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 30, 2002 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 (I.R.S. Employer of 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 May 10, 2002, there were 8,962,564 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 30, 2002 and March 31, 2001 3 Condensed Consolidated Balance Sheets as of March 30, 2002, March 31, 2001 and December 29, 2001 4 Condensed Consolidated Statements of Cash Flows for the three months ended March 30, 2002 and March 31, 2001 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 16 Part II Other Information ------------------------- Item 1. Legal Proceedings 17 Item 6. Exhibits and Reports on Form 8-K 17 Signatures 18 2 PART I FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS JOSTENS, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
Three months ended ----------------------------- March 30, March 31, In thousands, except per-share data 2002 2001 ---------------------------------------------------------------------------------------------- Net sales $121,323 $117,064 Cost of products sold 47,707 45,926 ---------------------------------------------------------------------------------------------- Gross profit 73,616 71,138 Selling and administrative expenses 67,011 67,115 ---------------------------------------------------------------------------------------------- Operating income 6,605 4,023 Net interest expense 17,690 21,282 ---------------------------------------------------------------------------------------------- Loss from continuing operations before income taxes (11,085) (17,259) Benefit from income taxes (4,600) (7,273) ---------------------------------------------------------------------------------------------- Loss from continuing operations (6,485) (9,986) Loss from discontinued operations, net of tax -- (2,290) ---------------------------------------------------------------------------------------------- Net loss (6,485) (12,276) Dividends and accretion on redeemable preferred shares (2,783) (2,418) ---------------------------------------------------------------------------------------------- Net loss available to common shareholders $ (9,268) $(14,694) ============================================================================================== Loss per common share Basic Loss from continuing operations $ (1.03) $ (1.38) Loss from discontinued operations -- (0.25) ---------------------------------------------------------------------------------------------- Basic loss per common share $ (1.03) $ (1.63) ============================================================================================== Diluted Loss from continuing operations $ (1.03) $ (1.38) Loss from discontinued operations -- (0.25) ---------------------------------------------------------------------------------------------- Diluted loss per common share $ (1.03) $ (1.63) ============================================================================================== Weighted average common shares outstanding Basic 8,965 8,993 Diluted 8,965 8,993
The accompanying notes are an integral part of the unaudited condensed consolidated financial statements. 3 JOSTENS, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited) ---------------------- March 30, March 31, December 29, In thousands, except per-share data 2002 2001 2001 ----------------------------------------------------------------------------------------------------------------------- ASSETS ------ Current assets Cash and cash equivalents $ 62,228 $ 53,143 $ 43,100 Accounts receivable, net of allowance of $3,666, $3,899 and $3,657 49,959 63,588 56,238 Inventories, net of reserve of $2,675, $4,469 and $2,089 105,715 119,422 70,514 Deferred income taxes 19,964 17,995 19,964 Salespersons overdrafts, net of allowance of $6,623, $5,203 and $6,897 27,130 26,418 28,037 Prepaid expenses and other current assets 9,754 9,207 7,723 Current assets of discontinued operations 966 -- 7,029 ----------------------------------------------------------------------------------------------------------------------- Total current assets 275,716 289,773 232,605 ----------------------------------------------------------------------------------------------------------------------- Other assets Goodwill, net 14,562 17,323 14,260 Deferred financing costs, net 26,425 31,581 27,476 Other 33,270 29,017 32,075 ----------------------------------------------------------------------------------------------------------------------- Total other assets 74,257 77,921 73,811 ----------------------------------------------------------------------------------------------------------------------- Property and equipment 270,692 285,604 267,255 Less accumulated depreciation (204,366) (209,839) (199,064) ----------------------------------------------------------------------------------------------------------------------- Property and equipment, net 66,326 75,765 68,191 ----------------------------------------------------------------------------------------------------------------------- $ 416,299 $ 443,459 $ 374,607 ======================================================================================================================= LIABILITIES AND SHAREHOLDERS' DEFICIT ------------------------------------- Current liabilities Customer deposits $ 181,830 $ 166,418 $ 126,400 Interest payable 14,844 16,485 10,567 Current portion of long-term debt 20,966 14,974 20,966 Other accrued liabilities 93,355 114,348 98,605 Current liabilities of discontinued operations 9,888 -- 16,511 ----------------------------------------------------------------------------------------------------------------------- Total current liabilities 320,883 312,225 273,049 Long-term debt - less current maturities, net of unamortized original issue discount of $17,852, $18,966 and $18,143 626,308 670,060 626,017 Other noncurrent liabilities including deferred tax liabilities of $4,035, $4,977 and $3,472 15,063 14,989 15,628 ----------------------------------------------------------------------------------------------------------------------- Total liabilities 962,254 997,274 914,694 ----------------------------------------------------------------------------------------------------------------------- Commitments and contingencies Redeemable preferred shares $.01 par value (liquidation preference: $76,079; authorized: 308 shares; issued and outstanding: March 30, 2002 - 76; March 31, 2001 - 65; December 29, 2001 - 74 61,826 51,259 59,043 Preferred shares $.01 par value (authorized: 4,000 shares; issued and outstanding in the form of redeemable preferred shares listed above: March 30, 2002 - 76; March 31, 2001 - 65: December 29, 2001 - 74; undesignated: 3,924) -- -- -- Shareholders' deficit Common shares (note 6) 1,006 1,015 1,006 Additional paid-in-capital - warrants 24,733 24,733 24,733 Officer notes receivable (1,660) (1,775) (1,407) Accumulated deficit (620,227) (618,795) (610,959) Accumulated other comprehensive loss (11,633) (10,252) (12,503) ----------------------------------------------------------------------------------------------------------------------- Total shareholders' deficit (607,781) (605,074) (599,130) ----------------------------------------------------------------------------------------------------------------------- $ 416,299 $ 443,459 $ 374,607 =======================================================================================================================
The accompanying notes are an integral part of the unaudited condensed consolidated financial statements. 4 JOSTENS, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
Three months ended ------------------------------ March 30, March 31, In thousands 2002 2001 --------------------------------------------------------------------------------------------------------------------- Operating activities Net loss $ (6,485) $(12,276) Adjustments to reconcile net loss to net cash provided by operating activities Depreciation 5,730 6,485 Amortization of debt discount and deferred financing costs 1,342 2,032 Other amortization 549 816 Other (267) (278) Changes in assets and liabilities: Accounts receivable 6,279 1,356 Inventories (35,201) (28,192) Prepaid expenses and other current assets (2,031) (8,957) Accounts payable (2,328) (3,477) Accrued employee compensation and related taxes (1,320) (3,558) Commissions payable 1,470 3,736 Customer deposits 55,430 57,570 Income taxes payable (3,763) (6,319) Interest payable 4,277 6,389 Other (703) 2,440 --------------------------------------------------------------------------------------------------------------------- Net cash provided by operating activities 22,979 17,767 --------------------------------------------------------------------------------------------------------------------- Investing activities Purchases of property and equipment (3,896) (4,370) Proceeds from sale of property and equipment 45 3,954 Other investing activities, net -- 123 --------------------------------------------------------------------------------------------------------------------- Net cash used for investing activities (3,851) (293) --------------------------------------------------------------------------------------------------------------------- Financing activities Net increase in bank overdrafts -- 9,117 --------------------------------------------------------------------------------------------------------------------- Net cash provided by financing activities -- 9,117 --------------------------------------------------------------------------------------------------------------------- Change in cash and cash equivalents 19,128 26,591 Cash and cash equivalents, beginning of period 43,100 26,552 --------------------------------------------------------------------------------------------------------------------- Cash and cash equivalents, end of period $ 62,228 $ 53,143 ===================================================================================================================== Supplemental information Income taxes refunded $ (28) $ (2,387) Interest paid $ 11,657 $ 13,267
