10-Q 1 d10q.txt FORM 10-Q UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Quarterly Period Ended March 31, 2001 OR [_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 Commission file number 1-5064 Jostens, Inc. -------------------------------------------------------------------------------- (Exact name of Registrant as specified in its charter) Minnesota 41-0343440 ------------------------------- ---------------------------------------- (State or other jurisdiction of (I.R.S. Employer Identification number) incorporation or organization) 5501 Norman Center Drive, Minneapolis, Minnesota 55437 ------------------------------------------------ -------------------------- (Address of principal executive offices) (Zip code) Registrant's telephone number, including area code: (952) 830-3300 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [_] On May 15, 2001 there were 8,993,297 shares of the Registrant's common stock outstanding. JOSTENS, INC. AND SUBSIDIARIES Part I Financial Information Page ---------------------------- ---- Item 1. Financial Statements (unaudited) Condensed Consolidated Statements of Operations for the three months ended March 31, 2001 and April 1, 2000 3 Condensed Consolidated Balance Sheets as of March 31, 2001, April 1, 2000 and December 30, 2000 4 Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2001 and April 1, 2000 5 Notes to Condensed Consolidated Financial Statements 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 12 Item 3. Quantitative and Qualitative Disclosures about Market Risk 18 Part II Other Information ------------------------- Item 1. Legal Proceedings 19 Item 6. Exhibits and Reports on Form 8-K 19 Signatures 20 2 PART I FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS JOSTENS, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
Three months ended --------------------- March 31, April 1, In thousands, except per-share data 2001 2000 ------------------------------------------------------------------------------------ Net sales $ 136,769 $ 154,836 Cost of products sold 58,521 65,232 ------------------------------------------------------------------------------------ Gross profit 78,248 89,604 Selling and administrative expenses 75,861 78,372 Special charge, net 2,087 -- ------------------------------------------------------------------------------------ Operating income 300 11,232 Interest income 406 212 Interest expense 21,688 1,939 ------------------------------------------------------------------------------------ Income (loss) before income taxes (20,982) 9,505 Provision for income taxes (8,706) 3,656 ------------------------------------------------------------------------------------ Income (loss) before cumulative effect of accounting change (12,276) 5,849 Cumulative effect of accounting change, net of tax -- (5,894) ------------------------------------------------------------------------------------ Net loss (12,276) (45) Dividends and accretion on redeemable preferred shares (2,418) -- ------------------------------------------------------------------------------------ Net loss available to common shareholders $ (14,694) $ (45) ==================================================================================== Earnings (loss) per common share Basic Before cumulative effect of accounting change $ (1.63) $ 0.18 Cumulative effect of accounting change -- (0.18) ------------------------------------------------------------------------------------ Basic earnings (loss) per common share $ (1.63) $ (0.00) ==================================================================================== Diluted Before cumulative effect of accounting change $ (1.63) $ 0.18 Cumulative effect of accounting change -- (0.18) ------------------------------------------------------------------------------------ Diluted earnings (loss) per common share $ (1.63) $ (0.00) ==================================================================================== Weighted average common shares outstanding Basic 8,993 33,263 Diluted 8,993 33,451
The accompanying notes are an integral part of the unaudited condensed consolidated financial information. 3 JOSTENS, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited) -------------------------- March 31, April 1, December 30, In thousands, except per-share data 2001 2000 2000 ------------------------------------------------------------------------------------------------------------------------------- ASSETS ------ Current assets Cash and cash equivalents $ 53,143 $ 14,278 $ 26,552 Accounts receivable, net of allowance for doubtful accounts of $3,899, $6,405 and $4,361, respectively 63,588 80,351 64,944 Inventories 119,422 126,875 91,230 Deferred income taxes 17,995 21,414 17,995 Salespersons overdrafts, net of allowance of $5,203, $6,355 and $5,568, respectively 26,418 24,220 27,227 Prepaid expenses and other current assets 9,207 9,849 8,154 ---------------------------------------------------------------------------------------------------------------------------- Total current assets 289,773 276,987 236,102 Other assets Intangibles, net 17,323 18,627 17,662 Deferred financing costs, net 31,581 -- 33,360 Other 29,017 21,086 21,812 ---------------------------------------------------------------------------------------------------------------------------- Total other assets 77,921 39,713 72,834 Property and equipment 285,604 273,941 