein.
| ITEM 9. | CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE |
None.
| ITEM 9A. | CONTROLS AND PROCEDURES |
Evaluation of Disclosure Controls and Procedures
Our management, under the supervision of our Chief Executive Officer and Senior Vice President, Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Exchange Act) and internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act) as of the end of the period covered by this report. Based upon that evaluation, our Chief Executive Officer and Senior Vice President, Chief Financial Officer concluded that our disclosure controls and procedures are effective as of the end of the period covered by this report.
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Changes in Internal Control Over Financial Reporting
In addition, during the quarter ended December 28, 2013, there was no change in our internal control over financial reporting that materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
Report of Management on Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting. Management conducted an evaluation of the effectiveness of our internal control over financial reporting based on the framework inInternal Control – Integrated Framework (1992 framework) issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this evaluation, management concluded that our internal control over financial reporting was effective as of December 28, 2013.
| ITEM 9B. OTHER | INFORMATION |
None.
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PART III
| ITEM 10. | DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE |
Set forth below are the names, ages, positions and business backgrounds of our executive officers and directors as of March 21, 2014.
| | | | |
Name | | Age | | Position |
Marc L. Reisch | | 58 | | Chairman, President and Chief Executive Officer |
Marie D. Hlavaty | | 50 | | Senior Vice President, Chief Legal Officer and Secretary |
Paul B. Carousso | | 45 | | Senior Vice President, Chief Financial Officer |
Charles W. Mooty | | 53 | | President and Chief Executive Officer, Jostens |
David F. Burgstahler | | 45 | | Director |
George M.C. Fisher | | 73 | | Director |
Alexander Navab | | 48 | | Director |
Tagar C. Olson | | 36 | | Director |
Susan C. Schnabel | | 52 | | Director |
Marc L. Reisch joined Visant as Chairman, President and Chief Executive Officer upon the consummation of the Transactions in October 2004. Mr. Reisch had been a director of Jostens since November 2003.
Marie D. Hlavaty joined Visant upon the consummation of the Transactions in October 2004. Ms. Hlavaty currently serves as our Senior Vice President, Chief Legal Officer and Secretary.
Paul B. Carousso joined Visant in October 2004 upon consummation of the Transactions and currently serves as our Senior Vice President, Chief Financial Officer.
Charles W. Mooty joined Jostens as President and Chief Executive Officer effective January 1, 2014. Mr. Mooty served as Interim Chief Executive Officer and President of Fairview Health Services from 2012 to 2013. Prior to that, Mr. Mooty served as the Chief Executive Officer of Faribault Woolen Mill Co. from 2011 to 2013. Previously, Mr. Mooty served as the Chairman of the Board, President and Chief Executive Officer of International Dairy Queen, Inc. from 2003 to 2008. Mr. Mooty currently serves as a member of the Board of Directors of Fairview Health Services and Faribault Woolen Mill Co.
David F. Burgstahler is a Partner and the President of Avista Capital Partners, a leading private equity firm. Prior to joining Avista Capital Partners in 2005, Mr. Burgstahler was a Partner with DLJ Merchant Banking Partners, the private equity investment arm of Credit Suisse. Mr. Burgstahler joined Credit Suisse in 2000 when it merged with the investment bank Donaldson, Lufkin and Jenrette. Mr. Burgstahler joined Donaldson, Lufkin and Jenrette in 1995. Mr. Burgstahler also serves on the boards of WideOpenWest Holdings, Inc., AngioDynamics, Armored AutoGroup, INC Research, Strategic Partners, Lantheus Medical Imaging, Vertical/Trigen Holdings, LLC and ConvaTec. Mr. Burgstahler is a past member of the board of Warner Chilcott plc and BioReliance Corporation.
George M.C. Fisher is currently a senior advisor to KKR. Mr. Fisher served as Chairman of the Board of Eastman Kodak Company from December 1993 to December 2000 and was Chief Executive Officer from December 1993 to January 2000. Before joining Kodak, Mr. Fisher was Chairman of the Board and Chief Executive Officer of Motorola, Inc. Mr. Fisher is a past member of the boards of AT&T, American Express Company, Comcast Corporation, Delta Air Lines, Inc., Eli Lilly & Company, General Motors Corporation, Hughes Electronics Corporation, Minnesota Mining & Manufacturing, Brown University and The National Urban League, Inc. Mr. Fisher is also the former Chairman of PanAmSat Corporation. He was a member of The Business Council and is an elected fellow of the American Academy of Arts & Sciences. Mr. Fisher was also an appointed member of the President’s Advisory Council for Trade Policy and Negotiations from 1993 through 2002.
Alexander Navab is a Member of KKR. He joined KKR in 1993, and he currently co-heads KKR’s Americas private equity business and the Media and Communications industry team in the United States. Mr. Navab serves as Global Co-Chair of the Private Equity Investment Committees, as well as serving on the Special Situations Investment
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Committee, of KKR. Prior to joining KKR, Mr. Navab was with James D. Wolfensohn Incorporated, where he was involved in merger and acquisition transactions and corporate finance advisory work. From 1987 to 1989, he was with Goldman, Sachs & Co. in the Investment Banking division. Mr. Navab is also a director of The Nielsen Company (formerly VNU Group BV) and Weld North. Mr. Navab is a past member of the board of PanAmSat Corporation.
Tagar C. Olson is a Member of KKR. He joined KKR in 2002, and he currently heads KKR’s Financial Services industry team. Prior to joining KKR, Mr. Olson was with Evercore Partners Inc. since 1999, where he was involved in a number of private equity transactions and mergers and acquisitions. Mr. Olson is also a director of Alliant Insurance Services, First Data Corporation, Santander Consumer USA and Sedgwick Claims Management Services, Inc., and serves as an observer to the board of directors of WMI Holdings Corp.
Susan C. Schnabel is a Managing Director of Credit Suisse in the Private Banking and Wealth Management division and Co-Head of DLJ Merchant Banking Partners. She is responsible for originating new investments and monitoring existing investments and serves on the Investment Committee. Ms. Schnabel is also a member of the Investment Committee of Hudson Capital, a joint venture formed by Credit Suisse to invest in alternative energy. Ms. Schnabel joined Credit Suisse First Boston in 2000 through the merger with Donaldson, Lufkin & Jenrette, where she was a Managing Director. Ms. Schnabel is also a director of Deffenbaugh Industries, Enduring Resources, Laramie Energy, Luxury Optical Holdings, Neiman Marcus, Specialized Technology Resources Inc. and Summit Gas Resources. Ms. Schnabel is a past member of the boards of DeCrane Aircraft Holdings, DenMat Holdings, Frontier Drilling, Merrill Corporation, Piceance Energy, Pinnacle Gas, Rockwood Holdings, Target Media Partners and Total Safety Inc.
Director Qualifications
Our Board of Directors seeks to ensure that it is composed of members whose particular experience, qualifications, attributes and skills, when taken together, enable the Board of Directors to satisfy its oversight responsibilities effectively. In identifying candidates for membership on the Board of Directors, we take into account individual qualifications, such as high ethical standards, integrity, mature, careful judgment, financial acumen and facility in the areas of capital markets, mergers and acquisitions and innovation, industry knowledge or experience and an ability to work collegially with the other members of the Board of Directors and other factors we may consider appropriate, including alignment with our stockholders, in particular the Sponsors.
Messrs. Burgstahler, Fisher, Navab and Olson and Ms. Schnabel (the “Sponsor Directors”) were appointed to our Board of Directors as a consequence of their respective relationships with the Sponsors and, in the case of Mr. Reisch, the Sponsors’ knowledge and familiarity with Mr. Reisch and his past accomplishments. Each is appointed under the terms of the 2004 Stockholders Agreement (as defined below). None of the members of our Board of Directors would be considered independent under the listing standards of the New York Stock Exchange.
When considering whether the directors have the experience, qualifications, attributes and skills, taken as a whole, to enable the Board of Directors to satisfy its oversight responsibilities effectively in light of our business and structure, the Sponsors and the Board of Directors focus primarily on each candidate’s prior experience.
Each of our directors possesses high ethical standards, acts with integrity, and exercises careful, mature judgment. Each is committed to employing his or her skills and abilities to aid the long-term interests of our stakeholders. In addition, our directors are knowledgeable and experienced in one or more business, governmental, or civic endeavors, which further qualifies them for service as members of the Board of Directors. Alignment with our stockholders is important in building value over time. As a group, Mr. Reisch and the Sponsor Directors possess experience in owning and managing enterprises like the Company and are familiar with corporate finance, strategic business planning activities and issues involving stakeholders more generally.
Our Board of Directors
Our Board of Directors is currently composed of six members. Each of the existing directors was appointed upon the consummation of the Transactions in October 2004, other than Mr. Fisher, who was appointed in November 2005, and Ms. Schnabel, who was appointed in October 2010. Under the stockholders agreement entered into in connection with the Transactions (the “2004 Stockholders Agreement”), KKR and DLJMBP III each has the right to designate four of our directors (currently three KKR and three DLJMBP III designees serve on our board), and our Chief Executive Officer and President, Marc Reisch, is Chairman. Our Board of Directors currently has three standing committees: an Audit Committee, a Compensation Committee and an Executive Committee. We expect the chair of each of the Audit Committee and the Compensation Committee to rotate annually between a director designated by KKR and a director designated by DLJMBP III, consistent with the terms of the 2004 Stockholders Agreement.
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Audit Committee
The primary duties of the Audit Committee include assisting the Board of Directors in its oversight of: (1) the integrity of our financial statements and financial reporting process; (2) the integrity of our internal controls regarding finance, accounting and legal compliance; and (3) the independence and performance of our independent auditor and internal audit function. The Audit Committee also reviews our critical accounting policies, our annual and quarterly reports on Form 10-K and Form 10-Q and our earnings releases before they are issued. The Audit Committee has sole authority to engage, evaluate and replace the independent auditor. The Audit Committee also has the authority to retain special legal, accounting and other consultants it deems necessary in the performance of its duties. The Audit Committee meets regularly with our management, independent auditor and internal auditor to discuss our internal controls and financial reporting process and also meets regularly with our independent auditor and internal auditor in private.
The members of the Audit Committee as of the end of fiscal 2013 were Messrs. Burgstahler (Chair) and Olson. The Board of Directors has determined that each of the current members qualifies as an “audit committee financial expert” through their relevant work experience as described above. Mr. Burgstahler is a Partner and President of Avista Capital Partners, and Mr. Olson is a Member of KKR. Neither of the members of the Audit Committee is considered “independent” as defined under the federal securities law. Effective as of April 2014, the Audit Committee will be comprised of Messrs. Burgstahler and Olson, and Mr. Olson will serve as Chair.
Compensation Committee
The primary duty of the Compensation Committee is to discharge the responsibilities of the Board of Directors relating to compensation practices and policies for our executive officers and other key employees, as the Committee may determine, to ensure that management’s interests are aligned with the interest of our equity holders. The Committee also reviews and makes recommendations to the Board of Directors with respect to our employee benefits plans, compensation and equity based plans and compensation of directors. The members of the Compensation Committee as of the end of fiscal 2013 were Messrs. Olson (Chair), Navab and Burgstahler and Ms. Schnabel. Effective as of April 2014, the Compensation Committee will be comprised of Ms. Schnabel and Mr. Olson, and Ms. Schnabel will serve as Chair.
Executive Committee
The current members of the Executive Committee are Messrs. Reisch and Olson and Ms. Schnabel. The Executive Committee may exercise all decision-making authority on behalf of the Board of Directors other than those matters that under Delaware law are expressly reserved to the entire Board of Directors.
Code of Ethics
We have adopted Business Conduct and Ethics Principles which cover our entire organization, including our Chief Executive Officer, Senior Vice Presidents, Chief Financial Officer and Corporate Controller and our Directors. We require senior management employees and employees with a significant role in internal control over financial reporting to confirm compliance with this code on an annual basis. Any changes to, or waiver (as defined under Item 5.05 of Form 8-K) from, our code that applies to our Chief Executive Officer, Senior Vice Presidents, Chief Financial Officer or Corporate Controller will be posted on our website. A copy of our current Business Conduct and Ethics Principles can be found on our website athttp://www.visant.net.
Section 16(a) Beneficial Ownership Reporting Compliance
Our executive officers and directors are not subject to the reporting requirements of Section 16 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”).
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| ITEM 11. | EXECUTIVE COMPENSATION |
Compensation Discussion and Analysis
Overview
This compensation discussion and analysis (the “Compensation Discussion and Analysis”) describes the material elements, policies and practices with respect to our principal executive officer, principal financial officer and our one other executive officer as of the end of fiscal year 2013, who are collectively referred to as the “named executive officers” in this Compensation Discussion and Analysis. This Compensation Discussion and Analysis also describes the material elements of compensation awarded to, earned by, or paid to each of the named executive officers. This section should be read in conjunction with the tables and narrative discussion of our executive compensation program that follows this discussion.
We provide what we believe is a competitive total compensation package to our executive management team through a combination of base salary, an annual cash incentive program, long-term equity-based incentives in the form of stock options, restricted stock and/or phantom equity, retirement and other benefits, perquisites, post-termination severance and equity award liquidity upon certain termination events and/or a change in control. Certain other post-termination retirement benefits are provided to our Chief Executive Officer (“CEO”). Our current retirement and other benefits include life, disability, medical, dental and vision insurance benefits and a qualified 401(k) savings plan and our perquisites generally include reimbursement for certain medical expenses and may include a car allowance.
Objectives of our Executive Compensation Program
Our compensation programs are designed to achieve the following objectives:
| | • | | attract, motivate, retain and reward talented and dedicated executives whose knowledge, skill and performance are critical to our success and long-term growth; |
| | • | | provide our executive officers with a balanced compensation opportunity, including both cash and equity or equity-based incentives, to further our interests and those of our stockholders; |
| | • | | provide cash and long-term incentive compensation that is competitive based on comparable market position; |
| | • | | align rewards to measurable performance metrics and to the interest of our stockholders through awards that vest based on the achievement of strategic objectives with the goal of enhancing long-term stockholder value; and |
| | • | | compensate our executives to manage our business to achieve long-range objectives and sustainable growth. |
Compensation Process
Our Compensation Committee, the members of which serve at the pleasure of our Sponsors, reviews and approves the principal elements of compensation for our named executive officers. The Compensation Committee meets outside the presence of all of our executive officers to consider appropriate compensation for our CEO, Marc Reisch. The Compensation Committee considers feedback from the Board of Directors and Mr. Reisch in establishing Mr. Reisch’s compensation and setting objectives for the ensuing year. For all other executive officers, the Committee meets outside the presence of the executive officers other than Mr. Reisch. Mr. Reisch annually reviews executive officer’s performance with the Compensation Committee and makes recommendations to the Compensation Committee. The Compensation Committee has from time to time reviewed market and industry data in setting compensation, and from time to time, we have retained outside compensation consultants to benchmark certain of our executive positions to provide another measure of compensation levels for executive positions within our company to companies with a comparative revenue base to ours. Positions were matched based on title and responsibilities of the position with comparable positions in the market based on similar company revenue size found within the published survey data of leading human resource organizations. We evaluated base salary and short- and long-term compensation information within the survey information. We may from time to time in the future have benchmarking performed to assist the Compensation Committee in setting executive compensation.
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Base Salary
We provide the opportunity for our named executive officers and other executives to earn a competitive annual base salary in order to attract and retain an appropriate caliber of ability, experience and talent for the position and to provide base compensation that is not subject to our performance risk. We establish the base salary for each executive officer based in part in consideration of competitive factors as well as individual factors, such as the individual’s scope of duties, performance and experience and, to a certain extent, the pay of others on the executive team. When establishing the base salary of any executive officer, we have also considered competitive market factors, business demands for certain skills, individual experience and contributions, the roles and responsibilities of the executive, and the potential impact the individual may make on our business. The base salaries for our named executive officers are generally reviewed on an 18-month or longer cycle taking into consideration market conditions, existing level of compensation and responsibilities. Adjustments to base salary take into consideration the foregoing factors, individual performance and expanded duties, as applicable.
None of the named executive officers received an increase in base salary during 2013 other than Mr. Carousso, whose salary was adjusted from $325,000 to $390,000 to assure alignment with market rates for his position and level of responsibility.
Annual Performance-Based Cash Incentive Compensation
General. We generally provide the opportunity for our named executive officers and other key employees to earn an annual cash incentive award in order to further align our executives’ compensation opportunity with our annual business and financial goals and the objectives of our stockholders, to motivate our executives’ annual performance and to ensure an overall competitive cash compensation opportunity. Our annual cash incentives in the form of management bonus programs generally link the compensation of participants directly to the accomplishment of specific business metrics and strategic initiatives. The Compensation Committee also considers market and other competitive conditions, extraordinary achievements and contributions to strategic and operating initiatives in establishing annual incentive awards.
Under the annual incentive programs, the Compensation Committee may also consider adjustments to performance goals. These adjustments may reflect all or a portion of both the positive or negative effect of external non-recurring events that are outside the reasonable control of our executives, including, without limitation, regulatory changes in accounting or taxation standards. These adjustments may also reflect all or a portion of both the positive or negative effect of unusual or extraordinary transactions that are within the control of our executives but that are undertaken with an expectation of improving our long-term financial performance or growth, such as consolidation activities, restructurings, acquisitions or divestitures.
Consolidated and business unit budgets and business plans which contain both annual financial and strategic objectives are developed by management and reviewed each year by the Board of Directors, which institutes such changes that are deemed appropriate by the Board. The budgets and business plans generally set the basis for the annual incentive program thresholds, targets and stretch measures. The annual management bonus program targets and other material terms by business unit are presented to the Compensation Committee for review and approval with such modifications deemed appropriate by the Compensation Committee. The specific objectives set for our named executive officers are not disclosed because we believe disclosure of this information would cause our company competitive harm and, in certain cases, would indicate material non-public strategic initiatives. There is risk that the targets will not be achieved in whole or in part. This uncertainty ensures that any payments under the plan are truly performance-based.
Annual cash award opportunity for executive officers is typically expressed as a percentage of qualifying base salary, with an established percentage for payout based on meeting the respective threshold or target objective, and enhanced opportunity based on certain stretch targets or extraordinary performance being achieved.
Annual management bonus program awards for our eligible named executive officers and other eligible executives are calculated following the completion of the annual audit, based on our performance against the respective annual objectives, subject to the exercise of discretion by the Compensation Committee as discussed in this section. The award amounts of all eligible officers, including any named executive officers, must be reviewed and approved by the Compensation Committee. Approved payments under the annual incentive programs are made not later than March 15th of the year following the fiscal year during which performance is measured.
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For 2013, the Compensation Committee evaluated achievement of the annual bonus opportunity based on key strategic or operating deliverables intended to drive operating and financial performance and strategic objectives. The Compensation Committee also considered market and other competitive factors, extraordinary achievement, strategic contributions and executive retention in establishing annual bonus payments.
For the 2013 fiscal year, annual cash bonus opportunities for the named executive officers at target are summarized below:
| | | | | | | | |
| | | Target Annual Cash Incentive
Award Opportunity | |
| | | % of Salary | | | Amount | |
Marc L. Reisch | | | 125 | % | | $ | 1,187,500 | |
Paul B. Carousso | | | 55 | % | | $ | 214,500 | |
Marie D. Hlavaty | | | 55 | % | | $ | 233,750 | |
Messrs. Reisch and Carousso and Ms. Hlavaty received payments under the annual management bonus program for fiscal year 2013 of $1,187,500, $214,500 and $233,750 respectively, which are reflected in the Summary Compensation Table and accompanying notes.
2014 Annual Management Bonus Opportunity. For 2014, we plan to continue to employ an approach that will drive operating and financial performance and strategic initiatives, as well as considering market and other competitive factors, extraordinary achievement and contributions and executive retention in establishing annual incentive payments and other incentive arrangements for 2014.
Other. Our Compensation Committee reserves the right to grant discretionary bonuses from time to time based on individual contribution impacting the business.
Equity-Based Incentives
General. We have generally offered incentive opportunities to our executives to promote long-term performance, strategic objectives and tenure, through grants of stock options, restricted stock and phantom equity to be paid out in cash based on the achievement of performance or service targets. Other types of long-term equity incentive compensation based on the appreciation of the Class A Common Stock may be considered in the future. Such equity incentive plans and arrangements are designed to:
| | • | | promote our long-term financial interests and performance by attracting and retaining management with the training, experience and ability to enable them to make a substantial contribution to the success of our business; |
| | • | | motivate management by means of growth-related incentives to achieve long-range goals; and |
| | • | | further the alignment of interests of participants with those of our stockholders through stock-based opportunities. |
The Compensation Committee serves as the administrator of such equity-based incentive plans and arrangements, with the power and authority to administer, construe and interpret the equity plans, to make rules for carrying out the plans and to make changes in such rules, subject to such interpretations, rules and administration being consistent with the basic purpose of the plans. Subject to the general parameters of the plans, the Compensation Committee has the discretion to fix the terms and conditions of the grants. Equity awards are granted based on the fair market value of the Class A Common Stock or the common stock of the respective subsidiary as determined by the Compensation Committee after evaluation of a fair market valuation conducted by an independent third party expert on a periodic basis.
Messrs. Reisch and Carousso and Ms. Hlavaty each made an investment in the Class A Common Stock in connection with the Transactions with his or her own personal funds. In turn, the number of Class A Common Stock options granted was based on a multiple of the respective level of individual investment. In consideration of his services in consummating the Transactions and in connection with entering into an employment agreement with us, Mr. Reisch also received at the consummation of the Transactions a grant of restricted stock as a further long-term
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incentive opportunity. No additional equity has been awarded to the named executive officers since their original investments, except that Mr. Carousso and Ms. Hlavaty were granted 600 and 1,000 shares, respectively, of restricted shares of Class A Common Stock in 2008, which shares vested in January 2010. The restricted stock was used as a means to recognize significant accomplishments of the recipients and to incentivize each individual’s continued tenure, commitment and performance for us and align the interests of our executive officers with our stockholders.
In connection with his employment as Chief Executive Officer of Jostens, Charles W. Mooty is expected to make a personal investment in the Class A Common Stock and be granted restricted shares of Class A Common Stock and earned appreciation rights that will be valued based on the fair market value of Jostens’ common stock.
The Compensation Committee reserves the right to issue additional equity-based incentives in the form of stock options, restricted stock and earned appreciation rights or other phantom shares to our executive officers upon in consideration of performance and for the purpose of assuring retention of executive talent aligned with long-term performance and strategic objectives and, in the case of equity, subject to shares remaining available for grant under the Third Amended and Restated 2004 Stock Option Plan for Key Employees of Visant Holding Corp. and Subsidiaries (the “2004 Plan”) or a successor plan. See “—Equity-based Compensation”.
We do not have any program, plan or obligation that requires us to grant equity compensation on specified dates. However, to the extent that additional grants have been or will be made by us to other members of management, we intend to limit grants to once per year. We also have issued and may from time to time issue equity to new executive management, including those who come into our employment in connection with the consummation of acquisitions by us.
Stock Options. Stock option awards provide our executive officers with the right to purchase shares of the Class A Common Stock at a fixed exercise price for a period of up to ten years from the option grant date under the 2004 Plan and may be either “time-based” or “performance-based”. Time-based options vest on the passage of time and an executive’s continued tenure. Performance-based options granted to date have vested based on the achievement of annual EBITDA targets and on an executive’s continued tenure. The purpose of the performance-based grant is to align management and stockholder interests. Options are subject to certain change of control and post-termination of employment vesting and expiration provisions. See “—Equity-based Compensation” for a discussion of the vesting, change in control and other provisions related to stock options under the 2004 Plan.
Restricted Stock. We also use restricted Class A Common Stock in our long-term equity incentive program as part of our management incentive, development, succession, and retention planning process. The restricted stock is generally subject to the same rights and restrictions set forth in the management stockholders’ agreement and sale participation agreement described under “—Equity-based Compensation”.
Phantom Equity. We have also issued and may from time to time issue phantom equity in the form of phantom shares or earned appreciation rights under our long-term incentive programs under which the awards and payments earned under the program are valued and paid in cash based on the fair market value of the Class A Common Stock or, in certain cases, the common stock of the subsidiary by which the executive is employed, in consideration of performance and for the purpose of assuring retention of talent.
Pension Benefits
Each of Marc L. Reisch, Paul B. Carousso and Marie D. Hlavaty has participated in a qualified pension plan and a non-qualified supplemental pension plan to compensate for Internal Revenue Service limitations. These benefits were provided as part of the regular retirement program available to eligible employees. We have also maintained individual non-contributory, non-qualified, unfunded supplemental retirement arrangements (“SERPs”) for certain named executive officer participants. Mr. Reisch also participated in an additional retirement benefit under the terms of his employment arrangements, and any payment thereunder is net of benefits to which he would otherwise be entitled under any other qualified or non-qualified defined benefit retirement plans. The accrual of additional benefits under these qualified and non-qualified retirement arrangements was frozen as of the end of calendar year 2012. For more detailed information, see the narrative accompanying the “Pension Benefits” table.
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Employment Agreements and Change in Control Provisions
Except with respect to our CEO, Marc L. Reisch, and Charles W. Mooty, the Chief Executive Officer of Jostens, we do not have any employment agreements with any of the executive officers discussed under this Compensation Discussion and Analysis. It is generally not our philosophy or practice to enter into employment agreements with our executives. Absent exigent competitive factors, we believe that our short- and long-term compensation practices and opportunities are competitively attractive and favorably motivate our executives towards performance and continuity of service.
Employment Agreement with Marc L. Reisch. In October 2004, Holdco entered into an employment agreement with Mr. Reisch with an initial term extending to December 31, 2009. The agreement was amended and restated in May 2010 with a term in effect through December 31, 2010, and automatic one-year renewal terms thereafter unless not renewed by prior written notice by either party to the other. Mr. Reisch’s employment agreement provides for certain post-termination payments and benefits which we believe are competitively reasonable and reflect Mr. Reisch’s value to us.
Employment Agreement with Charles W. Mooty. In November 2013, Jostens entered into an employment agreement with Mr. Mooty for a term commencing January 1, 2014 and continuing through December 31, 2017, with automatic one-year renewal terms thereafter unless not renewed by prior written notice by either party to the other. Mr. Mooty’s employment agreement provides for certain post-termination payments and benefits which we believe are competitively reasonable and reflect Mr. Mooty’s value to us.
The employment agreements are further described in the section entitled “—Employment Agreements and Arrangements”.
Change in Control Agreements. In 2007, we and Holdco entered into a change in control severance agreement with each of Paul B. Carousso, Senior Vice President, Chief Financial Officer, and Marie D. Hlavaty, Senior Vice President, Chief Legal Officer and Secretary. The agreements allow for certain payments and benefits upon a change in control as described in “—Termination, Severance and Change of Control Arrangements—Arrangements with Paul B. Carousso and Marie D. Hlavaty”. We provided these arrangements to assure the retention of these officers and in the absence of any other contractual severance arrangements. We believe that the post-termination payments and benefits are competitively reasonable and reflect Mr. Carousso’s and Ms. Hlavaty’s value to us.
Executive Benefits
We provide the opportunity for our named executive officers and other executives to receive certain general health and welfare benefits on terms consistent with other eligible employees. We also offer participation in our defined contribution 401(k) plan with a company match on terms consistent with other eligible employees. We provide certain perquisites to the named executive officers, including car allowance, medical stipend to apply to reimburse medical expenses, periodic physicals and extended coverage under long-term disability insurance, and in the case of certain of the named executive officers, financial planning and a health club stipend. We provide these benefits to offer additional incentives for our executives and to remain competitive in the general marketplace for executive talent.
Stock Ownership Guidelines
The Compensation Committee has not implemented stock ownership guidelines for our executive officers. Neither our stock nor Holdco’s stock is publicly traded. Stock granted to management is subject to agreements with our Sponsors that limit a stockholder’s ability to transfer his or her equity for a period of time following grant.
Regulatory Considerations
The compensation cost to us of awarding equity is taken into account in considering awards under the equity or equity-based incentive programs. We have taken steps to structure and assure that the compensation programs and arrangements are in compliance with Section 409A of the Code. Bonuses paid under the annual incentive plans and compensation under the long-term incentive arrangements are taxable at the time paid to our executives.
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Tax Gross-Up
Mr. Reisch’s employment agreement provides for a tax gross-up payment in the event that any amounts or benefits due to him would be subject to excise taxes under Section 280G of the Code. For more detailed information on gross-ups for excise taxes payable to Mr. Reisch, see “—Employment Agreements and Arrangements—Employment Arrangements with Marc L. Reisch—Gross-Up Payments for Excise Taxes”.
Compensation Committee Report
The Compensation Committee has reviewed and discussed the Compensation Discussion and Analysis with management. Based upon such review and discussions, the Compensation Committee recommended to the Board of Directors that the Compensation Discussion and Analysis be included in this Annual Report on Form 10-K.
The Compensation Committee of the Board of Directors
Tagar C. Olson, Chairman
David F. Burgstahler
Alexander Navab
Susan C. Schnabel
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Compensation Committee Interlocks and Insider Participation
Our Compensation Committee is comprised of Messrs. Burgstahler, Navab and Olson and Ms. Schnabel. Mr. Olson has been the Chair of the Committee since April 2013. For a description of the transactions between us and entities affiliated with members of the Compensation Committee, see the transactions described in “Certain Relationships and Related Transactions, and Director Independence”.
Summary Compensation Table
The following table presents compensation information paid to or accrued to the named executive officers for our fiscal years ended December 28, 2013, December 29, 2012 and December 31, 2011.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Name and Principal Position | | Year | | | Salary
($) | | | Bonus
($) | | | Stock
Awards
($) | | | Option/
Unit
Awards
($) | | | Non-Equity
Incentive Plan
Compensation
($) | | | Change in
Pension Value
and
Nonqualified
Deferred
Compensation
Earnings
($)(5) | | | All Other
Compensation
($) | | | Total $ | |
Marc L. Reisch | | | 2013 | | | $ | 950,000 | | | $ | 250,000 | (1) | | $ | — | | | $ | — | | | $ | 1,187,500 | (3) | | $ | — | | | $ | 76,347 | (6) | | $ | 2,463,847 | |
Chairman, President and Chief Executive Officer | | | 2012 | | | $ | 950,000 | | | $ | — | | | $ | — | | | $ | — | | | $ | 250,000 | | | $ | 628,210 | | | $ | 118,365 | | | $ | 1,946,575 | |
| | | 2011 | | | $ | 950,000 | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | 320,246 | | | $ | 27,938 | | | $ | 1,298,184 | |
Paul B. Carousso | | | 2013 | | | $ | 372,500 | | | $ | — | | | $ | — | | | $ | — | | | $ | 214,500 | (3) | | $ | — | | | $ | 25,788 | (7) | | $ | 612,788 | |
Senior Vice President, Chief Financial Officer | | | 2012 | | | $ | 325,000 | | | $ | — | | | $ | — | | | $ | — | | | $ | 178,750 | | | $ | 163,551 | | | $ | 28,600 | | | $ | 695,901 | |
| | | 2011 | | | $ | 317,212 | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | 75,253 | | | $ | 24,500 | | | $ | 416,965 | |
Marie D. Hlavaty | | | 2013 | | | $ | 425,000 | | | $ | — | | | $ | — | | | $ | — | | | $ | 233,750 | (3) | | $ | — | | | $ | 26,625 | (8) | | $ | 685,375 | |
Senior Vice President, Chief Legal Officer | | | 2012 | | | $ | 425,000 | | | $ | — | | | $ | — | | | $ | — | | | $ | 233,750 | | | $ | 253,394 | | | $ | 23,376 | | | $ | 935,520 | |
| | | 2011 | | | $ | 405,096 | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | 143,195 | | | $ | 21,600 | | | $ | 569,891 | |
Timothy M. Larson | | | 2013 | | | $ | 489,231 | | | $ | — | | | $ | — | | | $ | — | | | $ | 118,860 | (4) | | $ | — | | | $ | 645,658 | (9) | | $ | 1,253,749 | |
President and Chief Executive Officer, Jostens | | | 2012 | | | $ | 700,000 | | | $ | — | | | $ | — | | | $ | 1,752,400 | (2) | | $ | — | | | $ | 426,862 | | | $ | 78,006 | | | $ | 2,957,268 | |
| | | 2011 | | | $ | 699,037 | | | $ | 305,000 | | | $ | — | | | $ | — | | | $ | 113,218 | | | $ | 172,927 | | | $ | 33,215 | | | $ | 1,323,397 | |
| (1) | Paid in connection with the renewal of Mr. Reisch’s employment agreement. |
| (2) | These awards were forfeited without payment in connection with Mr. Larson’s resignation in 2013. |
| (3) | The amounts represent earnings under the annual management incentive bonus program. |
| (4) | Pursuant to his separation of services, Mr. Larson was entitled to a pro rata bonus (based on the number of days in 2013 in which Mr. Larson was employed). |
| (5) | Reflects the aggregate change in actuarial present value of the named executive officer’s accumulated benefit under the qualified, non-contributory pension plan, unfunded supplemental ERISA excess retirement plan and an individual non-contributory unfunded supplemental retirement plan and, in the case of Mr. Reisch, the supplemental retirement benefit originally provided for under his employment agreement. Effective December 31, 2012, such plans were amended to freeze the accrual of additional benefits related to future service and compensation under the plans. Please refer to the narrative descriptions of our pension plans under the Pension Benefits table. For 2013, the actuarial present value of the accumulated benefit under the plans decreased by $69,792 for Mr. Reisch, $60,751 for Mr. Carousso, $80,992 for Ms. Hlavaty, and $185,995 for Mr. Larson, respectively. We currently have no deferred compensation plans. |
| (6) | Includes for 2013: $30,825 of premiums under a life insurance policy which are paid by us under the terms of Mr. Reisch’s employment agreement (the proceeds under the policy are payable to beneficiaries designated by Mr. Reisch), $13,388 representing regular employer matching contributions under our 401(k) plan; $13,680 representing a car allowance; and approximately $18,454 representing financial planning/tax preparation, executive medical expenses reimbursed by us, a health club stipend and cash credits offered to any employee who foregoes certain disability insurance benefits. We have in the past made available to Mr. Reisch the company |
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| | aircraft for occasional personal use. In such cases, Mr. Reisch reimbursed us for an amount equal to our incremental cost for such use. The calculation of the incremental cost for personal use of our company aircraft included only variable costs incurred as a result of such flight activity. Incremental cost did not include fixed costs that are incurred regardless of Mr. Reisch’s use, e.g., aircraft insurance, maintenance, storage and flight crew salaries. |
| (7) | Includes for 2013: $13,388 representing regular employer matching contributions under our 401(k) plan; $10,200 representing a car allowance; and approximately $2,200 representing executive medical expenses reimbursed by us, a health club stipend and cash credits offered to any employee who participates in certain wellness programs or foregoes certain disability insurance benefits. |
| (8) | Includes for 2013: $13,388 representing regular employer matching contributions under our 401(k) plan; $10,000 representing a car allowance; and approximately $3,237 representing executive medical expenses reimbursed by us, a health club stipend and cash credits offered to any employee who foregoes certain disability insurance benefits. |
| (9) | Includes for 2013: $13,388 representing regular employer matching contributions under our 401(k) plan; $14,400 representing a car allowance; approximately $4,889 representing financial planning, executive medical expenses reimbursed by us and cash credits offered to any employee who foregoes certain disability insurance benefits; and $612,981 paid to Mr. Larson during 2013 pursuant to his employment agreement in connection with the separation of services in August 2013. See “—Employment Agreements and Arrangements—Timothy M. Larson”. |
Grants of Plan-Based Awards in 2013
The following table provides information with regard to the target level of bonus opportunities for our named executive officers for performance during 2013.
| | | | | | | | | | | | |
| | | | | | Target Payouts
Under Non-Equity Incentive
Plan Awards (1) | |
Name | | Grant Date | | | Target | | | Maximum | |
Marc L. Reisch | | | N/A | | | $ | 1,187,500 | | | $ | 1,781,250 | |
Paul B. Carousso | | | N/A | | | $ | 214,500 | | | $ | — | |
Marie D. Hlavaty | | | N/A | | | $ | 233,750 | | | $ | — | |
| (1) | Reflects the target and maximum award amounts under our annual management bonus program for our named executive officers. The actual non-equity annual incentive compensation amount earned by each named executive officer, if any, in 2013 is shown in the “Summary Compensation Table” above. |
Equity-based Compensation
Our equity-based compensation plans are based on the Class A Common Stock of Holdco or, in certain cases, the underlying subsidiary’s equity.
In connection with the closing of the Transactions, Holdco established the 2004 Plan, which permits Holdco to grant to key employees and certain other persons of Holdco and its subsidiaries various equity-based awards, including stock options and restricted stock. The 2004 Plan provides for the issuance of a total of 510,230 shares of Class A Common Stock. As of December 28, 2013, there were 150,577 shares available for grant under the 2004 Plan. Shares related to grants that are forfeited, terminated, cancelled or expire unexercised become available for new grants.
