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 June 30, 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 incorporation or organization) Identification number) 5501 Norman Center Drive, Minneapolis, Minnesota 55437 ------------------------------------------------ ------------------------- (Address of principal executive offices) (Zip code) Registrant's telephone number, including area code: (952) 830-3300 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [_] On August 13, 2001 there were 8,965,263 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 and Six months ended June 30, 2001 and July 1, 2000 3 Condensed Consolidated Balance Sheets as of June 30, 2001, July 1, 2000 and December 30, 2000 4 Condensed Consolidated Statements of Cash Flows for the Six months ended June 30, 2001 and July 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 20 Part II Other Information ------------------------- Item 1. Legal Proceedings 21 Item 6. Exhibits and Reports on Form 8-K 21 Signatures 22 2 PART I FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS JOSTENS, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
Three months ended Six months ended --------------------- ----------------------- June 30, July 1, June 30, July 1, In thousands, except per-share data 2001 2000 2001 2000 --------------------------------------------------------------------------------------------------------- Net sales $ 350,975 $ 344,712 $ 487,744 $ 499,548 Cost of products sold 155,293 154,806 213,814 220,038 --------------------------------------------------------------------------------------------------------- Gross profit 195,682 189,906 273,930 279,510 Selling and administrative expenses 102,790 104,286 178,651 182,658 Transaction costs and special charges, net 623 45,711 2,710 45,711 --------------------------------------------------------------------------------------------------------- Operating income 92,269 39,909 92,569 51,141 Net interest expense 19,640 13,078 40,922 14,805 --------------------------------------------------------------------------------------------------------- Income before income taxes 72,629 26,831 51,647 36,336 Provision for income taxes 30,141 23,769 21,435 27,425 --------------------------------------------------------------------------------------------------------- Income before cumulative effect of accounting change 42,488 3,062 30,212 8,911 Cumulative effect of accounting change, net of tax -- -- -- (5,894) --------------------------------------------------------------------------------------------------------- Net income 42,488 3,062 30,212 3,017 Dividends and accretion on redeemable preferred shares (2,504) (1,243) (4,922) (1,243) --------------------------------------------------------------------------------------------------------- Net income available to common shareholders $ 39,984 $ 1,819 $ 25,290 $ 1,774 ========================================================================================================= Earnings per common share Basic Before cumulative effect of accounting change $ 4.45 $ 0.10 $ 2.81 $ 0.31 Cumulative effect of accounting change -- -- -- (0.24) --------------------------------------------------------------------------------------------------------- Basic earnings per common share $ 4.45 $ 0.10 $ 2.81 $ 0.07 ========================================================================================================= Diluted Before cumulative effect of accounting change $ 4.02 $ 0.10 $ 2.54 $ 0.30 Cumulative effect of accounting change -- -- -- (0.23) --------------------------------------------------------------------------------------------------------- Diluted earnings per common share $ 4.02 $ 0.10 $ 2.54 $ 0.07 ========================================================================================================= Weighted average common shares outstanding Basic 8,993 18,880 8,993 25,043 Diluted 9,949 18,880 9,949 25,316
The accompanying notes are an integral part of the unaudited condensed consolidated financial information. 3 JOSTENS, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited) -------------------------------------- June 30, July 1, December 30, In thousands, except per-share data 2001 2000 2000 ---------------------------------------------------------------------------------------------------------------------------- ASSETS ------ Current assets Cash and cash equivalents $ 43,070 $ 35,875 $ 26,552 Accounts receivable, net of allowance for doubtful accounts of $3,549, $5,535 and $4,361, respectively 94,440 107,804 64,944 Inventories 60,728 72,684 91,230 Deferred income taxes 17,995 21,413 17,995 Salespersons overdrafts, net of allowance of $5,800, $5,301 and $5,568, respectively 14,177 11,108 27,227 Prepaid expenses and other current assets 4,574 5,592 8,154 --------------------------------------------------------------------------------------------------------------------------- Total current assets 234,984 254,476 236,102 Other assets Intangibles, net 17,105 18,309 17,662 Deferred financing costs, net 30,331 35,606 33,360 Other 30,672 29,139 21,812 --------------------------------------------------------------------------------------------------------------------------- Total other assets 78,108 83,054 72,834 Property and equipment 290,061 278,009 285,176 Less accumulated depreciation (216,136) (199,191) (205,831) --------------------------------------------------------------------------------------------------------------------------- Property and equipment, net 73,925 78,818 79,345 --------------------------------------------------------------------------------------------------------------------------- $ 387,017 $ 416,348 $ 388,281 =========================================================================================================================== LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT) ---------------------------------------------- Current liabilities Accounts payable 14,569 18,979 24,430 Accrued employee compensation and related taxes 25,855 25,674 30,826 Commissions payable 43,479 48,933 19,895 Customer deposits 58,516 55,277 108,848 Income taxes payable 38,307 35,782 15,155 Interest payable 8,876 10,661 10,096 Current portion of long-term debt 20,879 5,500 14,974 Other accrued liabilities 16,073 25,510 20,347 --------------------------------------------------------------------------------------------------------------------------- Total current liabilities 226,554 226,316 244,571 Long-term debt, net of current maturities 655,430 694,797 669,807 Other noncurrent liabilities 15,385 11,424 11,382 --------------------------------------------------------------------------------------------------------------------------- Total liabilities 897,369 932,537 925,760 Commitments and contingencies -- -- -- Redeemable preferred shares, $.01 par value, liquidation preference $68,619 authorized 307.5 shares, issued and outstanding; June 30, 2001 - 69, July 1, 2000 - 60, and December 30, 2000 - 64 53,763 44,243 48,841 Preferred shares, $.01 par value: authorized 4,000 shares, issued and outstanding; June 30, 2001 - 69 in the form of redeemable preferred shares listed above; 3,931 undesignated -- -- -- Shareholders' equity (deficit) Common shares (note 2) 1,015 1,015 1,015 Additional paid-in-capital - warrants 24,733 24,733 24,733 Officer notes receivable (1,775) (2,050) (1,775) Retained earnings (accumulated deficit) (578,822) (577,798) (604,102) Accumulated other comprehensive loss (9,266) (6,332) (6,191) --------------------------------------------------------------------------------------------------------------------------- Total shareholders' equity (deficit) (564,115) (560,432) (586,320) --------------------------------------------------------------------------------------------------------------------------- $ 387,017 $ 416,348 $ 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)
Six months ended ----------------------- June 30, July 1, In thousands 2001 2000 ----------------------------------------------------------------------------------------- Operating activities Net income $ 30,212 $ 3,017 Depreciation 12,998 12,684 Amortization of debt discount and deferred financing costs 3,547 1,011 Other amortization 1,634 536 Cumulative effect of accounting change, net of tax -- 5,894 Gain on sale/disposal of property and equipment, net (2,319) (107) Changes in operating assets and liabilities Accounts receivable (29,496) (25,494) Inventories 30,502 24,240 Salespersons overdrafts 13,050 15,086 Prepaid expenses and other assets (6,710) (3,776) Accounts payable (9,861) (10,294) Accrued employee compensation and related taxes (4,971) (3,804) Commissions payable 23,584 29,136 Customer deposits (50,332) (57,681) Income taxes payable 23,152 18,610 Other (4,513) 4,084 ----------------------------------------------------------------------------------------- Net cash provided by operating activities 30,477 13,142 ----------------------------------------------------------------------------------------- Investing activities Purchases of property and equipment (9,045) (7,150) Proceeds from sale of property and equipment 3,954 395 Other 123 (1,103) ----------------------------------------------------------------------------------------- Net cash used for investing activities (4,968) (7,858) ----------------------------------------------------------------------------------------- Financing activities Net short-term repayments -- (111,976) Repurchases of common stock -- (823,630) Principal payments on long-term debt (8,991) (3,600) Proceeds from issuance of long-term debt -- 700,139 Proceeds from issuance of common shares -- 208,693 Net proceeds from the issuance of preferred stock -- 43,000 Proceeds from the issuance of warrants to purchase common shares -- 24,733 Dividends paid to common shareholders -- (7,331) Proceeds from exercise of stock options -- 555 Issuance of officer note receivable -- (2,050) Debt acquisition costs -- (36,459) ----------------------------------------------------------------------------------------- Net cash used for financing activities $ (8,991) $ (7,926) ----------------------------------------------------------------------------------------- Change in cash and cash equivalents $ 16,518 $ (2,642) Cash and cash equivalents, beginning of period 26,552 38,517 ----------------------------------------------------------------------------------------- Cash and cash equivalents, end of period $ 43,070 $ 35,875 ========================================================================================= Supplemental information Income taxes paid (refunded) $ (1,717) $ 8,763 Interest paid $ 39,503 $ 6,767