285,176 Less accumulated depreciation (209,839) (193,191) (205,831) ---------------------------------------------------------------------------------------------------------------------------- Property and equipment, net 75,765 80,750 79,345 ---------------------------------------------------------------------------------------------------------------------------- $ 443,459 $ 397,450 $ 388,281 ============================================================================================================================ LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT) ---------------------------------------------- Current liabilities Short-term borrowings $ -- $ 74,960 $ -- Accounts payable 29,970 24,440 24,430 Accrued employee compensation and related taxes 27,268 25,235 30,826 Commissions payable 23,631 27,063 19,895 Customer deposits 166,418 155,826 108,848 Income taxes payable 8,836 18,676 15,155 Interest payable 16,485 88 10,096 Current portion of long-term debt 14,974 -- 14,974 Other accrued liabilities 24,643 26,921 20,347 ---------------------------------------------------------------------------------------------------------------------------- Total current liabilities 312,225 353,209 244,571 Long-term debt, net of current maturities 670,060 3,600 669,807 Other noncurrent liabilities 14,989 11,144 11,382 ---------------------------------------------------------------------------------------------------------------------------- Total liabilities 997,274 367,953 925,760 Commitments and contingencies -- -- -- Redeemable preferred shares, $.01 par value, liquidation preference $65,259 authorized 307.5 shares, issued and outstanding; March 31, 2001 - 65, December 30, 2000 - 64 51,259 -- 48,841 Preferred shares, $.01 par value: authorized 4,000 shares, issued and outstanding; March 31, 2001 - 65 in the form of redeemable preferred shares listed above; 3,935 undesignated -- -- -- Shareholders' equity (deficit) Common shares (note 2) 1,015 11,113 1,015 Additional paid-in-capital - warrants 24,733 -- 24,733 Officer notes receivable (1,775) -- (1,775) Retained earnings (accumulated deficit) (618,795) 24,054 (604,102) Accumulated other comprehensive loss (10,252) (5,670) (6,191) ---------------------------------------------------------------------------------------------------------------------------- Total shareholders' equity (deficit) (605,074) 29,497 (586,320) ---------------------------------------------------------------------------------------------------------------------------- $ 443,459 $ 397,450 $ 388,281 ============================================================================================================================
The accompanying notes are an integral part of the unaudited condensed consolidated financial information. 4 JOSTENS, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
Three months ended --------------------------- March 31, April 1, In thousands 2001 2000 --------------------------------------------------------------------------------------------------- Operating activities Net loss $(12,276) $ (45) Depreciation 6,485 6,313 Amortization of debt discount and deferred financing costs 2,032 -- Other amortization 816 268 Cumulative effect of accounting change, net of tax -- 5,894 Gain on disposal of property and equipment (278) (107) Changes in operating assets and liabilities Accounts receivable 1,356 1,959 Inventories (28,192) (29,951) Salespersons overdrafts 809 1,974 Prepaid expenses and other current assets (8,957) (1,123) Accounts payable (3,477) (3,712) Accrued employee compensation and related taxes (3,558) (4,244) Commissions payable 3,736 7,266 Customer deposits 57,570 42,868 Income taxes payable (6,319) 1,504 Other 8,020 (4,582) --------------------------------------------------------------------------------------------------- Net cash provided by operating activities 17,767 24,282 --------------------------------------------------------------------------------------------------- Investing activities Purchases of property and equipment (4,370) (2,711) Proceeds from sale of property 3,954 -- Purchase of equity investment -- (1,103) Other 123 395 --------------------------------------------------------------------------------------------------- Net cash used for investing activities (293) (3,419) --------------------------------------------------------------------------------------------------- Financing activities Net short-term borrowings (repayments) 9,117 (38,134) Dividends paid to common shareholders -- (7,331) Other -- 363 --------------------------------------------------------------------------------------------------- Net cash provided by (used for) financing activities 9,117 (45,102) --------------------------------------------------------------------------------------------------- Change in cash and cash equivalents 26,591 (24,239) Cash and cash equivalents, beginning of period 26,552 38,517 --------------------------------------------------------------------------------------------------- Cash and cash equivalents, end of period $ 53,143 $ 14,278 ===================================================================================================
