<PAGE>
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended July 1, 2000
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission file number 1-5064
Jostens, Inc.
--------------------------------------------------------------------------------
(Exact name of Registrant as specified in its charter)
<TABLE>
<S> <C>
Minnesota 41-0343440
---------------------------------------------------------------- ------------------------------------------
(State or other jurisdiction of incorporation or organization) (I.R.S. Employer Identification number)
5501 Norman Center Drive, Minneapolis, Minnesota 55437
---------------------------------------------------------------- ------------------------------------------
(Address of principal executive offices) (Zip code)
</TABLE>
Registrant's telephone number, including area code: (952) 830-3300
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [_]
On August 15, 2000 there were 8,993,297 shares of the Registrant's common stock
outstanding.
<PAGE>
JOSTENS, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
Part I Financial Information Page
---------------------------- ----
<S> <C>
Item 1. Financial Statements
Condensed Consolidated Statements of Operations for the Three and Six
months ended July 1, 2000 and July 3, 1999 3
Condensed Consolidated Balance Sheets as of July 1, 2000, July 3, 1999
and January 1, 2000 4
Condensed Consolidated Statements of Cash Flows for the Six months
ended July 1, 2000 and July 3, 1999 5
Condensed Consolidated Statement of Changes in Shareholders'
Investment (Deficit) for the Six months ended July 1, 2000 6
Notes to Condensed Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations 22
Item 3. Quantitative and Qualitative Disclosures about Market Risk 28
Part II Other Information
-------------------------
Item 1. Legal Proceedings 29
Item 4. Submission of Matters to a Vote of Security Holders 29
Item 6. Exhibits and Reports on Form 8-K 29
Signatures 30
</TABLE>
2
<PAGE>
PART I FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
JOSTENS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
<TABLE>
<CAPTION>
Three months ended Six months ended
---------------------------------- ----------------------------------
July 1 July 3 July 1 July 3
In thousands, except per-share data 2000 1999 2000 1999
------------------------------------------------------------------------------------------- ----------------------------------
<S> <C> <C> <C> <C>
Net sales $ 301,798 $ 303,161 $ 476,387 $ 469,519
Cost of products sold 135,201 140,744 201,787 209,243
------------------------------------------------------------------------------------------- ----------------------------------
Gross profit 166,597 162,417 274,600 260,276
Selling and administrative expenses 93,546 95,334 180,799 178,636
Transaction costs 45,711 -- 45,711 --
------------------------------------------------------------------------------------------- ----------------------------------
Operating income 27,340 67,083 48,090 81,640
Interest income (277) (116) (488) (201)
Interest expense 13,354 1,575 15,292 2,699
------------------------------------------------------------------------------------------- ----------------------------------
Income before income taxes 14,263 65,624 33,286 79,142
Income taxes 18,553 26,578 26,257 32,053
------------------------------------------------------------------------------------------- ----------------------------------
Net income (loss) $ (4,290) $ 39,046 $ 7,029 $ 47,089
Dividends and accretion on redeemable preferred stock 1,243 -- 1,243 --
------------------------------------------------------------------------------------------- ----------------------------------
Net income (loss) available to common shareholders $ (5,533) $ 39,046 $ 5,786 $ 47,089
=========================================================================================== ==================================
Net income (loss) per share available to common shareholders
Basic $ (0.29) $ 1.14 $ 0.23 $ 1.37
Diluted $ (0.29) $ 1.14 $ 0.23 $ 1.36
Weighted average common shares outstanding
Basic 18,880 34,128 25,043 34,488
Diluted 18,880 34,208 25,316 34,590
</TABLE>
The accompanying notes are an integral part of the unaudited condensed
consolidated financial statements.
3
<PAGE>
JOSTENS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
(Unaudited)
------------------------------
July 1 July 3 January 1
In thousands, except per-share data 2000 1999 2000
----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
ASSETS
-------
Current assets
Cash and cash equivalents $ 35,875 $ 8,405 $ 38,517
Accounts receivable, net of allowance for doubtful accounts of $5,535, $6,234
and $5,775, respectively 125,505 129,379 107,638
Inventories 66,319 77,783 87,839
Deferred income taxes 17,400 14,682 17,400
Salespersons overdrafts, net of allowance of $5,301, $7,157 and $6,332, respectively 11,108 11,934 26,194
Prepaid expenses and other current assets 5,592 4,382 8,721
---------------------------------------------------------------------------------------------------------------------------------
Total current assets 261,799 246,565 286,309
Other Assets
Intangibles, net 18,309 27,638 18,895
Deferred financing costs, net 35,606 -- --
Other 25,930 14,163 17,872
---------------------------------------------------------------------------------------------------------------------------------
Total other assets 79,845 41,801 36,767
Property and equipment 278,010 268,654 271,790
Less accumulated depreciation (199,192) (179,583) (187,150)
---------------------------------------------------------------------------------------------------------------------------------
Property and equipment, net 78,818 89,071 84,640
---------------------------------------------------------------------------------------------------------------------------------
$ 420,462 $ 377,437 $ 407,716
=================================================================================================================================
LIABILITIES AND SHAREHOLDERS' INVESTMENT (DEFICIT)
--------------------------------------------------
Current liabilities
Short-term borrowings $ -- $ 93,690 $ 117,608
Accounts payable 18,979 16,002 23,641
Accrued employee compensation and related taxes 25,674 23,160 29,478
Commissions payable 53,410 51,641 26,134
Customer deposits 55,277 53,576 112,958
Income taxes payable 34,617 30,953 17,223
Current portion of long-term debt 5,500 -- --
Other accrued liabilities 36,171 21,092 30,100
---------------------------------------------------------------------------------------------------------------------------------
Total current liabilities 229,628 290,114 357,142
Long-term debt, net of current maturities 694,797 3,600 3,600
Other noncurrent liabilities 8,215 15,698 10,464
---------------------------------------------------------------------------------------------------------------------------------
Total liabilities 932,640 309,412 371,206
Commitments and contingencies -- -- --
Redeemable preferred shares, $.01 par value, liquidation preference $60,000,
issued and outstanding; July 1, 2000 - 60 44,243 -- --
Preferred shares, $.01 par value: authorized 4,000 shares, issued and
outstanding; July 1, 2000 - 60 in the form of redeemable preferred shares
listed above, the remaining 3,940 undesignated
Shareholders' investment (deficit)
Common shares:
Class A, $.33 1/3 par value: authorized 4,200 shares, issued and
outstanding; July 1, 2000 - 2,862; July 3, 1999 - 34,049; January 1,
2000 - 33,324 954 11,350 11,108
Class B, $.01 par value: authorized 5,300 shares, issued and
outstanding; July 1, 2000 - 5,300 53 -- --
Class C, $.01 par value: authorized 2,500 shares, issued and
outstanding; July 1, 2000 - 811 8 -- --
Class D, $.01 par value: authorized 20 shares, issued and
outstanding; July 1, 2000 - 20 -- -- --
Class E, $.01 par value: authorized 1,900 shares, none issued -- -- --
Undesignated, $.01 par value: authorized 12,020 shares, none issued -- -- --
Warrants to purchase common shares 24,733 -- --
Officer notes receivable (2,050) -- --
Retained earnings (accumulated deficit) (573,787) 63,672 31,072
Accumulated other comprehensive loss (6,332) (6,997) (5,670)
---------------------------------------------------------------------------------------------------------------------------------
Total shareholders' investment (deficit) (556,421) 68,025 36,510
---------------------------------------------------------------------------------------------------------------------------------
$ 420,462 $ 377,437 $ 407,716
=================================================================================================================================
</TABLE>
The accompanying notes are an integral part of the
unaudited condensed consolidated financial statements.
