UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended September 29, 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.
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(Exact name of Registrant as specified in its charter)
Minnesota 41-0343440
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification number)
5501 Norman Center Drive, Minneapolis, Minnesota 55437
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(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code: (952) 830-3300
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [_]
On November 12, 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 Nine months ended September 29, 2001 and
September 30, 2000 3
Condensed Consolidated Balance Sheets as of September 29, 2001,
September 30, 2000 and December 30, 2000 4
Condensed Consolidated Statements of Cash Flows for the
Nine months ended September 29, 2001 and September 30, 2000 5
Notes to Condensed Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 13
Item 3. Quantitative and Qualitative Disclosures about Market Risk 21
Part II Other Information
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Item 1. Legal Proceedings 22
Item 6. Exhibits and Reports on Form 8-K 22
Signatures 23
2
PART I FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
JOSTENS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
Three months ended Nine months ended
---------------------------- ----------------------------
September 29, September 30, September 29, September 30,
In thousands, except per-share data 2001 2000 2001 2000
- ----------------------------------------------------------------------------------------- ----------------------------
Net sales $ 113,590 $ 117,118 $ 601,334 $ 616,666
Cost of products sold 63,182 63,488 276,996 283,526
- ----------------------------------------------------------------------------------------- ----------------------------
Gross profit 50,408 53,630 324,338 333,140
Selling and administrative expenses 65,067 67,642 243,718 250,300
Transaction costs and special charges, net 932 139 3,642 45,850
- ----------------------------------------------------------------------------------------- ----------------------------
Operating income (loss) (15,591) (14,151) 76,978 36,990
Net interest expense 17,520 22,018 58,442 36,823
- ----------------------------------------------------------------------------------------- ----------------------------
Income (loss) before income taxes (33,111) (36,169) 18,536 167
Provision for (benefit from) income taxes (13,741) (15,044) 7,694 12,381
- ----------------------------------------------------------------------------------------- ----------------------------
Income (loss) before cumulative effect of accounting change (19,370) (21,125) 10,842 (12,214)
Cumulative effect of accounting change, net of tax -- -- -- (5,894)
- ----------------------------------------------------------------------------------------- ----------------------------
Net income (loss) (19,370) (21,125) 10,842 (18,108)
Dividends and accretion on redeemable preferred shares (2,594) (2,264) (7,516) (3,507)
- ----------------------------------------------------------------------------------------- ----------------------------
Net income (loss) available to common shareholders $ (21,964) $ (23,389) $ 3,326 $ (21,615)
========================================================================================= ============================
Earnings per common share
Basic
Before cumulative effect of accounting change $ (2.45) $ (2.60) $ 0.37 $ (0.76)
Cumulative effect of accounting change -- -- -- (0.29)
- ----------------------------------------------------------------------------------------- ----------------------------
Basic earnings (loss) per common share $ (2.45) $ (2.60) $ 0.37 $ (1.05)
========================================================================================= ============================
Diluted
Before cumulative effect of accounting change $ (2.45) $ (2.60) $ 0.33 $ (0.76)
Cumulative effect of accounting change -- -- -- (0.29)
- ----------------------------------------------------------------------------------------- ----------------------------
Diluted earnings (loss) per common share $ (2.45) $ (2.60) $ 0.33 $ (1.05)
========================================================================================= ============================
Weighted average common shares outstanding
Basic 8,972 8,993 8,985 20,553
Diluted 8,972 8,993 9,941 20,553
The accompanying notes are an integral part of the
unaudited condensed consolidated financial information.
