-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, GdPUqi2t0SlUSqzOcqqgj+XtbP5naY57GQHpVtDyac8hFBGI8xjJ824qVqHNKfId Kr7p0VNJEovF3QQrvKiM9Q== 0001045969-99-000217.txt : 19990402 0001045969-99-000217.hdr.sgml : 19990402 ACCESSION NUMBER: 0001045969-99-000217 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 7 CONFORMED PERIOD OF REPORT: 19990102 FILED AS OF DATE: 19990331 FILER: COMPANY DATA: COMPANY CONFORMED NAME: JOSTENS INC CENTRAL INDEX KEY: 0000054050 STANDARD INDUSTRIAL CLASSIFICATION: JEWELRY, PRECIOUS METAL [3911] IRS NUMBER: 410343440 STATE OF INCORPORATION: MN FISCAL YEAR END: 0630 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 001-05064 FILM NUMBER: 99583199 BUSINESS ADDRESS: STREET 1: 5501 NORMAN CTR DR CITY: MINNEAPOLIS STATE: MN ZIP: 55437 BUSINESS PHONE: 6128303300 MAIL ADDRESS: STREET 1: 5501 NORMAN CENTER DRIVE CITY: MINNEAPOLIS STATE: MN ZIP: 55437 10-K 1 FORM 10-K UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Fiscal Year Ended January 2, 1999 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 (I.R.S. Employer of 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: (612-830-3300) Securities registered pursuant to Section 12(b) of the Act: Title of each class Name of each exchange on which registered - ---------------------------------- ----------------------------------------- Common Shares, $0.33 1/3 par value New York Stock Exchange Preferred Share Purchase Rights New York Stock Exchange Securities registered pursuant to Section 12(g) of the Act: None 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 [ ] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] The aggregate market value of voting stock held by nonaffiliates of the Registrant on March 3, 1999, was $779,308,114. The number of shares outstanding of Registrant's only class of common stock on March 3, 1999, was 35,134,930. Documents Incorporated by Reference Portions of the Registrant's 1998 Annual Report to Shareholders are incorporated by reference into Parts I, II and IV; Portions of the Registrant's Proxy Statement for Annual Meeting of Shareholders to be held April 22, 1999 are incorporated by reference into Part III. PART I Item 1. BUSINESS Jostens, Inc. ("Jostens" or the "company") was incorporated in 1906 under the laws of the State of Minnesota. Jostens is a leading provider of products and services that help people celebrate important moments, recognize achievements and build affiliations. The company's products include yearbooks, class rings, graduation products and school photography, as well as sports and employee achievement awards. In December 1998, the Board of Directors authorized the repurchase of up to $100 million shares of the company's common stock. Under the authorization, shares may be repurchased periodically in the open market and through privately negotiated transactions. The repurchase is to be funded from the company's cash, short-term investments and short-term borrowings. A similar $100 million repurchase program was authorized in July 1997 and completed in the fourth quarter of 1998. Under this program the company repurchased 4.4 million shares, including 3.6 million shares for $80 million in 1998. In fiscal year 1996, the company repurchased 7 million shares for $169 million. In June 1995, the company sold its Jostens Learning Corp. (JLC) curriculum software subsidiary to a group led by Bain Capital, Inc. As partial consideration for the sale, Jostens received two notes, which were discounted and recorded at their estimated fair values. In addition, the transaction gain of $13.2 million was deferred in accordance with the SEC Staff Accounting Bulletin No. 81, Gain Recognition on the Sale of a Business or Operating Assets to a Highly Leveraged Entity. The company recorded $12.9 million on its consolidated balance sheets representing the estimated fair value of the notes, net of the deferred gain. In January 1999, the company received information from JLC indicating to management that the carrying value of the notes were permanently impaired. As a result, the company wrote off $12 million in 1998 for the carrying value of the notes, net of miscellaneous JLC-related assets and liabilities, plus $3.7 million of net deferred tax assets associated with the initial sale of JLC that management does not expect to realize. In addition, the company did not record a tax benefit related to the write-off because it is currently not expected to be realized for tax purposes. Jostens' operations are classified into two business segments based upon products and services provided: school-based recognition products and services (School Products) and longevity and performance recognition products and services for business (Recognition). The School Products segment primarily manufactures and sells to school and college students products and services including yearbooks, class rings, graduation products and student photography packages. The Recognition segment manufactures and sells customized sales, service and business achievement awards. Business segment financial information is contained in Note 9 of the Notes to Consolidated Financial Statements on pages 39 through 41 of Jostens' 1998 Annual Report to Shareholders and is incorporated herein by reference. SCHOOL PRODUCTS SEGMENT School Products recognizes individual and group achievement and affiliation primarily in the academic market. School Products comprises four product lines: Printing & Publishing, Jewelry, Graduation Products and Photography. Printing & Publishing The company manufactures and sells student-created yearbooks in elementary schools, middle schools, high schools and colleges. The company's independent and employee sales representatives and their associates work closely with each school's yearbook staff (both students and a faculty adviser), assisting with the planning, editing, layout and printing scheduling until the yearbook is completed. The company's independent and employee sales representatives work with the faculty advisers to renew yearbook contracts each year. The company also prints commercial brochures, and promotional books and materials. Printing & Publishing contributed approximately 39 percent of School Products segment sales in 1998 and 1997 and 38 percent in 1996. 2 Jewelry The company manufactures and sells class rings primarily to high school and college students. This product line contributed approximately 30 percent of School Products segment sales in 1998, 1997 and 1996. Many schools have only one school-designated supplier to its students each year. Rings may be sold through bookstores, other campus stores, retail jewelry stores and within the school through temporary order-taking booths. The company, through its independent and employee sales representatives, manages the process of interacting with the students through ring design, promotion, ordering and presentation to relieve school officials of administrative burden connected with students purchasing this symbol of achievement. Graduation Products The company manufactures and sells graduation announcements and accessories, diplomas and caps and gowns to students and administrators in high schools and colleges. This product line contributed approximately 24 percent of School Products segment sales in 1998, 1997 and 1996. Jostens independent and employee sales representatives make calls on schools and sales are taken through temporary order-taking booths, telemarketing programs and college bookstores. Photography Photography provides class and individual school pictures to students in elementary, middle school and high school; high school senior portrait photography; photography for proms and other special events; and other photo-based products such as student ID cards. These services are provided through an employee sales force and independent dealers, who arrange the sittings/shootings at individual schools or in their own studios. This product line contributed approximately 7 percent of School Products segment sales in 1998 and 8 percent in 1997 and 1996. Seasonality This segment experiences strong seasonal business swings concurrent with the school year, with 40-45 percent of full-year sales and 55-65 percent of full-year operating income occurring in the period from April to June. The business generally requires short-term financing during the course of the year. Competition Consumers differentiate school products on the basis of price, quality, marketing and service. Printing & Publishing products competition is primarily made up of two national firms (Herff Jones and Taylor Publishing) and one smaller regional firm (Walsworth Publishing). All compete on the basis of price, print quality, product offerings and service. Technological offerings in the way of computer based publishing and curricula are becoming a more significant market differentiator. Customer service is particularly important in the sale of class rings because of the high degree of customization and the emphasis on timely delivery. Class rings with different quality and price points are marketed through different channels. Jewelry products competition is primarily made up of two national firms, Herff Jones and Commemorative Brands (CBI), which markets the Balfour and ArtCarved brands. Herff Jones distributes its product in schools, in a manner similar to the company's, while CBI distributes its product through multiple distribution channels including schools, independent and chain jewelers and mass merchandisers. In Graduation Products, several national and numerous local and regional competitors offer products similar to those of the company. In Photography products, the company competes with Lifetouch, Herff Jones and a variety of regional and locally owned and operated photographers. 3 RECOGNITION SEGMENT The Recognition segment helps companies and other organizations promote and recognize achievement in people's careers. It designs, communicates and administers programs to help customers improve performance and recognize employee service. It also produces awards for professional sports team accomplishments and affinity products for associations. Recognition serves customers from small and mid-size companies to global corporations, professional sports teams and special interest associations. Recognition offers an assortment of products and services tailored to the needs of the organization it is serving under a Strategic Recognition(TM) approach. For global companies, Jostens customizes programs to meet specific customer needs. Standardized programs, such as Symphony(TM) provide small and mid-size companies the same product and service features without complex customization. Recognition enjoys exclusive product and personalization distributor arrangements including Hartmann luggage and Lenox china for the service award marketplace. This business manufactures and markets a wide variety of products sold primarily to corporations and businesses in the United States and Canada. The products manufactured by Recognition include customized and personalized jewelry, rings, watches and engraved certificates. In addition, this business also markets items manufactured by others for incorporation into programs sold to Recognition customers. These products include items supplied by Lenox, Hartmann, Waterman, Howard Miller and Oneida. Recognition sells its products through independent and employee sales representatives who develop programs incorporating Recognition products. Competition The Recognition business competes primarily with O.C. Tanner and the Robbins Company on a national basis, as well as several regional companies. Recognition focuses on service and product offerings in competing with these companies. JOSTENS, INC. - INFORMATION REGARDING ALL BUSINESSES Backlog Because of the nature of the company's business, generally all orders are filled within a few months from the time of placement. However, the School Products segment obtains student yearbook contracts in one year for a significant portion of the yearbooks to be delivered in the next year. Often the prices of the yearbooks are not established at the time of the order because the content of the books may not have been finalized. Subject to the foregoing qualifications, the company estimates that as of January 2, 1999, the backlog of orders related to continuing operations was approximately $291.6 million, compared with $278.1 million at January 3, 1998, primarily related to student yearbooks, jewelry and graduation products. The company expects most of the January 2, 1999, backlog to be confirmed and filled in 1999. Environmental The information in the section "Commitments and Contingencies" on page 22 and in Note 7 on pages 36 through 37 in Jostens' 1998 Annual Report to Shareholders is incorporated herein by reference. 4 Raw Materials The principal raw materials that the company purchases are paper products, ink, gold and precious, semiprecious and synthetic stones. The cost of gold and precious, semiprecious and synthetic stones are affected by market volatility. Any material increase in the price of these raw materials could adversely impact the company's cost of sales. To manage the risk associated with gold price changes, the company enters into gold forward purchase contracts based upon the estimated ounces needed to satisfy projected orders for the upcoming school year. The company then sets ring prices at the beginning of the school year to reflect the locked-in gold price. The company purchases substantially all synthetic and semiprecious stones from a single supplier, located in Germany, which supplies semiprecious and synthetic stones to almost all of the class ring manufacturers in the United States. The company believes that the loss of this source of synthetic and semiprecious stones could adversely affect its business during the time period in which alternate sources adapted production capabilities to meet increased demand. Intellectual Property The company has no patents, licenses, franchises or concessions that are material to it as a whole, but does have a number of proprietary trade secrets, patents, trademarks and copyrights that it considers important. In addition, licenses are an important component of certain aspects of the company's businesses; however, the loss of any license would not have a material effect on the company's operations. Employees At February 28, 1999, the total number of employees of the company was approximately 6,800 (not including independent sales representatives). Because of seasonal fluctuations and the nature of the business, the number of employees tends to vary. As of February 28, 1999, the company had 394 employees who were members of two separate unions. The company has not had a work stoppage or strike that had a material impact on the company's operations. Foreign Operations The company's foreign sales are derived primarily from operations in Canada. The accounts and operations of the company's foreign businesses are not material. Local taxation, import duties, fluctuation in currency exchange rates and restrictions on exportation of currencies are among risks attendant to foreign operations, but these risks are not considered material with respect to the company's business. The profit margin on foreign sales is approximately the same as the profit margin on domestic sales. 5 Item 2. PROPERTIES The physical properties used by the Registrant and its significant business segments are summarized below:
- -------------------------------------------------------------------------------------------------------------------- Owned Approximate or Square Business Location Type of Property Leased Footage - -------------------------------------------------------------------------------------------------------------------- Corporate Bloomington, MN (1) Office Owned 116,000 - -------------------------------------------------------------------------------------------------------------------- Edina, MN Office Leased 21,000 - -------------------------------------------------------------------------------------------------------------------- School Products Anaheim, CA Office Leased 12,000 - -------------------------------------------------------------------------------------------------------------------- Attleboro, MA Manufacturing Owned 52,000 - -------------------------------------------------------------------------------------------------------------------- Burnsville, MN Office/Manufacturing Leased 47,000 - -------------------------------------------------------------------------------------------------------------------- Clarksville, TN Manufacturing Owned 105,000 - -------------------------------------------------------------------------------------------------------------------- Denton, TX Manufacturing Owned 56,000 - -------------------------------------------------------------------------------------------------------------------- Laurens, SC Manufacturing/Distribution Owned 97,700 - -------------------------------------------------------------------------------------------------------------------- Laurens, SC Warehouse Leased 105,000 - -------------------------------------------------------------------------------------------------------------------- Nuevo Laredo, Mexico Manufacturing Leased 36,000 - -------------------------------------------------------------------------------------------------------------------- Owatonna, MN Office Owned 88,000 - -------------------------------------------------------------------------------------------------------------------- Owatonna, MN Manufacturing Owned 30,000 - -------------------------------------------------------------------------------------------------------------------- Owatonna, MN Warehouse Leased 24,000 - -------------------------------------------------------------------------------------------------------------------- Red Wing, MN Manufacturing Owned 132,000 - -------------------------------------------------------------------------------------------------------------------- Shelbyville, TN Manufacturing Owned 87,000 - -------------------------------------------------------------------------------------------------------------------- State College, PA Manufacturing Owned 66,000 - -------------------------------------------------------------------------------------------------------------------- Topeka, KS Manufacturing Owned 236,000 - -------------------------------------------------------------------------------------------------------------------- Visalia, CA Manufacturing Owned 96,000 - -------------------------------------------------------------------------------------------------------------------- Winnipeg, MAN Manufacturing Owned 69,000 - -------------------------------------------------------------------------------------------------------------------- Winnipeg, MAN Office/Warehouse Leased 28,000 - -------------------------------------------------------------------------------------------------------------------- Winston-Salem, NC Manufacturing Owned 132,000 - -------------------------------------------------------------------------------------------------------------------- Webster, NY Manufacturing Owned 60,000 - -------------------------------------------------------------------------------------------------------------------- Recognition Memphis, TN Office/Distribution Center Owned 67,000 - -------------------------------------------------------------------------------------------------------------------- Princeton, IL Manufacturing Owned 65,000 - -------------------------------------------------------------------------------------------------------------------- Saddle Brook, NJ Office Leased 6,000 - -------------------------------------------------------------------------------------------------------------------- Sherbrooke, QUE Manufacturing Leased 15,000 - --------------------------------------------------------------------------------------------------------------------
(1) A portion of this facility has been financed through revenue bonds Management believes that the company's production facilities are suitable for their purpose and adequate to support its businesses. The extent of utilization of individual facilities varies due to the seasonal nature of the business. Item 3. LEGAL PROCEEDINGS In January 1999, a federal judge in Texas overturned a jury's $25.3 million verdict against Jostens in an antitrust lawsuit. The judge, acting on Jostens' post-trial motions, set aside the jury's verdict and dismissed all claims against Jostens in the case. Yearbook competitor Taylor Publishing, a unit of Insilco Holding Corp. and the plaintiff in the case has indicated in a press release that it intends to appeal the decision and will seek to have the jury verdict reinstated. No costs were accrued related to the lawsuit, because management determined a potential loss was unlikely. There are no other material pending or threatened legal, governmental, administrative or other proceedings to which the company or any subsidiary as a defendant or plaintiff is subject. 6 Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS - Not Applicable Executive Officers of the Registrant Incorporated by reference is information under the caption "Election of Directors" contained on pages 3 through 5 of Jostens' Proxy Statement for the Annual Meeting of Shareholders to be held on April 22, 1999. Executive officers of the Registrant are as follows:
Name Age Title and Business Experience - ---- --- ----------------------------- Robert C. Buhrmaster 51 Chairman of the Board, President and Chief Executive Officer Mr. Buhrmaster joined the company in December 1992 as Executive Vice President and Chief Staff Officer. He was named President and Chief Operating Officer in June 1993; was named Chief Executive Officer in March 1994; and was named Chairman in February 1998. Prior to joining the company, Mr. Buhrmaster was with Corning, Inc. for 18 years, most recently as Senior Vice President. He is also a director of The Toro Company. David J. Larkin 59 Executive Vice President and Chief Operating Officer Mr. Larkin joined the company in February 1998 in his current position. From 1995 to 1998, Mr. Larkin was an independent management consultant. Prior to 1995, he worked for Honeywell Inc. for 30 years, most recently as Chairman, President and CEO of Honeywell Limited in Canada. He is a director of Ault, Inc. Carl H. Blowers 59 Senior Vice President - Operations Mr. Blowers joined the company in May 1996 as an independent consultant serving as Division Vice President, Manufacturing & Engineering and was hired as an employee in 1997 and appointed to his current position in February 1998. Prior to joining the company, Mr. Blowers was with Corning, Inc. for 27 years, most recently as Vice President and General Manager of Corning's Advanced Materials and Process Technologies Division. William N. Priesmeyer 54 Senior Vice President and Chief Financial Officer Mr. Priesmeyer joined the company in August 1997 in his current position. From April to August 1997, Mr. Priesmeyer was Senior Vice President and CFO of MVE Holdings. From 1994 to 1997, he was Senior Vice President and CFO with Waldorf Corp.; and from 1993 to 1994 was Vice President and CFO for DataCard Corp. Michael Bailey 43 Vice President and General Manager - Jostens School Solutions Mr. Bailey joined the company in 1978. He has held a variety of leadership positions including director of marketing, planning manager for manpower and sales, national product sales director, division manager for Printing & Publishing and printing operations manager. He was appointed to his current position in January 1999. William J. George 50 Vice President, General Counsel & Secretary Mr. George joined the company in February 1999 in his current position. From 1995 to 1999, Mr. George was Vice President, General Counsel and Secretary of Simplex Time Recorder Co.From 1978 to 1995, he worked for Honeywell, Inc., most recently as Vice President and Associate General Counsel. Thomas W. Jans 50 Vice President-Consumer Marketing and Channel Development Mr. Jans joined the company in August 1995 as President of Business Recognition. He was appointed to his current position in January 1999. From 1992 to 1995, he worked for Carlson Travel, most recently as Executive Vice
7
Name Age Title and Business Experience - ---- --- ----------------------------- President of Global Sales and Marketing. Rodney Jordan 46 Vice President - Human Resources Mr. Jordan joined the company in 1981. He has served as staff attorney, senior attorney and assistant general counsel. He was named staff vice president-human resources in 1996. He was appointed to his current position in April 1998. Gregory S. Lea 46 Vice President and General Manager - College and University Mr. Lea joined the company in November 1993 as Vice President - Total Quality Management. He was named to his current position in June 1995. Prior to joining the company, Mr. Lea spent 19 years with International Business Machines Corp. in various financial, operations and quality positions. John J. Mann 54 Vice President and General Manager - Scholastic Mr. Mann joined the company in April 1996 as General Manager - Scholastic and was appointed to his current position in May 1997. Prior to joining the company, Mr. Mann was a director at Coopers & Lybrand Consulting. From 1991 to 1995, he worked for Grand Metropolitan PLC, most recently as Senior Vice President of strategic customer service development at Pillsbury. Lee U. McGrath 42 Vice President and Treasurer Mr. McGrath joined the company in May 1995 in his current position. For the six years prior to joining the company, he was the assistant treasurer for H.B. Fuller Company, a manufacturer of chemical products. Kevin M. Whalen 39 Vice President - Corporate Communications & Investor Relations Mr. Whalen joined the company in 1993 as Director - Corporate Communications and was appointed to his current position in May 1997. Prior to joining the company, he worked for Honeywell Inc. for two years as the Director of Corporate Public Relations.
8 PART II Item 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED SECURITY HOLDER MATTERS The information in the sections "Dividends" on page 22 and "Unaudited Quarterly Financial Data" on page 42 of Jostens' 1998 Annual Report to Shareholders is incorporated herein by reference. As of December 31, 1998, there were approximately 5,400 shareholders of record. Item 6. SELECTED FINANCIAL DATA The information for the years 1994 through 1998 on page 43 of Jostens' 1998 Annual Report to Shareholders is incorporated herein by reference. Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The information set forth in the section "Management Discussion and Analysis" on pages 16 through 22 of Jostens' 1998 Annual Report to Shareholders is incorporated herein by reference. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The information set forth in the section "Market Risk" on page 20 of Jostens' 1998 Annual Report to Shareholders is incorporated herein by reference. Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The Consolidated Financial Statements and Notes to Consolidated Financial Statements, together with the report thereon of independent auditors dated February 2, 1999, appearing on pages 23 through 42 and the information on page 43 (excluding fiscal years 1992-1993) of Jostens' 1998 Annual Report to Shareholders are incorporated herein by reference. Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTING AND FINANCIAL DISCLOSURE None. PART III Item 10. DIRECTORS AND OFFICERS OF THE REGISTRANT In addition to certain information as to executive officers of the company included in Part I of this Form 10-K, the information on pages 3 through 5 of Jostens' Proxy Statement for the Annual Meeting of Shareholders to be held April 22, 1999, with respect to directors and executive officers of the company, is incorporated herein by reference. Item 11. EXECUTIVE COMPENSATION Incorporated by reference is information under the caption "Executive Compensation" on pages 11 through 15 of Jostens' Proxy Statement for the Annual Meeting of Shareholders to be held April 22, 1999. Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT 9 Incorporated by reference is information under the captions "Principal Holders of Common Stock" on page 2 and "Shares held by Directors and Officers" on page 7 of Jostens' Proxy Statement for the Annual Meeting of Shareholders to be held April 22, 1999. Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS None. 10 PART IV Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (a) List of documents filed as part of this report: (1) Financial Statements - Consolidated Balance Sheets - January 2, 1999 and January 3, 1998 (incorporated by reference to page 25 of Jostens' 1998 Annual Report to Shareholders) Statements of Consolidated Operations for the years ended January 2, 1999, January 3, 1998, and December 28, 1996 (unaudited); Six-months ended December 28, 1996; and the year ended June 30, 1996 (incorporated by reference to page 24 of Jostens' 1998 Annual Report to Shareholders) Statements of Consolidated Cash Flows for the years ended January 2, 1999, January 3, 1998, and December 28, 1996 (unaudited); Six-months ended December 28, 1996; and the year ended June 30, 1996 (incorporated by reference to page 26 of Jostens' 1998 Annual Report to Shareholders) Statements of Consolidated Changes in Shareholders' Investment for the years ended January 2, 1999 and January 3, 1998; Six-months ended December 28, 1996; and the year ended June 30, 1996 (incorporated by reference to page 27 of Jostens' 1998 Annual Report to Shareholders) Notes to Consolidated Financial Statements (incorporated by reference to pages 28 through 42, and page 43 (excluding fiscal years 1992-1993) of Jostens' 1998 Annual Report to Shareholders) (2) Financial Statement Schedules - Schedule II - Valuation and Qualifying Accounts All other schedules for which provision is made in the applicable accounting regulations of the Securities and Exchange Commission have been omitted because they are not applicable or the required information is shown in the financial statements or notes thereto. (3) Exhibits 2 Stock Purchase Agreement by and between JLC Holdings, Inc. Software Systems Corp. and JLC Acquisition, Inc. and Jostens, Inc. (incorporated by reference to Exhibit 2.1 contained in the Current Report on Form 8-K filed on July 14, 1995). 3 Articles of Incorporation and Bylaws (Incorporated by reference to Exhibit 3(a) contained in the Annual Report on Form 10-K for 1993). 4 Rights Agreement, dated July 23, 1998, between Jostens, Inc. and Norwest Bank Minnesota, N.A. (incorporated by reference to the companyis Form 8-A filed on August 5, 1998). 4.1 Form of Indenture, dated May 1, 1991, between Jostens, Inc. and Norwest Bank Minnesota, N.A., as Trustee (incorporated by reference to Exhibit 4.1 contained in the company's Registration Statement on Form S-3, File No. 33-40233). 11 10 1984 Stock Option Plan (incorporated by reference to the company's Registration Statement on Form S-8, File No. 2-95076). 10.1 1987 Stock Option Plan (incorporated by reference to the company's Registration Statement on Form S-8, File No. 33-19308). 10.2 1992 Stock Incentive Plan (incorporated by reference to Exhibit 10(d) contained in the Annual Report on Form 10-K for 1992). 10.3 Form of Contract entered into with respect to Executive Supplemental Retirement Plan (incorporated by reference to the company's Registration Statement on Form 8 dated May 2, 1991). 10.4 Written description of the company's Retired Director Consulting Plan (incorporated by reference to the company's Registration Statement on Form 8 dated May 2, 1991). 10.5 1992 Stock Incentive Plan Performance Share Agreement (incorporated by reference to Exhibit 10(f) contained in the Annual Report on Form 10-K for 1997). 10.6 Deferred Compensation Plan (incorporated by reference to Exhibit 10(j) contained in the Annual Report on Form 10-K for 1997). 10.7 Jostens, Inc. Deferred Compensation Plan 1998 Revision and Jostens, Inc. Deferred Commission Plan 1998 Revision (incorporated by reference to the company's Registration Statement on Form S-8 filed on June 9, 1998, File No. 333-56455). 10.8 Jostens, Inc. Executive Change in Control Severance Pay Plan effective January 1, 1999. 10.9 Executive Stock Purchase Program dated February 15, 1999 (filed by the company on Form S-8 filed on February 12, 1999, File No. 333-72347). 13 Annual Report to Shareholders for the year ended January 2, 1999. 21 List of company subsidiaries. 23 Consent of Independent Auditors. 27 Financial Data Schedule. (b) Reports on Form 8-K No reports on Form 8-K were filed by Jostens during the quarter ended January 2, 1999. 12 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. JOSTENS, INC. March 31, 1999 By /s/ Robert C. Buhrmaster ----------------------------------- Robert C. Buhrmaster Chairman of the Board, President and Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. Signature Title Date - --------- ----- ---- /s/ Robert C. Buhrmaster Chairman of the Board, President March 31, 1999 - -------------------------- and Chief Executive Officer Robert C. Buhrmaster /s/ William N. Priesmeyer Senior Vice President and Chief March 31, 1999 - -------------------------- Financial Officer William N. Priesmeyer /s/ Lilyan H. Affinito Director March 31, 1999 - -------------------------- Lilyan H. Affinito /s/ Mannie L. Jackson Director March 31, 1999 - -------------------------- Mannie L. Jackson /s/ Jack W. Eugster Director March 31, 1999 - -------------------------- Jack W. Eugster /s/ Richard A. Zona Director March 31, 1999 - -------------------------- Richard A. Zona /s/ Kendrick B. Melrose Director March 31, 1999 - -------------------------- Kendrick B. Melrose /s/ Walker Lewis Director March 31, 1999 - -------------------------- Walker Lewis 13 JOSTENS, INC. AND SUBSIDIARIES SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS (In thousands)
Additions ----------------------------- Charged to Balance Charged to other Balance beginning costs and accounts - Deductions - end of Description of period expenses describe describe period - ------------------------------------------------------------------------------------------------------------------------------- Reserves and allowances deducted from asset accounts: Allowances for uncollectible accounts: Year ended January 2, 1999 $ 7,446 $ 1,858 $ - $ 1,996 (1) $7,308 Year ended January 3, 1998 $ 6,884 $ 2,245 $ - $ 1,683 (1) $7,446 Six months ended December 28, 1996 $ 5,966 $ 1,202 $ - $ 284 (1) $6,884 Year ended June 30, 1996 $ 9,049 $ 2,195 $ - $ 5,278 (1) $5,966 Allowances for sales returns: Year ended January 2, 1999 $ 5,569 $17,753 $ - $17,822 (2) $5,500 Year ended January 3, 1998 $ 4,787 $18,352 $ - $17,570 (2) $5,569 Six months ended December 28, 1996 $ 6,518 $ 6,308 $ - $ 8,039 (2) $4,787 Year ended June 30, 1996 $ 7,509 $12,951 $ - $13,942 (2) $6,518 Sales person overdraft reserves: Year ended January 2, 1999 $ 8,322 $ 1,947 $ - $ 3,208 (1) $7,061 Year ended January 3, 1998 $ 7,344 $ 2,946 $ - $ 1,968 (1) $8,322 Six months ended December 28, 1996 $ 6,545 $ 1,740 $ - $ 941 (1) $7,344 Year ended June 30, 1996 $ 6,157 $ 2,838 $ - $ 2,450 (1) $6,545