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Equity-based Incentive Plans
Certain key Jostens employees participate in Jostens long-term incentive programs. The programs provide for the grant of phantom shares to the participating employee, which are subject to vesting and other terms and conditions and restrictions of the share award, which may include meeting certain performance metrics and continued employment. The grants will be settled in cash in a lump sum amount based on the fair market value of the Class A Common Stock and the number of shares in which the employee has vested. In connection with the program put into place in 2012 (the “2012 LTIP”), the grants will be settled following the end of fiscal year 2014 (which occurs on January 3, 2015). In the case of a limited number of certain senior executives of Jostens, absent a change of control prior to January 3, 2015, payment with respect to a portion of the lump sum payment in respect of the performance award in which the executive vests as of the end of fiscal year 2014 will not be due until the earlier of a change in control or early 2016 (and not later than March 15, 2016). The awards provide for certain vesting and settlement of the vested award following the occurrence of certain termination of employment events prior to January 3, 2015, as described therein. Shares not vested as of the end of fiscal year 2014, including if the respective performance target is not achieved, are forfeited without payment. The awards are also subject to certain agreements by the employee as to confidentiality, non-competition and non-solicitation to which the employee is bound during his or her employment and for two years following a separation of service.
Certain key Jostens employees received an extraordinary long-term phantom share incentive grant in April 2013 (the “April 2013 Special LTIP”). The grants of phantom shares to the participating employees were made on terms similar to the 2012 LTIP, including that such shares are subject to vesting based on continued employment. The shares that vest under the grants will be settled in cash in a lump sum amount based on the fair market value of the Class A Common Stock and the number of shares in which the employee has vested, following the end of fiscal year 2015 (which occurs on January 2, 2016). The awards provide for certain vesting and settlement of the vested award following the occurrence of certain termination of employment events prior to January 2, 2016, as described therein.
During the third quarter of 2013, Jostens implemented a long-term phantom share incentive program with certain of Jostens’ key employees (the “Jostens 2013 LTIP”). The grants of phantom shares to the participating employees were made on terms similar to the 2012 LTIP and the April 2013 Special LTIP, provided that with certain limited exceptions, the shares are subject to vesting based solely on continued employment. The shares that vest under the grants will be settled in cash in a lump sum amount based on the fair market value of the Class A Common Stock and the number of shares in which the employee has vested, following the end of fiscal year 2015 (which occurs on January 2, 2016). The awards provide for certain vesting and settlement of the vested award following the occurrence of certain termination of employment events prior to January 2, 2016, as described therein.
We have issued and may from time to time issue phantom equity in the form of phantom shares or earned appreciation rights to certain employees of our other subsidiaries for the purpose of assuring retention of talent aligned with long-term performance and strategic objectives.
Employment Agreements and Arrangements
Employment Arrangements with Marc L. Reisch
General. Mr. Reisch’s employment agreement had an initial term ending on December 31, 2009. This agreement was amended and restated in 2010 with a term in effect through December 31, 2010 and has been automatically renewed under the provision providing for one-year renewals at the end of each renewal term. The employment agreement currently contains the following terms under which Mr. Reisch serves as the Chairman of our Board of Directors and our Chief Executive Officer and President.
Mr. Reisch’s agreement provides for the payment of an annual base salary of $950,000, subject to increase at the sole discretion of Holdco’s Board, which shall review Mr. Reisch’s base salary on at least an annual basis, plus an annual cash bonus opportunity between zero and 187.5% of annual base salary, with a current target bonus opportunity of $1,187,500.
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The employment agreement provides for our payment of the premiums on a life insurance policy having a death benefit equal to $10.0 million that will be payable to beneficiaries designated by Mr. Reisch. Mr. Reisch is subject to noncompetition and nonsolicitation restrictions during the term of the employment agreement and for a period of two years following Mr. Reisch’s termination of employment. The employment agreement also includes a provision relating to the nondisclosure of confidential information.
Change in Control. Upon a change in control, the employment agreement (other than certain provisions which survive such a termination of the agreement) will automatically terminate, and Mr. Reisch will be entitled to receive a lump sum payment equal to $4,200,000 in cash. In addition, if Mr. Reisch’s employment is terminated for any reason at any time on or after a change in control and the termination of the employment agreement, Mr. Reisch will be entitled to receive (1) any employee benefits that he may be entitled to under the applicable welfare benefit plans, fringe benefit plans and qualified and nonqualified retirement plans then in effect upon termination of employment to the date of termination and (2) so long as such termination is not by us for cause, a lump sum payment equal to the pro-rated portion of the target annual cash bonus that Mr. Reisch may have been eligible to receive in respect of such fiscal year.
Termination by us for Cause or by Mr. Reisch without Good Reason. Under Mr. Reisch’s employment agreement, termination for “cause” requires the affirmative vote of two-thirds of the members of our Board (or such higher percentage or procedures required under the 2004 Stockholders Agreement) and may be based on any of the following:
| | • | | Mr. Reisch’s willful and continued failure to perform his material duties which continues beyond ten days after a written demand for substantial performance is delivered to Mr. Reisch by us; |
| | • | | the willful or intentional engaging in conduct by Mr. Reisch that causes material and demonstrable injury, monetarily or otherwise, to us or KKR and DLJMBP III or their affiliates; |
| | • | | the commission of a crime constituting a felony under the laws of the United States or any state thereof or a misdemeanor involving moral turpitude; or |
| | • | | a material breach by Mr. Reisch of the employment agreement, the management stockholder’s agreement, the sale participation agreement, or the stock option agreement or restricted stock award agreement entered into in connection with the employment agreement, including, engaging in any action in breach of restrictive covenants contained in the employment agreement, which continues beyond ten days after a written demand to cure the breach is delivered by us to Mr. Reisch (to the extent that, in our Board’s reasonable judgment, the breach can be cured). |
Under the employment agreement between us and Mr. Reisch, Mr. Reisch’s employment may be terminated by him for good reason. The term “good reason” means:
| | • | | a reduction in Mr. Reisch’s rate of base salary or annual incentive compensation opportunity (other than a general reduction in base salary or annual incentive compensation opportunities that affects all members of our senior management equally, which general reduction will only be implemented by our Board after consultation with Mr. Reisch); |
| | • | | a material reduction in Mr. Reisch’s duties and responsibilities, an adverse change in Mr. Reisch’s titles of chairman and chief executive officer or the assignment to Mr. Reisch of duties or responsibilities materially inconsistent with such titles; however, none of the foregoing will be deemed to occur by virtue of the removal of Mr. Reisch from the position of chairman of the board following the completion of a public offering of the Class A Common Stock meeting certain specified criteria; or |
| | • | | a transfer of Mr. Reisch’s primary workplace by more than 20 miles outside of Armonk, New York. |
Notwithstanding the foregoing, “good reason” will not be deemed to exist unless Mr. Reisch provides us with written notice setting forth the event or circumstances giving rise to the good reason, and we fail to cure such event or circumstance within 30 days following the date of such notice.
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If Mr. Reisch’s employment were terminated by us for cause or by Mr. Reisch without good reason, he would be entitled to receive a lump sum payment, which includes the amount of any earned but unpaid base salary, earned but unpaid annual bonus for a previously completed fiscal year, and accrued and unpaid vacation pay as well as reimbursement for any unreimbursed business expenses, all as of the date of termination. In addition, Mr. Reisch would receive the supplemental retirement benefit described in the narrative following the Pension Benefits table and the transfer of the life insurance policy described under “—Employment Agreements and Arrangements—Employment Arrangements with Marc L. Reisch—General” such that Mr. Reisch may assume the policy at his own expense. Also, Mr. Reisch would receive any employee benefits that he may be entitled to under the applicable welfare benefit plans, fringe benefit plans and qualified and nonqualified retirement plans then in effect upon termination of employment to the date of termination (the benefits and payments described in this paragraph collectively referred to as the “Reisch Accrued Rights”).
Termination by us without Cause or by Mr. Reisch for Good Reason.The employment agreement also provides that if Mr. Reisch is terminated by us without cause (which includes our nonrenewal of the agreement for any additional one-year period, as described above but excludes death or disability) or if he resigns for good reason, he will be entitled to receive, in addition to the amounts and benefits described above in connection with a termination by us for cause or by Mr. Reisch without good reason:
| | • | | (1) a lump sum payment equal to the prorated (based on the number of days in the applicable fiscal year in which Mr. Reisch was employed) annual bonus for the year of termination that he otherwise would have been entitled to receive had he remained employed, paid at such time such annual bonus would otherwise be payable, and (2) $4,200,000, payable in equal monthly installments over the 24-month period following the date of termination; and |
| | • | | (1) continued participation in welfare benefit plans (on the same terms in effect for active employees) until the earlier of two years after the date of termination and the date that Mr. Reisch becomes eligible for coverage under a comparable plan maintained by any subsequent employer, or (2) cash in an amount that allows him to purchase equivalent coverage for the same period. |
Disability or Death. In the event that Mr. Reisch’s employment is terminated due to his death or disability (defined in the employment agreement as being unable to perform his duties due to physical or mental incapacity for six consecutive months or nine months in any consecutive 18-month period), Mr. Reisch (or his estate, as the case may be) will be entitled to receive, as applicable, (1) the Reisch Accrued Rights and (2) a lump sum payment equal to the prorated (based on the number of days in the applicable fiscal year in which Mr. Reisch was employed) portion of the annual bonus, if any, Mr. Reisch would have been entitled to receive for the year termination occurs, payable within 15 days after the date of termination.
Supplemental Retirement Benefits; Post-Termination Medical Benefits. The vested supplemental retirement benefits and post-termination medical benefits granted to Mr. Reisch are described in the narrative following the Pension Benefits table below.
Gross-Up Payments for Excise Taxes. Under the terms of the employment agreement, if it is determined that any payment, benefit or distribution to or for the benefit of Mr. Reisch would be subject to the excise tax imposed by Section 4999 of the Internal Revenue Code by reason of being “contingent on a change in ownership or control” of his employer within the meaning of Section 280G of the Code, or any interest or penalties are incurred by Mr. Reisch with respect to the excise tax, subject to certain notice and other requirements, then Mr. Reisch would be entitled to receive an additional payment or payments, or a “gross-up payment”. The gross-up payment would be equal to an amount such that after payment by Mr. Reisch of all taxes (including any interest or penalties imposed relating to such taxes), Mr. Reisch would retain an amount equal to the excise tax (including any interest and penalties) imposed.
Stock Options. All of Mr. Reisch’s stock options vested prior to December 28, 2013, and therefore there would be no unvested options subject to acceleration in the event of a change in control.
Code Section 409A. Payments which Mr. Reisch may be entitled to under the employment agreement may be subject to deferral for a period of time under Section 409A of the Code, as may be necessary to prevent any acceleration or additional tax under Section 409A.
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Employment Agreement with Charles W. Mooty
General. Jostens entered into an employment agreement with Charles W. Mooty, dated as of November 19, 2013, for a term which commenced on January 1, 2014, under which he serves as the President and Chief Executive Officer of Jostens. Mr. Mooty’s employment agreement has an initial term of three years ending on December 31, 2017, and is automatically renewable thereafter for one-year periods unless either party provides written notices to the contrary, subject to earlier termination of his employment upon notice by either Mr. Mooty or by Jostens pursuant to the terms of the agreement. Mr. Mooty’s agreement provides for the payment of an annual base salary of $750,000, subject to increase at the sole discretion of Jostens’ board of directors, which shall review Mr. Mooty’s base salary on at least an annual basis beginning in January 2015, plus an annual cash bonus opportunity between zero and 100% of base salary, with a current target bonus opportunity of 80% of his base salary. Provided Mr. Mooty is employed by Jostens through the last day of fiscal year 2014, he will receive an annual bonus of at least $250,000 in respect of fiscal year 2014. Also under the agreement, Mr. Mooty receives certain executive health benefits and perquisites. Additionally, the agreement allows for certain payments and benefits upon termination without cause or for good reason, death or disability.
Mr. Mooty is subject to nonsolicitation restrictions during the term of the employment agreement and for a period of two years following Mr. Mooty’s termination of employment. Mr. Mooty is also subject to noncompetition restrictions during the term of the employment agreement and for a period of up to two years following Mr. Mooty’s termination of employment (the duration to be determined based on the length of his employment prior to separation). The employment agreement also includes a provision relating to the nondisclosure of confidential information.
Termination by us for Cause or by Mr. Mooty without Good Reason. Under the employment agreement, termination by us for “cause” may be based on any of the following (as determined by the board of directors of Jostens):
| | • | | Mr. Mooty’s willful and continued failure to perform his material duties which continues beyond ten days after a written demand for substantial performance is delivered to Mr. Mooty by us; |
| | • | | the willful or intentional engaging in conduct that causes material and demonstrable injury, monetarily or otherwise, to us or KKR and DLJMBP III or their affiliates; |
| | • | | the commission of a crime constituting a felony under the laws of the United States or any state thereof or a misdemeanor involving moral turpitude; or |
| | • | | a material breach by Mr. Mooty of the employment agreement or any other agreement(s) with us, including engaging in any action in breach of restrictive covenants contained therein which continues beyond ten days after a written demand for substantial performance is delivered by us to Mr. Mooty (to the extent that, in the reasonable judgment of Jostens’ board of directors, the breach can be cured). |
Also as defined in the employment agreement, “good reason” means:
| | • | | a reduction in Mr. Mooty’s rate of base salary or annual incentive compensation opportunity (other than a general reduction in base salary or annual incentive compensation that affects all members of our senior management in substantially the same proportion, provided that Mr. Mooty’s base salary is not reduced by more than 10%); |
| | • | | a substantial reduction in Mr. Mooty’s duties and responsibilities; |
| | • | | the failure of any successor to assume Jostens’ obligations under the employment agreement; or |
| | • | | a transfer of Mr. Mooty’s primary workplace by more than 50 miles outside of Mr. Mooty’s primary workplace as of the date of the agreement. |
Notwithstanding the foregoing, good reason shall cease to exist for any such event on the 60th day following the later of the occurrence of the event or Mr. Mooty’s knowledge thereof, unless Mr. Mooty has given us written notice thereof prior to such date.
If Mr. Mooty’s employment were terminated by us for cause or by Mr. Mooty without good reason, he would be entitled to receive a lump sum payment, which includes the amount of any earned but unpaid base salary, earned but unpaid annual bonus for the previously completed fiscal year, accrued and unpaid vacation pay, reimbursement for any
58
unreimbursed business expenses and all other payments to which Mr. Mooty may be entitled under long-term incentive plans, all as of the date of termination. Also, Mr. Mooty would receive any employee benefits that he may be entitled to under the applicable welfare benefit plans, fringe benefit plans and qualified and nonqualified retirement plans then in effect upon termination of employment to the date of termination, as well as any payments to which he may be entitled under the equity and long-term incentive arrangements provided for in the agreement (the benefits and payments described in this paragraph collectively referred to as the “Mooty Accrued Rights”).
Termination by us without Cause or by Mr. Mooty for Good Reason. If Mr. Mooty is terminated by us without cause (which includes our nonrenewal of the agreement for any additional one-year period, but excludes death or disability) or if he resigns for good reason, he will be entitled to receive, in addition to the amounts and benefits described above in connection with a termination by us for cause or by Mr. Mooty without good reason:
| | • | | (1) a lump sum payment equal to the prorated (based on the number of days in the applicable fiscal year in which Mr. Mooty was employed) portion of the annual bonus, if any, Mr. Mooty would have been entitled to receive pursuant to the annual incentive plan had he remained employed through the date that bonuses are paid to other executives under the incentive plan in respect of the fiscal year in which the termination occurs, paid at such time such annual bonus would otherwise be payable (the “Pro-Rata Bonus”), and (2) subject to his continued compliance with the restrictive covenants set forth in the agreement and the execution of a release of claims, (a) an amount equal to the base salary at the rate in effect immediately prior to the date of termination plus (b) his target bonus for the year of termination, payable in equal monthly installments; and |
| | • | | an amount equal to the portion of the monthly insurance premium payments that Jostens subsidizes for Mr. Mooty as in effect immediately prior to the date of termination with respect to health insurance benefits in which Mr. Mooty (and his dependents) were enrolled at the date of termination, payable in equal monthly installments at the same time as the payments above are made, and continuing until the earlier of 12 months after the date of termination or the date that Mr. Mooty becomes eligible for health insurance coverage from any subsequent employer or other source, so long as he elects to receive such health insurance coverage under COBRA. |
Disability or Death. In the event that Mr. Mooty’s employment is terminated due to his death or disability (defined in the employment agreement as being unable to perform his duties due to physical or mental incapacity for six consecutive months or nine months in any consecutive 18-month period), Mr. Mooty (or his estate, as the case may be) will be entitled to receive, as applicable, (1) the Mooty Accrued Rights and (2) the Pro-Rata Bonus.
Equity. In connection with his employment, Charles W. Mooty is expected to make a personal investment in the Class A Common Stock and be granted restricted shares of Class A Common Stock and earned appreciation rights that will be valued based on the fair market value of Jostens’ common stock.
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Timothy M. Larson
Timothy M. Larson gave notice of his resignation as President and Chief Executive Officer of Jostens on January 23, 2013. He remained an employee of Jostens until August 2013. Mr. Larson is receiving the benefits to which he is entitled under his employment agreement as a result of the separation of service. Mr. Larson is subject to noncompetition and nonsolicitation restrictions for a period of two years following Mr. Larson’s termination of employment. The employment agreement also includes a provision relating to the nondisclosure of confidential information.
Change in Control Agreements
On May 10, 2007, we entered into a change in control severance agreement with each of Paul B. Carousso, Senior Vice President, Chief Financial Officer, and Marie D. Hlavaty, Senior Vice President, Chief Legal Officer and Secretary. The agreements allow for certain payments and benefits upon a change in control as described under “—Termination, Severance and Change of Control Arrangements—Arrangements with Paul B. Carousso and Marie D. Hlavaty”.
Outstanding Equity Awards at December 28, 2013
The following table presents the outstanding equity awards held by each named executive officer as of December 28, 2013.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Option Awards | | | Stock Awards | |
Name | | Number of
Securities
Underlying
Unexercised
Options
(#)
Exercisable | | | Number of
Securities
Underlying
Unexercised
Options
(#)
Unexercisable | | | Equity
Incentive
Plan
Awards:
Number of
Securities
Underlying
Unexercised
Unearned
Options
(#) | | | Option
Exercise
Price
($) (1) | | | Option
Expiration
Date | | | Number of
Shares or
Units of
Stock That
Have Not
Vested (#) | | | Market
Value of
Shares or
Units of
Stock That
Have Not
Vested
($) | |
Marc L. Reisch | | | 880 | (2) | | | — | | | | — | | | $ | 30.09 | | | | 1/20/2014 | | | | — | | | $ | — | |
| | | 127,466 | | | | — | | | | — | | | $ | 39.07 | | | | 10/4/2014 | | | | — | | | $ | — | |
Paul B. Carousso | | | 9,365 | | | | — | | | | — | | | $ | 39.07 | | | | 3/17/2015 | | | | — | | | $ | — | |
Marie D. Hlavaty | | | 18,730 | | | | — | | | | — | | | $ | 39.07 | | | | 3/17/2015 | | | | — | | | $ | — | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| (1) | There is no established public trading market for the Class A Common Stock, and, therefore, the exercise prices listed in this column represent the fair market value of a share of the Class A Common Stock, as determined by the Compensation Committee of the Board of Directors, based on an independent third party valuation, as of the grant date of the option (in each case, the original option exercise price was adjusted in April 2006 in connection with the special dividend paid on the Class A Common Stock). |
| (2) | The options were exercised in January 2014 prior to their expiration on January 20, 2014. |
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Option Exercises and Stock Vested in 2013
In connection with his termination of employment, 7,000 shares of restricted Class A Common Stock previously granted to Timothy M. Larson became vested in full. In accordance with his employment agreement, Mr. Larson tendered to us such shares for repurchase in connection with his termination of employment. The proceeds of such repurchase will be paid to Mr. Larson in a lump sum in September 2015. Also in accordance with his employment agreement, 3,444 shares of Class A Common Stock were issued to Mr. Larson in connection with his termination of employment under the net settlement exercise of 19,201 vested options. The shares of Class A Common Stock issued in connection with the exercise will be repurchased by us for cash in or about March 2014.
Pension Benefits in 2013
The following table presents the present value of accumulated pension benefits as of December 28, 2013.
Pension Benefits
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Jostens Pension Plan (1) | | | Jostens ERISA Excess Plan | | | Supplemental Executive
Retirement Plan (SERP) | | | 2010 SERP | |
Name | | Number
of
Years
Credited
Service
(#) | | | Present
Value
of
Accum-
ulated
Benefits
($)(2) | | | Payments
During
Last
Fiscal
Year ($) | | | Number
of
Years
Credited
Service
(#) | | | Present
Value
of
Accumulated
Benefits
($)(2) | | | Payments
During
Last
Fiscal
Year ($) | | | Number
of
Years
Credited
Service
(#) | | | Present
Value
of
Accumulated
Benefits
($)(2) | | | Payments
During
Last
Fiscal
Year ($) | | | Number
of
Years
Credited
Service
(#) | | | Present
Value of
Accum-
ulated
Benefits
($)(2) | | | Payments
During
Last
Fiscal
Year ($) | |
Marc L. Reisch | | | 8.2 | | | $ | 168,986 | | | $ | — | | | | 8.2 | | | $ | 991,154 | | | $ | — | | | | 8.2 | | | $ | 1,010,857 | | | $ | — | | | | N/A | | | $ | 115,448 | | | $ | — | |
Paul B. Carousso | | | 8.2 | | | $ | 86,258 | | | $ | — | | | | 8.2 | | | $ | 51,327 | | | $ | — | | | | 8.2 | | | $ | 235,202 | | | $ | — | | | | N/A | | | | N/A | | | | N/A | |
Marie D. Hlavaty | | | 8.2 | | | $ | 119,558 | | | $ | — | | | | 8.2 | | | $ | 138,763 | | | $ | — | | | | 8.2 | | | $ | 416,557 | | | $ | — | | | | N/A | | | | N/A | | | | N/A | |
Timothy M. Larson | | | 18.3 | | | $ | 146,282 | | | $ | — | | | | 18.3 | | | $ | 273,695 | | | $ | — | | | | 9.0 | | | $ | 437,029 | | | $ | — | | | | N/A | | | | N/A | | | | N/A | |
N/A- Not applicable
| (1) | Messrs. Reisch, Carousso, Larson and Ms. Hlavaty participate under the salaried employee pension formula. |
| (2) | The present value of accumulated benefits is determined using the assumptions disclosed in Note 14,Benefit Plans, to our consolidated financial statements and is net of any benefit to be received under any other qualified or non-qualified retirement plans. |
Jostens maintains a tax-qualified, non-contributory pension plan for salaried employees employed on or prior to December 31, 2005. Jostens also maintains an unfunded supplemental retirement plan (the “Jostens ERISA Excess Plan”). Benefits earned under the pension plan may exceed the level of benefits that may be paid from a tax-qualified plan under the Code. The Jostens ERISA Excess Plan pays the benefits that would have been provided from the pension plan but cannot because they exceed the level of benefits that may be paid from a tax-qualified plan under the Code.
Effective December 31, 2012, Visant’s qualified and non-qualified pension plans and arrangements for non-bargained, active employees were amended to freeze the accrual of additional benefits related to future service and compensation under the plans. Benefits accrued as of December 31, 2012 were not affected. As applicable, employees will continue to accrue service during their employment solely for purposes of vesting in pension benefits accrued as of December 31, 2012 which were not yet vested upon the freeze based on the applicable multiple year service requirement for vesting. In addition, the freeze does not impact retirees currently receiving pension benefits or employees who have separated service with vested pension benefits.
For the pension plan and the Jostens ERISA Excess Plan:
| | • | | Normal retirement age is 65 with at least five years of service, while early retirement is allowed at age 55 with at least ten years of service. Employees who retire prior to age 65 are subject to an early retirement factor adjustment based on their age at benefit commencement. The reduction is 7.8% for each year between ages 62 and 65 and 4.2% for each year between 55 and 62. |
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| | • | | The vesting period is five years or attainment of age 65. |
| | • | | The formula to determine retirement income benefits prior to January 1, 2006 (the grandfathered benefit) was based on a participant’s highest average annual cash compensation (W-2 earnings, excluding certain long term incentives and certain taxable allowances such as moving allowance) during any five consecutive calendar years, years of credited service (to a maximum of 35 years) and the Social Security covered compensation table in effect as of retirement. The grandfathered benefit formula is 0.85% of average annual salary up to Social Security covered compensation plus 1.50% of average annual salary in excess of Social Security covered compensation times years of benefit service (up to 35 maximum). Only those employees age 45 and over with more than 15 years of service as of December 31, 2005 are entitled to earn the grandfathered benefit formula for service after December 31, 2005 and before January 1, 2013. None of the named executive officers is eligible for the grandfathered benefit formula for service after December 31, 2005 and before January 1, 2013. |
| | • | | Effective January 1, 2006, the formula to determine an employee’s retirement income benefits for future service under the plan changed for employees under age 45 with less than 15 years of service as of December 31, 2005 (non-grandfathered participants). Benefits earned under the grandfathered benefit formula prior to January 1, 2006 are retained, and only benefits earned for future years are calculated under the revised formula. The formula for benefits earned after January 1, 2006 for the non-grandfathered participants is based on 1% of a participant’s cash compensation (W-2 compensation) for each year or partial year of benefit service beginning January 1, 2006 and through December 31, 2012. |
| | • | | The methods of payment upon retirement include, but are not limited to, life annuity, 50%, 75% or 100% joint and survivor annuity and life annuity with ten year certain. |
| | • | | There is a cap on the maximum annual salary that can be used to calculate the benefit accrual allowable under the pension plan. Additional salary over the cap is used to calculate the accrued benefit under the Jostens ERISA Excess Plan. No more than $250,000 of salary could be recognized in 2012 under the pension plan, and this limitation will increase periodically as established by the IRS. |
In addition, we maintain non-contributory unfunded supplemental retirement arrangements (SERPs) for the named executive officers which were also frozen as of December 31, 2012 for additional benefit and service accruals. Effective as of December 31, 2012, participants with at least seven calendar years of full-time employment service as an executive officer (as defined under the SERP) are eligible for a benefit equal to 1% of his/her base salary in effect as of December 31, 2012, multiplied by the number of years in full-time employment as an executive officer through December 31, 2012. Only service after age 30 and before age 60 is recognized under the SERP. The result of the calculation is divided by 12 to arrive at a monthly benefit payment payable over the employee’s remaining lifetime. Mr. Reisch’s benefit is payable in the form of a lump sum equal to the present value of such lifetime benefit, determined using the actuarial assumptions used under the Jostens tax-qualified pension plan in which Mr. Reisch participates. If the named executive officer’s employment (other than Mr. Reisch’s) is terminated for any reason (other than for death or total disability) after completing seven years of full-time employment service as an executive officer, the employee shall be entitled to begin receiving payment of the foregoing benefit upon the later of termination of employment or achieving age 55. For Mr. Reisch, if his employment terminates (1) prior to age 60, he will receive payment of his benefit at age 60, but if his employment terminates after age 60 and prior to age 65, he will receive the benefit at age 65 or (2) as a result of death or disability, he (or his estate) will receive payment of the benefit within 90 days of the date of death or total disability. The SERP provides a pre-retirement death benefit such that, if the employee dies prior to his/her total disability or termination of employment, the employee’s beneficiary will receive a lump sum payment equal to twice the employee’s base salary as of December 31, 2012. Without duplication, the SERP provides a surviving spouse benefit in the case the employee has experienced a termination of employment or total disability prior to his/her death, whether or not the benefit under the SERP has commenced, upon his/her death, equal to 50% of the monthly benefit he/she would have otherwise been entitled to for the duration of the natural life of his/her spouse or until the month the employee, if living, would have attained age 80.
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On May 17, 2010, Holdco and Jostens also entered into a 2010 supplemental executive retirement plan agreement (the “2010 SERP”) with Mr. Reisch to provide for the vested supplemental retirement benefits originally granted under Mr. Reisch’s employment agreement. The benefits include the provision of certain post-termination medical benefits whereby Mr. Reisch and his eligible dependents are eligible for welfare benefits on equivalent terms as if Mr. Reisch had remained employed (either through continued participation in our medical insurance plans or through the purchase of a medical insurance program solely for the benefit of Mr. Reisch and his dependents) (the “Post-Termination Medical Benefits”). Coverage ends at the earlier of Mr. Reisch reaching age 65 or the date on which Mr. Reisch becomes eligible for comparable coverage from a subsequent employer, and in the case of his death, his then spouse is entitled to receive the post-retirement medical benefits until the date on which Mr. Reisch would, but for his death, have reached age 65.
Effective as of December 31, 2012, the 2010 SERP was amended and restated (the “Amended and Restated 2010 SERP”) including to freeze additional benefit and service accruals. Under the Amended and Restated 2010 SERP, Mr. Reisch, or his beneficiaries, are entitled to payment in a lump sum of a retirement benefit, on the earlier of the date he achieves age 65 or a date that is within 90 days following the date of his death. The benefit is equal to 10% of the average of Mr. Reisch’s (1) base salary and (2) annual bonuses (excluding any transaction, signing or other non-recurring special bonuses) payable over the five fiscal years ended prior to December 31, 2012, plus 2% of such average compensation (prorated for any partial years) earned for each additional year of service accruing after December 31, 2009 through December 31, 2012, less the present value of the benefits payable under the other qualified or non-qualified retirement plans, including the SERP. Under the Amended and Restated 2010 SERP, Mr. Reisch shall be entitled to receive the Post-Termination Medical Benefits in connection with any separation of service.
Mr. Reisch’s supplemental retirement benefits under the Amended and Restated 2010 SERP and the SERP maintained for Mr. Reisch were funded under an irrevocable grantor trust on the last day of fiscal year 2010 (with such funding subject to true-up at least annually thereafter and additional funding made to the trust as necessary to maintain the retirement benefit), the assets of which are to be used exclusively to pay benefits under these retirement plans for the benefit of Mr. Reisch.
Nonqualified Deferred Compensation for 2013
None of the named executive officers receives any nonqualified deferred compensation.
Termination, Severance and Change of Control Arrangements
Post-termination Payments—Marc L. Reisch. The information below is provided to disclose hypothetical payments to Marc L. Reisch under various termination scenarios, assuming, in each situation, that Mr. Reisch was terminated on December 28, 2013 (and excluding any amounts accrued as of the date of termination). All amounts are stated in gross before taxes and withholding.
Post-Termination Payments
Marc L. Reisch
| | | | | | | | | | | | | | | | | | | | |
| | | Voluntary
Termination
Without
Good
Reason or
Involuntary
Termination
for Cause
($) | | | Voluntary
Termination
With Good
Reason or
Involuntary
Termination
Without
Cause ($) | | | Termination in
Connection
with a Change
in Control
($)(7) | | | Disability
($) | | | Death ($) | |
Severance | | $ | — | | | $ | 4,200,000 | (5) | | $ | 4,200,000 | (8) | | $ | — | | | $ | — | |
Stock Options | | | (3) | | | | (3) | | | | (3) | | | | (3) | | | | (3) | |
Incremental Pension Benefits (1) | | $ | — | | | $ | — | | | $ | — | | | $ | 22,988 | | | $ | 702,825 | (9) |
Continuation of Welfare Benefits | | $ | — | | | $ | 28,555 | (6) | | $ | 28,555 | (6) | | $ | — | | | $ | — | |
Additional Post-Termination Medical Benefits (2) | | $ | 69,084 | | | $ | 69,084 | | | $ | 69,084 | | | $ | 69,084 | | | $ | 47,860 | |
Insurance | | | (4) | | | | (4) | | | | (4) | | | | (4) | | | | (10) | |
| (1) | Represents the net increase in the actuarial present value of accumulated benefits under the pension plan, the Jostens Excess ERISA Plan, the SERP and the additional supplemental retirement benefit under the employment arrangements with Mr. Reisch over the aggregate actuarial present value of accumulated benefits reported in the Pension Benefits table (determined using the assumptions disclosed in Note 14,Benefit Plans, to our consolidated financial statements). |
| (2) | Represents the present value of the additional post-termination retiree medical benefits under Mr. Reisch’s employment arrangements, determined using the assumptions disclosed in Note 14,Benefit Plans, to our consolidated financial statements. |
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| (3) | All outstanding options held by the executive are currently vested, subject to exercise within the applicable time period corresponding to the nature of the termination. |
| (4) | Assumes the $10 million life insurance policy is transferred to Mr. Reisch, with future premiums to be paid by Mr. Reisch. |
| (5) | Payable in 24 equal monthly installments. |
| (6) | The table reflects the 2014 monthly premium payable by us for medical, dental and vision benefits in which Mr. Reisch and his dependents participated at January 1, 2014, multiplied by 24 months. |
| (7) | Subject to certain notice and other requirements, Mr. Reisch would be entitled to an additional payment (a gross-up) in the event it shall be determined that any payment, benefit or distribution (or combination thereof) by us for his benefit (whether paid or payable or distributed or distributable pursuant to the terms of our employment agreement with Mr. Reisch, or otherwise pursuant to or by reason of any other agreement, policy, plan, program or arrangement, including without limitation any stock option, restricted stock, or the lapse or termination of any restriction on the vesting or exercisability of any of the foregoing) would be subject to the excise tax imposed by Section 4999 of the Code by reason of being “contingent on a change in ownership or control” of us, within the meaning of Section 280G of the Code or any interest or penalties are incurred by Mr. Reisch with respect to the excise tax. The payment would be in an amount such that after payment by Mr. Reisch of all taxes (including any interest or penalties imposed with respect to those taxes), including, without limitation, any income taxes (and any interest and penalties imposed with respect thereto) and the excise tax imposed upon the gross-up available to cause the imposition of such taxes to be avoided, Mr. Reisch retains an amount equal to the excise tax (including any interest and penalties) imposed. However, there may be certain statutory exemptions based on our being a privately held company that would avoid the imposition of the excise tax. |
| (8) | Upon a change in control, the employment agreement (other than certain provisions which survive such a termination of the agreement) will automatically terminate, and Mr. Reisch will be entitled to receive a lump sum payment equal to $4,200,000 in cash. In such case, Mr. Reisch shall also be entitled to receive (1) any employee benefits that he may be entitled to under the applicable welfare benefit plans, fringe benefit plans and qualified and nonqualified retirement plans then in effect upon termination of employment to the date of termination and (2) so long as such termination is not by us for cause, a lump sum payment equal to the pro-rated portion of the target annual cash bonus that Mr. Reisch may have been eligible to receive in respect of such fiscal year, which would have been $1,187,500 if such termination occurred at December 28, 2013. |
| (9) | The Amended and Restated 2010 SERP provides for a lump sum payment on the earlier of Mr. Reisch reaching age 65 or a date that is within 90 days following his death. The incremental value in this scenario represents the enhancement, in actuarial present value dollar terms, from an immediate commencement of the benefit compared to payment at age 65. |
| (10) | The proceeds of the life insurance policy would be payable to Mr. Reisch’s beneficiary(ies). |
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Arrangements with Paul B. Carousso and Marie D. Hlavaty
Change in Control Severance Agreements. The change in control severance agreements between us and each of Paul B. Carousso, Senior Vice President, Chief Financial Officer, and Marie D. Hlavaty, Senior Vice President, Chief Legal Officer, provide for severance payments and benefits to the executive if, during the term of the agreement, his or her employment is terminated without cause or if the executive resigns with good reason within two years following a change in control. A “change in control” is defined as: (1) the sale (in one or a series of transactions) of all or substantially all of the assets of Holdings to an unaffiliated person; (2) a sale (in one transaction or a series of transactions) resulting in more than 50% of the voting stock of Holdco being held by an unaffiliated person; or (3) a merger, consolidation, recapitalization or reorganization of Holdco with or into an unaffiliated person. The change in control agreements were effective for an initial term extending to December 31, 2009 and automatic one-year renewal terms thereafter unless either we or the executive upon notice elects not to extend the agreement.
The severance payments and benefits under the change in control agreements are in lieu of any other severance benefits except as required by law and include an amount equal to one times the sum of (1) the executive’s then current annual base salary and (2) the higher of (a) an amount equal to the executive’s annual cash bonus at target for the year of termination or (b) an amount equal to the average bonus rate paid to the executive for the two years prior to termination multiplied by the executive’s then current annual base salary, payable over the twelve months following the date of termination (subject to deferral for a period of time under Section 409A of the Code, as may be necessary to prevent any accelerated or additional tax under Section 409A). In addition, the executive would be entitled to: a lump sum amount equal to his or her annual target bonus for the year of termination, (if termination is prior to September 30th, the amount shall be pro-rated for the portion of the year the executive was employed), payable at the time payments are otherwise made under the bonus plan; continued coverage under our group health benefits for twelve months (or earlier if otherwise covered by subsequent employer comparable benefits), or if plans are terminated or coverage is not permissible under law, a cash stipend in an equivalent amount to what we would otherwise pay for such executive’s group health continuation. The severance payments and benefits are subject to the executive entering into a severance agreement, including a general waiver and release of claims against us and our affiliates, and the executive’s continued compliance with the restrictive covenants to which the executives are otherwise bound.
Stock Options. All of Mr. Carousso’s and Ms. Hlavaty’s stock options were vested prior to December 28, 2013 and therefore there would be no unvested options subject to acceleration in the event of a change in control.
Post-termination Payments—Paul B. Carousso. The information below is provided to disclose hypothetical payments to Paul Carousso under various termination scenarios based on contractual arrangements in place with Mr. Carousso, assuming, in each situation, that Mr. Carousso was terminated on December 28, 2013. All amounts are stated in gross before taxes and withholding.
