-----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, VyQ3u2fha3tYCf0tNcvoJ9fciasrue5yvH1evP0t8/1Vi0QYeCIiELokW3JdNXfJ 7Dsv1RDfpagoC5k2+Rl1qg== 0001045969-01-000360.txt : 20010402 0001045969-01-000360.hdr.sgml : 20010402 ACCESSION NUMBER: 0001045969-01-000360 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 20001230 FILED AS OF DATE: 20010330 FILER: COMPANY DATA: COMPANY CONFORMED NAME: JOSTENS INC CENTRAL INDEX KEY: 0000054050 STANDARD INDUSTRIAL CLASSIFICATION: JEWELRY, PRECIOUS METAL [3911] IRS NUMBER: 410343440 STATE OF INCORPORATION: MN FISCAL YEAR END: 0102 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: SEC FILE NUMBER: 001-05064 FILM NUMBER: 1584789 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-K405 1 0001.txt FORM 10-K405 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D. C. 20549 ---------------- FORM 10-K [X]ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Fiscal Year Ended December 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 incorporation or organization) number) 5501 Norman Center Drive Minneapolis, Minnesota 55437 (Address of principal executive (Zip code) offices) Registrant's telephone number, including area code: (952) 830-3300 Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: None ---------------- Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [_] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in PART III of this Form 10-K or any amendment to this Form 10-K. [X] The aggregate market value of voting stock held by nonaffiliates of the Registrant on March 1, 2001: not applicable. The numbers of shares outstanding of each of the Registrant's classes of common stock on March 1, 2001, were as follows: Class A: 2,862,277; Class B: 5,300,000; Class C: 811,020; Class D; 20,000; Class E: 0; and Undesignated: 0. Documents incorporated by Reference: None - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- Jostens, Inc. Annual Report on Form 10-K For the Year Ended December 30, 2000
PART I Page ---- ITEM 1. Business............................................................................... 1 ITEM 2. Properties............................................................................. 6 ITEM 3. Legal Proceedings...................................................................... 7 ITEM 4. Submission of Matters to a Vote of Security Holders.................................... 7 PART II ITEM 5. Market for Registrant's Common Stock and Related Security Holder Matters............... 8 ITEM 6. Selected Financial Data................................................................ 9 ITEM 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.. 11 ITEM 7A. Quantitative and Qualitative Disclosures about Market Risk............................. 22 ITEM 8. Financial Statements and Supplementary Data............................................ 23 ITEM 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure... 50 PART III ITEM 10. Directors and Executive Officers of the Registrant..................................... 50 ITEM 11. Executive Compensation................................................................. 52 ITEM 12. Security Ownership of Certain Beneficial Owners and Management......................... 57 ITEM 13. Certain Relationships and Related Transactions......................................... 59 PART IV ITEM 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K........................ 61 Signatures...................................................................................... 65
PART I ITEM 1. BUSINESS We are a leading provider of school-related affinity products and services including yearbooks, class rings and graduation products. We also have the leading market share for school photography services in Canada. In addition, we are a leading provider of corporate employee service recognition programs and achievement awards and products for athletic champions. Our 104-year history of manufacturing and providing quality products and superior service has enabled us to develop long-standing and extensive relationships with schools throughout the country. Our two major business segments are School Products and Recognition. The School Products segment serves the high school, college and elementary school markets and accounted for 88.9% of our net sales in 2000. The School Products segment is comprised of four principal lines of products and services: Printing & Publishing, Jewelry, Graduation Products and Photography. The Recognition segment accounted for 10.0% of our net sales in 2000. This segment provides products and services that assist companies in recognizing and rewarding employee service and achievement of performance objectives. The Recognition segment also produces awards for professional sports team accomplishments and affinity products for special interest associations. Merger and Recapitalization On May 10, 2000, we were acquired by affiliates of Investcorp along with other investors. The acquisition was part of a recapitalization of Jostens, which resulted in affiliates of Investcorp and the other investors acquiring approximately 92% of our post-merger common stock. The remaining 8% of our common stock is held by pre-recapitalization shareholders and five members of senior management. As a result of the transaction, our shares were de-listed from the New York Stock Exchange. The recapitalization was funded by (a) $495.0 million of borrowings under a senior 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 our common stock, (c) issuance of $60.0 million in principal amount of redeemable preferred stock and warrants to purchase 531,325 shares of our common stock and (d) $208.7 million of proceeds from the sale of shares of common stock to affiliates of Investcorp and the other investors. The proceeds from these financings funded (a) the payment of approximately $823.6 million to holders of common stock representing $25.25 per share, (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 and (e) a pre-payment of $7.5 million for a management and consulting services agreement for a five-year term with an affiliate of Investcorp. BUSINESS SEGMENTS We classify our operations into the following business segments: . SCHOOL PRODUCTS -- This segment manufactures and markets school-related affinity products primarily for the high school and college markets. School Products is comprised of four product lines: Printing & Publishing, Jewelry, Graduation Products and Photography. 1 . RECOGNITION -- This segment manufactures and supplies corporate-based affinity products that help companies and other organizations promote and recognize achievement in people's careers. We concentrate our efforts in service recognition and incentive programs designed to help companies achieve their business objectives through improved employee performance. Products include jewelry and other brand name merchandise from industry leading manufacturers. . OTHER -- This segment represents the operating units which do not meet the quantitative threshold for determining reportable segments. The "Other" segment primarily is comprised of corporate expenses, the results of the direct marketing sales channel to college alumni (exited in 1999), international (excluding Canada) sales and expenses and expenses associated with new product development. Business segment financial information is contained in ITEM 8, Note 13 of the Notes to Consolidated Financial Statements, included in this Form 10-K and is incorporated herein by reference. SCHOOL PRODUCTS SEGMENT Product Lines Printing & Publishing We manufacture and sell student-created yearbooks in high schools, elementary and middle schools and colleges. Our independent and employee sales representatives and their associates work closely with each school's yearbook staff (both students and a faculty adviser), assisting with the planning, editing, layout and printing scheduling until the yearbook is completed. Our independent and employee sales representatives work with the faculty advisers to renew yearbook contracts. We also print commercial brochures and promotional books and materials. Jewelry We manufacture and sell class rings primarily to high school and college students. Most schools have only one school-designated supplier to its students each year. Class rings are sold within the schools, through bookstores, other campus stores, retail jewelry stores, and the Internet. Our independent and employee sales representatives manage the in-school process of interacting with the students through ring design, promotion and ordering. Graduation Products We manufacture and sell graduation announcements and accessories, diplomas and caps and gowns to students and administrators in high schools and colleges. Our independent and employee sales representatives take sales orders through in-school access, telemarketing programs, college bookstores and the Internet. Photography Photography provides class and individual school pictures to students in high schools and elementary and middle schools in Canada and the United States. Additionally, photography provides high school senior portrait photography, photography for proms and other special events and other photo-based products such as student ID cards. Our independent dealers and employee sales force arrange the sittings at individual schools or in their own studios. Seasonality Our School Products segment experiences seasonality concurrent with the North American school year, with about 45% of full-year segment sales and about 55 to 65% of full-year segment operating income occurring in the second quarter. This seasonality requires us to carefully manage our cash flows over the course of the year. 2 Competition Consumers differentiate school products principally on the basis of quality, price, marketing and service. We are one of four primary competitors in the sale of yearbooks along with Herff Jones, Inc., Taylor Publishing Company and Walsworth Publishing Company. Each competes on the basis of print quality, price, product offerings and service. Technological offerings in the way of computer-based publishing are becoming significant market differentiators. Customer service is particularly important in the sale of class rings because of the high degree of customization and the emphasis on timely delivery. Class rings are marketed through different channels that have different quality and price points. Competitors in the sale of class rings primarily consist of two firms: Herff Jones, Inc. and Commemorative Brands, Inc. (CBI), which markets the Balfour and ArtCarved brands. Herff Jones, Inc. distributes its product in schools, while CBI distributes its product through multiple distribution channels, including schools, independent and chain jewelers and mass merchandisers. In Graduation Products, several national and numerous local and regional competitors offer products similar to ours. In Photography products, we compete with Lifetouch, Inc., Herff Jones, Inc. and a variety of regional and locally owned and operated photographers. RECOGNITION SEGMENT Our Recognition business segment helps companies and other organizations achieve their objectives through improved employee retention and performance. We provide our clients with recognition program design and administration services that allow them to effectively manage their corporate recognition efforts to maximum organizational benefit. We serve customers ranging from small and mid-size companies to global corporations, professional sports teams and special interest associations. We design, communicate and administer programs tailored to an individual organization's needs. We sell our products primarily through independent sales representatives. We team with our Recognition customers to: . design recognition programs that help drive work force recruitment, retention and performance; . provide an administration platform that allows companies to cost effectively implement recognition including custom brochures and web sites as well as award fulfillment and reporting; and . create award selections that uniquely embrace and reinforce corporate culture, mission and values. We manufacture approximately half the products utilized within the client programs we design--including jewelry, rings, watches and engraved certificates. In addition, we market items manufactured by other companies, such as Waterman, Howard Miller, Oneida and Waterford. Competition Principal competitors in the service recognition and incentive program market include O.C. Tanner Recognition Company, The Robbins Company and The Tharpe Company, Inc. Subsequent Event--Restructuring Plans In March 2001, we announced our decision to consolidate three Recognition plants and implement a new customer service model as part of our effort to realign resources and streamline the Recognition segment's infrastructure and enhance profitability. 3 We will close our distribution facility in Memphis, Tennessee., and our manufacturing facility in Sherbrooke, Quebec, and shift these functions to our existing plant in Princeton, Illinois. In addition, the Recognition segment's customer service function, currently operated from the Princeton and Memphis facilities, along with some financial functions, will be relocated to the Owatonna, Minnesota, facility. A new customer service model will be implemented to leverage new technologies at the Owatonna location. The consolidation is scheduled to be completed in the summer of 2001. The total cost of the consolidation project, which will be expensed in 2001, is estimated to be approximately $4.0 million for severance benefits and costs associated with closing the facilities. These costs will be partially offset by a gain on sale of the Memphis facility of approximately $2.4 million. Approximately 100 full-time positions will be eliminated from the Memphis plant and approximately 40 full-time positions will be eliminated from the Sherbrooke plant. In Princeton, 44 new positions will be created and in Owatonna about 30 new customer service positions will be added. INFORMATION REGARDING ALL BUSINESS SEGMENTS Backlog Because of the nature of our business, all orders are generally filled within a few months from the time of placement. However, our School Products segment obtains student yearbook contracts in one year for a significant portion of the yearbooks to be delivered in the next year. Often the prices of the yearbooks are not established at the time of the order because the content of the books may not be finalized. Subject to the foregoing qualifications, we estimate the backlog of orders related to continuing operations was approximately $292.4 million as of the end of 2000, compared with $291.2 million as of the end of 1999, primarily related to student yearbooks, jewelry and graduation products. We expect most of the 2000 backlog to be confirmed and filled in 2001. Environmental Matters pertaining to the environment are discussed in ITEM 7 and in ITEM 8, Note 14 of the Notes to Consolidated Financial Statements, included in this Form 10-K and are incorporated herein by reference. Raw Materials The principal raw materials that we purchase are gold, paper products, and precious, semiprecious and synthetic stones. Any material increase in the price of gold could adversely impact our cost of sales. We purchase substantially all synthetic and semiprecious stones from a single supplier, located in Germany, who is also a supplier to almost all of the class ring manufacturers in the United States. We believe that the loss of this supplier could adversely affect our business during the time period in which alternate sources adapted their production capabilities to meet increased demand. Matters pertaining to our market risks are discussed in ITEM 7A, Quantitative and Qualitative Disclosures about Market Risk, included in this Form 10-K and are incorporated herein by reference. Intellectual Property We have licenses, trademarks and copyrights that, in the aggregate, are an important part of our business. However, we do not regard our business as being materially dependent upon any single license, trademark or copyright. We have trademark registration applications pending and will pursue other registrations as appropriate to establish and preserve our intellectual property rights. 4 Employees As of the end of February 2001, we had approximately 6,500 employees, of which approximately 300 were members of two separate unions. Because of the seasonality of our business, the number of employees tends to vary. We have never suffered an interruption of business that had a material impact on our operations as a result of a labor dispute and consider our relationship with our employees to be good. Foreign Operations Our foreign sales are derived primarily from operations in Canada. The accounts and operations of our foreign businesses, excluding Canada, are not significant. Local taxation, import duties, fluctuation in currency exchange rates and restrictions on exportation of currencies are among risks attendant to foreign operations, but these risks are not considered significant with respect to our business. The profit margin on foreign sales is approximately the same as the profit margin on domestic sales. Foreign operations financial information is contained in ITEM 8, Note 13 of the Notes to Consolidated Financial Statements, included in this Form 10-K and are incorporated herein by reference. ---------------- Jostens is a Minnesota corporation. Unless otherwise indicated, all references to "Jostens," "we," "our," and "us" refer to Jostens, Inc., and its subsidiaries. Our principle executive offices are located at 5501 Norman Center Drive, Minneapolis, Minnesota 55437. Our main phone number is (952) 830-3300. Our home page on the Internet is www.jostens.com. The information on our web site is not incorporated into this annual report. 5 ITEM 2. PROPERTIES Our properties are summarized below:
Owned Approximate or square Business segment Location Type of property leased footage ---------------- -------------------- ------------------- ------ ----------- School Products....... Anaheim, CA Office Leased 12,000 Attleboro, MA Manufacturing Owned 52,000 Burnsville, MN Manufacturing Leased 47,000 Clarksville, TN Manufacturing Owned 105,000 Clarksville, TN Warehouse Leased 13,000 Denton, TX Manufacturing Owned 56,000 Laurens, SC Manufacturing Owned 98,000 Laurens, SC Warehouse Leased 74,000 Owatonna, MN Office Owned 88,000 Owatonna, MN Manufacturing Owned 30,000 Owatonna, MN Warehouse Leased 29,000 Red Wing, MN Manufacturing Owned 132,000 Shelbyville, TN Manufacturing Owned 87,000 State College, PA Manufacturing Owned 66,000 State College, PA Warehouse Leased 6,000 Topeka, KS Manufacturing Owned 236,000 Visalia, CA Manufacturing Owned 96,000 Visalia, CA Warehouse Leased 13,000 Winnipeg, MAN Manufacturing Owned 69,000 Winnipeg, MAN Office Leased 28,000 Winnipeg, MAN Warehouse Leased 6,000 Etobicoke, Ontario Office Leased 3,000 Winston-Salem, NC Manufacturing Owned 132,000 Winston-Salem, NC Warehouse Leased 7,000 Webster, NY (1) Manufacturing Owned 60,000 Recognition..... Memphis, TN (3) Distribution center Leased 67,000 Princeton, IL Manufacturing Owned 65,000 Princeton, IL Warehouse Leased 6,000 Saddle Brook, NJ (2) Office Leased 6,000 Sherbrooke, QUE (3) Distribution center Leased 15,000 Other........... Bloomington, MN Office Owned 116,000 Bloomington, MN Office Leased 37,000
- -------- (1) Closed and currently held for sale (2) Currently under sublease to another business (3) Facilities to be closed due to restructuring plans relating to our Recognition segment. Our School Products segment also has office space that we both lease and own in 23 locations totaling 37,000 square feet. We believe that our production facilities are suitable for their purpose and are adequate to support our businesses. The extent of utilization of individual facilities varies due to the seasonal nature of the business. 6 ITEM 3. LEGAL PROCEEDINGS A federal antitrust action was served on Jostens on October 23, 1998. The complainant, Epicenter Recognition, Inc. ("Epicenter"), alleges that Jostens has attempted to monopolize the market of high school graduation products in the state of California. Epicenter is a successor to a corporation formed by four of our former sales representatives. The plaintiff is claiming damages of approximately $3 million to $10 million under various theories and differing sized relevant markets. Trial is scheduled to begin April 3, 2001 in which Epicenter has waived its right to a jury, so the case will be tried before a judge in U.S. District Court in Orange County, California. We believe the effect on our consolidated results of operations, cash flows and financial position, if any, for the disposition of these matters will not be material. In February 1998, we entered into an Information Technology Master Services Agreement with Ernst & Young LLP to provide guidance and consulting services for implementation of a company wide enterprise resource planning ("ERP") system. Under the Master Agreement, Ernst & Young LLP provided project management, guidance and consulting. We claim this work was deficient and substandard in various material respects constituting a breach of the Master Agreement entitling us to significant damages. In August 2000, the parties conducted a mandatory mediation which proved unsuccessful resulting in pending arbitration. Ernst & Young LLP claims are $0.3 million in unpaid fees. We claim damages in excess of $150.0 million, including over $9.0 million paid to Ernst & Young LLP on account of the engagement. We are a party to other litigation arising in the normal course of business. We regularly analyze current information and, as necessary, provide accruals for probable liabilities on the eventual disposition of these matters. We believe the effect on our consolidated results of operations, cash flows and financial position, if any, for the disposition of these matters will not be material. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS NONE 7 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED SECURITY HOLDER MATTERS As a result of the merger and recapitalization on May 10, 2000 as discussed in ITEM 1, our common shares were de-listed from the New York Stock Exchange. Currently, there is no established public trading market for our common stock. Shares of Class A common stock are not quoted but are sporadically traded over- the-counter on the so called "pink sheets." We believe that the information we have been able to obtain may not represent a reliable market indicator for our Class A common shares. Shares of Class B, Class C and Class D common stock are not traded. Quarterly market and dividend information for pre-merger common stock for fiscal year 1999 and for the first two quarters of fiscal 2000 up until May 10, 2000 are as follows:
2000 1999 ----------------------------------------- -------------------------------------- Second Quarter First Quarter through Year through First Second Third Fourth Pre-merger May 10, 2001 May 10, 2001 Quarter Quarter Quarter Quarter Year ------------- -------------- ------------ ------- ------- ------- ------- ------ Stock price: High.................. $24.44 $25.25 $25.25 $27.13 $22.63 $21.00 $24.31 $27.13 Low................... 23.44 23.94 23.44 21.25 20.44 19.13 17.56 17.56 Dividends declared per share.................. 0.22 -- 0.22 0.22 0.22 0.22 0.22 0.88
Our ability to pay dividends is limited by the terms of our senior secured credit facility and the notes, therefore we do not intend to pay dividends to any class of our common shareholders. The numbers of shareholders of record for each class of common stock at March 1, 2001 are as follows: Class A: 258; Class B: 12; Class C: 1; Class D: 11; and Class E: None. Recent Sales of Unregistered Securities We have not issued or sold securities within the past three years pursuant to offerings that were not registered under the Securities Act of 1933, as amended (the "Securities Act") except on May 10, 2000 as part of the merger and recapitalization, we: . sold shares of our common stock at a price per share of $25.25 at an aggregate offering price of $208.7 million, . issued $60.0 million in principal amount of redeemable, payment-in-kind, preferred shares with detachable warrants to purchase 531,325 shares of our common stock (at an exercise price of $0.01 per share and a term of 11 years) to DB Capital Investors for $60.0 million, and . issued $225.0 million in principal amount of 12.75% senior subordinated notes (the "notes") with detachable warrants to purchase 425,060 shares of our common stock (at an exercise price of $0.01 per share and exercisable through 2010) to Deutsche Bank Securities Inc., UBS Warburg LLC and Goldman, Sachs & Co. for $215.9 million. The transactions set forth above were undertaken in reliance upon exemption from the registration requirements of the Securities Act afforded by Section 4(2) and/or Regulation D promulgated thereunder, as sales not involving a public offering. In October 2000, we consummated a registered exchange offer with respect to the 12.75% senior subordinated notes described above, pursuant to which all such privately placed securities were exchanged for registered securities. 8 ITEM 6. SELECTED FINANCIAL DATA The table below sets forth summary consolidated historical data relating to Jostens. The summary historical financial information for the years ended December 30, 2000, January 1, 2000, January 2, 1999, January 3, 1998; the six month period ended December 28, 1996; and for the year ended June 30, 1996, was derived from the audited historical Consolidated Financial Statements of Jostens.
(5) (6) (7)(8) (8) (9) Six months Year Years ended ended ended ----------------------------------------- ----------- ------- December 30 January 1 January 2 January 3 December 28 June 30 2000 2000 1999 1998 1996 1996 ----------- --------- --------- --------- ----------- ------- (In millions, except per-share data) Statement of Operations Net sales (1)........... $ 805.0 $801.3 $789.6 $762.2 $281.1 $711.8 Cost of products sold (1).................... 356.3 368.5 370.5 371.0 145.4 348.8 Transaction costs....... 46.4 -- -- -- -- -- Special charge.......... 0.2 20.2 -- -- -- -- Operating income........ 67.8 81.7 102.2 99.7 4.2 94.8 Net interest expense.... 58.9 7.0 6.7 6.3 4.1 7.3 Provision for income taxes.................. 14.9 31.5 41.7 36.2 0.8 35.9 Income (loss) before cumulative effect of accounting change...... (12.8) 43.2 41.8 57.2 (0.8) 51.6 Cumulative effect of accounting change, net of tax................. (5.9) -- -- -- -- -- Net income (loss)....... (18.7) 43.2 41.8 57.2 (0.8) 51.6 -------- ------- ------- ------- ------- ------- Balance Sheet Data Current assets.......... $ 236.1 $286.3 $240.5 $252.5 $257.5 $251.3 Working capital (2)..... (20.0) 8.3 44.1 50.2 100.0 73.2 Property and equipment, net.................... 79.3 84.6 88.6 74.1 67.6 67.0 Total assets............ 388.3 408.2 366.2 390.7 383.8 384.0 Short-term borrowings... -- 117.6 93.9 50.0 90.9 27.6 Long-term debt, including current maturities............. 684.8 3.6 3.6 3.6 3.9 53.9 Redeemable preferred stock.................. 48.8 -- -- -- -- -- Shareholders' equity (deficit).............. (586.3) 36.5 58.6 127.1 112.6 121.8 -------- ------- ------- ------- ------- ------- Common Share Data Basic EPS--before cumulative effect of accounting change...... $ (1.05) $ 1.27 $ 1.14 $ 1.47 $(0.02) $ 1.29 Basic EPS--net income (loss)................. (1.39) 1.27 1.14 1.47 (0.02) 1.29 Diluted EPS--before cumulative effect of accounting change...... (1.05) 1.27 1.14 1.47 (0.02) 1.28 Diluted EPS--net income (loss)................. (1.39) 1.27 1.14 1.47 (0.02) 1.28 Cash dividends declared per share (3).......... 0.22 0.88 0.88 0.88 0.22 0.88 Common shares outstanding at period end.................... 9.0 33.3 35.1 38.4 38.7 38.7 Stock price--high (3)... N/M 27.13 26.25 28.81 22.25 25.13 Stock price--low (3).... N/M 17.56 19.00 20.00 17.25 19.50 -------- ------- ------- ------- ------- ------- Other Data Depreciation and amortization of intangibles............ $ 28.9 $ 25.3 $ 23.2 $ 22.1 $ 9.9 $ 16.6 Adjusted EBITDA (4)..... 143.4 127.2 125.4 121.8 14.0 111.4 Adjusted EBITDA margin.. 17.8% 15.9% 15.9% 16.0% 5.0% 15.7% Capital expenditures.... 22.2 27.8 36.9 24.4 9.9 15.4 -------- ------- ------- ------- ------- -------
9 - -------- (1) Sales and cost of products sold for all periods presented have been reclassified to include revenue derived from shipping and handling charges in net sales as discussed in Item 7 and in Item 8, Note 1 of the Notes to Consolidated Financial Statements, included in this Form 10-K. (2) Represents current assets (excluding cash and cash equivalents) less current liabilities (excluding short-term borrowings and current maturities of long-term debt). (3) As a result of the merger and recapitalization on May 10, 2000 as discussed in Item 1, our common shares were de-listed from the New York Stock Exchange. Currently, there is no established public trading market for our common shares. In addition, subsequent to the merger and recapitalization we did not pay nor do we plan to pay dividends to any class of our common shareholders. (4) Adjusted EBITDA represents earnings before interest, taxes, depreciation and amortization, transaction costs, special charges, equity losses and write-down of investments, and the loss on the write-off of the JLC notes. Adjusted EBITDA is not a measure of performance under generally accepted accounting principles ("GAAP") and it should not be considered in isolation or as a substitute for net income, cash flows from operations, or other income and cash flow statement data prepared in accordance with GAAP, or as a measure of profitability or liquidity. Moreover, adjusted EBITDA is not a standardized measure and may be calculated in a number of ways. Accordingly, the adjusted EBITDA information provided might not be comparable to other similarly titled measures provided by other companies. Adjusted EBITDA is included herein because management understands that adjusted EBITDA is customarily used as a criterion in evaluation of companies. (5) The cumulative effect of accounting change, net of tax, reflects changes in our accounting for certain sales transaction as discussed in Item 7 and in Item 8, Note 1 of the Notes to Consolidated Financial Statements, included in this Form 10-K. Net income in 2000 also reflects a $6.7 million charge for equity losses and a write-down of two internet investments. (6) Net income in 1999 reflects a pre-tax special charge of $20.2 million ($13.3 million after tax). (7) Net income in 1998 reflects an after tax charge of $15.7 million for the write-off of JLC notes receivable of $12.0 million and related net deferred tax assets of $3.7 million. (8) Net income in 1998 and 1997 reflects pre-tax gains of $3.7 million ($2.2 million after tax) and $6.8 million ($4.0 million after tax), respectively, resulting from a reduction in LIFO gold inventories. (9) In 1996, the company changed its fiscal year end from June 30 to the Saturday closest to December 31, resulting in a six-month transition period from July 1 to December 28, 1996. 10 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Our disclosure and analysis in this report may contain some "forward-looking statements." Forward-looking statements give our current expectations or forecasts of future events. Forward-looking statements generally can be identified by the use of forward-looking terminology such as "may," "will," "expect," "intend," "estimate," "anticipate," "believe," "project," or "continue," or the negative thereof or similar words. From time to time, we also may provide oral or written forward-looking statements in other materials we release to the public. Any or all of our forward-looking statements in this report and in any public statements we make may turn out to be wrong. They can be affected by inaccurate assumptions we might make or by known or unknown risks or uncertainties. Consequently, no forward-looking statement can be guaranteed. Actual results may vary materially. Investors are cautioned not to place undue reliance on any forward-looking statements. Investors should also understand that it is not possible to predict or identify all such factors and should not consider the following list to be a complete statement of all potential risks and uncertainties. Any change in the following factors may impact the achievement of results: . our ability to satisfy our debt obligations, including related covenants; . our relationship with our independent sales representatives and employees; . 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; . fashion and demographic trends; . litigation cases, if decided against us, may adversely affect our financial results; and . environmental regulations that could impose substantial costs upon us and may adversely affect our financial results. The foregoing factors are not exhaustive, and new factors may emerge or changes to the foregoing factors may occur that would impact our business. 11 RESULTS OF OPERATIONS The following table sets forth selected information from our Consolidated Statements of Operations, expressed as a percentage of net sales.