4
<PAGE>
JOSTENS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
<TABLE>
<CAPTION>
Six months ended
-------------------------------
July 1 July 3
In thousands 2000 1999
-----------------------------------------------------------------------------------------------
<S> <C> <C>
Operating activities
Net income $ 7,029 $ 47,089
Depreciation 12,684 11,663
Amortization of debt discount and deferred financing costs 1,011 6
Amortization of goodwill 536 1,125
Changes in operating assets and liabilities
Accounts receivable (17,867) (23,032)
Inventories 21,520 12,711
Salespersons overdrafts 15,086 8,755
Prepaid expenses and other current assets 3,129 1,355
Accounts payable (10,294) (2,497)
Accrued employee compensation and related taxes (3,804) (4,400)
Commissions payable 27,276 29,510
Customer deposits (57,681) (38,516)
Income taxes payable 17,394 26,240
Other (2,877) (2,715)
-----------------------------------------------------------------------------------------------
Net cash provided by operating activities 13,142 67,294
-----------------------------------------------------------------------------------------------
Investing activities
Purchases of property and equipment (7,150) (13,339)
Equity investments (1,103) (5,000)
Other 395 654
-----------------------------------------------------------------------------------------------
Net cash used for investing activities (7,858) (17,685)
-----------------------------------------------------------------------------------------------
Financing activities
Net short-term borrowings (repayments) (111,976) (5,415)
Repurchases of common stock (823,630) (25,007)
Principal payments on long-term debt (3,600) ---
Proceeds from issuance of long-term debt 700,139 ---
Proceeds from issuance of common shares 208,693 ---
Net proceeds from the issuance of preferred stock 43,000 ---
Proceeds from the issuance of warrants to purchase common shares 24,733 ---
Dividends paid to common shareholders (7,331) (15,231)
Proceeds from exercise of stock options 555 1,854
Issuance of officer note receivable (2,050) ---
Debt acquisition costs (36,459) ---
-----------------------------------------------------------------------------------------------
Net cash used for financing activities (7,926) (43,799)
-----------------------------------------------------------------------------------------------
Change in cash and cash equivalents (2,642) 5,810
Cash and cash equivalents, beginning of period 38,517 2,595
-----------------------------------------------------------------------------------------------
Cash and cash equivalents, end of period 35,875 $ 8,405
===============================================================================================
Supplemental information
Income taxes paid $ 8,763 $ 4,989
Interest paid $ 6,767 $ 2,976
</TABLE>
The accompanying notes are an integral part of the
unaudited condensed consolidated financial statements.
5
<PAGE>
JOSTENS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF CHANGES
IN SHAREHOLDERS' INVESTMENT (DEFICIT)
FOR THE SIX MONTHS ENDED JULY 1, 2000 (UNAUDITED)
<TABLE>
<CAPTION>
Warrants to Retained Accumulated
Common shares purchase Officer earnings other
In thousands, except ----------------- common Capital notes (accumulated comprehensive
per-share data Number Amount shares surplus receivable deficit) loss Total
-----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance - January 1, 2000 33,324 $ 11,108 $ -- $ -- $ -- $ 31,072 $ (5,670) $ 36,510
Exercise of stock options and
restricted stock - net 23 8 1,520 1,528
Cash dividends declared to common
shareholders of $0.22 per share (7,331) (7,331)
Issuance of common shares --
Class A 2,134 711 53,176 (2,050) 51,837
Class B 5,300 53 133,772 133,825
Class C 811 8 20,470 20,478
Class D 20 -- 505 505
Repurchases of common stock (32,619) (10,873) (209,443) (603,314) (823,630)
Issuance of warrants to purchase
common shares 24,733 24,733
Preferred stock dividend accrual (1,187) (1,187)
Preferred stock accretion (56) (56)
Net income 7,029 7,029
Change in cumulative translation
adjustment (662) (662)
-----------------------------------------------------------------------------------------------------------------------------------
Balance - July 1, 2000 8,993 $ 1,015 $ 24,733 $ -- $ (2,050) $ (573,787) $ (6,332) $(556,421)
===================================================================================================================================
</TABLE>
The accompanying notes are an integral part of the unaudited condensed
consolidated financial statements.
6
<PAGE>
JOSTENS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
1. Basis of Presentation
We prepared our accompanying unaudited condensed consolidated financial
statements following the requirements of the Securities and Exchange
Commission ("SEC") for interim reporting. As permitted under those rules,
certain footnotes or other financial information that are normally required
by accounting principles generally accepted in the United States can be
condensed or omitted. Therefore, we suggest that these financial statements
be read in conjunction with the consolidated financial statements and notes
thereto included in our Annual Report on Form 10-K for the fiscal year ended
January 1, 2000 ("1999 Form 10-K"). The condensed consolidated balance sheet
data as of January 1, 2000 were derived from audited financial statements,
but do not include all disclosures required by accounting principles
generally accepted in the United States.
Revenues, expenses, cash flows, assets and liabilities can and do vary during
each quarter of the year. Therefore, the results and trends in these interim
financial statements may not be the same as those for the full year.
In our opinion, the accompanying unaudited condensed consolidated financial
statements include all adjustments (including normal recurring items)
considered necessary to present fairly, when read in conjunction with the
1999 Form 10-K, our financial position, results of operations and cash flows
for the periods presented. Certain balances have been reclassified to conform
to the 2000 presentation.
2. Merger and Recapitalization
On December 27, 1999, we entered into a merger agreement with Saturn
Acquisition Corporation, an entity organized for the sole purpose of
effecting a merger on behalf of certain affiliates of Investcorp S.A. and
other investors. On May 10, 2000, Saturn Acquisition Corporation merged with
and into Jostens, with Jostens as the surviving corporation. The merger was
part of a recapitalization of Jostens which resulted in affiliates of
Investcorp and the other investors acquiring approximately 92 percent of our
post-merger common stock. The remaining 8 percent of our common stock was
retained by pre-recapitalization shareholders and five members of senior
management and was redesignated as shares of Class A common stock. As a
result of the transaction, our shares have been de-listed from the New York
Stock Exchange.
Voting Rights
The post-merger common stock consists of Class A through Class E common stock
as well as undesignated common stock. The number of authorized and issued
shares for each class of common stock is set forth in the Condensed
Consolidated Balance Sheet. Holders of Class A common stock are entitled to
one vote per share, whereas holders of Class D common stock are entitled to
306.55 votes per share. Holders of Class B common stock, Class C common stock
and Class E common stock have no voting rights.
Recapitalization Financing
The recapitalization was funded by (a) $495.0 million of borrowings under a
senior secured credit facility with a syndicate of banks which included term
loans and a revolving credit facility (collectively the "senior secured
credit facility"), (b) issuance of $225.0 million in principal amount of
senior subordinated notes (the "notes") and warrants to purchase 425,060
shares of Class E common stock, (c) issuance of $60.0 million in principal
amount of redeemable preferred stock and warrants to purchase 531,325 shares
of Class E common stock and (d) $208.7 million of proceeds from the sale of
shares of common stock to the investors.
The proceeds from these financings funded (a) the payment of approximately
$823.6 million to holders of common stock, (b) repayment of $67.6 million of
outstanding indebtedness (c) payment of $10.0 million in consideration for
cancellation of employee stock options (d) payments of approximately $71.9
million of fees and expenses associated with the recapitalization, including
approximately $12.7 million of advisory fees paid to Investcorp and (e)
a pre-payment of $7.5 million for a management and consulting services
agreement for a five-year term with Investcorp. This pre-payment is being
amortized on a straight-line basis over the term of the agreement.
7
<PAGE>
JOSTENS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(CONTINUED)
Recapitalization Accounting
The transaction was accounted for as a recapitalization and as such, the
historical basis of our assets and liabilities has not been affected.
Recapitalization related costs of $45.7 million consisting of investment
banker fees, transaction fees, legal and accounting fees, cash transaction
bonuses, stock option payments, and other miscellaneous costs were expensed in
the three and six month periods ended July 1, 2000. Additionally, $3.0 million
of recapitalization costs incurred related to the issuance of shares of
redeemable preferred stock was netted against the proceeds of $60.0 million.