Post-Termination Payments
Paul B. Carousso
| | | | | | | | | | | | | | | | | | | | |
| | | Voluntary
Termination
without
Good
Reason or
Involuntary
Termination
for Cause
($) | | | Voluntary
Termination
with Good
Reason or
Involuntary
Termination
without
Cause ($) | | | Termination in
Connection
with a Change
in Control ($) | | | Disability
($) | | | Death ($) | |
Severance | | $ | — | | | $ | — | | | $ | 604,500 | (4) | | $ | — | | | $ | — | |
Annual Incentive | | $ | — | | | $ | — | | | $ | 214,500 | (5) | | $ | — | | | $ | — | |
Stock Options | | | (3) | | | | (3) | | | | (3) | | | | (3) | | | | (3) | |
Incremental Pension Benefits (1) | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | 344,551 | (6) |
Continuation of Health Benefits (2) | | $ | — | | | $ | — | | | $ | 14,277 | | | $ | — | | | $ | — | |
| (1) | Represents the net increase in the actuarial present value of accumulated benefits under the pension plan, the Jostens Excess ERISA Plan and the SERP over the aggregate actuarial present value of accumulated benefits reported in the Pension Benefits table (determined using the assumptions disclosed in Note 14,Benefit Plans, to our consolidated financial statements). |
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| (2) | The table reflects the 2014 monthly COBRA premium payable for group health benefits in which Mr. Carousso and his dependents participated at January 1, 2014, multiplied by 12 months less the then applicable employee contribution. |
| (3) | All outstanding options held by the executive are currently vested, subject to exercise within the applicable time period corresponding to the nature of the termination. |
| (4) | Payments due to Mr. Carousso in connection with a termination without cause or for good reason following a change in control equal the sum of (a) Mr. Carousso’s annual base salary as of December 28, 2013 and (b) an amount equal to Mr. Carousso’s annual cash bonus at target for the year of termination, payable over 12 months in equal installments in accordance with our normal payroll practices. |
| (5) | Payable as a lump sum in connection with a termination without cause or for good reason following a change in control. |
| (6) | The SERP provides a pre-retirement death benefit such that, if the employee dies prior to his total disability or termination of employment, the employee’s beneficiary will receive a lump sum payment equal to twice the employee’s base salary as of December 28, 2013. |
Post-termination Payments—Marie D. Hlavaty.The information below is provided to disclose hypothetical payments to Marie Hlavaty under various termination scenarios based on contractual arrangements in place with Ms. Hlavaty, assuming, in each situation, that Ms. Hlavaty was terminated on December 28, 2013. All amounts are stated in gross before taxes and withholding.
Post-Termination Payments
Marie D. Hlavaty
| | | | | | | | | | | | | | | | | | | | |
| | | Voluntary
Termination
without
Good
Reason or
Involuntary
Termination
for Cause
($) | | | Voluntary
Termination
with Good
Reason or
Involuntary
Termination
without
Cause ($) | | | Termination in
Connection
with a Change
in Control ($) | | | Disability
($) | | | Death ($) | |
Severance | | $ | — | | | $ | — | | | $ | 658,750 | (4) | | $ | — | | | $ | — | |
Annual Incentive | | $ | — | | | $ | — | | | $ | 233,750 | (5) | | $ | — | | | $ | — | |
Stock Options | | | (3) | | | | (3) | | | | (3) | | | | (3) | | | | (3) | |
Incremental Pension Benefits (1) | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | 175,122 | (6) |
Continuation of Health Benefits (2) | | $ | — | | | $ | — | | | $ | 4,360 | | | $ | — | | | $ | — | |
| (1) | Represents the net increase in the actuarial present value of accumulated benefits under the pension plan, the Jostens Excess ERISA Plan and the SERP over the aggregate actuarial present value of accumulated benefits reported in the Pension Benefits table (determined using the assumptions disclosed in Note 14,Benefit Plans, to our consolidated financial statements). |
| (2) | The table reflects the 2014 monthly COBRA premium payable for group health benefits in which Ms. Hlavaty participated at January 1, 2014, multiplied by 12 months less the then applicable employee contribution. |
| (3) | All outstanding options held by the executive are currently vested, subject to exercise within the applicable time period corresponding to the nature of the termination. |
| (4) | Payments due to Ms. Hlavaty in connection with a termination without cause or for good reason following a change in control equal the sum of (a) Ms. Hlavaty’s annual base salary as of December 28, 2013 and (b) an amount equal to Ms. Hlavaty’s annual cash bonus at target for the year of termination, payable over 12 months in equal installments in accordance with our normal payroll practices. |
| (5) | Payable as a lump sum in connection with a termination without cause or for good reason following a change in control. |
| (6) | The SERP provides a pre-retirement death benefit such that, if the employee dies prior to her total disability or termination of employment, the employee’s beneficiary will receive a lump sum payment equal to twice the employee’s base salary as of December 28, 2013. |
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Director Compensation
Other than George M.C. Fisher, Visant’s employee and non-employee directors are not eligible to receive any cash compensation for their service as our directors. Mr. Fisher’s services as a director are not incidental to his engagement by our Sponsors, and he receives an annual fee of $50,000 in cash in consideration of his services. We reimburse all the non-employee directors for their reasonable out-of-pocket expenses incurred in connection with attendance at Board and Board committee meetings.
As of December 28, 2013, the Class A Common Stock options previously granted to our current directors were fully vested and exercisable. Such outstanding options are as follows with respect to the number of underlying shares of Class A Common Stock: each of Messrs. Navab and Olson—2,081 shares; and Messrs. Burgstahler and Fisher—3,122 shares. Mr. Burgstahler has assigned the economic benefit of his options to DLJMBP III. The options expire following the tenth anniversary of the grant date and are generally subject to the other terms of the equity incentive program applicable to other participants, including certain restrictions on transfer and sale. These options were granted at a fair market value of $96.10401 per share (the exercise price was reduced in connection with the dividend paid by Holdco to its stockholders on April 4, 2006, to $39.07 per share).
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| ITEM 12. | SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS |
Visant is an indirect wholly owned subsidiary of Holdco. Our Sponsors hold shares of the Class A and Class C Common Stock of Holdco and additionally our equity-based incentive compensation plans are based on the appreciation of the Class A Common Stock. Accordingly, the following table sets forth information regarding the beneficial ownership of the Class A and Class C Common Stock as of March 21, 2014 by (1) each person we believe owns beneficially more than five percent of Holdco’s outstanding common stock, (2) each of our directors, (3) each of our executive officers and (4) all directors and current executive officers as a group.
| | | | | | | | | | | | | | | | |
| | | Class A Voting
Common Stock | | | Class C Voting
Common Stock | |
Holder | | Shares (1) | | | Percent of Class | | | Shares (1) | | | Percent of Class | |
KKR and related funds(2) | | | 2,664,356 | | | | 44.8 | % | | | 1 | (3) | | | 100.0 | % |
DLJMBP III and related funds(4) | | | 2,664,357 | | | | 44.8 | % | | | — | | | | — | |
David F. Burgstahler(4)(8) | | | 3,122 | | | | * | | | | — | | | | — | |
Alexander Navab(2)(3)(8) | | | 2,081 | | | | * | | | | — | | | | — | |
Tagar C. Olson(2)(3)(8) | | | 2,081 | | | | * | | | | — | | | | — | |
George M.C. Fisher(2)(3)(5)(6)(8) | | | 6,244 | | | | * | | | | — | | | | — | |
Susan C. Schnabel(4) | | | — | | | | * | | | | — | | | | — | |
Marc L. Reisch(7)(8)(9) | | | 174,511 | | | | 2.9 | % | | | — | | | | — | |
Marie D. Hlavaty(7)(8) | | | 25,520 | | | | * | | | | — | | | | — | |
Paul B. Carousso(7)(8) | | | 12,803 | | | | * | | | | — | | | | — | |
Charles W. Mooty(7)(10) | | | — | | | | * | | | | — | | | | — | |
Directors and executive officers (9 persons) as a group(2)(4)(5)(6)(7)(8)(9)(10) | | | 226,362 | | | | 3.7 | % | | | — | | | | — | |
| * | Indicates less than one percent. |
| (1) | The amounts and percentages of Holdco’s common stock beneficially owned are reported on the basis of regulations of the SEC governing the determination of beneficial ownership of securities. Under the rules of the SEC, a person is deemed to be a “beneficial owner” of a security if that person has or shares “voting power”, which includes the power to vote or to direct the voting of such security, or “investment power”, which includes the power to dispose of or to direct the disposition of such security. A person is also deemed to be a beneficial owner of any securities of which that person has a right to acquire beneficial ownership within 60 days. Under these rules, more than one person may be deemed to be a beneficial owner of such securities as to which such person has an economic interest. |
| (2) | Reflects 2,664,356 shares of Class A Common Stock and one share of Class C Common Stock held by Fusion Acquisition LLC. As the managing member of Fusion Acquisition LLC, KKR Millennium Fund L.P. may be deemed to be the beneficial owner of the securities of Holdco held by Fusion Acquisition LLC. As the sole general partner of KKR Millennium Fund L.P., KKR Associates Millennium L.P. may be deemed to be the beneficial owner of the securities of Holdco held by Fusion Acquisition LLC. As the sole general partner of KKR Associates Millennium L.P., KKR Millennium GP LLC may be deemed to be the beneficial owner of the securities of Holdco held by Fusion Acquisition LLC. Each of KKR Fund Holdings L.P. (as the designated member of KKR Millennium GP LLC); KKR Fund Holdings GP Limited (as a general partner of KKR Fund Holdings L.P.); KKR Group Holdings L.P. (as a general partner of KKR Fund Holdings L.P. and the sole shareholder of KKR Fund Holdings GP Limited); KKR Group Limited (as the sole general partner of KKR Group Holdings L.P.); KKR & Co. L.P. (as the sole shareholder of KKR Group Limited) and KKR Management LLC (as the sole general partner of KKR & Co. L.P.) may be deemed to be the beneficial owner of the securities of Holdco held by Fusion Acquisition LLC. As the designated members of KKR Management LLC, each of Henry R. Kravis and George R. Roberts may also be deemed to be the beneficial owner of the securities of Holdco held by Fusion Acquisition LLC. Messrs. Kravis and Roberts have also been designated as managers of KKR |
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| | Millennium GP LLC by KKR Fund Holdings L.P. Each person, other than the record holder, disclaims beneficial ownership of the securities of Holdco held by Fusion Acquisition LLC. Mr. George M.C. Fisher is a director of Holdco and Visant and is a senior advisor of KKR. Messrs. Alexander Navab and Tagar C. Olson are directors of Holdco and Visant and are executives of KKR and/or its affiliates. Messrs. Fisher, Navab and Olson disclaim beneficial ownership of the securities of Holdco held by Fusion Acquisition LLC. The address of the above holders is c/o Kohlberg Kravis Roberts & Co. L.P., 9 West 57th Street, New York, New York 10019. |
| (3) | The contribution agreement entered into in connection with the Transactions provided that KKR receive one share of the Class C Common Stock, which, together with its shares of the Class A Common Stock, provides KKR with approximately 49.3% of Holdco’s voting interest. Messrs. Fisher, Navab and Olson disclaim beneficial ownership of these shares. |
| (4) | Includes 2,664,357 shares held by DLJMBP III, DLJ Offshore Partners III-1, C.V., DLJ Offshore Partners III-2, C.V., DLJ Offshore Partners III, C.V., DLJ MB Partners III GmbH & Co. KG, Millennium Partners II, L.P. and MBP III Plan Investors, L.P., all of which are private equity funds that form part of Credit Suisse’s Asset Management Division. The address for each of the foregoing is 11 Madison Avenue, New York, New York 10010, except that the address of the three “Offshore Partners” entities is c/o John B. Gosiraweg 14, Willemstad, Curacao, Netherlands Antilles. Ms. Susan C. Schnabel is a director of Holdco and Visant and an employee of Credit Suisse’s Asset Management Division, of which DLJMBP III is a part, and does not have sole or shared voting or dispositive power over shares shown as held by DLJMBP III and related funds, and therefore, does not have beneficial ownership of such shares and disclaims beneficial ownership. The address for Ms. Schnabel is Credit Suisse, 2121 Avenue of the Stars, Suite 3200, Los Angeles, CA 90067. Mr. Burgstahler, the President of Avista Capital Partners and a former partner of DLJMBP III, serves as a director of Holdco and Visant by appointment by Credit Suisse. Mr. Burgstahler disclaims beneficial ownership of any of the shares beneficially owned by DLJMBP III and related funds. The address for Mr. Burgstahler is c/o Avista Capital Partners, 65 East 55th Street, 18th Floor, New York, NY 10022. |
| (5) | Includes 3,122 shares purchased in connection with Mr. Fisher becoming a director of Visant and Holdco, which shares were subsequently transferred to and are currently held by the JBW Irrevocable Trust. Mr. Fisher and his wife are trustors of the trust but exercise no investment or voting control. Mr. Fisher disclaims beneficial ownership of these shares. A family trust, of which Mr. Fisher’s wife serves as trustee, also has an indirect interest through a limited partnership in less than one percent (1%) of the Class A Common Stock held by Fusion Acquisition LLC. |
| (6) | The address for Mr. George Fisher is c/o Kohlberg Kravis Roberts & Co. L.P., 9 West 57th Street, New York, New York 10019. |
| (7) | The address for Mr. Reisch, Mr. Carousso and Ms. Hlavaty is c/o Visant Holding Corp., 357 Main Street, Armonk, New York 10504. The address for Mr. Mooty is c/o Jostens, Inc., 3601 Minnesota Drive, Suite 400, Minneapolis, MN 55435. |
| (8) | Includes shares underlying stock options, which are all currently exercisable. Mr. Burgstahler has assigned the economic benefit of his options to DLJMBP III. Charles P. Pieper, a former director of Visant and Holdco, also assigned the economic benefit of the 3,122 options held by him to DLJMBP III. |
| (9) | Includes 46,824 shares held by the Reisch Family LLC, of which Mr. Reisch is a member. |
| (10) | In connection with his employment, Charles W. Mooty is expected to make a personal investment in the Class A Common Stock and be granted restricted shares of Class A Common Stock. |
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Equity Compensation Plan Information
The following table sets forth information about the equity compensation plans of Holdco as of December 28, 2013.
| | | | | | | | | | | | |
Plan Category | | Number of
securities
to be issued
upon
exercise of
outstanding
options
(a) | | | Weighted-
average
exercise
price of
outstanding
options
(b) | | | Number of
securities
remaining
available for
future
issuance
under equity
compensation
plans
(excluding
securities
reflected in
column (a))
(c) | |
Equity compensation plans approved by security holders: | | | | | | | | | | | | |
2004 Plan | | | 236,897 | | | $ | 41.43 | | | | 150,577 | |
2003 Plan | | | 4,180 | (1) | | $ | 30.09 | | | | — | |
Equity compensation plans not approved by security holders | | | — | | | | — | | | | — | |
| | | | | | | | | | | | |
Total | | | 241,077 | | | $ | 44.93 | | | | 150,577 | |
| (1) | The options issued in January 2004 that remained outstanding as of December 28, 2013 were exercised in January 2014 prior to their expiration. |
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| ITEM 13. | CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE |
Transactions with Sponsors
Stockholders Agreement
In connection with the Transactions, in October 2004 Holdco entered into the 2004 Stockholders Agreement with an entity affiliated with KKR and entities affiliated with DLJMBP III (each an “Investor Entity” and together the “Investor Entities”) that provides for, among other things:
| | • | | the right of each of the Investor Entities to designate a certain number of directors to Holdco’s board of directors for so long as they hold a certain amount of Holdco’s common stock. Of the eight members of Holdco’s board of directors, KKR and DLJMBP III each has the right to designate four of Holdco’s directors (currently three KKR and three DLJMBP III designees serve on Holdco’s board) with our Chief Executive Officer and President, Marc L. Reisch, as chairman; |
| | • | | certain limitations on the transfer of Holdco’s common stock held by the Investor Entities for a period of four years after the completion of the Transactions, after which, if Holdco has not completed an initial public offering, any Investor Entity wishing to sell any of Holdco common stock held by it must first offer to sell such stock to Holdco and the other Investor Entities, provided that, if Holdco completes an initial public offering during the four years after the completion of the Transactions, any Investor Entity may sell pursuant to its registration rights as described below; |
| | • | | a consent right for the Investor Entities with respect to certain corporate actions; |
| | • | | the ability of the Investor Entities to “tag-along” their shares of Holdco’s common stock to sales by any other Investor Entity, and the ability of the Investor Entities to “drag-along” Holdco’s common stock held by the other Investor Entities under certain circumstances; |
| | • | | the right of the Investor Entities to purchase a pro rata portion of all or any part of any new securities offered by Holdco; and |
| | • | | a restriction on the ability of the Investor Entities and certain of their affiliates to own, operate or control a business that competes with Holdings, subject to certain exceptions. |
Management Services Agreement
In connection with the Transactions, Holdco entered into a management services agreement with the Sponsors pursuant to which the Sponsors provide certain structuring, consulting and management advisory services. Under the management services agreement, during the term the Sponsors receive an annual advisory fee of $3.0 million that is payable quarterly and which increases by 3% per year. Holdco incurred advisory fees from the Sponsors of $3.8 million for the year ended December 28, 2013, $3.7 million for the year ended December 29, 2012 and $3.6 million for the year ended December 31, 2011. The management services agreement also provides that Holdco will indemnify the Sponsors and their affiliates, directors, officers and representatives for losses relating to the services contemplated by the management services agreement and the engagement of the Sponsors pursuant to, and the performance by the Sponsors of the services contemplated by, the management services agreement.
Registration Rights Agreement
In connection with the Transactions, Holdco entered into a registration rights agreement with the Investor Entities pursuant to which the Investor Entities are entitled to certain demand and piggyback rights with respect to the registration and sale of Holdco’s common stock held by them.
Other
KKR Capstone is a team of operational professionals who work exclusively with KKR’s investment professionals and portfolio company management teams to enhance and strengthen operations in KKR’s portfolio companies. We have retained KKR Capstone from time to time to provide certain of our businesses with consulting services primarily to help identify and implement operational improvements and other strategic efforts within our businesses. We incurred approximately $0.1 million, $0.2 million and $1.5 million in fiscal years 2013, 2012 and 2011, respectively, for services provided by KKR Capstone. An affiliate of KKR Capstone has an ownership interest in Holdco.
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Certain of the lenders under the Credit Facilities and their affiliates have engaged, and may in the future engage, in investment banking, commercial banking and other financial advisory and commercial dealings with Visant and its affiliates. Such parties have received (or will receive) customary fees and commissions for these transactions.
In connection with the execution of the Stock Purchase Agreement on November 19, 2013 for the acquisition of American Achievement, Visant and Holdco concurrently entered into a debt commitment letter (the “Debt Commitment Letter”) with Credit Suisse Securities (USA) LLC (“CSSUSA”) and Credit Suisse AG, Cayman Islands Branch (“CSAG”) pursuant to which, subject to the conditions set forth therein, CSAG has committed to provide Visant financing for the transactions under the Stock Purchase Agreement, which will include: (i) up to a $260.0 million senior secured term loan facility (the “Senior Facility”), either as an incremental facility pursuant to the Credit Facilities or under a new, stand-alone credit agreement, maturing on March 23, 2017; and (ii) up to $100.0 million in aggregate principal amount of senior unsecured notes issued by Visant in a private placement (the “Mirror Notes”) on terms substantially consistent with the Senior Notes, provided that if all or any portion of the contemplated Mirror Notes are not issued by Visant prior to the closing of the acquisition of American Achievement, the financing shall also include up to $100.0 million of senior unsecured fixed rate loans maturing on October 1, 2017 (the “Senior Unsecured Bridge Loans”) under a senior unsecured credit facility (the “Bridge Facility”), in each case, plus an amount sufficient to fund any OID or upfront fees required to be funded in respect thereof on the closing date. In any event, the combined aggregate amount of gross proceeds from the Mirror Notes and the Senior Unsecured Bridge Loans shall not exceed $100.0 million. Visant may in its sole discretion agree to reduce any commitment with respect to the Bridge Facility. At any time after the one year anniversary of the closing date, the Senior Unsecured Bridge Loans may be exchanged in whole or in part for senior unsecured exchange notes, in equal principal amount, as additional Senior Notes under the indenture governing the Senior Notes. The obligations under the Senior Facility and the Bridge Facility will be guaranteed by Visant Secondary and the subsidiaries of Visant that are guarantors under the Credit Facilities and the Senior Notes, respectively. The Senior Facility will be secured on the same basis as the security interests pursuant to the Credit Facilities. The obligation of CSAG to provide debt financing under the Debt Commitment Letter is subject to customary closing conditions for transactions of this type. The final termination date for the Debt Commitment Letter is the same as the termination date under the Stock Purchase Agreement. Our borrowing under such financing arrangement will be subject to the closing of the transactions under the Stock Purchase Agreement. CSSUSA will act as sole lead arranger and bookrunner and will perform duties customarily associated with such roles for which it will receive customary fees. In addition, KKR Capital Markets LLC (“KKRCM”) assisted in placing the financing, for which it will receive a customary fee. Each of CSAG, CSUSA and KKRCM is an affiliate of one of our Sponsors.
Affiliates of CSUSA, CSAG and KKRCM act as lenders and/or as agents under the Credit Facilities and were initial purchasers of the Senior Notes, for which they received and will receive customary fees and expenses and are indemnified by us against certain liabilities.
In December 2012 we repurchased for retirement in privately negotiated transactions $13.3 million in aggregate principal amount of Senior Notes. An affiliate of KKR served in an agency capacity for the broker executing the repurchases on our behalf, for which the affiliate received customary compensation.
In 2011, we entered into the Swap Transactions with respect to our variable rate term loan indebtedness under the Credit Facilities. The counterparties to the Swap Transactions or their affiliates are parties to the Credit Facilities. Such parties have received (or will receive) customary fees and commissions for such transactions. Credit Suisse International, which is a counterparty to one of the Swap Transactions, is an affiliate of DLJMBP III.
We are party to an agreement with CoreTrust Purchasing Group (“CoreTrust”), a group purchasing organization, pursuant to which we avail ourselves of the terms and conditions of the CoreTrust purchasing organization for certain purchases, including our prescription drug benefit program. An affiliate of KKR is party to an agreement with CoreTrust which permits certain KKR affiliates, including Visant, the benefit of utilizing the CoreTrust group purchasing program. CoreTrust receives payment of fees for administrative and other services provided by CoreTrust from certain vendors based on the products and services purchased by us and other parties, and CoreTrust shares a portion of such fees with the KKR affiliate.
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We have participated in providing integrated marketing programs with an affiliate of First Data Corporation, a company in which affiliates of KKR have an ownership interest. This collaborative arrangement was terminated during the quarter ended September 29, 2012, subject to certain possible residual revenue during 2013. For the fiscal years ended December 28, 2013, December 29, 2012 and December 31, 2011, the amount of revenue that we recognized through this arrangement was not material to our financial statements.
Transactions with Other Co-Investors and Management
Syndicate Stockholders Agreement
In September 2003, Visant, Holdco, DLJMBP III and certain of its affiliated funds (collectively, the “DLJMBP Funds”) and certain of the DLJMBP Funds’ co-investors entered into a stock purchase and stockholders’ agreement (the “Syndicate Stockholders Agreement”), pursuant to which the DLJMBP Funds sold to the co-investors shares of: (1) the Class A Common Stock, (2) Holdco Class B Non-Voting Common Stock (which have since been converted into shares of Class A Common Stock) and (3) Visant’s 8% Senior Redeemable Preferred Stock (which has since been repurchased).
The Syndicate Stockholders Agreement contains provisions which, among other things:
| | • | | restrict the ability of the syndicate stockholders to make certain transfers; |
| | • | | grant the co-investors certain board observation and information rights; |
| | • | | provide for certain tag-along and drag-along rights; |
| | • | | grant preemptive rights to the co-investors to purchase a pro rata share of any new shares of common stock issued by Holdco or Jostens to any of the DLJMBP Funds or their successors prior to an initial public offering; and |
| | • | | give the stockholders piggyback registration rights in the event of a public offering in which the DLJMBP Funds sell shares. |
Management Stockholders Agreement
In July 2003, Holdco, the DLJMBP Funds and certain members of management entered into a stockholders’ agreement that contains certain provisions which, among other things:
| | • | | restrict the ability of the management stockholders to transfer their shares; |
| | • | | provide for certain tag-along and drag-along rights; |
| | • | | provide certain call and put rights; |
| | • | | grant preemptive rights to the management stockholders to purchase a pro rata share of any new shares of common stock issued by Holdco or Jostens to any of the DLJMBP Funds or their successors prior to an initial public offering; |
| | • | | grant the DLJMBP Funds six demand registration rights; and |
| | • | | give the stockholders piggyback registration rights in the event of a public offering in which the DLJMBP Funds sell shares. |
Other
Ms. Ann Carr, who is Mr. Charles Mooty’s sister-in-law, joined Jostens as its Chief Marketing Officer in March 2014. Her compensation is commensurate with that of her peers.
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Review and Approval of Transactions with Related Parties
Under its responsibilities set forth in its charter, our Audit Committee reviews and approves all related party transactions, as required by applicable law, rules or regulations or under our material indebtedness agreements and otherwise to the extent it deems necessary or appropriate. The 2004 Stockholders Agreement also requires the consent of the stockholders party thereto to certain related party transactions.
Under our Business Conduct and Ethics Principles, we require the disclosure by employees of situations or transactions that reasonably would be expected to give rise to a conflict of interest. Any such situation or transaction should be avoided unless specifically approved and appropriate controls provided for. The Business Conduct and Ethics Principles also provide that conflicts of interest may be waived for our directors, executive officers or other principal financial officers only by our Board of Directors or an appropriate committee of the Board.
Director Independence
We are not a listed issuer under the rules of the SEC. For purposes of disclosure under Item 407(a) of Regulation S-K, we use the definition of independence under the listing standards of the New York Stock Exchange. Under such definition, none of the members of our Board of Directors would be considered independent.
| ITEM 14. | PRINCIPAL ACCOUNTANT FEES AND SERVICES |
Audit Fees
Deloitte & Touche LLP (“D&T”) has been engaged as our independent accountants since February 2005. During 2013 and 2012, the aggregate audit fees billed to us by D&T were $1.5 million and $1.4 million, respectively. Such fees were for audits of our consolidated financial statements and reviews of our quarterly consolidated financial statements for each of fiscal 2013 and 2012.
Audit-Related Fees
During fiscal years 2013 and 2012, the audit-related fees billed to us by D&T were $0.1 million and $0.3 million, respectively. During fiscal years 2013 and 2012, these fees primarily related to audit-related accounting services.
Tax Fees
During fiscal years 2013 and 2012, the aggregate tax fees billed to us by D&T were $1.1 million and $0.7 million, respectively. These fees related to a variety of tax consulting services primarily related to acquisitions, certain tax planning and compliance matters.
All Other Fees
In fiscal years 2013 and 2012, no fees were billed for products and services by D&T, other than as set forth above.
Audit Committee
The Audit Committee has the authority to appoint and retain, replace or terminate the independent auditor. The Audit Committee is directly responsible for the appointment, compensation, evaluation, retention and oversight of the work of the independent auditor, including resolution of disagreements between management and the independent auditor regarding financial reporting for the purpose of preparing or issuing an audit report or related work. The Audit Committee has established policies and procedures for the approval or pre-approval of all auditing services and permitted non-audit services (including, without limitation, accounting services related to merger and acquisition transactions and related financing activities) to be performed for us by our independent auditor. The Audit Committee, as permitted by its pre-approval policy, from time to time delegates the approval of certain permitted services or amounts to be incurred for such service to a member of the Audit Committee. The Audit Committee then reviews the delegate’s approval decisions periodically and not less frequently than at the next occurring quarterly Audit Committee meeting. The Audit Committee approved all audit, audit-related and tax services for us performed by D&T in 2013 and 2012.
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PART IV
| ITEM 15. | EXHIBITS, FINANCIAL STATEMENT SCHEDULES |
| (a) | List of documents filed as part of this report: |
| | (a) | Visant Corporation and subsidiaries |
| | (i) | Report of Independent Registered Public Accounting Firm |
| | (ii) | Consolidated Statements of Operations and Comprehensive (Loss) Income for the fiscal years ended December 28, 2013, December 29, 2012 and December 31, 2011 |
| | (iii) | Consolidated Balance Sheets as of December 28, 2013 and December 29, 2012 |
| | (iv) | Consolidated Statements of Cash Flows for the fiscal years ended December 28, 2013, December 29, 2012 and December 31, 2011 |
| | (v) | Consolidated Statements of Changes in Stockholder’s Deficit for the fiscal years ended December 28, 2013, December 29, 2012 and December 31, 2011 |
| | (b) | Notes to Consolidated Financial Statements |
| | (2) | Financial Statement Schedule |
Schedule II Valuation and Qualifying Accounts
All other schedules for which provision is made in the applicable accounting regulations of the Securities and Exchange Commission have been omitted because they are not applicable or the required information is shown in the financial statements or notes thereto.
The exhibits listed on the accompanying Exhibit Index are incorporated by reference herein and filed as part of this report.
