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 March 31, 2001
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 May 15, 2001 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 (unaudited)
Condensed Consolidated Statements of Operations for the three
months ended March 31, 2001 and April 1, 2000 3
Condensed Consolidated Balance Sheets as of March 31, 2001,
April 1, 2000 and December 30, 2000 4
Condensed Consolidated Statements of Cash Flows for the three
months ended March 31, 2001 and April 1, 2000 5
Notes to Condensed Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 12
Item 3. Quantitative and Qualitative Disclosures about Market Risk 18
Part II Other Information
- -------------------------
Item 1. Legal Proceedings 19
Item 6. Exhibits and Reports on Form 8-K 19
Signatures 20
2
PART I FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
JOSTENS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
Three months ended
---------------------
March 31, April 1,
In thousands, except per-share data 2001 2000
- ------------------------------------------------------------------------------------
Net sales $ 136,769 $ 154,836
Cost of products sold 58,521 65,232
- ------------------------------------------------------------------------------------
Gross profit 78,248 89,604
Selling and administrative expenses 75,861 78,372
Special charge, net 2,087 --
- ------------------------------------------------------------------------------------
Operating income 300 11,232
Interest income 406 212
Interest expense 21,688 1,939
- ------------------------------------------------------------------------------------
Income (loss) before income taxes (20,982) 9,505
Provision for income taxes (8,706) 3,656
- ------------------------------------------------------------------------------------
Income (loss) before cumulative effect of accounting change (12,276) 5,849
Cumulative effect of accounting change, net of tax -- (5,894)
- ------------------------------------------------------------------------------------
Net loss (12,276) (45)
Dividends and accretion on redeemable preferred shares (2,418) --
- ------------------------------------------------------------------------------------
Net loss available to common shareholders $ (14,694) $ (45)
====================================================================================
Earnings (loss) per common share
Basic
Before cumulative effect of accounting change $ (1.63) $ 0.18
Cumulative effect of accounting change -- (0.18)
- ------------------------------------------------------------------------------------
Basic earnings (loss) per common share $ (1.63) $ (0.00)
====================================================================================
Diluted
Before cumulative effect of accounting change $ (1.63) $ 0.18
Cumulative effect of accounting change -- (0.18)
- ------------------------------------------------------------------------------------
Diluted earnings (loss) per common share $ (1.63) $ (0.00)
====================================================================================
Weighted average common shares outstanding
Basic 8,993 33,263
Diluted 8,993 33,451
The accompanying notes are an integral part of the unaudited condensed
consolidated financial information.
3
JOSTENS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
--------------------------
March 31, April 1, December 30,
In thousands, except per-share data 2001 2000 2000
- -------------------------------------------------------------------------------------------------------------------------------
ASSETS
------
Current assets
Cash and cash equivalents $ 53,143 $ 14,278 $ 26,552
Accounts receivable, net of allowance for doubtful accounts of $3,899,
$6,405 and $4,361, respectively 63,588 80,351 64,944
Inventories 119,422 126,875 91,230
Deferred income taxes 17,995 21,414 17,995
Salespersons overdrafts, net of allowance of $5,203, $6,355 and
$5,568, respectively 26,418 24,220 27,227
Prepaid expenses and other current assets 9,207 9,849 8,154
- ----------------------------------------------------------------------------------------------------------------------------
Total current assets 289,773 276,987 236,102
Other assets
Intangibles, net 17,323 18,627 17,662
Deferred financing costs, net 31,581 -- 33,360
Other 29,017 21,086 21,812
- ----------------------------------------------------------------------------------------------------------------------------
Total other assets 77,921 39,713 72,834
Property and equipment 285,604 273,941 285,176
Less accumulated depreciation (209,839) (193,191) (205,831)
- ----------------------------------------------------------------------------------------------------------------------------
Property and equipment, net 75,765 80,750 79,345
- ----------------------------------------------------------------------------------------------------------------------------
