-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, V6r8vlFpJwN6F+SNvmsID2xh+VACfNziDqH9VsRgadgG14NsM+vw59u7UZUPtS9g Yv8pixUFG9ENZ28+E2F4CA== 0001045969-97-000105.txt : 19971114 0001045969-97-000105.hdr.sgml : 19971114 ACCESSION NUMBER: 0001045969-97-000105 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19970927 FILED AS OF DATE: 19971112 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: JOSTENS INC CENTRAL INDEX KEY: 0000054050 STANDARD INDUSTRIAL CLASSIFICATION: JEWELRY, PRECIOUS METAL [3911] IRS NUMBER: 410343440 STATE OF INCORPORATION: MN FISCAL YEAR END: 0630 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-05064 FILM NUMBER: 97712894 BUSINESS ADDRESS: STREET 1: 5501 NORMAN CTR DR CITY: MINNEAPOLIS STATE: MN ZIP: 55437 BUSINESS PHONE: 6128303300 MAIL ADDRESS: STREET 1: 5501 NORMAN CENTER DRIVE CITY: MINNEAPOLIS STATE: MN ZIP: 55437 10-Q 1 FORM 10-Q SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 FORM 10-Q (Mark One) x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 27, 1997 OR TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM ______ TO ________ Commission file number 1-5064 ------ JOSTENS, INC. ------------------------------------------------------------------------- (Exact name of registrant as specified in its charter) Minnesota 41-0343440 ----------------------- ----------------------- (State or other jurisdiction of (I.R.S. Employer Identification Number) incorporation or organization) 5501 Norman Center Drive, Minneapolis, Minnesota 55437 - ------------------------------------------------------------------------------- (Address of principal executive offices) (Zip Code) 612-830-3300 - ------------------------------------------------------------------------------- (Registrant's telephone number including area code) - ------------------------------------------------------------------------------- (Former name, address and fiscal year, if changed since last report) 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 --- --- The number of shares outstanding of the registrant's only class of common stock on November 3, 1997 was 38,871,970. 1 JOSTENS, INC. INDEX Part I. Financial Information - ------------------------------ Item 1. Financial Statements (Unaudited): Condensed Consolidated Balance Sheets as of September 27, 1997, September 30, 1996 and December 28, 1996 Condensed Consolidated Statements of Operations for the Three and Nine Months Ended September 27, 1997 and September 30,1996 Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 27, 1997 and September 30,1996 Notes to Condensed Consolidated Financial Statements Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Part II. Other Information - --------------------------- Item 6. Exhibits and Reports on Form 8-K Signatures - ---------- 2 JOSTENS, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (In thousands, except per-share data)
(Unaudited) ---------------------------- September 27, September 30, December 28, 1997 1996 1996 ------------ ------------ ------------ CURRENT ASSETS: Cash and short-term investments $ - $ 859 $ - Accounts receivable, net 109,076 109,151 107,314 Inventories: Finished products 36,010 32,634 40,174 Work-in-process 22,106 22,078 28,176 Materials and supplies 29,935 39,381 30,143 ---------- ---------- ---------- 88,051 94,093 98,493 Deferred income taxes 14,928 14,832 14,928 Prepaid expenses 2,834 2,223 2,189 Other receivables 24,617 23,980 24,893 ---------- ---------- ---------- 239,506 245,138 247,817 OTHER ASSETS: Intangibles, net 31,121 27,861 27,264 Note receivable, net 12,925 12,925 12,925 Deferred income taxes 11,393 11,374 11,393 Other 13,001 15,054 14,166 ---------- ---------- ---------- 68,440 67,214 65,748 PROPERTY AND EQUIPMENT 224,887 190,176 210,925 Accumulated depreciation (154,998) (124,210) (143,282) ---------- ---------- ---------- 69,889 65,966 67,643 ---------- ---------- ---------- $ 377,835 $ 378,318 $ 381,208 ========== ========== ========== CURRENT LIABILITIES: Notes payable $ 143,927 $ 165,441 $ 97,707 Accounts payable 14,596 14,836 14,913 Salary, benefits and commissions 23,165 22,802 32,583 Customer deposits 25,187 22,075 76,034 Other liabilities 11,120 12,778 14,933 Income taxes 10,015 3,558 6,938 ---------- ---------- ---------- 228,010 241,490 243,108 OTHER NON-CURRENT LIABILITIES 18,829 19,953 25,487 SHAREHOLDERS' INVESTMENT: Preferred shares, $1.00 par value: Authorized 4,000 shares, none issued - - - Common shares, $.33 1/3 par value: Authorized 100,000 shares, Issued - 38,842, 38,662 and 38,665 shares, respectively 12,947 12,887 12,888 Capital surplus 3,659 1,409 1,480 Retained earnings 117,959 105,850 101,567 Foreign currency translation (3,569) (3,271) (3,322) ---------- ---------- ---------- 130,996 116,875 112,613 ---------- ---------- ---------- $ 377,835 $ 378,318 $ 381,208 ========== ========== ==========
