-----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, SKIkHpnjjk2sfgB4or/52yi8FFVLfp1jU73ZL0AcpJyaRD+yThkBSc2uCfLVP4Hk 16kUZmz/G4yc8Jj8Edun8w== /in/edgar/work/0001045969-00-000876/0001045969-00-000876.txt : 20001115 0001045969-00-000876.hdr.sgml : 20001115 ACCESSION NUMBER: 0001045969-00-000876 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 20000930 FILED AS OF DATE: 20001114 FILER: COMPANY DATA: COMPANY CONFORMED NAME: JOSTENS INC CENTRAL INDEX KEY: 0000054050 STANDARD INDUSTRIAL CLASSIFICATION: [3911 ] IRS NUMBER: 410343440 STATE OF INCORPORATION: MN FISCAL YEAR END: 0102 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-05064 FILM NUMBER: 765047 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-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 September 30, 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 (I.R.S. Employer Identification number) incorporation or organization) 5501 Norman Center Drive, Minneapolis, Minnesota 55437 - ------------------------------------------------ ----------------------------- (Address of principal executive offices) (Zip code) Registrant's telephone number, including area code: (952) 830-3300 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] On November 13, 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 Nine months ended September 30, 2000 and October 2, 1999 3 Condensed Consolidated Balance Sheets as of September 30, 2000, October 2, 1999 and January 1, 2000 4 Condensed Consolidated Statements of Cash Flows for the Nine months ended September 30, 2000 and October 2, 1999 5 Condensed Consolidated Statement of Changes in Shareholders' Equity (Deficit) for the Nine months ended September 30, 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 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 Nine months ended -------------------------- ------------------------- September 30, October 2, September 30, October 2, In thousands, except per-share data 2000 1999 2000 1999 - ------------------------------------------------------------------------------------- ---------------------- Net sales $ 118,197 $ 122,643 $ 594,584 $ 592,162 Cost of products sold 63,258 69,659 265,044 278,902 - ------------------------------------------------------------------------------------- ---------------------- Gross profit 54,939 52,984 329,540 313,260 Selling and administrative expenses 68,315 62,626 249,115 241,262 Transaction costs 139 -- 45,850 -- - ------------------------------------------------------------------------------------- ---------------------- Operating income (loss) (13,515) (9,642) 34,575 71,998 Interest income (353) (55) (842) (256) Interest expense 22,374 2,035 37,666 4,734 - ------------------------------------------------------------------------------------- ---------------------- Income (loss) before income taxes (35,536) (11,622) (2,249) 67,520 Provision for income taxes (14,781) (4,708) 11,476 27,345 - ------------------------------------------------------------------------------------- ---------------------- Net income (loss) $ (20,755) $ (6,914) $ (13,725) $ 40,175 Dividends and accretion on redeemable preferred shares 2,264 -- 3,507 -- - ------------------------------------------------------------------------------------- ---------------------- Net income (loss) available to common shareholders $ (23,019) $ (6,914) $ (17,232) $ 40,175 ===================================================================================== ====================== Net income (loss) per share available to common shareholders Basic $ (2.56) $ (0.21) $ (0.84) $ 1.17 Diluted $ (2.56) $ (0.21) $ (0.84) $ 1.17 Weighted average common shares outstanding Basic 8,993 33,711 20,553 34,228 Diluted 8,993 33,711 20,553 34,344
The accompanying notes are an integral part of the unaudited condensed consolidated financial statements. 3 JOSTENS, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited) ------------------------- September 30, October 2, January 1, In thousands, except per-share data 2000 1999 2000 - --------------------------------------------------------------------------------------------------------- ASSETS ------ Current assets Cash and cash equivalents $ 15,435 $ 11,603 $ 38,517 Accounts receivable, net of allowance for doubtful accounts of $5,283, $6,234 and $5,775, respectively 94,665 110,762 107,638 Inventories 65,873 75,678 87,839 Deferred income taxes 17,400 14,682 17,400 Salespersons overdrafts, net of allowance of $5,599, $7,157 and $6,332, respectively 29,602 29,359 26,194 Prepaid expenses and other current assets 5,772 6,882 8,721 - --------------------------------------------------------------------------------------------------------- Total current assets 228,747 248,966 286,309 Other Assets Intangibles, net 18,040 27,076 18,895 Deferred financing costs, net 34,326 -- -- Other 21,377 15,503 17,872 - --------------------------------------------------------------------------------------------------------- Total other assets 73,743 42,579 36,767 Property and equipment 283,631 273,454 271,790 Less accumulated depreciation (205,829) (184,525) (187,150) - --------------------------------------------------------------------------------------------------------- Property and equipment, net 77,802 88,929 84,640 - --------------------------------------------------------------------------------------------------------- $ 380,292 $ 380,474 $ 407,716 ========================================================================================================= LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT) ---------------------------------------------- Current liabilities Short-term borrowings $ 51,400 $ 181,997 $ 117,608 Accounts payable 21,556 21,691 23,641 Accrued employee compensation and related taxes 23,004 23,587 29,478 Commissions payable 18,864 20,239 26,134 Customer deposits 35,866 34,022 112,958 Income taxes payable 16,186 18,537 17,223 Current portion of long-term debt 5,500 -- -- Other accrued liabilities 38,594 19,219 30,100 - --------------------------------------------------------------------------------------------------------- Total current liabilities 210,970 319,292 357,142 Long-term debt, net of current maturities 695,033 3,600 3,600 Other noncurrent liabilities 6,942 14,609 10,464 - --------------------------------------------------------------------------------------------------------- Total liabilities 912,945 337,501 371,206 Commitments and contingencies -- -- -- Redeemable preferred shares, $.01 par value, liquidation preference $61,890 authorized 307.5 shares, issued and outstanding; September 30, 2000 - 62 46,501 -- -- Preferred shares, $.01 par value: authorized 4,000 shares, issued and outstanding; September 30, 2000 - 62 in the form of redeemable preferred shares listed above; 3,938 undesignated -- -- -- Shareholders' equity (deficit) Common shares 1,015 11,176 11,108 Additional paid-in-capital - warrants 24,733 -- -- Officer notes receivable (1,775) -- -- Retained earnings (accumulated deficit) (596,805) 39,072 31,072 Accumulated other comprehensive loss (6,322) (7,275) (5,670) - --------------------------------------------------------------------------------------------------------- Total shareholders' equity (deficit) (579,154) 42,973 36,510 - --------------------------------------------------------------------------------------------------------- $ 380,292 $ 380,474 $ 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)