Note (1) -- Uncollectible accounts written off - net of recoveries. Note (2) -- Returns processed against reserve. 14 EX-10.8 2 EXECUTIVE CHANGE IN CONTROL SEVERANCE PAY PLAN Exhibit 10.8 JOSTENS, INC. EXECUTIVE CHANGE IN CONTROL SEVERANCE PAY PLAN As Adopted Effective January 1, 1999 JOSTENS, INC. EXECUTIVE CHANGE IN CONTROL SEVERANCE PAY PLAN Table of Contents Page ARTICLE 1. INTRODUCTION.....................................................1 1.1. PLAN NAME..........................................................1 1.2. PLAN TYPE..........................................................1 1.3. PLAN PURPOSE.......................................................1 ARTICLE 2. DEFINITIONS, CONSTRUCTION AND INTERPRETATIONS....................1 2.1. AFFILIATE..........................................................1 2.2. BASE PAY...........................................................1 2.3. BENEFIT PLAN.......................................................1 2.4. BOARD..............................................................2 2.5. CAUSE..............................................................2 2.6. CHANGE IN CONTROL..................................................3 2.7. CODE...............................................................4 2.8. COMPANY............................................................4 2.9. CONTINUATION PERIOD................................................4 2.10. DATE OF TERMINATION................................................4 2.11. ELIGIBLE PARTICIPANT...............................................5 2.12. ERISA..............................................................5 2.13. EXCHANGE ACT.......................................................5 2.14. GOOD REASON........................................................6 2.15. GOVERNING LAW......................................................7 2.16. HEADINGS...........................................................7 2.17. NOTICE OF TERMINATION..............................................7 2.18. NUMBER AND GENDER..................................................7 2.19. OTHER ARRANGEMENT..................................................7 2.20. PARENT CORPORATION.................................................7 2.21. PARTICIPANT........................................................7 2.22. PLAN...............................................................8 2.23. PERSON.............................................................8 2.24. QUALIFIED EMPLOYEE.................................................8 2.25. SUCCESSOR..........................................................8 2.26. TRUST..............................................................8 2.27. TRUSTEE............................................................8 ARTICLE PARTICIPATION AND ELIGIBILITY FOR BENEFITS..........................9 3.1. COMMENCEMENT OF PARTICIPATION......................................9 3.2. CEASING TO BE A QUALIFIED EMPLOYEE.................................9 3.3. ELIGIBILITY FOR BENEFITS...........................................9 ARTICLE BENEFITS...........................................................10 4.1. COMPENSATION AND BENEFITS BEFORE DATE OF TERMINATION..............10 4.2. CASH PAYMENT......................................................10 4.3. CONTINUATION OF CERTAIN WELFARE BENEFITS..........................11 4.4. CONTINUATION OF PERQUISITES.......................................12 4.5. EXCESS PARACHUTE PAYMENTS.........................................12 4.6. INDEMNIFICATION...................................................13 ARTICLE ADMINISTRATION AND ENFORCEMENT OF RIGHTS...........................13 5.1. PLAN ADMINISTRATION...............................................13 5.2. AMENDMENT AND TERMINATION.........................................13 i 5.3. BENEFIT CLAIMS....................................................14 5.4. DISPUTES..........................................................14 5.5. FUNDING AND PAYMENT...............................................15 ARTICLE MISCELLANEOUS......................................................15 6.1. SUCCESSORS........................................................15 6.2. BINDING PLAN......................................................16 6.3. VALIDITY..........................................................16 6.4. NO MITIGATION.....................................................16 6.5. NO SET-OFF........................................................16 6.6. TAXES.............................................................16 6.7. NOTICES...........................................................16 6.8. EFFECT OF PLAN BENEFITS ON OTHER SEVERANCE PLANS..................16 6.9. RELATED PLANS.....................................................16 6.10. NO EMPLOYMENT OR SERVICE CONTRACT.................................17 6.11. SURVIVAL..........................................................17 6.12. EFFECT ON OTHER PLANS.............................................17 6.13. PROHIBITION OF ALIENATION.........................................17 6.14. NOTICE OF REEMPLOYMENT............................................17 ii JOSTENS, INC. EXECUTIVE CHANGE IN CONTROL SEVERANCE PAY PLAN ARTICLE 1. INTRODUCTION 1.1. Plan Name. The name of the Plan is the "Jostens, Inc. Executive Change in Control Severance Pay Plan." 1.2. Plan Type. The Plan is an unfunded plan maintained by the Company primarily for the purpose of providing benefits for a select group of management or highly compensated employees and, as such, is intended to be exempt from the provisions of Parts 2, 3 and 4 of Subtitle B of Title I of ERISA, to the extent such provisions would otherwise be applicable, by operation of Sections 201(2), 301(a)(3) and 401(a)(1) thereof, respectively. The Plan is also intended to be unfunded for tax purposes. The Plan will be construed in a manner that gives effect to such intent. 1.3. Plan Purpose. The purpose of the Plan is to provide benefits to Qualified Employees whose employment is terminated in connection with a Change in Control. ARTICLE 2. DEFINITIONS, CONSTRUCTION AND INTERPRETATIONS The definitions and rules of construction and interpretation set forth in this Article 2 apply in construing the Plan unless the context otherwise indicates. 2.1. Affiliate. An "Affiliate" is: (a) any corporation at least a majority of whose outstanding securities ordinarily having the right to vote at elections of directors is owned directly or indirectly by the Parent Corporation; or (b) any other form of business entity in which the Parent Corporation, by virtue of a direct or indirect ownership interest, has the right to elect a majority of the members of such entity's governing body. 2.2. Base Pay. The "Base Pay" of a Participant is his or her annual base salary from the Company at the rate in effect immediately prior to the Change in Control or at the time Notice of Termination is given, whichever is greater. Base Pay includes only regular cash salary and is determined before any reduction or deduction of any kind. 2.3. Benefit Plan. A "Benefit Plan" is any (a) employee benefit plan as defined in ERISA Section 3(3), (b) cafeteria plan described in Code Section 125, (c) plan, policy or practice providing for paid vacation, other paid time off or short- or long-term profit sharing, bonus or incentive payments or perquisites or (d) stock option, stock purchase, restricted stock, phantom stock, stock appreciation right or other equity-based compensation plan that is sponsored, maintained or contributed to by the Company for the benefit of employees (and/or their families and dependents) generally or a Participant (and/or a Participant's family and dependents) in particular. 2.4. Board. The "Board" is the board of directors of the Parent Corporation duly qualified and acting at the time in question. On and after the date of a Change in Control, any duty of the Board in connection with the Plan is nondelegable and any attempt by the Board to delegate any such duty is ineffective. 2.5. Cause. (a) Subject to Subsection (b), "Cause" with respect to a particular Participant is any of the following: (i) the Participant's gross misconduct; (ii) the Participant's willful and continued failure to perform substantially his or her duties with the Company (other than any such failure relating to changes in the Participant's duties after a Change in Control that constitute Good Reason) after a demand for substantial performance is delivered to the Participant by the Chair of the Board which specifically identifies the manner in which the Board believes that the Participant has not substantially performed his or her duties and provides for a reasonable period of time within which the Participant may take corrective measures; or (iii) the Participant's conviction (including a plea of nolo contendere) of willfully engaging in illegal conduct constituting a felony or gross misdemeanor under federal or state law which is materially and demonstrably injurious to the Company or which impairs the Participant's ability to perform substantially his or her duties with the Company. An act or failure to act will be considered "gross" or "willful" for this purpose only if done, or omitted to be done, by the Participant in bad faith and without reasonable belief that it was in, or not opposed to, the best interests of the Company. Any act, or failure to act, based upon authority given pursuant to a resolution duly adopted by the Board (or a committee thereof) or based upon the advice of counsel for the Company will be conclusively presumed to be taken or not taken by the Participant in good faith and in the best interests of the Company. In addition, the Participant's attention to matters not directly related to the business of the Company will not provide a basis for termination for Cause so long as the Board did not expressly disapprove in writing to the Participant's engagement in such activities either before or within a reasonable time after the Board knew or reasonably should have known that the Participant engaged in the activities. (b) Notwithstanding Subsection (a), a Participant may not be terminated for Cause unless and until there has been delivered to the Participant a copy of a resolution duly adopted by the affirmative vote of not less than a majority of the entire membership of the Board at a meeting of the Board called and held for such purpose (after reasonable notice to such Participant and an opportunity for the Participant, together with his or her counsel, to be heard before the Board), finding that in the 2 good faith opinion of the Board the Participant was guilty of the conduct set forth in clause (i), (ii) or (iii) of Subsection (a) and specifying the particulars thereof in detail. 2.6. Change in Control. (a) "Change in Control" is the occurrence of any of the following on or after January 1, 1999: (i) the sale, lease, exchange or other transfer, directly or indirectly, of all or substantially all of the assets of the Parent Corporation, in one transaction or in a series of related transactions, to any Person; (ii) the approval by the stockholders of the Parent Corporation of any plan or proposal for the liquidation or dissolution of the Parent Corporation; (iii) any Person, other than a "bona fide underwriter," is or becomes the "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of (1) 20 percent or more, but not more than 50 percent, of the combined voting power of the Parent Corporation's outstanding securities ordinarily having the right to vote at elections of directors, unless the transaction resulting in such ownership has been approved in advance by the "continuity directors," as defined at Subsection (b) or (2) more than 50 percent of the combined voting power of the Parent Corporation's outstanding securities ordinarily having the right to vote at elections of directors (regardless of any approval by the continuity directors); (iv) a merger or consolidation to which the Parent Corporation is a party if the stockholders of the Parent Corporation immediately prior to the effective date of such merger or consolidation have, solely on account of ownership of securities of the Parent Corporation at such time, "beneficial ownership" (as defined in Rule 13d-3 under the Exchange Act) immediately following the effective date of such merger or consolidation of securities of the surviving corporation representing (1) 50 percent or more, but not more than 80 percent, of the combined voting power of the surviving corporation's then outstanding securities ordinarily having the right to vote at elections of directors, unless such merger or consolidation has been approved in advance by the continuity directors, or (2) less than 50 percent of the combined voting power of the surviving corporation's then outstanding securities ordinarily having the right to vote at elections of directors (regardless of any approval by the continuity directors); or (v) the continuity directors cease for any reason to constitute at least a majority the Board. (b) For purposes of this section- (i) "Continuity director" means any individual who was a member of the Board on April 24, 1998, while he or she is a member of the Board, and any individual who subsequently becomes a member of the Board whose election, or nomination for election by the Parent Corporation's stockholders, was approved by a vote of at least a majority of the directors who are continuity directors (either by a specific vote or by approval of the proxy statement of the Parent Corporation in which such individual is named as a nominee for director without objection to such nomination). For example, if a majority of the seven individuals constituting the Board on April 24, 1998, approved a proxy statement in which two different individuals were nominated to replace two of the individuals who were members of the Board on April 24, 1998, the two newly elected directors would join the five remaining directors who were members of the Board on April 24, 1998 as continuity directors. Similarly, if a majority of those seven directors approved a proxy statement in which three different individuals were nominated to replace three other directors who were members of the Board on April 24, 1998, the 3 three newly elected directors would also become, along with the other four directors, continuity directors. Individuals subsequently joining the Board could become continuity directors under the principles reflected in this example. (ii) "Bona fide underwriter" means a Person engaged in business as an underwriter of securities that acquires securities of the Parent Corporation from the Parent Corporation through such Person's participation in good faith in a firm commitment underwriting until the expiration of 40 days after the date of such acquisition. 2.7. Code. The "Code" is the Internal Revenue Code of 1986, as amended. Any reference to a specific provision of the Code includes a reference to such provision as it may be amended from time to time and to any successor provision. 2.8. Company. The "Company" is the Parent Corporation, any Successor and any Affiliate. 2.9. Continuation Period. The "Continuation Period" with respect to an Eligible Participant is the period that begins on the Eligible Participant's Date of Termination and ends on the last day of the (a) thirty-sixth month that begins after the Eligible Participant's Date of Termination if, immediately prior to the date of the Change in Control (or, if earlier, immediately prior to the Eligible Participant's Date of Termination), the Eligible Participant was the Chief Executive Officer of the Parent Corporation, or (b) twenty-fourth month that begins after the Eligible Participant's Date of Termination if, immediately prior to the date of the Change in Control (or, if earlier, immediately prior to the Eligible Participant's Date of Termination), the Eligible Participant was the President of the Parent Corporation (unless the Chief Executive Officer of the Parent Corporation is also the President of the Parent Corporation, in which case the Continuation Period will be the period specified in clause (a)), an Executive Vice President of the Parent Corporation or a Senior Vice President of the Parent Corporation, or (c) eighteenth month that begins after the Eligible Participant's Date of Termination if, immediately prior to the date of the Change in Control (or, if earlier, immediately prior to the Eligible Participant's Date of Termination), the Eligible Participant was a Vice President of the Parent Corporation elected by the Board other than an Executive Vice President or Senior Vice President, or (d) fifteenth month that begins after the Eligible Participant's Date of Termination in the case of any other Eligible Participant. 4 2.10. Date of Termination. The "Date of Termination" with respect to a Participant following a Change in Control (or prior to a Change in Control if the Participant's termination was either a condition of the Change in Control or was at the request or insistence of any Person related to the Change in Control) means: (a) if the Participant's employment is to be terminated by the Participant for Good Reason, the date specified in the Notice of Termination which in no event may be a date more than 15 days after the date on which Notice of Termination is given unless the Company expressly agrees in writing to a later date; (b) if the Participant's employment is to be terminated by the Company for Cause, the date specified in the Notice of Termination; (c) if the Participant's employment is terminated by reason of his or her death, the date of his or her death; or (d) if the Participant's employment is to be terminated by the Company for any reason other than Cause or his or her death, the date specified in the Notice of Termination, which in no event may be a date earlier than 15 days after the date on which a Notice of Termination is given, unless the Participant expressly agrees in writing to an earlier date. If the Company terminates a Participant's employment for Cause following a Change in Control (or prior to a Change in Control if the Participant's termination was either a condition of the Change in Control or was at the request or insistence of any Person related to the Change in Control) and the Participant has not previously expressly agreed in writing to the termination, then within the 30-day period after the Participant's receipt of the Notice of Termination, the Participant may notify the Company that a dispute exists concerning the termination, in which event the Date of Termination will be the date set either by mutual written agreement of the parties or by the arbitrators or a court in a proceeding as provided in Section 5.4. During the pendency of any such dispute, the Participant will continue to make himself or herself available to provide services to the Company and the Company will continue to pay the Participant his or her full compensation and benefits in effect immediately prior to the date on which the Notice of Termination is given (without regard to any changes to such compensation or benefits which constitute Good Reason) and until the dispute is resolved in accordance with Section 5.4. The Participant will be entitled to retain the full amount of any such compensation and benefits without regard to the resolution of the dispute unless the arbitrators or judge decide(s) that the Participant's claim of a dispute was frivolous or advanced by the Participant in bad faith. 2.11. Eligible Participant. An "Eligible Participant" is a Participant who has become eligible to receive benefits pursuant to Section 3.3. 2.12. ERISA. "ERISA" is the Employee Retirement Income Security Act of 1974, as amended. Any reference to a specific provision of ERISA includes a reference to such provision as it may be amended from time to time and to any successor provision. 5 2.13. Exchange Act. The "Exchange Act" is the Securities Exchange Act of 1934, as amended. Any reference to a specific provision of the Exchange Act or to any rule or regulation thereunder includes a reference to such provision as it may be amended from time to time and to any successor provision. 2.14. Good Reason. (a) Subject to Subsection (a), "Good Reason" with respect to a Participant is any of the following: (i) a change in the Participant's title(s), status, position(s), authority, duties or responsibilities as an executive of the Company as in effect at any time during the 90-day period ending on the date of the Change in Control which, in the Participant's reasonable judgment, is adverse (other than, if applicable, any such change directly attributable to the fact that the Parent Corporation is no longer publicly owned); provided, however, that Good Reason does not include a change in a Participant's title(s), status, position(s), authority, duties or responsibilities caused by an insubstantial and inadvertent action that is remedied by the Company promptly after receipt of notice of such change is given by the Participant; (ii) a reduction by the Company in the Participant's Base Pay, or an adverse change in the form or timing of the payment thereof, as in effect immediately prior to the Change in Control or as thereafter increased or by a reduction in the Participant's target annual incentive award as in effect immediately prior to the Change in Control or as thereafter increased; (iii) the failure by the Company to cover the Participant under Benefit Plans that, in the aggregate, provide substantially similar benefits to the Participant and/or his or her family and dependents at a substantially similar total cost to the Participant (e.g., premiums, deductibles, co-pays, out of pocket maximums, required contributions, taxes and the like) relative to the benefits and total costs under the Benefit Plans in which the Participant (and/or his or her family or dependents) is participating at any time during the 90-day period immediately preceding the Change in Control; (iv) the Company's requiring a Participant to be based more than 30 miles from where his or her office is located immediately prior to the Change in Control, except for required travel on the Company's business, and then only to the extent substantially consistent with the business travel obligations which the Participant undertook on behalf of the Company during the 180-day period ending on the date of the Change in Control (without regard to travel related to or in anticipation of the Change in Control); (v) the failure of the Parent Corporation to obtain from any Successor the assent to this Plan contemplated by Section 6.1; (vi) any purported termination by the Company of a Participant's employment which is not properly effected pursuant to a Notice of Termination and pursuant to any other requirements of this Plan, and for purposes of this Plan, no such purported termination will be effective; or (vii) any refusal by the Company to continue to allow a Participant to attend to matters or engage in activities not directly related to the business of the Company which, at any time 6 prior to the Change in Control, the Participant was not expressly prohibited by the Company from attending to or engaging in. (b) A Participant's continued employment does not constitute consent to, or waiver of any rights arising in connection with, any circumstance constituting Good Reason. Termination by a Participant of his or her employment for Good Reason as defined in this section will constitute Good Reason for all purposes of this Plan, notwithstanding that the Participant may also thereby be deemed to have "retired" under any applicable retirement programs of the Company. 2.15. Governing Law. To the extent that state law is not preempted by provisions of ERISA or any other laws of the United States, all questions pertaining to the construction, validity, effect and enforcement of this Plan will be determined in accordance with the internal, substantive laws of the State of Minnesota, without regard to the conflict of laws principles of the State of Minnesota or of any other jurisdiction. 2.16. Headings. The headings of articles and sections are included solely for convenience. If there is a conflict between the headings and the text of the Plan, the text will control. 2.17. Notice of Termination. A "Notice of Termination" is a written notice given on or after the date of a Change in Control (unless the termination before the date of the Change in Control was either a condition of the Change in Control or was at the request or insistence of any Person related to the Change in Control in which case the written notice may be given before the date of the Change in Control) which indicates the specific termination provision in this Plan pursuant to which the notice is given. Any purported termination by the Company or by a Participant for Good Reason on or after the date of a Change in Control (or before the date of the Change in Control if the termination was either a condition of the Change in Control or was at the request or insistence of any Person related to the Change in Control) must be communicated by written Notice of Termination to be effective; provided, that a Participant's failure to provide Notice of Termination will not limit any of his or her rights under the Plan except to the extent the Company demonstrates that it suffered material actual damages by reason of such failure. 2.18. Number and Gender. Wherever appropriate, the singular number may be read as the plural, the plural number may be read as the singular and a reference to one gender may be read as a reference to the other. 2.19. Other Arrangement. An "Other Arrangement" is any Benefit Plan or other plan, policy or practice of the Company or any other agreement between the Participant and the Company, other than the Plan. 2.20. Parent Corporation. The "Parent Corporation" is Jostens, Inc. and any Successor. 2.21. Participant. A "Participant" is a Qualified Employee who is participating in the Plan pursuant to Article 3. 7 2.22. Plan. The "Plan" is that set forth in this instrument as it may be amended from time to time. 2.23. Person. A "Person" includes any individual, corporation, partnership, group, association or other "person," as such term is used in Section 13 (d) or Section 14(d) of the Exchange Act, other than the Parent Corporation, any Affiliate or any benefit plan sponsored by the Parent Corporation or an Affiliate. 2.24. Qualified Employee. (a) A "Qualified Employee" is an individual who (i) is either (1) employed by the Parent Corporation as an executive officer of the Parent Corporation elected by the Board or (2) employed by the Company as a management or highly compensated employee, as determined by the Chief Executive Officer of the Parent Corporation, and selected as a Qualified Employee by the Chief Executive Officer of the Parent Corporation and (ii) is not a party to a separate written agreement with the Company which by its express terms specifically provides that the individual is not eligible to participate in the Plan. (b) An individual who, during the 90-day period ending on the date of a Change in Control, ceases to be an executive officer of the Parent Corporation elected by the Board, will nevertheless remain a Qualified Employee until his or her Date of Termination. (c) In the case of an individual who is selected as a Qualified Employee pursuant to Subsection (a)(i)(2), the Chief Executive Officer of the Parent Corporation may at any time prior to a Change in Control, but not thereafter, determine that the individual is no longer a Qualified Employee but as to that individual, the Chief Executive Officer's determination will be deemed to be an amendment to the Plan subject to the provisions of Section 5.2(a). 2.25. Successor. A "Successor" is any Person that succeeds to, or has the practical ability to control (either immediately or solely with the passage of time), the Parent Corporation's business directly, by merger, consolidation or other form of business combination, or indirectly, by purchase of the Parent Corporation's outstanding securities ordinarily having the right to vote at the election of directors, all or substantially all of its assets or otherwise. 2.26. Trust. "Trust" means the trust or trusts, if any, established by the Company pursuant to Section 5.5. 2.27. Trustee. "Trustee" means the one or more banks or trust companies which at the relevant time has or have been appointed by the Company to act as Trustee of the Trust. 8 ARTICLE 3. PARTICIPATION AND ELIGIBILITY FOR BENEFITS 3.1. Commencement of Participation. (a) An individual who is employed by the Parent Corporation as an executive officer of the Parent Corporation elected by the Board will commence participation in the Plan on the first day on which he or she performs services for the Parent Corporation as an executive officer of the Parent Corporation elected by the Board. (b) An individual who is selected by the Chief Executive Officer of the Parent Corporation as a Qualified Employee pursuant to Section 2.24(a)(i)(2) will commence participation in the Plan as of the date specified by the Chief Executive Officer of the Parent Corporation in a notice to the individual regarding his or her selection. (c) Notwithstanding any other provision of the Plan to the contrary, no individual will commence participation in the Plan on or after the date of a Change in Control. 3.2. Ceasing to be a Qualified Employee. (a) A Participant who ceases for any reason to be a Qualified Employee will, except with respect to any current or future benefit to which he or she is then entitled, thereupon cease his or her participation in the Plan. (b) Notwithstanding any other provision of the Plan to the contrary, a Participant will cease to be a Qualified Employee if, prior to the date of a Change in Control: (i) an Affiliate is sold, merged, transferred or in any other manner or for any other reason ceases to be an Affiliate or all or any portion of the business or assets of an Affiliate are sold, transferred or otherwise disposed of and no Change in Control occurs in connection therewith; (ii) the Participant's primary employment duties are with the Affiliate at the time of the occurrence of such event; and (iii) such Participant does not, in conjunction therewith, transfer employment directly to the Parent Corporation or another Affiliate as a Qualified Employee. 3.3. Eligibility for Benefits. (a) A Participant will become eligible for the benefits provided in Article 4 if and only if (i) (1) the Company terminates his or her employment for any reason other than his or her death or Cause or (2) the Participant terminates employment with the Company for Good Reason and (ii) the termination occurs within the period beginning on the date of a Change in Control and ending on the last day of the twenty-fourth month that begins after the month in which the Change in Control occurs or prior to a Change in Control if the termination was either a condition of the Change in Control or at the request or insistence of a Person related to the Change in Control. (b) If, on or after the date of a Change in Control, an Affiliate is sold, merged, transferred or in any other manner or for any other reason ceases to be an Affiliate or all or any portion of the business or assets of an Affiliate is or are sold, transferred or otherwise disposed of and the acquiror is not the Parent Corporation or an Affiliate (a "Disposition"), any individual who was a Qualified Employee immediately prior to the Disposition and who remains or becomes employed by the acquiror or any Person that, directly or indirectly, through one or more intermediaries, controls or is controlled by, or is under common control with, the acquiror (an "Acquiror Affiliate") in connection with the Disposition will be deemed to have terminated employment on the effective 9 date of the Disposition for purposes of Subsection (a) unless (i) the acquiror and the Acquiror Affiliates jointly and severally expressly assume and agree, in a manner that is enforceable by the individual, to perform the obligations of this Plan to the same extent that the Company would be required to perform if the Disposition had not occurred and (ii) the Successor guarantees, in a manner that is enforceable by the individual, payment and performance by the acquiror. ARTICLE 4. BENEFITS 4.1. Compensation and Benefits Before Date of Termination. During the period beginning on the date a Participant or the Company, as the case may be, receives Notice of Termination and ending on the Date of Termination, the Company will continue to pay the Participant his or her Base Pay and cause his or her continued participation in all Benefit Plans in accordance with the terms of such Benefit Plans. 4.2. Cash Payment. (a) The Company will make a cash payment to an Eligible Participant in an amount equal to the product of the applicable amount determined under clause (i) multiplied by the applicable factor determined under clause (ii). (i) The applicable amount with respect to an Eligible Participant is the sum of the Eligible Participant's Base Pay plus the greater of (1) the amount of the Eligible Participant's target annual incentive award for the fiscal year of the Company during which the Date of Termination occurs and (2) the average amount of the Eligible Participant's actual annual incentive award for the three consecutive fiscal years of the Company ending immediately prior to the date of the Change in Control (or if the Eligible Participant was not an employee of the Company for such three-year period, the average amount of his or her actual annual incentive award for any prior full fiscal years of the Company). (ii) The applicable factor with respect to an Eligible Participant is (1) three if, immediately prior to the date of the Change in Control (or, if earlier, immediately prior to the Eligible Participant's Date of Termination), the Eligible Participant was the Chief Executive Officer of the Parent Corporation, or (2) two if, immediately prior to the date of the Change in Control (or, if earlier, immediately prior to the Eligible Participant's Date of Termination), the Eligible Participant was the President of the Parent Corporation (unless the Chief Executive Officer of the Parent Corporation is also the President of the Parent Corporation, in which case the applicable factor is the factor specified in item (1)), an Executive Vice President of the Parent Corporation or a Senior Vice President of the Parent Corporation, or (3) one and one-half if, immediately prior to the date of the Change in Control (or, if earlier, immediately prior to the Eligible Participant's Date of Termination), the Eligible Participant was a Vice President of the Parent Corporation elected by the Board other than an Executive Vice President or Senior Vice President, or 10 (4) one and one-quarter in the case of any other Eligible Participant. The payment pursuant to this subsection is in lieu of any other cash bonus payment to which the Eligible Participant may otherwise be entitled under any annual bonus plan for the period that includes the Participant's Date of Termination. (b) The Company will make a lump sum cash payment to an Eligible Participant in an amount equal to the amount by which the actuarially equivalent lump sum value of the benefit he or she would have received under the Company Pension Plans had he or she remained employed with the Company until the end of his or her Continuation Period and had his or her benefit under all such Company Pension Plans been fully vested exceeds the actuarially equivalent lump sum value of the benefit which he or she is actually entitled to receive under the Company Pension Plans. For purposes of applying the foregoing sentence: (i) Company Pension Plan means each qualified or nonqualified defined benefit pension plan, arrangement or agreement maintained by the Company and covering the Eligible Participant, or to which the Company and the Eligible Participant are parties, as in effect immediately prior to the Eligible Participant's Date of Termination (without regard to any changes to such plans, arrangements or agreements that constitute Good Reason); (ii) An Eligible Participant will be deemed to have continued employment during the Continuation Period in the same position and on the same schedule as in effect immediately prior to his or her Date of Termination (without regard to any change that constitutes Good Reason) and will be deemed to have received compensation equal to the amount of the cash payment pursuant to Subsection (a) but paid ratably over the Continuation Period; (iii) The Participant will be deemed to commence his or her benefit under each Company Pension Plan as of his or her normal retirement date under the Company Pension Plan (of if later as of the first day of the month first following the Participant's Date of Termination) in the normal form of payment under the Company Pension Plan; and (iv) Actuarial equivalence will be determined based on the assumptions used as of the date of the payment pursuant to this section to determine the value of a lump sum payment of $5000 or less under the Jostens Pension Plan D (or any successor plan) or if that plan has been terminated without the establishment of a successor plan, based on the assumptions used to determine the value of lump sum payments of $5000 or less in connection with the termination. (c) The amounts determined under Subsections (a) and (b) will be paid in a single lump sum within ten days after the Eligible Participant's Date of Termination or, if later, within ten business days following the date of the Change in Control. 11 4.3. Continuation of Certain Welfare Benefits. (a) Through the end of an Eligible Participant's Continuation Period or, if earlier, through the last day of the first month after the Eligible Participant's Date of Termination during which the Eligible Participant commences full-time employment, the Company will provide, or arrange to provide, medical, dental, vision and life insurance benefits (excluding premium conversion or flexible spending accounts under any cafeteria plan) to each Eligible Participant (and his or her family members and dependents who were eligible to be covered at any time during the 90-day period ending on the date of a Change in Control for the period after the Change in Control in which such family members and dependents would otherwise continue to be covered under the terms of the applicable Benefit Plan in effect immediately prior to the Change in Control) under the same terms and at the same cost to the Eligible Participant and his or her family members and dependents as similarly situated executives who continue to be employed by the Company (without regard to any reduction in such benefits that constitutes Good Reason). (b) To the extent an Eligible Participant incurs a tax liability (including federal, state and local taxes and any interest and penalties with respect thereto) in connection with a benefit provided pursuant to Subsection (a) which he or she would not have incurred had he or she been an active employee of the Company participating in the Company's Benefit Plan, the Company will make a payment to the Eligible Participant in an amount equal to such tax liability plus an additional amount sufficient to permit the Eligible Participant to retain a net amount after all taxes (including penalties and interest) equal the initial tax liability in connection with the benefit. For purposes of applying the foregoing, an Eligible Participant's tax rate will be deemed to be the highest statutory marginal state and federal tax rate (on a combined basis) then in effect. The payment pursuant to this subsection will be made within ten days after the Eligible Participant's remittal of a written request therefor accompanied by a statement indicating the basis for and amount of the liability. 4.4. Continuation of Perquisites. Through the end of an Eligible Participant's Continuation Period or, if earlier, through the last day of the first month after the Eligible Participant's Date of Termination during which the Eligible Participant commences full-time employment, the Company will provide the Eligible Participant with the same perquisites he or she was entitled to receive immediately prior to his or her Date of Termination (without regard to any reduction in perquisites that constitutes Good Reason). 4.5. Excess Parachute Payments. (a) In the case of an Eligible Participant who, immediately prior to the date of a Change in Control, was the Chief Executive Officer of the Parent Corporation, an Executive Vice President of the Parent Corporation or a Senior Vice President of the Parent Corporation, following the Change in Control, the Company will cause its independent auditors promptly to review, at the Company's sole expense, the applicability of Code Section 4999 to any payment or distribution of any type by the Company to such Participant or for his or her benefit, whether paid or payable or distributed or distributable pursuant to the terms of this Plan, any other Benefit Plan or otherwise (the "Total Payments"). If the auditor determines that the Total Payments result in an excise tax imposed by Code Section 4999 or any comparable state or local law or any interest or penalties with respect to such excise tax (such excise tax, together with any such interest and penalties, are collectively referred to as the "Excise Tax"), the Company will make an additional cash payment (a "Gross-Up Payment") to the Participant within 10 days after such determination equal to an amount such that after payment by the Participant of all taxes (including any interest or penalties imposed with respect to such taxes), including any Excise Tax, imposed upon the Gross-Up Payment, the Participant would retain an amount of the Gross-Up Payment equal to the Excise Tax imposed upon the Total Payments. For purposes of the foregoing determination, the Participant's tax rate will be deemed to be the highest statutory marginal state and federal tax 12 rate (on a combined basis) then in effect. If no determination by the Company's auditors is made prior to the time the Participant is required to file a tax return reflecting the Total Payments, the Participant will be entitled to receive from the Company a Gross-Up Payment calculated on the basis of the Excise Tax the Participant reported in such tax return, within 10 days after the later of the date on which the Participant files such tax return or the date on which the Participant provides a copy thereof to the Company. In all events, if any tax authority determines that a greater Excise Tax should be imposed upon the Total Payments than is determined by the Company's independent auditors or reflected in the Participant's tax return pursuant to this Section 4.5, the Participant will be entitled to receive from the Company the full Gross-Up Payment calculated on the basis of the amount of Excise Tax determined to be payable by such tax authority within 10 days after the Participant notifies the Company of such determination. If any Other Arrangement specifically provides that benefits thereunder will be reduced or limited so that such benefits or the Total Payments will not result in the imposition of an excise tax pursuant to Code Section 4999, the reduction or limitation will apply, to the extent provided in the Other Arrangement, solely to the benefits provided pursuant to the Other Arrangement as if the benefits under the Other Arrangement constituted the entire Total Payments, and such reduction or limitation will not otherwise reduce or limit the actual Total Payments. (b) In the case of any Eligible Participant not described in Subsection (a), notwithstanding anything in this Plan to the contrary, if any payments or benefits to be made or provided by the Company to or for the benefit of the Participant constitute an "excess parachute payment" (as defined in Code Section 280G(b)), the payments or benefits to be made or provided in connection with this Plan will be reduced to the extent necessary to prevent any portion of such payments or benefits from becoming subject to the excise tax imposed under Code Section 4999. The determination as to whether any such decrease in the payments or benefits to be made or provided in connection with this Plan is necessary must be made in good faith by legal counsel or a certified public accountant selected by the Company, and such determination will be conclusive and binding. In the event that such a reduction is necessary, the Participant will have the right to designate the particular payments or benefits that are to be reduced or eliminated so that no portion of the payments or benefits to be made or provided in connection with this Plan will be excess parachute payments subject to the excise tax under Code Section 4999. 