UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended September 30, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission file number 1-5064
Jostens, Inc.
- --------------------------------------------------------------------------------
(Exact name of Registrant as specified in its charter)
Minnesota 41-0343440
- ------------------------------- ---------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification number)
incorporation or organization)
5501 Norman Center Drive, Minneapolis, Minnesota 55437
- ------------------------------------------------ -----------------------------
(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code: (952) 830-3300
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
On November 13, 2000 there were 8,993,297 shares of the Registrant's common
stock outstanding.
JOSTENS, INC. AND SUBSIDIARIES
Part I Financial Information Page
- ---------------------------- ----
Item 1. Financial Statements
Condensed Consolidated Statements of Operations for the Three
and Nine months ended September 30, 2000 and October 2, 1999 3
Condensed Consolidated Balance Sheets as of September 30, 2000,
October 2, 1999 and January 1, 2000 4
Condensed Consolidated Statements of Cash Flows for the Nine
months ended September 30, 2000 and October 2, 1999 5
Condensed Consolidated Statement of Changes in Shareholders'
Equity (Deficit) for the Nine months ended September 30, 2000 6
Notes to Condensed Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 22
Item 3. Quantitative and Qualitative Disclosures about Market Risk 28
Part II Other Information
- -------------------------
Item 1. Legal Proceedings 29
Item 6. Exhibits and Reports on Form 8-K 29
Signatures 30
2
PART I FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
JOSTENS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
Three months ended Nine months ended
-------------------------- -------------------------
September 30, October 2, September 30, October 2,
In thousands, except per-share data 2000 1999 2000 1999
- ------------------------------------------------------------------------------------- ----------------------
Net sales $ 118,197 $ 122,643 $ 594,584 $ 592,162
Cost of products sold 63,258 69,659 265,044 278,902
- ------------------------------------------------------------------------------------- ----------------------
Gross profit 54,939 52,984 329,540 313,260
Selling and administrative expenses 68,315 62,626 249,115 241,262
Transaction costs 139 -- 45,850 --
- ------------------------------------------------------------------------------------- ----------------------
Operating income (loss) (13,515) (9,642) 34,575 71,998
Interest income (353) (55) (842) (256)
Interest expense 22,374 2,035 37,666 4,734
- ------------------------------------------------------------------------------------- ----------------------
Income (loss) before income taxes (35,536) (11,622) (2,249) 67,520
Provision for income taxes (14,781) (4,708) 11,476 27,345
- ------------------------------------------------------------------------------------- ----------------------
Net income (loss) $ (20,755) $ (6,914) $ (13,725) $ 40,175
Dividends and accretion on redeemable preferred shares 2,264 -- 3,507 --
- ------------------------------------------------------------------------------------- ----------------------
Net income (loss) available to common shareholders $ (23,019) $ (6,914) $ (17,232) $ 40,175
===================================================================================== ======================
Net income (loss) per share available to common shareholders
Basic $ (2.56) $ (0.21) $ (0.84) $ 1.17
Diluted $ (2.56) $ (0.21) $ (0.84) $ 1.17
Weighted average common shares outstanding
Basic 8,993 33,711 20,553 34,228
Diluted 8,993 33,711 20,553 34,344
The accompanying notes are an integral part of the unaudited condensed
consolidated financial statements.
3
JOSTENS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
-------------------------
September 30, October 2, January 1,
In thousands, except per-share data 2000 1999 2000
- ---------------------------------------------------------------------------------------------------------
ASSETS
------
Current assets
Cash and cash equivalents $ 15,435 $ 11,603 $ 38,517
Accounts receivable, net of allowance for doubtful accounts of
$5,283, $6,234 and $5,775, respectively 94,665 110,762 107,638
Inventories 65,873 75,678 87,839
Deferred income taxes 17,400 14,682 17,400
Salespersons overdrafts, net of allowance of $5,599, $7,157 and
$6,332, respectively 29,602 29,359 26,194
Prepaid expenses and other current assets 5,772 6,882 8,721
- ---------------------------------------------------------------------------------------------------------
Total current assets 228,747 248,966 286,309
Other Assets
Intangibles, net 18,040 27,076 18,895
Deferred financing costs, net 34,326 -- --
Other 21,377 15,503 17,872
- ---------------------------------------------------------------------------------------------------------
Total other assets 73,743 42,579 36,767
Property and equipment 283,631 273,454 271,790
Less accumulated depreciation (205,829) (184,525) (187,150)
- ---------------------------------------------------------------------------------------------------------
Property and equipment, net 77,802 88,929 84,640
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$ 380,292 $ 380,474 $ 407,716
=========================================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
----------------------------------------------
Current liabilities
Short-term borrowings $ 51,400 $ 181,997 $ 117,608
Accounts payable 21,556 21,691 23,641
Accrued employee compensation and related taxes 23,004 23,587 29,478
Commissions payable 18,864 20,239 26,134
Customer deposits 35,866 34,022 112,958
Income taxes payable 16,186 18,537 17,223
Current portion of long-term debt 5,500 -- --
Other accrued liabilities 38,594 19,219 30,100
- ---------------------------------------------------------------------------------------------------------
Total current liabilities 210,970 319,292 357,142
Long-term debt, net of current maturities 695,033 3,600 3,600
Other noncurrent liabilities 6,942 14,609 10,464
- ---------------------------------------------------------------------------------------------------------
Total liabilities 912,945 337,501 371,206
Commitments and contingencies -- -- --
Redeemable preferred shares, $.01 par value, liquidation
preference $61,890 authorized 307.5 shares, issued and
outstanding; September 30, 2000 - 62 46,501 -- --
Preferred shares, $.01 par value: authorized 4,000 shares,
issued and outstanding; September 30, 2000 - 62 in the form
of redeemable preferred shares listed above; 3,938 undesignated -- -- --
Shareholders' equity (deficit)
Common shares 1,015 11,176 11,108
Additional paid-in-capital - warrants 24,733 -- --
Officer notes receivable (1,775) -- --
Retained earnings (accumulated deficit) (596,805) 39,072 31,072
Accumulated other comprehensive loss (6,322) (7,275) (5,670)
- ---------------------------------------------------------------------------------------------------------
Total shareholders' equity (deficit) (579,154) 42,973 36,510
- ---------------------------------------------------------------------------------------------------------
$ 380,292 $ 380,474 $ 407,716
=========================================================================================================
The accompanying notes are an integral part of the
unaudited condensed consolidated financial statements.
4
JOSTENS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
Nine months ended
-------------------------
September 30, October 2,
In thousands 2000 1999
- ---------------------------------------------------------------- ----------------------
Operating activities
Net income $ (13,725) $ 40,175
Depreciation 19,325 17,331
Amortization of debt discount and deferred financing costs 2,527 --
Amortization of goodwill 804 1,698
Changes in operating assets and liabilities
Accounts receivable 12,973 (4,415)
Inventories 21,966 14,816
Salespersons overdrafts (3,408) (8,670)
Prepaid expenses and other current assets 2,949 (1,145)
Accounts payable (10,365) (448)
Accrued employee compensation and related taxes (6,474) (3,973)
Commissions payable (7,270) (1,892)
Customer deposits (77,092) (58,070)
Income taxes payable (1,037) 13,824
Other (1,871) (4,884)
- ---------------------------------------------------------------- ----------------------
Net cash (used for) provided by operating activities (60,698) 4,347
- ---------------------------------------------------------------- ----------------------
Investing activities
Purchases of property and equipment (12,773) (19,358)
Equity investments 3,588 (7,493)
Other 404 1,224
- ---------------------------------------------------------------- ----------------------
Net cash used for investing activities (8,781) (25,627)
- ---------------------------------------------------------------- ----------------------
Financing activities
Net short-term borrowings (repayments) (57,928) 86,532
Repurchases of common stock (823,630) (36,043)
Principal payments on long-term debt (3,600) --
Proceeds from issuance of long-term debt 700,139 --
Proceeds from issuance of common shares 208,693 --
Net proceeds from the issuance of preferred stock 43,000 --
Proceeds from the issuance of warrants to purchase common shares 24,733 --
Dividends paid to common shareholders (7,331) (22,664)
Debt financing costs (36,459) --
Other (1,220) 2,463
- ---------------------------------------------------------------- ----------------------
Net cash provided by financing activities 46,397 30,288
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Change in cash and cash equivalents (23,082) 9,008
Cash and cash equivalents, beginning of period 38,517 2,595
- ---------------------------------------------------------------- ----------------------
Cash and cash equivalents, end of period $ 15,435 $ 11,603
================================================================ ======================
Supplemental information
Income taxes paid $ 12,402 $ 12,654
Interest paid $ 20,744 $ 4,692
The accompanying notes are an integral part of the unaudited
condensed consolidated financial statements.