Percentage of net sales Percentage change --------------------- ----------------- 2000 vs. 1999 vs. 2000 1999 1998 1999 1998 ------- ------ ------ -------- -------- Net Sales............................. 100.0% 100.0% 100.0% 0.5% 1.5% Cost of products sold................. 44.3% 46.0% 46.9% (3.3%) (0.5%) ------- ------ ------ -------- -------- Gross profit........................ 55.7% 54.0% 53.1% 3.7% 3.3% Selling and administrative expenses... 41.5% 41.3% 40.1% 1.0% 4.4% Transaction costs..................... 5.8% 0.0% 0.0% -- -- Special charge........................ 0.0% 2.5% 0.0% (98.8%) -- ------- ------ ------ -------- -------- Operating income.................. 8.4% 10.2% 13.0% (16.9%) (20.1%) Interest income....................... 0.2% 0.1% 0.0% 171.0% 33.1% Interest expense...................... 7.5% 0.9% 0.9% 704.9% 6.5% Equity losses and write-down of investments.......................... 0.8% 0.0% 0.0% -- -- Write-off of JLC notes receivable, net.................................. 0.0% 0.0% 1.5% -- (100.0%) ------- ------ ------ -------- -------- Income before income taxes.......... 0.3% 9.3% 10.6% (97.1%) (10.6%) Provision for income taxes............ 1.9% 3.9% 5.3% (52.6%) (24.5%) ------- ------ ------ -------- -------- Income (loss) before cumulative effect of accounting change................. (1.6%) 5.4% 5.3% (129.6%) 3.2% Cumulative effect of accounting change, net of tax................... (0.7%) 0.0% 0.0% -- -- ------- ------ ------ -------- -------- Net income (loss)................... (2.3%) 5.4% 5.3% (143.2%) 3.2% Dividends and accretion on redeemable preferred shares..................... (0.7%) 0.0% 0.0% -- -- ------- ------ ------ -------- -------- Net income (loss) available to common shareholders................ (3.0%) 5.4% 5.3% (156.7%) 3.2% ======= ====== ====== ======== ========
Net sales The change in net sales from 1999 to 2000 was due to price increases averaging approximately 2.2%, offset partially by volume/mix decreases of 1.7%. The change in net sales from 1998 to 1999 was due to price increases averaging approximately 3.1%, offset partially by volume/mix decreases of 1.6%. During the fourth quarter of 2000, we reclassified revenues derived from shipping and handling charges to net sales in accordance with the Emerging Issues Task Force (EITF) Issue No. 00-10, Accounting for Shipping and Handling Fees and Costs. Distribution and freight expenses for products shipped to customers continue to be included in cost of products sold. Previously, revenue from customers was recorded as a reduction of distribution and freight expenses within costs of products sold. Prior period revenues derived from shipping and handling charges have been reclassified to net sales, which had no effect on previously reported net income. This reclassification increased previously reported net sales by $18.8 million and $18.7 million in 1999 and 1998, respectively. 12 Year-to-date sales by segment and the changes between years were as follows:
Percentage change ----------------- 2000 vs. 1999 vs. 2000 1999 1998 1999 1998 -------- -------- -------- -------- -------- (In thousands) School Products................... $715,644 $691,252 $669,804 3.5% 3.2% Recognition....................... 80,265 99,800 106,358 (19.6%) (6.2%) Other............................. 9,138 10,234 13,417 (10.7%) (23.7%) -------- -------- -------- ------- ------- Consolidated net sales............ $805,047 $801,286 $789,579 0.5% 1.5% ======== ======== ======== ======= =======
School Products The increase in School Products sales from 1999 to 2000 was primarily due to: . price increases in our product lines; . sales increases in graduation announcements and caps and gowns due to winning new school accounts; . increased sales of graduation accessories; . increased sales dollars for yearbooks due to increased page count and add-on features; . fewer yearbook rebates and returns resulting from improvements with Jostens Direct Solutions ("JDS") (a direct payment program for parents of high school students); and . increased revenue from JDS processing fees due to more schools enrolled in the program. These increases were offset by decreases in jewelry sales due to: . weak sales in the high school market; . delays in school presentations caused by a new multi-media marketing tool which was recently put in place; and . the loss of a large account in the college market. The increase from 1998 to 1999 was primarily due to: . price increases in our product lines; . increased sales dollars for yearbooks due to increased page count and add-on features; and . a unit volume increase of 2.2% in Jewelry, primarily due to strong sales in the high school market and accelerated jewelry shipments into the fourth quarter of 1999. These increases were offset by: . a decline in sales of approximately $9.9 million in Jewelry, Graduation Products and Printing resulting from an independent sales group that left in mid-1998; . higher than expected yearbook rebates and returns due to problems encountered with JDS; . a decline in commercial printing volume (used to fill excess capacity); and . a decrease in photography sales due to closing eleven unprofitable retail sites and not renewing our relationships with a number of independent wholesale dealers. 13 Recognition The decreases in Recognition sales in 1999 and 2000 were primarily due to lost customers as a result of problems encountered with a system implementation that took place in 1999. Adding to the sales decrease in 2000, was a reduction in the number of sales representatives and a shift in sales to lower priced programs and general merchandise. Other Other segment sales decreased in 2000 as a result of exiting the college alumni direct marketing business in the fourth quarter of 1999. Sales from this business had declined from $7.4 million in 1998 to $3.1 million in 1999 due to fewer response rates and fewer mailings on direct marketing programs. Offsetting this decrease was higher sales of jewelry in our international business in 1999 and 2000 due to our replacing sales representatives in Puerto Rico in the second half of 1999. Gross Margin Gross margin in 2000 was 55.7%, compared with 54.0% in 1999 and 53.1% in 1998. The 1.7 percentage point increase in gross margin from 1999 to 2000 and the 0.9% increase from 1998 to 1999 were primarily the result of : . increased pricing; . continued emphasis on manufacturing efficiencies; . exiting the ring production facility in Nuevo Laredo, Mexico in 1999, which experienced higher than expected costs compared to production in the United States; and . closing eleven unprofitable retail photo sites in 1999. In addition, the increase in 2000 was partially due to favorable raw material costs particularly for gold and stones. Offsetting the increases in 1999 were: . approximately $2.5 million of expenses incurred to exit the Nuevo Laredo, Mexico facility; and . higher costs due to problems encountered with JDS. Selling and Administrative Expenses Selling and administrative expenses in 2000, 1999 and 1998 were $334.3 million, $330.9 million and $316.9 million, respectively. The increases in 1999 and 2000 reflect: . higher selling and marketing expenses related to programs and initiatives intended to increase our sales; and . higher commission expense partially due to changes in the commission program for graduation products and partially due to the timing of those changes. In addition, we incurred higher information system expenses in 1999 to ensure year 2000 readiness which resulted in higher depreciation expense in 2000. In 2000, the increases were offset by: . lower labor costs and headcount realized from the special charge taken in the fourth quarter of 1999; 14 . lower costs as a result of exiting the college alumni direct marketing business in the fourth quarter of 1999; . lower amortization expense due to the write-off of $3.0 million of goodwill as part of the 1999 special charge; and . reduced spending on temporary labor and other lower costs in our Recognition segment in 2000 compared with 1999 due to added costs resulting from problems encountered during the transition to a new system implemented in 1999. Transaction Costs We incurred costs consisting of professional fees and transaction expenses associated with the merger and recapitalization. Transaction costs of $46.4 million have been expensed as of December 30, 2000. The remaining costs of $36.5 million were deferred and are being amortized over the applicable lives of the associated debt for up to a maximum of ten years. Special Charge In the fourth quarter of 1999, we completed a strategic review of product lines, manufacturing operations, infrastructure projects and support functions based on performance trends. We decided to refocus our organization on sales growth versus infrastructure improvement. As a result of this review, we incurred a pre-tax special charge of $20.2 million ($13.3 million after tax) in 1999 and an additional $0.2 million to complete the project in 2000. Information relating to the special charge follows:
Net Balance Initial Used in Used in Adjustments end of accrual 1999 2000 in 2000 2000 ------- --------- -------- ----------- ------- (In thousands) Employee termination benefits.. $ 4,910 $ -- $(3,880) $ 714 $1,744 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 direct marketing sales channel to college alumni................ 3,086 (3,086) -- -- -- Other costs related to exiting the direct marketing sales channel to college alumni..... 1,183 (270) (436) (477) -- ------- --------- -------- ------ ------ $20,194 $(14,161) $(4,526) $ 237 $1,744 ======= ========= ======== ====== ======
Of the $20.4 million total special charge, $4.8 million relates to the School Products segment and $15.6 million relates to the "Other" segment. Of the total special charge, $5.6 million relates to employee termination benefits for the elimination of about 140 full-time positions, in corporate, recognition and executive functions as well as individuals affected by the exiting of the direct marketing sales channel to college alumni. Headcount reductions were completed in 2000 and termination benefits continue to be paid over the benefit period as specified under our severance plan. We accrued $4.9 million in termination benefits in 1999 and took an additional $0.7 million net charge in 2000 to revise our original exit plan to retain certain employees and eliminate the remaining approximately 40 full-time positions to complete the project. Included in other accrued liabilities on the consolidated balance sheet is the unpaid portion of the special charge of $1.7 million, related to these future termination benefits. 15 As part of the special charge, we wrote off $6.5 million in system development work primarily for account and product configuration software that will not be put into service. We reviewed and modified our strategies for the retail class ring product line and, as a result, determined that the carrying value of the related goodwill was impaired based upon anticipated inadequate projected cash flows. Accordingly, an impairment charge of $4.6 million was recorded as part of the special charge for the write-off of the carrying value of all of the goodwill. We also reviewed Jostens Direct, our direct marketing sales channel to college alumni, and decided, in the fourth quarter of 1999 to close down the business due to our expectations of a continued decline in sales volume. As a result, the remaining carrying value of the related goodwill of $3.1 million was written-off and other exit costs of $1.2 million were recorded during the fourth quarter of 1999. In 2000, we completed our exit activities and took into income $0.5 million of our original accrual that was not utilized. We estimate the pre-tax savings resulting from the implementation of the strategic review were approximately $8.0 million in 2000 and will provide future pre-tax savings of approximately $12.0 million annually in 2001 and thereafter. Subsequent Event--Restructuring Plans In March 2001, we announced our decision to consolidate three Recognition plants and implement a new customer service model as part of our effort to realign resources and streamline the Recognition segment's infrastructure and enhance profitability. We will close our distribution facility in Memphis, Tennessee, and our manufacturing facility in Sherbrooke, Quebec, and shift these functions to our existing plant in Princeton, Illinois. In addition, the Recognition segment's customer service function, currently operated from the Princeton and Memphis facilities, along with some financial functions, will be relocated to the Owatonna, Minnesota, facility. A new customer service model will be implemented to leverage new technologies at the Owatonna location. The consolidation is scheduled to be completed in the summer of 2001. The total cost of the consolidation project, which will be expensed in 2001, is estimated to be approximately $4.0 million for severance benefits and costs associated with closing the facilities. These costs will be partially offset by a gain on sale of the Memphis facility of approximately $2.4 million. Approximately 100 full-time positions will be eliminated from the Memphis plant and approximately 40 full-time positions will be eliminated from the Sherbrooke plant. In Princeton, 44 new positions will be created and in Owatonna about 30 new customer service positions will be added. Operating Income (Loss) Year-to-date operating income (loss) by segment and the changes from 1999 and 1998 were as follows:
Percentage change ------------------ 2000 to 1999 to 2000 1999 1998 1999 1998 --------- --------- --------- --------- -------- (In thousands) School Products.............. $148,615 $141,947 $127,016 4.7% 11.8% Recognition.................. (4,157) (361) 10,430 (1051.5%) (103.5%) Other........................ (76,636) (59,928) (35,257) (27.9%) (70.0%) --------- --------- --------- --------- -------- Consolidated operating income...................... $ 67,822 $ 81,658 $102,189 (16.9%) (20.1%) ========= ========= ========= ========= ========
16 School Products The increases in operating income in both 1999 and 2000 were due to manufacturing efficiencies and increased sales performance. Offsetting the increases in both 1999 and 2000 were higher marketing and selling expenses, higher commissions and an increase in the allocation of management information system expenses. Operating income in 1999 included $4.8 million of the special charge taken for the write-off of goodwill related to the retail class ring sales channel and a portion of employee termination benefits. In addition, operating income in 1999 included approximately $2.5 million of expenses incurred to exit the Nuevo Laredo, Mexico facility and move all ring manufacturing back to the United States. Operating income in 1998 included a one-time pre-tax benefit of $2.3 million due to a reduction in the remaining LIFO gold inventories resulting from our decision to consign gold. Recognition The decrease in operating income in 2000 was primarily due to a decrease in sales, an increase in bad debt expense and an increase in the allocation of management information system expenses as a result of 1999 system implementations. The decrease in operating income in 1999 was primarily due to a decrease in sales and higher spending on temporary labor and increases in other costs due to problems encountered during the transition to a new system implemented in 1999. In addition, 1998 operating income included a one-time pre-tax benefit of $1.4 million due to a reduction in the remaining LIFO gold inventories resulting from our decision to consign gold. Other The increase in operating loss from 1999 to 2000 was primarily due to transaction related costs of $46.4 million associated with the merger and recapitalization on May 10, 2000. This was partially 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 expenses related to year 2000 compliance efforts. The increase in operating loss from 1998 to 1999 was primarily due to: . costs of $15.4 million related to the special charge taken in the fourth quarter of 1999 including employee termination benefits, abandonment of internal use software under development and the write-off of goodwill and other costs related to exiting the direct marketing sales channel to college alumni; . higher costs related to investments in information systems as part of our year 2000 compliance efforts; and . higher costs associated with market development activities. Net Interest Expense Net interest expense was $58.9 million in 2000 compared with $7.0 million in 1999 and $6.7 million in 1998. The increase in 2000 is 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 merger and recapitalization. Equity Losses and Write-down of Investments In 2000, we recorded equity losses and a write-down to zero of our investments in two Internet companies resulting in a $6.7 million non-cash charge. 17 Write-off of JLC Notes Receivable, Net In June 1995, we sold our Jostens Learning Corp. ("JLC") curriculum software subsidiary to a group led by Bain Capital, Inc. As partial consideration for the sale, we received two notes receivable that were subsequently discounted and recorded at their estimated fair values. In addition, a transaction gain of $13.2 million was deferred in accordance with the SEC Staff Accounting Bulletin No. 81, "Gain Recognition on the Sale of a Business or Operating Assets to a Highly Leveraged Entity." The notes were subsequently recorded at their estimated fair value of $12.9 million, net of deferred gain. In January 1999, we received information indicating to us that the carrying value of the notes was permanently impaired. As a result, we wrote off $12.0 million in 1998 for the carrying value of the notes, net of miscellaneous JLC related assets and liabilities, plus $3.7 million of net deferred tax assets associated with the initial sale of JLC. We did not record a tax benefit related to the write-off for financial reporting purposes because the tax benefit may not be realized. Income Taxes Our 2000 provision for income taxes before the cumulative effect of accounting change was $14.9 million resulting in an effective rate of 691.3%. The deferred tax benefit of the cumulative effect of accounting change was $4.0 million. The provision for income taxes reflects the impact of non-deductible transaction related costs of approximately $27.0 million and a deferred tax asset valuation reserve of $2.7 million established for the equity losses and write-down of $6.7 million of two Internet investments. In 1999, our effective income tax rate was 42.2% compared to 49.9% in 1998. The 7.7 percentage point decrease in 1999 from 1998 was primarily due to the write-off of $3.7 million of net deferred tax assets related to the sale of JLC, and the fact that no tax benefit was recorded for financial reporting purposes on the write-off of the JLC notes. Other items that impacted our tax rates for 1999 and 1998 were the write-off of $3.1 million of nondeductible goodwill in connection with the special charge in 1999 and a benefit of $0.8 million for the reduction of a valuation reserve in 1998 to reflect the utilization of previously reserved foreign tax credits as a result of executed tax planning strategies. We expect our effective tax rate in 2001 to be approximately 41.5%. LIQUIDITY AND CAPITAL RESOURCES Our primary cash needs are for debt service obligations, capital expenditures, working capital, redeemable securities and general corporate purposes. Operating Activities Operating activities generated cash of $35.5 million in 2000 compared with $125.2 million in 1999 and $101.6 million in 1998. The decrease of $89.7 million in 2000 over 1999 was primarily due to lower net income as a result of expenses incurred of $46.4 million related to the merger and recapitalization and an increase in interest paid of $38.6 million. In addition, cash was unfavorably impacted by the payment of $7.5 million for a deferred management fee related to the transaction, severance payments of $3.9 million associated with the special charge taken in 1999, and the timing of other accrued liabilities all of which are included in the "Other" category on our Consolidated Statement of Cash Flows. Cash was also unfavorably impacted by the timing of customer deposits and accounts payable. In 2000, cash was favorably impacted by reduced inventories and reduced accounts receivable due to improvement in the number of days sales outstanding. The $23.6 million increase in 1999 over 1998 was primarily due to increased customer deposits, partially offset by other working capital decreases. 18 Investing Activities Capital expenditures in 2000, 1999 and 1998 were $22.2 million, $27.8 million and $36.9 million, respectively. The $5.6 million decrease in 2000 over 1999 and the $9.1 million decrease in 1999 over 1998 was primarily due to higher spending to replace information systems to ensure year 2000 compliance. The decrease in 2000 was partially offset by increased spending on new automation technology in our School Products segment. We anticipate capital spending in 2001 to be about $30.0 million relating mainly to marketing and sales initiatives. In 1999, we invested $10.6 million to take minority equity positions in three privately-held Internet-based companies. In 2000, we funded an additional investment of $1.1 million for one of these investments and sold our entire ownership position in another one of these investments for $5.0 million which resulted in no gain or loss. We recorded equity losses and a write-down of the two remaining investments resulting in a non-cash charge of $6.7 million. Financing Activities Net cash used by financing activities in 2000, 1999 and 1998 was $29.3 million, $52.1 million and $69.8 million, respectively. The decrease in net cash used by financing activities from 1999 to 2000 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, third and fourth quarters of 2000. These decreases were offset by payment of $25.25 for each share of common stock tendered in the transaction, the pay-off of credit facilities existing prior to the transaction and a $16.0 million voluntary pay down on our new senior secured credit facility. The decrease in cash used by financing activities from 1998 to 1999 was primarily due to more share repurchases in 1998. In mid 1999, we suspended our share repurchases due to the proposed merger and recapitalization. We experience seasonality that corresponds to the North American school year. This seasonality requires us to manage our cash flows over the course of the year. To help manage our cash flow, we entered into a $150 million, six year revolving credit facility that expires on May 31, 2006. At December 30, 2000, we had $147.4 million available under this facility. We also have a precious metals consignment arrangement with a major financial institution whereby we have the ability to obtain up to $30.0 million in consigned inventory. At December 30, 2000, we had $13.2 million available under this arrangement. Mandatory principal payments obligations under term loan A are approximately $4.5 million due June 30, 2001 and approximately $9.0 million due December 31, 2001. Thereafter, semi-annual principal payments increase approximately $1.12 million per semi-annual period through December 2005, with a final payment of approximately $9.0 million due in May 2006. Mandatory principal payment obligations under term loan B are approximately $0.5 million due June 30, 2001 and approximately $1.0 million semi-annually thereafter through December 2005. Semiannual payments increase on an escalating scale from approximately $25.4 million in June 2006 to approximately $112.2 million in December 2007, with a final payment of approximately $66.1 million due in May 2008. The $225.0 million in senior subordinated notes come due May 2010. In addition, mandatory interest payment obligations on the senior subordinated notes are $14.3 million semi-annually through May 2010. The redeemable, payment-in-kind, preferred shares have an initial liquidation preference of $60.0 million and are entitled to receive dividends at 14.0% per annum, compounded quarterly, and are payable either in cash or in additional shares of the same series of preferred stock. We plan to pay dividends in additional shares of preferred stock for the foreseeable future. The redeemable preferred shares are subject to mandatory redemption by Jostens in May 2011. 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"). 19 The senior secured credit facility is collateralized by substantially all the assets of our domestic operations and all of our capital stock (limited to 65% 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% 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. COMMITMENTS AND CONTINGENCIES Environmental As part of our environmental management program, we are involved in various environmental remediation activities. As sites are identified and assessed in this program, we determine potential environmental liabilities. Factors considered in assessing liability include, but are not limited to: whether we have been designated as a potentially responsible party, the number of other potentially responsible parties designated at the site, the stage of the proceedings and available environmental technology. As of the end of 2000, we had identified three sites requiring further investigation. However, we have not been designated as a potentially responsible party at any site. In 1996, we assessed the likelihood that a loss had been incurred at one of these sites as probable based on findings included in remediation reports and from discussions with legal counsel. As of the end of 2000, we had made payments of $5.5 million for remediation, and at December 30, 2000, $1.1 million was accrued and is included in "other accrued liabilities" on the consolidated balance sheet. While we may have a right of contribution or reimbursement under insurance policies, amounts recoverable from other entities with respect to a particular site are not considered until recoveries are deemed probable. No assets for potential recoveries were established as of the end of 2000. We believe the effect on our consolidated results of operations, cash flows and financial position, if any, for the disposition of these matters will not be material. Litigation A federal antitrust action was served on Jostens on October 23, 1998. The complainant, Epicenter Recognition, Inc. ("Epicenter"), alleges that we attempted to monopolize the market of high school graduation products in the state of California. Epicenter is a successor to a corporation formed by four of our former sales representatives. The plaintiff is claiming damages of approximately $3 million to $10 million under various theories and differing sized relevant markets. Trial is scheduled to begin April 3, 2001 in which Epicenter has waived its right to a jury, so the case will be tried before a judge in U.S. District Court in Orange County, California. We believe the effect on our consolidated results of operations, cash flows and financial position, if any, for the disposition of these matters will not be material. In February 1998, we entered into an Information Technology Master Services Agreement with Ernst & Young LLP to provide guidance and consulting services for implementation of a company wide enterprise resource planning ("ERP") system. Under the Master Agreement, Ernst & Young LLP provided project management, guidance and consulting. We claim this work was deficient and substandard in various material respects constituting a breach of the Master Agreement entitling us to significant damages. In August 2000, the parties conducted a mandatory mediation which proved unsuccessful resulting in pending arbitration. Ernst & Young LLP claims are $0.3 million in unpaid fees. We claim damages in excess of $150.0 million, including over $9.0 million paid to Ernst & Young LLP on account of the engagement. We are a party to other litigation arising in the normal course of business. We regularly analyze current information and, as necessary, provide accruals for probable liabilities on the eventual disposition of these 20 matters. We believe the effect on our consolidated results of operations, cash flows and financial position, if any, for the disposition of these matters will not be material. NEW ACCOUNTING STANDARDS Accounting for Derivative Instruments and Hedging Activities In June 1998, the Financial Accounting Standards Board (FASB) issued SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities. Subsequently in June 2000, the FASB issued SFAS No. 138, which amends SFAS No. 133. These statements modify the accounting and reporting for derivative instruments and hedging activities and are required to be adopted in years beginning after June 15, 2000. We adopted these new standards effective the first quarter of 2001, and the effect of adoption is not currently expected to have a material impact on our future financial position, cash flows or results of operations. Revenue Recognition In December 1999, the Securities and Exchange Commission issued Staff Accounting Bulletin No. 101, Revenue Recognition in Financial Statements (SAB 101), which among other guidance, clarified the Staff's views on various revenue recognition and reporting matters. As a result, we changed our method of accounting for certain sales transactions. Under our previous policy, we recognized revenue upon shipment of the product from our production facility. Under the new accounting method adopted retroactive to January 1, 2000, we now defer revenue and direct costs until the product is delivered to the end consumer. The cumulative effect of the change resulted in a non-cash charge to net income of $5.9 million (net of an income tax benefit of $4.0 million) for the year ended December 30, 2000. The effect of the change on the year ended December 30, 2000, was to decrease operating income by $0.8 million. The pro forma amounts presented in the consolidated statements of income were calculated assuming the accounting change was made retroactively to prior periods. The quarterly pro forma information after adopting this new accounting method, retroactive to January 1, 2000, is as follows:
2000 ---------------------------------------------- First Second Third Fourth Quarter Quarter Quarter Quarter Year -------- -------- -------- -------- -------- (In thousands) Net sales..................... $154,836 $344,712 $117,118 $188,381 $805,047 Gross profit.................. 89,604 189,906 53,630 115,624 448,764 Selling and administrative expenses..................... 78,372 104,286 67,642 84,032 334,332 Operating income (loss)....... 11,232 39,909 (14,151) 30,832 67,822 Net income (loss)............. 5,849 3,062 (21,125) (551) (12,765)
Accounting for Shipping and Handling Fees and Costs Revenues derived from shipping and handling charges are included in net sales in accordance with the Emerging Issues Task Force (EITF) No. 00-10, Accounting for Shipping and Handling Fees and Costs. Additionally, distribution and freight expenses for products shipped to customers are included in cost of products sold. Previously, revenue from customers was recorded as a reduction of distribution and freight expenses within costs of products sold. Prior period revenues derived from shipping and handling charges have been reclassified to net sales, which had no effect on previously reported net income. This reclassification increased previously reported net sales by $18.8 million and $18.7 million in 1999 and 1998, respectively. 21 ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Market Risk We are subject to market risk associated with changes in commodity prices, interest rates and foreign currency exchange rates. To reduce any one of these risks, we may at times use financial instruments. All hedging transactions are authorized and executed under clearly defined policies and procedures, which prohibit the use of financial instruments for trading purposes. Commodity Price Risk Our results of operations could be significantly affected by changes in the price of gold. To manage the risk associated with gold price changes, on an annual basis we simultaneously set our pricing to customers and enter into gold forward or option contracts based upon the estimated ounces needed to satisfy customer requirements. We prepared a sensitivity analysis as of the end of 2000 to estimate our exposure to market risk on our open gold forward purchase contracts. The fair market value of our gold positions was calculated by valuing each position at quoted futures prices as of the end of 2000 and 1999, and was $10.8 million and $18.0 million, respectively. The market risk associated with these contracts was $1.1 million and $1.8 million as of the end of 2000 and 1999, respectively, and is estimated as the potential loss in fair value resulting from a hypothetical 10% adverse change in such prices. Interest Rate Risk For 1999, our earnings were affected by changes in short-term interest rates as a result of issuing commercial paper. For 2000, our earnings were 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% more or less in 2000 and 1999, our interest expense would have changed by approximately $2.9 million and $0.7 million in 2000 and 1999, respectively. As of the end of 2000 and 1999, the fair value of our debt, excluding the senior subordinated notes (the "notes"), approximated its carrying value and is estimated based on quoted market prices for comparable instruments. The fair value of the notes at December 30, 2000 was $204.8 million and was estimated based on a quoted market price of $910 per unit for the notes. Our senior secured credit facility bears a variable interest rate predominantly linked to the London Interbank Offered Rate ("LIBOR"), as determined in three month intervals, plus a fixed spread. To manage our exposure to changes in the variable interest rate, 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% as opposed to LIBOR. 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 December 30, 2000 was a liability of $3.0 million. There were no open interest rate swap agreements as of the end of 1999. Foreign Currency Risk We may enter into foreign currency forward contracts to hedge purchases of inventory in foreign currency. The purpose of these hedging activities is to protect us from the risk that inventory purchases denominated in foreign currencies will be adversely affected by changes in foreign currency rates. Our principal currency exposures relate to the Canadian dollar and German mark. We consider our market risk in such activities to be immaterial. Our foreign operations are primarily in Canada, and substantially all transactions are denominated in the local currency. Therefore, the exposure to exchange risks is not considered to be material. 22 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Report of Independent Accountants To the Shareholders and Directors of Jostens, Inc.: In our opinion, the accompanying consolidated balance sheet as of December 30, 2000 and the related consolidated statements of operations, of changes in shareholders' equity (deficit) and comprehensive income (loss) and of cash flows present fairly, in all material respects, the consolidated financial position of Jostens, Inc. and its subsidiaries as of December 30, 2000, and the consolidated results of their operations and their cash flows for the year then ended in conformity with accounting principles generally accepted in the United States of America. These financial statements are the responsibility of the Jostens Inc.'s management; our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit of these financial statements in accordance with auditing standards generally accepted in the United States of America, which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. As discussed in Note 1 to the consolidated financial statements, Jostens, Inc. changed its method of recognizing revenue for certain transactions, pursuant to Staff Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements." /s/ PricewaterhouseCoopers LLP PricewaterhouseCoopers LLP Minneapolis, Minnesota March 27, 2001 23 Report of Independent Auditors To the Shareholders and Directors of Jostens, Inc.: We have audited the accompanying consolidated balance sheet of Jostens, Inc. and subsidiaries as of January 1, 2000, and the related consolidated statements of operations, changes in shareholders' investment and cash flows for each of the two fiscal years in the period ended January 1, 2000. Our audits also included the related financial statement schedule listed in the Index at Item 14(a). These financial statements and schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Jostens, Inc. and subsidiaries as of January 1, 2000, and the consolidated results of their operations and their cash flows for each of the two fiscal years in the period ended January 1, 2000, in conformity with accounting principles generally accepted in the United States. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein. /s/ Ernst & Young LLP Ernst & Young LLP Minneapolis, Minnesota February 2, 2000 24 JOSTENS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS
2000 1999 1998 -------- -------- -------- (In thousands, except per- share data) Net sales......................................... $805,047 $801,286 $789,579 Cost of products sold............................. 356,283 368,539 370,457 -------- -------- -------- Gross profit.................................... 448,764 432,747 419,122 Selling and administrative expenses............... 334,332 330,895 316,933 Transaction costs................................. 46,373 -- -- Special charge.................................... 237 20,194 -- -------- -------- -------- Operating income................................ 67,822 81,658 102,189 Interest income................................... 1,320 487 366 Interest expense.................................. 60,252 7,486 7,026 Equity losses and write-down of investments....... 6,730 -- -- Write-off of JLC notes receivable, net............ -- -- 12,009 -------- -------- -------- Income before income taxes...................... 2,160 74,659 83,520 Provision for income taxes........................ 14,925 31,480 41,700 -------- -------- -------- Income (loss) before cumulative effect of accounting change................................ (12,765) 43,179 41,820 Cumulative effect of accounting change, net of tax.............................................. (5,894) -- -- -------- -------- -------- Net income (loss)............................... (18,659) 43,179 41,820 Dividends and accretion on redeemable preferred shares........................................... (5,841) -- -- -------- -------- -------- Net income (loss) available to common shareholders................................... $(24,500) $ 43,179 $ 41,820 ======== ======== ======== Earnings (loss) per common share Basic Before cumulative effect of accounting change....................................... $ (1.05) $ 1.27 $ 1.14 Cumulative effect of accounting change........ (0.33) -- -- -------- -------- -------- Basic earnings (loss) per common share...... $ (1.39) $ 1.27 $ 1.14 ======== ======== ======== Diluted Before cumulative effect of accounting change....................................... $ (1.05) $ 1.27 $ 1.14 Cumulative effect of accounting change........ (0.33) -- -- -------- -------- -------- Diluted earnings (loss) per common share.... $ (1.39) $ 1.27 $ 1.14 ======== ======== ======== Weighted average common shares outstanding Basic........................................... 17,663 34,004 36,527 Diluted......................................... 17,663 34,093 36,705 Proforma amounts assuming the accounting change had been in effect for all periods presented (unaudited) Net income (loss)............................... $(12,765) $ 43,747 $ 42,315 Net income (loss) available to common shareholders................................... $(18,606) $ 43,747 $ 42,315 Earnings (loss) available to common shareholders per common share Basic......................................... $ (1.05) $ 1.29 $ 1.16 Diluted....................................... $ (1.05) $ 1.28 $ 1.15
The accompanying notes are an integral part of the consolidated financial statements. 25 JOSTENS, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS December 30, 2000 and January 1, 2000
2000 1999 --------- -------- (In thousands, except per-share data) ASSETS Current assets Cash and cash equivalents................................ $ 26,552 $ 38,517 Accounts receivable, net of allowance of $4,361 and $5,775, respectively.................................... 64,944 107,638 Inventories.............................................. 91,230 87,839 Deferred income taxes.................................... 17,995 17,400 Salespersons overdrafts, net of allowance of $5,568 and $6,332, respectively.................................... 27,227 26,194 Prepaid expenses and other current assets................ 8,154 8,721 --------- -------- Total current assets................................... 236,102 286,309 --------- -------- Other assets Intangibles, net......................................... 17,662 18,895 Deferred financing costs, net............................ 33,360 23 Other.................................................... 21,812 18,304 --------- -------- Total other assets..................................... 72,834 37,222 --------- -------- Property and equipment, net.............................. 79,345 84,640 --------- -------- $ 388,281 $408,171 ========= ======== LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT) Current liabilities Short-term borrowings.................................... $ -- $117,608 Accounts payable......................................... 24,430 23,641 Accrued employee compensation and related taxes.......... 30,826 29,478 Commissions payable...................................... 19,895 26,134 Customer deposits........................................ 108,848 112,958 Income taxes payable..................................... 15,155 17,223 Interest payable......................................... 10,096 2,136 Current portion of long-term debt........................ 14,974 -- Other accrued liabilities................................ 20,347 27,964 --------- -------- Total current liabilities.............................. 244,571 357,142 Long-term debt, net of current maturities................ 669,807 3,600 Other noncurrent liabilities............................. 11,382 10,919 --------- -------- Total liabilities...................................... 925,760 371,661 Commitments and contingencies Redeemable preferred shares, $.01 par value, liquidation preference $64,056 authorized 307.5 shares, issued and outstanding; December 30, 2000 - 64..................... 48,841 -- Preferred shares, $.01 par value: authorized 4,000 shares, issued and outstanding; December 30, 2000 - 64 in the form of redeemable preferred shares listed above; 3,936 undesignated...................................... -- -- Shareholders' equity (deficit) Common shares (note 11).................................. 1,015 11,108 Additional paid-in-capital - warrants.................... 24,733 -- Officer notes receivable................................. (1,775) -- Retained earnings (accumulated deficit).................. (604,102) 31,072 Accumulated other comprehensive loss..................... (6,191) (5,670) --------- -------- Total shareholders' equity (deficit)................... (586,320) 36,510 --------- -------- $ 388,281 $408,171 ========= ========
The accompanying notes are an integral part of the consolidated financial statements. 26 JOSTENS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS
2000 1999 1998 --------- -------- -------- (In thousands) Operating activities Net income (loss)............................... $ (18,659) $ 43,179 $ 41,820 Depreciation.................................... 26,875 23,329 20,587 Amortization of debt discount and deferred financing costs................................ 3,741 -- -- Amortization.................................... 2,064 2,009 2,584 Deferred income taxes........................... 3,079 (2,671) 15,712 Special charge (non-cash portion)............... -- 14,101 -- Equity losses and write-down of investments..... 6,730 -- -- Write-off of JLC notes receivable, net.......... -- -- 12,009 Cumulative effect of accounting change, net of tax............................................ 5,894 -- -- Changes in assets and liabilities, net of effects of business acquisition: Accounts receivable........................... 17,366 (1,291) 2,167 Inventories................................... 5,694 2,655 1,568 Salespersons overdrafts....................... (1,033) (5,505) 4,806 Prepaid expenses and other current assets..... 567 (2,984) (1,058) Accounts payable.............................. 789 8,364 (1,171) Accrued employee compensation and related taxes........................................ 1,348 1,918 8,114 Commissions payable........................... 98 4,003 2,909 Customer deposits............................. (4,110) 20,866 (6,567) Interest payable.............................. 7,960 -- -- Income taxes payable.......................... (2,068) 12,593 (6,044) Other......................................... (20,823) 4,653 4,179 --------- -------- -------- Net cash provided by operating activities.... 35,512 125,219 101,615 --------- -------- -------- Investing activities Purchases of property and equipment............. (22,158) (27,830) (36,936) Proceeds from sale of equity investments........ 4,691 -- -- Purchase of equity investments.................. (1,119) (10,611) -- Other........................................... 421 1,262 1,675 --------- -------- -------- Net cash used for investing activities....... (18,165) (37,179) (35,261) --------- -------- -------- Financing activities Net short-term borrowings (repayments).......... (117,608) 15,281 38,248 Repurchases of common stock..................... (823,659) (39,853) (80,001) Principal payments on long-term debt............ (19,600) -- -- Proceeds from issuance of long-term debt........ 700,139 -- -- Proceeds from issuance of common shares......... 208,695 -- -- Net proceeds from issuance of preferred stock... 43,000 -- -- Proceeds from issuance of warrants to purchase common shares.................................. 24,733 -- -- Debt financing costs............................ (36,459) -- -- Dividends paid to common shareholders........... (7,331) (29,998) (32,332) Other........................................... (1,222) 2,452 4,258 --------- -------- -------- Net cash used for financing activities....... (29,312) (52,118) (69,827) --------- -------- -------- Change in cash and cash equivalents............. (11,965) 35,922 (3,473) Cash and cash equivalents, beginning of period.. 38,517 2,595 6,068 --------- -------- -------- Cash and cash equivalents, end of period........ $ 26,552 $ 38,517 $ 2,595 ========= ======== ======== Supplemental information Income taxes paid............................... $ 13,914 $ 20,623 $ 32,357 Interest paid................................... $ 44,256 $ 5,702 $ 6,426 --------- -------- --------
The accompanying notes are an integral part of the consolidated financial statements. 27 JOSTENS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (DEFICIT) AND COMPREHENSIVE INCOME (LOSS)
Accumu- Retained lated Additional earnings other Compre- Common shares paid-in- Officer (accumu- compre- hensive ----------------- capital Capital notes lated hensive income Number Amount warrants surplus receivable deficit) loss Total (loss) ------- -------- ---------- --------- ---------- --------- ------- --------- -------- (In thousands, except per-share data) Balance--January 3, 1998.................. 38,422 $ 12,853 $ -- $ -- $ -- $ 119,378 $(5,138) $ 127,093 Exercise of stock options and restricted stock, net............ 234 78 4,180 4,258 Cash dividends declared to common shareholders of $0.88 per share.... (32,332) (32,332) Repurchases of common stock................. (3,585) (1,241) (4,521) (74,239) (80,001) Tax benefit of stock options............... 341 341 Net income............. 41,820 41,820 $ 41,820 Change in cumulative translation adjustment............ (1,576) (1,576) (1,576) Adjustment in minimum pension liability, net of $649 tax........... (1,051) (1,051) (1,051) -------- Comprehensive income... $ 39,193 ------- -------- ------- --------- ------- --------- ------- --------- ======== Balance--January 2, 1999.................. 35,071 11,690 -- -- -- 54,627 (7,765) 58,552 Exercise of stock options and restricted stock, net............ 129 43 2,409 2,452 Cash dividends declared to common shareholders of $0.88 per share.... (29,998) (29,998) Repurchases of common stock................. (1,876) (625) (2,492) (36,736) (39,853) Tax benefit of stock options............... 83 83 Net income............. 43,179 43,179 $ 43,179 Change in cumulative translation adjustment............ 1,078 1,078 1,078 Adjustment in minimum pension liability, net of $667 tax........... 1,017 1,017 1,017 -------- Comprehensive income $ 45,274 ------- -------- ------- --------- ------- --------- ------- --------- ======== 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) (603,343) (823,659) Issuance of warrants to purchase common shares................ 24,733 24,733 Payment on officer note receivable............ 275 275 Preferred stock dividends............. (5,551) (5,551) Preferred stock accretion............. (290) (290) Net loss............... (18,659) (18,659) $(18,659) Change in cumulative translation adjustment............ (599) (599) (599) Adjustment in minimum pension liability, net of $51 tax............ 78 78 78 -------- Comprehensive loss..... -- $(19,180) ------- -------- ------- --------- ------- --------- ------- --------- ======== Balance--December 30, 2000.................. 8,993 $ 1,015 $24,733 $ -- $(1,775) $(604,102) $(6,191) $(586,320) ======= ======== ======= ========= ======= ========= ======= =========
The accompanying notes are an integral part of the consolidated financial statements. 28 JOSTENS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. Summary of Significant Accounting Policies Our Business We are a leading manufacturer and marketer of school-related affinity products and one of the leading manufacturers and suppliers of corporate-based affinity products that help people celebrate important moments, recognize achievements and build affiliations. Fiscal Year Our fiscal year ends the Saturday closest to December 31. Fiscal years 2000, 1999 and 1998 ended on December 30, 2000, January 1, 2000 and January 2, 1999, respectively. Normally each fiscal year consists of 52 weeks, but periodically, there will be a 53-week year. Principles of Consolidation Our consolidated financial statements include the accounts of our company and our wholly-owned subsidiaries. Intercompany accounts and transactions have been eliminated. Certain amounts have been reclassified to conform to the 2000 presentation. These reclassifications had no impact on our net income, shareholders' equity, or cash provided by operating activities. Use of Estimates The preparation of our consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires us to make estimates and assumptions that affect the amounts reported in our consolidated financial statements and accompanying notes. Actual results could differ from those estimates. Cash and Cash Equivalents Cash and cash equivalents include cash on hand, time deposits and commercial paper all having an original maturity of three months or less. Inventories Inventories are stated at the lower of cost or market. Cost is determined by the first-in, first-out (FIFO) method for all inventories except gold and certain other precious metals, which are determined using the last-in, first- out (LIFO) method. LIFO inventories were $0.1 million as of the end of 2000 and 1999 and approximated replacement cost. Net income in 1998 reflects a pre-tax gain of $3.7 million ($2.2 million after tax) resulting from a reduction in LIFO gold inventories. Intangibles Intangibles primarily represent the excess of the purchase price over the fair value of the net tangible assets of acquired businesses and are amortized over various periods of up to 40 years. Accumulated amortization of intangibles as of the end of 2000 and 1999 was $15.2 million and $14.1 million, respectively. 29 JOSTENS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Property and Equipment Property and equipment are stated at cost. Depreciation and amortization is computed for financial reporting purposes by principally using the straight- line method over the following estimated useful lives:
Years -------- Buildings........................................................ 15 to 40 Machinery and equipment.......................................... 3 to 10 Capitalized software............................................. 2 to 5
Impairment of Long-Lived Assets We review long-lived assets for impairment when events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. If impairment indicators are present and the estimated future undiscounted cash flows are less than the carrying value of the assets and any related goodwill, the carrying value is reduced to the estimated fair value as measured by the future discounted cash flows. Income Taxes Deferred taxes are recognized for the estimated taxes ultimately payable or recoverable based on enacted tax law. Changes in enacted tax rates are reflected in the tax provision as they occur. Revenue Recognition, Sales Returns and Warranty Costs We recognize revenue when the earnings process is complete, evidenced by an agreement between Jostens and the customer, there has been delivery and acceptance, collectibility is probable and pricing is fixed and determinable. Provisions for sales returns and warranty costs are recorded at the time of sale based on historical information and current trends. Foreign Currency Translation Assets and liabilities denominated in foreign currency are translated at the current exchange rate as of the balance sheet date, and income statement amounts are translated at the average monthly exchange rate. Translation adjustments resulting from fluctuations in exchange rates are recorded in comprehensive income (loss) in shareholders' equity (deficit). Supplier Concentration We purchase substantially all synthetic and semiprecious stones from a single supplier located in Germany, who is also the supplier to substantially all of the class ring manufactures in the United States. Financial Instruments From time to time, we may use derivative financial instruments to manage market risks and reduce our exposure resulting from fluctuations in foreign currency and interest rates. Financial instruments are not used for trading purposes. See Note 7 for a description of our interest rate swap agreement and Note 14 for a description of our gold forward contracts. We also may enter into foreign currency forward contracts to hedge purchases of inventory in foreign currency. The purpose of these hedging activities is to protect us from the risk that inventory purchases 30 JOSTENS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) denominated in foreign currency will be adversely affected by changes in foreign currency rates. The amount of contracts outstanding at December 30, 2000 was $1.9 million. There were no foreign currency contracts outstanding as of the end of 1999. Gains or losses on forward contracts used to purchase inventory for which we have firm purchase commitments qualify as accounting hedges and are therefore deferred and recognized in income when the inventory is sold. Counter parties expose us to credit loss in the event of nonperformance as measured by the unrealized gains on the contracts. At December 30, 2000 and January 1, 2000, there were no material unrealized gains or losses on outstanding foreign currency forward contracts or gold forward contracts. Earnings (Loss) Per Common Share Basic earnings (loss) per share are computed by dividing net income (loss) available to common shareholders by the weighted average number of common shares outstanding. Diluted earnings (loss) per share are computed by dividing net income (loss) available to common shareholders by the weighted average number of common shares outstanding, including the dilutive effects of warrants, options and restricted stock. Unless otherwise noted, references are to diluted earnings (loss) per share. Basic and diluted earnings (loss) per share were calculated using the following:
2000 1999 1998 -------- ------- ------- (In thousands, except per-share data) Net income (loss) before cumulative effect of accounting change............................... $(12,765) $43,179 $41,820 Cumulative effect of accounting change, net of tax............................................. (5,894) -- -- -------- ------- ------- Net income (loss)................................ (18,659) 43,179 41,820 Dividends and accretion on redeemable preferred shares.......................................... (5,841) -- -- -------- ------- ------- Net income (loss) available to common shareholders.................................... $(24,500) $43,179 $41,820 ======== ======= ======= Weighted average number of common shares outstanding--basic.............................. 17,663 34,004 36,527 Dilutive shares.................................. -- (1) 89 178 -------- ------- ------- Weighted average number of common shares outstanding--diluted............................ 17,663 34,093 36,705 ======== ======= ======= - -------- (1) Options and warrants to purchase approximately 1.5 million shares were not included as their effect would have been antidilutive. Earnings (loss) per common share Basic Before cumulative effect of accounting change...................................... $ (1.05) $ 1.27 $ 1.14 Cumulative effect of accounting change....... (0.33) -- -- -------- ------- ------- Basic earnings (loss) per common share..... $ (1.39) $ 1.27 $ 1.14 ======== ======= ======= Diluted Before cumulative effect of accounting change...................................... $ (1.05) $ 1.27 $ 1.14 Cumulative effect of accounting change....... (0.33) -- -- -------- ------- ------- Diluted earnings (loss) per common share... $ (1.39) $ 1.27 $ 1.14 ======== ======= =======