3
JOSTENS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
----------------------------
September 29, September 30, December 30,
In thousands, except per-share data 2001 2000 2000
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ASSETS
------
Current assets
Cash and cash equivalents $ 16,944 $ 15,435 $ 26,552
Accounts receivable, net of allowance for doubtful accounts
of $3,655, $5,283 and $4,361, respectively 65,451 74,157 64,944
Inventories 65,262 73,742 91,230
Deferred income taxes 17,995 21,413 17,995
Salespersons overdrafts, net of allowance of $6,236, $5,599
and $5,568, respectively 33,618 29,602 27,227
Prepaid expenses and other current assets 5,205 5,772 8,154
- ------------------------------------------------------------------------------------------------------------------------
Total current assets 204,475 220,121 236,102
Other assets
Intangibles, net 16,763 18,040 17,662
Deferred financing costs, net 29,254 34,326 33,360
Other 31,642 25,931 21,812
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Total other assets 77,659 78,297 72,834
Property and equipment 289,912 283,631 285,176
Less accumulated depreciation (216,184) (205,829) (205,831)
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Property and equipment, net 73,728 77,802 79,345
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$ 355,862 $ 376,220 $ 388,281
========================================================================================================================
LIABILITIES AND SHAREHOLDERS' DEFICIT
-------------------------------------
Current liabilities
Short-term borrowings $ 42,900 $ 51,400 $ --
Accounts payable 18,272 21,556 24,430
Accrued employee compensation and related taxes 24,164 23,004 30,826
Commissions payable 13,011 13,713 19,895
Customer deposits 41,963 35,866 108,848
Income taxes payable 23,050 17,089 15,155
Interest payable 16,122 16,531 10,096
Current portion of long-term debt 20,879 5,500 14,974
Other accrued liabilities 13,465 22,063 20,347
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Total current liabilities 213,826 206,722 244,571
Long-term debt, net of current maturities 655,702 695,033 669,807
Other noncurrent liabilities 18,736 11,495 11,382
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Total liabilities 888,264 913,250 925,760
Commitments and contingencies -- -- --
Redeemable preferred shares, $.01 par value, liquidation preference $71,020
authorized 308 shares, issued and outstanding September 29, 2001 - 71,
September 30, 2000 - 62 and December 30, 2000 - 64 56,357 46,501 48,841
Preferred shares, $.01 par value: authorized 4,000 shares, issued and
outstanding; September 29, 2001 - 71, in the form of redeemable preferred
shares listed above; 3,929 undesignated -- -- --
Shareholders' deficit
Common shares (note 2) 1,006 1,015 1,015
Additional paid-in-capital - warrants 24,733 24,733 24,733
Officer notes receivable (1,407) (1,775) (1,775)
Accumulated deficit (601,530) (601,182) (604,102)
Accumulated other comprehensive loss (11,561) (6,322) (6,191)
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Total shareholders' deficit (588,759) (583,531) (586,320)
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$ 355,862 $ 376,220 $ 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)
Nine months ended
-----------------------------
September 29, September 30,
In thousands 2001 2000
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Operating activities
Net income (loss) $ 10,842 $ (18,108)
Depreciation 19,630 19,324
Amortization of debt discount and deferred financing costs 4,897 2,527
Other amortization 2,453 805
Cumulative effect of accounting change, net of tax -- 5,894
Gain on sale/disposal of property and equipment, net (2,327) (118)
Changes in operating assets and liabilities
Accounts receivable (507) 8,153
Inventories 25,968 23,182
Salespersons overdrafts (6,391) (3,408)
Prepaid expenses and other assets (8,850) (8,195)
Accounts payable (12,183) (10,365)
Accrued employee compensation and related taxes (6,662) (6,474)
Commissions payable (6,884) (6,084)
Customer deposits (66,885) (77,092)
Income taxes payable 7,895 (83)
Other 1,217 9,343
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Net cash used for operating activities (37,787) (60,699)
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Investing activities
Purchases of property and equipment (15,550) (12,772)
Proceeds from sale of property and equipment 3,995 404
Other investing activities, net 185 3,588
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Net cash used for investing activities (11,370) (8,780)
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Financing activities
Net short-term borrowings (repayments) 48,925 (57,928)
Repurchases of common stock (753) (823,630)
Principal payments on long-term debt (8,991) (3,600)
Principal repayments on officer note receivable 368 275
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)
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Net cash provided by financing activities $ 39,549 $ 46,397
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Change in cash and cash equivalents $ (9,608) $ (23,082)
Cash and cash equivalents, beginning of period 26,552 38,517
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Cash and cash equivalents, end of period $ 16,944 $ 15,435
================================================================================================
Supplemental information
Income taxes paid (refunded) $ (201) $ 12,402
Interest paid $ 49,647 $ 20,744
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 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 each class of common stock is set forth below:
Issued and Outstanding Shares
-------------------------------------------------
Par Authorized September 29, September 30, December 30,
In thousands, except par value data Value Shares 2001 2000 2000
------------------------------------------------------------------------------------------------------------------
Class A $.33 1/3 4,200 2,834 2,862 2,862
Class B $.01 5,300 5,300 5,300 5,300
Class C $.01 2,500 811 811 811
Class D $.01 20 20 20 20
Class E $.01 1,900 - - -
Undesignated $.01 12,020 - - -
------------------------------------------------------------------
25,940 8,965 8,993 8,993
==================================================================
During the three month period ended September 29, 2001, we repurchased
28,034 shares of our Class A common stock from a senior executive in
accordance with his separation agreement.
