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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
[X]ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the Fiscal Year Ended January 1, 2000
OR
[_]TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
Commission file number 1-5064
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Jostens, Inc.
(Exact name of Registrant as specified in its charter)
Minnesota 41-0343440
(State or other jurisdiction of (I.R.S. Employer Identification
incorporation or organization) number)
5501 Norman Center Drive, 55437
Minneapolis, Minnesota (Zip code)
(Address of principal executive
offices)
Registrant's telephone number, including area code: (952) 830-3300
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange
Title of each class on which registered
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Common Shares, $0.33 1/3 par value New York Stock Exchange
Preferred Share Purchase Rights New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
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 [_]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in PART III of this Form 10-K or any
amendment to this Form 10-K. [_]
The aggregate market value of voting stock held by nonaffiliates of the
Registrant on March 1, 2000, was $567,548,472, based upon a closing price of
$24.00 per share. The number of shares outstanding of Registrant's only class
of common stock on March 1, 2000, was 33,327,209.
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JOSTENS, INC.
Annual Report on Form 10-K
For the Year Ended January 1, 2000
Page
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PART I
ITEM 1. Our Business.................................................. 1
ITEM 2. Properties.................................................... 6
ITEM 3. Legal Proceedings............................................. 6
ITEM 4. Submission of Matters to a Vote of Security Holders........... 7
PART II
Market for Registrant's Common Stock and Related Security
ITEM 5. Holder Matters................................................ 7
ITEM 6. Selected Financial Data....................................... 8
Management's Discussion and Analysis of Financial Condition
ITEM 7. and Results of Operations..................................... 9
ITEM 7A. Quantitative and Qualitative Disclosures about Market Risk.... 17
ITEM 8. Financial Statements and Supplementary Data................... 18
Changes in and Disagreements with Accountants on Accounting
ITEM 9. and Financial Disclosure...................................... 42
PART III
ITEM 10. Directors and Executive Officers of the Registrant............ 42
ITEM 11. Executive Compensation........................................ 43
Security Ownership of Certain Beneficial Owners and
ITEM 12. Management.................................................... 52
ITEM 13. Certain Relationships and Related Transactions................ 53
PART IV
Exhibits, Financial Statement Schedules, and Reports on Form
ITEM 14. 8-K........................................................... 54
Signatures.................................................... 56
PART I
ITEM 1. OUR BUSINESS
Unless otherwise indicated, all references to "Jostens," "we," "our," and
"us" refer to Jostens, Inc., a Minnesota corporation (incorporated in 1906),
and its subsidiaries.
We are a leading manufacturer and marketer of school-related affinity
products and one of the leading manufacturers and suppliers of corporate-based
affinity products that help people celebrate important moments, recognize
achievements and build affiliations.
Our home page on the Internet is www.jostens.com. You may learn more about
us by visiting this site. The information on our web site is not incorporated
into this annual report.
RECENT DEVELOPMENTS
Merger and Recapitalization
On December 27, 1999, we entered into a merger agreement with Saturn
Acquisition Corporation, a newly formed corporation controlled by Investcorp
S.A., a global investment group, and its co-investors. Under this agreement,
Saturn Acquisition Corporation will merge with and into Jostens. The merger
will be accounted for as a recapitalization by Jostens. Upon completion of the
merger, Investcorp and its co-investors, including Jostens' senior management,
will own approximately 94 percent of Jostens' common stock. The remaining 6
percent of our post-merger common stock will be retained by some or all of our
pre-merger public shareholders.
As a result of the merger:
. approximately 98 percent of Jostens' outstanding common stock will be
purchased for cash of $25.25 per share;
. all outstanding options to purchase Jostens' common stock will
automatically vest and be cancelled in exchange for a cash payment equal
to $25.25 per underlying share, less the applicable exercise price; and
. we will incur a substantial amount of debt.
The merger agreement obligates us to pay a fee of $19.125 million, plus up
to $5.0 million in expenses if the agreement is terminated under certain
circumstances, including a decision by us to accept a more favorable
acquisition proposal.
Successful completion of the recapitalization depends principally upon
shareholder approval and satisfaction of conditions to closing in the merger
agreement with Saturn Acquisition Corporation.
It is anticipated that the merger and recapitalization will be completed in
the second quarter of 2000.
In connection with our execution of the merger agreement, our Board of
Directors approved the following amendments to the shareholder rights
agreement:
. neither Saturn Acquisition nor its affiliates will be deemed to be an
acquiring person;
. the execution and delivery of the merger agreement will not give rise to
a distribution date or a triggering event; and
. no holder of rights shall be entitled to exercise such rights as a result
of the execution and delivery of the merger agreement.
1
If the merger is not approved, the rights will expire in August 2008 unless
extended or redeemed earlier by us.
Special Charge
In the fourth quarter of 1999, we completed a strategic review of product
lines, manufacturing operations, infrastructure projects, and support functions
based on performance trends. In addition, we decided to refocus our
organization on sales growth versus infrastructure improvement. As a result of
this review, we incurred a pre-tax special charge of $20.2 million ($13.3
million after tax or $0.39 per share), which was approved by our Board of
Directors.
Information relating to the special charge follows:
Balance
Initial Used in end of
Accrual 1999 1999
------- ------- -------
(In thousands)
Employee termination benefits......................... $ 4,910 $ -- $4,910
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 direct
marketing sales channel to college alumni............ 3,086 3,086 --
Other costs related to exiting the direct marketing
sales channel to college alumni...................... 1,183 270 913
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$20,194 $14,161 $6,033
======= ======= ======
Of the $20.2 million special charge, $4.8 million relates to the School
Products segment and $15.4 million relates to the "Other" segment.
Included in other accrued liabilities on the consolidated balance sheets is
the unused portion of the special charge of $6.0 million, which will be used or
paid in 2000.
Of the total special charge, $4.9 million relates to employee termination
benefits for the elimination of about 100 full-time positions, primarily in
corporate staff and executive functions and in exiting the direct marketing
sales channel to college alumni. Headcount reductions will be completed and
termination benefits paid in 2000.
We reviewed and modified our strategies for the retail class ring product
line and, as a result, determined that the carrying value of the related
goodwill was impaired based upon anticipated inadequate projected cash flows.
Accordingly, an impairment charge of $4.6 million was recorded as part of the
special charge for the write-off of all of the goodwill.
We also reviewed the Jostens Direct business and decided in the fourth
quarter of 1999 to close down the business due to 1999 performance and
forecasted decline in sales volume. As a result of that decision, the remaining
balance of the related goodwill of $3.1 million was written off and other
exiting costs of $1.2 million were recorded.
We estimate the pre-tax future savings of the 1999 special charge to be
approximately $8.0 million in 2000 and $10.0 million in 2001 and beyond.
2
BUSINESS SEGMENTS
We classify our operations into the following business segments:
. SCHOOL PRODUCTS, which manufactures and markets school-related affinity
products primarily for the high school and college markets. School
Products is comprised of four product lines: Printing & Publishing,
Jewelry, Graduation Products and Photography.
. RECOGNITION, which manufactures and supplies corporate-based affinity
products that help companies and other organizations promote and
recognize achievement in people's careers. We concentrate our efforts in
service recognition and incentive programs designed to help companies
achieve their business objectives through improved employee performance.
Products include jewelry and other brand name merchandise from industry
leading manufacturers.
. OTHER, which represents the operating units that do not meet the
quantitative threshold for determining reportable segments. The "Other"
segment is primarily comprised of corporate expenses, the results of the
direct marketing sales channel to college alumni, international sales and
expenses and expenses associated with new product development.
Business segment financial information is contained in ITEM 8, Note 12 of the
Notes to Consolidated Financial Statements, included in this Form 10-K and is
incorporated herein by reference.
SCHOOL PRODUCTS SEGMENT
Product Lines
Printing & Publishing
We manufacture and sell student-created yearbooks in elementary, middle and
high schools, and colleges. Our independent and employee sales representatives
and their associates work closely with each school's yearbook staff (both
students and a faculty adviser), assisting with the planning, editing, layout
and printing scheduling until the yearbook is completed. Our independent and
employee sales representatives work with the faculty advisers to renew yearbook
contracts. We also print commercial brochures, and promotional books and
materials.
Jewelry
We manufacture and sell class rings primarily to high school and college
students. Many schools have only one school-designated supplier to its students
each year. Class rings are sold through bookstores, other campus stores, retail
jewelry stores and within the school through temporary order-taking booths. Our
independent and employee sales representatives manage the in-school process of
interacting with the students through ring design, promotion and ordering.
Graduation Products
We manufacture and sell graduation announcements and accessories, diplomas
and caps and gowns to students and administrators in high schools and colleges.
Our independent and employee sales representatives make calls on schools and
take sales orders through temporary order-taking booths, telemarketing
programs, college bookstores and the Internet.
Photography
Photography provides class and individual school pictures to students in
elementary, middle and high schools. Additionally, photography provides high
school senior portrait photography, photography for proms and other special
events and other photo-based products such as student ID cards. Our independent
dealers and employee sales force arrange the sittings/shootings at individual
schools or in their own studios.
3
Seasonality
Our School Products segment experiences strong seasonal business swings
concurrent with the North American school year, with about 40 percent of full-
year segment sales and about 50 to 60 percent of full-year segment operating
income occurring in the second quarter. This seasonality requires us to
carefully manage our cash flows over the course of the year.
Competition
Consumers differentiate school products principally on the basis of
quality, price, marketing and service.
We are one of four primary competitors in the sale of yearbooks along with
Herff Jones, Inc., Taylor Publishing Company and Walsworth Publishing Company.
Each competes on the basis of print quality, price, product offerings and
service. Technological offerings in the way of computer-based publishing are
becoming significant market differentiators.