31 JOSTENS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Stock-Based Compensation We use the intrinsic value method prescribed by Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees," and related interpretations in accounting for stock options granted to employees and non employee directors. New Accounting Standards Accounting for Derivative Instruments and Hedging Activities -- In June 1998, the Financial Accounting Standards Board (FASB) issued SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities. Subsequently in June 2000, the FASB issued SFAS No. 138, which amends SFAS No. 133. These statements modify the accounting and reporting for derivative instruments and hedging activities and are required to be adopted in years beginning after June 15, 2000. We adopted these new standards effective the first quarter of 2001, and the effect of adoption is not currently expected to have a material impact on our future financial position, cash flows or results of operations. Revenue Recognition -- In December 1999, the Securities and Exchange Commission issued Staff Accounting Bulletin No. 101, Revenue Recognition in Financial Statements (SAB 101), which, among other guidance, clarified the Staff's views on various revenue recognition and reporting matters. As a result, we changed our method of accounting for certain sales transactions. Under our previous policy, we recognized revenue upon shipment of the product from our production facility. Under the new accounting method adopted retroactive to January 1, 2000, we now defer revenue and direct costs until the product is delivered to the end consumer. The cumulative effect of the change resulted in a non-cash charge to net income of $5.9 million (net of an income tax benefit of $4.0 million) for the year ended December 30, 2000. The effect of the change on the year ended December 30, 2000, was to decrease operating income by $0.8 million. The pro forma amounts presented in the consolidated statements of income were calculated assuming the accounting change was made retroactively to prior periods. The (unaudited) quarterly pro forma information after adopting this new accounting method, retroactive to January 1, 2000, is as follows:
2000 ---------------------------------------------- First Second Third Fourth Quarter Quarter Quarter Quarter Year -------- -------- -------- -------- -------- (In thousands) Net sales..................... $154,836 $344,712 $117,118 $188,381 $805,047 Gross profit.................. 89,604 189,906 53,630 115,624 448,764 Selling and administrative expenses..................... 78,372 104,286 67,642 84,032 334,332 Operating income (loss)....... 11,232 39,909 (14,151) 30,832 67,822 Net income (loss)............. 5,849 3,062 (21,125) (551) (12,765)
Accounting for Shipping and Handling Fees and Costs -- Revenues derived from shipping and handling charges are included in net sales in accordance with the Emerging Issues Task Force (EITF) No. 00-10, Accounting for Shipping and Handling Fees and Costs. Additionally, distribution and freight expenses for products shipped to customers are included in cost of products sold. Previously, revenue from customers was recorded as a reduction of distribution and freight expenses within costs of products sold. Prior period revenues derived from shipping and handling charges have been reclassified to net sales, which had no effect on previously reported net income. This reclassification increased previously reported net sales by $18.8 million and $18.7 million in 1999 and 1998, respectively. 32 JOSTENS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) 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. (Investcorp) 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% of our post- merger common stock. The remaining 8% 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. Recapitalization Financing The recapitalization was funded by (a) $495.0 million of borrowings under a senior 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 affiliates of Investcorp and the other investors. The proceeds from these financings funded (a) the payment of approximately $823.6 million to holders of common stock representing $25.25 per share, (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 an affiliate of Investcorp and (e) a pre-payment of $7.5 million for a management and consulting services agreement for a five-year term with an affiliate of 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 $46.4 million consisting of investment banking fees, transaction fees, legal and accounting fees, transition bonuses, stock option payments and other miscellaneous costs were expensed in the year ended December 30, 2000. Additionally, $3.0 million of recapitalization costs incurred related to the issuance of shares of redeemable preferred stock were 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. 3. Special Charge In the fourth quarter of 1999, we completed a strategic review of product lines, manufacturing operations, infrastructure projects and support functions based on performance trends. We decided to refocus our organization on sales growth versus infrastructure improvement. As a result of this review, we incurred a pre-tax special charge of $20.2 million ($13.3 million after tax) in 1999 and an additional $0.2 million to complete the project in 2000. 33 JOSTENS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Information relating to the special charge follows:
Net Balance Initial Used in Used in Adjustments end of accrual 1999 2000 in 2000 2000 ------- -------- ------- ----------- ------- (In thousands) Employee termination benefits.. $ 4,910 $ -- $(3,880) $ 714 $1,744 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 direct marketing sales channel to college alumni................ 3,086 (3,086) -- -- -- Other costs related to exiting the direct marketing sales channel to college alumni..... 1,183 (270) (436) (477) -- ------- -------- ------- ----- ------ $20,194 $(14,161) $(4,526) $ 237 $1,744 ======= ======== ======= ===== ======
Of the $20.4 million total special charge, $4.8 million relates to the School Products segment and $15.6 million relates to the "Other" segment. Of the total special charge, $5.6 million relates to employee termination benefits for the elimination of about 140 full-time positions, in corporate, recognition and executive functions as well as individuals affected by the exiting of the direct marketing sales channel to college alumni. Headcount reductions were completed in 2000 and termination benefits continue to be paid over the benefit period as specified under our severance plan. We accrued $4.9 million in termination benefits in 1999 and took an additional $0.7 million net charge in 2000 to revise our original exit plan to retain certain employees and eliminate the remaining approximately 40 full-time positions to complete the project. Included in other accrued liabilities on the consolidated balance sheet is the unpaid portion of the special charge of $1.7 million, related to these future termination benefits. As part of the special charge, we wrote off $6.5 million in system development work primarily for account and product configuration software that will not be put into service. We reviewed and modified our strategies for the retail class ring product line and, as a result, determined that the carrying value of the related goodwill was impaired based upon anticipated inadequate projected cash flows. Accordingly, an impairment charge of $4.6 million was recorded as part of the special charge for the write-off of the carrying value of all of the goodwill. We also reviewed Jostens Direct, our direct marketing sales channel to college alumni, and decided, in the fourth quarter of 1999 to close down the business due to our expectations of a continued decline in sales volume. As a result, the remaining carrying value of the related goodwill of $3.1 million was written-off and other exit costs of $1.2 million were recorded during the fourth quarter of 1999. In 2000, we completed our exit activities and took into income $0.5 million of our original accrual that was not utilized. 34 JOSTENS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) 4. Comprehensive Income (Loss) The following amounts were included in accumulated other comprehensive loss as of the end of 2000 and 1999:
2000 1999 ------- ------- (In thousands) Minimum pension liability adjustments, net of tax...... $ (948) $(1,026) Foreign currency translation adjustments............... (5,243) (4,644) ------- ------- Accumulated other comprehensive loss................... $(6,191) $(5,670) ======= =======
5. Inventories As of the end of 2000 and 1999, inventories were comprised of:
2000 1999 ------- ------- (In thousands) Raw materials and supplies............................... $17,054 $17,886 Work-in-process.......................................... 30,490 29,772 Finished goods........................................... 43,686 40,181 ------- ------- Total inventories........................................ $91,230 $87,839 ======= =======
Precious Metals Consignment Arrangement We have a precious metals consignment arrangement with a major financial institution whereby we have the ability to obtain up to $30.0 million in consigned inventory. In 2000, 1999 and 1998, we expensed consignment fees related to this facility of approximately $0.3 million, $0.3 million and $0.1 million, respectively. Under the terms of the consignment arrangement, we do not own the consigned inventory until it is shipped in the form of a product to a customer. Accordingly, we do not include the value of consigned inventory or the corresponding liability in our financial statements. The value of our consigned inventory as of the end of 2000 and 1999 was $16.8 million and $22.1 million, respectively. 6. Property and Equipment As of the end of 2000 and 1999, property and equipment, net consisted of:
2000 1999 -------- -------- (In thousands) Land................................................... $ 3,432 $ 3,618 Buildings.............................................. 36,913 36,420 Machinery and equipment................................ 206,659 195,673 Capitalized software................................... 38,172 36,079 -------- -------- Total property and equipment........................... 285,176 271,790 Less accumulated depreciation and amortization......... 205,831 187,150 -------- -------- Property and equipment, net............................ $ 79,345 $ 84,640 ======== ========
Depreciation expense was $26.9 million, $23.3 million and $20.6 million in 2000, 1999, and 1998, respectively. Amortization related to capitalized software is included in depreciation expense. Accumulated amortization of capitalized software was $17.5 million and $11.1 million in 2000 and 1999, respectively. 35 JOSTENS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) 7. Borrowings As of the end of 2000 and 1999, long-term debt consisted of the following:
2000 1999 -------- ------ (In thousands) Borrowings under senior secured credit facility: Term loan A, variable rate, 9.76 percent at December 30, 2000, semi-annual principal and interest payments through May 2006......................................................... $134,775 $ -- Term loan B, variable rate, 10.26 percent at December 30, 2000, semi-annual principal and interest payments through May 2008......................................................... 344,225 -- Senior subordinated notes, 12.75 percent fixed rate, net of discounts of $19,219, semi-annual interest payments of $14.3 million, principal due and payable at maturity - May 2010.... 205,781 -- Industrial revenue bonds, 6.75 percent fixed rate, covering general offices................................................ -- 3,600 -------- ------ 684,781 3,600 Less current portion............................................ 14,974 -- -------- ------ $669,807 $3,600 ======== ======
Maturities of long-term debt, excluding $19.2 million of discount, as of December 30, 2000 are as follows:
(In thousands) 2001...................................................... $ 14,974 2002...................................................... 23,335 2003...................................................... 27,827 2004...................................................... 32,320 2005...................................................... 36,813 Thereafter................................................ 568,731 --------- $ 704,000 =========
In 2000, we voluntarily paid down $15.2 million of term loan A and $0.8 million of term loan B. Future mandatory principal payments obligations under term loan A are approximately $4.5 million due June 30, 2001 and approximately $9.0 million due December 31, 2001. Thereafter, semi-annual principal payments increase approximately $1.12 million per semi-annual period through December 2005, with a final payment of approximately $9.0 million due in May 2006. Future mandatory principal payment obligations under term loan B are approximately $0.5 million due June 30, 2001 and approximately $1.0 million semi-annually thereafter through December 2005. Semiannual payments increase on an escalating scale from approximately $25.4 million in June 2006 to approximately $112.2 million in December 2007, with a final payment of approximately $66.1 million due in May 2008. As of the end of 2000 and 1999, the fair value of our debt, excluding the senior subordinated notes (the "notes"), approximated its carrying value and is estimated based on quoted market prices for comparable instruments. The fair value of the notes at December 30, 2000 was $204.8 million and was estimated based on the quoted market price of $910 per unit for the notes. 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 $2.6 million outstanding under this facility, in the form of letters of credit, as of December 30, 2000. Our old credit facility, due to expire on December 31, 2000, was terminated as part of the transaction. 36 JOSTENS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) The senior subordinated notes (the "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 collateralized by substantially all the assets of our domestic operations and all of our capital stock (limited to 65% 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 are payable quarterly, initially at a rate per annum of 0.5% 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. Our senior secured credit facility bears a variable interest rate predominantly linked to the London Interbank Offered Rate ("LIBOR"), as determined in three month intervals, plus a fixed spread. To manage our exposure to changes in the variable interest rate, 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% as opposed to LIBOR. 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 December 30, 2000 was a liability of $3.0 million. There were no open interest rate swap agreements as of the end of 1999. 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 shareholders' 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% 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 and, during 2000, the amount of interest expense related to the amortization of debt discount was $0.6 million. In 1999, we incurred annual fees and interest on borrowings that were based on our commercial paper rating. Annual fees ranged from 0.075 to 0.15% of the commitment. The weighted average interest rate on commercial paper outstanding as of the end of 1999 was 5.9%. 8. 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% 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, we 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 shareholders' 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 is being 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 retained earnings (accumulated deficit) account. 37 JOSTENS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) 9. Income Taxes The following summarizes the differences between income taxes computed at the federal statutory rate and the provision for income taxes for financial reporting purposes:
2000 1999 1998 ------- ------- ------- (In thousands) Federal statutory income tax rate............... 35% 35% 35% Federal tax at statutory rate................... $ 756 $26,130 $29,232 State income taxes, net of federal tax benefit.. 1,215 3,086 4,509 Write-off of JLC notes and related deferred tax assets......................................... -- -- 7,245 Write-off of goodwill........................... -- 1,080 -- Non deductible transaction costs................ 9,473 -- -- Increase (reduction) in deferred tax valuation allowance...................................... 2,355 -- (750) Other differences, net.......................... 1,126 1,184 1,464 ------- ------- ------- Provision for income taxes...................... $14,925 $31,480 $41,700 ======= ======= =======
The U.S. and foreign components of income before income taxes and the provision for income taxes were as follows:
2000 1999 1998 ------- ------- ------- (In thousands) Income before income taxes Domestic.......................................... $(5,935) $68,044 $77,756 Foreign........................................... 8,095 6,615 5,764 ------- ------- ------- Income before income taxes........................ $ 2,160 $74,659 $83,520 ======= ======= ======= Provision for income taxes Federal........................................... $ 6,914 $25,828 $18,435 State............................................. 1,385 5,276 4,439 Foreign........................................... 3,547 3,047 3,114 ------- ------- ------- Total current income taxes........................ 11,846 34,151 25,988 Deferred.......................................... 3,079 (2,671) 15,712 ------- ------- ------- Provision for income taxes........................ $14,925 $31,480 $41,700 ======= ======= =======
38 JOSTENS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of the deferred income tax liabilities and assets as of the end of 2000 and 1999 consisted of:
2000 1999 -------- -------- (In thousands) Deferred tax liabilities Tax over book depreciation............................. $ (3,285) $ (3,558) Capitalized software development costs................. (7,195) (8,712) Other.................................................. (5,901) (3,616) -------- -------- Deferred tax liabilities............................... (16,381) (15,886) -------- -------- Deferred tax assets Reserves for accounts receivable and salespersons overdrafts............................................ 5,776 6,936 Reserves for employee benefits......................... 9,560 10,669 Other reserves not recognized for tax purposes......... 6,825 4,025 Foreign tax credit carryforwards....................... 185 838 Reserves for investments............................... 2,661 -- Other.................................................. 5,329 4,483 -------- -------- Deferred tax assets.................................... 30,336 26,951 Valuation allowance.................................... (2,846) (838) -------- -------- Deferred tax assets, net............................... 27,490 26,113 -------- -------- Net deferred tax asset................................. $ 11,109 $ 10,227 ======== ========
The net deferred tax asset as of the end of 2000 consisted of $18.0 million current net deferred tax assets and $6.9 million noncurrent net deferred tax liabilities. The net deferred tax assets as of the end of 1999 consisted of $17.4 million current net deferred tax assets and $7.2 million noncurrent net deferred tax liabilities. During 2000, we increased the deferred tax asset valuation allowance by $2.7 million because the tax benefit related to the reserves for investments may not be realized. We also have a foreign tax credit carryforward of $0.2 million that expires in 2002. The foreign tax credits of $0.2 million and $0.8 million as of the end of 2000 and 1999 were fully reserved. 10. Benefit Plans Pension and Postretirement Benefits We have noncontributory defined-benefit pension plans that cover nearly all employees. The benefits provided under the plans are based on years of service and/or compensation levels. We also provide health care insurance benefits for nearly all retirees. Generally, the health care plans require contributions from retirees. The assumptions used for these plans consisted of:
Pension benefits Retiree health benefits ------------------- ------------------------- 2000 1999 1998 2000 1999 1998 ----- ----- ----- ------- ------- ------- Discount rate.............. 7.75% 7.75% 7.00% 7.75% 7.75% 7.00% Expected return on plan assets.................... 10.00% 10.00% 10.00% -- -- -- Rate of compensation increase.................. 6.30% 6.30% 6.30% -- -- -- Initial health care cost trend rate................ -- -- -- 6.00% 7.00% 8.00%
39 JOSTENS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Net periodic benefit (income) or expense for 2000, 1999 and 1998 included the following components:
Retiree health Pension benefits benefits ---------------------------- ----------------- 2000 1999 1998 2000 1999 1998 -------- -------- -------- ----- ---- ---- (In thousands) Service cost.............. $ 4,174 $ 4,419 $ 4,044 $ 56 $ 74 $ 65 Interest cost............. 9,992 9,462 8,838 292 351 372 Expected return on plan assets................... (17,105) (14,942) (13,447) -- -- -- Amortization of prior year service cost............. 1,869 1,869 1,716 (7) (8) (7) Amortization of transition amount................... (875) (885) (894) -- -- -- Amortization of net actuarial gains.......... (1,833) (341) (929) (110) (41) (95) -------- -------- -------- ----- ---- ---- Net periodic benefit (income) expense......... $ (3,778) $ (418) $ (672) $ 231 $376 $335 ======== ======== ======== ===== ==== ====
The following tables present a reconciliation of the benefit obligation of the plans, plan assets and funded status of the plans.
Pension benefits Retiree health benefits ------------------ ------------------------ 2000 1999 2000 1999 -------- -------- ----------- ----------- (In thousands) Change in benefit obligation Benefit obligation beginning of year..................... $132,503 $138,825 $ 4,007 $ 5,238 Service cost................. 4,174 4,419 56 74 Interest cost................ 9,992 9,462 292 351 Actuarial loss (gain)........ 5,700 (12,284) 2,347 (894) Special termination benefits.................... 91 -- -- -- Benefits paid................ (7,880) (7,919) (1,588) (762) -------- -------- ----------- ----------- Benefit obligation end of year........................ $144,580 $132,503 $ 5,114 $ 4,007 ======== ======== =========== =========== Change in plan assets Fair value of plan assets beginning of year........... $201,773 $164,103 $ -- $ -- Actual return on plan assets...................... 41,483 43,651 -- -- Company contributions........ 1,880 1,938 1,588 762 Benefits paid................ (7,880) (7,919) (1,588) (762) -------- -------- ----------- ----------- Fair value of plan assets end of year..................... $237,256 $201,773 $ -- $ -- ======== ======== =========== =========== Funded status Funded (unfunded) status end of year..................... $ 92,676 $ 69,270 $ (5,114) $ (4,007) Unrecognized cost: Net actuarial gains........ (81,108) (64,263) 510 (1,947) Transition amount.......... (2,419) (3,294) -- -- Prior service cost......... 6,548 8,416 (43) (50) -------- -------- ----------- ----------- Prepaid (accrued) benefit cost........................ $ 15,697 $ 10,129 $ (4,647) $ (6,004) ======== ======== =========== ===========
Plan assets consist primarily of corporate equity investments as well as corporate and U.S. government debt and real estate. 40 JOSTENS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) The components in the consolidated balance sheets consist of:
Pension benefits Retiree health benefits ------------------ ------------------------ 2000 1999 2000 1999 -------- -------- ----------- ----------- (In thousands) Prepaid benefit cost.......... $ 31,573 $ 25,612 $ -- $ -- Accrued benefit liability..... (18,272) (18,185) (4,647) (6,004) Intangible asset.............. 888 1,005 -- -- Minimum pension liability..... 1,508 1,697 -- -- -------- -------- ----------- ----------- Net amount recognized......... $ 15,697 $ 10,129 $ (4,647) $ (6,004) ======== ======== =========== ===========
Pension plans with obligations in excess of plan assets were as follows:
2000 1999 ------- ------- (In thousands) Projected benefit obligation................................ $19,284 $19,159 Accumulated benefit obligation.............................. 18,272 18,114 Fair value of plan assets................................... -- --
A one-percent change in the assumed health care cost trend rate would have the following effects:
1-Percent Increase 1-Percent Decrease ------------------ ------------------ (In thousands) Effect on total of service and interest cost components for 2000.. $ 17 $ 16 Effect on postretirement benefit obligation at the end of 2000...... $254 $230
Savings Plan We have a retirement savings plan (401k plan), which covers nearly all nonunion employees. We provide a matching contribution on amounts, limited to 6% of compensation, contributed by employees. Our contribution was $3.1 million, $2.9 million and $2.6 million in 2000, 1999 and 1998, respectively, and this represents 50% of eligible employee contributions. In 1999 and 1998, our contribution was made in the form of our common stock purchased in the open market. These shares were converted to cash at a price of $25.25 as part of the merger and recapitalization. 11. Shareholders' Equity Common Stock 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. 41 JOSTENS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) The par value and number of authorized, issued and outstanding shares for December 30, 2000 for each class of common stock is set forth below:
Par Authorized Issued and Value Shares Outstanding Shares ----- ---------- ------------------ (In thousands, except per-share data) 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 -- ----- ------ ----- Total................................. 25,940 8,993 ====== =====
As of January 1, 2000 there were approximately 33.3 million shares of common stock outstanding. Share Repurchases In December 1998, the Board of Directors authorized the repurchase of up to $100.0 million shares of our common stock in open market or negotiated transactions. During 1999, we repurchased 1.9 million shares for $39.9 million. This share repurchase program was suspended in the fourth quarter of 1999 due to the pending merger and recapitalization which occurred on May 10, 2000. A similar $100.0 million repurchase program was authorized in July 1997 and completed in the fourth quarter of 1998. Under this program we repurchased 4.4 million shares, including 3.6 million shares for $80.0 million in 1998. Shareholder Rights Plan In July 1998, the Board of Directors declared a distribution to shareholders of one preferred share purchase right for each outstanding share of common stock. The dividend was payable August 19, 1998 to shareholders of record at the close of business on that date. As a result of the merger and recapitalization on May 10, 2000, the rights were redeemed for one-tenth of a cent per right as allowed under the Plan. 12. Stock Plans Stock Options As a result of the merger and recapitalization, outstanding options to purchase approximately 3.0 million shares of our previously existing common stock were cancelled and holders of those outstanding stock options were paid cash of $25.25 per underlying share, less the applicable option exercise price, resulting in an aggregate payment of approximately $10.0 million. Stock options with an exercise price equal to or in excess of $25.25 per share were cancelled as part of the merger for no consideration. In connection with the merger and recapitalization, 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 (after a six month waiting period), 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 42 JOSTENS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) to five members of senior management. In addition, options to purchase 27,900 of our Class A common stock were granted on November 15, 2000. All options granted have an exercise price of $25.25, representing the Board's estimated fair value of our common stock, vest upon the seventh anniversary of the grant with the possibility of accelerated vesting in one-fifth increments upon Jostens meeting or exceeding target cumulative earnings before interest, taxes, depreciation and amortization ("EBITDA") for each of the five calendar years from the date of grant, and expire on the thirtieth day following the seventh anniversary of the grant date. The stock option plan also provides for vesting of certain percentages of the options in the event of an initial public offering or approved sale as defined in the stock option plan. Options issued pursuant to the plan expire on the thirtieth day following the seventh anniversary of the grant date. We apply Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees," and related interpretations in accounting for employee and non-employee director stock options and long-term management incentive plans. Accordingly, no compensation cost has been recognized for these plans. The following table summarizes results as if we had recorded compensation expense for our stock option and long-term management incentive plans under SFAS No. 123, "Accounting for Stock-Based Compensation."