5
JOSTENS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY (DEFICIT)
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2000 (UNAUDITED)
Retained
Common shares Additional Officer earnings Accumulated
----------------- paid-in-capital Capital notes (accumulated other com-
In thousands, except per-share data Number Amount - warrants surplus receivable deficit) prehensive loss Total
- ----------------------------------------------------------------------------------------------------------------------------------
Balance - January 1, 2000 33,324 $11,108 $-- $-- $-- $ 31,072 $ (5,670) $ 36,510
Exercise of stock options and
restricted stock - net 23 8 1,520 1,528
Cash dividends declared to common
shareholders of $0.22 per share (7,331) (7,331)
Issuance of common shares --
Class A 2,134 711 53,176 (2,050) 51,837
Class B 5,300 53 133,772 133,825
Class C 811 8 20,470 20,478
Class D 20 -- 505 505
Repurchases of common stock (32,619) (10,873) (209,443) (603,314) (823,630)
Issuance of warrants to purchase
common shares 24,733 24,733
Payment on officer note receivable 275 275
Preferred stock dividends (3,334) (3,334)
Preferred stock accretion (173) (173)
Net loss (13,725) (13,725)
Change in cumulative translation
adjustment (652) (652)
- -----------------------------------------------------------------------------------------------------------------------------------
Balance - September 30, 2000 8,993 $ 1,015 $ 24,733 $-- $(1,775) $ (596,805) $ (6,322) $(579,154)
===================================================================================================================================
The accompanying notes are an integral part of the unaudited condensed
consolidated financial statements.
6
JOSTENS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
1. Basis of Presentation
We prepared our accompanying unaudited condensed consolidated financial
statements following the requirements of the Securities and Exchange
Commission ("SEC") for interim reporting. As permitted under those rules,
certain footnotes or other financial information that are normally required
by accounting principles generally accepted in the United States of America
can be condensed or omitted. Therefore, we suggest that these financial
statements be read in conjunction with the consolidated financial
statements and notes thereto included in our Annual Report on Form 10-K for
the fiscal year ended January 1, 2000 ("1999 Form 10-K"). The condensed
consolidated balance sheet data as of January 1, 2000 were derived from
audited financial statements, but do not include all disclosures required
by accounting principles generally accepted in the United States of
America.
Revenues, expenses, cash flows, assets and liabilities can and do vary
during each quarter of the year. Therefore, the results and trends in these
interim financial statements may not be the same as those for the full
year.
In our opinion, the accompanying unaudited condensed consolidated financial
statements include all adjustments (consisting of normal recurring items)
considered necessary to present fairly, when read in conjunction with the
1999 Form 10-K, our financial position, results of operations and cash
flows for the periods presented. Certain balances have been reclassified to
conform to the 2000 presentation.
2. Merger and Recapitalization
On December 27, 1999, we entered into a merger agreement with Saturn
Acquisition Corporation, an entity organized for the sole purpose of
effecting a merger on behalf of certain affiliates of Investcorp S.A. and
other investors. On May 10, 2000, Saturn Acquisition Corporation merged
with and into Jostens, with Jostens as the surviving corporation. The
merger was part of a recapitalization of Jostens which resulted in
affiliates of Investcorp and the other investors acquiring approximately 92
percent of our post-merger common stock. The remaining 8 percent of our
common stock was retained by pre-recapitalization shareholders and five
members of senior management and was redesignated as shares of Class A
common stock. As a result of the transaction, our shares have been
de-listed from the New York Stock Exchange.
Voting Rights
The post-merger common stock consists of Class A through Class E common
stock as well as undesignated common stock. Holders of Class A common stock
are entitled to one vote per share, whereas holders of Class D common stock
are entitled to 306.55 votes per share. Holders of Class B common stock,
Class C common stock and Class E common stock have no voting rights.
The par value and number of authorized, issued and outstanding shares for
September 30, 2000 for each class of common stock is set forth below:
Par Authorized Issued and
In thousands, except per-share data Value Shares Outstanding Shares
-------------------------------------------------------------------------------
Class A $.33 1/3 4,200 2,862
Class B $.01 5,300 5,300
Class C $.01 2,500 811
Class D $.01 20 20
Class E $.01 1,900 -
Undesignated $.01 12,020 -
As of October 2, 1999 there were 33,528 thousand shares of common stock
outstanding
7
JOSTENS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -
(CONTINUED)
Recapitalization Financing
The recapitalization was funded by (a) $495.0 million of borrowings under a
senior secured credit facility with a syndicate of banks which included
term loans and a revolving credit facility (collectively the "senior
secured credit facility"), (b) issuance of $225.0 million in principal
amount of senior subordinated notes (the "notes") and warrants to purchase
425,060 shares of Class E common stock, (c) issuance of $60.0 million in
principal amount of redeemable preferred stock and warrants to purchase
531,325 shares of Class E common stock and (d) $208.7 million of proceeds
from the sale of shares of common stock to the investors.
The proceeds from these financings funded (a) the payment of approximately
$823.6 million to holders of common stock, (b) repayment of $67.6 million
of outstanding indebtedness (c) payment of $10.0 million in consideration
for cancellation of employee stock options (d) payments of approximately
$72.1 million of fees and expenses associated with the recapitalization,
including approximately $12.7 million of advisory fees paid to Investcorp
and (e) a pre-payment of $7.5 million for a management and consulting
services agreement for a five-year term with Investcorp. This pre-payment
is being amortized on a straight-line basis over the term of the agreement.
Recapitalization Accounting
The transaction was accounted for as a recapitalization and as such, the
historical basis of our assets and liabilities has not been affected.
Recapitalization related costs of $45.9 million consisting of investment
banking fees, transaction fees, legal and accounting fees, transaction
bonuses, stock option payments, and other miscellaneous costs were expensed
in the nine month period ended September 30, 2000. Additionally, $3.0
million of recapitalization costs incurred related to the issuance of
shares of redeemable preferred stock was netted against the proceeds of
$60.0 million. Finally, $36.5 million associated with the debt financing
was capitalized and is being amortized as interest expense over the
applicable lives of the debt for up to a maximum of ten years.
Other Arrangements
We adopted a new employee stock option plan to purchase shares of Class A
common stock. The number of shares available to be awarded under the new
stock option plan is 676,908. The stock option plan is administered by the
Compensation Committee of the Board of Directors who designate the amount,
timing and other terms and conditions applicable to the option awards.
Under the stock option plan, an optionee has certain rights to put to us,
and we have certain rights to call from the optionee, vested stock options
issued to the optionee under the stock option plan upon termination of the
optionee's employment prior to a public offering of Jostens' common stock.