The accompanying notes are an integral part of the unaudited condensed consolidated financial statements. 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 as of June 30, 2001, July 1, 2000 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 ======================================
Subsequent to June 30, 2001, we repurchased 28,034 shares of our Class A common stock from a senior executive in accordance with his separation agreement. The senior executive repaid an outstanding promissory note of approximately $0.4 million. The promissory note had been executed by the executive as partial payment for such shares. 6 JOSTENS, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED) 3. Long-Term Debt Long-term debt consists of the following:
June 30, July 1, December 30, In thousands 2001 2000 2000 ------------------------------------------------------------------------------------------------------------------------ Borrowings under senior secured credit facility: Term loan A, variable rate, 6.59 percent at June 30, 2001, 9.77 percent at July 1, 2000 and 9.40 percent at December 30, 2000, with semi-annual principal and interest payments through May 2006 $128,956 $150,000 $134,775 Term loan B, variable rate, 7.34 percent at June 30, 2001, 10.27 percent at July 1, 2000 and 9.90 percent at December 30, 2000, with semi-annual principal and interest payments through May 2008 341,053 345,000 344,225 Senior subordinated notes, 12.75 percent fixed rate, net of discounts of $18,700 at June 30, 2001, $19,703 at July 1, 2000 and $19,219 at December 30, 2000, with semi-annual interest payments of $14,344, principal due and payable at maturity - May 2010 206,300 205,297 205,781 ------------------------------------------------------------------------------------------------------------------------ 676,309 700,297 684,781 Less current portion 20,879 5,500 14,974 ------------------------------------------------------------------------------------------------------------------------ $655,430 $694,797 $669,807 ========================================================================================================================
In June of 2001, we used the proceeds from the sale of our Memphis, Tennessee facility to voluntarily pay down $1.3 million of term loan A and $2.7 million of term loan B. Future mandatory principal payment obligations are not materially impacted by the voluntary payment. 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 the "eurodollar" interest rate provisions of the agreement. There was $5.4 million outstanding under this facility, in the form of letters of credit, as of June 30, 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. The swap agreement became effective on August 15, 2000 with a notional amount of $135.0 million, decreasing quarterly to $70.0 million by June 30, 2003. 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 June 30, 2001 was a liability of $4.6 million and is recorded in "other noncurrent liabilities" in our condensed consolidated balance sheet. 4. Earnings Per Common Share Basic earnings per share is computed by dividing net income available to common shareholders by the weighted average number of common shares outstanding. Diluted earnings per share is computed by dividing net income 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 per share were calculated as follows:
Three months ended Six months ended -------------------------- ---------------------- June 30, July 1, June 30, July 1, In thousands, except per-share data 2001 2000 2001 2000 ------------------------------------------------------------------------------------------ ---------------------- Net income $42,488 $ 3,062 $30,212 $ 3,017 Dividends and accretion on redeemable preferred shares (2,504) (1,243) (4,922) (1,243) ------------------------------------------------------------------------------------------ ---------------------- Net income available to common shareholders $39,984 $ 1,819 $25,290 $ 1,774 ========================================================================================== ====================== Weighted average number of common shares outstanding - basic 8,993 18,880 8,993 25,043 Dilutive shares 956 -- 956 273 ------------------------------------------------------------------------------------------ ---------------------- Weighted average number of common shares outstanding - diluted 9,949 18,880 9,949 25,316 ========================================================================================== ====================== Earnings per share - basic $ 4.45 $ 0.10 $ 2.81 $ 0.07 Earnings per share - diluted $ 4.02 $ 0.10 $ 2.54 $ 0.07
5. Special Charges - 2001 In March of 2001, we announced our decision to consolidate three Recognition plants into one plant 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 is being 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 two facilities and costs of moving production to our Princeton, Illinois facility. The total cost of the project is partially offset by a gain of $2.4 million, which resulted from the first quarter sale of our distribution facility in Memphis, Tennessee for $4.0 million. We leased the facility back from the buyer until May 31, 2001, and ratably recognized the gain over that period. Through June 30, 2001, we have expensed $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, Quebec plant. The majority of these termination benefits will be paid by the end of 2001. We have also recognized $0.4 million in shutdown costs and asset write-offs as well as $0.7 million of period costs that were directly related to this restructuring project. We anticipate incurring another $0.9 million of period costs during the third quarter of 2001 to complete the project. The components of the special charge are as follows:
Three months ended Three months ended Six months ended In thousands March 31, 2001 June 30, 2001 June 30, 2001 ------------------------------------------------------------------------------------------------------------------ Accruable exit costs and asset write-downs: Employee termination benefits $1,932 $ -- $ 1,932 Costs related to disposition of assets 414 -- 414 ------------------------------------------------------------- Subtotal 2,346 -- 2,346 Period costs related to moving production to our Princeton facility 150 525 675 Gain on sale of building (409) (2,040) (2,449) ------------------------------------------------------------------------------------------------------------------ $2,087 $(1,515) $ 572 ==================================================================================================================
8 JOSTENS, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED) Accrued costs and utilization for the six-month period ended June 30, 2001 are as follows:
Utilization ------------------- Six months Initial ended Balance In thousands accrual June 30, 2001 June 30, 2001 ---------------------------------------------------------------------------------------- Employee termination benefits $1,932 $(1,502) $430 Costs related to disposition of assets 414 (226) 188 ---------------------------------------------------------------------------------------- $2,346 $(1,728) $618 ========================================================================================
The remaining amount accrued at June 30, 2001 is classified in "other current liabilities" in our condensed consolidated balance sheet. In the second quarter of 2001, we entered into a separation agreement with a senior executive. The total cost of $2.1 million for severance benefits was expensed in the Other segment's income statement. As of June 30, 2001, approximately $2.0 million is accrued for and classified in "other current liabilities" in our condensed consolidated balance sheet. The majority of the remaining separation benefits will be paid in the third quarter of 2001. 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 $1.5 million in the first six months of 2001. The components of the special charge and utilization prior to 2001 and in the first six months of 2001 are as follows:
Utilization -------------------------- Net Six months Initial Adjustments Prior ended Balance In thousands accrual in 2000 Periods June 30, 2001 June 30, 2001 ------------------------------------------------------------------------------------------------------------------ Employee termination benefits $ 4,910 $ 714 $ (3,880) $(1,469) $275 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) $(1,469) $275 ===================================================================================================================
The remaining termination benefits will be paid by December of 2001 and are classified in "other current liabilities" in our condensed consolidated balance sheet. 9 JOSTENS, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED) 7. Inventories Inventories are comprised of the following:
June 30, July 1, December 30, In thousands 2001 2000 2000 ----------------------------------------------------------------------------- Raw material and supplies $15,839 $18,765 $17,054 Work-in-process 27,864 28,178 30,490 Finished goods 17,025 25,741 43,686 ----------------------------------------------------------------------------- Total inventories $60,728 $72,684 $91,230 =============================================================================
8. Comprehensive Income Comprehensive income and its components, net of tax, are as follows:
Three months ended Six months ended ------------------------- --------------------- June 30, July 1, June 30, July 1, In thousands 2001 2000 2001 2000 ---------------------------------------------------------------------- --------------------- Net income $42,488 $3,062 $30,212 $3,017 Change in cumulative translation adjustment 784 (662) (322) (662) Change in fair value of hedging instruments 202 -- (2,753) -- ---------------------------------------------------------------------- --------------------- Comprehensive income $43,474 $2,400 $27,137 $2,355 ====================================================================== =====================
9. Business Segments Financial information by reportable business segment is included in the following summary:
Three months ended Six months ended --------------------------- ---------------------------- June 30, July 1, June 30, July 1, In thousands 2001 2000 2001 2000 -------------------------------------------------------------------------------------------- Net Sales From External Customers School Products $334,039 $314,954 $450,117 $446,880 Recognition 13,383 25,560 31,941 46,341 Other 3,553 4,198 5,686 6,327 -------------------------------------------------------------------------------------------- Consolidated $350,975 $344,712 $487,744 $499,548 ============================================================================================ Operating Income (Loss) School Products $101,143 $ 92,735 $113,246 $111,879 Recognition (1,875) (1) 314 (6,114) (2) (244) Other (6,999) (3) (53,140) (4) (14,563) (3) (60,494) (4) -------------------------------------------------------------------------------------------- Consolidated 92,269 39,909 92,569 51,141 Net interest expense 19,640 13,078 40,922 14,806 -------------------------------------------------------------------------------------------- Income (loss) before income taxes $ 72,629 $ 26,831 $ 51,647 $ 36,336 ============================================================================================
(1) Includes $1.5 million of income associated with the 2001 Special Charge (see Note 5 regarding Special Charges - 2001). (2) Includes $0.6 million of costs associated with the 2001 Special Charge (see Note 5 regarding Special Charges - 2001). (3) Includes $2.1 million of costs associated with the 2001 Special Charge (see Note 5 regarding Special Charges - 2001). (4) Includes $45.7 million of transaction costs associated with the 2000 recapitalization. 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. We adopted these new standards effective December 31, 2000, and recorded a $2.4 million, net-of-tax cumulative-effect adjustment in other comprehensive income at the beginning of our first quarter in 2001. 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. For the six month period ending June 30, 2001, the fair value of the swap increased by approximately $0.4 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 first quarter in 2000. Accounting for Business Combinations, Goodwill and Other Intangible Assets On June 29, 2001, the Financial Accounting Standards Board approved its proposed Statements of Financial Accounting Standards No. 141 (FAS 141), "Business Combinations," and No. 142 (FAS 142), "Goodwill and Other Intangible Assets." FAS 141 supercedes Accounting Principles Board Opinion No. 16 (APB 16), "Business Combinations." The most significant changes made by FAS 141 are: (1) requiring that the purchase method of accounting be used for all business combinations initiated after June 30, 2001, and (2) establishing specific criteria for the recognition of intangible assets separately from goodwill. FAS 142 supercedes APB 17, "Intangible Assets." FAS 142 primarily addresses the accounting for goodwill and intangible assets subsequent to their acquisition (i.e., the post-acquisition accounting). The most significant changes made by FAS 142 are (1) goodwill and indefinite lived intangible assets will no longer be amortized, (2) goodwill will be tested for impairment at least annually at the reporting level, (3) intangible assets deemed to have an indefinite life will be tested for impairment at least annually, and (4) the amortization period of intangible assets with finite lives will no longer be limited to forty years. We will adopt FAS 142 effective December 30, 2001. These standards only permit prospective application of the new accounting; accordingly, the adoption of these standards will not affect previously reported financial information. We are currently evaluating the impact that FAS 141 and 142 will have on our results of operations and financial condition. 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 Six months ended ---------------------- ------------------- June 30, July 1, June 30, July 1, Dollars in thousands 2001 2000 $ Change % Change 2001 2000 $ Change % Change ---------------------------------------------------------------------------------- ---------------------------------------- Net sales $350,975 $344,712 $6,263 1.8% $487,744 $499,548 $(11,804) (2.4%) % of net sales 100.0% 100.0% 100.0% 100.0% Cost of products sold 155,293 154,806 487 0.3% 213,814 220,038 (6,224) (2.8%) % of net sales 44.2% 44.9% 43.8% 44.0% ---------------------------------------------------------------------------------- ---------------------------------------- Gross profit 195,682 189,906 5,776 3.0% 273,930 279,510 (5,580) (2.0%) % of net sales 55.8% 55.1% 56.2% 56.0% Selling and administrative expenses 102,790 104,286 (1,496) (1.4%) 178,651 182,658 (4,007) (2.2%) % of net sales 29.3% 30.3% 36.6% 36.6% Special charges, net 623 45,711 (45,088) NM 2,710 45,711 (43,001) NM ---------------------------------------------------------------------------------- ---------------------------------------- Operating income 92,269 39,909 52,360 131.2% 92,569 51,141 41,428 81.0% % of net sales 26.3% 11.6% 19.0% 10.2% Net interest expense 19,640 13,078 6,562 50.2% 40,922 14,805 26,117 176.4% % of net sales 5.6% 3.8% 8.4% 3.0% ---------------------------------------------------------------------------------- ---------------------------------------- Income before income taxes 72,629 26,831 45,798 170.7% 51,647 36,336 15,311 42.1% % of net sales 20.7% 7.8% 10.6% 7.3% Provision for income taxes 30,141 23,769 6,372 26.8% 21,435 27,425 (5,990) (21.8%) % of net sales 8.6% 6.9% 4.4% 5.5% ---------------------------------------------------------------------------------- ---------------------------------------- Income before cumulative effect of accounting change 42,488 3,062 39,426 1287.6% 30,212 8,911 21,301 239.0% % of net sales 12.1% 0.9% 6.2% 1.8% Cumulative effect of accounting change, net of tax -- -- -- NM -- (5,894) 5,894 (100.0%) % of net sales -1.2% ---------------------------------------------------------------------------------- ---------------------------------------- Net income $42,488 $3,062 $39,426 1287.6% $30,212 $3,017 $27,195 901.4% ================================================================================== ======================================== % of net sales 12.1% 0.9% 6.2% 0.6%