The accompanying notes are an integral part of the unaudited condensed consolidated financial statements. 5 Notes to Condensed Consolidated Financial Statements (Unaudited) Jostens, Inc. and subsidiaries 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 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 29, 2001 ("2001 Form 10-K"). The condensed consolidated balance sheet data as of December 29, 2001 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 2001 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 2002 presentation. 2. Earnings (Loss) Per Common Share Basic earnings (loss) per share are computed by dividing net income (loss) available to common shareholders by the weighted average number of outstanding common shares. Diluted earnings per share are computed by dividing net income (loss) available to common shareholders by the weighted average number of outstanding common shares and common share equivalents. Common share equivalents include the dilutive effects of warrants and options. During the first quarter of both 2002 and 2001, 1.0 million shares of common stock equivalents were excluded in the computation of loss per share as their effect would have been antidilutive. 3. Comprehensive Loss Comprehensive loss and its components, net of tax, are as follows: Three months ended ----------------------- March 30, March 31, In thousands 2002 2001 -------------------------------------------------------------------------------- Net loss $ (6,485) $ (12,276) Change in cumulative translation adjustment 10 (1,106) Transition adjustment relating to adoption of SFAS 133 -- (1,821) Change in fair value of interest rate swap agreement 860 (1,134) -------------------------------------------------------------------------------- 870 (4,061) -------------------------------------------------------------------------------- Comprehensive loss $ (5,615) $ (16,337) ================================================================================ 6 Notes to Condensed Consolidated Financial Statements (Unaudited) Jostens, Inc. and subsidiaries The following amounts were included in accumulated other comprehensive loss as of March 30, 2002: Fair value Accumulated Foreign Minimum of interest other currency pension rate swap comprehensive In thousands translation liability agreement loss -------------------------------------------------------------------------------- Balance at December 29, 2001 $ (6,745) $ (2,371) $ (3,387) $ (12,503) Current period change 10 -- 860 870 -------------------------------------------------------------------------------- Balance at March 30, 2002 $ (6,735) $ (2,371) $ (2,527) $ (11,633) ================================================================================ 4. Inventories Inventories, net are comprised of the following: March 30, March 31, December 29, In thousands 2002 2001 2001 ------------------------------------------------------------------------------ Raw material and supplies $ 10,599 $ 16,400 $ 10,302 Work-in-process 59,468 62,894 28,447 Finished goods 35,648 40,128 31,765 ------------------------------------------------------------------------------ Total inventories, net $ 105,715 $ 119,422 $ 70,514 ============================================================================== Net inventories as of March 31, 2001 included $7.9 million related to discontinued operations. 5. Borrowings Long-term debt consists of the following:
March 30, March 31, December 29, In thousands 2002 2001 2001 ---------------------------------------------------------------------------------------------------------------- Borrowings under senior secured credit facility: Term loan A, variable rate, 4.28 percent at March 30, 2002, 7.88 percent at March 31, 2001 and 4.63 percent at December 29, 2001, with semi-annual principal and interest payments through May 2006 $ 108,187 $ 134,775 $ 108,187 Term loan B, variable rate, 5.53 percent at March 30, 2002, 8.38 percent at March 31, 2001 and 5.38 percent at December 29, 2001, with semi-annual principal and interest payments through May 2008 331,939 344,225 331,939 Senior subordinated notes, 12.75 percent fixed rate, net of discounts of $17,852 at March 30, 2002, $18,966 at March 31, 2001 and $18,143 at December 29, 2001, with semi-annual interest payments of $14,334, principal due and payable at maturity - May 2010 207,148 206,034 206,857 --------------------------------------------------------------------------------------------------------------- 647,274 685,034 646,983 Less current portion 20,966 14,974 20,966 --------------------------------------------------------------------------------------------------------------- $ 626,308 $ 670,060 $ 626,017 ===============================================================================================================