4.6. Indemnification. Following a Change in Control, the Company will indemnify and advance expenses to an Eligible Participant to the full extent permitted by law for damages, costs and expenses (including, without limitation, judgments, fines, penalties, settlements and reasonable fees and expenses of the Participant's counsel) incurred in connection with all matters, events and transactions relating to such Eligible Participant's service to or status with the Company or any other corporation, employee benefit plan or other entity with whom the Eligible Participant served at the request of the Company. ARTICLE 5. ADMINISTRATION AND ENFORCEMENT OF RIGHTS 5.1. Plan Administration. The Board has the power and authority to construe, interpret and administer the Plan. Prior to the date of a Change in Control, the Board may delegate such power and authority to any committee or individual but such delegation will automatically cease to be effective on the date of a Change in Control. Prior to (but not after) the date of a Change in Control, the power and authority of the Board and any individual or committee to whom such power and authority is in whole or in part delegated is discretionary as to all matters. 5.2. Amendment and Termination. 13 (a) Prior to the date of a Change in Control, the Board may amend the Plan from time to time in such respects as the Board may deem advisable; provided, that the effective date of any amendment that adversely affects a Qualified Employee may not be less than one year after the date on which the amendment is approved by the Board and, if a Change in Control occurs prior to the date on which the amendment would otherwise be effective, the amendment automatically will be null and void. On and after the date of a Change in Control, the Plan may be amended only if each Participant and Eligible Participant is provided with written notice of the amendment (which must include a complete and accurate description of the amendment and its intended and potential impact on Participants and Eligible Participants and a copy of the proposed amendment) at least 90 days before the adoption of the amendment and the amendment is approved by the affirmative vote of not less than 80 percent of all Participants and Eligible Participants. (b) The Board may terminate the Plan at any time; provided, first, that prior to the date of a Change in Control, the effective date of the termination may not be less than one year after the date on which the termination is approved by the Board; and, second, that the Plan cannot be terminated, and no termination will become effective, within the period beginning on the date of a Change in Control and ending on the last day of the thirty-sixth month that begins after the month in which the Change in Control occurs. (c) Any amendment or termination of the Plan must be set forth in a written instrument approved by the Board and signed by at least two officers of the Parent Corporation. 5.3. Benefit Claims. A person whose employment relationship with the Company has terminated and who has not been awarded benefits under the Plan or who objects to the amount of the benefits so awarded may file a written request for benefits with the Board. The Board will review such request and will notify the claimant of its decision within 60 days after such request is filed. If the Board denies the claim for benefits, the notice of the denial will contain (a) the specific reason for the denial, (b) a specific reference to the provision of the Plan on which denial is based, (c) a description of any additional information or material necessary for the person to perfect his or her claim (and an explanation of why such information is material or necessary), and (d) an explanation of the Plan's claim review procedure. If the Board determines that a claimant is not eligible for benefits, or if the claimant believes that he or she is entitled to greater or different benefits, the claimant may file a petition for review with the Board within 60 days after the claimant receives the notice issued by the Board. Within 60 days after the Board receives the petition, the Board will give the claimant (and his or her counsel, if any) an opportunity to present his or her position to the Board orally or in writing, and the claimant (or his or her counsel) will have the right to review the pertinent documents. Within 60 days after the hearing (or the date of receipt of the petition if the claimant presents his or her position in writing) the Board will notify the claimant of its decision in writing, stating the decision and the specific provisions of the Plan on which the decision is based. 5.4. Disputes. (a) If a Participant so elects, any dispute, controversy or claim arising under or in connection with this Plan will be settled exclusively by binding arbitration in Minneapolis, Minnesota in accordance with the Employee Benefit Plan Claims Arbitration Rules of the American Arbitration Association, incorporated by referenced herein; provided, that a Participant may seek 14 specific performance of his or her right to receive benefits until the Date of Termination during the pendency of any dispute or controversy arising under or in connection with the Plan. Judgment may be entered on the arbitrator's award in any court having jurisdiction. If any dispute, controversy or claim for damages arising under or in connection with this Plan is settled by arbitration, the Company will pay, or if elected by the Participant, reimburse, all fees, costs and expenses incurred by a Participant related to such arbitration unless the arbitrator decides that the claim was frivolous or advanced by the Participant in bad faith. (b) If a Participant does not elect arbitration, he or she may pursue all available legal remedies. The Company will pay, or if elected by the Participant, reimburse each Participant for, all fees, costs and expenses incurred by such Participant in connection with any actual, threatened or contemplated litigation relating to this Plan to which the Participant is or reasonably expects to become a party, whether or not initiated by the Participant, if the Participant is successful in recovering any benefit under this Plan as a result of such action. (c) In any dispute or controversy with any Participant arising under or in connection with this Plan, the Company will not assert the Participant's failure to exhaust administrative remedies. 5.5. Funding and Payment. (a) The Company may establish a Trust with an independent corporate trustee. The Trust must (i) be a grantor trust with respect to which the Company is treated as grantor for purposes of Code Section 677, (ii) not cause the Plan to be funded for purposes of Title I of ERISA and (iii) provide that Trust assets will, upon the insolvency of the Company, be used to satisfy claims of the Company's general creditors. The Company may from time to time transfer to the Trust cash, marketable securities or other property acceptable to the Trustee. (b) The Trustee will make distributions to Participants and Beneficiaries from the Trust in satisfaction of the Company's obligations under the Plan in accordance with the terms of the Trust. The Company is responsible for paying any benefits that are not paid from the Trust. (c) Nothing contained in the Plan or Trust is to be construed as providing for assets to be held for the benefit of any Participant or any other person or persons to whom benefits are to be paid pursuant to the terms of this Plan, the Participant's or other person's only interest under the Plan being the right to receive the benefits set forth herein. The Trust is established only for the convenience of the Company and no Participant has any interest in the assets of the Trust. To the extent the Participant or any other person acquires a right to receive benefits under this Plan or the Trust, such right is no greater than the right of any unsecured general creditor of the Company. ARTICLE 6. MISCELLANEOUS 6.1. Successors. The Parent Corporation will require any Successor to expressly assume and agree to perform the obligations of this Plan in the same manner and to the same extent that the Parent Corporation would be required to perform if no such succession had taken place. Failure of the Parent Corporation to obtain such assumption and agreement at least three business days prior to the time a Person becomes a Successor (or where the Parent Corporation does not have at least three business days' advance notice that a Person may become a Successor, within one business day after having notice that such Person may become or has become a Successor) will constitute Good Reason for termination of a Participant's employment. The date on which any such succession becomes effective will be deemed the Date of Termination and Notice of Termination will be deemed to have been given on such date. A Successor has no rights, authority or power with respect to the Plan prior to a Change in Control. 15 6.2. Binding Plan. This Plan is for the benefit of, and is enforceable by, each Participant, each Participant's personal and legal representatives, executors, administrators, successors, heirs, distributees, devisees and legatees, but a Participant may not otherwise assign any of his or her rights or delegate any of his or her obligations under this Plan. If a Participant dies after becoming entitled to, but before receiving, any amounts payable under this Plan, all such amounts, unless otherwise provided in this Plan, will be paid in accordance with the terms of this Plan to such Participant's devisee, legatee or other designee or, if there be no such designee, to such Participant's estate. 6.3. Validity. The invalidity or unenforceability of any provision of the Plan does not affect the validity or enforceability of any other provision of the Plan, which will remain in full force and effect. 6.4. No Mitigation. No Eligible Participant will be required to mitigate the amount of any benefits the Company becomes obligated to provide in connection with this Plan by seeking other employment or otherwise and the benefits to be provided in connection with this Plan may not be reduced, offset or subject to recovery by the Company by any benefits an Eligible Participant may receive from other sources. 6.5. No Set-off. The Company has no right to set-off benefits owed under this Plan against amounts owed or claimed to be owed by an Eligible Participant to the Company under this Plan or otherwise. 6.6. Taxes. All benefits to be provided to each Eligible Participant in connection with this Plan will be subject to required withholding of federal, state and local income, excise and employment-related taxes. 6.7. Notices. For the purposes of this Plan, notices and all other communications provided for in, or required under, this Plan must be in writing and will be deemed to have been duly given when personally delivered or when mailed by United States registered or certified mail, return receipt requested, postage prepaid and addressed to each Participant's or the Company's (as the case may be) respective address (provided that all notices to the Company must be directed to the attention of the chair of the Board). For purposes of any such notice requirement, the Company will use the Participant's most current address on file in the Company's personnel records. Any notice of a Participant's change of address will be effective only upon receipt by the Company. 6.8. Effect of Plan Benefits on Other Severance Plans. A Participant who receives any payment under the terms of this Plan will not be eligible to receive benefits under any other severance pay plan sponsored or maintained by the Company. 16 6.9. Related Plans. To the extent that any provision of any Other Arrangement limits, qualifies or is inconsistent with any provision of this Plan, then for purposes of this Plan, while such Other Arrangement remains in force, the provision of this Plan will control and such provision of such Other Arrangement will be deemed to have been superseded, and to be of no force or effect, as if such Other Arrangement had been formally amended to the extent necessary to accomplish such purpose. Nothing in this Plan prevents or limits a Participant's continuing or future participation in any Other Arrangement, and nothing in this Plan limits or otherwise affects the rights Participants may have under any Other Arrangement. Amounts which are vested benefits or which Participants are otherwise entitled to receive under any Other Arrangement at or subsequent to the Date of Termination will be payable in accordance with such Other Arrangement. 6.10. No Employment or Service Contract. Nothing in this Plan is intended to provide any Participant with any right to continue in the employ of the Company for any period of specific duration or interfere with or otherwise restrict in any way Participants' rights or the rights of the Company, which rights are hereby expressly reserved, to terminate a Participant's employment at any time for any reason or no reason whatsoever, with or without cause. 6.11. Survival. The respective obligations of, and benefits afforded to, the Company and the Participants which by their express terms or clear intent survive termination of a Participant's employment with the Company or termination of this Plan, as the case may be, will remain in full force and effect according to their terms notwithstanding the termination of a Participant's employment with the Company or termination of this Plan, as the case may be. 6.12. Effect on Other Plans. Unless otherwise expressly provided therein, benefits paid or payable under the Plan will not be deemed to be salary or compensation for purposes of determining the benefits to which a Participant may be entitled under any other Benefit Plan sponsored, maintained or contributed to by the Company. 6.13. Prohibition of Alienation. No Participant will have the right to alienate, assign, encumber, hypothecate or pledge his or her interest in any benefit provided under the Plan, voluntarily or involuntarily, and any attempt to so dispose of any interest will be void. 6.14. Notice of Reemployment. If an Eligible Participant commences full-time employment during his or her Continuation Period, he or she must notify the Company not later than five business days after he or she commences full-time employment. 17 EX-10.9 3 EXECUTIVE STOCK PURCHASE PROGRAM Exhibit 10.9 SUPPLEMENT TO PROSPECTUS JOSTENS, INC. 500,000 Shares of Common Stock, including Preferred Share Purchase Rights ---------------- Offered pursuant to the Jostens, Inc. Executive Stock Purchase Program --------------- This document constitutes part of a prospectus covering securities that have been registered under the Securities Act of 1933. ---------------- This Supplement modifies the Prospectus dated February 15, 1999 covering the offer and sale of shares of Common Stock, including attached Preferred Share Purchase Rights, of Jostens, Inc. under the Jostens, Inc. Executive Stock Purchase Program. --------------------------------------------------------------------------- The Prospectus for Jostens, Inc. Executive Stock Purchase Program offered you the opportunity to elect to participate in the Program during two purchase periods: a period beginning on March 1, 1999 and ending on March 19, 1999 or during a period beginning on June 8, 1999 and ending on July 9, 1999. You also could elect to purchase under the Program during both periods. Due to lack of interest in the second purchase period, it has been deemed advisable to purchase Common Stock under the Program during only one purchase period beginning on March 1, 1999 and ending on March 19, 1999. The first interest payment on the Program Loan will now be due on June 3, 1999. The interest rate on your Program Loan will now convert to a rate that is fixed for the remaining life of the loan on March 25, 1999 rather than July 15, 1999. The date of this Prospectus is February 15, 1999. PROSPECTUS JOSTENS, INC. 500,000 Shares of Common Stock, including Preferred Share Purchase Rights ---------------- Offered pursuant to the Jostens, Inc. Executive Stock Purchase Program ---------------- This document constitutes part of a prospectus covering securities that have been registered under the Securities Act of 1933. ----------------- This Prospectus covers offers and sales of shares of Common Stock, including attached Preferred Share Purchase Rights, of Jostens, Inc. under the Jostens, Inc. Executive Stock Purchase Program. Important Notices to all Program Participants You may not use this Prospectus to reoffer or resell shares of Common Stock acquired under the Program if you are an "affiliate" (generally a director, officer or other controlling person) of Jostens. Affiliates may, however, resell shares without registration under the Securities Act of 1933, as amended, pursuant to an exemption from registration. An exemption from registration is available by following the terms and conditions of Rule 144 under the Securities Act (other than the holding period requirements). In addition, you should not sell any shares of Common Stock without carefully considering: o the laws prohibiting trading on the basis of material, inside information, o laws prohibiting "short swing" profits, and o your personal financial and tax situation. Additional Information Please see "Certain Federal Income Tax Consequences" beginning on page 13 and "Impact of Short-Swing Profit Provisions" on page 14 for more information. For additional information about the Program and its administrators, please contact Diana Weber of Jostens' legal department, by mail at 5501 Norman Center Drive, Minneapolis, Minnesota, or by telephone at (612) 830-3300. Table of Contents Page Limitations on the Use of this Prospectus.......................................2 Summary of the Program...............................3 Introduction.....................................3 Eligible Participants............................4 Administration and Amendment.....................4 No Right to Service..............................5 The Program Loan.................................5 The Reimbursement Agreement......................7 The Restricted Stock Match.......................7 Stock Subject to the Program.....................7 Selling Your Stock...............................7 Potential Gain/(Loss) on Program.................8 Numerical Examples..............................10 Certain Federal Income Tax Consequences....................................13 Impact of Short-Swing Profit Provisions......................................14 Questions and Answers...............................15 Additional Information..............................19 Available Information...........................19 Documents Incorporated by Reference....................................19 Limitations on the Use of this Prospectus No one is authorized to provide you with information that is not contained in either this Prospectus or in the documents referenced in this Prospectus. If someone has given you information or made a representation that is not contained in this Prospectus or in the documents referenced in this Prospectus, you must not rely on such information or representations as being authorized by Jostens. The business and affairs of Jostens may have changed since the date of this Prospectus or since the date of the documents referenced in this Prospectus. Please do not assume otherwise simply because Jostens has delivered this Prospectus to you. This Prospectus does not constitute: o an offer to buy or sell any securities other than the Common Stock offered under the Program, or o an offer of securities in any state where such an offer would be unlawful. 2 Summary of the Program --------------------------------------------------------------------------- Introduction The Executive Stock Purchase Program represents a major financial commitment on the part of participants. Please read carefully all of the information presented in this Prospectus. You should also seek the advice of an independent financial advisor before you participate in the Program. The Jostens, Inc. Executive Stock Purchase Program is a voluntary program which provides you and certain other key executives of Jostens with the opportunity to purchase shares of Jostens' Common Stock. The purpose of the Program is to facilitate the immediate purchase of shares of Common Stock by you and other members of Jostens' management in order to: o increase the ownership of Common Stock among key employees of Jostens; o more closely align key employees' financial rewards with the financial rewards realized by all other Jostens' shareholders; and o increase key employees' motivation to manage Jostens as owners. Under the Program, Jostens will make arrangements for you to obtain a loan from The First National Bank of Chicago, the proceeds of which will be used to purchase shares of Common Stock. If you decide to participate, you must take out a loan. The maximum dollar value of shares that you can purchase under the Program will be one to three times your base salary, depending upon your position within Jostens. The minimum dollar value of shares of Common Stock that you will be able to purchase under the Program is 50% of your maximum purchase. As an added incentive to participate in the Program, Jostens will grant you a number of shares of restricted Common Stock equal to 15% of the number of shares that you purchase in the Program. If you elect to participate in the Program, shares of Common Stock will be purchased on your behalf on the open market at prevailing market prices during a period beginning on March 1, 1999 and ending on March 19, 1999 or during a period beginning on June 8, 1999 and ending on July 9, 1999, or both, depending on your election. If you elect to purchase shares during both periods, your overall purchase obligation is subject to a $25,000 minimum per period. The price for your shares purchased under the Program will be the weighted average purchase price paid for shares during each period in which you participate. The shares that you purchase through the Program will bear dividends at the same times and in the same amounts as all other 3 shares of Common Stock and will be registered in your name. You will have all the rights of a shareholder with respect to shares purchased under the Program, including the right to vote the shares and the right to receive dividends. Participants should note that the Program is not: o an employee benefit plan subject to the Employee Retirement Income Security Act of 1974; o qualified under Section 401(a) of the Internal Revenue Code; or o an "employee stock purchase plan" (as defined in Section 423 of the Internal Revenue Code). Eligible Participants Participation is only open to certain employees determined to be eligible by the Compensation Committee of the Board of Directors (the "Committee") or its designee. These employees will be given notice prior to the date on which purchase elections may be made. To become a participant an eligible employee must, prior to February 19, 1999: o complete and sign an irrevocable election to purchase shares of Common Stock under the Program; o complete and sign all necessary agreements and provide other documents (including a personal financial statement) relating to Program Loans, as described below; and o satisfy all other terms and conditions of participation in the Program established by the Committee. The agreements and other documents specified above must be in such forms and submitted at such times as specified by the Committee. Eligible employees are not required to participate in the Program. Administration and Amendment The Committee or its designee will administer the Program. All questions of interpretation of the Program will be determined by the Committee and will be conclusive and binding for all purposes. The Committee or its designee(s) will have the authority and power to: o adopt, alter, waive and repeal administrative rules, guidelines, practices and provisions of the Program as the Committee may deem advisable, interpret terms and provisions of the Program (and any agreements relating to the Program), and supervise the administration of the Program; o select eligible employees; o designate purchase periods; o designate minimum and maximum purchases under the Program, either by the number of shares of Common Stock or by the purchase price; and o negotiate terms and conditions of the related bank guarantees. The Committee may waive, amend, alter or discontinue all or any provision of the Program. However, no waiver, amendment, alteration or discontinuation 4 may be made which would adversely impair your rights under the Program without your consent. No Right to Service Nothing in the Program limits Jostens' right to terminate your service or employment at any time or otherwise confers any right to your continued service or employment. The Program Loan If you elect to participate in the Program, Jostens will arrange for you to receive a full recourse loan from The First National Bank of Chicago to buy Common Stock. Proceeds of this loan will be paid by The First National Bank of Chicago to an independent agent who will make Program purchases on behalf of all participants as directed by Jostens. Jostens will guarantee repayment to The First National Bank of Chicago of one hundred percent (100%) of all principal, interest, early payment fees and other obligations of each participant's Program Loan. The terms and conditions of the guaranty are as agreed by Jostens and The First National Bank of Chicago. Although Jostens will guarantee repayment of your Program Loan to The First National Bank of Chicago in the event of default, the loan will be your personal obligation. You will be responsible for satisfying all of the bank's requirements in connection with your Program Loan. Even if Jostens pays the Program Loan in the event you default, you will remain personally liable for the loan balance, accrued interest and other expenses incurred by Jostens in connection with your Program Loan. Jostens may take all actions relating to you and your assets which the Committee deems reasonable and necessary to obtain full reimbursement for amounts Jostens pays to The First National Bank of Chicago under its guarantee of your Program Loan. The specific terms of the Program Loan vary with respect to each purchase period, and are more fully described below: March Purchases Purchases made in March 1999 will be funded with a five year term Program Loan that initially bears interest at The First National Bank of Chicago's corporate base rate. The first interest payment on the Program Loan will be due on July 15, 1999 to coincide with the end of the second purchase period. Any dividends you have received may be directed to The First National Bank of Chicago and will be applied toward your first interest payment. The amount by which this first interest payment exceeds any income you earned from dividends will be added to the principal amount of your Program Loan. The total amount of your Program Loan will exceed the dollar amount of the shares you elect to purchase because the net amount of interest on July 15, 1999 will be added to the total amount of the Program Loan. If you elect to purchase shares only in March 1999, on July 15, 1999 the interest rate on your Program Loan will convert to a rate that is fixed for the remaining life of the loan. June and July Purchases 5 Purchases made in June and July 1999 will be funded with an approximately 4.75 year term Program Loan that will initially bear interest at The First National Bank of Chicago's corporate base rate. Interest will accrue on the Program Loan at this interest rate until the rate is fixed on July 15, 1999. The accrued interest will be added to the principal amount of your Program Loan on July 15, 1999. The total amount of your Program Loan will exceed the dollar amount of the shares you elect to purchase due to this accrued interest. On July 15, 1999, the interest rate on your Program Loan will convert to a rate that is fixed for the remaining life of the loan. Purchases in Both Periods If you elect to purchase shares in both the March and June and July periods, the balance on your Program Loan attributable to purchases in March and the amount of interest due on July 15, 1999 that is not covered by dividends will be added to the dollar amount of purchases made in June and July. This will equal the total amount of your Program Loan. This total will exceed the dollar amount of the shares you elect to purchase because the net amount of interest on July 15, 1999 will be added to the amount of the Program Loan used to purchase shares. The total amount of your Program Loan will bear interest at a new rate that will be fixed on July 15, 1999 for the remaining approximately 4.75 year life of the Program Loan. Other Program Loan Terms Every participant in the Program will have the same fixed interest rate on his or her Program Loan. The Program Loan will carry a customized interest payment schedule with two interest components i) current interest and ii) deferred interest. The current interest payment schedule will be structured to coincide with Jostens's projected future dividend payments over the life of the Program Loan. The intent is that your current interest payments will be substantially covered by the dividends paid on the shares you purchase with the Program Loan. However, there is no guarantee that Jostens' Board of Directors will continue to declare dividends or that such dividends will be sufficient to cover your current interest payments. You should note that, at present, the dividend yield on Jostens' Common Stock is below market rates of interest. Consequently, the current interest rate is less than the interest rate on the Program Loan. The amount of interest in excess of the current interest will be deferred and will be due at maturity along with the principal amount. You may prepay the Program Loan on any interest payment date. However, you will want to consider the following items before you decide to prepay: o Prepayments must be made in a minimum principal amount of $25,000 and in $5,000 increments above $25,000. o The Program Loan is NOT structured like some home mortgages which allow prepayment without penalty regardless of current market interest rates. Beginning on July 15, 1999, the Program Loan contains a "make whole" provision similar to those commonly found in 6 fixed rate loans for Jostens. See "Numerical Example--Prepayment Fee Illustration" for more details. If you prepay, you will be responsible for paying any interest that has been deferred, any amount required to make The First National Bank of Chicago whole for any changes in the market level of interest rates since the interest rate on your Program Loan was established and an administrative fee of $750. In the event of your death, disability, early retirement or the termination of your employment with Jostens, your Program Loan will become due and payable. You will incur the same costs if your loan becomes due and payable early for any of these reasons as you will incur if you voluntarily prepay. In addition, certain actions by Jostens can cause your Program Loan to become due and payable. Specifically, if there is a change in control of Jostens or if Jostens breaches the representations, warranties or covenants in its Facility and Guaranty Agreement with The First National Bank of Chicago, defaults under certain other important debt obligations or becomes insolvent, your Program Loan will become due and payable. Prepayment pricing provisions will apply. The Reimbursement Agreement As a condition to participation in the Program, you will be required to enter into a Reimbursement Agreement with Jostens, providing for your absolute and unconditional agreement to reimburse Jostens for all costs and expenses incurred if Jostens is required to perform under its guarantee of your Program Loan. The Reimbursement Agreement includes a right of setoff in favor of Jostens against amounts owed to you, and requires you to agree to certain financial covenants and to make certain representations and warranties. As with each other document required in connection with the Program Loan, you should carefully read the Reimbursement Agreement and understand its terms before deciding to participate in the Program. The Restricted Stock Match Jostens will match your purchases under the Program by awarding you shares of restricted stock equal to 15% of the number of shares that you purchase through the Program. These shares of restricted stock will be awarded under and subject to the terms of Jostens' 1992 Stock Incentive Plan, and will vest in their entirety on the loan maturity date, subject to forfeiture if conditions to vesting (including continued employment by Jostens) are not satisfied. A separate prospectus for the 1992 Stock Incentive Plan has been or will be provided to you, which will describe the operation of that plan and provide you with other information regarding these restricted stock awards. Stock Subject to the Program Jostens' has registered a maximum of 500,000 shares of Common Stock for purchase under the Program. 7 Selling Your Stock Determining when to sell shares of Common Stock you acquire under the Program is a personal decision. You may sell the shares you purchase at any time, subject to the restrictions that normally apply to your sales of Common Stock, including those noted on the cover and elsewhere in this Prospectus. In addition to those items, you should also carefully consider the following factors before you sell: o The dividend payments on your shares may be used to pay a portion of the interest on your Program Loan. Unless you simultaneously prepay the Program Loan, you will need to begin providing cash for these interest payments after you sell the stock. o The price of a share of Common Stock on the date you sell may be above or below the purchase price for your shares, resulting in a gain or loss on sale. The gain or loss on sale will have consequences on your personal tax position. (See "Certain Federal Income Tax Consequences.") o You will incur transaction expenses when you sell your shares, which are your responsibility. Potential Gain/(Loss) on Program Some examples of the gain or loss you may experience as a participant in the Program are illustrated below. This illustration reflects current market conditions and is for informational purposes only. The weighted average purchase price for your shares and the fixed interest rate on your Program Loan have not yet been established. The price for Common Stock in connection with purchases in June and July and the fixed interest rate on your Program Loan will not be known until the end of the June and July purchase window. Consequently, they may be significantly different from the figures shown below. Any differences will affect your actual gain or loss at maturity. The example below assumes that i) Jostens' Board of Directors continues to declare dividends according to its historic practices, ii) you apply the dividends from your restricted stock match to pay interest on your Program Loan and iii) your restricted stock vests. There is no guarantee that Jostens' Board of Directors will continue to declare dividends or that such dividends will be sufficient to meet required interest payments. 8 At the maturity of your Program Loan, your pre-tax gain or loss will be equal to the market value of the shares you purchased plus the matching shares (i.e., 5,000 shares in the example below) minus the amount due on your loan at maturity (i.e., principal plus interest, including all deferred interest, $118,359, in the example below.) Illustration Assumptions: Weighted Average Purchase Price.. $23.00 Shares Purchased................. 4,348 Restricted Share Match.......................... 652 Loan Amount (a).................. $101,828 Interest Rate on Program Loan (Simple Interest).............. 7.90% Annual Dividend (b).............. $0.88 on all shares (a) equals an assumed $100,000 stock purchase plus $1,828 additional principal from net interest on shares purchased. (b) Includes the value of the matching restricted stock grant Estimated Pre-Tax Gain/Loss at Various Stock Prices at Maturity:
- ---------------------------------------------------------------------------------------------------------------------- Ending Market Ending Market Value Loan Principal Annual Stock Return Price of Stock of Stock Plus Interest Gain/(Loss) - ---------------------------------------------------------------------------------------------------------------------- -5.0% $17.90 $89,000 $118,359 $(29,359) - ---------------------------------------------------------------------------------------------------------------------- -2.5% $20.37 $101,350 $118,359 $(17,009) - ---------------------------------------------------------------------------------------------------------------------- +0.6% $23.67 $122,100 $118,359 $0 - ---------------------------------------------------------------------------------------------------------------------- +2.5% $26.02 $130,100 $118,359 $11,741 - ---------------------------------------------------------------------------------------------------------------------- +5.0% $29.35 $146,750 $118,359 $28,391 - ---------------------------------------------------------------------------------------------------------------------- +7.5% $33.02 $165,100 $118,359 $46,741 - ---------------------------------------------------------------------------------------------------------------------- +10.0% $37.04 $185,200 $118,359 $66,841 - ----------------------------------------------------------------------------------------------------------------------
The intent of the Program is that (i) the dividends paid on shares purchased in the Program together with dividends paid on the restricted stock awarded will cover the 9 interest on the Program Loan, and (ii) the value of the purchased and restricted shares will appreciate so that they will be at least equal to the principal and deferred interest due on the Program Loan at maturity. However, there is no guarantee that the stock price will appreciate or that the dividends will continue to be paid. In addition, there may be a mismatch between i) the assumed dividend payment dates and when dividends are actually credited to your account and/or ii) the actual dividend yield on the shares you hold and the dividend yield used to calculate the current interest rate for the Program Loan. This mismatch may give rise to payments due or credited amounts in your Program account during the life of the Program. 10 Numerical Examples Cash Flow Illustration An example of potential cash flows for a Program participant are illustrated below. This example is for informational purposes only and is intended to illustrate simplified terms of the Program. All of your dividend and interest payments will occur quarterly. The example assumes that a participant elects to purchase $100,000 worth of Common Stock through the Program, with all of the purchase made in March. Other assumptions include a weighted average purchase price of $23.00 per share; a fixed rate yield to maturity on the Program Loan of 7.38%; and a Common Stock dividend of $0.88 per year on both purchased and restricted shares.
