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 June 30, 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
incorporation or organization) Identification number)
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 August 13, 2001 there were 8,965,263 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 and Six months ended June 30, 2001 and July 1, 2000 3
Condensed Consolidated Balance Sheets as of June 30, 2001,
July 1, 2000 and December 30, 2000 4
Condensed Consolidated Statements of Cash Flows for the
Six months ended June 30, 2001 and July 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 20
Part II Other Information
- -------------------------
Item 1. Legal Proceedings 21
Item 6. Exhibits and Reports on Form 8-K 21
Signatures 22
2
PART I FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
JOSTENS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
Three months ended Six months ended
--------------------- -----------------------
June 30, July 1, June 30, July 1,
In thousands, except per-share data 2001 2000 2001 2000
- ---------------------------------------------------------------------------------------------------------
Net sales $ 350,975 $ 344,712 $ 487,744 $ 499,548
Cost of products sold 155,293 154,806 213,814 220,038
- ---------------------------------------------------------------------------------------------------------
Gross profit 195,682 189,906 273,930 279,510
Selling and administrative expenses 102,790 104,286 178,651 182,658
Transaction costs and special charges, net 623 45,711 2,710 45,711
- ---------------------------------------------------------------------------------------------------------
Operating income 92,269 39,909 92,569 51,141
Net interest expense 19,640 13,078 40,922 14,805
- ---------------------------------------------------------------------------------------------------------
Income before income taxes 72,629 26,831 51,647 36,336
Provision for income taxes 30,141 23,769 21,435 27,425
- ---------------------------------------------------------------------------------------------------------
Income before cumulative effect of accounting change 42,488 3,062 30,212 8,911
Cumulative effect of accounting change, net of tax -- -- -- (5,894)
- ---------------------------------------------------------------------------------------------------------
Net income 42,488 3,062 30,212 3,017
Dividends and accretion on redeemable preferred shares (2,504) (1,243) (4,922) (1,243)
- ---------------------------------------------------------------------------------------------------------
Net income available to common shareholders $ 39,984 $ 1,819 $ 25,290 $ 1,774
=========================================================================================================
Earnings per common share
Basic
Before cumulative effect of accounting change $ 4.45 $ 0.10 $ 2.81 $ 0.31
Cumulative effect of accounting change -- -- -- (0.24)
- ---------------------------------------------------------------------------------------------------------
Basic earnings per common share $ 4.45 $ 0.10 $ 2.81 $ 0.07
=========================================================================================================
Diluted
Before cumulative effect of accounting change $ 4.02 $ 0.10 $ 2.54 $ 0.30
Cumulative effect of accounting change -- -- -- (0.23)
- ---------------------------------------------------------------------------------------------------------
Diluted earnings per common share $ 4.02 $ 0.10 $ 2.54 $ 0.07
=========================================================================================================
Weighted average common shares outstanding
Basic 8,993 18,880 8,993 25,043
Diluted 9,949 18,880 9,949 25,316
The accompanying notes are an integral part of the
unaudited condensed consolidated financial information.
3
JOSTENS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
--------------------------------------
June 30, July 1, December 30,
In thousands, except per-share data 2001 2000 2000
- ----------------------------------------------------------------------------------------------------------------------------
ASSETS
------
Current assets
Cash and cash equivalents $ 43,070 $ 35,875 $ 26,552
Accounts receivable, net of allowance for doubtful accounts of $3,549,
$5,535 and $4,361, respectively 94,440 107,804 64,944
Inventories 60,728 72,684 91,230
Deferred income taxes 17,995 21,413 17,995
Salespersons overdrafts, net of allowance of $5,800, $5,301 and $5,568, respectively 14,177 11,108 27,227
Prepaid expenses and other current assets 4,574 5,592 8,154
- ---------------------------------------------------------------------------------------------------------------------------
Total current assets 234,984 254,476 236,102
Other assets
Intangibles, net 17,105 18,309 17,662
Deferred financing costs, net 30,331 35,606 33,360
Other 30,672 29,139 21,812
- ---------------------------------------------------------------------------------------------------------------------------
Total other assets 78,108 83,054 72,834
Property and equipment 290,061 278,009 285,176
Less accumulated depreciation (216,136) (199,191) (205,831)
