10-Q 1 0001.txt FORM 10-Q UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Quarterly Period Ended July 1, 2000 OR [_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 Commission file number 1-5064 Jostens, Inc. -------------------------------------------------------------------------------- (Exact name of Registrant as specified in its charter) Minnesota 41-0343440 ---------------------------------------------------------------- ------------------------------------------ (State or other jurisdiction of incorporation or organization) (I.R.S. Employer Identification number) 5501 Norman Center Drive, Minneapolis, Minnesota 55437 ---------------------------------------------------------------- ------------------------------------------ (Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code: (952) 830-3300 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [_] On August 15, 2000 there were 8,993,297 shares of the Registrant's common stock outstanding. JOSTENS, INC. AND SUBSIDIARIES
Part I Financial Information Page ---------------------------- ---- Item 1. Financial Statements Condensed Consolidated Statements of Operations for the Three and Six months ended July 1, 2000 and July 3, 1999 3 Condensed Consolidated Balance Sheets as of July 1, 2000, July 3, 1999 and January 1, 2000 4 Condensed Consolidated Statements of Cash Flows for the Six months ended July 1, 2000 and July 3, 1999 5 Condensed Consolidated Statement of Changes in Shareholders' Investment (Deficit) for the Six months ended July 1, 2000 6 Notes to Condensed Consolidated Financial Statements 7 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 22 Item 3. Quantitative and Qualitative Disclosures about Market Risk 28 Part II Other Information ------------------------- Item 1. Legal Proceedings 29 Item 4. Submission of Matters to a Vote of Security Holders 29 Item 6. Exhibits and Reports on Form 8-K 29 Signatures 30
2 PART I FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS JOSTENS, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
Three months ended Six months ended ---------------------------------- ---------------------------------- July 1 July 3 July 1 July 3 In thousands, except per-share data 2000 1999 2000 1999 ------------------------------------------------------------------------------------------- ---------------------------------- Net sales $ 301,798 $ 303,161 $ 476,387 $ 469,519 Cost of products sold 135,201 140,744 201,787 209,243 ------------------------------------------------------------------------------------------- ---------------------------------- Gross profit 166,597 162,417 274,600 260,276 Selling and administrative expenses 93,546 95,334 180,799 178,636 Transaction costs 45,711 -- 45,711 -- ------------------------------------------------------------------------------------------- ---------------------------------- Operating income 27,340 67,083 48,090 81,640 Interest income (277) (116) (488) (201) Interest expense 13,354 1,575 15,292 2,699 ------------------------------------------------------------------------------------------- ---------------------------------- Income before income taxes 14,263 65,624 33,286 79,142 Income taxes 18,553 26,578 26,257 32,053 ------------------------------------------------------------------------------------------- ---------------------------------- Net income (loss) $ (4,290) $ 39,046 $ 7,029 $ 47,089 Dividends and accretion on redeemable preferred stock 1,243 -- 1,243 -- ------------------------------------------------------------------------------------------- ---------------------------------- Net income (loss) available to common shareholders $ (5,533) $ 39,046 $ 5,786 $ 47,089 =========================================================================================== ================================== Net income (loss) per share available to common shareholders Basic $ (0.29) $ 1.14 $ 0.23 $ 1.37 Diluted $ (0.29) $ 1.14 $ 0.23 $ 1.36 Weighted average common shares outstanding Basic 18,880 34,128 25,043 34,488 Diluted 18,880 34,208 25,316 34,590
The accompanying notes are an integral part of the unaudited condensed consolidated financial statements. 3 JOSTENS, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited) ------------------------------ July 1 July 3 January 1 In thousands, except per-share data 2000 1999 2000 ---------------------------------------------------------------------------------------------------------------------------------- ASSETS ------- Current assets Cash and cash equivalents $ 35,875 $ 8,405 $ 38,517 Accounts receivable, net of allowance for doubtful accounts of $5,535, $6,234 and $5,775, respectively 125,505 129,379 107,638 Inventories 66,319 77,783 87,839 Deferred income taxes 17,400 14,682 17,400 Salespersons overdrafts, net of allowance of $5,301, $7,157 and $6,332, respectively 11,108 11,934 26,194 Prepaid expenses and other current assets 5,592 4,382 8,721 --------------------------------------------------------------------------------------------------------------------------------- Total current assets 261,799 246,565 286,309 Other Assets Intangibles, net 18,309 27,638 18,895 Deferred financing costs, net 35,606 -- -- Other 25,930 14,163 17,872 --------------------------------------------------------------------------------------------------------------------------------- Total other assets 79,845 41,801 36,767 Property and equipment 278,010 268,654 271,790 Less accumulated depreciation (199,192) (179,583) (187,150) --------------------------------------------------------------------------------------------------------------------------------- Property and equipment, net 78,818 89,071 84,640 --------------------------------------------------------------------------------------------------------------------------------- $ 420,462 $ 377,437 $ 407,716 ================================================================================================================================= LIABILITIES AND SHAREHOLDERS' INVESTMENT (DEFICIT) -------------------------------------------------- Current liabilities Short-term borrowings $ -- $ 93,690 $ 117,608 Accounts payable 18,979 16,002 23,641 Accrued employee compensation and related taxes 25,674 23,160 29,478 Commissions payable 53,410 51,641 26,134 Customer deposits 55,277 53,576 112,958 Income taxes payable 34,617 30,953 17,223 Current portion of long-term debt 5,500 -- -- Other accrued liabilities 36,171 21,092 30,100 --------------------------------------------------------------------------------------------------------------------------------- Total current liabilities 229,628 290,114 357,142 Long-term debt, net of current maturities 694,797 3,600 3,600 Other noncurrent liabilities 8,215 15,698 10,464 --------------------------------------------------------------------------------------------------------------------------------- Total liabilities 932,640 309,412 371,206 Commitments and contingencies -- -- -- Redeemable preferred shares, $.01 par value, liquidation preference $60,000, issued and outstanding; July 1, 2000 - 60 44,243 -- -- Preferred shares, $.01 par value: authorized 4,000 shares, issued and outstanding; July 1, 2000 - 60 in the form of redeemable preferred shares listed above, the remaining 3,940 undesignated Shareholders' investment (deficit) Common shares: Class A, $.33 1/3 par value: authorized 4,200 shares, issued and outstanding; July 1, 2000 - 2,862; July 3, 1999 - 34,049; January 1, 2000 - 33,324 954 11,350 11,108 Class B, $.01 par value: authorized 5,300 shares, issued and outstanding; July 1, 2000 - 5,300 53 -- -- Class C, $.01 par value: authorized 2,500 shares, issued and outstanding; July 1, 2000 - 811 8 -- -- Class D, $.01 par value: authorized 20 shares, issued and outstanding; July 1, 2000 - 20 -- -- -- Class E, $.01 par value: authorized 1,900 shares, none issued -- -- -- Undesignated, $.01 par value: authorized 12,020 shares, none issued -- -- -- Warrants to purchase common shares 24,733 -- -- Officer notes receivable (2,050) -- -- Retained earnings (accumulated deficit) (573,787) 63,672 31,072 Accumulated other comprehensive loss (6,332) (6,997) (5,670) --------------------------------------------------------------------------------------------------------------------------------- Total shareholders' investment (deficit) (556,421) 68,025 36,510 --------------------------------------------------------------------------------------------------------------------------------- $ 420,462 $ 377,437 $ 407,716 =================================================================================================================================
The accompanying notes are an integral part of the unaudited condensed consolidated financial statements. 4 JOSTENS, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
