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EX-31.2 - CERTIFICATION OF SENIOR VP, CHIEF FINANCIAL OFFICER PURSUANT TO SECTION 302 - VISANT CORPd337319dex312.htm
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EX-31.1 - CERTIFICATION OF PRESIDENT AND CHIEF EXECUTIVE OFFICER PURSUANT TO SECTION 302 - VISANT CORPd337319dex311.htm
Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

 

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2012

or

 

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                 to

 

Commission

File Number

  

Registrant, State of Incorporation,

Address of Principal Executive Offices and Telephone Number

   I.R.S.
Employer
Identification

No.
333-120386    VISANT CORPORATION    90-0207604
   (Incorporated in Delaware)   
   357 Main Street   
   Armonk, New York 10504   
   Telephone: (914) 595-8200   

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 requirement for the past 90 days.  Yes  ¨  No  ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes  x  No  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

    Large accelerated filer  ¨      Accelerated filer  ¨   Non-accelerated filer  x   Smaller reporting company  ¨
       (Do not check if a smaller
reporting company)
 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes  ¨  No  x

As of May 7, 2012, there were 1,000 shares of common stock, par value $.01 per share, of Visant Corporation outstanding (all of which are indirectly, beneficially owned by Visant Holding Corp.).

The registrant has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding twelve months.

FILING FORMAT

This Quarterly Report on Form 10-Q is being filed by Visant Corporation (“Visant”). Unless the context indicates otherwise, any reference in this report to the “Company”, “we”, “our” or “us” refers to Visant together with its consolidated subsidiaries.


Table of Contents

TABLE OF CONTENTS

 

   PART I – FINANCIAL INFORMATION   
     Page  

ITEM 1.

  

Financial Statements (Unaudited)

  
  

Condensed Consolidated Statements of Operations and Comprehensive Loss for the three months ended March 31, 2012 and April 2, 2011

     1   
  

Condensed Consolidated Balance Sheets as of March 31, 2012 and December 31, 2011

     2   
  

Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2012 and April 2, 2011

     3   
   Notes to Condensed Consolidated Financial Statements      4   

ITEM 2.

   Management’s Discussion and Analysis of Financial Condition and Results of Operations      25   

ITEM 3.

   Quantitative and Qualitative Disclosures About Market Risk      34   

ITEM 4.

   Controls and Procedures      35   
   PART II – OTHER INFORMATION   

ITEM 2.

   Unregistered Sales of Equity Securities and Use of Proceeds      35   

ITEM 5.

   Other Information      35   

ITEM 6.

   Exhibits      36   

Signatures

     


Table of Contents

PART I. FINANCIAL INFORMATION

 

ITEM 1. FINANCIAL STATEMENTS

VISANT CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS (UNAUDITED)

 

     Three months ended  
     March 31,     April 2,  

In thousands

   2012     2011  

Net sales

   $ 258,803      $ 250,738   

Cost of products sold

     126,619        119,903   
  

 

 

   

 

 

 

Gross profit

     132,184        130,835   

Selling and administrative expenses

     110,938        116,685   

Gain on disposal of fixed assets

     (1,838     (61

Special charges

     1,490        2,763   
  

 

 

   

 

 

 

Operating income

     21,594        11,448   

Interest expense, net

     39,476        42,599   
  

 

 

   

 

 

 

Loss before income taxes

     (17,882     (31,151

Benefit from income taxes

     (7,745     (12,677
  

 

 

   

 

 

 

Net loss

   $ (10,137   $ (18,474
  

 

 

   

 

 

 

Comprehensive loss

   $ (9,572   $ (18,227
  

 

 

   

 

 

 

The accompanying notes are an integral part of the condensed consolidated financial statements.

 

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Table of Contents

VISANT CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)

 

     March 31,     December 31,  

In thousands, except share amounts

   2012     2011  
ASSETS     

Cash and cash equivalents

   $ 58,817      $ 36,014   

Accounts receivable, net

     126,519        112,838   

Inventories

     133,259        109,290   

Salespersons overdrafts, net of allowance of $13,338 and $12,915, respectively

     28,105        30,074   

Prepaid expenses and other current assets

     25,673        19,313   

Income tax receivable

     2,018        2,022   

Deferred income taxes

     24,781        21,896   
  

 

 

   

 

 

 

Total current assets

     399,172        331,447   
  

 

 

   

 

 

 

Property, plant and equipment

     508,431        501,286   

Less accumulated depreciation

     (301,798     (291,236
  

 

 

   

 

 

 

Property, plant and equipment, net

     206,633        210,050   

Goodwill

     983,163        983,114   

Intangibles, net

     435,947        448,394   

Deferred financing costs, net

     50,283        52,486   

Deferred income taxes

     2,615        2,564   

Other assets

     12,117        11,533   

Prepaid pension costs

     4,906        4,906   
  

 

 

   

 

 

 

Total assets

   $ 2,094,836      $ 2,044,494   
  

 

 

   

 

 

 
LIABILITIES, MEZZANINE EQUITY AND STOCKHOLDER’S DEFICIT     

Accounts payable

   $ 56,297      $ 55,350   

Accrued employee compensation and related taxes

     27,973        30,547   

Commissions payable

     28,088        21,365   

Customer deposits

     228,774        176,996   

Income taxes payable

     29,566        29,812   

Current portion of long-term debt and capital leases

     4,416        4,026   

Interest payable

     53,932        34,294   

Other accrued liabilities

     28,861        36,384   
  

 

 

   

 

 

 

Total current liabilities

     457,907        388,774   
  

 

 

   

 

 

 

Long-term debt and capital leases - less current maturities

     1,914,997        1,913,579   

Deferred income taxes

     152,119        158,095   

Pension liabilities, net

     96,193        97,174   

Other noncurrent liabilities

     41,064        44,851   
  

 

 

   

 

 

 

Total liabilities

     2,662,280        2,602,473   
  

 

 

   

 

 

 

Mezzanine equity

     685        578   

Preferred stock $.01 par value; authorized 300,000 shares; none issued and outstanding at March 31, 2012 and December 31, 2011

     —          —     

Common stock $.01 par value; authorized 1,000 shares; 1,000 shares issued and outstanding at March 31, 2012 and December 31, 2011

     —          —     

Additional paid-in-capital

     103        103   

Accumulated deficit

     (505,636     (495,499

Accumulated other comprehensive loss

     (62,596     (63,161
  

 

 

   

 

 

 

Total stockholder’s deficit

     (568,129     (558,557
  

 

 

   

 

 

 

Total liabilities, mezzanine equity and stockholder’s deficit

   $ 2,094,836      $ 2,044,494   
  

 

 

   

 

 

 

The accompanying notes are an integral part of the condensed consolidated financial statements.

 

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Table of Contents

VISANT CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

 

     Three months ended  
     March 31,     April 2,  

In thousands

   2012     2011  

Net loss

   $ (10,137   $ (18,474

Adjustments to reconcile net loss to net cash provided by operating activities:

    

Depreciation

     12,138        12,466   

Amortization of intangible assets

     13,759        13,889   

Amortization of debt discount, premium and deferred financing costs

     3,034        2,463   

Other amortization

     101        110   

Deferred income taxes

     (9,214     884   

Gain on disposal of fixed assets

     (1,838     (61

Stock-based compensation

     107        120   

Loss on asset impairments

     238        1,352   

Other

     —          3,791   

Changes in assets and liabilities:

    

Accounts receivable

     (13,486     (4,664

Inventories

     (23,805     (29,470

Salespersons overdrafts

     1,990        761   

Prepaid expenses and other current assets

     (6,604     (4,175

Accounts payable and accrued expenses

     17        4,538   

Customer deposits

     51,611        55,824   

Commissions payable

     6,707        8,135   

Income taxes payable/receivable

     (244     (15,622

Interest payable

     19,638        (36,938

Other operating activities, net

     (6,893     3,303   
  

 

 

   

 

 

 

Net cash provided by (used in) operating activities

     37,119        (1,768
  

 

 

   

 

 

 

Purchases of property, plant and equipment

     (17,836     (12,845

Proceeds from sale of property and equipment

     3,571        181   

Additions to intangibles

     (976     (66
  

 

 

   

 

 

 

Net cash used in investing activities

     (15,241     (12,730
  

 

 

   

 

 

 

Short-term borrowings

     9,500        —     

Short-term repayments

     (9,500     —     

Repayment of long-term debt and capital lease obligations

     (1,166     (4,031

Proceeds from issuance of long-term debt and capital leases

     2,094        —     

Debt financing costs and related expenses

     —          (16,540
  

 

 

   

 

 

 

Net cash provided by (used in) financing activities

     928        (20,571
  

 

 

   

 

 

 

Effect of exchange rate changes on cash and cash equivalents

     (3     37   
  

 

 

   

 

 

 

Increase (decrease) in cash and cash equivalents

     22,803        (35,032

Cash and cash equivalents, beginning of period

     36,014        60,197   
  

 

 

   

 

 

 

Cash and cash equivalents, end of period

   $ 58,817      $ 25,165   
  

 

 

   

 

 

 

The accompanying notes are an integral part of the condensed consolidated financial statements.

 

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Table of Contents

VISANT CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

1. Overview and Basis of Presentation

Overview

The Company is a marketing and publishing services enterprise servicing the school affinity, direct marketing, fragrance, cosmetic and personal care sampling and packaging, and educational and trade publishing segments. The Company sells products and services to end customers through several different sales channels including independent sales representatives and dedicated sales forces. Sales and results of operations are impacted by a number of factors, including general economic conditions, seasonality, cost of raw materials, school population trends, the availability of school funding, product and service offerings and quality and price.

On October 4, 2004, an affiliate of Kohlberg Kravis Roberts & Co. L.P. (“KKR”) and affiliates of DLJ Merchant Banking Partners III, L.P. (“DLJMBP III”) completed a series of transactions which created a marketing and publishing services enterprise (the “Transactions”) through the combination of Jostens, Inc. (“Jostens”), Von Hoffmann Corporation (“Von Hoffmann”) and AKI, Inc. and its subsidiaries (“Arcade”).

Prior to the Transactions, Von Hoffmann and Arcade were each controlled by affiliates of DLJ Merchant Banking Partners II, L.P. (“DLJMBP II”), and DLJMBP III owned approximately 82.5% of Visant Holding Corp.’s (“Holdco”) outstanding equity, with the remainder held by other co-investors and certain members of management. Upon consummation of the Transactions, an affiliate of KKR invested $256.1 million and was issued equity interests representing approximately 49.6% of Holdco’s voting interest and 45.0% of Holdco’s economic interest, while affiliates of DLJMBP III held equity interests representing approximately 41.0% of Holdco’s voting interest and 45.0% of Holdco’s economic interest, with the remainder held by other co-investors and certain members of management. As of March 31, 2012, affiliates of KKR and DLJMBP III (collectively, the “Sponsors”) held approximately 49.2% and 41.1%, respectively, of Holdco’s voting interest, while each continued to hold approximately 44.7% of Holdco’s economic interest. As of March 31, 2012, the other co-investors held approximately 8.4% of the voting interest and 9.1% of the economic interest of Holdco, and members of management held approximately 1.3% of the voting interest and approximately 1.5% of the economic interest of Holdco (exclusive of exercisable options). Visant is an indirect wholly owned subsidiary of Holdco.

Basis of Presentation

The unaudited condensed consolidated financial statements included herein are for Visant and its wholly-owned subsidiaries.

All intercompany balances and transactions have been eliminated in consolidation.

The accompanying unaudited condensed consolidated financial statements of Visant and its subsidiaries are presented pursuant to the rules and regulations of the U.S. Securities and Exchange Commission (the “SEC”) in accordance with disclosure requirements for the quarterly report on Form 10-Q. In the opinion of management, all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation have been included. Operating results for the interim periods presented are not necessarily indicative of the results that may be expected for the full year. These financial statements should be read in conjunction with the consolidated financial statements and footnotes included in Visant’s Annual Report on Form 10-K for the fiscal year ended December 31, 2011.

The preparation of the financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates.

Amounts previously reported for “Stock-based compensation” and “Other operating activities, net” within the operating section of the Condensed Consolidated Statement of Cash Flows for the three-months ended April 2, 2011 have been adjusted in order to present separately the amount of stock-based compensation not settled in cash; however, total net cash provided by operating activities was unchanged.

 

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2. Significant Accounting Policies

Revenue Recognition

The Company recognizes revenue when the earnings process is complete, evidenced by an agreement with the respective customer, delivery and acceptance has occurred, collectability is probable and pricing is fixed or determinable. Revenue is recognized (1) when products are shipped (if shipped free on board “FOB” shipping point), (2) when products are delivered (if shipped FOB destination) or (3) as services are performed as determined by contractual agreement, but in all cases only when risk of loss has transferred to the customer and the Company has no further performance obligations.

Shipping and Handling

Net sales include amounts billed to customers for shipping and handling costs. Costs incurred for shipping and handling are recorded in cost of products sold.

Cost of Products Sold

Cost of products sold primarily includes the cost of paper and other materials, direct and indirect labor and related benefit costs, depreciation of production assets and shipping and handling costs.

Warranty Costs

Provisions for warranty costs related to Jostens’ scholastic products, particularly class rings due to their lifetime warranty, are recorded based on historical information and current trends in manufacturing costs. The provision related to the lifetime warranty is based on the number of rings manufactured in the prior school year consistent with industry standards. The provision for the total net warranty costs on rings were $1.4 million for each of the three-month periods ended March 31, 2012 and April 2, 2011. Warranty repair costs for rings manufactured in the current school year are expensed as incurred. Accrued warranty costs included in the Condensed Consolidated Balance Sheets were approximately $0.6 million as of each of March 31, 2012 and December 31, 2011.

Selling and Administrative Expenses

Selling and administrative expenses are expensed as incurred. These costs primarily include salaries and related benefits of sales and administrative personnel, sales commissions, amortization of intangibles and professional fees such as audit and consulting fees.

Advertising

The Company expenses advertising costs as incurred. Selling and administrative expenses included advertising expense of $2.0 million and $1.9 million for each of the three months ended March 31, 2012 and April 2, 2011, respectively.