6
JOSTENS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(CONTINUED)
3. Long-Term Debt
Long-term debt consists of the following:
September 29, September 30, December 30,
In thousands 2001 2000 2000
------------------------------------------------------------------------------------------------------------------
Borrowings under senior secured credit facility:
Term loan A, variable rate, 5.09 percent at
September 29, 2001, 9.81 percent at September 30, 2000
and 9.40 percent at December 30, 2000, with semi-annual
principal and interest payments through May 2006 $ 128,957 $ 150,000 $ 134,775
Term loan B, variable rate, 6.09 percent at September 29,
2001, 10.31 percent at September 30, 2000 and 9.90 percent
at December 30, 2000, with semi-annual principal and
interest payments through May 2008 341,052 345,000 344,225
Senior subordinated notes, 12.75 percent fixed rate, net of
discounts of $18,428 at September 29, 2001, $19,467 at
September 30, 2000 and $19,219 at December 30, 2000, with
semi-annual interest payments of $14,344, principal due
and payable at maturity - May 2010 206,572 205,533 205,781
------------------------------------------------------------------------------------------------------------------
676,581 700,533 684,781
Less current portion 20,879 5,500 14,974
------------------------------------------------------------------------------------------------------------------
$ 655,702 $ 695,033 $ 669,807
==================================================================================================================
We have a $150.0 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. As of September 29, 2001, there was $5.4 million
outstanding in the form of letters of credit and $42.9 million
outstanding in the form of short term borrowings leaving $101.7 million
available under this facility.
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 September 29, 2001 was a liability of $6.4
million ($3.9 million net-of-tax) 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 Nine months ended
------------------------------- -----------------------------
September 29, September 30, September 29, September 30,
In thousands, except per-share data 2001 2000 2001 2000
------------------------------- ----------------------------
Net income (loss) $ (19,370) $ (21,125) $ 10,842 $ (18,108)
Dividends and accretion on redeemable
preferred shares (2,594) (2,264) (7,516) (3,507)
------------------------------------------------------------------------- ----------------------------
Net income (loss) available to common
shareholders $ (21,964) $ (23,389) $ 3,326 $ (21,615)
========================================================================= ============================
Weighted average number of common shares
outstanding - basic 8,972 8,993 8,985 20,553
Dilutive shares -- (1) -- 956 --
------------------------------------------------------------------------- ----------------------------
Weighted average number of common shares
outstanding - diluted 8,972 8,993 9,941 20,553
========================================================================= ============================
Earnings (loss) per share - basic $ (2.45) $ (2.60) $ 0.37 $ (1.05)
Earnings (loss) per share - diluted $ (2.45) $ (2.60) $ 0.33 $ (1.05)
(1) Options and warrants to purchase 956 shares were not
included as their effect would have been antidilutive.
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 has been expensed in the
Recognition segment's statement of operations in 2001, was $3.9 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.
As of September 29, 2001, the restructuring project was complete. 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. All termination benefits
have been paid in full. We have also recognized $0.4 million in
shutdown costs and asset write-offs as well as $1.6 million of period
costs that were directly related to this restructuring project.
The components of the special charge are as follows:
Three Nine
months ended months ended
------------- -------------
September 29, September 29,
In thousands 2001 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 932 1,607
Gain on sale of building -- (2,449)
------------------------------------------------------------- ----------
$ 932 $ 1,504
============================================================= ==========
8
JOSTENS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(CONTINUED)
Accrued costs and utilization for the nine month period ended September
29, 2001 are as follows:
Utilization
-----------------
Net Nine months
Initial Adjustments ended Balance
In thousands accrual in 2001 September 29, 2001 September 29, 2001
---------------------------------------------------------------------------------------------------------
Employee termination benefits $ 1,932 $ 216 $ (2,148) $ --
Costs related to disposition of assets 414 (216) (198) --
---------------------------------------------------------------------------------------------------------
$ 2,346 $ -- $ (2,346) $ --
=========================================================================================================
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. The
remaining liability of approximately $0.2 million will be paid over the
next two years and 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 $1.6 million in the first nine months of 2001. The
components of the special charge and utilization prior to 2001 and in
the first nine months of 2001 are as follows:
Utilization
------------------------------
Net Nine months
Initial Adjustments Prior ended Balance
In thousands accrual in 2000 Periods September 29, 2001 September 29, 2001
-------------------------------------------------------------------------------------------------------------------------
Employee termination benefits $ 4,910 $ 714 $ (3,880) $(1,632) $112
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) $(1,632) $112
=========================================================================================================================
The remaining termination benefits will be paid by March of 2002 and
are classified in "other current liabilities" in our condensed
consolidated balance sheet.