Six months ended ------------------------------- July 1 July 3 In thousands 2000 1999 ----------------------------------------------------------------------------------------------- Operating activities Net income $ 7,029 $ 47,089 Depreciation 12,684 11,663 Amortization of debt discount and deferred financing costs 1,011 6 Amortization of goodwill 536 1,125 Changes in operating assets and liabilities Accounts receivable (17,867) (23,032) Inventories 21,520 12,711 Salespersons overdrafts 15,086 8,755 Prepaid expenses and other current assets 3,129 1,355 Accounts payable (10,294) (2,497) Accrued employee compensation and related taxes (3,804) (4,400) Commissions payable 27,276 29,510 Customer deposits (57,681) (38,516) Income taxes payable 17,394 26,240 Other (2,877) (2,715) ----------------------------------------------------------------------------------------------- Net cash provided by operating activities 13,142 67,294 ----------------------------------------------------------------------------------------------- Investing activities Purchases of property and equipment (7,150) (13,339) Equity investments (1,103) (5,000) Other 395 654 ----------------------------------------------------------------------------------------------- Net cash used for investing activities (7,858) (17,685) ----------------------------------------------------------------------------------------------- Financing activities Net short-term borrowings (repayments) (111,976) (5,415) Repurchases of common stock (823,630) (25,007) Principal payments on long-term debt (3,600) --- Proceeds from issuance of long-term debt 700,139 --- Proceeds from issuance of common shares 208,693 --- Net proceeds from the issuance of preferred stock 43,000 --- Proceeds from the issuance of warrants to purchase common shares 24,733 --- Dividends paid to common shareholders (7,331) (15,231) Proceeds from exercise of stock options 555 1,854 Issuance of officer note receivable (2,050) --- Debt acquisition costs (36,459) --- ----------------------------------------------------------------------------------------------- Net cash used for financing activities (7,926) (43,799) ----------------------------------------------------------------------------------------------- Change in cash and cash equivalents (2,642) 5,810 Cash and cash equivalents, beginning of period 38,517 2,595 ----------------------------------------------------------------------------------------------- Cash and cash equivalents, end of period 35,875 $ 8,405 =============================================================================================== Supplemental information Income taxes paid $ 8,763 $ 4,989 Interest paid $ 6,767 $ 2,976
The accompanying notes are an integral part of the unaudited condensed consolidated financial statements. 5 JOSTENS, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' INVESTMENT (DEFICIT) FOR THE SIX MONTHS ENDED JULY 1, 2000 (UNAUDITED)
Warrants to Retained Accumulated Common shares purchase Officer earnings other In thousands, except ----------------- common Capital notes (accumulated comprehensive per-share data Number Amount shares surplus receivable deficit) loss Total ----------------------------------------------------------------------------------------------------------------------------------- Balance - January 1, 2000 33,324 $ 11,108 $ -- $ -- $ -- $ 31,072 $ (5,670) $ 36,510 Exercise of stock options and restricted stock - net 23 8 1,520 1,528 Cash dividends declared to common shareholders of $0.22 per share (7,331) (7,331) Issuance of common shares -- Class A 2,134 711 53,176 (2,050) 51,837 Class B 5,300 53 133,772 133,825 Class C 811 8 20,470 20,478 Class D 20 -- 505 505 Repurchases of common stock (32,619) (10,873) (209,443) (603,314) (823,630) Issuance of warrants to purchase common shares 24,733 24,733 Preferred stock dividend accrual (1,187) (1,187) Preferred stock accretion (56) (56) Net income 7,029 7,029 Change in cumulative translation adjustment (662) (662) ----------------------------------------------------------------------------------------------------------------------------------- Balance - July 1, 2000 8,993 $ 1,015 $ 24,733 $ -- $ (2,050) $ (573,787) $ (6,332) $(556,421) ===================================================================================================================================
The accompanying notes are an integral part of the unaudited condensed consolidated financial statements. 6 JOSTENS, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 1. Basis of Presentation We prepared our accompanying unaudited condensed consolidated financial statements following the requirements of the Securities and Exchange Commission ("SEC") for interim reporting. As permitted under those rules, certain footnotes or other financial information that are normally required by accounting principles generally accepted in the United States can be condensed or omitted. Therefore, we suggest that these financial statements be read in conjunction with the consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for the fiscal year ended January 1, 2000 ("1999 Form 10-K"). The condensed consolidated balance sheet data as of January 1, 2000 were derived from audited financial statements, but do not include all disclosures required by accounting principles generally accepted in the United States. Revenues, expenses, cash flows, assets and liabilities can and do vary during each quarter of the year. Therefore, the results and trends in these interim financial statements may not be the same as those for the full year. In our opinion, the accompanying unaudited condensed consolidated financial statements include all adjustments (including normal recurring items) considered necessary to present fairly, when read in conjunction with the 1999 Form 10-K, our financial position, results of operations and cash flows for the periods presented. Certain balances have been reclassified to conform to the 2000 presentation. 2. Merger and Recapitalization On December 27, 1999, we entered into a merger agreement with Saturn Acquisition Corporation, an entity organized for the sole purpose of effecting a merger on behalf of certain affiliates of Investcorp S.A. and other investors. On May 10, 2000, Saturn Acquisition Corporation merged with and into Jostens, with Jostens as the surviving corporation. The merger was part of a recapitalization of Jostens which resulted in affiliates of Investcorp and the other investors acquiring approximately 92 percent of our post-merger common stock. The remaining 8 percent of our common stock was retained by pre-recapitalization shareholders and five members of senior management and was redesignated as shares of Class A common stock. As a result of the transaction, our shares have been de-listed from the New York Stock Exchange. Voting Rights The post-merger common stock consists of Class A through Class E common stock as well as undesignated common stock. The number of authorized and issued shares for each class of common stock is set forth in the Condensed Consolidated Balance Sheet. Holders of Class A common stock are entitled to one vote per share, whereas holders of Class D common stock are entitled to 306.55 votes per share. Holders of Class B common stock, Class C common stock and Class E common stock have no voting rights. Recapitalization Financing The recapitalization was funded by (a) $495.0 million of borrowings under a senior secured credit facility with a syndicate of banks which included term loans and a revolving credit facility (collectively the "senior secured credit facility"), (b) issuance of $225.0 million in principal amount of senior subordinated notes (the "notes") and warrants to purchase 425,060 shares of Class E common stock, (c) issuance of $60.0 million in principal amount of redeemable preferred stock and warrants to purchase 531,325 shares of Class E common stock and (d) $208.7 million of proceeds from the sale of shares of common stock to the investors. The proceeds from these financings funded (a) the payment of approximately $823.6 million to holders of common stock, (b) repayment of $67.6 million of outstanding indebtedness (c) payment of $10.0 million in consideration for cancellation of employee stock options (d) payments of approximately $71.9 million of fees and expenses associated with the recapitalization, including approximately $12.7 million of advisory fees paid to Investcorp and (e) a pre-payment of $7.5 million for a management and consulting services agreement for a five-year term with Investcorp. This pre-payment is being amortized on a straight-line basis over the term of the agreement. 