At the time of the transaction, options to purchase 502,846 of our Class A
common stock were granted to five members of senior management. The options
have an exercise price of $25.25, prior to a public offering, and become
exercisable annually in one-fifth increments upon Jostens meeting or
exceeding target cumulative earnings before interest, taxes, depreciation
and amortization ("EBITDA"). These options expire after 7 years from the
date of grant.
We adopted a new stock loan program to loan a total of $2.0 million to five
members of senior management in individual amounts to refinance up to 100
percent of their outstanding loans existing at the time of the transaction.
The proceeds of the loans were used to purchase shares of our common stock.
Loans made under the stock loan program bear interest at our cost of funds
under our new revolving credit facility and are recourse loans. The loans
are payable through May 10, 2005 with interest rates set annually. The
loans are collateralized by the shares of stock owned by such individuals,
and each individual has entered into a pledge agreement and has executed a
secured promissory note. At September 30, 2000, there were $1.8 million of
these loans outstanding.
8
JOSTENS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -
(CONTINUED)
3. Long-Term Debt
Long-term debt consists of the following:
September 30 October 2 January 1
In thousands 2000 1999 2000
---------------------------------------------------------------------------------------------------
Term loan A, 9.626 percent variable rate at September 30, 2000,
semi-annual principal and interest payments
through May 2006 $150,000 $ -- $ --
Term loan B, 10.18 percent variable rate at September 30, 2000,
semi-annual principal and interest payments
through May 2008 345,000 -- --
Senior subordinated notes, 12.75 percent fixed rate, net
of discounts of $19,467, semi-annual interest payments
of $14.3 million, interest due and payable at maturity -
May 2010 205,533 -- --
Industrial revenue bonds, 6.75 percent fixed
rate, covering general offices -- 3,600 3,600
---------------------------------------------------------------------------------------------------
700,533 3,600 3,600
Less current portion 5,500 -- --
---------------------------------------------------------------------------------------------------
$695,033 $3,600 $3,600
===================================================================================================
Maturities of long-term debt, including $19.5 million of discount, as of
September 30, 2000 are as follows:
In thousands
------------------------------------------------------------------------
September 30, 2001 $5,500
September 30, 2002 23,250
September 30, 2003 28,250
September 30, 2004 33,250
September 30, 2005 38,250
Thereafter 591,500
------------------------------------------------------------------------
$720,000
========================================================================
Principal payments under term loan A commence in 2001 with a $5.0 million
payment due June 30, 2001 and a $10.0 million payment due December 31,
2001. Thereafter, semi-annual payments increase $1.25 million per semi-
annual period through December 2005 with the remaining $10.0 million due in
May 2006.
Principal payments under term loan B commence in 2001 with a $0.5 million
payment due June 30, 2001 and semiannual payments of $1.0 million
thereafter through December 2005. Semiannual payments increase on an
escalating scale from $25.5 million in June 2006 to $112.5 million in
December 2007 with a final payment of $66.2 million due in May 2008.
9
JOSTENS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -
(CONTINUED)
The fair value of long-term debt at September 30, 2000, October 2, 1999 and
January 1, 2000 approximated the carrying value and is estimated based on
quoted market prices for comparable instruments.
In connection with the merger and recapitalization, we entered into a $150
million, six year revolving credit facility that expires on May 31, 2006.
We may borrow funds and elect to pay interest under the "alternative base
rate" or "eurodollar" interest rate provisions of the agreement. There was
$51.4 million outstanding under this facility as of September 30, 2000. Our
old credit facility, due to expire on December 31, 2000, was terminated as
part of the transaction.
The senior subordinated notes are not collateralized and are subordinate in
right of payment to the term loans and borrowings under the new revolving
credit facility (collectively the "senior secured credit facility"). The
senior secured credit facility is with the same lenders and is
collateralized by substantially all the assets of our domestic operations
and all of our capital stock (limited to 65 percent in the case of foreign
subsidiaries). The senior secured credit facility requires that we meet
certain financial covenants, ratios and tests, including a maximum leverage
ratio and a minimum interest coverage ratio. In addition, we are required
to pay certain fees in connection with the senior secured credit facility,
including letter of credit fees, agency fees and commitment fees.
Commitment fees will be payable quarterly, initially at a rate per annum of
0.5 percent on the average daily unused portion of the revolving credit
facility. The senior secured credit facility and senior subordinated notes
contain certain cross-default provisions whereby a violation of a covenant
under one debt obligation would, consequently, violate covenants under the
other debt obligations.
The variable rate on the senior secured credit facility is predominantly
linked to the London Interbank Offered Rate ("LIBOR") as determined in
three month intervals. To manage our exposure to changes in the LIBOR, we
entered into an interest rate swap agreement on July 7, 2000. The interest
rate provided by the swap agreement is fixed at 7.0 percent. The swap
agreement became effective on August 15, 2000 with a notional amount of
$135.0 million, decreasing to $70.0 million quarterly over the next three
years. The notional amount is used to measure the interest to be paid or
received and does not represent the amount of exposure to loss. The fair
value of the interest rate swap as of September 30, 2000 was $(1.2)
million.
The senior subordinated notes were issued with detachable warrants and an
original issuance discount, resulting in total discounts of $19.7 million.
The detachable warrants were valued at $10.7 million and are exercisable
through 2010. The value of the warrants has been included as a component of
stockholders' deficit. If all the warrants were to be exercised, the
holders would acquire shares (at a price of $0.01 per share) of our Class E
common stock representing approximately 4.0 percent of the total number of
shares (outstanding immediately after the transaction) of our common equity
on a fully diluted basis. The entire discount is being amortized to
interest expense through 2010.
4. Redeemable Preferred Stock
In connection with the recapitalization, we issued redeemable,
payment-in-kind preferred shares, which have an initial liquidation
preference of $60.0 million and are entitled to receive dividends at 14.0
percent per annum, compounded quarterly and payable either in cash or in
additional shares of the same series of preferred stock. The redeemable
preferred shares are subject to mandatory redemption by Jostens in May
2011. In connection with the redeemable preferred shares, the company
ascribed $14.0 million of the proceeds to detachable warrants to purchase
531,325 shares of our Class E common stock (at an exercise price of $0.01
per share), which is reflected as a component of stockholders' deficit. In
addition, $3.0 million of issuance costs have been netted against the
initial proceeds and are reflected as a reduction to the carrying amount of
the preferred stock. The carrying value of the preferred stock will be
accreted to full liquidation preference value plus unpaid preferred stock
dividends over the eleven year period of the redeemable preferred stock
through charges to the accumulated deficit account.
10
JOSTENS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -
(CONTINUED)
5. Earnings (Loss) Per Common Share
Basic earnings (loss) per share is computed by dividing net income (loss)
available to common shareholders by the weighted average number of common
shares outstanding. Diluted earnings (loss) per share is computed by
dividing net income (loss) available to common shareholders by the average
number of common shares outstanding, including the dilutive effect of
options and restricted stock.
Basic and diluted earnings (loss) per share were calculated as follows:
Three months ended Nine months ended
------------- ---------- ------------- ----------
September 30, October 2, September 30, October 2,
In thousands, except per-share data 2000 1999 2000 1999
------------------------------------------------------------------------------------------- -------------------------
Net income (loss) $(20,755) $(6,914) $(13,725) $40,175
Dividends and accretion on redeemable preferred stock 2,264 -- 3,507 --
------------------------------------------------------------------------------------------- -------------------------
Net income (loss) available to common shareholders $(23,019) $(6,914) $(17,232) $40,175
=========================================================================================== =========================
Weighted average number of common shares outstanding - basic 8,993 33,711 20,553 34,228
Dilutive shares -- (1) -- -- (1) 116
------------------------------------------------------------------------------------------- -------------------------
Weighted average number of common shares outstanding - diluted 8,993 33,711 20,553 34,344
=========================================================================================== =========================
Earnings (loss) per share - basic $(2.56) $(0.21) $(0.84) $1.17
Earnings (loss) per share - diluted $(2.56) $(0.21) $(0.84) $1.17
(1) Options and warrants to purchase 1,459 shares were not included as
their effect would have been antidilutive.