- ---------------------------------------------------------------------------------------------------------------------------
Property and equipment, net 73,925 78,818 79,345
- ---------------------------------------------------------------------------------------------------------------------------
$ 387,017 $ 416,348 $ 388,281
===========================================================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
----------------------------------------------
Current liabilities
Accounts payable 14,569 18,979 24,430
Accrued employee compensation and related taxes 25,855 25,674 30,826
Commissions payable 43,479 48,933 19,895
Customer deposits 58,516 55,277 108,848
Income taxes payable 38,307 35,782 15,155
Interest payable 8,876 10,661 10,096
Current portion of long-term debt 20,879 5,500 14,974
Other accrued liabilities 16,073 25,510 20,347
- ---------------------------------------------------------------------------------------------------------------------------
Total current liabilities 226,554 226,316 244,571
Long-term debt, net of current maturities 655,430 694,797 669,807
Other noncurrent liabilities 15,385 11,424 11,382
- ---------------------------------------------------------------------------------------------------------------------------
Total liabilities 897,369 932,537 925,760
Commitments and contingencies -- -- --
Redeemable preferred shares, $.01 par value, liquidation preference $68,619
authorized 307.5 shares, issued and outstanding; June 30, 2001 - 69, July 1,
2000 - 60, and December 30, 2000 - 64 53,763 44,243 48,841
Preferred shares, $.01 par value: authorized 4,000 shares, issued and outstanding;
June 30, 2001 - 69 in the form of redeemable preferred shares listed above;
3,931 undesignated -- -- --
Shareholders' equity (deficit)
Common shares (note 2) 1,015 1,015 1,015
Additional paid-in-capital - warrants 24,733 24,733 24,733
Officer notes receivable (1,775) (2,050) (1,775)
Retained earnings (accumulated deficit) (578,822) (577,798) (604,102)
Accumulated other comprehensive loss (9,266) (6,332) (6,191)
- ---------------------------------------------------------------------------------------------------------------------------
Total shareholders' equity (deficit) (564,115) (560,432) (586,320)
- ---------------------------------------------------------------------------------------------------------------------------
$ 387,017 $ 416,348 $ 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)
Six months ended
-----------------------
June 30, July 1,
In thousands 2001 2000
- -----------------------------------------------------------------------------------------
Operating activities
Net income $ 30,212 $ 3,017
Depreciation 12,998 12,684
Amortization of debt discount and deferred financing costs 3,547 1,011
Other amortization 1,634 536
Cumulative effect of accounting change, net of tax -- 5,894
Gain on sale/disposal of property and equipment, net (2,319) (107)
Changes in operating assets and liabilities
Accounts receivable (29,496) (25,494)
Inventories 30,502 24,240
Salespersons overdrafts 13,050 15,086
Prepaid expenses and other assets (6,710) (3,776)
Accounts payable (9,861) (10,294)
Accrued employee compensation and related taxes (4,971) (3,804)
Commissions payable 23,584 29,136
Customer deposits (50,332) (57,681)
Income taxes payable 23,152 18,610
Other (4,513) 4,084
- -----------------------------------------------------------------------------------------
Net cash provided by operating activities 30,477 13,142
- -----------------------------------------------------------------------------------------
Investing activities
Purchases of property and equipment (9,045) (7,150)
Proceeds from sale of property and equipment 3,954 395
Other 123 (1,103)
- -----------------------------------------------------------------------------------------
Net cash used for investing activities (4,968) (7,858)
- -----------------------------------------------------------------------------------------
Financing activities
Net short-term repayments -- (111,976)
Repurchases of common stock -- (823,630)
Principal payments on long-term debt (8,991) (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)
Proceeds from exercise of stock options -- 555
Issuance of officer note receivable -- (2,050)
Debt acquisition costs -- (36,459)
- -----------------------------------------------------------------------------------------
Net cash used for financing activities $ (8,991) $ (7,926)
- -----------------------------------------------------------------------------------------
Change in cash and cash equivalents $ 16,518 $ (2,642)
Cash and cash equivalents, beginning of period 26,552 38,517
- -----------------------------------------------------------------------------------------
Cash and cash equivalents, end of period $ 43,070 $ 35,875
=========================================================================================
Supplemental information
Income taxes paid (refunded) $ (1,717) $ 8,763
Interest paid $ 39,503 $ 6,767
The accompanying notes are an integral part of the
unaudited condensed consolidated financial statements.