7 JOSTENS, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED) Recapitalization Accounting The transaction was accounted for as a recapitalization and as such, the historical basis of our assets and liabilities has not been affected. Recapitalization related costs of $45.7 million consisting of investment banker fees, transaction fees, legal and accounting fees, cash transaction bonuses, stock option payments, and other miscellaneous costs were expensed in the three and six month periods ended July 1, 2000. Additionally, $3.0 million of recapitalization costs incurred related to the issuance of shares of redeemable preferred stock was netted against the proceeds of $60.0 million. Finally, $36.5 million associated with the debt financing was capitalized and is being amortized over the applicable lives of the debt for up to a maximum of ten years. Other Arrangements We adopted a new employee stock option plan to purchase shares of Class A common stock. The number of shares available to be awarded under the new stock option plan is 676,908. The stock option plan is administered by the Compensation Committee of the Board of Directors who designate the amount, timing and other terms and conditions applicable to the option awards. Under the stock option plan, an optionee has certain rights to put to us, and we have certain rights to call from the optionee, vested stock options issued to the optionee under the stock option plan upon termination of the optionee's employment prior to a public offering of Jostens' common stock. At the time of the transaction, options to purchase 502,846 of our Class A common stock were granted to five members of senior management. The options have an exercise price of $25.25 and, prior to a public offering, become exercisable annually in one-fifth increments upon Jostens meeting or exceeding target cumulative earnings before interest, taxes, depreciation and amortization ("EBITDA"). We adopted a new stock loan program to loan a total of $2.0 million to five members of senior management in individual amounts to refinance up to 100 percent of their outstanding loans existing at the time of the transaction. The proceeds of the loans were used to purchase shares of our common stock, to permit them to retain up to 100 percent of their pre-recapitalization share ownership. Loans made under the stock loan program bear interest at our cost of funds under our new revolving credit facility and are recourse loans. The loans are payable through May 10, 2005 with interest rates set annually. The loans are collaterlized by the shares of stock owned by such individuals, and each individual has entered into a pledge agreement and has executed a secured promissory note. 8 JOSTENS, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED) 3. Long-Term Debt Long-term debt consists of the following:
July 1 July 3 January 1 In thousands 2000 1999 2000 ----------------------------------------------------------------------------------------------------------------- Term loan A, 9.87 percent variable rate at July 1, 2000, semi-annual principal and interest payments through May 2006 $150,000 $ -- $ -- Term loan B, 10.37 percent variable rate at July 1, 2000, semi-annual principlal and interest payments through May 2008 345,000 -- -- Senior subordinated notes, 12.75 percent fixed rate, net of discounts of $19,703, semi-annual interest payments of $14.3 million, interest due and payable at maturity - May 2010 205,297 -- -- Industrial revenue bonds, 6.75 percent fixed rate, covering general offices -- 3,600 3,600 ---------------------------------------------------------------------------------------------------------------- 700,297 3,600 3,600 Less current portion 5,500 -- -- ---------------------------------------------------------------------------------------------------------------- $694,797 $3,600 $3,600 ================================================================================================================
Maturities of long-term debt including $19.7 million of discount as of July 1, 2000 are as follows: In thousands ---------------------------------------------------- 2001 $ 5,500 2002 23,250 2003 28,250 2004 33,250 2005 38,250 Thereafter 591,500 ---------------------------------------------------- $720,000 ==================================================== The fair value of long-term debt at July 1, 2000, July 3, 1999 and January 1, 2000 approximated the carrying value and is estimated based on quoted market prices for comparable instruments. In connection with the merger and recapitalization, we entered into a $150 million, six year revolving credit facility that expires on May 31, 2006. We may borrow funds and elect to pay interest under the "alternative base rate" or "eurodollar" interest rate provisions of the agreement. There were no amounts outstanding under this facility as of July 1, 2000. Our old credit facility, due to expire on December 31, 2000, was terminated as part of the transaction. The senior subordinated notes are not collateralized and are subordinate in right of payment to the term loans and borrowings under the new revolving credit facility (collectively the "senior secured credit facility"). The senior secured credit facility is with the same lenders and is collateralized by substantially all the assets of our domestic operations and all of our capital stock (limited to 65 percent in the case of foreign subsidiaries). The senior 9 JOSTENS, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED) secured credit facility requires that we meet certain financial covenants, ratios and tests, including a maximum leverage ratio and a minimum interest coverage ratio. In addition, we are required to pay certain fees in connection with the senior secured credit facility, including letter of credit fees, agency fees and commitment fees. Commitment fees will be payable quarterly, initially at a rate per annum of 0.5 percent on the average daily unused portion of the revolving credit facility. The variable rate on the senior secured credit facility is predominantly linked to the London Interbank Offered Rate ("LIBOR") as determined in three month intervals. To manage our exposure to changes in the LIBOR, we entered into an interest rate swap agreement on July 7, 2000. The interest rate provided by the swap agreement is fixed at 7.0 percent. The swap agreement becomes effective on August 15, 2000 with a notional amount of $135.0 million, decreasing to $70.0 million quarterly over the next three years. The notional amount is used to measure the interest to be paid or received and does not represent the amount of exposure to loss. The senior subordinated notes were issued with detachable warrants and an original issuance discount, resulting in total discounts of $19.7 million. The detachable warrants were valued at $10.7 million and are exercisable through 2011. The value of the warrants has been included as a component of stockholders' deficit. If all the warrants were to be exercised, the holders would acquire shares (at a price of $0.01 per share) of our Class E common stock representing approximately 4.0 percent of the total number of shares (outstanding immediately after the transaction) of our common equity on a fully diluted basis. The entire discount is being amortized to interest expense through 2011. 4. Redeemable Preferred Stock In connection with the recapitalization, we issued redeemable, payment-in- kind preferred shares which have an initial liquidation preference of $60.0 million and are entitled to receive dividends at 14.0 percent per annum, compounded quarterly and payable either in cash or in additional shares of the same series of preferred stock. The redeemable preferred shares are subject to mandatory redemption by Jostens in May 2011. In connection with the redeemable preferred shares, the company ascribed $14.0 million of the proceeds to detachable warrants to purchase shares of our Class E common stock, which is reflected as a component of stockholders' deficit. In addition, $3.0 million of issuance costs have been netted against the initial proceeds and are reflected as a reduction to the carrying amount of the preferred stock. The carrying value of the preferred stock will be accreted to full liquidation preference value plus unpaid preferred stock dividends over the eleven year period of the redeemable preferred stock through changes to the accumulated deficit account. 10 JOSTENS, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)- (CONTINUED) 5. Earnings (Loss) Per Common Share Basis earnings (loss) per share is computed by dividing net income (loss) available to common shareholders by the weighted average number of common shares outstanding. Diluted earnings (loss) per share is computed by dividing net income available to common shareholders by the average number of common shares outstanding, including the dilutive effects of options, restricted stock and contingently issuable shares. Basis and diluted earnings (loss) per share were calculated using the following:
Three months ended Six months ended --------------------------------- ------------------------------ July 1 July 3 July 1 July 3 In thousands, except per-share data 2000 1999 2000 1999 -------------------------------------------------------------------------------------------------- ------------------------------ Net income (loss) $ (4,290) $ 39,046 $ 7,029 $ 47,089 Dividends and accretion on redeemable preferred stock 1,243 -- 1,243 -- -------------------------------------------------------------------------------------------------- ------------------------------ Net income (loss) available to common shareholders $ (5,533) $ 39,046 $ 5,786 $ 47,089 ================================================================================================== ============================== Weighted average number of common shares outstanding - basic 18,880 34,128 25,043 34,488 Dilutive shares -- /1/ 80 273 /2/ 102 -------------------------------------------------------------------------------------------------- ------------------------------ Weighted average number of common shares outstanding - diluted 18,880 34,208 25,316 34,590 ================================================================================================== ============================== Earnings (loss) per share - basic $ (0.29) $ 1.14 $ 0.23 $ 1.37 Earnings (loss) per share - diluted $ (0.29) $ 1.14 $ 0.23 $ 1.36