Percentages in this table may reflect rounding adjustments. NM = percentage not meaningful Net sales The increase in net sales for the three month period was due to price increases averaging approximately 2.3 percent, somewhat offset by volume decreases of approximately 0.5 percent. The decrease in net sales for the six month period was due to a volume decrease of approximately 4.4 percent, somewhat offset by price increases averaging approximately 2.0 percent. 13 Second quarter and year-to-date net sales by segment and the changes from last year were as follows:
Three months ended Six months ended --------------------------- ------------------- June 30, July 1, June 30, July 1, In thousands 2001 2000 $ change % change 2001 2000 $ change % change ------------------------------------------------------------------------------------------------------------- School Products $334,039 $314,954 $ 19,085 6.1% $450,117 $446,880 $ 3,237 0.7% Recognition 13,383 25,560 (12,177) (47.6%) 31,941 46,341 (14,400) (31.1%) Other 3,553 4,198 (645) (15.4%) 5,686 6,327 (641) (10.1%) ------------------------------------------------------------------------------------------------------------- Consolidated $350,975 $344,712 $ 6,263 1.8% $487,744 $499,548 $(11,804) (2.4%) =============================================================================================================
School Products The increase in School Products sales for the three and six month periods was primarily due to: o price increases in all school product lines; o increased sales in our printing product line as a result of additional pages per book, additional copies per school and additional sales of color pages per book; and o an increase in commercial printing volume. The year-to-date performance on the jewelry and graduation product lines was negatively impacted by modest sales declines. In addition, the three month period reflects a shift in the timing of sales from the first to the second quarter on the jewelry and graduation product lines. Recognition The decrease in Recognition sales for the three and six month periods 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. In the first six months of 2001, more than thirty sales representatives have been added in an attempt to turn around the sales shortfall. A shift in sales to lower priced programs and general merchandise has also contributed to the sales decline. Other Other segment sales decreased slightly for the three and six month periods as a result of decreased sales in our International business. Gross Profit Gross profit as a percent of sales for the three and six month periods ended June 30, 2001 was 55.8 percent and 56.2 percent, compared with 55.1 percent and 56.0 percent, respectively, for the comparable periods in 2000. The increase in gross profit percent for the three and six month periods was primarily due to price increases in the School Products segment in 2001. These gross profit percent increases were partially offset by our Recognition segment's sales decreases and shift in sales to lower margin programs and general merchandise. Selling and Administrative Expenses Selling and administrative expenses for the three and six month periods ended June 30, 2001 were $102.8 million and $178.7 million, compared with $104.3 million and $182.7 million, respectively, for the comparable periods in 2000. The decrease in the three and six month periods reflects: o lower commission expense due to sales shortfalls experienced in the Recognition segment; o lower commission expense in our jewelry and graduation product lines due to modest sales declines; o lower commission expense in our graduation products line due to a change in the commission structure; and o lower information systems and general and administrative spending versus the comparable periods. 14 These decreases were partially offset by: o higher commission expense in our printing product line due to increased sales; o higher marketing expenses in 2001 related to programs and initiatives intended to increase future sales; o higher customer service costs in our School Products segment due to increased labor costs as a result of wage rate increases; and o increased investment in research and development. Operating Income Second quarter and year-to-date operating income (loss) by segment and the changes from last year were as follows:
Three months ended Six months ended --------------------------- ----------------------- June 30, July 1, June 30, July 1, In thousands 2001 2000 $ change % change 2001 2000 $ change % change -------------------------------------------------------------------- ------------------------------------------------ School Products $101,143 $92,735 $ 8,408 9.1% $113,246 $111,879 $ 1,367 1.2% Recognition (1,875) (1) 314 (2,189) NM (6,114) (2) (244) (5,870) NM Other (6,999) (3) (53,140) (4) 46,141 (86.8%) (14,563) (3) (60,494) (4) 45,931 (75.9%) -------------------------------------------------------------------- ------------------------------------------------ Consolidated $92,269 $39,909 $ 52,360 131.2% $ 92,569 $ 51,141 $41,428 81.0% =================================================================== ================================================