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
as of June 30, 2001, July 1, 2000 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
======================================
Subsequent to June 30, 2001, we repurchased 28,034 shares of our Class
A common stock from a senior executive in accordance with his
separation agreement. The senior executive repaid an outstanding
promissory note of approximately $0.4 million. The promissory note had
been executed by the executive as partial payment for such shares.
6
JOSTENS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(CONTINUED)
3. Long-Term Debt
Long-term debt consists of the following:
June 30, July 1, December 30,
In thousands 2001 2000 2000
------------------------------------------------------------------------------------------------------------------------
Borrowings under senior secured credit facility:
Term loan A, variable rate, 6.59 percent at June 30, 2001, 9.77
percent at July 1, 2000 and 9.40 percent at December 30, 2000, with
semi-annual principal and interest payments through
May 2006 $128,956 $150,000 $134,775
Term loan B, variable rate, 7.34 percent at June 30, 2001, 10.27
percent at July 1, 2000 and 9.90 percent at December 30, 2000, with
semi-annual principal and interest payments through
May 2008 341,053 345,000 344,225
Senior subordinated notes, 12.75 percent fixed rate, net
of discounts of $18,700 at June 30, 2001, $19,703 at July 1, 2000 and
$19,219 at December 30, 2000, with semi-annual interest payments of
$14,344, principal due and payable at
maturity - May 2010 206,300 205,297 205,781
------------------------------------------------------------------------------------------------------------------------
676,309 700,297 684,781
Less current portion 20,879 5,500 14,974
------------------------------------------------------------------------------------------------------------------------
$655,430 $694,797 $669,807
========================================================================================================================
In June of 2001, we used the proceeds from the sale of our Memphis,
Tennessee facility to voluntarily pay down $1.3 million of term loan A
and $2.7 million of term loan B. Future mandatory principal payment
obligations are not materially impacted by the voluntary payment.
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 the "eurodollar" interest rate provisions of
the agreement. There was $5.4 million outstanding under this facility,
in the form of letters of credit, as of June 30, 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. The swap agreement became effective
on August 15, 2000 with a notional amount of $135.0 million, decreasing
quarterly to $70.0 million by June 30, 2003. 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 June 30, 2001 was a liability of $4.6 million
and is recorded in "other noncurrent liabilities" in our condensed
consolidated balance sheet.
4. Earnings Per Common Share
Basic earnings per share is computed by dividing net income available
to common shareholders by the weighted average number of common shares
outstanding. Diluted earnings per share is computed by dividing net
income 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 per share were calculated as follows:
Three months ended Six months ended
-------------------------- ----------------------
June 30, July 1, June 30, July 1,
In thousands, except per-share data 2001 2000 2001 2000
------------------------------------------------------------------------------------------ ----------------------
Net income $42,488 $ 3,062 $30,212 $ 3,017
Dividends and accretion on redeemable preferred shares (2,504) (1,243) (4,922) (1,243)
------------------------------------------------------------------------------------------ ----------------------
Net income available to common shareholders $39,984 $ 1,819 $25,290 $ 1,774
========================================================================================== ======================
Weighted average number of common shares outstanding - basic 8,993 18,880 8,993 25,043
Dilutive shares 956 -- 956 273
------------------------------------------------------------------------------------------ ----------------------
Weighted average number of common shares outstanding - diluted 9,949 18,880 9,949 25,316
========================================================================================== ======================
Earnings per share - basic $ 4.45 $ 0.10 $ 2.81 $ 0.07
Earnings per share - diluted $ 4.02 $ 0.10 $ 2.54 $ 0.07
5. Special Charges - 2001
In March of 2001, we announced our decision to consolidate three
Recognition plants into one plant 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 is being 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 two facilities and costs of moving production to our
Princeton, Illinois facility. The total cost of the project is
partially offset by a gain of $2.4 million, which resulted from the
first quarter sale of our distribution facility in Memphis, Tennessee
for $4.0 million. We leased the facility back from the buyer until May
31, 2001, and ratably recognized the gain over that period.
Through June 30, 2001, we have expensed $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, Quebec plant. The majority
of these termination benefits will be paid by the end of 2001. We have
also recognized $0.4 million in shutdown costs and asset write-offs as
well as $0.7 million of period costs that were directly related to this
restructuring project. We anticipate incurring another $0.9 million of
period costs during the third quarter of 2001 to complete the project.