See notes to condensed consolidated financial statements 3 JOSTENS, INC. AND SUBSIDIARIES UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (In thousands, except per-share data)
Three Months Ended Nine Months Ended ---------------------------- ----------------------------- September 27, September 30, September 27, September 30, 1997 1996 1997 1996 -------------- -------------- -------------- -------------- Net Sales $ 109,079 $ 105,399 $ 556,832 $ 537,015 Cost of products sold 63,408 60,847 274,095 273,292 ------------ ------------ ------------ ------------ 45,671 44,552 282,737 263,723 Selling and administrative expenses 54,804 51,155 206,901 202,552 ------------ ------------ ------------ ------------ Operating Income (Loss) (9,133) (6,603) 75,836 61,171 Net interest expense 1,354 1,917 4,498 6,764 ------------ ------------ ------------ ------------ (10,487) (8,520) 71,338 54,407 Income taxes (4,300) (3,493) 29,248 22,295 ------------ ------------ ------------ ------------ Net Income (Loss) $ (6,187) $ (5,027) $ 42,090 $ 32,112 ============ ============ ============ ============ Earnings (Loss) Per Common Share $ (0.16) $ (0.13) $ 1.08 $ 0.83 ============ ============ ============ ============ Average shares outstanding 38,987 38,656 38,840 38,646 ============ ============ ============ ============ Dividends declared per common share $ 0.22 $ - $ 0.66 $ 0.44 ============ ============ ============ ============
See notes to condensed consolidated financial statements 4 JOSTENS, INC. AND SUBSIDIARIES UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands) Nine Months Ended ---------------------------- September 27, September 30, 1997 1996 ------------ ------------ OPERATING ACTIVITIES Net income $ 42,090 $ 32,112 Depreciation and amortization 15,875 12,331 Changes in assets and liabilities (57,608) (31,924) ------------ ------------ 357 12,519 ------------ ------------ INVESTING ACTIVITIES Capital expenditures (14,325) (10,265) Business acquisition (8,500) - ------------ ------------ (22,825) (10,265) ------------ ------------ FINANCING ACTIVITIES Short-term borrowing 46,220 73,109 Reduction in long-term notes (292) (49,852) Cash dividends (25,698) (25,628) Stock options 11,150 554 Share repurchases (8,962) - Other 50 - ------------ ------------ 22,468 (1,817) ------------ ------------ Increase in cash and short-term investments $ - $ 437 ============ ============ See notes to condensed consolidated financial statements 5 JOSTENS, INC. AND SUBSIDIARIES NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS BASIS OF PRESENTATION The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Because of the seasonal nature of the Company's business, the results of operations for the nine months ended September 27, 1997, are not necessarily indicative of the results for all of 1997. Certain items on the September and December 1996 condensed consolidated balance sheet have been reclassified to conform to the 1997 presentation. For further information, refer to the consolidated financial statements and footnotes in the Company's Form 10-K for the six-month transition period ended December 28, 1996. FISCAL YEAR In October 1996, the Company elected to change its fiscal year end from June 30 to the Saturday closest to December 31 effective December 29, 1996, to enable better planning and internal management of its businesses. A six-month transition period of July 1, 1996, through December 28, 1996, preceded the start of this new fiscal year. These financial statements reflect the results of the first nine months of the 1997 calendar year. INVENTORIES AND COST OF PRODUCTS SOLD The Company implemented a new inventory cost accounting system in July 1996 which provides more precise, detailed performance information by product within each line. The new system results in a more accurate valuation of inventories and recording of cost of products sold during the individual quarters, consistent with the manner used to value inventory at previous June year ends. The use of this more precise information will have no effect on annual results. As a result of this implementation, cost of products sold reported during the six months ended December 28, 1996, was $16.9 million ($.26 per share) higher than what would have been reported using the prior method, while cost of products sold in the six months ended June 28, 1997, had an equal positive impact. Implementation of the new cost accounting system does not impact the comparability of reported cost of products sold or earnings per share for the quarter ended September 27, 1997, since the new cost accounting system was in place for both the 1997 and 1996 periods. INTEREST RATE SWAP AGREEMENT In May 1997, the Company entered into a six-month interest rate swap which commenced