<PAGE>
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 OCTOBER 3, 1998
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 9, 1998 was 35,337,585.
<PAGE>
JOSTENS, INC.
Part I. Financial Information Page
- - ------- --------------------- ----
Item 1. Financial Statements (Unaudited):
Condensed Consolidated Balance Sheets as of October 3, 1998,
September 27, 1997, and January 3, 1998 3
Condensed Consolidated Statements of Operations for the Three
and Nine Months Ended October 3, 1998, and September 27, 1997 4
Condensed Consolidated Statements of Cash Flows for the Nine
Months Ended October 3, 1998, and September 27, 1997 5
Notes to Condensed Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations 9
Part II. Other Information
- - -------- -----------------
Item 1. Legal Proceedings 15
Item 5. Other Information 15
Item 6. Exhibits and Reports on Form 8-K 15
Signatures 16
2
<PAGE>
JOSTENS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except per share data)
<TABLE>
<CAPTION>
(Unaudited)
--------------------------
October 3, September 27, January 3,
1998 1997 1998
---------- ------------- ----------
<S> <C> <C> <C>
CURRENT ASSETS:
Short-term investments $ 3,746 $ 3,240 $ 6,068
Accounts receivable, net 107,269 109,076 108,697
Inventories:
Finished products 33,012 36,010 38,122
Work-in-process 19,802 22,106 29,388
Materials and supplies 32,105 29,935 24,552
--------- --------- ---------
84,919 88,051 92,062
Deferred income taxes 15,543 14,928 15,543
Other receivables, net 19,711 24,617 25,495
Prepaid expenses and other current assets 3,990 9,878 4,679
--------- --------- ---------
Total current assets 235,178 249,790 252,544
OTHER ASSETS:
Intangibles, net 28,903 31,121 30,749
Note receivable, net 12,925 12,925 12,925
Deferred income taxes 7,743 4,349 7,743
Other 13,970 13,001 12,631
--------- --------- ---------
63,541 61,396 64,048
PROPERTY AND EQUIPMENT 257,261 224,887 231,747
Accumulated depreciation and amortization (172,956) (154,998) (157,609)
--------- --------- ---------
84,305 69,889 74,138
--------- --------- ---------
$ 383,024 $ 381,075 $ 390,730
========= ========= =========
CURRENT LIABILITIES:
Notes payable 178,326 139,681 49,974
Accounts payable 19,457 22,082 30,553
Salaries, wages and commissions 32,018 23,165 38,668
Customer deposits 28,727 25,187 98,659
Income taxes 12,765 10,015 11,098
Other accrued liabilities 22,049 11,120 17,281
--------- --------- ---------
Total current liabilities 293,342 231,250 246,233
OTHER NON-CURRENT LIABILITIES 15,072 18,829 17,404
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 - 35,397, 38,842
and 38,422 shares, respectively 11,799 12,947 12,853
Capital surplus - 3,659 -
Retained earnings 69,379 118,079 119,378
Accumulated other comprehensive income (6,568) (3,689) (5,138)
--------- --------- ---------
74,610 130,996 127,093
--------- --------- ---------
$ 383,024 $ 381,075 $ 390,730
========= ========= =========
</TABLE>
See notes to condensed consolidated financial statements
3
<PAGE>
JOSTENS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
------------------------- -------------------------
October 3, September 27, October 3, September 27,
1998 1997 1998 1997
------------------------- --------- -------------
<S> <C> <C> <C> <C>
Net sales $ 127,009 $ 109,079 $594,165 $ 556,832
Cost of products sold 70,470 63,408 281,702 274,095
--------- --------- -------- ---------
Gross profit 56,539 45,671 312,463 282,737
Selling and administrative expenses 66,659 54,804 238,927 206,901
--------- --------- -------- ---------
Operating income (loss) (10,120) (9,133) 73,536 75,836
Net interest expense (1,943) (1,354) (4,565) (4,498)
--------- --------- -------- ---------
Income before income taxes (12,063) (10,487) 68,971 71,338
Income tax (benefit) expense (4,885) (4,300) 28,021 29,248
--------- --------- -------- ---------
Net income (loss) $ (7,178) $ (6,187) $ 40,950 $ 42,090
========= ========= ======== =========
Basic earnings (loss) per common share $ (0.20) $ (0.16) $ 1.11 $ 1.08
========= ========= ======== =========
Shares used to compute basic per share amounts 36,213 38,975 36,970 38,829
========= ========= ======== =========
Diluted earnings (loss) per common share $ (0.20) $ (0.16) $ 1.10 $ 1.08
========= ========= ======== =========
Shares used to compute diluted per share amounts 36,213 38,975 37,159 39,046
========= ========= ======== =========
Dividends declared per common share $ 0.22 $ 0.22 $ 0.66 $ 0.66