11
JOSTENS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)--
(CONTINUED)
6. Special Charge
During the fourth quarter of 1999, we recorded a special charge of $20.2
million. Cash outlays associated with the charge were $3.1 million in the
first nine months of 2000. The components of the special charge and
utilization in 1999 and the first nine months of 2000 are as follows:
Utilization
-----------------------------------------
Nine months
ended Balance
Initial September 30, September 30,
In thousands accrual 1999 2000 2000
------------------------------------------------------------------------------------------------------------------------
Employee termination benefits $4,910 $ -- $2,754 $2,156
Abandonment of internal use software under development 6,455 6,245 -- 210
Write-off of impaired goodwill related to retail class ring sales
channel 4,560 4,560 -- --
Write-off of goodwill related to exiting the college alumni
direct marketing business 3,086 3,086 -- --
Other costs related to exiting the college alumni direct
marketing business 1,183 270 302 611
------------------------------------------------------------------------------------------------------------------------
$20,194 $14,161 $3,056 $2,977
========================================================================================================================
We expect to complete restructuring activities and utilize the majority of
the remaining charge by the end of 2000.
As of September 30, 2000, all affected employees have been notified of
termination. The majority of the termination benefits will be paid by the
end of 2000.
7. Inventories
Inventories were comprised of the following:
September 30, October 2, January 1,
In thousands 2000 1999 2000
---------------------------------------------------------------------------
Raw material and supplies $11,670 $32,060 $17,886
Work-in-process 19,092 20,380 29,772
Finished goods 35,111 23,238 40,181
---------------------------------------------------------------------------
Total inventories $65,873 $75,678 $87,839
===========================================================================
12
JOSTENS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)--
(CONTINUED)
8. Comprehensive Income (loss)
Comprehensive income (loss) and its components, net of tax, are as follows:
Three months ended Nine months ended
September 30, October 2, September 30, October 2,
In thousands 2000 1999 2000 1999
--------------------------------------------------------------------- ------------------------
Net income (loss) $(20,755) $(6,914) $(13,725) $40,175
Change in cumulative translation adjustment 10 (278) (652) 490
--------------------------------------------------------------------- ------------------------
Comprehensive income (loss) $(20,745) $(7,192) $(14,377) $40,665
===================================================================== ========================
9. Business Segments
Financial information by reportable business segment is included in the
following summary:
Three months ended Nine months ended
September 30, October 2, September 30, October 2,
In thousands 2000 1999 2000 1999
------------------------------------------------------------------ ---------------------------
Net Sales From External Customers
School Products $101,378 $100,446 $526,040 $509,369
Recognition 15,881 21,339 61,449 74,875
Other 938 858 7,095 7,918
------------------------------------------------------------------ ---------------------------
Consolidated $118,197 $122,643 $594,584 $592,162
================================================================== ===========================
Operating Income (Loss)
School Products $ (2,698) $2,396 $105,959 $103,338
Recognition (2,591) (994) (2,667) 1,168
Other (8,226) (1) (11,044) (68,717) (1) (32,508)
------------------------------------------------------------------ ---------------------------
Consolidated (13,515) (9,642) 34,575 71,998
Net interest expense 22,021 (2) 1,980 36,824 (2) 4,478
------------------------------------------------------------------ ---------------------------
Income (loss) before income taxes $(35,536) $(11,622) $(2,249) $67,520
================================================================== ===========================
(1) The Other segment includes $0.2 million and $45.9 million of
transaction related costs in the three and nine months ended September
30, 2000, respectively, as discussed in footnote 2 "Merger and
Recapitalization."
(2) Net interest expense increased due to higher debt levels resulting
from the transaction as discussed in footnote 2 "Merger and
Recapitalization."
Capitalized deferred financing costs associated with obtaining financing
for the transaction have been included in the Other segment's identifiable
assets.
13
JOSTENS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)--
(CONTINUED)
10. Income Taxes
Income taxes for the three and nine month periods ended September 30, 2000
were accrued at a rate of 41.6 percent of taxable income compared with 40.5
percent of taxable income for the comparable periods in 1999. Year-to-date
income tax expense was $11.5 million for September 30, 2000 which reflects
the impact of non-deductible transaction related costs of approximately
$30.0 million.
11. Supplier Concentration
We purchase substantially all synthetic and semiprecious stones from a
single supplier located in Germany, who is also a supplier to substantially
all of the class ring manufactures in the United States.
12. New Accounting Standards
In June 1998, the Financial Accounting Standards Board (FASB) issued SFAS
No. 133, Accounting for Derivative Instruments and Hedging Activities.
Subsequently in June 2000, the FASB issued SFAS No. 138 which is an
amendment to SFAS No. 133. These statements are required to be adopted in
years beginning after June 15, 2000. The effect of adopting the Statement
is not currently expected to have a material effect on our future financial
position or overall trends in results of operations.
In December of 1999, the Securities and Exchange Commission (SEC) issued
Staff Accounting Bulletin No. 101 (SAB 101), which summarizes certain of
the SEC's views regarding the application of generally accepted accounting
principles to revenue recognition in financial statements. We are in the
process of analyzing the requirements of SAB 101 and are required to comply
with its provisions in the fourth quarter of fiscal 2000. Management
believes the ultimate outcome will not have a significant effect on our
consolidated results of operations, financial position or liquidity.
13. Condensed Consolidating Information
Jostens' wholly-owned foreign subsidiaries are not co-borrowers under the
new $645.0 million senior secured credit facility and do not guarantee
$225.0 million aggregate principal amount of senior subordinated notes. As
such, the information which follows presents the condensed consolidating
financial position as of September 30, 2000, October 2, 1999 and January 1,
2000; the condensed consolidating results of operations for the three and
nine month periods ended September 30, 2000 and October 2, 1999; and the
condensed consolidating cash flows for the nine month periods ended
September 30, 2000 and October 2, 1999 of (a) the parent company only
("Parent"), (b) the combined Non-Guarantors ("Non-Guarantors"), (c)
eliminating entries and (d) Jostens, Inc. and Subsidiaries on a
consolidated basis. Effective July 29, 2000, Jostens wholly-owned domestic
subsidiary merged with and into Jostens and as a result, amounts and
balances of this wholly-owned domestic subsidiary have been included with
those of the parent company.