Nine months ended ------------------------- September 30, October 2, In thousands 2000 1999 - ---------------------------------------------------------------- ---------------------- Operating activities Net income $ (13,725) $ 40,175 Depreciation 19,325 17,331 Amortization of debt discount and deferred financing costs 2,527 -- Amortization of goodwill 804 1,698 Changes in operating assets and liabilities Accounts receivable 12,973 (4,415) Inventories 21,966 14,816 Salespersons overdrafts (3,408) (8,670) Prepaid expenses and other current assets 2,949 (1,145) Accounts payable (10,365) (448) Accrued employee compensation and related taxes (6,474) (3,973) Commissions payable (7,270) (1,892) Customer deposits (77,092) (58,070) Income taxes payable (1,037) 13,824 Other (1,871) (4,884) - ---------------------------------------------------------------- ---------------------- Net cash (used for) provided by operating activities (60,698) 4,347 - ---------------------------------------------------------------- ---------------------- Investing activities Purchases of property and equipment (12,773) (19,358) Equity investments 3,588 (7,493) Other 404 1,224 - ---------------------------------------------------------------- ---------------------- Net cash used for investing activities (8,781) (25,627) - ---------------------------------------------------------------- ---------------------- Financing activities Net short-term borrowings (repayments) (57,928) 86,532 Repurchases of common stock (823,630) (36,043) 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) (22,664) Debt financing costs (36,459) -- Other (1,220) 2,463 - ---------------------------------------------------------------- ---------------------- Net cash provided by financing activities 46,397 30,288 - ---------------------------------------------------------------- ---------------------- Change in cash and cash equivalents (23,082) 9,008 Cash and cash equivalents, beginning of period 38,517 2,595 - ---------------------------------------------------------------- ---------------------- Cash and cash equivalents, end of period $ 15,435 $ 11,603 ================================================================ ====================== Supplemental information Income taxes paid $ 12,402 $ 12,654 Interest paid $ 20,744 $ 4,692
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' EQUITY (DEFICIT) FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2000 (UNAUDITED)
Retained Common shares Additional Officer earnings Accumulated ----------------- paid-in-capital Capital notes (accumulated other com- In thousands, except per-share data Number Amount - warrants surplus receivable deficit) prehensive 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 Payment on officer note receivable 275 275 Preferred stock dividends (3,334) (3,334) Preferred stock accretion (173) (173) Net loss (13,725) (13,725) Change in cumulative translation adjustment (652) (652) - ----------------------------------------------------------------------------------------------------------------------------------- Balance - September 30, 2000 8,993 $ 1,015 $ 24,733 $-- $(1,775) $ (596,805) $ (6,322) $(579,154) ===================================================================================================================================
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 of America can be condensed or omitted. Therefore, we suggest that these financial statements be read in conjunction with the consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for the fiscal year ended 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 of America. Revenues, expenses, cash flows, assets and liabilities can and do vary during each quarter of the year. Therefore, the results and trends in these interim financial statements may not be the same as those for the full year. In our opinion, the accompanying unaudited condensed consolidated financial statements include all adjustments (consisting of normal recurring items) considered necessary to present fairly, when read in conjunction with the 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. Holders of Class A common stock are entitled to one vote per share, whereas holders of Class D common stock are entitled to 306.55 votes per share. Holders of Class B common stock, Class C common stock and Class E common stock have no voting rights. The par value and number of authorized, issued and outstanding shares for September 30, 2000 for each class of common stock is set forth below:
Par Authorized Issued and In thousands, except per-share data Value Shares Outstanding Shares ------------------------------------------------------------------------------- Class A $.33 1/3 4,200 2,862 Class B $.01 5,300 5,300 Class C $.01 2,500 811 Class D $.01 20 20 Class E $.01 1,900 - Undesignated $.01 12,020 -
As of October 2, 1999 there were 33,528 thousand shares of common stock outstanding 7 JOSTENS, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - (CONTINUED) 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 $72.1 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. 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 $45.9 million consisting of investment banking fees, transaction fees, legal and accounting fees, transaction bonuses, stock option payments, and other miscellaneous costs were expensed in the nine month period ended September 30, 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 as interest expense 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, prior to a public offering, and become exercisable annually in one-fifth increments upon Jostens meeting or exceeding target cumulative earnings before interest, taxes, depreciation and amortization ("EBITDA"). These options expire after 7 years from the date of grant. 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. 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 collateralized 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. At September 30, 2000, there were $1.8 million of these loans outstanding. 8 JOSTENS, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - (CONTINUED) 3. Long-Term Debt Long-term debt consists of the following:
September 30 October 2 January 1 In thousands 2000 1999 2000 --------------------------------------------------------------------------------------------------- Term loan A, 9.626 percent variable rate at September 30, 2000, semi-annual principal and interest payments through May 2006 $150,000 $ -- $ -- Term loan B, 10.18 percent variable rate at September 30, 2000, semi-annual principal and interest payments through May 2008 345,000 -- -- Senior subordinated notes, 12.75 percent fixed rate, net of discounts of $19,467, semi-annual interest payments of $14.3 million, interest due and payable at maturity - May 2010 205,533 -- -- Industrial revenue bonds, 6.75 percent fixed rate, covering general offices -- 3,600 3,600 --------------------------------------------------------------------------------------------------- 700,533 3,600 3,600 Less current portion 5,500 -- -- --------------------------------------------------------------------------------------------------- $695,033 $3,600 $3,600 ===================================================================================================
Maturities of long-term debt, including $19.5 million of discount, as of September 30, 2000 are as follows: In thousands ------------------------------------------------------------------------ September 30, 2001 $5,500 September 30, 2002 23,250 September 30, 2003 28,250 September 30, 2004 33,250 September 30, 2005 38,250 Thereafter 591,500 ------------------------------------------------------------------------ $720,000 ======================================================================== Principal payments under term loan A commence in 2001 with a $5.0 million payment due June 30, 2001 and a $10.0 million payment due December 31, 2001. Thereafter, semi-annual payments increase $1.25 million per semi- annual period through December 2005 with the remaining $10.0 million due in May 2006. Principal payments under term loan B commence in 2001 with a $0.5 million payment due June 30, 2001 and semiannual payments of $1.0 million thereafter through December 2005. Semiannual payments increase on an escalating scale from $25.5 million in June 2006 to $112.5 million in December 2007 with a final payment of $66.2 million due in May 2008. 9 JOSTENS, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - (CONTINUED) The fair value of long-term debt at September 30, 2000, October 2, 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 was $51.4 million outstanding under this facility as of September 30, 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 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 senior secured credit facility and senior subordinated notes contain certain cross-default provisions whereby a violation of a covenant under one debt obligation would, consequently, violate covenants under the other debt obligations. 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 became 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 fair value of the interest rate swap as of September 30, 2000 was $(1.2) million. 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 2010. 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 2010. 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 531,325 shares of our Class E common stock (at an exercise price of $0.01 per share), 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 charges to the accumulated deficit account. 10 JOSTENS, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - (CONTINUED) 5. Earnings (Loss) Per Common Share Basic earnings (loss) per share is computed by dividing net income (loss) available to common shareholders by the weighted average number of common shares outstanding. Diluted earnings (loss) per share is computed by dividing net income (loss) available to common shareholders by the average number of common shares outstanding, including the dilutive effect of options and restricted stock. Basic and diluted earnings (loss) per share were calculated as follows:
Three months ended Nine months ended ------------- ---------- ------------- ---------- September 30, October 2, September 30, October 2, In thousands, except per-share data 2000 1999 2000 1999 ------------------------------------------------------------------------------------------- ------------------------- Net income (loss) $(20,755) $(6,914) $(13,725) $40,175 Dividends and accretion on redeemable preferred stock 2,264 -- 3,507 -- ------------------------------------------------------------------------------------------- ------------------------- Net income (loss) available to common shareholders $(23,019) $(6,914) $(17,232) $40,175 =========================================================================================== ========================= Weighted average number of common shares outstanding - basic 8,993 33,711 20,553 34,228 Dilutive shares -- (1) -- -- (1) 116 ------------------------------------------------------------------------------------------- ------------------------- Weighted average number of common shares outstanding - diluted 8,993 33,711 20,553 34,344 =========================================================================================== ========================= Earnings (loss) per share - basic $(2.56) $(0.21) $(0.84) $1.17 Earnings (loss) per share - diluted $(2.56) $(0.21) $(0.84) $1.17
(1) Options and warrants to purchase 1,459 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 $3.1 million in the first nine months of 2000. The components of the special charge and utilization in 1999 and the first nine months of 2000 are as follows:
Utilization ----------------------------------------- Nine months ended Balance Initial September 30, September 30, In thousands accrual 1999 2000 2000 ------------------------------------------------------------------------------------------------------------------------ Employee termination benefits $4,910 $ -- $2,754 $2,156 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 1,183 270 302 611 ------------------------------------------------------------------------------------------------------------------------ $20,194 $14,161 $3,056 $2,977 ========================================================================================================================
We expect to complete restructuring activities and utilize the majority of the remaining charge by the end of 2000. As of September 30, 2000, all affected employees have been notified of termination. The majority of the termination benefits will be paid by the end of 2000. 7. Inventories Inventories were comprised of the following:
September 30, October 2, January 1, In thousands 2000 1999 2000 --------------------------------------------------------------------------- Raw material and supplies $11,670 $32,060 $17,886 Work-in-process 19,092 20,380 29,772 Finished goods 35,111 23,238 40,181 --------------------------------------------------------------------------- Total inventories $65,873 $75,678 $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 Nine months ended September 30, October 2, September 30, October 2, In thousands 2000 1999 2000 1999 --------------------------------------------------------------------- ------------------------ Net income (loss) $(20,755) $(6,914) $(13,725) $40,175 Change in cumulative translation adjustment 10 (278) (652) 490 --------------------------------------------------------------------- ------------------------ Comprehensive income (loss) $(20,745) $(7,192) $(14,377) $40,665 ===================================================================== ========================
9. Business Segments Financial information by reportable business segment is included in the following summary:
Three months ended Nine months ended September 30, October 2, September 30, October 2, In thousands 2000 1999 2000 1999 ------------------------------------------------------------------ --------------------------- Net Sales From External Customers School Products $101,378 $100,446 $526,040 $509,369 Recognition 15,881 21,339 61,449 74,875 Other 938 858 7,095 7,918 ------------------------------------------------------------------ --------------------------- Consolidated $118,197 $122,643 $594,584 $592,162 ================================================================== =========================== Operating Income (Loss) School Products $ (2,698) $2,396 $105,959 $103,338 Recognition (2,591) (994) (2,667) 1,168 Other (8,226) (1) (11,044) (68,717) (1) (32,508) ------------------------------------------------------------------ --------------------------- Consolidated (13,515) (9,642) 34,575 71,998 Net interest expense 22,021 (2) 1,980 36,824 (2) 4,478 ------------------------------------------------------------------ --------------------------- Income (loss) before income taxes $(35,536) $(11,622) $(2,249) $67,520 ================================================================== ===========================
(1) The Other segment includes $0.2 million and $45.9 million of transaction related costs in the three and nine months ended September 30, 2000, respectively, 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 nine month periods ended September 30, 2000 were accrued at a rate of 41.6 percent of taxable income compared with 40.5 percent of taxable income for the comparable periods in 1999. Year-to-date income tax expense was $11.5 million for September 30, 2000 which reflects the impact of non-deductible transaction related costs of approximately $30.0 million. 11. Supplier Concentration We purchase substantially all synthetic and semiprecious stones from a single supplier located in Germany, who is also a supplier to substantially all of the class ring manufactures in the United States. 12. New Accounting Standards In June 1998, the Financial Accounting Standards Board (FASB) issued SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities. Subsequently in June 2000, the FASB issued SFAS No. 138 which is an amendment to SFAS No. 133. These statements are required to be adopted in years beginning after June 15, 2000. The effect of adopting the Statement is not currently expected to have a material effect on our future financial position or overall trends in results of operations. In December of 1999, the Securities and Exchange Commission (SEC) issued Staff Accounting Bulletin No. 101 (SAB 101), which summarizes certain of the SEC's views regarding the application of generally accepted accounting principles to revenue recognition in financial statements. We are in the process of analyzing the requirements of SAB 101 and are required to comply with its provisions in the fourth quarter of fiscal 2000. Management believes the ultimate outcome will not have a significant effect on our consolidated results of operations, financial position or liquidity. 13. 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 September 30, 2000, October 2, 1999 and January 1, 2000; the condensed consolidating results of operations for the three and nine month periods ended September 30, 2000 and October 2, 1999; and the condensed consolidating cash flows for the nine month periods ended September 30, 2000 and October 2, 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 included with those of 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 SEPTEMBER 30, 2000
In thousands Parent Non-guarantors Eliminations Consolidated - ------------------------------------------------------------------------------------------------------ ASSETS ------ Current assets Cash and cash equivalents $ 2,520 $ 12,915 $ -- $ 15,435 Accounts receivable, net of allowance 91,287 3,378 -- 94,665 Inventories 60,788 5,085 -- 65,873 Deferred income taxes 17,400 -- -- 17,400 Salespersons overdrafts, net of allowance 23,339 6,263 -- 29,602 Prepaid expenses and other current assets 5,464 308 -- 5,772 - -------------------------------------------------------------------------------------------------- Total current assets 200,798 27,949 -- 228,747 Other Assets Intercompany accounts 3,007 (3,007) -- -- Intangibles, net 13,467 4,573 -- 18,040 Deferred financing costs, net 34,326 -- -- 34,326 Other 38,782 321 (17,726) 21,377 - -------------------------------------------------------------------------------------------------- Total other assets 89,582 1,887 (17,726) 73,743 Property and equipment, net 74,646 3,156 -- 77,802 - -------------------------------------------------------------------------------------------------- $ 365,026 $ 32,992 $ (17,726) 380,292 ================================================================================================== LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT) ---------------------------------------------- Current liabilities Short-term borrowings $ 51,400 $ -- $ -- $ 51,400 Accounts payable 20,577 979 -- 21,556 Accrued employee compensation and related taxes 21,936 1,068 -- 23,004 Commissions payable 18,664 200 -- 18,864 Customer deposits 31,589 4,277 -- 35,866 Income taxes payable 17,331 (1,145) -- 16,186 Current portion of long-term debt 5,500 -- -- 5,500 Other accrued liabilities 38,128 466 -- 38,594 - -------------------------------------------------------------------------------------------------- Total current liabilities 205,125 5,845 -- 210,970 Long-term debt, net of current maturities 695,033 -- -- 695,033 Other noncurrent liabilities 6,942 -- -- 6,942 - -------------------------------------------------------------------------------------------------- Total liabilities 907,100 5,845 -- 912,945 Commitments and contingencies -- -- -- -- Redeemable Preferred Stock 46,501 -- -- 46,501 Shareholders' equity (deficit) (588,575) 27,147 (17,726) (579,154) - -------------------------------------------------------------------------------------------------- $ 365,026 $ 32,992 $ (17,726) $ 380,292 ==================================================================================================