The components of the special charge are as follows:
Three months ended Three months ended Six months ended
In thousands March 31, 2001 June 30, 2001 June 30, 2001
------------------------------------------------------------------------------------------------------------------
Accruable exit costs and asset write-downs:
Employee termination benefits $1,932 $ -- $ 1,932
Costs related to disposition of assets 414 -- 414
-------------------------------------------------------------
Subtotal 2,346 -- 2,346
Period costs related to moving production to our
Princeton facility 150 525 675
Gain on sale of building (409) (2,040) (2,449)
------------------------------------------------------------------------------------------------------------------
$2,087 $(1,515) $ 572
==================================================================================================================
8
JOSTENS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(CONTINUED)
Accrued costs and utilization for the six-month period ended June 30,
2001 are as follows:
Utilization
-------------------
Six months
Initial ended Balance
In thousands accrual June 30, 2001 June 30, 2001
----------------------------------------------------------------------------------------
Employee termination benefits $1,932 $(1,502) $430
Costs related to disposition of assets 414 (226) 188
----------------------------------------------------------------------------------------
$2,346 $(1,728) $618
========================================================================================
The remaining amount accrued at June 30, 2001 is classified in "other
current liabilities" in our condensed consolidated balance sheet.
In the second quarter of 2001, we entered into a separation agreement
with a senior executive. The total cost of $2.1 million for severance
benefits was expensed in the Other segment's income statement. As of
June 30, 2001, approximately $2.0 million is accrued for and classified
in "other current liabilities" in our condensed consolidated balance
sheet. The majority of the remaining separation benefits will be paid
in the third quarter of 2001.
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 $1.5 million in the first six months of 2001. The
components of the special charge and utilization prior to 2001 and in
the first six months of 2001 are as follows:
Utilization
--------------------------
Net Six months
Initial Adjustments Prior ended Balance
In thousands accrual in 2000 Periods June 30, 2001 June 30, 2001
------------------------------------------------------------------------------------------------------------------
Employee termination benefits $ 4,910 $ 714 $ (3,880) $(1,469) $275
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) $(1,469) $275
===================================================================================================================
The remaining termination benefits will be paid by December of 2001 and
are classified in "other current liabilities" in our condensed
consolidated balance sheet.
9
JOSTENS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(CONTINUED)
7. Inventories
Inventories are comprised of the following:
June 30, July 1, December 30,
In thousands 2001 2000 2000
-----------------------------------------------------------------------------
Raw material and supplies $15,839 $18,765 $17,054
Work-in-process 27,864 28,178 30,490
Finished goods 17,025 25,741 43,686
-----------------------------------------------------------------------------
Total inventories $60,728 $72,684 $91,230
=============================================================================
8. Comprehensive Income
Comprehensive income and its components, net of tax, are as follows:
Three months ended Six months ended
------------------------- ---------------------
June 30, July 1, June 30, July 1,
In thousands 2001 2000 2001 2000
---------------------------------------------------------------------- ---------------------
Net income $42,488 $3,062 $30,212 $3,017
Change in cumulative translation adjustment 784 (662) (322) (662)
Change in fair value of hedging instruments 202 -- (2,753) --
---------------------------------------------------------------------- ---------------------
Comprehensive income $43,474 $2,400 $27,137 $2,355
====================================================================== =====================
9. Business Segments
Financial information by reportable business segment is included in the
following summary:
Three months ended Six months ended
--------------------------- ----------------------------
June 30, July 1, June 30, July 1,
In thousands 2001 2000 2001 2000
--------------------------------------------------------------------------------------------
Net Sales From External Customers
School Products $334,039 $314,954 $450,117 $446,880
Recognition 13,383 25,560 31,941 46,341
Other 3,553 4,198 5,686 6,327
--------------------------------------------------------------------------------------------
Consolidated $350,975 $344,712 $487,744 $499,548
============================================================================================
Operating Income (Loss)
School Products $101,143 $ 92,735 $113,246 $111,879
Recognition (1,875) (1) 314 (6,114) (2) (244)
Other (6,999) (3) (53,140) (4) (14,563) (3) (60,494) (4)
--------------------------------------------------------------------------------------------
Consolidated 92,269 39,909 92,569 51,141
Net interest expense 19,640 13,078 40,922 14,806
--------------------------------------------------------------------------------------------
Income (loss) before income
taxes $ 72,629 $ 26,831 $ 51,647 $ 36,336
============================================================================================
(1) Includes $1.5 million of income associated with the 2001 Special Charge
(see Note 5 regarding Special Charges - 2001).