14
JOSTENS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)--
(CONTINUED)
JOSTENS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATING BALANCE SHEETS
AS OF SEPTEMBER 30, 2000
In thousands Parent Non-guarantors Eliminations Consolidated
- ------------------------------------------------------------------------------------------------------
ASSETS
------
Current assets
Cash and cash equivalents $ 2,520 $ 12,915 $ -- $ 15,435
Accounts receivable, net of allowance 91,287 3,378 -- 94,665
Inventories 60,788 5,085 -- 65,873
Deferred income taxes 17,400 -- -- 17,400
Salespersons overdrafts, net of allowance 23,339 6,263 -- 29,602
Prepaid expenses and other current assets 5,464 308 -- 5,772
- --------------------------------------------------------------------------------------------------
Total current assets 200,798 27,949 -- 228,747
Other Assets
Intercompany accounts 3,007 (3,007) -- --
Intangibles, net 13,467 4,573 -- 18,040
Deferred financing costs, net 34,326 -- -- 34,326
Other 38,782 321 (17,726) 21,377
- --------------------------------------------------------------------------------------------------
Total other assets 89,582 1,887 (17,726) 73,743
Property and equipment, net 74,646 3,156 -- 77,802
- --------------------------------------------------------------------------------------------------
$ 365,026 $ 32,992 $ (17,726) 380,292
==================================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
----------------------------------------------
Current liabilities
Short-term borrowings $ 51,400 $ -- $ -- $ 51,400
Accounts payable 20,577 979 -- 21,556
Accrued employee compensation and related taxes 21,936 1,068 -- 23,004
Commissions payable 18,664 200 -- 18,864
Customer deposits 31,589 4,277 -- 35,866
Income taxes payable 17,331 (1,145) -- 16,186
Current portion of long-term debt 5,500 -- -- 5,500
Other accrued liabilities 38,128 466 -- 38,594
- --------------------------------------------------------------------------------------------------
Total current liabilities 205,125 5,845 -- 210,970
Long-term debt, net of current maturities 695,033 -- -- 695,033
Other noncurrent liabilities 6,942 -- -- 6,942
- --------------------------------------------------------------------------------------------------
Total liabilities 907,100 5,845 -- 912,945
Commitments and contingencies -- -- -- --
Redeemable Preferred Stock 46,501 -- -- 46,501
Shareholders' equity (deficit) (588,575) 27,147 (17,726) (579,154)
- --------------------------------------------------------------------------------------------------
$ 365,026 $ 32,992 $ (17,726) $ 380,292
==================================================================================================
15
JOSTENS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)--
(CONTINUED)
JOSTENS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATING BALANCE SHEETS
AS OF OCTOBER 2, 1999
In thousands Parent Non-guarantors Eliminations Consolidated
- -----------------------------------------------------------------------------------------------------
ASSETS
------
Current assets
Cash and cash equivalents $ 5,751 $ 5,852 $ -- $ 11,603
Accounts receivable, net of allowance 107,158 3,604 -- 110,762
Inventories 70,217 5,461 -- 75,678
Deferred income taxes 14,682 -- -- 14,682
Salespersons overdrafts, net of allowance 22,793 6,566 -- 29,359
Prepaid expenses and other current assets 6,602 280 -- 6,882
- -------------------------------------------------------------------------------------------------
Total current assets 227,203 21,763 -- 248,966
Other Assets
Intercompany accounts 2,535 (2,535) -- --
Intangibles, net 22,063 5,013 -- 27,076
Other 32,559 101 (17,157) 15,503
- -------------------------------------------------------------------------------------------------
Total other assets 57,157 2,579 (17,157) 42,579
Property and equipment, net 85,252 3,677 -- 88,929
- -------------------------------------------------------------------------------------------------
$ 369,612 $ 28,019 $ (17,157) $ 380,474
=================================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
----------------------------------------------
Current liabilities
Short-term borrowings $ 181,997 $ -- $ -- $ 181,997
Accounts payable 20,025 1,666 -- 21,691
Accrued employee compensation and related taxes 22,096 1,491 -- 23,587
Commissions payable 19,883 356 -- 20,239
Customer deposits 30,179 3,843 -- 34,022
Income taxes payable 20,289 (1,752) -- 18,537
Other accrued liabilities 18,841 378 -- 19,219
- -------------------------------------------------------------------------------------------------
Total current liabilities 313,310 5,982 -- 319,292
Long-term debt, net of current maturities 3,600 -- -- 3,600
Other noncurrent liabilities 14,609 -- -- 14,609
- -------------------------------------------------------------------------------------------------
Total liabilities 331,519 5,982 -- 337,501
Commitments and contingencies -- -- -- --
Shareholders' equity (deficit) 38,093 22,037 (17,157) 42,973
- -------------------------------------------------------------------------------------------------
$ 369,612 $ 28,019 $ (17,157) $ 380,474
=================================================================================================
16
JOSTENS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)--
(CONTINUED)
JOSTENS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATING BALANCE SHEETS
AS OF JANUARY 1, 2000
In thousands Parent Non-guarantors Eliminations Consolidated
- -----------------------------------------------------------------------------------------------------
ASSETS
------
Current assets
Cash and cash equivalents $ 26,604 $ 11,913 $ -- $ 38,517
Accounts receivable, net of allowance 102,512 5,126 -- 107,638
Inventories 84,574 3,265 -- 87,839
Deferred income taxes 17,400 -- -- 17,400
Salespersons overdrafts, net of allowance 19,514 6,680 -- 26,194
Prepaid expenses and other current assets 8,457 264 -- 8,721
- -------------------------------------------------------------------------------------------------
Total current assets 259,061 27,248 -- 286,309
Other Assets
Intercompany accounts 1,096 (1,096) -- --
Intangibles, net 13,940 4,955 -- 18,895
Other 35,398 200 (17,726) 17,872
- -------------------------------------------------------------------------------------------------
Total other assets 50,434 4,059 (17,726) 36,767
Property and equipment, net 80,770 3,870 -- 84,640
- -------------------------------------------------------------------------------------------------
$ 390,265 $ 35,177 $ (17,726) $ 407,716
=================================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
----------------------------------------------
Current liabilities
Short-term borrowings $ 117,608 $ -- $ -- $ 117,608
Accounts payable 21,631 2,010 -- 23,641
Accrued employee compensation and related taxes 28,353 1,125 -- 29,478
Commissions payable 23,371 2,763 -- 26,134
Customer deposits 109,951 3,007 -- 112,958
Income taxes payable 16,974 249 -- 17,223
Other accrued liabilities 29,254 846 -- 30,100
- -------------------------------------------------------------------------------------------------
Total current liabilities 347,142 10,000 -- 357,142
Long-term debt, net of current maturities 3,600 -- -- 3,600
Other noncurrent liabilities 10,464 -- -- 10,464
- -------------------------------------------------------------------------------------------------
Total liabilities 361,206 10,000 -- 371,206
Commitments and contingencies -- -- -- --
Redeemable Preferred Stock -- -- -- --
Shareholders' equity (deficit) 29,059 25,177 (17,726) 36,510
- -------------------------------------------------------------------------------------------------
$ 390,265 $ 35,177 $ (17,726) $ 407,716
=================================================================================================
17
JOSTENS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)--
(CONTINUED)
JOSTENS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2000
In thousands Parent Non-guarantors Consolidated
- ------------------------------------------------------------------------------------------
Net sales $110,431 $7,766 $118,197
Cost of products sold 60,174 3,084 63,258
- ------------------------------------------------------------------------------------------
Gross profit 50,257 4,682 54,939
Selling and administrative expenses 64,087 4,228 68,315
Transaction costs 139 -- 139
- ------------------------------------------------------------------------------------------
Operating income (loss) (13,969) 454 (13,515)
Interest income (191) (162) (353)
Interest expense 22,365 9 22,374
- ------------------------------------------------------------------------------------------
Income (loss) before income taxes (36,143) 607 (35,536)
Provision for income taxes (14,612) (169) (14,781)
- ------------------------------------------------------------------------------------------
Net income (loss) $(21,531) $776 $(20,755)
==========================================================================================
JOSTENS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2000
In thousands Parent Non-guarantors Consolidated
- ------------------------------------------------------------------------------------------
Net sales $563,155 $31,429 $594,584
Cost of products sold 251,306 13,738 265,044
- ------------------------------------------------------------------------------------------
Gross profit 311,849 17,691 329,540