========= ========= ======== =========
</TABLE>
See notes to condensed consolidated financial statements
4
<PAGE>
JOSTENS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
-----------------------------
October 3, September 27,
1998 1997
---------- -------------
<S> <C> <C>
OPERATING ACTIVITIES
Net income $ 40,950 $ 42,090
Depreciation and amortization 18,057 15,875
Changes in assets and liabilities (69,834) (59,556)
Other 799 -
-------- --------
Net cash used in operating activities (10,028) (1,591)
-------- --------
INVESTING ACTIVITIES
Capital expenditures (27,844) (14,325)
Business acquisition - (8,500)
-------- --------
Net cash used in investing activities (27,844) (22,825)
-------- --------
FINANCING ACTIVITIES
Short-term borrowings 128,352 48,769
Cash dividends (24,582) (25,698)
Stock options 1,649 11,150
Share repurchases (69,869) (8,962)
Other - (242)
-------- --------
Net cash provided by financing activities 35,550 25,017
-------- --------
Increase (decrease) in short-term investments $ (2,322) $ 601
======== ========
</TABLE>
See notes to condensed consolidated financial statements
5
<PAGE>
JOSTENS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
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.
Certain balances on the condensed consolidated balance sheet as of September 27,
1997, and condensed consolidated statement of cash flows for the period ended
September 27, 1997, have been reclassified to conform to the October 3, 1998,
presentation.
Because of the seasonal nature of the Company's business, the results of
operations for the nine months ended October 3, 1998, are not necessarily
indicative of the results for the entire year ending January 2, 1999.
For further information, refer to the consolidated financial statements and
footnotes in the Company's Form 10-K for the year ended January 3, 1998.
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
Basic earnings per share are computed by dividing net income by the weighted
average number of common shares outstanding. Diluted earnings (loss) per share
are computed by dividing net income (loss) by the average number of common
shares outstanding, including the dilutive effects of options, restricted stock
and contingently issuable shares. Unless otherwise noted, references are to
diluted earnings (loss) per share. The following table sets forth the
computation of basic and diluted earnings per share for the nine-month periods:
6
<PAGE>
<TABLE>
<CAPTION>
Nine months ended October 3, 1998 Nine months ended September 27, 1997
---------------------------------- ------------------------------------
Per share Per share
(In thousands, except per share data) Income Shares amount Income Shares amount
------- ------ --------- ------- ------ ---------
<S> <C> <C> <C> <C> <C> <C>
Basic EPS
Net income $40,950 36,970 $ 1.11 $42,090 38,829 $ 1.08
- - -------------------------------------------------------------------------------------------------------------------
Effect of dilutive securities
Options 138 201
Awards 51 16
- - -------------------------------------------------------------------------------------------------------------------
Diluted EPS
Net income $40,950 37,159 $ 1.10 $42,090 39,046 $ 1.08
===================================================================================================================
</TABLE>
The computation of basic and diluted earnings (loss) per share for the three
months ended October 3, 1998, and September 27, 1997, are the same since there
are no dilutive securities from these periods.
COMPREHENSIVE INCOME
As of January 4, 1998, the Company adopted SFAS No. 130, Reporting Comprehensive
Income. SFAS 130 establishes new rules for the reporting and display of
comprehensive income and its components; however, this statement has no impact
on the Company's net income or shareholders' investment. SFAS 130 requires
minimum pension liability adjustments and foreign currency translation
adjustments, which prior to adoption were reported separately in shareholders'
investment, to be included in other comprehensive income. Prior year financial
statements have been reclassified to conform to the requirements of SFAS 130.
For the third quarter of 1998 and 1997, total comprehensive loss was ($8,051)
and ($6,187), respectively. For the nine months ended October 3, 1998, and
September 27, 1997, total comprehensive income was $39,520 and $41,843,
respectively.