Customer service is particularly important in the sale of class rings
because of the high degree of customization and the emphasis on timely
delivery. Class rings are marketed through different channels that have
different quality and price points. Competitors in the sale of class rings
primarily consists of two firms: Herff Jones, Inc. and Commemorative Brands,
Inc. (CBI), which markets the Balfour and ArtCarved brands. Herff Jones, Inc.
distributes its product in schools in a manner similar to ours, while CBI
distributes its product through multiple distribution channels, including
schools, independent and chain jewelers and mass merchandisers.
In Graduation Products, several national and numerous local and regional
competitors offer products similar to ours.
In Photography products, we compete with Lifetouch, Inc., Herff Jones, Inc.
and a variety of regional and locally owned and operated photographers.
RECOGNITION SEGMENT
Our Recognition segment helps companies and other organizations promote and
recognize achievement in people's careers. We concentrate our efforts in
service recognition and incentive programs designed to help companies achieve
their business objectives through improved employee performance.
We manufacture almost half the products sold including jewelry, rings,
watches and engraved certificates. In addition, we market items manufactured
by other companies, such as Lenox, Waterman, Howard Miller, Oneida and
Waterford.
We serve customers ranging from small and mid-size companies to global
corporations, professional sports teams and special interest associations. We
design, communicate and administer programs, tailoring the products to an
individual organization's needs. We sell our products primarily through
independent sales representatives.
Standardized programs such as Symphony(TM) provide small to mid-sized
clients a variety of recognition options based on how much administrative work
the client wants to outsource and the client's budget. Many larger companies
expect more customized programs and products. We team with them to:
. design jewelry collections that capture the client's corporate identity;
. create brochures that feature product offerings and promote the client's
mission, values and goals; and
. design company-specific web sites for employees to view and choose their
awards.
4
Competition
Principal competitors in the service recognition and incentive program
market include O.C. Tanner Recognition Company, The Robbins Company and The
Tharpe Company, Inc.
INFORMATION REGARDING ALL BUSINESS SEGMENTS
Backlog
Because of the nature of our business, all orders are generally filled
within a few months from the time of placement. However, our School Products
segment obtains student yearbook contracts in one year for a significant
portion of the yearbooks to be delivered in the next year. Often the prices of
the yearbooks are not established at the time of the order because the content
of the books may not be finalized. Subject to the foregoing qualifications, we
estimate the backlog of orders related to continuing operations was
approximately $305.0 million as of the end of 1999, compared with $292.0
million as of the end of 1998, primarily related to student yearbooks, jewelry
and graduation products. We expect most of the 1999 backlog to be confirmed and
filled in 2000.
Environmental
Matters pertaining to the environment are discussed in ITEM 7 and in ITEM 8,
Note 13 of the Notes to Consolidated Financial Statements, included in this
Form 10-K and are incorporated herein by reference.
Raw Materials
The principal raw materials that we purchase are gold, paper products, and
precious, semiprecious and synthetic stones. Any material increase in the price
of gold could adversely impact our cost of sales.
We purchase substantially all synthetic and semiprecious stones from a
single supplier, located in Germany, who is also a supplier to almost all of
the class ring manufacturers in the United States. We believe that the loss of
this supplier could adversely affect our business during the time period in
which alternate sources adapted their production capabilities to meet increased
demand.
Matters pertaining to our market risks are discussed in ITEM 7A,
Quantitative and Qualitative Disclosures about Market Risk, included in this
Form 10-K and are incorporated herein by reference.
Intellectual Property
We have licenses, trademarks and copyrights that in aggregate, are an
important part of our business. However, we do not regard our business as being
materially dependent upon any single license, trademark or copyright. We have
trademark registration applications pending and will pursue other registrations
as appropriate to establish and preserve our intellectual property rights.
Employees
As of the end of January 2000 we had approximately 6,700 employees, of which
approximately 300 were members of two separate unions. Because of the
seasonality of our business, the number of employees tends to vary. We have
never suffered an interruption of business that had a material impact on our
operations as a result of a labor dispute and consider our relationship with
our employees to be good.
Foreign Operations
Our foreign sales are derived primarily from operations in Canada. The
accounts and operations of our foreign businesses, excluding Canada, are not
material. Local taxation, import duties, fluctuation in currency exchange rates
and restrictions on exportation of currencies are among risks attendant to
foreign operations, but these risks are not considered material with respect to
our business. The profit margin on foreign sales is approximately the same as
the profit margin on domestic sales.
5
ITEM 2. PROPERTIES
Our physical properties are summarized below:
Approximate
Owned square
Business segment Location Type of property or leased footage
---------------- ------------------ ------------------- --------- -----------
School Products.. Anaheim, CA Office Leased 12,000
Attleboro, MA Manufacturing Owned 52,000
Burnsville, MN Manufacturing Leased 47,000
Clarksville, TN Manufacturing Owned 105,000
Denton, TX Manufacturing Owned 56,000
Laurens, SC Manufacturing Owned 98,000
Laurens, SC Warehouse Leased 105,000
Owatonna, MN Office Owned 88,000
Owatonna, MN Manufacturing Owned 30,000
Owatonna, MN Warehouse Leased 29,000
Red Wing, MN Manufacturing Owned 132,000
Shelbyville, TN Manufacturing Owned 87,000
State College, PA Manufacturing Owned 66,000
Topeka, KS Manufacturing Owned 236,000
Visalia, CA Manufacturing Owned 96,000
Winnipeg, MAN Manufacturing Owned 69,000
Winnipeg, MAN Office Leased 28,000
Winston-Salem, NC Manufacturing Owned 132,000
Webster, NY (2) Manufacturing Owned 60,000
Recognition...... Memphis, TN Distribution center Owned 67,000
Princeton, IL Manufacturing Owned 65,000
Saddle Brook, NJ Office Leased 6,000
Sherbrooke, QUE Distribution center Leased 15,000
Other............ Bloomington, MN (1) Office Owned 116,000
Bloomington, MN Office Leased 37,000
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(1) A portion of this facility has been financed through revenue bonds.
(2) Closed and currently held for sale.
We believe that our production facilities are suitable for their purpose and
are adequate to support our businesses. The extent of utilization of individual
facilities varies due to the seasonal nature of the business.
ITEM 3. LEGAL PROCEEDINGS
In January 1999, a federal judge in Texas overturned a jury's $25.3 million
verdict against Jostens in an antitrust lawsuit. The judge, acting on Jostens'
post-trial motions, set aside the jury's verdict and dismissed all claims
against Jostens in the case. Yearbook competitor Taylor Publishing Company, who
is also the plaintiff in the case, has appealed the decision and is seeking to
have the jury verdict reinstated. Briefs have been filed and oral arguments
were held on December 8, 1999. The date for the decision from the Fifth Circuit
Court of Appeals has not been determined. No costs were accrued related to the
lawsuit because we believe a loss is not "probable and estimable."
Following the public announcement of the merger, three purported class
actions were filed, two on December 30, 1999 and the third on January 14, 2000,
in the Fourth Judicial District of the District Court for the State of
Minnesota, County of Hennepin ("the Court"). By order of the Honorable Daniel
H. Mabley dated January 21, 2000, the Actions were consolidated, and the
Complaint in File No. MC 99-18533 was thereafter designated as the Consolidated
Complaint.
6
The Consolidated Complaint is purportedly brought on behalf of a class of
"all holders of Jostens common stock who are being and will be harmed" by the
actions alleged in the Consolidated Complaint. In the Consolidated Complaint,
the plaintiffs allege that the individual defendants, by virtue of their
positions as officers and directors of Jostens, owe fiduciary duties to the
shareholders of Jostens, and that by allegedly failing to take all steps
reasonably required to maximize the value shareholders will receive in a sale
of Jostens, the defendants have breached such duties. More specifically, the
plaintiffs allege that the defendants have taken actions designed to halt any
other offers and deter higher offers from other potential acquirers including,
among other things:
. allegedly concealing Jostens' fourth quarter results until after the
defendants entered into and disclosed the existence of the merger
agreement, thus allegedly capping the price of Jostens' common stock;
. allegedly agreeing to include in the merger agreement a termination fee
provision which would under specified circumstances require Jostens to
pay Saturn Acquisition the sum of $24 million, together with Investcorp's
expenses, in the event that Jostens receives a superior offer and
terminates the merger agreement;
. allegedly structuring a "preferential deal" pursuant to which some of the
defendants would receive "change of control" payments following the
consummation of the proposed merger; and
. allegedly failing to announce any active auction, open bidding, or any
other procedures best calculated to maximize shareholder value.
The Consolidated Complaint seeks an order of the Court:
. enjoining the defendants from proceeding with the merger;
. enjoining the defendants from consummating the merger, or a business
combination with a third party, unless and until Jostens adopts and
implements a procedure or process, such as an auction, to obtain the
highest possible price for Jostens;
. directing the individual defendants to exercise their fiduciary duties to
obtain a transaction which is in the best interests of shareholders until
the process for the sale or auction of Jostens is completed and the
highest possible price is obtained;
. awarding compensatory damages against the defendants;
. awarding the plaintiffs the costs and disbursements of the Consolidated
Complaint, including reasonable attorneys' and experts' fees; and
. granting such further relief as the Court may deem just and proper.
Jostens is a party to other litigation arising in the normal course of
business. We regularly analyze current information and, as necessary, provide
accruals for probable liabilities on the eventual disposition of these matters.
We believe the effect on our consolidated results of operations and financial
position, if any, for the disposition of these matters will not be material.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
NONE
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED SECURITY HOLDER
MATTERS
Our common stock trades on the New York Stock Exchange under the trading
symbol "JOS." As of December 31, 1999, there were 5,044 shareholders of record.
Quarterly market and dividend information can be found in ITEM 8, Note 15 of
the Notes to Consolidated Financial Statements, included in this Form 10-K and
is incorporated herein by reference.