2000 1999 1998 --------- ------- ------- (In thousands, except per-share data) Net income (loss) available to common shareholders As reported.................................. $ (24,500) $43,179 $41,820 Pro forma.................................... $ (22,137) $41,038 $41,404 --------- ------- ------- Basic earnings (loss) per share As reported.................................. $ (1.39) $ 1.27 $ 1.14 Pro forma.................................... $ (1.25) $ 1.21 $ 1.13 --------- ------- ------- Diluted earnings (loss) per share As reported.................................. $ (1.39) $ 1.27 $ 1.14 Pro forma.................................... $ (1.25) $ 1.20 $ 1.13
These figures reflect only the impact of grants since July 1, 1995 and reflect only part of the possible compensation expense that we would amortize over the vesting period of the grants. In future years, therefore, the effect on net income and earnings per share may differ from those shown above. The weighted average fair value of options granted in 2000, 1999 and 1998 was $9.04, $6.72 and $4.67 per option, respectively. We estimated the fair values using the Black-Scholes option-pricing model, modified for dividends and using the following assumptions:
2000 1999 1998 ---- ---- ---- Risk-free rate............................................ 4.9% 6.7% 4.7% Dividend yield............................................ 0.0% 3.9% 3.8% Volatility factor of the expected market price of Jostens' common stock............................................. 20% 37% 26% Expected life of the award (years)........................ 7.0 5.0 5.2
43 JOSTENS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) The following table summarizes stock option activity:
Weighted- average Shares exercise price ------ -------------- (Shares in thousands) Outstanding at January 3, 1998................ 2,215 $22.31 Granted................. 946 23.47 Exercised............... (199) 19.34 Canceled................ (62) 24.40 ------ ------ Outstanding at January 2, 1999................ 2,900 22.69 Granted................. 776 22.66 Exercised............... (53) 18.51 Canceled................ (453) 24.85 ------ ------ Outstanding at January 1, 2000................ 3,170 22.44 Granted................. 531 25.25 Exercised............... (23) 19.10 Canceled................ (141) 31.63 Settled for cash in the merger and recapitalization....... (3,006) 21.95 ------ ------ Outstanding at December 30, 2000............... 531 $25.25 ====== ======
The weighted average remaining contractual life of the options at December 30, 2000 was approximately 6.4 years. At December 30, 2000 all outstanding options had an exercise price of $25.25 and 106,149 options were exercisable. In connection with the merger and recapitalization, we further provided that, in the event of either a sale of Jostens or a public offering of our securities, we will grant to certain executives options to purchase 1% of our common stock on a fully diluted basis. The ultimate terms of these options will be dependent upon certain facts and circumstances at the date of grant. Restricted Stock Awards Prior to the merger and recapitalization, we had a stock incentive plan under which eligible employees were awarded restricted shares of our common stock. Awards would generally vest from three to five years, subject to continuous employment and certain other conditions. The awards were recorded at market value on the date of the grant as unearned compensation and amortized over the vesting period. In connection with the merger and recapitalization in 2000, the restricted stock awards that were outstanding became fully vested and, as a result, we incurred a compensation charge of $1.0 million which is included in transaction costs on the Consolidated Statement of Operations. Amortization of unearned compensation expense in 1999 and 1998 was $629,000 and $416,000 million, respectively. Stock Loan Program In connection with the merger and recapitalization, 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% 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 44 JOSTENS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) each individual has entered into a pledge agreement and has executed a secured promissory note. At December 30, 2000, there were $1.8 million of these loans outstanding. The outstanding balance of these loans are classified as a reduction in shareholders' equity (deficit) on the Consolidated Balance Sheet. 13. Business Segments We classify our operations into the following business segments: . SCHOOL PRODUCTS -- This segment manufactures and markets school-related affinity products primarily for the high school and college markets. School Products is comprised of four product lines: Printing & Publishing, Jewelry, Graduation Products and Photography. . RECOGNITION -- This segment manufactures and supplies corporate-based affinity products that help companies and other organizations promote and recognize achievement in people's careers. We concentrate our efforts in service recognition and incentive programs designed to help companies achieve their business objectives through improved employee performance. Products include jewelry and other brand name merchandise from industry leading manufacturers. . OTHER -- This segment represents the operating units which do not meet the quantitative threshold for determining reportable segments. The "Other" segment primarily is comprised of corporate expenses, the results of the direct marketing sales channel to college alumni (exited in 1999), international (excluding Canada) sales and expenses and expenses associated with new product development. The accounting policies of our operating segments are the same as those described in Note 1 "Summary of Significant Accounting Policies". We evaluate performance based on the operating income of the segment. Revenues are reported in the geographic area where the final sales to customers are made, rather than where the transaction originates. 45 JOSTENS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Financial information by reportable business segment
2000 1999 1998 -------- -------- -------- (In thousands) Net Sales From External Customers School Products............................... $715,644 $691,252 $669,804 Recognition................................... 80,265 99,800 106,358 Other......................................... 9,138 10,234 13,417 -------- -------- -------- Consolidated.................................. $805,047 $801,286 $789,579 ======== ======== ======== Operating Income (loss) School Products............................... $148,615 $141,947 $127,016 Recognition................................... (4,157) (361) 10,430 Other......................................... (76,636) (59,928) (35,257) -------- -------- -------- Consolidated.................................. 67,822 81,658 102,189 Net interest expense.......................... 58,932 6,999 6,660 Equity losses and write-down of investments... 6,730 -- -- Write-off of JLC notes receivable, net........ -- -- 12,009 -------- -------- -------- Income Before Income Taxes.................... $ 2,160 $ 74,659 $ 83,520 ======== ======== ======== Identifiable Assets School Products............................... $231,597 $247,514 $251,629 Recognition................................... 35,046 54,109 43,089 Other......................................... 121,638 106,548 71,449 -------- -------- -------- Consolidated.................................. $388,281 $408,171 $366,167 ======== ======== ======== Depreciation and Amortization School Products............................... $ 16,055 $ 15,560 $ 16,032 Recognition................................... 2,150 2,649 2,749 Other......................................... 10,734 7,129 4,390 -------- -------- -------- Consolidated.................................. $ 28,939 $ 25,338 $ 23,171 ======== ======== ======== Capital Expenditures School Products............................... $ 13,488 $ 12,509 $ 12,358 Recognition................................... 937 1,074 1,966 Other......................................... 7,733 14,247 22,612 -------- -------- -------- Consolidated.................................. $ 22,158 $ 27,830 $ 36,936 ======== ======== ========
Operating Income School Products operating income included: . $4.8 million of the $20.2 million special charge in 1999 as discussed in Note 3 "Special Charge;" . charges of $2.5 million in both 1999 and 1998 for plant closing costs; and . LIFO gains from converting owned gold to consigned gold of $2.3 million in 1998. Recognition operating income included LIFO gains from converting owned gold to consigned gold of $1.4 million in 1998. 46 JOSTENS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Operating loss for the Other segment included: . $15.4 million of the $20.2 million special charge in 1999 as discussed in Note 3 "Special Charge"; and . $46.4 million in transaction costs in 2000 related to the merger and recapitalization as discussed in Note 2 "Merger and Recapitalization." Identifiable Assets Capitalized deferred financing costs associated with obtaining financing for the transaction have been included in the Other segment's identifiable assets Net Sales by Product and Geographical Information
2000 1999 1998 -------- -------- -------- (In thousands) Net Sales by Classes of Similar Products or Services Printing & publishing, primarily yearbooks...... $288,255 $270,186 $263,790 Jewelry, primarily class rings.................. 204,787 207,374 194,976 Graduation products............................. 183,592 174,151 168,948 Photography..................................... 47,729 46,297 47,730 Recognition, primarily jewelry and brand name merchandise.................................... 80,265 99,800 106,358 Other........................................... 419 3,478 7,777 -------- -------- -------- Consolidated.................................... $805,047 $801,286 $789,579 ======== ======== ======== Net Sales by Geographic Area United States................................... $764,672 $761,646 $750,377 Other, primarily Canada......................... 40,375 39,640 39,202 -------- -------- -------- Consolidated.................................... $805,047 $801,286 $789,579 ======== ======== ======== Net Property and Equipment and Intangibles by Geographic Area United States................................... $ 93,212 $ 98,858 $111,911 Other, primarily Canada......................... 3,795 4,677 4,901 -------- -------- -------- Consolidated.................................... $ 97,007 $103,535 $116,812 ======== ======== ========
14. Commitments and Contingencies Forward Purchase Contracts To manage the risk associated with gold price changes, on an annual basis we simultaneously set our pricing to customers and enter into gold forward or option contracts based upon the estimated ounces needed to satisfy customer requirements. At December 30, 2000, we had open forward contracts of $10.8 million to purchase gold that mature at various times in 2001. Leases We lease buildings, equipment and vehicles under operating leases. Future minimum rental commitments under noncancellable operating leases are $2.8 million, $2.2 million, $1.5 million and $0.8 million in 2001, 2002, 2003 and 2004, respectively. Rent expense was $3.4 million, $4.4 million and $3.7 million in 2000, 1999 and 1998, respectively. 47 JOSTENS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Environmental As part of our environmental management program, we are involved in various environmental remediation activities. As sites are identified and assessed in this program, we determine potential environmental liabilities. Factors considered in assessing liability include, but are not limited to: whether we have been designated as a potentially responsible party, the number of other potentially responsible parties designated at the site, the stage of the proceedings and available environmental technology. As of the end of 2000, we had identified three sites requiring further investigation. However, we have not been designated as a potentially responsible party at any site. In 1996, we assessed the likelihood that a loss had been incurred at one of these sites as probable based on findings included in remediation reports and from discussions with legal counsel. As of the end of 2000, we had made payments of $5.5 million for remediation, and at December 30, 2000, $1.1 million was accrued and is included in "other accrued liabilities" on the consolidated balance sheet. While we may have a right of contribution or reimbursement under insurance policies, amounts recoverable from other entities with respect to a particular site are not considered until recoveries are deemed probable. No assets for potential recoveries were established as of the end of 2000. We believe the effect on our consolidated results of operations, cash flows and financial position, if any, for the disposition of these matters will not be material. We believe the effect on our consolidated results of operations, cash flows and financial position, if any, for the disposition of these matters will not be material. Litigation A federal antitrust action was served on Jostens on October 23, 1998. The complainant, Epicenter Recognition, Inc. ("Epicenter"), alleges that Jostens has attempted to monopolize the market of high school graduation products in the state of California. Epicenter is a successor to a corporation formed by four of our former sales representatives. The plaintiff is claiming damages of approximately $3 million to $10 million under various theories and differing sized relevant markets. Trial is scheduled to begin April 3, 2001 in which Epicenter has waived its right to a jury, so the case will be tried before a judge in U.S. District Court in Orange County, California. We believe the effect on our consolidated results of operations, cash flows and financial position, if any, for the disposition of these matters will not be material. In February 1998, we entered into an Information Technology Master Services Agreement with Ernst & Young LLP to provide guidance and consulting services for implementation of a company wide enterprise resource planning ("ERP") system. Under the Master Agreement, Ernst & Young LLP provided project management, guidance and consulting. We claim this work was deficient and substandard in various material respects constituting a breach of the Master Agreement entitling us to significant damages. In August 2000, the parties conducted a mandatory mediation which proved unsuccessful resulting in pending arbitration. Ernst & Young LLP claims are $0.3 million in unpaid fees. We claim damages in excess of $150.0 million, including over $9.0 million paid to Ernst & Young LLP on account of the engagement. We are a party to other litigation arising in the normal course of business. We regularly analyze current information and, as necessary, provide accruals for probable liabilities on the eventual disposition of these matters. We believe the effect on our consolidated results of operations, cash flows and financial position, if any, for the disposition of these matters will not be material. 15. Equity Losses and Write-down of Investments In 2000, we recorded equity losses and a write-down to zero against our investment in two Internet companies resulting in a $6.7 million non-cash charge. 48 JOSTENS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) 16. Write-off of JLC Notes Receivable, Net In June 1995, we sold our Jostens Learning Corp. ("JLC") curriculum software subsidiary to a group led by Bain Capital, Inc. As partial consideration for the sale, we received two notes which were subsequently discounted and recorded at their estimated fair values. In addition, a transaction gain of $13.2 million was deferred in accordance with the SEC Staff Accounting Bulletin No. 81, "Gain Recognition on the Sale of a Business or Operating Assets to a Highly Leveraged Entity." The notes were subsequently recorded at their estimated fair value of $12.9 million, net of deferred gain. In January 1999, we received information indicating to us that the carrying value of the notes was permanently impaired. As a result, we wrote off $12.0 million in 1998 for the carrying value of the notes, net of miscellaneous JLC- related assets and liabilities, plus $3.7 million of net deferred tax assets associated with the initial sale of JLC. We did not record a tax benefit related to the write-off for financial reporting purposes because the tax benefit may not be realized. 17. Subsequent Event--Restructuring Plans (unaudited) In March 2001, we announced our decision to consolidate three Recognition plants and implement a new customer service model as part of our effort to realign resources and streamline the Recognition segment's infrastructure and enhance profitability. We will close our distribution facility in Memphis, Tennessee, and our manufacturing facility in Sherbrooke, Quebec, and shift these functions to our existing plant in Princeton, Illinois. In addition, the Recognition segment's customer service function, currently operated from the Princeton and Memphis facilities, along with some financial functions, will be relocated to the Owatonna, Minnesota, facility. A new customer service model will be implemented to leverage new technologies at the Owatonna location. The consolidation is scheduled to be completed in the summer of 2001. The total cost of the consolidation project which will be expensed in 2001 is estimated to be approximately $4.0 million for severance benefits and costs associated with closing the facilities. These costs will be partially offset by a gain on sale of the Memphis facility of approximately $2.4 million. Approximately 100 full-time positions will be eliminated from the Memphis plant and approximately 40 full-time positions will be eliminated from the Sherbrooke plant. In Princeton, 44 new positions will be created and in Owatonna about 30 new customer service positions will be added. 49 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE NONE PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT Executive officers and directors of Jostens as of March 1, 2001 are as follows:
Name Age Title ---- --- ----- Chairman of the Board, President and Chief Robert C. Buhrmaster 53 Executive Officer William N. Priesmeyer 56 Senior Vice President and Chief Financial Officer Senior Vice President--Manufacturing and Carl H. Blowers 61 Recognition Michael L. Bailey 45 Senior Vice President--School Solutions Gregory S. Lea 48 Vice President--Business Ventures Lee U. McGrath 44 Vice President and Treasurer Steven A. Tighe 49 Vice President--Human Resources Andrew W. Black 38 Vice President and Chief Information Officer James O. Egan 52 Director Charles K. Marquis 58 Director Charles J. Philippin 50 Director Steven G. Puccinelli 42 Director Robert G. Sharp 35 Director David A. Tayeh 34 Director George O. Visnyei 51 Director
Robert C. Buhrmaster joined Jostens in December 1992 as Executive Vice President and Chief Staff Officer. He was named President and Chief Operating Officer in June 1993; was named Chief Executive Officer in March 1994; and was named Chairman in February 1998. Prior to joining Jostens, Mr. Buhrmaster worked for Corning, Inc. for 18 years, most recently as Senior Vice President. He is also a director of The Toro Company. William N. Priesmeyer joined Jostens in August 1997 in his current position. From April to August 1997, Mr. Priesmeyer was Senior Vice President and CFO of MVE Holdings. From 1994 to 1997, he was Senior Vice President and CFO for Waldorf Corp.; and from 1993 to 1994 was Vice President and CFO for DataCard Corp. Carl H. Blowers joined Jostens in May 1996 as an independent consultant serving as Division Vice President--Manufacturing & Engineering and was hired as an employee in 1997. He was appointed to his current position in February 1998. Prior to joining Jostens, Mr. Blowers worked for Corning, Inc. for 27 years, most recently as Vice President and General Manager of Corning's Advanced Materials and Process Technologies Division. Michael L. Bailey joined Jostens in 1978. He has held a variety of leadership positions, including director of marketing, planning manager for manpower and sales, national product sales director, division manager for Printing & Publishing, printing operations manager and Vice President--Jostens School Solutions. He was appointed to his current position in February 2000. Gregory S. Lea joined Jostens in November 1993 as Vice President--Total Quality Management. From June 1995 to January 2000, he was Vice President and General Manager--College and Universities. He was named to his current position in February 2000. Prior to joining Jostens, Mr. Lea spent 19 years with International Business Machines Corp. in various financial, operations and quality positions. 50 Lee U. McGrath joined Jostens in May 1995 in his current position. For the six years prior to joining Jostens, he was the assistant treasurer for H.B. Fuller Company. Steven A. Tighe joined Jostens in September 2000 in his current position. From January to September 2000, Mr. Tighe was Vice President of Human Resources at RealNetworks. Prior to that, Mr. Tighe was Senior Vice President of Human Resources, Communications & Corporate Services at Fortis Health from June 1997 to January 2000. Prior to that, from June 1995 to June 1997, Mr. Tighe was Director of Human Resources at Cray Research and Sun MicroSystems. Sun MicroSystems acquired Cray Research in 1996. Prior to that, Mr. Tighe was Director of Human Resources and Quality at Weyerhaeuser from June 1987 to June 1995. Andrew W. Black joined Jostens in September 2000 in his current position. Prior to joining Jostens, Mr. Black was an Information Systems Director with Target Corporation. James O. Egan became one of our directors upon consummation of the recapitalization. Mr. Egan has been an executive of Investcorp or one or more of its wholly owned subsidiaries since January 1999. Prior to joining Investcorp, Mr. Egan was a partner in the accounting firm of KPMG from October 1997 to December 1998. Prior to that, Mr. Egan was a Senior Vice President and Chief Financial Officer of Riverwood International, a paperboard, packaging and machinery company, from May 1996 to September 1997. Prior to that, Mr. Egan was a partner in the accounting firm of Coopers & Lybrand L.L.P. (now PricewaterhouseCoopers LLP). Mr. Egan is a director of CSK Auto Corporation, Harborside Healthcare Corporation, IWO Holdings, Inc., SIND Holdings, Inc., and Werner Holding Co. (DE), Inc. Charles K. Marquis became one of our directors upon consummation of the recapitalization. Mr. Marquis has been a senior advisor to Investcorp or one or more of its wholly owned subsidiaries since January 1999. Prior to joining Investcorp, Mr. Marquis was a partner in the law firm of Gibson, Dunn & Crutcher LLP. Mr. Marquis is a director of CSK Auto Corporation, Stratus Computer Systems International S.A., Tiffany & Co. and Werner Holding Co. (DE), Inc. Charles J. Philippin became one of our directors upon consummation of the recapitalization. Mr. Philippin was an executive of Investcorp or one or more of its wholly owned subsidiaries from July 1994 until 2000. Prior to joining Investcorp, Mr. Philippin was a partner in the accounting firm of Coopers & Lybrand L.L.P. (now PricewaterhouseCoopers LLP). Since June 2000, Mr. Philippin has been the Chief Executive Officer of Accordia, Inc. Steven G. Puccinelli became one of our directors in July 2000. Mr. Puccinelli has been an executive of Investcorp or one or more of its wholly owned subsidiaries since July 2000. Prior to joining Investcorp, Mr. Puccinelli was a Managing Director at Donaldson, Lufkin & Jenrette. Robert G. Sharp became one of our directors upon consummation of the recapitalization. Mr. Sharp has been an executive of DB Capital Partners, Inc., the general partner of DB Capital Investors, since October 1999. Prior to joining DB Capital Investors, Mr. Sharp was an executive at Investcorp or one or more of its wholly owned subsidiaries. Mr. Sharp is a director of Displaytech, Inc., GlobalSight Corporation, NationsRent, Inc., PC On Call and Stratus Computer Systems International S.A. David A. Tayeh became one of our directors upon consummation of the recapitalization. Mr. Tayeh has been an executive of Investcorp or one or more of its wholly owned subsidiaries since February 1999. Prior to joining Investcorp, Mr. Tayeh was a Vice President in investment banking at Donaldson, Lufkin & Jenrette. George O. Visnyei became one of our directors in August 2000. Mr. Visnyei has been an executive of Investcorp or one or more of its wholly owned subsidiaries since 1996. Prior to joining Investcorp, Mr. Visnyei was a partner with Coopers & Lybrand L.L.P. (now PricewaterhouseCoopers LLP). Mr. Visnyei is a director of SIND Holdings, Inc. 51 ITEM 11. EXECUTIVE COMPENSATION The following table sets forth the cash and non-cash compensation for 2000, 1999 and 1998 awarded to or earned by the Chief Executive Officer, the four other most highly compensated executive officers and one former executive officer of Jostens. Summary Compensation Table
Long-Term Annual Compensation Compensation Awards ---------------------- --------------------- Restricted Securities Name and principal Bonus Stock Underlying All Other position Year Salary (1) Awards (2) Options Compensation (3) - ------------------ ---- -------- -------- ---------- ---------- ---------------- Robert C. Buhrmaster, 2000 $561,808 $785,752 $ -- 290,103 $3,047,224 Chairman of the Board, President 1999 536,154 273,266 243,873 100,000 -- and Chief Executive Officer 1998 500,000 324,000 -- 75,000 286,344 Carl H. Blowers, 2000 $308,617 $574,813 $ -- 48,351 $ 290,182 Senior Vice President-- 1999 296,471 124,524 115,909 25,000 -- Manufacturing and Recognition 1998 290,097 118,288 -- 70,000 100,221 William N. Priesmeyer, 2000 $278,891 $929,701 $ -- 48,351 $ 285,337 Senior Vice President and 1999 262,490 153,536 120,144 50,000 -- Chief Financial Officer 1998 229,154 132,478 15,491 85,000 100,221 Michael L. Bailey 2000 $260,385 $624,200 $ -- 77,361 $ 333,999 Senior Vice President-- 1999 219,029 82,486 66,244 35,000 -- School Solutions (4) 1998 168,000 78,686 -- 61,500 42,953 Gregory S. Lea 2000 $203,798 $405,959 $ -- 36,680 $ 379,417 Vice President-- 1999 182,765 46,056 33,110 17,000 -- Business Ventures (5) 1998 173,109 38,844 -- 46,500 71,586 David J. Larkin 2000 $ 80,746 $ -- $ -- -- $1,030,353 Executive Vice President and 1999 348,650 153,516 154,265 55,000 492,000 Chief Operating Officer (6) 1998 304,927 181,458 10,639 100,000 183,260
- -------- (1) Amounts in 2000 include additional compensation approved by the Jostens Board of Directors for Messrs. Buhrmaster, Priesmeyer, Blowers, Bailey and Lea for services rendered in connection with our transition to new ownership, including managing the transition process from financial reporting, public relations and sales and marketing perspectives, in an amount equal to $2.5 million in aggregate. The additional compensation was allocated as follows: Mr. Buhrmaster, $500,000; Mr. Blowers, $400,000; Mr. Priesmeyer, $800,000; Mr. Bailey, $500,000 and Mr. Lea, $300,000. In addition, amounts in 2000 include payments under the Performance Pays bonus program as follows: Mr. Buhrmaster, not eligible; Mr. Blowers, $10,853; Mr. Priesmeyer, $11,278; Mr. Bailey, $10,800; and Mr. Lea, $8,344. Amounts in 1999 include payments under the Performance Pays bonus program as follows: Mr. Buhrmaster, not eligible; Mr. Blowers, $10,969; Mr. Priesmeyer, $9,712; Mr. Bailey, $8,104; Mr. Lea, $6,762 and Mr. Larkin, $12,900. Amounts in 1998 include payments under the Performance Pays bonus program as follows: Mr. Buhrmaster, not eligible; Mr. Blowers, $10,792; Mr. Priesmeyer, $8,525; Mr. Bailey, 6,250; Mr. Lea, $5,366 and Mr. Larkin, $11,343. The 1998 amounts listed for Mr. Larkin and Mr. Priesmeyer also include the portion of their 1998 bonus they elected to have paid in our common stock, $42,525 and $61,965, respectively. (2) Amounts in 1999 include awards of restricted stock (valued as of the grant date) under the Executive Stock Purchase Program. Amounts in 1998 were for restricted stock awarded to Mr. Priesmeyer and Mr. Larkin as part of their bonus. In 2000, all restricted shares were redeemed for $25.25 per underlying share. The total number of restricted stock holdings and amounts paid to the named officers are as follows: Mr. Burhmaster, 10,135 shares redeemed for $255,908; Mr. Blowers, 4,817 shares redeemed for $121,629; 52 Mr. Priesmeyer, 5,673 shares redeemed for $143,243; Mr Bailey, 2,753 shares redeemed for $69,513; Mr. Lea, 1,376 shares redeemed for $34,744 and Mr. Larkin, 6411 shares redeemed for $161,878. (3) Amounts in 2000 include the redemption of options at $25.25 per underlying share less the applicable option exercise price. The number of option share holdings and amounts paid to the named officers are as follows: Mr. Buhrmaster, 601,000 shares in the amount of $3,047,224; Mr. Blowers, 134,000 shares in the amount of $290,182; Mr. Priesmeyer, 156,000 shares in the amount of $285,337; Mr. Bailey, 130,750 shares in the amount of $333,999; Mr. Lea, 113,740 shares in the amount of $379,417 and Mr. Larkin, 155,000 shares in the amount of $313,899. Also included in the amount for Mr. Larkin are salary continuation and other benefits paid or to be paid under his separation agreement with Jostens. Amounts in 1998 include conversion of performance shares granted in 1997 for 1998 company performance. Performance shares were earned at 110 % of targets. One-half of the amounts were paid in cash and the other-half was paid in our common stock based on the average of the high and low trading prices of our common stock on the last trading day of 1998 ($26.0313). (4) Mr. Bailey joined Jostens in 1978. He was appointed to his current position in February 2000. (5) Mr. Lea joined Jostens in 1993. He was appointed to his current position in February 2000. (6) Mr. Larkin was terminated in March 2000 as part of a restructuring plan announced in the fourth quarter of 1999. Mr. Larkin and Jostens reached a mutually acceptable separation agreement in which his compensation and certain benefits will continue through June 2001. Option Grants in the Last Fiscal Year In connection with the merger and recapitalization, 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 designates 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 (after a six month waiting period), 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. All options granted have an exercise price of $25.25 and vest upon the seventh anniversary of the grant with the possibility of accelerated vesting in one-fifth increments upon Jostens meeting or exceeding target cumulative earnings before interest, taxes, depreciation and amortization ("EBITDA") for each of the five calendar years from the date of grant. The stock option plan also provides for vesting of certain percentages of the options in the event of an initial public offering or approved sale as defined in the stock option plan. Options issued pursuant to the plan expire on the thirtieth day following the seventh anniversary of the grant date. The following table sets forth information concerning stock options granted to the six members of senior management in 2000.