- ------------------------------------------------------------------------------------------------------------------------------ Year 1 Year 2 Year 3 Year 4 Year 5 Year 5 3/1 to 7/15 (Q2-Q4) (Q1-Q4) (Q1-Q4) (Q1-Q4) (Q1-Q3) Maturity - ------------------------------------------------------------------------------------------------------------------------------ Rate of Interest Due This Period (Act/360) 7.75% 4.26% 4.26% 4.26% 4.26% 4.26%(b) 18.70%(c) - ------------------------------------------------------------------------------------------------------------------------------ Interest Payment Due $(2,928) $(3,300) $(4,400) $(4,400) $(4,400) $(3,300) $(19,306) - ------------------------------------------------------------------------------------------------------------------------------ Dividends Received on Stock $1,100 $3,300 $4,400 $4,400 $4,400 $3,300 $1,100 - ------------------------------------------------------------------------------------------------------------------------------ Cash Flow $(1,828)(a) $0.00 $0.00 $0.00 $0.00 $0.00 $(18,206) - ------------------------------------------------------------------------------------------------------------------------------ Loan Amount $100,000 $101,828 $101,828 $101,828 $101,828 $101,828 $101,828 - ------------------------------------------------------------------------------------------------------------------------------
(a) Amount included in principal beginning in Year One, Q2 (b) Represents 75% (three quarters) of the annual rate of interest (c) Represents the final quarter of current loan interest plus deferred interest Interest Rate Structure You will see the fixed interest rate for your Program Loan stated two ways - as a simple interest rate and as a yield to maturity. The simple interest rate and yield to maturity for your Program Loan have not yet been established. Consequently, they may differ from the rates shown below. o Simple Interest Rate. The simple interest rate for a Program Loan is currently 7.90%. Over the fixed rate life of a $101,828 Program Loan with a 7.90% simple interest rate, a participant will effectively accrue interest of $8,156 per year. This calculation does not include the time value of money. (Interest is calculated on an actual/360 day basis.) o Yield to Maturity. The yield to maturity for a Program Loan is currently 7.38%. This interest rate takes into account the fact that money paid today is more valuable than money paid five years from now. Since the current fixed interest payments from July 15, 1999 until the final quarter of the Program Loan will be substantially below market 11 interest rates, the amount of interest due at maturity (i.e., the deferred interest) will equal the difference between the rate of interest paid quarterly and the yield to maturity. Prepayment Once your Program Loan carries a fixed interest rate, you will incur early payment fees if you wish to prepay your Program Loan before its final maturity. These early payment fees contain a "make whole" provision that is similar to the provisions contained in corporate fixed rate loans. The methodology for calculating these early payment fees is explicitly defined in the Facility and Guaranty Agreement between Jostens and The First National Bank of Chicago. It is consistent with practices commonly used to value corporate fixed rate loans. The early payment fee for prepaying either a part of or the entire Program Loan will approximate the amount of interest deferred to date, adjusted for any reinvestment cost for The First National Bank of Chicago and the $750 administrative fee. Your total prepayment amount will equal the principal amount you are prepaying, any interest accrued during the quarter, the early payment fees and the administrative fee. Deferred Interest Since you will be paying current interest at below market rates for all but the final quarter that your Program Loan carries a fixed rate, the difference between the amount paid and the full interest rate is deferred until the last quarter of the Program Loan. The annual amount of deferred interest for the second, third and fourth years of the Program Loan period is illustrated below. Please note that the simple interest rate and the current rate of interest paid on your Program Loan may be significantly different than the rates used here for illustration. Simple Interest Rate 7.90% Rate of Interest Paid in Cash ("Current Interest") 4.40% Rate of Deferred Interest 3.50% Loan Amount (a) $101,828 Annual Deferred Interest $3,564 (a) equals an assumed $100,000 stock purchase plus $1,828 additional principal from net interest on shares purchased. Bank Reinvestment Cost The customized rate structure built into your Program Loan makes it almost impossible to determine the bank's reinvestment cost in advance. The bank's reinvestment cost is a function of how interest rates change over the life of your Program Loan. However, it is possible to make reasonable estimates of this potential cost using varying interest rate assumptions. In general, higher market rates relative to the fixed rate on your Program Loan will result in relatively lower bank reinvestment cost, and, therefore, lower early payment fees. Conversely, lower market rates will mean relatively higher bank reinvestment cost and higher early payment fees. In any event, your prepayment fees will compensate The First National Bank of Chicago for the market value of the deferred interest that you would otherwise pay at maturity. 12 The following table provides estimates for the amount of deferred interest adjusted for the First National Bank of Chicago's approximate reinvestment cost under various interest rate movement scenarios (i.e., yield shifts) for a $100,000 Program Loan. - -------------------------------------------------------------------------------- Yield Shift End of Yr. End of End of Yr. Two* Yr. Three* Four* - -------------------------------------------------------------------------------- 2.0% $3,999 $9,188 $13,263 - -------------------------------------------------------------------------------- 1.0% $7,081 $11,368 $14,403 - -------------------------------------------------------------------------------- 0% $10,263 $13,597 $15,558 - -------------------------------------------------------------------------------- -1.0% $13,549 $15,877 $16,727 - -------------------------------------------------------------------------------- -2.0% $16,942 $18,209 $17,910 - -------------------------------------------------------------------------------- *All amounts represent estimates only. Actual early payment fees will vary with prepayment dates, actual number of days during the quarter, shape of the yield curve and the interest payment set at Program Loan pricing. Please note that the level of interest rates will probably be different when your Program Loan is priced than interest rate levels were when this illustration was calculated. Consequently, estimates for early prepayment fees will be different than those shown here. 13 Certain Federal Income Tax Consequences The discussion below is a summary of the federal income tax consequences (and not foreign, state or local) that may result in connection with your participation in the Program. Because you are an insider and because the federal income tax consequences depend upon regulations under the Internal Revenue Code and your tax status, Jostens strongly recommends that you consult your personal tax advisor before electing to participate in the Program or to sell any shares of Common Stock you acquire under the Program. o Dividends paid on stock you purchase through the Program are considered investment income and will be includable in your taxable income in the year received. o Interest on your Program Loan is considered to be interest on investment indebtedness. o Due to the structure of the Program, the interest that is deemed to be deductible is based upon the overall interest rate over the period of the Program Loan. This is true even though the actual interest paid in cash (the current interest) is less than the simple interest rate and yield to maturity on the Program Loan. o The amount of interest deduction you may use in any period will be limited by your amount of investment income for the period. Interest on investment indebtedness that cannot be deducted during a period may be carried over. o Your purchase price or total cost for the Common Stock acquired under the Program will be your tax basis in your shares of Common Stock. o You may receive a capital gain or loss when you sell shares of Common Stock you purchase through the Program. Whether the gain (or loss) constitutes long or short term capital gain (or loss) will depend upon the length of time you hold the shares prior to disposition. 14 Impact of Short-Swing Profit Provisions Under Section 16(b) of the Securities Exchange Act of 1934, as amended, any profit by an "insider" of Jostens (an officer, director, greater-than-10% shareholder or other person deemed an insider by Jostens) on a purchase and sale or sale and purchase of Common Stock within any six-month period belongs to and is recoverable by Jostens. Rule 16b-3 under the Exchange Act exempts certain transactions by insiders from the operation of Section 16(b). Under Rule 16b-3, the purchase of shares of Common Stock under the Program is an exempt purchase under Section 16(b), and is also exempt from the reporting requirements of Section 16(a). The sale of shares acquired under the Program, however, will be deemed to be a sale for the purpose of Section 16(b), regardless of Rule 16b-3, and will generally be required to be reported on a Form 4. This discussion of the impact of Section 16 is only a brief summary of certain rules and is not intended to provide comprehensive guidance to Program participants. The rules and regulations relating to Section 16 are extremely complex, and transactions under the Program may or may not be deemed purchases or sales under Section 16 depending on the facts and circumstances of such transactions. As a result, Jostens strongly recommends that participants who are insiders consult with Jostens' legal department or their own counsel regarding the applicability of Section 16 of their transactions under the Program. 15 Questions and Answers Q: When may I sell the shares that I acquire under the Program? A: You may sell your shares any time subject to the restrictions that normally apply to your sales of Jostens' Common Stock. Some of these restrictions are summarized in this Prospectus. Q: How would I go about selling my shares? A: Pursuant to Jostens' normal policy, you must inform Jostens's legal department before you sell your shares. Q: What happens if I leave Jostens after I have agreed to participate in the Program? A: Termination of employment other than through normal retirement will cause the Program Loan to become immediately payable. In addition, you will forfeit the restricted stock match if your termination occurs prior to the end of the vesting period. Q: Can I be assured that dividends will continue to be paid on my shares of Common Stock so that my normal cash flow will be unaffected during the period I am required to pay loan interest? A: No. The payment of dividends is determined by Jostens' Board of Directors. There is no guarantee that the Board of Directors will declare a dividend or that there will be ongoing dividend payments. Q: Is it possible that my interest cost could exceed the dividends that I receive? A: Yes, if future dividend payments do not equal the projected dividend payments used to structure the Program Loan. You will receive a quarterly payment notice that reflects interest due, dividends paid and any excess or shortage. Q: If dividends exceed interest payments, I understand that the excess will be deposited into my account with The First National Bank of Chicago. May I withdraw these funds? A: Yes, but you are expected to have your account fully funded by each interest payment date. Q: Why has the Program been structured so that cash interest payments are low for the majority of the life of the Program Loan with a large balloon payment at maturity? A: We have tried to minimize your out-of-pocket cash expenditures during the life of the Program Loan. Q: Can I avoid paying the balloon payment if I repay the Program Loan before it matures? 16 A: No. When you decide to prepay the Program Loan, you will be informed of the amount of principal, interest and early payment fees you owe. On the day you prepay, this amount will be due in the form of a balloon payment. Q: What is the Facility and Guaranty Agreement and what impact does it have on me as a borrower? A: The Facility and Guaranty Agreement is the agreement between Jostens and The First National Bank of Chicago whereby Jostens guarantees the obligation of the participant. The agreement includes many definitions which are used in the Master Note Agreement you will sign. The Facility and Guaranty Agreement contains the provision for calculating the early payment fees. It also specifies events relating to Jostens which may trigger repayment of the loan and early payment fees. Q: Why is the simple interest rate different from the yield-to-maturity interest rate? A: The Program is structured such that, until maturity, the cash interest paid on the Program Loan is limited to the dividend yield on the stock. The First National Bank of Chicago requires a yield-to-maturity interest rate which is similar to the interest rate on normal market loans. For normal market loans, interest would be due currently on loan amounts outstanding, with the full interest paid quarterly. Under the Program Loan structure, you are permitted to make current interest payments of a lower rate, with a catch up balloon payment at maturity to cover deferred interest costs. The deferred interest expense results in an increased simple interest rate above the yield-to-maturity rate. Q: Can I make voluntary early payment of the loan? A: Yes, on any interest payment date. Once the Program Loan bears interest at a fixed rate on July 15, 1999, voluntary early payments are allowed subject to certain minimum amounts, together with all accrued interest, early payment fees and the administration fee. In the event of an early repayment of all or any portion of the loan (whether voluntary or by reason of an event of default or acceleration), you will be obliged to reimburse The First National Bank of Chicago for certain reinvestment costs which may be substantial and which are described in the Program Loan documents. Q: Are there any situations which may give rise to acceleration of the Program Loan repayment requirement? A: Yes, certain events may result in acceleration of Program Loans, including default, death, disability, early retirement, termination of employment, failure to pay interest and other amounts under the Program Loan when due and insolvency. With respect to Jostens, breaches of representations, warranties or covenants, under Jostens guaranty documents, or certain defaults by Jostens under other important debt obligations, or insolvency events concerning Jostens may result in acceleration of Program Loans. You will incur early payment fees for Program Loan repayments resulting from acceleration. 17 Q: What is the nature of the dividends paid on shares I purchase under the Program? A: Dividends paid on shares purchased under the Program are considered investment income and are reported on Schedule B of an individual's federal income tax return (Form 1040). Q: Is the interest I pay to The First National Bank of Chicago deductible for federal income tax purposes? A: Yes. The interest is considered to be interest on investment indebtedness. An individual's deduction for interest on investment indebtedness is limited to such individual's net investment income. Net investment income is defined as being the excess of investment income over investment expenses. Investment income includes (but is not limited to) all dividend income, all interest income, annuity income, royalty income, net short term capital gains, and if elected, long term capital gains (see IRS Form 4952 for more details). It should be noted that any investment interest that is disallowed because of the limitation may be carried over the succeeding tax year and is deductible to the extent of the limitation in that year. Q: The example used in this Prospectus illustrates the financial impact of a yield-to-maturity Program Loan over the term at a stated percent. In the example, in the early years of the Program, I understand that the interest I actually pay on the Program Loan is much lower. What is the investment interest that is considered to be deductible? A: Because of the structure of the Program, the interest that is deemed to be deductible is based upon the overall interest rate over the period of the Program Loan. The actual deduction, of course, is limited to the individual's net investment income, as described above, and any unused interest expense can be carried over to future years. The interest that Jostens believes to be eligible for deduction as investment interest will vary from year to year. Q: If at the end of the term of the Program Loan I have not been able to deduct all of my investment interest, can I consider the capital gain I receive when I sell my shares to be investment income that can be utilized to offset any unused investment interest? A: Yes, if you so elect. Net capital gains from investments can be considered to be investment income for purposes of the investment interest deduction. All net short term capital gains (gains where your holding period is equal to or less than one year) are considered to be investment income. Net long term capital gains (holding periods of more than one year) are excluded from investment income; however, you can elect to treat as much or as little of any long term capital gain as investment income as you like. If you elect to treat any long-term capital gains as investment income, you give up the long term capital gains rate (currently 20%). Consequently, the elected income is treated as ordinary income and you get to offset any investment interest expense to the extent of your election (e.g. this largely eliminates capital gain income from your taxable income). Even if you do not make this election, you still will be able to deduct your investment interest in future years if you have other investment income. Q: If I sell my stock for a gain and use the proceeds of the sale to repay my Program Loan, will the gain be treated as capital gains, subject to favorable income tax rates? A: Any gain on the subsequent disposition of your stock will be treated as capital gain unless an election is made as discussed above. If you sell your stock more than one year after it is purchased, your capital gains will be treated as "long-term" capital gain, and under current federal tax law the income is subject to more favorable income tax rates (generally 20%) than ordinary income tax rates. The gain that will be treated as capital gain will be the difference between the sale proceeds on your shares, and the sum of your initial Common Stock purchase price, any broker's fees and, any early loan payment fees you incur (other than interest expense charges), if you sell your Program shares early. 18 Additional Information Available Information Jostens will provide you the following information, without charge, upon your written or oral request: o a copy of our most recent Annual Report to Shareholders; o a copy of this Prospectus and the Facility and Guaranty Agreement; o copies of all future reports, proxy statements and other communications distributed to our shareholders generally; o updating information regarding the Program and any other information covered by this Prospectus, as deemed necessary; and o the documents "incorporated by reference." Requests should be directed to the attention of Diana Weber in Jostens' legal department at the address and telephone number on the cover of this Prospectus. Documents Incorporated by Reference The following documents that have been filed by Jostens with the SEC are incorporated into this Prospectus: o our Annual Report on Form 10-K for the year ended January 3, 1998; o our Quarterly Reports on Form 10-Q for the quarters ended April 4, 1998, July 4, 1998; and October 3, 1998; o our Current Report on Form 8-K, dated July 23, 1998; o all other reports filed by us pursuant to Sections 13 or 15(d) of the Securities Exchange Act of 1934, since January 3, 1998; and o the descriptions of our Common Stock and Preferred Share Purchase Rights contained in our Registration Statements on Form 8-A, including any amendments or reports filed for the purpose of updating such description. This Prospectus also incorporates all documents Jostens files with the SEC pursuant to Sections 13(a), 13(c), 14 or 15(d) of the Securities Exchange Act of 1934 after the date of this Prospectus from their date of filing. These documents will be incorporated into this Prospectus until Jostens (a) files an amendment with the SEC indicating that all shares of Common Stock covered by this Prospectus have been sold, or (b) deregisters all shares of Common Stock remaining unsold. All reports filed by Jostens under the Exchange Act are filed with the SEC under Jostens' file number 1-5064. 19 EX-13 4 ANNUAL REPORT [picture] 50s male cheerleader ANNUAL REPORT Jostens 98 Jostens provides products and services that help people celebrate achievement, reward performance, recognize service and commemorate experiences. We provide these achievement and affiliation products in partner- ship with the diverse organizations people belong to throughout their lives. As a partner, we are committed to delivering value and quality that exceed the needs of the people and organizations we serve. Jostens is a team of employees and independent business partners. Our aim is to be the world leader in providing achievement and affiliation products and to constantly deliver exceptional performance. CONTENTS 3 Shareholders Letter 6 Infrastructure 8 Our Market Strength 10 New Products, Services and Channels 12 Performance Improvements 14 Jostens at a Glance 16 Management Discussion and Analysis 24 Consolidated Financial Statements and Notes 44 Corporate Information Financial Highlights Jostens Inc. and subsidiaries [picture] blackboard art [Insert Bar Graph Chart] Net sales Yr 94 649.9 continuing operations 95 665.1 ($ in millions)(1) 96 695.1 97 742.5 98 770.9 Earnings per diluted share Yr 94 0.62 continuing operations 95 1.22 (in $)(1)(2) 96 1.28 97 1.47 98 1.14 Return on investment Yr 94 (5.7%) (in %)(1) 95 19.1% 96 26.3% 97 47.7% 98 45.1%
Years ended ====================================== Dollars in millions, except ratio and per-share data January 2, 1999 January 3, 1998 - --------------------------------------------------------------------------------------------- STATEMENT OF OPERATIONS Net sales $770.9 $742.5 Income before income taxes 83.5 93.4 Net income(2) 41.8 57.2 Return on sales 5.4% 7.7% - --------------------------------------------------------------------------------------------- BALANCE SHEET DATA Working capital $(47.2) $ 6.3 Current ratio 0.8 1.0 Total assets 366.2 390.7 Total shareholders' investment 58.6 127.1 - --------------------------------------------------------------------------------------------- COMMON SHARE DATA Earnings per share: Basic $ 1.14 $ 1.47 Diluted 1.14 1.47 Stock price: High 26 1/4 28 13/16 Low 19 20 Cash dividends per share 0.88 0.88 =============================================================================================
(1) Sales, EPS and ROI graphs reflect June fiscal year-end results for 1994- 1996 and calendar 1997 and 1998 results. In 1996, the company changed its fiscal year end from June 30 to the Saturday closest to December 31, resulting in a six-month transition period from July 1 to December 28, 1996. The 1998 year ended January 2, 1999, and the 1997 year ended January 3, 1998. (2) Includes a $15.7 million charge (43 cents per share) in the fourth quarter of 1998 for the write-off of Jostens Learning Corp. (JLC) notes receivable and related net deferred tax assets. 1 (Picture) letter jacket J A letter from Robert C. Buhrmaster Chairman, President ... 2 [picture] Robert C. Buhrmaster Chairman, President... ...and Chief Executive Officer. To our shareholders: 3 On Balance, 1998 was a good year for Jostens. We did what we set out to do: We generated record performance from our largest product lines; we made internal investments necessary to strengthen our infrastructure and establish a foundation to handle more robust growth; we delivered reasonable earnings improvement from our ongoing business; and we utilized our share repurchase program to improve earnings per share. It was also a year in which our progress was overshadowed by a one-time, noncash charge to write off notes receivable and deferred tax assets related to the 1995 sale of a former subsidiary, Jostens Learning Corp. Our decision to take the charge at year end reflects a conservative stance regarding this investment, which we've now written down to zero. This was unrelated to ongoing business or cash flow performance. Excluding the JLC charge, our business improved nicely over 1997. In recent years, we have devoted a great deal of energy to internal improvements -- including systems, business practices and policies, process simplification and a renewed emphasis on the customer. Attention to those areas are central factors in our strategy to build the organization's capability to efficiently handle the growth we see in relevant opportunities available to us. I am pleased to report that our infrastructure work peaked in 1998. More importantly, those efforts have led to tangible improvements in several performance measures -- from working capital reductions to gross profit margin gains to unit sales growth. Performance Recap In 1998, we continued to drive significant change while maintaining strong financial fundamentals. We reported net income of $41.8 million, or $1.14 per diluted share. Those results include the noncash JLC charge, which reduced net income by $15.7 million, or 43 cents per share. Excluding the JLC charge, we earned $57.5 million, up slightly from 1997. Because the JLC charge has no bearing on the past or future performance of our ongoing business, I will focus the rest of my letter on our results excluding the charge. [picture] IN 1998, WE CONTINUED TO DRIVE Robert C. Buhrmaster Chairman, President... SIGNIFICANT CHANGE WHILE MAINTAINING STRONG FINANCIAL FUNDAMENTALS ...In 1999, we will devote more time and energy to building our business. 