15 JOSTENS, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)-- (CONTINUED) JOSTENS, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATING BALANCE SHEETS AS OF OCTOBER 2, 1999
In thousands Parent Non-guarantors Eliminations Consolidated - ----------------------------------------------------------------------------------------------------- ASSETS ------ Current assets Cash and cash equivalents $ 5,751 $ 5,852 $ -- $ 11,603 Accounts receivable, net of allowance 107,158 3,604 -- 110,762 Inventories 70,217 5,461 -- 75,678 Deferred income taxes 14,682 -- -- 14,682 Salespersons overdrafts, net of allowance 22,793 6,566 -- 29,359 Prepaid expenses and other current assets 6,602 280 -- 6,882 - ------------------------------------------------------------------------------------------------- Total current assets 227,203 21,763 -- 248,966 Other Assets Intercompany accounts 2,535 (2,535) -- -- Intangibles, net 22,063 5,013 -- 27,076 Other 32,559 101 (17,157) 15,503 - ------------------------------------------------------------------------------------------------- Total other assets 57,157 2,579 (17,157) 42,579 Property and equipment, net 85,252 3,677 -- 88,929 - ------------------------------------------------------------------------------------------------- $ 369,612 $ 28,019 $ (17,157) $ 380,474 ================================================================================================= LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT) ---------------------------------------------- Current liabilities Short-term borrowings $ 181,997 $ -- $ -- $ 181,997 Accounts payable 20,025 1,666 -- 21,691 Accrued employee compensation and related taxes 22,096 1,491 -- 23,587 Commissions payable 19,883 356 -- 20,239 Customer deposits 30,179 3,843 -- 34,022 Income taxes payable 20,289 (1,752) -- 18,537 Other accrued liabilities 18,841 378 -- 19,219 - ------------------------------------------------------------------------------------------------- Total current liabilities 313,310 5,982 -- 319,292 Long-term debt, net of current maturities 3,600 -- -- 3,600 Other noncurrent liabilities 14,609 -- -- 14,609 - ------------------------------------------------------------------------------------------------- Total liabilities 331,519 5,982 -- 337,501 Commitments and contingencies -- -- -- -- Shareholders' equity (deficit) 38,093 22,037 (17,157) 42,973 - ------------------------------------------------------------------------------------------------- $ 369,612 $ 28,019 $ (17,157) $ 380,474 =================================================================================================
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' EQUITY (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' equity (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 SEPTEMBER 30, 2000
In thousands Parent Non-guarantors Consolidated - ------------------------------------------------------------------------------------------ Net sales $110,431 $7,766 $118,197 Cost of products sold 60,174 3,084 63,258 - ------------------------------------------------------------------------------------------ Gross profit 50,257 4,682 54,939 Selling and administrative expenses 64,087 4,228 68,315 Transaction costs 139 -- 139 - ------------------------------------------------------------------------------------------ Operating income (loss) (13,969) 454 (13,515) Interest income (191) (162) (353) Interest expense 22,365 9 22,374 - ------------------------------------------------------------------------------------------ Income (loss) before income taxes (36,143) 607 (35,536) Provision for income taxes (14,612) (169) (14,781) - ------------------------------------------------------------------------------------------ Net income (loss) $(21,531) $776 $(20,755) ==========================================================================================
JOSTENS, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2000
In thousands Parent Non-guarantors Consolidated - ------------------------------------------------------------------------------------------ Net sales $563,155 $31,429 $594,584 Cost of products sold 251,306 13,738 265,044 - ------------------------------------------------------------------------------------------ Gross profit 311,849 17,691 329,540 Selling and administrative expenses 234,539 14,576 249,115 Transaction costs 45,850 -- 45,850 - ------------------------------------------------------------------------------------------ Operating income 31,460 3,115 34,575 Interest income (439) (403) (842) Interest expense 37,616 50 37,666 - ------------------------------------------------------------------------------------------ Income (loss) before income taxes (5,717) 3,468 (2,249) Provision for income taxes 10,636 840 11,476 - ------------------------------------------------------------------------------------------ Net income (loss) $(16,353) $2,628 $(13,725) ==========================================================================================
18 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 OCTOBER 2, 1999
In thousands Parent Non-guarantors Consolidated - ------------------------------------------------------------------------------------------ Net sales $116,076 $6,567 $122,643 Cost of products sold 67,047 2,612 69,659 - ------------------------------------------------------------------------------------------ Gross profit 49,029 3,955 52,984 Selling and administrative expenses 58,442 4,184 62,626 - ------------------------------------------------------------------------------------------ Operating income (loss) (9,413) (229) (9,642) Interest income (28) (27) (55) Interest expense 2,026 9 2,035 - ------------------------------------------------------------------------------------------ Income (loss) before income taxes (11,411) (211) (11,622) Provision for income taxes (4,881) 173 (4,708) - ------------------------------------------------------------------------------------------ Net income (loss) $(6,530) $(384) $(6,914) ==========================================================================================
JOSTENS, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS FOR THE NINE MONTHS ENDED OCTOBER 2, 1999