DIVIDENDS
Dividends of 22 cents per share were declared and paid in the third quarter in
both 1998 and 1997.
In addition, on October 22, 1998, the Company's Board of Directors declared a
dividend of 22 cents per share that will be paid December 1, 1998.
7
<PAGE>
COMMITMENTS AND CONTINGENCIES
Litigation. Taylor Publishing Company filed a civil suit against Jostens on
January 14, 1997, in U.S. District Court for the Eastern District of Texas. In
the suit, Taylor alleged that Jostens violated federal antitrust laws with
respect to the yearbook publishing market, interfered with Taylor's sales
representatives and improperly sought trade secrets. Taylor, citing the loss of
school accounts over the previous four years, argued that such loss of business
resulted directly from Jostens' attempt to monopolize the yearbook business. On
June 15, 1998, a judgment was entered following a jury verdict that awarded
Taylor $25.25 million on the antitrust claims, including attorneys' fees.
Post-trial motions have been filed and are pending before the court. The Company
intends to vigorously pursue reversal of the decision and is, therefore, unable
to estimate the potential loss, if any. Accordingly, no amount was accrued as of
October 3, 1998.
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 October 3, 1998, the Company had identified
three sites requiring further investigation.
Management has assessed the likelihood that a loss has been incurred at these
sites as probable and, based on findings included in remediation reports,
estimates the potential loss to range from $1 million to $9 million; $6.6
million was accrued in December 1996. As of October 3, 1998, the Company made
payments of $2.1 million, bringing the reserve balance to $4.5 million. The
current portion of the reserve ($1.9 million) is included with "other accrued
liabilities" on the condensed consolidated balance sheets, while the long-term
portion ($2.6 million) is 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
probable. No assets for potential recoveries were established as of October 3,
1998.
PLANT CONSOLIDATION
In April 1998, the Company, as part of an effort to improve the Photography
product line, announced the closing of its Webster, N.Y., photo processing
facility and the transfer of all operations to the Company's photo processing
plant in Winnipeg, Manitoba. As a result, the Company recorded a charge to
operations of $2.5 million in the second quarter of 1998, primarily for
severance and other employee-related costs. The Webster facility was closed in
August 1998, and as of October 3, 1998, the consolidation was complete and the
remaining unpaid portion of the charge was $952,000.
8
<PAGE>
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," "expects," "will continue," "anticipates," "believe," "estimate,"
"projected," or similar expressions are intended to identify forward-looking
statements. 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 forward-looking statements speak only as of the date on which the statements
are made. 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
(SEC).
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 Company's ability to respond to customer change
orders and delivery schedules; competitive pricing and program changes; ability
to manufacture quality products and continued success improving operating
efficiencies; the impact of year-2000 compliance on computer-based systems of
the Company and its external relationships; and the costs and impact of the
Company's information systems implementations.
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 October 3, 1998, were $127 million
and $594.2 million, respectively, representing increases of 16.4 percent and 6.7
percent over the comparable prior-year periods. Sales in the third quarter
increased from year-earlier levels in each of the Company's product lines. Some
of the improvement resulted from earlier product shipments due to shorter cycle
times, particularly in the Photography and Jewelry product lines. In addition,
the three- and nine-month sales improvement was driven by increased consumer
demand in the Company's three largest product lines -- Printing & Publishing,
Jewelry and Graduation Products. The Company expects full-year 1998 sales to
increase by about 4 to 6 percent from 1997.
9
<PAGE>
The cost of products sold was $70.5 million and $281.7 million, respectively,
for the three and nine months ended October 3, 1998. Costs as a percentage of
sales for the three- and nine-month periods were 55.5 percent and 47.4 percent,
compared with 58.1 percent and 49.2 percent in the same periods last year. The
decrease was primarily the result of manufacturing efficiency initiatives. In
the third quarter, those initiatives included completing the consolidation of
Photography processing to one facility serving the North America market. Cost
savings were offset by investments in preventative steps to assure a successful
fall Jewelry manufacturing season as we approach peak production. The Company
expects to reduce costs as a percentage of sales by about one point in 1998
versus 1997.