7
ITEM 6. SELECTED FINANCIAL DATA
The table below sets forth summary consolidated historical data relating to
Jostens. The summary historical financial information for the years ended
January 1, 2000, January 2, 1999, January 3, 1998; the six month period ended
December 28, 1996; and for each of the two years ended June 30, 1996 and 1995
was derived from the audited historical Consolidated Financial Statements of
Jostens.
Financial Summary of Selected Financial Data Jostens, Inc. and subsidiaries
(2) (3) (4) (4) (5) (6)
---------- ---------- ---------- ---------------- ------------------
Years ended Six months ended Years ended
--------------------------------- ---------------- ------------------
January 1, January 2, January 3, December 28, June 30, June 30,
2000 1999 1998 1996 1996 1995
---------- ---------- ---------- ---------------- -------- --------
(In millions, except per share data)
Statement of Operations
Net sales .............. $782.4 $770.9 $742.5 $ 277.1 $695.1 $665.1
Cost of products sold .. 349.7 351.8 351.3 141.5 332.2 313.7
Operating income ....... 81.7 102.2 99.7 4.2 94.8 94.6
Net interest expense ... 7.0 6.7 6.3 4.1 7.3 0.7
Income taxes ........... 31.5 41.7 36.2 0.8 35.9 38.0
Income (loss) --
continuing operations
....................... 43.2 41.8 57.2 (0.8) 51.6 55.9
Net income (loss) ...... 43.2 41.8 57.2 (0.8) 51.6 50.4
Return on sales --
continuing operations
....................... 5.5% 5.4% 7.7% (0.3%) 7.4% 8.4%
Return on average
shareholders'
investment . 90.8% 45.1% 47.7% (0.7%) 26.3% 19.1%
------ ------ ------ ------- ------ ------
Balance Sheet Data
Current assets ......... $286.3 $240.5 $252.5 $ 257.5 $251.3 $402.4
Working capital (1) .... (70.8) (47.2) 6.3 11.8 8.9 206.3
Property and equipment,
net ................... 84.6 88.6 74.1 67.6 67.0 67.8
Total assets ........... 407.7 366.2 390.7 383.8 384.0 548.0
Short-term borrowings .. 117.6 93.9 50.0 90.9 27.6 --
Long-term debt,
including current
maturities 3.6 3.6 3.6 3.9 53.9 54.3
Shareholders' investment
....................... 36.5 58.6 127.1 112.6 121.8 270.6
------ ------ ------ ------- ------ ------
Common Share Data
Basic EPS -- continuing
operations ............ $ 1.27 $ 1.14 $ 1.47 $ (0.02) $ 1.29 $ 1.23
Basic EPS -- net income
(loss) ................ 1.27 1.14 1.47 (0.02) 1.29 1.11
Diluted EPS --
continuing operations
....................... 1.27 1.14 1.47 (0.02) 1.28 1.22
Diluted EPS -- net
income (loss) ......... 1.27 1.14 1.47 (0.02) 1.28 1.10
Cash dividends declared
per share ............. 0.88 0.88 0.88 0.22 0.88 0.88
Common shares
outstanding at period
end.................... 33.3 35.1 38.4 38.7 38.7 45.5
Stock price -- high .... 27 1/8 26 1/4 28 13/16 22 1/4 25 1/8 21 5/8
Stock price -- low ..... 17 9/16 19 20 17 1/4 19 1/2 15 3/4
------ ------ ------ ------- ------ ------
Other Data
Depreciation and
amortization .......... $ 25.3 $ 23.2 $ 22.1 $ 9.9 $ 16.6 $ 28.3
Capital expenditures ... 27.8 36.9 24.4 9.9 15.4 28.7
------ ------ ------ ------- ------ ------
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(1) Represents current assets less current liabilities.
(2) Net income in 1999 reflects a pre-tax special charge of $20.2 million
($13.3 million after tax or 39 cents per share).
(3) Net income in 1998 reflects an after tax charge of $15.7 million (43 cents
per share) for the write-off of JLC notes receivable of $12.0 million and
related net deferred tax assets of $3.7 million.
(4) Net income in 1998 and 1997 reflects pre-tax gains of $3.7 million ($2.2
million after tax or 6 cents per share) and $6.8 million ($4.0 million
after tax or 10 cents per share), respectively, resulting from a reduction
in LIFO gold inventories.
(5) In 1996, the company changed its fiscal year end from June 30 to the
Saturday closest to December 31, resulting in a six-month transition period
from July 1 to December 28, 1996.
(6) Net income reflects a loss from discontinued operations of $4.9 million (11
cents per share) for our JLC and Wicat Systems businesses. Net income also
reflects the cumulative effect of adopting SFAS 112 of $1.1 million ($0.6
million after tax, or one cent per share).
8
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
We occasionally may make statements regarding our business and markets, such
as projections of future performance, statements of our 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. 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. Forward-looking statements may appear in this document or other
documents, reports, press releases and written or oral presentations made by
our officers 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
our subsequent filings with the Securities and Exchange Commission ("SEC").
Any change in the following factors may impact the achievement of results:
the proposed merger and recapitalization; our ability to achieve the intended
benefits of our corporate restructuring; the price of gold; our dependence on a
key supplier for our synthetic and semiprecious stones; the seasonality of our
School Products business; general economic conditions, especially during peak
buying seasons for our products; competitive pricing and program changes;
manufacturing performance; our relationship with our sales forces; our ability
to respond to customer change orders and delivery schedules; fashion and
demographic trends; our ability to control costs and our ability to maintain
our customer base.
The foregoing factors are not exhaustive, and new factors may emerge or
changes to the foregoing factors may occur that would impact our business.
RESULTS OF OPERATIONS
The following table sets forth selected information from our Consolidated
Statements of Operations, expressed as a percentage of net sales.
Percentage of net sales Percentage change
------------------------- -------------------------
1999 1998 1997 1999 to 1998 1998 to 1997
------- ------- ------- ------------ ------------
Net sales................ 100.0% 100.0% 100.0% 1.5% 3.8%
Cost of products sold.... 44.7% 45.6% 47.3% (0.6%) 0.1%
------- ------- ------- ------ -----
Gross profit........... 55.3% 54.4% 52.7% 3.3% 7.1%
Selling and
administrative
expenses................ 42.3% 41.1% 39.3% 4.4% 8.7%
Special charge........... 2.6% 0.0% 0.0% -- --
------- ------- ------- ------ -----
Operating income......... 10.4% 13.3% 13.4% (20.1%) 2.5%
Net interest expense..... 0.9% 0.9% 0.8% 5.1% 6.1%
Write-off of JLC notes
receivable, net......... 0.0% 1.6% 0.0% (100.0%) --
------- ------- ------- ------ -----
Income before income
taxes................. 9.5% 10.8% 12.6% (10.6%) (10.6%)
Income taxes............. 4.0% 5.4% 4.9% (24.5%) 15.2%
------- ------- ------- ------ -----
Net income............... 5.5% 5.4% 7.7% 3.2% (26.9%)
======= ======= ======= ====== =====
Net sales
Net sales in 1999, 1998 and 1997 were $782.4 million, $770.9 million and
$742.5 million, respectively. The increase from 1998 to 1999 of $11.5 million,
or 1.5 percent, was driven by price increases in our School Products segment
and volume increases in class rings and yearbook pages. These increases were
offset by overall volume decreases in our other product lines. The increase
from 1997 to 1998 of $28.4 million, or 3.8
9
percent, was driven by increases in sales volume and pricing in our three
largest product lines (Printing & Publishing, Jewelry and Graduation Products).
Price increases in 1999 and 1998 varied by product and ranged from zero to four
percent. The following is an explanation of changes in net sales by business
segment.
School Products segment net sales in 1999, 1998 and 1997 were $675.5
million, $653.9 million and $624.5 million, respectively. The increase from
1998 to 1999 of $21.6 million, or 3.3 percent, was primarily driven by price
increases in all school product lines and a unit volume increase of 2.2 percent
in Jewelry, primarily due to strong sales in the high school market. In
addition, we experienced yearbook page volume increases and higher sales of
add-on features in our Printing & Publishing product line. These increases were
offset by a decline in commercial printing volume (used to fill excess
capacity), higher than expected yearbook rebates and returns due to problems
encountered with Jostens Direct Solutions ("JDS") (a direct payment program for
parents of high school students), a decrease in photography sales volume due to
closing eleven unprofitable retail sites and not renewing our relationships
with a number of independent wholesale dealers. In addition, the first half of
1998 included approximately $9.9 million in Jewelry, Graduation Products, and
Printing & Publishing sales volume from an independent sales group that left in
mid-1998.
The increase of $29.4 million, or 4.5 percent, from 1997 to 1998 was due to
increased pricing in all school product lines and new marketing programs which
resulted in higher sales of yearbooks and add-on features in our Printing &
Publishing product line. In addition, we had a 5.2 percent increase in Jewelry
units sold in 1998 primarily due to sales of specially designed rings for
students graduating in 1999, 2000 and 2001 (the "Millennium classes"). These
increases were offset by a decline in commercial printing volume as more
production capacity was used to produce higher margin yearbooks, and a decrease
in photography sales volume as we did not renew our relationships with a number
of independent wholesale dealers whose volume generated unacceptable returns.
In addition, we lost about $2.9 million in Jewelry and Graduation Products
sales volume due to an independent sales group that left in mid-1998.
Recognition segment net sales in 1999, 1998 and 1997 were $97.0 million,
$103.9 million and $103.7 million, respectively. The decrease of 6.7 percent
from 1998 to 1999 was primarily due to lower sales volume caused by issues
related to the new system implemented in the first quarter of 1999 as part of
our year 2000 compliance efforts. In 1998 Recognition sales were flat with 1997
as we realigned sales management, drove internal efficiencies and streamlined
business processes in advance of the system implementation.