Finally, $36.5 million associated with the debt financing was capitalized and
is being amortized over the applicable lives of the debt for up to a maximum
of ten years.
Other Arrangements
We adopted a new employee stock option plan to purchase shares of Class A
common stock. The number of shares available to be awarded under the new stock
option plan is 676,908. The stock option plan is administered by the
Compensation Committee of the Board of Directors who designate the amount,
timing and other terms and conditions applicable to the option awards. Under
the stock option plan, an optionee has certain rights to put to us, and we
have certain rights to call from the optionee, vested stock options issued to
the optionee under the stock option plan upon termination of the optionee's
employment prior to a public offering of Jostens' common stock. At the time of
the transaction, options to purchase 502,846 of our Class A common stock were
granted to five members of senior management. The options have an exercise
price of $25.25 and, prior to a public offering, become exercisable annually
in one-fifth increments upon Jostens meeting or exceeding target cumulative
earnings before interest, taxes, depreciation and amortization ("EBITDA").
We adopted a new stock loan program to loan a total of $2.0 million to five
members of senior management in individual amounts to refinance up to 100
percent of their outstanding loans existing at the time of the transaction.
The proceeds of the loans were used to purchase shares of our common stock, to
permit them to retain up to 100 percent of their pre-recapitalization share
ownership. Loans made under the stock loan program bear interest at our cost
of funds under our new revolving credit facility and are recourse loans. The
loans are payable through May 10, 2005 with interest rates set annually. The
loans are collaterlized by the shares of stock owned by such individuals, and
each individual has entered into a pledge agreement and has executed a secured
promissory note.
8
<PAGE>
JOSTENS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(CONTINUED)
3. Long-Term Debt
Long-term debt consists of the following:
<TABLE>
<CAPTION>
July 1 July 3 January 1
In thousands 2000 1999 2000
-----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Term loan A, 9.87 percent variable rate at July 1, 2000,
semi-annual principal and interest payments
through May 2006 $150,000 $ -- $ --
Term loan B, 10.37 percent variable rate at July 1, 2000,
semi-annual principlal and interest payments
through May 2008 345,000 -- --
Senior subordinated notes, 12.75 percent fixed rate, net
of discounts of $19,703, semi-annual interest payments
of $14.3 million, interest due and payable at maturity -
May 2010 205,297 -- --
Industrial revenue bonds, 6.75 percent fixed
rate, covering general offices -- 3,600 3,600
----------------------------------------------------------------------------------------------------------------
700,297 3,600 3,600
Less current portion 5,500 -- --
----------------------------------------------------------------------------------------------------------------
$694,797 $3,600 $3,600
================================================================================================================
</TABLE>
Maturities of long-term debt including $19.7 million of discount as of July 1,
2000 are as follows:
In thousands
----------------------------------------------------
2001 $ 5,500
2002 23,250
2003 28,250
2004 33,250
2005 38,250
Thereafter 591,500
----------------------------------------------------
$720,000
====================================================
The fair value of long-term debt at July 1, 2000, July 3, 1999 and January 1,
2000 approximated the carrying value and is estimated based on quoted market
prices for comparable instruments.
In connection with the merger and recapitalization, we entered into a $150
million, six year revolving credit facility that expires on May 31, 2006. We may
borrow funds and elect to pay interest under the "alternative base rate" or
"eurodollar" interest rate provisions of the agreement. There were no amounts
outstanding under this facility as of July 1, 2000. Our old credit facility, due
to expire on December 31, 2000, was terminated as part of the transaction.
The senior subordinated notes are not collateralized and are subordinate in
right of payment to the term loans and borrowings under the new revolving credit
facility (collectively the "senior secured credit facility"). The senior secured
credit facility is with the same lenders and is collateralized by substantially
all the assets of our domestic operations and all of our capital stock (limited
to 65 percent in the case of foreign subsidiaries). The senior
9
<PAGE>
JOSTENS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(CONTINUED)
secured credit facility requires that we meet certain financial covenants,
ratios and tests, including a maximum leverage ratio and a minimum interest
coverage ratio. In addition, we are required to pay certain fees in
connection with the senior secured credit facility, including letter of
credit fees, agency fees and commitment fees. Commitment fees will be
payable quarterly, initially at a rate per annum of 0.5 percent on the
average daily unused portion of the revolving credit facility.
The variable rate on the senior secured credit facility is predominantly
linked to the London Interbank Offered Rate ("LIBOR") as determined in
three month intervals. To manage our exposure to changes in the LIBOR, we
entered into an interest rate swap agreement on July 7, 2000. The interest
rate provided by the swap agreement is fixed at 7.0 percent. The swap
agreement becomes effective on August 15, 2000 with a notional amount of
$135.0 million, decreasing to $70.0 million quarterly over the next three
years. The notional amount is used to measure the interest to be paid or
received and does not represent the amount of exposure to loss.
The senior subordinated notes were issued with detachable warrants and an
original issuance discount, resulting in total discounts of $19.7 million.
The detachable warrants were valued at $10.7 million and are exercisable
through 2011. The value of the warrants has been included as a component of
stockholders' deficit. If all the warrants were to be exercised, the
holders would acquire shares (at a price of $0.01 per share) of our Class E
common stock representing approximately 4.0 percent of the total number of
shares (outstanding immediately after the transaction) of our common equity
on a fully diluted basis. The entire discount is being amortized to
interest expense through 2011.
4. Redeemable Preferred Stock
In connection with the recapitalization, we issued redeemable, payment-in-
kind preferred shares which have an initial liquidation preference of $60.0
million and are entitled to receive dividends at 14.0 percent per annum,
compounded quarterly and payable either in cash or in additional shares of
the same series of preferred stock. The redeemable preferred shares are
subject to mandatory redemption by Jostens in May 2011. In connection with
the redeemable preferred shares, the company ascribed $14.0 million of the
proceeds to detachable warrants to purchase shares of our Class E common
stock, which is reflected as a component of stockholders' deficit. In
addition, $3.0 million of issuance costs have been netted against the
initial proceeds and are reflected as a reduction to the carrying amount of
the preferred stock. The carrying value of the preferred stock will be
accreted to full liquidation preference value plus unpaid preferred stock
dividends over the eleven year period of the redeemable preferred stock
through changes to the accumulated deficit account.
10
<PAGE>
JOSTENS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)-
(CONTINUED)
5. Earnings (Loss) Per Common Share
Basis earnings (loss) per share is computed by dividing net income (loss)
available to common shareholders by the weighted average number of common
shares outstanding. Diluted earnings (loss) per share is computed by
dividing net income available to common shareholders by the average number
of common shares outstanding, including the dilutive effects of options,
restricted stock and contingently issuable shares.
Basis and diluted earnings (loss) per share were calculated using the
following:
<TABLE>
<CAPTION>
Three months ended Six months ended
--------------------------------- ------------------------------
July 1 July 3 July 1 July 3
In thousands, except per-share data 2000 1999 2000 1999
-------------------------------------------------------------------------------------------------- ------------------------------
<S> <C> <C> <C> <C>
Net income (loss) $ (4,290) $ 39,046 $ 7,029 $ 47,089
Dividends and accretion on redeemable preferred stock 1,243 -- 1,243 --
-------------------------------------------------------------------------------------------------- ------------------------------
Net income (loss) available to common shareholders $ (5,533) $ 39,046 $ 5,786 $ 47,089
================================================================================================== ==============================
Weighted average number of common shares outstanding - basic 18,880 34,128 25,043 34,488
Dilutive shares -- /1/ 80 273 /2/ 102
-------------------------------------------------------------------------------------------------- ------------------------------
Weighted average number of common shares outstanding - diluted 18,880 34,208 25,316 34,590
================================================================================================== ==============================
Earnings (loss) per share - basic $ (0.29) $ 1.14 $ 0.23 $ 1.37
Earnings (loss) per share - diluted $ (0.29) $ 1.14 $ 0.23 $ 1.36
</TABLE>
/1/ Options and warrants to purchase 1,459 shares were not included as their
effect would have been antidilutive.