(2) Includes $0.6 million of costs associated with the 2001 Special Charge
(see Note 5 regarding Special Charges - 2001).
(3) Includes $2.1 million of costs associated with the 2001 Special Charge
(see Note 5 regarding Special Charges - 2001).
(4) Includes $45.7 million of transaction costs associated with the 2000
recapitalization.
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. We adopted
these new standards effective December 31, 2000, and recorded a $2.4
million, net-of-tax cumulative-effect adjustment in other comprehensive
income at the beginning of our first quarter in 2001. 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. For the six month period
ending June 30, 2001, the fair value of the swap increased by
approximately $0.4 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 first quarter in 2000.
Accounting for Business Combinations, Goodwill and Other Intangible
Assets
On June 29, 2001, the Financial Accounting Standards Board approved its
proposed Statements of Financial Accounting Standards No. 141 (FAS
141), "Business Combinations," and No. 142 (FAS 142), "Goodwill and
Other Intangible Assets."
FAS 141 supercedes Accounting Principles Board Opinion No. 16 (APB 16),
"Business Combinations." The most significant changes made by FAS 141
are: (1) requiring that the purchase method of accounting be used for
all business combinations initiated after June 30, 2001, and (2)
establishing specific criteria for the recognition of intangible assets
separately from goodwill.
FAS 142 supercedes APB 17, "Intangible Assets." FAS 142 primarily
addresses the accounting for goodwill and intangible assets subsequent
to their acquisition (i.e., the post-acquisition accounting). The most
significant changes made by FAS 142 are (1) goodwill and indefinite
lived intangible assets will no longer be amortized, (2) goodwill will
be tested for impairment at least annually at the reporting level, (3)
intangible assets deemed to have an indefinite life will be tested for
impairment at least annually, and (4) the amortization period of
intangible assets with finite lives will no longer be limited to forty
years. We will adopt FAS 142 effective December 30, 2001.
These standards only permit prospective application of the new
accounting; accordingly, the adoption of these standards will not
affect previously reported financial information. We are currently
evaluating the impact that FAS 141 and 142 will have on our results of
operations and financial condition.
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 Six months ended
---------------------- -------------------
June 30, July 1, June 30, July 1,
Dollars in thousands 2001 2000 $ Change % Change 2001 2000 $ Change % Change
- ---------------------------------------------------------------------------------- ----------------------------------------
Net sales $350,975 $344,712 $6,263 1.8% $487,744 $499,548 $(11,804) (2.4%)
% of net sales 100.0% 100.0% 100.0% 100.0%
Cost of products sold 155,293 154,806 487 0.3% 213,814 220,038 (6,224) (2.8%)
% of net sales 44.2% 44.9% 43.8% 44.0%
- ---------------------------------------------------------------------------------- ----------------------------------------
Gross profit 195,682 189,906 5,776 3.0% 273,930 279,510 (5,580) (2.0%)
% of net sales 55.8% 55.1% 56.2% 56.0%
Selling and administrative expenses 102,790 104,286 (1,496) (1.4%) 178,651 182,658 (4,007) (2.2%)
% of net sales 29.3% 30.3% 36.6% 36.6%
Special charges, net 623 45,711 (45,088) NM 2,710 45,711 (43,001) NM
- ---------------------------------------------------------------------------------- ----------------------------------------
Operating income 92,269 39,909 52,360 131.2% 92,569 51,141 41,428 81.0%
% of net sales 26.3% 11.6% 19.0% 10.2%
Net interest expense 19,640 13,078 6,562 50.2% 40,922 14,805 26,117 176.4%
% of net sales 5.6% 3.8% 8.4% 3.0%
- ---------------------------------------------------------------------------------- ----------------------------------------
Income before income taxes 72,629 26,831 45,798 170.7% 51,647 36,336 15,311 42.1%
% of net sales 20.7% 7.8% 10.6% 7.3%
Provision for income taxes 30,141 23,769 6,372 26.8% 21,435 27,425 (5,990) (21.8%)
% of net sales 8.6% 6.9% 4.4% 5.5%
- ---------------------------------------------------------------------------------- ----------------------------------------
Income before cumulative effect of
accounting change 42,488 3,062 39,426 1287.6% 30,212 8,911 21,301 239.0%
% of net sales 12.1% 0.9% 6.2% 1.8%
Cumulative effect of accounting change,
net of tax -- -- -- NM -- (5,894) 5,894 (100.0%)
% of net sales -1.2%
- ---------------------------------------------------------------------------------- ----------------------------------------
Net income $42,488 $3,062 $39,426 1287.6% $30,212 $3,017 $27,195 901.4%
================================================================================== ========================================
% of net sales 12.1% 0.9% 6.2% 0.6%
Percentages in this table may reflect rounding adjustments.