Derivative Financial Instruments

The Company recognizes all derivatives on the balance sheet at fair value. Changes in the fair value of derivatives are either recorded in earnings or other comprehensive income (loss), based on whether the instrument qualifies for and is designated as part of a hedging relationship. Gains or losses on derivative instruments reported in other comprehensive income (loss) are reclassified into earnings in the period in which earnings are affected by the underlying hedged item. The ineffective portion, if any, of a derivative’s change in fair value is recognized in earnings in the current period. Refer to Note 11, Derivative Financial Instruments and Hedging Activities, for further details.

Stock-Based Compensation

The Company recognizes compensation expense related to all equity awards granted, including awards modified, repurchased or cancelled based on the fair values of the awards at the grant date. Visant recognized compensation expense related to stock-based compensation of approximately $0.1 million and $2.5 million for the three-month periods ended March 31, 2012 and April 2, 2011, respectively, which was included in selling and administrative expenses. Refer to Note 15, Stock-based Compensation, for further details.

 

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Table of Contents

Mezzanine Equity

Certain management stockholder agreements contain a purchase feature pursuant to which, in the event the holder’s employment terminates as a result of the death or permanent disability (as defined in the agreement) of the holder, the holder (or his/her estate, in the case of death) has the option to require that the common shares or vested options be purchased from the holder (estate) and settled in cash. These equity instruments are considered temporary equity and have been classified as mezzanine equity on the balance sheet as of March 31, 2012 and December 31, 2011, respectively.

Recently Adopted Accounting Pronouncements

In December 2010, the Financial Accounting Standards Board (“FASB”) amended its authoritative guidance related to Step 1 of the goodwill impairment test for reporting units with zero or negative carrying amounts. For those reporting units, an entity is required to perform Step 2 of the goodwill impairment test if it is more-likely-than-not that a goodwill impairment exists. In determining whether it is more-likely-than-not that a goodwill impairment exists, consideration should be made as to whether there are any adverse qualitative factors indicating that an impairment may exist. This guidance became effective for the first reporting period beginning after December 15, 2011. The Company’s adoption of this guidance did not have a material impact on its financial statements.

In December 2010, the FASB amended its authoritative guidance related to business combinations entered into by an entity that is material on an individual or aggregate basis. These amendments clarify existing guidance that, if an entity presents comparative financial statements that include a material business combination, the entity should disclose revenue and earnings of the combined entity as though the business combination that occurred during the current year had occurred as of the beginning of the comparable prior annual reporting period. The amendments also require expanded supplemental pro forma disclosures to include a description of the nature and amount of material, nonrecurring pro forma adjustments directly attributable to the business combination included in the reported pro forma revenue and earnings. This guidance became effective, on a prospective basis, for business combinations for which the acquisition date is on or after the first annual reporting period after December 15, 2010. The Company’s adoption of this guidance did not have a material impact on its financial statements.

In May 2011, the FASB issued Accounting Standards Update 2011-04 (“ASU 2011-04”) which generally provides a uniform framework for fair value measurements and related disclosures between GAAP and the International Financial Reporting Standards (“IFRS”). Additional disclosure requirements in ASU 2011-04 include: (1) for Level 3 fair value measurements, quantitative information about unobservable inputs used, a description of the valuation processes used by the entity and a qualitative discussion about the sensitivity of the measurements to changes in the unobservable inputs, (2) for an entity’s use of a nonfinancial asset that is different from the asset’s highest and best use, the reason for the difference, (3) for financial instruments not measured at fair value but for which disclosure of fair value is required, the fair value hierarchy level in which the fair value measurements were determined and (4) the disclosure of all transfers between Level 1 and Level 2 of the fair value hierarchy. ASU 2011-04 became effective for interim and annual periods beginning on or after December 15, 2011. The Company’s adoption of this guidance did not have a material impact on its financial statements.

In June 2011, the FASB issued Accounting Standards Update 2011-05 (“ASU 2011-05”) which revises the manner in which entities present comprehensive income in their financial statements. This new guidance amends existing guidance by allowing only two options for presenting the components of net income and other comprehensive income: (1) in a single continuous financial statement, referred to as the statement of comprehensive income, or (2) in two separate but consecutive financial statements, consisting of an income statement followed by a separate statement of other comprehensive income. Also, items that are reclassified from other comprehensive income to net income must be presented on the face of the financial statements. ASU 2011-05 became effective for fiscal years, and interim periods within those years, beginning after December 15, 2011. The Company’s adoption of this guidance did not have a material impact on its financial statements.

In September 2011, the FASB issued Accounting Standards Update 2011-08 (“ASU 2011-08”) which gives entities testing goodwill for impairment the option of performing a qualitative assessment before calculating the fair value of a reporting unit in Step 1 of the goodwill impairment test. If an entity determines, on the basis of qualitative factors, that the fair value of a reporting unit is, more likely than not, less than the carrying amount for such reporting unit, then the two-step goodwill impairment test would be required. Otherwise, further goodwill impairment testing would not be required. Companies are not required to perform the qualitative assessment for any reporting unit in any period and may proceed directly to Step 1 of the goodwill impairment test. A company that validates its conclusion by measuring fair value can resume performing the qualitative assessment in any subsequent period. ASU 2011-08 became effective for annual and interim goodwill impairment tests performed with respect to fiscal years beginning after December 15, 2011. The Company’s adoption of this guidance did not have a material impact on its financial statements.

 

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In September 2011, the FASB issued Accounting Standards Update 2011-09 (“ASU 2011-09”), which amends ASC 715-80 by increasing the quantitative and qualitative disclosures an employer is required to provide about its participation in significant multiemployer plans that offer pension or other postretirement benefits. The objective of ASU 2011-09 is to enhance the transparency of disclosures about (1) the significant multiemployer plans in which an employer participates, (2) the level of the employer’s participation in those plans, (3) the financial health of the plans and (4) the nature of the employer’s commitments to the plans. ASU 2011-09 is effective for fiscal years ending after December 15, 2011. The Company’s adoption of this guidance did not have a material impact on its financial statements.

On December 23, 2011, the FASB issued Accounting Standards Update 2011-12 (“ASU 2011-12”) which defers certain provisions of ASU 2011-05. One provision of ASU 2011-05 required entities to present reclassification adjustments out of accumulated other comprehensive income by component in both the statement in which net income is presented and the statement in which other comprehensive income is presented (for both interim and annual financial statements). This requirement is indefinitely deferred under ASU 2011-12 and will be further deliberated by the FASB at a future date. During the deferral period, all entities are required to comply with existing requirements for reclassification adjustments in Accounting Standards Codification 220, Comprehensive Income, which indicates that “an entity may display reclassification adjustments on the face of the financial statement in which comprehensive income is reported, or it may disclose reclassification adjustments in the notes to the financial statements.” The effective date of ASU 2011-12 for public entities is for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2011. The Company’s adoption of this guidance did not have a material impact on its financial statements.

 

3. Restructuring Activity and Other Special Charges

During the three months ended March 31, 2012, the Company recorded $1.3 million of restructuring costs and $0.2 million of other special charges. Restructuring costs consisted of $1.3 million of severance and related benefits associated with reductions in force in the Marketing and Publishing Services segment. Other special charges consisted of $0.2 million of non-cash asset related impairment charges in the Marketing and Publishing Services segment. The associated employee headcount reductions related to the above actions were 57 in the Marketing and Publishing Services segment.

During the three months ended April 2, 2011, the Company recorded $1.4 million of restructuring costs and $1.4 million of other special charges. Restructuring costs consisted of $0.8 million, $0.3 million and $0.3 million of severance and related benefits associated with reductions in force in the Scholastic, Memory Book and Marketing and Publishing Services segments, respectively. Other special charges consisted of $1.4 million of non-cash asset related impairment charges associated with the sale of one of our owned facilities. The associated employee headcount reductions related to the above actions were 45, six and three in the Scholastic, Marketing and Publishing Services and Memory Book segments, respectively.

Restructuring accruals of $2.4 million and $2.9 million as of March 31, 2012 and December 31, 2011, respectively, are included in other accrued liabilities in the Condensed Consolidated Balance Sheets. The accruals included amounts provided for severance and related benefits related to headcount reductions in each segment.

On a cumulative basis through March 31, 2012, the Company incurred $21.6 million of employee severance and related benefit costs associated with the 2012, 2011, 2010 and 2009 initiatives, which affected an aggregate of 1,199 employees. The Company paid $19.1 million in cash related to these initiatives as of March 31, 2012.

 

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Changes in the restructuring accruals during the first three months of 2012 were as follows:

 

In thousands

   2012
Initiatives
    2011
Initiatives
    2010
Initiatives
    2009
Initiatives
    Total  

Balance at December 31, 2011

   $ —        $ 2,384      $ 241      $ 267      $ 2,892   

Restructuring charges

     674        611        (32     —        $ 1,253   

Severance and related benefits paid

     (79     (1,529     (62     (26   $ (1,696
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at March 31 , 2012

   $ 595      $ 1,466      $ 147      $ 241      $ 2,449   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

The majority of the remaining severance and related benefits associated with all initiatives are expected to be paid by the end of 2013.

 

4. Acquisitions

On April 4, 2011, the Company consummated the acquisition of Color Optics, Inc. (“Color Optics”) through a stock purchase for a total purchase price of $4.8 million paid in cash at closing and a subsequent working capital adjustment. Color Optics is a specialized packaging provider, serving the cosmetic and consumer products industries with highly-decorated packaging solutions complementary to the Company’s sampling business. The results of the acquired Color Optics operations are reported as part of the Marketing and Publishing Services segment from the date of acquisition. There were no goodwill or intangible assets recognized in connection with this acquisition.

The aggregate cost of the acquisition was allocated to the tangible assets acquired and liabilities assumed based upon their relative fair values as of the date of the acquisition.

The final allocation of the purchase price for the Color Optics acquisition was as follows:

 

In thousands

      

Current assets

   $ 3,451   

Property, plant and equipment

     614   

Intangible assets

     —     

Goodwill

     —     

Long-term assets

     2,412   

Current liabilities

     (1,647

Long-term liabilities

     (54
  

 

 

 
   $ 4,776   
  

 

 

 

The Color Optics acquisition was not considered material to the Company’s results of operations, financial position or cash flows.

 

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5. Comprehensive Loss

The following amounts were included in determining comprehensive loss for the Company as of the dates indicated:

 

     Three months ended  

In thousands

   March 31,
2012
    April 2,
2011
 

Net loss

   $ (10,137   $ (18,474

Change in cumulative translation adjustment

     50        435   

Pension and other postretirement benefit plans, net of tax

     755        (188

Deferred loss on derivatives, net of tax

     (240       
  

 

 

   

 

 

 

Comprehensive loss

   $ (9,572   $ (18,227
  

 

 

   

 

 

 

 

6. Accounts Receivable

Net accounts receivable were comprised of the following:

 

In thousands

   March 31,
2012
    December 31,
2011
 

Trade receivables

   $ 142,891      $ 125,198   

Allowance for doubtful accounts

     (5,885     (5,326

Allowance for sales returns

     (10,487     (7,034
  

 

 

   

 

 

 

Accounts receivable, net

   $ 126,519      $ 112,838   
  

 

 

   

 

 

 

 

7. Inventories

Inventories were comprised of the following:

 

In thousands

   March 31,
2012
     December 31,
2011
 

Raw materials and supplies

   $ 49,040       $ 48,144   

Work-in-process

     45,081         31,685   

Finished goods

     39,138         29,461   
  

 

 

    

 

 

 

Inventories

   $ 133,259       $ 109,290   
  

 

 

    

 

 

 

Precious Metals Consignment Arrangement

Jostens is a party to a precious metals consignment agreement with a major financial institution whereby it currently has the ability to obtain up to the lesser of a certain specified quantity of precious metals and $57.0 million in dollar value in consigned inventory. As required by the terms of the agreement, Jostens does not take title to consigned inventory until payment. Accordingly, Jostens does not include the value of consigned inventory or the corresponding liability in its consolidated financial statements. The value of consigned inventory at March 31, 2012 and April 2, 2011 was $29.8 million and $32.1 million, respectively. The agreement does not have a stated term, and it can be terminated by either party upon 60 days written notice. Additionally, Jostens incurred expenses for consignment fees related to this facility of $0.3 million and $0.2 million for each of the three-month periods ended March 31, 2012 and April 2, 2011, respectively. The obligations under the consignment agreement are guaranteed by Visant.

 

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8. Fair Value Measurements

The Company measures fair value as the price that would be received upon sale of an asset or paid upon transfer of a liability in an orderly transaction between market participants at the measurement date and in the principal or most advantageous market for that asset or liability. The fair value should be calculated based on assumptions that market participants would use in pricing the asset or liability, not on assumptions specific to the entity. In addition, the fair value of liabilities should include consideration of non-performance risk, including the Company’s own credit risk.

The disclosure requirements around fair value establish a fair value hierarchy for valuation inputs. The hierarchy prioritizes the inputs into three levels based on the extent to which inputs used in measuring fair value are observable in the market. Each fair value measurement is reported in one of the three levels which are determined by the lowest level input that is significant to the fair value measurement in its entirety. These levels are:

 

   

Level 1 – inputs are based upon unadjusted quoted prices for identical instruments traded in active markets.

 

   

Level 2 – inputs are based upon quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active and model-based valuation techniques for which all significant assumptions are observable in the market or can be corroborated by observable market data for substantially the full term of the assets or liabilities.

 

   

Level 3 – inputs are generally unobservable and typically reflect management’s estimates of assumptions that market participants would use in pricing the asset or liability. The fair values are therefore determined using model-based techniques that include option pricing models, discounted cash flow models and similar techniques.

The Company does not have financial assets or financial liabilities that are currently measured and reported on the balance sheet on a fair value basis except as noted in Note 11, Derivative Financial Instruments and Hedging Activities.