Individual Grants ------------------------------------------- Number of % of total securities options underlying granted to Exercise Grant Date options employees price Expiration Present Name granted (#) in 2000 ($/share) date (1) Value (2) - ---- ----------- ---------- --------- ---------- ---------- Robert C. Buhrmaster..... 290,103 54.66% $25.25 6/9/07 $2,621,323 Carl H. Blowers.......... 48,351 9.11% 25.25 6/9/07 436,892 William N. Priesmeyer.... 48,351 9.11% 25.25 6/9/07 436,892 Michael L. Bailey........ 77,361 14.58% 25.25 6/9/07 699,021 Gregory S. Lea........... 38,680 7.29% 25.25 6/9/07 349,506 David J. Larkin.......... -- 0.00% -- -- --
53 - -------- (1) Options vest and become exercisable upon the seventh anniversary of the grant date with the possibility of accelerated vesting in one-fifth increments upon Jostens meeting or exceeding target cumulative earnings before interest, taxes, depreciation and amortization ("EBITDA") for each of the five calendar years from the date of grant. The stock option plan also provides for vesting of certain percentages of the options in the event of an initial public offering or approved sale as defined in the stock option plan. Options issued pursuant to the plan expire on the thirtieth day following the seventh anniversary of the grant date. (2) The fair value of each stock option is estimated on the date of grant using the Black-Scholes pricing model with the following weighted-average assumptions: an expected life of seven years, no dividend yield, expected volatility of 20% and a risk-free interest rate of 4.9%. Aggregated Option Exercises in Fiscal Year 2000 and Fiscal Year End Option Values The following table sets forth information concerning the aggregate number of exercisable and unexercisable options held as of the end of 2000. No options by the named executive officers were exercised in 2000.
Number of securities Value of unexercised underlying unexercised options In-the-money options at at fiscal year end 2000 fiscal year end 2000(1) ---------------------------------- ------------------------- Name Exercisable Unexercisable Exercisable Unexercisable - ---- ----------- ---------------- ----------- ------------- Robert C. Buhrmaster.... 58,021 232,082 $ -- $ -- Carl H. Blowers......... 9,670 38,681 -- -- William N. Priesmeyer... 9,670 38,681 -- -- Michael L. Bailey....... 15,472 61,889 -- -- Gregory S. Lea.......... 7,736 30,944 -- -- David J. Larkin......... -- -- -- --
- -------- (1) Currently, there is no established public trading market for our common shares. None of these options are considered to be in-the-money for purposes of this table. COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION Former directors, Mr. Jack Eugster, Mr. Mannie Jackson and Ms. Brenda Lauderback served as members of the Compensation Committee during fiscal year 2000 for the period prior to the merger and recapitalization. Neither Mr. Eugster, Mr. Jackson, nor Ms. Lauderback was an officer or employee of Jostens or any of its subsidiaries during 2000. Messrs. Buhrmaster, Egan, Marquis, Philippin and Puccinelli became members of the Compensation Committee after the consummation of the merger and recapitalization. Only Mr. Buhrmaster served as an officer of Jostens during 2000. EMPLOYMENT AGREEMENTS AND CHANGE IN CONTROL ARRANGEMENTS Management Bonus Arrangements In connection with the merger and recapitalization, we established a Management Shareholder Bonus Plan providing for an annual bonus to be paid to Messrs. Buhrmaster, Priesmeyer, Bailey, Blowers and Lea. Based upon achievements of specific EBITDA targets, Mr Buhrmaster will be entitled to a standard bonus equal to 60% of his base salary. No bonus will be paid to Mr. Burhmaster if Jostens fails to achieve specified performance levels. Based upon achievements of specific EBITDA targets, Messrs. Priesmeyer, Bailey, Blowers and Lea will be entitled to a standard bonus as determined by the Chief Executive Officer and the Board of Directors and approved by Investcorp. Similarly, no bonus will be paid to them if Jostens fails to achieve specified minimum performance levels. 54 In connection with the merger, we further provided that, in the event of either a sale of Jostens or a public offering of our securities, we will grant to Messrs. Burhmaster, Priesmeyer, Bailey, Blowers and Lea options to purchase 1% of our common stock on a fully diluted basis, without taking into account any shares issued following the merger, other than any shares issued upon exercise of the options granted under our stock option plan, and without taking into account any shares issued upon exercise of warrants issued to purchasers of the redeemable preferred stock. In the event of a sale of Jostens, the options would be immediately exercisable. In the event of a public offering of our securities, the options would be exercisable for a period of two years beginning one year after the date of the public offering. In either case, the options will be exercisable only if Investcorp realizes a specified rate of return in such transaction on its investment in Jostens. In either case, we will allocate such options among Messrs. Burhmaster, Priesmeyer, Bailey, Blowers and Lea provided that each is still employed by us at the time of such sale or offering, based upon the recommendation of our Chief Executive Officer, subject to the approval of our Board of Directors. Termination of Employment In April of 2000, we entered into a separation agreement with David J. Larkin. The terms of the agreement provide Mr. Larkin salary, medical/dental benefits and perquisites continuation through June 30, 2001 and a management bonus of $131,200. In addition, Mr. Larkin received a $100,000 lump sum payment as consideration for the waiver and release of claims under his employment agreements and the Executive Change in Control Severance Pay Plan, $25,000 in lieu of outplacement services and $9,000 for legal fees. Mr. Larkin's stock options and restricted stock were redeemed by Jostens ($25.25 per share) at the time of the merger and recapitalization. In April of 2000, we entered into a separation agreement with Thomas W. Jans. The terms of the agreement provide Mr. Jans salary, medical/dental benefits and perquisites continuation through December 31, 2000 and a management bonus of $28,357 for the first six months of 2000. In addition, Mr. Jans received standard and customary outplacement services for similarly situated Jostens employees (approximately $23,000) and $3,000 for legal fees. Mr. Jans' stock options and restricted stock were redeemed by Jostens ($25.25 per share) at the time of the merger and recapitalization. Executive Change in Control Severance Pay Plan In 1999, we implemented the Jostens' Executive Change in Control Severance Pay Plan (the "Plan"). The primary purpose of the Plan is to provide severance benefits for our Chief Executive Officer and other members of management or highly compensated employees that are selected by our Chief Executive Officer, whose employment is terminated during the 24 month period following a change in control (as defined in the Plan). Plan participants are eligible to receive severance benefits if their employment is terminated either voluntarily with "good reason" (as defined in the Plan) or involuntarily for any reason other than death or for "cause" (as defined in the Plan). The amount of severance benefits received by a particular employee is based upon the employee's position in Jostens and the employee's base salary plus the higher of the target of the current year's annual incentive or the three year average of actual payments of annual incentives. The range of severance benefits is from 15 months to 36 months of salary and would be paid in a lump sum upon termination. Plan participants are also eligible to receive an additional cash payment from us to the extent the total payments received from this Plan or any other benefit plan is treated as an "excess parachute payment" within the meaning of Section 280(G) of the Internal Revenue Code of 1986, as amended. JOSTENS RETIREMENT PLANS We maintain a non-contributory pension plan, Pension Plan D (Plan D), that provides benefits for substantially all salaried employees. Retirement income benefits are based upon a participant's highest average annual cash compensation (base salary plus annual bonus, if any) during any five consecutive calendar years, years of credited service (to a maximum of 35 years) and the Social Security-covered compensation table in effect at termination. 55 We also maintain an unfunded supplemental retirement plan that gives additional credit under Plan D for years of service as a Jostens' sales representative to those salespersons who were hired as employees of Jostens prior to October 1, 1991. In addition, benefits specified in Plan D may exceed the level of benefits that may be paid from a tax-qualified plan under the Internal Revenue Code of 1986, as amended. The benefits up to IRS limits are paid from Plan D and benefits in excess, to the extent they could have been earned in Plan D, are paid from the unfunded supplemental plan. The executive officers participate in pension plans maintained by us for certain employees. The following table shows estimated annual retirement benefits payable for life at age 65 for various levels of compensation and service under these plans. The table does not take into account transition rule provisions of the plan for employees who were participants on June 30, 1988.
Average Years of service at retirement (1) final -------------------------------------------------------------- compensation 15 20 25 30 35 ------------ -------- -------- -------- -------- -------- $ 150,000 $ 27,000 $ 36,000 $ 45,000 $ 54,000 $ 63,000 200,000 38,200 51,000 63,700 76,500 89,200 300,000 60,700 81,000 101,200 121,500 141,700 400,000 83,200 111,000 138,700 166,500 194,200 500,000 105,700 141,000 176,200 211,500 246,700 600,000 128,200 171,000 213,700 256,500 299,200 700,000 150,700 201,000 251,200 301,500 351,700 800,000 173,200 231,000 288,700 346,500 404,200 900,000 195,700 261,000 326,200 391,500 456,700 1,000,000 218,200 291,000 363,700 436,500 509,200 1,050,000 229,500 306,000 382,500 459,000 535,500
- -------- (1) The following individuals named in the Summary Compensation Table have the respective number of years of service under Plan D: Mr. Buhrmaster, 8.1 years; Mr. Blowers, 4.6 years; Mr. Priesmeyer, 3.3 years; Mr. Bailey, 22.5 years including sales service of 6.5 years; and Mr. Lea, 7.1 years. We also maintain a non-contributory supplemental pension plan for corporate vice presidents. Under the plan, vice presidents who retire after age 55 with at least seven full calendar years of service as a corporate vice president are eligible for a benefit equal to 1 % of final base salary for each full calendar year of service, up to a maximum of 30 %. Only service after age 30 is recognized in the plan. The calculation of benefits is frozen at the levels reached at age 60. If they continue in their current positions at their current levels of compensation and retire at age 60, the estimated total annual pension amounts from this plan for Messrs. Buhrmaster, Priesmeyer, Bailey and Lea would be $79,380, $22,557, $40,500 and $38,592, respectively. Mr. Blowers waived his eligibility in this plan. DIRECTORS FEES We do not pay any remuneration to our employees or to executives of Investcorp or its co-investors for serving as directors. We reimburse directors for expenses incurred in attending any meetings. SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE Following the completion of the merger and recapitalization, officers and directors of Jostens are no longer subject to Section 16(a) reporting requirements. 56 ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT We are authorized to issue shares of six classes of common stock, each with a par value of $0.01 per share except for the Class A common stock which has a par value of $0.33 1/3 per share. The classes of common stock consist of Class A common stock, Class B common stock, Class C common stock, Class D common stock, Class E common stock and common stock. Class A common stock, Class D common stock and common stock are the only classes of common stock that have a right to vote. Holders of Class B common stock, Class C common stock and Class E common stock do not have any voting rights, except that the holders of such classes of common stock have the right to vote as a class to the extent required under the laws of the State of Minnesota. Holders of Class A common stock and common stock of the Company are entitled to one vote per share, and holders of Class D common stock are entitled to 306.55 votes per share, in each case on all matters as to which shareholders may be entitled to vote pursuant to the Minnesota Business Corporation Act. Investcorp and its co-investors (other than DB Capital Investors and First Union Leveraged Capital) beneficially own all of the outstanding Class D common stock, constituting approximately 68% of our voting power. DB Capital Investors, First Union Leveraged Capital, Northwestern Mutual Life Insurance Company and our pre-merger shareholders, including certain members of management, beneficially own all of the outstanding Class A common stock, constituting the remainder of our voting power. In addition, Investcorp and its co-investors, other than DB Capital Investors and First Union Leveraged Capital, own 5,300,000 shares of Class B common stock and 811,020 shares of Class C common stock. The following table sets forth certain information regarding the beneficial ownership of our voting stock as of March 1, 2001. The table sets forth, as of that date: . each person whom we know to be a beneficial owner of more than 5% of any class of our voting stock; . each person who was a named executive officer of Jostens; . all of our directors and executive officers as a group; . other persons as required. None of our directors or executive officers own shares of our Class D common stock. Unless otherwise indicated, we believe each of the shareholders shown in the table below has sole voting and investment power with respect to the shares beneficially owned. Except as set forth in the table none of our executive officers beneficially owns shares of our common stock. 57
Options Common stock Percentage Name and address of Number of exercisable beneficially of class beneficial owner (1) shares within 60 days (2) owned (4) outstanding (5) - -------------------- --------- ------------------ ------------ --------------- CLASS A COMMON STOCK (approximately 32% of Voting Power) DB Capital Investors, L.P. (3)............... 2,003,679 -- 2,003,679 70.0% First Union Leveraged Capital (3)............ 198,019 -- 198,019 6.9% Northwestern Mutual Life Insurance Company (3).. 463,682 -- 463,682 16.2% Robert C. Burhmaster (3).................... 93,205 58,021 151,226 5.3% Carl H. Blowers (3)..... 41,858 9,670 51,528 1.8% William N. Priesmeyer (3).................... 28,034 9,670 37,704 1.3% Michael L. Bailey (3)... 15,913 15,472 31,385 1.1% Gregory S. Lea (3)...... 9,522 7,736 17,258 0.6% David J. Larkin......... -- -- -- 0.0% All directors and executives officers as a group, including certain of the persons named above (14 persons)........... 189,418 108,669 298,087 10.4% CLASS D COMMON STOCK (approximately 68% of Voting Power) INVESTCORP S.A. (6)(7).. 20,000 -- 20,000 100.0% SIPCO Limited (7)....... 20,000 -- 20,000 100.0% CIP Limited (7)......... 18,400 -- 18,400 92.0% Ballet Limited (7)...... 1,840 -- 1,840 9.2% Denary Limited (7)...... 1,840 -- 1,840 9.2% Gleam Limited (7)....... 1,840 -- 1,840 9.2% Highlands Limited (7)... 1,840 -- 1,840 9.2% Nobel Limited (7)....... 1,840 -- 1,840 9.2% Outrigger Limited (7)... 1,840 -- 1,840 9.2% Quill Limited (7)....... 1,840 -- 1,840 9.2% Radial Limited (7)...... 1,840 -- 1,840 9.2% Shoreline Limited (7)... 1,840 -- 1,840 9.2% Zinnia Limited (7)...... 1,840 -- 1,840 9.2% Investcorp Investment Equity Limited (7)..... 1,600 -- 1,600 8.0%
- -------- (1) As used in the table above, a beneficial owner of a security includes any person who, directly or indirectly, through contract, arrangement, understanding, relationship, or otherwise has or shares (i) the power to vote, or direct the voting of, such security or (ii) investment power which includes the power to dispose, or to direct the disposition of, such security. (2) Represents options exercisable within 60 days from March 1, 2001. (3) The address for DB Capital Investors, L.P. is 130 Liberty Street, 25th Floor, New York, New York 10006. The address for First Union Leveraged Capital is One First Union Center, 5th Floor, 301 South College Street, Charlotte, North Carolina 28288. The address for Northwestern Mutual Life Insurance Company is 720 East Wisconsin Avenue, Milwaukee, Wisconsin 53202. The address of each other person listed in the table as a holder of our Class A Common Stock is c/o Jostens, Inc., 5501 Norman Center Drive, Minneapolis, Minnesota 55437. (4) This number includes shares of stock that are subject to securities exercisable or convertible within 60 days of March 1, 2001. (5) Less than 1% unless otherwise indicated. (6) Investcorp does not directly own any of our stock. The number of shares of stock shown as owned by Investcorp includes all of the shares owned by Investcorp Investment Equity Limited (see note (7) below). 58 Investcorp owns no stock in Ballet Limited, Denary Limited, Gleam Limited, Highlands Limited, Noble Limited, Outrigger Limited, Quill Limited, Radial Limited, Shoreline Limited, Zinnia Limited, or in the beneficial owners of these entities (see note (7) below). Investcorp may be deemed to share beneficial ownership of the shares of voting stock held by these entities because the entities have entered into revocable management services or similar agreements with an affiliate of Investcorp, pursuant to which each such entities has granted such affiliate the authority to direct the voting and deposition of Jostens' voting stock owned by such entity for so long as such agreement is in effect. Investcorp is a Luxembourg corporation with its address at 37 rue Notre-Dame, Luxembourg. (7) Investcorp Investment Equity Limited is a Cayman Islands corporation, and a wholly-owned subsidiary of Investcorp, with its address at P.O. Box 1111, West Wind Building, George Town, Grand Cayman, Cayman Islands. SIPCO Limited may be deemed to control Investcorp through its ownership of a majority of a company's stock that indirectly owns a majority of Investcorp's shares. SIPCO Limited's address is P.O. Box 1111, West Wind Building, George Town, Grand Cayman, Cayman Islands. CIP Limited ("CIP") owns no stock of Jostens. CIP indirectly owns less than 0.1% of the stock of each of Ballet Limited, Denary Limited, Gleam Limited, Highlands Limited, Noble Limited, Outrigger Limited, Quill Limited, Radial Limited, Shoreline Limited and Zinnia Limited. CIP may be deemed to share beneficial ownership of the shares of Jostens' voting stock held by such entities because CIP acts as a director of such entities and the ultimate beneficial shareholders of each of those entities have granted to CIP revocable proxies in companies that own those entities' stock. None of the ultimate beneficial owners of such entities beneficially owns individually more than 5% of Jostens' voting stock. Each of CIP Limited, Ballet Limited, Denary Limited, Gleam Limited, Highlands Limited, Noble Limited, Outrigger Limited, Quill Limited, Radial Limited, Shoreline Limited and Zinnia Limited is a Cayman Islands corporation with its address at P.O. Box 2197, West Wind Building, George Town, Grand Cayman, Cayman Islands. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Immediately prior to consummation of the recapitalization, we received approximately $208.7 million of equity capital provided by Investcorp and its co-investors. In connection with obtaining the financing for the recapitalization, we paid Investcorp International, Inc., an affiliate of Investcorp, advisory fees of approximately $12.7 million. In addition, we entered into an agreement with Investcorp International for management advisory and consulting services for a five-year term pursuant to which we prepaid Investcorp International $7.5 million at the closing of the merger. Pursuant to the merger agreement, for six years after the closing date of the merger, we had agreed to indemnify and hold harmless our present and former officers and directors for acts or omissions occurring before the completion of the merger to the extent provided under our articles of incorporation and by-laws in effect on the date of the merger agreement. In addition, all indemnification agreements with any current or former directors, officers and employees of Jostens or any subsidiary will survive the merger and terminate as provided in such agreements. For six years after the completion of the merger, Jostens will provide officers' and directors' or fiduciary liability insurance for acts or omissions occurring before the completion of the merger covering each such person currently covered by our officers' and directors' or fiduciary liability insurance policy on terms with respect to coverage and amount no less favorable than those in effect on the date of the merger agreement, provided that the cost of such insurance does not exceed 200% of the most recent annual premium paid by us. 59 Pursuant to the merger agreement, Messrs. Buhrmaster, Priesmeyer, Blowers, Bailey and Lea retained shares of our common stock as follows:
Name Number of Shares ---- ---------------- Robert C. Buhrmaster........................................ 93,205 William N. Priesmeyer....................................... 41,858 Carl H. Blowers............................................. 28,034 Michael L. Bailey........................................... 15,913 Gregory S. Lea.............................................. 9,522 ------- Total....................................................... 188,532 =======
These shares were redesignated as Class A common stock as of the effective time of the merger, the same designation as the shares of common stock retained by other existing Jostens shareholders. All other shares held by Messrs. Buhrmaster, Priesmeyer, Blowers, Bailey and Lea were exchanged in the merger for $25.25 in cash. We have entered into management shareholder agreements with each of Messrs. Buhrmaster, Priesmeyer, Bailey, Blowers and Lea. Each agreement allows us to repurchase shares of our common stock from the executive in the event the executive ceases to be employed by us at any time prior to a public offering of our common stock. In addition, in the event of termination of employment under specified circumstances, the executive has the right to require an affiliate of Investcorp to repurchase his shares of common stock. The management shareholder agreements grant to the executives piggyback registration rights in connection with a registration statement filed by us with respect to our common equity securities following an initial public offering of our common stock. The agreements also impose restrictions on each executive's ability to sell shares in connection with or following an initial public offering. The agreements with each of Messrs. Priesmeyer, Bailey, Blowers and Lea further provide that if Mr. Buhrmaster is terminated without cause or leaves Jostens for good reason prior to May 10, 2001, each of the other executives will be entitled to resign within 60 days of such event and receive severance benefits in an amount equal to the benefits he would have received under our benefits plans as if a change in control had occurred and the executive has resigned for good reason. At the time of the merger, we agreed to redeem all outstanding preferred share purchase rights issued pursuant to our shareholder rights plan for approximately $33,500. In addition, at the time of the merger we agreed to terminate, by mutual consent, the shareholder rights plan which was promulgated under a shareholder rights agreement dated as of July 23, 1998 between Norwest Bank Minnesota, N.A. and Jostens. Stock Loan Program In connection with the merger and recapitalization, 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% 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 December 30, 2000, there were $1.8 million of these loans outstanding. The principal amounts of loans to the named executive officers are: Mr. Buhrmaster: $1,010,025; Mr. Priesmeyer: $368,499; Mr. Bailey: $291,158 and Mr. Lea: $105,318. 60 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (a) List of documents filed as part of this report: (1) Financial Statements Reports of Independent Accountants Consolidated Statements of Operations for 2000, 1999 and 1998 Consolidated Balance Sheets as of December 30, 2000 and January 1, 2000 Consolidated Statements of Cash Flows for 2000, 1999 and 1998 Consolidated Statements of Changes in Shareholders' Equity (Deficit) and Comprehensive Income (Loss) for 2000, 1999 and 1998 Notes to Consolidated Financial Statements (2) Financial Statement Schedules Report of Independent Accountants Schedule II--Valuation and Qualifying Accounts All other schedules for which provision is made in the applicable accounting regulations of the Securities and Exchange Commission have been omitted because they are not applicable or the required information is shown in the financial statements or notes thereto. (3) Exhibits 2.1 Agreement and Plan of Merger, dated as of December 27, 1999, by and between Jostens, Inc. and Saturn Acquisition Corporation, incorporated by reference to Appendix A to the Proxy Statement/Prospectus which is a part of Jostens' registration statement on Form S-4 filed April 7, 2000. 2.2 First Amendment to the Agreement and Plan of Merger, dated as of March 31, 2000, by and between Jostens, Inc. and Saturn Acquisition Corporation, incorporated by reference to Appendix A to the Proxy Statement/Prospectus which is a part of Jostens' registration statement on Form S-4 filed April 7, 2000. 3.1 Form of Amended and Restated Articles of Incorporation of Jostens, Inc., incorporated by reference to Appendix D to the Proxy Statement/Prospectus which is a part of Jostens' registration statement on Form S-4 filed April 7, 2000. 3.2 Certificate of Designation, effective May 10, 2000, of the Powers, Preferences and Rights of the 14 % Senior Redeemable Payment-In- Kind Preferred Stock, and Qualifications, Limitations and Restrictions Thereof. Incorporated by reference to Exhibit 4.3 to Jostens' Form 8-K filed on May 25, 2000. 3.3 Bylaws of Jostens, Inc. Incorporated by reference to Exhibit 3.2 contained in Jostens' Report on Form 10-Q for the quarterly period ended July 3, 1999. 4.1 Indenture, dated as of May 10, 2000, including therein the form of Note, between Jostens, Inc. and The Bank of New York, as Trustee, providing for 12.75% Senior Subordinated Notes due 2010. Incorporated by reference to Exhibit 4.1 to Jostens' Form 8-K filed on May 25, 2000. 61 4.2 Registration Rights Agreement, dated as of May 10, 2000, between Jostens, Inc. and American Yearbook Company, Inc. as Issuers, and Deutsche Bank Securities Inc., UBS Warburg LLC and Goldman, Sachs & Co. as Initial Purchasers. Incorporated by reference to Exhibit 4.2 to Jostens' Form 8-K filed on May 25, 2000. 4.3 Purchase Agreement dated May 5, 2000, for 225,000 Units Consisting of $225,000,000 12.75% Senior Subordinated Notes due 2010 and Warrants to Purchase 425,060 Shares of Class E Common Stock, between Jostens, Inc. and American Yearbook Company, and Deutsche Bank Securities Inc., UBS Warburg LLC and Goldman, Sachs & Co. Incorporated by reference to Exhibit 4.6 to Jostens' Form 8-K filed on May 25, 2000. 4.4 Form of Exchange Note. Incorporated by reference to Exhibit 4.4 contained in Jostens' registration statement on Form S-4 filed April 7, 2000. 5.1 Opinion of William J. George, Esq., regarding the legality of the exchange notes issued by Jostens. Incorporated by reference to Exhibit 5.1 contained in Jostens' registration statement on Form S-4 filed April 7, 2000. 10.1 Warrant Agreement, dated May 10, 2000, including therein the form of Warrant, between Jostens, Inc. and The Bank of New York, as Warrant Agent. Incorporated by reference to Exhibit 10.2 contained in Jostens' registration statement on Form S-4 filed April 7, 2000. 