Selling and administrative expenses 234,539 14,576 249,115
Transaction costs 45,850 -- 45,850
- ------------------------------------------------------------------------------------------
Operating income 31,460 3,115 34,575
Interest income (439) (403) (842)
Interest expense 37,616 50 37,666
- ------------------------------------------------------------------------------------------
Income (loss) before income taxes (5,717) 3,468 (2,249)
Provision for income taxes 10,636 840 11,476
- ------------------------------------------------------------------------------------------
Net income (loss) $(16,353) $2,628 $(13,725)
==========================================================================================
18
JOSTENS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)--
(CONTINUED)
JOSTENS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED OCTOBER 2, 1999
In thousands Parent Non-guarantors Consolidated
- ------------------------------------------------------------------------------------------
Net sales $116,076 $6,567 $122,643
Cost of products sold 67,047 2,612 69,659
- ------------------------------------------------------------------------------------------
Gross profit 49,029 3,955 52,984
Selling and administrative expenses 58,442 4,184 62,626
- ------------------------------------------------------------------------------------------
Operating income (loss) (9,413) (229) (9,642)
Interest income (28) (27) (55)
Interest expense 2,026 9 2,035
- ------------------------------------------------------------------------------------------
Income (loss) before income taxes (11,411) (211) (11,622)
Provision for income taxes (4,881) 173 (4,708)
- ------------------------------------------------------------------------------------------
Net income (loss) $(6,530) $(384) $(6,914)
==========================================================================================
JOSTENS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS
FOR THE NINE MONTHS ENDED OCTOBER 2, 1999
In thousands Parent Non-guarantors Consolidated
- ------------------------------------------------------------------------------------------
Net sales $565,907 $26,255 $592,162
Cost of products sold 267,791 11,111 278,902
- ------------------------------------------------------------------------------------------
Gross profit 298,116 15,144 313,260
Selling and administrative expenses 228,014 13,248 241,262
- ------------------------------------------------------------------------------------------
Operating income 70,102 1,896 71,998
Interest income (132) (124) (256)
Interest expense 4,685 49 4,734
- ------------------------------------------------------------------------------------------
Income before income taxes 65,549 1,971 67,520
Provision for income taxes 27,011 334 27,345
- ------------------------------------------------------------------------------------------
Net income $38,538 $1,637 $40,175
==========================================================================================
19
JOSTENS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)--
(CONTINUED)
JOSTENS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2000
In thousands Parent Non-guarantors Consolidated
- ---------------------------------------------------------------------------------------------------------
Operating activities
Net income (loss) $ (16,353) $ 2,628 $ (13,725)
Depreciation 18,492 833 19,325
Amortization of debt discount and deferred financing costs 2,527 -- 2,527
Amortization of goodwill 473 331 804
Changes in operating assets and liabilities
Accounts receivable 11,225 1,748 12,973
Inventories 23,786 (1,820) 21,966
Salespersons overdrafts (3,825) 417 (3,408)
Prepaid expenses and other current assets 2,993 (44) 2,949
Intercompany accounts (1,911) 1,911 --
Accounts payable (9,334) (1,031) (10,365)
Accrued employee compensation and related taxes (6,417) (57) (6,474)
Commissions payable (4,707) (2,563) (7,270)
Customer deposits (78,362) 1,270 (77,092)
Income taxes payable 357 (1,394) (1,037)
Other (866) (1,005) (1,871)
- ------------------------------------------------------------------------------------------------------
Net cash (used for) provided by operating activities (61,922) 1,224 (60,698)
- ------------------------------------------------------------------------------------------------------
Investing activities
Purchases of property and equipment (12,654) (119) (12,773)
Equity investments 3,691 (103) 3,588
Other 404 -- 404
- ------------------------------------------------------------------------------------------------------
Net cash used for investing activities (8,559) (222) (8,781)
- ------------------------------------------------------------------------------------------------------
Financing activities
Net short-term borrowings (repayments) (57,928) -- (57,928)
Repurchases of common stock (823,630) -- (823,630)
Principal payments on long-term debt (3,600) -- (3,600)
Proceeds from issuance of long-term debt 700,139 -- 700,139
Proceeds from issuance of common shares 208,693 -- 208,693
Net proceeds from the issuance of preferred stock 43,000 -- 43,000
Proceeds from the issuance of warrants to purchase common shares 24,733 -- 24,733
Dividends paid to common shareholders (7,331) -- (7,331)
Debt financing costs (36,459) -- (36,459)
Other (1,220) -- (1,220)
- ------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 46,397 -- 46,397
- ------------------------------------------------------------------------------------------------------
Change in cash and cash equivalents (24,084) 1,002 (23,082)
Cash and cash equivalents, beginning of period 26,604 11,913 38,517
- ------------------------------------------------------------------------------------------------------
Cash and cash equivalents, end of period $ 2,520 $ 12,915 $ 15,435
======================================================================================================
Supplemental information
Income taxes paid $ 10,125 $ 2,277 $ 12,402
Interest paid $ 20,694 $ 50 $ 20,744
20
JOSTENS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)--
(CONTINUED)
JOSTENS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED OCTOBER 2, 1999
In thousands Parent Non-guarantors Consolidated
- ----------------------------------------------------------------------------------------------
Operating activities
Net income $ 38,538 $ 1,637 $ 40,175
Depreciation 16,435 896 17,331
Amortization of goodwill 1,354 344 1,698
Changes in operating assets and liabilities --
Accounts receivable (6,379) 1,964 (4,415)
Inventories 17,011 (2,195) 14,816
Salespersons overdrafts (7,107) (1,563) (8,670)
Prepaid expenses and other current assets (991) (154) (1,145)
Intercompany accounts (3,552) 3,552 --
Accounts payable (68) (380) (448)
Accrued employee compensation and related taxes (4,123) 150 (3,973)
Commissions payable (1,369) (523) (1,892)
Customer deposits (59,455) 1,385 (58,070)
Income taxes payable 15,947 (2,123) 13,824
Other (4,684) (200) (4,884)
- -------------------------------------------------------------------------------------------
Net cash provided by operating activities 1,557 2,790 4,347
- -------------------------------------------------------------------------------------------
Investing activities --
Purchases of property and equipment (18,765) (593) (19,358)
Equity investments (7,493) -- (7,493)
Other 1,329 (105) 1,224
- -------------------------------------------------------------------------------------------
Net cash used for investing activities (24,929) (698) (25,627)
- -------------------------------------------------------------------------------------------
Financing activities
Net short-term borrowings (repayments) 86,532 -- 86,532
Repurchases of common stock (36,043) -- (36,043)
Dividends paid to common shareholders (22,664) -- (22,664)
Other 2,463 -- 2,463
- -------------------------------------------------------------------------------------------
Net cash provided by financing activities 30,288 -- 30,288
- -------------------------------------------------------------------------------------------
Change in cash and cash equivalents 6,916 2,092 9,008
Cash and cash equivalents, beginning of period (1,165) 3,760 2,595
- -------------------------------------------------------------------------------------------
Cash and cash equivalents, end of period $ 5,751 $ 5,852 $ 11,603
===========================================================================================
Supplemental information
Income taxes paid $ 10,191 $ 2,463 $ 12,654
Interest paid $ 4,643 $ 49 $ 4,692
21
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Our disclosure and analysis in this report may contain some "forward-looking
statements." Forward-looking statements give our current expectations or
forecasts of future events. Forward-looking statements generally can be
identified by the use of forward-looking terminology such as "may," "will,"
"expected," "intend," "estimate," "anticipate," "believe," "project," or
"continue," or the negative thereof or similar words. From time to time, we also
may provide oral or written forward-looking statements in other materials we
release to the public. Any or all of our forward-looking statements in this
report and in any public statements we make may turn out to be wrong. They can
be affected by inaccurate assumptions we might make or by known or unknown risks
or uncertainties. Consequently, no forward-looking statements can be guaranteed.