7. Inventories
Inventories are comprised of the following:
September 29, September 30, December 30,
In thousands 2001 2000 2000
------------------------------------------------------------------------------------
Raw material and supplies $ 14,753 $ 11,670 $ 17,054
Work-in-process 19,495 19,092 30,490
Finished goods 31,014 42,980 43,686
------------------------------------------------------------------------------------
Total inventories $ 65,262 $ 73,742 $ 91,230
====================================================================================
9
JOSTENS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(CONTINUED)
8. Comprehensive Income
Comprehensive income and its components, net of tax, are as follows:
Three months ended Nine months ended
---------------------------- ----------------------------
September 29, September 30, September 29, September 30,
In thousands 2001 2000 2001 2000
------------------------------------------------------------------------ ----------------------------
Net income (loss) $ (19,370) $ (21,125) $ 10,842 $ (18,108)
Change in cumulative translation adjustment (1,166) 10 (1,488) (650)
Change in fair value of hedging instruments (1,129) -- (3,882) --
------------------------------------------------------------------------ ---------------------------
Comprehensive income (loss) $ (21,665) $ (21,115) $ 5,472 $ (18,758)
======================================================================== ===========================
9. Business Segments
Financial information by reportable business segment is included in the
following summary:
Three months ended Nine months ended
------------------------------- -----------------------------
September 29, September 30, September 29, September 30,
In thousands 2001 2000 2001 2000
-------------------------------------------------------------------- -----------------------------
Net Sales From External Customers
School Products $ 98,873 $100,113 $548,990 $546,994
Recognition 14,416 16,058 46,357 62,399
Other 301 947 5,987 7,273
-------------------------------------------------------------------- -----------------------------
Consolidated $113,590 $117,118 $601,334 $616,666
==================================================================== =============================
Operating Income (Loss)
School Products $ (4,563) $ (3,258) $108,680 $108,620
Recognition (2,967)(1) (2,663) (9,081)(2) (2,909)
Other (8,061) (8,230) (22,621)(3) (68,721)(4)
-------------------------------------------------------------------- -----------------------------
Consolidated (15,591) (14,151) 76,978 36,990
Net interest expense 17,520 22,018 58,442 36,823
-------------------------------------------------------------------- -----------------------------
Income (loss) before income taxes $(33,111) $(36,169) $ 18,536 $ 167
==================================================================== =============================
(1) Includes $0.9 million of costs associated with the 2001
Special Charge (see Note 5 regarding Special Charges - 2001).
(2) Includes $1.5 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 $45.8 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
its Statement of Financial Accounting Standards No. 133 (SFAS 133),
"Accounting for Derivative Instrument and Hedging Activities."
Subsequently in June 2000, the FASB issued SFAS No. 138, which amended
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 loss 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 nine month period ended
September 29, 2001, the fair value of the swap changed by an additional
$1.5 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 (SAB 101), "Revenue Recognition in
Financial Statements," 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
In June 2001, the FASB approved its proposed Statements of Financial
Accounting Standards No. 141 (SFAS 141), "Business Combinations," and
No. 142 (SFAS 142), "Goodwill and Other Intangible Assets."
SFAS 141 supercedes Accounting Principles Board Opinion No. 16 (APB
16), "Business Combinations." The most significant changes made by SFAS
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.
SFAS 142 supercedes APB 17, "Intangible Assets." SFAS 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 SFAS 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 SFAS 142 as of the beginning of our new fiscal
year on 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 SFAS 141 and 142 will have on our results of
operations and financial condition.