In addition to the methods and assumptions the Company uses to record the fair value of financial and non-financial instruments as discussed above, the Company used the following methods and assumptions to estimate the fair value of its financial instruments which are not recorded at fair value on the balance sheet as of March 31, 2012. As of March 31, 2012, the fair value of Visant’s 10.00% senior notes due 2017 (the “Senior Notes”) was estimated based on quoted market prices for identical instruments in inactive markets. The fair value of the outstanding Senior Notes, with a principal amount of $750.0 million, approximated $700.8 million at such date. As of March 31, 2012, the fair value of the term loan B facility maturing in 2016 (the “Term Loan Credit Facility”) was estimated based on quoted market prices for similar instruments in inactive markets. The fair value of the Term Loan Credit Facility, with an outstanding principal amount of $1,174.4 million, approximated $1,143.9 million at such date.

As of December 31, 2011, the fair value of the Senior Notes was estimated based on quoted market prices for identical instruments in inactive markets. The fair value of the Senior Notes, with an outstanding principal amount of $750.0 million, approximated $688.1 million at such date. As of December 31, 2011, the fair value of the Term Loan Credit Facility was estimated based on quoted market prices for similar instruments in inactive markets. The fair value of the Term Loan Credit Facility, with an outstanding principal amount of $1,174.4 million, approximated $1,103.9 million at such date.

 

9. Goodwill and Other Intangible Assets

The change in the carrying amount of goodwill is as follows:

 

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In thousands

   Scholastic      Memory
Book
     Marketing and
Publishing
Services
     Total  

Balance at December 31, 2011

   $ 309,878       $ 391,178       $ 282,058       $ 983,114   

Currency translation

     49         —           —           49   
  

 

 

    

 

 

    

 

 

    

 

 

 

Balance at March 31, 2012

   $ 309,927       $ 391,178       $ 282,058       $ 983,163   
  

 

 

    

 

 

    

 

 

    

 

 

 

Information regarding other intangible assets is as follows:

 

          March 31, 2012      December 31, 2011  

In thousands

   Estimated
useful life
   Gross
carrying
amount
     Accumulated
amortization
    Net      Gross
carrying
amount
     Accumulated
amortization
    Net  

School relationships

   10 years    $ 330,000       $ (286,379   $ 43,621       $ 330,000       $ (278,161   $ 51,839   

Internally developed software

   2 to 5 years      9,800         (9,800     —           9,800         (9,800     —     

Patented/unpatented technology

   3 years      12,736         (11,707     1,029         12,692         (11,670     1,022   

Customer relationships

   4 to 40 years      159,362         (51,855     107,507         158,339         (48,811     109,528   

Trademarks (definite lived)

   20 years      492         (49     443         471         (32     439   

Restrictive covenants

   3 to 10 years      55,452         (33,585     21,867         55,459         (31,373     24,086   
  

 

  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 
        567,842         (393,375     174,467         566,761         (379,847     186,914   

Trademarks

   Indefinite      261,480         —          261,480         261,480         —          261,480   
  

 

  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 
      $ 829,322       $ (393,375   $ 435,947       $ 828,241       $ (379,847   $ 448,394   
  

 

  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Amortization expense related to other intangible assets was $13.8 million and $13.9 million for the three months ended March 31, 2012 and April 2, 2011, respectively.

Based on intangible assets in service as of March 31, 2012, estimated amortization expense for the remainder of fiscal 2012 and each of the five succeeding fiscal years is $31.7 million for 2012, $43.6 million for 2013, $14.4 million for 2014, $13.5 million for 2015, $11.8 million for 2016 and $8.5 million for 2017.

 

10.   Debt

Debt obligations as of March 31, 2012 and December 31, 2011 consisted of the following:

 

In thousands

   March 31,
2012
     December 31,
2011
 

Senior secured term loan facilities, net of original issue discount of $18.4 million:

     

Term Loan B, variable rate, 5.25% at March 31, 2012 with quarterly interest payments, principal due and payable at maturity - December 2016

   $ 1,156,039       $ 1,155,212   

Senior notes, 10.00% fixed rate, with semi-annual interest payments of $37.5 million in April and October, principal due and payable at maturity - October 2017

     750,000         750,000   
  

 

 

    

 

 

 
     1,906,039         1,905,212   

Equipment financing arrangements

     7,671         6,055   

Capital lease obligations

     5,703         6,338   
  

 

 

    

 

 

 

Total debt

   $ 1,919,413       $ 1,917,605   
  

 

 

    

 

 

 

Senior Secured Credit Facilities

In connection with the refinancing consummated by Visant on September 22, 2010 (the “Refinancing”), Visant entered into senior secured credit facilities, among Visant, as borrower, Jostens Canada Ltd. (“Jostens Canada”), as Canadian borrower, Visant Secondary Holdings Corp. (“Visant Secondary”), as guarantor, the lenders from time to time parties thereto, Credit

 

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Suisse AG, Cayman Islands Branch, as administrative agent, and Credit Suisse AG, Toronto Branch, as Canadian administrative agent, for the Term Loan Credit Facility and a revolving credit facility expiring in 2015 consisting of a $165.0 million U.S. revolving credit facility available to Visant and its subsidiaries and a $10.0 million Canadian revolving credit facility available to Jostens Canada (the “Revolving Credit Facility” and together with the Term Loan Credit Facility, the “Credit Facilities”). The borrowing capacity under the Revolving Credit Facility can also be used for the issuance of up to $35.0 million of letters of credit (inclusive of a Canadian letter of credit facility). On March 1, 2011, Visant announced the completion of the repricing of the Term Loan Credit Facility (the “Repricing”). The amended Term Loan Credit Facility provides for an interest rate for each term loan based upon LIBOR or an alternative base rate (“ABR”) plus a spread of 4.00% or 3.00%, respectively, with a 1.25% LIBOR floor. In connection with the amendment, Visant was required to pay a prepayment premium of 1% of the outstanding principal amount of the Term Loan Credit Facility along with certain other fees and expenses. The Credit Facilities allow Visant, subject to certain conditions, to incur additional term loans under the Term Loan Credit Facility in either case in an aggregate principal amount of up to $300.0 million, which additional term loans will have the same security and guarantees as the Term Loan Credit Facility. Amounts borrowed under the Term Loan Credit Facility that are repaid or prepaid may not be reborrowed. On December 22, 2011, Visant made an optional prepayment of $60.0 million on its Term Loan Credit Facility.

Visant’s obligations under the Credit Facilities are unconditionally and irrevocably guaranteed jointly and severally by Visant Secondary and all of Visant’s material current and future wholly-owned domestic subsidiaries (the “U.S. Subsidiary Guarantors”). The obligations of Jostens Canada under the Credit Facilities are unconditionally and irrevocably guaranteed jointly and severally by Visant Secondary, Visant, the U.S. Subsidiary Guarantors and by any future Canadian subsidiaries of Visant. Visant’s obligations under the Credit Facilities and the guarantees are secured by substantially all of Visant’s assets and substantially all of the assets of Visant Secondary and the U.S. Subsidiary Guarantors. The obligations of Jostens Canada under the Credit Facilities and the guarantees are also secured by substantially all of the tangible and intangible assets of Jostens Canada and any future Canadian subsidiaries of Visant.

The Credit Facilities require that Visant not exceed a maximum total leverage ratio, that it meet a minimum interest coverage ratio and that it abide by a maximum capital expenditure limitation. In addition, the Credit Facilities contain certain restrictive covenants which, among other things, limit Visant’s and its subsidiaries’ ability to incur additional indebtedness and liens, pay dividends, prepay subordinated and senior unsecured debt, make investments, merge or consolidate, change the business, amend the terms of its subordinated and senior unsecured debt, engage in certain dispositions of assets, enter into sale and leaseback transactions, engage in certain transactions with affiliates and engage in certain other activities customarily restricted in such agreements. It also contains certain customary events of default, subject to applicable grace periods, as appropriate.

As of March 31, 2012, the annual interest rate under the Revolving Credit Facility was LIBOR plus 5.25% or an ABR plus 4.25% (or, in the case of Canadian dollar denominated loans, the bankers’ acceptance discount rate plus 5.25% or the Canadian prime rate plus 4.25% (subject to a floor of the one-month Canadian Dealer Offered Rate plus 1.0%)), in each case, with step-downs based on the total leverage ratio. To the extent that the interest rates on the borrowings under the Revolving Credit Facility are determined by reference to LIBOR, the LIBOR component of such interest rates is subject to a LIBOR floor of 1.75%.

As of March 31, 2012, there was $11.9 million outstanding in the form of letters of credit, leaving $163.1 million available for borrowing under the Revolving Credit Facility. Visant is obligated to pay commitment fees of 0.75% on the unused portion of the Revolving Credit Facility, with a step-down to 0.50% if the total leverage ratio is below 5.00 to 1.00.

Senior Notes

In connection with the issuance of the Senior Notes as part of the Refinancing, Visant and the U.S. Subsidiary Guarantors entered into an Indenture among Visant, the U.S. Subsidiary Guarantors and U.S. Bank National Association, as trustee (the “Indenture”). The Senior Notes are guaranteed on a senior unsecured basis by the U.S. Subsidiary Guarantors. Interest on the notes accrues at the rate of 10.00% per annum and is payable semi-annually in arrears on April 1 and October 1, to holders of record on the immediately preceding March 15 and September 15.

The Senior Notes are senior unsecured obligations of Visant and the U.S. Subsidiary Guarantors and rank (i) equally in right of payment with any existing and future senior unsecured indebtedness of Visant and the U.S. Subsidiary Guarantors; (ii) senior to all of Visant’s and the U.S. Subsidiary Guarantors’ existing, and any of Visant’s and the U.S. Subsidiary Guarantors’ future, subordinated indebtedness; (iii) effectively junior to all of Visant’s existing and future secured obligations and the existing and future secured obligations of the U.S. Subsidiary Guarantors, including indebtedness under the Credit Facilities, to

 

12


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the extent of the value of the assets securing such obligations; and (iv) structurally subordinated to all liabilities of Visant’s existing and future subsidiaries that do not guarantee the Senior Notes. The Senior Notes are redeemable, in whole or in part, under certain circumstances. Upon the occurrence of certain change of control events, Visant must offer to purchase the Senior Notes at 101% of their principal amount, plus accrued and unpaid interest and additional interest, if any.

The Indenture contains restrictive covenants that limit, among other things, the ability of Visant and its restricted subsidiaries to (i) incur additional indebtedness or issue certain preferred stock, (ii) pay dividends on or make other distributions or repurchase capital stock or make other restricted payments, (iii) make investments, (iv) pay dividends or other payments by restricted subsidiaries to Visant or other restricted subsidiaries, (v) create liens on pari passu or subordinated indebtedness without securing the notes, (vi) sell certain assets or merge with or into other companies or otherwise dispose of all or substantially all of Visant’s assets, (vii) enter into certain transactions with affiliates and (viii) designate Visant’s subsidiaries as unrestricted subsidiaries. The Indenture also contains customary events of default, including the failure to make timely payments on the Senior Notes or other material indebtedness, the failure to satisfy certain covenants and specified events of bankruptcy and insolvency.

 

11. Derivative Financial Instruments and Hedging Activities

Risk Management Objective of Using Derivatives

The Company is exposed to certain risk arising from both its business operations and economic conditions. The Company principally manages its exposures to economic risks, including interest rate, liquidity and credit risk, primarily by managing the amount, sources, and duration of its debt funding and the use of derivative financial instruments. Specifically, the Company enters into derivative financial instruments to manage exposures that arise from business activities that result in the receipt or payment of future known or uncertain cash amounts, the value of which are determined by interest rates. The Company’s derivative financial instruments are used to manage differences in the amount, timing, and duration of the Company’s known or expected cash receipts and its known or expected cash payments principally related to the Company’s borrowings.

Cash Flow Hedges of Interest Rate Risk

The Company’s objectives in using interest rate derivatives are to add stability to interest expense and to manage its exposure to interest rate movements. To accomplish this objective, the Company primarily uses interest rate swaps as part of its management of interest rate risk. During the three months ended March 31, 2012, such derivatives were used to hedge the variable cash flows associated with existing variable-rate debt under the Term Loan Credit Facility. As of March 31, 2012, the Company had three outstanding interest rate derivatives with an outstanding aggregate notional amount of $600.0 million.

The effective portion of changes in the fair value of derivatives designated and that qualify as cash flow hedges is recorded in accumulated other comprehensive loss and is subsequently reclassified into earnings in the period that the hedged forecasted transaction affects earnings. The ineffective portion of the change in fair value of the derivatives is recognized directly in earnings. As of March 31, 2012, there was no ineffectiveness on the outstanding interest rate derivatives. Amounts reported in accumulated other comprehensive loss related to derivatives will be reclassified to interest expense as interest payments are made on the Company’s variable-rate debt under the Term Loan Credit Facility. During fiscal year 2012, the Company estimates that $3.6 million will be reclassified as an increase to interest expense.

The fair value of outstanding derivative instruments as of March 31, 2012 and December 31, 2011 was as follows:

 

Classification in the Consolidated Balance Sheets

In thousands

        March 31, 2012      December 31, 2011  

Liability Derivatives:

        

Derivatives designated as hedging instruments

        

Interest rate swaps

   Other accrued liabilities    $ 3,641       $ 3,705   

Interest rate swaps

   Other noncurrent liabilities      2,212         1,766   
     

 

 

    

 

 

 

Total

      $ 5,853       $ 5,471   
     

 

 

    

 

 

 

 

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Table of Contents

The following table summarizes the activity of derivative instruments that qualify for hedge accounting as of December 31, 2011 and March 31, 2012, and the impact of such derivative instruments on accumulated other comprehensive loss for the three months ended March 31, 2012:

 

In thousands

   December 31,
2011
    Amount of loss
recognized in
Other
Comprehensive
Loss on
derivatives
(effective portion)
    Amount of loss
reclassified from
Accumulated
Other
Comprehensive
Loss to interest
expense (effective
portion)
     March 31,
2012
 

Interest rate swaps designated as cash flow hedges

   $ (5,471   $ (1,322   $ 940       $ (5,853

The following table provides the location in the Company’s financial statements of the recognized gain or loss related to such derivative instruments:

 

     Three Months Ended  

In thousands

   March 31, 2012      April 2, 2011  

Interest rate swaps designated as cash flow hedges recognized in interest expense

   $ 940       $ —     

Based on an evaluation of the inputs used, the Company has categorized its derivative instruments to be within Level 2 of the fair value hierarchy. Any transfer into or out of a level of the fair value hierarchy is recognized based on the value of the derivative instruments at the end of the applicable reporting period.