Actual results may vary materially. Investors are cautioned not to place undue
reliance on any forward-looking statements. Investors should also understand
that it is not possible to predict or identify all such factors and should not
consider the following list to be a complete statement of all potential risks
and uncertainties.
Any change in the following factors may impact the achievement of results:
o our ability to satisfy our debt obligations;
o our relationship with our independent and employee sales
representatives;
o environmental regulations that could impose substantial costs upon us
and may adversely affect our financial results;
o the fluctuating prices of raw materials, primarily gold;
o the seasonality of our School Products segment sales and operating
income;
o our dependence on a key supplier for our synthetic and semiprecious
stones;
o fashion and demographic trends; and
o litigation cases if decided against us, may adversely affect our
financial results.
The foregoing factors are not exhaustive, and new factors may emerge or changes
to the foregoing factors may occur that would impact our business.
22
RESULTS OF OPERATIONS
The following table sets forth selected information from our Condensed
Consolidated Statements of Operations.
Three months ended Nine months ended
------------------------------------- ---------------------------------------
September 30, October 2, September 30, October 2,
Dollars in thousands 2000 1999 % Change 2000 1999 % Change
- --------------------------------------------------------------------------- ---------------------------------------
Net sales $118,197 $122,643 (3.6%) $594,584 $592,162 0.4%
% of net sales 100.0% 100.0% 100.0% 100.0%
Cost of products sold 63,258 69,659 (9.2%) 265,044 278,902 (5.0%)
% of net sales 53.5% 56.8% 44.6% 47.1%
- --------------------------------------------------------------------------- ---------------------------------------
Gross profit 54,939 52,984 3.7% 329,540 313,260 5.2%
% of net sales 46.5% 43.2% 55.4% 52.9%
Selling and administrative expenses 68,315 62,626 9.1% 249,115 241,262 3.3%
% of net sales 57.8% 51.1% 41.9% 40.7%
Transaction costs 139 -- 45,850 --
% of net sales 0.1% 7.7%
- --------------------------------------------------------------------------- ---------------------------------------
Operating income (13,515) (9,642) (40.2%) 34,575 71,998 (52.0%)
% of net sales -11.4% -7.9% 5.8% 12.2%
Interest income (353) (55) 541.8% (842) (256) 228.9%
% of net sales -0.3% 0.0% -0.1% 0.0%
Interest expense 22,374 2,035 999.5% 37,666 4,734 695.6%
% of net sales 18.9% 1.7% 6.3% 0.8%
- --------------------------------------------------------------------------- ---------------------------------------
Income before income taxes (35,536) (11,622) (205.8%) (2,249) 67,520 (103.3%)
% of net sales -30.1% -9.5% -0.4% 11.4%
Provision for income taxes (14,781) (4,708) (214.0%) 11,476 27,345 (58.0%)
% of net sales -12.5% -3.8% 1.9% 4.6%
- --------------------------------------------------------------------------- ---------------------------------------
Net income (loss) $(20,755) $(6,914) (200.2%) $(13,725) $40,175 (134.2%)
=========================================================================== =======================================
% of net sales -17.6% -5.6% -2.3% 6.8%
Percentages in this table may reflect rounding adjustments.
Net sales
The change in net sales for the three and nine month periods was due to price
increases averaging approximately 1.6 percent and 2.2 percent, respectively, and
volume/mix decreases of approximately 5.2 percent and 1.8 percent, respectively.
23
Third quarter and year-to-date net sales by segment and the changes from last
year were as follows:
Three months ended Nine months ended
---------------------------------------- -------------------------------------
September 30, October 2, September 30, October 2,
In thousands 2000 1999 % change 2000 1999 % change
- ------------------------------------------------------------ -------------------------------------
School Products $101,378 $100,446 0.9% $526,040 $509,369 3.3%
Recognition 15,881 21,339 (25.6%) 61,449 74,875 (17.9%)
Other 938 858 9.3% 7,095 7,918 (10.4%)
- ------------------------------------------------------------ -------------------------------------
Consolidated $118,197 $122,643 (3.6%) $594,584 $592,162 0.4%
============================================================ ====================================
School Products
The increase in School Products sales for the three and nine month periods
was primarily due to:
o price increases in all school product lines;
o an increase in graduation announcements and caps and gowns due to more
schools;
o expanded sales of graduation accessories;
o increased sales dollars for yearbooks due to increased page count and
add-on features;
o fewer yearbook rebates and returns resulting from improvements with
Jostens Direct Solutions ("JDS") (a direct payment program for parents
of high school students); and
o increased revenue from JDS processing fees due to more schools on the
program.
These increases were offset by:
o accelerated jewelry shipments into the fourth quarter of 1999 due to
improved manufacturing efficiencies compared with the prior year; and
o a decrease in jewelry sales in the college market primarily due to the
loss of one large account.
Recognition
The decrease in Recognition sales was primarily due to the reduction of the
sales representatives as well as lost customers as a result of problems
encountered with a system implementation that took place in 1999. In
addition, we experienced a shift in sales to lower priced programs and
general merchandise.
Other
Other segment sales decreased for the nine month period as a result of
exiting the college alumni direct marketing business in the fourth quarter
of 1999. Sales for this business were $0.3 million and $2.1 million for the
three and nine month periods ended October 2,1999, respectively. Offsetting
this decrease was higher sales of jewelry in our international business in
both the three and nine month periods.
24
Gross Profit
Gross margin for the three and nine months ended September 30, 2000 was 46.5
percent and 55.4 percent, compared with 43.2 percent and 52.9 percent,
respectively, for the comparable periods in 1999. The increases were primarily
due to favorable product mix, price increases and manufacturing efficiencies in
our School Products segment in 2000. In addition, the increase for the nine
month period reflects a $1.5 million non-recurring charge in the first quarter
of 1999 to close a facility in Mexico and realign Jewelry operations in the
United States. These increases were partially offset by sales decreases in
Recognition as a result of problems encountered with a system implementation
that took place in 1999.
Selling and Administrative Expenses
Selling and administrative expenses for the three and nine months ended
September 30, 2000 were $68.3 million and $249.1 million, compared with $62.6
million and $241.3 million, respectively, for the comparable periods in 1999.
The increase in the three and nine month periods reflects:
o higher selling and marketing expenses in 2000 related to programs and
initiatives intended to increase our sales;
o higher commission expense partially due to changes in the commission
program for graduation products and partially due to the timing of
those changes; and
o higher information system expense, primarily associated with
depreciation due to our 1999 system implementation and increased
spending on initiatives to support marketing and selling activities
referenced above.
These increases were offset by:
o lower labor costs attributable to the headcount reductions as part of
the special charge taken in the fourth quarter of 1999;
o lower costs as a result of exiting the college alumni direct marketing
business in the fourth quarter of 1999;
o lower amortization expense in 2000 related to our write-off of
goodwill as part of the 1999 special charge; and
o reduced spending on temporary labor and other lower costs in our
Recognition segment in 2000 compared with 1999 due to the system
implementation.
25
Operating Income
Third quarter and year-to-date operating income (loss) by segment and the
changes from last year were as follows:
Three months ended Nine months ended
-------------------------------------- -----------------------------------
September 30, October 2, September 30, October 2,
In thousands 2000 1999 % change 2000 1999 % change
- ---------------------------------------------------------- -----------------------------------
School Products $(2,698) $2,396 (212.6%) $105,959 $103,338 2.5%
Recognition (2,591) (994) 160.7% (2,667) 1,168 (328.3%)
Other (8,226) (11,044) (25.5%) (68,717) (32,508) 111.4%
- ---------------------------------------------------------- -----------------------------------
Consolidated $(13,515) $(9,642) 40.2% $34,575 $71,998 (52.0%)
========================================================== ===================================
School Products
The increase in School Products operating income for the nine month period
was primarily due to strong sales performance in our yearbook and
photography businesses as well as overall excellent manufacturing
performance. Offsetting these increases for the nine month period and the
reason for the decline in operating income for the three month period was
an increase in marketing and selling expenses, higher commissions, and an
increase in management information system expenses as a result of 1999
system implementations.