11
JOSTENS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(CONTINUED)
Accounting for Asset Retirement Obligations
In June 2001, the FASB issued Statement of Financial Accounting
Standards No. 143 (SFAS 143), "Accounting for Asset Retirement
Obligations." The new statement applies to legal obligations associated
with the retirement of tangible long-lived assets that result from the
acquisition, construction, development and (or) the normal operation of
a long-lived asset, except for certain obligations of lessees. The
provisions of SFAS 143 are effective for financial statements for
fiscal years beginning after June 15, 2002, but allow for early
application. Initial application of this standard shall be as of the
beginning of an entity's fiscal year and requires an entity to
recognize the cumulative effect of initially applying this standard as
a change in accounting principle. We are currently evaluating the
impact that SFAS 143 will have on our results of operations and
financial condition.
Accounting for Impairment of Long-Lived Assets
In August 2001, the FASB issued Statement of Financial Accounting
Standards No. 144 (SFAS 144), "Accounting for Impairment of Long-Lived
Assets." The new standard supercedes FASB Statement No. 121 (SFAS 121),
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of." Although retaining many of the fundamental
recognition and measurement provisions of SFAS 121, the new rules
significantly change the criteria that would have to be met to classify
an asset as held-for-sale. The new standard also supercedes the
provisions of Accounting Principles Board Opinion No. 30 (APB 30),
"Reporting the Results of Operations--Reporting the Effects of Disposal
of a Segment of a Business, and Extraordinary, Unusual and Infrequently
Occurring Events and Transactions," and will require expected future
operating losses from discontinued operations to be displayed in
discontinued operations in the period(s) in which the losses are
incurred rather than as of the measurement date as presently required
by APB 30. The provisions of SFAS 144 are effective for financial
statements for fiscal years beginning after December 15, 2001, but
allow for early application. We plan to adopt this standard as of the
beginning of our new fiscal year on December 30, 2001. The provisions
of SFAS 144 generally are to be applied prospectively, therefore, the
adoption of this standard will not affect previously reported financial
information. We are currently evaluating the impact that SFAS 144 will
have on our results of operations and financial condition.
12
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.
13
RESULTS OF OPERATIONS
The following table sets forth selected information from our Condensed
Consolidated Statements of Operations:
Three months ended Nine months ended
---------------------------- ---------------------------
September 29, September 30, September 29, September 30,
Dollars in thousands 2001 2000 $ Change % Change 2001 2000 $ Change % Change
- --------------------------------------------------------------------------------- ------------------------------------------------
Net sales $ 113,590 $ 117,118 $ (3,528) (3.0%) $ 601,334 $ 616,666 $ (15,332) (2.5%)
% of net sales 100.0% 100.0% 100.0% 100.0%
Cost of products sold 63,182 63,488 (306) (0.5%) 276,996 283,526 (6,530) (2.3%)
% of net sales 55.6% 54.2% 46.1% 46.0%
- --------------------------------------------------------------------------------- ------------------------------------------------
Gross profit 50,408 53,630 (3,222) (6.0%) 324,338 333,140 (8,802) (2.6%)
% of net sales 44.4% 45.8% 53.9% 54.0%
Selling and administrative
expenses 65,067 67,642 (2,575) (3.8%) 243,718 250,300 (6,582) (2.6%)
% of net sales 57.3% 57.8% 40.5% 40.6%
Special charges, net 932 139 793 NM 3,642 45,850 (42,208) NM
- --------------------------------------------------------------------------------- ------------------------------------------------
Operating income (loss) (15,591) (14,151) (1,440) (10.2%) 76,978 36,990 39,988 108.1%
% of net sales -13.7% -12.1% 12.8% 6.0%
Net interest expense 17,520 22,018 (4,498) (20.4%) 58,442 36,823 21,619 58.7%
% of net sales 15.4% 18.8% 9.7% 6.0%
- --------------------------------------------------------------------------------- ------------------------------------------------
Income (loss) before
income taxes (33,111) (36,169) 3,058 8.5% 18,536 167 18,369 10999.4%
% of net sales -29.1% -30.9% 3.1% 0.0%
Provision for (benefit from)
income taxes (13,741) (15,044) 1,303 8.7% 7,694 12,381 (4,687) (37.9%)
% of net sales -12.1% -12.8% 1.3% 2.0%
- --------------------------------------------------------------------------------- ------------------------------------------------
Income (loss) before cumulative
effect of accounting change (19,370) (21,125) 1,755 8.3% 10,842 (12,214) 23,056 188.8%
% of net sales -17.1% -18.0% 1.8% -2.0%
Cumulative effect of accounting
change, net of tax -- -- -- 0.0% -- (5,894) 5,894 100.0%
% of net sales -1.0%
- --------------------------------------------------------------------------------- ------------------------------------------------
Net income (loss) $ (19,370) $ (21,125) $ 1,755 8.3% $ 10,842 $ (18,108) $ 28,950 159.9%
================================================================================= ================================================
% of net sales -17.1% -18.0% 1.8% -2.9%
Percentages in this table may reflect rounding adjustments.