NM = percentage not meaningful (1) Includes $1.5 million of income associated with the 2001 Special Charge (see Note 5 regarding Special Charges - 2001). (2) Includes $0.6 million of costs associated with the 2001 Special Charge (see Note 5 regarding Special Charges - 2001). (3) Includes $2.1 million of costs associated with the 2001 Special Charge (see Note 5 regarding Special Charges - 2001). (4) Includes $45.7 million of transaction costs associated with the 2000 recapitalization. School Products The increase in school products operating income for the three month period was due to increased pricing across all school product lines, increased yearbook and commercial volume in our printing product line, and a shift in the timing of sales from the first to the second quarter on our jewelry and graduation product lines. The operating income increase for the three month period was somewhat offset by increased customer service costs as a result of wage rate increases and an increase in marketing expense to support programs and initiatives intended to increase future sales. The increase in school products operating income for the six month period was due to increased pricing across all school product lines and increased yearbook and commercial volume in our printing product line. The operating income increase for the six month period was somewhat offset by modest volume declines in our jewelry and graduation product lines, increased marketing expense to support future sales and increased customer service costs. 15 Recognition The increase in Recognition's operating loss for the three and six month periods was primarily due to a decrease in sales versus the comparable prior year periods as well as a shift to lower margin programs and general merchandise. Also contributing to the operating loss was an increase in marketing expense to support programs and initiatives intended to increase future sales. In March of 2001, we announced our decision to consolidate three Recognition plants into one plant 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 is being 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 two facilities and costs of moving production to our Princeton, Illinois facility. The total cost of the project is partially offset by a gain of $2.4 million, which resulted from the first quarter sale of our distribution facility in Memphis, Tennessee for $4.0 million. We leased the facility back from the buyer until May 31, 2001, and ratably recognized the gain over that period. Through June 30, 2001, we have expensed $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, Quebec plant. The majority of these termination benefits will be paid by the end of 2001. We have also recognized $0.4 million in shutdown costs and asset write-offs as well as $0.7 million of period costs that were directly related to this restructuring project. We anticipate incurring another $0.9 million of period costs during the third quarter of 2001 to complete the project. The components of the special charge are as follows:
Three months ended Three months ended Six months ended In thousands March 31, 2001 June 30, 2001 June 30, 2001 ------------------------------------------------------------------------------------------------------------------ Accruable exit costs and asset write-downs: Employee termination benefits $1,932 $ -- $ 1,932 Costs related to disposition of assets 414 -- 414 --------------------------------------------------------------- Subtotal 2,346 -- 2,346 Period costs related to moving production to our Princeton facility 150 525 675 Gain on sale of building (409) (2,040) (2,449) ------------------------------------------------------------------------------------------------------------------ $2,087 $(1,515) $ 572 ==================================================================================================================
Accrued costs and utilization for the six-month period ended June 30, 2001 are as follows:
Utilization --------------- Six months Initial ended Balance In thousands accrual June 30, 2001 June 30, 2001 ---------------------------------------------------------------------------------------- Employee termination benefits $1,932 $(1,502) $430 Costs related to disposition of assets 414 (226) 188 ---------------------------------------------------------------------------------------- $2,346 $(1,728) $618 ========================================================================================