July 7, 1997, as a means of managing its interest rate risk. Under terms of the agreements, the Company pays interest at a rate of 6 percent and receives interest weekly at a floating rate equal to the seven-day U.S. commercial paper rate, without the exchange of the underlying notional amount upon which the payments are based. The notional amount of the agreement changes weekly based on the Company's planned borrowing needs and ranges from $21.5 million to $65.6 million. In addition, in October 1997, the Company entered into a twelve-month interest rate swap that will commence on December 29, 1997. Under the terms of the agreement, the Company will pay interest at a rate of 5.89 percent and will receive interest weekly at a floating rate equal to the seven-day U.S. commercial paper rate, without the exchange of the underlying notional amount upon which the 6 payments are based. The notional amount of the agreement changes weekly based on the company's planned borrowing needs and ranges from $35 million to $85 million. The difference to be paid or received from counterparties as interest rates change will be included in other liabilities or assets, with the corresponding amount accrued and recognized as an adjustment of interest expense related to the debt. There were no material interest rate differences as of September 27, 1997. The fair values of the swap agreements will not be recognized in the financial statements. Gains and losses on terminations of interest rate swap agreements will be deferred as an adjustment to the carrying amount of the outstanding debt and amortized as an adjustment to interest expense related to the debt over the remaining term of the original contract life of the terminated swap agreement. If a designated debt obligation is extinguished early, any realized or unrealized gain or loss from the swap would be recognized in income during the same period as the debt extinguishment. SALES FORCE For sales representatives who serve the college market, the Company changed their contract status from independent sales representatives to Company employees effective July 1, 1997. The change from independent representatives to Company employees was made to better enable the Company to address market needs and over time strengthen its position in the market. These representatives' previous contracts called for a transition commission, which historically had been paid by the new sales representatives who assumed responsibility for the accounts of the outgoing representative, with the Company acting as a collection agent. In anticipation of this change, the Company communicated offers of employment in April 1997 and notified sales representatives serving the college market that their independent contracts would not be renewed upon expiration on June 30, 1997. College sales representatives who elected to become Jostens employees forfeited their right to the transition commission in exchange for participation in a newly created severance plan as well as other employee benefit programs. As a result, the Company will recognize approximately $4.2 million of severance plan costs ratably over these representatives' estimated average remaining service period of five years. During the 1997 third quarter, the Company recognized $200,000 of these severance costs. Representatives who elected not to become employees will receive estimated future transition payments from the Company of $5.2 million in exchange for helping to transition and retain existing business and for signing agreements not to compete. These costs will be recognized as a charge to operations ratably over the individual non-compete periods, generally three years. The 1997 third quarter costs associated with non-employee representatives was $300,000. In addition, the Company in the second quarter communicated contractual changes and policy clarifications to the approximately 350 independent sales representatives who serve the high school Jewelry and Graduation Products markets. The changes and clarifications, which took effect July 1 and do not affect the reps' independent status, are intended to better align the interests of the sales force with the Company's interest. INCOME TAXES The Company provides for income taxes in interim periods based on the estimated effective income tax rate for the complete fiscal year. EARNINGS PER COMMON SHARE Earnings per share have been computed by dividing net income by the average number of common shares outstanding. The impact of any additional shares issuable upon the exercise of dilutive stock options is not material. In February 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards (SFAS) No. 128, Earnings Per Share. The Company will adopt SFAS No. 128 in the fourth quarter of 1997 as required by the pronouncement. Management does not expect the adoption of SFAS No. 128 to have a material impact on future computations of earnings per share. 