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EXHIBIT INDEX
| | |
Exhibit No. | | Exhibit Description |
| 2.1(20) | | Agreement and Plan of Merger, dated as of July 21, 2004, among Fusion Acquisition LLC, VHH Merger, Inc. and Von Hoffmann Holdings Inc. |
| |
| 2.2(8) | | Agreement and Plan of Merger, dated as of July 21, 2004, among Fusion Acquisition LLC, AHC Merger, Inc. and AHC I Acquisition Corp. |
| |
| 2.3(9) | | Contribution Agreement, dated as of July 21, 2004, between Visant Holding Corp. (f/k/a Jostens Holding Corp.) and Fusion Acquisition LLC. |
| |
| 2.4(2) | | Amendment No. 1 to Contribution Agreement, dated as of September 30, 2004, between Visant Holding Corp. and Fusion Acquisition LLC. |
| |
| 2.5(16) | | Stock Purchase Agreement, dated January 2, 2007, among Visant Corporation, Visant Holding Corp. and R.R. Donnelley & Sons Company. |
| |
| 2.6(19) | | Agreement and Plan of Merger, dated as of February 11, 2008, by and among Visant Corporation, Coyote Holdco Acquisition Company LLC, Phoenix Color Corp., Louis LaSorsa, as stockholders’ representative and the stockholders signatory thereto. |
| |
| 2.7(33) | | Stock Purchase Agreement, dated as of November 19, 2013, by and among Jostens, Inc., American Achievement Group Holding Corp., Visant Corporation, each holder of outstanding equity interests of American Achievement Group Holding Corp., and American Achievement Holdings LLC, in its capacity as Sellers’ Representative. |
| |
| 3.1(2) | | Second Amended and Restated Certificate of Incorporation of Visant Holding Corp. (f/k/a Jostens Holding Corp.) |
| |
| 3.2(14) | | Certificate of Amendment of the Second Amended and Restated Certificate of Incorporation of Visant Holding Corp. |
| |
| 3.3(34) | | Certificate of Amendment of the Second Amended and Restated Certificate of Incorporation of Visant Holding Corp. |
| |
| 3.4(3) | | By-laws of Visant Holding Corp. (f/k/a Ring Holding Corp.) |
| |
| 3.5(14) | | Certificate of Incorporation of Visant Secondary Holdings Corp. (f/k/a Jostens Secondary Holding Corp.). |
| |
| 3.6(14) | | Certificate of Amendment of the Certificate of Incorporation of Visant Secondary Holdings Corp. |
| |
| 3.7(34) | | Certificate of Amendment of the Certificate of Incorporation of Visant Secondary Holdings Corp. |
| |
| 3.8(14) | | By-Laws of Visant Secondary Holding Corp. |
| |
| 3.9(4) | | Amended and Restated Certificate of Incorporation of Visant Corporation (f/k/a Ring IH Corp.) |
| |
| 3.10(14) | | Certificate of Amendment of the Amended and Restated Certificate of Incorporation of Visant Corporation. |
| |
| 3.11(34) | | Certificate of Amendment of the Amended & Restated and Certificate of Incorporation of Visant Corporation. |
| |
| 3.12(4) | | By-Laws of Visant Corporation. |
| |
| 3.13(13) | | Form of Amended and Restated Articles of Incorporation of Jostens, Inc. |
| |
| 3.14(27) | | By-Laws of Jostens, Inc. |
| |
| 3.15(27) | | Certificate of Formation of The Lehigh Press LLC. |
| |
| 3.16(27) | | Limited Liability Company Agreement of The Lehigh Press LLC. |
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| | |
Exhibit No. | | Exhibit Description |
| 3.17(6) | | Certificate of Amendment of Amended and Restated and Certificate of Incorporation of AKI, Inc. (f/k/a Arcade Marketing, Inc.). |
| |
| 3.18(7) | | Amended and Restated By-Laws of AKI, Inc. |
| |
| 3.19(27) | | Certificate of Formation of Dixon Direct LLC. |
| |
| 3.20(27) | | Limited Liability Company Agreement of Dixon Direct LLC. |
| |
| 3.21(17) | | Certificate of Amendment of Certificate of Incorporation and Certificate of Incorporation of Neff Holding Company. |
| |
| 3.22(17) | | By-Laws of Neff Holding Company. |
| |
| 3.23(17) | | Amended Articles of Incorporation of Neff Motivation, Inc. |
| |
| 3.24(17) | | Amended Code of Regulations of Neff Motivation, Inc. |
| |
| 3.25(21) | | Certificate of Formation of Memory Book Acquisition LLC. |
| |
| 3.26(21) | | Limited Liability Company Agreement of Memory Book Acquisition LLC. |
| |
| 3.27(21) | | Certificate of Incorporation of PCC Express, Inc. |
| |
| 3.28(21) | | By-Laws of PCC Express, Inc. |
| |
| 3.29(21) | | Certificate of Incorporation of Phoenix Color Corp. (f/k/a Phoenix Merger Corp.) |
| |
| 3.30(21) | | Amended and Restated By-Laws of Phoenix Color Corp. |
| |
| 3.31(21) | | Articles of Organization of Phoenix (Md.) Realty, LLC. |
| |
| 3.32(21) | | Operating Agreement of Phoenix (Md.) Realty, LLC. |
| |
| 3.33(24) | | Articles of Amendment to the Articles of Incorporation and Articles of Incorporation of Rock Creek Athletics, Inc. |
| |
| 3.34(24) | | By-Laws of Rock Creek Athletics, Inc. |
| |
| 3.35(30) | | Certificate of Incorporation of Color Optics, Inc. |
| |
| 3.36(30) | | Bylaws of Color Optics, Inc. |
| |
| 3.37(30) | | First Amendment to Limited Liability Company Agreement of The Lehigh Press LLC. |
| |
| 4.1(25) | | Indenture, dated September 22, 2010, among Visant Corporation, the guarantors party thereto and U.S. Bank National Association, as trustee. |
| |
| 4.2(25) | | Exchange and Registration Rights Agreement, dated September 22, 2010, among Visant Corporation, the guarantors party thereto, Goldman, Sachs & Co., Credit Suisse Securities (USA) LLC, Banc of America Securities LLC, Barclays Capital Inc., Deutsche Bank Securities Inc. and KKR Capital Markets LLC. |
| |
| 4.3(2) | | Registration Rights Agreement, dated as of October 4, 2004, between Visant Holding Corp. and the Stockholders named therein. |
| |
| 10.1(25) | | Credit Agreement, dated as of September 22, 2010, among Visant Corporation, as Borrower, Jostens Canada Ltd., as Canadian Borrower, Visant Secondary Holdings Corp., as Guarantor, Credit Suisse AG, as Administrative Agent, Credit Suisse AG Toronto Branch, as Canadian Administrative Agent, Credit Suisse Securities (USA) LLC, as Joint Lead Arranger and Joint Bookrunner, Goldman Sachs Lending Partners LLC, as Joint Lead Arranger, Joint Bookrunner and Syndication Agent, Banc of America Securities LLC, Barclays Capital, Deutsche Bank Securities Inc. and KKR Capital Markets LLC, as Co-Arrangers and Joint Bookrunners, Banc of America Securities LLC, Barclays Bank plc, Deutsche Bank AG New York Branch and KKR Capital Markets LLC, as Co-Documentation Agents, and certain other lending institutions from time to time parties thereto. |
77
| | |
Exhibit No. | | Exhibit Description |
| 10.2(10) | | Stock Purchase and Stockholders’ Agreement, dated as of September 3, 2003, among Visant Holding Corp., Visant Corporation and the stockholders party thereto. |
| |
| 10.3(12) | | Stock Purchase Agreement among Von Hoffmann Corporation, The Lehigh Press, Inc. and the shareholders of The Lehigh Press Inc., dated September 5, 2003. |
| |
| 10.4(5) | | Management Stock Incentive Plan established by Jostens, Inc., dated as of May 10, 2000.* |
| |
| 10.5(1) | | Amended and Restated 2004 Stock Option Plan for Key Employees of Visant Holding Corp. and its Subsidiaries, dated as of January 6, 2005.* |
| |
| 10.6(26) | | Second Amended and Restated Employment Agreement, dated as of May 17, 2010, among Visant Holding Corp., Jostens, Inc. and Marc L. Reisch.* |
| |
| 10.7(32) | | Marc L. Reisch Amended and Restated Supplemental Executive Retirement Plan, dated as of December 31, 2012.* |
| |
| 10.8(26) | | Marc L. Reisch 2010 Supplemental Executive Retirement Plan Form of Trust Agreement.* |
| |
| 10.9(32) | | Second Amended and Restated Executive Supplemental Retirement Agreement, dated as of December 31, 2012, between Marc L. Reisch and Visant Holding Corp.* |
| |
| 10.10(2) | | Management Stockholder’s Agreement, dated as of October 4, 2004, between Visant Holding Corp. and Marc Reisch.* |
| |
| 10.11(2) | | Restricted Stock Award Agreement, dated as of October 4, 2004, between Visant Holding Corp. and Marc Reisch.* |
| |
| 10.12(2) | | Sale Participation Agreement, dated as of October 4, 2004, between Visant Holding Corp. and Marc Reisch.* |
| |
| 10.13(2) | | Stock Option Agreement, dated as of October 4, 2004, between Visant Holding Corp. and Marc Reisch.* |
| |
| 10.14(1) | | Stockholders Agreement, dated as of October 4, 2004, among Visant Holding Corp. and the stockholders named therein. |
| |
| 10.15(2) | | Transaction and Monitoring Agreement, dated as of October 4, 2004, between Visant Holding Corp., Kohlberg Kravis Roberts & Co. L.P. and DLJ Merchant Banking III, Inc. |
| |
| 10.16(14) | | Second Amended and Restated 2004 Stock Option Plan for Key Employees of Visant Holding Corp. and its Subsidiaries, dated as of March 14, 2005.* |
| |
| 10.17(14) | | Form of Management Stockholder’s Agreement.* |
| |
| 10.18(14) | | Form of Sale Participation Agreement.* |
| |
| 10.19(14) | | Form of Visant Holding Corp. Stock Option Agreement.* |
| |
| 10.20(14) | | Form of Jostens, Inc. Stock Option Agreement.* |
| |
| 10.21(15) | | Third Amended and Restated 2004 Stock Option Plan for Key Employees of Visant Holding Corp. and its Subsidiaries, dated March 22, 2006.* |
| |
| 10.22(11) | | Jostens Holding Corp. 2003 Stock Incentive Plan, effective October 30, 2003.* |
| |
| 10.23(32) | | Form of Amended and Restated Agreement for Executive Supplemental Retirement Plan, dated as of December 31, 2012.* |
| |
| 10.24(18) | | Change in Control Severance Agreement, dated May 10, 2007, by and among Visant Holding Corp., Visant Corporation and Paul B. Carousso.* |
| |
| 10.25(18) | | Change in Control Severance Agreement, dated May 10, 2007, by and among Visant Holding Corp., Visant Corporation and Marie D. Hlavaty.* |
78
| | |
Exhibit No. | | Exhibit Description |
| 10.26(22) | | Second Amended and Restated Employment Agreement dated as of August 9, 2012 by and among Visant Corporation, Jostens, Inc. and Timothy Larson.* |
| |
| 10.27(23) | | Form of Restricted Stock Award Agreement.* |
| |
| 10.28(24) | | Amendment to the Jostens Holding Corp. 2003 Stock Incentive Plan.* |
| |
| 10.29(28) | | Amendment No. 1 dated as of March 1, 2011 to the Credit Agreement dated as of September 22, 2010, among Visant Corporation, Jostens Canada Ltd., Visant Secondary Holdings Corp., the lending institutions from time to time party thereto, Credit Suisse AG, as Administrative Agent, and Credit Suisse AG, Toronto Branch, as Canadian Administrative Agent. |
| |
| 10.32(31) | | Form of 2012 Jostens, Inc. Long-Term Incentive Award Letter.* |
| |
| 10.33(33) | | Commitment Letter, dated November 19, 2013, by and among Credit Suisse Securities (USA) LLC, Credit Suisse AG, Cayman Islands Branch, Visant Secondary Holdings Corp. and Visant Corporation. |
| |
| 10.34(34) | | Employment Agreement, dated as of November 19, 2013, by and between Jostens, Inc. and Charles W. Mooty.* |
| |
| 12.1(34) | | Computation of Ratio of Earnings to Fixed Charges. |
| |
| 14.1(29) | | Visant Holding Corp. and Subsidiaries Business Conduct and Ethics Principles. |
| |
| 21(34) | | Subsidiaries of Visant Holding Corp. |
| |
| 31.1(34) | | Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 for Visant Corporation. |
| |
| 31.2(34) | | Certification of Senior Vice President, Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 for Visant Corporation. |
| |
| 32.1(34) | | Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 for Visant Corporation. |
| |
| 32.2(34) | | Certification of Senior Vice President, Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 for Visant Corporation. |
| |
| 101 | | The following materials from Visant’s Annual Report on Form 10-K for the year ended December 28, 2013 formatted in XBRL (eXtensible Business Reporting Language): (i) the Consolidated Statements of Operations and Other Comprehensive (Loss) Income, (ii) the Consolidated Balance Sheets, (iii) the Consolidated Statements of Cash Flows, (iv) Consolidated Statements of Changes in Stockholder’s Equity (Deficit), (v) Notes to the Consolidated Financial Statements, and (vi) Schedule of Valuation and Qualifying Accounts. |
| (1) | Incorporated by reference to Visant Holding Corp.’s Post-Effective Amendment No. 2 toForm S-4/A (file no.333-112055), filed on February 14, 2005. |
| (2) | Incorporated by reference to Visant Holding Corp.’s Post-Effective Amendment toForm S-4/A (file no.333-112055), filed on November 12, 2004. |
79
| (3) | Incorporated by reference to Visant Holding Corp.’sForm S-4/A (file no.333-112055), filed on February 2, 2004. |
| (4) | Incorporated by reference to Visant Corporation’sForm S-4 (file no.333-120386), filed on November 12, 2004. |
| (5) | Incorporated by reference to Jostens, Inc.’sForm S-4 (file no.333-45006), filed on September 1, 2000. |
| (6) | Incorporated by reference to AKI, Inc.’sForm S-4/A (file no.333-60989), filed on November 13, 1998. |
| (7) | Incorporated by reference to AKI, Inc.’sForm S-4 (file no.333-60989), filed on August 7, 1998. |
| (8) | Incorporated by reference to AKI, Inc.’sForm 10-K, filed on September 1, 2004. |
| (9) | Incorporated by reference to Visant Holding Corp.’sForm 10-Q, filed on August 17, 2004. |
| (10) | Incorporated by reference to Visant Holding Corp.’sForm 10-K, filed on April 28, 2004. |
| (11) | Incorporated by reference to Jostens, Inc.’sForm 10-K, filed on April 1, 2004. |
| (12) | Incorporated by reference to Von Hoffmann Holdings Inc.’sForm 10-Q, filed on November 10, 2003. |
| (13) | Incorporated by reference to Jostens, Inc.’sForm 10-Q, filed on November 12, 2003. |
| (14) | Incorporated by reference to Visant Holding Corp.’sForm 10-K, filed on April 1, 2005. |
| (15) | Incorporated by reference to Visant Holding Corp.’s Form 10-K, filed on March 30, 2006. |
| (16) | Incorporated by reference to Visant Holding Corp.’s Form 8-K, filed on January 5, 2007. |
| (17) | Incorporated by reference to Visant Corporation’s Form S-1 (file no. 333-142678), filed on May 7, 2007. |
| (18) | Incorporated by reference to Visant Holding Corp.’s Form 10-Q, filed on May 14, 2007. |
| (19) | Incorporated by reference to Visant Holding Corp.’s Form 8-K, filed on February 15, 2008. |
| (20) | Incorporated by reference to Von Hoffmann Holdings Inc.’s Form 10-Q/A, filed on August 12, 2004. |
| (21) | Incorporated by reference to Visant Corporation’s Form S-1 (file no. 333-151052), filed on May 20, 2008. |
| (22) | Incorporated by reference to Visant Corporation’s Form 10-Q, filed on August 14, 2012. |
| (23) | Incorporated by reference to Visant Holding Corp.’s Post-Effective Amendment to Form S-1/A (file no. 333-142680), filed on May 20, 2008. |
| (24) | Incorporated by reference to Visant Holding Corp.’s Form 10-K, filed on April 1, 2010. |
| (25) | Incorporated by reference to Visant Corporation’s Form 8-K, filed September 27, 2010. |
| (26) | Incorporated by reference to Visant Holding Corp.’s Form 10-Q, filed May 18, 2010. |
| (27) | Incorporated by reference to Visant Corporation’s Form S-4 (file no. 333-171061), filed on December 9, 2010. |
| (28) | Incorporated by reference to Visant Corporation’s Form 8-K, filed March 1, 2011. |
80
| (29) | Incorporated by reference to Visant Corporation’s Form 10-K, filed April 1, 2011. |
| (30) | Incorporated by reference to Visant Corporation’s Form 10-K filed March 21, 2012. |
| (31) | Incorporated by reference to Visant Corporation’s Form 10-Q filed November 13, 2012. |
| (32) | Incorporated by reference to Visant Corporation’s Form 10-K, filed March 28, 2013. |
| (33) | Incorporated by reference to Visant Corporation’s Form 8-K, filed November 20, 2013. |
| * | Management contract or compensatory plan or arrangement |
The agreements and other documents filed as exhibits to this report are not intended to provide factual information or other disclosure other than the terms of the agreements or other documents themselves, and you should not rely on them for that purpose. In particular, any representations and warranties made by the Company in these agreements or other documents were made solely within the specific context of the relevant agreement or document and may not describe the actual state of affairs at the date they were made or at any other time.
81
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.
| | | | |
| | | | | VISANT CORPORATION |
| | |
Date: March 28, 2014 | | | | /s/ Marc L. Reisch |
| | | | Marc L. Reisch President and Chief Executive 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 and on the dates indicated.
| | | | |
| | | Signature | | Title |
| | |
Date: March 28, 2014 | | /s/ Marc L. Reisch Marc L. Reisch | | Chairman of the Board, President and Chief Executive Officer (Principal Executive Officer) |
| | |
Date: March 28, 2014 | | /s/ Paul B. Carousso Paul B. Carousso | | Senior Vice President, Chief Financial Officer (Principal Financial and Accounting Officer) |
| | |
Date: March 28, 2014 | | /s/ David F. Burgstahler David F. Burgstahler | | Director |
| | |
Date: March 28, 2014 | | George M.C. Fisher | | Director |
| | |
Date: March 28, 2014 | | Alexander Navab | | Director |
| | |
Date: March 28, 2014 | | /s/ Tagar C. Olson Tagar C. Olson | | Director |
| | |
Date: March 28, 2014 | | /s/ Susan C. Schnabel Susan C. Schnabel | | Director |
82
INDEX TO FINANCIAL STATEMENTS
| | | | |
Consolidated Financial Statements | | | | |
| |
Visant Corporation and subsidiaries: | | | | |
| |
Report of Independent Registered Public Accounting Firm | | | F-2 | |
| |
Consolidated Statements of Operations and Comprehensive Income (Loss) for the fiscal years ended December 28, 2013, December 29, 2012 and December 31, 2011 | | | F-3 | |
| |
Consolidated Balance Sheets as of December 28, 2013 and December 29, 2012 | | | F-4 | |
| |
Consolidated Statements of Cash Flows for the fiscal years ended December 28, 2013, December 29, 2012 and December 31, 2011 | | | F-5 | |
| |
Consolidated Statements of Changes in Stockholder’s Deficit for the fiscal years ended December 28, 2013, December 29, 2012 and December 31, 2011 | | | F-6 | |
| |
Notes to Consolidated Financial Statements | | | F-7 | |
| |
Financial Statement Schedule: | | | F-50 | |
| |
Schedule II—Valuation and Qualifying Accounts | | | F-50 | |
F-1
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors of
Visant Corporation
Armonk, New York
We have audited the accompanying consolidated balance sheets of Visant Corporation and subsidiaries (the “Company”) as of December 28, 2013 and December 29, 2012, and the related consolidated statements of operations and comprehensive income (loss), changes in stockholder’s deficit and cash flows for each of the three years in the period ended December 28, 2013. Our audits also included the financial statement schedule listed in the Index at Item 15. These financial statements and financial statement schedules are the responsibility of the Company’s management. Our responsibility is to express an opinion on the consolidated financial statements and financial statement schedule based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall consolidated 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 Visant Corporation and subsidiaries as of December 28, 2013 and December 29, 2012, and the results of their operations and their cash flows for each of the three years in the period ended December 28, 2013, in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, such financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects the information set forth therein.
/s/DELOITTE & TOUCHE LLP
New York, New York
March 28, 2014
F-2
VISANT CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
AND COMPREHENSIVE INCOME (LOSS)
| | | | | | | | | | | | |
In thousands | | 2013 | | | 2012 | | | 2011 | |
Net sales | | $ | 1,127,703 | | | $ | 1,155,342 | | | $ | 1,217,792 | |
Cost of products sold | | | 543,401 | | | | 549,490 | | | | 572,611 | |
| | | | | | | | | | | | |
Gross profit | | | 584,302 | | | | 605,852 | | | | 645,181 | |
Selling and administrative expenses | | | 405,962 | | | | 426,376 | | | | 449,801 | |
Gain on disposal of fixed assets | | | (835 | ) | | | (1,629 | ) | | | (910 | ) |
Special charges | | | 20,561 | | | | 75,905 | | | | 44,413 | |
| | | | | | | | | | | | |
Operating income | | | 158,614 | | | | 105,200 | | | | 151,877 | |
Interest income | | | (74 | ) | | | (79 | ) | | | (97 | ) |
Interest expense | | | 155,342 | | | | 159,003 | | | | 164,233 | |
Gain on repurchase and redemption of debt | | | — | | | | (947 | ) | | | — | |
| | | | | | | | | | | | |
Income (loss) before income taxes | | | 3,346 | | | | (52,777 | ) | | | (12,259 | ) |
Provision for income taxes | | | 2,265 | | | | 5,823 | | | | 2,625 | |
| | | | | | | | | | | | |
Net income (loss) | | $ | 1,081 | | | $ | (58,600 | ) | | $ | (14,884 | ) |
| | | | | | | | | | | | |
Other comprehensive income (loss), net of tax: | | | | | | | | | | | | |
Deferred gain (loss) on derivatives | | | 2,016 | | | | (1,960 | ) | | | (3,427 | ) |
Change in cumulative translation adjustment | | | 555 | | | | (167 | ) | | | (1,137 | ) |
Change in minimum pension liability | | | 45,272 | | | | (23,269 | ) | | | (29,001 | ) |
| | | | | | | | | | | | |
Comprehensive income (loss) | | $ | 48,924 | | | $ | (83,996 | ) | | $ | (48,449 | ) |
| | | | | | | | | | | | |
The accompanying notes are an integral part of the consolidated financial statements.
F-3
VISANT CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
| | | | | | | | |
In thousands, except number of shares | | 2013 | | | 2012 | |
ASSETS | | | | | | | | |
Cash and cash equivalents | | $ | 96,042 | | | $ | 60,196 | |
Accounts receivable, net | | | 108,201 | | | | 104,785 | |
Inventories | | | 104,349 | | | | 111,343 | |
Salespersons overdrafts, net of allowance of $9,174 and $10,003, respectively | | | 24,321 | | | | 24,144 | |
Income tax receivable | | | 3,462 | | | | 2,928 | |
Prepaid expenses and other current assets | | | 18,770 | | | | 17,952 | |
Deferred income taxes | | | 21,053 | | | | 25,184 | |
| | | | | | | | |
Total current assets | | | 376,198 | | | | 346,532 | |
| | | | | | | | |
Property, plant and equipment | | | 543,063 | | | | 526,143 | |
Less accumulated depreciation | | | (353,972 | ) | | | (322,478 | ) |
| | | | | | | | |
Property, plant and equipment, net | | | 189,091 | | | | 203,665 | |
Goodwill | | | 926,823 | | | | 918,946 | |
Intangibles, net | | | 367,567 | | | | 401,323 | |
Deferred financing costs, net | | | 33,118 | | | | 42,740 | |
Deferred income taxes | | | 2,316 | | | | 2,472 | |
Other assets | | | 11,162 | | | | 10,728 | |
| | | | | | | | |
Total assets | | $ | 1,906,275 | | | $ | 1,926,406 | |
| | | | | | | | |
LIABILITIES, MEZZANINE EQUITY AND STOCKHOLDER’S DEFICIT | | | | | | | | |
Accounts payable | | $ | 45,867 | | | $ | 55,103 | |
Accrued employee compensation and related taxes | | | 35,391 | | | | 31,511 | |
Commissions payable | | | 10,908 | | | | 12,345 | |
Customer deposits | | | 169,919 | | | | 175,145 | |
Income taxes payable | | | 3,310 | | | | 49,321 | |
Interest payable | | | 33,702 | | | | 34,514 | |
Current portion of long-term debt and capital leases | | | 4,778 | | | | 15,236 | |
Other accrued liabilities | | | 29,194 | | | | 26,152 | |
| | | | | | | | |
Total current liabilities | | | 333,069 | | | | 399,327 | |
| | | | | | | | |
Long-term debt and capital leases—less current maturities | | | 1,868,147 | | | | 1,869,215 | |
Deferred income taxes | | | 147,059 | | | | 134,703 | |
Pension liabilities, net | | | 51,926 | | | | 129,627 | |
Other noncurrent liabilities | | | 38,812 | | | | 34,871 | |
| | | | | | | | |
Total liabilities | | | 2,439,013 | | | | 2,567,743 | |
| | | | | | | | |
Mezzanine equity | | | 11 | | | | 1,216 | |
Preferred stock $.01 par value; authorized 300,000 shares; none issued and outstanding at December 28, 2013 and December 29, 2012 | | | — | | | | — | |
Common stock $.01 par value; authorized 1,000 shares; 1,000 shares issued and outstanding at December 28, 2013 and December 29, 2012 | | | — | | | | — | |
Additional paid-in-capital | | | 60,983 | | | | 103 | |
Accumulated deficit | | | (553,018 | ) | | | (554,099 | ) |
Accumulated other comprehensive loss | | | (40,714 | ) | | | (88,557 | ) |
| | | | | | | | |
Total stockholder’s deficit | | | (532,749 | ) | | | (642,553 | ) |
| | | | | | | | |
Total liabilities, mezzanine equity and stockholder’s deficit | | $ | 1,906,275 | | | $ | 1,926,406 | |
| | | | | | | | |
The accompanying notes are an integral part of the consolidated financial statements.
F-4
VISANT CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
| | | | | | | | | | | | |
In thousands | | 2013 | | | 2012 | | | 2011 | |
Net income (loss) | | $ | 1,081 | | | $ | (58,600 | ) | | $ | (14,884 | ) |
Adjustments to reconcile net income (loss) to net cash provided by operating activities: | | | | | | | | | | | | |
Depreciation | | | 51,367 | | | | 49,538 | | | | 49,866 | |
Amortization of intangible assets | | | 37,812 | | | | 54,590 | | | | 55,780 | |
Amortization of debt discount, premium and deferred financing costs | | | 13,248 | | | | 13,225 | | | | 14,910 | |
Other amortization | | | 344 | | | | 405 | | | | 437 | |
Deferred income taxes | | | (18,424 | ) | | | (10,717 | ) | | | (1,010 | ) |
Gain on repurchase and redemption of debt | | | — | | | | (947 | ) | | | — | |
Gain on disposal of fixed assets | | | (835 | ) | | | (1,629 | ) | | | (910 | ) |
Stock-based compensation | | | 102 | | | | 638 | | | | 482 | |
Loss on asset impairments | | | 728 | | | | 65,842 | | | | 36,501 | |
Other | | | 8,200 | | | | 813 | | | | 5,671 | |
Changes in assets and liabilities: | | | | | | | | | | | | |
Accounts receivable | | | 1,154 | | | | 6,864 | | | | 988 | |
Inventories | | | 7,826 | | | | (1,941 | ) | | | (6,365 | ) |
Salespersons overdrafts | | | (285 | ) | | | 5,951 | | | | 531 | |
Prepaid expenses and other current assets | | | 2,618 | | | | (91 | ) | | | 4,077 | |
Accounts payable and accrued expenses | | | (11,200 | ) | | | 2,150 | | | | 2,674 | |
Customer deposits | | | (4,765 | ) | | | (2,018 | ) | | | (6,152 | ) |
Commissions payable | | | (1,384 | ) | | | (9,037 | ) | | | (593 | ) |
Income taxes payable | | | 13,248 | | | | 18,612 | | | | (2,234 | ) |
Interest payable | | | (812 | ) | | | 220 | | | | (3,620 | ) |
Other operating activities, net | | | 1,571 | | | | (22,127 | ) | | | (13,620 | ) |
| | | | | | | | | | | | |
Net cash provided by operating activities | | | 101,594 | | | | 111,741 | | | | 122,529 | |
| | | | | | | | | | | | |
Purchases of property, plant and equipment | | | (34,323 | ) | | | (52,132 | ) | | | (55,525 | ) |
Proceeds from sale of property and equipment | | | 3,107 | | | | 4,727 | | | | 6,734 | |
Acquisition of businesses, net of cash acquired | | | (16,939 | ) | | | — | | | | (4,681 | ) |
Additions to intangibles | | | (318 | ) | | | (3,248 | ) | | | (212 | ) |
Other investing activities, net | | | — | | | | 1 | | | | — | |
| | | | | | | | | | | | |
Net cash used in investing activities | | | (48,473 | ) | | | (50,652 | ) | | | (53,684 | ) |
| | | | | | | | | | | | |
Short-term borrowings | | | 59,000 | | | | 107,000 | | | | 83,000 | |
Short-term repayments | | | (59,000 | ) | | | (107,000 | ) | | | (83,000 | ) |
Repayment of long-term debt and capital lease obligations | | | (16,944 | ) | | | (38,700 | ) | | | (76,297 | ) |
Proceeds from issuance of long-term debt and capital leases | | | 644 | | | | 2,094 | | | | 349 | |
Distribution to stockholder | | | (642 | ) | | | — | | | | — | |
Debt financing costs and related expenses | | | — | | | | — | | | | (16,579 | ) |
| | | | | | | | | | | | |
Net cash used in financing activities | | | (16,942 | ) | | | (36,606 | ) | | | (92,527 | ) |
| | | | | | | | | | | | |
Effect of exchange rate changes on cash and cash equivalents | | | (333 | ) | | | (301 | ) | | | (501 | ) |
| | | | | | | | | | | | |
Increase (decrease) in cash and cash equivalents | | | 35,846 | | | | 24,182 | | | | (24,183 | ) |
Cash and cash equivalents, beginning of period | | | 60,196 | | | | 36,014 | | | | 60,197 | |
| | | | | | | | | | | | |
Cash and cash equivalents, end of period | | $ | 96,042 | | | $ | 60,196 | | | $ | 36,014 | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
Supplemental information: | | | | | | | | | | | | |
Interest paid | | $ | 143,023 | | | $ | 145,528 | | | $ | 152,302 | |
Income taxes paid, net of refunds | | $ | 7,307 | | | $ | 5,105 | | | $ | 5,886 | |
The accompanying notes are an integral part of the consolidated financial statements.
F-5
VISANT CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDER’S DEFICIT
| | | | | | | | | | | | | | | | | | | | | | | | |
In thousands | | Common shares | | | Additional
paid-in-
capital | | | Accumulated
deficit | | | Accumulated
other
comprehensive
loss | | | Total | |
| | Number | | | Amount | | | | | |
Balance—January 1, 2011 | | | 1 | | | $ | — | | | $ | 54 | | | $ | (480,615 | ) | | $ | (29,596 | ) | | $ | (510,157 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | |
Net loss | | | | | | | | | | | | | | | (14,884 | ) | | | | | | | (14,884 | ) |
Cumulative translation adjustment | | | | | | | | | | | | | | | | | | | (1,137 | ) | | | (1,137 | ) |
Change in fair value of derivatives | | | | | | | | | | | | | | | | | | | (3,427 | ) | | | (3,427 | ) |
Pension and other postretirement benefit adjustments | | | | | | | | | | | | | | | | | | | (29,001 | ) | | | (29,001 | ) |
Stock-based compensation | | | | | | | | | | | 49 | | | | | | | | | | | | 49 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Balance—December 31, 2011 | | | 1 | | | $ | — | | | $ | 103 | | | $ | (495,499 | ) | | $ | (63,161 | ) | | $ | (558,557 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | |
Net loss | | | | | | | | | | | | | | | (58,600 | ) | | | | | | | (58,600 | ) |
Cumulative translation adjustment | | | | | | | | | | | | | | | | | | | (167 | ) | | | (167 | ) |
Change in fair value of derivatives | | | | | | | | | | | | | | | | | | | (1,960 | ) | | | (1,960 | ) |
Pension and other postretirement benefit adjustments | | | | | | | | | | | | | | | | | | | (23,269 | ) | | | (23,269 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | |
Balance—December 29, 2012 | | | 1 | | | $ | — | | | $ | 103 | | | $ | (554,099 | ) | | $ | (88,557 | ) | | $ | (642,553 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | |
Net income | | | | | | | | | | | | | | | 1,081 | | | | | | | | 1,081 | |
Cumulative translation adjustment | | | | | | | | | | | | | | | | | | | 555 | | | | 555 | |
Change in fair value of derivatives | | | | | | | | | | | | | | | | | | | 2,016 | | | | 2,016 | |
Pension and other postretirement benefit adjustments | | | | | | | | | | | | | | | | | | | 45,272 | | | | 45,272 | |
Excess tax benefit on share based arrangements | | | | | | | | | | | (265 | ) | | | | | | | | | | | (265 | ) |
Distribution to stockholder | | | | | | | | | | | (642 | ) | | | | | | | | | | | (642 | ) |
Reclass from mezzanine equity | | | | | | | | | | | 1,302 | | | | | | | | | | | | 1,302 | |
Contribution from stockholder | | | | | | | | | | | 60,485 | | | | | | | | | | | | 60,485 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Balance—December 28, 2013 | | | 1 | | | $ | — | | | $ | 60,983 | | | $ | (553,018 | ) | | $ | (40,714 | ) | | $ | (532,749 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | |
The accompanying notes are an integral part of the consolidated financial statements.
F-6
VISANT CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
| 1. | Summary of Significant Accounting Policies |
Description of Business
The Company is a marketing and publishing services enterprise servicing the school affinity, direct marketing, fragrance, cosmetic and personal care sampling and packaging, and educational and trade publishing segments. The Company sells products and services to end customers through several different sales channels including independent sales representatives and dedicated sales forces. Sales and results of operations are impacted by a number of factors, including general economic conditions, seasonality, cost of raw materials, school population trends, the availability of school funding, product and service offerings and quality and price.
On October 4, 2004, an affiliate of Kohlberg Kravis Roberts & Co. L.P. (“KKR”) and affiliates of DLJ Merchant Banking Partners III, L.P. (“DLJMBP III”) completed a series of transactions which created a marketing and publishing services enterprise (the “Transactions”) through the combination of Jostens, Inc. (“Jostens”), Von Hoffmann Corporation (“Von Hoffmann”) and AKI, Inc. and its subsidiaries (“Arcade”).
As of December 28, 2013, affiliates of KKR and DLJMBP III (the “Sponsors”) held approximately 49.3% and 41.1%, respectively, of Visant Holding Corp.’s (“Holdco”) voting interest, while each continued to hold approximately 44.8% of Holdco’s economic interest. As of December 28, 2013, the other co-investors held approximately 8.4% of the voting interest and approximately 9.1% of the economic interest of Holdco, and members of management held approximately 1.2% of the voting interest and approximately 1.3% of the economic interest of Holdco (exclusive of exercisable options). Visant is an indirect wholly-owned subsidiary of Holdco.
Basis of Presentation
The consolidated financial statements included herein are for Visant and its wholly-owned subsidiaries.
All intercompany balances and transactions have been eliminated in consolidation.
Fiscal Year
The Company’s fiscal year ends on the Saturday closest to December 31st and as a result, a 53rd week is added approximately every sixth year. The Company’s 2013 fiscal year ended on December 28, 2013. Fiscal years 2013, 2012, 2011, 2010 and 2009 consisted of 52 weeks. Our 2014 fiscal year will include a 53rd week.
Use of Estimates
The preparation of consolidated financial statements in conformity with generally accepted accounting principles (“GAAP”) in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the dates of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results may differ from these estimates.
Revenue Recognition
The Company recognizes revenue when the earnings process is complete, evidenced by an agreement with the respective customer, delivery and acceptance has occurred, collectability is probable and pricing is fixed or determinable. Revenue is recognized (1) when products are shipped (if shipped free on board “FOB” shipping point), (2) when products are delivered (if shipped FOB destination) or (3) as services are performed as determined by contractual agreement, but in all cases only when risk of loss has transferred to the customer and the Company has no further performance obligations.
Shipping and Handling
Net sales include amounts billed to customers for shipping and handling costs. Costs incurred for shipping and handling are recorded in cost of products sold.
F-7
VISANT CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
Cost of Products Sold
Cost of products sold primarily includes the cost of paper and other materials, direct and indirect labor and related benefit costs, depreciation of production assets and shipping and handling costs.
Warranty Costs
Provisions for warranty costs related to Jostens’ scholastic products, particularly class rings due to their lifetime warranty, are recorded based on historical information and current trends in manufacturing costs. The provision related to the lifetime warranty is based on the number of rings manufactured in the prior school year consistent with industry standards. For fiscal years ended 2013, 2012 and 2011, the provision for the total net warranty costs was $4.7 million, $4.9 million and $4.8 million, respectively. Warranty repair costs for rings manufactured in the current school year are expensed as incurred. Accrued warranty costs in the accompanying consolidated balance sheets were approximately $0.8 million as of each of December 28, 2013 and December 29, 2012.
Selling and Administrative Expenses
Selling and administrative expenses are expensed as incurred. These costs primarily include salaries and related benefits of sales and administrative personnel, sales commissions, amortization of intangibles and professional fees such as audit and consulting fees.
Advertising
The Company expenses advertising costs as incurred. Selling and administrative expenses included advertising expense of $8.2 million for 2013, $9.1 million for 2012 and $7.9 million for 2011.
Foreign Currency Translation
Assets and liabilities denominated in foreign currencies are translated at the current exchange rate as of the balance sheet date, and income statement amounts are translated at the average monthly exchange rate. Translation adjustments resulting from fluctuations in exchange rates are recorded in Accumulated Other Comprehensive Loss.
Supplier Concentration
Jostens purchases substantially all precious, semi-precious and synthetic stones from a single supplier located in Germany. Arcade’s products utilize specific grades of paper and foil and other laminates for which it relies on limited suppliers with whom it does not have written supply agreements in place.
Derivative Financial Instruments
The Company recognizes all derivatives on the balance sheet at fair value. Changes in the fair value of derivatives are either recorded in earnings or other comprehensive income (loss), based on whether the instrument qualifies for and is designated as part of a hedging relationship. Gains or losses on derivative instruments reported in other comprehensive income (loss) are reclassified into earnings in the period in which earnings are affected by the underlying hedged item. The ineffective portion, if any, of a derivative’s change in fair value is recognized in earnings in the current period. Refer to Note 11,Derivative Financial Instruments and Hedging Activities, for further details.
Stock-Based Compensation
The Company recognizes compensation expense related to all equity awards granted, including awards modified, repurchased or cancelled based on the fair values of the awards at the grant date. For the years ended December 28, 2013, December 29, 2012 and December 31, 2011, Visant recognized compensation expense related to stock-based compensation of approximately $1.5 million, $1.1 million and $7.0 million, respectively, which was included in selling and administrative expenses. Refer to Note 15,Stock-based Compensation, for further details.
Mezzanine Equity
Certain management stockholder agreements contain a purchase feature pursuant to which, in the event the holder’s employment terminates as a result of the death or permanent disability (as defined in the agreement) of the holder, the holder (or his/her estate, in the case of death) has the option to require that the common shares or vested options be purchased from the holder (estate) and settled in cash. These equity instruments are considered temporary equity and have been classified as mezzanine equity on the balance sheet as of December 28, 2013 and December 29, 2012, respectively.
F-8
VISANT CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
Cash and Cash Equivalents
All investments with an original maturity of three months or less on their acquisition date are considered to be cash equivalents.
Allowance for Doubtful Accounts
The Company makes estimates of potentially uncollectible customer accounts receivable and evaluates the adequacy of the allowance periodically. The evaluation considers historical loss experience, the length of time receivables are past due, adverse situations that may affect a customer’s ability to pay and prevailing economic conditions. The Company makes adjustments to the allowance balance if the evaluation of allowance requirements differs from the actual aggregate reserve. This evaluation is inherently subjective and estimates may be revised as more information becomes available.
Allowance for Sales Returns
The Company makes estimates of potential future product returns related to current period product revenue. The Company evaluates the adequacy of the allowance periodically. This evaluation considers historical return experience, changes in customer demand and acceptance of the Company’s products and prevailing economic conditions. The Company makes adjustments to the allowance if the evaluation of allowance requirements differs from the actual aggregate reserve. This evaluation is inherently subjective and estimates may be revised as more information becomes available.
Allowance for Salespersons Overdrafts
The Company makes estimates of potentially uncollectible receivables arising from sales representative draws paid in advance of earned commissions. These estimates are based on historical commissions earned and length of service for each sales representative. The Company evaluates the adequacy of the allowance on a periodic basis. The evaluation considers historical loss experience, length of time receivables are past due, adverse situations that may affect a sales representative’s ability to repay and prevailing economic conditions. The Company makes adjustments to the allowance balance if the evaluation of allowance requirements differs from the actual aggregate reserve. This evaluation is inherently subjective and estimates may be revised as more information becomes available.
Inventories
Inventories are stated at the lower of cost or market value. Cost is determined by using standard costing, which approximates the first-in, first-out (FIFO) method for all inventories except gold, which are determined using the last-in, first-out (LIFO) method. Cost includes direct materials, direct labor and applicable overhead. Obsolescence adjustments are provided as necessary in order to approximate inventories at market value. This evaluation is inherently subjective and estimates may be revised as more information becomes available.
Property, Plant and Equipment
Property, plant and equipment are stated at historical cost except when adjusted to fair value in applying purchase accounting in conjunction with an acquisition or merger or when recording an impairment. Maintenance and repairs are charged to operations as incurred. Major renewals and improvements are capitalized. Depreciation is determined for financial reporting purposes by using the straight-line method over the following estimated useful lives:
| | | | |
| | | Years | |
Buildings and improvements | | | 7 to 40 | |
Machinery and equipment | | | 3 to 12 | |
Capitalized software | | | 2 to 5 | |
Transportation equipment | | | 4 to 10 | |
Furniture and fixtures | | | 3 to 7 | |
F-9
VISANT CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
Assets acquired under capital leases are depreciated using a straight-line method over the estimated useful life of the asset and are included in depreciation expense.
Capitalization of Internal-Use Software
Costs of software developed or obtained for internal use are capitalized once the preliminary project stage has concluded, management commits to funding the project and it is probable that the project will be completed and the software will be used to perform the function intended. Capitalized costs include only (1) external direct costs of materials and services consumed in developing or obtaining internal-use software, (2) payroll and payroll-related costs for employees who are directly associated with and who devote time to the internal-use software project and (3) interest costs incurred, when material, while developing internal-use software. Capitalization of costs ceases when the project is substantially complete and ready for its intended use.
Goodwill and Indefinite-Lived Intangible Assets
Goodwill is measured as the excess of the cost of an acquired entity over the fair value assigned to identifiable assets acquired and liabilities assumed. The Company is required to test goodwill and other intangible assets with indefinite lives for impairment annually, or more frequently if impairment indicators occur. The impairment test requires management to make judgments in connection with identifying reporting units, assigning assets and liabilities to reporting units, assigning goodwill and other indefinite-lived intangible assets to reporting units and determining the fair value of each reporting unit.
As part of the annual impairment analysis for each reporting unit, the Company engaged a third-party appraisal firm to assist in the determination of the estimated fair value of each unit. This determination included estimating the fair value using both the income and market approaches. The income approach requires management to estimate a number of factors for each reporting unit, including projected future operating results, economic projections, anticipated future cash flows and discount rates. The market approach estimates fair value using comparable marketplace fair value data from within a comparable industry grouping. Where applicable, the Company weighted both the income and market approach equally to estimate the concluded fair value of each reporting unit. The projections are based on management’s best estimate given recent financial performance, market trends, strategic plans and other available information. Changes in these estimates and assumptions could materially affect the determination of fair value and/or impairment for each reporting unit.
The most recent impairment testing was completed as of the beginning of the fourth quarter of fiscal year 2013. As part of such impairment test, the Company first evaluated the recoverability of goodwill at the reporting unit level by comparing the estimated fair value of each reporting unit to its carrying value. Based on this Step 1 test, the fair value of each reporting unit tested for impairment was in excess of its carrying value with the exception of the publishing services reporting unit, which is included in the Marketing and Publishing Services segment. Accordingly, the Company proceeded to perform Step 2 of the impairment test on the publishing services reporting unit’s goodwill which had a carrying value of $57.0 million. In performing the Step 2 analysis, it was determined that the implied fair value of the publishing services reporting unit’s goodwill was in excess of its carrying value, and, accordingly, no impairment charge was recognized. The fair value of each of the other reporting units tested for impairment was substantially in excess of its carrying value. Unforeseen events, however, could adversely affect the reported value of goodwill and indefinite-lived intangible assets, which at the end of fiscal 2013 and 2012 totaled approximately $1,180.1 million and $1,180.4 million, respectively.
In the fourth quarter of fiscal 2013, the Company made a strategic decision to no longer use a certain tradename in its Marketing and Publishing Services segment. In connection with this decision, the Company recorded an $8.2 million non-cash charge, which is reflected in the results of the Marketing and Publishing Services segment.
Customer Deposits
Amounts received from customers in the form of cash down payments to purchase goods and services are recorded as a liability until the goods or services are delivered.
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. The effect on deferred tax assets
F-10
VISANT CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. Income tax expense represents the taxes payable for the current period, the changes in deferred taxes during the year, and the effect of changes in tax reserve requirements. Valuation allowances are established when necessary to reduce deferred tax assets to the amount expected to be realized.