The accompanying notes are an integral part of the unaudited condensed consolidated financial information. 5 JOSTENS, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 1. Basis of Presentation We prepared our accompanying unaudited condensed consolidated financial statements following the requirements of the Securities and Exchange Commission ("SEC") for interim reporting. As permitted under those rules, certain footnotes or other financial information that are normally required by accounting principles generally accepted in the United States of America can be condensed or omitted. Therefore, we suggest that these financial statements be read in conjunction with the consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for the fiscal year ended December 30, 2000 ("2000 Form 10-K"). The condensed consolidated balance sheet data as of December 30, 2000 were derived from audited financial statements, but do not include all disclosures required by accounting principles generally accepted in the United States of America. Revenues, expenses, cash flows, assets and liabilities can and do vary during each quarter of the year. Therefore, the results and trends in these interim financial statements may not be the same as those for the full year. In our opinion, the accompanying unaudited condensed consolidated financial statements include all adjustments (consisting of normal recurring items) considered necessary to present fairly, when read in conjunction with the 2000 Form 10-K, our financial position, results of operations and cash flows for the periods presented. Certain balances have been reclassified to conform to the 2001 presentation. The fiscal 2000 financial statements have been reclassified to reflect the Company's adoption of the SEC's Staff Accounting Bulletin No. 101 ("SAB 101"), "Revenue Recognition in Financial Statements" beginning with the first quarter of fiscal 2000. 2. Shareholders' Equity Our common stock consists of Class A through Class E common stock as well as undesignated common stock. Holders of Class A common stock are entitled to one vote per share, whereas holders of Class D common stock are entitled to 306.55 votes per share. Holders of Class B common stock, Class C common stock and Class E common stock have no voting rights. The par value and number of authorized, issued and outstanding shares for March 31, 2001 and December 30, 2000 for each class of common stock is set forth below: Par Authorized Issued and In thousands, except per-share data Value Shares Outstanding Shares -------------------------------------------------------------------------- Class A $.33 1/3 4,200 2,862 Class B $.01 5,300 5,300 Class C $.01 2,500 811 Class D $.01 20 20 Class E $.01 1,900 - Undesignated $.01 12,020 - ----------------------- 25,940 8,993 ======================= As of April 1, 2000 there were approximately 33.3 million shares of common stock outstanding. 6 JOSTENS, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED) 3. Long-Term Debt Long-term debt consists of the following:
March 31, April 1, December 30, In thousands 2001 2000 2000 ----------------------------------------------------------------------------------------------------------- Borrowings under senior secured credit facility: Term loan A, variable rate, 8.39 percent at March 31, 2001 and 9.76 percent at December 30, 2000, with semi-annual principal and interest payments through May 2006 $134,775 $ -- $134,775 Term loan B, variable rate, 8.89 percent at March 31, 2001 and 10.26 percent at December 30, 2000, with semi-annual principal and interest payments through May 2008 344,225 -- 344,225 Senior subordinated notes, 12.75 percent fixed rate, net of discounts of $18,966 at March 31, 2001, and $19,219 at December 39, 2000, with semi-annual interest payments of $14,344, principal due and payable at maturity - May 2010 206,034 -- 205,781 Industrial revenue bonds, 6.75 percent fixed rate, covering general offices -- 3,600 -- ---------------------------------------------------------------------------------------------------------- 685,034 3,600 684,781 Less current portion 14,974 -- 14,974 ---------------------------------------------------------------------------------------------------------- $670,060 $3,600 $669,807 ==========================================================================================================
We have a $150 million revolving credit facility that expires on May 31, 2006. We may borrow funds and elect to pay interest under the "alternative base rate" or "eurodollar" interest rate provisions of the agreement. There was $5.9 million outstanding under this facility, in the form of letters of credit, as of March 31, 2001. The variable rate on the senior secured credit facility is predominantly linked to the London Interbank Offered Rate ("LIBOR") as determined in three-month intervals, plus a fixed spread. To manage our exposure to changes in the LIBOR, we entered into an interest rate swap agreement on July 7, 2000. The interest rate provided by the swap agreement is fixed at 7.0 percent as opposed to LIBOR. The swap agreement became effective on August 15, 2000 with a notional amount of $135.0 million, decreasing quarterly to $70.0 million 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 March 31, 2001 was a liability of $4.9 million. 4. Earnings (Loss) Per Common Share Basic earnings (loss) per share is computed by dividing net income (loss) available to common shareholders by the weighted average number of common shares outstanding. Diluted earnings (loss) per share is computed by dividing net income (loss) available to common shareholders by the weighted average number of common shares outstanding, including the dilutive effect of warrants, options and restricted stock. 7 JOSTENS, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED) Basic and diluted earnings (loss) per share were calculated as follows:
Three months ended ----------------------- March 31, April 1, In thousands, except per-share data 2001 2000 --------------------------------------------------------------------------------------- Net income (loss) $(12,276) $ (45) Dividends and accretion on redeemable preferred shares (2,418) -- --------------------------------------------------------------------------------------- Net income (loss) available to common shareholders $(14,694) $ (45) ======================================================================================= Weighted average number of common shares outstanding - basic 8,993 33,263 Dilutive shares -- (1) 188 --------------------------------------------------------------------------------------- Weighted average number of common shares outstanding - diluted 8,993 33,451 ======================================================================================= Earnings (loss) per share - basic $(1.63) $ (0.00) Earnings (loss) per share - diluted $(1.63) $ (0.00)
(1) Options and warrants to purchase approximately 1.5 million shares were not included as their effect would have been antidilutive. 5. Special Charge - 2001 In March of 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 its profitability. The total cost of the consolidation project, which will be expensed in the Recognition segment's statement of operations in 2001, is estimated to be approximately $4.0 million for severance benefits, costs associated with closing the facilities and costs of moving production to our Princeton facility. The total costs of the project will be partially offset by a gain of $2.4 million, which resulted from the sale of our distribution facility in Memphis, Tennessee for $4.0 million. We have leased this facility until May 31, 2001, and will ratably recognize the gain over this period. As of March 31, 2001, we have accrued $1.9 million for severance benefits to eliminate approximately 100 full-time plant and management positions in our Memphis facility and approximately 40 full-time plant and management positions in our Sherbrooke plant. We also recognized $0.4 million in shutdown costs and asset write-offs. In addition, we incurred $0.2 million of period costs that were directly related to this restructuring project. The components of the special charge are as follows: Special Charge In thousands March 31, 2001 ------------------------------------------------------------------------- Accruable exit costs and asset write-downs: Employee termination benefits $1,932 Costs related to disposition of assets 414 ------ Subtotal 2,346 Period costs related to moving production to our Princeton facility 150 Gain on sale of building (409) ------------------------------------------------------------------------ $2,087 ======================================================================== 8 JOSTENS, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED) The majority of the termination benefits will be paid by the end of 2001. Accrued costs and utilization for the three-month period ended March 31, 2001 are as follows:
Initial Utilization Balance In thousands accrual March 31, 2001 March 31, 2001 --------------------------------------------------------------------------------- Employee termination benefits $1,932 $ -- $1,932 Costs related to disposition of assets 414 (11) 403 ----------------------------------------------------------------------------- $2,346 $(11) $2,335 =============================================================================
The remaining amount accrued at March 31, 2001 is classified in other current liabilities in our condensed consolidated balance sheet. 6. Special Charge - 1999 During the fourth quarter of 1999, we recorded a special charge of $20.2 million and recorded an additional $0.2 million to complete the project in 2000. Cash outlays associated with the charge were approximately $1.0 million in the first three months of 2001. The components of the special charge and utilization prior to 2001 and in the first quarter of 2001 are as follows:
Utilization ------------------------ Net Three months Initial Adjustments Prior ended Balance In thousands accrual in 2000 Periods March 31, 2001 March 31, 2001 ---------------------------------------------------------------------------------------------------------------------- Employee termination benefits $ 4,910 $ 714 $ (3,880) $(951) $793 Abandonment of internal use software under development 6,455 -- (6,455) -- -- Write-off of impaired goodwill related to retail class ring sales channel 4,560 -- (4,560) -- -- Write-off of impaired goodwill related to exiting the college alumni direct marketing business 3,086 -- (3,086) -- -- Other costs related to exiting the college alumni direct marketing business 1,183 (477) (706) -- -- ----------------------------------------------------------------------------------------------------------------- $20,194 $ 237 $(18,687) $(951) $793 =================================================================================================================