The Other segment is comprised primarily of corporate expenses, the results
of the direct marketing sales channel to college alumni, international sales
and expenses and expenses associated with new product development. Net sales in
1999, 1998 and 1997 were $9.9 million, $13.1 million and $14.3 million,
respectively. The decreases of $3.2 million in 1999 compared with 1998, and
$1.2 million in 1998 compared with 1997 were primarily due to lower sales
volume resulting from a decline in response rates and fewer mailings in our
direct marketing program to college alumni. As part of the 1999 special charge,
we decided to closedown the direct marketing program to college alumni due to
1999 performance and forecasted decline in sales volume. In addition, we
experienced International sales volume decreases from 1997 to 1998 due to sales
representatives in Puerto Rico not renewing their contracts. We replaced these
sales representatives in the second-half of 1999.
Gross Margin
Gross margin in 1999 was 55.3 percent, compared with 54.4 percent in 1998
and 52.7 percent in 1997. The 2.6 percentage point increase in gross margin
from 1997 to 1999 was primarily the result of increased pricing and
manufacturing efficiencies.
Improvements in 1999 included:
. exiting the ring production facility in Nuevo Laredo, Mexico, which
experienced higher than expected costs, and moving all ring manufacturing
back to the United States; and
. closing eleven unprofitable retail photo sites.
10
Improvements in 1999 were offset by:
. approximately $2.5 million of expenses incurred in 1999 to exit the Nuevo
Laredo, Mexico facility;
. higher costs in 1999 due to problems encountered with JDS; and
. higher costs in Recognition due to issues related to the new system
implemented in the first quarter of 1999 as part of our year 2000
compliance efforts.
Improvements in 1998 included:
. consolidating all photography processing into one facility;
. a one-time pre-tax benefit of $3.7 million in 1998 due to a reduction in
the remaining LIFO gold inventories resulting from our expansion of
consigned gold; and
. a decrease in raw material costs for jewelry compared with 1997.
Improvements in 1998 were offset by:
. a one-time charge of $2.5 million in 1998 to consolidate all photography
processing into one facility; and
. a one-time pre-tax benefit of $6.8 million in 1997 due to a reduction in
a portion of the LIFO gold inventories resulting from our decision to
consign gold.
Selling and Administrative Expenses
Selling and administrative expenses in 1999, 1998 and 1997 were $330.9
million, $316.9 million and $291.5 million, respectively. The 4.4 percent
increase in 1999 from 1998 and 8.0 percent increase in 1998 from 1997 were
primarily the result of investments in information systems to ensure year 2000
readiness and higher costs associated with market development activities.
Special Charge
In the fourth quarter of 1999, we completed a strategic review of product
lines, manufacturing operations, infrastructure projects, and support functions
based on performance trends. In addition, we decided to refocus our
organization on sales growth versus infrastructure improvement. As a result of
this review, we incurred a pre-tax special charge of $20.2 million ($13.3
million after tax or $0.39 per share), which was approved by our Board of
Directors.
Information relating to the special charge follows:
Balance
Initial Used in end of
accrual 1999 1999
------- ------- -------
(In thousands)
Employment termination benefits....................... $ 4,910 $ -- $4,910
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 direct
marketing sales channel to college alumni............ 3,086 3,086 --
Other costs related to exiting the direct marketing
sales channel to college alumni...................... 1,183 270 913
------- ------- ------
$20,194 $14,161 $6,033
======= ======= ======
Of the $20.2 million special charge, $4.8 million relates to the School
Products segment and $15.4 million relates to the "Other" segment.
11
Included in other accrued liabilities on the consolidated balance sheets is
the unused portion of the special charge of $6.0 million, which will be used or
paid in 2000.
Of the total special charge, $4.9 million relates to employee termination
benefits for the elimination of about 100 full-time positions, primarily in
corporate staff and executive functions and in exiting the direct marketing
sales channel to college alumni. Headcount reductions will be completed and
termination benefits paid in 2000.
We reviewed and modified our strategies for the retail class ring product
line and, as a result, determined that the carrying value of the related
goodwill was impaired based upon anticipated inadequate projected cash flows.
Accordingly, an impairment charge of $4.6 million was recorded as part of the
special charge for the write-off of all of the goodwill.
We also reviewed the Jostens Direct business and decided in the fourth
quarter of 1999 to close down the business due to 1999 performance and
forecasted decline in sales volume. As a result of that decision, the remaining
balance of the related goodwill of $3.1 million was written off and other
exiting costs of $1.2 million were recorded.
We estimate the pre-tax future savings of the 1999 special charge to be
approximately $8.0 million in 2000 and $10.0 million in 2001 and beyond.
Operating Income (Loss)
Excluding the special charge of $20.2 million, operating income in 1999 was
$101.9 million compared with $102.2 million in 1998 and $99.7 million in 1997.
The following is an explanation of changes in operating income by business
segment.
School Products operating income in 1999 was $146.7 million, excluding the
special charge of $4.8 million, compared with $127.0 million in 1998 and $108.8
million in 1997.
The $19.7 million, or 15.5 percent, increase in 1999 compared with 1998
primarily resulted from:
. increased sales; and
. manufacturing efficiencies due to exiting the Nuevo Laredo, Mexico
facility and moving all ring manufacturing back to the United States.
These were partially offset by:
. approximately $2.5 million of expenses incurred in 1999 to exit the
Nuevo, Laredo, Mexico facility; and
. higher costs in 1999 due to problems encountered with JDS.
The $18.2 million, or 16.7 percent, increase in 1998 compared with 1997
primarily resulted from:
. consolidating all photography processing into one facility;
. decreased cycle times and lower costs in Printing & Publishing due to
operating plants with common management teams;
. a one-time pre-tax benefit of $2.3 million in 1998 due to a reduction in
the remaining LIFO gold inventories resulting from our expansion of
consigned gold;
. a decrease in raw material costs for jewelry compared with 1997; and
. a one-time charge of $2.6 million in 1997 to close an announcement plant.
12
These were partially offset by:
. a one-time charge of $2.5 million in 1998 to consolidate all photography
processing into one facility;
. higher than expected costs associated with the Nuevo Laredo, Mexico
facility; and
. a one-time pre-tax benefit of $5.4 million in 1997 due to a reduction in
a portion of the LIFO gold inventories resulting from our decision to
consign gold.
Recognition had an operating loss in 1999 of $0.4 million compared with
operating income of $10.4 million in 1998 and $8.9 million in 1997.
The $10.8 million decrease in 1999 compared with 1998 was primarily due to:
. decreased sales;
. higher costs caused by issues related to the new system implemented in
the first quarter of 1999 as part of our year 2000 compliance efforts;
and
. a one-time pre-tax benefit of $1.4 million in 1998 due to a reduction in
the remaining LIFO gold inventories resulting from our expansion of
consigned gold.
The $1.5 million increase in 1998 compared with 1998 was primarily the
result of:
. $3.3 million in material cost reductions, overhead spending reductions
and production efficiency improvements; and
. a partial offset by $1.8 million of additional investments in sales and
marketing staff to realign sales management.
Operating loss for the "Other" segment in 1999 was $44.5 million, excluding
the special charge of $15.4 million, compared with $35.3 million in 1998 and
$18.1 million in 1997.
The $9.2 million operating loss increase in 1999 compared with 1998 and
$17.2 million increase in 1998 compared with 1997 resulted primarily from:
. higher costs related to investments in information systems as part of our
year 2000 compliance efforts and
. higher costs associated with market development activities.
Net Interest Expense
Net interest expense was $7.0 million in 1999 compared with $6.7 million in
1998 and $6.3 million in 1997. The year-over-year increases reflect higher
borrowings partially offset by a decline in average interest rates. As a result
of the proposed merger and recapitalization, we will have significantly more
debt that will result in much higher future interest expense.
Write-off of JLC Notes Receivable, Net
In June 1995 we sold our Jostens Learning Corp. ("JLC") curriculum software
subsidiary to a group led by Bain Capital, Inc. As partial consideration for
the sale, we received two notes which were subsequently discounted and recorded
at their estimated fair values. In addition, a transaction gain of $13.2
million was 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." The notes were subsequently recorded at their estimated fair
value of $12.9 million, net of deferred gain.
In January 1999, we received information indicating to us that the carrying
value of the notes was permanently impaired. As a result, we wrote-off $12.0
million in 1998 for the carrying value of the notes, net
13
of miscellaneous JLC-related assets and liabilities, plus $3.7 million of net
deferred tax assets associated with the initial sale of JLC. We did not record
a tax benefit related to the write-off for financial reporting purposes because
the tax benefit may not be realized.
Income Taxes
Our 1999 effective income tax rate was 42.2 percent compared with 49.9
percent in 1998 and 38.8 percent in 1997. The 7.7 percentage point decrease in
1999 from 1998 and the 11.1 percentage point increase in 1998 from 1997 were
primarily due to the write-off in 1998 of $3.7 million of net deferred tax
assets related to our 1995 sale of JLC, and the fact that no tax benefit was
recorded for financial reporting purposes on the JLC-notes that were written
off.
Other items that impacted our tax rates for the three years included: the
write-off of $3.1 million of nondeductible goodwill in connection with the
special charge in 1999; a benefit of $0.8 million for the reduction of a
valuation reserve in 1998 to reflect the utilization of previously reserved
foreign tax credits as a result of executed tax planning strategies; and the
recognition of $2.0 million of accumulated net operation loss carryforwards
benefits in 1997 through the reversal of a deferred tax asset valuation reserve
as a result of combining our U.S. Photography legal entity with the main U.S.
businesses.
We expect our effective tax rate in 2000 to be 40.5 percent before the
effects of the proposed merger and recapitalization.