10.2 Warrant Registration Rights Agreement, dated May 10, 2000, between Jostens, Inc. and Deutsche Bank Securities Inc., UBS Warburg LLC and Goldman, Sachs & Co. Incorporated by reference to Exhibit 4.5 to Jostens' Form 8-K filed on May 25, 2000. 10.3 Purchase Agreement, dated May 10, 2000, for 14 % Senior Redeemable Payment-In-Kind Preferred Stock with Warrants to Purchase Shares of Class E Common Stock, between Jostens, Inc. and DB Capital Investors, L.P. Incorporated by reference to Exhibit 4.6 to Jostens' Form 8-K filed on May 25, 2000. 10.4 Warrant Agreement, dated May 10, 2000, including therein the form of Warrant, between Jostens, Inc. and The Bank of New York, as Warrant Agent. Incorporated by reference to Exhibit 10.5 contained in Jostens' registration statement on Form S-4 filed April 7, 2000. 10.5 Preferred Stock Registration Rights Agreement, dated May 10, 2000, between Jostens, Inc. and DB Capital Investors, L.P. Incorporated by reference to Exhibit 4.8 to Jostens' Form 8-K filed on May 25, 2000. 10.6 Shareholder Agreement, dated May 10, 2000, between Jostens, Inc., and DB Capital Investors, L.P. and Certain Other Holders of Stock of Jostens, Inc. Incorporated by reference to Exhibit 4.9 to Jostens' Form 8-K filed on May 25, 2000. 10.7 Shareholder Agreement, dated May 10, 2000, between Jostens, Inc., and First Union Leveraged Capital, LLC and Certain Other Holders of Stock of Jostens, Inc. Incorporated by reference to Exhibit 4.10 to Jostens' Form 8-K filed on May 25, 2000. 10.8 Common Equity Registration Rights Agreement, dated May 10, 2000, between Jostens, Inc., and Certain Holders as Defined Therein. Incorporated by reference to Exhibit 4.11 to Jostens' Form 8-K filed on May 25, 2000. 10.9 Management Shareholder Agreement, dated as of May 10, 2000, between Jostens, Inc. and Robert Buhrmaster. Incorporated by reference to Exhibit 10.10 contained in Jostens' registration statement on Form S-4 filed April 7, 2000. 10.10 Management Shareholder Agreement, dated as of May 10, 2000, between Jostens, Inc. and William Priesmeyer. Incorporated by reference to Exhibit 10.11 contained in Jostens' registration statement on Form S-4 filed April 7, 2000. 62 10.11 Management Shareholder Agreement, dated as of May 10, 2000, between Jostens, Inc. and Carl Blowers. Incorporated by reference to Exhibit 10.12 contained in Jostens' registration statement on Form S-4 filed April 7, 2000. 10.12 Management Shareholder Agreement, dated as of May 10, 2000, between Jostens, Inc. and Michael Bailey. Incorporated by reference to Exhibit 10.13 contained in Jostens' registration statement on Form S-4 filed April 7, 2000. 10.13 Management Shareholder Agreement, dated as of May 10, 2000, between Jostens, Inc. and Gregory Lea. Incorporated by reference to Exhibit 10.14 contained in Jostens' registration statement on Form S-4 filed April 7, 2000. 10.14 Stock Option Agreement, dated as of May 10, 2000, between Jostens, Inc. and William Priesmeyer. Incorporated by reference to Exhibit 10.15 contained in Jostens' registration statement on Form S-4 filed April 7, 2000. * 10.15 Stock Option Agreement, dated as of May 10, 2000, between Jostens, Inc. and Carl Blowers. Incorporated by reference to Exhibit 10.16 contained in Jostens' registration statement on Form S-4 filed April 7, 2000. * 10.16 Stock Option Agreement, dated as of May 10, 2000, between Jostens, Inc. and Michael Bailey. Incorporated by reference to Exhibit 10.17 contained in Jostens' registration statement on Form S-4 filed April 7, 2000. * 10.17 Stock Option Agreement, dated as of May 10, 2000, between Jostens, Inc. and Gregory Lea. Incorporated by reference to Exhibit 10.18 contained in Jostens' registration statement on Form S-4 filed April 7, 2000. * 10.18 Stock Option Agreement, dated as of May 10, 2000, between Jostens, Inc. and Robert Buhrmaster. Incorporated by reference to Exhibit 10.19 contained in Jostens' registration statement on Form S-4 filed April 7, 2000. * 10.19 Loan and Pledge Agreement, dated as of May 10, 2000, between Jostens, Inc. and Robert Buhrmaster, together with form of proxy and promissory note. Incorporated by reference to Exhibit 10.20 contained in Jostens' registration statement on Form S-4 filed April 7, 2000. 10.20 Loan and Pledge Agreement, dated as of May 10, 2000, between Jostens, Inc. and William Priesmeyer, together with form of proxy and promissory note. Incorporated by reference to Exhibit 10.21 contained in Jostens' registration statement on Form S-4 filed April 7, 2000. 10.21 Loan and Pledge Agreement, dated as of May 10, 2000, between Jostens, Inc. and Michael Bailey, together with form of proxy and promissory note. Incorporated by reference to Exhibit 10.22 contained in Jostens' registration statement on Form S-4 filed April 7, 2000. 10.22 Loan and Pledge Agreement, dated as of May 10, 2000, between Jostens, Inc. and Gregory Lea, together with form of proxy and promissory note. Incorporated by reference to Exhibit 10.23 contained in Jostens' registration statement on Form S-4 filed April 7, 2000. 10.23 Management Stock Incentive Plan established by Jostens, Inc. dated as of May 10, 2000. Incorporated by reference to Exhibit 10.24 contained in Jostens' registration statement on Form S-4 filed April 7, 2000. * 10.24 Jostens, Inc. 2000 Stock Loan Plan. Incorporated by reference to Exhibit 10.25 contained in Jostens' registration statement on Form S-4 filed April 7, 2000. 10.25 Management Shareholder Bonus Plan established by Credit Agreement. Incorporated by reference to Exhibit 10.26 contained in Jostens' registration statement on Form S-4 filed April 7, 2000. * 63 10.26 Credit Agreement, dated as of May 10, 2000, between Jostens, Inc. and Chase Securities Inc., Deutsche Bank Securities Inc., and Goldman Sachs Credit Partners L.P., as Co-Lead Arrangers, Bankers Trust Company, as Syndication Agent, Goldman Sachs Credit Partners L.P., as Documentation Agent, and The Chase Manhattan Bank, as Administrative Agent. Incorporated by reference to Exhibit 10.27 contained in Jostens' registration statement on Form S-4 filed April 7, 2000. 10.27 Separation Agreement, dated as of April 11, 2000, between Jostens, Inc. and Mr. Thomas W. Jans. * 10.28 Separation Agreement, dated as of April 26, 2000, between Jostens, Inc. and Mr. David J. Larkin. * 10.29 Jostens, Inc. Executive Change in Control Severance Pay Plan effective January 1, 1999. Incorporated by reference to Exhibit 10.8 contained in the Annual Report on Form 10-K for 1998. * 10.30 Jostens, Inc. Executive Change in Control Severance Pay Plan First Declaration of Amendment, effective August 1, 1999. Incorporated by reference to Jostens' Report on Form 10-K for the quarterly period ended October 2, 1999. * 10.31 Form of Contract entered into with respect to Executive Supplemental Retirement Plan. Incorporated by reference to Jostens' Registration Statement on Form 8 dated May 2, 1991. * 12 Computation of Ratio of Earnings to Fixed Charges 21 List of Jostens' subsidiaries. (b) Reports on Form 8-K No reports on Form 8-K were filed by Jostens during the quarter ended December 30, 2000. - -------- * Management contract or compensatory plan or arrangement required to be filed as an exhibit to Form 10-K pursuant to Item 14 (c) of this annual report. 64 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, on March 28, 2001. JOSTENS, INC. /s/ Robert C. Buhrmaster By __________________________________ Robert C. Buhrmaster Chairman of the Board, President and Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on March 28, 2001 in the capacities indicated. Signature Title /s/ Robert C. Buhrmaster _____________________________________ Chairman of the Board, President and Robert C. Buhrmaster Chief Executive Officer /s/ William N. Priesmeyer _____________________________________ Senior Vice President and Chief William N. Priesmeyer Financial Officer (Chief Accounting Officer) /s/ James O. Egan _____________________________________ Director James O. Egan /s/ Charles K. Marquis _____________________________________ Director Charles K. Marquis /s/ Charles J. Philippin _____________________________________ Director Charles J. Philippin /s/ Steven G. Puccinelli _____________________________________ Director Steven G. Puccinelli /s/ David A. Tayeh _____________________________________ Director David A. Tayeh /s/ George O. Visnyei _____________________________________ Director George O. Visnyei 65 Report of Independent Accountants To the Board of Directors of Jostens, Inc.: Our audit of the consolidated financial statements as of December 30, 2000 and for the year then ended referred to in our report dated March 27, 2001 appearing in the 2000 Annual Report on Form 10-K also included an audit, as of December 30, 2000 and for the year then ended, of the financial statement schedule listed in Item 14(a)(2) of this Form 10-K. In our opinion, this financial statement schedule presents fairly, in all material respects, the information set forth therein as of December 30, 2000 and for the year then ended when read in conjunction with the related consolidated financial statements. /s/ PricewaterhouseCoopers LLP PricewaterhouseCoopers LLP Minneapolis, Minnesota March 27, 2001 Schedule II--Valuation and Qualifying Accounts Jostens, Inc. and subsidiaries
Additions ------------------- Charged Charged to Balance to costs other Balance beginning and accounts-- Deductions-- end of of period expenses describe describe period --------- -------- ---------- ------------ ------- (In thousands) Reserves and allowances deducted from asset accounts: Allowances for uncollectible accounts: Year ended December 30, 2000............. $5,775 $ 2,712 $-- $ 4,126(1) $4,361 Year ended January 1, 2000................. $7,308 $ 1,882 $-- $ 3,415(1) $5,775 Year ended January 2, 1999................. $7,446 $ 1,858 $-- $ 1,996(1) $7,308 Allowances for sales returns: Year ended December 30, 2000............. $7,130 $18,203 $-- $18,973(2) $6,360 Year ended January 1, 2000................. $5,500 $22,527 $-- $20,897(2) $7,130 Year ended January 2, 1999................. $5,569 $17,753 $-- $17,822(2) $5,500 Sales person overdraft reserves: Year ended December 30, 2000............. $6,332 $ 1,116 $-- $ 1,880(1) $5,568 Year ended January 1, 2000................. $7,061 $ 2,500 $-- $ 3,229(1) $6,332 Year ended January 2, 1999................. $8,322 $ 1,947 $-- $ 3,208(1) $7,061
- -------- (1) Uncollectible accounts written off, net of recoveries. (2) Returns processed against reserve. EX-10.27 2 0002.txt SEPARATION AGREEMENT - MR. JANS Exhibit 10.27 April 11, 2000 Mr. Thomas W. Jans 18709 Melrose Chase Eden Prairie, MN 55437 Dear Tom: This letter, when signed by you, will confirm the mutual Separation Agreement ("Agreement") we have reached concerning your termination of employment with Jostens, Inc. ("Jostens"). Your position has been eliminated as part of a corporate restructuring that did not occur in connection with or as a result of a change in control. You acknowledge that this Agreement supercedes and cancels the terms and provisions of the Executive Change in Control Severance Pay Plan adopted January 1, 1999 and any amendments thereto with respect to your termination. Your compensation, perquisites and benefits will continue through the effective date of your termination of employment. After the Effective Date of your termination of employment, you will be entitled to continuing compensation, perquisites and benefits only to the extent provided in the Jostens, Inc. Executive Severance Pay Plan (the "Severance Pay Plan") or as described in this Agreement. The following terms and conditions apply: 1. Effective Date: Effective March 31, 2000 your employment with Jostens has --------------- terminated. In this Agreement, this date is referred to as your "Termination Date." 2. Accrued Vacation: Your last regular paycheck will include a payment equal ----------------- to the value of your accrued, unused vacation pay. You will not accrue vacation after your Termination Date. Mr. Thomas W. Jans Page 2 3. Severance Pay Plan Benefits: You will be entitled to the following benefits ----------------------------- under the Severance Pay Plan, subject to the limitations, conditions and terms set forth in the Severance Pay Plan, a copy of which is attached: a. Salary Continuation: Your base salary (minus federal, state and local ------------------- withholdings and any liens) will be continued at your current rate (not including bonuses or other incentives) in bi-weekly payments until December 31, 2000. At any time, Jostens may, but is not required to, pay the remaining payments to you in a lump sum payment without your consent. b. Management Bonus: You will receive a management bonus for calendar ---------------- year 1999. You will be eligible for a management bonus for the 2000 calendar year prorated through June 30, 2000. Your bonus will be targeted at the same percentage you had in 1999 applied to the annual base salary you received at your Termination Date and will be based on overall Jostens' results as determined by Jostens' Board of Directors. You will not be eligible for any management bonus for any calendar year beginning after your Termination Date. c. COBRA Premiums: Your current group medical and dental coverages will -------------- remain in effect until December 31, 2000. Your current group life and vision coverages will cease on your Termination Date. You will have the option of continuing these existing coverages following these dates by paying the full cost of the premium as provided by COBRA legislation. You will be advised separately of your coverage continuation rights by DCA, Inc., the COBRA administrator. (You may also be entitled to convert your group life coverage to an individual policy. Contact Lisa Triplett if you desire conversion information. You must apply for conversion within 30 days after coverage terminates or by the end of your group life COBRA continuation period.) d. Perquisites: The perquisites you were entitled to receive immediately ----------- prior to your termination date will remain in effect until December 31, 2000, subject to any reductions applicable to similarly situated active Jostens employees. Mr. Thomas W. Jans Page 3 e. Additional Benefits: You are entitled to standard and customary -------------------- outplacement services for similarly situated Jostens employees. Jostens will pay directly to your legal counsel fees in an amount not to exceed $3,000.00 for consultation and negotiation of this Separation Agreement. Payment will be made upon submission of a billing statement showing itemized entries in a form acceptable to Jostens' General Counsel. f. Conditions and Limitations: -------------------------- (i) Waiver and Release of Claims: You acknowledge that in order to ---------------------------- receive any payments or benefits under the Severance Pay Plan, you must sign this Agreement, which includes a waiver and release of claims, (see Section 18), and you must not revoke the waiver and release of claims within the period described in Sections 18 and 19. If the waiver and release of claims is at any time determined to be partially or wholly unenforceable or ineffective in any respect for any reason, (1) you will no longer be entitled to reimbursement of health premiums as described in clause (c) or to continued perquisites as described in clause (d), (2) the payments described in clauses (a) and (b) will be reduced by 30% (of the gross payments before any other reductions), (3) you must promptly reimburse Jostens for the full amount or value of any reimbursements or perquisites described in clause (c) or (d) that you previously received and (4) you must promptly reimburse Jostens for 30% (of the gross payments before any other reductions) of any payments described in clauses (a) and (b) that were previously made. (ii) Non-Compete and Confidentiality: You acknowledge that in order to -------------------------------- receive payments or benefits under the Severance Pay Plan, you must not compete with Jostens at any time before December 31, 2000 or disclose confidential information. If you do, (1) you will no longer be entitled to reimbursement of health premiums as described in clause (c) or to continued perquisites as described in clause (d), (2) the payments described in clauses (a) and (b) will be reduced by 70% (of the gross payments before any after reductions), (3) you must promptly reimburse Jostens for the full amount or value of any reimbursements or perquisites described in clause (c) or (d) that you previously received Mr. Thomas W. Jans Page 4 and (4) you must promptly reimburse Jostens for 70% (of the gross payments before any other reductions) of any payments described in clauses (a) and (b) that were previously made. You will be deemed to compete with Jostens if the Administrator of the Severance Pay Plan determines that, directly or indirectly, alone or as a partner, officer, director, shareholder, sole proprietor, employee or consultant of any other firm or entity, you have engaged, are engaging or intend to engage in any commercial activity in competition with any part of the business of Jostens or any affiliate as conducted at the time in question or solicit, or you have solicited or interfered, are soliciting or interfering or intend to solicit or interfere with the relationship of Jostens or any affiliate with, any customers, suppliers, employees or sales representatives of Jostens or any affiliate. Confidential information means any information relating to the business or affairs of Jostens or any affiliate, including but not limited to information relating to financial statements, customer identities, potential customers, employees, sales representatives, suppliers, servicing methods, equipment, programs, strategies and information, analyses, profit margins or other proprietary information used by Jostens or an affiliate except for information in the public domain or known in the industry through no wrongful act on your part. (iii) Return to Jostens: If you return to work for Jostens or one of ----------------- its affiliates, you will not be entitled to any further benefits under the Severance Pay Plan. (iv) Other Work: If you perform any services for which you receive, ----------- directly or indirectly, remuneration as an employee, consultant, sole proprietor, partner, member, owner or otherwise (other than as an employee of Jostens or an affiliate), it will not affect any payments made to you by Jostens under this Agreement. (v) Other: You acknowledge that you have carefully reviewed the ----- Severance Pay Plan, and particularly Section 4.5 of the Severance Pay Plan, and understand the other limitations on the benefits described above. Mr. Thomas W. Jans Page 5 4. AD&D and Business Travel Accident Insurance: Your current accidental death -------------------------------------------- and dismemberment insurance coverage and business travel accident coverage will remain in effect until the last day of the pay period that includes your Termination Date. There is no continuation or conversion option for either of these coverages. 5. Spending Accounts: If you participated in either the Health Care Expense ----------------- Account or Dependent Care Account, deductions will stop as of the last day of the pay period that includes your Termination Date. Your Health Care Expense account may be continued through COBRA. You will be advised separately of coverage continuance rights by DCA, Inc., the COBRA administrator. 6. Pension Plan: Your entitlement to benefits under the Pension Plan will be ------------ determined in accordance with the terms of the Plan. For purposes of vesting service credit under Pension Plan D, you shall be granted service credit through December 31, 2000. 7. 401(k) Retirement Savings Plan: You may elect to make 401(k) contributions --------------------------------- through your salary continuation period. Any outstanding loans will become due in full on December 31, 2000. Distribution of your account balances, if any, will be made in accordance with the terms of the Plan. 8. Executive Supplemental Retirement Agreement: You will not accrue additional ------------------------------------------- benefits or earn additional service for vesting or any other purposes under your Executive Supplemental Retirement Agreement after your Termination Date. You acknowledge that you are not entitled to receive any benefits under your Executive Supplemental Retirement Agreement because you have neither reached age 55 nor completed at least 7 years as an executive officer of Jostens. 9. Short and Long Term Disability: Short-and Long-Term Disability coverage ------------------------------ will cease on your Termination Date. Contact your HR representative if you desire conversion information on the Long-Term Disability Plan. You must apply for conversion within 30 days after coverage terminates. 10. Performance Pays Bonus: You will not be entitled to receive any Performance ------------------------ Pays bonus for the performance period ending this calendar year or for any subsequent performance period. Mr. Thomas W. Jans Page 6 11. Stock Options and Restricted Stock: You have until the end of the six (6) ---------------------------------- month period following December 31, 2000, to exercise any of your Jostens stock options that have become vested on or before that date. During the period beginning on December 31, 1999 and ending December 31, 2000, all of your Jostens stock options and your shares of restricted Jostens stock that were outstanding on December 31, 1999, will remain outstanding and will continue to vest according to the terms of the Jostens, Inc. 1992 Stock Incentive Plan (the "Incentive Plan") and the instruments granting those options and shares, as if you were employed by Jostens throughout that period, subject to the rights of Jostens to fully vest and redeem such options and shares at an earlier date, pursuant to the Incentive Plan, in the event of a Change in Control of Jostens, as defined in the Incentive Plan and the instruments granting those options and shares (a "Change in Control"). At the end of that period, any of those options and shares that remain outstanding and have not become vested will be automatically forfeited. Jostens represents and warrants that such options and shares will become fully vested under the terms of the Incentive Plan in the event of a Change in Control during that period. 12. Executive Stock Purchase Plan: The restricted shares you hold pursuant to ------------------------------ the Executive Stock Purchase Plan will become totally vested on the closing date of the sale of substantially all of the stock of Jostens to Investcorp. In that event, notwithstanding any contrary provision in the Plan, Jostens will arrange to have your shares tendered and will cover any prepayment penalty due the First National Bank of Chicago. You agree to participate in the liquidation procedure Jostens puts in place for the Executive Stock Purchase Program. You also agree that severance payments to you may be offset by amounts Jostens is required to pay to First National Bank of Chicago as a guarantor of the loan you took out with that bank for the purpose of purchasing stock under this program should you default in your loan payments. 13. Confidentiality/No Admission: You agree to keep the existence and all ------------------------------ specific terms of this Agreement confidential and you further agree not to disclose any information concerning this Agreement to any person, company, entity or third party other than your attorney, accountant, tax advisor, spouse and other immediate family. You and Jostens also agree that the existence of this Agreement is not an admission by Jostens that the termination of your employment was in any way wrongful or discriminatory or violated any law. Mr. Thomas W. Jans Page 7 14. Confidentiality Duty: You acknowledge that while employed by Jostens you -------------------- had access to Jostens' confidential and proprietary information and/or trade secrets. You further acknowledge your continuing duty not to disclose, furnish or otherwise make available such information and/or trade secrets to any person, company, entity or third party. 15. Return of Company Property: You acknowledge that prior to the date on which -------------------------- you sign this Agreement, you have returned all Jostens' property in your possession or control, including, but not limited to, any company credit card (or any credit card on which the company is guarantor), Jostens' business files, documents or data in any form, computer, fax, printer or other equipment. Further, you agree to repay to Jostens the amount of any permanent or temporary advances and balance owing on any credit cards of any monies due and owing Jostens or for which Jostens is a guarantor. Notwithstanding the above, you may retain the laptop computer provided you by Jostens. You understand that Jostens will first review all information, data, records and files stored therein and retrieve or destroy at its discretion any information, data, records or files constituting the property of Jostens. 16. Nondisparagement: You and Jostens agree that before or after your ---------------- termination of employment with Jostens neither you or Jostens will make any statement or communication of information by whatever means to any person relating to your employment with Jostens which may be reasonably interpreted to be critical or derogatory of the other party to this Agreement; including in the case of Jostens, its officers, directors or employees. Nothing herein however is intended to bar either party from truthfully testifying under Subpoena or other legal process before any court or administrative agency authorized to compel testimony. 17. Cooperation: You agree (i) to cooperate fully in the defense of any suit or ----------- claim asserted against Jostens or you individually or jointly with Jostens or its subsidiaries, based on any alleged act or omission by you severally or jointly with others, in your alleged capacity as employee or agent of Jostens or any of its subsidiaries, and (ii) to cooperate fully with Jostens and any of its subsidiaries and any of their directors, officers, employees, attorneys or other personnel retained in any litigation, dispute or controversy in which Jostens or any of its subsidiaries is a party involving claims which arose during your service with Jostens or a subsidiary or to which Jostens believes your knowledge or expertise relate. As used herein, "cooperate fully" means that you will make yourself available on reasonable notice and participate in such Mr. Thomas W. Jans Page 8 proceedings as reasonably are necessary to complete such matters. Subject to your compliance with these obligations, Jostens will, to the extent required by applicable law and under the conditions set out in its Articles and By-Laws, defend and hold you harmless from suits and claims covered by part (i) of this paragraph and shall compensate you at a reasonable rate ($250.00 per hour) for time spent in providing services and reimburse you for reasonable and necessary expenses incurred at Jostens' request under paragraph (ii) of this paragraph. 18. Waiver and Release of Claims: ---------------------------- a. In consideration of the benefits provided to you under this Agreement you agree: you release and forever discharge Jostens, its subsidiaries and affiliated companies including each of their officers, directors, agents and employees from and waive all causes of action, damages, liability and claims of whatever nature relating to or arising out of your employment with Jostens, its subsidiaries and affiliated companies and the termination of your employment, including but not limited to, claims under federal, state or local discrimination laws, claims arising out of wrongful termination, whistle blowing claims and the Age Discrimination in Employment Act. The prior sentence does not release or discharge Jostens or you from obligations under this Agreement or which arise after the date you sign this Agreement. Nothing in this Agreement prevents you from filing a charge or complaint, including a challenge to the validity of this Agreement or the waiver and release of claims in this section, with the Equal Employment Opportunity Commission or participating in any investigation or proceeding conducted by the Equal Employment Opportunity Commission. b. Jostens, Inc., its subsidiaries, affiliates successors and any company related to it releases, waives and discharges Thomas W. Jans from any and all claims, demands, actions, suits, liabilities and damages which they may have relating to or arising out of his employment with Jostens as of the date of this agreement. 