We have a $150.0 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 as defined in the agreement. The eurodollar rate is based upon the London Interbank Offered Rate ("LIBOR") and the alternative base rate is 7 Notes to Condensed Consolidated Financial Statements (Unaudited) Jostens, Inc. and subsidiaries based upon the prime rate. There was $5.9 million outstanding under this facility, in the form of letters of credit, as of March 30, 2002. Our senior secured credit facility bears a variable interest rate predominantly linked to LIBOR, as determined in three-month intervals, plus a fixed spread. To manage our exposure to changes in the variable interest rate, we entered into an interest rate swap agreement on July 7, 2000. The interest rate provided by the swap agreement is fixed at 7.0 % as opposed to LIBOR. The swap agreement became effective on August 15, 2000 with a notional amount of $135.0 million, decreasing 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 notional amount as of March 30, 2002 was $100.0 million. The fair value of the interest rate swap as of March 30, 2002, March 31, 2001 and December 29, 2001 was a non-cash liability of $4.2 million ($2.5 million net of tax), $4.9 million ($3.0 million net of tax) and $5.6 million ($3.4 million net of tax), respectively, and is recorded in "other noncurrent liabilities" in our Condensed Consolidated Balance Sheet. The change in fair value of the interest rate swap is recorded in "other comprehensive loss" in our Condensed Consolidated Balance Sheet. 6. Shareholders' Deficit 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 each class of common stock is set forth below:
Issued and Outstanding Shares ------------------------------------ Par Authorized March 30, March 31, December 29, In thousands, except par value data Value Shares 2002 2001 2001 -------------------------------------------------------------------------------------------------- Class A $.33 1/3 4,200 2,834 2,862 2,834 Class B $.01 5,300 5,300 5,300 5,300 Class C $.01 2,500 811 811 811 Class D $.01 20 20 20 20 Class E $.01 1,900 -- -- -- Undesignated $.01 12,020 -- -- -- -------------------------------------------------------------------------------------------------- 25,940 8,965 8,993 8,965 ==================================================================================================
Subsequent to March 30, 2002, we repurchased 2,699 shares of our Class A common stock from a former employee. 7. Special Charges Accrued special charges of $0.2 million at both March 30, 2002 and December 29, 2001 are included in "other current liabilities" in our Condensed Consolidated Balance Sheets. 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 and related termination benefits was expensed in 2001 and included costs for the senior executive and two other management personnel. We utilized $1.9 million of the special charge in 2001. The remaining liability of approximately $0.2 million will continue to be paid out over the benefit period as specified under the severance agreement. 8. Discontinued Operations Discontinued operations represents the results of our Recognition business, which we exited on December 3, 2001 by selling certain assets and leasing our production facility to a current supplier who manufactures awards and trophies. 8 Notes to Condensed Consolidated Financial Statements (Unaudited) Jostens, Inc. and subsidiaries Revenue and loss from discontinued operations for the first quarter of 2001 were as follows: In thousands ------------------------------------------------------------------------ Revenue from external customers $ 19,705 ------------------------------------------------------------------------ Pre-tax loss from operations of discontinued operations before measurement date $ (3,723) Pre-tax loss on disposal -- Income tax benefit 1,433 ------------------------------------------------------------------------ Net loss from discontinued operations $ (2,290) ======================================================================== In conjunction with exiting the Recognition business, we recorded a $27.4 million pre-tax loss on disposal of the discontinued segment in the fourth quarter of 2001. The pre-tax loss on disposal consisted of a non-cash charge of $11.2 million to write off certain net assets not sold in the exit from the Recognition business plus a $16.3 million charge for accrued costs related to exiting the Recognition business. Components of the accrued disposal costs are as follows:
Utilization -------------- Three months Initial Prior ended Balance In thousands charge accrual March 30, 2002 March 30, 2002 -------------------------------------------------------------------------------------------------------------- Employee separation benefits and other related costs $ 6,164 $ -- $ (2,498) $ 3,666 Phase-out costs of exiting the Recognition business 4,255 -- (2,365) 1,890 Salesperson transition benefits 2,855 1,236 (392) 3,699 Other costs related to exiting the Recognition business 3,018 1,434 (302) 4,150 -------------------------------------------------------------------------------------------------------------- $ 16,292 $ 2,670 $ (5,557) $ 13,405 ==============================================================================================================