Recognition
The decrease in Recognition operating income was primarily due to the
decrease in sales, an increase in bad debt expense, and an increase in the
allocation of management information expenses as a result of 1999 system
implementations. These decreases were partially offset by reduced spending
on temporary labor and other lower costs compared to 1999 during the system
implementation.
Other
The increase in Other operating loss was primarily due to costs of $45.9
million associated with the transaction on May 10, 2000. This was partially
offset by:
o lower selling and administrative expenses as a result of exiting
the college alumni direct marketing business in the fourth
quarter of 1999;
o lower spending in 2000 compared with 1999 related to our new
product and channel development group; and
o lower information system expense related to the year 2000 and
Oracle system.
Transaction Costs
We incurred costs consisting of professional fees and transaction expenses
associated with the merger and recapitalization. Transaction costs of $45.9
million have been expensed as of September 30, 2000. The remaining costs of
$36.5 million were deferred and are being amortized over the applicable lives of
the debt for up to a maximum of ten years.
Net Interest Expense
Net interest expense increased $20.0 million and $32.3 million in the three and
nine month periods ended September 30, 2000, respectively, over the prior year
periods. The increases are due to additional interest expense resulting from the
new senior secured credit facility and the issuance of the senior subordinated
notes in connection with the transaction.
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Income Taxes
Income taxes for the three and nine month periods ended September 30, 2000 were
accrued at a rate of 41.6 percent of taxable income compared with 40.5 percent
of taxable income for the comparable periods in 1999. Year-to-date income tax
expense was $11.5 million for September 30, 2000 which reflects the impact of
non-deductible transaction related costs of approximately $30.0 million.
LIQUIDITY AND CAPITAL RESOURCES
Our primary cash needs are for debt service obligations, capital expenditures,
working capital, redeemable securities and general corporate purposes. Proceeds
in connection with the transaction including a new senior secured credit
facility, issuance of the senior subordinated notes, issuance of redeemable
preferred stock, and issuance of common stock were our main sources of liquidity
for the nine month period ended September 30, 2000. These funds covered our cash
payments made in connection with the transaction, including $25.25 for each
share of common stock tendered, debt acquisition costs, interest payments and
the pay-off of borrowings under the credit facilities existing prior to the
transaction. In addition, we made investments in property and equipment.
Operating Activities
Operating activities used cash of $60.7 million in the first nine months of
2000, compared with cash generated of $4.3 million for the same period in the
prior year. The decrease of $65.0 million was primarily due to lower net income
related to transaction expenses of $45.9 million and an increase in interest
paid of approximately $16.1 million. In addition, during the nine months ended
September 30, 2000, cash was unfavorably impacted by the timing of customer
deposits, accounts payable, and income taxes payable and favorably impacted by
reduced inventories and reduced accounts receivable due to improvement in the
number of days sales outstanding. Adjusting for transaction related components
and excluding interest, our operating cash flow this year is slightly favorable
to the prior year.
Investing Activities
Capital expenditures for the first nine months of 2000 were $12.8 million,
compared with $19.4 million for the same period in 1999. The decrease of $6.6
million relates primarily to higher capital expenditures in 1999 on information
systems offset partially by an increase in spending on new automation technology
in our School Products segment.
In the first half of 1999 we invested $5.0 million to take an ownership position
in Family Education Network, a privately held company, which creates web sites
for schools to link school districts with students and their families. In the
third quarter of 2000, we sold our entire ownership position in this investment
for $5.0 million.
Financing Activities
Net cash provided by financing activities in the first nine months of 2000 was
$46.4 million, compared with $30.3 million for the same period in 1999. The
increase in net cash provided by financing activities of $16.1 million was
primarily due to proceeds from the new senior secured credit facility, issuance
of the senior subordinated notes, issuance of redeemable preferred stock and
issuance of common stock in connection with the transaction. In addition, no
dividend was paid in the second or third quarters of 2000. These increases were
offset by payment of $25.25 for each share of common stock tendered in the
transaction and the pay-off of credit facilities existing prior to the
transaction.
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
As a result of the transaction, our earnings could be highly affected by changes
in the London Interbank Offered Rate ("LIBOR") due to our new senior secured
credit facility which bears a variable rate predominantly linked to the LIBOR as
determined in three month intervals. To reduce our exposure to these interest
rate changes, we entered into an interest rate swap agreement. The interest rate
provided by the swap agreement is fixed at 7.0 percent. The swap agreement
became effective on August 15, 2000 with a notional amount of $135 million,
decreasing to $70.0 million quarterly over the next three years. The notional
amount is used to measure the interest to be paid or received and does not
represent the amount of exposure.
For 1999 our earnings were affected by changes in short-term interest rates as a
result of issuing commercial paper. For 2000, our earnings are affected by
changes in the LIBOR as a result of our new senior secured credit facility. If
short-term interest rates or the LIBOR averaged 10 percent more or less in 2000
and 1999, or interest expense would have changed by approximately $2.4 million
for the nine month period in 2000 and $0.7 million for the year in 1999.
There have been no other material changes in our market risk during the nine
months ended September 30, 2000. For additional information, refer to Item 7A of
our 1999 Form 10-K.
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PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On May 9, 2000, we agreed in principal to settle three purported class
action lawsuits that were filed in Minnesota district court for the
County of Hennepin against Jostens and its directors alleging breaches
of fiduciary duty by Jostens' directors in connection with the merger.
The settlement is subject to court approval at a final hearing
following notice of the settlement terms sent to the shareholders.
On July 10, 2000, the Fifth Circuit affirmed the trial court's entry
of judgment as a matter of law on Jostens behalf, in connection with
an antitrust action brought against Jostens by Taylor Publishing
Company. On July 24, 2000, Taylor filed a petition with the Fifth
Circuit to rehear the case in front of the panel that previously heard
the case. The Fifth Circuit denied this petition on August 10, 2000.
No further action will be taken by Taylor and the entry of judgment in
favor of Jostens has been entered. For additional information, refer
to Item 3 of our 1999 Form 10-K.
We are occasionally a party to litigation arising in the normal course
of business. We regularly analyze current information and, as
necessary, provide accruals for probable liabilities on the eventual
disposition of these matters. We believe the effect on our
consolidated results of operations and financial position, if any, for
the disposition of all currently pending matters will not be material.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
12 Computation of Ratio of Earnings to Fixed Charges
27 Financial Data Schedule
(b) Reports on Form 8-K
A Form 8-K dated and filed on July 19, 2000, announcing the 5th
U.S. Court of Appeals decision to deny an appeal by Taylor
Publishing Company and affirm the Texas Federal trial court's
judgment to overturn a jury verdict against Jostens.
A Form 8-K dated July 26, 2000 and filed on August 2, 2000
announcing the resignation of Ernst and Young LLP as our
independent accountants.
A Form 8-K dated and filed on August 10, 2000 announcing the
engagement of PricewaterhouseCoopers LLP as our new independent
accountants.
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SIGNATURES
Pursuant to the requirements 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, on November 14, 2000.
JOSTENS, INC.
Registrant
By /s/ Robert C. Buhrmaster
-------------------------------------
Robert C. Buhrmaster
Chairman, President and
Chief Executive Officer
By /s/ William N. Priesmeyer
-------------------------------------
William N. Priesmeyer
Senior Vice President and
Chief Financial Officer
(Chief Accounting Officer)
30