19. Revocation: ---------- a. You have the right to revoke only that portion of this waiver and release which relate to claims under the Age Discrimination in Employment Act within 7 Mr. Thomas W. Jans Page 9 days from the date you sign this Agreement. You likewise have the right to rescind only that portion of this waiver and release which relates to claims under the Minnesota Human Rights Act by written notice to Jostens within 15 days from the date you sign this Agreement. To be effective, this rescission or revocation must be in writing and hand delivered or mailed to Jostens to the attention of William J. George, General Counsel, Jostens, 5501 Norman Center Drive, Minneapolis, MN 55437 and sent by certified mail, return-receipt requested. Rescission or revocation of the release will result in cessation of any future separation payments to be paid. b. You agree that if you exercise any right of rescission or revocation, payments made to you by Jostens under this Agreement will be sufficient consideration for the release of all other claims you have against Jostens, except those under the Age Discrimination in Employment Act and in Minnesota, those under the Minnesota Human Rights Act. 20. Miscellaneous: You acknowledge that you have been given at least 45 days ------------- from the date you receive this Agreement to consider this Agreement and that you have been advised to and have had the opportunity to consult legal counsel of your own choosing concerning this Agreement and that you have entered into it of your own free will and without compulsion. Both you and Jostens agree that any written changes to this Agreement, whether material or immaterial will not restart the running of the 45-day period. You acknowledge that you have been provided with a list of the job titles and ages of all individuals in the same job classification or organizational unit whose positions were involuntarily eliminated in this corporate restructuring and the ages of all individuals in the same job classification or organizational unit whose positions were not involuntarily eliminated. (Exhibit A) This Agreement contains the entire agreement and understanding of the parties. No representations have been made or relied upon by either party other than those that are expressly set forth in this Agreement, and each party has entered into this Agreement voluntarily and without coercion. If any portion or provision of this Agreement is deemed unenforceable, the Agreement will be deemed modified to remaining provisions will remain in full force and effect. Mr. Thomas W. Jans Page 10 This Agreement may not be altered, amended or modified unless done in writing and signed by an executive officer of Jostens and you. Nothing in this Agreement, however, in any way prevents or limits Jostens from amending or terminating any of its benefit plans, policies or practices and in such a case, your rights would be determined solely under the terms of the plan, policy or practice in question. If this Agreement is acceptable to you, please sign and return this letter to William J. George, General Counsel, Jostens, 5501 Norman Center Drive, Minneapolis, MN 55437 by April 11, 2000. Should any overpayments be made to you under this Agreement or after a revocation or rescission of this Agreement, you are responsible for immediate repayment to Jostens. Yours truly, /s/ Robert Buhrmaster Robert Buhrmaster Chief Executive Officer AGREED AND ACCEPTED: /s/ Thomas W. Jans - ------------------------------------ Thomas W. Jans 4/11/00 - ------------------------------------ DATE ACKNOWLEDGMENT I acknowledge that on April 11, 2000 I was provided with the attached Separation Agreement ("Agreement"). I further acknowledge that I have been advised to consult with an attorney before entering into the attached Agreement, and that I have been given a period of at least 45 days to consider whether to accept the Agreement. I have received and read the above acknowledgment, and I fully understand its meaning. /s/ Thomas W. Jans - ------------------------------------ Thomas W. Jans 4/11/00 - ------------------------------------ Date EXHIBIT A In accordance with the Older Workers' Benefit Protection Act/Age Discrimination in Employment Act [Sec. 7(f)(1)(H)], listed below are the titles and ages of individuals whose positions were and were not eliminated as a result of the restructuring of Senior Management as of March 1, 2000: 1. Class/Unit: Senior Management 2. Eligibility Factor: Senior Management 3. Time Limits to Program: All persons who are being offered consideration under a separation agreement must sign the agreement and return it to Jostens General Counsel within 45 days after receipt. Once the signed agreement is returned, the employee has 7 days to revoke the waiver. 4. Job Titles/Ages of Individual(s) Selected for Eliminations: Executive Vice President and Chief Operating Officer.................. 61 Vice President - Consumer Marketing and Channel Development........... 51 Vice President - Strategic Marketing.................................. 48 Vice President and General Manager - North American Photo............. 45 5. Job Titles/Ages of Individual(s) Not Selected for Elimination: Chairman of the Board, President and Chief Executive Officer.......... 52 Senior Vice President - Manufacturing................................. 60 Senior Vice President and Chief Financial Officer..................... 55 Senior Vice President - Jostens School Solutions...................... 44 Vice President, General Counsel and Corporate Secretary............... 51 Vice President and General Manager - Business Ventures................ 47 Vice President - Treasurer............................................ 43 EX-10.28 3 0003.txt SEPARATION AGREEMENT - MR. LARKIN Exhibit 10.28 April 26, 2000 Mr. David J. Larkin 4611 Townes Circle Edina, MN 55424 Dear Dave: This letter, when signed by you, will confirm the mutual Separation Agreement ("Agreement") we have reached concerning your termination of employment with Jostens, Inc. ("Jostens"). Your position has been eliminated as part of a corporate restructuring that did not occur in connection with or as a result of a change in control. You acknowledge that this Agreement supercedes and cancels the terms and provisions of the Executive Change in Control Severance Pay Plan adopted January 1, 1999 and any amendments thereto with respect to your termination. Your compensation, perquisites and benefits will continue through the effective date of your termination of employment. After the Effective Date of your termination of employment, you will be entitled to continuing compensation, perquisites and benefits to the extent provided in your Employment Agreement or as described in this Agreement. The following terms and conditions apply: 1. Effective Date: Effective March 31, 2000 your employment with Jostens will -------------- terminate. In this Agreement, this date is referred to as your "Termination Date." 2. Accrued Vacation: Your last regular paycheck will include a payment equal ---------------- to the value of your accrued, unused vacation pay. 3. Severance Benefits: You will be entitled to the following benefits under ------------------ your Employment Agreement: a. Salary Continuation: Your base salary and plan waiver allowance (minus ------------------- federal, state and local withholdings and any liens) will be continued at your current rate (not including bonuses or other incentives) in bi-weekly payments until June 30, 2001. At any time after January 1, 2001, Jostens may, but is not required to, pay the remaining payments to you in a lump sum payment without your consent. Mr. David J. Larkin Page 2 b. Management Bonus: You will receive a management bonus for calendar ---------------- year 2000 and a pro-rated portion of any management bonus that may be earned for calendar year 2001. Your bonus for the years 2000 and pro- rated 2001 will be targeted at the same percentage of base salary used to determine your 1999 bonus, applied to the annual base salary you received at your Termination Date, and will be based on overall Jostens' results for years 2000 and 2001 as determined by Jostens' Board of Directors. Any bonus earned will be paid to you at the same time other participants receive their bonus payout. c. Lump Sum Payment: As additional consideration for the waiver and ---------------- release of any and all claims under your employment agreements and any rights you may claim under the Executive Change In Control Severance Pay Plan, Jostens will pay you a lump sum of $100,000.00 less customary federal and state withholding within 10 days following the execution of this Agreement. d. COBRA Premiums: Your current group medical and dental coverages will -------------- cease on June 30, 2001. Your current group life and vision coverages will cease on June 30, 2001. You will have the option of continuing existing medical and dental coverages following these dates by paying the full cost of the premium as provided by COBRA legislation. You will be advised separately of your coverage continuation rights by DCA, Inc., the COBRA administrator. (You may also be entitled to convert your group life coverage to an individual policy. Contact Lisa Triplett if you desire conversion information. You must apply for conversion within 30 days after coverage terminates or by the end of your group life COBRA continuation period.) e. Perquisites: The perquisites you were entitled to receive immediately ----------- prior to and during the month including your termination date will remain in effect until June 30, 2001, subject to any reductions applicable to similarly situated active Jostens employees. f. Additional Benefits: You are entitled to the following benefits: ------------------- Standard and customary outplacement services for similarly situated Jostens employees. You may, at your option, elect to receive $25,000.00 in lieu of such services. Jostens will pay directly to your legal counsel fees for consultation and negotiation of this Separation Agreement in an amount not to exceed $9,000.00. Payment will be made upon submission of a billing statement showing itemized entries in a form acceptable to Jostens' General Counsel. Mr. David J. Larkin Page 3 g. Waiver and Release of Claims: You acknowledge that in order to receive ---------------------------- any payments or benefits under your Employment Agreement, you must sign this Agreement, which includes a waiver and release of claims, (see Section 15), and you must not revoke the waiver and release of claims within the period described in Sections 15 and 16. 4. AD&D and Business Travel Accident Insurance: Your current accidental death ------------------------------------------- and dismemberment insurance coverage and business travel accident coverage will remain in effect until the last day of the pay period that includes June 30, 2001. There is no continuation or conversion option for either of these coverages. 5. 401(k) Retirement Savings Plan: You may continue to make 401(k) ------------------------------ contributions through your salary continuation period. Any outstanding loans will become due in full on June 30, 2001. Distribution of your account balances, if any, will be made in accordance with the terms of the Plan. 6. Short and Long Term Disability: Short-and Long-Term Disability coverage ------------------------------ will cease on your June 30, 2001. Contact your HR representative if you desire conversion information on the Long-Term Disability Plan. You must apply for conversion within 30 days after coverage terminates. 7. Performance Pays Bonus: You will receive a Performance Pays bonus for ---------------------- calendar year 2000. You will not be entitled to receive a Performance Pays bonus for the performance period ending calendar year 2001. 8. Stock Options and Restricted Stock: You have until the end of the three (3) ---------------------------------- month period following June 30, 2001 to exercise any of your Jostens stock options that have become vested on or before that date. During the period beginning on December 31, 1999, and ending June 30, 2001, all of your Jostens stock options and your shares of restricted Jostens stock that were outstanding on December 31, 1999, will remain outstanding and will continue to vest according to the terms of the Jostens, Inc. 1992 Stock Incentive Plan (the "Incentive Plan") and the instruments granting those options and shares, as if you were employed by Jostens throughout that period, subject to the rights of Jostens to fully vest and redeem such options and shares at an earlier date, pursuant to the Incentive Plan, in the event of a Change in Control of Jostens, as defined in the Incentive Plan and the instruments granting those options and shares (a "Change in Control"). At the end of that period, any of those options and shares that remain outstanding and have not become vested will be automatically forfeited. Jostens represents and warrants that such options and shares will become fully vested under the terms of the Incentive Plan in the event of a Change in Control during that period. Mr. David J. Larkin Page 4 9. Executive Stock Purchase Plan: The restricted shares you hold pursuant to ----------------------------- the Executive Stock Purchase Plan will become totally vested on the closing date of the sale of substantially all of the stock of Jostens to Investcorp. In that event, notwithstanding any contrary provision in the Plan, Jostens will arrange to have your shares tendered and will cover any prepayment penalty due the First National Bank of Chicago. You agree to participate in the liquidation procedure Jostens puts in place for the Executive Stock Purchase Program. You also agree that severance payments to you may be offset by amounts Jostens is required to pay to First National Bank of Chicago as a guarantor of the loan you took out with that bank for the purpose of purchasing stock under this program should you default in your loan payments. 10. Confidentiality/No Admission: You agree to keep the existence and all ---------------------------- specific terms of this Agreement confidential and you further agree not to disclose any information concerning this Agreement to any person, company, entity or third party other than your attorney, accountant, tax advisor, spouse and other immediate family. You and Jostens also agree that the existence of this Agreement is not an admission by Jostens that the termination of your employment was in any way wrongful or discriminatory or violated any law. The terms of this Agreement will be kept confidential and disclosed only to those of management with a need to know for the purpose of administering the terms hereof. No other disclosure will occur except to the extent required by applicable law or regulations. 11. Confidentiality Duty: You acknowledge that while employed by Jostens you -------------------- had access to Jostens' confidential and proprietary information and/or trade secrets. You further acknowledge your continuing duty not to disclose, furnish or otherwise make available such information and/or trade secrets to any person, company, entity or third party. Confidential information means any information relating to the business or affairs of Jostens or any affiliate, including but not limited to information relating to financial statements, customer identities, potential customers, employees, sales representatives, suppliers, servicing methods, equipment, programs, strategies and information, analyses, profit margins or other proprietary information used by Jostens or an affiliate except for information in the public domain or known in the industry through no wrongful act on your part. 12. Return of Company Property: You acknowledge that prior to the date on which -------------------------- you sign this Agreement, you have returned all Jostens' property in your possession or control, including, but not limited to, any company credit card (or any credit card on which the company is guarantor), Jostens' business files, documents or data in any form, computer, fax, printer or other equipment. Further, you agree to repay to Jostens the amount of any permanent or temporary advances and balance owing on any credit cards of any monies due and owing Jostens or for which Jostens is a guarantor. 13. Nondisparagement: You and Jostens agree that before or after your ---------------- termination of employment with Jostens neither you or Jostens will make any statement or communication Mr. David J. Larkin Page 5 of information by whatever means to any person relating to your employment with Jostens which may be reasonably interpreted to be critical or derogatory of the other party to this Agreement; including in the case of Jostens, its officers, directors or employees. Nothing herein however is intended to bar either party from truthfully testifying under Subpoena or other legal process before any court or administrative agency authorized to compel testimony. 14. Cooperation: You agree (i) to cooperate fully in the defense of any suit or ----------- claim asserted against Jostens or you individually or jointly with Jostens or its subsidiaries, based on any alleged act or omission by you severally or jointly with others, in your alleged capacity as employee or agent of Jostens or any of its subsidiaries, and (ii) to cooperate fully with Jostens and any of its subsidiaries and any of their directors, officers, employees, attorneys or other personnel retained in any litigation, dispute or controversy in which Jostens or any of its subsidiaries is a party involving claims which arose during your service with Jostens or a subsidiary or to which Jostens believes your knowledge or expertise relate. As used herein, "cooperate fully" means that you will make yourself available on reasonable notice and participate in such proceedings as reasonably are necessary to complete such matters. Subject to your compliance with these obligations, Jostens will, to the extent required by applicable law and under the conditions set out in its Articles and By- Laws, defend and hold you harmless from suits and claims covered by part (i) of this paragraph and shall compensate you at a reasonable rate (at least $250.00 per hour) for time spent in providing services and reimburse you for reasonable and necessary expenses incurred at Jostens' request under paragraph (ii) of this paragraph. 15. Waiver and Release of Claims: ---------------------------- a. In consideration of the benefits provided to you under this Agreement you agree: you release and forever discharge Jostens, its subsidiaries and affiliated companies including each of their officers, directors, agents and employees from and waive all causes of action, damages, liability and claims of whatever nature relating to or arising out of your employment with Jostens, its subsidiaries and affiliated companies and the termination of your employment, including but not limited to, claims under federal, state or local discrimination laws, claims arising out of wrongful termination, whistle blowing claims and the Age Discrimination in Employment Act. The prior sentence does not release or discharge Jostens or you from obligations under this Agreement or which arise after the date you sign this Agreement. Nothing in this Agreement prevents you from filing a charge or complaint, including a challenge to the validity of this Agreement or the waiver and release of claims in this section, with the Equal Employment Opportunity Commission or participating in any investigation or proceeding conducted by the Equal Employment Opportunity Commission. Mr. David J. Larkin Page 6 b. Jostens, Inc., its subsidiaries, affiliates successors and any company related to it releases, waives and discharges David J. Larkin from any and all claims, demands, actions, suits, liabilities and damages which they may have relating to or arising out of his employment with Jostens as of the date of this agreement. 16. Revocation: ---------- a. You have the right to revoke only that portion of this waiver and release which relate to claims under the Age Discrimination in Employment Act within 7 days from the date you sign this Agreement. You likewise have the right to rescind only that portion of this waiver and release which relates to claims under the Minnesota Human Rights Act by written notice to Jostens within 15 days from the date you sign this Agreement. To be effective, this rescission or revocation must be in writing and hand delivered or mailed to Jostens to the attention of William J. George, General Counsel, Jostens, 5501 Norman Center Drive, Minneapolis, MN 55437 and sent by certified mail, return-receipt requested. Rescission or revocation of the release will result in cessation of any future separation payments to be paid. b. You agree that if you exercise any right of rescission or revocation, payments made to you by Jostens under this Agreement will be sufficient consideration for the release of all other claims you have against Jostens, except those under the Age Discrimination in Employment Act and in Minnesota, those under the Minnesota Human Rights Act. 17. Miscellaneous: You acknowledge that you have been given at least 45 days ------------- from the date you receive this Agreement to consider this Agreement and that you have been advised to and have had the opportunity to consult legal counsel of your own choosing concerning this Agreement and that you have entered into it of your own free will and without compulsion. Both you and Jostens agree that any written changes to this Agreement, whether material or immaterial will not restart the running of the 45-day period. You acknowledge that you have been provided with a list of the job titles and ages of all individuals in the same job classification or organizational unit whose positions were involuntarily eliminated in this corporate restructuring and the ages of all individuals in the same job classification or organizational unit whose positions were not involuntarily eliminated. (Exhibit A) This Agreement contains the entire agreement and understanding of the parties. No representations have been made or relied upon by either party other than those that are expressly set forth in this Agreement, and each party has entered into this Agreement voluntarily and without coercion. If any portion or provision of this Agreement is deemed Mr. David J. Larkin Page 7 unenforceable, the Agreement will be deemed modified to remaining provisions will remain in full force and effect. If you die during the continuation period of this Agreement, then all remaining payments due under this Agreement will be paid to your named beneficiary. This Agreement may not be altered, amended or modified unless done in writing and signed by an executive officer of Jostens and you. Nothing in this Agreement, however, in any way prevents or limits Jostens from amending or terminating any of its benefit plans, policies or practices and in such a case, your rights would be determined solely under the terms of the plan, policy or practice in question. If this Agreement is acceptable to you, please sign and return this letter to William J. George, General Counsel, Jostens, 5501 Norman Center Drive, Minneapolis, MN 55437 by April 28, 2000. Should any overpayments be made to you under this Agreement or after a revocation or rescission of this Agreement, you are responsible for immediate repayment to Jostens. Yours truly, /s/ Robert Buhrmaster Robert Buhrmaster Chief Executive Officer AGREED AND ACCEPTED: /s/ David J. Larkin - ------------------------------------ David J. Larkin 4/27/2000 - ------------------------------------ DATE ACKNOWLEDGMENT I acknowledge that on April 27, 2000 I was provided with the attached Separation Agreement ("Agreement"). I further acknowledge that I have been advised to consult with an attorney before entering into the attached Agreement, and that I have been given a period of at least 45 days to consider whether to accept the Agreement. I have received and read the above acknowledgment, and I fully understand its meaning. /s/ David J. Larkin - ------------------------------------ David J. Larkin 4/27/2000 - ------------------------------------ Date EXHIBIT A In accordance with the Older Workers' Benefit Protection Act/Age Discrimination in Employment Act [Sec. 7(f)(1)(H)], listed below are the titles and ages of individuals whose positions were and were not eliminated as a result of the restructuring of Senior Management as of March 1, 2000: 1. Class/Unit: Senior Management 2. Eligibility Factor: Senior Management 3. Time Limits to Program: All persons who are being offered consideration under a separation agreement must sign the agreement and return it to Jostens General Counsel within 45 days after receipt. Once the signed agreement is returned, the employee has 7 days to revoke the waiver. 4. Job Titles/Ages of Individual(s) Selected for Eliminations: Executive Vice President and Chief Operating Officer................... 61 Vice President - Consumer Marketing and Channel Development............ 51 Vice President - Strategic Marketing................................... 48 Vice President and General Manager - North American Photo.............. 45 5. Job Titles/Ages of Individual(s) Not Selected for Elimination: Chairman of the Board, President and Chief Executive Officer........... 52 Senior Vice President - Manufacturing.................................. 60 Senior Vice President and Chief Financial Officer...................... 55 Senior Vice President - Jostens School Solutions....................... 44 Vice President, General Counsel and Corporate Secretary................ 51 Vice President and General Manager - Business Ventures................. 47 Vice President - Treasurer............................................. 43 EX-12 4 0004.txt COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES Exhibit 12 Computation of Ratio of Earnings to Fixed Charges Jostens, Inc. and subsidiaries
Six months Year Years ended ended ended ------------------------------------------------- ----------- ------- (Unaudited) December 30 January 1 January 2 January 3 December 28 June 30 Dollars in thousands 2000 2000 1999 1998 1996 1996 - ------------------------------------------------------------------------------------------------------------------ Earnings Income from continuing operations before income taxes $ 2,160 $ 74,659 $ 83,520 $ 93,383 $ 26 $ 87,479 Interest expense (excluding capitalized interest) 60,252 7,486 7,026 6,866 4,330 9,403 Portion of rent expense under long-term operating leases representative of an interest factor 1,121 1,483 1,233 2,133 1,070 2,103 -------- -------- -------- -------- -------- -------- Total earnings $ 63,533 $ 83,628 $ 91,779 $102,382 $ 5,426 $ 98,985 ======== ======== ======== ======== ======== ======== Fixed charges Interest expense (including capitalized interest) 60,252 7,887 7,729 6,866 4,330 9,403 Portion of rent expense under long-term operating leases representative of an interest factor 1,121 1,483 1,233 2,133 1,070 2,103 -------- -------- -------- -------- -------- -------- Total fixed charges $ 61,373 $ 9,370 $ 8,962 $ 8,999 $ 5,400 $ 11,506 ======== ======== ======== ======== ======== ======== Ratio of earnings to fixed charges 1.0 8.9 10.2 11.4 1.0 8.6
EX-21 5 0005.txt LIST OF JOSTENS' SUBSIDIARIES EXHIBIT 21 Jostens, Inc. and subsidiaries as of March 1, 2001. Name of Company Jurisdiction of Incorporation - --------------- ----------------------------- Jostens Canada, Ltd. Canada Jostens Can Investments B.V. The Netherlands Jostens International Holdings B.V. The Netherlands C.V. Jostens Global Trading The Netherlands JC Trading, Inc. Puerto Rico Conceptos Jostens, S.A. de C.V. Mexico Reconocimientos E Incentivos, S.A. de C.V. Mexico -----END PRIVACY-ENHANCED MESSAGE-----