The plan of disposal contemplates a workforce reduction of 150 full-time positions in the Recognition business and corporate support functions and as of March 30, 2002, 136 employees have been terminated. Termination benefits will continue to be paid out over the benefit period as specified under our severance plan. The $4.3 million charge for phase-out costs of exiting the Recognition business includes $1.3 million for payroll and benefits, $0.8 million for information systems and customer service costs and $2.2 million of internal support costs expected to be incurred during the phase-out period. We also accrued $2.8 million for future payments of transition benefits earned by certain Recognition sales representatives. The transition benefits will be paid out over the next three years. In addition, we accrued $3.0 million for customer receivable and salesperson overdraft allowances anticipated as a result of exiting the Recognition business. With the exception of certain transition benefits, we anticipate the remaining payments will occur in 2002. Of the $13.4 million in our Condensed Consolidated Balance Sheet as of March 30, 2002, $9.3 million is classified as "current liabilities of discontinued operations" and $4.1 million is classified as a contra asset in "current assets of discontinued operations". 9 Notes to Condensed Consolidated Financial Statements (Unaudited) Jostens, Inc. and subsidiaries Assets and liabilities of the discontinued business included in our Condensed Consolidated Balance Sheet were as follows: March 30, March 31, December 29, In thousands 2002 2001 2001 ------------------------------------------------------------------------------- Assets Accounts receivable $ -- $14,864 $ -- Inventories -- 7,890 -- Salespersons overdrafts -- 1,712 -- Current assets of discontinued operations 966 -- 7,029 Intangibles -- 2,717 -- Property and equipment, net -- 2,178 -- Other -- 602 -- ------------------------------------------------------------------------------ $ 966 $29,963 $ 7,029 ============================================================================== Liabilities Accounts payable $ -- $ 5,021 $ -- Accrued employee compensation and related taxes -- 999 -- Commissions payable -- 3,219 -- Other -- 7,037 -- Current liabilities of discontinued operations 9,888 -- 16,511 ------------------------------------------------------------------------------ $9,888 $16,276 $16,511 ============================================================================== 9. New Accounting Standards Accounting for Goodwill and Other Intangible Assets On December 30, 2001, the beginning of our fiscal year, we adopted Statement of Financial Accounting Standards No. 142 (SFAS 142), "Goodwill and Other Intangible Assets." SFAS 142 supercedes APB 17, "Intangible Assets." SFAS 142 addresses the financial accounting and reporting for acquired goodwill and other intangible assets. Under the new statement, goodwill and intangible assets with indefinite useful lives will no longer be amortized, but instead tested for impairment at least annually in accordance with the provisions of SFAS 142. We have no intangible assets with indefinite useful lives. We are required to complete the first step of the transitional impairment test for goodwill within six months of adoption of SFAS 142 and to complete the final step of the transitional impairment test by the end of the fiscal year. Although we have not completed our transitional impairment test, we anticipate that the results of this assessment will not have a material impact on our consolidated financial statements. Pro forma net loss from continuing operations and net loss per share from continuing operations adjusted to eliminate historical amortization of goodwill and related tax effects are as follows: 10 Notes to Condensed Consolidated Financial Statements (Unaudited) Jostens, Inc. and subsidiaries
Three months ended March 30, March 31, In thousands 2002 2001 --------------------------------------------------------------------------------------------- Reported net loss from continuing operations $ (6,485) $ (9,986) Dividends and accretion on redeemable preferred shares (2,783) (2,418) Goodwill amortization, net of tax -- 129 --------------------------------------------------------------------------------------------- Pro forma net loss from continuing operations $ (9,268) $ (12,275) ============================================================================================= Reported net loss per share from continuing operations: Basic $ (1.03) $ (1.38) Diluted $ (1.03) $ (1.38) Pro forma net loss per share from continuing operations: Basic $ (1.03) $ (1.36) Diluted $ (1.03) $ (1.36)