/2/ Options to purchase 503 shares were not included as their effect would have
been antidilutive.
11
<PAGE>
JOSTENS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)--
(CONTINUED)
6. Special Charge
During the fourth quarter of 1999, we recorded a special charge of $20.2
million. Cash outlays associated with the charge were $2.2 million in the
first half of 2000. The components of the special charge and utilization in
1999 and the first half of 2000 are as follows:
<TABLE>
<CAPTION>
Utilization
-------------------------
Six months
Initial ended Balance
In thousands accrual 1999 July 1, 2000 July 1, 2000
-----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Employee termination benefits $ 4,910 $ -- $2,015 $2,895
Abandonment of internal use software under development 6,455 6,245 -- 210
Write-off of impaired goodwill related to retail class ring sales
channel 4,560 4,560 -- --
Write-off of goodwill related to exiting the college alumni
direct marketing business 3,086 3,086 -- --
Other costs related to exiting the college alumni direct
marketing business 1,183 270 210 703
-----------------------------------------------------------------------------------------------------------------------------
$20,194 $14,161 $2,225 $3,808
=============================================================================================================================
</TABLE>
We expect to complete restructuring activities and utilize the majority of
remaining charge by the end of 2000.
As a result of the special charge, the work force was reduced by about 100
personnel, primarily in corporate staff and executive functions and in our
college alumni direct marketing business.
7. Inventories
Inventories were comprised of the following:
<TABLE>
<CAPTION>
July 1 July 3 January 1
In thousands 2000 1999 2000
----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Raw material and supplies $18,765 $26,229 $17,886
Work-in-process 28,178 27,089 29,772
Finished goods 19,376 24,465 40,181
----------------------------------------------------------------------------------------------------------------------------
Total inventories $66,319 $77,783 $87,839
============================================================================================================================
</TABLE>
12
<PAGE>
JOSTENS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)-
(CONTINUED)
8. Comprehensive Income (loss)
Comprehensive income (loss) and its components, net of tax, are as
follows:
<TABLE>
<CAPTION>
Three months ended Six months ended
------------------------------------- ---------------------------------------
July 1 July 3 July 1 July 3
In thousands 2000 1999 2000 1999
------------------------------------------------------------------------------------------ ---------------------------------------
<S> <C> <C> <C> <C>
Net income (loss) $ (4,290) $39,046 $ 7,029 $47,089
Change in cumulative translation adjustment (662) 517 (662) 768
------------------------------------------------------------------------------------------ ---------------------------------------
Comprehensive income (loss) $ (4,952) $39,563 $ 6,367 $47,857
========================================================================================== =======================================
</TABLE>
9. Business Segments
Financial information by reportable business segment is included in the
following summary:
<TABLE>
<CAPTION>
Three months ended Six months ended
------------------------------------------ ------------------------------------
July 1 July 3 July 1 July 3
In thousands 2000 1999 2000 1999
------------------------------------------------------------------------------------------- ------------------------------------
<S> <C> <C> <C> <C>
Net Sales From External Customers
School Products $ 273,220 $ 266,135 $ 424,662 $ 408,923
Recognition 24,497 31,938 45,568 53,536
Other 4,081 5,088 6,157 7,060
------------------------------------------------------------------------------------------- ------------------------------------
Consolidated $ 301,798 $ 303,161 $ 476,387 $ 469,519
=========================================================================================== ====================================
Operating Income
School Products $ 80,246 $ 76,484 $ 108,657 $ 100,942
Recognition 232 2,033 (76) 2,162
Other (53,138) /1/ (11,434) (60,491) /1/ (21,464)
------------------------------------------------------------------------------------------- ------------------------------------
Consolidated 27,340 67,083 48,090 81,640
Net interest expense 13,077 /2/ 1,459 14,804 /2/ 2,498
------------------------------------------------------------------------------------------- ------------------------------------
Income before income taxes $ 14,263 $ 65,624 $ 33,286 $ 79,142
=========================================================================================== ====================================
</TABLE>
/1/ The Other segment includes $45.7 million of transaction related costs as
discussed in footnote 2 "Merger and Recapitalization."
/2/ Net interest expense increased due to higher debt levels resulting from
the transaction as discussed in footnote 2 "Merger and Recapitalization."
Capitalized deferred financing costs associated with obtaining financing for the
transaction have been included in the Other segment's identifiable assets.
13
<PAGE>
JOSTENS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(CONTINUED)
10 Income Taxes
Income taxes for the three and six month periods ended July 1, 2000 were
accrued at a rate of 41.5 percent compared with 40.5 percent for the
comparable periods in 1999. The year-to-date effective rate for July 1,
2000 was 78.9 percent and reflects the impact of non-deductible transaction
related costs of approximately $30.0 million.
11. Condensed Consolidating Information
Jostens' wholly-owned foreign subsidiaries are not co-borrowers under the
new $645.0 million senior secured credit facility and do not guarantee
$225.0 million aggregate principal amount of senior subordinated notes. As
such, the information which follows presents the condensed consolidating
financial position as of July 1, 2000, July 3, 1999 and January 1, 2000;
the condensed consolidating results of operations for the three and six
month periods ended July 1, 2000 and July 3, 1999; and the condensed
consolidating cash flows for the six month periods ended July 1, 2000 and
July 3, 1999 of (a) the parent company only ("Parent"), (b) the combined
Non-Guarantors ("Non-Guarantors"), (c) eliminating entries and (d) Jostens,
Inc. and Subsidiaries on a consolidated basis. Effective July 29, 2000,
Jostens wholly-owned domestic subsidiary merged with and into Jostens and
as a result, amounts and balances of this wholly-owned domestic subsidiary
have been consolidated with the parent company.