The remaining amount accrued at June 30, 2001 is classified in "other current liabilities" in our condensed consolidated balance sheet. 16 Other The $46.1 and $45.9 million increases in Other operating income for the three and six month periods, respectively, were primarily due to the non-recurring transaction costs of $45.7 million incurred in the second quarter of 2000. This was partially offset by lower information systems and general and administrative spending versus the comparable three and six month periods. In the second quarter of 2001, we entered into a separation agreement with a senior executive. The total cost of $2.1 million for severance benefits was expensed in the Other segment's income statement. As of June 30, 2001, approximately $2.0 million is accrued for and classified in "other current liabilities" in our condensed consolidated balance sheet. The majority of the remaining separation benefits will be paid in the third quarter of 2001. Net Interest Expense Net interest expense increased $6.6 million and $26.1 million in the three and six month periods ended June 30, 2001, respectively, over the prior year periods. The increases are primarily due to increased interest expense resulting from our new debt structure, a result of the recapitalization in the second quarter of 2000. Income Taxes We accrue income taxes based on our best estimate of the effective tax rate expected to be applicable for the full year. Income taxes for the three and six month periods ended June 30, 2001 were accrued at a rate of 41.5 percent. The year-to-date effective rate for July 1, 2000 was 75.5 percent and reflects non-deductible transaction related costs of $30.0 million. 17 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 $30.5 million for the first six months of 2001, compared with $13.1 million of cash generated for the comparable prior period. The increase of $17.4 million was largely due to our increased net income versus the prior year. Investing Activities Capital expenditures for the first six months of 2001 were $9.0 million, compared with $7.2 million for the same period in 2000. The increase of $1.8 million relates primarily to higher capital expenditures in 2001 on an enterprise-wide 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 regarding Special Charges - 2001). Financing Activities Net cash used for financing activities in the first six months of 2001 was $9.0 million, compared with net cash used for financing activities of $7.9 million for the same period in 2000. The net cash used for financing activities included a scheduled debt payment of $5.0 million under our senior secured credit facility. We also used the proceeds from the sale of our distribution facility in Memphis, Tennessee to voluntarily pre-pay $4.0 million of borrowings under that same 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. We adopted these new standards effective December 31, 2000, and recorded a $2.4 million, net-of-tax cumulative-effect adjustment in other comprehensive income at the beginning of our first quarter in 2001. 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. For the six month period ending June 30, 2001, the fair value of the swap increased by approximately $0.4 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 first quarter in 2000. 18 Accounting for Business Combinations, Goodwill and Other Intangible Assets On June 29, 2001, the Financial Accounting Standards Board approved its proposed Statements of Financial Accounting Standards No. 141 (FAS 141), "Business Combinations," and No. 142 (FAS 142), "Goodwill and Other Intangible Assets." FAS 141 supercedes Accounting Principles Board Opinion No. 16 (APB 16), "Business Combinations." The most significant changes made by FAS 141 are: (1) requiring that the purchase method of accounting be used for all business combinations initiated after June 30, 2001, and (2) establishing specific criteria for the recognition of intangible assets separately from goodwill. FAS 142 supercedes APB 17, "Intangible Assets." FAS 142 primarily addresses the accounting for goodwill and intangible assets subsequent to their acquisition (i.e., the post-acquisition accounting). The most significant changes made by FAS 142 are (1) goodwill and indefinite lived intangible assets will no longer be amortized, (2) goodwill will be tested for impairment at least annually at the reporting level, (3) intangible assets deemed to have an indefinite life will be tested for impairment at least annually, and (4) the amortization period of intangible assets with finite lives will no longer be limited to forty years. We will adopt FAS 142 effective December 30, 2001. These standards only permit prospective application of the new accounting; accordingly, the adoption of these standards will not affect previously reported financial information. We are currently evaluating the impact that FAS 141 and 142 will have on our results of operations and financial condition. 19 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK There have been no material changes in our market risk during the six months ended June 30, 2001. For additional information, refer to Item 7A of the 2000 Form 10-K. 20 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 later this summer. 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 $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 10.32 Separation Agreement, dated as of June 18, 2001, between Jostens, Inc. and Mr. William N. Priesmeyer. (b) Reports on Form 8-K No reports on Form 8-K were filed by Jostens during the quarter ended June 30, 2001 21 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, on August 13, 2001. JOSTENS, INC. Registrant By /s/ Robert C. Buhrmaster ---------------------------------- Robert C. Buhrmaster Chairman, President and Chief Executive Officer By /s/ William E. Schlukebier ---------------------------------- William E. Schlukebier Vice President and Corporate Controller 22