$ 443,459 $ 397,450 $ 388,281
============================================================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
----------------------------------------------
Current liabilities
Short-term borrowings $ -- $ 74,960 $ --
Accounts payable 29,970 24,440 24,430
Accrued employee compensation and related taxes 27,268 25,235 30,826
Commissions payable 23,631 27,063 19,895
Customer deposits 166,418 155,826 108,848
Income taxes payable 8,836 18,676 15,155
Interest payable 16,485 88 10,096
Current portion of long-term debt 14,974 -- 14,974
Other accrued liabilities 24,643 26,921 20,347
- ----------------------------------------------------------------------------------------------------------------------------
Total current liabilities 312,225 353,209 244,571
Long-term debt, net of current maturities 670,060 3,600 669,807
Other noncurrent liabilities 14,989 11,144 11,382
- ----------------------------------------------------------------------------------------------------------------------------
Total liabilities 997,274 367,953 925,760
Commitments and contingencies -- -- --
Redeemable preferred shares, $.01 par value, liquidation preference $65,259
authorized 307.5 shares, issued and outstanding; March 31, 2001 - 65,
December 30, 2000 - 64 51,259 -- 48,841
Preferred shares, $.01 par value: authorized 4,000 shares, issued and
outstanding; March 31, 2001 - 65 in the form of redeemable preferred
shares listed above; 3,935 undesignated -- -- --
Shareholders' equity (deficit)
Common shares (note 2) 1,015 11,113 1,015
Additional paid-in-capital - warrants 24,733 -- 24,733
Officer notes receivable (1,775) -- (1,775)
Retained earnings (accumulated deficit) (618,795) 24,054 (604,102)
Accumulated other comprehensive loss (10,252) (5,670) (6,191)
- ----------------------------------------------------------------------------------------------------------------------------
Total shareholders' equity (deficit) (605,074) 29,497 (586,320)
- ----------------------------------------------------------------------------------------------------------------------------
$ 443,459 $ 397,450 $ 388,281
============================================================================================================================
The accompanying notes are an integral part of the unaudited condensed
consolidated financial information.
4
JOSTENS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
Three months ended
---------------------------
March 31, April 1,
In thousands 2001 2000
- ---------------------------------------------------------------------------------------------------
Operating activities
Net loss $(12,276) $ (45)
Depreciation 6,485 6,313
Amortization of debt discount and deferred financing costs 2,032 --
Other amortization 816 268
Cumulative effect of accounting change, net of tax -- 5,894
Gain on disposal of property and equipment (278) (107)
Changes in operating assets and liabilities
Accounts receivable 1,356 1,959
Inventories (28,192) (29,951)
Salespersons overdrafts 809 1,974
Prepaid expenses and other current assets (8,957) (1,123)
Accounts payable (3,477) (3,712)
Accrued employee compensation and related taxes (3,558) (4,244)
Commissions payable 3,736 7,266
Customer deposits 57,570 42,868
Income taxes payable (6,319) 1,504
Other 8,020 (4,582)
- ---------------------------------------------------------------------------------------------------
Net cash provided by operating activities 17,767 24,282
- ---------------------------------------------------------------------------------------------------
Investing activities
Purchases of property and equipment (4,370) (2,711)
Proceeds from sale of property 3,954 --
Purchase of equity investment -- (1,103)
Other 123 395
- ---------------------------------------------------------------------------------------------------
Net cash used for investing activities (293) (3,419)
- ---------------------------------------------------------------------------------------------------
Financing activities
Net short-term borrowings (repayments) 9,117 (38,134)
Dividends paid to common shareholders -- (7,331)
Other -- 363
- ---------------------------------------------------------------------------------------------------
Net cash provided by (used for) financing activities 9,117 (45,102)
- ---------------------------------------------------------------------------------------------------
Change in cash and cash equivalents 26,591 (24,239)
Cash and cash equivalents, beginning of period 26,552 38,517
- ---------------------------------------------------------------------------------------------------
Cash and cash equivalents, end of period $ 53,143 $ 14,278
===================================================================================================
The accompanying notes are an integral part of the unaudited condensed
consolidated financial information.