In thousands Parent Non-guarantors Consolidated - ------------------------------------------------------------------------------------------ Net sales $565,907 $26,255 $592,162 Cost of products sold 267,791 11,111 278,902 - ------------------------------------------------------------------------------------------ Gross profit 298,116 15,144 313,260 Selling and administrative expenses 228,014 13,248 241,262 - ------------------------------------------------------------------------------------------ Operating income 70,102 1,896 71,998 Interest income (132) (124) (256) Interest expense 4,685 49 4,734 - ------------------------------------------------------------------------------------------ Income before income taxes 65,549 1,971 67,520 Provision for income taxes 27,011 334 27,345 - ------------------------------------------------------------------------------------------ Net income $38,538 $1,637 $40,175 ==========================================================================================
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 NINE MONTHS ENDED SEPTEMBER 30, 2000
In thousands Parent Non-guarantors Consolidated - --------------------------------------------------------------------------------------------------------- Operating activities Net income (loss) $ (16,353) $ 2,628 $ (13,725) Depreciation 18,492 833 19,325 Amortization of debt discount and deferred financing costs 2,527 -- 2,527 Amortization of goodwill 473 331 804 Changes in operating assets and liabilities Accounts receivable 11,225 1,748 12,973 Inventories 23,786 (1,820) 21,966 Salespersons overdrafts (3,825) 417 (3,408) Prepaid expenses and other current assets 2,993 (44) 2,949 Intercompany accounts (1,911) 1,911 -- Accounts payable (9,334) (1,031) (10,365) Accrued employee compensation and related taxes (6,417) (57) (6,474) Commissions payable (4,707) (2,563) (7,270) Customer deposits (78,362) 1,270 (77,092) Income taxes payable 357 (1,394) (1,037) Other (866) (1,005) (1,871) - ------------------------------------------------------------------------------------------------------ Net cash (used for) provided by operating activities (61,922) 1,224 (60,698) - ------------------------------------------------------------------------------------------------------ Investing activities Purchases of property and equipment (12,654) (119) (12,773) Equity investments 3,691 (103) 3,588 Other 404 -- 404 - ------------------------------------------------------------------------------------------------------ Net cash used for investing activities (8,559) (222) (8,781) - ------------------------------------------------------------------------------------------------------ Financing activities Net short-term borrowings (repayments) (57,928) -- (57,928) 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) Debt financing costs (36,459) -- (36,459) Other (1,220) -- (1,220) - ------------------------------------------------------------------------------------------------------ Net cash provided by financing activities 46,397 -- 46,397 - ------------------------------------------------------------------------------------------------------ Change in cash and cash equivalents (24,084) 1,002 (23,082) Cash and cash equivalents, beginning of period 26,604 11,913 38,517 - ------------------------------------------------------------------------------------------------------ Cash and cash equivalents, end of period $ 2,520 $ 12,915 $ 15,435 ====================================================================================================== Supplemental information Income taxes paid $ 10,125 $ 2,277 $ 12,402 Interest paid $ 20,694 $ 50 $ 20,744
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 NINE MONTHS ENDED OCTOBER 2, 1999
In thousands Parent Non-guarantors Consolidated - ---------------------------------------------------------------------------------------------- Operating activities Net income $ 38,538 $ 1,637 $ 40,175 Depreciation 16,435 896 17,331 Amortization of goodwill 1,354 344 1,698 Changes in operating assets and liabilities -- Accounts receivable (6,379) 1,964 (4,415) Inventories 17,011 (2,195) 14,816 Salespersons overdrafts (7,107) (1,563) (8,670) Prepaid expenses and other current assets (991) (154) (1,145) Intercompany accounts (3,552) 3,552 -- Accounts payable (68) (380) (448) Accrued employee compensation and related taxes (4,123) 150 (3,973) Commissions payable (1,369) (523) (1,892) Customer deposits (59,455) 1,385 (58,070) Income taxes payable 15,947 (2,123) 13,824 Other (4,684) (200) (4,884) - ------------------------------------------------------------------------------------------- Net cash provided by operating activities 1,557 2,790 4,347 - ------------------------------------------------------------------------------------------- Investing activities -- Purchases of property and equipment (18,765) (593) (19,358) Equity investments (7,493) -- (7,493) Other 1,329 (105) 1,224 - ------------------------------------------------------------------------------------------- Net cash used for investing activities (24,929) (698) (25,627) - ------------------------------------------------------------------------------------------- Financing activities Net short-term borrowings (repayments) 86,532 -- 86,532 Repurchases of common stock (36,043) -- (36,043) Dividends paid to common shareholders (22,664) -- (22,664) Other 2,463 -- 2,463 - ------------------------------------------------------------------------------------------- Net cash provided by financing activities 30,288 -- 30,288 - ------------------------------------------------------------------------------------------- Change in cash and cash equivalents 6,916 2,092 9,008 Cash and cash equivalents, beginning of period (1,165) 3,760 2,595 - ------------------------------------------------------------------------------------------- Cash and cash equivalents, end of period $ 5,751 $ 5,852 $ 11,603 =========================================================================================== Supplemental information Income taxes paid $ 10,191 $ 2,463 $ 12,654 Interest paid $ 4,643 $ 49 $ 4,692
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: o our ability to satisfy our debt obligations; o our relationship with our independent and employee sales representatives; o environmental regulations that could impose substantial costs upon us and may adversely affect our financial results; o the fluctuating prices of raw materials, primarily gold; o the seasonality of our School Products segment sales and operating income; o our dependence on a key supplier for our synthetic and semiprecious stones; o fashion and demographic trends; and o litigation cases if decided against us, may adversely affect our financial results. The foregoing factors are not exhaustive, and new factors may emerge or changes to the foregoing factors may occur that would impact our business. 22 RESULTS OF OPERATIONS The following table sets forth selected information from our Condensed Consolidated Statements of Operations.