LIQUIDITY AND CAPITAL RESOURCES
Cash generated from operating activities and availability under short-term
borrowing agreements have been our principal sources of liquidity in 1999, 1998
and 1997. These funds covered our share repurchases, dividend payments, and
investments in property and equipment and equity investments.
Operating Activities
Operating activities generated cash of $125.2 million in 1999 compared with
$101.6 million in 1998 and $116.7 million in 1997. The $23.6 million increase
in 1999 over 1998 was primarily due to increased customer deposits, partially
offset by other working capital decreases. The $15.1 million decrease in cash
generated in 1998 compared with 1997 primarily reflected a change in the timing
of customer deposit collections resulting from a vendor change in the JDS
program.
Investing Activities
Capital expenditures in 1999, 1998 and 1997 were $27.8 million, $36.9
million and $24.4 million, respectively. The $9.1 million decrease in 1999 over
1998 and the $12.5 million increase in 1998 over 1997 was primarily due to
higher spending in 1998 to replace information systems to ensure year 2000
compliance. We anticipate capital spending in 2000 to be about $27.0 million.
In 1999 we invested $10.6 million to take minority equity positions in three
privately-held Internet-based companies which we believe will leverage our
access into, and our sales representatives' relationships with, schools. In
1997, we invested $9.5 million to purchase Gold Lance, our retail class ring
sales channel. An impairment charge of $4.6 million was recorded as part of the
1999 special charge for the write-off of goodwill associated with this sales
channel.
Financing Activities
Dividends paid in 1999 were $30.0 million compared with $32.3 million in
1998 and $34.2 million in 1997. The year-over-year decreases are the result of
common stock repurchases in each of the years. Following
14
the proposed merger and recapitalization, we do not anticipate paying any
dividends to common shareholders for the foreseeable future.
The following table summarizes total amounts available under various
borrowing agreements as of the end of 1999:
Amount
Expiration Total available
date of amount of at the
agreement agreement end of 1999
---------- --------- -----------
(In millions)
Five-year bank credit
agreement.............. 12/20/2000 $180.0 $ 62.4
Unsecured demand
facilities with three
banks.................. (1) 54.5 54.5
Precious metals
consignment arrangement
(2).................... 5/31/2000 25.0 2.9
------ ------
$259.5 $119.8
====== ======
- --------
(1) Facilities are subject to periodic review from time to time and at least
annually.
(2) See Note 5 of Notes to Consolidated Financial Statements.
As a result of the proposed merger and recapitalization, we will have
significantly more debt which will result in much higher interest expense and a
decline in operating cash flows which could adversely affect our future
financial health.
YEAR 2000
In 1997 we began to develop programs to address the impact of the year 2000
on our computer systems. All programs were completed before the century change
and to date we have not experienced any adverse effects resulting from the date
change. Our spending on year 2000 projects since inception was $50.2 million of
which $36.3 million was capitalized.
COMMITMENTS AND CONTINGENCIES
Environmental
As part of our environmental management program, we are involved in various
environmental remediation activities. As sites are identified and assessed in
this program, we determine potential environmental liabilities. Factors
considered in assessing liability include, but are not limited to: whether we
have 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 the end of 1999, we
had identified three sites requiring further investigation. However, we have
not been designated as a potentially responsible party at any site.
We have assessed the likelihood that a loss has been incurred at one of
these sites as probable, and based on findings included in remediation reports
and from discussions with legal counsel, estimated the potential loss as of the
end of 1999 to range from $2.8 million to $3.8 million. As of the end of 1999,
$3.5 million was accrued and is included in "other accrued liabilities" on the
consolidated balance sheets. While we may have a right of contribution or
reimbursement under insurance policies, amounts recoverable from other entities
with respect to a particular site are not considered until recoveries are
deemed probable. No assets for potential recoveries were established as of the
end of 1999.
Litigation
In January 1999, a federal judge in Texas overturned a jury's $25.3 million
verdict against Jostens in an antitrust lawsuit. The judge, acting on Jostens'
post-trial motions, set aside the jury's verdict and dismissed all claims
against Jostens in the case. Yearbook competitor Taylor Publishing Company, who
is also the plaintiff in
15
the case, has appealed the decision and is seeking to have the jury verdict
reinstated. Briefs have been filed and oral arguments were held on December 8,
1999. The date for the decision from the Fifth Circuit Court of Appeals has not
been determined. No costs were accrued related to the lawsuit because we
believe a loss is not "probable and estimable."
Following the public announcement of the merger, three purported class
actions were filed, two on December 30, 1999 and the third on January 14, 2000,
in the Fourth Judicial District of the District Court for the State of
Minnesota, County of Hennepin ("the Court"). By order of the Honorable Daniel
H. Mabley dated January 21, 2000, the Actions were consolidated, and the
Complaint in File No. MC 99-18533 was thereafter designated as the Consolidated
Complaint.
The Consolidated Complaint is purportedly brought on behalf of a class of
"all holders of Jostens common stock who are being and will be harmed" by the
actions alleged in the Consolidated Complaint. In the Consolidated Complaint,
the plaintiffs allege that the individual defendants, by virtue of their
positions as officers and directors of Jostens, owe fiduciary duties to the
shareholders of Jostens, and that by allegedly failing to take all steps
reasonably required to maximize the value shareholders will receive in a sale
of Jostens, the defendants have breached such duties. More specifically, the
plaintiffs allege that the defendants have taken actions designed to halt any
other offers and deter higher offers from other potential acquirers including,
among other things:
. allegedly concealing Jostens' fourth quarter results until after the
defendants entered into and disclosed the existence of the merger
agreement, thus allegedly capping the price of Jostens' common stock;
. allegedly agreeing to include in the merger agreement a termination fee
provision which would under specified circumstances require Jostens to
pay Saturn Acquisition the sum of $24 million, together with Investcorp's
expenses, in the event that Jostens receives a superior offer and
terminates the merger agreement;
. allegedly structuring a "preferential deal" pursuant to which some of the
defendants would receive "change of control" payments following the
consummation of the proposed merger; and
. allegedly failing to announce any active auction, open bidding, or any
other procedures best calculated to maximize shareholder value.
The Consolidated Complaint seeks an order of the Court:
. enjoining the defendants from proceeding with the merger;
. enjoining the defendants from consummating the merger, or a business
combination with a third party, unless and until Jostens adopts and
implements a procedure or process, such as an auction, to obtain the
highest possible price for Jostens;
. directing the individual defendants to exercise their fiduciary duties to
obtain a transaction which is in the best interests of shareholders until
the process for the sale or auction of Jostens is completed and the
highest possible price is obtained;
. awarding compensatory damages against the defendants;
. awarding the plaintiffs the costs and disbursements of the Consolidated
Complaint, including reasonable attorneys' and experts' fees; and
. granting such further relief as the Court may deem just and proper.
Jostens is a party to other litigation arising in the normal course of
business. We regularly analyze current information and, as necessary, provide
accruals for probable liabilities on the eventual disposition of these matters.
We believe the effect on our consolidated results of operations and financial
position, if any, for the disposition of these matters will not be material.
16
NEW ACCOUNTING STANDARDS
In June 1998, the Financial Accounting Standards Board issued Statement SFAS
No. 133, "Accounting for Derivative Instruments and Hedging Activities," as
amended, which is required to be adopted in years beginning after June 15,
2000. The effect of adopting the Statement is not currently expected to have a
material effect on our future financial position or overall trends in results
of operations.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market Risk
We are subject to market risk associated with changes in commodity prices,
interest rates and foreign currency exchange rates. To reduce any one of these
risks, we may at times use financial instruments. All hedging transactions are
authorized and executed under clearly defined policies and procedures, which
prohibit the use of financial instruments for trading purposes.
Commodity Price Risk
Our results of operations could be significantly affected by changes in the
price of gold. To manage the risk associated with gold price changes, on an
annual basis we simultaneously set our pricing to customers and enter into gold
forward or option contracts based upon the estimated ounces needed to satisfy
customer requirements. We prepared a sensitivity analysis as of the end of 1999
to estimate our exposure to market risk on our open gold forward purchase
contracts. The fair market value of our gold positions was calculated by
valuing each position at quoted futures prices as of the end of 1999 and 1998,
and was $18.0 million and $17.8 million, respectively. The market risk
associated with these contracts was $1.8 million as of the end of 1999 and
1998, and is estimated as the potential loss in fair value resulting from a
hypothetical 10 percent adverse change in such prices.
Interest Rate Risk
Our earnings are affected by changes in short-term interest rates as a
result of our issuing short-term commercial paper. As of the end of 1999 and
1998, the fair market value of our outstanding commercial paper approximated
the carrying value. If market interest rates for commercial paper borrowings
averaged 10 percent more or less in 1999 and 1998, our interest expense would
have changed by approximately $0.7 million in 1999 and 1998.
Foreign Currency Risk
We may enter into foreign currency forward contracts to hedge purchases of
inventory in foreign currency. The purpose of these hedging activities is to
protect us from the risk that inventory purchases denominated in foreign
currencies will be adversely affected by changes in foreign currency rates. Our
principal currency exposures relate to the Canadian dollar and German mark. We
consider our market risk in such activities to be immaterial. Our foreign
operations are primarily in Canada, and substantially all transactions are
denominated in the local currency. Therefore, the exposure to exchange risks is
not considered to be material.
17
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
REPORT OF MANAGEMENT
We are responsible for the integrity and objectivity of the financial
information presented in this report. The financial statements have been
prepared in conformity with accounting principles generally accepted in the
United States and include certain amounts based on our best estimates and
judgment.
We are also responsible for establishing and maintaining our accounting
systems and related internal controls, which are designed to provide reasonable
assurance that assets are safeguarded and transactions are properly recorded.