5
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 December 30, 2000 ("2000 Form 10-K"). The condensed
consolidated balance sheet data as of December 30, 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
2000 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 2001 presentation. The fiscal 2000 financial statements have
been reclassified to reflect the Company's adoption of the SEC's Staff
Accounting Bulletin No. 101 ("SAB 101"), "Revenue Recognition in Financial
Statements" beginning with the first quarter of fiscal 2000.
2. Shareholders' Equity
Our 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
March 31, 2001 and December 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 -
-----------------------
25,940 8,993
=======================
As of April 1, 2000 there were approximately 33.3 million shares of common
stock outstanding.
6
JOSTENS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(CONTINUED)
3. Long-Term Debt
Long-term debt consists of the following:
March 31, April 1, December 30,
In thousands 2001 2000 2000
-----------------------------------------------------------------------------------------------------------
Borrowings under senior secured credit facility:
Term loan A, variable rate, 8.39 percent at March 31, 2001 and
9.76 percent at December 30, 2000, with semi-annual
principal and interest payments through May 2006 $134,775 $ -- $134,775
Term loan B, variable rate, 8.89 percent at March 31, 2001 and
10.26 percent at December 30, 2000, with semi-annual
principal and interest payments through May 2008 344,225 -- 344,225
Senior subordinated notes, 12.75 percent fixed rate, net
of discounts of $18,966 at March 31, 2001, and $19,219 at
December 39, 2000, with semi-annual interest payments of
$14,344, principal due and payable at maturity - May 2010 206,034 -- 205,781
Industrial revenue bonds, 6.75 percent fixed
rate, covering general offices -- 3,600 --
----------------------------------------------------------------------------------------------------------
685,034 3,600 684,781
Less current portion 14,974 -- 14,974
----------------------------------------------------------------------------------------------------------
$670,060 $3,600 $669,807
==========================================================================================================
We have a $150 million 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 $5.9 million outstanding under this facility, in the form of letters of
credit, as of March 31, 2001.
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, plus a fixed spread. 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 as opposed to LIBOR. The swap agreement became effective on
August 15, 2000 with a notional amount of $135.0 million, decreasing
quarterly to $70.0 million 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 March 31, 2001 was a liability of $4.9 million.
4. 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 weighted
average number of common shares outstanding, including the dilutive effect
of warrants, options and restricted stock.
7
JOSTENS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(CONTINUED)
Basic and diluted earnings (loss) per share were calculated as follows:
Three months ended
-----------------------
March 31, April 1,
In thousands, except per-share data 2001 2000
---------------------------------------------------------------------------------------
Net income (loss) $(12,276) $ (45)
Dividends and accretion on redeemable preferred shares (2,418) --
---------------------------------------------------------------------------------------
Net income (loss) available to common shareholders $(14,694) $ (45)
=======================================================================================
Weighted average number of common shares outstanding - basic 8,993 33,263
Dilutive shares -- (1) 188
---------------------------------------------------------------------------------------
Weighted average number of common shares outstanding - diluted 8,993 33,451
=======================================================================================
Earnings (loss) per share - basic $(1.63) $ (0.00)
Earnings (loss) per share - diluted $(1.63) $ (0.00)
(1) Options and warrants to purchase approximately 1.5 million shares were
not included as their effect would have been antidilutive.
5. Special Charge - 2001
In March of 2001, we announced our decision to consolidate three
Recognition plants and implement a new customer service model as part of
our effort to realign resources and streamline the Recognition segment's
infrastructure and enhance its profitability. The total cost of the
consolidation project, which will be expensed in the Recognition segment's
statement of operations in 2001, is estimated to be approximately $4.0
million for severance benefits, costs associated with closing the
facilities and costs of moving production to our Princeton facility. The
total costs of the project will be partially offset by a gain of $2.4
million, which resulted from the sale of our distribution facility in
Memphis, Tennessee for $4.0 million. We have leased this facility until May
31, 2001, and will ratably recognize the gain over this period.