4 Earnings per share increased 10 cents to $1.57, reflecting the impact of our share repurchase program, which we said we would use to strengthen EPS. Included in the $1.57 were 6 cents of LIFO earnings resulting from a decision to expand our gold consignment program. Excluding that gain and a similar 1997 LIFO gain from gold inventory reductions, our earnings were $1.51 per share, versus $1.37 on a comparable basis in 1997. In manufacturing, solid performance in 1998 generated gains that helped offset higher general and administrative spending associated with our internal investments. Sales for the year were $771 million, up about 4 percent from 1997. That was below my target for the organization, but the top line was not our primary focus in 1998. Infrastructure was our focus, and we continued our program to strengthen the underpinnings of the company. Systems Our information systems work in 1998 centered on preparing for the year 2000 and beginning a longer-term effort to install integrated systems throughout the company. With our year 2000 project, we are both upgrading our current systems and, where upgrades aren't feasible, installing new systems. The upgrade work is well along. We repaired computer code in virtually all relevant systems in 1998, and we are now testing those repairs. In 1999, our activities will include analyzing contingencies and planning to minimize the risk of business interruptions as a result of the year-date change. In addition, our core finance functions were the first to receive new systems under our integrated systems program. Additional installations scheduled for 1999 are part of a multi-year effort to modernize our information technology, as well as to ensure year 2000 readiness. Our systems work in 1998 represented a major investment of resources. As we complete year 2000 preparations, we will have more flexibility in pacing future investments to upgrade and integrate our information technology. Manufacturing We also continued an initiative begun in 1996 to improve manufacturing performance, with steps that resulted in a $28 million increase in gross profit margin in 1998. During the year, we closed our last remaining U.S. photo processing plant. The resulting consolidation of photography production in Winnipeg, Manitoba, went smoothly and successfully. In its first peak season of consolidated operations, Winnipeg met customer quality and delivery requirements and generated solid cost efficiencies. In addition, we had strong manufacturing performance in our graduation announcement plant -- the result of a consolidation in 1997 -- and in our yearbook printing facilities, which are benefiting from the use of technology and from a multi-facility management approach. I am also pleased with a growing emphasis on uniform manufacturing and quality processes taking hold across the company. Overall, it was a very good year in manufacturing, one of our areas of internal focus. We did not, however, meet our expectations for greater efficiency in Jewelry manufacturing. We have identified the issues and are working to ensure better results in 1999. Share Repurchase To strengthen EPS growth in the face of our internal investments, we repurchased about 3.6 million shares in 1998, exhausting a $100 million repurchase authorization approved by the board in July 1997. We funded most of the program with cash generated by improvements in working capital. A new $100 million authorization was approved in December, and we expect to continue repurchasing shares as a tool to improve earnings per share in the short term. That said, the best use of our resources is to grow the company. The first step toward that end has been to build an infrastructure to support higher growth, and much of that work is now behind us. Key Improvements In recent years, we have increased our customer knowledge and used it to improve the appeal of our products and services. As we have applied that learning, our largest product lines -- Printing & Publishing, Jewelry and Graduation Products have generated steadily improving results. In 1998, those three product lines delivered record sales and profit contribution. Those results relate directly to new product and service introductions, as well as to updating and extending existing products and services. For example: . We improved the Jostens Complete(SM) program and expanded this direct marketing service to 2,000 schools. Through the program, we are making it easier for our customers to do business with us and we are winning more business per customer. . We launched a series of new graduation- and yearbook-related products to help students commemorate the millennium. Starting in 1999, we expect to see the results of those offerings, which are in addition to our successful millennium class ring collection introduced in 1996. . College sales and profits accelerated in the second half of 1998, reflecting higher-than-historical growth rates as a result of a new market strategy initiated in 1997. We expect continued improvement in the college market for our Jewelry and Graduation product lines in 1999. In addition, we organized our leadership team to further develop our school business, to coordinate the development of new business concepts and to develop additional distribution channels, such as electronic commerce and direct marketing, that will complement our sales representative network. Today we are devoting more activity than at any other time this decade to testing and introducing new products and services, product extensions and market strategies -- some of which I expect will help our 1999 results. I also expect that level of activity to increase as we move through the year. 1999 Outlook Our company is in a great business. We do wonderful things for our customers, helping them celebrate important moments, recognize achievements and build lasting affinity. Because celebration, recognition and affinity are important to everyone, we have plenty of opportunities to expand. Our company is working from a position of strength. We are the industry leader in our largest market, with a well-established distribution channel that provides a variety of programs, products and services to high school students, parents and school administrators. We have a strong presence, as well, in the college market, and we are among the leaders in recognition products and programs for businesses. Financially, Jostens is healthy. Our income statement and balance sheets are strong, the fundamentals of the business are solid and we generate terrific cash flow. Now, more than ever, we have a strong base on which to build, and in 1999 we will have more expansion activity. In 1998, we achieved a good balance between delivering reasonable earnings and other performance improvements and upgrading our infrastructure. That work, undertaken by talented people throughout Jostens, was the means to an end -- building a solid foundation that can support more robust top-line growth. In 1999 -- particularly in the second half of the year -- we will devote more time and energy to building our business. It won't be overnight and we'll still be working on our infrastructure, but the changing emphasis should be noticeable. I anticipate an exciting year for our company, and I look forward to sharing our progress with you. /s/ Robert C. Buhrmaster Robert C. Buhrmaster Chairman, President and Chief Executive Officer 5 [picture] marching band tubas Integration [picture] kid playing twister Streamlining [picture] waving graduates Technology -------------- INFRASTRUCTURE -------------- Efficiency [picture] girl wearing saftey goggles in shop class Teamwork [picture] 2 guys in glasses with rulers Simplification Quality Manufacturing Improvements Systems INFRASTRUCTURE A multi-year effort to improve the company's infrastructure peaked in 1998. While the work is not yet done, a great deal of improvements have been made - improvements that have started making a positive impact on our performance. Systems In 1998, we devoted a great deal of resources to information technology, primarily to prepare Jostens to meet the year 2000 (Y2K) computer-bug challenge. A detailed project and systems plan developed in 1997 was implemented in 1998. Our Y2K readiness plan includes upgrading many of our current systems. Where it's not possible to upgrade current systems, we are installing new systems, utilizing software from Oracle Corp. and Trilogy. Specific progress in 1998 included: Installing and implementing new core financial systems, including accounts receivable, accounts payable and sales compensation; identifying and updating 3.4 million lines of obsolete computer code in our current systems and rolling the calendar forward into 2000 to test the updated code; contacting and evaluating external partners, such as vendors and raw material suppliers, to assess their Y2K readiness and minimize potential business problems; beginning to develop specific contingencies; and adhering to timelines calling for new systems to be implemented by mid-1999 in the Recognition, Cap & Gown and Diploma product areas. Our systems program is making us year 2000 ready but it's also part of a longer-term initiative to install new, integrated information systems across the company. As we complete year 2000 work, we'll evaluate and pace additional systems installations based on their impact. Simplification We're also attacking needless complexity created over the last century. This is important work, since complexity adds cost and time but not value. And it can be challenging work, since many of the changes we are making touch employees and independent sales representatives used to doing business a certain way. For example, in 1998 we moved Jewelry customer service activities to one central call center, a change from locating customer service at manufacturing sites. Along with that consolidation, we automated our order-entry process, a step that required sales representatives to adopt, for the first time, a standardized ordering process and format. By centralizing Jewelry customer service, we expect to reduce costs. More importantly, we'll speed the processing of incoming orders and provide faster service and information to our customers whether they're calling to place an order, ask a question or learn the status of their purchase. Manufacturing Improvements Since the launch of a manufacturing improvement program in 1996, we have closed and consolidated five facilities and generated steady increases in gross profit margin. In 1998, manufacturing performed very well, contributing to a 1.7 point gain in gross profit as a percentage of sales. Notable performances came from Graduation Products, which realized a full year of efficiency gains following the 1997 consolidation of announcement production in Shelbyville, Tenn. In Printing & Publishing, our five yearbook production plants also had an excellent year. Success there was due in part to our 1997 program to implement standard processes and install multi-plant management concepts steps that enabled us to more easily shift production to match customer requirements with manufacturing capabilities and capacity. We also continued to benefit from the ever-increasing use of technology by our customers. In 1998, about 70 percent of our yearbook pages were prepared by school staffs using desktop publishing systems, enabling us to take greater advantage of our technology investments in our plants. Our major consolidation project in 1998 occurred in North American Photography. In August, we shut down our last remaining U.S. photo processing plant and shifted all photo production to our existing facility in Winnipeg, Manitoba. Excellent planning and execution resulted in a smooth transition and outstanding manufacturing performance during photo's busy fall season. Our lone manufacturing disappointment in 1998 was in Jewelry, where we did not realize expected cost improvements. The key issue involved logistical challenges associated with moving product among two U.S. plants and a contract ring finishing facility in Mexico. Efforts to streamline the movement of product among plants, expand our training programs and more effectively retain qualified workers fell short of our objectives. In February 1999, we decided to discontinue activities at the Mexico facility and return all aspects of ring production to our existing sites in the United States. We believe this step will enable us to meet customer expectations for quality and delivery and to reduce costs through process improvements and the use of technology. Infrastructure Outlook We've come a long way in improving our infrastructure and building our ability to profitably expand. But our work isn't completed. Infrastructure activities will continue in 1999, with our integrated systems program, process improvements and consolidation opportunities. At the same time, we believe we will have the resource capacity to increase our activity on expansion opportunities. 7 Our Market Strength [picture] [picture] chemistry student thumbs up guy JOSTENS IS BEST KNOWN FOR ITS SCHOOL PRODUCTS AND SERVICES, and they remain our strength today. We lead the U.S. market in yearbooks, class rings, graduation announcements, and caps and gowns, and we are the Canadian market leader in school photography. In the last four years, sales in our three largest product lines Printing & Publishing, Jewelry and Graduation Products have increased an average of 6.2 percent. The reason for our continued success? Consumer focus. Marketing programs. And products that take the enduring qualities of tradition and inject them with a relevance for today's youth. It's all adding up to improving performance in our main school product lines. Reversing the Trends For decades, Jostens has had a strong presence in the youth market, founded on a network of sales representatives who reach customers in high schools and colleges. In the 1980s, however, the products we are known best for began to lose their luster. While sales dollars continued to grow, the actual number of rings we sold declined, while yearbooks held steady. We solved the problem with a consumer approach. We went to the people whose opinions count most our customers. Based on what we learned, we have made improvements from uniform marketing practices to streamlined product offerings to consumer-friendly pricing strategies.
[INSERT BAR CHART] U.S. HIGH SCHOOL RINGS SOLD U.S. YEARBOOKS SOLD In thousands In thousands 1000 8000 800 6000 600 4000 400 2000 200 0 0 80 82 84 86 88 90 92 94 96 98 80 82 84 86 88 90 92 94 96 98 81 83 85 87 89 91 93 95 97 81 83 85 87 89 91 93 95 97 Year Year
8 [picture] girl with braids and calculator [picture] student election [picture] [picture] three cheerleaders handing out an award - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- We have redesigned entire product programs - as with our high school class ring offering, where we reduced the number of styles and made our pricing structure easier to understand. We have introduced convenient product packages to make it easier for consumers not interested in a la carte product menus. To add value for customers, we have worked with schools to create a yearbook curriculum to build students' journalism skills. We've added new features to personalize and customize yearbooks and graduation announcements for each student. And we've introduced new product designs, such as millennium ring, yearbook and graduation products for graduates in 1999, 2000 and 2001. In addition, we've added complementary products, such as Hear the Year(R) multi-media CDs sold as companions to school yearbooks. In Photography, we took steps to improve our results by consolidating manufacturing, and we now manage the product line on a North American basis, including sales from Canada and the United States. Looking ahead, we are working to expand our business through the use of digital technology and new products and services. Beyond High School For many students, after high school comes college. Jostens is there as well, as a market leader in college rings and graduation products. Our primary emphasis in college is to work with university leaders to build affiliation between the school and students and alumni. Our products and services symbolize that affinity bond. In 1998, we continued to expand the number of campus events, such as Senior Salute,(SM) where we can merchandise products and help improve commencement participation. In addition, 16 schools last year adopted one unique ring design representing a lasting, unchanging symbol of affiliation that is easily recognized, strengthens the student's relationship with the school and generates more business for us. For 1999, we expect double-digit sales growth in our college market business, which represented nearly 10 percent of School Products segment sales in 1998. In 1999, we will serve all four major U.S. service academies Army, Navy, Air Force and Coast Guard. And two of those schools have signed multi-year relationships based on our past performance. Business Recognition Jostens also serves the business market through our Recognition segment, which provides performance awards and support services to companies and their employees. We are a leading provider of turn-key programs structured to celebrate and reward employee service and affiliation. We continue to implement Strategic Recognition(TM) to help business leaders develop coordinated programs to influence and reward employees in a wide range of performance areas. In 1998, Recognition was internally focused, as it prepared for the installation of a new business information system in 1999. Preparations included simplifying business processes and reducing by 40 percent the number of base products, effectively eliminating products with low consumer demand. 9 [picture football player with trophy] [picture soccer goalie] Even while we've focused on internal IMPROVEMENTS, we've been testing and introducing new products, programs [picture boys at a computer] NEW PRODUCTS, [LOGO P&C&S here] SERVICES and 10 Products and Programs--and Services Sure, we've got products and programs. But we also provide services--a little known but increasingly important aspect of what we do. Some services, such as Jostens Renaissance(R), are a way to help schools improve and celebrate academic performance. Other services make it easier for schools to offer, and customers to purchase, affinity-building products. Our Jostens Complete(SM) service does both. Introduced as a way to eliminate the headaches schools experience in collecting yearbook payments, Jostens Complete was an immediate hit with administrators. By coordinating with schools to offer yearbooks and related products directly to student homes, we created a direct-payment ability removing the cash-collection task from teachers and administrators. In addition, customers like the option of shopping at home, and they're more likely to select additional products such as personalized yearbook covers. In Printing & Publishing, the notion of service extends to YearTech(R), a tool to automate and simplify the yearbook preparation process for students. YearTech, which is updated annually, helps simplify yearbook creation through page design options, automatic creation of portrait pages and automated functions for submitting completed yearbook pages. It also helps schools stay on top of deadlines to ensure on-time delivery of their yearbooks. Yearbook staffs give YearTech excellent marks--and that's important, since 70 percent of our yearbooks are prepared with electronic publishing software. Sports Marketing--The Ring is the Thing For decades, Jostens has been a leader in helping professional and collegiate athletes commemorate championship performances. For instance, the quest for excellence in pro football is symbolized by the Super Bowl ring. And 20 of the 32 NFL Super Bowl winners have selected Jostens to design and produce their championship rings, pendants and watches. In 1998, we were selected to produce jewelry for several teams, including: . The San Diego Padres, champions of Major League Baseball's National League; . The Chicago Bulls, who won their sixth National Basketball Association championship of the 1990s; and . The Green Bay Packers, the National Football League's NFC champions. We also created jewelry for various collegiate champs, including the University of Kentucky Wildcats, who won the men's Final Four(R) basketball championship. [picture] golfer and services. And we're EXPLORING additional channels so our customers can REACH us at their convenience. [picture] three women looking at a piece of paper [picture] hand with five championship rings Channels move the business. 11 Fan Appeal More recently, we've extended our product line from champions to fans of champions. In 1998, for example, we unveiled fan collections for the Boston Red Sox, Cleveland Indians and New York Yankees. We introduced fan products commemorating the Detroit Red Wings' National Hockey League Stanley Cup win, in addition to collections for fans of the Boston Bruins and New York Rangers. We also signed an exclusive, multi-year agreement with the National Collegiate Athletic Association giving us exclusive use of the NCAA(R) championship brand names in creating jewelry for fans. In December, we introduced our first products under that agreement--rings to celebrate the seven NCAA basketball championships earned by the University of Kentucky Wildcats. We anticipate offering similar programs for teams in sports that include basketball, hockey, soccer and baseball. Fore! Whether its sports, school or business, our products symbolize achievement and affiliation. In late 1998 we took another step forward in affiliation marketing, becoming the official award and recognition company of The PGA of America. More than 24,000 PGA golf pros across the country will now have access to a full line of Jostens products to help display their personal affiliation with this rapidly growing sport. In addition, our products can be used as participation and achievement awards at the tens of thousands of local golf events hosted annually by PGA pros nationwide. This multi-year relationship is just getting started in 1999, but it represents our efforts to expand beyond traditional school and business markets. Developing Alternative Distribution Channels One of our strengths is a network of about 1,000 independent and employee sales representatives, who put a personal face on our products, programs and services. As successful as this distribution channel continues to be, we cannot rely solely on one channel--especially as people of all ages become increasingly comfortable shopping in such diverse channels as retail, direct mail and electronic commerce. In 1998, we centralized our retail, Internet development and direct marketing activities to better coordinate strategies and tactics to benefit the entire organization. In 1999, we expect to take additional steps. For example, we expect to offer the ability for PGA pros to order products on line under our new agreement. [picture] satin-clad victory graduate [picture] girls putting on makeup [picture] kid lifting weights [picture] marching band horn player PERFORMANCE IMPROVEMENTS 12 We have strengthened the company's foundation in recent years to enable us to handle our current business more efficiently and build the organization's ability to handle more rapid growth. [picture] student playing violin [picture] [picture] students arm wrestling baseball students high-fiving Cash Flows and Balance Sheet Buoyed by healthy and improving product lines, we continue to generate strong cash flow. In 1998, $102 million in cash generated from operations enabled us to fund infrastructure projects and improve shareholder returns by repurchasing stock. In recent years, we've put in place programs to reduce inventories. At year-end 1998, inventories declined by about $1.5 million from 1997, even as sales increased by $28 million. Closer adherence to policies, as well as a decision to expand our gold consignment program rather than own our inventory outright, contributed to the 1998 improvement. We have also developed new ways to improve customer deposits. We've worked with the sales force to introduce new methods to collect deposits. And we've had success with Jostens Complete, which provides a means for payments to go directly from customers to Jostens, rather than through schools first. It's convenient for customers and schools, and it enables us to improve deposits and reduce receivables. The transition to a new format for the Jostens Complete program in 1998 led to a delay in receiving customer deposits in the second half of the year. We currently carry only $4 million in long-term debt, although we fund seasonal operating requirements with short-term borrowings. At year-end 1998 we had negative working capital, a positive sign of how effective our programs are. Internally, we also use economic value added (EVA)(1) as a strategic performance measure. EVA grew for the third straight year--in 1998 it grew by 12 percent compared with 1997. It is another indicator of our company's health. Cash to Shareholders In 1998, in a decision made to balance acceptable shareholder returns with internal investments, we utilized our strong cash flow to aggressively repurchase Jostens stock to help improve earnings per share. Since 1994 we've returned to shareholders more than $450 million through cash dividends and share repurchases. In addition to an 88-cent per share annual dividend, we have been in the market regularly repurchasing our stock. In 1998, we invested $80 million in repurchases, completing a $100 million repurchase program authorized in mid-1997. In December, the board authorized a new $100 million program. Although there is no deadline to complete the new program, we expect to be a regular participant in the market repurchasing our stock-but likely at a lower rate than in 1998. Asset Utilization Our company's assets are working harder and more effectively than ever. Total assets have been reduced from $570 million in 1994 to $366 million in 1998--that's a 36 percent decline--as we sold under-performing product lines, closed under-used manufacturing facilities and repurchased shares. During the same period, income from continuing operations has held fairly steady, which means we're getting greater productivity from an asset base that's a third smaller than it was four years ago. ASSET UTILIZATION [Bar graph goes here] Dollars in millions
1994 1995 1996 1997 1998 ---- ---- ---- ---- ---- Total Assets 570 548 384 391 366 Income from continuing operations 28 56 52 57 42
CASH RETURNED TO SHAREHOLDERS [Bar graph goes here] Dollars in millions
1994 1995 1996 1997 1998 ---- ---- ---- ---- ---- Dividends 40 40 36 34 32 Share repurchases -- -- 169 20 80
OPERATING CASH FLOW [Bar graph goes here] Dollars in millions
1994 1995 1996 1997 1998 ---- ---- ---- ---- ---- 125 81 29 117 102
WORKING CAPITAL [Bar graph goes here] Dollars in millions
1994 1995 1996 1997 1998 ---- ---- ---- ---- ---- 173 206 9 6 -47
Graph information reflects June fiscal year-end results for 1994-1996 and calendar 1997 and 1998 results. (1) EVA is a trademark of Stern Stewart & Co., New York. 13 [LOGO JOSTENS GOES HERE] at a glance An overview of our business
SEGMENTS PRODUCT LINE CORE PRODUCTS NEW PRODUCTS/SERVICES School Products PRINTING & Yearbooks, memory books YearTech(R) yearbook design and School-related products and PUBLISHING and related items, commercial marketing kits; yearbook class services primarily in the printing services. curriculum; Hear The Year(R) United States and Canada. multi-media CD; Jostens Complete(R); Millennia Review(TM) historical summary. Recognition Products and services for companies and their employees --------------------------------------------------------------------------------------------------- JEWELRY Class and school-related High School: activity rings symbolizing Millennium Collection(TM); affinity or achievement. Jostens Renaissance(R) program to recognize academic achievement. College: Custom Collegiate Collection(TM) 14 (one ring design for one school). Net Sales (in millions) --------------------------------------------------------------------------------------------------- $103.9 [pie chart goes here] GRADUATION Graduation announcements, High School: PRODUCTS diplomas, graduation regalia, Jostens Renaissance, accessories and other millennium-related products. celebration-related items. $659.5 College: Senior Salute(TM) program to boost commencement participation. Operating income (in millions) --------------------------------------------------------------------------------------------------- NORTH AMERICAN Class and individual school Student ID cards, Excellence in $10.4 PHOTOGRAPHY pictures, senior portraits, Education(TM) recognition program. [pie chart goes here] special school events photos PanelXPress(R) photo page layout and related products in the service. K-12 market. $127.9 --------------------------------------------------------------------------------------------------- RECOGNITION Programs and products that Strategic Recognition(TM) helps help motivate, recognize and clients align all recognition and reward individual and team performance initiatives to support contributions that support the organization's vision, mission, organizational objectives. goals and values; and jewelry for professional sports teams, associations and fans.
segments, product lines and offerings
MANUFACTURING COMPETITORS DISTRIBUTION NET SALES ($ in millions) (Calendar year) Visalia, Calif. Herff Jones In schools via independent Topeka, Kan. Taylor Publishing sales agents and sales 98 258.4 Winston/Salem, N.C. Walsworth associates, and through direct 97 243.8 State College, Pa. Lifetouch marketing channels. 96 230.2 Clarksville, Tenn. 95 214.0 94 201.3 Attleboro, Mass. Commemorative Brands In junior and senior high Denton, Texas (ArtCarved and Balfour schools via independent sales 98 194.3 Burnsville, Minn. brands) agents and sales associates, 97 186.8 Herff Jones and through retail jewelers. 96 177.5 95 167.6 94 153.1 In colleges and universities via employee sales force and through college bookstores. Red Wing, Minn. Herff Jones In schools via independent Laurens, S.C. Commemorative Brands sales agents and sales 98 159.5 Shelbyville, Tenn. Carlson Craft associates. 97 153.1 96 142.7 In colleges and universities 95 136.9 via employee sales force and 94 124.4 through college bookstores. Winnipeg, Manitoba Lifetouch In schools via independent D.W. Friesen photo dealers and through 98 47.3 Herff Jones emplolyees and freelance 97 48.2 Olan Mills photographers. 96 48.8 95 48.7 94 50.8 Princeton, Ill. O.C. Tanner Directly to clients via 98 103.9 Memphis, Tenn. Tiffany independent and employee 97 103.7 (distribution center) Robbins sales agents. 96 101.3 Red Wing, Minn. 95 96.9 Sherbrooke, Quebec 94 103.9
15 Management Discussion and Management Discussion and Analysis Jostens Inc. and subsidiaries [picture] trophy The company occasionally may make statements regarding its business and markets, such as projections of future performance, statements of management's plans and objectives, forecasts of market trends and other matters. To the extent such statements are not historical fact, they may constitute forward- looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Statements containing the words or phrases "will likely result," "are expected to," "expects," "will continue," "anticipates," "believes," "estimates," "projected" or similar expressions are intended to identify forward-looking statements. Forward-looking statements may appear in this document or other documents, reports, press releases and written or oral presentations made by officers of the company to shareholders, analysts, news organizations or others. All forward-looking statements speak only as of the date on which the statements are made. Actual results could be affected by one or more factors, which could cause the results to differ materially. Therefore, all forward-looking statements are qualified in their entirety by such factors, including the factors listed below. Such factors may be more fully discussed periodically in the company's subsequent filings with the Securities and Exchange Commission (SEC). Any change in the following factors may impact the achievement of results in forward-looking statements: the price of gold; the company's access to students and consumers in schools; the seasonality of the company's business; the company's relationship with its sales force; fashion and demographic trends; the general economy, especially during peak buying seasons for the company's products and services; the company's ability to respond to customer change orders and delivery schedules; competitive pricing and program changes; the ability to manufacture quality products and continue improving operating efficiencies; the impact of year 2000 compliance on computer-based systems of the company and its external relationships; and the costs and impact of the company's information systems implementations. The foregoing factors are not exhaustive, and new factors may emerge or changes to the foregoing factors may occur that would impact the company's business. INTRODUCTION Effective December 29, 1996, we changed our fiscal year end from June 30 to the Saturday closest to December 31. The change was made to enable better business planning and internal management. The consolidated financial statements and notes include our results of operations and cash flows for the years ended January 2, 1999 (calendar 1998), January 3, 1998 (calendar 1997), and December 28, 1996 (calendar 1996) (unaudited); the six-month transition period ended December 28, 1996; and the fiscal year ended June 30, 1996. This discussion summarizes significant factors that affected the consolidated operating results, financial condition and liquidity of Jostens in the 1998, 1997 and 1996 (unaudited) calendar years and should be read in conjunction with the consolidated financial statements and accompanying notes. RESULTS OF OPERATIONS The following table sets forth selected information from the company's Statements of Consolidated Operations, expressed as a percentage of net sales.