Three months ended Nine months ended ------------------------------------- --------------------------------------- September 30, October 2, September 30, October 2, Dollars in thousands 2000 1999 % Change 2000 1999 % Change - --------------------------------------------------------------------------- --------------------------------------- Net sales $118,197 $122,643 (3.6%) $594,584 $592,162 0.4% % of net sales 100.0% 100.0% 100.0% 100.0% Cost of products sold 63,258 69,659 (9.2%) 265,044 278,902 (5.0%) % of net sales 53.5% 56.8% 44.6% 47.1% - --------------------------------------------------------------------------- --------------------------------------- Gross profit 54,939 52,984 3.7% 329,540 313,260 5.2% % of net sales 46.5% 43.2% 55.4% 52.9% Selling and administrative expenses 68,315 62,626 9.1% 249,115 241,262 3.3% % of net sales 57.8% 51.1% 41.9% 40.7% Transaction costs 139 -- 45,850 -- % of net sales 0.1% 7.7% - --------------------------------------------------------------------------- --------------------------------------- Operating income (13,515) (9,642) (40.2%) 34,575 71,998 (52.0%) % of net sales -11.4% -7.9% 5.8% 12.2% Interest income (353) (55) 541.8% (842) (256) 228.9% % of net sales -0.3% 0.0% -0.1% 0.0% Interest expense 22,374 2,035 999.5% 37,666 4,734 695.6% % of net sales 18.9% 1.7% 6.3% 0.8% - --------------------------------------------------------------------------- --------------------------------------- Income before income taxes (35,536) (11,622) (205.8%) (2,249) 67,520 (103.3%) % of net sales -30.1% -9.5% -0.4% 11.4% Provision for income taxes (14,781) (4,708) (214.0%) 11,476 27,345 (58.0%) % of net sales -12.5% -3.8% 1.9% 4.6% - --------------------------------------------------------------------------- --------------------------------------- Net income (loss) $(20,755) $(6,914) (200.2%) $(13,725) $40,175 (134.2%) =========================================================================== ======================================= % of net sales -17.6% -5.6% -2.3% 6.8%
Percentages in this table may reflect rounding adjustments. Net sales The change in net sales for the three and nine month periods was due to price increases averaging approximately 1.6 percent and 2.2 percent, respectively, and volume/mix decreases of approximately 5.2 percent and 1.8 percent, respectively. 23 Third quarter and year-to-date net sales by segment and the changes from last year were as follows:
Three months ended Nine months ended ---------------------------------------- ------------------------------------- September 30, October 2, September 30, October 2, In thousands 2000 1999 % change 2000 1999 % change - ------------------------------------------------------------ ------------------------------------- School Products $101,378 $100,446 0.9% $526,040 $509,369 3.3% Recognition 15,881 21,339 (25.6%) 61,449 74,875 (17.9%) Other 938 858 9.3% 7,095 7,918 (10.4%) - ------------------------------------------------------------ ------------------------------------- Consolidated $118,197 $122,643 (3.6%) $594,584 $592,162 0.4% ============================================================ ====================================
School Products The increase in School Products sales for the three and nine month periods was primarily due to: o price increases in all school product lines; o an increase in graduation announcements and caps and gowns due to more schools; o expanded sales of graduation accessories; o increased sales dollars for yearbooks due to increased page count and add-on features; o fewer yearbook rebates and returns resulting from improvements with Jostens Direct Solutions ("JDS") (a direct payment program for parents of high school students); and o increased revenue from JDS processing fees due to more schools on the program. These increases were offset by: o accelerated jewelry shipments into the fourth quarter of 1999 due to improved manufacturing efficiencies compared with the prior year; and o a decrease in jewelry sales in the college market primarily due to the loss of one large account. Recognition The decrease in Recognition sales was primarily due to the reduction of the sales representatives as well as lost customers as a result of problems encountered with a system implementation that took place in 1999. In addition, we experienced a shift in sales to lower priced programs and general merchandise. Other Other segment sales decreased for the nine month period as a result of exiting the college alumni direct marketing business in the fourth quarter of 1999. Sales for this business were $0.3 million and $2.1 million for the three and nine month periods ended October 2,1999, respectively. Offsetting this decrease was higher sales of jewelry in our international business in both the three and nine month periods. 24 Gross Profit Gross margin for the three and nine months ended September 30, 2000 was 46.5 percent and 55.4 percent, compared with 43.2 percent and 52.9 percent, respectively, for the comparable periods in 1999. The increases were primarily due to favorable product mix, price increases and manufacturing efficiencies in our School Products segment in 2000. In addition, the increase for the nine 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 nine months ended September 30, 2000 were $68.3 million and $249.1 million, compared with $62.6 million and $241.3 million, respectively, for the comparable periods in 1999. The increase in the three and nine month periods reflects: o higher selling and marketing expenses in 2000 related to programs and initiatives intended to increase our sales; o higher commission expense partially due to changes in the commission program for graduation products and partially due to the timing of those changes; and o higher information system expense, primarily associated with depreciation due to our 1999 system implementation and increased spending on initiatives to support marketing and selling activities referenced above. These increases were offset by: o lower labor costs attributable to the headcount reductions as part of the special charge taken in the fourth quarter of 1999; o lower costs as a result of exiting the college alumni direct marketing business in the fourth quarter of 1999; o lower amortization expense in 2000 related to our write-off of goodwill as part of the 1999 special charge; and o reduced spending on temporary labor and other lower costs in our Recognition segment in 2000 compared with 1999 due to the system implementation. 25 Operating Income Third quarter and year-to-date operating income (loss) by segment and the changes from last year were as follows:
Three months ended Nine months ended -------------------------------------- ----------------------------------- September 30, October 2, September 30, October 2, In thousands 2000 1999 % change 2000 1999 % change - ---------------------------------------------------------- ----------------------------------- School Products $(2,698) $2,396 (212.6%) $105,959 $103,338 2.5% Recognition (2,591) (994) 160.7% (2,667) 1,168 (328.3%) Other (8,226) (11,044) (25.5%) (68,717) (32,508) 111.4% - ---------------------------------------------------------- ----------------------------------- Consolidated $(13,515) $(9,642) 40.2% $34,575 $71,998 (52.0%) ========================================================== ===================================