7 DIVIDENDS Dividends declared in the nine months ended September 27, 1997, were $.66 per share, up from $.44 per share in the comparable prior-year period. The increase in 1997 was due to the timing of declarations. The 1997 third-quarter dividend of $.22 per share was declared in the third quarter, while the 1996 third- quarter dividend of $.22 was declared in the fourth quarter. SHARE REPURCHASE In July 1997, Jostens' board of directors authorized the repurchase of up to $100 million in shares of the Company's common stock. Under the authorization, shares may be repurchased periodically in the open market and through privately negotiated transactions. The repurchase is to be funded from the Company's cash and short-term investment balance, as well as short-term borrowings. As of September 27, 1997, the Company had repurchased $9 million in common shares. PLANT CONSOLIDATION In March 1997, the Company announced the closing of its Porterville, Calif., graduation announcement facility, with plans to transfer all operations to the Company's announcement plant in Shelbyville, Tenn., by October. As a result, the Company recorded a pre-tax charge to operations of $3 million in the first quarter of 1997, primarily to accrue for severance and other employee-related costs, generally expected to be incurred over the following 12 months. As of September 27, 1997, the accrual decreased by $2.3 million due to incurred costs of $1.5 million and a revision to the initial estimate of $750,000 recorded in the second quarter. ACQUISITION In April 1997, the Company entered into an agreement to purchase, the Gold Lance class ring brand from Town & Country Corporation for $10.8 million in cash, subject to adjustment. Under the terms of the agreement, Jostens purchased the Gold Lance name, accounts and notes receivable and tooling. Town & Country Corporation continued to manufacture Gold Lance products for its own account through July 31, 1997, at which time the acquisition took effect and manufacturing moved to the Company's facilities. As of September 27, 1997, the Company had paid $8.5 million to Town & Country Corporation under terms of the purchase agreement. The remaining payment of $2.3 million is in dispute and the Company is in discussions with Town & Country Corporation concerning this portion of the purchase price. 8 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The Company occasionally may make statements regarding its business and markets, such as projections of future performance, statements of management's plans and objectives, forecasts of market trends and other matters. To the extent such statements are not historical fact, they may constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Statements containing the words or phrases "will likely result," "are expected to," "will continue," "is anticipated," "believe," "estimate," "projected," or similar expressions are intended to identify forward-looking statements. Such forward-looking statements may appear in this document or other documents, reports, press releases and written or oral presentations made by officers of the Company to shareholders, analysts, news organizations or others. All such forward-looking statements speak only as of the date on which such statement is made. No assurance can be given that the results in any forward-looking statement will be achieved and actual results could be affected by one or more factors, which could cause the results to differ materially. Therefore, all forward-looking statements are qualified in their entirety by such factors, including the factors listed below. Such factors may be more fully discussed periodically in the Company's subsequent filings with the Securities and Exchange Commission. Any change in the following factors may impact the achievement of results in forward-looking statements: the price of gold; the Company's access to students and consumers in schools; the seasonality of the Company's business; regulatory and accounting rules with respect to the Company's independent sales force; the Company's relationship with its sales force; fashion and demographic trends; the general economy, especially during peak buying seasons for the Company's products and services; the ability of the Company to respond to customer change orders and delivery schedules; competitive pricing and program changes; and continued success improving operating efficiencies. The foregoing factors are not exhaustive and new factors may emerge or changes to the foregoing factors may occur that would impact the Company's business. RESULTS OF OPERATIONS Net sales for the three and nine months ended September 27, 1997, were $109.1 million and $556.8 