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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
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JOSTENS, INC.
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(Exact name of registrant as specified in its charter)
Minnesota 41-0343440
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(State or other jurisdiction of (I.R.S. Employer Identification Number)
incorporation or organization)
5501 Norman Center Drive, Minneapolis, Minnesota 55437
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(Address of principal executive offices) (Zip Code)
612-830-3300
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(Registrant's telephone number including area code)
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(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.
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JOSTENS, INC.
INDEX
Part I. Financial Information
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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
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Item 6. Exhibits and Reports on Form 8-K
Signatures
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JOSTENS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except per-share data)
<TABLE>
<CAPTION>
(Unaudited)
----------------------------
September 27, September 30, December 28,
1997 1996 1996
------------ ------------ ------------
<S> <C> <C> <C>
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
========== ========== ==========
</TABLE>
See notes to condensed consolidated financial statements
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JOSTENS, INC. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per-share data)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
---------------------------- -----------------------------
September 27, September 30, September 27, September 30,
1997 1996 1997 1996
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
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
============ ============ ============ ============
</TABLE>
See notes to condensed consolidated financial statements
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JOSTENS, INC. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Nine Months Ended
----------------------------
September 27, September 30,
1997 1996
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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
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INVESTING ACTIVITIES
Capital expenditures (14,325) (10,265)
Business acquisition (8,500) -
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(22,825) (10,265)
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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 -
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22,468 (1,817)
------------ ------------
Increase in cash and short-term
investments $ - $ 437
============ ============
See notes to condensed consolidated financial statements
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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
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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.
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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.
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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 $16.9 million
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($.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.
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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).
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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
<PAGE>
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
<PAGE>
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
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
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.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JAN-03-1998
<PERIOD-START> DEC-29-1996
<PERIOD-END> SEP-27-1997
<CASH> 0
<SECURITIES> 0
<RECEIVABLES> 115,752
<ALLOWANCES> (6,676)
<INVENTORY> 88,051
<CURRENT-ASSETS> 239,506
<PP&E> 224,887
<DEPRECIATION> (154,998)
<TOTAL-ASSETS> 377,835
<CURRENT-LIABILITIES> 228,010
<BONDS> 3,589
0
0
<COMMON> 12,947
<OTHER-SE> 118,049
<TOTAL-LIABILITY-AND-EQUITY> 377,835
<SALES> 556,832
<TOTAL-REVENUES> 556,832
<CGS> 274,095
<TOTAL-COSTS> 274,095
<OTHER-EXPENSES> 206,901
<LOSS-PROVISION> 1,255
<INTEREST-EXPENSE> 4,498
<INCOME-PRETAX> 71,338
<INCOME-TAX> 29,248
<INCOME-CONTINUING> 42,090
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 42,090
<EPS-PRIMARY> 1.08
<EPS-DILUTED> 1.08
</TABLE>