School Products The increase in School Products operating income for the nine month period was primarily due to strong sales performance in our yearbook and photography businesses as well as overall excellent manufacturing performance. Offsetting these increases for the nine month period and the reason for the decline in operating income for the three month period was an increase in marketing and selling expenses, higher commissions, and an increase in management information system expenses as a result of 1999 system implementations. Recognition The decrease in Recognition operating income was primarily due to the decrease in sales, an increase in bad debt expense, and an increase in the allocation of management information expenses as a result of 1999 system implementations. These decreases were partially offset by reduced spending on temporary labor and other lower costs compared to 1999 during the system implementation. Other The increase in Other operating loss was primarily due to costs of $45.9 million associated with the transaction on May 10, 2000. This was partially offset by: o lower selling and administrative expenses as a result of exiting the college alumni direct marketing business in the fourth quarter of 1999; o lower spending in 2000 compared with 1999 related to our new product and channel development group; and o lower information system expense related to the year 2000 and Oracle system. Transaction Costs We incurred costs consisting of professional fees and transaction expenses associated with the merger and recapitalization. Transaction costs of $45.9 million have been expensed as of September 30, 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 $20.0 million and $32.3 million in the three and nine month periods ended September 30, 2000, respectively, over the prior year periods. The increases are 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. 26 Income Taxes Income taxes for the three and nine month periods ended September 30, 2000 were accrued at a rate of 41.6 percent of taxable income compared with 40.5 percent of taxable income for the comparable periods in 1999. Year-to-date income tax expense was $11.5 million for September 30, 2000 which reflects the impact of non-deductible transaction related costs of approximately $30.0 million. LIQUIDITY AND CAPITAL RESOURCES Our primary cash needs are for debt service obligations, capital expenditures, working capital, redeemable securities and general corporate purposes. 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 nine month period ended September 30, 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, interest payments 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 used cash of $60.7 million in the first nine months of 2000, compared with cash generated of $4.3 million for the same period in the prior year. The decrease of $65.0 million was primarily due to lower net income related to transaction expenses of $45.9 million and an increase in interest paid of approximately $16.1 million. In addition, during the nine months ended September 30, 2000, cash was unfavorably impacted by the timing of customer deposits, accounts payable, and income taxes payable and favorably impacted by reduced inventories and reduced accounts receivable due to improvement in the number of days sales outstanding. Adjusting for transaction related components and excluding interest, our operating cash flow this year is slightly favorable to the prior year. Investing Activities Capital expenditures for the first nine months of 2000 were $12.8 million, compared with $19.4 million for the same period in 1999. The decrease of $6.6 million relates primarily to higher capital expenditures in 1999 on information systems offset partially by an increase in spending on new automation technology in our School Products segment. In the first half of 1999 we invested $5.0 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. In the third quarter of 2000, we sold our entire ownership position in this investment for $5.0 million. Financing Activities Net cash provided by financing activities in the first nine months of 2000 was $46.4 million, compared with $30.3 million for the same period in 1999. The increase in net cash provided by financing activities of $16.1 million was primarily due to 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, no dividend was paid in the second or third quarters of 2000. These increases 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. The interest rate provided by the swap agreement is fixed at 7.0 percent. The swap agreement became effective on August 15, 2000 with a notional amount of $135 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 2000 and 1999, or interest expense would have changed by approximately $2.4 million for the nine 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 nine months ended September 30, 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 at a final hearing following notice of the settlement terms sent to the shareholders. 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. No further action will be taken by Taylor and the entry of judgment in favor of Jostens has been entered. 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 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 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 judgment 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 November 14, 2000. JOSTENS, INC. Registrant By /s/ Robert C. Buhrmaster ------------------------------------- Robert C. Buhrmaster Chairman, President and Chief Executive Officer By /s/ William N. Priesmeyer ------------------------------------- William N. Priesmeyer Senior Vice President and Chief Financial Officer (Chief Accounting Officer) 30 EX-12 2 0002.txt RATIO OF EARNINGS EXHIBIT 12 JOSTENS, INC. AND SUBSIDIARIES COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES (UNAUDITED)
Six months Nine months ended Years ended ended Years ended ------------------------ -------------------------------- ----------- ----------------- September 30, October 2, January 1, January 2, January 3, December 28, June 30, June 30, Dollars in thousands 2000 1999 2000 1999 1998 1996 1996 1995 - ---------------------------------------------------------------- ------------------------------ ------------------------------ Earnings Income (loss) from continuing operations before income taxes $ (2,249) $ 67,520 $ 74,659 $ 83,520 $ 93,383 $ 26 $ 87,479 $ 93,893 Interest expense and amortization of debt expense (excluding capitalized interest) 37,666 4,333 7,486 7,026 6,866 4,330 9,403 5,452 Portion of rent expense under long-term operating leases representative of an interest factor 891 1,087 1,483 1,233 2,133 1,070 2,103 2,100 - ---------------------------------------------------------------- ------------------------------ ------------------------------ Total earnings $ 36,308 $ 72,940 $ 83,628 $ 91,779 $102,382 $ 5,426 $ 98,985 $101,445 ================================================================ ============================== ============================== Fixed charges Interest expense and amortization of debt expense (including capitalized interest) $ 37,666 $ 4,734 $ 7,887 $ 7,729 $ 6,866 $ 4,330 $ 9,403 $ 5,452 Portion of rent expense under long-term operating leases representative of an interest factor 891 1,087 1,483 1,233 2,133 1,070 2,103 2,100 - ---------------------------------------------------------------- ------------------------------ ------------------------------ Total fixed charges $ 38,557 $ 5,821 $ 9,370 $ 8,962 $ 8,999 $ 5,400 $ 11,506 $ 7,552 ================================================================ ============================== ============================== Ratio of earnings to fixed charges 0.9 12.5 8.9 10.2 11.4 1.0 8.6 13.4
EX-27 3 0003.txt FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM JOSTENS, INC. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS AS OF AND FOR THE NINE MONTH PERIOD ENDED SEPTEMBER 30, 2000, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 9-MOS DEC-30-2000 JAN-02-2000 SEP-30-2000 15,435 0 99,948 5,283 65,873 228,747 283,631 205,829 380,292 210,970 700,533 46,501 0 1,015 (580,169) 380,292 594,584 594,584 265,044 265,044 294,965 1,885 37,666 (2,249) 11,476 (13,725) 0 0 0 (13,725) (0.84) (0.84)
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