Years ended Increase (decrease) ============================================================= January 2 January 3 December 28 1998 1997 1999 1998 1996 over over (unaudited) 1997 1996 - ---------------------------------------------------------------------------------------------------------------------- NET SALES 100.0% 100.0% 100.0% 3.8% 4.8% Cost of products sold 45.6% 47.3% 49.9% 0.1% (0.7%) - ---------------------------------------------------------------------------------------------------------------------- Gross margin 54.4% 52.7% 50.1% 7.1% 10.3% Selling and administrative expenses 41.1% 39.3% 39.9% 8.7% 3.1% - ---------------------------------------------------------------------------------------------------------------------- OPERATING INCOME 13.3% 13.4% 10.2% 2.5% 38.6% Net interest expense (0.9%) (0.8%) (1.2%) 6.1% (30.0%) Write-off of JLC notes receivable, net (1.6%) - - - - - ---------------------------------------------------------------------------------------------------------------------- INCOME BEFORE INCOME TAXES 10.8% 12.6% 9.0% (10.6%) 48.3% Income taxes 5.4% 4.9% 3.8% 15.2% 36.0% - ---------------------------------------------------------------------------------------------------------------------- NET INCOME (LOSS) 5.4% 7.7% 5.2% (26.9%) 57.4% ======================================================================================================================
16 Analysis Net Sales Net sales in 1998, 1997 and 1996 were $770.9 million, $742.5 million and $708.7 million, respectively. The increase from 1997 to 1998 of $28.4 million, or 3.8 percent, and the increase of $33.8 million, or 4.8 percent, from 1996 to 1997 were driven by increases in sales volume and pricing in our three largest school product lines -- Printing & Publishing, Jewelry and Graduation Products. Price increases in 1998 and 1997 varied by product and ranged from zero to 4 percent in 1998 and zero to 5 percent in 1997. We experienced 4 to 6 percent year-over-year sales growth in the three largest product lines and essentially flat sales in the remaining lines in 1998. Gains in our largest product lines stem from new marketing programs and products. We expect 1999 sales to increase by a mid-single digit percentage rate over 1998. Gross Margin Gross margin in 1998 was 54.4 percent, compared with 52.7 percent in 1997 and 50.1 percent in 1996. The 1.7 percentage point increase in 1998 was primarily the result of investments to improve our internal processes and increase manufacturing efficiencies. In addition, 1998 gross margin benefited from a decrease in raw material costs for jewelry compared with 1997. Offsetting those improvements was a one-time charge of $2.5 million to consolidate all photography processing into one facility. In addition, as part of our balance sheet management, in the fourth quarter of 1998 we expanded our policy of consigning our gold inventory used in products and samples. The conversion to consigned gold, executed via a sale of all owned gold, resulted in a one-time pre-tax income benefit of $3.7 million (6 cents per share) in 1998 due to the lower carrying value of gold under LIFO. In 1997, pre-tax income similarly benefited by $6.8 million (10 cents per share) from a gold inventory reduction program. We anticipate additional improvements in gross margin in 1999; however, we expect the rate of improvement to be lower than in 1998. The 2.6 percentage point increase in gross margin in 1997 primarily reflects the July 1996 implementation of a new inventory cost accounting system, which provided more precise, detailed performance information by product within each line. The new system resulted in a more accurate valuation of inventories and recording of cost of products sold, consistent with prior year ends. As a result of this implementation, the cost of products sold in the six months ended December 28, 1996, was $16.9 million (26 cents per share) higher than what would have been reported using the prior method, while the cost of products sold in the six months ended June 28, 1997, had an equally positive impact. Also contributing to the increase in 1997 gross margin compared with 1996 was the previously mentioned gold inventory reduction program, which decreased total net costs by $6.8 million (10 cents per share) in 1997. In 1997, the positive impact of the new cost accounting system and the gold reduction program was partially offset by higher training costs to prepare a facility in Mexico for its first peak ring finishing season, as well as costs to consolidate our two graduation announcement plants. Selling and Administrative Expenses Selling and administrative expenses increased to $316.9 million in 1998 from $291.5 million in 1997 and $282.9 million in 1996. As a percentage of sales, the 1.8 percentage point increase from 1997 to 1998 was primarily the result of investments in information systems, market research expenses and expensed year 2000 readiness costs. Selling and administrative expenses as a percentage of sales are anticipated to remain about flat in 1999 compared with 1998. The decrease in costs as a percentage of sales from 1996 to 1997 primarily related to the recording of $6 million in reserves in 1996 to cover environmental investigation and cleanup costs (see subsequent discussion under "Commitments and Contingencies"). This was partially offset by higher salary and legal costs in 1997 associated with changing the college market sales force from independent representatives to employees, and by the development of marketing materials for the Gold Lance retail ring business, which was acquired in 1997 (see subsequent discussion under "Capital Expenditures and Acquisition"). Net Interest Expense Net interest expense was $6.7 million in 1998, compared with $6.3 million in 1997 and $9 million in 1996. Our short-term borrowing needs increased in 1998 over 1997, primarily because we repurchased $80 million (3.6 million shares) of Jostens common stock and received less cash from customer deposit programs. Despite the short-term borrowing increase, net interest expense remained comparable to 1997, primarily the result of favorable interest rates and capitalizing $700,000 of interest related to software development. Net interest expense in 1997 was $2.6 million lower than 1996, primarily because long-term notes with higher interest rates were paid off in August 1996. 17 Management Discussion and Analysis Jostens Inc. and subsidiaries Write-off of JLC Notes Receivable, Net In June 1995, we sold our Jostens Learning Corp. (JLC) curriculum software subsidiary to a group led by Bain Capital, Inc. As partial consideration for the sale, we received two notes, which were discounted and recorded at their estimated fair values. In addition, the transaction gain of $13.2 million was deferred in accordance with the SEC Staff Accounting Bulletin No. 81, Gain Recognition on the Sale of a Business or Operating Assets to a Highly Leveraged Entity. We recorded $12.9 million on our consolidated balance sheets representing the estimated fair value of the notes, net of the deferred gain. In January 1999, we received information from JLC indicating to us that the carrying value of the notes was permanently impaired. As a result, we wrote off $12 million in 1998 for the carrying value of the notes, net of miscellaneous JLC-related assets and liabilities, plus $3.7 million of net deferred tax assets associated with the initial sale of JLC that we do not expect to realize. In addition, we did not record a tax benefit related to the write-off because it is currently not expected to be realized for tax purposes. Income Taxes Our 1998 effective income tax rate was 49.9 percent, compared with 38.8 percent in 1997 and 42.3 percent in 1996. The increase from 1997 to 1998 was primarily due to the $3.7 million write-off of net deferred tax assets related to the 1995 sale of JLC, combined with the fact that no tax benefit was recorded on the write-off of the JLC notes. The 1998 rate benefited from a $750,000 (2 cents per share) reduction of a valuation reserve to reflect the utilization of previously reserved foreign tax credits as a result of executed tax planning strategies. Our 1997 effective income tax rate decreased by 3.5 percentage points compared with the 1996 rate as we combined the U.S. Photography legal entity with the main U.S. businesses. As a result, we reduced income tax expense by recognizing $2 million (5 cents per share) of accumulated net operating loss carryforward benefits through the reversal of a deferred tax asset valuation reserve. We expect the effective tax rate in 1999 to be about 40.5 percent. SCHOOL PRODUCTS SEGMENT Sales in the School Products segment increased 4.4 percent to $659.5 million in 1998, compared with $631.9 million in 1997 and $599.2 million in 1996. The sales increase resulted primarily from sales volume and price increases in the Printing & Publishing, Jewelry and Graduation Products product lines. Printing & Publishing sales were $258.4 million in 1998, compared with $243.8 million in 1997 and $230.2 million in 1996. Year-over-year sales growth in Printing & Publishing was driven by new marketing programs and products that targeted new accounts and increased volume in the existing account base. The $14.6 million, or 6 percent, increase from 1997 to 1998 was primarily the result of a 3 percent price increase and a 3 percent volume increase. Yearbook sales dollars in 1997 increased over 1996 by 8 percent, partially offset by a 9 percent decline in commercial printing sales, as more production capacity was used to produce higher-margin yearbook products. Jewelry sales in 1998 were $194.3 million, compared with $186.8 million in 1997 and $177.5 million in 1996. The 1998 increase of $7.5 million, or 4 percent, was driven by a 5.2 percent increase in unit volume. Sales dollar increases in the high school market were partially offset by a decrease in the college market as a result of having only one service academy account in 1998 versus three in 1997. We expect college market sales to increase in 1999 at a double-digit rate. Overall ring sales in high school and college increased by 5 percent from 1996 to 1997. In high school, the number of class rings sold increased by 5 percent, led by healthy consumer acceptance of specially designed rings for students graduating in 1999, 2000 and 2001, the "Millennium classes." Our 1998 results put us on track for the fifth straight school year of increased ring unit volume after a 12-year decline. Graduation Products sales increased to $159.5 million in 1998, from $153.1 million in 1997 and $142.7 million in 1996. The 4.2 percent increase in 1998 from 1997 and the 7.3 percent increase from 1996 to 1997 reflects more customers purchasing products and higher sales dollars per customer. North American Photography sales decreased by 2 percent to $47.3 million in 1998, from $48.2 million in 1997. The decrease was planned, as we did not renew our relationships with a number of independent wholesalers whose volume generated unacceptable returns. Photography sales in 1997 were 1.1 percent lower than the $48.7 million recorded in 1996. The decline was the result of strikes by Ontario school teachers and the Canadian postal service, hindering our ability to take and ship orders in the peak fall season. 18 Operating income for School Products was $127.9 million in 1998, compared with $109.1 million in 1997 and $85.9 million in 1996. The 17.2 percent increase in 1998 resulted from investments to improve internal processes and manufacturing efficiencies, primarily in Printing & Publishing and Graduation Products. Printing & Publishing decreased cycle times and lowered costs by operating plants with common management teams, utilizing consistent processes and coordinating production loads. In 1997, we spent $2.6 million to close an announcement plant. A full year of post-consolidation efficiencies were achieved in 1998 by reducing fixed costs, streamlining product offerings and reducing process complexity. Operating income was also favorably impacted by a decrease in Jewelry raw material costs in 1998, partially offset by higher than expected costs associated with the facility in Mexico and $2.5 million to consolidate all photography processing into one facility. In addition, pre-tax income was $3.1 million higher in 1997 than in 1998 due to the LIFO gain from converting owned gold to consigned gold in both 1997 and 1998. The 26 percent increase in 1997 operating income resulted primarily from higher sales, the inventory cost accounting system implemented in 1996 and the 1997 gold inventory reduction program. The increase was partially offset by training costs associated with a new facility in Mexico, as well as costs associated with consolidating our two graduation announcement facilities. RECOGNITION SEGMENT Recognition sales were $103.9 million in 1998, compared with $103.7 million in 1997 and $101.3 million in 1996. In 1998, Recognition sales were expected to be flat as we realigned sales management, drove internal efficiencies and streamlined business processes in advance of the installation of a new computer system in 1999. The 1997 sales increase of 2.3 percent resulted from new accounts and an increase in sales volume from the Strategic Recognition program, from high-profile account wins in professional sports and from the introduction of jewelry products for fans of sports teams. These gains were largely offset by declines in the sale of individual products to corporate accounts. Operating income in 1998 was $10.4 million, compared with the $8.9 million in 1997 and $3 million in 1996. The $1.5 million increase in 1998 was primarily the result of $3.3 million in material cost reductions, overhead spending reductions and production efficiency improvements. This was offset by $1.8 million of additional investments in sales and marketing staff and to realign sales management. The $6.9 million increase in operating income from 1996 to 1997 was primarily attributed to a $6 million environmental liability charge in 1996. LIQUIDITY AND CAPITAL RESOURCES Cash generated from operating activities and short-term borrowings have been our principal sources of liquidity. Cash has been used primarily for dividends, common stock repurchases, capital expenditures, the purchase of Gold Lance in 1997 and the repayment of $50 million medium-term notes in 1996. Operating activities generated cash of $101.6 million in 1998 compared with $116.7 million in 1997. The decrease of $15.1 million in cash generated in 1998 compared with 1997 primarily reflected a change in the timing of customer deposit collections resulting from a new payment plan implemented in 1998. Compared with 1996, we generated $27.6 million more cash from operating activities in 1997. The increase related primarily to a $7.7 million increase in net income adjusted for depreciation, amortization and deferred taxes, and $19.9 million of cash generated as a result of our working capital reduction efforts. Net cash provided by operating activities funded capital expenditures and cash dividends in 1998, 1997 and 1996. However, because most of our sales volume occurs in the second and fourth quarters, we usually require interim financing of inventories and receivables. We have a $180 million, five-year bank credit agreement that expires in December 2000. Credit available under this agreement is reduced by commercial paper borrowings outstanding. At January 2, 1999, $86 million was available under the bank credit agreement as a result of $94 million in outstanding commercial paper borrowings. Average short-term borrowing under the commercial paper program was $108.3 million and $94.4 million in 1998 and 1997, with highs of $180 million in 1998 and $143 million in 1997. In addition, we had available unsecured demand facilities with three banks totaling $54.2 million. These demand facilities are renegotiated periodically based on our anticipated seasonal needs for short-term financing. There were no borrowings outstanding under these demand facilities at January 2, 1999. We also have a gold consignment arrangement with a major financial institution whereby we have the ability to obtain up to $15 million in consigned inventory. Under the terms of the consignment arrangement, we do not own the consigned gold until it is shipped in the form of a product to a customer. Accordingly, we do not include for financial statement purposes the value of consigned gold in inventory with a corresponding liability. At January 2, 1999, $611,000 was available under this agreement. 19 Management Discussion and Analysis Jostens Inc. and subsidiaries We believe cash generated from operating activities, together with credit available under the bank credit agreement and demand facilities, will be sufficient to fund planned capital expenditures, dividends, share repurchases and seasonal build-ups of inventories and accounts receivable in 1999 and beyond. CAPITAL EXPENDITURES AND ACQUISITION We invested $36.9 million in capital expenditures in 1998, compared with $24.4 million in 1997 and $16.9 million in 1996. The 1998 increase of $12.5 million reflected additional investments to replace information systems to ensure year 2000 compliance. Capital expenditure increases of $7.5 in 1997 resulted from investments to upgrade processes and yearbook printing technology and to improve information systems. We anticipate spending approximately $32 million in 1999 on capital projects, including about $14 million for hardware, software, internal payroll costs devoted to information systems projects, and consulting fees. In 1997, we purchased the Gold Lance class ring brand for $9.5 million in cash. Gold Lance products are sold at retail locations and represent part of our strategy to develop additional distribution channels. MARKET RISK The market risk inherent in our financial instruments and positions is the potential loss arising from adverse changes in interest rates and commodity prices as discussed below. To reduce risk, we selectively use financial instruments. All hedging transactions are authorized and executed under clearly defined policies and procedures, which prohibit the use of financial instruments for trading purposes. While we do have international operations, primarily in Canada, we consider our market risk in such activities to be immaterial. Commodity Price Risk Our consolidated results of operations could be significantly affected by changes in the price of gold. To manage the risk associated with gold price changes, we enter into gold forward purchase contracts based upon the estimated ounces needed to satisfy projected orders for the upcoming school year. We then set our ring prices at the beginning of the school year to reflect the locked-in gold price. We prepared a sensitivity analysis as of January 2, 1999, to estimate our exposure to market risk on our gold forward purchase contracts. The fair value of our gold positions was calculated by valuing each position at quoted futures prices at January 2, 1999, and was $17.8 million. The market risk associated with these contracts was $1.8 million at January 2, 1999, and is estimated as the potential loss in fair value resulting from a hypothetical 10 percent adverse change in such prices. Interest Rate Risk Our earnings are affected by changes in short-term interest rates as a result of our issuing short-term commercial paper. At January 2, 1999, the fair market value of our outstanding commercial paper approximated the carrying value. If market interest rates for commercial paper borrowings averaged 10 percent more or less in 1998, our interest expense would have changed by approximately $700,000. YEAR 2000 We have developed programs to address the impact of the year 2000 on our computer systems. Key financial, information and operational systems, including equipment with embedded microprocessors, have been inventoried and assessed, and detailed programs are in place for the required systems modifications or replacements. Progress against these programs is monitored and reported regularly to management and to the Audit Committee of the Board of Directors. Both internal and external resources are being utilized to implement the programs. Systems that will not be replaced before 2000 are being modified to achieve year 2000 functionality. The total year 2000 program cost is estimated at $50 million. Approximately $35 million of the $50 million will be used to license and implement new software that will be capitalized as part of a companywide systems replacement program, and $15 million will be expensed as incurred. The estimated program cost includes internally allocated expenses such as salaries, benefits and contractor costs. Our spending on the project since inception in 1997 has been $36.2 million, of which $27.3 million has been capitalized. In 1998, we spent $28.7 million, including $21.5 million in capital spending. We have divided our year 2000 program into eight planks covering the following areas: 1) mainframe infrastructure; 2) central legacy applications; 3) shared technical infrastructure; 4) distributed systems and manufacturing technology by product line; 5) distributed systems and manufacturing technology by plant; 6) external agents; 7) legal and audit; and 8) conversions to new software systems. Each plank is separated into three categories based on the potential impact on our operations: mission critical, high impact and low impact. 20 Mission critical inventory items are those where loss or interruption of functionality, support or delivery would have a catastrophic impact on our customers, operations or earnings. High impact inventory items are those where loss or interruption of functionality, support or delivery would have a serious impact on internal productivity with minor impact to our customers. Low impact inventory items are those where loss or interruption of functionality, support or delivery would have a nominal impact on internal productivity with no impact to our customers. Inventory items refer to computer hardware, software, embedded equipment, machinery and devices, and external suppliers of products and services. We have completed most mission critical activities. Outstanding critical tasks include upgrading the Oracle-based software used in our Cap & Gown manufacturing facility, a project scheduled for completion in the third quarter of 1999; installing an Oracle-based system in the Recognition segment, a project scheduled for completion in the first quarter of 1999; remediating a current system used to support one marketing program in the Recognition segment, a project scheduled for completion in the second quarter of 1999; upgrading two AS400 systems and applications in the Jewelry product line, a project scheduled for completion in June 1999. All mission critical activities are scheduled to be completed by September 1999. However, they are subject to ongoing integration testing throughout 1999. For external agents, the testing phase commencing after the scheduled completion in March 1999 of mission critical activities will consist primarily of confirming third-party readiness and our alternatives for ensuring continuity of the products and services they provide. As of February 4, 1999, the completion status of the mission critical planks was: Year 2000 project completion percentage
Actual Estimated February 4 March 31 Mission critical activities by plank 1999 1999 1. Mainframe infrastructure 94% 100% 2. Central legacy applications 78% 95% 3. Shared technical infrastructure 89% 95% 4. Distributed systems and manufacturing technology, by product line 92% 95% 5. Distributed systems and manufacturing technology, by plant 82% 90% 6. External agent due diligence and contingency planning 62% 100% 7. Legal and audit 75% 100% 8. Conversions to new software systems 82% 92%
We believe that modifications to existing software and conversions to new software for mission critical activities are sufficiently on schedule so the year 2000 issue will not pose significant operational problems. Activities on all high impact categories are scheduled to occur from January 1999 through September 1999 and through June 2000 on low impact activities. The completion status of the planks for these low impact activities ranged from 21 percent to 60 percent as of February 4, 1999. As part of the external agents plank, we are in contact with suppliers and customers to assess the potential impact on operations if key third parties do not convert their systems in a timely manner. Risk assessment, readiness evaluation, action plans and contingency plans related to these third parties are expected to be completed by March 1999. We have begun, but not yet completed, a comprehensive analysis of and contingency planning process for the operational problems and costs (including the loss of revenues) that could most likely result from a potential failure by us or certain third parties to achieve year 2000 compliance on a timely basis. We anticipate that this analysis and related plans will be completed by June 1999. In planning for the most reasonably likely worst case scenarios, we believe our information technology systems and manufacturing systems will be ready for the year 2000, but we may experience isolated incidents of non- compliance. We plan to allocate resources to be ready to take action if these events occur. We also recognize the risks to us if other key suppliers in areas such as utilities, communications, transportation, banking and government are not ready for the year 2000, and we are developing plans to minimize the potential adverse impacts of these risks. The costs of the program and the dates when we believe the year 2000 modifications will be completed are based on our best estimates. Estimates were derived utilizing numerous assumptions of future events, including the continued availability of certain resources and other factors. There can be no guarantee that we will achieve these estimates, and actual results could differ materially from those anticipated. Specific factors that might cause such material differences include, but are not limited to, the availability and cost of personnel trained in this area, the ability to locate and correct all relevant computer codes, the impact of year 2000 compliance on computer-based systems of our suppliers and customers, and similar uncertainties. 21 Management Discussion and Analysis Jostens Inc. and subsidiaries DIVIDENDS We paid $32.3 million, $34.2 million and $34.1 million to shareholders in 1998, 1997 and 1996, respectively. In fiscal 1996, $35.5 million in cash dividends were paid to shareholders. Dividends declared were 88 cents per share in 1998 and 1997 and 66 cents in 1996. The increase from 1996 to 1997 was due to the timing of declarations. Dividends declared in fiscal 1996 were 88 cents per share. COMMITMENTS AND CONTINGENCIES Environmental As part of our environmental management program, we are involved in various environmental remediation activities. As sites are identified and assessed in this program, we determine potential environmental liability. Factors considered in assessing liability include, among others, the following: whether we had been designated as a potentially responsible party, the number of other potentially responsible parties designated at the site, the stage of the proceedings and available environmental technology. As of January 2, 1999, we identified three sites requiring further investigation. However, we have not been designated as a potentially responsible party at any site. We have assessed the likelihood that a loss has been incurred at one of our sites as probable and, based on findings included in remediation reports and discussions with legal counsel, we estimated the potential loss at January 2, 1999, to range from $3 million to $4.2 million. As of January 2, 1999, $4.2 million was accrued and is included with "other accrued liabilities" on the consolidated balance sheets. While we may have a right of contribution or reimbursement under insurance policies, amounts recoverable from other entities with respect to a particular site are not considered until recoveries are deemed probable. No assets for potential recoveries were established as of January 2, 1999. Litigation In January 1999, a federal judge in Texas overturned a jury's $25.3 million verdict against Jostens in an antitrust lawsuit. The judge, acting on Jostens' post-trial motions, set aside the jury's verdict and dismissed all claims against Jostens in the case. Yearbook competitor Taylor Publishing, a unit of Insilco Holding Corp. and the plantiff in the case, has indicated in a press release that it intends to appeal the decision and will seek to have the jury verdict reinstated. No costs were accrued related to the lawsuit, since we believed a potential loss was unlikely. Jostens is a party to litigation arising in the normal course of business. We regularly analyze current information and, as necessary, provide accruals for probable liabilities on the eventual disposition of these matters. We believe the effect on our consolidated results of operations and financial position, if any, for the disposition of these matters will not be material. NEW ACCOUNTING STANDARDS In June 1998, the Financial Accounting Standards Board issued SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities. SFAS 133 will be effective for us beginning January 2, 2000, and requires recognition of all derivatives on the balance sheet at fair value. Derivatives that are not hedges must be adjusted to fair value through income. If the derivative is a hedge, depending on the nature of the hedge, changes in the fair value of the hedged assets, liabilities or firm commitments are recognized through earnings or in other comprehensive income until the hedged item is recognized in earnings. The ineffective portion of a derivative's change in fair value will be immediately recognized in earnings. We have not yet determined what the effect of SFAS 133 will be on our earnings and financial position. 22 Reports of Management and Independent Auditors REPORT OF MANAGEMENT The management of Jostens is responsible for the integrity and objectivity of the financial information presented in this report. The financial statements have been prepared in accordance with generally accepted accounting principles and include certain amounts based on management's best estimates and judgment. Management is also responsible for establishing and maintaining the company's accounting systems and related internal controls, which are designed to provide reasonable assurance that assets are safeguarded and transactions are properly recorded. These systems and controls are reviewed by the internal auditors. In addition, the company's code of conduct states that its affairs are to be conducted under the highest ethical standards. The independent auditors provide an independent review of the financial statements and the fairness of the information presented therein. The Audit Committee of the Board of Directors, composed solely of outside directors, meets regularly with management, the company's internal auditors and its independent auditors to review audit activities, internal controls and other accounting, reporting and financial matters. Both the independent auditors and internal auditors have unrestricted access to the Audit Committee. /s/ William N. Priesmeyer William N. Priesmeyer Senior Vice President and Chief Financial Officer /s/ Robert C. Buhrmaster Robert C. Buhrmaster Chairman of the Board, President and Chief Executive Officer Minneapolis, Minnesota February 2, 1999 REPORT OF INDEPENDENT AUDITORS To the Stockholders of Jostens, Inc.: We have audited the accompanying consolidated balance sheets of Jostens, Inc. and subsidiaries as of January 2, 1999 and January 3, 1998, and the related consolidated statements of operations, changes in shareholders' investment and cash flows for the years ended January 2, 1999 and January 3, 1998, the six- month period ended December 28, 1996, and the year ended June 30, 1996. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Jostens, Inc. and subsidiaries as of January 2, 1999 and January 3, 1998, and the consolidated results of their operations and cash flows for the years ended January 2, 1999, and January 3, 1998, the six-month period ended December 28, 1996, and the year ended June 30, 1996, in conformity with generally accepted accounting principles. /s/ Ernst & Young LLP Ernst & Young LLP Minneapolis, Minnesota February 2, 1999 23 Operations Statements of Consolidated Operations Jostens Inc. and subsidiaries hat and diploma
Years ended Six-months ended Year ended ================================================================================================================ In thousands, except per-share data January 2 January 3 December 28 December 28 June 30 1999 1998 1996 1996 1996 (unaudited) - ---------------------------------------------------------------------------------------------------------------- NET SALES $770,917 $742,479 $708,734 $277,118 $695,149 Cost of products sold 351,795 351,290 353,938 141,493 332,212 - ---------------------------------------------------------------------------------------------------------------- Gross margin 419,122 391,189 354,796 135,625 362,937 Selling and administrative expenses 316,933 291,527 282,870 131,473 268,135 - ---------------------------------------------------------------------------------------------------------------- OPERATING INCOME 102,189 99,662 71,926 4,152 94,802 Interest income 366 587 370 204 2,080 Interest expense (7,026) (6,866) (9,343) (4,330) (9,403) Write-off of JLC notes receivable, net (12,009) -- -- -- -- - ---------------------------------------------------------------------------------------------------------------- INCOME BEFORE INCOME TAXES 83,520 93,383 62,953 26 87,479 Income taxes 41,700 36,200 26,617 829 35,854 - ---------------------------------------------------------------------------------------------------------------- NET INCOME (LOSS) $ 41,820 $ 57,183 $ 36,336 $ (803) $ 51,625 ================================================================================================================ EARNINGS PER COMMON SHARE Basic $ 1.14 $ 1.47 $ 0.94 $ (0.02) $ 1.29 Diluted $ 1.14 $ 1.47 $ 0.94 $ (0.02) $ 1.28 ================================================================================================================ WEIGHTED AVERAGE COMMON SHARES OUTSTANDING Basic 36,527 38,773 38,639 38,647 40,157 Diluted 36,705 38,969 38,815 38,763 40,337 ================================================================================================================
See notes to consolidated financial statements 24 Balance Sheets Consolidated Balance Sheets Jostens Inc. and subsidiaries yearbook
================================================================================================= In thousands, except per-share data January 2 January 3 1999 1998 - ------------------------------------------------------------------------------------------------- ASSETS CURRENT ASSETS Short-term investments $ 2,595 $ 6,068 Accounts receivable, net of allowance of $7,308 and $7,446, respectively 106,347 108,697 Inventories 90,494 92,062 Deferred income taxes 14,682 15,543 Other receivables, net of allowance of $7,061 and $8,322, respectively 20,689 25,495 Prepaid expenses and other current assets 5,737 4,679 - ------------------------------------------------------------------------------------------------- TOTAL CURRENT ASSETS 240,544 252,544 - ------------------------------------------------------------------------------------------------- OTHER ASSETS Intangibles, net 28,165 30,749 Notes receivable, net of $35,044 discount and $13,181 deferred gain -- 12,925 Noncurrent deferred income taxes -- 7,743 Other 8,811 12,631 - ------------------------------------------------------------------------------------------------- TOTAL OTHER ASSETS 36,976 64,048 - ------------------------------------------------------------------------------------------------- PROPERTY AND EQUIPMENT, NET 88,647 74,138 - ------------------------------------------------------------------------------------------------- $366,167 $390,730 ================================================================================================= LIABILITIES AND SHAREHOLDERS' INVESTMENT CURRENT LIABILITIES Notes payable $ 93,922 $ 49,974 Accounts payable 23,682 30,553 Employee compensation 27,560 19,446 Commissions payable 22,131 19,222 Customer deposits 92,092 98,659 Income taxes 4,713 11,098 Other accrued liabilities 23,679 17,281 - ------------------------------------------------------------------------------------------------- TOTAL CURRENT LIABILITIES 287,779 246,233 OTHER NONCURRENT LIABILITIES 19,836 17,404 - ------------------------------------------------------------------------------------------------- TOTAL LIABILITIES 307,615 263,637 COMMITMENTS AND CONTINGENCIES SHAREHOLDERS' INVESTMENT Preferred shares, $1.00 par value: authorized 4,000 shares, none issued -- -- Common shares, $.33 1/3 par value: authorized 100,000 shares, issued January 2, 1999 - 35,071; January 3, 1998 - 38,422 11,690 12,853 Retained earnings 54,627 119,378 Accumulated other comprehensive loss (7,765) (5,138) - ------------------------------------------------------------------------------------------------- TOTAL SHAREHOLDERS' INVESTMENT 58,552 127,093 - ------------------------------------------------------------------------------------------------- $366,167 $390,730 =================================================================================================
See notes to consolidated financial statements 25 Cash Flows Statements of Consolidated Cash Flows Jostens Inc. and subsidiaries [picture] class pin