Non-designated Hedges

Derivatives not designated as hedges are not speculative and are used to manage the Company’s exposure to foreign exchange rate movements but do not meet the hedge accounting requirements. Changes in the fair value of derivatives not designated in hedging relationships are recorded directly in earnings. As of each of March 31, 2012, and April 2, 2011, the Company did not have any derivatives outstanding that were not designated as hedges.

Credit-risk-related Contingent Features

The Company has an agreement with each of its derivative counterparties that contains a provision whereby the Company could be declared in default on its derivative obligations if repayment of the underlying indebtedness is accelerated by the lender due to the Company’s default on such indebtedness.

As of March 31, 2012, the termination value of derivatives in a net liability position, which includes accrued interest but excludes any adjustment for nonperformance risk, related to these agreements was $7.2 million. As of March 31, 2012, the Company had not posted any collateral related to these agreements. If the Company had breached any of these provisions at March 31, 2012, it could have been required to settle its obligations under the agreements at their termination value of $7.2 million.

 

12. Commitments and Contingencies

Forward Purchase Contracts

The Company is subject to market risk associated with changes in the price of precious metals. To mitigate the commodity price risk, the Company may from time to time enter into forward contracts to purchase gold, platinum and silver based upon the estimated ounces needed to satisfy projected customer demand. As of March 31, 2012, the Company had purchase commitment contracts outstanding totaling $18.6 million with delivery dates occurring through 2013. The forward purchase contracts are considered normal purchases and therefore are not subject to the requirements of derivative accounting. As of March 31, 2012, the fair market value of open precious metal forward contracts was $18.7 million based on quoted future prices for each contract.

 

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13. Income Taxes

Visant and its subsidiaries are included in the consolidated federal income tax filing of its indirect parent company, Holdco, and its consolidated subsidiaries. The Company determines and allocates its income tax provision under the separate-return method except for the effects of certain provisions of the U.S. tax code which are accounted for on a consolidated group basis. Income tax amounts payable or receivable among members of the controlled group are settled based on the filing of income tax returns and the cash requirements of the respective members of the consolidated group.

The Company recorded an income tax benefit for the three months ended March 31, 2012 based on its best estimate of the consolidated effective tax rate applicable for the entire year. The estimated full-year consolidated effective tax rate for 2012 is 43.9% before taking into account the impact of $0.1 million of accruals considered a current period tax expense. The combined effect of the annual estimated consolidated effective tax rate and the net current period tax adjustments resulted in an effective rate of tax benefit of 43.2% for the three-month period ended March 31, 2012.

For the comparable three-month period ended April 2, 2011, the effective income tax rate was 40.7%. The increase in the rate of tax benefit from the first quarter of 2011 to the first quarter of 2012 was primarily due to the recognition in the first fiscal quarter of 2011 of a tax adjustment to reflect the increased tax rates at which the Company expected deferred tax assets and liabilities to be realized or settled in the future as a result of changes in certain state income tax rates.

The Company’s income tax rate continues to be unfavorably impacted by the loss of the domestic manufacturing deduction and the higher cost of foreign earnings repatriations due to the Company’s anticipated taxable loss position for 2012 after carrying forward prior year U.S. federal net operating loss carryforwards reported by its indirect parent company, Holdco. Holdco reported U.S. federal tax losses for 2010 and 2011 primarily as a result of the repurchase and redemption of its 10.25% senior discount notes due 2013 in 2010, which included tax deferred original issue discount, and the Repricing, respectively.

For the three-month period ended March 31, 2012, the Company provided net tax and interest accruals for unrecognized tax benefits of $0.1 million. At March 31, 2012, the Company’s unrecognized tax benefit liability totaled $19.7 million, including interest and penalty accruals totaling $3.5 million. At December 31, 2011, the Company’s unrecognized tax benefit liability totaled $19.5 million, including interest and penalty accruals totaling $3.4 million. Substantially all of the liability was included in noncurrent liabilities for both periods.

Holdco’s income tax filings for 2005 to 2010 are subject to examination in the U.S federal tax jurisdiction. In connection with an examination of Holdco’s income tax filings for 2005 and 2006, the Internal Revenue Service (the “IRS”) proposed certain transfer price adjustments with which the Company disagreed in order to preserve its right to seek relief from double taxation with the applicable U.S. and French tax authorities. The Company is also subject to examination in certain state jurisdictions and in France for the 2005 to 2010 periods, none of which was individually material. During 2009, the Company filed a notice of objection with the Canadian Revenue Agency (the “CRA”) in connection with the CRA’s reassessment of tax years 1996 and 1997 for issues related to transfer pricing. During 2010, the Company was notified that the CRA withdrew its original assessment for both tax periods. As a result, a net income tax benefit of $0.8 million was included in the 2010 results of operations for assessments of Canadian tax and interest previously paid. The CRA examination of the Company’s Canadian income tax filings for 2007 and 2008 was concluded in 2011 without adjustment. Though subject to uncertainty, the Company believes it has made appropriate provisions for all outstanding issues for all open years and in all applicable jurisdictions. Due primarily to the potential for resolution of the Company’s current U.S. federal examination and the expiration of the related statute of limitations, it is reasonably possible that the Company’s gross unrecognized tax benefit liability could change within the next twelve months by a range of zero to $7.9 million.

President Obama’s administration has proposed significant changes to U.S. tax laws for U.S. corporations doing business outside the United States, including a proposal to defer certain tax deductions allocable to non-U.S. earnings until those earnings are repatriated. It is unclear whether the proposed tax changes will be enacted or, if enacted, what the ultimate scope of the changes will be. If tax changes are enacted as currently proposed, the Company does not believe that there will be a material adverse tax effect because the Company’s repatriation practice is to distribute substantially all of its non-U.S. earnings on an annual basis.

 

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14. Benefit Plans

Pension and Other Postretirement Benefit Plans

Net periodic benefit expense (income) for pension and other postretirement benefit plans is presented below:

 

     Pension benefits     Postretirement benefits  
     Three months ended     Three months ended  
     March 31,     April 2,     March 31,     April 2,  

In thousands

   2012     2011     2012     2011  

Service cost

   $ 1,146      $ 1,233      $ —        $ 2   

Interest cost

     4,493        4,458        16        25   

Expected return on plan assets

     (6,009     (6,173     —          —     

Amortization of prior service cost

     (211     (208     (69     (69

Amortization of net actuarial loss

     1,529        583        7        7   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net periodic benefit expense (income)

   $ 948      $ (107   $ (46   $ (35
  

 

 

   

 

 

   

 

 

   

 

 

 

As of December 31, 2011, the Company did not expect to have an obligation to contribute to its qualified pension plans in 2012 due to the funded status and credit balances of the qualified plans and this expectation for 2012 had not changed as of March 31, 2012. The Company anticipates beginning to need to make pension cash contributions after 2012. For the three months ended March 31, 2012, the Company did not make any contributions to its qualified pension plans and contributed $0.6 million and $0.1 million to its non-qualified pension plans and postretirement welfare plans, respectively. The contributions to the non-qualified pension and the postretirement welfare plans during the first quarter 2012 were consistent with the amounts anticipated as of December 31, 2011.

 

15. Stock-based Compensation

2003 Stock Incentive Plan

The 2003 Stock Incentive Plan (the “2003 Plan”) was approved by Holdco’s Board of Directors and was effective as of October 30, 2003. The 2003 Plan permits Holdco to grant to key employees and certain other persons stock options and stock awards and provides for a total of 288,023 shares of common stock for issuance of options and awards to employees of Holdco and its subsidiaries and a total of 10,000 shares of common stock for issuance of options and awards to directors and other persons providing services to Holdco. As of March 31, 2012, there were 288,648 shares in total available for grant under the 2003 Plan. The maximum grant to any one person must not exceed 70,400 shares in the aggregate. Holdco does not currently intend to make any additional grants under the 2003 Plan.

Option grants consist of “time options”, which vest and become exercisable in annual installments over the first five years following the date of grant, and/or “performance options”, which vest and become exercisable over the first five years following the date of grant at varying levels based on the achievement of certain EBITDA targets, and in any event by the eighth anniversary of the date of grant. The performance vesting includes certain carryforward provisions if targets are not achieved in a particular fiscal year and performance in a subsequent fiscal year satisfies cumulative performance targets, subject to certain conditions. Upon the occurrence of a “change in control” (as defined in the 2003 Plan), the unvested portion of any time option will immediately become vested and exercisable, and the vesting and exercisability of the unvested portion of any performance option may accelerate depending on the timing of the change of control and return on DLJMBP III’s equity investment in Holdco, all as provided under the 2003 Plan. A “change in control” under the 2003 Plan is defined as: (i) any person or other entity (other than any of Holdco’s subsidiaries), including any “person” as defined in Section 13(d)(3) of the Exchange Act, other than certain of the DLJMBP funds or affiliated parties thereof, becoming the beneficial owner, directly or indirectly, in a single transaction or a series of related transactions, by way of merger, consolidation or other business combination, of securities of Holdco representing more than 51% of the total combined voting power of all classes of capital stock of Holdco (or its successor) normally entitled to vote for the election of directors of Holdco or (ii) the sale of all or substantially all of the property or assets of Holdco to any unaffiliated person or entity other than one of Holdco’s subsidiaries is consummated. The Transactions did not constitute a change of control under the 2003

 

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Plan. Options issued under the 2003 Plan in January 2004 expire on the tenth anniversary of the grant date, in or about January 2014. The shares underlying the options are subject to certain transfer and other restrictions set forth in a management stockholders agreement dated July 29, 2003, by and among Holdco and certain holders of the capital stock of Holdco. Participants under the 2003 Plan also agree to certain restrictive covenants with respect to confidential information learned in their employment and certain non-competition obligations in connection with their receipt of options.

2004 Stock Option Plan

In connection with the closing of the Transactions, Holdco established a new stock option plan, which permits Holdco to grant to key employees and certain other persons of Holdco and its subsidiaries various equity-based awards, including stock options and restricted stock. The plan, currently known as the Third Amended and Restated 2004 Stock Option Plan for Key Employees of Visant Holding Corp. and Subsidiaries (the “2004 Plan”), provides for the issuance of a total of 510,230 shares of Holdco Class A Common Stock (“Class A Common Stock”). As of March 31, 2012, there were 139,227 shares available for grant under the 2004 Plan. Shares related to grants that are forfeited, terminated, cancelled or expire unexercised become available for new grants. Under his employment agreement, Mr. Marc L. Reisch, the Chairman of the Board of Directors and Chief Executive Officer and President, received awards of stock options and restricted stock under the 2004 Plan in October 2004. Additional members of management have also received grants under the 2004 Plan.

Option grants consist of “time options”, which fully vested and became exercisable in annual installments through 2009 (for those options granted in 2004 and 2005), and/or “performance options”, which vest and become exercisable following the date of grant based upon the achievement of certain EBITDA and other performance targets, and in any event by the eighth anniversary of the date of grant. The performance vesting includes certain carryforward provisions if targets are not achieved in a particular fiscal year and performance in a subsequent fiscal year satisfies cumulative performance targets. Upon the occurrence of a “change in control” (as defined under the 2004 Plan), the unvested portion of any time option will immediately become vested and exercisable, and the vesting and exercisability of the unvested portion of any performance option may accelerate, if certain EBITDA or other performance measures have been satisfied. A “change in control” under the 2004 Plan is defined as: (i) the sale (in one or a series of transactions) of all or substantially all of the assets of Holdco to an unaffiliated person; (ii) a sale (in one transaction or a series of transactions) resulting in more than 50% of the voting stock of Holdco being held by an unaffiliated person; (iii) a merger, consolidation, recapitalization or reorganization of Holdco with or into an unaffiliated person; in the case of each of clauses (i) through (iii) above, if and only if any such event results in the inability of the Sponsors, or any member or members of the Sponsors, to designate or elect a majority of Holdco’s Board of Directors (or the board of directors of the resulting entity or its parent company). The option exercise period is determined at the time of grant of the option but may not extend beyond the end of the calendar year that is ten calendar years after the date the option is granted, with most expiring between 2014 and 2016. All stock options, restricted shares and any common stock received upon the exercise of such equity awards or with respect to which restrictions lapse are governed by a management stockholder’s agreement and a sale participation agreement. As of March 31, 2012, there were 274,000 options vested under the 2004 Plan and zero options unvested and subject to future vesting.

2010 LTIP

During the first fiscal quarter of 2010, the Company implemented long-term phantom share incentive arrangements with certain key employees (the “2010 LTIP”). The awards were subject to vesting based on meeting certain performance objectives and/or continued employment. 2010 LTIP awards were settled in cash in an amount equal to the fair market value of one share of Class A Common Stock as of the vesting date multiplied by the number of phantom share units in which the executive’s awards have vested, payable in a lump sum. During the three months ended March 31, 2012, payments in the aggregate of $8.8 million were made with respect to awards made under the 2010 LTIP.

Common Stock

Visant is an indirect, wholly owned subsidiary of Holdco. The Sponsors hold shares of the Class A Common Stock of Holdco and additionally Visant’s equity-based incentive compensation plans are based on the value of the Class A Common Stock. There is no established public market for the Class A Common Stock. The fair market value of the Class A Common Stock is established pursuant to the terms of the 2004 Plan and is determined by a third party valuation, and the methodology to determine the fair market value under the equity incentive plans does not give effect to any premium for control or discount for minority interests or restrictions on transfers. Fair value includes any premium for control or discount for minority interests or restrictions on transfers. Holdco used a discounted cash flow analysis and selected public company analysis to determine the enterprise value and share price for the Class A Common Stock.

 

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Visant recognized total stock-based compensation expense of approximately $0.1 million and $2.5 million for the three-month periods ended March 31, 2012 and April 2, 2011, respectively, which was included in selling and administrative expenses.

For the three-month periods ended March 31, 2012 and April 2, 2011, there were no issuances of restricted shares or stock options.