Significant judgment is required in determining the Company’s income tax expense. Uncertain tax positions are evaluated under the more-likely-than-not threshold for financial statement recognition and measurement for tax positions taken or expected to be taken in a tax return. The Company reviews its tax positions quarterly and adjusts its tax reserve balances as more information becomes available. Refer to Note 13,Income Taxes, for additional information on the provision for income taxes.
All interest and penalties on income tax assessments are recorded as income tax expense, and all interest income in connection with income tax refunds is recorded as a reduction of income tax expense.
Recently Adopted Accounting Pronouncements
In May 2011, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update 2011-04 (“ASU 2011-04”) which generally provides a uniform framework for fair value measurements and related disclosures between GAAP and the International Financial Reporting Standards (“IFRS”). Additional disclosure requirements in ASU 2011-04 include: (1) for Level 3 fair value measurements, quantitative information about unobservable inputs used, a description of the valuation processes used by the entity and a qualitative discussion about the sensitivity of the measurements to changes in the unobservable inputs, (2) for an entity’s use of a nonfinancial asset that is different from the asset’s highest and best use, the reason for the difference, (3) for financial instruments not measured at fair value but for which disclosure of fair value is required, the fair value hierarchy level in which the fair value measurements were determined and (4) the disclosure of all transfers between Level 1 and Level 2 of the fair value hierarchy. ASU 2011-04 became effective for interim and annual periods beginning on or after December 15, 2011. The Company’s adoption of this guidance did not have a material impact on its financial statements.
In June 2011, the FASB issued Accounting Standards Update 2011-05 (“ASU 2011-05”) which revises the manner in which entities present comprehensive income in their financial statements. This new guidance amends existing guidance by allowing only two options for presenting the components of net income and other comprehensive income: (1) in a single continuous financial statement, referred to as the statement of comprehensive income, or (2) in two separate but consecutive financial statements, consisting of an income statement followed by a separate statement of other comprehensive income. Also, items that are reclassified from other comprehensive income to net income must be presented on the face of the financial statements. ASU 2011-05 became effective for fiscal years, and interim periods within those years, beginning after December 15, 2011. The Company’s adoption of this guidance did not have a material impact on its financial statements.
In September 2011, the FASB issued Accounting Standards Update 2011-08 (“ASU 2011-08”) which gives entities testing goodwill for impairment the option of performing a qualitative assessment before calculating the fair value of a reporting unit in Step 1 of the goodwill impairment test. If an entity determines, on the basis of qualitative factors, that the fair value of a reporting unit is, more likely than not, less than the carrying amount for such reporting unit, then the two-step goodwill impairment test would be required. Otherwise, further goodwill impairment testing would not be required. Companies are not required to perform the qualitative assessment for any reporting unit in any period and may proceed directly to Step 1 of the goodwill impairment test. A company that validates its conclusion by measuring fair value can resume performing the qualitative assessment in any subsequent period. ASU 2011-08 became effective for annual and interim goodwill impairment tests performed with respect to fiscal years beginning after December 15, 2011. The Company’s adoption of this guidance did not have a material impact on its financial statements.
In September 2011, the FASB issued Accounting Standards Update 2011-09 (“ASU 2011-09”) which amends ASC 715-80 by increasing the quantitative and qualitative disclosures an employer is required to provide about its participation in significant multiemployer plans that offer pension or other postretirement benefits. The objective of ASU 2011-09 is to enhance the transparency of disclosures about (1) the significant multiemployer plans in which an employer participates, (2) the level of the employer’s participation in those plans, (3) the financial health of the plans and (4) the nature of the employer’s commitments to the plans. ASU 2011-09 is effective for fiscal years ending after December 15, 2011. The Company’s adoption of this guidance did not have a material impact on its financial statements.
F-11
VISANT CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
In December 2011, the FASB issued Accounting Standards Update 2011-12 (“ASU 2011-12”) which defers certain provisions of ASU 2011-05. One provision of ASU 2011-05 required entities to present reclassification adjustments out of accumulated other comprehensive income by component in both the statement in which net income is presented and the statement in which other comprehensive income is presented (for both interim and annual financial statements). This requirement is indefinitely deferred under ASU 2011-12 and will be further deliberated by the FASB at a future date. During the deferral period, all entities are required to comply with existing requirements for reclassification adjustments in Accounting Standards Codification 220, Comprehensive Income, which indicates that “an entity may display reclassification adjustments on the face of the financial statement in which comprehensive income is reported, or it may disclose reclassification adjustments in the notes to the financial statements.” The effective date of ASU 2011-12 for public entities is for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2011. The Company’s adoption of this guidance did not have a material impact on its financial statements.
On July 27, 2012, the FASB issued Accounting Standards Update 2012-02 (“ASU 2012-02”) which amends the guidance on testing indefinite-lived intangible assets, other than goodwill, for impairment. Under ASU 2012-02, an entity testing an indefinite-lived intangible asset, other than goodwill, for impairment has the option of performing a qualitative assessment before calculating the fair value of the asset. Although ASU 2012-02 revises the examples of events and circumstances that an entity should consider in interim periods, it does not revise the requirements to test (1) indefinite-lived intangible assets annually for impairment and (2) between annual tests if there is a change in events or circumstances. ASU 2012-02 is effective for annual and interim impairment tests performed for fiscal years beginning after September 15, 2012, with early adoption permitted. The Company’s adoption of this guidance did not have a material impact on its financial statements.
On January 31, 2013, the FASB issued Accounting Standards Update 2013-01 (“ASU 2013-01”), which clarifies the scope of the offsetting disclosure requirements. Under ASU 2013-01, the disclosure requirements would apply to derivative instruments accounted for in accordance with Accounting Standards Codification 815, Derivatives and Hedging (“ASC 815”), including bifurcated embedded derivatives, repurchase agreements and reverse repurchase agreements, and securities borrowing and securities lending arrangements that are either offset on the balance sheet or subject to an enforceable master netting arrangement or similar agreement. ASU 2013-01 became effective for interim and annual periods beginning on or after January 1, 2013. Retrospective application is required for all comparative periods presented. The Company’s adoption of this guidance did not have a material impact on its financial statements.
On February 5, 2013, the FASB issued Accounting Standards Update 2013-02 (“ASU 2013-02”), which amends existing guidance by requiring additional disclosure either on the face of the income statement or in the notes to the financial statements of significant amounts reclassified out of accumulated other comprehensive income. ASU 2013-02 became effective for interim and annual periods beginning on or after December 15, 2012, to be applied on a prospective basis. The Company’s adoption of this guidance did not have a material impact on its financial statements.
On February 28, 2013, the FASB issued Accounting Standards Update 2013-04 (“ASU 2013-04”), which requires entities to measure obligations resulting from joint and several liability arrangements, for which the total amount of the obligation is fixed at the reporting date, as the sum of (1) the amount the reporting entity agreed to pay on the basis of its arrangement among its co-obligors and (2) any additional amount the reporting entity expects to pay on behalf of its co-obligors. Required disclosures include a description of the joint and several arrangement and the total outstanding amount of the obligation for all joint parties. ASU 2013-04 is effective for interim and annual periods beginning on or after December 15, 2013 and should be applied retrospectively to obligations with joint and several liabilities existing at the beginning of an entity’s fiscal year of adoption. Early adoption is permitted. The Company is currently evaluating the impact and disclosure under this guidance but does not expect this standard to have a material impact, if any, on its financial statements.
On March 4, 2013, the FASB issued Accounting Standards Update 2013-05 (“ASU 2013-05”), which indicates that the entire amount of a cumulative translation adjustment (“CTA”) related to an entity’s investment in a foreign entity should be released when there has been (1) the sale of a subsidiary or group of net assets within a foreign entity, and the sale represents the substantially complete liquidation of the investment in the foreign entity, (2) a loss of controlling financial interest in an investment in a foreign entity or (3) a step acquisition for a foreign entity. ASU 2013-05 does not change the requirement to release a pro rata portion of the CTA of the foreign entity into earnings for a partial sale of an equity method investment in a foreign entity. This guidance is effective for fiscal years, and interim periods within those fiscal years, beginning on or after December 15, 2013. The Company is currently evaluating the impact and disclosure under this guidance but does not expect this standard to have a material impact, if any, on its financial statements.
F-12
VISANT CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
On July 17, 2013, the FASB issued Accounting Standards Update 2013-10 (“ASU 2013-10”), which amends ASC 815 to allow entities to use the federal funds effective swap rate, in addition to U.S. Treasury rates and LIBOR, as a benchmark interest rate in accounting for fair value and cash flow hedges in the United States. ASU 2013-10 also eliminates the provision in ASC 815 which prohibited the use of different benchmark rates for similar hedges except in rare and justifiable circumstances. ASU 2013-10 is effective prospectively for qualifying new hedging relationships entered into on or after July 17, 2013 and for hedging relationships redesignated on or after that date. The Company’s adoption of this guidance did not have a material impact on its financial statements.
On July 18, 2013, the FASB issued Accounting Standards Update 2013-11 (“ASU 2013-11”), which provides guidance on the financial statement presentation of unrecognized tax benefits (“UTB”) when a net operating loss (“NOL”) carryforward, a similar tax loss or a tax credit carryforward exists. Under ASU 2013-11, an entity must present a UTB, or a portion of a UTB, in its financial statements as a reduction to a deferred tax asset (“DTA”) for a NOL carryforward, a similar tax loss or a tax credit carryforward, except when (1) a NOL carryforward, a similar tax loss or a tax credit carryforward is not available as of the reporting date under the governing tax law to settle taxes that would result from the disallowance of the tax position or (2) the entity does not intend to use the DTA for this purpose. If either of these conditions exists, an entity should present a UTB in the financial statements as a liability and should not net the UTB with a DTA. This guidance is effective for fiscal years beginning after December 15, 2013, with early adoption permitted. The amendment should be applied to all UTBs that exist as of the effective date. Entities may choose to apply the amendments retrospectively to each prior reporting period presented. The Company is currently evaluating the impact and disclosure under this guidance but does not expect this standard to have a material impact, if any, on its financial statements.
| 2. | Restructuring Activity and Other Special Charges |
For the year ended December 28, 2013, the Company recorded $11.6 million of restructuring costs and $8.9 million of other special charges. Included in these charges were (a) $8.6 million of costs in the Marketing and Publishing Services segment consisting of a non-cash charge of $8.2 million related to the write-off of a tradename no longer in use, and $0.4 million of severance and related benefit costs associated with reductions in force; (b) $2.6 million of costs in the Scholastic segment consisting of $2.5 million of severance and related benefit costs associated with reductions in force and a non-cash charge of $0.1 million related to asset impairment charges associated with facility consolidations; and (c) $1.7 million of costs in the Memory Book segment consisting of $1.0 million of severance and related benefit costs associated with reductions in force and a non-cash charge of $0.7 million related to asset impairment charges associated with the consolidation of Jostens’ Topeka, Kansas facility. Also included in special charges for the twelve months ended December 28, 2013 was $7.7 million related to the mutual termination of a multi-year marketing and sponsorship arrangement entered into by Jostens in 2007. The associated employee headcount reductions were 123, 21 and 18 in the Scholastic, Marketing and Publishing Services and Memory Book segments, respectively.
For the year ended December 29, 2012, the Company recorded $9.8 million of restructuring costs and $66.1 million of other special charges. Included in these charges were $58.0 million of costs in the Marketing and Publishing Services segment consisting of $55.3 million of non-cash impairment charges associated with the write-down of goodwill and $0.5 million of non-cash asset related impairment charges. Also included in such charges was $2.2 million of severance and related benefit costs. Special charges in the Scholastic segment included $8.9 million of non-cash impairment charges associated with the write-down of goodwill, and $1.2 million of severance and related benefit costs associated with reductions in force. Special charges in the Memory Book segment included $7.8 million of costs consisting of $6.4 million of severance and related benefit costs associated with reductions in force and approximately $1.4 million of non-cash asset related impairment charges, in each case associated with the consolidation of its Clarksville, Tennessee and Topeka, Kansas facilities. The associated employee headcount reductions were 389, 60 and 39 in the Memory Book, Marketing and Publishing Services, and Scholastic segments, respectively.
For the year ended December 31, 2011, the Company recorded $7.9 million of restructuring costs and $36.5 million of other special charges. Included in these charges were $35.3 million of costs in the Marketing and Publishing Services segment consisting of $31.9 million of non-cash impairment charges associated with the write-down of goodwill in the amount of $24.9 million and other indefinite-lived intangible assets in the amount of $7.0
F-13
VISANT CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
million and $1.0 million of severance and related benefit costs and $2.4 million of non-cash asset related impairment charges associated with the closure of its Milwaukee, Wisconsin facility. Special charges in the Memory Book segment included $6.6 million of costs consisting of $4.4 million of severance and related benefit costs associated with reductions in force and approximately $2.2 million of non-cash asset related impairment charges, in each case associated with the consolidation of its Clarksville, Tennessee and State College, Pennsylvania facilities. Special charges in the Scholastic segment included $2.2 million of severance and related benefit costs associated with reductions in force in connection with the consolidation of certain diploma operations. Also included in special charges were $0.3 million of severance and related benefit costs associated with the elimination of certain corporate management positions. The associated employee headcount reductions were 242, 137 and 46 in the Memory Book, Scholastic and Marketing and Publishing Services segments, respectively.
Restructuring accruals of $7.5 million and $2.9 million as of each of December 28, 2013 and December 29, 2012, respectively, are included in other accrued liabilities in the consolidated balance sheets. These accruals as of December 28, 2013 included amounts provided for the termination of the multi-year marketing and sponsorship arrangement entered into by Jostens in 2007 and severance and related benefits related to headcount reductions in each segment.
On a cumulative basis through December 28, 2013, the Company incurred $29.3 million of costs related to the termination of the multi-year marketing and sponsorship arrangement entered into by Jostens in 2007 and employee severance and related benefit costs related to the 2011, 2012 and 2013 initiatives, which affected an aggregate of 1,064 employees. Visant paid $21.8 million in cash related to these initiatives as of December 28, 2013.
Changes in the restructuring accruals during fiscal 2013 were as follows:
| | | | | | | | | | | | | | | | |
In thousands | | 2013 Initiatives | | | 2012 Initiatives | | | 2011 Initiatives | | | Total | |
Balance at December 29, 2012 | | $ | — | | | $ | 2,918 | | | $ | 13 | | | $ | 2,931 | |
Restructuring charges | | | 11,195 | | | | 436 | | | | 2 | | | | 11,633 | |
Severance paid | | | (3,828 | ) | | | (3,225 | ) | | | (15 | ) | | | (7,068 | ) |
| | | | | | | | | | | | | | | | |
Balance at December 28, 2013 | | $ | 7,367 | | | $ | 129 | | | $ | — | | | $ | 7,496 | |
| | | | | | | | | | | | | | | | |
The majority of the remaining severance and related benefits associated with the 2013 and 2012 initiatives are expected to be paid by the end of fiscal 2014 and the costs associated with the termination of the multi-year marketing and sponsorship arrangement entered into by Jostens in 2007 are expected to be paid by the end of 2016.
2013 Acquisition
On July 1, 2013, the Company announced the acquisition of SAS Carestia (“Carestia”), a leading producer of fragrance blotter cards, for a total purchase price of $16.9 million, net of cash, subject to certain subsequent post-closing adjustments. The acquisition was completed through Arcade’s subsidiary, Arcade Europe SAS. The results of the acquired Carestia operations are reported as part of the Marketing and Publishing Services segment from the date of acquisition.
The aggregate cost of the acquisition was allocated to the tangible and intangible assets acquired and liabilities assumed based upon their relative fair values as of the date of the acquisition.
F-14
VISANT CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
The final allocation of the purchase price for the Carestia acquisition was as follows:
| | | | |
In thousands | | | |
Current assets | | $ | 10,303 | |
Property, plant and equipment | | | 5,025 | |
Intangible assets | | | 8,954 | |
Goodwill | | | 7,683 | |
Long-term assets | | | 120 | |
Current liabilities | | | (4,853 | ) |
Long-term liabilities | | | (4,811 | ) |
| | | | |
| | $ | 22,421 | |
| | | | |
In connection with the purchase accounting related to the acquisition of Carestia, the intangible assets and goodwill approximated $16.6 million and consisted of:
| | | | |
In thousands | | | |
Customer relationships | | $ | 6,058 | |
Non-compete agreements | | | 262 | |
Trademarks (definite lived) | | | 2,634 | |
Goodwill | | | 7,683 | |
| | | | |
| | $ | 16,637 | |
| | | | |
2011 Acquisition
On April 4, 2011, the Company consummated the acquisition of Color Optics, Inc. (“Color Optics”) through a stock purchase for a total purchase price of $4.8 million paid in cash at closing and a subsequent working capital adjustment. Color Optics is a specialized packaging provider, serving the cosmetic and consumer products industries with highly decorated packaging solutions complementary to the Company’s sampling business. The results of the acquired Color Optics operations are reported as part of the Marketing and Publishing Services segment from the date of acquisition. There were no goodwill or intangible assets recognized in connection with this acquisition.
The aggregate cost of the acquisition was allocated to the tangible assets acquired and liabilities assumed based upon their relative fair values as of the date of the acquisition.
The final allocation of the purchase price for the Color Optics acquisition was as follows:
| | | | |
In thousands | | | |
Current assets | | $ | 3,451 | |
Property, plant and equipment | | | 614 | |
Intangible assets | | | — | |
Goodwill | | | — | |
Long-term assets | | | 2,412 | |
Current liabilities | | | (1,647 | ) |
Long-term liabilities | | | (54 | ) |
| | | | |
| | $ | 4,776 | |
| | | | |
The Color Optics acquisition was not considered material to the Company’s results of operations, financial position or cash flows.
F-15
VISANT CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
| 4. | Accumulated Other Comprehensive Loss |
The changes in accumulated other comprehensive loss (“AOCL”), by component and related tax effects, for each period were as follows:
| | | | | | | | | | | | | | | | |
In thousands | | Fair Value of
Derivatives | | | Foreign Currency
Translation | | | Pension and
Postretirement
Plans | | | Total | |
Balance as of January 1, 2011 | | $ | — | | | $ | 4,678 | | | $ | (34,274 | ) | | $ | (29,596 | ) |
| | | | | | | | | | | | | | | | |
Change in fair value of derivatives, net of tax of $(2.0) million | | | (3,427 | ) | | | — | | | | — | | | | (3,427 | ) |
Change in cumulative translation adjustment | | | — | | | | (1,137 | ) | | | — | | | | (1,137 | ) |
Change in pension and other postretirement benefit plans, net of tax of $(18.7) million | | | — | | | | — | | | | (29,001 | ) | | | (29,001 | ) |
| | | | | | | | | | | | | | | | |
Balance as of December 31, 2011 | | $ | (3,427 | ) | | $ | 3,541 | | | $ | (63,275 | ) | | $ | (63,161 | ) |
| | | | | | | | | | | | | | | | |
Change in fair value of derivatives, net of tax of $(2.6) million | | | (4,302 | ) | | | — | | | | — | | | | (4,302 | ) |
Change in cumulative translation adjustment | | | — | | | | (167 | ) | | | — | | | | (167 | ) |
Change in pension and other postretirement benefit plans, net of tax of $(15.0) million | | | — | | | | — | | | | (23,269 | ) | | | (23,269 | ) |
Amounts reclassified from AOCL, net of tax of $1.4 million | | | 2,342 | | | | — | | | | — | | | | 2,342 | |
| | | | | | | | | | | | | | | | |
Balance as of December 29, 2012 | | $ | (5,387 | ) | | $ | 3,374 | | | $ | (86,544 | ) | | $ | (88,557 | ) |
| | | | | | | | | | | | | | | | |
Change in fair value of derivatives, net of tax of $(0.1) million | | | (140 | ) | | | — | | | | — | | | | (140 | ) |
Change in cumulative translation adjustment | | | — | | | | 555 | | | | — | | | | 555 | |
Change in pension and other postretirement benefit plans, net of tax of $29.5 million | | | — | | | | — | | | | 45,272 | | | | 45,272 | |
Amounts reclassified from AOCL, net of tax of $1.3 million | | | 2,156 | | | | — | | | | — | | | | 2,156 | |
| | | | | | | | | | | | | | | | |
Balance as of December 28, 2013 | | $ | (3,371 | ) | | $ | 3,929 | | | $ | (41,272 | ) | | $ | (40,714 | ) |
| | | | | | | | | | | | | | | | |
Net accounts receivable were comprised of the following:
| | | | | | | | |
In thousands | | 2013 | | | 2012 | |
Trade receivables | | $ | 119,559 | | | $ | 115,775 | |
Allowance for doubtful accounts | | | (5,040 | ) | | | (4,932 | ) |
Allowance for sales returns | | | (6,318 | ) | | | (6,058 | ) |
| | | | | | | | |
Accounts receivable, net | | $ | 108,201 | | | $ | 104,785 | |
| | | | | | | | |
Inventories were comprised of the following:
| | | | | | | | |
In thousands | | 2013 | | | 2012 | |
Raw materials and supplies | | $ | 36,035 | | | $ | 37,920 | |
Work-in-process | | | 40,828 | | | | 43,662 | |
Finished goods | | | 27,486 | | | | 29,761 | |
| | | | | | | | |
Inventories | | $ | 104,349 | | | $ | 111,343 | |
| | | | | | | | |
Precious Metals Consignment Arrangement
Jostens is a party to a precious metals consignment agreement with a major financial institution under which it currently has the ability to obtain up to the lesser of a certain specified quantity of precious metals and $57.0 million in dollar value in consigned inventory. Under these arrangements, Jostens does not take title to consigned inventory until payment. Accordingly, Jostens does not include the value of consigned inventory or the corresponding liability in its consolidated financial statements. The value of consigned inventory at December 28, 2013 and December 29, 2012 was $15.6 million and $32.8 million, respectively. The agreement does not have a stated term, and it can be terminated by either party upon 60 days written notice. Additionally, Jostens incurred expenses for consignment fees related to this facility of $0.8 million for fiscal 2013 and $1.1 million for each of fiscal 2012 and 2011. The obligations under the consignment agreement are guaranteed by Visant.
F-16
VISANT CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
| 7. | Fair Value Measurements |
The Company measures fair value as the price that would be received upon sale of an asset or paid upon transfer of a liability in an orderly transaction between market participants at the measurement date and in the principal or most advantageous market for that asset or liability. The fair value should be calculated based on assumptions that market participants would use in pricing the asset or liability, not on assumptions specific to the entity. In addition, the fair value of liabilities should include consideration of non-performance risk including the Company’s own credit risk.
The disclosure requirements around fair value establish a fair value hierarchy for valuation inputs. The hierarchy prioritizes the inputs into three levels based on the extent to which inputs used in measuring fair value are observable in the market. Each fair value measurement is reported in one of the three levels which are determined by the lowest level input that is significant to the fair value measurement in its entirety. These levels are:
| | • | | Level 1 – inputs are based upon unadjusted quoted prices for identical instruments traded in active markets. |
| | • | | Level 2 – inputs are based upon quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active and model-based valuation techniques for which all significant assumptions are observable in the market or can be corroborated by observable market data for substantially the full term of the assets or liabilities. |
| | • | | Level 3 – inputs are generally unobservable and typically reflect management’s estimates of assumptions that market participants would use in pricing the asset or liability. The fair values are therefore determined using model-based techniques that include option pricing models, discounted cash flow models and similar techniques. |
Derivative Financial Instruments
Currently, the Company uses derivative financial arrangements to manage a variety of risk exposures, including interest rate risk associated with its term loan B facility maturing in 2016 (the “Term Loan Credit Facility”). The valuation of these instruments is determined using widely accepted valuation techniques, including discounted cash flow analysis on the expected cash flows of each derivative. This analysis reflects the contractual terms of the derivatives, including the period to maturity, and uses observable market-based inputs, including interest rate curves and implied volatilities.
The Company incorporates credit valuation adjustments to appropriately reflect both its own nonperformance risk and the respective counterparty’s nonperformance risk in the fair value measurements. In adjusting the fair value of its derivative contracts for the effect of nonperformance risk, the Company has considered the impact of netting and any applicable credit enhancements, such as collateral postings, thresholds, mutual puts and guarantees.
Based on an evaluation of the inputs used, the Company has categorized its derivatives within Level 2 of the fair value hierarchy. Any transfer into or out of a level of the fair value hierarchy is recognized based on the value of the instruments at the end of the reporting period.
| | | | | | | | | | | | |
| | | Fair Value Measurements Using | | | |
In thousands | | Quoted Prices in Active
Market for Identical
Assets
Level 1 | | Significant Other
Observable Input
Level 2 | | | Significant Unobservable
Inputs
Level 3 | | Total Loss | |
Interest Rate Swaps included as liabilities | | | | $ | 5,382 | | | | | $ | 5,382 | |
In addition to such financial assets and liabilities that are recorded at fair value on a recurring basis, the Company used Level 2 inputs to estimate the fair value of its financial instruments which are not recorded at fair value on the balance sheet as of each of December 28, 2013 and December 29, 2012.
F-17
VISANT CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
As of December 28, 2013, the fair value of Visant’s 10.00% senior notes due 2017 (the “Senior Notes”) with a principal amount of $736.7 million, approximated $713.9 million at such date. As of December 28, 2013, the fair value of the Term Loan Credit Facility with a principal amount of $1,140.4 million, approximated $1,127.6 million at such date.
As of December 29, 2012, the fair value of the Senior Notes with a principal amount of $736.7 million, approximated $682.9 million at such date. As of December 29, 2012, the fair value of the Term Loan Credit Facility with a principal amount of $1,152.4 million, approximated $1,047.1 million at such date.
| 8. | Property, Plant and Equipment |
Net property, plant and equipment, which includes capital lease assets, consisted of the following:
| | | | | | | | |
In thousands | | 2013 | | | 2012 | |
Land | | $ | 10,119 | | | $ | 10,819 | |
Buildings | | | 69,023 | | | | 67,559 | |
Machinery and equipment | | | 338,065 | | | | 340,294 | |
Capitalized software | | | 88,415 | | | | 76,825 | |
Transportation equipment | | | 206 | | | | 181 | |
Furniture and fixtures | | | 30,093 | | | | 24,308 | |
Construction in progress | | | 7,142 | | | | 6,157 | |
| | | | | | | | |
Total property, plant and equipment | | | 543,063 | | | | 526,143 | |
Less accumulated depreciation and amortization | | | (353,972 | ) | | | (322,478 | ) |
| | | | | | | | |
Property, plant and equipment, net | | $ | 189,091 | | | $ | 203,665 | |
| | | | | | | | |
Depreciation expense was $51.4 million for 2013, $49.5 million for 2012 and $49.9 million for 2011. Amortization related to capitalized software was included in depreciation expense and totaled $10.4 million for 2013, $8.2 million for 2012 and $6.7 million for 2011.
As of December 28, 2013 and December 29, 2012, the Company recorded gross machinery and equipment under capital leases totaling $12.9 million and $11.5 million, respectively, and accumulated depreciation on assets under capital leases of $7.8 million and $6.1 million, respectively.
| 9. | Goodwill and Other Intangible Assets |
Goodwill
The change in the carrying amount of goodwill is as follows:
| | | | | | | | | | | | | | | | |
In thousands | | Scholastic | | | Memory Book | | | Marketing and
Publishing
Services | | | Total | |
Balance at December 29, 2012 | | $ | 301,027 | | | $ | 391,178 | | | $ | 226,741 | | | $ | 918,946 | |
Goodwill additions during the period | | | — | | | | — | | | | 7,683 | | | | 7,683 | |
Currency translation | | | (170 | ) | | | — | | | | 364 | | | | 194 | |
| | | | | | | | | | | | | | | | |
Balance at December 28, 2013 | | $ | 300,857 | | | $ | 391,178 | | | $ | 234,788 | | | $ | 926,823 | |
| | | | | | | | | | | | | | | | |
Goodwill is measured as the excess of the cost of an acquired entity over the fair value assigned to identifiable assets acquired and liabilities assumed. The Company is required to test goodwill and other intangible assets with indefinite lives for impairment annually or more frequently if impairment indicators occur. The impairment test requires management to make judgments in connection with identifying reporting units, assigning assets and liabilities to reporting units, assigning goodwill and other indefinite-lived intangible assets to reporting units and determining the fair value of each reporting unit.
F-18
VISANT CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
As part of the annual impairment analysis for each reporting unit, the Company engaged a third-party appraisal firm to assist in the determination of the estimated fair value of each unit. This determination included estimating the fair value using both the income and market approaches. The income approach requires management to estimate a number of factors for each reporting unit, including projected future operating results, economic projections, anticipated future cash flows and discount rates. The market approach estimates fair value using comparable marketplace fair value data from within a comparable industry grouping. Where applicable, the Company weighted both the income and market approach equally to estimate the concluded fair value of each reporting unit. The projections are based on management’s best estimate given recent financial performance, market trends, strategic plans and other available information. Changes in these estimates and assumptions could materially affect the determination of fair value and/or impairment for each reporting unit.
The most recent impairment testing was completed as of the beginning of the fourth quarter of fiscal year 2013. As part of such impairment test, the Company first evaluated the recoverability of goodwill at the reporting unit level by comparing the estimated fair value of each reporting unit to its carrying value. Based on this Step 1 test, the fair value of each reporting unit tested for impairment was in excess of its carrying value with the exception of the publishing services reporting unit, which is included in the Marketing and Publishing Services segment. Accordingly, the Company proceeded to perform Step 2 of the impairment test on the publishing services reporting unit’s goodwill which had a carrying value of $57.0 million. In performing the Step 2 analysis, it was determined that the implied fair value of the publishing services reporting unit’s goodwill was in excess of its carrying value, and, accordingly, no impairment charge was recognized. The fair value of each of the other reporting units tested for impairment was substantially in excess of its carrying value. Unforeseen events, however, could adversely affect the reported value of goodwill and indefinite-lived intangible assets, which at the end of fiscal 2013 and 2012 totaled approximately $1,180.1 million and $1,180.4 million, respectively.
Other Intangible Assets
Information regarding other intangible assets as of December 28, 2013 and December 29, 2012 is as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | 2013 | | | 2012 | |
In thousands | | Estimated
useful life | | Gross
carrying
amount | | | Accumulated
amortization | | | Net | | | Gross
carrying
amount | | | Accumulated
amortization | | | Net | |
School relationships | | 10 years | | $ | 330,000 | | | $ | (330,000 | ) | | $ | — | | | $ | 330,000 | | | $ | (311,034 | ) | | $ | 18,966 | |
Internally developed software | | 2 to 5 years | | | 8,600 | | | | (8,600 | ) | | | — | | | | 8,600 | | | | (8,600 | ) | | | — | |
Patented/unpatented technology | | 3 years | | | 15,085 | | | | (12,820 | ) | | | 2,265 | | | | 14,767 | | | | (12,102 | ) | | | 2,665 | |
Customer relationships | | 4 to 40 years | | | 165,552 | | | | (71,636 | ) | | | 93,916 | | | | 159,969 | | | | (61,167 | ) | | | 98,802 | |
Trademarks (definite lived) | | 20 years | | | 3,228 | | | | (241 | ) | | | 2,987 | | | | 489 | | | | (65 | ) | | | 424 | |
Restrictive covenants | | 3 to 10 years | | | 40,411 | | | | (25,292 | ) | | | 15,119 | | | | 53,189 | | | | (34,203 | ) | | | 18,986 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | 562,876 | | | | (448,589 | ) | | | 114,287 | | | | 567,014 | | | | (427,171 | ) | | | 139,843 | |
Trademarks | | Indefinite | | | 253,280 | | | | — | | | | 253,280 | | | | 261,480 | | | | — | | | | 261,480 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | $ | 816,156 | | | $ | (448,589 | ) | | $ | 367,567 | | | $ | 828,494 | | | $ | (427,171 | ) | | $ | 401,323 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
Amortization expense related to other intangible assets was $37.8 million for 2013, $54.6 million for 2012 and $55.8 million for 2011. During the fiscal year ended December 28, 2013, approximately $11.0 million of fully amortized restrictive covenants were written off. Additionally, in the fourth quarter of fiscal 2013, the Company made a strategic decision to no longer use a certain tradename in its Marketing and Publishing Services segment. In connection with this decision, the Company recorded an $8.2 million non-cash charge, which is reflected in the results of the Marketing and Publishing Services segment.
Based on the intangible assets in service as of December 28, 2013, estimated amortization expense for each of the five succeeding fiscal years is $16.9 million for 2014, $15.8 million for 2015, $13.6 million for 2016, $10.1 million for 2017 and $9.1 million for 2018.
F-19
VISANT CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
As of the end of 2013 and 2012, debt obligations consisted of the following:
| | | | | | | | |
In thousands | | 2013 | | | 2012 | |
Senior secured term loan facilities, net of original issue discount of $11.9 million: | | | | | | | | |
Term Loan B, variable rate, 5.25% at December 28, 2013 and December 29, 2012 with quarterly interest payments, principal due and payable at maturity—December 2016 | | $ | 1,128,544 | | | $ | 1,136,905 | |
Senior notes, 10.00% fixed rate, with semi-annual interest payments of $36.8
million in April and October, principal due and payable at maturity—October 2017 | | | 736,670 | | | | 736,670 | |
| | | | | | | | |
| | | 1,865,214 | | | | 1,873,575 | |
Capital lease obligations | | | 3,806 | | | | 6,093 | |
Equipment financing arrangements | | | 3,905 | | | | 4,783 | |
| | | | | | | | |
Total debt | | $ | 1,872,925 | | | $ | 1,884,451 | |
| | | | | | | | |
Maturities of debt obligations, excluding original issue discount of $11.9 million, as of the end of 2013 are as follows:
| | | | |
In thousands | | | |
Visant: | | | | |
2014 | | $ | 4,785 | |
2015 | | | 1,666 | |
2016 | | | 1,141,204 | |
2017 | | | 736,989 | |
2018 | | | 143 | |
Thereafter | | | — | |
| | | | |
Total debt | | $ | 1,884,787 | |
| | | | |
Senior Secured Credit Facilities
In connection with the refinancing consummated by Visant on September 22, 2010 (the “Refinancing”), Visant entered into senior secured credit facilities, among Visant, as borrower, Jostens Canada, as Canadian borrower, Visant Secondary Holdings Corp. (“Visant Secondary”), as guarantor, the lenders from time to time parties thereto, Credit Suisse AG, Cayman Islands Branch, as administrative agent, and Credit Suisse AG, Toronto Branch, as Canadian administrative agent, for the Term Loan Credit Facility and a revolving credit facility expiring in 2015 consisting of a $165.0 million U.S. revolving credit facility available to Visant and its subsidiaries and a $10.0 million Canadian revolving credit facility available to Jostens Canada (the “Revolving Credit Facility” and together with the Term Loan Credit Facility, the “Credit Facilities”). The borrowing capacity under the Revolving Credit Facility can also be used for the issuance of up to $35.0 million of letters of credit (inclusive of a Canadian letter of credit facility). On March 1, 2011, Visant announced the completion of the repricing of the Term Loan Credit Facility (the “Repricing”). The amended Term Loan Credit Facility provides for an interest rate for each term loan based upon LIBOR or an alternative base rate (“ABR”) plus a spread of 4.00% or 3.00%, respectively, with a 1.25% LIBOR floor. In connection with the amendment, Visant was required to pay a prepayment premium of 1% of the outstanding principal amount of the Term Loan Credit Facility along with certain other fees and expenses. The Credit Facilities allow Visant, subject to certain conditions, to incur additional term loans under the Term Loan Credit Facility in either case in an aggregate principal amount of up to $300.0 million, which additional term loans will have the same security and guarantees as the Term Loan Credit Facility. Amounts borrowed under the Term Loan Credit Facility that are repaid or prepaid may not be reborrowed. On March 8, 2013, Visant made an aggregate payment of $12.0 million on the outstanding Term Loan Credit Facility, inclusive of a voluntary pre-payment of $1.3 million and a payment of $10.7 million under the excess cash flow provisions of the Term Loan Credit Facility. On December 14, 2012 and December 22, 2011, Visant made voluntary pre-payments of $22.0 million and $60.0 million, respectively, on the outstanding Term Loan Credit Facility.
F-20
VISANT CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
Visant’s obligations under the Credit Facilities are unconditionally and irrevocably guaranteed jointly and severally by Visant Secondary and all of Visant’s material current and future wholly-owned domestic subsidiaries (the “U.S. Subsidiary Guarantors”). The obligations of Jostens Canada under the Credit Facilities are unconditionally and irrevocably guaranteed jointly and severally by Visant Secondary, Visant, the U.S. Subsidiary Guarantors and by any future Canadian subsidiaries of Visant. Visant’s obligations under the Credit Facilities and the guarantees are secured by substantially all of Visant’s assets and substantially all of the assets of Visant Secondary and the U.S. Subsidiary Guarantors. The obligations of Jostens Canada under the Credit Facilities and the guarantees are also secured by substantially all of the tangible and intangible assets of Jostens Canada and any future Canadian subsidiaries of Visant.
The Credit Facilities require that Visant not exceed a maximum total leverage ratio, that it meet a minimum interest coverage ratio and that it abide by a maximum capital expenditure limitation. In addition, the Credit Facilities contain certain restrictive covenants which, among other things, limit Visant’s and its subsidiaries’ ability to incur additional indebtedness and liens, pay dividends, prepay subordinated and senior unsecured debt, make investments, merge or consolidate, change the business, amend the terms of its subordinated and senior unsecured debt, engage in certain dispositions of assets, enter into sale and leaseback transactions, engage in certain transactions with affiliates and engage in certain other activities customarily restricted in such agreements. It also contains certain customary events of default, subject to applicable grace periods, as appropriate.