/1/ Options and warrants to purchase 1,459 shares were not included as their effect would have been antidilutive. /2/ Options to purchase 503 shares were not included as their effect would have been antidilutive. 11 JOSTENS, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)-- (CONTINUED) 6. Special Charge During the fourth quarter of 1999, we recorded a special charge of $20.2 million. Cash outlays associated with the charge were $2.2 million in the first half of 2000. The components of the special charge and utilization in 1999 and the first half of 2000 are as follows:
Utilization ------------------------- Six months Initial ended Balance In thousands accrual 1999 July 1, 2000 July 1, 2000 ----------------------------------------------------------------------------------------------------------------------------- Employee termination benefits $ 4,910 $ -- $2,015 $2,895 Abandonment of internal use software under development 6,455 6,245 -- 210 Write-off of impaired goodwill related to retail class ring sales channel 4,560 4,560 -- -- Write-off of goodwill related to exiting the college alumni direct marketing business 3,086 3,086 -- -- Other costs related to exiting the college alumni direct marketing business 1,183 270 210 703 ----------------------------------------------------------------------------------------------------------------------------- $20,194 $14,161 $2,225 $3,808 =============================================================================================================================
We expect to complete restructuring activities and utilize the majority of remaining charge by the end of 2000. As a result of the special charge, the work force was reduced by about 100 personnel, primarily in corporate staff and executive functions and in our college alumni direct marketing business. 7. Inventories Inventories were comprised of the following:
July 1 July 3 January 1 In thousands 2000 1999 2000 ---------------------------------------------------------------------------------------------------------------------------- Raw material and supplies $18,765 $26,229 $17,886 Work-in-process 28,178 27,089 29,772 Finished goods 19,376 24,465 40,181 ---------------------------------------------------------------------------------------------------------------------------- Total inventories $66,319 $77,783 $87,839 ============================================================================================================================
12 JOSTENS, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)- (CONTINUED) 8. Comprehensive Income (loss) Comprehensive income (loss) and its components, net of tax, are as follows:
Three months ended Six months ended ------------------------------------- --------------------------------------- July 1 July 3 July 1 July 3 In thousands 2000 1999 2000 1999 ------------------------------------------------------------------------------------------ --------------------------------------- Net income (loss) $ (4,290) $39,046 $ 7,029 $47,089 Change in cumulative translation adjustment (662) 517 (662) 768 ------------------------------------------------------------------------------------------ --------------------------------------- Comprehensive income (loss) $ (4,952) $39,563 $ 6,367 $47,857 ========================================================================================== =======================================
9. Business Segments Financial information by reportable business segment is included in the following summary:
Three months ended Six months ended ------------------------------------------ ------------------------------------ July 1 July 3 July 1 July 3 In thousands 2000 1999 2000 1999 ------------------------------------------------------------------------------------------- ------------------------------------ Net Sales From External Customers School Products $ 273,220 $ 266,135 $ 424,662 $ 408,923 Recognition 24,497 31,938 45,568 53,536 Other 4,081 5,088 6,157 7,060 ------------------------------------------------------------------------------------------- ------------------------------------ Consolidated $ 301,798 $ 303,161 $ 476,387 $ 469,519 =========================================================================================== ==================================== Operating Income School Products $ 80,246 $ 76,484 $ 108,657 $ 100,942 Recognition 232 2,033 (76) 2,162 Other (53,138) /1/ (11,434) (60,491) /1/ (21,464) ------------------------------------------------------------------------------------------- ------------------------------------ Consolidated 27,340 67,083 48,090 81,640 Net interest expense 13,077 /2/ 1,459 14,804 /2/ 2,498 ------------------------------------------------------------------------------------------- ------------------------------------ Income before income taxes $ 14,263 $ 65,624 $ 33,286 $ 79,142 =========================================================================================== ====================================
/1/ The Other segment includes $45.7 million of transaction related costs as discussed in footnote 2 "Merger and Recapitalization." /2/ Net interest expense increased due to higher debt levels resulting from the transaction as discussed in footnote 2 "Merger and Recapitalization." Capitalized deferred financing costs associated with obtaining financing for the transaction have been included in the Other segment's identifiable assets. 13 JOSTENS, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED) 10 Income Taxes Income taxes for the three and six month periods ended July 1, 2000 were accrued at a rate of 41.5 percent compared with 40.5 percent for the comparable periods in 1999. The year-to-date effective rate for July 1, 2000 was 78.9 percent and reflects the impact of non-deductible transaction related costs of approximately $30.0 million. 11. Condensed Consolidating Information Jostens' wholly-owned foreign subsidiaries are not co-borrowers under the new $645.0 million senior secured credit facility and do not guarantee $225.0 million aggregate principal amount of senior subordinated notes. As such, the information which follows presents the condensed consolidating financial position as of July 1, 2000, July 3, 1999 and January 1, 2000; the condensed consolidating results of operations for the three and six month periods ended July 1, 2000 and July 3, 1999; and the condensed consolidating cash flows for the six month periods ended July 1, 2000 and July 3, 1999 of (a) the parent company only ("Parent"), (b) the combined Non-Guarantors ("Non-Guarantors"), (c) eliminating entries and (d) Jostens, Inc. and Subsidiaries on a consolidated basis. Effective July 29, 2000, Jostens wholly-owned domestic subsidiary merged with and into Jostens and as a result, amounts and balances of this wholly-owned domestic subsidiary have been consolidated with the parent company. 14 JOSTENS, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)-- (CONTINUED) JOSTENS, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATING BALANCE SHEETS AS OF JULY 1, 2000
In thousands Parent Non-guarantors Eliminations Consolidated ---------------------------------------------------------------------------------------------------------------------------- ASSETS ------ Current assets Cash and cash equivalents $ 19,200 $ 16,675 $ -- $ 35,875 Accounts receivable, net of allowance 120,597 4,908 -- 125,505 Inventories 62,684 3,635 -- 66,319 Deferred income taxes 17,400 -- -- 17,400 Salespersons overdrafts, net of allowance 6,822 4,286 -- 11,108 Prepaid expenses and other current assets 5,230 362 -- 5,592 ---------------------------------------------------------------------------------------------------------------------------- Total current assets 231,933 29,866 -- 261,799 Other Assets Intercompany accounts 4,712 (4,712) -- -- Intangibles, net 13,626 4,683 -- 18,309 Deferred financing costs, net 35,606 -- -- 35,606 Other 43,438 218 (17,726) 25,930 ---------------------------------------------------------------------------------------------------------------------------- Total other assets 97,382 189 (17,726) 79,845 Property and equipment, net 75,571 3,247 -- 78,818 ---------------------------------------------------------------------------------------------------------------------------- $ 404,886 $ 33,302 $ (17,726) 420,462 ============================================================================================================================ LIABILITIES AND SHAREHOLDERS' INVESTMENT (DEFICIT) -------------------------------------------------- Current liabilities Accounts payable $ 17,688 $ 1,291 $ -- $ 18,979 Accrued employee compensation and related taxes 24,694 980 -- 25,674 Commissions payable 51,762 1,648 -- 53,410 Customer deposits 52,213 3,064 -- 55,277 Income taxes payable 34,688 (71) -- 34,617 Current portion of long-term debt 5,500 -- -- 5,500 Other accrued liabilities 35,856 315 -- 36,171 ---------------------------------------------------------------------------------------------------------------------------- Total current liabilities 222,401 7,227 -- 229,628 Long-term debt, net of current maturities 694,797 -- -- 694,797 Other noncurrent liabilities 8,215 -- -- 8,215 ---------------------------------------------------------------------------------------------------------------------------- Total liabilities 925,413 7,227 -- 932,640 Commitments and contingencies -- -- -- -- Redeemable Preferred Stock 44,243 -- -- 44,243 Shareholders' investment (deficit) (564,770) 26,075 (17,726) (556,421) ---------------------------------------------------------------------------------------------------------------------------- $ 404,886 $ 33,302 $ (17,726) $ 420,462 ============================================================================================================================