NM = percentage not meaningful
Net sales
The decrease in net sales for the three month period was due to a volume
decrease of approximately 5.4 percent, offset by price increases averaging
approximately 2.4 percent. Similarly, the decrease in net sales for the nine
month period was due to a volume decrease of approximately 4.6 percent, offset
by price increases averaging approximately 2.1 percent.
14
Third quarter and year-to-date net sales by segment and the changes from last
year were as follows:
Three months ended Nine months ended
---------------------------- ---------------------------
September 29, September 30, September 29, September 30,
In thousands 2001 2000 $ change % change 2001 2000 $ change % change
- --------------------------------------------------------------- ----------------------------------------------
School Products $ 98,873 $ 100,113 $ (1,240) (1.2%) $ 548,990 $ 546,994 $ 1,996 0.4%
Recognition 14,416 16,058 (1,642) (10.2%) 46,357 62,399 (16,042) (25.7%)
Other 301 947 (646) (68.2%) 5,987 7,273 (1,286) (17.7%)
- --------------------------------------------------------------- ----------------------------------------------
Consolidated $113,590 $ 117,118 $ (3,528) (3.0%) $ 601,334 $ 616,666 $(15,332) (2.5%)
=============================================================== =============================================
School Products
The decrease in School Products sales for the three month period was primarily
due to slight volume declines in all school product lines except jewelry. The
volume decline was offset by price increases most significantly in the printing
and graduation product lines.
The increase in School Products sales for the nine month period was primarily
due to price increases in all product lines. The price increases were offset by
modest sales declines in all product lines except printing which reflects an
increase in commercial printing volume.
Recognition
The decrease in Recognition sales for the three and nine 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 nine months of 2001, approximately forty 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 for the three and nine month periods as a result
of decreased sales in our International business.
Gross Profit
Gross profit as a percentage of net sales for the three and nine month periods
ended September 29, 2001 was 44.4 percent and 53.9 percent, compared with 45.8
percent and 54.0 percent, respectively, for the comparable periods in 2000.
The slight decrease in gross profit percentage for the three month period was
primarily due to processing and shipping delays experienced in our photography
business as a result of the grounding of major air couriers during the last part
of September. For the nine month period, price increases in the School Products
segment in 2001 were offset by our Recognition segment's sales decreases and
shift in sales to lower margin programs and general merchandise resulting in a
relatively consistent gross profit percentage to the comparable prior year
period.
15
Selling and Administrative Expenses
Selling and administrative expenses for the three and nine month periods ended
September 29, 2001 were $65.1 million and $243.7 million, compared with $67.6
million and $250.3 million, respectively, for the comparable periods in 2000.
The decrease in both the three and nine 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 general and administrative as well as information
systems spending versus the comparable prior year periods.
The decrease in both periods was 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 wage rate increases; and
o increased investment in research and development.
Operating Income (Loss)
Third quarter and year-to-date operating income (loss) by segment and the
changes from last year were as follows:
Three months ended Nine months ended
----------------------------- ------------------------------
September 29, September 30, September 29, September 30,
In thousands 2001 2000 $ change % change 2001 2000 $ change % change
- ----------------------------------------------------------------- --------------------------------------------------
School Products $ (4,563) $ (3,258) $(1,305) (40.1%) $108,680 $108,620 $ 60 0.1%
Recognition (2,967)(1) (2,663) (304) (11.4%) (9,081)(2) (2,909) (6,172) (212.2%)
Other (8,061) (8,230) 169 2.1% (22,621)(3) (68,721)(4) 46,100 67.1%
- ----------------------------------------------------------------- --------------------------------------------------
Consolidated $(15,591) $(14,151) $(1,440) (10.2%) $ 76,978 $ 36,990 $39,988 108.1%
================================================================= ==================================================
(1) Includes $0.9 million of costs associated with the 2001 Special Charge
(see Note 5 regarding Special Charges - 2001).