million, respectively, representing increases of 3.5 percent and 3.7 percent over the comparable prior-year periods. The sales improvement was driven by increases in sales volume and pricing in the Company's three largest business lines--Printing & Publishing, Jewelry and Graduation Products. Cost of products sold was $63.4 million and $274.1 million, respectively, for the three and nine months ended September 27, 1997. Costs as a percentage of sales for the three- and nine-month periods were 58.1 percent and 49.2 percent, compared with 57.7 percent and 50.9 percent in the same periods last year. The increase in costs as a percentage of sales during the 1997 third quarter resulted from higher training costs to prepare the company's new facility in Mexico for its first peak ring finishing season, as well as from costs to consolidate the company's two graduation announcement plants (see subsequent discussion under "Plant Consolidation"). The decrease in costs as a percentage of sales during the nine months ended September 27, 1997, resulted primarily from the new inventory cost accounting system implemented in July 1996 which provides more precise, detailed performance information by product within each line. The new system results in a more accurate valuation of inventories and recording of cost of products sold during the individual quarters, consistent with the manner used to value inventory at previous June year ends. The use of this more precise information will have no effect on annual results. As a result of this implementation, the cost of products sold reported during the six months ended December 28, 1996, was $16.9 million 9 ($.26 per share) higher than what would have been reported using the prior method, while the cost of products sold in the six months ended June 28, 1997, had an equal positive impact. Implementation of the new cost accounting system does not impact the comparability of reported cost of products sold or earnings per share for the quarter ended September 27, 1997, since the new cost accounting system was in place for both the 1997 and 1996 periods. Selling and administrative expenses were $54.8 million and $206.9 million, respectively, for the three- and nine-month periods ended September 27, 1997. As a percentage of sales, selling and administrative expenses for the three- and nine-month periods were 50.2 percent and 37.2 percent, compared with 48.5 percent and 37.7 percent in the same periods last year. The increase in the 1997 third quarter was the result of salary and legal costs associated with the transition of the college sales force from independent representatives to employees, and the development of products and marketing materials for the recently acquired Gold Lance business (see subsequent discussion under "Capital Expenditures, Product Development and Acquisition"). Net interest expense for the three and nine months ended September 27, 1997, was $1.4 million and $4.5 million, respectively, compared with $1.9 million and $6.8 million in the comparable prior-year periods. The decrease in net interest expense corresponded with reduced borrowing levels and overall lower interest rates in the first nine months of 1997 versus the year-earlier periods. Borrowing levels were lower in the 1997 periods primarily as a result of accelerated customer deposit collections in the Printing & Publishing business, partially offset by an $8.5 million payment to Town & Country Corporation in connection with the purchase of Gold Lance. LIQUIDITY AND CAPITAL RESOURCES Cash generated from operating activities, short-term borrowings, and stock option activities were Jostens' principal sources of liquidity during the nine- month period. Cash generated from these activities was used primarily for dividends, capital expenditures, repurchasing shares and the purchase of Gold Lance. Operating activities provided cash of $357,000 for the nine months ended September 27, 1997, primarily due to net income ($42.1 million) and a decrease in inventories ($10.4 million). Offsetting the cash increases was a decrease in customer deposits of $50.8 million. With the exception of inventories, these fluctuations reflect the seasonality of the business, evident when comparing the December and September month-end balances. The decrease in inventories results from the Porterville plant closing, the product simplification programs, and the decline in gold prices and gold quantities on hand. The Company generated $12.2 million less cash from operating activities in the nine months ended September 1997 than in the same 1996 period. This decrease related primarily to $16.3 million of customer deposits in the Printing & Publishing business which were accelerated and collected in the December 1996 quarter. This decrease in cash generated during the 