The majority of the remaining termination benefits will be paid by June of 2001. 7. Inventories Inventories were comprised of the following: March 31, April 1, December 30, In thousands 2001 2000 2000 ----------------------------------------------------------------------- Raw material and supplies $ 16,400 $ 17,021 $17,054 Work-in-process 62,894 60,921 30,490 Finished goods 40,128 48,933 43,686 ----------------------------------------------------------------------- Total inventories $119,422 $126,875 $91,230 ======================================================================= 9 JOSTENS, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED) 8. Comprehensive Loss Comprehensive loss and its components, net of tax, are as follows: Three months ended --------------------- March 31, April 1, In thousands 2001 2000 -------------------------------------------------------------------- Net loss $(12,276) $(45) Change in cumulative translation adjustment (1,106) -- Change in fair value of hedging instruments (2,955) -- -------------------------------------------------------------------- Comprehensive loss $(16,337) $(45) ==================================================================== 9. Business Segments Financial information by reportable business segment is included in the following summary: Three months ended ------------------------- March 31, April 1, In thousands 2001 2000 ----------------------------------------------------------------------- Net Sales From External Customers School Products $116,078 $131,930 Recognition 18,558 20,778 Other 2,133 2,128 ----------------------------------------------------------------------- Consolidated $136,769 $154,836 ======================================================================= Operating Income (Loss) School Products $12,103 $19,144 Recognition (4,239)(1) (559) Other (7,564) (7,353) ----------------------------------------------------------------------- Consolidated 300 11,232 Net interest expense 21,282 1,727 ----------------------------------------------------------------------- Income (loss) before income taxes $(20,982) $9,505 ======================================================================= (1) Includes $2.1 million of costs associated with the 2001 Special Charge (see note 5 - Special Charge 2001). 10 JOSTENS, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED) 10. New Accounting Standards Accounting for Derivative Instruments and Hedging Activities In June 1998, the Financial Accounting Standards Board (FASB) issued SFAS No. 133, Accounting for Derivative Instrument and Hedging Activities. Subsequently in June 2000, the FASB issued SFAS No. 138, which amends SFAS 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 have adopted these new standards effective December 31, 2000, and have recorded a $2.4 million, net-of-tax cumulative-effect adjustment in other comprehensive income. The adjustment primarily related to recording an additional liability on the balance sheet for the fair value of our interest rate swap which hedges our cash flow on our variable interest rate debt. As of March 31, 2001, the fair value of the swap increased by $0.6 million, net-of-tax, which was recorded through other comprehensive loss. Any changes in the fair value of our interest rate swap will be recorded through other comprehensive income until earnings are affected by the variability of cash flows of the hedged transaction. We believe that only in rare circumstances would it be determined that our interest rate swap is not effective as a hedge. Revenue Recognition In December 1999, the Securities and Exchange Commission issued Staff Accounting Bulletin No. 101, Revenue Recognition in Financial Statements (SAB 101), which among other guidance clarified the Staff's view on various revenue recognition and reporting matters. As a result, we changed our method of accounting for certain sales transactions. Under our previous policy, we recognized revenue upon shipment of the product from our production facility. Under the new accounting method, adopted retroactive to January 1, 2000, we now defer revenue and direct costs until the product is delivered to the end consumer. The cumulative effect of the change resulted in a non-cash charge to net income of $5.9 million (net of an income tax benefit of $4.0 million) for the quarter ended April 1, 2000. 11 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Our disclosure and analysis in this report may contain some "forward-looking statements." Forward-looking statements give our current expectations or forecasts of future events. Forward-looking statements generally can be identified by the use of forward-looking terminology such as "may," "will," "expect," "intend," "estimate," "anticipate," "believe," "project," or "continue," or the negative thereof or similar words. From time to time, we also may provide oral or written forward-looking statements in other materials we release to the public. Any or all of our forward-looking statements in this report and in any public statements we make may turn out to be wrong. They can be affected by inaccurate assumptions we might make or by known or unknown risks or uncertainties. Consequently, no forward-looking statement can be guaranteed. Actual results may vary materially. Investors are cautioned not to place undue reliance on any forward-looking statements. Investors should also understand that it