Pro forma net loss and net loss per share adjusted to eliminate historical amortization of goodwill and related tax effects are as follows:
Three months ended March 30, March 31, In thousands 2002 2001 --------------------------------------------------------------------------------------------- Reported net loss available to common shareholders $ (9,268) $ (14,694) Goodwill amortization, net of tax -- 250 --------------------------------------------------------------------------------------------- Pro forma net loss available to common shareholders $ (9,268) $ (14,444) ============================================================================================= Reported net loss per share: Basic $ (1.03) $ (1.63) Diluted $ (1.03) $ (1.63) Pro forma net loss per share: Basic $ (1.03) $ (1.61) Diluted $ (1.03) $ (1.61)
Accounting for Asset Retirement Obligations In June 2001, the FASB issued Statement of Financial Accounting Standards No. 143 (SFAS 143), "Accounting for Asset Retirement Obligations." SFAS 143 establishes accounting standards for the recognition and measurement of an asset retirement obligation and its associated asset retirement cost. It also provides accounting guidance for legal obligations associated with the retirement of tangible long-lived assets. SFAS 143 is effective for fiscal years beginning after June 15, 2002, with early adoption permitted. We expect that the provisions of SFAS 143 will not have a material impact, if any, on our consolidated results of operations, cash flows and financial position. 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 the seasonality of our sales and operating income; o our relationship with our independent sales representatives and employees; o the fluctuating prices of raw materials, primarily gold; 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, expressed as a percentage of net sales.
Three months ended -------------------------- March 30, March 31, Dollars in thousands 2002 2001 $ Change % Change ------------------------------------------------------------------------------------------------------------------------- Net sales $ 121,323 $ 117,064 $ 4,259 3.6% % of net sales 100.0% 100.0% Cost of products sold 47,707 45,926 1,781 3.9% % of net sales 39.3% 39.2% ------------------------------------------------------------------------------------------------------------------------- Gross profit 73,616 71,138 2,478 3.5% % of net sales 60.7% 60.8% Selling and administrative expenses 67,011 67,115 (104) (0.2%) % of net sales 55.2% 57.3% ------------------------------------------------------------------------------------------------------------------------- Operating income 6,605 4,023 2,582 64.2% % of net sales 5.4% 3.4% Net interest expense 17,690 21,282 (3,592) (16.9%) % of net sales 14.6% 18.2% ------------------------------------------------------------------------------------------------------------------------- Loss from continuing operations before income taxes (11,085) (17,259) 6,174 35.8% % of net sales -9.1% -14.7% Benefit from income taxes (4,600) (7,273) 2,673 36.8% % of net sales -3.8% -6.2% ------------------------------------------------------------------------------------------------------------------------- Loss from continuing operations (6,485) (9,986) 3,501 35.1% % of net sales -5.3% -8.5% Loss from discontinued operations, net of tax -- (2,290) 2,290 NM % of net sales 0.0% -2.0% ------------------------------------------------------------------------------------------------------------------------- Net loss $ (6,485) $ (12,276) $ 5,791 47.2% ========================================================================================================================= % of net sales -5.3% -10.5%
Percentages in this table may reflect rounding adjustments. NM = percentage not meaningful Three Months Ended March 30, 2002 Compared to the Three Months Ended March 31, 2001 Net Sales Net sales increased $4.3 million, or 3.6%, to $121.3 million for the first quarter of 2002 from $117.1 million for the first quarter of 2001. The increase in net sales resulted from price increases averaging approximately 2.8% and volume/mix increases of approximately 0.8%. The increase in net sales was primarily due to: o price increases in the jewelry and graduation product lines; o increased volume for graduation regalia and diplomas due to new account growth and earlier deliveries than last year; and o increased volume from commercial printing These increases were offset by the following: o decreased volume in the high school jewelry market due to decreases in same school ring unit sales; o decreased volume in the college jewelry market as a result of the loss of a significant customer; and o volume decreases in graduation announcements due to lower sales per student 13 Gross Margin Gross margin increased $2.5 million, or 3.5%, to $73.6 million for the first quarter of 2002 from $71.1 million for the first quarter of 2001. As a percentage of net