1997 period was partially offset by income taxes payable at September 27, 1997, which was caused by a timing difference on the Company's tax payments as a result of the change in the fiscal year-end. Because most of the Company's sales volume occurs in the quarters ending in June and December, Jostens usually requires additional interim financing of inventories and receivables. To provide the necessary financing, the Company maintains a bank credit agreement that is reduced by commercial paper outstanding. Effective July 14, 1997, the Company's credit line under this agreement was increased from $150 million to $180 million. At September 27, 1997, $56.1 million was available under the bank credit agreement as a result of $123.9 million in outstanding borrowings. In addition, the Company had unsecured demand facilities with three banks totaling $84.7 million, $20 million of which was outstanding at September 27, 1997. These demand facilities are renegotiated periodically based on the anticipated seasonal needs for short-term financing. Both commercial paper and demand facility borrowings were included in notes payable in the consolidated balance sheet. 10 Management believes that cash expected to be generated from operating activities, together with credit available under the bank credit agreement and demand facilities, will be sufficient to fund planned capital expenditures, dividends and any incremental working capital requirements in 1997. SHARE REPURCHASE In July 1997, Jostens' board of directors authorized the repurchase of up to $100 million in shares of the Company's common stock. Under the authorization, shares may be repurchased periodically in the open market and through privately negotiated transactions. The repurchase is to be funded from the Company's cash and short-term investment balance, as well as short-term borrowings. As of September 27, 1997, the Company had repurchased $9 million in common shares. CAPITAL EXPENDITURES, PRODUCT DEVELOPMENT AND ACQUISITION Year-to-date capital expenditures through September 27, 1997, were $14.3 million, approximately $4 million higher than the comparable period in 1996. The increase was primarily the result of continued upgrades to manufacturing technology and the replacement of School Products, Recognition and corporate management information systems. In April 1997, the Company entered into an agreement to purchase the Gold Lance class ring brand from Town & Country Corporation for $10.8 million in cash, subject to adjustment. Under the terms of the agreement, Jostens purchased the Gold Lance name along with its accounts and notes receivable and tooling. Town & Country Corporation continued to manufacture Gold Lance products for its own account through July 31, 1997, at which time the acquisition took effect and manufacturing moved to the Company's facilities. As of September 27, 1997, the Company had paid $8.5 million to Town & Country Corporation under terms of the purchase agreement. The remaining payment of $2.3 million is in dispute and the Company is in discussions with Town & Country Corporation concerning this portion of the purchase price. SALE OF JOSTENS LEARNING CORPORATION In June 1995, Jostens sold its JLC curriculum software subsidiary to a group led by Bain Capital, Inc. for $50 million in cash; a $36 million unsecured, subordinated note maturing in eight years with a stated interest rate of 11 percent; and a separate $4 million note with a stated interest rate of 8.3 percent convertible into 19 percent of the equity of Jostens Learning, subject to dilution in certain events. The notes were recorded at fair value, using an estimated 20 percent discount rate on the $36 million note, resulting in a discount of $9.9 million. As part of the JLC sale, Jostens also agreed to pay $13 million over two years to fund certain JLC existing liabilities. As of June 28, 1997, the entire $13 million has been paid. In October 1995, the Company sold its Wicat Systems business to Wicat Acquisition Corp., a private investment group. Wicat Systems was the small, computer-based aviation training subsidiary of JLC that was retained in the sale of JLC but held for sale. The Company received $1.5 million in cash plus a promissory note for approximately $150,000 from the sale. The Company treated Wicat Systems as a discontinued operation in June 1995, pending the sale of the business. A transaction gain of $11.1 million ($5.8 million after tax) was originally recorded at the time of the JLC sale and deferred in accordance with the Securities and Exchange Commission Staff Accounting Bulletin No. 81, Gain Recognition on the Sale of a Business or Operating Assets to a Highly Leveraged Entity. In October 1995, the deferred gain increased to $17.2 million ($9.7 million after tax) as a result of the sale of Wicat ($5.3 million) and some accrual settlements ($800,000). 