NM = percentage not meaningful
Net sales
The increase in net sales for the three month period was due to price increases
averaging approximately 2.3 percent, somewhat offset by volume decreases of
approximately 0.5 percent. The decrease in net sales for the six month period
was due to a volume decrease of approximately 4.4 percent, somewhat offset by
price increases averaging approximately 2.0 percent.
13
Second quarter and year-to-date net sales by segment and the changes from last
year were as follows:
Three months ended Six months ended
--------------------------- -------------------
June 30, July 1, June 30, July 1,
In thousands 2001 2000 $ change % change 2001 2000 $ change % change
- -------------------------------------------------------------------------------------------------------------
School Products $334,039 $314,954 $ 19,085 6.1% $450,117 $446,880 $ 3,237 0.7%
Recognition 13,383 25,560 (12,177) (47.6%) 31,941 46,341 (14,400) (31.1%)
Other 3,553 4,198 (645) (15.4%) 5,686 6,327 (641) (10.1%)
- -------------------------------------------------------------------------------------------------------------
Consolidated $350,975 $344,712 $ 6,263 1.8% $487,744 $499,548 $(11,804) (2.4%)
=============================================================================================================
School Products
The increase in School Products sales for the three and six month periods was
primarily due to:
o price increases in all school product lines;
o increased sales in our printing product line as a result of
additional pages per book, additional copies per school and
additional sales of color pages per book; and
o an increase in commercial printing volume.
The year-to-date performance on the jewelry and graduation product lines was
negatively impacted by modest sales declines. In addition, the three month
period reflects a shift in the timing of sales from the first to the second
quarter on the jewelry and graduation product lines.
Recognition
The decrease in Recognition sales for the three and six month periods 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. In
the first six months of 2001, more than thirty sales representatives have been
added in an attempt to turn around the sales shortfall. A shift in sales to
lower priced programs and general merchandise has also contributed to the sales
decline.
Other
Other segment sales decreased slightly for the three and six month periods as a
result of decreased sales in our International business.
Gross Profit
Gross profit as a percent of sales for the three and six month periods ended
June 30, 2001 was 55.8 percent and 56.2 percent, compared with 55.1 percent and
56.0 percent, respectively, for the comparable periods in 2000.
The increase in gross profit percent for the three and six month periods was
primarily due to price increases in the School Products segment in 2001. These
gross profit percent increases were partially offset by our Recognition
segment's sales decreases and shift in sales to lower margin programs and
general merchandise.
Selling and Administrative Expenses
Selling and administrative expenses for the three and six month periods ended
June 30, 2001 were $102.8 million and $178.7 million, compared with $104.3
million and $182.7 million, respectively, for the comparable periods in 2000.
The decrease in the three and six month periods reflects:
o lower commission expense due to sales shortfalls experienced
in the Recognition segment;
o lower commission expense in our jewelry and graduation product
lines due to modest sales declines;
o lower commission expense in our graduation products line due
to a change in the commission structure; and
o lower information systems and general and administrative
spending versus the comparable periods.
14
These decreases were partially offset by:
o higher commission expense in our printing product line due to
increased sales;
o higher marketing expenses in 2001 related to programs and
initiatives intended to increase future sales;
o higher customer service costs in our School Products segment
due to increased labor costs as a result of wage rate
increases; and
o increased investment in research and development.