14
<PAGE>
JOSTENS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)--
(CONTINUED)
JOSTENS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATING BALANCE SHEETS
AS OF JULY 1, 2000
<TABLE>
<CAPTION>
In thousands Parent Non-guarantors Eliminations Consolidated
----------------------------------------------------------------------------------------------------------------------------
ASSETS
------
<S> <C> <C> <C> <C>
Current assets
Cash and cash equivalents $ 19,200 $ 16,675 $ -- $ 35,875
Accounts receivable, net of allowance 120,597 4,908 -- 125,505
Inventories 62,684 3,635 -- 66,319
Deferred income taxes 17,400 -- -- 17,400
Salespersons overdrafts, net of allowance 6,822 4,286 -- 11,108
Prepaid expenses and other current assets 5,230 362 -- 5,592
----------------------------------------------------------------------------------------------------------------------------
Total current assets 231,933 29,866 -- 261,799
Other Assets
Intercompany accounts 4,712 (4,712) -- --
Intangibles, net 13,626 4,683 -- 18,309
Deferred financing costs, net 35,606 -- -- 35,606
Other 43,438 218 (17,726) 25,930
----------------------------------------------------------------------------------------------------------------------------
Total other assets 97,382 189 (17,726) 79,845
Property and equipment, net 75,571 3,247 -- 78,818
----------------------------------------------------------------------------------------------------------------------------
$ 404,886 $ 33,302 $ (17,726) 420,462
============================================================================================================================
LIABILITIES AND SHAREHOLDERS' INVESTMENT (DEFICIT)
--------------------------------------------------
Current liabilities
Accounts payable $ 17,688 $ 1,291 $ -- $ 18,979
Accrued employee compensation and related taxes 24,694 980 -- 25,674
Commissions payable 51,762 1,648 -- 53,410
Customer deposits 52,213 3,064 -- 55,277
Income taxes payable 34,688 (71) -- 34,617
Current portion of long-term debt 5,500 -- -- 5,500
Other accrued liabilities 35,856 315 -- 36,171
----------------------------------------------------------------------------------------------------------------------------
Total current liabilities 222,401 7,227 -- 229,628
Long-term debt, net of current maturities 694,797 -- -- 694,797
Other noncurrent liabilities 8,215 -- -- 8,215
----------------------------------------------------------------------------------------------------------------------------
Total liabilities 925,413 7,227 -- 932,640
Commitments and contingencies -- -- -- --
Redeemable Preferred Stock 44,243 -- -- 44,243
Shareholders' investment (deficit) (564,770) 26,075 (17,726) (556,421)
----------------------------------------------------------------------------------------------------------------------------
$ 404,886 $ 33,302 $ (17,726) $ 420,462
============================================================================================================================
</TABLE>
15
<PAGE>
JOSTENS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)--
(CONTINUED)
JOSTENS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATING BALANCE SHEETS
AS OF JULY 3, 1999
<TABLE>
<CAPTION>
In thousands Parent Non-guarantors Eliminations Consolidated
----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
ASSETS
------
Current assets
Cash and cash equivalents $ 614 $ 7,791 $ -- $ 8,405
Accounts receivable, net of allowance 124,011 5,368 -- 129,379
Inventories 73,408 4,375 -- 77,783
Deferred income taxes 14,682 -- 14,682
Salespersons overdrafts, net of allowance 6,993 4,941 -- 11,934
Prepaid expenses and other current assets 4,142 240 -- 4,382
----------------------------------------------------------------------------------------------------------------------------
Total current assets 223,850 22,715 -- 246,565
Other Assets
Intercompany accounts 3,376 (3,376) -- --
Intangibles, net 22,483 5,155 -- 27,638
Other 31,258 62 (17,157) 14,163
----------------------------------------------------------------------------------------------------------------------------
Total other assets 57,117 1,841 (17,157) 41,801
Property and equipment, net 85,306 3,765 -- 89,071
----------------------------------------------------------------------------------------------------------------------------
$ 366,273 $ 28,321 $ (17,157) $ 377,437
============================================================================================================================
LIABILITIES AND SHAREHOLDERS' INVESTMENT (DEFICIT)
--------------------------------------------------
Current liabilities
Short-term borrowings $ 93,690 $ -- $ -- $ 93,690
Accounts payable 15,080 922 -- 16,002
Accrued employee compensation and related taxes 21,846 1,314 -- 23,160
Commissions payable 50,385 1,256 -- 51,641
Customer deposits 50,657 2,919 -- 53,576
Income taxes payable 31,409 (456) -- 30,953
Other accrued liabilities 20,720 372 -- 21,092
----------------------------------------------------------------------------------------------------------------------------
Total current liabilities 283,787 6,327 -- 290,114
Long-term debt, net of current maturities 3,600 3,600
Other noncurrent liabilities 15,698 -- -- 15,698
----------------------------------------------------------------------------------------------------------------------------
Total liabilities 303,085 6,327 -- 309,412
Commitments and contingencies -- -- --
Shareholders' investment (deficit) 63,188 21,994 (17,157) 68,025
----------------------------------------------------------------------------------------------------------------------------
$ 366,273 $ 28,321 $ (17,157) $ 377,437
============================================================================================================================
</TABLE>
16
<PAGE>
JOSTENS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)--
(CONTINUED)
JOSTENS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATING BALANCE SHEETS
AS OF JANUARY 1, 2000
<TABLE>
<CAPTION>
In thousands Parent Non-guarantors Eliminations Consolidated
=======================================================================================================================
ASSETS
------
<S> <C> <C> <C> <C>
Current assets
Cash and cash equivalents $ 26,604 $ 11,913 $ -- $ 38,517
Accounts receivable, net of allowance 102,512 5,126 -- 107,638
Inventories 84,574 3,265 -- 87,839
Deferred income taxes 17,400 -- -- 17,400
Salespersons overdrafts, net of allowance 19,514 6,680 -- 26,194
Prepaid expenses and other current assets 8,457 264 -- 8,721
-----------------------------------------------------------------------------------------------------------------------
Total current assets 259,061 27,248 -- 286,309
Other Assets
Intercompany accounts 1,096 (1,096) -- --
Intangibles, net 13,940 4,955 -- 18,895
Other 35,398 200 (17,726) 17,872
-----------------------------------------------------------------------------------------------------------------------
Total other assets 50,434 4,059 (17,726) 36,767
Property and equipment, net 80,770 3,870 -- 84,640
-----------------------------------------------------------------------------------------------------------------------
$ 390,265 $ 35,177 $ (17,726) $ 407,716
=======================================================================================================================
LIABILITIES AND SHAREHOLDERS' INVESTMENT (DEFICIT)
--------------------------------------------------
Current liabilities
Short-term borrowings $ 117,608 $ -- $ -- $ 117,608
Accounts payable 21,631 2,010 -- 23,641
Accrued employee compensation and related taxes 28,353 1,125 -- 29,478
Commissions payable 23,371 2,763 -- 26,134
Customer deposits 109,951 3,007 -- 112,958
Income taxes payable 16,974 249 -- 17,223
Other accrued liabilities 29,254 846 -- 30,100
-----------------------------------------------------------------------------------------------------------------------
Total current liabilities 347,142 10,000 -- 357,142
Long-term debt, net of current maturities 3,600 -- -- 3,600
Other noncurrent liabilities 10,464 -- -- 10,464
-----------------------------------------------------------------------------------------------------------------------
Total liabilities 361,206 10,000 -- 371,206
Commitments and contingencies -- -- -- --
Redeemable Preferred Stock -- -- -- --
Shareholders' investment (deficit) 29,059 25,177 (17,726) 36,510
-----------------------------------------------------------------------------------------------------------------------
$ 390,265 $ 35,177 $ (17,726) $ 407,716
=======================================================================================================================
</TABLE>
17
<PAGE>
JOSTENS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)-
(CONTINUED)
JOSTENS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED JULY 1, 2000
<TABLE>
<CAPTION>
In thousands Parent Non-guarantors Consolidated
================================================================================================
<S> <C> <C> <C>
Net sales $285,892 $15,906 $301,798
Cost of products sold 127,189 8,012 135,201
------------------------------------------------------------------------------------------------
Gross profit 158,703 7,894 166,597
Selling and administrative expenses 87,435 6,111 93,546
Transaction costs 45,711 -- 45,711
------------------------------------------------------------------------------------------------
Operating income 25,557 1,783 27,340
Interest income (142) (135) (277)
Interest expense 13,338 16 13,354
------------------------------------------------------------------------------------------------
Income before income taxes 12,361 1,902 14,263
Income taxes 17,753 800 18,553
------------------------------------------------------------------------------------------------
Net income (loss) $(5,392) $ 1,102 $ (4,290)
================================================================================================
</TABLE>
JOSTENS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS
FOR THE SIX MONTHS ENDED JULY 1, 2000
<TABLE>
<CAPTION>
In thousands Parent Non-guarantors Consolidated
====================================================================================================