11 In conjunction with its efforts to raise additional equity capital for ongoing cash requirements, JLC requested that the Company restructure its interests in JLC. In November 1996, the Company restructured terms of its $36 million, unsecured, subordinated note from JLC in conjunction with a third-party equity infusion into JLC. Terms of the restructuring resulted in the exchange of the $36 million unsecured, subordinated note and accrued interest for a new $57.2 million unsecured, subordinated note maturing June 29, 2003, with a stated interest rate of 6 percent and rights to early redemption discounts. The early redemption discounts, exercisable only in whole at JLC's option, adjust periodically and range from a 65 percent discount on the face value if redeemed by December 27, 1997, to 40 percent if redeemed by March 31, 2003. The new note was recorded at fair value using an estimated 20 percent discount rate on the $57.2 million note, resulting in a discount of $35.1 million. The restructuring had no impact on the net carrying value of Jostens' investment in JLC, since the $4 million reduction in the note receivable's carrying value was offset by a corresponding reduction in the deferred gain to $13.2 million ($7.3 million after tax). The adjusted $13.2 million gain and interest on the notes receivable will be deferred until cash flows from the operating activities of JLC are sufficient to fund debt service, dividend or any other covenant requirements. The deferred gain is presented in the condensed consolidated balance sheet as an offset to notes receivable. The notes receivable balance represents amounts owed by JLC related to the sale of JLC net of a $35.1 million discount and the deferred gain. Despite the equity infusion and restructuring of Jostens' interests in JLC, there is no guarantee that JLC will be able to repay the note. JLC incurred losses in both 1996 and 1995; however, the Company believes that such carrying value is not impaired based on current facts and circumstances. FISCAL YEAR In October 1996, the Company elected to change its fiscal year end from June 30 to the Saturday closest to December 31 effective December 29, 1996, to enable better planning and internal management of its businesses. A six-month transition period of July 1, 1996, through December 28, 1996, preceded the start of this new fiscal year. These financial statements reflect the results of the first nine months of the 1997 calendar year. COMMITMENTS AND CONTINGENCIES Environmental. As part of its continuing environmental management program, Jostens is involved in various environmental improvement activities. As sites are identified and assessed in this program, the Company determines potential environmental liability. Factors considered in assessing this liability include, among others, the following: whether the Company has been designated as a potentially responsible party, the number of other potentially responsible parties designated at the site, the stage of the proceedings and available environmental technology. As of September 27, 1997, the Company has identified three sites requiring further investigation. However, the Company has not been designated as a potentially responsible party at any site. During the six-month period ending December 28, 1996, the Company adopted the provisions of Statement of Position (SOP) 96-1, Environmental Remediation Liabilities. Under SOP 96-1, the Company is required to assess the likelihood that an environmental liability has been incurred and to accrue for the best estimate of any loss where the likelihood of incurrence is assessed as probable and the amount can be reasonably estimated. Management has assessed the likelihood that a loss has been incurred at its sites as probable and, based on findings included in a preliminary remediation report received in January 1997, estimates the potential loss to range from $1.7 million to $9.7 million. Based on a review of the remediation alternatives outlined in the report, management believes that the best estimate of the loss is $6.6 million. The Company recorded a charge to operations of $6 million during the six months ended December 28, 1996, to increase the liability for environmental costs to the revised best estimate amount contained in the preliminary remediation report. As of September 27, 1997, payments of $735,000 had been applied against the reserve. The 12 current portion of the reserve ($565,000) was included with "other liabilities" on the consolidated balance sheet, while the long-term portion ($5.3 million) was included with "other non-current liabilities." While Jostens may have a right of contribution or reimbursement under insurance policies, amounts that may be recoverable from