15 JOSTENS, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)-- (CONTINUED) JOSTENS, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATING BALANCE SHEETS AS OF JULY 3, 1999
In thousands Parent Non-guarantors Eliminations Consolidated ---------------------------------------------------------------------------------------------------------------------------- ASSETS ------ Current assets Cash and cash equivalents $ 614 $ 7,791 $ -- $ 8,405 Accounts receivable, net of allowance 124,011 5,368 -- 129,379 Inventories 73,408 4,375 -- 77,783 Deferred income taxes 14,682 -- 14,682 Salespersons overdrafts, net of allowance 6,993 4,941 -- 11,934 Prepaid expenses and other current assets 4,142 240 -- 4,382 ---------------------------------------------------------------------------------------------------------------------------- Total current assets 223,850 22,715 -- 246,565 Other Assets Intercompany accounts 3,376 (3,376) -- -- Intangibles, net 22,483 5,155 -- 27,638 Other 31,258 62 (17,157) 14,163 ---------------------------------------------------------------------------------------------------------------------------- Total other assets 57,117 1,841 (17,157) 41,801 Property and equipment, net 85,306 3,765 -- 89,071 ---------------------------------------------------------------------------------------------------------------------------- $ 366,273 $ 28,321 $ (17,157) $ 377,437 ============================================================================================================================ LIABILITIES AND SHAREHOLDERS' INVESTMENT (DEFICIT) -------------------------------------------------- Current liabilities Short-term borrowings $ 93,690 $ -- $ -- $ 93,690 Accounts payable 15,080 922 -- 16,002 Accrued employee compensation and related taxes 21,846 1,314 -- 23,160 Commissions payable 50,385 1,256 -- 51,641 Customer deposits 50,657 2,919 -- 53,576 Income taxes payable 31,409 (456) -- 30,953 Other accrued liabilities 20,720 372 -- 21,092 ---------------------------------------------------------------------------------------------------------------------------- Total current liabilities 283,787 6,327 -- 290,114 Long-term debt, net of current maturities 3,600 3,600 Other noncurrent liabilities 15,698 -- -- 15,698 ---------------------------------------------------------------------------------------------------------------------------- Total liabilities 303,085 6,327 -- 309,412 Commitments and contingencies -- -- -- Shareholders' investment (deficit) 63,188 21,994 (17,157) 68,025 ---------------------------------------------------------------------------------------------------------------------------- $ 366,273 $ 28,321 $ (17,157) $ 377,437 ============================================================================================================================
16 JOSTENS, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)-- (CONTINUED) JOSTENS, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATING BALANCE SHEETS AS OF JANUARY 1, 2000
In thousands Parent Non-guarantors Eliminations Consolidated ======================================================================================================================= ASSETS ------ Current assets Cash and cash equivalents $ 26,604 $ 11,913 $ -- $ 38,517 Accounts receivable, net of allowance 102,512 5,126 -- 107,638 Inventories 84,574 3,265 -- 87,839 Deferred income taxes 17,400 -- -- 17,400 Salespersons overdrafts, net of allowance 19,514 6,680 -- 26,194 Prepaid expenses and other current assets 8,457 264 -- 8,721 ----------------------------------------------------------------------------------------------------------------------- Total current assets 259,061 27,248 -- 286,309 Other Assets Intercompany accounts 1,096 (1,096) -- -- Intangibles, net 13,940 4,955 -- 18,895 Other 35,398 200 (17,726) 17,872 ----------------------------------------------------------------------------------------------------------------------- Total other assets 50,434 4,059 (17,726) 36,767 Property and equipment, net 80,770 3,870 -- 84,640 ----------------------------------------------------------------------------------------------------------------------- $ 390,265 $ 35,177 $ (17,726) $ 407,716 ======================================================================================================================= LIABILITIES AND SHAREHOLDERS' INVESTMENT (DEFICIT) -------------------------------------------------- Current liabilities Short-term borrowings $ 117,608 $ -- $ -- $ 117,608 Accounts payable 21,631 2,010 -- 23,641 Accrued employee compensation and related taxes 28,353 1,125 -- 29,478 Commissions payable 23,371 2,763 -- 26,134 Customer deposits 109,951 3,007 -- 112,958 Income taxes payable 16,974 249 -- 17,223 Other accrued liabilities 29,254 846 -- 30,100 ----------------------------------------------------------------------------------------------------------------------- Total current liabilities 347,142 10,000 -- 357,142 Long-term debt, net of current maturities 3,600 -- -- 3,600 Other noncurrent liabilities 10,464 -- -- 10,464 ----------------------------------------------------------------------------------------------------------------------- Total liabilities 361,206 10,000 -- 371,206 Commitments and contingencies -- -- -- -- Redeemable Preferred Stock -- -- -- -- Shareholders' investment (deficit) 29,059 25,177 (17,726) 36,510 ----------------------------------------------------------------------------------------------------------------------- $ 390,265 $ 35,177 $ (17,726) $ 407,716 =======================================================================================================================
17 JOSTENS, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)- (CONTINUED) JOSTENS, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS FOR THE THREE MONTHS ENDED JULY 1, 2000
In thousands Parent Non-guarantors Consolidated ================================================================================================ Net sales $285,892 $15,906 $301,798 Cost of products sold 127,189 8,012 135,201 ------------------------------------------------------------------------------------------------ Gross profit 158,703 7,894 166,597 Selling and administrative expenses 87,435 6,111 93,546 Transaction costs 45,711 -- 45,711 ------------------------------------------------------------------------------------------------ Operating income 25,557 1,783 27,340 Interest income (142) (135) (277) Interest expense 13,338 16 13,354 ------------------------------------------------------------------------------------------------ Income before income taxes 12,361 1,902 14,263 Income taxes 17,753 800 18,553 ------------------------------------------------------------------------------------------------ Net income (loss) $(5,392) $ 1,102 $ (4,290) ================================================================================================
JOSTENS, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS FOR THE SIX MONTHS ENDED JULY 1, 2000
In thousands Parent Non-guarantors Consolidated ==================================================================================================== Net sales $452,724 $23,663 $476,387 Cost of products sold 191,133 10,654 201,787 ---------------------------------------------------------------------------------------------------- Gross profit 261,591 13,009 274,600 Selling and administrative expenses 170,451 10,348 180,799 Transaction costs 45,711 -- 45,711 ---------------------------------------------------------------------------------------------------- Operating income 45,429 2,661 48,090 Interest income (247) (241) (488) Interest expense 15,251 41 15,292 ---------------------------------------------------------------------------------------------------- Income before income taxes 30,425 2,861 33,286 Income taxes 24,957 1,300 26,257 ---------------------------------------------------------------------------------------------------- Net income $ 5,468 $ 1,561 $ 7,029 ====================================================================================================
18 JOSTENS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)-- (CONTINUED) JOSTENS, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS FOR THE THREE MONTHS ENDED JULY 3, 1999
In thousands Parent Non-guarantors Consolidated ----------------------------------------------------------------------------------- Net sales $289,864 $13,297 $303,161 Cost of products sold 134,566 6,178 140,744 ----------------------------------------------------------------------------------- Gross profit 155,298 7,119 162,417 Selling and administrative expenses 89,894 5,440 95,334 ----------------------------------------------------------------------------------- Operating income 65,404 1,679 67,083 Interest income (65) (51) (116) Interest expense 1,560 15 1,575 ----------------------------------------------------------------------------------- Income before income taxes 63,909 1,715 65,624 Income taxes 25,878 700 26,578 ----------------------------------------------------------------------------------- Net income (loss) $ 38,031 $ 1,015 $ 39,046 ===================================================================================
JOSTENS, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS FOR THE SIX MONTHS ENDED JULY 3, 1999