is not possible to predict or identify all such factors and should not consider the following list to be a complete statement of all potential risks and uncertainties. Any change in the following factors may impact the achievement of results: o our ability to satisfy our debt obligations, including related covenants; o our relationship with our independent sales representatives and employees; o the fluctuating prices of raw materials, primarily gold; o the seasonality of our School Products segment sales and operating income; o our dependence on a key supplier for our synthetic and semiprecious stones; o fashion and demographic trends; o litigation cases, if decided against us, may adversely affect our financial results; and o environmental regulations that could impose substantial costs upon us and may adversely affect our financial results. The foregoing factors are not exhaustive, and new factors may emerge or changes to the foregoing factors may occur that would impact our business. 12 RESULTS OF OPERATIONS The following table sets forth selected information from our Condensed Consolidated Statements of Operations:
Three months ended --------------------------- March 31, April 1, Dollars in thousands 2001 2000 $ Change % Change -------------------------------------------------------------------------------------------------------------------------------- Net sales $136,769 $154,836 $(18,067) (11.7%) % of net sales 100.0% 100.0% Cost of products sold 58,521 65,232 (6,711) (10.3%) % of net sales 42.8% 42.1% -------------------------------------------------------------------------------------------------------------------------------- Gross profit 78,248 89,604 (11,356) (12.7%) % of net sales 57.2% 57.9% Selling and administrative expenses 75,861 78,372 (2,511) (3.2%) % of net sales 55.5% 50.6% Special charge, net 2,087 - 2,087 NM -------------------------------------------------------------------------------------------------------------------------------- Operating income 300 11,232 (10,932) (97.3%) % of net sales 0.2% 7.3% Interest income (406) (212) (194) 91.5% % of net sales -0.3% -0.1% Interest expense 21,688 1,939 19,749 NM % of net sales 15.9% 1.3% -------------------------------------------------------------------------------------------------------------------------------- Income (loss) before income taxes (20,982) 9,505 (30,487) NM % of net sales -15.3% 6.1% Provision for income taxes 8,706 (3,656) 12,362 NM % of net sales 6.4% -2.4% -------------------------------------------------------------------------------------------------------------------------------- Income (loss) before cumulative effect of accounting change (12,276) 5,849 (18,125) NM % of net sales -9.0% 3.8% Cumulative effect of accounting change, net of tax - (5,894) 5,894 NM % of net sales -3.8% -------------------------------------------------------------------------------------------------------------------------------- Net loss $(12,276) $(45) $(12,231) NM ================================================================================================================================ % of net sales -9.0% 0.0%
Percentages in this table may reflect rounding adjustments. NM = percentage not meaningful Net sales The change in net sales for the three-month period was due to volume and product mix decreases of approximately 13 percent, which were partially offset by price increases averaging approximately 1.3 percent. 13 First quarter net sales by segment and the changes from last year were as follows: Three months ended ------------------------- March 31, April 1, In thousands 2001 2000 $ change % change ---------------------------------------------------------------------------- School Products $116,078 $131,930 $(15,852) (12.0%) Recognition 18,558 20,778 $ (2,220) (10.7%) Other 2,133 2,128 $ 5 0.2% ---------------------------------------------------------------------------- Consolidated $136,769 $154,836 (18,067) (11.7%) ============================================================================ School Products The decrease in School Products sales for the three-month period was primarily due to a shift in the timing of sales and a decrease in the student buy rates in both the graduation and jewelry product lines, partially offset by price increases in all school product lines. Recognition The decrease in Recognition sales for the three-month period was primarily due to additional lost customers as a result of problems encountered with a system implementation that took place in 1999. Those problems also contributed to a reduction in the number of seasoned sales representatives. Also, a shift in sales to lower priced programs and general merchandise contributed to the sales decline. Other Other segment sales increased slightly for the three-month period as a result of increased sales in our International business. Gross Profit Gross profit for the three months ended March 31, 2001 was $78.2 million compared with $89.6 million for the comparable period in 2000. The decrease was primarily due to the aforementioned volume shortfalls in the School Products and Recognition segments, somewhat offset by increased pricing in the School Products segment. Selling and Administrative Expenses Selling and administrative expenses for the three months ended March 31, 2001 were $75.9 million compared with $78.4 million for the comparable period in 2000. The decrease in the three-month period reflects: o lower commission expense due to the volume shortfalls experienced in the first quarter. This decrease was somewhat offset by: o higher marketing expenses in 2001 related to programs and initiatives intended to increase our future sales; o higher customer service costs in our School Products segment due to increased labor costs (due to wage rate increases); o increased information systems expense to support selling and marketing programs and initiatives intended to increase our future sales; and o increased investment in research and development. 