As of March 31, 2001, we have accrued $1.9 million for severance benefits
to eliminate approximately 100 full-time plant and management positions in
our Memphis facility and approximately 40 full-time plant and management
positions in our Sherbrooke plant. We also recognized $0.4 million in
shutdown costs and asset write-offs. In addition, we incurred $0.2 million
of period costs that were directly related to this restructuring project.
The components of the special charge are as follows:
Special Charge
In thousands March 31, 2001
-------------------------------------------------------------------------
Accruable exit costs and asset write-downs:
Employee termination benefits $1,932
Costs related to disposition of assets 414
------
Subtotal 2,346
Period costs related to moving production to our
Princeton facility 150
Gain on sale of building (409)
------------------------------------------------------------------------
$2,087
========================================================================
8
JOSTENS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(CONTINUED)
The majority of the termination benefits will be paid by the end of 2001.
Accrued costs and utilization for the three-month period ended March 31,
2001 are as follows:
Initial Utilization Balance
In thousands accrual March 31, 2001 March 31, 2001
---------------------------------------------------------------------------------
Employee termination benefits $1,932 $ -- $1,932
Costs related to disposition of assets 414 (11) 403
-----------------------------------------------------------------------------
$2,346 $(11) $2,335
=============================================================================
The remaining amount accrued at March 31, 2001 is classified in other
current liabilities in our condensed consolidated balance sheet.
6. Special Charge - 1999
During the fourth quarter of 1999, we recorded a special charge of $20.2
million and recorded an additional $0.2 million to complete the project in
2000. Cash outlays associated with the charge were approximately $1.0
million in the first three months of 2001. The components of the special
charge and utilization prior to 2001 and in the first quarter of 2001 are
as follows:
Utilization
------------------------
Net Three months
Initial Adjustments Prior ended Balance
In thousands accrual in 2000 Periods March 31, 2001 March 31, 2001
----------------------------------------------------------------------------------------------------------------------
Employee termination benefits $ 4,910 $ 714 $ (3,880) $(951) $793
Abandonment of internal use software under development 6,455 -- (6,455) -- --
Write-off of impaired goodwill related to retail
class ring sales channel 4,560 -- (4,560) -- --
Write-off of impaired 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 (477) (706) -- --
-----------------------------------------------------------------------------------------------------------------
$20,194 $ 237 $(18,687) $(951) $793
=================================================================================================================
The majority of the remaining termination benefits will be paid by June of
2001.
7. Inventories
Inventories were comprised of the following:
March 31, April 1, December 30,
In thousands 2001 2000 2000
-----------------------------------------------------------------------
Raw material and supplies $ 16,400 $ 17,021 $17,054
Work-in-process 62,894 60,921 30,490
Finished goods 40,128 48,933 43,686
-----------------------------------------------------------------------
Total inventories $119,422 $126,875 $91,230
=======================================================================
9
JOSTENS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(CONTINUED)
8. Comprehensive Loss
Comprehensive loss and its components, net of tax, are as follows:
Three months ended
---------------------
March 31, April 1,
In thousands 2001 2000
--------------------------------------------------------------------
Net loss $(12,276) $(45)
Change in cumulative translation adjustment (1,106) --
Change in fair value of hedging instruments (2,955) --
--------------------------------------------------------------------
Comprehensive loss $(16,337) $(45)
====================================================================
9. Business Segments
Financial information by reportable business segment is included in the
following summary:
Three months ended
-------------------------
March 31, April 1,
In thousands 2001 2000
-----------------------------------------------------------------------
Net Sales From External Customers
School Products $116,078 $131,930
Recognition 18,558 20,778
Other 2,133 2,128
-----------------------------------------------------------------------
Consolidated $136,769 $154,836
=======================================================================
Operating Income (Loss)
School Products $12,103 $19,144
Recognition (4,239)(1) (559)
Other (7,564) (7,353)
-----------------------------------------------------------------------
Consolidated 300 11,232
Net interest expense 21,282 1,727
-----------------------------------------------------------------------
Income (loss) before income taxes $(20,982) $9,505
=======================================================================
(1) Includes $2.1 million of costs associated with the 2001 Special Charge
(see note 5 - Special Charge 2001).