sales, gross margin remained relatively flat at 60.7% in the first quarter of 2002 compared to 60.8% in the first quarter of 2001. The slight decrease in gross margin can be attributed to a shift in sales mix of graduation product offerings and increased commercial printing volume, which generally carries a lower margin. This decrease is offset by price increases primarily in the jewelry and graduation product lines, favorable manufacturing variances associated with higher volumes for graduation regalia and continued emphasis on manufacturing efficiencies. Selling and Administrative Expenses Selling and administrative expenses decreased $0.1 million, or 0.2%, to $67.0 million for the first quarter of 2002 from $67.1 million for the first quarter of 2001. The decrease reflects lower spending on selling and marketing programs and initiatives than in the comparable prior year quarter. It also reflects lower commission expense as a result of a shift in sales mix. The decrease is offset by: o higher customer service expenses related to additional headcount and equipment purchases; o higher spending on information systems; and o higher general and administrative expenses due to increased costs for legal counsel associated with the litigation described in PART II, ITEM 1 of this Form 10-Q Net Interest Expense Net interest expense decreased $3.6 million to $17.7 million for the first quarter of 2002 as compared to $21.3 million for the first quarter of 2001. The decrease is due to a lower average outstanding balance and a lower average interest rate. Provision for Income Taxes Our effective tax rate for continuing operations was 41.5% for the first quarter of 2002 compared to 42.1% for the first quarter of 2001. Loss From Continuing Operations Loss from continuing operations decreased $3.5 million , or 35.1% to $6.5 million for the first quarter of 2002 from $10.0 million for the first quarter of 2001 as a result of increased net sales, relatively flat spending and lower net interest expense. Discontinued Operations Loss from discontinued operations was $2.3 million in the first quarter of 2001. This represents the results of our Recognition business, which we exited in December 2001 by selling certain assets and leasing our production facility to a former supplier who manufactures awards and trophies. In conjunction with exiting the Recognition business, we recorded a $27.4 million pre-tax loss on disposal of the discontinued segment in the fourth quarter of 2001. The pre-tax loss on disposal consisted of a non-cash charge of $11.2 million to write off certain net assets not sold in the exit from the Recognition business plus a $16.3 million charge for accrued costs related to exiting the Recognition business. Components of the accrued disposal costs are as follows:
Utilization --------------- Three months Initial Prior ended Balance In thousands charge accrual March 30, 2002 March 30, 2002 ------------------------------------------------------------------------------------------------------------------- Employee separation benefits and other related costs $ 6,164 $ -- $ (2,498) $ 3,666 Phase-out costs of exiting the Recognition business 4,255 -- (2,365) 1,890 Salesperson transition benefits 2,855 1,236 (392) 3,699 Other costs related to exiting the Recognition business 3,018 1,434 (302) 4,150 ------------------------------------------------------------------------------------------------------------------- $ 16,292 $ 2,670 $ (5,557) $ 13,405 ===================================================================================================================
14 The plan of disposal contemplates a workforce reduction of 150 full-time positions in the Recognition business and corporate support functions and as of March 30, 2002, 136 employees have been terminated. Termination benefits will continue to be paid out over the benefit period as specified under our severance plan. The $4.3 million charge for phase-out costs of exiting the Recognition business includes $1.3 million for payroll and benefits, $0.8 million for information systems and customer service costs and $2.2 million of internal support costs expected to be incurred during the phase-out period. We also accrued $2.8 million for future payments of transition benefits earned by certain Recognition sales representatives. The transition benefits will be paid out over the next three years. In addition, we accrued $3.0 million for customer receivable and salesperson overdraft allowances anticipated as a result of exiting the Recognition business. With the exception of certain transition benefits, we anticipate the remaining payments will occur in 2002. Of the $13.4 million in our Condensed Consolidated Balance Sheet as of March 30, 2002, $9.3 million is classified as "current liabilities of discontinued operations" and $4.1 million is classified as a contra asset in "current assets of discontinued operations". LIQUIDITY AND CAPITAL RESOURCES Our primary