14 Operating Income First quarter operating income (loss) by segment and the changes from last year were as follows: Three months ended ---------------------- March 31, April 1, In thousands 2001 2000 $ change % change -------------------------------------------------------------------------- School Products $12,103 $19,144 $ (7,041) (36.8%) Recognition (4,239)(1) (559) (3,680) NM Other (7,564) (7,353) (211) 2.9% -------------------------------------------------------------------------- Consolidated $300 $11,232 $(10,932) (97.3%) ========================================================================== NM = percentage not meaningful (1) Includes $2.1 million of costs associated with the 2001 Special Charge (see note 5 - Special Charge 2001). School Products The decrease in School Products operating income for the three-month period was primarily due to sales shortfalls in our jewelry and graduation product lines. Also contributing to the decrease in operating income for the three-month period was an increase in marketing expenses to support programs and initiatives intended to increase our future sales. Recognition The increase in Recognition's operating loss was partially due to the decrease in sales as compared to the prior year period. Also contributing to the operating loss was an increase in selling and marketing expense to support programs and initiatives intended to increase our future sales. In addition, a shift in sales to lower margin programs and general merchandise caused decreases in the operating income. In March of 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 its profitability. The total cost of the consolidation project, which will be expensed in the Recognition segment's statement of operations in 2001, is estimated to be approximately $4.0 million for severance benefits, costs associated with closing the facilities and costs of moving production to our Princeton facility. The total costs of the project will be partially offset by a gain of $2.4 million, which resulted from the sale of our distribution facility in Memphis, Tennessee for $4.0 million. We have leased this facility until May 31, 2001, and will ratably recognize the gain over this period. As of March 31, 2001, we accrued $1.9 million for severance benefits to eliminate approximately 100 full-time plant and management positions in our Memphis facility and approximately 40 full-time plant and management positions in our Sherbrooke plant. We also recognized $0.4 million in shutdown costs and asset write-offs. In addition, we incurred $0.2 million of period costs that were directly related to this restructuring project. 15 The components of the special charge are as follows: Special Charge In thousands March 31, 2001 ----------------------------------------------------------------------- Accruable exit costs and asset write-downs: Employee termination benefits $1,932 Costs related to disposition of assets 414 ------- Subtotal 2,346 Period costs related to moving production to our Princeton facility 150 Gain on sale of building (409) -------------------------------------------------------------------- $2,087 ==================================================================== Accrued costs and utilization for the three-month period ended March 31, 2001 are as follows: Initial Utilization Balance In thousands accrual March 31, 2001 March 31, 2001 -------------------------------------------------------------------------------- Employee termination benefits $1,932 $ -- $1,932 Costs related to disposition of assets 414 (11) 403 -------------------------------------------------------------------------- $2,346 $(11) $2,335 ========================================================================== The remaining amount accrued at March 31, 2001 is classified in other current liabilities in our condensed consolidated balance sheet. Other The slight increase in Other operating loss was primarily due to: o increased information system expense related to work being done to support selling and marketing initiatives intended to increase our future sales; and o increased investment in research and development. Net Interest Expense Net interest expense of $21.3 million has increased $19.6 million over the prior year three-month period. The increase was due to increased interest expense resulting from our new debt structure. Income Taxes We accrue income taxes based on our best estimate of the effective tax rate expected to be applicable for the full year. Our income tax rate increased in 2001 due to the unfavorable effect that non-deductible expenses have on our full year tax rate estimate. 