As of March 31, 2012, $0.6 million of total unrecognized stock-based compensation expense related to restricted shares is expected to be recognized over a weighted-average period of 1.5 years.

Stock Options

The following table summarizes stock option activity for the Company:

 

Options in thousands

   Options      Weighted -
average
exercise price
 

Outstanding at December 31, 2011

     283       $ 44.93   

Exercised

     —         $ —     

Granted

     —         $ —     

Forfeited/Expired

     —         $ —     

Cancelled

     —         $ —     
  

 

 

    

Outstanding at March 31, 2012

     283       $ 44.93   
  

 

 

    

Vested or expected to vest at March 31, 2012

     283       $ 44.93   
  

 

 

    

Exercisable at March 31, 2012

     283       $ 44.93   
  

 

 

    

The weighted-average remaining contractual life of outstanding options at March 31, 2012 was approximately 2.9 years. As of March 31, 2012, there was no unrecognized stock-based compensation expense related to stock options expected to be recognized.

 

16. Business Segments

The Company’s three reportable segments consist of:

 

   

Scholastic — provides services in conjunction with the marketing, sale and production of class rings and an array of graduation products and other scholastic affinity products to students and administrators primarily in high schools, colleges and other post-secondary institutions;

 

   

Memory Book — provides services in conjunction with the publication, marketing, sale and production of school yearbooks, memory books and related products that help people tell their stories and chronicle important events; and

 

   

Marketing and Publishing Services — provides services in conjunction with the development, marketing, sale and production of multi-sensory and interactive advertising sampling systems and packaging, primarily for the fragrance, cosmetic and personal care segments, and provides innovative products and related services to the direct marketing sector. The group also produces book components primarily for the educational and trade publishing segments.

 

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The following table presents information of the Company by business segment:

 

     Three months ended              

In thousands

   March 31,
2012
    April 2,
2011
    $ Change     % Change  

Net sales

        

Scholastic

   $ 155,401      $ 156,282      $ (881     (0.6 %) 

Memory Book

     5,523        5,572        (49     (0.9 %) 

Marketing and Publishing Services

     97,891        88,890        9,001        10.1

Inter-segment eliminations

     (12     (6     (6     NM   
  

 

 

   

 

 

   

 

 

   
   $ 258,803      $ 250,738      $ 8,065        3.2
  

 

 

   

 

 

   

 

 

   

Operating income (loss)

        

Scholastic

   $ 23,922      $ 18,510      $ 5,412        29.2

Memory Book

     (14,394     (14,878     484        3.3

Marketing and Publishing Services

     12,066        7,816        4,250        54.4
  

 

 

   

 

 

   

 

 

   
   $ 21,594      $ 11,448      $ 10,146        88.6
  

 

 

   

 

 

   

 

 

   

Depreciation and Amortization

        

Scholastic

   $ 9,202      $ 9,210      $ (8     (0.1 %) 

Memory Book

     8,351        8,707        (356     (4.1 %) 

Marketing and Publishing Services

     8,445        8,548        (103     (1.2 %) 
  

 

 

   

 

 

   

 

 

   
   $ 25,998      $ 26,465      $ (467     (1.8 %) 
  

 

 

   

 

 

   

 

 

   

 

17. Related Party Transactions

Management Services Agreement

In connection with the Transactions, Holdco entered into a management services agreement with the Sponsors pursuant to which the Sponsors provide certain structuring, consulting and management advisory services. Under the management services agreement, during the term the Sponsors receive an annual advisory fee of $3.0 million that is payable quarterly and which increases by 3% per year. Holdco incurred advisory fees from the Sponsors of $0.9 million for each of the three-month periods ended March 31, 2012 and April 2, 2011. The management services agreement also provides that Holdco will indemnify the Sponsors and their affiliates, directors, officers and representatives for losses relating to the services contemplated by the management services agreement and the engagement of the Sponsors pursuant to, and the performance by the Sponsors of the services contemplated by, the management services agreement.

Other

KKR Capstone is a team of operational professionals who work exclusively with KKR’s investment professionals and portfolio company management teams to enhance and strengthen operations in KKR’s portfolio companies. The Company has retained KKR Capstone from time to time to provide certain of the Company’s businesses with consulting services primarily to help identify and implement operational improvements and other strategic efforts within its businesses. The Company incurred approximately $0.2 million and $0.6 million during the three months ended March 31, 2012 and April 2, 2011, respectively, for services provided by KKR Capstone. An affiliate of KKR Capstone has an ownership interest in Holdco.

 

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Certain of the lenders under the Credit Facilities and their affiliates have engaged, and may in the future engage, in investment banking, commercial banking and other financial advisory and commercial dealings with Visant and its affiliates. Such parties have received (or will receive) customary fees and commissions for these transactions.

Affiliates of Credit Suisse Securities (USA) LLC and KKR Capital Markets LLC act as lenders and/or as agents under the Credit Facilities and were initial purchasers of the Senior Notes, for which they received and will receive customary fees and expenses and are indemnified by the Company against certain liabilities. Each of Credit Suisse Securities (USA) LLC and KKR Capital Markets LLC is an affiliate of one of the Sponsors.

In 2011, Visant entered into pay-fixed/receive-floating interest rate swap transactions (the “Swap Transactions”) with respect to its variable rate term loan indebtedness under the Credit Facilities. The counterparties to the Swap Transactions or their affiliates are parties to the Credit Facilities. Such parties have received (or will receive) customary fees and commissions for such transactions. Credit Suisse International, which is a counterparty to one of the Swap Transactions, is an affiliate of DLJMBP III.

The Company is party to an agreement with CoreTrust Purchasing Group (“CoreTrust”), a group purchasing organization, pursuant to which the Company avails itself of the terms and conditions of the CoreTrust purchasing organization for certain purchases, including its prescription drug benefit program. An affiliate of KKR is party to an agreement with CoreTrust which permits certain KKR affiliates, including Visant, the benefit of utilizing the CoreTrust group purchasing program. CoreTrust receives payment of fees for administrative and other services provided by CoreTrust from certain vendors based on the products and services purchased by the Company and other parties and CoreTrust shares a portion of such fees with the KKR affiliate.

The Company participates in providing, with an affiliate of First Data Corporation (“First Data”), integrated marketing programs to third parties from time to time. The terms of the arrangement between the Company and First Data have been negotiated on an arm’s length basis. First Data is also owned and controlled by affiliates of KKR, and Tagar C. Olson, a member of Visant’s and Holdco’s board of directors, is a director of First Data. Based on the applicable guidance, the Company records its portion of the profits from such “collaborative arrangement” as revenue. The Company is not permitted, in accordance with the applicable accounting guidance, to present the sales, cost of sales or marketing expenses related to the sales transactions with third parties because First Data is the “principal participant” in the “collaborative arrangement”. For the three months ended March 31, 2012 and April 2, 2011, the amount of revenue that the Company recognized through this arrangement was not material to its financial statements.

 

18. Condensed Consolidating Guarantor Information

As discussed in Note 10, Debt, Visant’s obligations under the Senior Notes are guaranteed by the U.S. Subsidiary Guarantors on a full, unconditional and joint and several basis. The following tables present condensed consolidating financial information for Visant, as issuer, and its guarantor and non-guarantor subsidiaries. Immaterial amounts previously reported in the “Guarantors” and “Eliminations” column for “Net Sales” and “Cost of Product Sold” in the period ended April 2, 2011 have been adjusted in order to present the elimination of transactions among the guarantors.

 

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CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS AND COMPREHENSIVE LOSS (UNAUDITED)

Three months ended March 31, 2012

 

In thousands

   Visant     Guarantors     Non-
Guarantors
    Eliminations     Total  

Net sales

   $ —        $ 243,992      $ 20,310      $ (5,499   $ 258,803   

Cost of products sold

     —          116,861        15,116        (5,358     126,619   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

     —          127,131        5,194        (141     132,184   

Selling and administrative expenses

     (703     106,746        4,895        —          110,938   

Gain on sale of assets

     —          (1,838     —          —          (1,838

Special charges

     —          1,508        (18     —          1,490   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating income

     703        20,715        317        (141     21,594   

Net interest expense

     38,834        34,522        62        (33,942     39,476   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

(Loss) income before income taxes

     (38,131     (13,807     255        33,801        (17,882

(Benefit from) provision for income taxes

     (1,251     (6,742     302        (54     (7,745
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loss from operations

     (36,880     (7,065     (47     33,855        (10,137

Equity (earnings) loss in subsidiary, net of tax

     (26,743     47        —          26,696        —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net loss

   $ (10,137   $ (7,112   $ (47   $ 7,159      $ (10,137
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive (loss) income

   $ (9,572   $ (6,357   $ 3      $ 6,354      $ (9,572
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS AND COMPREHENSIVE LOSS (UNAUDITED)

Three months ended April 2, 2011

 

In thousands

   Visant     Guarantors     Non-
Guarantors
    Eliminations     Total  

Net sales

   $ —        $ 240,798      $ 13,455      $ (3,515   $ 250,738   

Cost of products sold

     —          113,056        10,408        (3,561     119,903   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

     —          127,742        3,047        46        130,835   

Selling and administrative expenses

     1,315        112,205        3,165        —          116,685   

Gain on sale of assets

     —          (61     —          —          (61

Special charges

     —          2,763        —          —          2,763   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating (loss) income

     (1,315     12,835        (118     46        11,448   

Net interest expense

     42,199        34,155        31        (33,786     42,599   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loss before income taxes

     (43,514     (21,320     (149     33,832        (31,151

Benefit from income taxes

     (2,370     (10,307     (18     18        (12,677
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loss from operations

     (41,144     (11,013     (131     33,814        (18,474

Equity (earnings) loss in subsidiary, net of tax

     (22,670     131        —          22,539        —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net loss

   $ (18,474   $ (11,144   $ (131   $ 11,275      $ (18,474
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive (loss) income

   $ (18,227   $ (11,332   $ 304      $ 11,028      $ (18,227
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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Table of Contents

CONDENSED CONSOLIDATING BALANCE SHEET (UNAUDITED)

March 31, 2012

 

In thousands

   Visant     Guarantors     Non-
Guarantors
    Eliminations     Total  

ASSETS

          

Cash and cash equivalents

   $ 51,376      $ 1,520      $ 5,921      $ —        $ 58,817   

Accounts receivable, net

     989        109,681        15,849        —          126,519   

Inventories

     —          124,465        9,296        (502     133,259   

Salespersons overdrafts, net

     —          26,642        1,463        —          28,105   

Prepaid expenses and other current assets

     1,187        22,655        1,831        —          25,673   

Income tax receivable

     2,018        —          —          —          2,018   

Intercompany receivable

     21,947        6,382        —          (28,329     —     

Deferred income taxes

     5,854        18,807        120        —          24,781   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total current assets

     83,371        310,152        34,480        (28,831     399,172   

Property, plant and equipment, net

     142        205,077        1,414        —          206,633   

Goodwill

     —          959,004        24,159        —          983,163   

Intangibles, net

     —          424,751        11,196        —          435,947   

Deferred financing costs, net

     50,283        —          —          —          50,283   

Deferred income taxes

     —          —          2,615        —          2,615   

Intercompany receivable

     553,219        22,925        53,433        (629,577     —     

Other assets

     846        11,008        263        —          12,117   

Investment in subsidiaries

     806,564        97,273        —          (903,837     —     

Prepaid pension costs

     —          4,906        —          —          4,906   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
   $ 1,494,425      $ 2,035,096      $ 127,560      $ (1,562,245   $ 2,094,836   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

LIABILITIES AND STOCKHOLDER’S (DEFICIT) EQUITY

          

Accounts payable

   $ 3,448      $ 43,504      $ 9,345      $ —        $ 56,297   

Accrued employee compensation

     6,700        19,130        2,143        —          27,973   

Customer deposits

     —          217,576        11,198        —          228,774   

Commissions payable

     —          27,461        627        —          28,088   

Income taxes payable

     31,123        (792     (568     (197     29,566   

Interest payable

     53,857        75        —          —          53,932   

Current portion of long-term debt and capital leases

     11        4,389        16        —          4,416   

Intercompany payable

     —          21,627        6,702        (28,329     —     

Other accrued liabilities

     3,856        24,193        812        —          28,861   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total current liabilities

     98,995        357,163        30,275        (28,526     457,907   

Long-term debt and capital leases, less current maturities

     1,906,039        8,946        12        —          1,914,997   

Intercompany payable

     22,925        606,957        —          (629,882     —     

Deferred income taxes

     (7,598     159,717        —          —          152,119   

Pension liabilities, net

     19,708        76,485        —          —          96,193   

Other noncurrent liabilities

     21,800        19,264        —          —          41,064   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total liabilities

     2,061,869        1,228,532        30,287        (658,408     2,662,280   

Mezzanine equity

     685        —          —          —          685   

Stockholder’s (deficit) equity

     (568,129     806,564        97,273        (903,837     (568,129
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
   $ 1,494,425      $ 2,035,096      $ 127,560      $ (1,562,245   $ 2,094,836   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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CONDENSED CONSOLIDATING BALANCE SHEET

2011

 

In thousands

   Visant     Guarantors     Non-
Guarantors
     Eliminations     Total  

ASSETS

           

Cash and cash equivalents

   $ 30,138      $ 2,334      $ 3,542       $ —        $ 36,014   

Accounts receivable, net

     1,099        96,626        15,113         —          112,838   

Inventories

     —          104,998        4,652         (360     109,290   

Salespersons overdrafts, net

     —          29,158        916         —          30,074   

Prepaid expenses and other current assets

     —          18,434        879         —          19,313   

Income tax receivable

     2,022        —          —           —          2,022   

Intercompany receivable

     —          12,400        —           (12,400     —     

Deferred income taxes

     3,006        18,806        84         —          21,896   
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Total current assets