Operating Income
Second quarter and year-to-date operating income (loss) by segment and the
changes from last year were as follows:
Three months ended Six months ended
--------------------------- -----------------------
June 30, July 1, June 30, July 1,
In thousands 2001 2000 $ change % change 2001 2000 $ change % change
- -------------------------------------------------------------------- ------------------------------------------------
School Products $101,143 $92,735 $ 8,408 9.1% $113,246 $111,879 $ 1,367 1.2%
Recognition (1,875) (1) 314 (2,189) NM (6,114) (2) (244) (5,870) NM
Other (6,999) (3) (53,140) (4) 46,141 (86.8%) (14,563) (3) (60,494) (4) 45,931 (75.9%)
- -------------------------------------------------------------------- ------------------------------------------------
Consolidated $92,269 $39,909 $ 52,360 131.2% $ 92,569 $ 51,141 $41,428 81.0%
=================================================================== ================================================
NM = percentage not meaningful
(1) Includes $1.5 million of income associated with the 2001 Special Charge
(see Note 5 regarding Special Charges - 2001).
(2) Includes $0.6 million of costs associated with the 2001 Special Charge
(see Note 5 regarding Special Charges - 2001).
(3) Includes $2.1 million of costs associated with the 2001 Special Charge
(see Note 5 regarding Special Charges - 2001).
(4) Includes $45.7 million of transaction costs associated with the 2000
recapitalization.
School Products
The increase in school products operating income for the three month period was
due to increased pricing across all school product lines, increased yearbook and
commercial volume in our printing product line, and a shift in the timing of
sales from the first to the second quarter on our jewelry and graduation product
lines. The operating income increase for the three month period was somewhat
offset by increased customer service costs as a result of wage rate increases
and an increase in marketing expense to support programs and initiatives
intended to increase future sales.
The increase in school products operating income for the six month period was
due to increased pricing across all school product lines and increased yearbook
and commercial volume in our printing product line. The operating income
increase for the six month period was somewhat offset by modest volume declines
in our jewelry and graduation product lines, increased marketing expense to
support future sales and increased customer service costs.
15
Recognition
The increase in Recognition's operating loss for the three and six month periods
was primarily due to a decrease in sales versus the comparable prior year
periods as well as a shift to lower margin programs and general merchandise.
Also contributing to the operating loss was an increase in marketing expense to
support programs and initiatives intended to increase future sales.
In March of 2001, we announced our decision to consolidate three Recognition
plants into one plant 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 is being 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 two facilities and costs
of moving production to our Princeton, Illinois facility. The total cost of the
project is partially offset by a gain of $2.4 million, which resulted from the
first quarter sale of our distribution facility in Memphis, Tennessee for $4.0
million. We leased the facility back from the buyer until May 31, 2001, and
ratably recognized the gain over that period.
Through June 30, 2001, we have expensed $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, Quebec plant. The majority of these termination benefits will
be paid by the end of 2001. We have also recognized $0.4 million in shutdown
costs and asset write-offs as well as $0.7 million of period costs that were
directly related to this restructuring project. We anticipate incurring another
$0.9 million of period costs during the third quarter of 2001 to complete the
project.
The components of the special charge are as follows:
Three months ended Three months ended Six months ended
In thousands March 31, 2001 June 30, 2001 June 30, 2001
- ------------------------------------------------------------------------------------------------------------------
Accruable exit costs and asset write-downs:
Employee termination benefits $1,932 $ -- $ 1,932
Costs related to disposition of assets 414 -- 414
---------------------------------------------------------------
Subtotal 2,346 -- 2,346
Period costs related to moving production to our
Princeton facility 150 525 675
Gain on sale of building (409) (2,040) (2,449)
- ------------------------------------------------------------------------------------------------------------------
$2,087 $(1,515) $ 572
==================================================================================================================
Accrued costs and utilization for the six-month period ended June 30, 2001 are
as follows:
Utilization
---------------
Six months
Initial ended Balance
In thousands accrual June 30, 2001 June 30, 2001
- ----------------------------------------------------------------------------------------
Employee termination benefits $1,932 $(1,502) $430
Costs related to disposition of assets 414 (226) 188
- ----------------------------------------------------------------------------------------
$2,346 $(1,728) $618
========================================================================================
The remaining amount accrued at June 30, 2001 is classified in "other current
liabilities" in our condensed consolidated balance sheet.
16
Other
The $46.1 and $45.9 million increases in Other operating income for the three
and six month periods, respectively, were primarily due to the non-recurring
transaction costs of $45.7 million incurred in the second quarter of 2000. This
was partially offset by lower information systems and general and administrative
spending versus the comparable three and six month periods.