These systems and controls are reviewed by the internal auditors. In addition,
our code of conduct states that our affairs are to be conducted under the
highest ethical standards.
The independent auditors provide an independent review of the financial
statements and the fairness of the information presented therein. The Audit
Committee of the Board of Directors, composed solely of outside directors,
meets regularly with us, our internal auditors and our independent auditors to
review audit activities, internal controls and other accounting, reporting and
financial matters. Both the independent auditors and internal auditors have
unrestricted access to the Audit Committee.
William N. Priesmeyer
Senior Vice President and Chief Financial Officer
Robert C. Buhrmaster
Chairman of the Board, President and Chief Executive Officer
Minneapolis, Minnesota
February 2, 2000
18
REPORT OF INDEPENDENT AUDITORS
To the Shareholders of Jostens, Inc.:
We have audited the accompanying consolidated balance sheets of Jostens,
Inc. and subsidiaries as of January 1, 2000 and January 2, 1999, and the
related consolidated statements of operations, changes in shareholders'
investment and cash flows for each of the three fiscal years in the period
ended January 1, 2000. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Jostens, Inc.
and subsidiaries as of January 1, 2000 and January 2, 1999, and the
consolidated results of their operations and cash flows for each of the three
fiscal years in the period ended January 1, 2000, in conformity with accounting
principles generally accepted in the United States.
Ernst & Young LLP
Minneapolis, Minnesota
February 2, 2000
19
JOSTENS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
1999 1998 1997
-------- -------- --------
(In thousands, except per-
share data)
Net sales......................................... $782,438 $770,917 $742,479
Cost of products sold............................. 349,691 351,795 351,290
-------- -------- --------
Gross profit.................................... 432,747 419,122 391,189
Selling and administrative expenses............... 330,895 316,933 291,527
Special charge.................................... 20,194 -- --
-------- -------- --------
Operating income.................................. 81,658 102,189 99,662
Interest income................................... (487) (366) (587)
Interest expense.................................. 7,486 7,026 6,866
Write-off of JLC notes receivable, net............ -- 12,009 --
-------- -------- --------
Income before income taxes...................... 74,659 83,520 93,383
Income taxes...................................... 31,480 41,700 36,200
-------- -------- --------
Net income........................................ $ 43,179 $ 41,820 $ 57,183
======== ======== ========
Earnings per common share
Basic........................................... $ 1.27 $ 1.14 $ 1.47
Diluted......................................... $ 1.27 $ 1.14 $ 1.47
-------- -------- --------
Weighted average common shares outstanding
Basic........................................... 34,004 36,527 38,773
Diluted......................................... 34,093 36,705 38,969
-------- -------- --------
See accompanying notes to consolidated financial statements.
20
JOSTENS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
January 1, 2000 and January 2, 1999
1999 1998
-------- --------
(In thousands,
except per-share
ASSETS data)
Current assets
Cash and cash equivalents.................................. $ 38,517 $ 2,595
Accounts receivable, net of allowance of $5,775 and $7,308,
respectively.............................................. 107,638 106,347
Inventories................................................ 87,839 90,494
Deferred income taxes...................................... 17,400 14,682
Salespersons overdrafts, net of allowance of $6,332 and
$7,061, respectively...................................... 26,194 20,689
Prepaid expenses and other current assets.................. 8,721 5,737
-------- --------
Total current assets..................................... 286,309 240,544
-------- --------
Other assets
Intangibles, net........................................... 18,895 28,165
Other...................................................... 17,872 8,811
-------- --------
Total other assets....................................... 36,767 36,976
-------- --------
Property and equipment, net................................ 84,640 88,647
-------- --------
$407,716 $366,167
======== ========
LIABILITIES AND SHAREHOLDERS' INVESTMENT
Current liabilities
Short-term borrowings...................................... $117,608 $ 93,922
Accounts payable........................................... 23,641 23,682
Employee compensation...................................... 29,478 27,560
Commissions payable........................................ 26,134 22,131
Customer deposits.......................................... 112,958 92,092
Income taxes............................................... 17,223 4,713
Other accrued liabilities.................................. 30,100 23,679
-------- --------
Total current liabilities................................ 357,142 287,779
Other noncurrent liabilities............................... 14,064 19,836
-------- --------
Total liabilities.......................................... 371,206 307,615
Commitments and contingencies
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 January 1, 2000 --33,324; January 2, 1999
-- 35,071................................................. 11,108 11,690
Retained earnings.......................................... 31,072 54,627
Accumulated other comprehensive loss....................... (5,670) (7,765)
-------- --------
Total shareholders' investment........................... 36,510 58,552
-------- --------
$407,716 $366,167
======== ========
See accompanying notes to consolidated financial statements.
21
JOSTENS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
1999 1998 1997
-------- -------- --------
(In thousands)
Operating activities
Net income...................................... $ 43,179 $ 41,820 $ 57,183
Depreciation.................................... 23,329 20,587 19,845
Amortization.................................... 2,009 2,584 2,297
Deferred income taxes........................... (2,671) 15,712 (3,403)
Special charge (non-cash portion)............... 14,101 -- --
Write-off of JLC notes receivable, net.......... -- 12,009 --
Changes in assets and liabilities, net of
effects of business acquisition:
Accounts receivable........................... (1,291) 2,167 (651)
Inventories................................... 2,655 1,568 6,431
Salespersons overdrafts....................... (5,505) 4,806 (602)
Prepaid expenses and other current assets..... (2,984) (1,058) 4,554
Accounts payable.............................. 8,364 (1,171) 1,506
Employee compensation......................... 1,918 8,114 4,457
Commissions payable........................... 4,003 2,909 1,628
Customer deposits............................. 20,866 (6,567) 22,625
Income taxes.................................. 12,593 (6,044) 5,658
Other......................................... 4,653 4,179 (4,811)
-------- -------- --------
Net cash provided by operating activities... 125,219 101,615 116,717
-------- -------- --------
Investing activities
Purchases of property and equipment............. (27,830) (36,936) (24,381)
Business acquisition............................ -- -- (9,883)
Equity investments.............................. (10,611) -- --
Other........................................... 1,262 1,675 --
-------- -------- --------
Net cash used for investing activities...... (37,179) (35,261) (34,264)
-------- -------- --------
Financing activities
Net short-term borrowings (repayments).......... 15,281 38,248 (36,238)
Principal payments on long-term debt............ -- -- (281)
Dividends paid.................................. (29,998) (32,332) (34,198)
Proceeds from exercise of stock options......... 2,452 4,258 11,693
Repurchases of common stock..................... (39,853) (80,001) (20,000)
-------- -------- --------
Net cash used for financing activities...... (52,118) (69,827) (79,024)
-------- -------- --------
Change in cash and cash equivalents............. 35,922 (3,473) 3,429
Cash and cash equivalents, beginning of period.. 2,595 6,068 2,639
-------- -------- --------
Cash and cash equivalents, end of period........ $ 38,517 $ 2,595 $ 6,068
======== ======== ========
Supplemental information
Income taxes paid............................... $ 20,623 $ 32,357 $ 26,300
Interest paid................................... $ 5,702 $ 6,426 $ 5,900
-------- -------- --------
See accompanying notes to consolidated financial statements.
22
JOSTENS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' INVESTMENT
Accumulated
Common shares other
--------------- Capital Retained comprehensive Comprehensive
Number Amount surplus earnings loss Total income
------ ------- ------- -------- ------------- -------- -------------
(In thousands, except per-share data)
Balance -- December 28,
1996................... 38,665 $12,888 $ 1,480 $101,687 $ (3,442) $112,613
Stock options and
restricted stock, net.. 584 241 11,452 11,693
Cash dividends declared
of $0.88 per share..... (34,198) (34,198)
Share repurchases....... (827) (276) (14,430) (5,294) (20,000)
Tax benefit of stock
options................ 1,498 1,498
Net income.............. 57,183 57,183 $57,183
Change in cumulative
translation
adjustment............. (824) (824) (824)
Adjustment in minimum
pension liability, net
of $606 tax............ (872) (872) (872)
-------
Comprehensive income.... $55,487
------ ------- ------- -------- -------- -------- =======
Balance -- January 3,
1998................... 38,422 12,853 -- 119,378 (5,138) 127,093
Stock options and
restricted stock, net.. 234 78 4,180 4,258
Cash dividends declared
of $0.88 per share..... (32,332) (32,332)
Share repurchases....... (3,585) (1,241) (4,521) (74,239) (80,001)
Tax benefit of stock
options................ 341 341
Net income.............. 41,820 41,820 $41,820
Change in cumulative
translation
adjustment............. (1,576) (1,576) (1,576)
Adjustment in minimum
pension liability, net
of $649 tax............ (1,051) (1,051) (1,051)
-------
Comprehensive income.... $39,193
------ ------- ------- -------- -------- -------- =======
Balance -- January 2,
1999................... 35,071 11,690 -- 54,627 (7,765) 58,552
Stock options and
restricted stock, net.. 129 43 2,409 2,452
Cash dividends declared
of $0.88 per share..... (29,998) (29,998)
Share repurchases....... (1,876) (625) (2,492) (36,736) (39,853)
Tax benefit of stock
options................ 83 83
Net income.............. 43,179 43,179 $43,179
Change in cumulative
translation
adjustment............. 1,078 1,078 1,078
Adjustment in minimum
pension liability, net
of $667 tax............ 1,017 1,017 1,017
-------
Comprehensive income.... $45,274
------ ------- ------- -------- -------- -------- =======
Balance -- January 1,
2000................... 33,324 $11,108 $ -- $ 31,072 $ (5,670) $ 36,510
====== ======= ======= ======== ======== ========
See accompanying notes to consolidated financial statements.