     36,265        282,756        25,186         (12,760     331,447   

Property, plant and equipment, net

     172        208,524        1,354         —          210,050   

Goodwill

     —          959,004        24,110         —          983,114   

Intangibles, net

     —          438,022        10,372         —          448,394   

Deferred financing costs, net

     52,486        —          —           —          52,486   

Deferred income taxes

     —          —          2,564         —          2,564   

Intercompany receivable

     592,610        14,303        56,229         (663,142     —     

Other assets

     847        10,429        257         —          11,533   

Investment in subsidiaries

     812,921        97,270        —           (910,191     —     

Prepaid pension costs

     —          4,906        —           —          4,906   
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 
   $ 1,495,301      $ 2,015,214      $ 120,072       $ (1,586,093   $ 2,044,494   
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

LIABILITIES AND STOCKHOLDER’S (DEFICIT) EQUITY

           

Accounts payable

   $ 5,135      $ 44,647      $ 5,570       $ (2   $ 55,350   

Accrued employee compensation

     6,579        21,405        2,563         —          30,547   

Customer deposits

     —          168,904        8,092         —          176,996   

Commissions payable

     —          20,651        714         —          21,365   

Income taxes payable

     28,478        1,414        62         (142     29,812   

Interest payable

     34,204        90        —           —          34,294   

Current portion of long-term debt and capital leases

     12        3,996        18         —          4,026   

Intercompany payable

     12,075        (4,275     4,598         (12,398     —     

Other accrued liabilities

     13,553        21,673        1,158         —          36,384   
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Total current liabilities

     100,036        278,505        22,775         (12,542     388,774   

Long-term debt and capital leases, less current maturities

     1,905,214        8,351        14         —          1,913,579   

Intercompany payable

     14,303        649,057        —           (663,360     —     

Deferred income taxes

     (5,783     163,878        —           —          158,095   

Pension liabilities, net

     18,274        78,900        —           —          97,174   

Other noncurrent liabilities

     21,236        23,602        13         —          44,851   
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Total liabilities

     2,053,280        1,202,293        22,802         (675,902     2,602,473   

Mezzanine equity

     578        —          —           —          578   

Stockholder’s (deficit) equity

     (558,557     812,921        97,270         (910,191     (558,557
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 
   $ 1,495,301      $ 2,015,214      $ 120,072       $ (1,586,093   $ 2,044,494   
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

 

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CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS (UNAUDITED)

Three months ended March 31, 2012

 

In thousands

   Visant     Guarantors     Non-
Guarantors
    Eliminations     Total  

Net loss

   $ (10,137   $ (7,112   $ (47   $ 7,159      $ (10,137

Other cash (used in) provided by operating activities

     (12,497     65,514        1,397        (7,158     47,256   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net cash (used in) provided by operating activities

     (22,634     58,402        1,350        1        37,119   

Purchases of property, plant and equipment

     —          (17,702     (134     —          (17,836

Additions to intangibles

     —          (46     (930     —          (976

Proceeds from sale of property and equipment

     —          3,571        —          —          3,571   

Other investing activities, net

     —          (2,100     2,100        —          —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net cash (used in) provided by investing activities

     —          (16,277     1,036        —          (15,241

Short-term borrowings

     9,500        —          —          —          9,500   

Short-term repayments

     (9,500     —          —          —          (9,500

Repayments of long-term debt and capital leases

     (1     (1,161     (4     —          (1,166

Proceeds from issuance of long-term debt

     —          2,094        —          —          2,094   

Intercompany payable (receivable)

     43,873        (43,872     —          (1     —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net cash provided by (used in) financing activities

     43,872        (42,939     (4     (1     928   

Effect of exchange rate changes on cash and cash equivalents

     —          —          (3     —          (3
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Increase (decrease) in cash and cash equivalents

     21,238        (814     2,379        —          22,803   

Cash and cash equivalents, beginning of period

     30,138        2,334        3,542        —          36,014   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cash and cash equivalents, end of period

   $ 51,376      $ 1,520      $ 5,921      $ —        $ 58,817   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS (UNAUDITED)

Three months ended April 2, 2011

 

In thousands

   Visant     Guarantors     Non-
Guarantors
    Eliminations     Total  

Net loss

   $ (18,474   $ (11,144   $ (131   $ 11,275      $ (18,474

Other cash (used in) provided by operating activities

     (26,904     55,184        (299     (11,275     16,706   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net cash (used in) provided by operating activities

     (45,378     44,040        (430     —          (1,768

Purchases of property, plant and equipment

     —          (12,542     (303     —          (12,845

Additions to intangibles

     —          (66     —          —          (66

Proceeds from sale of property and equipment

     —          181        —          —          181   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net cash used in investing activities

     —          (12,427     (303     —          (12,730

Repayments of long-term debt and capital leases

     (3,118     (911     (2     —          (4,031

Intercompany payable (receivable)

     35,896        (35,896     —          —          —     

Debt financing costs

     (16,540     —          —          —          (16,540
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net cash provided by (used in) financing activities

     16,238        (36,807     (2     —          (20,571

Effect of exchange rate changes on cash and cash equivalents

     —          —          37        —          37   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Decrease in cash and cash equivalents

     (29,140     (5,194     (698     —          (35,032

Cash and cash equivalents, beginning of period

     46,794        8,098        5,305        —          60,197   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cash and cash equivalents, end of period

   $ 17,654      $ 2,904      $ 4,607      $ —        $ 25,165   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

This discussion and analysis should be read in conjunction with our condensed consolidated financial statements and notes thereto.

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

This report contains forward-looking statements including, without limitation, statements concerning the conditions in our industry, expectations with respect to future cost savings, our operations, our economic performance and financial condition, including, in particular, statements relating to our business and growth strategy and product development efforts. These forward-looking statements are not historical facts, but rather predictions and generally can be identified by use of statements that include such words as “may”, “might”, “will”, “should”, “estimate”, “project”, “plan”, “anticipate”, “expect”, “intend”, “outlook”, “believe” and other similar expressions that are intended to identify forward-looking statements and information. These forward-looking statements are based on estimates and assumptions by our management that, although we believe to be reasonable, are inherently uncertain and subject to a number of risks and uncertainties. These risks and uncertainties include, without limitation, those identified under, Part I, Item 1A. Risk Factors, in our Annual Report on Form 10-K for the year ended December 31, 2011, in addition to those discussed elsewhere in this report.

The following list represents some, but not necessarily all, of the factors that could cause actual results to differ from historical results or those anticipated or predicted by these forward-looking statements:

 

   

our substantial indebtedness and our ability to service the indebtedness;

 

   

our inability to implement our business strategy in a timely and effective manner;

 

   

global market and economic conditions;

 

   

levels of customers’ advertising and marketing spending, including as may be impacted by economic factors and general market conditions;

 

   

competition from other companies;

 

   

fluctuations in raw material prices;

 

   

our reliance on a limited number of suppliers;

 

   

the seasonality of our businesses;

 

   

the loss of significant customers or customer relationships;

 

   

Jostens’ reliance on independent sales representatives;

 

   

our reliance on numerous complex information systems;

 

   

the amount of capital expenditures required at our businesses;

 

   

developments in technology and related changes in consumer behavior;

 

   

the reliance of our businesses on limited production facilities;

 

   

actions taken by the U.S. Postal Service and changes in postal standards and their effect on our marketing services business, including as such changes may impact competition for our sampling systems;

 

   

labor disturbances;

 

   

environmental obligations and liabilities;

 

   

adverse outcome of pending or threatened litigation;

 

   

the enforcement of intellectual property rights;

 

   

the impact of changes in applicable law and regulations;

 

   

the application of privacy laws and other related obligations on our business;

 

   

the textbook adoption cycle and levels of government funding for education spending;

 

   

local conditions in the countries in which we operate;

 

   

control by our stockholders;

 

   

changes in market value of the securities held in our pension plans; and

 

   

our dependence on members of senior management.

 

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We caution you that the foregoing list of important factors is not exclusive. In addition, in light of these risks and uncertainties, the matters referred to in the forward-looking statements contained in this report may not in fact occur. Forward-looking statements speak only as of the date they are made, and we undertake no obligation to update publicly or revise any of them in light of new information, future events or otherwise, except as required by law. Comparisons of results for current and prior periods are not intended to express any future trends or indications of future performance, unless expressed as such, and should only be viewed as historical data.

GENERAL

We are a leading marketing and publishing services enterprise servicing the school affinity, direct marketing, fragrance, cosmetic and personal care sampling and packaging, and educational and trade publishing segments. Visant was formed to create a platform of businesses with leading positions in attractive end market segments and to establish a highly experienced management team that could leverage a shared services infrastructure and capitalize on margin and growth opportunities. Since 2004, we have developed a unified marketing and publishing services organization with a leading and differentiated approach in each of our segments. Our management team has created and integrated central services and management functions and has reshaped the business to focus on the most attractive and highest growth market opportunities.

We sell our products and services to end customers through several different sales channels, including independent sales representatives and dedicated sales forces. Visant (formerly known as Jostens IH Corp.) was originally incorporated in Delaware in 2003.

In April 2011, Arcade acquired the capital stock of Color Optics, a specialty packaging provider, serving the cosmetic and consumer products industries with highly-decorated packaging solutions. The results of the Color Optics operations are reported as part of the Marketing and Publishing Services segment from the date of acquisition.

We have demonstrated our ability over the last seven years since our inception to execute acquisitions and dispositions that have allowed us to complement and expand our core capabilities, accelerate into market segment adjacencies, as well as enabled us to divest non-core businesses and deleverage. We anticipate that we will continue to pursue this strategy of consummating complementary acquisitions to support expansion of our product offerings and services, including to address marketplace dynamics, developments in technology and changing consumer behaviors, and broaden our geographic reach, as well as availing ourselves of strategic opportunities and market conditions for transacting on businesses in the Visant portfolio.

Our three reportable segments as of March 31, 2012 consisted of:

 

   

Scholastic—provides services in conjunction with the marketing, sale and production of class rings and an array of graduation products and other scholastic affinity products to students and administrators primarily in high schools, colleges and other post-secondary institutions;

 

   

Memory Book—provides services in conjunction with the publication, marketing, sale and production of school yearbooks, memory books and related products that help people tell their stories and chronicle important events; and

 

   

Marketing and Publishing Services—provides services in conjunction with the development, marketing, sale and production of multi-sensory and interactive advertising sampling systems and packaging, primarily for the fragrance, cosmetic and personal care segments, and provides innovative products and related services to the direct marketing sector. The group also produces book components primarily for the educational and trade publishing segments.

We experience seasonal fluctuations in our net sales and cash flow from operations, tied primarily to the North American school year. In particular, Jostens generates a significant portion of its annual net sales in the second quarter in connection with the delivery of caps, gowns and diplomas for spring graduation ceremonies and spring deliveries of school yearbooks, and a significant portion of its annual cash flow in the fourth quarter is driven by the receipt of customer deposits in our Scholastic and Memory Book segments. The net sales of our sampling and other direct mail and commercial printed products have also historically reflected seasonal variations, and we generate a majority of the annual net sales in this segment during the third and fourth quarters, including based on the timing of customers’ advertising campaigns which have traditionally been concentrated prior to the Christmas and spring holiday seasons. Net sales of textbook components are

 

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impacted seasonally by state and local schoolbook purchasing schedules, which commence in the spring and peak in the summer months preceding the start of the school year. The seasonality of each of our businesses requires us to allocate our resources to manage our manufacturing capacity, which often operates at full or near full capacity during peak seasonal demand periods. Based on the seasonality of our cash flow, we traditionally borrow under our Revolving Credit Facility during the third quarter to fund general working capital needs during this period of time when schools are generally not in session and orders are not being placed, and repay the amount borrowed for general working capital purposes in the fourth quarter when customer deposits in the Scholastic and Memory Book segments are received and customers’ advertising campaigns in anticipation of the holiday season generally increase.

Our net sales include sales to certain customers for whom we purchase paper. The price of paper, a primary material across most of our products and services, is volatile over time and may cause swings in net sales and cost of sales. We generally are able to pass on increases in the cost of paper to our customers across most of our product lines at the time we are impacted by such increases.

The price of gold and other precious metals has increased dramatically since 2009, and we anticipate continued volatility in the price of gold for the foreseeable future driven by numerous factors, such as changes in supply and demand and investor sentiment. These higher metal prices have impacted, and could further impact, our jewelry sales metal mix. We have seen a continuing shift in jewelry metal mix from gold to lesser priced metals over the past several years, which we believe is primarily attributable to the impact of significantly higher precious metal costs on our jewelry prices. To mitigate continued volatility and the impact on our manufacturing costs, we have entered into purchase commitments which we believe will cover all of our needs for 2012 and a portion of 2013.

The continued uncertainty in market conditions and excess capacity that exists in the print and related services industry, as well as the variety of other advertising media with which we compete, have amplified competitive and pricing pressures, which we anticipate will continue for the foreseeable future. We continue to see the impact of restrictions on school budgets, which affects spending at the state and local levels, resulting in reduced spending for our Memory Book, Scholastic and elementary/high school publishing services products and services and heightened pricing pressure on our core Memory Book products and services. Funding constraints have impacted textbook adoption cycles, which are being extended in many states due to fiscal pressures, continuing to affect volume in our elementary/high school publishing services products and services. Trade book publishing has experienced an accelerated shift towards digital books, which has negatively impacted our publishing services business in terms of fewer printed copies of books as well as shorter print runs. It is anticipated that the impact of digital books and the lower volume of book purchases through retail stores will likely continue to impact demand for trade books during the remainder of 2012.

We seek to distinguish ourselves based on our capabilities, innovative service offerings to our customers, quality and organizational and financial strength. We continue to diversify, expand and improve our product and service offerings, including to address changes in technology, consumer behavior and user preferences.

In addition, we have continued to implement efforts to reduce costs and drive operating efficiencies, including through the restructuring and integration of our operations and the rationalization of sales, administrative and support functions. We expect to initiate additional efforts focused on cost reduction and containment to address continued challenging marketplace conditions as well as competitive and pricing pressures demanding innovation and a lower cost structure.

Company Background

On October 4, 2004, an affiliate of KKR and affiliates of DLJMBP III completed the Transactions, which created a marketing and publishing services enterprise through the consolidation of Jostens, Von Hoffmann and Arcade. The Transactions were accounted for as a combination of interests under common control.