In thousands Parent Non-guarantors Consolidated -------------------------------------------------------------------------------------- Net sales $449,831 $19,688 $469,519 Cost of products sold 200,747 8,496 209,243 -------------------------------------------------------------------------------------- Gross profit 249,084 11,192 260,276 Selling and administrative expenses 169,578 9,058 178,636 -------------------------------------------------------------------------------------- Operating income 79,506 2,134 81,640 Interest income (104) (97) (201) Interest expense 2,659 40 2,699 -------------------------------------------------------------------------------------- Income before income taxes 76,951 2,191 79,142 Income taxes 31,178 875 32,053 -------------------------------------------------------------------------------------- Net income $ 45,773 $ 1,316 $ 47,089 ======================================================================================
19 JOSTENS, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)-- (CONTINUED) JOSTENS, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS FOR THE SIX MONTHS ENDED JULY 1, 2000
In thousands Parent Non-guarantors Consolidated ------------------------------------------------------------------------------------------------------------------------------ Operating activities Net income $ 5,468 $ 1,561 $ 7,029 Depreciation 12,061 623 12,684 Amortization of debt discount and deferred financing costs 1,011 -- 1,011 Amortization of goodwill 314 222 536 Changes in operating assets and liabilities Accounts receivable (18,085) 218 (17,867) Inventories 21,890 (370) 21,520 Salespersons overdrafts 12,692 2,394 15,086 Prepaid expenses and other current assets 3,227 (98) 3,129 Intercompany accounts (3,616) 3,616 -- Accounts payable (9,575) (719) (10,294) Accrued employee compensation and related taxes (3,659) (145) (3,804) Commissions payable 28,391 (1,115) 27,276 Customer deposits 57,738) 57 (57,681) Income taxes payable 17,714 (320) 17,394 Other (1,819) (1,058) (2,877) ------------------------------------------------------------------------------------------------------------------------------ Net cash provided by operating activities 8,276 4,866 13,142 ------------------------------------------------------------------------------------------------------------------------------ Investing activities Purchases of property and equipment (7,150) -- (7,150) Equity investments (1,103) -- (1,103) Other 499 (104) 395 ------------------------------------------------------------------------------------------------------------------------------ Net cash used for investing activities (7,754) (104) (7,858) ------------------------------------------------------------------------------------------------------------------------------ Financing activities Net short-term borrowings (repayments) (111,976) -- (111,976) Repurchases of common stock (823,630) -- (823,630) Principal payments on long-term debt (3,600) -- (3,600) Proceeds from issuance of long-term debt 700,139 -- 700,139 Proceeds from issuance of common shares 208,693 -- 208,693 Net proceeds from the issuance of preferred stock 43,000 -- 43,000 Proceeds from the issuance of warrants to purchase common shares 24,733 -- 24,733 Dividends paid to common shareholders (7,331) -- (7,331) Proceeds from exercise of stock options 555 -- 555 Issuance of officer note receivable (2,050) -- (2,050) Debt acquisition costs (36,459) -- (36,459) ------------------------------------------------------------------------------------------------------------------------------ Net cash used for financing activities (7,926) -- (7,926) ------------------------------------------------------------------------------------------------------------------------------ Change in cash and cash equivalents (7,404) 4,762 (2,642) Cash and cash equivalents, beginning of period 26,604 11,913 38,517 ------------------------------------------------------------------------------------------------------------------------------ Cash and cash equivalents, end of period $ 19,200 $ 16,675 $ 35,875 ============================================================================================================================== Supplemental information Income taxes paid $ 7,135 $ 1,628 $ 8,763 Interest paid $ 6,726 $ 41 $ 6,767
20 JOSTENS, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)-- (CONTINUED) JOSTENS, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS FOR THE SIX MONTHS ENDED JULY 3, 1999
In thousands Parent Non-guarantors Consolidated -------------------------------------------------------------------------------------------------------------- Operating activities Net income $45,773 $1,316 $47,089 Depreciation 11,072 591 11,663 Amortization of debt discount and deferred financing costs 6 -- 6 Amortization of goodwill 928 197 1,125 Changes in operating assets and liabilities Accounts receivable (23,232) 200 (23,032) Inventories 13,820 (1,109) 12,711 Salespersons overdrafts 8,693 62 8,755 Prepaid expenses and other current assets 1,469 (114) 1,355 Intercompany accounts (4,393) 4,393 -- Accounts payable (1,373) (1,124) (2,497) Accrued employee compensation and related taxes (4,373) (27) (4,400) Commissions payable 29,133 377 29,510 Customer deposits (38,977) 461 (38,516) Income taxes payable 27,067 (827) 26,240 Other (2,793) 78 (2,715) -------------------------------------------------------------------------------------------------------------- Net cash provided by operating activities 62,820 4,474 67,294 -------------------------------------------------------------------------------------------------------------- Investing activities Purchases of property and equipment (12,963) (376) (13,339) Equity investments (5,000) -- (5,000) Other 721 (67) 654 -------------------------------------------------------------------------------------------------------------- Net cash used for investing activities (17,242) (443) (17,685) -------------------------------------------------------------------------------------------------------------- Financing activities Net short-term borrowings (repayments) (5,415) -- (5,415) Repurchases of common stock (25,007) -- (25,007) Dividends paid to common shareholders (15,231) -- (15,231) Proceeds from exercise of stock options 1,854 -- 1,854 -------------------------------------------------------------------------------------------------------------- Net cash used for financing activities (43,799) -- (43,799) -------------------------------------------------------------------------------------------------------------- Change in cash and cash equivalents 1,779 4,031 5,810 Cash and cash equivalents, beginning of period (1,165) 3,760 2,595 -------------------------------------------------------------------------------------------------------------- Cash and cash equivalents, end of period $614 $7,791 $8,405 ============================================================================================================== Supplemental information Income taxes paid $ 3,273 $ 1,716 $ 4,989 Interest paid $ 2,936 $ 40 $ 2,976
21 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Our disclosure and analysis in this report may contain some "forward-looking statements." Forward-looking statements give our current expectations or forecasts of future events. Forward-looking statements generally can be identified by the use of forward-looking terminology such as "may," "will," "expected," "intend," "estimate," "anticipate," "believe," "project," or "continue," or the negative thereof or similar words. From time to time, we also may provide oral or written forward-looking statements in other materials we release to the public. Any or all of our forward-looking statements in this report and in any public statements we make may turn out to be wrong. They can be affected by inaccurate assumptions we might make or by known or unknown risks or uncertainties. Consequently, no forward-looking statements can be guaranteed. Actual results may vary materially. Investors are cautioned not to place undue reliance on any forward-looking statements. Investors should also understand that it is not possible to predict or identify all such factors and should not consider the following list to be a complete statement of all potential risks and uncertainties. Any change in the following factors may impact the achievement of results: . our ability to satisfy our debt obligations; . our ability to achieve the intended benefits of our corporate restructuring announced in the fourth quarter of 1999; . our relationship with our independent and employee sales representatives; . litigation cases if decided against us, may adversely affect our financial results; . environmental regulations that could impose substantial costs upon us and may adversely affect our financial results; . the fluctuating prices of raw materials, primarily gold; . the seasonality of our School Products segment sales and operating income; . our dependence on a key supplier for our synthetic and semiprecious stones; and . fashion and demographic trends. The foregoing factors are not exhaustive, and new factors may emerge or changes to the foregoing factors may occur that would impact our business. 22 RESULTS OF OPERATIONS The following table sets forth selected information from our Condensed Consolidated Statements of Operations.