As of December 28, 2013, the annual interest rate under the Revolving Credit Facility was LIBOR plus 5.25% or an ABR plus 4.25% (or, in the case of Canadian dollar denominated loans, the bankers’ acceptance discount rate plus 5.25% or the Canadian prime rate plus 4.25% (subject to a floor of the one-month Canadian Dealer Offered Rate plus 1.0%)), in each case, with step-downs based on the total leverage ratio. To the extent that the interest rates on the borrowings under the Revolving Credit Facility are determined by reference to LIBOR, the LIBOR component of such interest rates is subject to a LIBOR floor of 1.75%.
As of December 28, 2013, there was $11.5 million outstanding in the form of letters of credit, leaving $163.5 million available for borrowing under the Revolving Credit Facility. Visant is obligated to pay commitment fees of 0.75% on the unused portion of the Revolving Credit Facility, with a step-down to 0.50% if the total leverage ratio is below 5.00 to 1.00.
The annualized weighted average interest rates on short term borrowings under the Company’s respective revolving credit facilities were 7.5% for each of the fiscal years ended December 28, 2013, December 29, 2012 and December 31, 2011, respectively.
Senior Notes
In connection with the issuance of the Senior Notes in aggregate principal amount of $750.0 million, as part of the Refinancing, Visant and the U.S. Subsidiary Guarantors entered into an Indenture among Visant, the U.S. Subsidiary Guarantors and U.S. Bank National Association, as trustee (the “Indenture”). The Senior Notes are guaranteed on a senior unsecured basis by the U.S. Subsidiary Guarantors. Interest on the notes accrues at the rate of 10.00% per annum and is payable semi-annually in arrears on April 1 and October 1, to holders of record on the immediately preceding March 15 and September 15.
The Senior Notes are senior unsecured obligations of Visant and the U.S. Subsidiary Guarantors and rank (i) equally in right of payment with any existing and future senior unsecured indebtedness of Visant and the U.S. Subsidiary Guarantors; (ii) senior to all of Visant’s and the U.S. Subsidiary Guarantors’ existing, and any of Visant’s and the U.S. Subsidiary Guarantors’ future, subordinated indebtedness; (iii) effectively junior to all of Visant’s existing and future secured obligations and the existing and future secured obligations of the U.S. Subsidiary Guarantors, including indebtedness under the Credit Facilities, to the extent of the value of the assets securing such obligations; and (iv) structurally subordinated to all liabilities of Visant’s existing and future subsidiaries that do not guarantee the Senior Notes. The Senior Notes are redeemable, in whole or in part, under certain circumstances. Upon the occurrence of certain change of control events, the holders have the right to require Visant to offer to purchase the Senior Notes at 101% of their principal amount, plus accrued and unpaid interest and additional interest, if any.
The Indenture contains restrictive covenants that limit, among other things, the ability of Visant and its restricted subsidiaries to (i) incur additional indebtedness or issue certain preferred stock, (ii) pay dividends on or make other distributions or repurchase capital stock or make other restricted payments, (iii) make investments, (iv) limit dividends or other payments by restricted subsidiaries to Visant or other restricted subsidiaries, (v) create liens on pari passu or subordinated indebtedness without securing the notes, (vi) sell certain assets or merge with or into other companies or otherwise dispose of all or substantially all of Visant’s assets, (vii) enter into certain transactions with affiliates and (viii) designate Visant’s subsidiaries as unrestricted subsidiaries. The Indenture also contains customary events of default, including the failure to make timely payments on the Senior Notes or other material indebtedness, the failure to satisfy certain covenants and specified events of bankruptcy and insolvency.
F-21
VISANT CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
In December 2012, Visant repurchased for retirement in privately negotiated transactions $13.3 million in aggregate principal amount of Senior Notes and accordingly, the aggregate principal amount of Senior Notes outstanding at December 28, 2013 was $736.7 million.
| 11. | Derivative Financial Instruments and Hedging Activities |
Risk Management Objective of Using Derivatives
The Company is exposed to certain risk arising from both its business operations and economic conditions. The Company principally manages its exposures to economic risks, including interest rate, liquidity and credit risk, primarily by managing the amount, sources, and duration of its debt funding and the use of derivative financial instruments. Specifically, the Company enters into derivative financial instruments to manage exposures that arise from business activities that result in the receipt or payment of future known and uncertain cash amounts, the value of which is determined by interest rates. The Company’s derivative financial instruments are used to manage differences in the amount, timing, and duration of the Company’s known or expected cash receipts and its known or expected cash payments principally related to the Company’s borrowings.
Cash Flow Hedges of Interest Rate Risk
The Company’s objectives in using interest rate derivatives are to add stability to interest expense and to manage its exposure to interest rate movements. To accomplish this objective, the Company primarily uses interest rate swaps as part of its interest rate risk management strategy. During the year ended December 28, 2013, such derivatives were used to hedge the variable cash flows associated with existing variable-rate debt. As of December 28, 2013, the Company had three outstanding interest rate derivatives with an outstanding notional amount of $500.0 million.
The effective portion of changes in the fair value of derivatives designated and that qualify as cash flow hedges is recorded in accumulated other comprehensive income (loss) and is subsequently reclassified into earnings in the period that the hedged forecasted transaction affects earnings. The ineffective portion of the change in fair value of the derivatives is recognized directly in earnings. As of December 28, 2013, there was no ineffectiveness on the outstanding interest rate derivatives. Amounts reported in accumulated other comprehensive income (loss) related to derivatives will be reclassified to interest expense as interest payments are made on the Company’s variable-rate debt. During fiscal year 2014, the Company estimates that $3.1 million will be reclassified as an increase to interest expense.
Non-designated Hedges
Derivatives not designated as hedges are not speculative and are used to manage the Company’s exposure to foreign exchange rate movements but do not meet the strict hedge accounting requirements. Changes in the fair value of derivatives not designated in hedging relationships are recorded directly in earnings. As of each of December 28, 2013 and December 29, 2012, the Company did not have any derivatives outstanding that are not designated as hedges.
The table below presents the pre-tax fair value of the Company’s derivative financial instruments as well as their classification on the Consolidated Balance Sheets as of December 28, 2013 and December 29, 2012:
| | | | | | | | | | |
In thousands | | Classification in the Consolidated
Balance Sheets | | 2013 | | | 2012 | |
Liability Derivatives: | | | | | | | | | | |
Derivatives designated as hedging instruments | | | | | | | | | | |
Interest rate swaps | | Other accrued liabilities | | $ | 3,088 | | | $ | 3,399 | |
Interest rate swaps | | Other noncurrent liabilities | | | 2,294 | | | | 5,205 | |
| | | | | | | | | | |
Total | | | | $ | 5,382 | | | $ | 8,604 | |
| | | | | | | | | | |
F-22
VISANT CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
| | | | | | | | | | | | |
| In thousands | | Amount of loss recognized in
Other Comprehensive Income (Loss)
on derivatives
(effective portion) | |
Loss on Derivatives in Cash Flow Hedging Relationships | | 2013 | | | 2012 | | | 2011 | |
Interest rate swaps | | $ | (5,382 | ) | | $ | (8,604 | ) | | $ | (5,471 | ) |
| | | | | | | | | | | | |
| | $ | (5,382 | ) | | $ | (8,604 | ) | | $ | (5,471 | ) |
| | | | | | | | | | | | |
The table below presents the effect of the Company’s derivative financial instruments on its Consolidated Statements of Operations and Comprehensive Income (Loss) for the twelve months ended December 28, 2013, December 29, 2012 and December 31, 2011:
| | | | | | | | | | | | | | | | |
In thousands Loss on Derivatives Designated as Hedges | | Classification in Consolidated
Statement Of Operations and
Comprehensive Income (Loss) | | | 2013 | | | 2012 | | | 2011 | |
Interest Rate Swaps | | | Interest Expense | | | $ | 3,446 | | | $ | 3,744 | | | $ | — | |
| | | | | | | | | | | | | | | | |
| | | | | | $ | 3,446 | | | $ | 3,744 | | | $ | — | |
| | | | | | | | | | | | | | | | |
Credit-risk-related Contingent Features
The Company has an agreement with each of its derivative counterparties that contains a provision whereby the Company could be declared in default on its derivative obligations if repayment of the underlying indebtedness is accelerated by the lender due to the Company’s default on such indebtedness.
As of December 28, 2013, the termination value of derivatives in a net liability position, which includes accrued interest but excludes any adjustment for nonperformance risk, related to these agreements was $6.4 million. As of December 28, 2013, the Company had not posted any collateral related to these agreements. If the Company had breached any of these provisions at December 28, 2013, it could have been required to settle its obligations under the agreements at their termination value of $6.4 million.
12. Commitments and Contingencies
Leases
Equipment and office, warehouse and production space under operating leases expire at various dates. Rent expense was $6.7 million for 2013 and $7.3 million for each of fiscal 2012 and 2011. Future minimum lease payments under the leases are as follows:
| | | | | | | | |
In thousands | | Operating
Leases | | | Capital
Leases | |
2014 | | $ | 6,641 | | | $ | 2,611 | |
2015 | | | 5,395 | | | | 585 | |
2016 | | | 4,590 | | | | 276 | |
2017 | | | 3,696 | | | | 276 | |
2018 | | | 2,326 | | | | 144 | |
Thereafter | | | 2,475 | | | | — | |
| | | | | | | | |
Total minimum lease payments | | $ | 25,123 | | | $ | 3,892 | |
| | | | | | | | |
Less interest expense | | | — | | | | (180 | ) |
| | | | | | | | |
Capital lease obligations | | $ | — | | | $ | 3,712 | |
| | | | | | | | |
F-23
VISANT CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
Forward Purchase Contracts
The Company is subject to market risk associated with changes in the price of precious metals. To mitigate the commodity price risk, the Company enters into forward contracts from time to time to purchase gold, platinum and silver based upon the estimated ounces needed to satisfy projected customer demand. The Company had purchase commitment contracts totaling $15.8 million outstanding as of December 28, 2013 with delivery dates occurring through 2014. The forward purchase contracts are considered normal purchases and therefore not subject to the requirements of derivative accounting. As of the end of 2013, the fair market value of open precious metal forward contracts was $13.4 million based on quoted future prices for each contract.
Environmental
The Company’s operations are subject to a variety of federal, state, local and foreign laws and regulations governing emissions to air, discharge to water, the generation, handling, storage, transportation, treatment and disposal of hazardous substances and other materials, and employee health and safety matters, and from time to time the Company may be involved in remedial and compliance efforts.
Legal Proceedings
The Company is party from time to time to litigation arising in the ordinary course of business. This litigation may include actions related to petitions for reorganization under the U.S. bankruptcy laws filed by customers or suppliers resulting in claims against the Company for the return of certain pre-petition payments that may be deemed preferential. The Company regularly analyzes current information and, as necessary, provides accruals for probable and estimable liabilities on the eventual disposition of these matters. The Company does not believe that the disposition of these matters will have a material adverse effect on its business, financial condition and results of operations.
13. Income Taxes
Visant and its subsidiaries are included in the consolidated federal income tax filing of its indirect parent company, Holdco, and its consolidated subsidiaries. The Company determines and allocates its income tax provision under the separate-return method except for the effects of certain provisions of the U.S. tax code which are accounted for on a consolidated group basis. Income tax amounts payable or receivable among members of the controlled group are settled based on the filing of income tax returns and the cash requirements of the respective members of the consolidated group.
In connection with the taxable loss incurred by Holdco in 2010 as a result of the Refinancing and the related deduction of $97.2 million for previously tax-deferred original issue discount, Holdco derived certain income tax benefits that have since been fully utilized. The utilization of these tax benefits resulted in unsettled intra-group income taxes receivable and payable balances at Holdco and Visant, respectively. During 2013, these balances were settled when Holdco contributed approximately $60.5 million of income taxes receivable to Visant. Amounts related to deferred income taxes and income taxes payable reported in the Company’s consolidating statement of cash flows have reflected the transaction as a noncash contribution.
The U.S. and foreign components of income (loss) before income taxes and the provision for income taxes for the Company consist of:
| | | | | | | | | | | | |
In thousands | | 2013 | | | 2012 | | | 2011 | |
Domestic | | $ | (2,015 | ) | | $ | (62,201 | ) | | $ | (22,134 | ) |
Foreign | | | 5,361 | | | | 9,424 | | | | 9,875 | |
| | | | | | | | | | | | |
Income (loss) before income taxes | | $ | 3,346 | | | $ | (52,777 | ) | | $ | (12,259 | ) |
| | | | | | | | | | | | |
Federal | | $ | 3,519 | | | $ | 9,146 | | | $ | (76 | ) |
State | | | 2,793 | | | | 4,297 | | | | 2,128 | |
Foreign | | | 2,278 | | | | 3,099 | | | | 1,748 | |
| | | | | | | | | | | | |
Total current income taxes | | | 8,590 | | | | 16,542 | | | | 3,800 | |
Deferred | | | (6,325 | ) | | | (10,719 | ) | | | (1,175 | ) |
| | | | | | | | | | | | |
Provision for income taxes | | $ | 2,265 | | | $ | 5,823 | | | $ | 2,625 | |
| | | | | | | | | | | | |
F-24
VISANT CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
The Company’s consolidated effective income tax rate was 67.7%, (11.0%) and (21.4%) for the fiscal years ended December 28, 2013, December 29, 2012 and December 31, 2011, respectively. In 2012, the rate reflected the significant impact of a non-deductible goodwill write-off which reduced the effective rate substantially. The effective tax rates for both 2013 and 2012 were significantly impacted by the unfavorable effects of foreign earnings repatriations. For 2013, the smaller base of pre-tax income, against which reconciling tax rate effects are measured, resulted in tax rate percentage effects that are not comparable or meaningful on a year-over-year basis.
The effective tax rates for both 2012 and 2011 were significantly impacted by the unfavorable effect of nondeductible goodwill impairment charges during each such year. Foreign earnings repatriations also had unfavorable impacts on the effective tax rates for both annual periods. Comparisons of percentage changes year-over-year are not meaningful when the pre-tax income base for comparison changes significantly. The impact of changes in the effective tax rate at which the Company expects deferred tax assets and liabilities to be realized or settled in the future was unfavorable in 2012 compared with a favorable tax rate impact in 2011. The change in effective deferred tax rates reflects the Company’s 2011 state income tax returns and the effects of certain changes in state tax laws.
A reconciliation between the provision for income taxes computed at the U.S. federal statutory rate and income taxes for financial reporting purposes is as follows:
| | | | | | | | | | | | | | | | | | | | | | | | |
In thousands | | 2013 | | | 2012 | | | 2011 | |
Federal tax (benefit) at statutory rate | | $ | 1,171 | | | | 35.0 | % | | $ | (18,472 | ) | | | 35.0 | % | | $ | (4,291 | ) | | | 35.0 | % |
State tax, net of federal tax benefit | | | 391 | | | | 11.7 | % | | | 77 | | | | (0.1 | %) | | | 260 | | | | (2.1 | %) |
State deferred tax rate change, net of federal effect | | | (191 | ) | | | (5.7 | %) | | | 425 | | | | (0.8 | %) | | | (1,323 | ) | | | 10.8 | % |
Foreign tax credits generated, net of expirations | | | 1,051 | | | | 31.4 | % | | | 11,202 | | | | (21.2 | %) | | | — | | | | — | |
Foreign earnings repatriation, net | | | 1,383 | | | | 41.3 | % | | | 1,963 | | | | (3.7 | %) | | | 1,534 | | | | (12.5 | %) |
Goodwill and intangible impairment charges | | | — | | | | — | | | | 21,889 | | | | (41.5 | %) | | | 8,216 | | | | (67.0 | %) |
Decrease in deferred tax valuation allowance, net | | | (680 | ) | | | (20.3 | %) | | | (10,882 | ) | | | 20.6 | % | | | — | | | | — | |
Foreign tax rate differences | | | (300 | ) | | | (9.0 | %) | | | (435 | ) | | | 0.8 | % | | | (522 | ) | | | 4.2 | % |
Other differences, net | | | (560 | ) | | | (16.7 | %) | | | 56 | | | | (0.1 | %) | | | (1,249 | ) | | | 10.2 | % |
| | | | | | | | | | | | | | | | | | | | | | | | |
Provision for income taxes | | $ | 2,265 | | | | 67.7 | % | | $ | 5,823 | | | | (11.0 | %) | | $ | 2,625 | | | | (21.4 | %) |
| | | | | | | | | | | | | | | | | | | | | | | | |
The tax effect of temporary differences which give rise to deferred tax assets and liabilities is:
| | | | | | | | |
In thousands | | 2013 | | | 2012 | |
Basis difference on property, plant and equipment | | $ | (32,165 | ) | | $ | (35,025 | ) |
Capitalized software development costs | | | (9,139 | ) | | | (9,690 | ) |
Basis difference on financing arrangements | | | (11,408 | ) | | | (14,928 | ) |
Basis difference on intangible assets | | | (133,453 | ) | | | (144,711 | ) |
Other | | | (3,632 | ) | | | (3,169 | ) |
| | | | | | | | |
Deferred tax liabilities | | | (189,797 | ) | | | (207,523 | ) |
| | | | | | | | |
Reserves for accounts receivable and salespersons overdrafts | | | 7,428 | | | | 8,069 | |
Reserves for employee benefits | | | 21,595 | | | | 21,131 | |
Other reserves not recognized for tax purposes | | | 7,643 | | | | 6,926 | |
Foreign tax credit carryforwards | | | 1,802 | | | | 2,853 | |
Net operating loss and tax credit carryforwards | | | 10,959 | | | | 13,184 | |
Basis difference on pension liabilities | | | 8,308 | | | | 37,953 | |
Other | | | 10,865 | | | | 13,533 | |
| | | | | | | | |
Deferred tax assets | | | 68,600 | | | | 103,649 | |
Valuation allowance | | | (2,493 | ) | | | (3,173 | ) |
| | | | | | | | |
Deferred tax assets, net | | | 66,107 | | | | 100,476 | |
| | | | | | | | |
Net deferred tax liability | | $ | (123,690 | ) | | $ | (107,047 | ) |
| | | | | | | | |
F-25
VISANT CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
For 2013 and 2012, the Company has provided a valuation allowance for the entire amount of its deferred tax asset for foreign tax credit carryforwards and certain foreign net operating loss carryforwards because the related tax benefit may not be realized. The decrease in the tax valuation allowance from the fiscal year 2012 balance was due primarily to the expiration of $1.1 million of foreign tax credit carryforwards from 2003. The Company’s $1.8 million foreign tax credits expire in fiscal years 2014 to 2019. No foreign tax credits were utilized for the 2013 fiscal year because Holdco’s consolidated net operating loss carryforwards exceeded consolidated taxable income generated from 2013 operations.
During 2013, the Company repatriated $3.7 million of earnings from its foreign subsidiaries. The Company does not provide for deferred taxes on undistributed earnings of foreign subsidiaries because such earnings are essentially permanent in duration, and it is not practicable to estimate the amount of tax that may be payable upon any such distribution. Generally, such amounts become subject to U.S. taxation upon remittance of dividends and under certain other circumstances. Undistributed earnings indefinitely reinvested as working capital totaled $12.4 million at December 28, 2013.
The Company’s deferred tax assets include $11.0 million for net operating loss and federal and state tax credit carryforwards, $5.5 million of which is classified as noncurrent. The Company’s U.S. federal net operating losses from 2010 and 2011 were substantially utilized during 2012 and 2013 with approximately $4.0 million of remaining net operating loss anticipated to be realized in 2014. The Company also has $2.2 million of federal alternative minimum tax credit carryforwards and $0.9 million of general business tax credit carryforwards that it anticipates will be utilized in 2014. State tax credit carryforwards and the net tax benefit of state net operating loss carryforwards totaled approximately $2.4 million.
At December 28, 2013, the Company’s remaining net operating loss from its 2011 acquisition of Color Optics, Inc. was $3.7 million expiring in years 2021 through 2024. At December 28, 2013, the Company’s remaining Canadian net operating loss carryforward from its 2010 acquisition of Intergold Ltd. was $8.1 million expiring in years 2023 through 2029. At December 28, 2013, there was no remaining acquired net operating loss carryforward from the Company’s 2008 acquisition of Phoenix Color Corp. because it became fully utilized against the Company’s post-acquisition taxable income in 2012. Net operating loss carryforwards resulting from the Company’s start-up operations in China have been fully reserved and generally expire in years 2017 and 2018.
Included in results of operations for fiscal years 2013, 2012 and 2011 were net income tax (benefit) accruals for unrecognized tax benefits of ($0.4) million, ($0.2) million and ($0.4) million, respectively. Also included in the Company’s income tax provision for fiscal years ended 2013, 2012 and 2011 were net interest accruals for unrecognized tax benefits of $0.2 million, ($0.3) million and less than $0.1 million, respectively. During 2012, certain Internal Revenue Service (“IRS”) guidance caused the Company to re-assess its prior tax positions resulting in the Company concluding that certain previously unrecognized tax benefit positions, primarily related to the timing of operating loss utilization, could be recognized. Accordingly, the Company recognized $8.2 million of current tax benefit, including interest, and $7.4 million of deferred tax expense in connection with the positions it reevaluated during 2012. The unrecognized tax benefit recorded for 2011 and the reduced interest accrual for 2011 compared with 2010 resulted from remeasurement of tax reserves provided in connection with the Transactions in 2004 based on IRS guidance issued in July 2011 as well as tax and interest benefit recognition in connection with the lapse of certain state statutes of limitation.
At December 28, 2013 and December 29, 2012, the Company’s gross unrecognized tax benefit liability was $11.2 million and $11.4 million, respectively, and included interest and penalty accruals of $3.1 million and $3.0 million, respectively. Substantially all of the liability was included in noncurrent liabilities. The Company’s net unrecognized tax benefits that, if recognized, would affect the effective tax rate were $9.9 million including net interest and penalty accruals of $1.9 million at December 28, 2013.
F-26
VISANT CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
The reconciliation of the total gross amount recorded for unrecognized tax benefits for the Company is as follows:
| | | | | | | | | | | | |
In thousands | | 2013 | | | 2012 | | | 2011 | |
Balance at beginning of period | | $ | 8,406 | | | $ | 16,141 | | | $ | 17,104 | |
Gross increases—tax positions in prior periods | | | — | | | | 104 | | | | — | |
Gross decreases—tax positions in prior periods | | | (231 | ) | | | (7,606 | ) | | | (1,286 | ) |
Gross increases—current period tax positions | | | 146 | | | | — | | | | 674 | |
Settlements—(payments) refunds | | | (23 | ) | | | (233 | ) | | | 3 | |
Lapse of statute of limitations | | | (239 | ) | | | — | | | | (354 | ) |
| | | | | | | | | | | | |
Balance at end of period | | $ | 8,059 | | | $ | 8,406 | | | $ | 16,141 | |
| | | | | | | | | | | | |
Holdco’s income tax filings for 2005 to 2012 are subject to examination in the U.S federal tax jurisdiction. In connection with the IRS examination of Holdco’s income tax filings for 2005 and 2006, the IRS proposed certain transfer price adjustments for which the Company disagreed in order to preserve its right to seek relief from double taxation with the applicable U.S. and French tax authorities. During the fourth quarter of 2013, the IRS and French tax authorities agreed to transfer price adjustments for 2005 and 2006. The settlement was consistent with the terms of an advance pricing agreement for years 2007 through 2011, which was also concluded during 2013, and was consistent with the Company’s expectations with only minor adjustments being required to be made to the Company’s existing reserves. The U.S. statute of limitations for years 2005 through 2010 remains open because the IRS has not yet completed its final reports for the affected tax periods. The Company is also subject to examination in certain state jurisdictions, none of which was individually material. During 2013, the French tax authorities concluded their examination of tax filings for 2010 and 2011 with only minor adjustments. During 2011, the Canada Revenue Agency concluded its examination of Canadian income tax filings for 2007 and 2008 without adjustment. Though subject to uncertainty, the Company believes it has made appropriate provisions for all outstanding issues for all open years and in all applicable jurisdictions. Due primarily to the potential for final resolution of the Company’s current U.S. federal examination and the expiration of the related statute of limitations, it is reasonably possible that the Company’s gross unrecognized tax benefit liability could change within the next twelve months by a range of zero to $7.3 million.
In September 2013, the U.S. Treasury issued final regulations under Sections 162(a) and 263(a) of the Internal Revenue Code of 1986, as amended (the “Code”) regarding the deduction and capitalization of expenditures related to tangible property. The final regulations replace temporary regulations that were issued in December 2011. The U.S. Treasury also released proposed regulations under Section 168 of the Code regarding dispositions of tangible property. These final and proposed regulations will be effective for the Company’s 2014 fiscal year ending January 3, 2015. The Company continues to review the regulations but does not believe there will be a material impact on its results of operations, financial position or cash flows when the regulations are fully adopted.
President Obama’s administration has proposed significant changes to U.S. tax laws for U.S. corporations doing business outside the United States, including a proposal to defer certain tax deductions allocable to non-U.S. earnings until those earnings are repatriated. As discussion continues over comprehensive U.S. tax reform, it is not presently possible to predict the effect on the Company of tax legislation not yet enacted into law.
14. Benefit Plans
Pension and Other Postretirement Benefits
Jostens has maintained noncontributory defined benefit pension plans that cover nearly all employees hired by Jostens and Visant prior to December 31, 2005. The benefits provided under the plans are based on years of service, age, eligibility and employee compensation. The benefits for Jostens’ qualified pension plans have been funded through pension trusts, the objective being to accumulate sufficient funds to provide for future benefits. In addition to qualified pension plans, Jostens has unfunded, non-qualified pension plans covering certain employees, which provide for benefits in addition to those provided by the qualified plans.
Effective December 31, 2005, the pension plans were closed to newly hired nonunion employees. Pension benefits for salaried nonunion employees were modified to provide a percentage of career average earnings, rather than final average earnings for service after January 1, 2006 except for certain grandfathered employees who met specified age and service requirements as of December 31, 2005. Effective July 1, 2008 and January 1, 2008, the pension plans covering Jostens’ employees covered under respective collective bargaining agreements were closed.
F-27
VISANT CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
Effective December 31, 2012, the Company’s qualified and non-qualified pension plans for non-bargained, active employees and its executive supplemental retirement agreements for certain executive officers were amended to freeze the accrual of additional benefits related to future service and compensation under the plans. Effective December 31, 2013, Visant’s qualified pension plan for bargained employees at Jostens’ Owatonna, Minnesota location was amended to freeze the accrual of additional benefits related to future service and compensation under the plan. Benefits accrued as of December 31, 2012 and December 31, 2013, respectively, were not affected. Employees will continue to accrue service during their employment solely for purposes of vesting in pension benefits accrued as of December 31, 2012 and December 31, 2013, as applicable, which were not yet vested upon the freeze based on the applicable multiple year service requirement for vesting. In addition, the freeze does not impact retirees currently receiving pension benefits or employees who have separated service with vested pension benefits.
Jostens also provides certain medical benefits for eligible retirees, including their spouses and dependents. Generally, the postretirement benefits require contributions from retirees. Effective January 1, 2006, the retiree medical plan was closed other than for certain union employees and certain employees grandfathered into the plan on the basis of their age and tenure with Jostens as of December 31, 2005. Prescription drug coverage for Medicare eligible retirees was also eliminated from the program as of January 1, 2006 in connection with coverage under Medicare Part D. Visant is obligated for certain post-retirement benefits under the employment agreement with its Chief Executive Officer.
Eligible employees from Lehigh participate in a noncontributory defined benefit pension plan, which was merged with a Jostens plan effective December 31, 2004. The plan provides benefits based on years of service and final average compensation. Effective December 31, 2006, the pension plan was closed to hourly nonunion employees hired after December 31, 2006 (currently there are no active hourly employees in such plan), and benefit accruals were frozen for all salaried and office administrative nonunion employees.
In addition, Lehigh maintains an unfunded supplemental retirement plan (SERP) for certain key executives of Lehigh. This SERP no longer has any active participants accruing benefits under it. Lehigh and Arcade also contribute to multi-employer pension plans for certain employees covered by collective bargaining agreements. Contribution amounts are determined by the respective collective bargaining agreement subject to escalation, and the Company does not administer or control the funds in any way.
F-28
VISANT CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
The following tables set forth the components of the changes in benefit obligations and fair value of plan assets during fiscal 2013 and 2012 as well as the funded status and amounts recognized in the balance sheets as of December 28, 2013 and December 29, 2012, for all defined benefit plans combined and retiree welfare plans. The information presented for the 2013 plan year and 2012 plan year is based on a measurement date of December 28, 2013 and December 29, 2012, respectively. Furthermore, the Jostens plans represented 86% of the aggregate benefit obligation and 91% of the aggregate plan assets as of the end of fiscal 2013, with benefits for Lehigh representing 14% of the liability and 9% of the assets for the same period.
| | | | | | | | | | | | | | | | |
| | | Pension benefits | | | Postretirement benefits | |
In thousands | | 2013 | | | 2012 | | | 2013 | | | 2012 | |
Change in benefit obligation | | | | | | | | | | | | | | | | |
Benefit obligation, beginning of period | | $ | 401,141 | | | $ | 342,266 | | | $ | 1,380 | | | $ | 1,498 | |
Service cost | | | 1,121 | | | | 4,581 | | | | 2 | | | | 4 | |
Interest cost | | | 16,412 | | | | 17,969 | | | | 42 | | | | 62 | |
Actuarial (gain) loss | | | (34,505 | ) | | | 58,703 | | | | (66 | ) | | | 270 | |
Benefit payments and administrative expenses | | | (18,330 | ) | | | (18,173 | ) | | | (471 | ) | | | (868 | ) |
Plan participants’ contributions | | | — | | | | — | | | | 389 | | | | 414 | |
Other adjustments: curtailment | | | — | | | | (4,205 | ) | | | — | | | | — | |
| | | | | | | | | | | | | | | | |
Benefit obligation, end of period | | $ | 365,839 | | | $ | 401,141 | | | $ | 1,276 | | | $ | 1,380 | |
| | | | | | | | | | | | | | | | |
Change in plan assets | | | | | | | | | | | | | | | | |
Fair value of plan assets, beginning of period | | $ | 270,181 | | | $ | 248,950 | | | $ | — | | | $ | — | |
Actual return on plan assets | | | 57,961 | | | | 36,862 | | | | — | | | | — | |
Company contributions | | | 2,650 | | | | 2,542 | | | | 82 | | | | 454 | |
Benefit payments and administrative expenses | | | (18,330 | ) | | | (18,173 | ) | | | (471 | ) | | | (868 | ) |
Plan participants’ contributions | | | — | | | | — | | | | 389 | | | | 414 | |
| | | | | | | | | | | | | | | | |
Fair value of plan assets, end of period | | $ | 312,462 | | | $ | 270,181 | | | $ | — | | | $ | — | |
| | | | | | | | | | | | | | | | |
Funded status—End of Period | | | | | | | | | | | | | | | | |
Funded status, over-funded plans | | $ | — | | | $ | — | | | $ | — | | | $ | — | |
Funded status, under-funded plans | | | (53,377 | ) | | | (130,960 | ) | | | (1,276 | ) | | | (1,380 | ) |
| | | | | | | | | | | | | | | | |
Net funded status | | $ | (53,377 | ) | | $ | (130,960 | ) | | $ | (1,276 | ) | | $ | (1,380 | ) |
| | | | | | | | | | | | | | | | |
Amounts recognized in the balance sheets | | | | | | | | | | | | | | | | |
Current liabilities | | $ | (2,545 | ) | | $ | (2,547 | ) | | $ | (181 | ) | | $ | (170 | ) |
Non-current liabilities | | | (50,832 | ) | | | (128,413 | ) | | | (1,095 | ) | | | (1,210 | ) |
| | | | | | | | | | | | | | | | |
Net pension amounts recognized on Consolidated balance sheets | | $ | (53,377 | ) | | $ | (130,960 | ) | | $ | (1,276 | ) | | $ | (1,380 | ) |
| | | | | | | | | | | | | | | | |
Amounts in Accumulated Other Comprehensive Loss (Income) | | | | | | | | | | | | | | | | |
Net loss | | $ | 68,304 | | | $ | 143,241 | | | $ | 526 | | | $ | 643 | |
Prior service credits | | | — | | | | — | | | | (1,089 | ) | | | (1,366 | ) |
| | | | | | | | | | | | | | | | |
Other comprehensive loss (income)—total | | $ | 68,304 | | | $ | 143,241 | | | $ | (563 | ) | | $ | (723 | ) |
| | | | | | | | | | | | | | | | |
Amortization expense expected to be recognized during next fiscal year | | | | | | | | | | | | | | | | |
Net loss | | $ | 2,607 | | | $ | 4,428 | | | $ | 43 | | | $ | 51 | |
Prior service credits | | | — | | | | — | | | | (277 | ) | | | (277 | ) |
| | | | | | | | | | | | | | | | |
Total amortizations | | $ | 2,607 | | | $ | 4,428 | | | $ | (234 | ) | | $ | (226 | ) |
| | | | | | | | | | | | | | | | |
During 2013, the discount rate assumption changed from 4.19% to 5.02% for the pension plans and from 3.21% to 3.83% for the postretirement plans, which resulted in a decrease in liability. In addition, asset returns in 2013 were above the assumed return. The plans’ experience resulted in a net gain for 2013.
The accumulated benefit obligation (“ABO”) for all defined benefit pension plans was $365.8 million and $401.1 million at the end of 2013 and 2012, respectively. The ABO is now equivalent to the projected benefit obligation due to the pension accruals for all employees being frozen as of December 31, 2012 and December 31, 2013.
F-29
VISANT CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
Non-qualified retirement benefits, included in the tables above, with obligations in excess of plan assets were as follows:
| | | | | | | | |
In thousands | | 2013 | | | 2012 | |
Projected benefit obligation | | $ | 31,605 | | | $ | 34,014 | |
Accumulated benefit obligation | | $ | 31,605 | | | $ | 34,014 | |
Fair value of plan assets | | $ | — | | | $ | — | |
In total, the qualified pension plans have a projected benefit obligation in excess of the fair value of plan assets as of year-end 2013.
Net periodic benefit expense (income) of the pension and other postretirement benefit plans included the following components:
| | | | | | | | |
| | | Pension benefits | |
In thousands | | 2013 | | | 2012 | |
Service cost | | $ | 1,121 | | | $ | 4,581 | |
Interest cost | | | 16,412 | | | | 17,969 | |
Expected return on plan assets | | | (21,957 | ) | | | (24,036 | ) |
Amortization of prior year service cost | | | — | | | | (844 | ) |
Amortization of net actuarial loss | | | 4,428 | | | | 6,113 | |
Other adjustment: curtailment | | | — | | | | (1,339 | ) |
| | | | | | | | |
Net periodic benefit expense | | $ | 4 | | | $ | 2,444 | |
| | | | | | | | |
| |
| | | Postretirement benefits | |
In thousands | | 2013 | | | 2012 | |
Service cost | | $ | 2 | | | $ | 4 | |
Interest cost | | | 42 | | | | 61 | |
Amortization of prior year service cost | | | (277 | ) | | | (277 | ) |
Amortization of net actuarial loss | | | 51 | | | | 26 | |
| | | | | | | | |
Net periodic benefit income | | $ | (182 | ) | | $ | (186 | ) |
| | | | | | | | |
Assumptions
Weighted-average assumptions used to determine end-of-year benefit obligations are as follows:
| | | | | | | | | | | | | | | | |
| | | Pension
benefits | | | Postretirement
benefits | |
| | | 2013 | | | 2012 | | | 2013 | | | 2012 | |
Discount rate: | | | | | | | | | | | | | | | | |
Jostens | | | 5.02 | % | | | 4.19 | % | | | 3.83 | % | | | 3.21 | % |
Lehigh | | | 5.02 | % | | | 4.19 | % | | | N/A | | | | N/A | |
Rate of compensation increase: | | | | | | | | | | | | | | | | |
Jostens | | | N/A | | | | 3.40 | % | | | N/A | | | | N/A | |
Lehigh | | | N/A | | | | N/A | | | | N/A | | | | N/A | |
F-30
VISANT CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
Weighted-average assumptions used to determine net periodic benefit cost for the year are as follows:
| | | | | | | | | | | | | | | | |
| | | Pension
benefits | | | Postretirement
benefits | |
| | | 2013 | | | 2012 | | | 2013 | | | 2012 | |
Discount rate: | | | | | | | | | | | | | | | | |
Jostens | | | 4.19 | % | | | 5.39 | % | | | 3.21 | % | | | 4.47 | % |
Lehigh | | | 4.19 | % | | | 5.39 | % | | | N/A | | | | N/A | |
Expected long-term rate of return on plan assets: | | | | | | | | | | | | | | | | |
Jostens | | | 8.50 | % | | | 9.00 | % | | | N/A | | | | N/A | |
Lehigh | | | 8.50 | % | | | 9.00 | % | | | N/A | | | | N/A | |
Rate of compensation increase: | | | | | | | | | | | | | | | | |
Jostens | | | 3.40 | % | | | 3.45 | % | | | N/A | | | | N/A | |
Lehigh | | | N/A | | | | N/A | | | | N/A | | | | N/A | |
Management, in consultation with the Company’s pension plan investment advisor and actuary, projects the expected return of each pension trust over a 20- to 30-year period. The Company’s investment advisor develops capital market assumptions by asset class taking into account expected return, volatility and correlation factors. They perform a stochastic projection and determine long-term return distributions. The actuary performs a similar analysis using their global capital market assumptions. Management then adjusts the results for expected fund manager performance and fees. In addition management adjusts the standard results for select investments, including the Dynamic Asset Allocation fund, the Structured Credit fund and the Core Property fund, to reflect the investment objectives of these specialized funds. Management reviews results from these analyses to confirm that the capital market assumptions reflect the Company’s long-term views in developing the return on asset assumption. Management also reviews how the trust and fund managers have performed historically, how the assumption has changed over time, and whether capital market assumptions have changed from prior periods.