<S> <C> <C> <C>
Net sales $452,724 $23,663 $476,387
Cost of products sold 191,133 10,654 201,787
----------------------------------------------------------------------------------------------------
Gross profit 261,591 13,009 274,600
Selling and administrative expenses 170,451 10,348 180,799
Transaction costs 45,711 -- 45,711
----------------------------------------------------------------------------------------------------
Operating income 45,429 2,661 48,090
Interest income (247) (241) (488)
Interest expense 15,251 41 15,292
----------------------------------------------------------------------------------------------------
Income before income taxes 30,425 2,861 33,286
Income taxes 24,957 1,300 26,257
----------------------------------------------------------------------------------------------------
Net income $ 5,468 $ 1,561 $ 7,029
====================================================================================================
</TABLE>
18
<PAGE>
JOSTENS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)--
(CONTINUED)
JOSTENS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED JULY 3, 1999
<TABLE>
<CAPTION>
In thousands Parent Non-guarantors Consolidated
-----------------------------------------------------------------------------------
<S> <C> <C> <C>
Net sales $289,864 $13,297 $303,161
Cost of products sold 134,566 6,178 140,744
-----------------------------------------------------------------------------------
Gross profit 155,298 7,119 162,417
Selling and administrative expenses 89,894 5,440 95,334
-----------------------------------------------------------------------------------
Operating income 65,404 1,679 67,083
Interest income (65) (51) (116)
Interest expense 1,560 15 1,575
-----------------------------------------------------------------------------------
Income before income taxes 63,909 1,715 65,624
Income taxes 25,878 700 26,578
-----------------------------------------------------------------------------------
Net income (loss) $ 38,031 $ 1,015 $ 39,046
===================================================================================
</TABLE>
JOSTENS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS
FOR THE SIX MONTHS ENDED JULY 3, 1999
<TABLE>
<CAPTION>
In thousands Parent Non-guarantors Consolidated
--------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net sales $449,831 $19,688 $469,519
Cost of products sold 200,747 8,496 209,243
--------------------------------------------------------------------------------------
Gross profit 249,084 11,192 260,276
Selling and administrative expenses 169,578 9,058 178,636
--------------------------------------------------------------------------------------
Operating income 79,506 2,134 81,640
Interest income (104) (97) (201)
Interest expense 2,659 40 2,699
--------------------------------------------------------------------------------------
Income before income taxes 76,951 2,191 79,142
Income taxes 31,178 875 32,053
--------------------------------------------------------------------------------------
Net income $ 45,773 $ 1,316 $ 47,089
======================================================================================
</TABLE>
19
<PAGE>
JOSTENS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)--
(CONTINUED)
JOSTENS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JULY 1, 2000
<TABLE>
<CAPTION>
In thousands Parent Non-guarantors Consolidated
------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Operating activities
Net income $ 5,468 $ 1,561 $ 7,029
Depreciation 12,061 623 12,684
Amortization of debt discount and deferred financing costs 1,011 -- 1,011
Amortization of goodwill 314 222 536
Changes in operating assets and liabilities
Accounts receivable (18,085) 218 (17,867)
Inventories 21,890 (370) 21,520
Salespersons overdrafts 12,692 2,394 15,086
Prepaid expenses and other current assets 3,227 (98) 3,129
Intercompany accounts (3,616) 3,616 --
Accounts payable (9,575) (719) (10,294)
Accrued employee compensation and related taxes (3,659) (145) (3,804)
Commissions payable 28,391 (1,115) 27,276
Customer deposits 57,738) 57 (57,681)
Income taxes payable 17,714 (320) 17,394
Other (1,819) (1,058) (2,877)
------------------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 8,276 4,866 13,142
------------------------------------------------------------------------------------------------------------------------------
Investing activities
Purchases of property and equipment (7,150) -- (7,150)
Equity investments (1,103) -- (1,103)
Other 499 (104) 395
------------------------------------------------------------------------------------------------------------------------------
Net cash used for investing activities (7,754) (104) (7,858)
------------------------------------------------------------------------------------------------------------------------------
Financing activities
Net short-term borrowings (repayments) (111,976) -- (111,976)
Repurchases of common stock (823,630) -- (823,630)
Principal payments on long-term debt (3,600) -- (3,600)
Proceeds from issuance of long-term debt 700,139 -- 700,139
Proceeds from issuance of common shares 208,693 -- 208,693
Net proceeds from the issuance of preferred stock 43,000 -- 43,000
Proceeds from the issuance of warrants to purchase common shares 24,733 -- 24,733
Dividends paid to common shareholders (7,331) -- (7,331)
Proceeds from exercise of stock options 555 -- 555
Issuance of officer note receivable (2,050) -- (2,050)
Debt acquisition costs (36,459) -- (36,459)
------------------------------------------------------------------------------------------------------------------------------
Net cash used for financing activities (7,926) -- (7,926)
------------------------------------------------------------------------------------------------------------------------------
Change in cash and cash equivalents (7,404) 4,762 (2,642)
Cash and cash equivalents, beginning of period 26,604 11,913 38,517
------------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents, end of period $ 19,200 $ 16,675 $ 35,875
==============================================================================================================================
Supplemental information
Income taxes paid $ 7,135 $ 1,628 $ 8,763
Interest paid $ 6,726 $ 41 $ 6,767
</TABLE>
20
<PAGE>
JOSTENS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)--
(CONTINUED)
JOSTENS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JULY 3, 1999
<TABLE>
<CAPTION>
In thousands Parent Non-guarantors Consolidated
--------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Operating activities
Net income $45,773 $1,316 $47,089
Depreciation 11,072 591 11,663
Amortization of debt discount and deferred financing costs 6 -- 6
Amortization of goodwill 928 197 1,125
Changes in operating assets and liabilities
Accounts receivable (23,232) 200 (23,032)
Inventories 13,820 (1,109) 12,711
Salespersons overdrafts 8,693 62 8,755
Prepaid expenses and other current assets 1,469 (114) 1,355
Intercompany accounts (4,393) 4,393 --
Accounts payable (1,373) (1,124) (2,497)
Accrued employee compensation and related taxes (4,373) (27) (4,400)
Commissions payable 29,133 377 29,510
Customer deposits (38,977) 461 (38,516)
Income taxes payable 27,067 (827) 26,240
Other (2,793) 78 (2,715)
--------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 62,820 4,474 67,294
--------------------------------------------------------------------------------------------------------------
Investing activities
Purchases of property and equipment (12,963) (376) (13,339)
Equity investments (5,000) -- (5,000)
Other 721 (67) 654
--------------------------------------------------------------------------------------------------------------
Net cash used for investing activities (17,242) (443) (17,685)
--------------------------------------------------------------------------------------------------------------
Financing activities
Net short-term borrowings (repayments) (5,415) -- (5,415)
Repurchases of common stock (25,007) -- (25,007)
Dividends paid to common shareholders (15,231) -- (15,231)
Proceeds from exercise of stock options 1,854 -- 1,854
--------------------------------------------------------------------------------------------------------------
Net cash used for financing activities (43,799) -- (43,799)
--------------------------------------------------------------------------------------------------------------
Change in cash and cash equivalents 1,779 4,031 5,810
Cash and cash equivalents, beginning of period (1,165) 3,760 2,595
--------------------------------------------------------------------------------------------------------------
Cash and cash equivalents, end of period $614 $7,791 $8,405
==============================================================================================================
Supplemental information
Income taxes paid $ 3,273 $ 1,716 $ 4,989
Interest paid $ 2,936 $ 40 $ 2,976
</TABLE>
21
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Our disclosure and analysis in this report may contain some "forward-looking
statements." Forward-looking statements give our current expectations or
forecasts of future events. Forward-looking statements generally can be
identified by the use of forward-looking terminology such as "may," "will,"
"expected," "intend," "estimate," "anticipate," "believe," "project," or
"continue," or the negative thereof or similar words. From time to time, we also
may provide oral or written forward-looking statements in other materials we
release to the public. Any or all of our forward-looking statements in this
report and in any public statements we make may turn out to be wrong. They can
be affected by inaccurate assumptions we might make or by known or unknown risks
or uncertainties. Consequently, no forward-looking statements can be guaranteed.
Actual results may vary materially. Investors are cautioned not to place undue
reliance on any forward-looking statements. Investors should also understand
that it is not possible to predict or identify all such factors and should not
consider the following list to be a complete statement of all potential risks
and uncertainties.