Three months ended Six months ended ---------------------------------------- --------------------------------------- July 1 July 3 July 1 July 3 Dollars in thousands 2000 1999 % Change 2000 1999 % Change ------------------------------------------------------------------------------- ---------------------------------------- Net sales $301,798 $303,161 (0.4%) $476,387 $469,519 1.5% % of net sales 100.0% 100.0% 100.0% 100.0% Cost of products sold 135,201 140,744 (3.9%) 201,787 209,243 (3.6%) % of net sales 44.8% 46.4% 42.4% 44.6% ------------------------------------------------------------------------------- ---------------------------------------- Gross profit 166,597 162,417 2.6% 274,600 260,276 5.5% % of net sales 55.2% 53.6% 57.6% 55.4% Selling and administrative expenses 93,546 95,334 (1.9%) 180,799 178,636 1.2% % of net sales 31.0% 31.4% 38.0% 38.0% Transaction costs 45,711 -- 0.0% 45,711 -- 0.0% % of net sales 15.1% 0.0% 9.6% 0.0% ------------------------------------------------------------------------------- ---------------------------------------- Operating income 27,340 67,083 (59.2%) 48,090 81,640 (41.1%) % of net sales 9.1% 22.1% 10.1% 17.4% Interest income (277) (116) 138.8% (488) (201) 142.8% % of net sales -0.1% 0.0% -0.1% 0.0% Interest expense 13,354 1,575 747.9% 15,292 2,699 466.6% % of net sales 4.4% 0.5% 3.2% 0.6% ------------------------------------------------------------------------------- ---------------------------------------- Income before income taxes 14,263 65,624 (78.3%) 33,286 79,142 (57.9%) % of net sales 4.7% 21.6% 7.0% 16.9% Income taxes 18,553 26,578 (30.2%) 26,257 32,053 (18.1%) % of net sales 6.1% 8.8% 5.5% 6.8% ------------------------------------------------------------------------------- ---------------------------------------- Net income (loss) $(4,290) $39,046 (111.0%) $7,029 $47,089 (85.1%) =============================================================================== ======================================== % of net sales -1.49% 12.9% 1.5% 10.0%
Percentages in this table may reflect rounding adjustments. Net sales The change in net sales for the three and six month periods was due to price/mix increases averaging approximately 3.2 percent and 2.7 percent, respectively, and volume decreases of approximately 3.6 percent and 1.2 percent, respectively. 23 Second quarter and year-to-date net sales by segment and the changes from last year were as follows:
Three months ended Six months ended ------------------------------------------- -------------------------------------- July 1 July 3 July 1 July 3 In thousands 2000 1999 % change 2000 1999 % change ---------------------------------------------------------------------------------- -------------------------------------- School Products $273,220 $266,135 2.7% $424,662 $408,923 3.8% Recognition 24,497 31,938 (23.3%) 45,568 53,536 (14.9%) Other 4,081 5,088 (19.8%) 6,157 7,060 (12.8%) ---------------------------------------------------------------------------------- -------------------------------------- Consolidated $301,798 $303,161 (0.4%) $476,387 $469,519 1.5% ================================================================================== ======================================
School Products The increase in School Products sales for the three and six month periods was primarily due to: . fewer yearbook rebates and returns resulting from improvements with Jostens Direct Solutions ("JDS") (a direct payment program for parents of high school students); . increased JDS processing fees; and . an increase in commercial printing volume. In addition, the increase for the six month period reflects: . higher sales of add-on features in our Printing and Publishing product line; . sales of graduation announcements to more schools; and . expanded sales of graduation accessories. These increases were offset by: . accelerated jewelry shipments into the fourth quarter of 1999 due to improved manufacturing efficiencies compared with the prior year. Recognition The decrease in Recognition sales for the three and six month periods was primarily due to a decline in the headcount of the sales force as well as lost customers as a result of problems encountered with a system implementation that took place in 1999. Other Other segment sales decreased for the three and six month periods as a result of exiting the college alumni direct marketing business in the fourth quarter of 1999. Sales for this business were $1.4 million and $1.8 million for the three and six month periods ended July 3, 1999, respectively. Gross Profit Gross margin for the three and six months ended July 1, 2000 was 55.2 percent and 57.6 percent, compared with 53.6 percent and 55.4 percent, respectively, for the comparable periods in 1999. The increase in gross margin for the three and six month period was primarily due to: . favorable product mix and price increases; and . manufacturing efficiencies in our School Products segment in 2000. 24 In addition, the increase for the six month period reflects: . a $1.5 million non-recurring charge in the first quarter of 1999 to close a facility in Mexico and realign Jewelry operations in the United States. These increases were partially offset by: . sales decreases in Recognition as a result of problems encountered with a system implementation that took place in 1999. Selling and Administrative Expenses Selling and administrative expenses for the three and six months ended July 1, 2000 were $93.5 million and $180.8 million, compared with $95.3 million and $178.6 million, respectively, for the comparable periods in 1999. The changes reflect the following offsetting increases and decreases: . lower amortization expense in 2000 related to our write-off of goodwill as part of the 1999 special charge; . lower costs as a result of exiting the college alumni direct marketing business in the fourth quarter of 1999; . lower legal fees in 2000 compared with 1999 primarily due to the litigation with Taylor Publishing; . reduced spending on temporary labor and lower costs in our Recognition segment in 2000 compared with 1999 due to the system implementation; . higher selling expense in 2000 related to programs and initiatives intended to increase our sales; . higher bad debt expense in 2000; and . higher information system expense, primarily associated with depreciation. In addition, the six month period reflects: . higher commission expense in 2000 due to increased sales. Operating Income Second quarter and year-to-date operating income (loss) by segment and the changes from last year were as follows:
Three months ended Six months ended ---------------------------------------- ----------------------------------------- July 1 July 3 July 1 July 3 In thousands 2000 1999 % change 2000 1999 % change -------------------------------------------------------- ----------------------------------------- School Products $ 80,246 $ 76,484 4.9% $ 108,657 $ 100,942 7.6% Recognition 232 2,033 (88.6%) (76) 2,162 (103.5%) Other (53,138) (11,434) 364.7% (60,491) (21,464) 181.8% -------------------------------------------------------- ----------------------------------------- Consolidated $ 27,340 $ 67,083 (59.2%) $ 48,090 $ 81,640 (41.1%) ======================================================== =========================================
School Products The increase in School Products operating income for the three and six month periods was primarily due to: . favorable product mix and price increases; . fewer yearbook rebates and returns resulting from improvements with JDS; . increased JDS processing fees; . an increase in commercial printing volume; 25 . manufacturing efficiencies in 2000; and . lower legal fees in 2000 compared with 1999. In addition the six month period increase reflects: . higher sales of add-on features in our Printing and Publishing product line; . sales of graduation announcements to more schools; . expanded sales of graduation accessories; and . a $1.5 million charge in the first quarter of 1999 to close a facility in Mexico and realign Jewelry operations in the United States. These increases were partially offset by: . the acceleration of jewelry sales into the fourth quarter of 1999 due to manufacturing efficiencies compared with the prior year; . higher selling and marketing expense in 2000 related to programs and initiatives intended to increase sales; . higher bad debt expense in 2000; and . higher information system depreciation expense as a result of our 1999 system implementations. In addition, the six month period increase was offset by: . higher commission expense in 2000 due to increased sales. Recognition The decrease in Recognition operating income was primarily due to: . a sales decrease due to a decline in the head count of the sales force and lost customers as a result of problems encountered with a system implementation that took place in 1999. . higher information system depreciation expense as a result of our 1999 system implementation. These decreases were partially offset by: . reduced spending on temporary labor in 2000 compared with 1999 when we prepared for a system implementation that took place in 1999; and . lower costs in 2000 compared to 1999 related to problems encountered during the system implementation. Other The increase in Other operating loss was primarily due to costs of $45.7 million associated with the transaction on May 10, 2000. This was offset by: . lower selling and administrative expenses as a result of exiting the college alumni direct marketing business in the fourth quarter of 1999; . lower spending in 2000 compared with 1999 related to our new product and channel development group; and . lower information system expense related to the year 2000 and Oracle system. 