23
JOSTENS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Summary of Significant Accounting Policies
Our Business
We are a leading manufacturer and marketer of school-related affinity
products and one of the leading manufacturers and suppliers of corporate-based
affinity products that help people celebrate important moments, recognize
achievements and build affiliations.
Fiscal Year
Our fiscal year ends the Saturday closest to December 31. Fiscal years 1999,
1998 and 1997 ended on January 1, 2000, January 2, 1999 and January 3, 1998,
respectively. Normally each fiscal year consists of 52 weeks, but periodically,
there will be a 53-week year, as was the case in 1997.
Principles of Consolidation
Our consolidated financial statements include the accounts of our company
and our subsidiaries. Significant intercompany accounts and transactions have
been eliminated. Certain balances have been reclassified to conform to the 1999
presentation.
Use of Estimates
The preparation of our consolidated financial statements in conformity with
accounting principles generally accepted in the United States requires us to
make estimates and assumptions that affect the amounts reported in our
consolidated financial statements and accompanying notes. Actual results could
differ from those estimates.
Cash and Cash Equivalents
Cash and cash equivalents include cash on hand, time deposits and commercial
paper. Short-term investments have an original maturity of three months or less
and are considered cash equivalents. Investments in debt securities have an
original maturity of three months or less and are held to maturity. All short-
term securities are carried at amortized cost, which approximates fair value.
Negative cash as of the end of 1998 was $8.4 million and is included in
"accounts payable" on the consolidated balance sheets. There was no negative
cash as of the end of 1999.
Inventories
Inventories are stated at the lower of cost or market. Cost is determined by
the first-in, first-out (FIFO) method for all inventories except gold and
certain other precious metals which are determined using the last-in, first-out
(LIFO) method. LIFO inventories were $0.1 million and $0.2 million as of the
end of 1999 and 1998 and approximate replacement cost.
Net income in 1998 and 1997 reflects pre-tax gains of $3.7 million ($2.2
million after tax or 6 cents per share) and $6.8 million ($3.5 million after
tax or 10 cents per share), respectively, resulting from a reduction in LIFO
gold inventories.
Intangibles
Intangibles primarily represent the excess of the purchase price over the
fair value of the net tangible assets of acquired businesses and are amortized
over various periods of up to 40 years. Accumulated amortization as of the end
of 1999 and 1998 was $14.1 million and $16.6 million, respectively.
24
JOSTENS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
Property and Equipment
Property and equipment are stated at cost. Depreciation and amortization is
computed for financial reporting purposes principally using the straight-line
method over the following estimated useful lives:
Years
--------
Buildings........................................................ 15 to 40
Machinery and equipment.......................................... 3 to 10
Capitalized software............................................. 2 to 5
Impairment of Long-Lived Assets
We review long-lived assets for impairment when events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. If impairment indicators are present and the estimated future
undiscounted cash flows are less than the carrying value of the assets and any
related goodwill, the carrying value is reduced to the estimated fair value as
measured by the discounted cash flows.
Income Taxes
Deferred taxes are recognized for the estimated taxes ultimately payable or
recoverable based on enacted tax law. Changes in enacted tax rates are
reflected in the tax provision as they occur.
Revenue Recognition, Sales Returns and Warranty Costs
Sales are recognized when product is shipped. Provisions for sales returns
and warranty costs are recorded at the time of sale based on historical
information and current trends.
Foreign Currency Translation
Assets and liabilities denominated in foreign currency are translated at the
current exchange rate as of the balance sheet date, and income statement
amounts are translated at the average monthly exchange rate. Translation
adjustments resulting from fluctuations in exchange rates are recorded in
comprehensive income.
Financial Instruments
From time to time, we may use derivative financial instruments to manage
market risks and reduce our exposure resulting from fluctuations in foreign
currency and interest rates. Financial instruments are not used for trading
purposes.
We may enter into foreign currency forward contracts to hedge purchases of
inventory in foreign currency. The purpose of these hedging activities is to
protect us from the risk that inventory purchases denominated in foreign
currency will be adversely affected by changes in foreign currency rates. Gains
or losses on forward contracts used to purchase inventory for which we have
firm purchase commitments qualify as accounting hedges and are therefore
deferred and recognized in income when the inventory is sold. Counterparties
expose us to credit loss in the event of nonperformance as measured by the
unrealized gains on the contracts. There were no foreign currency contracts
outstanding as of the end of 1999 or 1998.
We may enter into interest rate swap agreements to limit the effect of
increases in the interest rates on any floating rate debt. The differential is
accrued as interest rates change and is recorded in interest expense. There
were no open interest rate swap agreements as of the end of 1999 or 1998.
25
JOSTENS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
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 per share are
computed by dividing net income by the weighted 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 per share.
Basic and diluted earnings per share were calculated using the following:
1999 1998 1997
------- ------- -------
(In thousands, except
per-share data)
Weighted average common shares outstanding --
basic............................................. 34,004 36,527 38,773
Dilutive shares.................................... 89 178 196
------- ------- -------
Weighted average common shares outstanding --
diluted........................................... 34,093 36,705 38,969
======= ======= =======
Net income for basic and diluted earnings per
share............................................. $43,179 $41,820 $57,183
Earnings per share -- basic........................ $ 1.27 $ 1.14 $ 1.47
Earnings per share -- diluted...................... $ 1.27 $ 1.14 $ 1.47
Stock-Based Compensation
We use the intrinsic value method prescribed by Accounting Principles Board
Opinion No. 25, "Accounting for Stock Issued to Employees," and related
interpretations in accounting for employee stock options. Under the intrinsic
value method, compensation expense is recognized only to the extent the market
price of the common stock exceeds the exercise price of the stock at the date
of grant.
New Accounting Standards
In June 1998, the Financial Accounting Standards Board issued Statement SFAS
No. 133, "Accounting for Derivative Instruments and Hedging Activities," as
amended, which is required to be adopted in years beginning after June 15,
2000. The effect of adopting the Statement is not currently expected to have a
material effect on our future financial position or overall trends in results
of operations.
2. Merger and Recapitalization
On December 27, 1999, we entered into a merger agreement with Saturn
Acquisition Corporation, a newly formed corporation controlled by Investcorp
S.A., a global investment group, and its co-investors. Under this agreement,
Saturn Acquisition Corporation will merge with and into Jostens. The merger
will be accounted for as a recapitalization by Jostens. Upon completion of the
merger, Investcorp and its co-investors, including Jostens' senior management,
will own approximately 94 percent of Jostens' common stock. The remaining 6
percent of our post-merger common stock will be retained by some or all of our
pre-merger public shareholders.
As a result of the merger:
. approximately 98 percent of Jostens' outstanding common stock will be
purchased for cash of $25.25 per share;
. all outstanding options to purchase Jostens' common stock will
automatically vest and be cancelled in exchange for a cash payment equal
to $25.25 per underlying share, less the applicable exercise price; and
. we will incur a substantial amount of debt.
26
JOSTENS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
The merger agreement obligates us to pay a fee of $19.125 million, plus up
to $5.0 million in expenses if the agreement is terminated under certain
circumstances, including a decision by us to accept a more favorable
acquisition proposal.
Successful completion of the recapitalization depends principally upon
shareholder approval and satisfaction of conditions to closing in the merger
agreement with Saturn Acquisition Corporation.
It is currently anticipated that the merger and recapitalization will be
completed in the second quarter of 2000.
In connection with our execution of the merger agreement, our Board of
Directors approved the following amendments to the shareholder rights
agreement:
. neither Saturn Acquisition nor its affiliates will be deemed to be an
acquiring person;
. the execution and delivery of the merger agreement will not give rise to
a distribution date or a triggering event; and
. no holder of rights shall be entitled to exercise such rights as a result
of the execution and delivery of the merger agreement.
If the merger is not approved, the rights will expire in August 2008 unless
extended or redeemed earlier by us.
3. Special Charge
In the fourth quarter of 1999, we completed a strategic review of product
lines, manufacturing operations, infrastructure projects, and support functions
based on performance trends. In addition, we decided to refocus our
organization on sales growth versus infrastructure improvement. As a result of
this review, we incurred a pre-tax special charge of $20.2 million ($13.3
million after tax or $0.39 per share), which was approved by our Board of
Directors.
Information relating to the special charge follows:
Balance
Initial Used in end of
accrual 1999 1999
------- ------- -------
(In thousands)
Employee termination benefits......................... $ 4,910 $ -- $4,910
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 direct
marketing sales channel to college alumni............ 3,086 3,086 --
Other costs related to exiting the direct marketing
sales channel to college alumni...................... 1,183 270 913
------- ------- ------
$20,194 $14,161 $6,033
======= ======= ======
Of the $20.2 million special charge, $4.8 million relates to the School
Products segment and $15.4 million relates to the "Other" segment.
Included in other accrued liabilities on the consolidated balance sheets is
the unused portion of the special charge of $6.0 million, which will be used or
paid in 2000.
27
JOSTENS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
Of the total special charge, $4.9 million relates to employee termination
benefits for the elimination of about 100 full-time positions, primarily in
corporate staff and executive functions and in exiting the direct marketing
sales channel to college alumni. Headcount reductions will be completed and
termination benefits paid in 2000.
We reviewed and modified our strategies for the retail class ring product
line and, as a result, determined that the carrying value of the related
goodwill was impaired based upon anticipated inadequate projected cash flows.
Accordingly, an impairment charge of $4.6 million was recorded as part of the
special charge for the write-off of all of the goodwill.
We also reviewed the Jostens Direct business and decided in the fourth
quarter of 1999 to close down the business due to 1999 performance and
forecasted decline in sales volume. As a result of that decision, the remaining
balance of the related goodwill of $3.1 million was written off and other
exiting costs of $1.2 million were recorded.