Assumed health care cost trend rates are as follows:
| | | | | | | | |
| | | Postretirement
benefits | |
| | | 2013 | | | 2012 | |
Health care cost trend rate assumed for next year | | | 8.00 | % | | | 8.00 | % |
Rate to which the cost trend rate is assumed to decline (the ultimate trend rate) | | | 5.00 | % | | | 5.00 | % |
Year that the rate reaches the ultimate trend rate | | | 2017 | | | | 2016 | |
Assumed health care cost trend rates have some effect on the amounts reported for health care plans. For 2013, a one percentage point change in the assumed health care cost trend rates would have had the following effects:
| | | | | | | | |
In thousands | | Impact
of 1%
Increase | | | Impact
of 1%
Decrease | |
Effect on total of service and interest cost components | | $ | 3 | | | $ | (2 | ) |
Effect on postretirement benefit obligation | | $ | 78 | | | $ | (70 | ) |
F-31
VISANT CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
Plan Assets
The weighted-average asset allocations for the pension plans as of the measurement dates of December 28, 2013 and December 29, 2012, by asset category, are as follows:
| | | | | | | | |
Asset Category | | 2013 | | | 2012 | |
Equity securities | | | 65.7 | % | | | 68.2 | % |
Debt securities | | | 9.8 | % | | | 20.3 | % |
Other | | | 24.5 | % | | | 11.5 | % |
| | | | | | | | |
Total | | | 100 | % | | | 100 | % |
| | | | | | | | |
Since 2007, the Company’s pension plans have been managed by SEI, a portfolio manager. A total return investment approach is employed under which a mix of equities, fixed income and other investments are used to maximize the long-term return of plan assets for a prudent level of risk. The investment portfolio contains a diversified blend of investments within each category. Furthermore, equity investments are diversified across U.S. and non-U.S. securities.
The fair values of the defined benefit assets at December 28, 2013, by asset class are as follows:
| | | | | | | | | | | | | | | | |
| | | | | | Fair Value Measurements Using | |
In thousands | | Fair Value
December 28,
2013 | | | Quoted Prices in
Active Market
for Identical
Assets
Level 1 (10) | | | Significant
Other
Observable
Input
Level 2 (10) | | | Significant
Unobservable
Inputs
Level 3 (10) | |
Equity Securities | | | | | | | | | | | | | | | | |
Large Cap Disciplined (1) | | $ | 86,111 | | | $ | 86,111 | | | $ | — | | | $ | — | |
Small/ Mid Cap (2) | | | 30,957 | | | | 30,957 | | | | — | | | | — | |
Intl/ World Equity (3) | | | 61,732 | | | | 61,732 | | | | — | | | | — | |
Real Estate (4) | | | 2,873 | | | | 2,873 | | | | — | | | | — | |
Dynamic Asset Fund (5) | | | 23,713 | | | | 23,713 | | | | — | | | | — | |
Debt Securities | | | | | | | | | | | | | | | | |
High Yield Bond Fund (6) | | | 15,604 | | | | 15,604 | | | | — | | | | — | |
Emerging Markets Debt (7) | | | 14,914 | | | | 14,914 | | | | — | | | | — | |
Cash | | | 1 | | | | 1 | | | | — | | | | — | |
Alternatives | | | | | | | | | | | | | | | | |
Structured Credit (8) | | | 33,726 | | | | — | | | | — | | | | 33,726 | |
Core Property (9) | | | 42,831 | | | | — | | | | 42,831 | | | | — | |
| | | | | | | | | | | | | | | | |
Total | | $ | 312,462 | | | $ | 235,905 | | | $ | 42,831 | | | $ | 33,726 | |
| | | | | | | | | | | | | | | | |
F-32
VISANT CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
The fair values of the defined benefit assets at December 29, 2012, by asset class are as follows:
| | | | | | | | | | | | | | | | |
| | | | | | Fair Value Measurements Using | |
In thousands | | Fair Value
December 29,
2012 | | | Quoted Prices in
Active Market
for Identical
Assets
Level 1 (10) | | | Significant
Other
Observable
Input
Level 2 (10) | | | Significant
Unobservable
Inputs
Level 3 (10) | |
Equity Securities | | | | | | | | | | | | | | | | |
Large Cap Disciplined (1) | | $ | 95,970 | | | $ | 95,970 | | | $ | — | | | $ | — | |
Small/ Mid Cap (2) | | | 26,197 | | | | 26,197 | | | | — | | | | — | |
Intl/ World Equity (3) | | | 62,098 | | | | 62,098 | | | | — | | | | — | |
Debt Securities | | | | | | | | | | | | | | | | |
High Yield Bond Fund (6) | | | 41,484 | | | | 41,484 | | | | — | | | | — | |
Emerging Markets Debt (7) | | | 13,350 | | | | 13,350 | | | | — | | | | — | |
Cash | | | 2 | | | | 2 | | | | — | | | | — | |
Alternatives | | | | | | | | | | | | | | | | |
Structured Credit (8) | | | 31,080 | | | | — | | | | — | | | | 31,080 | |
| | | | | | | | | | | | | | | | |
Total | | $ | 270,181 | | | $ | 239,101 | | | $ | — | | | $ | 31,080 | |
| | | | | | | | | | | | | | | | |
| (1) | The fund invests in equity securities of large companies and in portfolio strategies designed to correlate to a portfolio composed of large-cap equity securities. The value is based on quoted prices in active markets. |
| (2) | The fund invests in equity securities of small-to-mid cap companies. The value is based on quoted prices in active markets. |
| (3) | The fund invests primarily in common stock and other equity securities located outside the United States. The value is based on quoted prices in active markets. |
| (4) | The fund seeks to produce total returns including current income and capital appreciation. The fund will invest at least 80% of its net assets in equity securities of real estate companies including common stocks, rights, warrants, exchange-traded funds (“ETFs”), convertible securities and preferred stocks of real estate investment trusts (“REITs”) and real estate operating companies (“REOCs”). |
| (5) | The fund aims to capitalize on short/medium-term market inefficiencies in order to generate excess returns or limit overall risk with a focus on flexible, precise, timely and cost effective implementation of viewpoints. In addition, the fund attempts to capture opportunities created by behavioral biases that cause volatility. |
| (6) | The fund invests at least 80% of its net assets in high-yield fixed-income securities. The fund will invest primarily in fixed-income securities below investment grade, including corporate bonds and debentures, convertible and preferred securities and zero-coupon obligation. The value is based on quoted prices in active markets. |
| (7) | The fund invests at least 80% of its net assets in fixed-income securities and emerging market issuers. The fund will invest primarily in U.S. dollar-denominated debt securities of government, government-related and corporate issuers in emerging-market countries, as well as entities organized to restructure the outstanding debt of such issuers. The value is based on quoted prices in active markets. |
| (8) | The fund is an alternative investment and invests primarily in collateralized debt obligations (“CDOs”) and other structured credit vehicles. |
| (9) | The fund acts as a diversification enhancer with income-driven returns. It also acts as a historical inflation hedge with a relatively low risk profile that invests in real/tangible assets. The fund focuses on the multi-family, office, industrial, retail and other specialty sectors (such as self-storage, hotels, land) which are stabilized assets that are fully leased (>85%) at market rates to a diversified mix of high quality tenants with solid credit ratings. To maintain occupancy goals, core properties must typically meet competitive standards, such as Class A ranked office buildings and assets that are energy star and/or Leadership in Energy and Environment Design (LEED) certified. |
| (10) | Refer to Note 7,Fair Value Measurements, for definitions of the three levels of fair value measurements. |
F-33
VISANT CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
The following number represents a rollforward of the structured credit fund:
| | | | |
In thousands | | Fair Value Measurements
Using Significant Unobservable
Inputs (Level 3) | |
| | | Structured Credit Fund | |
Beginning balance as of December 31, 2011 | | $ | 24,854 | |
Actual return on plan assets | | | 6,226 | |
Purchase, sales and settlements | | | — | |
Transfers in/out of Level 3 | | | — | |
| | | | |
Ending balance as of December 29, 2012 | | $ | 31,080 | |
| | | | |
Actual return on plan assets | | | 2,646 | |
Purchase, sales and settlements | | | — | |
Transfers in/out of Level 3 | | | — | |
| | | | |
Ending balance as of December 28, 2013 | | $ | 33,726 | |
| | | | |
Contributions
The Pension Protection Act changed the minimum funding requirements for defined benefit pension plans beginning in 2008. Under the new funding requirements, there were no contributions required to be made under the plans for 2013 and 2012. Due to the funded status and exhaustion of the credit balances of the qualified plans, the Company will be required to make contributions under the Company’s qualified pension plans in 2014, estimated to be in an aggregate amount of $5.3 million. The funded status of the Company’s plans is dependent upon many factors, including returns on invested assets, the level of certain market interest rates used in determining the value of the Company’s obligations and changes to regulatory requirements, each of which can affect assumptions and have an impact on the Company’s cash funding requirements under its plans. Visant’s pension income associated with the pension plans is expected to increase as the cash contributions associated with pension plans will increase in future periods. The total contributions expected to be made by the Company to its non-qualified plans in 2014 include $2.6 million to the nonqualified pension plans and $0.2 million to the postretirement benefit plans. The actual amount of contributions is dependent upon the actual return on plan assets and actual disbursements from the postretirement benefit and nonqualified pension plans.
Benefit Payments
Estimated benefit payments under the pension and postretirement benefit plans are as follows:
| | | | | | | | |
In thousands | | Pension
benefits | | | Postretirement
benefits | |
2014 | | $ | 19,682 | | | $ | 185 | |
2015 | | | 20,319 | | | | 174 | |
2016 | | | 21,175 | | | | 177 | |
2017 | | | 21,518 | | | | 161 | |
2018 | | | 22,110 | | | | 146 | |
2019 through 2023 | | | 119,135 | | | | 405 | |
| | | | | | | | |
Total estimated payments | | $ | 223,939 | | | $ | 1,248 | |
| | | | | | | | |
401(k) Plans
The Company has 401(k) savings plans, which cover substantially all salaried and hourly employees who have met the plans’ eligibility requirements. Under certain of the plans, the Company provides a matching contribution on amounts contributed by employees, limited to a specific amount of compensation that varies among the plans. In some instances, the Company has provided discretionary profit sharing contributions in the past and may do so in the future. The aggregate matching and other contributions were $6.3 million for 2013, $5.5 million for 2012 and $5.7 million for 2011.
F-34
VISANT CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
On January 1, 2011, and January 1, 2012, respectively, Rock Creek Athletics, Inc. employees and Color Optics employees became eligible for the Lehigh & Neff 401(k) Retirement Savings Plan. The plan was renamed the LN Co 401(k) Retirement Savings Plan as of January 1, 2012.
On January 1, 2013, in connection with freezing the pension plans, Jostens, Memory Book and Visant active participants began participating in a new plan, called the Jostens 401(k) Retirement Plan, and the matching contribution was enhanced for those employees no longer eligible for further pension accrual. Bargained employees at Jostens’ Owatonna, Minnesota location who continued earning pension accruals during 2013 remained in the Visant 401(k) Retirement Savings Plan without change to the matching contribution.
On May 1, 2013, the Phoenix Color Corp. Employees’ Savings and Investment Plan was renamed the Phoenix Color 401(k) Retirement Plan.
On January 1, 2014, in connection with the freeze of the pension plan for the bargained employees, the bargained employees at Jostens’ Owatonna, Minnesota location became eligible for the Jostens 401(k) Retirement Plan and the enhanced match.
15. Stock-based Compensation
2003 Stock Incentive Plan
The 2003 Stock Incentive Plan (the “2003 Plan”) was approved by Holdco’s Board of Directors and was effective as of October 30, 2003. The 2003 Plan permitted Holdco to grant to key employees and certain other persons stock options and stock awards and provided for a total of 288,023 shares of common stock for issuance of options and awards to employees of Holdco and its subsidiaries and a total of 10,000 shares of common stock for issuance of options and awards to directors and other persons providing services to Holdco. As of July 29, 2013, no further grants may be made under the 2003 Plan in accordance with its terms. The 4,180 options issued under the 2003 Plan in January 2004 that remained outstanding as of December 28, 2013 were exercised in January 2014 prior to their expiration in January 2014.
2004 Stock Option Plan
In connection with the closing of the Transactions, Holdco established a new stock option plan, which permits Holdco to grant to key employees and certain other persons of Holdco and its subsidiaries various equity-based awards, including stock options and restricted stock. The plan, currently known as the Third Amended and Restated 2004 Stock Option Plan for Key Employees of Visant Holding Corp. and Subsidiaries (the “2004 Plan”), provides for the issuance of a total of 510,230 shares of Class A Common Stock. Options granted under the 2004 Plan may consist of time vesting options or performance vesting options. The option exercise period is determined at the time of grant of the option but may not extend beyond the end of the calendar year that is ten calendar years after the date the option is granted. Options granted under the 2004 Plan will begin expiring in late 2014. As of December 28, 2013, there were 150,577 shares available for grant under the 2004 Plan. Shares related to grants that are forfeited, terminated, cancelled or expire unexercised become available for new grants. As of December 28, 2013, there were 236,897 options vested under the 2004 Plan and no options unvested and subject to future vesting.
Jostens Long-Term Incentives
Certain key Jostens employees participate in Jostens long-term incentive programs. The programs provide for the grant of phantom shares to the participating employee, which are subject to vesting and other terms and conditions and restrictions of the share award, which may include meeting certain performance metrics and continued employment. The grants will be settled in cash in a lump sum amount based on the fair market value of the Class A Common Stock and the number of shares in which the employee has vested. In connection with the program put into place in 2012 (the “2012 LTIP), the grants will be settled following the end of fiscal year 2014 (which occurs on January 3, 2015). In the case of a limited number of certain senior executives of Jostens, absent a change of control prior to January 3, 2015, payment with respect to a portion of the lump sum payment in respect of the performance award in which the executive vests as of the end of fiscal year 2014 will not be due until the earlier of a change in control or early 2016 (and not later than March 15, 2016). The awards provide for certain vesting and settlement of the vested award following the occurrence of certain termination of employment events prior to January 3, 2015, as described therein. Shares not vested as of the end of fiscal year 2014, including if the respective performance target is not achieved, are forfeited without payment. The awards are also subject to certain agreements by the employee as to confidentiality, non-competition and non-solicitation to which the employee is bound during his or her employment and for two years following a separation of service.
F-35
VISANT CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
Certain key Jostens employees received an extraordinary long-term phantom share incentive grant in April 2013 (the “April 2013 Special LTIP”). The grants of phantom shares to the participating employees were made on terms similar to the 2012 LTIP, including that such shares are subject to vesting based on continued employment. The shares vested under the grants will be settled in cash in a lump sum amount based on the fair market value of the Class A Common Stock and the number of shares in which the employee has vested, following the end of fiscal year 2015 (which occurs on January 2, 2016). The awards provide for certain vesting and settlement of the vested award following the occurrence of certain termination of employment events prior to January 2, 2016, as described therein.
During the third quarter of 2013, Jostens implemented a long-term phantom share incentive program with certain of Jostens’ key employees (the “Jostens 2013 LTIP”). The grants of phantom shares to the participating employees were made on terms similar to the 2012 LTIP and the April 2013 Special LTIP, provided that with certain limited exceptions, the shares are subject to vesting based solely on continued employment. The shares vested under the grants will be settled in cash in a lump sum amount based on the fair market value of the Class A Common Stock and the number of shares in which the employee has vested, following the end of fiscal year 2015 (which occurs on January 2, 2016). The awards provide for certain vesting and settlement of the vested award following the occurrence of certain termination of employment events prior to January 2, 2016, as described therein.
The Company has issued and may from time to time issue phantom equity in the form of phantom shares or earned appreciation rights to certain employees of its other subsidiaries for the purpose of assuring retention of talent aligned with long-term performance and strategic objectives.
Common Stock
Visant is an indirect, wholly-owned subsidiary of Holdco. The Sponsors hold shares of the Class A Common Stock of Holdco, and additionally Visant’s equity-based incentive compensation plans are based on the value of the Class A Common Stock. There is no established public market for the Class A Common Stock. The fair market value of the Class A Common Stock is established pursuant to the terms of the 2004 Plan and is determined by a third party valuation, and the methodology to determine the fair market value under the equity incentive plans does not give effect to any premium for control or discount for minority interests or restrictions on transfers. Fair value includes any premium for control or discount for minority interests or restrictions on transfers. Holdco used a discounted cash flow analysis and selected public company analysis to determine the enterprise value and share price for the Class A Common Stock.
For the years ended December 28, 2013, December 29, 2012 and December 31, 2011, Visant recognized total stock-based compensation expense of approximately $1.5 million, $1.1 million and $7.0 million, respectively, which was included in selling and administrative expenses.
There were no issuances of stock options or restricted shares during the year ended December 28, 2013. During the year ended December 29, 2012, Visant issued, subject to vesting, a total of 40,000 options of Class A Common Stock to one executive officer under the 2004 Plan, however these options were forfeited during fiscal 2013 in connection with the executive’s resignation. As of December 28, 2013, there was no unrecognized stock-based compensation expense related to restricted shares expected to be recognized.
F-36
VISANT CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
Stock Options
The following table summarizes stock option activity for the Company:
| | | | | | | | |
Options in thousands | | Options | | | Weighted -
average
exercise price | |
Outstanding at December 29, 2012 | | | 317 | | | $ | 49.28 | |
Exercised | | | (31 | ) | | $ | 37.57 | |
Forfeited/expired | | | (45 | ) | | $ | 100.24 | |
| | | | | | | | |
Outstanding at December 28, 2013 | | | 241 | | | $ | 41.21 | |
| | | | | | | | |
Vested or expected to vest at December 28, 2013 | | | 241 | | | $ | 41.21 | |
| | | | | | | | |
Exercisable at December 28, 2013 | | | 241 | | | $ | 41.21 | |
| | | | | | | | |
During the fiscal year ended December 29, 2012, the Company granted an aggregate of 40,000 stock options under the 2004 Plan to one executive officer of a subsidiary of Visant, which were subsequently forfeited as a result of the executive’s resignation in 2013. The per-share weighted average fair value of stock options granted was $43.81 on the date of grant using the Black-Scholes option pricing model. The following key assumptions were used to value options issued:
| | | | |
| | | 2012 | |
Expected life | | | 6.1 years | |
Expected volatility | | | 68.8 | % |
Dividend yield | | | — | |
Risk-free interest rate | | | 1.0 | % |
The weighted-average remaining contractual life of outstanding options at December 28, 2013 was approximately 1.0 year. As of December 28, 2013, there was no unrecognized stock-based compensation expense related to stock options expected to be recognized.
LTIPs
The following table summarizes the 2012 LTIP, the April 2013 Special LTIP and the Jostens 2013 LTIP award activity for the Company:
| | | | |
Units in thousands | | 2013
Activity | |
Outstanding at December 29, 2012 | | | 66 | |
Granted | | | 96 | |
Forfeited/Expired | | | — | |
Settled/Paid | | | (1 | ) |
Cancelled | | | (29 | ) |
| | | | |
Outstanding at December 28, 2013 | | | 132 | |
| | | | |
Vested or expected to vest at December 28, 2013 | | | 112 | |
| | | | |
F-37
VISANT CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
As of December 28, 2013, there was $4.3 million of unrecognized stock-based compensation expense related to the long-term incentive plans to be recognized over a weighted-average period of 1.9 years.
16. Business Segments
The Company’s three reportable segments consist of:
| | • | | Scholastic —provides services in conjunction with the marketing, sale and production of class rings and an array of graduation products and other scholastic affinity products to students and administrators primarily in high schools, colleges and other post-secondary institutions; |
| | • | | Memory Book— provides services in conjunction with the publication, marketing, sale and production of school yearbooks, memory books and related products that help people tell their stories and chronicle important events; and |
| | • | | Marketing and Publishing Services —provides services in conjunction with the development, marketing, sale and production of multi-sensory and interactive advertising sampling systems and packaging, primarily for the fragrance, cosmetic and personal care segments, and provides innovative products and related services to the direct marketing sector. The group also produces book components primarily for the educational and trade publishing segments. |
Scholastic
The Scholastic segment provides services in conjunction with the marketing, sale and production of class rings and an array of graduation products, such as caps, gowns, diplomas and announcements, graduation-related accessories and other scholastic affinity products. In the Scholastic segment, Jostens markets and sells through an in school channel, under which it primarily serves U.S. high schools, colleges and universities, marketing and selling products to students and administrators. Jostens relies primarily on a network of independent sales representatives to sell its scholastic products in school. However, Jostens also markets and sells its products through a retail channel (rings) and online. Jostens provides customer service in the marketing and sale of class rings and related jewelry products and certain other graduation products. Jostens also provides ongoing warranty service on its class and affiliation rings. In addition to its class ring offerings, Jostens also designs, manufactures, markets and sells championship rings for high schools and colleges and for professional sports teams and affinity rings for a variety of specialty markets. The Company also markets, manufactures and sells an array of additional scholastic products, including chenille letters, varsity jackets, mascot mats, plaques and sports apparel in schools and to dealers through its Neff subsidiary.
Memory Book
Jostens provides services in conjunction with the publication, marketing, sale and production of memory books, and related products that help people tell their stories and chronicle important events. Jostens’ strong brand recognition is deeply rooted in its school-by-school relationships and in its consistent ability to deliver high quality products and services and innovate to meet market demands. Jostens primarily services U.S. high schools, colleges, universities, elementary schools and middle schools. Jostens generates the majority of its revenues from high school accounts. Jostens’ independent sales representatives and technical support employees assist students and faculty advisers with the planning and layout of yearbooks, including through the provision of online layout and editorial tools to assist the schools in the publication of the yearbook. With a new class of students each year and periodic faculty advisor turnover, Jostens’ independent sales representatives and customer service employees are the main point of continuity for the yearbook production process on a year-to-year basis.
Marketing and Publishing Services
The Marketing and Publishing Services segment includes operations in sampling, direct marketing and publishing services. The sampling operations provide services in conjunction with the development, marketing, sale and production of multi-sensory and interactive advertising sampling systems and packaging, primarily for the fragrance, cosmetic and personal care segments. With over a 100-year history, Arcade pioneered the leading ScentStrip® product in 1980. Since then, it has developed an extensive portfolio of proprietary, patented and patent-pending technologies that can be incorporated into various conventional and online marketing programs designed to reach the consumer at home or in-store, including magazine and catalog inserts, statement enclosures, blow-ins, direct mail, direct sell and point-of-sale materials and gift-with-purchase/purchase-with-purchase programs. The Company
F-38
VISANT CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
also markets, manufactures and sells highly decorated packaging solutions to the cosmetic and consumer products industries through Color Optics and Carestia. The direct marketing operations specialize in high-quality, in-line printed products and can accommodate large marketing projects with a wide range of dimensional printed products and in-line finishing production, data processing and mailing services. The products range from conventional direct marketing pieces to integrated offerings. The personalized imaging capabilities can offer individualized messages to each recipient within a geographical area or demographic group for targeted marketing efforts. The publishing services business produces book components, including book covers and jackets, and employs specialized techniques to create highly decorated covers.
The following table presents information of the Company by business segment:
| | | | | | | | | | | | |
In thousands | | 2013 | | | 2012 | | | 2011 | |
Net sales | | | | | | | | | | | | |
Scholastic | | $ | 431,895 | | | $ | 445,790 | | | $ | 474,667 | |
Memory Book | | | 331,339 | | | | 346,070 | | | | 362,380 | |
Marketing and Publishing Services | | | 365,011 | | | | 364,297 | | | | 380,774 | |
Inter-segment eliminations | | | (542 | ) | | | (815 | ) | | | (29 | ) |
| | | | | | | | | | | | |
| | $ | 1,127,703 | | | $ | 1,155,342 | | | $ | 1,217,792 | |
| | | | | | | | | | | | |
Operating income (loss) | | | | | | | | | | | | |
Scholastic | | $ | 39,481 | | | $ | 25,260 | | | $ | 34,948 | |
Memory Book | | | 101,920 | | | | 92,284 | | | | 103,137 | |
Marketing and Publishing Services | | | 17,213 | | | | (12,344 | ) | | | 13,792 | |
| | | | | | | | | | | | |
| | $ | 158,614 | | | $ | 105,200 | | | $ | 151,877 | |
| | | | | | | | | | | | |
Interest, net | | | | | | | | | | | | |
Scholastic | | $ | 59,123 | | | $ | 62,110 | | | $ | 64,071 | |
Memory Book | | | 45,204 | | | | 47,861 | | | | 49,365 | |
Marketing and Publishing Services | | | 50,941 | | | | 48,953 | | | | 50,700 | |
| | | | | | | | | | | | |
| | $ | 155,268 | | | $ | 158,924 | | | $ | 164,136 | |
| | | | | | | | | | | | |
Depreciation and Amortization | | | | | | | | | | | | |
Scholastic | | $ | 26,806 | | | $ | 33,023 | | | $ | 32,627 | |
Memory Book | | | 30,096 | | | | 38,408 | | | | 39,424 | |
Marketing and Publishing Services | | | 32,621 | | | | 33,102 | | | | 34,032 | |
| | | | | | | | | | | | |
| | $ | 89,523 | | | $ | 104,533 | | | $ | 106,083 | |
| | | | | | | | | | | | |
Capital expenditures | | | | | | | | | | | | |
Scholastic | | $ | 13,037 | | | $ | 17,025 | | | $ | 12,440 | |
Memory Book | | | 10,501 | | | | 16,949 | | | | 29,949 | |
Marketing and Publishing Services | | | 10,785 | | | | 18,158 | | | | 13,136 | |
| | | | | | | | | | | | |
| | $ | 34,323 | | | $ | 52,132 | | | $ | 55,525 | |
| | | | | | | | | | | | |
F-39
VISANT CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
| | | | | | | | | | | | |
In thousands | | 2013 | | | 2012 | | | 2011 | |
Goodwill | | | | | | | | | | | | |
Scholastic | | $ | 300,857 | | | $ | 301,027 | | | $ | 309,878 | |
Memory Book | | | 391,178 | | | | 391,178 | | | | 391,178 | |
Marketing and Publishing Services | | | 234,788 | | | | 226,741 | | | | 282,058 | |
| | | | | | | | | | | | |
| | $ | 926,823 | | | $ | 918,946 | | | $ | 983,114 | |
| | | | | | | | | | | | |
Intangible assets | | | | | | | | | | | | |
Scholastic | | $ | 147,515 | | | $ | 158,539 | | | $ | 145,941 | |
Memory Book | | | 108,618 | | | | 120,977 | | | | 168,984 | |
Marketing and Publishing Services | | | 111,434 | | | | 121,807 | | | | 133,469 | |
| | | | | | | | | | | | |
| | $ | 367,567 | | | $ | 401,323 | | | $ | 448,394 | |
| | | | | | | | | | | | |
Total assets | | | | | | | | | | | | |
Scholastic | | $ | 656,314 | | | $ | 664,308 | | | $ | 668,179 | |
Memory Book | | | 670,662 | | | | 697,683 | | | | 749,932 | |
Marketing and Publishing Services | | | 579,299 | | | | 564,415 | | | | 626,383 | |
| | | | | | | | | | | | |
| | $ | 1,906,275 | | | $ | 1,926,406 | | | $ | 2,044,494 | |
| | | | | | | | | | | | |
Net sales are reported in the geographic area where the final sales to customers are made, rather than where the transaction originates. No single customer accounted for more than 10% of revenue in any of 2013, 2012 and 2011.
The following table presents net sales by class of similar products and certain geographic information for the Company:
| | | | | | | | | | | | |
In thousands | | 2013 | | | 2012 | | | 2011 | |
Net sales by classes of similar products | | | | | | | | | | | | |
Memory book and yearbook products and services | | $ | 330,797 | | | $ | 345,281 | | | $ | 362,380 | |
Graduation and affinity products | | | 244,623 | | | | 253,341 | | | | 261,849 | |
Class ring and jewelry products | | | 187,272 | | | | 192,449 | | | | 212,818 | |
Sampling products and services | | | 194,844 | | | | 192,195 | | | | 174,831 | |
Book components | | | 91,315 | | | | 94,788 | | | | 108,784 | |
Direct marketing products and services | | | 78,852 | | | | 77,288 | | | | 97,130 | |
| | | | | | | | | | | | |
| | $ | 1,127,703 | | | $ | 1,155,342 | | | $ | 1,217,792 | |
| | | | | | | | | | | | |
Net sales by geographic area | | | | | | | | | | | | |
United States | | $ | 1,019,268 | | | $ | 1,055,217 | | | $ | 1,116,602 | |
Canada | | | 25,955 | | | | 30,830 | | | | 38,436 | |
France | | | 23,440 | | | | 21,663 | | | | 30,925 | |
Other | | | 59,040 | | | | 47,632 | | | | 31,829 | |
| | | | | | | | | | | | |
| | $ | 1,127,703 | | | $ | 1,155,342 | | | $ | 1,217,792 | |
| | | | | | | | | | | | |
Net property, plant and equipment and intangible assets by geographic area | | | | | | | | | | | | |
United States | | $ | 1,451,137 | | | $ | 1,514,461 | | | $ | 1,634,369 | |
Other, primarily France and Canada | | | 32,344 | | | | 9,473 | | | | 7,189 | |
| | | | | | | | | | | | |
| | $ | 1,483,481 | | | $ | 1,523,934 | | | $ | 1,641,558 | |
| | | | | | | | | | | | |
F-40
VISANT CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
17. Common Stock
Holdco’s common stock, $0.01 par value per share, consists of Class A and Class C common stock. Holdco’s charter also authorizes the issuance of non-voting Class B common stock, but currently no such shares are outstanding. Holders of Class A common stock are entitled to one vote for each share held for any matter coming before the stockholders of Holdco. The holder of the share of Class C common stock is entitled to a number of votes for any matter coming before the stockholders of Holdco equal to:
| | (i) | initially, the excess of (x) 50% of all votes entitled to be cast by holders of outstanding common stock for any matter coming before the stockholders of Holdco, over (y) the percentage of all votes entitled to be cast by the initial holder of the share of Class C common stock together with any permitted transferees of the initial holder, for any matter coming before the stockholders of Holdco by virtue of the shares of Class A common stock acquired by the initial holder pursuant to the Contribution Agreement, dated July 21, 2004, between Holdco and the initial holder, such excess determined based on the shares of common stock issued and outstanding immediately prior to October 4, 2004, giving effect to any shares of common stock acquired by the initial holder pursuant to the Contribution Agreement at the closing thereunder; and |
| | (ii) | thereafter, the number of votes will be permanently reduced to an amount equal to the excess, if any, of (x) 50% of all votes entitled to be cast by holders of outstanding common stock for any matter coming before the stockholders of Holdco (as reduced by any shares of Class A common stock of Holdco issued on the date of the closing under the Contribution Agreement or thereafter to any person other than the initial holder), over (y) the percentage of all votes entitled to be cast by the initial holder, together with its transferees, for any matter coming before the stockholders of Holdco by virtue of the shares of Class A common stock then held by the initial holder, together with its transferees, not to exceed the percentage voting interest attributed to such share pursuant to clause (i) above; and |
| | (iii) | if the share of Class C common stock is transferred by the initial holder (or its permitted transferee) to any person other than a permitted transferee of the initial holder, the share of Class C common stock will entitle the holder to the same voting rights as the share of Class C common stock entitled the holder immediately prior to the transfer. |
The share of Class C common stock will at all times entitle the holder to at least one vote on any matter coming before the stockholders of Holdco. In addition, the share of Class C common stock will automatically convert into one fully-paid and non-assessable share of Class A common stock (1) upon the consummation of an initial public offering or (2) upon the first occurrence that the share of Class C common stock is entitled to only one vote for any matter coming before the stockholders of Holdco, as more fully provided by the certificate of incorporation.
18. Related Party Transactions
Transactions with Sponsors
Stockholders Agreement
In connection with the Transactions, in October 2004 Holdco entered into a stockholders agreement (the “2004 Stockholders Agreement”) with an entity affiliated with KKR and entities affiliated with DLJMBP III (each an “Investor Entity” and together the “Investor Entities”) that provides for, among other things:
| | • | | the right of each of the Investor Entities to designate a certain number of directors to Holdco’s board of directors for so long as they hold a certain amount of Holdco’s common stock. Of the eight members of Holdco’s board of directors, KKR and DLJMBP III each has the right to designate four of Holdco’s directors (currently three KKR and three DLJMBP III designees serve on Holdco’s board) with the Company’s Chief Executive Officer and President, Marc L. Reisch, as chairman; |
| | • | | certain limitations on the transfer of Holdco’s common stock held by the Investor Entities for a period of four years after the completion of the Transactions, after which, if Holdco has not completed an initial public offering, any Investor Entity wishing to sell any of Holdco common stock held by it must first offer to sell such stock to Holdco and the other Investor Entities, provided that, if Holdco completes an initial public offering during the four years after the completion of the Transactions, any Investor Entity may sell pursuant to its registration rights as described below; |
| | • | | a consent right for the Investor Entities with respect to certain corporate actions; |
F-41
VISANT CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
| | • | | the ability of the Investor Entities to “tag-along” their shares of Holdco’s common stock to sales by any other Investor Entity, and the ability of the Investor Entities to “drag-along” Holdco’s common stock held by the other Investor Entities under certain circumstances; |
| | • | | the right of the Investor Entities to purchase a pro rata portion of all or any part of any new securities offered by Holdco; and |
| | • | | a restriction on the ability of the Investor Entities and certain of their affiliates to own, operate or control a business that competes with Holdings, subject to certain exceptions. |
Management Services Agreement
In connection with the Transactions, Holdco entered into a management services agreement with the Sponsors pursuant to which the Sponsors provide certain structuring, consulting and management advisory services. Under the management services agreement, during the term the Sponsors receive an annual advisory fee of $3.0 million that is payable quarterly and which increases by 3% per year. Holdco incurred advisory fees from the Sponsors of $3.8 million for the year ended December 28, 2013, $3.7 million for the year ended December 29, 2012 and $3.6 million for the year ended December 31, 2011. The management services agreement also provides that Holdco will indemnify the Sponsors and their affiliates, directors, officers and representatives for losses relating to the services contemplated by the management services agreement and the engagement of the Sponsors pursuant to, and the performance by the Sponsors of the services contemplated by, the management services agreement.
Registration Rights Agreement
In connection with the Transactions, Holdco entered into a registration rights agreement with the Investor Entities pursuant to which the Investor Entities are entitled to certain demand and piggyback rights with respect to the registration and sale of Holdco’s common stock held by them.
Other
KKR Capstone is a team of operational professionals who work exclusively with KKR’s investment professionals and portfolio company management teams to enhance and strengthen operations in KKR’s portfolio companies. The Company has retained KKR Capstone from time to time to provide certain of its businesses with consulting services primarily to help identify and implement operational improvements and other strategic efforts within its businesses. The Company incurred approximately $0.1 million, $0.2 million and $1.5 million in fiscal years 2013, 2012 and 2011, respectively, for services provided by KKR Capstone. An affiliate of KKR Capstone has an ownership interest in Holdco.
Certain of the lenders under the Credit Facilities and their affiliates have engaged, and may in the future engage, in investment banking, commercial banking and other financial advisory and commercial dealings with Visant and its affiliates. Such parties have received (or will receive) customary fees and commissions for these transactions.
In connection with the execution of the stock purchase agreement on November 19, 2013 (the “Stock Purchase Agreement”) for the acquisition of all the outstanding equity interests in American Achievement Group Holding Corp. (“American Achievement”), Visant and Holdco concurrently entered into a debt commitment letter (the “Debt Commitment Letter”) with Credit Suisse Securities (USA) LLC (“CSSUSA”) and Credit Suisse AG, Cayman Islands Branch (“CSAG”) pursuant to which, subject to the conditions set forth therein, CSAG has committed to provide Visant financing for the transactions under the Stock Purchase Agreement, which will include: (i) up to a $260.0 million senior secured term loan facility (the “Senior Facility”), either as an incremental facility pursuant to the Credit Facilities or under a new, stand-alone credit agreement, maturing on March 23, 2017; and (ii) up to $100.0 million in aggregate principal amount of senior unsecured notes issued by Visant in a private placement (the “Mirror Notes”) on terms substantially consistent with the Senior Notes, provided that if all or any portion of the contemplated Mirror Notes are not issued by Visant prior to the closing of the acquisition of American Achievement, the financing shall also include up to $100.0 million of senior unsecured fixed rate loans maturing on October 1, 2017 (the “Senior Unsecured Bridge Loans”) under a senior unsecured credit facility (the “Bridge Facility”), in each case, plus an amount sufficient to fund any OID or upfront fees required to be funded in respect thereof on the closing date. In any event, the combined aggregate amount of gross proceeds from the Mirror Notes and the Senior Unsecured Bridge Loans shall not exceed $100.0 million. Visant may in its sole discretion agree to reduce any commitment with respect to the Bridge Facility. At any time after the one year anniversary of the closing date, the Senior Unsecured Bridge Loans may be exchanged in whole or in part for senior unsecured exchange notes, in equal principal amount, as additional Senior Notes under the indenture governing the Senior Notes. The obligations under the Senior Facility and
F-42
VISANT CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
the Bridge Facility will be guaranteed by Visant Secondary and the subsidiaries of Visant that are guarantors under the Credit Facilities and the Senior Notes, respectively. The Senior Facility will be secured on the same basis as the security interests pursuant to the Credit Facilities. The obligation of CSAG to provide debt financing under the Debt Commitment Letter is subject to customary closing conditions for transactions of this type. The final termination date for the Debt Commitment Letter is the same as the termination date under the Stock Purchase Agreement. The Company’s borrowing under such financing arrangement will be subject to the closing of the transactions under the Stock Purchase Agreement. CSSUSA will act as sole lead arranger and bookrunner and will perform duties customarily associated with such roles for which it will receive customary fees. In addition, KKR Capital Markets LLC (“KKRCM”) assisted in placing the financing, for which it will receive a customary fee. Each of CSAG, CSUSA and KKRCM is an affiliate of one of the Sponsors.