10
JOSTENS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(CONTINUED)
10. New Accounting Standards
Accounting for Derivative Instruments and Hedging Activities
In June 1998, the Financial Accounting Standards Board (FASB) issued SFAS
No. 133, Accounting for Derivative Instrument and Hedging Activities.
Subsequently in June 2000, the FASB issued SFAS No. 138, which amends SFAS
133. These statements modify the accounting and reporting for derivative
instruments and hedging activities and are required to be adopted in years
beginning after June 15, 2000. We have adopted these new standards
effective December 31, 2000, and have recorded a $2.4 million, net-of-tax
cumulative-effect adjustment in other comprehensive income. The adjustment
primarily related to recording an additional liability on the balance sheet
for the fair value of our interest rate swap which hedges our cash flow on
our variable interest rate debt. As of March 31, 2001, the fair value of
the swap increased by $0.6 million, net-of-tax, which was recorded through
other comprehensive loss. Any changes in the fair value of our interest
rate swap will be recorded through other comprehensive income until
earnings are affected by the variability of cash flows of the hedged
transaction. We believe that only in rare circumstances would it be
determined that our interest rate swap is not effective as a hedge.
Revenue Recognition
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101, Revenue Recognition in Financial Statements
(SAB 101), which among other guidance clarified the Staff's view on various
revenue recognition and reporting matters. As a result, we changed our
method of accounting for certain sales transactions. Under our previous
policy, we recognized revenue upon shipment of the product from our
production facility. Under the new accounting method, adopted retroactive
to January 1, 2000, we now defer revenue and direct costs until the product
is delivered to the end consumer. The cumulative effect of the change
resulted in a non-cash charge to net income of $5.9 million (net of an
income tax benefit of $4.0 million) for the quarter ended April 1, 2000.
11
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,"
"expect," "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 statement 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, including related
covenants;
o our relationship with our independent sales representatives and
employees;
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;
o litigation cases, if decided against us, may adversely affect our
financial results; and
o environmental regulations that could impose substantial costs upon us
and 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.
12
RESULTS OF OPERATIONS
The following table sets forth selected information from our Condensed
Consolidated Statements of Operations:
Three months ended
---------------------------
March 31, April 1,
Dollars in thousands 2001 2000 $ Change % Change
- --------------------------------------------------------------------------------------------------------------------------------
Net sales $136,769 $154,836 $(18,067) (11.7%)
% of net sales 100.0% 100.0%
Cost of products sold 58,521 65,232 (6,711) (10.3%)
% of net sales 42.8% 42.1%
- --------------------------------------------------------------------------------------------------------------------------------
Gross profit 78,248 89,604 (11,356) (12.7%)
% of net sales 57.2% 57.9%
Selling and administrative expenses 75,861 78,372 (2,511) (3.2%)
% of net sales 55.5% 50.6%
Special charge, net 2,087 - 2,087 NM
- --------------------------------------------------------------------------------------------------------------------------------
Operating income 300 11,232 (10,932) (97.3%)
% of net sales 0.2% 7.3%
Interest income (406) (212) (194) 91.5%
% of net sales -0.3% -0.1%
Interest expense 21,688 1,939 19,749 NM
% of net sales 15.9% 1.3%
- --------------------------------------------------------------------------------------------------------------------------------
Income (loss) before income taxes (20,982) 9,505 (30,487) NM
% of net sales -15.3% 6.1%
Provision for income taxes 8,706 (3,656) 12,362 NM
% of net sales 6.4% -2.4%
- --------------------------------------------------------------------------------------------------------------------------------
Income (loss) before cumulative effect of accounting change (12,276) 5,849 (18,125) NM
% of net sales -9.0% 3.8%
Cumulative effect of accounting change, net of tax - (5,894) 5,894 NM
% of net sales -3.8%
- --------------------------------------------------------------------------------------------------------------------------------
Net loss $(12,276) $(45) $(12,231) NM
================================================================================================================================
% of net sales -9.0% 0.0%
Percentages in this table may reflect rounding adjustments.