In the second quarter of 2001, we entered into a separation agreement with a
senior executive. The total cost of $2.1 million for severance benefits was
expensed in the Other segment's income statement. As of June 30, 2001,
approximately $2.0 million is accrued for and classified in "other current
liabilities" in our condensed consolidated balance sheet. The majority of the
remaining separation benefits will be paid in the third quarter of 2001.
Net Interest Expense
Net interest expense increased $6.6 million and $26.1 million in the three and
six month periods ended June 30, 2001, respectively, over the prior year
periods. The increases are primarily due to increased interest expense resulting
from our new debt structure, a result of the recapitalization in the second
quarter of 2000.
Income Taxes
We accrue income taxes based on our best estimate of the effective tax rate
expected to be applicable for the full year. Income taxes for the three and six
month periods ended June 30, 2001 were accrued at a rate of 41.5 percent. The
year-to-date effective rate for July 1, 2000 was 75.5 percent and reflects
non-deductible transaction related costs of $30.0 million.
17
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 $30.5 million for the first six months of
2001, compared with $13.1 million of cash generated for the comparable prior
period. The increase of $17.4 million was largely due to our increased net
income versus the prior year.
Investing Activities
Capital expenditures for the first six months of 2001 were $9.0 million,
compared with $7.2 million for the same period in 2000. The increase of $1.8
million relates primarily to higher capital expenditures in 2001 on an
enterprise-wide 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 regarding
Special Charges - 2001).
Financing Activities
Net cash used for financing activities in the first six months of 2001 was $9.0
million, compared with net cash used for financing activities of $7.9 million
for the same period in 2000. The net cash used for financing activities included
a scheduled debt payment of $5.0 million under our senior secured credit
facility. We also used the proceeds from the sale of our distribution facility
in Memphis, Tennessee to voluntarily pre-pay $4.0 million of borrowings under
that same 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. We adopted these new standards effective December 31, 2000,
and recorded a $2.4 million, net-of-tax cumulative-effect adjustment in other
comprehensive income at the beginning of our first quarter in 2001. 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. For the six month period ending June 30, 2001,
the fair value of the swap increased by approximately $0.4 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 first
quarter in 2000.
18
Accounting for Business Combinations, Goodwill and Other Intangible Assets
On June 29, 2001, the Financial Accounting Standards Board approved its proposed
Statements of Financial Accounting Standards No. 141 (FAS 141), "Business
Combinations," and No. 142 (FAS 142), "Goodwill and Other Intangible Assets."
FAS 141 supercedes Accounting Principles Board Opinion No. 16 (APB 16),
"Business Combinations." The most significant changes made by FAS 141 are: (1)
requiring that the purchase method of accounting be used for all business
combinations initiated after June 30, 2001, and (2) establishing specific
criteria for the recognition of intangible assets separately from goodwill.
FAS 142 supercedes APB 17, "Intangible Assets." FAS 142 primarily addresses the
accounting for goodwill and intangible assets subsequent to their acquisition
(i.e., the post-acquisition accounting). The most significant changes made by
FAS 142 are (1) goodwill and indefinite lived intangible assets will no longer
be amortized, (2) goodwill will be tested for impairment at least annually at
the reporting level, (3) intangible assets deemed to have an indefinite life
will be tested for impairment at least annually, and (4) the amortization period
of intangible assets with finite lives will no longer be limited to forty years.
We will adopt FAS 142 effective December 30, 2001.
These standards only permit prospective application of the new accounting;
accordingly, the adoption of these standards will not affect previously reported
financial information. We are currently evaluating the impact that FAS 141 and
142 will have on our results of operations and financial condition.
19
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
There have been no material changes in our market risk during the six months
ended June 30, 2001. For additional information, refer to Item 7A of the 2000
Form 10-K.
20
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 later this
summer.
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 $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
10.32 Separation Agreement, dated as of June 18, 2001, between Jostens, Inc.
and Mr. William N. Priesmeyer.
(b) Reports on Form 8-K
No reports on Form 8-K were filed by Jostens during the quarter ended
June 30, 2001
21
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 August 13, 2001.
JOSTENS, INC.
Registrant
By /s/ Robert C. Buhrmaster
----------------------------------
Robert C. Buhrmaster
Chairman, President and Chief
Executive Officer
By /s/ William E. Schlukebier
----------------------------------
William E. Schlukebier
Vice President and Corporate
Controller
22