(2) Includes $1.5 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 $45.8 million of transaction costs associated with the 2000
recapitalization.
School Products
The decrease in School Products operating income for the three month period was
due to slight volume declines in all school product lines except jewelry and an
increase in marketing expense to support programs and initiatives intended to
increase future sales. The decrease in operating income for the three month
period was somewhat offset by price increases most significantly in the printing
and graduation product lines.
School Products operating income for the nine month period was relatively
consistent with the comparable prior year period but was impacted by the
following:
o increased pricing across all school product lines; and
o increased commercial volume in our printing product line.
These increases were offset by:
o modest volume declines in all product lines except printing;
o increased marketing expense to support future sales; and
o increased customer service costs.
16
Recognition
The increase in Recognition's operating loss for the three and nine month
periods was primarily due to a decrease in sales versus the comparable prior
year periods due to additional lost customers as a result of problems
encountered with a system implementation that took place in 1999. Also
contributing to the operating loss was a shift to lower margin programs and
general merchandise as well as 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 has been expensed in the Recognition segment's
statement of operations in 2001, was $3.9 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.
As of September 29, 2001, the restructuring project was complete. 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. All termination benefits have been paid in full. We have also
recognized $0.4 million in shutdown costs and asset write-offs as well as $1.6
million of period costs that were directly related to this restructuring
project.
The components of the special charge are as follows:
Three Nine
months ended months ended
------------- -------------
September 29, September 29,
In thousands 2001 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 932 1,607
Gain on sale of building -- (2,449)
- ------------------------------------------------------------- ----------
$ 932 $ 1,504
============================================================= ==========
Accrued costs and utilization for the nine month period ended September 29, 2001
are as follows:
Utilization
--------------------
Net Nine months
Initial Adjustments ended Balance
In thousands accrual in 2001 September 29, 2001 September 29, 2001
- -------------------------------------------------------------------------------------------------------------------
Employee termination benefits $ 1,932 $ 216 $ (2,148) $ --
Costs related to disposition of assets 414 (216) (198) --
- -------------------------------------------------------------------------------------------------------------------
$ 2,346 $ -- $ (2,346) $ --
===================================================================================================================
Other
Other operating income for the three month period ended September 29, 2001 was
relatively flat with the comparable prior year period. The $46.1 million
increase in Other operating income for the nine month period was primarily due
to the non-recurring transaction costs of $45.8 million incurred in the second
quarter of 2000 associated with our recapitalization. This was partially offset
by lower information systems and general and administrative spending versus the
comparable prior year period.
17
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. The remaining liability of
approximately $0.2 million will be paid over the next two years and is
classified in "other current liabilities" in our condensed consolidated balance
sheet.
Net Interest Expense
Net interest expense decreased $4.5 million in the three month period ended
September 29, 2001. The decrease was due to lower variable interest rates and a
lower debt balance in the current period as a result of scheduled and voluntary
prepayments.
Net interest expense increased $21.6 in the nine month period ended September
29, 2001 over the prior year period. The increase was due to our new debt
structure, which was not put in place until the second quarter of 2000 as
compared to it being in effect for a full nine months in 2001. This was somewhat
offset by lower interest rates in the current year versus the prior year.
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 nine
month periods ended September 29, 2001 were accrued at a rate of 41.5 percent.
Year-to-date income tax expense was $12.4 million for September 30, 2000, which
reflects the impact of non-deductible transaction related costs of approximately
$30.0 million associated with our recapitalization.
18
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 used cash of $37.8 million for the first nine months of
2001 compared with $60.7 million of cash used in the comparable prior year
period. The lower use of cash in the current year was primarily due to a $28.9
million increase in net income versus the prior year. The increase in net income
is largely the result of $45.8 million of non-recurring transaction costs
incurred in the second quarter of 2000 associated with our recapitalization
offset by increased interest expense as a result of our new debt structure.
Investing Activities
Capital expenditures for the first nine months of 2001 were $15.6 million
compared with $12.8 million for the same period in 2000. The increase of $2.8
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. Also affecting investing activities was the sale
of our distribution facility in Memphis, Tennessee for proceeds of $4.0 million
(see Note 5 regarding Special Charges - 2001).