Selling and administrative expenses were $66.7 million and $238.9 million,
respectively, for the three- and nine-month periods ended October 3, 1998. As a
percentage of sales, selling and administrative expenses for the three- and
nine-month periods were 52.5 percent and 40.2 percent, compared with 50.2
percent and 37.2 percent in the same periods last year. The increase in
third-quarter and year-to-date selling and administrative expenses were
primarily the result of investment in information systems and expensed year-2000
readiness costs. Selling and administrative expenses also increased over the
prior-year three- and nine-month periods due to spending for consumer research
and future marketing programs. Selling and administrative expenses are expected
to be higher in 1998 versus 1997.
Net interest expense for the three and nine months ended October 3, 1998, was
$1.9 million and $4.6 million, respectively, compared with $1.4 million and $4.5
million in the prior-year periods. The increase in net interest expense
corresponds with the increase in average borrowings under the Company's notes
payable and commercial paper program, primarily related to seasonal funding and
the Company's share repurchase program.
Net income was lower in the third quarter and year-to-date when compared to
prior-year performance. However, earnings per share improved as a result of the
Company's decision to accelerate its share repurchase program.
LIQUIDITY AND CAPITAL RESOURCES
Cash generated from short-term borrowings was Jostens' principal source of cash
during the nine months ended October 3, 1998. Cash generated from this activity
was used primarily for share repurchases, dividends, and capital expenditures.
Operating activities used cash of $10 million for the nine months ended October
3, 1998, primarily due to the seasonality of the business. Comparing the nine
months ended October 3, 1998, with the nine months ended September 27, 1997, the
Company generated $8.4 million less cash from operating activities primarily due
to a change in timing of customer deposit collections resulting from a new
payment plan implemented in 1997 for the Printing and Publishing product lines.
10
<PAGE>
Because most sales volume occurs in the second and fourth quarters, 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. The Company has a $180 million,
five-year bank agreement that expires in December 2000. At October 3, 1998,
$21.7 million was available under the bank credit agreement as a result of
$158.3 million in outstanding commercial paper. In addition, the Company had
unsecured demand facilities with three banks totaling $54.2 million, $20 million
of which was outstanding at October 3, 1998. These demand facilities are
renegotiated periodically based on the anticipated seasonal needs for short-term
financing. Commercial paper borrowings and outstanding unsecured demand
facilities were included in notes payable in the condensed consolidated balance
sheet.
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,
share repurchases, dividends and any incremental working capital requirements
for the remainder of 1998.
In July 1997, the 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 being funded from the Company's cash
and short-term investment balance, as well as short-term borrowings. As of
October 3, 1998, the Company had repurchased $90.2 million or 4 million common
shares, including $35.2 million or 1.6 million shares and $69.9 million or 3.1
million shares for the three and nine months ended October 3, 1998.
Capital expenditures for the nine months ended October 3, 1998, were $27.8
million, approximately $13.5 million higher than the comparable period in 1997.
The increase resulted primarily from costs incurred to replace company-wide
information systems and to improve manufacturing efficiency.
YEAR 2000
The Company has developed programs to address the possible exposures related to
the impact on its computer systems of the Year 2000. Key financial, information
and operational systems, including equipment with embedded microprocessors, have
been inventoried and assessed, and detailed programs are in place for the
required systems modifications or replacements. Progress against these programs
is monitored and reported to management and to the Audit Committee of the Board
of Directors on a regular basis. Both internal and external resources are being
utilized to implement the programs. Systems that will not be replaced before the
Year 2000 are being modified to achieve Year 2000 functionality. The total Year
2000 program cost is estimated at approximately $50 million, which includes $35
million to purchase and implement new software that will be capitalized as part
of the company-wide systems replacement program and $15 million that will be
expensed as incurred. The estimated program cost includes internal allocated
expenses such as salary and benefits, contractor fees, and travel expenses. As
of October 3, 1998, the Company had incurred approximately $30.8 million ($22.1
million capitalized) of which $23.8 million ($16.5 million capitalized) occurred
in the nine months ending October 3, 1998.