Years ended Six months ended Year ended ============================================================================================================================ In thousands January 2 January 3 December 28 December 28 June 30 1999 1998 1996 1996 1996 (unaudited) - ---------------------------------------------------------------------------------------------------------------------------- OPERATING ACTIVITIES Net income (loss) $ 41,820 $ 57,183 $ 36,336 $ (803) $ 51,625 Depreciation 20,587 19,845 15,962 8,992 14,999 Amortization 2,584 2,297 1,726 942 1,558 Deferred income taxes 15,712 (3,403) 14,158 6,933 7,315 Write-off of JLC notes receivable, net 12,009 -- -- -- -- CHANGES IN ASSETS AND LIABILITIES, NET OF EFFECTS OF BUSINESS ACQUISITION: Accounts receivable 2,167 (651) (6,409) 22,845 (10,401) Inventories 1,568 6,431 18,103 (19,525) (8,157) Other receivables 4,806 (602) 1,311 (12,652) 158 Prepaid expenses and other current assets (1,058) 4,554 (6,041) (7,400) 992 Accounts payable (1,171) 1,506 (2,513) (1,329) 460 Employee compensation 8,114 4,457 1,137 82 (4,236) Commissions payable 2,909 1,628 1,831 (21,803) 6,326 Customer deposits (6,567) 22,625 19,460 38,426 1,472 Income taxes (6,044) 5,658 (10,030) (20,384) (7,879) Other 4,179 (4,811) 4,035 (959) (25,185) - ---------------------------------------------------------------------------------------------------------------------------- Net cash provided (used) by operating activities 101,615 116,717 89,066 (6,635) 29,047 - ---------------------------------------------------------------------------------------------------------------------------- INVESTING ACTIVITIES Purchases of property and equipment (36,936) (24,381) (16,864) (9,897) (15,371) Business acquisition -- (9,883) -- -- -- Other 1,675 -- -- -- 1,813 - ---------------------------------------------------------------------------------------------------------------------------- Net cash used for investing activities (35,261) (34,264) (16,864) (9,897) (13,558) - ---------------------------------------------------------------------------------------------------------------------------- FINANCING ACTIVITIES Net short-term borrowings (repayments) 38,248 (36,238) 7,980 72,725 27,587 Principal payments on long-term debt -- (281) (50,018) (50,018) (355) Dividends paid (32,332) (34,198) (34,135) (17,011) (35,515) Proceeds from exercise of stock options 4,258 11,693 625 168 1,964 Repurchases of common stock (80,001) (20,000) -- -- (169,332) - ---------------------------------------------------------------------------------------------------------------------------- Net cash provided (used) for financing activities (69,827) (79,024) (75,548) 5,864 (175,651) - ---------------------------------------------------------------------------------------------------------------------------- CHANGE IN SHORT-TERM INVESTMENTS (3,473) 3,429 (3,346) (10,668) (160,162) SHORT-TERM INVESTMENTS, BEGINNING OF PERIOD 6,068 2,639 5,985 13,307 173,469 - ---------------------------------------------------------------------------------------------------------------------------- SHORT-TERM INVESTMENTS, END OF PERIOD $ 2,595 $ 6,068 $ 2,639 $ 2,639 $ 13,307 ============================================================================================================================ Income taxes paid $ 32,357 $ 26,300 $ 28,800 $ 22,100 $ 34,300 Interest paid $ 6,426 $ 5,900 $ 5,511 $ 3,200 $ 8,700 ============================================================================================================================
See notes to consolidated financial statements 26 Statements of [picture] Shareholders' Investment Consolidated Changes in round award Jostens Inc. and subsidiaries Shareholders' Investment
Accumulated In thousands, except per-share data other Common Shares Capital Retained comprehensive Comprehensive Number Amount surplus earnings loss Total income (loss) - ----------------------------------------------------------------------------------------------------------------------------------- BALANCE - JUNE 30, 1995 45,482 $ 15,160 $ 154,410 $105,213 $ (4,170) $ 270,613 Stock options and restricted stock - net 182 61 1,903 1,964 Tax benefit of stock options 171 171 Share repurchases (7,011) (2,337) (155,168) (11,827) (169,332) Cash dividends declared of $0.88 per share (34,015) (34,015) Net income 51,625 51,625 $ 51,625 Change in cumulative translation adjustment 899 899 899 Adjustment in minimum pension liability, net of $86 tax (124) (124) (124) --------- Comprehensive income $ 52,400 - --------------------------------------------------------------------------------------------------------------------- ========= BALANCE - JUNE 30, 1996 38,653 12,884 1,316 110,996 (3,395) 121,801 Stock options and restricted stock - net 12 4 164 168 Cash dividends declared of $0.22 per share (8,506) (8,506) Net loss (803) (803) $ (803) Change in cumulative translation adjustment (51) (51) (51) Adjustment in minimum pension liability, net of $4 tax 4 4 4 --------- Comprehensive loss $ (850) - ----------------------------------------------------------------------------------------------------------------------- ========= BALANCE - DECEMBER 28, 1996 38,665 12,888 1,480 101,687 (3,442) 112,613 Stock options and restricted stock - net 584 241 11,452 11,693 Cash dividends declared of $0.88 per share (34,198) (34,198) Share repurchases (827) (276) (14,430) (5,294) (20,000) Tax benefit of stock options 1,498 1,498 Net income 57,183 57,183 $ 57,183 Change in cumulative translation adjustment (824) (824) (824) Adjustment in minimum pension liability, net of $606 tax (872) (872) (872) --------- Comprehensive income $ 55,487 - ---------------------------------------------------------------------------------------------------------------------- ========= BALANCE - JANUARY 3, 1998 38,422 12,853 -- 119,378 (5,138) 127,093 Stock options and restricted stock - net 234 78 4,180 4,258 Cash dividends declared of $0.88 per share (32,332) (32,332) Share repurchases (3,585) (1,241) (4,521) (74,239) (80,001) Tax benefit of stock options 341 341 Net income 41,820 41,820 $ 41,820 Change in cumulative translation adjustment (1,576) (1,576) (1,576) Adjustment in minimum pension liability, net of $649 tax (1,051) (1,051) (1,051) --------- Comprehensive income $ 39,193 - ---------------------------------------------------------------------------------------------------------------------- ========= BALANCE - JANUARY 2, 1999 35,071 $ 11,690 $ -- $ 54,627 $ (7,765) $ 58,552 =================================================================================================================================
See notes to consolidated financial statements 27 Notes to Consolidated Notes to Consolidated Financial Statements Jostens Inc. and subsidiaries [picture] class ring SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Business Overview Jostens is a leading provider of products and services that help people celebrate important moments, recognize achievements and build affiliations. The company's products include yearbooks, class rings, graduation products and school photography, as well as sports and employee achievement awards. Fiscal Year In October 1996, the company elected to change its fiscal year end from June 30 to the 52- or 53-week period ending the Saturday closest to December 31, effective December 29, 1996. The change was made to enable better business planning and internal management. The consolidated financial statements and notes include the company's results of operations and cash flows for the years ended January 2, 1999, January 3, 1998, and December 28, 1996 (unaudited); the six-month transition period ended December 28, 1996; and the fiscal year ended June 30, 1996. Calendar year 1998 consisted of 52 weeks, calendar year 1997 consisted of 53 weeks, and calendar year 1996 and fiscal year 1996 consisted of 52 weeks. Principles of Consolidation The consolidated financial statements include the accounts of the company and its subsidiaries. All material inter-company accounts and transactions have been eliminated. Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. The most significant areas that require the use of management's estimates relate to the allowance for uncollectible receivables, inventory reserves, sales returns, warranty costs, environmental reserves, valuation of intangibles and deferred income tax valuations. Cash and Short-term Investments Cash and short-term investments include cash on hand, time deposits and commercial paper. Short-term investments have an original maturity of three months or less and are considered cash equivalents. All investments in debt securities have an original maturity of three months or less and are considered to be held to maturity. The short-term securities are carried at amortized cost, which approximates fair value. Negative cash balances of $8.4 million and $14.1 million at January 2, 1999, and January 3, 1998, respectively, have been reclassified to "accounts payable" on the consolidated balance sheets. Inventories Inventories are stated at the lower of cost or market. Cost is primarily determined using standard costs, which approximate costs utilizing the first-in, first-out (FIFO) method. Gold and certain other precious metal inventories aggregating $196,000 at January 2, 1999, and $677,000 at January 3, 1998, are stated at the lower of last-in, first-out (LIFO) cost or market, and are zero and $6.8 million lower in the respective periods than such inventories determined under the lower of FIFO cost or market. In 1998 and 1997, gold inventory quantities were reduced, causing a liquidation of LIFO inventory. The liquidation increased pre-tax income by $3.7 million (6 cents per share) in 1998 and $6.8 million (10 cents per share) in 1997, due to LIFO cost being less than current cost. At January 2, 1999, gold inventory was zero, as a result of the company's decision to expand its consigned gold inventory program. In July 1996, the company implemented a new inventory cost accounting system, which provided more precise, detailed performance information by product within each line. The new system resulted in a more accurate valuation of inventories and recording of cost of products sold during the individual quarters, consistent with the manner used to value inventory at previous June year ends. As a result of this implementation, cost of products sold reported during the six months ended December 28, 1996, was $16.9 million (26 cents per share) higher than what would have been reported using the prior method, while cost of products sold in the six months ended June 28, 1997, had an equally positive impact. 28 Financial Statements Intangibles Intangibles primarily represent the excess of the purchase price over the fair value of the net tangible assets of acquired businesses and are amortized over various periods of up to 40 years. Accumulated amortization at January 2, 1999, and January 3, 1998, was $21.9 million and $19.3 million, respectively. The carrying value of intangible assets is assessed semiannually, or more often when factors indicate an impairment. The company employs an undiscounted cash flow method to assess these assets. The intangible balance also includes the intangible asset related to additional minimum pension liability of $1.3 million and $1.4 million at January 2, 1999, and January 3, 1998, respectively. Property and Equipment Property and equipment are carried at cost. Depreciation and amortization on buildings, machinery and equipment and capitalized software, including purchased software and software implementation costs, is provided principally on the straight-line method for financial reporting purposes over their estimated useful lives: buildings, 15 to 40 years; machinery and equipment, three to 10 years; capitalized software, two to five years. The carrying value of property, equipment and capitalized software is assessed when circumstances indicate that their carrying value may be impaired or not recoverable. The company determines such impairment by measuring undiscounted future cash flows. If an impairment is present, the assets are reported at fair value. Beginning in fiscal 1996, the company capitalized certain software implementation costs. Prior to 1996, such costs were not significant. Implementation costs are expensed until the company has determined that the software will result in probable future economic benefits and management has committed to funding the project. Thereafter, all direct implementation costs and purchased software costs are capitalized and amortized using the straight- line method over the remaining estimated useful lives, not exceeding five years. In March 1998, the Accounting Standards Executive Committee of the AICPA issued Statement of Position (SOP) 98-1, Accounting for Costs of Computer Software Developed or Obtained for Internal Use. The SOP, which was adopted in 1998, requires the capitalization of certain costs incurred to develop or obtain internal-use software. The effect of adopting the SOP was to increase net income in 1998 by $1.1 million, or 3 cents per share. Income Taxes Deferred taxes are recognized for the estimated taxes ultimately payable or recoverable based on enacted tax law. Changes in enacted tax rates are reflected in the tax provision as they occur. Sales, Sales Returns and Warranty Costs Sales are recognized when product is shipped. Provisions for sales returns and warranty costs are recorded at the time of sale based on historical information and current trends. Foreign Currency The company enters into foreign currency forward contracts to hedge purchases of inventory in foreign currency. The purpose of these hedging activities is to protect the company from the risk that inventory purchases denominated in foreign currency will be adversely affected by changes in foreign currency rates. The amount of contracts outstanding at January 2, 1999, and January 3, 1998, were zero and $2.4 million, respectively. The company is exposed to credit loss in the event of nonperformance by counterparties on foreign exchange forward contracts. The amount of this credit exposure is generally limited to unrealized gains on the contracts. At January 2, 1999, and January 3, 1998, there were no material unrealized gains or losses on outstanding foreign currency forward contracts. Assets and liabilities denominated in foreign currency are translated at the current exchange rate as of the balance sheet date, and income statement amounts are translated at the average monthly exchange rate. Translation adjustments resulting from fluctuations in exchange rates are recorded in comprehensive income. Realized and unrealized gains and losses on forward contracts used to purchase inventory for which the company has firm purchase commitments qualify as accounting hedges and are therefore deferred and recognized in income when the inventory is sold. 29 Notes to Consolidated Financial Statements Jostens Inc. and Subsidiaries Earnings Per Common Share Basic earnings per share are computed by dividing net income by the weighted average number of common shares outstanding. Diluted earnings per share are computed by dividing net income by the average number of common shares outstanding, including the dilutive effects of options, restricted stock and contingently issuable shares. Unless otherwise noted, references are to diluted earnings per share.
Years ended Six months ended Year ended --------------------------------- ---------------- ---------- January 2 January 3 December 28 December 28 June 30 In thousands, except per-share data 1999 1998 1996 1996 1996 - --------------------------------------------------------------------------------------------------------------------- EARNINGS PER SHARE -- BASIC Net income (loss) $41,820 $57,183 $36,336 $ (803) $51,625 Weighted average common shares outstanding -- basic 36,527 38,773 38,639 38,647 40,157 - --------------------------------------------------------------------------------------------------------------------- Net income (loss) per share -- basic $ 1.14 $ 1.47 $ 0.94 $ (0.02) $ 1.29 ===================================================================================================================== EARNINGS PER SHARE -- DILUTED Net income (loss) $41,820 $57,183 $36,336 $ (803) $51,625 Weighted average common shares outstanding -- basic 36,527 38,773 38,639 38,647 40,157 Effect of dilutive securities: Stock options and awards 178 196 176 116 180 - --------------------------------------------------------------------------------------------------------------------- Weighted average common shares outstanding -- diluted 36,705 38,969 38,815 38,763 40,337 - --------------------------------------------------------------------------------------------------------------------- Net income (loss) per share -- diluted $ 1.14 $ 1.47 $ 0.94 $ (0.02) $ 1.28 =====================================================================================================================
New Accounting Standards In June 1998, the Financial Accounting Standards Board (FASB) issued SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities. SFAS 133 will be effective for the company beginning January 2, 2000, and requires recognition of all derivatives on the balance sheet at fair value. Derivatives that are not hedges must be adjusted to fair value through income. If the derivative is a hedge, depending on the nature of the hedge, changes in the fair value of the hedged assets, liabilities or firm commitments are recognized through earnings or in other comprehensive income until the hedged item is recognized in earnings. The ineffective portion of a derivative's change in fair value will be immediately recognized in earnings. The company has not yet determined the effect of SFAS 133 on the earnings and financial position of the company. Reclassification Certain balances have been reclassified to conform to the January 2, 1999, presentation. 2 SUPPLEMENTAL BALANCE SHEET INFORMATION
January 2 January 3 In thousands 1999 1998 - -------------------------------------------------------------------- INVENTORIES Finished goods $ 38,141 $ 38,122 Work-in-process 29,735 29,388 Raw materials and supplies 22,618 24,552 - -------------------------------------------------------------------- Total inventories $ 90,494 $ 92,062 ==================================================================== PROPERTY AND EQUIPMENT Land $ 4,866 $ 4,928 Buildings 36,210 35,500 Machinery and equipment 182,698 185,177 Capitalized software 32,391 6,142 - -------------------------------------------------------------------- Total property and equipment 256,165 231,747 Accumulated depreciation and amortization (167,518) (157,609) - -------------------------------------------------------------------- Property and equipment, net $ 88,647 $ 74,138 ====================================================================
30 3 COMPREHENSIVE INCOME In 1998, The company adopted SFAS No. 130, Reporting Comprehensive Income. SFAS 130 establishes new rules for the reporting and display of comprehensive income and its components. SFAS 130 requires minimum pension liability adjustments and foreign currency translation adjustments, which prior to adoption were reported separately in shareholders' investment, to be included in other comprehensive income. The adoption of SFAS 130 resulted in revised and additional disclosures but had no impact on the company's consolidated financial position, results of operations or liquidity. The following amounts were included in accumulated other comprehensive loss at January 2, 1999, and January 3, 1998:
January 2 January 3 In thousands 1999 1998 - ------------------------------------------------------------------------------ Minimum pension liability adjustments, net of tax $(2,043) $ (992) Foreign currency translation adjustments (5,722) (4,146) - ------------------------------------------------------------------------------ Accumulated other comprehensive loss $(7,765) $(5,138) ==============================================================================
4 BORROWINGS The company has a $180 million, five-year bank credit agreement that expires December 31, 2000. Credit available under the agreement is reduced by commercial paper borrowings outstanding. Annual fees and interest on borrowings are based on the company's commercial paper rating. Annual fees range from 0.075 to 0.15 percent of the commitment. The weighted average interest rate on commercial paper outstanding at January 2, 1999, and January 3, 1998, was 5.8 and 6.2 percent, respectively. Under the restrictive covenants of the agreement, the company must maintain a defined minimum interest coverage ratio and a maximum leverage ratio. At January 2, 1999, $86 million was available under the bank credit agreement. In 1997, the company entered into a 12-month interest rate swap agreement that expired December 29, 1998, as a means of managing its interest rate risk. Under the terms of the agreement, the company paid interest at a rate of 5.89 percent and received interest weekly at a floating rate equal to the seven-day U.S. commercial paper rate, without the exchange of the underlying notional amount upon which the payments were based. The notional amount of the agreement changed weekly based on the company's borrowings. The difference paid or received from counterparties as interest rates changed was included in other liabilities or assets, with the corresponding amount accrued and recognized as an adjustment of interest expense related to the debt. The fair value of swap agreements are not recognized in the financial statements. Commercial paper outstanding is due within 90 days and is included in notes payable in the consolidated balance sheets. In addition, the company had available at January 2, 1999, unsecured demand facilities with three banks totaling $54.2 million. Such credit arrangements are renegotiated periodically based on the anticipated seasonal needs for short-term financing. 31 Notes to Consolidated Financial Statements Jostens Inc. and subsidiaries 5 INCOME TAXES The following summarizes the differences between income taxes computed at the U.S. statutory rate and income tax expense for financial reporting purposes:
Years ended Six months ended Year ended ========================== ================ =========== January 2 January 3 December 28 June 30 Dollars in thousands 1999 1998 1996 1996 - --------------------------------------------------------------------------------------------------------------- U.S. federal statutory income tax rate 35% 35% 35% 35% Federal tax at statutory rate $29,232 $32,684 $ 9 $30,618 State income taxes, net of federal tax benefit 4,509 4,223 (84) 4,012 Write-off of JLC notes and related deferred tax assets 7,245 -- -- -- Reduction in deferred tax valuation allowance (750) (2,030) -- -- Other differences, net 1,464 1,323 904 1,224 - --------------------------------------------------------------------------------------------------------------- Income tax expense $41,700 $36,200 $829 $35,854 ===============================================================================================================
The U.S. and foreign components of income before income taxes and the provision for income taxes were as follows:
Years ended Six months ended Year ended ========================== ================ =========== January 2 January 3 December 28 June 30 In thousands 1999 1998 1996 1996 - --------------------------------------------------------------------------------------------------------------- INCOME BEFORE INCOME TAXES Domestic $ 77,756 $88,275 $(3,585) $82,818 Foreign 5,764 5,108 3,611 4,661 - --------------------------------------------------------------------------------------------------------------- Income before income taxes $ 83,520 $93,383 $ 26 $87,479 =============================================================================================================== PROVISION FOR INCOME TAXES Federal $ 18,435 $30,227 $(6,943) $21,425 State 4,439 6,864 (101) 5,385 Foreign 3,114 2,512 948 2,041 - --------------------------------------------------------------------------------------------------------------- Total current taxes 25,988 39,603 (6,096) 28,851 Deferred 15,712 (3,403) 6,925 7,003 - --------------------------------------------------------------------------------------------------------------- Income tax expense $ 41,700 $36,200 $ 829 $35,854 ===============================================================================================================
32 Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of the deferred income tax liabilities and assets as of January 2, 1999, and January 3, 1998, were as follows:
======================== January 2 January 3 In thousands 1999 1998 - ------------------------------------------------------------------- DEFERRED TAX LIABILITIES Tax over book depreciation $ (4,083) $(3,763) Capitalized software development costs (8,076) (2,285) Other, net (2,792) (2,800) - ------------------------------------------------------------------- DEFERRED TAX LIABILITIES (14,951) (8,848) - ------------------------------------------------------------------- DEFERRED TAX ASSETS Reserves not recognized for tax purposes 11,994 12,489 Net operating loss and tax credit carryforwards of acquired companies 687 1,844 Foreign tax credit carryforwards 1,900 2,915 Deferred gain on sale of JLC -- 5,908 Other, net 10,492 11,893 - ------------------------------------------------------------------- Deferred tax assets 25,073 35,049 VALUATION ALLOWANCE (1,900) (2,915) - ------------------------------------------------------------------- DEFERRED TAX ASSETS 23,173 32,134 - ------------------------------------------------------------------- NET DEFERRED TAX ASSET $ 8,222 $23,286 ===================================================================
The net deferred tax asset at January 2, 1999, consisted of $14.7 million of current net deferred tax assets and $6.5 million of noncurrent net deferred tax liabilities. The net deferred tax asset at January 3, 1998, consisted of $15.5 million of current and $7.8 million of noncurrent net deferred tax assets. At January 2, 1999, the company had net operating loss carryforwards (NOLs) from business acquisitions of $2 million for federal income tax purposes that expire in the years 1999 through 2002. In 1998, the company consolidated two legal entities, which management believes will allow the company to utilize the remaining NOLs. The company also has foreign tax credit carryforwards of $1.9 million that expire in 1999 through 2002. The foreign tax credits of $1.9 million and $2.9 million at January 2, 1999, and January 3, 1998, were fully reserved. 33 Notes to Consolidated Financial Statements Jostens Inc. and subsidiaries 6 BENEFIT PLANS In 1998, the company adopted SFAS No. 132, Employers' Disclosures about Pensions and Other Postretirement Benefits. SFAS 132 revises the disclosures for pensions and other postretirement benefits; however, this statement has no impact on the company's consolidated net income or shareholders' investment. Financial information from prior periods contained in this report conforms to SFAS 132 requirements. Noncontributory defined-benefit pension plans cover nearly all employees. The benefits provided under the plans are based on years of service and/or compensation levels. The company also provides health care insurance benefits for nearly all retirees. Generally, the health care plans require contributions from retirees. The following tables contain information on the company's pension and postretirement plans:
Six months Year Years ended ended ended ----------------------------------------------- Pension Benefits January 2 January 3 December 28 June 30 In thousands 1999 1998 1996 1996 - -------------------------------------------------------------------------------------------- COMPONENTS OF NET PERIODIC BENEFIT COST: Service cost $ 4,044 $ 3,988 $ 1,899 $3,459 Interest cost 8,838 8,346 4,061 7,737 Expected return on plan assets (13,447) (11,653) (5,431) (9,759) Amortization of prior year service cost 1,716 1,585 793 1,578 Amortization of transition amount (894) (894) (447) (894) Amortization of net actuarial gains (929) (698) (318) (547) - -------------------------------------------------------------------------------------------- Net periodic benefit (income) cost $ (672) $ 674 $ 557 $ 1,574 ============================================================================================
Six months Year Years ended ended ended ---------------------------------------------- Retiree Health Benefits January 2 January 3 December 28 June 30 In thousands 1999 1998 1996 1996 - -------------------------------------------------------------------------------------------- COMPONENTS OF NET PERIODIC BENEFIT COST: Service cost $ 65 $ 61 $ 30 $ 72 Interest cost 372 377 185 450 Amortization of prior year service cost (7) (7) (4) (7) Amortization of net actuarial gains (95) (109) (57) (34) - -------------------------------------------------------------------------------------------- Net periodic benefit cost $ 335 $ 322 $ 154 $481 ============================================================================================
34
Pension Benefits Retiree Health Benefits Years ended Years ended ============================================= January 2 January 3 January 2 January 3 In thousands 1999 1998 1999 1998 - ----------------------------------------------------------------------------------------------------------------- CHANGE IN BENEFIT OBLIGATION: Benefit obligation at beginning of year $117,670 $110,700 $ 5,047 $ 5,064 Service cost 4,044 3,988 65 61 Interest cost 8,838 8,346 372 377 Plan amendments 1,575 1,311 -- -- Actuarial loss (gain) 14,004 (3,508) 643 (26) Benefits paid (7,306) (3,167) (889) (429) - ----------------------------------------------------------------------------------------------------------------- Benefit obligation at end of year $138,825 $117,670 $ 5,238 $ 5,047 ================================================================================================================= CHANGE IN PLAN ASSETS: Fair value of plan assets at beginning of year $167,246 $125,803 $ -- $ -- Actual return on plan assets 2,397 39,899 -- -- Company contributions 1,766 4,710 889 429 Benefits paid (7,306) (3,166) (889) (429) - ----------------------------------------------------------------------------------------------------------------- Fair value of plan assets at end of year $164,103 $167,246 $ -- $ -- ================================================================================================================= FUNDED STATUS: Funded (unfunded) status at end of year $ 25,278 $ 49,576 $(5,238) $(5,047) Unrecognized cost: Net actuarial gains (23,611) (49,593) (1,095) (1,832) Transition amount (4,179) (5,073) -- -- Prior service cost 10,285 10,426 (58) (66) - ----------------------------------------------------------------------------------------------------------------- Prepaid (accrued) benefit cost $ 7,773 $ 5,336 $(6,391) $(6,945) ================================================================================================================= AMOUNTS RECOGNIZED IN THE CONSOLIDATED BALANCE SHEETS CONSIST OF: Prepaid benefit cost $ 22,918 $ 20,199 $ -- $ -- Accrued benefit liability (19,808) (17,922) (6,391) (6,945) Intangible asset 1,283 1,379 -- -- Accumulated other comprehensive income 3,380 1,680 -- -- - ----------------------------------------------------------------------------------------------------------------- Net amount recognized $ 7,773 $ 5,336 $(6,391) $(6,945) =================================================================================================================
Amounts applicable to the company's plan with accumulated benefit obligations in excess of plan assets were as follows:
Years ended ===================== January 2 January 3 In thousands 1999 1998 - ----------------------------------------------------------------------------------------------------------------- Projected benefit obligation $21,048 $18,851 Accumulated benefit obligation 19,808 17,736 Fair value of plan assets -- -- =================================================================================================================
The assumptions used in determining the components of pension and retiree health expense were as follows:
Pension Benefits Retiree Health Benefits Six months Year Six months Year Years ended ended ended Years ended ended ended ============================================================================================== January 2 January 3 December 28 June 30 January 2 January 3 December 28 June 30 1999 1998 1996 1996 1999 1998 1996 1996 - ---------------------------------------------------------------------------------------------------------------------------------- Discount rate 7.00% 7.75% 7.75% 7.75% 7.00% 7.75% 7.75% 7.75% Expected return on plan assets 10.00% 10.00% 10.00% 10.00% -- -- -- -- Rate of compensation increase 5.00% 5.00% 5.00% 5.00% -- -- -- -- Initial health care cost trend rate* -- -- -- -- 8.00% 9.00% 10.00% 12.00% =================================================================================================================================
*Assumed to decrease to 6 percent in 2002. 35 Notes to Consolidated Financial Statements Jostens Inc. and subsidiaries A 1 percentage-point change in the assumed health care cost trend rate would have the following effects:
=============================== 1 Percentage- 1 Percentage- In thousands Point Increase Point Decrease - ------------------------------------------------------------------------- Effect on total of service and interest cost components for the year ended January 2, 1999 $ 23 $ 22 Effect on postretirement benefit obligation as of January 2, 1999 $325 $316 =========================================================================
Plan assets consist primarily of corporate equity as well as corporate U.S. government debt and real estate. Corporate equity investments include the fair value of the company's common stock of $5.3 million at January 3, 1998. There were no investments in the company's common stock at January 2, 1999. In its retirement savings plan, which covers nearly all nonunion employees, the company provides a matching contribution on amounts, limited to 6 percent of compensation, contributed by employees. The company's contribution, in the form of Jostens common shares purchased in the open market, was $2.6 million in 1998, $2.3 million in 1997, $1.1 million in the six-month period ended December 28, 1996, and $2.4 million in the fiscal year ended June 30, 1996. This represents 50 percent of eligible employee contributions. 7 COMMITMENTS AND CONTINGENCIES Gold Forward Purchase Contracts The company has forward contracts of $19 million for commitments to purchase gold that mature at various times in 1999. Consigned Gold The company has a gold consignment arrangement with a major financial institution whereby the company has the ability to obtain up to $15 million in consigned inventory. In 1998 and 1997, the company expensed consignment fees of approximately $92,000 and $72,000, respectively, in connection with this facility. Under the terms of the consignment arrangement, the company does not own the consigned gold until it is shipped in the form of a product to a customer. Accordingly, the company does not include for financial statement purposes the value of consigned gold in inventory with a corresponding liability. The value of the company's consigned gold at January 2, 1999, and January 3, 1998, was $14.4 million and $6.8 million. Environmental As part of its environmental management program, the company is involved in various environmental remediation activities. As sites are identified and assessed in this program, the company determines potential environmental liability. Factors considered in assessing liability include, among others, the following: whether the company had been designated as a potentially responsible party, the number of other potentially responsible parties designated at the site, the stage of the proceedings and available environmental technology. As of January 2, 1999, the company had identified three sites requiring further investigation. However, the company has not been designated as a potentially responsible party at any site. Management has assessed the likelihood that a loss has been incurred at one of its sites as probable and, based on findings included in remediation reports and discussions with legal counsel, estimated the potential loss at January 2, 1999, to range from $3 million to $4.2 million. As of January 2, 1999, $4.2 million had been accrued and is included with "other accrued liabilities" on the consolidated balance sheets. While Jostens may have a right of contribution or reimbursement under insurance policies, amounts recoverable from other entities with respect to a particular site are not considered until recoveries are deemed probable. No assets for potential recoveries were established as of January 2, 1999. Sales Force In 1997, the company changed the contract for sales representatives who serve the college market for Jewelry and Graduation Products from independent sales representatives to company employees. The change was made to better enable the company to address market needs and strengthen its position in the market. These representatives' previous contracts called for a transition commission, which historically was paid by the new sales representatives who assumed responsibility for the accounts of the outgoing representative, with the company acting as a collection agent. College market sales representatives who elected to become Jostens employees forfeited their right to the transition commission in exchange for participation in a newly created severance plan and other employee benefit programs. As a result, the company will recognize approximately $4 million of severance costs ratably over these representatives' estimated average remaining service 36 period of five years. The company recognized severance costs of $691,000 in 1998 and $358,000 in 1997. Representatives who elected not to become employees will receive estimated future transition payments from the company of $5.5 million in exchange for helping to transition and retain existing business and for signing agreements not to compete. These costs are recognized as a charge to operations ratably over the individual noncompete periods, generally three years, and were $1.4 million in 1998 and $763,000 in 1997. Litigation In January 1999, a federal judge in Texas overturned a jury's $25.3 million verdict against Jostens in an antitrust lawsuit. The judge, acting on Jostens' post-trial motions, set aside the jury's verdict and dismissed all claims against Jostens in the case. Yearbook competitor Taylor Publishing, a unit of Insilco Holding Corp. and the plaintiff in the case, has indicated in a press release that it intends to appeal the decision and will seek to have the jury verdict reinstated. No costs were accrued related to the lawsuit, as management's assessment of a potential loss was unlikely. Jostens is a party to litigation arising in the normal course of business. Management regularly analyzes current information and, as necessary, provides accruals for probable liabilities on the eventual disposition of these matters. Management believes the impact on the company's consolidated results of operations and financial position, if any, for the disposition of these matters will not be material. 8 SHAREHOLDERS' INVESTMENT Share Repurchases In December 1998, the Board of Directors authorized the repurchase of up to $100 million shares of the company's common stock. Under the authorization, shares may be repurchased periodically in the open market and through privately negotiated transactions. The repurchase is to be funded from the company's cash, short-term investments and short-term borrowings. A similar $100 million repurchase program was authorized in July 1997 and completed in the fourth quarter of 1998. Under this program the company repurchased 4.4 million shares, including 3.6 million shares for $80 million in 1998. In fiscal year 1996, the company repurchased 7 million shares for $169 million. Stock Options and Restricted Stock Under stock option plans, the company has granted to key employees options to purchase Jostens common shares at 100 percent of the market price on the dates the options were granted. One plan also provides for increases in the number of shares available for future grants equal to 1 percent of the outstanding common shares on July 1 of each year through 2002. The company applies Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees, and related interpretations in accounting for its employee stock options and long-term management incentive plans, which are described below. Accordingly, no compensation cost has been recognized for these plans. Had the company determined compensation cost based upon the fair value at the grant dates for its stock option and long-term management incentive plans under SFAS No. 123, Accounting for Stock-Based Compensation, the company's consolidated net income and earnings per share would have been affected by the pro forma amounts indicated below.