Affiliates of CSUSA, CSAG and KKRCM act as lenders and/or as agents under the Credit Facilities and were initial purchasers of the Senior Notes, for which they received and will receive customary fees and expenses and are indemnified by the Company against certain liabilities.
In December 2012 the Company repurchased for retirement in privately negotiated transactions $13.3 million in aggregate principal amount of Senior Notes. An affiliate of KKR served in an agency capacity for the broker executing the repurchases on Visant’s behalf, for which the affiliate received customary compensation.
In 2011, Visant entered into pay-fixed/receive-floating interest rate swap transactions (the “Swap Transactions”) with respect to its variable rate term loan indebtedness under the Credit Facilities. The counterparties to the Swap Transactions or their affiliates are parties to the Credit Facilities. Such parties have received (or will receive) customary fees and commissions for such transactions. Credit Suisse International, which is a counterparty to one of the Swap Transactions, is an affiliate of DLJMBP III.
The Company is party to an agreement with CoreTrust Purchasing Group (“CoreTrust”), a group purchasing organization, pursuant to which the Company avails itself of the terms and conditions of the CoreTrust purchasing organization for certain purchases, including its prescription drug benefit program. An affiliate of KKR is party to an agreement with CoreTrust which permits certain KKR affiliates, including Visant, the benefit of utilizing the CoreTrust group purchasing program. CoreTrust receives payment of fees for administrative and other services provided by CoreTrust from certain vendors based on the products and services purchased by the Company and other parties, and CoreTrust shares a portion of such fees with the KKR affiliate.
The Company has participated in providing integrated marketing programs with an affiliate of First Data Corporation, a company, in which affiliates of KKR have an ownership interest. This collaborative arrangement was terminated during the quarter ended September 29, 2012, subject to certain possible residual revenue during 2013. For the fiscal years ended December 28, 2013, December 29, 2012 and December 31, 2011, the amount of revenue that the Company recognized through this arrangement was not material to its financial statements.
Transactions with Other Co-Investors and Management
Syndicate Stockholders Agreement
In September 2003, Visant, Holdco, DLJMBP III and certain of its affiliated funds (collectively, the “DLJMBP Funds”) and certain of the DLJMBP Funds’ co-investors entered into a stock purchase and stockholders’ agreement (the “Syndicate Stockholders Agreement”), pursuant to which the DLJMBP Funds sold to the co-investors shares of: (1) the Class A Common Stock, (2) Holdco’s Class B Non-Voting Common Stock (which have since been converted into shares of Class A Common Stock) and (3) Visant’s 8% Senior Redeemable Preferred Stock (which has since been repurchased).
The Syndicate Stockholders Agreement contains provisions which, among other things:
| | • | | restrict the ability of the syndicate stockholders to make certain transfers; |
| | • | | grant the co-investors certain board observation and information rights; |
| | • | | provide for certain tag-along and drag-along rights; |
| | • | | grant preemptive rights to the co-investors to purchase a pro rata share of any new shares of common stock issued by Holdco or Jostens to any of the DLJMBP Funds or their successors prior to an initial public offering; and |
| | • | | give the stockholders piggyback registration rights in the event of a public offering in which the DLJMBP Funds sell shares. |
F-43
VISANT CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
Management Stockholders Agreement
In July 2003, Holdco, the DLJMBP Funds and certain members of management entered into a stockholders’ agreement that contains certain provisions which, among other things:
| | • | | restrict the ability of the management stockholders to transfer their shares; |
| | • | | provide for certain tag-along and drag-along rights; |
| | • | | provide certain call and put rights; |
| | • | | grant preemptive rights to the management stockholders to purchase a pro rata share of any new shares of common stock issued by Holdco or Jostens to any of the DLJMBP Funds or their successors prior to an initial public offering; |
| | • | | grant the DLJMBP Funds six demand registration rights; and |
| | • | | give the stockholders piggyback registration rights in the event of a public offering in which the DLJMBP Funds sell shares. |
Other
Ms. Ann Carr, who is Mr. Charles Mooty’s sister-in-law, joined Jostens as its Chief Marketing Officer in March 2014. Her compensation is commensurate with that of her peers.
19. Condensed Consolidating Guarantor Information
As discussed in Note 10,Debt, Visant’s obligations under the Credit Facilities and the Senior Notes are guaranteed by certain of its wholly-owned subsidiaries on a full, unconditional and joint and several basis. The following tables present condensed consolidating financial information for Visant, as issuer, and its guarantor and non-guarantor subsidiaries. Included in the presentation of “Equity (earnings) loss in subsidiary, net of tax” is the elimination of intercompany interest expense incurred by the guarantors in the amount of $133.2 million, $135.5 million and $138.0 million in fiscal years 2013, 2012, and 2011, respectively.
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS AND
COMPREHENSIVE INCOME
2013
| | | | | | | | | | | | | | | | | | | | |
In thousands | | Visant | | | Guarantors | | | Non-
Guarantors | | | Eliminations | | | Total | |
Net sales | | $ | — | | | $ | 1,045,910 | | | $ | 104,411 | | | $ | (22,618 | ) | | $ | 1,127,703 | |
Cost of products sold | | | — | | | | 492,617 | | | | 73,336 | | | | (22,552 | ) | | | 543,401 | |
| | | | | | | | | | | | | | | | | | | | |
Gross profit | | | — | | | | 553,293 | | | | 31,075 | | | | (66 | ) | | | 584,302 | |
Selling and administrative expenses | | | (533 | ) | | | 381,663 | | | | 24,832 | | | | — | | | | 405,962 | |
Gain on sale of assets | | | — | | | | (835 | ) | | | — | | | | — | | | | (835 | ) |
Special charges | | | — | | | | 20,239 | | | | 322 | | | | — | | | | 20,561 | |
| | | | | | | | | | | | | | | | | | | | |
Operating income | | | 533 | | | | 152,226 | | | | 5,921 | | | | (66 | ) | | | 158,614 | |
Net interest expense | | | 153,304 | | | | 134,626 | | | | 561 | | | | (133,223 | ) | | | 155,268 | |
| | | | | | | | | | | | | | | | | | | | |
(Loss) income before income taxes | | | (152,771 | ) | | | 17,600 | | | | 5,360 | | | | 133,157 | | | | 3,346 | |
(Benefit from) provision for income taxes | | | (6,079 | ) | | | 6,377 | | | | 1,993 | | | | (26 | ) | | | 2,265 | |
| | | | | | | | | | | | | | | | | | | | |
(Loss) income from operations | | | (146,692 | ) | | | 11,223 | | | | 3,367 | | | | 133,183 | | | | 1,081 | |
Equity (earnings) in subsidiary, net of tax | | | (147,773 | ) | | | (3,367 | ) | | | — | | | | 151,140 | | | | — | |
| | | | | | | | | | | | | | | | | | | | |
Net income | | $ | 1,081 | | | $ | 14,590 | | | $ | 3,367 | | | $ | (17,957 | ) | | $ | 1,081 | |
| | | | | | | | | | | | | | | | | | | | |
| | | | | |
Other comprehensive income, net of tax : | | | | | | | | | | | | | | | | | | | | |
Deferred loss on derivatives | | | 2,016 | | | | — | | | | — | | | | — | | | | 2,016 | |
Change in cumulative translation adjustment | | | 555 | | | | — | | | | 555 | | | | (555 | ) | | | 555 | |
Minimum pension liability | | | 45,272 | | | | 45,272 | | | | — | | | | (45,272 | ) | | | 45,272 | |
| | | | | | | | | | | | | | | | | | | | |
Comprehensive income | | $ | 48,924 | | | $ | 59,862 | | | $ | 3,922 | | | $ | (63,784 | ) | | $ | 48,924 | |
| | | | | | | | | | | | | | | | | | | | |
F-44
VISANT CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS AND
COMPREHENSIVE (LOSS) INCOME
2012
| | | | | | | | | | | | | | | | | | | | |
In thousands | | Visant | | | Guarantors | | | Non-
Guarantors | | | Eliminations | | | Total | |
Net sales | | $ | — | | | $ | 1,087,262 | | | $ | 93,151 | | | $ | (25,071 | ) | | $ | 1,155,342 | |
Cost of products sold | | | — | | | | 513,861 | | | | 60,643 | | | | (25,014 | ) | | | 549,490 | |
| | | | | | | | | | | | | | | | | | | | |
Gross profit | | | — | | | | 573,401 | | | | 32,508 | | | | (57 | ) | | | 605,852 | |
Selling and administrative expenses | | | (630 | ) | | | 404,155 | | | | 22,851 | | | | — | | | | 426,376 | |
(Gain) loss on sale of assets | | | — | | | | (1,683 | ) | | | 54 | | | | — | | | | (1,629 | ) |
Special charges | | | 30 | | | | 75,840 | | | | 35 | | | | — | | | | 75,905 | |
| | | | | | | | | | | | | | | | | | | | |
Operating income | | | 600 | | | | 95,089 | | | | 9,568 | | | | (57 | ) | | | 105,200 | |
Gain on redemption of debt | | | (947 | ) | | | — | | | | — | | | | — | | | | (947 | ) |
| | | | | | | | | | | | | | | | | | | | |
Income before interest and taxes | | | 1,547 | | | | 95,089 | | | | 9,568 | | | | (57 | ) | | | 106,147 | |
Net interest expense | | | 156,648 | | | | 137,639 | | | | 143 | | | | (135,506 | ) | | | 158,924 | |
| | | | | | | | | | | | | | | | | | | | |
(Loss) income before income taxes | | | (155,101 | ) | | | (42,550 | ) | | | 9,425 | | | | 135,449 | | | | (52,777 | ) |
(Benefit from) provision for income taxes | | | (8,305 | ) | | | 10,702 | | | | 3,445 | | | | (19 | ) | | | 5,823 | |
| | | | | | | | | | | | | | | | | | | | |
(Loss) income from operations | | | (146,796 | ) | | | (53,252 | ) | | | 5,980 | | | | 135,468 | | | | (58,600 | ) |
Equity (earnings) in subsidiary, net of tax | | | (88,196 | ) | | | (5,980 | ) | | | — | | | | 94,176 | | | | — | |
| | | | | | | | | | | | | | | | | | | | |
Net (loss) income | | $ | (58,600 | ) | | $ | (47,272 | ) | | $ | 5,980 | | | $ | 41,292 | | | $ | (58,600 | ) |
| | | | | | | | | | | | | | | | | | | | |
| | | | | |
Other comprehensive (loss) income, net of tax : | | | | | | | | | | | | | | | | | | | | |
Deferred loss on derivatives | | | (1,960 | ) | | | — | | | | — | | | | — | | | | (1,960 | ) |
Change in cumulative translation adjustment | | | (167 | ) | | | — | | | | (167 | ) | | | 167 | | | | (167 | ) |
Minimum pension liability | | | (23,269 | ) | | | (23,269 | ) | | | — | | | | 23,269 | | | | (23,269 | ) |
| | | | | | | | | | | | | | | | | | | | |
Comprehensive (loss) income | | $ | (83,996 | ) | | $ | (70,541 | ) | | $ | 5,813 | | | $ | 64,728 | | | $ | (83,996 | ) |
| | | | | | | | | | | | | | | | | | | | |
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS AND
COMPREHENSIVE (LOSS) INCOME
2011
| | | | | | | | | | | | | | | | | | | | |
In thousands | | Visant | | | Guarantors | | | Non-
Guarantors | | | Eliminations | | | Total | |
Net sales | | $ | — | | | $ | 1,154,477 | | | $ | 86,383 | | | $ | (23,068 | ) | | $ | 1,217,792 | |
Cost of products sold | | | — | | | | 538,404 | | | | 57,221 | | | | (23,014 | ) | | | 572,611 | |
| | | | | | | | | | | | | | | | | | | | |
Gross profit | | | — | | | | 616,073 | | | | 29,162 | | | | (54 | ) | | | 645,181 | |
Selling and administrative expenses | | | 2,943 | | | | 427,731 | | | | 19,127 | | | | — | | | | 449,801 | |
Gain on sale of assets | | | — | | | | (910 | ) | | | — | | | | — | | | | (910 | ) |
Special charges | | | 320 | | | | 44,064 | | | | 29 | | | | — | | | | 44,413 | |
| | | | | | | | | | | | | | | | | | | | |
Operating (loss) income | | | (3,263 | ) | | | 145,188 | | | | 10,006 | | | | (54 | ) | | | 151,877 | |
Net interest expense | | | 161,931 | | | | 140,055 | | | | 142 | | | | (137,992 | ) | | | 164,136 | |
| | | | | | | | | | | | | | | | | | | | |
(Loss) income before income taxes | | | (165,194 | ) | | | 5,133 | | | | 9,864 | | | | 137,938 | | | | (12,259 | ) |
(Benefit from) provision for income taxes | | | (8,966 | ) | | | 9,906 | | | | 1,709 | | | | (24 | ) | | | 2,625 | |
| | | | | | | | | | | | | | | | | | | | |
(Loss) income from operations | | | (156,228 | ) | | | (4,773 | ) | | | 8,155 | | | | 137,962 | | | | (14,884 | ) |
Equity (earnings) in subsidiary, net of tax | | | (141,344 | ) | | | (8,155 | ) | | | — | | | | 149,499 | | | | — | |
| | | | | | | | | | | | | | | | | | | | |
Net (loss) income | | $ | (14,884 | ) | | $ | 3,382 | | | $ | 8,155 | | | $ | (11,537 | ) | | $ | (14,884 | ) |
| | | | | | | | | | | | | | | | | | | | |
| | | | | |
Other comprehensive (loss) income, net of tax : | | | | | | | | | | | | | | | | | | | | |
Deferred loss on derivatives | | | (3,427 | ) | | | — | | | | — | | | | — | | | | (3,427 | ) |
Change in cumulative translation adjustment | | | (1,137 | ) | | | — | | | | (1,137 | ) | | | 1,137 | | | | (1,137 | ) |
Minimum pension liability | | | (29,001 | ) | | | (29,001 | ) | | | — | | | | 29,001 | | | | (29,001 | ) |
| | | | | | | | | | | | | | | | | | | | |
Comprehensive (loss) income | | $ | (48,449 | ) | | $ | (25,619 | ) | | $ | 7,018 | | | $ | 18,601 | | | $ | (48,449 | ) |
| | | | | | | | | | | | | | | | | | | | |
F-45
VISANT CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
CONDENSED CONSOLIDATING BALANCE SHEET
2013
| | | | | | | | | | | | | | | | | | | | |
In thousands | | Visant | | | Guarantors | | | Non-
Guarantors | | | Eliminations | | | Total | |
ASSETS | | | | | | | | | | | | | | | | | | | | |
Cash and cash equivalents | | $ | 83,633 | | | $ | 2,695 | | | $ | 9,714 | | | $ | — | | | $ | 96,042 | |
Accounts receivable, net | | | 1,070 | | | | 88,352 | | | | 18,779 | | | | — | | | | 108,201 | |
Inventories | | | — | | | | 97,871 | | | | 6,961 | | | | (483 | ) | | | 104,349 | |
Salespersons overdrafts, net | | | — | | | | 23,036 | | | | 1,285 | | | | — | | | | 24,321 | |
Prepaid expenses and other current assets | | | 857 | | | | 16,015 | | | | 1,898 | | | | — | | | | 18,770 | |
Income tax receivable | | | 2,148 | | | | — | | | | 1,314 | | | | — | | | | 3,462 | |
Intercompany receivable | | | 6,487 | | | | 3,665 | | | | 8 | | | | (10,160 | ) | | | — | |
Deferred income taxes | | | 6,526 | | | | 14,220 | | | | 307 | | | | — | | | | 21,053 | |
| | | | | | | | | | | | | | | | | | | | |
Total current assets | | | 100,721 | | | | 245,854 | | | | 40,266 | | | | (10,643 | ) | | | 376,198 | |
Property, plant and equipment, net | | | 77 | | | | 179,103 | | | | 9,911 | | | | — | | | | 189,091 | |
Goodwill | | | — | | | | 894,787 | | | | 32,036 | | | | — | | | | 926,823 | |
Intangibles, net | | | — | | | | 348,976 | | | | 18,591 | | | | — | | | | 367,567 | |
Deferred financing costs, net | | | 33,118 | | | | — | | | | — | | | | — | | | | 33,118 | |
Deferred income taxes | | | — | | | | — | | | | 2,316 | | | | — | | | | 2,316 | |
Intercompany receivable | | | 519,772 | | | | 55,526 | | | | 57,972 | | | | (633,270 | ) | | | — | |
Other assets | | | 1,211 | | | | 9,476 | | | | 475 | | | | — | | | | 11,162 | |
Investment in subsidiaries | | | 802,242 | | | | 107,005 | | | | — | | | | (909,247 | ) | | | — | |
| | | | | | | | | | | | | | | | | | | | |
| | $ | 1,457,141 | | | $ | 1,840,727 | | | $ | 161,567 | | | $ | (1,553,160 | ) | | $ | 1,906,275 | |
| | | | | | | | | | | | | | | | | | | | |
LIABILITIES AND STOCKHOLDER’S (DEFICIT) EQUITY | | | | | | | | | | | | | | | | | | | | |
Accounts payable | | $ | 6,185 | | | $ | 31,874 | | | $ | 7,810 | | | $ | (2 | ) | | $ | 45,867 | |
Accrued employee compensation | | | 7,929 | | | | 21,516 | | | | 5,946 | | | | — | | | | 35,391 | |
Customer deposits | | | — | | | | 163,205 | | | | 6,714 | | | | — | | | | 169,919 | |
Commissions payable | | | — | | | | 10,390 | | | | 518 | | | | — | | | | 10,908 | |
Income taxes payable | | | (892 | ) | | | 3,183 | | | | 1,207 | | | | (188 | ) | | | 3,310 | |
Interest payable | | | 33,616 | | | | 86 | | | | — | | | | — | | | | 33,702 | |
Current portion of long-term debt and capital leases | | | 10 | | | | 4,395 | | | | 373 | | | | — | | | | 4,778 | |
Intercompany payable | | | 73 | | | | 1,195 | | | | 8,890 | | | | (10,158 | ) | | | — | |
Other accrued liabilities | | | 3,003 | | | | 23,741 | | | | 2,450 | | | | — | | | | 29,194 | |
| | | | | | | | | | | | | | | | | | | | |
Total current liabilities | | | 49,924 | | | | 259,585 | | | | 33,908 | | | | (10,348 | ) | | | 333,069 | |
Long-term debt and capital leases, less current maturities | | | 1,865,229 | | | | 2,359 | | | | 559 | | | | — | | | | 1,868,147 | |
Intercompany payable | | | 40,461 | | | | 577,904 | | | | 15,200 | | | | (633,565 | ) | | | — | |
Deferred income taxes | | | 2,714 | | | | 140,192 | | | | 4,153 | | | | — | | | | 147,059 | |
Pension liabilities, net | | | 17,046 | | | | 34,880 | | | | — | | | | — | | | | 51,926 | |
Other noncurrent liabilities | | | 14,505 | | | | 23,565 | | | | 742 | | | | — | | | | 38,812 | |
| | | | | | | | | | | | | | | | | | | | |
Total liabilities | | | 1,989,879 | | | | 1,038,485 | | | | 54,562 | | | | (643,913 | ) | | | 2,439,013 | |
Mezzanine equity | | | 11 | | | | — | | | | — | | | | — | | | | 11 | |
Stockholder’s (deficit) equity | | | (532,749 | ) | | | 802,242 | | | | 107,005 | | | | (909,247 | ) | | | (532,749 | ) |
| | | | | | | | | | | | | | | | | | | | |
| | $ | 1,457,141 | | | $ | 1,840,727 | | | $ | 161,567 | | | $ | (1,553,160 | ) | | $ | 1,906,275 | |
| | | | | | | | | | | | | | | | | | | | |
F-46
VISANT CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
CONDENSED CONSOLIDATING BALANCE SHEET
2012
| | | | | | | | | | | | | | | | | | | | |
In thousands | | Visant | | | Guarantors | | | Non-
Guarantors | | | Eliminations | | | Total | |
ASSETS | | | | | | | | | | | | | | | | | | | | |
Cash and cash equivalents | | $ | 48,590 | | | $ | 3,286 | | | $ | 8,320 | | | $ | — | | | $ | 60,196 | |
Accounts receivable, net | | | 1,474 | | | | 91,690 | | | | 11,621 | | | | — | | | | 104,785 | |
Inventories | | | — | | | | 106,704 | | | | 5,057 | | | | (418 | ) | | | 111,343 | |
Salespersons overdrafts, net | | | — | | | | 22,912 | | | | 1,232 | | | | — | | | | 24,144 | |
Prepaid expenses and other current assets | | | 1,777 | | | | 14,861 | | | | 1,314 | | | | — | | | | 17,952 | |
Income tax receivable | | | 2,928 | | | | — | | | | — | | | | — | | | | 2,928 | |
Intercompany receivable | | | 379 | | | | 6,100 | | | | 395 | | | | (6,874 | ) | | | — | |
Deferred income taxes | | | 10,582 | | | | 14,548 | | | | 54 | | | | — | | | | 25,184 | |
| | | | | | | | | | | | | | | | | | | | |
Total current assets | | | 65,730 | | | | 260,101 | | | | 27,993 | | | | (7,292 | ) | | | 346,532 | |
Property, plant and equipment, net | | | 55 | | | | 200,500 | | | | 3,110 | | | | — | | | | 203,665 | |
Goodwill | | | — | | | | 894,787 | | | | 24,159 | | | | — | | | | 918,946 | |
Intangibles, net | | | — | | | | 390,391 | | | | 10,932 | | | | — | | | | 401,323 | |
Deferred financing costs, net | | | 42,740 | | | | — | | | | — | | | | — | | | | 42,740 | |
Deferred income taxes | | | — | | | | — | | | | 2,472 | | | | — | | | | 2,472 | |
Intercompany receivable | | | 527,924 | | | | — | | | | 58,662 | | | | (586,586 | ) | | | — | |
Other assets | | | 844 | | | | 9,617 | | | | 267 | | | | — | | | | 10,728 | |
Investment in subsidiaries | | | 742,380 | | | | 103,083 | | | | — | | | | (845,463 | ) | | | — | |
| | | | | | | | | | | | | | | | | | | | |
| | $ | 1,379,673 | | | $ | 1,858,479 | | | $ | 127,595 | | | $ | (1,439,341 | ) | | $ | 1,926,406 | |
| | | | | | | | | | | | | | | | | | | | |
LIABILITIES AND STOCKHOLDER’S(DEFICIT) EQUITY | | | | | | | | | | | | | | | | | | | | |
Accounts payable | | $ | 5,710 | | | $ | 44,428 | | | $ | 4,963 | | | $ | 2 | | | $ | 55,103 | |
Accrued employee compensation | | | 6,952 | | | | 20,883 | | | | 3,676 | | | | — | | | | 31,511 | |
Customer deposits | | | — | | | | 167,328 | | | | 7,817 | | | | — | | | | 175,145 | |
Commissions payable | | | — | | | | 11,649 | | | | 696 | | | | — | | | | 12,345 | |
Income taxes payable | | | 51,917 | | | | (2,949 | ) | | | 515 | | | | (162 | ) | | | 49,321 | |
Interest payable | | | 34,403 | | | | 111 | | | | — | | | | — | | | | 34,514 | |
Current portion of long-term debt and capital leases | | | 10,668 | | | | 4,556 | | | | 12 | | | | — | | | | 15,236 | |
Intercompany payable | | | 1,982 | | | | (522 | ) | | | 5,415 | | | | (6,875 | ) | | | — | |
Other accrued liabilities | | | 3,539 | | | | 21,357 | | | | 1,256 | | | | — | | | | 26,152 | |
| | | | | | | | | | | | | | | | | | | | |
Total current liabilities | | | 115,171 | | | | 266,841 | | | | 24,350 | | | | (7,035 | ) | | | 399,327 | |
Long-term debt and capital leases, less current maturities | | | 1,862,908 | | | | 6,305 | | | | 2 | | | | — | | | | 1,869,215 | |
Intercompany payable | | | — | | | | 586,843 | | | | — | | | | (586,843 | ) | | | — | |
Deferred income taxes | | | 1,685 | | | | 132,871 | | | | 147 | | | | — | | | | 134,703 | |
Pension liabilities, net | | | 23,829 | | | | 105,798 | | | | — | | | | — | | | | 129,627 | |
Other noncurrent liabilities | | | 17,417 | | | | 17,441 | | | | 13 | | | | — | | | | 34,871 | |
| | | | | | | | | | | | | | | | | | | | |
Total liabilities | | | 2,021,010 | | | | 1,116,099 | | | | 24,512 | | | | (593,878 | ) | | | 2,567,743 | |
Mezzanine equity | | | 1,216 | | | | — | | | | — | | | | — | | | | 1,216 | |
Stockholder’s (deficit) equity | | | (642,553 | ) | | | 742,380 | | | | 103,083 | | | | (845,463 | ) | | | (642,553 | ) |
| | | | | | | | | | | | | | | | | | | | |
| | $ | 1,379,673 | | | $ | 1,858,479 | | | $ | 127,595 | | | $ | (1,439,341 | ) | | $ | 1,926,406 | |
| | | | | | | | | | | | | | | | | | | | |
F-47
VISANT CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
2013
| | | | | | | | | | | | | | | | | | | | |
In thousands | | Visant | | | Guarantors | | | Non-
Guarantors | | | Eliminations | | | Total | |
Net income | | $ | 1,081 | | | $ | 14,590 | | | $ | 3,367 | | | $ | (17,957 | ) | | $ | 1,081 | |
Other cash provided by (used in) operating activities | | | 632 | | | | 83,977 | | | | (2,052 | ) | | | 17,956 | | | | 100,513 | |
| | | | | | | | | | | | | | | | | | | | |
Net cash provided by operating activities | | | 1,713 | | | | 98,567 | | | | 1,315 | | | | (1 | ) | | | 101,594 | |
Purchases of property, plant and equipment | | | (62 | ) | | | (31,623 | ) | | | (2,638 | ) | | | — | | | | (34,323 | ) |
Additions to intangibles | | | — | | | | (318 | ) | | | — | | | | — | | | | (318 | ) |
Proceeds from sale of property and equipment | | | — | | | | 3,107 | | | | — | | | | — | | | | 3,107 | |
Acquisition of business, net of cash acquired | | | — | | | | — | | | | (16,939 | ) | | | — | | | | (16,939 | ) |
Other investing activities, net | | | — | | | | (1,005 | ) | | | 1,005 | | | | — | | | | — | |
| | | | | | | | | | | | | | | | | | | | |
Net cash used in investing activities | | | (62 | ) | | | (29,839 | ) | | | (18,572 | ) | | | — | | | | (48,473 | ) |
Short-term borrowings | | | 59,000 | | | | — | | | | — | | | | — | | | | 59,000 | |
Short-term repayments | | | (59,000 | ) | | | — | | | | — | | | | — | | | | (59,000 | ) |
Repayments of long-term debt and capital leases | | | (12,008 | ) | | | (4,717 | ) | | | (219 | ) | | | — | | | | (16,944 | ) |
Proceeds from issuance of long-term debt | | | — | | | | 644 | | | | — | | | | — | | | | 644 | |
Intercompany payable (receivable) | | | 46,042 | | | | (65,246 | ) | | | 19,203 | | | | 1 | | | | — | |
Distribution to shareholder | | | (642 | ) | | | — | | | | — | | | | — | | | | (642 | ) |
| | | | | | | | | | | | | | | | | | | | |
Net cash provided by (used in) financing activities | | | 33,392 | | | | (69,319 | ) | | | 18,984 | | | | 1 | | | | (16,942 | ) |
Effect of exchange rate changes on cash and cash equivalents | | | — | | | | — | | | | (333 | ) | | | — | | | | (333 | ) |
| | | | | | | | | | | | | | | | | | | | |
Increase (decrease) in cash and cash equivalents | | | 35,043 | | | | (591 | ) | | | 1,394 | | | | — | | | | 35,846 | |
Cash and cash equivalents, beginning of period | | | 48,590 | | | | 3,286 | | | | 8,320 | | | | — | | | | 60,196 | |
| | | | | | | | | | | | | | | | | | | | |
Cash and cash equivalents, end of period | | $ | 83,633 | | | $ | 2,695 | | | $ | 9,714 | | | $ | — | | | $ | 96,042 | |
| | | | | | | | | | | | | | | | | | | | |
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
2012
| | | | | | | | | | | | | | | | | | | | |
In thousands | | Visant | | | Guarantors | | | Non-
Guarantors | | | Eliminations | | | Total | |
Net (loss) income | | $ | (58,600 | ) | | $ | (47,272 | ) | | $ | 5,980 | | | $ | 41,292 | | | $ | (58,600 | ) |
Other cash provided by operating activities | | | 56,320 | | | | 153,545 | | | | 1,768 | | | | (41,292 | ) | | | 170,341 | |
| | | | | | | | | | | | | | | | | | | | |
Net cash (used in) provided by operating activities | | | (2,280 | ) | | | 106,273 | | | | 7,748 | | | | — | | | | 111,741 | |
Purchases of property, plant and equipment | | | — | | | | (49,781 | ) | | | (2,351 | ) | | | — | | | | (52,132 | ) |
Additions to intangibles | | | — | | | | (2,077 | ) | | | (1,171 | ) | | | — | | | | (3,248 | ) |
Proceeds from sale of property and equipment | | | — | | | | 4,727 | | | | — | | | | — | | | | 4,727 | |
Other investing activities, net | | | — | | | | (2,099 | ) | | | 2,100 | | | | — | | | | 1 | |
| | | | | | | | | | | | | | | | | | | | |
Net cash used in investing activities | | | — | | | | (49,230 | ) | | | (1,422 | ) | | | — | | | | (50,652 | ) |
Short-term borrowings | | | 107,000 | | | | — | | | | — | | | | — | | | | 107,000 | |
Short-term repayments | | | (107,000 | ) | | | — | | | | — | | | | — | | | | (107,000 | ) |
Repayments of long-term debt and capital leases | | | (34,175 | ) | | | (4,508 | ) | | | (17 | ) | | | — | | | | (38,700 | ) |
Proceeds from issuance of long-term debt | | | — | | | | 2,094 | | | | — | | | | — | | | | 2,094 | |
Intercompany payable (receivable) | | | 54,907 | | | | (54,907 | ) | | | — | | | | — | | | | — | |
Dividends | | | — | | | | 1,230 | | | | (1,230 | ) | | | — | | | | — | |
| | | | | | | | | | | | | | | | | | | | |
Net cash provided by (used in) financing activities | | | 20,732 | | | | (56,091 | ) | | | (1,247 | ) | | | — | | | | (36,606 | ) |
Effect of exchange rate changes on cash and cash equivalents | | | — | | | | — | | | | (301 | ) | | | — | | | | (301 | ) |
| | | | | | | | | | | | | | | | | | | | |
Increase in cash and cash equivalents | | | 18,452 | | | | 952 | | | | 4,778 | | | | — | | | | 24,182 | |
Cash and cash equivalents, beginning of period | | | 30,138 | | | | 2,334 | | | | 3,542 | | | | — | | | | 36,014 | |
| | | | | | | | | | | | | | | | | | | | |
Cash and cash equivalents, end of period | | $ | 48,590 | | | $ | 3,286 | | | $ | 8,320 | | | $ | — | | | $ | 60,196 | |
| | | | | | | | | | | | | | | | | | | | |
F-48
VISANT CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
2011
| | | | | | | | | | | | | | | | | | | | |
In thousands | | Visant | | | Guarantors | | | Non-
Guarantors | | | Eliminations | | | Total | |
Net (loss) income | | $ | (14,884 | ) | | $ | 3,382 | | | $ | 8,155 | | | $ | (11,537 | ) | | | (14,884 | ) |
Other cash provided by (used in) operating activities | | | 24,825 | | | | 109,545 | | | | (8,495 | ) | | | 11,538 | | | | 137,413 | |
| | | | | | | | | | | | | | | | | | | | |
Net cash provided by (used in) operating activities | | | 9,941 | | | | 112,927 | | | | (340 | ) | | | 1 | | | | 122,529 | |
Purchases of property, plant and equipment | | | — | | | | (54,648 | ) | | | (877 | ) | | | — | | | | (55,525 | ) |
Additions to intangibles | | | — | | | | (212 | ) | | | — | | | | — | | | | (212 | ) |
Proceeds from sale of property and equipment | | | — | | | | 6,734 | | | | — | | | | — | | | | 6,734 | |
Acquisition of business, net of cash acquired | | | — | | | | (4,681 | ) | | | — | | | | — | | | | (4,681 | ) |
Other investing activities, net | | | — | | | | (1,233 | ) | | | 1,233 | | | | — | | | | — | |
| | | | | | | | | | | | | | | | | | | | |
Net cash (used in) provided by investing activities | | | — | | | | (54,040 | ) | | | 356 | | | | — | | | | (53,684 | ) |
Short-term borrowings | | | 83,000 | | | | — | | | | — | | | | — | | | | 83,000 | |
Short-term repayments | | | (83,000 | ) | | | — | | | | — | | | | — | | | | (83,000 | ) |
Repayments of long-term debt and capital leases | | | (72,479 | ) | | | (3,802 | ) | | | (16 | ) | | | — | | | | (76,297 | ) |
Proceeds from issuance of long-term debt | | | — | | | | 349 | | | | — | | | | — | | | | 349 | |
Intercompany payable (receivable) | | | 62,461 | | | | (62,460 | ) | | | — | | | | (1 | ) | | | — | |
Dividends | | | — | | | | 1,262 | | | | (1,262 | ) | | | — | | | | — | |
Debt financing costs | | | (16,579 | ) | | | — | | | | — | | | | — | | | | (16,579 | ) |
| | | | | | | | | | | | | | | | | | | | |
Net cash used in financing activities | | | (26,597 | ) | | | (64,651 | ) | | | (1,278 | ) | | | (1 | ) | | | (92,527 | ) |
Effect of exchange rate changes on cash and cash equivalents | | | — | | | | — | | | | (501 | ) | | | — | | | | (501 | ) |
| | | | | | | | | | | | | | | | | | | | |
Decrease in cash and cash equivalents | | | (16,656 | ) | | | (5,764 | ) | | | (1,763 | ) | | | — | | | | (24,183 | ) |
Cash and cash equivalents, beginning of period | | | 46,794 | | | | 8,098 | | | | 5,305 | | | | — | | | | 60,197 | |
| | | | | | | | | | | | | | | | | | | | |
Cash and cash equivalents, end of period | | $ | 30,138 | | | $ | 2,334 | | | $ | 3,542 | | | $ | — | | | $ | 36,014 | |
| | | | | | | | | | | | | | | | | | | | |
F-49
FINANCIAL STATEMENT SCHEDULE
Schedule II- Valuation and Qualifying Accounts
Visant Corporation and subsidiaries
| | | | | | | | | | | | |
| | | Allowance for
uncollectible
accounts (1) | | | Allowance for
sales returns (2) | | | Salesperson
overdraft reserve (1) | |
Balance, January 1, 2011 | | $ | 5,071 | | | $ | 7,116 | | | $ | 11,467 | |
| | | | | | | | | | | | |
Charged to expense | | | 2,416 | | | | 21,426 | | | | 2,933 | |
Deductions | | | 2,161 | | | | 21,508 | | | | 1,485 | |
| | | | | | | | | | | | |
Balance, December 31, 2011 | | $ | 5,326 | | | $ | 7,034 | | | $ | 12,915 | |
| | | | | | | | | | | | |
Charged to expense | | | 2,253 | | | | 19,329 | | | | 2,135 | |
Deductions | | | 2,647 | | | | 20,305 | | | | 5,047 | |
| | | | | | | | | | | | |
Balance, December 29, 2012 | | $ | 4,932 | | | $ | 6,058 | | | $ | 10,003 | |
| | | | | | | | | | | | |
Charged to expense | | | 2,166 | | | | 22,130 | | | | 1,508 | |
Deductions | | | 2,058 | | | | 21,870 | | | | 2,337 | |
| | | | | | | | | | | | |
Balance, December 28, 2013 | | $ | 5,040 | | | $ | 6,318 | | | $ | 9,174 | |
| | | | | | | | | | | | |
| (1) | Deductions represent uncollectible accounts written off, net of recoveries. |
| (2) | Deductions represent returns processed against reserve. |
F-50