Any change in the following factors may impact the achievement of results:
. our ability to satisfy our debt obligations;
. our ability to achieve the intended benefits of our corporate
restructuring announced in the fourth quarter of 1999;
. our relationship with our independent and employee sales
representatives;
. litigation cases if decided against us, may adversely affect our
financial results;
. environmental regulations that could impose substantial costs upon us
and may adversely affect our financial results;
. the fluctuating prices of raw materials, primarily gold;
. the seasonality of our School Products segment sales and operating
income;
. our dependence on a key supplier for our synthetic and semiprecious
stones; and
. fashion and demographic trends.
The foregoing factors are not exhaustive, and new factors may emerge or changes
to the foregoing factors may occur that would impact our business.
22
<PAGE>
RESULTS OF OPERATIONS
The following table sets forth selected information from our Condensed
Consolidated Statements of Operations.
<TABLE>
<CAPTION>
Three months ended Six months ended
---------------------------------------- ---------------------------------------
July 1 July 3 July 1 July 3
Dollars in thousands 2000 1999 % Change 2000 1999 % Change
------------------------------------------------------------------------------- ----------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net sales $301,798 $303,161 (0.4%) $476,387 $469,519 1.5%
% of net sales 100.0% 100.0% 100.0% 100.0%
Cost of products sold 135,201 140,744 (3.9%) 201,787 209,243 (3.6%)
% of net sales 44.8% 46.4% 42.4% 44.6%
------------------------------------------------------------------------------- ----------------------------------------
Gross profit 166,597 162,417 2.6% 274,600 260,276 5.5%
% of net sales 55.2% 53.6% 57.6% 55.4%
Selling and administrative expenses 93,546 95,334 (1.9%) 180,799 178,636 1.2%
% of net sales 31.0% 31.4% 38.0% 38.0%
Transaction costs 45,711 -- 0.0% 45,711 -- 0.0%
% of net sales 15.1% 0.0% 9.6% 0.0%
------------------------------------------------------------------------------- ----------------------------------------
Operating income 27,340 67,083 (59.2%) 48,090 81,640 (41.1%)
% of net sales 9.1% 22.1% 10.1% 17.4%
Interest income (277) (116) 138.8% (488) (201) 142.8%
% of net sales -0.1% 0.0% -0.1% 0.0%
Interest expense 13,354 1,575 747.9% 15,292 2,699 466.6%
% of net sales 4.4% 0.5% 3.2% 0.6%
------------------------------------------------------------------------------- ----------------------------------------
Income before income taxes 14,263 65,624 (78.3%) 33,286 79,142 (57.9%)
% of net sales 4.7% 21.6% 7.0% 16.9%
Income taxes 18,553 26,578 (30.2%) 26,257 32,053 (18.1%)
% of net sales 6.1% 8.8% 5.5% 6.8%
------------------------------------------------------------------------------- ----------------------------------------
Net income (loss) $(4,290) $39,046 (111.0%) $7,029 $47,089 (85.1%)
=============================================================================== ========================================
% of net sales -1.49% 12.9% 1.5% 10.0%
</TABLE>
Percentages in this table may reflect rounding adjustments.
Net sales
The change in net sales for the three and six month periods was due to price/mix
increases averaging approximately 3.2 percent and 2.7 percent, respectively, and
volume decreases of approximately 3.6 percent and 1.2 percent, respectively.
23
<PAGE>
Second quarter and year-to-date net sales by segment and the changes from last
year were as follows:
<TABLE>
<CAPTION>
Three months ended Six months ended
------------------------------------------- --------------------------------------
July 1 July 3 July 1 July 3
In thousands 2000 1999 % change 2000 1999 % change
---------------------------------------------------------------------------------- --------------------------------------
<S> <C> <C> <C> <C> <C> <C>
School Products $273,220 $266,135 2.7% $424,662 $408,923 3.8%
Recognition 24,497 31,938 (23.3%) 45,568 53,536 (14.9%)
Other 4,081 5,088 (19.8%) 6,157 7,060 (12.8%)
---------------------------------------------------------------------------------- --------------------------------------
Consolidated $301,798 $303,161 (0.4%) $476,387 $469,519 1.5%
================================================================================== ======================================
</TABLE>
School Products
The increase in School Products sales for the three and six month periods
was primarily due to:
. fewer yearbook rebates and returns resulting from improvements with
Jostens Direct Solutions ("JDS") (a direct payment program for
parents of high school students);
. increased JDS processing fees; and
. an increase in commercial printing volume.
In addition, the increase for the six month period reflects:
. higher sales of add-on features in our Printing and Publishing
product line;
. sales of graduation announcements to more schools; and
. expanded sales of graduation accessories.
These increases were offset by:
. accelerated jewelry shipments into the fourth quarter of 1999 due
to improved manufacturing efficiencies compared with the prior
year.
Recognition
The decrease in Recognition sales for the three and six month periods was
primarily due to a decline in the headcount of the sales force as well as
lost customers as a result of problems encountered with a system
implementation that took place in 1999.
Other
Other segment sales decreased for the three and six month periods as a
result of exiting the college alumni direct marketing business in the
fourth quarter of 1999. Sales for this business were $1.4 million and $1.8
million for the three and six month periods ended July 3, 1999,
respectively.
Gross Profit
Gross margin for the three and six months ended July 1, 2000 was 55.2 percent
and 57.6 percent, compared with 53.6 percent and 55.4 percent, respectively, for
the comparable periods in 1999.
The increase in gross margin for the three and six month period was
primarily due to:
. favorable product mix and price increases; and
. manufacturing efficiencies in our School Products segment in 2000.
24
<PAGE>
In addition, the increase for the six month period reflects:
. a $1.5 million non-recurring charge in the first quarter of 1999 to
close a facility in Mexico and realign Jewelry operations in the United
States.
These increases were partially offset by:
. sales decreases in Recognition as a result of problems encountered with
a system implementation that took place in 1999.
Selling and Administrative Expenses
Selling and administrative expenses for the three and six months ended July 1,
2000 were $93.5 million and $180.8 million, compared with $95.3 million and
$178.6 million, respectively, for the comparable periods in 1999.
The changes reflect the following offsetting increases and decreases:
. lower amortization expense in 2000 related to our write-off of goodwill
as part of the 1999 special charge;
. lower costs as a result of exiting the college alumni direct marketing
business in the fourth quarter of 1999;
. lower legal fees in 2000 compared with 1999 primarily due to the
litigation with Taylor Publishing;
. reduced spending on temporary labor and lower costs in our Recognition
segment in 2000 compared with 1999 due to the system implementation;
. higher selling expense in 2000 related to programs and initiatives
intended to increase our sales;
. higher bad debt expense in 2000; and
. higher information system expense, primarily associated with
depreciation.
In addition, the six month period reflects:
. higher commission expense in 2000 due to increased sales.
Operating Income
Second quarter and year-to-date operating income (loss) by segment and the
changes from last year were as follows:
<TABLE>
<CAPTION>
Three months ended Six months ended
---------------------------------------- -----------------------------------------
July 1 July 3 July 1 July 3
In thousands 2000 1999 % change 2000 1999 % change
-------------------------------------------------------- -----------------------------------------
<S> <C> <C> <C> <C> <C> <C>
School Products $ 80,246 $ 76,484 4.9% $ 108,657 $ 100,942 7.6%
Recognition 232 2,033 (88.6%) (76) 2,162 (103.5%)
Other (53,138) (11,434) 364.7% (60,491) (21,464) 181.8%
-------------------------------------------------------- -----------------------------------------
Consolidated $ 27,340 $ 67,083 (59.2%) $ 48,090 $ 81,640 (41.1%)
======================================================== =========================================
</TABLE>
School Products
The increase in School Products operating income for the three and six month
periods was primarily due to:
. favorable product mix and price increases;
. fewer yearbook rebates and returns resulting from improvements with JDS;
. increased JDS processing fees;
. an increase in commercial printing volume;
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. manufacturing efficiencies in 2000; and
. lower legal fees in 2000 compared with 1999.