Prior to the Transactions, Von Hoffmann and Arcade were each controlled by affiliates of DLJ Merchant Banking Partners II, L.P., and DLJMBP III owned approximately 82.5% of Holdco’s outstanding equity, with the remainder held by other co-investors and certain members of management. Upon consummation of the Transactions, an affiliate of KKR invested $256.1 million and was issued equity interests representing approximately 49.6% of Holdco’s voting interest and 45.0% of Holdco’s economic interest, while affiliates of DLJMBP III held equity interests representing approximately 41.0% of Holdco’s voting interest and 45.0% of Holdco’s economic interest, with the remainder held by other co-investors and certain members of management. Approximately $175.6 million of the proceeds were distributed to certain stockholders, and certain treasury stock held by Von Hoffmann was redeemed. As of May 7, 2012, affiliates of KKR and DLJMBP III held

 

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approximately 49.2% and 41.1%, respectively, of Holdco’s voting interest, while each continued to hold approximately 44.7% of Holdco’s economic interest. As of May 7, 2012, the other co-investors held approximately 8.4% of the voting interest and 9.1% of the economic interest of Holdco, and members of management held approximately 1.3% of the voting interest and approximately 1.5% of the economic interest of Holdco (exclusive of exercisable options). Visant is an indirect wholly owned subsidiary of Holdco.

CRITICAL ACCOUNTING POLICIES

The preparation of interim financial statements involves the use of certain estimates that differ from those used in the preparation of annual financial statements, the most significant of which relate to income taxes. For purposes of preparing our interim financial statements, we utilize an estimated annual effective tax rate based on estimates of the components that impact the tax rate. Those components are re-evaluated each interim period, and, if changes in our estimates are significant, we modify our estimate of the annual effective tax rate and make any required adjustments in the interim period.

There have been no material changes to our critical accounting policies and estimates as described in Part I, Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations, of our Annual Report on Form 10-K for the fiscal year ended December 31, 2011.

Recently Adopted Accounting Pronouncements

In December 2010, the Financial Accounting Standards Board (“FASB”) amended its authoritative guidance related to Step 1 of the goodwill impairment test for reporting units with zero or negative carrying amounts. For those reporting units, an entity is required to perform Step 2 of the goodwill impairment test if it is more-likely-than-not that a goodwill impairment exists. In determining whether it is more-likely-than-not that a goodwill impairment exists, consideration should be made as to whether there are any adverse qualitative factors indicating that an impairment may exist. This guidance became effective for the first reporting period beginning after December 15, 2011. The Company’s adoption of this guidance did not have a material impact on its financial statements.

In December 2010, the FASB amended its authoritative guidance related to business combinations entered into by an entity that is material on an individual or aggregate basis. These amendments clarify existing guidance that, if an entity presents comparative financial statements that include a material business combination, the entity should disclose revenue and earnings of the combined entity as though the business combination that occurred during the current year had occurred as of the beginning of the comparable prior annual reporting period. The amendments also require expanded supplemental pro forma disclosures to include a description of the nature and amount of material, nonrecurring pro forma adjustments directly attributable to the business combination included in the reported pro forma revenue and earnings. This guidance became effective, on a prospective basis, for business combinations for which the acquisition date is on or after the first annual reporting period after December 15, 2010. The Company’s adoption of this guidance did not have a material impact on its financial statements.

In May 2011, the FASB issued Accounting Standards Update 2011-04 (“ASU 2011-04”) which generally provides a uniform framework for fair value measurements and related disclosures between GAAP and the International Financial Reporting Standards (“IFRS”). Additional disclosure requirements in ASU 2011-04 include: (1) for Level 3 fair value measurements, quantitative information about unobservable inputs used, a description of the valuation processes used by the entity and a qualitative discussion about the sensitivity of the measurements to changes in the unobservable inputs, (2) for an entity’s use of a nonfinancial asset that is different from the asset’s highest and best use, the reason for the difference, (3) for financial instruments not measured at fair value but for which disclosure of fair value is required, the fair value hierarchy level in which the fair value measurements were determined and (4) the disclosure of all transfers between Level 1 and Level 2 of the fair value hierarchy. ASU 2011-04 became effective for interim and annual periods beginning on or after December 15, 2011. The Company’s adoption of this guidance did not have a material impact on its financial statements.

In June 2011, the FASB issued Accounting Standards Update 2011-05 (“ASU 2011-05”) which revises the manner in which entities present comprehensive income in their financial statements. This new guidance amends existing guidance by allowing only two options for presenting the components of net income and other comprehensive income: (1) in a single continuous financial statement, referred to as the statement of comprehensive income, or (2) in two separate but consecutive financial statements, consisting of an income statement followed by a separate statement of other comprehensive income. Also, items that are reclassified from other comprehensive income to net income must be presented on the face of the financial statements. ASU 2011-05 became effective for fiscal years, and interim periods within those years, beginning after December 15, 2011. The Company’s adoption of this guidance did not have a material impact on its financial statements.

 

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In September 2011, the FASB issued Accounting Standards Update 2011-08 (“ASU 2011-08”) which gives entities testing goodwill for impairment the option of performing a qualitative assessment before calculating the fair value of a reporting unit in Step 1 of the goodwill impairment test. If an entity determines, on the basis of qualitative factors, that the fair value of a reporting unit is, more likely than not, less than the carrying amount for such reporting unit, then the two-step goodwill impairment test would be required. Otherwise, further goodwill impairment testing would not be required. Companies are not required to perform the qualitative assessment for any reporting unit in any period and may proceed directly to Step 1 of the goodwill impairment test. A company that validates its conclusion by measuring fair value can resume performing the qualitative assessment in any subsequent period. ASU 2011-08 became effective for annual and interim goodwill impairment tests performed with respect to fiscal years beginning after December 15, 2011. The Company’s adoption of this guidance did not have a material impact on its financial statements.

In September 2011, the FASB issued Accounting Standards Update 2011-09 (“ASU 2011-09”), which amends ASC 715-80 by increasing the quantitative and qualitative disclosures an employer is required to provide about its participation in significant multiemployer plans that offer pension or other postretirement benefits. The objective of ASU 2011-09 is to enhance the transparency of disclosures about (1) the significant multiemployer plans in which an employer participates, (2) the level of the employer’s participation in those plans, (3) the financial health of the plans and (4) the nature of the employer’s commitments to the plans. ASU 2011-09 is effective for fiscal years ending after December 15, 2011. The Company’s adoption of this guidance did not have a material impact on its financial statements.

On December 23, 2011, the FASB issued Accounting Standards Update 2011-12 (“ASU 2011-12”) which defers certain provisions of ASU 2011-05. One provision of ASU 2011-05 required entities to present reclassification adjustments out of accumulated other comprehensive income by component in both the statement in which net income is presented and the statement in which other comprehensive income is presented (for both interim and annual financial statements). This requirement is indefinitely deferred under ASU 2011-12 and will be further deliberated by the FASB at a future date. During the deferral period, all entities are required to comply with existing requirements for reclassification adjustments in Accounting Standards Codification 220, Comprehensive Income, which indicates that “[a]n entity may display reclassification adjustments on the face of the financial statement in which comprehensive income is reported, or it may disclose reclassification adjustments in the notes to the financial statements.” The effective date of ASU 2011-12 for public entities is for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2011. The Company’s adoption of this guidance did not have a material impact on its financial statements.

RESULTS OF OPERATIONS

Three Months Ended March 31, 2012 Compared to the Three Months Ended April 2, 2011

The following table sets forth selected information derived from our Condensed Consolidated Statements of Operations and Comprehensive Loss for the three-month periods ended March 31, 2012 and April 2, 2011. In the text below, amounts and percentages have been rounded and are based on the amounts in our condensed consolidated financial statements.

 

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     Three months ended              

In thousands

   March 31,
2012
    April 2,
2011
    $ Change     % Change  

Net sales

   $ 258,803      $ 250,738      $ 8,065        3.2

Cost of products sold

     126,619        119,903        6,716        5.6
  

 

 

   

 

 

   

 

 

   

Gross profit

     132,184        130,835        1,349        1.0

% of net sales

     51.1     52.2    

Selling and administrative expenses

     110,938        116,685        (5,747     (4.9 %) 

% of net sales

     42.9     46.5    

Gain on disposal of fixed assets

     (1,838     (61     (1,777     NM   

Special charges

     1,490        2,763        (1,273     NM   
  

 

 

   

 

 

   

 

 

   

Operating income

     21,594        11,448        10,146        88.6

% of net sales

     8.3     4.6    

Interest expense, net

     39,476        42,599        (3,123     (7.3 %) 
  

 

 

   

 

 

   

 

 

   

Loss before income taxes

     (17,882     (31,151     13,269     

Benefit from income taxes

     (7,745     (12,677     4,932        38.9
  

 

 

   

 

 

   

 

 

   

Net loss

   $ (10,137   $ (18,474   $ 8,337        45.1
  

 

 

   

 

 

   

 

 

   

NM = Not meaningful

Our business is managed on the basis of three reportable segments: Scholastic, Memory Book and Marketing and Publishing Services. The following table sets forth selected segment information derived from our Condensed Consolidated Statements of Operations and Comprehensive Loss for the three-month periods ended March 31, 2012 and April 2, 2011. For additional financial information about our operating segments, see Note 16, Business Segments, to the condensed consolidated financial statements.

 

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     Three months ended              

In thousands

   March 31,
2012
    April 2,
2011
    $ Change     % Change  

Net sales

        

Scholastic

   $ 155,401      $ 156,282      $ (881     (0.6 %) 

Memory Book

     5,523        5,572        (49     (0.9 %) 

Marketing and Publishing Services

     97,891        88,890        9,001        10.1

Inter-segment eliminations

     (12     (6     (6     NM   
  

 

 

   

 

 

   

 

 

   

Net sales

   $ 258,803      $ 250,738      $ 8,065        3.2
  

 

 

   

 

 

   

 

 

   

Operating income (loss)

        

Scholastic

   $ 23,922      $ 18,510      $ 5,412        29.2

Memory Book

     (14,394     (14,878     484        3.3

Marketing and Publishing Services

     12,066        7,816        4,250        54.4
  

 

 

   

 

 

   

 

 

   

Operating income

   $ 21,594      $ 11,448      $ 10,146        88.6
  

 

 

   

 

 

   

 

 

   

Depreciation and amortization

        

Scholastic

   $ 9,202      $ 9,210      $ (8     (0.1 %) 

Memory Book

     8,351        8,707        (356     (4.1 %) 

Marketing and Publishing Services

     8,445        8,548        (103     (1.2 %) 
  

 

 

   

 

 

   

 

 

   

Depreciation and amortization

   $ 25,998      $ 26,465      $ (467     (1.8 %) 
  

 

 

   

 

 

   

 

 

   

NM = Not meaningful

Net Sales. Consolidated net sales increased $8.1 million, or 3.2%, to $258.8 million for the first fiscal quarter ended March 31, 2012 compared to $250.7 million for the first fiscal quarter of 2011. Included in consolidated net sales for the quarter ended March 31, 2012 were approximately $2.5 million of incremental sales in the Marketing and Publishing Services segment attributed to the impact from the acquisition of Color Optics in April 2011. Excluding the impact of this item, consolidated net sales increased $5.6 million for the first fiscal quarter ended March 31, 2012 compared to the same prior year period.

Net sales for the Scholastic segment were $155.4 million, a decrease of less than 1% compared to $156.3 million for the first fiscal quarter of 2011. This decrease was primarily attributable to lower volume in certain products, including announcements.

Net sales for the Memory Book segment were $5.5 million and essentially flat year-over-year when compared to $5.6 million for the first fiscal quarter of 2011.

Net sales for the Marketing and Publishing Services segment increased $9.0 million, or 10.1%, to $97.9 million from $88.9 million for the first fiscal quarter of 2011. This increase was primarily attributable to significantly higher volume in our sampling operations, including the incremental impact from the acquisition of Color Optics and the volume from our Latin American sampling operations, the results of which were recognized beginning in the second quarter of 2011, offset somewhat by lower volume in our direct mail operations.

Gross Profit. Consolidated gross profit increased $1.3 million, or 1.0%, to $132.2 million for the three months ended March 31, 2012 from $130.8 million for the three-month period ended April 2, 2011. As a percentage of net sales, gross profit margin for the three months ended March 31, 2012 decreased to 51.1% from 52.2% for the comparative period in 2011. This decrease in gross profit margin was primarily due to higher pension expense and the continued shift in jewelry sales metal mix to lower priced metals in our Scholastic segment.

Selling and Administrative Expenses. Selling and administrative expenses decreased $5.7 million, or 4.9 %, to $110.9 million for the three months ended March 31, 2012 from $116.7 million for the corresponding period in 2011. This decrease

 

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reflected an approximately $2.4 million decrease in stock-based compensation expense and the absence of costs of approximately $3.8 million associated with the Repricing that were included in our first quarter 2011 results. Excluding the impact of stock-based compensation expense and costs associated with the Repricing, selling and administrative expenses increased $0.4 million and, as a percentage of net sales, were approximately 42.8% for the three months ended March 31, 2012 compared to 44.0% for the three months ended April 2, 2011. This improvement was due to the impact of minimal incremental costs associated with revenue increases period-over-period.

Special Charges. During the three months ended March 31, 2012, the Company recorded $1.3 million of restructuring costs and $0.2 million of other special charges. Restructuring costs consisted of $1.3 million of severance and related benefits associated with reductions in force in the Marketing and Publishing Services segment. Other special charges consisted of $0.2 million of non-cash asset related impairment charges in the Marketing and Publishing Services segment. The associated employee headcount reductions related to the above actions were 57 in the Marketing and Publishing Services segment.

During the three months ended April 2, 2011, the Company recorded $1.4 million of restructuring costs and $1.4 million of other special charges. Restructuring costs consisted of $0.8 million, $0.3 million and $0.3 million of severance and related benefits associated with reductions in force in the Scholastic, Memory Book and Marketing and Publishing Services segments, respectively. Other special charges consisted of $1.4 million of non-cash asset related impairment charges associated with the sale of one of our owned facilities. The associated employee headcount reductions related to the above actions were 45, six and three in the Scholastic, Marketing and Publishing Services and Memory Book segments, respectively.