NM = percentage not meaningful
Net sales
The change in net sales for the three-month period was due to volume and product
mix decreases of approximately 13 percent, which were partially offset by price
increases averaging approximately 1.3 percent.
13
First quarter net sales by segment and the changes from last year were as
follows:
Three months ended
-------------------------
March 31, April 1,
In thousands 2001 2000 $ change % change
- ----------------------------------------------------------------------------
School Products $116,078 $131,930 $(15,852) (12.0%)
Recognition 18,558 20,778 $ (2,220) (10.7%)
Other 2,133 2,128 $ 5 0.2%
- ----------------------------------------------------------------------------
Consolidated $136,769 $154,836 (18,067) (11.7%)
============================================================================
School Products
The decrease in School Products sales for the three-month period was
primarily due to a shift in the timing of sales and a decrease in the
student buy rates in both the graduation and jewelry product lines,
partially offset by price increases in all school product lines.
Recognition
The decrease in Recognition sales for the three-month period was primarily
due to additional lost customers as a result of problems encountered with a
system implementation that took place in 1999. Those problems also
contributed to a reduction in the number of seasoned sales representatives.
Also, a shift in sales to lower priced programs and general merchandise
contributed to the sales decline.
Other
Other segment sales increased slightly for the three-month period as a
result of increased sales in our International business.
Gross Profit
Gross profit for the three months ended March 31, 2001 was $78.2 million
compared with $89.6 million for the comparable period in 2000. The decrease
was primarily due to the aforementioned volume shortfalls in the School
Products and Recognition segments, somewhat offset by increased pricing in
the School Products segment.
Selling and Administrative Expenses
Selling and administrative expenses for the three months ended March 31,
2001 were $75.9 million compared with $78.4 million for the comparable
period in 2000.
The decrease in the three-month period reflects:
o lower commission expense due to the volume shortfalls experienced in
the first quarter.
This decrease was somewhat offset by:
o higher marketing expenses in 2001 related to programs and initiatives
intended to increase our future sales;
o higher customer service costs in our School Products segment due to
increased labor costs (due to wage rate increases);
o increased information systems expense to support selling and marketing
programs and initiatives intended to increase our future sales; and
o increased investment in research and development.
14
Operating Income
First quarter operating income (loss) by segment and the changes from last
year were as follows:
Three months ended
----------------------
March 31, April 1,
In thousands 2001 2000 $ change % change
- --------------------------------------------------------------------------
School Products $12,103 $19,144 $ (7,041) (36.8%)
Recognition (4,239)(1) (559) (3,680) NM
Other (7,564) (7,353) (211) 2.9%
- --------------------------------------------------------------------------
Consolidated $300 $11,232 $(10,932) (97.3%)
==========================================================================
NM = percentage not meaningful
(1) Includes $2.1 million of costs associated with the 2001 Special Charge (see
note 5 - Special Charge 2001).
School Products
The decrease in School Products operating income for the three-month period
was primarily due to sales shortfalls in our jewelry and graduation product
lines. Also contributing to the decrease in operating income for the
three-month period was an increase in marketing expenses to support
programs and initiatives intended to increase our future sales.