Years ended ================================== In thousands, January 2 January 3 June 30 except per-share data 1999 1998 1996 - ---------------------------------------------------------------- Net income As reported $41,820 $57,183 $51,625 Pro forma $41,404 $56,800 $51,500 - ---------------------------------------------------------------- Basic earnings per share As reported $ 1.14 $ 1.47 $ 1.29 Pro forma $ 1.13 $ 1.46 $ 1.28 - ---------------------------------------------------------------- Diluted earnings per share As reported $ 1.14 $ 1.47 $ 1.28 Pro forma $ 1.13 $ 1.46 $ 1.28 ================================================================
37 Notes to Consolidated Financial Statements Jostens Inc. and subsidiaries The pro forma amounts indicated above reflect the amortization to expense the estimated fair value of the stock awards over the awards' vesting period. The effects of applying the fair value method of measuring compensation expense in 1998, 1997 and fiscal 1996 are not likely to be representative of the effects for future years, in part because the fair value method was applied only to stock options granted after June 30, 1995. The weighted average fair values of options granted in 1998, 1997 and fiscal 1996 are $4.67, $4.44 and $4.18 per option, respectively. The company used the weighted average assumptions in the Black-Scholes option pricing model in estimating the fair value of stock options at the date of grant, as shown in the following table:
Years ended =============================== January 2 January 3 June 30 1999 1998 1996 - -------------------------------------------------------------------- Risk-free rate 4.7% 5.4% 6.2% Dividend yield 3.8% 3.6% 3.9% Volatility factor of the expected market price of the company's common stock 26% 22% 20% Expected life of the award 5.2 4.7 5.2 ====================================================================
Following is a summary of stock option activity:
Years ended Six months ended Year ended January 2, 1999 January 3, 1998 December 28, 1996 June 30, 1996 =========================================================================================== Weighted Weighted Weighted Weighted average average average average Shares exercise Shares exercise Shares exercise Shares exercise In thousands, except dollar amounts price price price price - ----------------------------------------------------------------------------------------------------------------------------------- Outstanding beginning of year 2,215 $22.31 2,882 $22.13 2,751 $22.38 2,971 $22.39 Granted 946 $23.47 496 $24.69 192 $18.66 278 $22.61 Exercised (199) $23.81 (581) $25.05 (26) $19.32 (163) $17.53 Forfeited (62) $24.40 (582) $25.14 (35) $24.95 (335) $25.04 - ----------------------------------------------------------------------------------------------------------------------------------- Outstanding end of year 2,900 $22.69 2,215 $22.31 2,882 $22.13 2,751 $22.38 Exercisable at end of year 1,289 $22.84 969 $23.79 1,573 $24.73 1,491 $24.87 Reserved for issuance 4,441 4,272 4,448 4,098 Available for future grants 1,495 1,966 1,511 1,292 ===================================================================================================================================
At January 2, 1999, the range of exercise prices on outstanding options were as follows:
Options outstanding Options exercisable ========================================================================================= Number Weighted-average outstanding remaining life Weighted-average Number exercisable Weighted-average Range of exercise prices (in thousands) (in years) exercise price (in thousands) exercise price - ----------------------------------------------------------------------------------------------------------------------- $16.56 - $20.00 939 5.7 $18.21 596 $18.14 $20.01 - $25.00 1,668 8.2 $23.81 400 $24.14 $25.01 - $30.00 110 2.1 $26.26 110 $26.26 $30.01 - $34.19 183 2.6 $33.27 183 $33.27 - ----------------------------------------------------------------------------------------------------------------------- Summary 2,900 6.8 $22.69 1,289 $22.84 =======================================================================================================================
38 The company has a stock incentive plan under which eligible employees have been awarded restricted shares of common stock of the company. The awards have restriction periods that are tied primarily to employment and/or service. The awards are recorded at market value on the date of the grant as unearned compensation and amortized over the restriction periods. Restricted stock and annual expense information is as follows:
Years ended =================================== January 2 January 3 December 28 Restricted stock awards 1999 1998 1996 (unaudited) - -------------------------------------------------------------------- Number of restricted shares awarded during the year 5,350 46,050 6,000 Average market price of shares awarded during the year $ 23.72 $ 23.51 $ 20.03 Restricted shares outstanding at year end 47,100 53,350 63,517 Annual expense, net (in thousands) $ 416 $ 36 $ 39
In July 1997, a new management incentive plan was approved. Under the plan, certain members of the senior management team would receive the market value of up to 56,400 shares of Jostens common stock upon achieving specific financial targets in 1998. Under the plan, 50 percent of the value of the award would be paid in cash and 50 percent in unrestricted common stock of the company. The company recorded $1.1 million as compensation expense in 1998 as a result of achieving the financial targets contained in the plan. Shareholder Rights Plan In July 1998, the Board of Directors declared a distribution to shareholders of one preferred share purchase right for each outstanding share of common stock. The dividend was payable August 19, 1998, to shareholders of record at the close of business on that date. Each right entitles the holder to purchase one one-hundredth of a share of Series A Junior Participating Preferred Stock at an exercise price of $90. If a person or group acquires at least 20 percent of the company's common stock, each right will entitle its holder (other than the acquiring person or group) to purchase, at the right's then-current exercise price, a number of Jostens common shares having a market value of twice the exercise price. In addition, if Jostens is acquired in a merger or other business combination transaction after a person has acquired at least 20 percent of the company's common stock, each right will entitle its holder to purchase, at the right's then-current exercise price, a number of the acquiring company's common shares having a market value of twice the exercise price. If a person or group acquires at least 20 percent and less than 50 percent of the company's common stock, the Board of Directors may exchange the rights (other than the rights owned by the acquiring person or group), in whole or in part, for the number of shares of common stock per right as could be purchased at the then- current exercise price. Before a person or group acquires at least 20 percent of the company's stock, the rights are redeemable for one-tenth of a cent per right at the option of a committee of the board composed exclusively of the company's independent, non-employee directors. The rights will expire in August 2008, unless extended or redeemed earlier by the company. 9 BUSINESS SEGMENTS The company adopted SFAS no. 131, Disclosures About Segments of an Enterprise and Related Information, during the quarter ended January 2, 1999. SFAS 131 establishes standards for reporting information about operating segments in annual financial statements of public companies and requires selected information about operating segments to be reported in interim financial reports issued to shareholders. It also establishes standards for related disclosures about products and services and geographic areas. The company has defined its operating segments based upon the financial information available that is evaluated regularly by the chief operating decision maker in deciding how to allocate resources and in assessing performance. Jostens' operations are classified into two business segments based upon products and services provided: school-based recognition products and services (School Products) and longevity and performance recognition products and services for business (Recognition). The School Products segment manufactures and sells products and services including yearbooks, class rings, graduation products and student photography packages, as well as customized products for university alumni and other affinity groups. The Recognition segment manufactures and sells customized sales, service and business achievement awards. The Other segment includes principally corporate amounts. 39 Notes to Consolidated Financial Statements Jostens Inc. and subsidiaries The accounting policies of the operating segments are the same as those described in the summary of significant accounting policies. Jostens evaluates performance based on the operating income of the segment. Revenues are reported in the geographic area where the final sales to customers are made, rather than where the transaction originates. Financial information by reportable business segment is included in the following summary:
Years ended Six months ended Year ended ==================================================================== January 2 January 3 December 28 December 28 June 30 1999 1998 1996 1996 1996 In thousands (unaudited) - -------------------------------------------------------------------------------------------------------------- NET SALES FROM EXTERNAL CUSTOMERS School Products $659,505 $631,931 $599,179 $232,588 $586,098 Recognition 103,929 103,651 101,323 41,076 100,208 Other 7,483 6,897 8,232 3,454 8,843 - -------------------------------------------------------------------------------------------------------------- CONSOLIDATED $770,917 $742,479 $708,734 $277,118 $695,149 ============================================================================================================== OPERATING INCOME School Products(1) $127,889 $109,079 $ 85,899 $ 19,086 $100,373 Recognition(2) 10,430 8,916 3,048 (4,616) 8,661 Other (36,130) (18,333) (17,021) (10,318) (14,232) - -------------------------------------------------------------------------------------------------------------- Consolidated 102,189 99,662 71,926 4,152 94,802 Net interest expense (6,660) (6,279) (8,973) (4,126) (7,323) Write-off of JLC notes receivable, net (12,009) -- -- -- -- - -------------------------------------------------------------------------------------------------------------- INCOME BEFORE INCOME TAXES $ 83,520 $ 93,383 $ 62,953 $ 26 $ 87,479 ============================================================================================================== IDENTIFIABLE ASSETS School Products $262,345 $272,005 $269,488 $269,488 $253,830 Recognition 43,089 43,080 43,253 43,253 48,190 Other 60,733 75,645 71,106 71,106 81,954 - -------------------------------------------------------------------------------------------------------------- CONSOLIDATED $366,167 $390,730 $383,847 $383,847 $383,974 ============================================================================================================== DEPRECIATION AND AMORTIZATION School Products $ 16,032 $ 15,244 $ 12,275 $ 7,197 $ 11,086 Recognition 2,749 3,002 2,369 1,409 2,056 Other 4,390 3,896 3,044 1,328 3,415 - -------------------------------------------------------------------------------------------------------------- CONSOLIDATED $ 23,171 $ 22,142 $ 17,688 $ 9,934 $ 16,557 ============================================================================================================== CAPITAL EXPENDITURES School Products $ 12,358 $ 14,754 $ 13,865 $ 7,691 $ 13,023 Recognition 1,966 2,036 1,669 1,434 381 Other 22,612 7,591 1,330 772 1,967 - -------------------------------------------------------------------------------------------------------------- CONSOLIDATED $ 36,936 $ 24,381 $ 16,864 $ 9,897 $ 15,371 ==============================================================================================================
(1) Includes A LIFO gain from converting owned gold to consigned gold of $2.3 million in 1998 and $5.4 million in 1997, offset by charges of $2.5 million in 1998 and $2.6 million in 1997 for plant closing costs. Operating income in 1996 included $16.9 million higher cost of products sold as a result of implementing a new inventory cost accounting system. (2) Includes a LIFO gain from converting owned gold to consigned gold of $1.4 million in 1998 and in 1997. Operating income in 1996 also included $6 million in environmental charges. 40
Years ended Six months ended Year ended ================================================================ January 2 January 3 December 28 December 28 June 30 1999 1998 1996 1996 1996 Dollars in thousands (unaudited) - --------------------------------------------------------------------------------------------------------------------- SALES BY CLASSES OF SIMILAR PRODUCTS OR SERVICES Printing, primarily yearbooks $258,452 $243,806 $230,219 $ 75,697 $226,520 Jewelry 194,283 186,816 177,465 92,465 172,655 Photography 47,297 48,245 48,791 35,714 48,465 Graduation products 159,473 153,066 142,706 28,714 138,458 Recognition 103,929 103,651 101,323 41,076 100,208 Other 7,483 6,895 8,230 3,452 8,843 - --------------------------------------------------------------------------------------------------------------------- CONSOLIDATED $770,917 $742,479 $708,734 $277,118 $695,149 ===================================================================================================================== SALES BY GEOGRAPHIC AREA United States $732,041 $703,659 $668,700 $253,570 $654,531 Other, primarily Canada 38,876 38,820 40,034 23,548 40,618 - --------------------------------------------------------------------------------------------------------------------- CONSOLIDATED $770,917 $742,479 $708,734 $277,118 $695,149 ===================================================================================================================== PROPERTY, PLANT AND EQUIPMENT AND INTANGIBLES (NET) BY GEOGRAPHIC AREA United States $108,411 $100,999 $ 90,071 $ 90,071 $ 90,478 Other, primarily Canada 8,401 3,888 4,836 4,836 4,891 - --------------------------------------------------------------------------------------------------------------------- CONSOLIDATED $116,812 $104,887 $ 94,907 $ 94,907 $ 95,369 =====================================================================================================================
10 WRITE-OFF OF JLC NOTES RECEIVABLE, NET In June 1995, the company sold its Jostens Learning Corp. (JLC) curriculum software subsidiary to a group led by Bain Capital, Inc. As partial consideration for the sale, Jostens received two notes, which were discounted and recorded at their estimated fair values. In addition, the transaction gain of $13.2 million was deferred in accordance with the SEC Staff Accounting Bulletin No. 81, Gain Recognition on the Sale of a Business or Operating Assets to a Highly Leveraged Entity. The company recorded $12.9 million on its consolidated balance sheets representing the estimated fair value of the notes, net of the deferred gain. In January 1999, the company received information from JLC indicating to management that the carrying value of the notes were permanently impaired. As a result, the company wrote off $12 million in 1998 for the carrying value of the notes, net of miscellaneous JLC-related assets and liabilities, plus $3.7 million of net deferred tax assets associated with the initial sale of JLC that management does not expect to realize. In addition, the company did not record a tax benefit related to the write-off because it is currently not expected to be realized for tax purposes. 11 ACQUISITION The company purchased the Gold Lance class ring brand for $9.5 million in cash on July 31, 1997. Under the terms of the agreement, the company purchased the Gold Lance name, accounts and notes receivable, and tooling. The company also incurred $383,000 of direct, acquisition-related costs, which were capitalized as part of the purchase price. The acquisition was recorded using the purchase method of accounting, which resulted in the recording of $5.9 million of goodwill that is being amortized over 10 years. 41 Notes to Consolidated Financial Statements Jostens Inc. and subsidiaries Unaudited Quarterly Financial Data Total In thousands, except per-share data First Second Third Fourth Year - ------------------------------------------------------------------------------------------------ YEAR ENDED JANUARY 2, 1999 Net sales $ 168,277 $298,879 $ 127,009 $ 176,752 $ 770,917 Gross margin 99,604 156,320 56,539 106,659 419,122 Net income (loss)(1) 10,496 37,632 (7,178) 870 41,820 Earnings (loss) per share(1)(2): Basic 0.28 1.02 (0.20) 0.02 1.14 Diluted 0.28 1.01 (0.20) 0.02 1.14 Stock price: High 24 15/16 26 1/4 25 5/8 26 1/4 26 1/4 Low 22 1/16 22 7/8 19 9/16 19 19 Dividends per share 0.22 0.22 0.22 0.22 0.88 ================================================================================================ YEAR ENDED JANUARY 3, 1998 Net sales $ 150,437 $297,316 $ 109,079 $ 185,647 $ 742,479 Gross margin 86,041 151,025 45,671 108,452 391,189 Net income (loss) 9,954 38,323 (6,187) 15,093 57,183 Earnings (loss) per share(2): Basic 0.26 0.99 (0.16) 0.39 1.47 Diluted 0.26 0.98 (0.16) 0.39 1.47 Stock price: High 22 7/8 26 7/8 28 13/16 27 15/16 28 13/16 Low 20 21 5/8 23 1/4 22 3/16 20 Dividends per share 0.22 0.22 0.22 0.22 0.88 ================================================================================================
(1) Includes a $15.7 million charge (43 cents per share) in the fourth quarter of 1998 for the write-off of JLC notes receivable and related net deferred tax assets. (2) Amounts may not total to the annual earnings per share because each quarter and the year are calculated separately based on average outstanding shares and common share equivalents during that period. 42
Years ended Six months Years ended ended Seven-Year Financial Summary --------------------------------------------------------------------------------------------- Dollars in thousands, except January 2 January 3 December 28 June 30 June 30 June 30 June 30 June 30 per-share data 1999 1998 1996 1996 1995 1994 1993 1992 - ---------------------------------------------------------------------------------------------------------------------------------- STATEMENT OF OPERATIONS Net sales $ 770.9 $ 742.5 $ 277.1 $ 695.1 $ 665.1 $ 649.9 $ 634.8 $ 639.2 Cost of products sold 351.8 351.3 141.5 332.2 313.7 313.8 310.4 314.0 Net interest expense 6.7 6.3 4.1 7.3 0.7 5.0 5.7 8.7 Income taxes 41.7 36.2 0.8 35.9 38.0 20.5 10.7 29.8 Income (loss)--continuing operations 41.8 57.2 (0.8) 51.6 55.9 28.0 8.5 45.2 Return on sales--continuing operations 5.4% 7.7% (0.3%) 7.4% 8.4% 4.3% 1.3% 7.1% Net income (loss) 41.8 57.2 (0.8) 51.6 50.4 (16.2) (12.7) 59.2 Return on investment 45.1% 47.7% (0.7%) 26.3% 19.1% (5.7%) (3.7%) 16.9% - ---------------------------------------------------------------------------------------------------------------------------------- BALANCE SHEET DATA Current assets $ 240.5 $ 252.5 $ 257.5 $ 251.3 $ 402.4 $ 396.1 $ 401.6 $ 436.3 Working capital (47.2) 6.3 11.8 8.9 206.3 172.7 185.3 232.2 Current ratio 0.8 1.0 1.0 1.0 2.1 1.8 1.9 2.2 Property and equipment, net 88.6 74.1 67.6 67.0 67.8 75.8 88.9 89.2 Total assets 366.2 390.7 383.8 384.0 548.0 569.8 613.5 643.3 Notes payable 93.9 50.0 90.9 27.6 -- -- -- -- Long-term debt, including current maturities 3.6 3.6 3.9 53.9 54.3 54.8 55.3 79.4 Shareholders' investment 58.6 127.1 112.6 121.8 270.6 256.6 315.7 364.7 - ---------------------------------------------------------------------------------------------------------------------------------- COMMON SHARE DATA Basic EPS--continuing operations $ 1.14 $ 1.47 $ (0.02) $ 1.29 $ 1.23 $ 0.61 $ 0.19 $ 1.00 Basic EPS--net income (loss) 1.14 1.47 (0.02) 1.29 1.11 (0.36) (0.28) 1.32 Diluted EPS--continuing operations 1.14 1.47 (0.02) 1.28 1.22 0.62 0.19 1.09 Diluted EPS--net income (loss) 1.14 1.47 (0.02) 1.28 1.10 (0.36) (0.28) 1.43 Cash dividends declared 0.88 0.88 0.22 0.88 0.88 0.88 0.88 0.84 Book value 1.67 3.31 2.91 3.15 5.95 5.64 6.95 8.10 Common shares outstanding 35.1 38.4 38.7 38.7 45.5 45.5 45.4 45.0 Stock price high 26 1/4 28 13/16 22 1/4 25 1/8 21 5/8 20 7/8 31 1/4 37 3/8 Stock price low 19 20 17 1/4 19 1/2 15 3/4 15 1/8 16 1/2 24 1/8 - ---------------------------------------------------------------------------------------------------------------------------------
Net income for 1998 reflects a charge of $15.7 million (43 cents per share) for the write-off of JLC notes receivable and related net deferred tax assets. Discontinued operations reflects JLC, Wicat Systems and Sportswear. Restructuring charges totaling $8.5 million and $40.2 million were recorded in continuing operations and $60.9 million and $25.4 million in discontinued operations in fiscal 1994 and 1993, respectively. In fiscal 1994, $16.9 million was recorded for provisions related to revised estimates of reserves for inventories, receivables and overdrafts. Net income for fiscal 1993 reflects the cumulative effect of adopting SFAS 106 of $6.7 million ($4.2 million after tax, or 9 cents per share). Net income for fiscal 1995 reflects the cumulative effect of adopting SFAS 112 of $1.1 million ($600,000 after tax, or 1 cent per share). 43 Corporate Information BOARD OF DIRECTORS [picture] Lilyan H. Affinito Lilyan H. Affinito Former Vice Chairman of the Board, President and Chief Operations Officer of Maxxam Group Inc. ... Director, Caterpillar Inc. ... Chrysler Corp. ... Kmart Corp. ... KeySpan Energy Corporation (Member, Audit Committee and Compensation Committee) [picture] Mannie L. Jackson Mannie L. Jackson Chairman of the Board, Harlem Globetrotters Inc. ... Former Senior Vice President-Corporate Marketing and Administration, Honeywell Inc. ... Director, Ashland Inc. ... Reebok International Ltd. ... The Stanley Works. (Member, Compensation Committee) [picture] Robert C. Buhrmaster Robert C. Buhrmaster Chairman of the Board, President and Chief Executive Officer, Jostens Inc. ... Director, The Toro Company. (Member, Executive Committee) [picture] Walker Lewis Walker Lewis Senior Advisor, SBC Warburg Dillon Read ... Chairman of the Board, Devon Value Advisors ... Former Chairman of the Board, Strategic Planning Associates ... Former President, Avon Products Inc., U.S. Division ... Director, American Management Systems ... Owens Corning ... London Fog Industries Inc. [picture] Richard A. Zona Richard A. Zona Vice Chairman, U.S. Bancorp. (Member, Audit Committee and Executive Committee) [picture] Jack W. Eugster Jack W. Eugster Chairman of the Board, President and Chief Executive Officer, Musicland Stores Corp. ... Director, Damark International Inc. ... Donaldson Co. Inc. ... MidAmerican Energy Co. ... Shopko Stores Inc. (Member, Compensation Committee and Executive Committee) [picture] Kendrick B. Melrose Kendrick B. Melrose Chairman of the Board and Chief Executive Officer, The Toro Company ... Director, Donaldson Company Inc. ... SurModics Inc. ... Valspar Corp. (Member, Audit Committee and Executive Committee) MANAGEMENT Robert C. Buhrmaster, 51 Chairman of the Board, President and Chief Executive Officer David J. Larkin, 59 Executive Vice President and Chief Operating Officer Carl H. Blowers, 59 Senior Vice President-Manufacturing William N. Priesmeyer, 54 Senior Vice President and Chief Financial Officer Bob Adkinson, 45 Vice President and Chief Information Officer Michael Bailey, 43 Vice President and General Manager-Jostens School Solutions William J. George, 50 Vice President, General Counsel and Corporate Secretary Thomas W. Jans, 50 Vice President-Consumer Marketing and Channel Development Rodney Jordan, 46 Vice President-Human Resources Greg S. Lea, 46 Vice President and General Manager-Colleges and Universities John Mann, 54 Vice President and General Manager-Scholastic Lee U. McGrath, 42 Vice President-Treasurer Patricia Schiavone, 47 Vice President and General Manager-Recognition Kevin M. Whalen, 39 Vice President-Corporate Communications Most photos in this annual report have been provided by high school and middle school students participating in the annual Jostens Photo Contest. [RECYCLE LOGO] This report was printed on recycled (and recyclable) paper containing 10% post-consumer waste. 44 Shareholder Information ANNUAL MEETING OF SHAREHOLDERS The annual meeting of shareholders will be held at 10 a.m. Thursday, April 22, 1999, in the Jostens auditorium, 5501 Norman Center Drive, Minneapolis, Minnesota. All shareholders are invited to attend. SHAREHOLDER INFORMATION Common Stock Communications concerning stockholdings, transfer requirements, address changes, dividend checks and requests for automatic dividend reinvestment brochures should be directed to the company's transfer agent and registrar: Norwest Shareowner Services, P.O. Box 64854, St. Paul, MN 55164-0854. Telephone: (800) 468-9716. Financial Publications Investors seeking financial publications such as annual reports and form 10-Q and 10-K reports may call (612) 830-3214. Financial statements and other information about Jostens are also available electronically via the worldwide web at www.jostens.com. General Stockholder and Investor Questions Jostens maintains an Investor Relations office to assist stockholders and investors. Inquiries may be directed to: Heide Erickson, Director - Investor Relations, Jostens Inc., 5501 Norman Center Drive, Minneapolis, MN 55437. Telephone (612) 830-3332. DIVIDEND REINVESTMENT Jostens' automatic dividend reinvestment service is a convenient way for shareholders to increase their investment in the company. About 40 percent of Jostens' registered shareholders use this service, which applies quarterly dividends and optional cash deposits to the purchase of additional Jostens shares. Shareholders interested in this service can obtain a brochure by contacting Norwest Shareowner Services at the address listed above. STOCK EXCHANGE LISTING Jostens common stock is traded on the New York Stock Exchange under the trading symbol JOS. There were approximately 5,400 shareholders of record as of December 31, 1998. [picture] 50s female cheerleader [LOGO] For more information about our products and services, please contact us. Jostens Inc. 5501 Norman Center Drive Telephone (612) 830-3300 Minneapolis, MN 55437 www.jostens.com EX-21 5 LIST OF COMPANY SUBSIDIARIES EXHIBIT 21 JOSTENS, INC. AND SUBSIDIARIES Name of Company Jurisdiction of Incorporation American Yearbook Company, Inc. Kansas Jostens Canada, Ltd. Canada Balfirm Canada, Inc. Canada Jostens Can Investments B.V. Netherlands Jostens International Holding B.V. Netherlands JC Trading, Inc. Puerto Rico Conceptos Jostens, S.A. de C.V. Mexico Reconocimientos E Incentivos, S.A. de C.V. Mexico JostFer, S.A. de C.V. Mexico EX-23 6 CONSENT OF INDEPENDENT AUDITORS EXHIBIT 23 CONSENT OF INDEPENDENT AUDITORS We consent to the incorporation by reference in the Annual Report (Form 10-K) of Jostens, Inc. of our report dated February 2, 1999, included in the 1998 Annual Report to Shareholders of Jostens, Inc. Our audits also included the financial statement schedule of Jostens, Inc listed in Item 14(a). This schedule is the responsibility of the Company's management. Our responsibility is to express an opinion based on our audits. In our opinion, the financial statement schedule referred to above, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein. We also consent to the incorporation by reference in Jostens Inc.'s Registration Statement Number 33-40233 on Form S-3 and Registration Statements on Form S-8 (Post-effective Amendment Number 1 to Registration Statement Number 2-95076, 33-19308, 33-58414, 333-00713, 333-13221, 333-13223, 333-56455, and 333-72347) of our report dated February 2, 1999, with respect to the consolidated financial statements incorporated herein by reference, and our report included in the preceding paragraph with respect to the financial statement schedule included in the Annual Report (Form 10-K) of Jostens, Inc. /s/ Ernst & Young LLP Ernst & Young LLP Minneapolis, Minnesota March 31, 1999 EX-27 7 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM JOSTENS, INC. CONSOLIDATED FINANCIAL STATEMENTS AS OF AND FOR THE YEAR ENDED JANUARY 2, 1999, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. YEAR JAN-02-1999 JAN-03-1998 JAN-02-1999 0 2,595 113,655 (7,308) 90,494 240,544 256,165 (167,518) 366,167 287,779 3,600 0 0 11,690 46,862 366,167 770,917 770,917 351,795 351,795 316,933 1,858 7,026 83,520 41,700 41,820 0 0 0 41,820 1.14 1.14
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