cash needs are for debt service obligations, capital expenditures, working capital and general corporate purposes. As of March 30, 2002, we had cash and cash equivalents of $62.2 million. Our free cash flow for the first quarter of 2002 was $19.1 million compared to $17.5 million for the first quarter of 2001. Free cash flow excludes the effects of cash flow from financing activities. Operating Activities Operating activities generated cash of $23.0 million during the first quarter of 2002 compared to $17.8 million during the first quarter of 2001. The increase of $5.2 million was primarily due to a $3.5 million lower net loss on continuing operations in the first quarter of 2002 than in the comparable prior year quarter. In addition, operating activities for the first quarter of 2001 included a $2.3 million loss on discontinued operations. Investing Activities Capital expenditures for the first quarter of 2002 were $3.9 million compared to $4.4 million for the first quarter of 2001. A decrease of $0.2 million relates to 2001 capital spending on our discontinued operations. We anticipate capital spending in 2002 to be about $27.0 million reflecting spending on normal replacement projects plus improvements to our manufacturing capabilities. Financing Activities Net cash provided by financing activities for the first quarter of 2001 relates to bank overdrafts. There was no short-term borrowing activity during the first quarter of 2002, however there was $5.9 million outstanding under our revolving credit facility, in the form of letters of credit, as of March 30, 2002. NEW ACCOUNTING STANDARDS Accounting for Goodwill and Other Intangible Assets On December 30, 2001, the beginning of our fiscal year, we adopted Statement of Financial Accounting Standards No. 142 (SFAS 142), "Goodwill and Other Intangible Assets." SFAS 142 supercedes APB 17, "Intangible Assets." SFAS 142 addresses the financial accounting and reporting for acquired goodwill and other intangible assets. Under the new statement, goodwill and intangible assets with indefinite useful lives will no longer be amortized, but instead tested for impairment at least annually in accordance with the provisions of SFAS 142. We have no intangible assets with indefinite useful lives. We are required to complete the first step of the transitional impairment test for goodwill within six months of adoption of SFAS 142 and to complete the final step of the transitional impairment test by the end of the fiscal year. Although we have not completed our transitional impairment test, we anticipate that the results of this assessment will not have a material impact on our consolidated financial statements. See Note 9 to our Condensed Consolidated Financial Statements. 15 Accounting for Asset Retirement Obligations In June 2001, the FASB issued Statement of Financial Accounting Standards No. 143 (SFAS 143), "Accounting for Asset Retirement Obligations." SFAS 143 establishes accounting standards for the recognition and measurement of an asset retirement obligation and its associated asset retirement cost. It also provides accounting guidance for legal obligations associated with the retirement of tangible long-lived assets. SFAS 143 is effective for fiscal years beginning after June 15, 2002, with early adoption permitted. We expect that the provisions of SFAS 143 will not have a material impact, if any, on our consolidated results of operations, cash flows and financial position. 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 30, 2002. For additional information, refer to Item 7A of our 2001 Form 10-K. 16 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 $3.0 million to $10.0 million under various theories and differing sized relevant markets. Epicenter waived its right to a jury, so the case was tried before a judge in U.S. District Court in Orange County, California where trial concluded on April 24, 2001. We are awaiting a written decision from the Court. 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. The long-standing dispute with Ernst & Young LLP regarding implementation of a company wide enterprise resource planning ("ERP") system was heard by a three-arbitrator panel in Minneapolis, Minnesota in December 2001. On March 8, 2002, the arbitration panel issued its award granting Ernst & Young LLP's claim for payment of its remaining unpaid consulting fees and costs of the arbitration, and denied our counterclaim. The result is not material to our consolidated results of operations, cash flows and financial position. 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 30, 2002. 17 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, on May 10, 2002. JOSTENS, INC. By /s/ Robert C. Buhrmaster ------------------------------------------------ Robert C. Buhrmaster Chairman, President and Chief Executive Officer By /s/ John A. Feenan ------------------------------------------------ John A. Feenan Sr. Vice President and Chief Financial Officer 18