16 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 $17.8 million in the first three months of 2001, compared with $24.3 million of cash generated for the comparable prior period. The decrease of $6.5 million is largely due to the $12.2 million decrease in net income versus the prior year, offset in part by increased deposits and other accrued liabilities. Investing Activities Capital expenditures for the first three months of 2001 were $4.4 million, compared with $2.7 million for the same period in 2000. The increase of $1.7 million relates primarily to higher capital expenditures in 2001 on a human resources information system and manufacturing equipment for our printing product line. Additionally, we received $4.0 million from the sale of our distribution facility in Memphis, Tennessee (see note 5 - Special Charge 2001). Financing Activities Net cash provided by financing activities in the first three months of 2001 was $9.1 million, compared with net cash used for financing activities of $45.1 million for the same period in 2000. The increase in net cash provided by financing activities was due to a decrease in repayments of short term borrowing in 2001 versus 2000 and due to no dividend payments being made in 2001 versus 2000. We plan on using the proceeds from the sale of our distribution facility in Memphis, Tennessee to voluntarily pre-pay $4.0 million of borrowings under our senior secured credit facility. 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 Instrument and Hedging Activities. Subsequently in June 2000, the FASB issued SFAS No. 138, which amends SFAS 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 have adopted these new standards effective December 31, 2000, and have recorded a $2.4 million, net-of-tax cumulative-effect adjustment in other comprehensive income. The adjustment primarily related to recording an additional liability on the balance sheet for the fair value of our interest rate swap which hedges our cash flow on our variable interest rate debt. As of March 31, 2001, the fair value of the swap increased by $0.6 million, net-of-tax, which was recorded through other comprehensive loss. Any changes in the fair value of our interest rate swap will be recorded through other comprehensive income, until earnings are affected by the variability of cash flows of the hedged transaction. We believe that only in rare circumstances would it be determined that our interest rate swap is not effective as a hedge. Revenue Recognition In December 1999, the Securities and Exchange Commission issued Staff Accounting Bulletin No. 101, Revenue Recognition in Financial Statements (SAB 101), which among other guidance clarified the Staff's view on various revenue recognition and reporting matters. As a result, we changed our method of accounting for certain sales transactions. Under our previous policy, we recognized revenue upon shipment of the product from our production facility. Under the new accounting method adopted retroactive to January 1, 2000, we now defer revenue and direct costs until the product is delivered to the end consumer. The cumulative effect of the change resulted in a non-cash charge to net income of $5.9 million (net of an income tax benefit of $4.0 million) for the quarter ended April 1, 2000. 17 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK There have been no material changes in our market risk during the three months ended March 31, 2001. For additional information, refer to Item 7A of our 2000 Form 10-K. 18 PART II OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS A federal antitrust action was served on Jostens on October 23, 1998. The complainant, Epicenter Recognition, Inc. ("Epicenter"), alleges that Jostens has attempted to monopolize the market of high school graduation products in the state of California. Epicenter is a successor to a corporation formed by four of our former sales representatives. The plaintiff is claiming damages of approximately $3 million to $10 million under various theories and differing sized relevant markets. The trial began on March 26, 2001 and concluded with final arguments on April 24, 2001. A written decision is expected within 30-60 days from that time. 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 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. On March 9, 2001, the arbitration panel conducted a case management conference and established a schedule for the exchange of information and discovery with hearings to commence on December 3, 2001. We are a party to other litigation arising in the normal course of business. We regularly analyze current information and, as necessary, provide accruals for probable liabilities on the eventual disposition of these matters. We believe the effect on our consolidated results of operations, cash flows and financial position, if any, for the disposition of these matters will not be material. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits 12 Computation of Ratio of Earnings to Fixed Charges (b) Reports on Form 8-K No reports on Form 8-K were filed by Jostens during the quarter ended March 31, 2001 19 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, on May 14, 2001. JOSTENS, INC. Registrant By /s/ Robert C. Buhrmaster -------------------------------------- Robert C. Buhrmaster Chairman, President and Chief Executive Officer By /s/ William N. Priesmeyer -------------------------------------- William N. Priesmeyer Senior Vice President and Chief Financial Officer (Chief Accounting Officer) 20