Recognition
The increase in Recognition's operating loss was partially due to the
decrease in sales as compared to the prior year period. Also contributing
to the operating loss was an increase in selling and marketing expense to
support programs and initiatives intended to increase our future sales. In
addition, a shift in sales to lower margin programs and general merchandise
caused decreases in the operating income.
In March of 2001, we announced our decision to consolidate three
Recognition plants and implement a new customer service model as part of
our effort to realign resources and streamline the Recognition segment's
infrastructure and enhance its profitability. The total cost of the
consolidation project, which will be expensed in the Recognition segment's
statement of operations in 2001, is estimated to be approximately $4.0
million for severance benefits, costs associated with closing the
facilities and costs of moving production to our Princeton facility. The
total costs of the project will be partially offset by a gain of $2.4
million, which resulted from the sale of our distribution facility in
Memphis, Tennessee for $4.0 million. We have leased this facility until May
31, 2001, and will ratably recognize the gain over this period.
As of March 31, 2001, we accrued $1.9 million for severance benefits to
eliminate approximately 100 full-time plant and management positions in our
Memphis facility and approximately 40 full-time plant and management
positions in our Sherbrooke plant. We also recognized $0.4 million in
shutdown costs and asset write-offs. In addition, we incurred $0.2 million
of period costs that were directly related to this restructuring project.
15
The components of the special charge are as follows:
Special Charge
In thousands March 31, 2001
- -----------------------------------------------------------------------
Accruable exit costs and asset write-downs:
Employee termination benefits $1,932
Costs related to disposition of assets 414
-------
Subtotal 2,346
Period costs related to moving production to our
Princeton facility 150
Gain on sale of building (409)
- --------------------------------------------------------------------
$2,087
====================================================================
Accrued costs and utilization for the three-month period ended March 31,
2001 are as follows:
Initial Utilization Balance
In thousands accrual March 31, 2001 March 31, 2001
- --------------------------------------------------------------------------------
Employee termination benefits $1,932 $ -- $1,932
Costs related to disposition of assets 414 (11) 403
- --------------------------------------------------------------------------
$2,346 $(11) $2,335
==========================================================================
The remaining amount accrued at March 31, 2001 is classified in other current
liabilities in our condensed consolidated balance sheet.
Other
The slight increase in Other operating loss was primarily due to:
o increased information system expense related to work being done to
support selling and marketing initiatives intended to increase our
future sales; and
o increased investment in research and development.
Net Interest Expense
Net interest expense of $21.3 million has increased $19.6 million over the
prior year three-month period. The increase was due to increased interest
expense resulting from our new debt structure.
Income Taxes
We accrue income taxes based on our best estimate of the effective tax rate
expected to be applicable for the full year. Our income tax rate increased
in 2001 due to the unfavorable effect that non-deductible expenses have on
our full year tax rate estimate.
16
LIQUIDITY AND CAPITAL RESOURCES
Our primary cash needs are for debt service obligations, capital
expenditures, working capital, redeemable securities and general corporate
purposes.
Operating Activities
Operating activities generated cash of $17.8 million in the first three
months of 2001, compared with $24.3 million of cash generated for the
comparable prior period. The decrease of $6.5 million is largely due to the
$12.2 million decrease in net income versus the prior year, offset in part
by increased deposits and other accrued liabilities.
Investing Activities
Capital expenditures for the first three months of 2001 were $4.4 million,
compared with $2.7 million for the same period in 2000. The increase of
$1.7 million relates primarily to higher capital expenditures in 2001 on a
human resources information system and manufacturing equipment for our
printing product line. Additionally, we received $4.0 million from the sale
of our distribution facility in Memphis, Tennessee (see note 5 - Special
Charge 2001).
Financing Activities
Net cash provided by financing activities in the first three months of 2001
was $9.1 million, compared with net cash used for financing activities of
$45.1 million for the same period in 2000. The increase in net cash
provided by financing activities was due to a decrease in repayments of
short term borrowing in 2001 versus 2000 and due to no dividend payments
being made in 2001 versus 2000.