11
<PAGE>
The Company has divided its Year 2000 program into eight planks. The planks
cover the following areas: 1) mainframe infrastructure, 2) central legacy
applications, 3) shared technical infrastructure, 4) distributed systems and
manufacturing technology by business unit, 5) distributed systems and
manufacturing technology by plant, 6) external agents, 7) legal and audit and 8)
conversions to new software systems. Each plank is separated into three
categories based on the potential impact on the Company's operations: mission
critical, high impact and low impact. Mission critical inventory items are those
items where loss or interruption of functionality, support or delivery would
have a catastrophic impact on the Company's customers, operations or earnings.
High impact inventory items are those items where loss or interruption of
functionality, support or delivery would have a serious impact on internal
productivity with minor impact to the Company's customers. Low impact inventory
items are those items where loss or interruption of functionality, support or
delivery would have a nominal impact on internal productivity with no impact to
the Company's customers. Inventory items refer to computer hardware, software,
embedded equipment, machinery, and devices; and external suppliers of products
and services.
Most mission critical activities are scheduled to be complete by March 1999, the
major exceptions being one project to upgrade the Oracle-based software
currently being used in the Company's cap & gown manufacturing facility which
will be complete in the third quarter of 1999 and another project to remediate a
legacy system used to support one product line in the Recognition business which
is scheduled to be complete in the second quarter of 1999. All mission critical
activities will be subject to ongoing integration testing in the Company's
internal systems throughout 1999. For external agents, the testing phase
commencing after the scheduled completion in March 1999 will consist primarily
of confirming the third parties' readiness and the Company's alternatives for
ensuring continuity of products and services provided by them. As of October 29,
1998, the current completion status of the mission critical planks are as
follows:
<TABLE>
<CAPTION>
Percent Year 2000
Compliant
--------------------------
Actual Estimated
Plank October 29, March 31,
1998 1999
- - ----------------------------------------------------------------------------------------------------
<S> <C> <C>
1. Mainframe infrastructure 87% 100%
2. Central legacy applications 67% 100%
3. Shared technical infrastructure 89% 100%
4. Distributed systems and manufacturing technology, by business unit 80% 90%
5. Distributed systems and manufacturing technology, by plant 62% 90%
6. External agents 43% 100%
7. Legal and audit 64% 100%
8. Conversions to new software systems 50% 83%
</TABLE>
The Company believes that its modifications to existing software and conversions
to new software for mission critical activities are sufficiently on schedule so
that the Year 2000 issue will not pose significant operational problems.
Activities on all high and low impact categories are scheduled to occur from
January 1999 through September 1999 for high impact activities and through June
2000 for low impact activities. Some progress has already been made on certain
of these less critical needs as efficiencies permit work on these in
conjunction with work on mission critical activities. The current completion
status of the planks for these activities ranges from 9% to 60% as of October
29, 1998.
12
<PAGE>
As part of the External Agents plank, the Company is in contact with suppliers
and customers to assess the potential impact on operations if key third parties
are not successful in converting their systems in a timely manner. Risk
assessment, readiness evaluation, action plans and contingency plans related to
these third parties are expected to be complete by March 1999.
The Company has begun, but not yet completed, a comprehensive analysis of and
contingency planning process for the operational problems and costs (including
the loss of revenues) that would most likely result from a failure by the
Company or certain third parties to achieve Year 2000 compliance on a timely
basis. Although the Company has not yet identified the most likely worst case
scenario, the risk to the Company would primarily be delivery delays to
customers with events or graduations scheduled in January 2000. Because most of
the Company's sales volume occurs in the second and fourth quarters, the Company
believes that it will have sufficient time to recover, although some delayed
deliveries may result in cancellations of orders or customer refunds.
The Company has not yet developed contingency plans to protect the business from
Year 2000 related interruptions and anticipates developing contingency plans in
the later stages of the project. The Company anticipates these plans will be
complete for all mission critical activities that are not fully remediated and
tested by June 1999.
The costs of the program and the dates when the Company believes it will
complete the Year 2000 modifications are based on management's best estimates.
Estimates were derived utilizing numerous assumptions of future events,
including the continued availability of certain resources and other factors.
There can be no guarantee that the Company will achieve these estimates, and
actual results could differ materially from those anticipated. Specific factors
that might cause such material differences include, but are not limited to, the
availability and cost of personnel trained in this area, the ability to locate
and correct all relevant computer codes, the impact of Year 2000 compliance on
computer based systems of the Company's external relationships and similar
uncertainties.