In addition the six month period increase reflects:
. higher sales of add-on features in our Printing and Publishing product
line;
. sales of graduation announcements to more schools;
. expanded sales of graduation accessories; and
. a $1.5 million charge in the first quarter of 1999 to close a facility
in Mexico and realign Jewelry operations in the United States.
These increases were partially offset by:
. the acceleration of jewelry sales into the fourth quarter of 1999 due to
manufacturing efficiencies compared with the prior year;
. higher selling and marketing expense in 2000 related to programs and
initiatives intended to increase sales;
. higher bad debt expense in 2000; and
. higher information system depreciation expense as a result of our 1999
system implementations.
In addition, the six month period increase was offset by:
. higher commission expense in 2000 due to increased sales.
Recognition
The decrease in Recognition operating income was primarily due to:
. a sales decrease due to a decline in the head count of the sales force
and lost customers as a result of problems encountered with a system
implementation that took place in 1999.
. higher information system depreciation expense as a result of our 1999
system implementation.
These decreases were partially offset by:
. reduced spending on temporary labor in 2000 compared with 1999 when we
prepared for a system implementation that took place in 1999; and
. lower costs in 2000 compared to 1999 related to problems encountered
during the system implementation.
Other
The increase in Other operating loss was primarily due to costs of $45.7
million associated with the transaction on May 10, 2000. This was offset by:
. lower selling and administrative expenses as a result of exiting the
college alumni direct marketing business in the fourth quarter of 1999;
. lower spending in 2000 compared with 1999 related to our new product and
channel development group; and
. lower information system expense related to the year 2000 and Oracle
system.
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Transaction Costs
We incurred costs consisting of professional fees and transaction expenses
associated with the merger and recapitalization. Transaction costs of $45.7
million were expensed in the second quarter of 2000. The remaining costs of
$36.5 million were deferred and are being amortized over the applicable lives of
the debt for up to a maximum of ten years.
Net Interest Expense
Net interest expense increased $11.6 million and $12.3 million in the three and
six month periods ended July 1, 2000, respectively, over the prior year periods.
The increases are primarily due to additional interest expense resulting from
the new senior secured credit facility and the issuance of the senior
subordinated notes in connection with the transaction.
Income Taxes
Income taxes for the three and six month periods ended July 1, 2000 were accrued
at a rate of 41.5 percent compared with 40.5 percent for the comparable periods
in 1999. The year-to-date effective rate for July 1, 2000 was 78.9 percent and
reflects non-deductible transaction related costs of $30.0 million.
LIQUIDITY AND CAPITAL RESOURCES
Our primary cash needs are for debt obligations, capital expenditures, working
capital, redeemable securities and general corporate purposes. Cash generated
from operating activities and proceeds in connection with the transaction
including a new senior secured credit facility, issuance of the senior
subordinated notes, issuance of redeemable preferred stock, and issuance of
common stock were our main sources of liquidity for the six month period ended
July 1, 2000. These funds covered our cash payments made in connection with the
transaction, including $25.25 for each share of common stock tendered, debt
acquisition costs and the pay-off of borrowings under the credit facilities
existing prior to the transaction. In addition, we made investments in property
and equipment.
Operating Activities
Operating activities generated cash of $13.1 million in the first six months of
2000, compared with $67.3 million for the same period in the prior year. The
decrease of $54.2 million was primarily due to lower net income related to cash
payments associated with the transaction. In addition, during the six months
ended July 1, 2000, cash was unfavorably impacted by the timing of customer
deposits and accounts payable and favorably impacted by reduced inventories.
Investing Activities
Capital expenditures for the first six months of 2000 were $7.2 million,
compared with $13.3 million for the same period in 1999. The decrease of $6.1
million relates primarily to higher capital expenditures in 1999 on information
systems.
In the first half of 1999 we invested $5 million to take an ownership position
in Family Education Network, a privately held company, which creates web sites
for schools to link school districts with students and their families.
Subsequent to July 1, 2000, we sold our entire ownership position in this
investment for $5.0 million.
Financing Activities
Net cash used for financing activities in the first six months of 2000 was $7.9
million, compared with $43.8 million for the same period in 1999. The decrease
of the net cash used for financing activities of $35.9 million was primarily due
proceeds from the new senior secured credit facility, issuance of the senior
subordinated notes, issuance of redeemable preferred stock and issuance of
common stock in connection with the transaction. In addition, we had no common
stock repurchases in 2000 and no dividend was paid in the second quarter of
2000. These decreases were offset by payment of $25.25 for each share of common
stock tendered in the transaction and the pay-off of credit facilities existing
prior to the transaction.
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
As a result of the transaction, our earnings could be highly affected by changes
in the London Interbank Offered Rate ("LIBOR") due to our new senior secured
credit facility which bears a variable rate predominantly linked to the LIBOR as
determined in three month intervals. To reduce our exposure to these interest
rate changes, we entered into an interest rate swap agreement on July 7, 2000.
The interest rate provided by the swap agreement is fixed at 7.0 percent. The
swap agreement becomes effective on August 15, 2000 with a notional amount of
$135 million, decreasing to $70.0 million quarterly over the next three years.
The notional amount is used to measure the interest to be paid or received and
does not represent the amount of exposure.
For 1999 our earnings were affected by changes in short-term interest rates as a
result of issuing commercial paper. For 2000, our earnings are affected by
changes in the LIBOR as a result of our new senior secured credit facility. If
short-term interest rates or the LIBOR averaged 10 percent more or less in 1999
and 2000, our interest expense would have changed by approximately $1.3 million
for the six month period in 2000 and $0.7 million for the year in 1999.
There have been no other material changes in our market risk during the six
months ended July 1, 2000. For additional information, refer to Item 7A of our
1999 Form 10-K.
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PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On May 9, 2000, we agreed in principal to settle three purported class
action lawsuits that were filed in Minnesota district court for the
County of Hennepin against Jostens and its directors alleging breaches
of fiduciary duty by Jostens' directors in connection with the merger.
The settlement is subject to court approval.
On July 10, 2000, the Fifth Circuit affirmed the trial court's entry of
judgment as a matter of law on Jostens behalf, in connection with an
antitrust action brought against Jostens by Taylor Publishing Company.
On July 24, 2000, Taylor filed a petition with the Fifth Circuit to
rehear the case in front of the panel that previously heard the case.
The Fifth Circuit denied this petition on August 10, 2000. Taylor has
until October 23, 2000 to petition the U.S. Supreme Court to review the
case. For additional information, refer to Item 3 of our 1999 Form
10-K.
We are occasionally a party to litigation arising in the normal course
of business. We regularly analyze current information and, as
necessary, provide accruals for probable liabilities on the eventual
disposition of these matters. We believe the effect on our consolidated
results of operations and financial position, if any, for the
disposition of all currently pending matters will not be material.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Incorporated by reference to Item 4 contained in the Report on Form 10-
Q for the quarterly period ended April 1, 2000.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
12 Computation of Ratio of Earnings to Fixed Charges
27 Financial Data Schedule
(b) Reports on Form 8-K
A Form 8-K dated and filed on May 25, 2000,
announcing and describing the merger and
recapitalization and related financings.
A Form 8-K dated and filed on July 19, 2000,
announcing the 5th U.S. Court of Appeals decision to
deny an appeal by Taylor Publishing Company and
affirm the Texas Federal trial court's judgement to
overturn a jury verdict against Jostens.
A Form 8-K dated July 26, 2000 and filed on August 2,
2000 announcing the resignation of Ernst and Young
LLP as our independent accountants.
A Form 8-K dated and filed on August 10, 2000
announcing the engagement of PricewaterhouseCoopers
LLP as our new independent accountants.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized, on August 15, 2000.
JOSTENS, INC.
Registrant
By /s/ Carl H. Blowers
---------------------------------------
Carl H. Blowers
Senior Vice President
By /s/ William N. Priesmeyer
---------------------------------------
William N. Priesmeyer
Senior Vice President and Chief Financial Officer
(Chief Accounting Officer)
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