26 Transaction Costs We incurred costs consisting of professional fees and transaction expenses associated with the merger and recapitalization. Transaction costs of $45.7 million were expensed in the second quarter of 2000. The remaining costs of $36.5 million were deferred and are being amortized over the applicable lives of the debt for up to a maximum of ten years. Net Interest Expense Net interest expense increased $11.6 million and $12.3 million in the three and six month periods ended July 1, 2000, respectively, over the prior year periods. The increases are primarily due to additional interest expense resulting from the new senior secured credit facility and the issuance of the senior subordinated notes in connection with the transaction. Income Taxes Income taxes for the three and six month periods ended July 1, 2000 were accrued at a rate of 41.5 percent compared with 40.5 percent for the comparable periods in 1999. The year-to-date effective rate for July 1, 2000 was 78.9 percent and reflects non-deductible transaction related costs of $30.0 million. LIQUIDITY AND CAPITAL RESOURCES Our primary cash needs are for debt obligations, capital expenditures, working capital, redeemable securities and general corporate purposes. Cash generated from operating activities and proceeds in connection with the transaction including a new senior secured credit facility, issuance of the senior subordinated notes, issuance of redeemable preferred stock, and issuance of common stock were our main sources of liquidity for the six month period ended July 1, 2000. These funds covered our cash payments made in connection with the transaction, including $25.25 for each share of common stock tendered, debt acquisition costs and the pay-off of borrowings under the credit facilities existing prior to the transaction. In addition, we made investments in property and equipment. Operating Activities Operating activities generated cash of $13.1 million in the first six months of 2000, compared with $67.3 million for the same period in the prior year. The decrease of $54.2 million was primarily due to lower net income related to cash payments associated with the transaction. In addition, during the six months ended July 1, 2000, cash was unfavorably impacted by the timing of customer deposits and accounts payable and favorably impacted by reduced inventories. Investing Activities Capital expenditures for the first six months of 2000 were $7.2 million, compared with $13.3 million for the same period in 1999. The decrease of $6.1 million relates primarily to higher capital expenditures in 1999 on information systems. In the first half of 1999 we invested $5 million to take an ownership position in Family Education Network, a privately held company, which creates web sites for schools to link school districts with students and their families. Subsequent to July 1, 2000, we sold our entire ownership position in this investment for $5.0 million. Financing Activities Net cash used for financing activities in the first six months of 2000 was $7.9 million, compared with $43.8 million for the same period in 1999. The decrease of the net cash used for financing activities of $35.9 million was primarily due proceeds from the new senior secured credit facility, issuance of the senior subordinated notes, issuance of redeemable preferred stock and issuance of common stock in connection with the transaction. In addition, we had no common stock repurchases in 2000 and no dividend was paid in the second quarter of 2000. These decreases were offset by payment of $25.25 for each share of common stock tendered in the transaction and the pay-off of credit facilities existing prior to the transaction. 27 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK As a result of the transaction, our earnings could be highly affected by changes in the London Interbank Offered Rate ("LIBOR") due to our new senior secured credit facility which bears a variable rate predominantly linked to the LIBOR as determined in three month intervals. To reduce our exposure to these interest rate changes, we entered into an interest rate swap agreement on July 7, 2000. The interest rate provided by the swap agreement is fixed at 7.0 percent. The swap agreement becomes effective on August 15, 2000 with a notional amount of $135 million, decreasing to $70.0 million quarterly over the next three years. The notional amount is used to measure the interest to be paid or received and does not represent the amount of exposure. For 1999 our earnings were affected by changes in short-term interest rates as a result of issuing commercial paper. For 2000, our earnings are affected by changes in the LIBOR as a result of our new senior secured credit facility. If short-term interest rates or the LIBOR averaged 10 percent more or less in 1999 and 2000, our interest expense would have changed by approximately $1.3 million for the six month period in 2000 and $0.7 million for the year in 1999. There have been no other material changes in our market risk during the six months ended July 1, 2000. For additional information, refer to Item 7A of our 1999 Form 10-K. 28 PART II OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS On May 9, 2000, we agreed in principal to settle three purported class action lawsuits that were filed in Minnesota district court for the County of Hennepin against Jostens and its directors alleging breaches of fiduciary duty by Jostens' directors in connection with the merger. The settlement is subject to court approval. On July 10, 2000, the Fifth Circuit affirmed the trial court's entry of judgment as a matter of law on Jostens behalf, in connection with an antitrust action brought against Jostens by Taylor Publishing Company. On July 24, 2000, Taylor filed a petition with the Fifth Circuit to rehear the case in front of the panel that previously heard the case. The Fifth Circuit denied this petition on August 10, 2000. Taylor has until October 23, 2000 to petition the U.S. Supreme Court to review the case. For additional information, refer to Item 3 of our 1999 Form 10-K. We are occasionally a party to litigation arising in the normal course of business. We regularly analyze current information and, as necessary, provide accruals for probable liabilities on the eventual disposition of these matters. We believe the effect on our consolidated results of operations and financial position, if any, for the disposition of all currently pending matters will not be material. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS Incorporated by reference to Item 4 contained in the Report on Form 10- Q for the quarterly period ended April 1, 2000. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits 12 Computation of Ratio of Earnings to Fixed Charges 27 Financial Data Schedule (b) Reports on Form 8-K A Form 8-K dated and filed on May 25, 2000, announcing and describing the merger and recapitalization and related financings. A Form 8-K dated and filed on July 19, 2000, announcing the 5th U.S. Court of Appeals decision to deny an appeal by Taylor Publishing Company and affirm the Texas Federal trial court's judgement to overturn a jury verdict against Jostens. A Form 8-K dated July 26, 2000 and filed on August 2, 2000 announcing the resignation of Ernst and Young LLP as our independent accountants. A Form 8-K dated and filed on August 10, 2000 announcing the engagement of PricewaterhouseCoopers LLP as our new independent accountants. 29 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, on August 15, 2000. JOSTENS, INC. Registrant By /s/ Carl H. Blowers --------------------------------------- Carl H. Blowers Senior Vice President By /s/ William N. Priesmeyer --------------------------------------- William N. Priesmeyer Senior Vice President and Chief Financial Officer (Chief Accounting Officer) 30