4. Comprehensive Income
The following amounts were included in accumulated other comprehensive loss
as of the end of 1999 and 1998:
1999 1998
------- -------
(In thousands)
Minimum pension liability adjustments, net of tax...... $(1,026) $(2,043)
Foreign currency translation adjustments............... (4,644) (5,722)
------- -------
Accumulated other comprehensive loss................. $(5,670) $(7,765)
======= =======
5. Inventories
As of the end of 1999 and 1998, inventories were comprised of:
1999 1998
------- -------
(In thousands)
Raw materials and supplies............................... $17,886 $22,618
Work-in-process.......................................... 29,772 29,735
Finished goods........................................... 40,181 38,141
------- -------
Total inventories...................................... $87,839 $90,494
======= =======
Precious Metals Consignment Arrangement
We have a precious metals consignment arrangement with a major financial
institution whereby we have the ability to obtain up to $25.0 million in
consigned inventory. In 1999, 1998 and 1997, we expensed consignment fees
related to this facility of approximately $0.3 million, $0.1 million and $0.1
million, respectively. Under the terms of the consignment arrangement, we do
not own the consigned inventory until it is shipped in the form of a product to
a customer. Accordingly, we do not include the value of consigned inventory or
the corresponding liability in our financial statements. The value of our
consigned inventory as of the end of 1999 and 1998 was $22.1 million and $14.4
million.
28
JOSTENS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
6. Property and Equipment
As of the end of 1999 and 1998, property and equipment, net consisted of:
1999 1998
-------- --------
(In thousands)
Land................................................... $ 3,618 $ 4,866
Buildings.............................................. 36,420 36,210
Machinery and equipment................................ 195,673 182,698
Capitalized software................................... 36,079 32,391
-------- --------
Total property and equipment........................... 271,790 256,165
Less accumulated depreciation and amortization......... 187,150 167,518
-------- --------
Property and equipment, net............................ $ 84,640 $ 88,647
======== ========
Capitalized interest was $0.4 million in 1999 and $0.7 million in 1998.
7. Borrowings
Line of Credit and Commercial Paper
We have a $180.0 million, five-year bank credit agreement that expires on
December 31, 2000. Credit available under the agreement is reduced by
commercial paper borrowings outstanding. Commercial paper outstanding is due
within 90 days and is included in short-term borrowings in the consolidated
balance sheets.
Annual fees and interest on borrowings are based on our commercial paper
rating. Annual fees range from 0.075 to 0.15 percent of the commitment. The
weighted average interest rate on commercial paper outstanding as of the end of
1999 and 1998 was 5.9 percent and 5.8 percent. Under the restrictive covenants
of the agreement, we must maintain a defined minimum interest coverage ratio
and a maximum leverage ratio. As of the end of 1999, $62.4 million was
available under the bank credit agreement.
Demand Facilities
As of the end of 1999, we had available unsecured demand facilities with
three banks totaling $54.5 million. Such credit arrangements are renegotiated
periodically based on the anticipated seasonal needs for short-term financing.
8. Income Taxes
The following summarizes the differences between income taxes computed at
the federal statutory rate and income tax expense for financial reporting
purposes:
1999 1998 1997
------- ------- -------
(In thousands)
Federal statutory income tax rate............ 35% 35% 35%
Federal tax at statutory rate................ $26,130 $29,232 $32,684
State income taxes, net of federal tax
benefit..................................... 3,086 4,509 4,223
Write-off of JLC notes and related deferred
tax assets.................................. -- 7,245 --
Write-off of goodwill........................ 1,080 -- --
Reduction in deferred tax valuation
allowance................................... -- (750) (2,030)
Other differences, net....................... 1,184 1,464 1,323
------- ------- -------
Income tax expense........................... $31,480 $41,700 $36,200
======= ======= =======
29
JOSTENS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
The U.S. and foreign components of income before income taxes and the
provision for income taxes were as follows:
1999 1998 1997
------- ------- -------
(In thousands)
Income before income taxes
Domestic........................................ $68,044 $77,756 $88,275
Foreign......................................... 6,615 5,764 5,108
------- ------- -------
Income before income taxes...................... $74,659 $83,520 $93,383
======= ======= =======
Provision for income taxes
Federal......................................... $25,828 $18,435 $30,227
State........................................... 5,276 4,439 6,864
Foreign......................................... 3,047 3,114 2,512
------- ------- -------
Total current taxes............................. 34,151 25,988 39,603
Deferred........................................ (2,671) 15,712 (3,403)
------- ------- -------
Income tax expense.............................. $31,480 $41,700 $36,200
======= ======= =======
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components
of the deferred income tax liabilities and assets as of the end of 1999 and
1998 consisted of:
1999 1998
-------- --------
(In thousands)
Deferred tax liabilities
Tax over book depreciation.......................... $ (3,558) $ (4,083)
Capitalized software development costs.............. (8,712) (8,076)
Other, net.......................................... (3,616) (2,792)
-------- --------
Deferred tax liabilities............................ (15,886) (14,951)
-------- --------
Deferred tax assets
Reserves for accounts receivable and salespersons
overdrafts......................................... 6,936 7,194
Reserves for employee benefits...................... 10,669 8,698
Other reserves not recognized for tax purposes...... 4,025 4,215
Foreign tax credit carryforwards.................... 838 1,900
Other, net.......................................... 4,483 3,066
-------- --------
Deferred tax assets................................. 26,951 25,073
Valuation allowance................................. (838) (1,900)
-------- --------
Deferred tax assets................................. 26,113 23,173
-------- --------
Net deferred tax asset.............................. $ 10,227 $ 8,222
======== ========
The net deferred tax asset as of the end of 1999 consisted of $17.4 million
current net deferred tax assets and $7.2 million noncurrent net deferred tax
liabilities. The net deferred tax asset as of the end of 1998 consisted of
$14.7 million current net deferred tax assets and $6.5 million noncurrent net
deferred tax assets.
We also have foreign tax credit carryforwards of $0.8 million that expire in
2000 through 2002. The foreign tax credits of $0.8 million and $1.9 million as
of the end of 1999 and 1998 were fully reserved.
30
JOSTENS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
9. Benefit Plans
Pension and Postretirement Benefits
We have noncontributory defined-benefit pension plans that cover nearly all
employees. The benefits provided under the plans are based on years of service
and/or compensation levels. We also provide health care insurance benefits for
nearly all retirees. Generally, the health care plans require contributions
from retirees.
The assumptions used for these plans consisted of:
Pension benefits Retiree health benefits
------------------- -------------------------
1999 1998 1997 1999 1998 1997
----- ----- ----- ------- ------- -------
Discount rate.............. 7.75% 7.00% 7.75% 7.75% 7.00% 7.75%
Expected return on plan
assets.................... 10.00% 10.00% 10.00% -- -- --
Rate of compensation
increase.................. 5.00% 5.00% 5.00% -- -- --
Initial health care cost
trend rate(1)............. -- -- -- 7.00% 8.00% 9.00%
- --------
(1) Assumed to decrease to 6% in 2001.
Net periodic benefit (income) or expense for 1999, 1998 and 1997 included
the following components:
Pension benefits Retiree health benefits
---------------------------- -------------------------
1999 1998 1997 1999 1998 1997
-------- -------- -------- ------- ------- -------
Service cost............ $ 4,419 $ 4,044 $ 3,988 $ 74 $ 65 $ 61
Interest cost........... 9,462 8,838 8,346 351 372 377
Expected return on plan
assets................. (14,942) (13,447) (11,653) -- -- --
Amortization of prior
year service cost...... 1,869 1,716 1,585 (8) (7) (7)
Amortization of
transition amount...... (885) (894) (894) -- -- --
Amortization of net
actuarial gains........ (341) (929) (698) (41) (95) (109)
-------- -------- -------- ------- ------- -------
Net periodic benefit
(income) expense....... $ (418) $ (672) $ 674 $ 376 $ 335 $ 322
======== ======== ======== ======= ======= =======
31
JOSTENS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
The following tables present a reconciliation of the benefit obligation of
the plans, plan assets, and funded status of the plans.
Retiree health
Pension benefits benefits
------------------ ------------------
1999 1998 1999 1998
-------- -------- -------- --------
Change in benefit obligation
Benefit obligation beginning of year.. $138,825 $117,670 $ 5,238 $ 5,047
Service cost.......................... 4,419 4,044 74 65
Interest cost......................... 9,462 8,838 351 372
Plan amendments....................... -- 1,575 -- --
Actuarial loss (gain)................. (12,284) 14,004 (894) 643
Benefits paid......................... (7,919) (7,306) (762) (889)
-------- -------- -------- --------
Benefit obligation end of year........ $132,503 $138,825 $ 4,007 $ 5,238
======== ======== ======== ========
Change in plan assets
Fair value of plan assets beginning of
year................................. $164,103 $167,246 $ -- $ --
Actual return on plan assets.......... 43,651 2,397 -- --
Company contributions................. 1,938 1,766 762 889
Benefits paid......................... (7,919) (7,306) (762) (889)
-------- -------- -------- --------
Fair value of plan assets end of
year................................. $201,773 $164,103 $ -- $ --
======== ======== ======== ========
Funded status
Funded (unfunded) status end of year.. $ 69,270 $ 25,278 $ (4,007) $ (5,238)
Unrecognized cost:
Net actuarial gains................. (64,263) (23,611) (1,947) (1,095)
Transition amount................... (3,294) (4,179) -- --
Prior service cost.................. 8,416 10,285 (50) (58)
-------- -------- -------- --------
Prepaid (accrued) benefit cost........ $ 10,129 $ 7,773 $ (6,004) $ (6,391)
======== ======== ======== ========
Plan assets consist primarily of corporate equity investments as well as
corporate and U.S. government debt and real estate.
The components in the consolidated balance sheets consist of:
Pension benefits Retiree health benefits