SALE OF JOSTENS LEARNING CORPORATION (JLC)
In June 1995, Jostens sold its JLC curriculum software subsidiary 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.
In October 1995, the Company sold its Wicat Systems business. 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.
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 SEC
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
Wicat sale.
13
<PAGE>
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 30, 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 60 percent discount on the face value if redeemed
by December 31, 1998, 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 sheets 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 the first three quarters of 1998 and all of fiscal years 1997, 1996,
and 1995; however, the Company believes that such carrying value is not impaired
based on current facts and circumstances.
PLANT CONSOLIDATION
In April 1998, the Company, as part of an effort to improve the Photography
product line, announced the closing of its Webster, N.Y., photo processing
facility and the transfer of all operations to the Company's photo processing
plant in Winnipeg, Manitoba. As a result, the Company recorded a charge to
operations of $2.5 million in the second quarter of 1998, primarily for
severance and other employee-related costs. The Webster facility was closed in
August 1998, and as of October 3, 1998, the consolidation was complete and the
remaining unpaid portion of the charge was $952,000.
14
<PAGE>
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Taylor Publishing Company filed a civil suit against Jostens on
January 14, 1997, in the U.S. District Court for the Eastern District
of Texas. In the suit, Taylor alleged that Jostens violated federal
antitrust laws with the respect to the yearbook publishing market,
interfered with Taylor's sales representatives and improperly sought
trade secrets. Taylor, citing the loss of school accounts over the
previous four years, argued that such loss of business resulted
directly from Jostens' attempt to monopolize the yearbook business. On
June 15, 1998, a judgment was entered following a jury verdict that
awarded Taylor $25.25 million on the antitrust claims, including
attorneys' fees. Post-trial motions have been filed and are pending
before the court. The Company intends to vigorously pursue reversal of
the decision through the post-trial and appellate processes.
There are no other material pending or threatened legal, governmental,
administrative or other proceedings to which the Company or any other
subsidiary as a defendant or plaintiff is subject.
Item 5. Other Information
The SEC has amended Rule 14a-4, which governs the use by the Company
of its discretionary voting authority with respect to certain
shareholder proposals. Pursuant to this amendment, the Company's proxy
card for its 1999 Annual Meeting of shareholders may confer
discretionary authority on any matter as to which the Company does not
receive notice by February 1, 1999.
Item 6. Exhibits and reports on Form 8-K
(a) Exhibit 27 Financial Data Schedule
(b) Reports on Form 8-K:
A report on Form 8-K, dated July 23, 1998, was filed during the
third quarter of the year ended January 2, 1999. The report was
filed under Item 5 and Item 7 of Form 8-K, describing the
Company's new shareholder rights plan which replaced the plan
expiring in August, 1998. In addition, the Form 8-K describes the
dividend declared as part of the new plan.
15
<PAGE>
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 17, 1998 /s/ Robert C. Buhrmaster
----------------- ------------------------------
Robert C. Buhrmaster
Chairman, President and Chief Executive
Officer
/s/ William N. Priesmeyer
------------------------------
William N. Priesmeyer
Senior Vice President and Chief Financial
Officer
16
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<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM JOSTENS INC.
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-02-1999
<PERIOD-START> JAN-04-1998
<PERIOD-END> OCT-03-1998
<CASH> 0
<SECURITIES> 3,746
<RECEIVABLES> 115,240
<ALLOWANCES> (7,971)
<INVENTORY> 84,919
<CURRENT-ASSETS> 235,178
<PP&E> 257,261
<DEPRECIATION> (172,956)
<TOTAL-ASSETS> 383,024
<CURRENT-LIABILITIES> 293,342
<BONDS> 3,600
0
0
<COMMON> 11,799
<OTHER-SE> 62,811
<TOTAL-LIABILITY-AND-EQUITY> 383,024
<SALES> 594,165
<TOTAL-REVENUES> 594,165
<CGS> 281,702
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<OTHER-EXPENSES> 238,927
<LOSS-PROVISION> 1,893
<INTEREST-EXPENSE> 4,565
<INCOME-PRETAX> 68,971
<INCOME-TAX> 28,021
<INCOME-CONTINUING> 40,950
<DISCONTINUED> 0
<EXTRAORDINARY> 0
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<NET-INCOME> 40,950
<EPS-PRIMARY> 1.11
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