other entities by the Company with respect to a particular site are not considered until recoveries are deemed to be probable. No assets for potential recoveries were established as of September 27, 1997. Sales Force. For sales representatives who serve the college market, the Company changed their contract status from independent sales representatives to Company employees effective July 1, 1997. As of July 1, all college sales positions were filled either with incumbents or new sales professionals. The change from independent representatives to Company employees was made to better enable the Company to address market needs and over time strengthen its position in the market. These representatives' previous contracts called for a transition commission, which historically had been paid by the new sales representatives who assumed responsibility for the accounts of the outgoing representative, with the Company acting as a collection agent. In anticipation of this change, the Company communicated offers of employment in April 1997 and notified sales representatives serving the college market that their independent contracts would not be renewed when they expired on June 30, 1997. College sales representatives who elected to become Jostens employees forfeited their right to the transition commission in exchange for participation in a newly created severance plan as well as other employee benefit programs. As a result, the Company will recognize approximately $4.2 million of severance plan costs ratably over these representatives' estimated average remaining service period of five years. During the 1997 third quarter, the Company recognized $200,000 of these severance costs. Representatives who elected not to become employees will receive estimated future transition payments from the Company of $5.2 million in exchange for helping to transition and retain existing business and for signing agreements not to compete. These costs will be recognized as a charge to operations ratably over the individual non-compete periods, generally three years. The 1997 third-quarter costs associated with nonemployee representatives was $300,000. Management expects payments in future years relating to the severance plan and transition payments to be partially offset by reduced operating costs. Additionally, management believes that this change in contractual relationship will have positive business results and the associated liabilities will not have a material negative impact during future operating periods. In addition, the Company in the second quarter communicated contractual changes and policy clarifications to the approximately 350 independent sales representatives who serve the high school Jewelry and Graduation Products markets. The changes and clarifications, which took effect July 1 and do not affect the reps' independent status, are intended to better align the interests of the sales force with the Company's interest. PLANT CONSOLIDATION In March 1997, the Company announced the closing of its Porterville, Calif., graduation announcement facility, with plans to transfer all operations to the Company's announcement plant in Shelbyville, Tenn., by October 1997. As a result, the Company recorded a pre-tax charge to operations of $3 million in the first quarter of 1997, primarily to accrue for severance and other employee- related costs, generally expected to be incurred over the following 12 months. As of September 27, 1997, the accrual decreased by $2.3 million due to incurred costs of $1.5 million and a revision to the initial estimate of $750,000 recorded in the second quarter. 13 PART II. OTHER INFORMATION Item 6. Exhibits and reports on Form 8-K (a) Exhibit 27 Financial Data Schedule (b) Reports on Form 8-K: No reports on Form 8-K were filed during the quarter for which this report is filed. 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. JOSTENS, INC. Date November 12, 1997 /s/ Robert C. Buhrmaster --------------------------- ------------------------------------- Robert C. Buhrmaster President and Chief Executive Officer /s/ William N. Priesmeyer ------------------------------------------ William N. Priesmeyer Senior Vice President and Chief Financial Officer 14 EX-27 2 FINANCIAL DATA SCHEDULE
5 This schedule contains summary financial information extracted from Jostens, Inc. condensed consolidated financial statements as of and for the nine month period ended September 27, 1997, and is qualified in its entirety by reference to such financial statements. 1,000 9-MOS JAN-03-1998 DEC-29-1996 SEP-27-1997 0 0 115,752 (6,676) 88,051 239,506 224,887 (154,998) 377,835 228,010 3,589 0 0 12,947 118,049 377,835 556,832 556,832 274,095 274,095 206,901 1,255 4,498 71,338 29,248 42,090 0 0 0 42,090 1.08 1.08
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