Financing Activities
Net cash provided by financing activities in the first nine months of 2001 was
$39.5 million compared with $46.4 million for the same period in 2000. The $6.9
million decrease in cash provided by financing activities in the current year
can be attributed to the results of our recapitalization in 2000. Seasonal
short-term borrowings are normally paid in full by the end of the fiscal year.
NEW ACCOUNTING STANDARDS
Accounting for Derivative Instruments and Hedging Activities
In June 1998, the Financial Accounting Standards Board (FASB) issued its
Statement of Financial Accounting Standards No. 133 (SFAS 133), "Accounting for
Derivative Instrument and Hedging Activities." Subsequently in June 2000, the
FASB issued SFAS No. 138, which amended 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 loss 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 nine month period ended September 29, 2001, the fair value of the
swap changed by an additional $1.5 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 (SAB 101), "Revenue Recognition in Financial Statements," 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.
19
Accounting for Business Combinations, Goodwill and Other Intangible Assets
In June 2001, the FASB approved its proposed Statements of Financial Accounting
Standards No. 141 (SFAS 141), "Business Combinations," and No. 142 (SFAS 142),
"Goodwill and Other Intangible Assets."
SFAS 141 supercedes Accounting Principles Board Opinion No. 16 (APB 16),
"Business Combinations." The most significant changes made by SFAS 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.
SFAS 142 supercedes APB 17, "Intangible Assets." SFAS 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 SFAS 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 SFAS 142 as of the beginning of our new
fiscal year on 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 SFAS 141 and
142 will have on our results of operations and financial condition.
Accounting for Asset Retirement Obligations
In June 2001, the FASB issued Statement of Financial Accounting Standards No.
143 (SFAS 143), "Accounting for Asset Retirement Obligations." The new statement
applies to legal obligations associated with the retirement of tangible
long-lived assets that result from the acquisition, construction, development
and (or) the normal operation of a long-lived asset, except for certain
obligations of lessees. The provisions of SFAS 143 are effective for financial
statements for fiscal years beginning after June 15, 2002, but allow for early
application. Initial application of this standard shall be as of the beginning
of an entity's fiscal year and requires an entity to recognize the cumulative
effect of initially applying this standard as a change in accounting principle.
We are currently evaluating the impact that SFAS 143 will have on our results of
operations and financial condition.
Accounting for Impairment of Long-Lived Assets
In August 2001, the FASB issued Statement of Financial Accounting Standards No.
144 (SFAS 144), "Accounting for Impairment of Long-Lived Assets." The new
standard supercedes FASB Statement No. 121 (SFAS 121), "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of."
Although retaining many of the fundamental recognition and measurement
provisions of SFAS 121, the new rules significantly change the criteria that
would have to be met to classify an asset as held-for-sale. The new standard
also supercedes the provisions of Accounting Principles Board Opinion No. 30
(APB 30), "Reporting the Results of Operations--Reporting the Effects of
Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently
Occurring Events and Transactions," and will require expected future operating
losses from discontinued operations to be displayed in discontinued operations
in the period(s) in which the losses are incurred rather than as of the
measurement date as presently required by APB 30. The provisions of SFAS 144 are
effective for financial statements for fiscal years beginning after December 15,
2001, but allow for early application. We plan to adopt this standard as of the
beginning of our new fiscal year on December 30, 2001. The provisions of SFAS
144 generally are to be applied prospectively, therefore, the adoption of this
standard will not affect previously reported financial information. We are
currently evaluating the impact that SFAS 144 will have on our results of
operations and financial condition.
20
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
There have been no material changes in our market risk during the nine months
ended September 29, 2001. For additional information, refer to Item 7A of the
2000 Form 10-K.
21
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 $3.0 million to $10.0 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. We await a written decision from the Court.
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. The parties are now into preparation for
the arbitration, having conducted discovery and exchanged expert opinions and
reports. The arbitration panel has reserved a total of six weeks for hearings,
commencing on December 3, 2001 through January 25, 2002, allowing for a break
for the holidays.
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
September 29, 2001
22
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized, on November 12, 2001.
JOSTENS, INC.
Registrant
By /s/ Robert C. Buhrmaster
---------------------------------------
Robert C. Buhrmaster
Chairman, President and
Chief Executive Officer
By /s/ John A. Feenan
--------------------------------------
John A. Feenan
Sr. Vice President and Chief
Financial Officer
23