We plan on using the proceeds from the sale of our distribution facility in
Memphis, Tennessee to voluntarily pre-pay $4.0 million of borrowings under
our senior secured credit facility.
NEW ACCOUNTING STANDARDS
Accounting for Derivative Instruments and Hedging Activities
In June 1998, the Financial Accounting Standards Board (FASB) issued SFAS
No. 133, Accounting for Derivative Instrument and Hedging Activities.
Subsequently in June 2000, the FASB issued SFAS No. 138, which amends SFAS
133. These statements modify the accounting and reporting for derivative
instruments and hedging activities and are required to be adopted in years
beginning after June 15, 2000. We have adopted these new standards
effective December 31, 2000, and have recorded a $2.4 million, net-of-tax
cumulative-effect adjustment in other comprehensive income. The adjustment
primarily related to recording an additional liability on the balance sheet
for the fair value of our interest rate swap which hedges our cash flow on
our variable interest rate debt. As of March 31, 2001, the fair value of
the swap increased by $0.6 million, net-of-tax, which was recorded through
other comprehensive loss. Any changes in the fair value of our interest
rate swap will be recorded through other comprehensive income, until
earnings are affected by the variability of cash flows of the hedged
transaction. We believe that only in rare circumstances would it be
determined that our interest rate swap is not effective as a hedge.
Revenue Recognition
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101, Revenue Recognition in Financial Statements
(SAB 101), which among other guidance clarified the Staff's view on various
revenue recognition and reporting matters. As a result, we changed our
method of accounting for certain sales transactions. Under our previous
policy, we recognized revenue upon shipment of the product from our
production facility. Under the new accounting method adopted retroactive to
January 1, 2000, we now defer revenue and direct costs until the product is
delivered to the end consumer. The cumulative effect of the change resulted
in a non-cash charge to net income of $5.9 million (net of an income tax
benefit of $4.0 million) for the quarter ended April 1, 2000.
17
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
There have been no material changes in our market risk during the three
months ended March 31, 2001. For additional information, refer to Item 7A
of our 2000 Form 10-K.
18
PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
A federal antitrust action was served on Jostens on October 23, 1998. The
complainant, Epicenter Recognition, Inc. ("Epicenter"), alleges that
Jostens has attempted to monopolize the market of high school graduation
products in the state of California. Epicenter is a successor to a
corporation formed by four of our former sales representatives. The
plaintiff is claiming damages of approximately $3 million to $10 million
under various theories and differing sized relevant markets. The trial
began on March 26, 2001 and concluded with final arguments on April 24,
2001. A written decision is expected within 30-60 days from that time. We
believe the effect on our consolidated results of operations, cash flows
and financial position, if any, for the disposition of these matters will
not be material.
In February 1998, we entered into an Information Technology Master Services
Agreement with Ernst & Young LLP to provide guidance and consulting
services for implementation of a company wide enterprise resource planning
("ERP") system. Under the Master Agreement, Ernst & Young LLP provided
project management, guidance and consulting. We claim this work was
deficient and substandard in various material respects constituting a
breach of the Master Agreement entitling us to significant damages. In
August 2000, the parties conducted a mandatory mediation, which proved
unsuccessful resulting in arbitration. Ernst & Young LLP claims are $0.3
million in unpaid fees. We claim damages in excess of $150.0 million,
including over $9.0 million paid to Ernst & Young LLP on account of the
engagement. On March 9, 2001, the arbitration panel conducted a case
management conference and established a schedule for the exchange of
information and discovery with hearings to commence on December 3, 2001.
We are a party to other 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, cash flows and financial position, if any, for the disposition
of these 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
(b) Reports on Form 8-K
No reports on Form 8-K were filed by Jostens during the quarter ended
March 31, 2001
19
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 May 14, 2001.
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)
20