Operating Income. As a result of the foregoing, consolidated operating income increased $10.2 million to $21.6 million for the three months ended March 31, 2012 compared to $11.4 million for the comparable period in 2011. As a percentage of net sales, operating income increased to 8.3% for the first fiscal quarter of 2012 from 4.6% for the same period in 2011.

Net Interest Expense. Net interest expense was comprised of the following:

 

     Three months ended              

In thousands

   March 31,
2012
    April 2,
2011
    $ Change     % Change  

Interest expense

   $ 36,464      $ 40,158      $ (3,694     (9.2 %) 

Amortization of debt discount, premium and deferred financing costs

     3,034        2,463        571        23.2

Interest income

     (22     (22     —          NM   
  

 

 

   

 

 

   

 

 

   

Interest expense, net

   $ 39,476      $ 42,599      $ (3,123     (7.3 %) 
  

 

 

   

 

 

   

 

 

   

NM = Not meaningful

Net interest expense decreased $3.1 million to $39.5 million for the three months ended March 31, 2012 compared to $42.6 million for the comparative 2011 period primarily due to lower interest rates resulting from the Repricing and lower borrowings as a result of the $60.0 million voluntary pre-payment we made under the Term Loan Credit Facility in December 2011.

Income Taxes. We recorded an income tax benefit for the three months ended March 31, 2012 based on our best estimate of the consolidated effective tax rate applicable for the entire year and giving effect to tax adjustments considered a period expense or benefit. The effective tax rates for the quarters ended March 31, 2012 and April 2, 2011 were 43.2% and 40.7%, respectively. The increase in the rate of tax benefit from the first quarter of 2011 to the first quarter of 2012 was primarily due to the recognition in the 2011 fiscal quarter of a tax adjustment to reflect increased tax rates at which we expected deferred tax assets and liabilities to be realized or settled in the future as a result of changes in certain state income tax rates.

Net Loss. As a result of the aforementioned items, we reported a net loss of $10.1 million for the three months ended March 31, 2012 compared to a net loss of $18.5 million for the three months ended April 2, 2011.

 

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LIQUIDITY AND CAPITAL RESOURCES

The following table presents cash flow activity for the first three months of fiscal 2012 and 2011 and should be read in conjunction with our Condensed Consolidated Statements of Cash Flows.

 

     Three months ended  

In thousands

   March 31,
2012
    April 2,
2011
 

Net cash provided by (used in) operating activities

   $ 37,119      $ (1,768

Net cash used in investing activities

     (15,241     (12,730

Net cash provided by (used in) financing activities

     928        (20,571

Effect of exchange rate changes on cash

     (3     37   
  

 

 

   

 

 

 

Increase (decrease) in cash and cash equivalents

   $ 22,803      $ (35,032
  

 

 

   

 

 

 

For the three months ended March 31, 2012, cash provided by operating activities was $37.1 million compared with cash used in operating activities of $1.8 million for the comparable prior year period. The increase in cash provided by operating activities of $38.9 million was attributable to the timing of cash interest payments and higher cash earnings offset somewhat by increased working capital.

Net cash used in investing activities for the three months ended March 31, 2012 was $15.2 million compared with $12.7 million for the comparative 2011 period. The $2.5 million change was primarily driven by increased expenditures for property, plant and equipment of $5.0 million during the first three months of 2012 versus the comparable 2011 period offset by proceeds from the sale of property, plant and equipment of $3.3 million during the first three months of 2012 versus the comparable 2011 period. Our capital expenditures relating to purchases of property, plant and equipment were $17.8 million and $12.8 million for the three months ended March 31, 2012 and April 2, 2011, respectively.

Net cash provided by financing activities for the three months ended March 31, 2012 was $0.9 million, compared with cash used in financing activities of $20.6 million for the comparable 2011 period. Net cash provided by financing activities for the three months ended March 31, 2012 primarily consisted of $2.1 million of proceeds from the issuance of long-term debt in connection with equipment financing arrangements, offset somewhat by $1.1 million of net repayments of long-term debt. Net cash used in financing activities for the three months ended April 2, 2011 primarily consisted of $4.0 million for the repayment of long-term debt under our Term Loan Credit Facility, equipment financing arrangements and capital leases and $16.6 million related to debt financing costs and related expenses from the Repricing described below.

On March 1, 2011, Visant announced the completion of the Repricing providing for the incurrence of new term loans in an aggregate principal amount of $1,246.9 million, with the proceeds of the new term loans, together with cash on hand, being used to repay the then existing term B loans outstanding in full. The amended Term Loan Credit Facility provides for an interest rate for each term loan based upon LIBOR or an ABR plus a spread of 4.00% or 3.00%, respectively, with a 1.25% LIBOR floor. In connection with the amendment, Visant was required to pay a prepayment premium of 1% of the outstanding principal amount of the Term Loan Credit Facility along with certain other fees and expenses.

In the fourth quarter of 2011, we entered into the Swap Transactions in an aggregate initial notional principal amount of $600.0 million with respect to our variable rate term loan indebtedness under the Credit Facilities. Each of the Swap Transactions had an effective date of January 3, 2012 and a maturity date of July 5, 2016, and is designed to mitigate the effect of increases in interest rates between the effective date of the Swap Transactions and their maturity or earlier termination. See Note 11, Derivative Financial Instruments and Hedging Activities, for further details.

We use cash generated from operations primarily for debt service obligations and capital expenditures and to fund other working capital requirements. In assessing our liquidity, we review and analyze our current cash on-hand, the number of days our sales are outstanding and capital expenditure commitments. Our ability to make scheduled payments of principal, or to pay the interest on, or to refinance our indebtedness, or to fund planned capital expenditures will depend on our future operating performance. Future principal debt payments are expected to be paid out of cash flows from operations, cash on-hand and, if consummated, future financings. Based upon the current level of operations, management expects our cash flows from operations along with availability under our Credit Facilities will provide sufficient liquidity to fund our obligations,

 

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including our projected working capital requirements, debt interest and retirement obligations and related costs, and capital spending for the foreseeable future. To the extent we make future acquisitions, we may require new sources of funding, including additional debt or equity financing or some combination thereof.

We experience seasonal fluctuations in our net sales and cash flow from operations, tied primarily to the North American school year. In particular, Jostens generates a significant portion of its annual net sales in the second quarter in connection with the delivery of caps, gowns and diplomas for spring graduation ceremonies and spring deliveries of school yearbooks, and a significant portion of its annual cash flow in the fourth quarter is driven by the receipt of customer deposits in our Scholastic and Memory Book segments. The net sales of our sampling and other direct mail and commercial printed products have also historically reflected seasonal variations, and we generate a majority of the annual net sales in this segment during the third and fourth quarters, including based on the timing of customers’ advertising campaigns which have traditionally been concentrated prior to the Christmas and spring holiday seasons. Based on the seasonality of our cash flow, we traditionally borrow under our Revolving Credit Facility during the third quarter to fund general working capital needs during this period of time when schools are generally not in session and orders are not being placed, and repay the amount borrowed for general working capital purposes in the fourth quarter when customer deposits in the Scholastic and Memory Book segments are received and customers’ advertising campaigns in anticipation of the holiday season generally increase.

We have substantial debt service requirements and are highly leveraged. As of March 31, 2012, we had total indebtedness of $1,937.8 million (exclusive of $11.9 million of standby letters of credit outstanding and $18.4 million of original issue discount related to the Term Loan Credit Facility), including $1,174.4 million outstanding under the Term Loan Credit Facility, $750.0 million aggregate principal amount outstanding under the Senior Notes and $13.4 million of outstanding borrowings under capital lease and equipment financing arrangements. Our cash and cash equivalents as of March 31, 2012 totaled $58.8 million. We had no outstanding borrowings under the Revolving Credit Facility as of March 31, 2012 (other than the $11.9 million outstanding in the form of standby letters of credit). As of March 31, 2012, we were in compliance with the financial covenants under our outstanding material debt obligations, including our consolidated total debt to consolidated EBITDA covenant. Our principal sources of liquidity are cash flows from operating activities and available borrowings under the Credit Facilities, which included $163.1 million of available borrowings (net of standby letters of credit) under the $175.0 million Revolving Credit Facility as of March 31, 2012.

Our liquidity and our ability to fund our capital requirements will depend on the credit markets and our financial condition. The extent of any impact of credit market conditions on our liquidity and ability to fund our capital requirements or to undertake future financings will depend on several factors, including our operating cash flows, credit conditions, our credit ratings and credit capacity, the cost of financing and other general economic and business conditions that are beyond our control. If those factors significantly change or other unexpected factors adversely affect us, our business may not generate sufficient cash flows from operations or we may not be able to obtain future financings to meet our liquidity needs. Any refinancing of our debt could be on less favorable terms, including becoming subject to higher interest rates. In addition, the terms of existing or future debt instruments, including the Credit Facilities and the Indenture, may restrict certain of our alternatives. We anticipate that, to the extent additional liquidity is necessary to fund our operations or make additional acquisitions, it would be funded through borrowings under our Revolving Credit Facility, the incurrence of other indebtedness, additional equity issuances or a combination of these potential sources of liquidity. The possibility of consummating any such financing will be subject to conditions in the capital markets at such time. We may not be able to obtain this additional liquidity when needed on terms acceptable to us or at all.

As market conditions warrant, we and our Sponsors, including KKR and DLJMBP III and their affiliates, may from time to time redeem or repurchase debt securities, in privately negotiated or open market transactions, by tender offer, exchange offer or otherwise subject to the terms of applicable contractual restrictions. We cannot give any assurance as to whether or when such repurchases or exchanges will occur and at what price.

 

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

There were no material changes in our exposure to market risk during the quarter ended March 31, 2012. In the first quarter, there continued to be unprecedented volatility in the price of gold. To mitigate continued volatility and the impact on our manufacturing costs, we have entered into purchase commitments which we believe will cover all of our needs for 2012 and a portion of 2013. For additional information, refer to the discussion under Part I, Item 1., Note 12, Commitments and Contingencies and Part I, Item 2, Management’s Discussion and Analysis of Financial Condition and Results of Operations – General, elsewhere in this report and Part II, Item 7A of our Annual Report on Form 10-K for the fiscal year ended December 31, 2011.

 

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ITEM 4. CONTROLS AND PROCEDURES

Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as defined in Rule 13a-15(f) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”).

Our management, under the supervision of our Chief Executive Officer and Senior Vice President, Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Exchange Act) as of the end of the period covered by this report. Based upon that evaluation, our Chief Executive Officer and Senior Vice President, Chief Financial Officer concluded that our disclosure controls and procedures are effective as of the end of the period covered by this report.

During the quarter ended March 31, 2012, there was no change in our internal control over financial reporting that materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

PART II. OTHER INFORMATION

 

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

Our equity securities are not registered pursuant to Section 12 of the Exchange Act. For the first fiscal quarter ended March 31, 2012, we did not issue or sell any equity securities.

 

ITEM 5. OTHER INFORMATION

During 2011, the FASB issued ASU 2011-05 and ASU 2011-12, amending previous guidance on the presentation of comprehensive income in financial statements. See Note 2, Significant Accounting Policies, for further details. Entities are required to present total comprehensive income either in a single, continuous statement of comprehensive income or in two separate, but consecutive, statements. We adopted these standards as of January 1, 2012, and will present net income and other comprehensive income in one continuous statement of comprehensive income in our future annual financial statements.

The table below reflects the retrospective application of this amended guidance for each of the three years ended December 31, 2011, January 1, 2011 and January 2, 2010, and should be read in conjunction with our consolidated financial statements contained in our annual report on Form 10-K for the fiscal year ended December 31, 2011. The retrospective application of this guidance did not have a material impact on our financial statements.

VISANT CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME

 

     For the Years Ended  

In thousands

   December 31,
2011
    January 1,
2011
    January 2,
2010
 

Net (loss) income

   $ (14,884   $ 56,167      $ 90,660   
  

 

 

   

 

 

   

 

 

 

Other comprehensive (loss) income, net of tax:

      

Cumulative translation adjustment

     (1,137     (227     1,078   

Pension and other postretirement benefit plans, net of tax

     (29,001     (2,222     (2,668

Change in market value of derivative financial instruments, net of tax

     (3,427     —          —     
  

 

 

   

 

 

   

 

 

 

Total other comprehensive loss, net of tax

   $ (33,565   $ (2,449   $ (1,590
  

 

 

   

 

 

   

 

 

 

Comprehensive (loss) income

   $ (48,449   $ 53,718      $ 89,070   
  

 

 

   

 

 

   

 

 

 

 

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The table below also reflects the retrospective application of the amended guidance for each of the three years ended December 31, 2011, January 1, 2011 and January 2, 2010, and should be read in conjunction with Note 19, Condensed Consolidating Guarantor Information, to our consolidated financial statements contained in our annual report on Form 10-K for the fiscal year ended December 31, 2011. The retrospective application of this guidance did not have a material impact on our financial statements.

VISANT CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME

FOR THE YEARS ENDED

 

In thousands

   Visant     Guarantors     Non-
Guarantors
     Eliminations     Total  

December 31, 2011

           

Comprehensive (loss) income

   $ (48,449   $ (25,619   $ 7,018       $ 18,601      $ (48,449
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

January 1, 2011

           

Comprehensive income

   $ 53,718      $ 85,944      $ 5,791       $ (91,735   $ 53,718   
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

January 2, 2010

           

Comprehensive income

   $ 89,070      $ 97,080      $ 6,268       $ (103,348   $ 89,070   
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

 

ITEM 6. EXHIBITS

 

3.1(1)   Amended and Restated Certificate of Incorporation of Visant Corporation (f/k/a Ring IH Corp.).
3.2(2)   Certificate of Amendment of the Amended and Restated Certificate of Incorporation of Visant Corporation.
3.3(1)   By-Laws of Visant Corporation.
31.1   Certification of President and Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 for Visant Corporation.
31.2   Certification of Senior Vice President, Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 for Visant Corporation.
32.1   Certification of President and Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 for Visant Corporation.
32.2   Certification of Senior Vice President, Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 for Visant Corporation.
101   The following materials from Visant’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2012 formatted in XBRL (eXtensible Business Reporting Language): (i) the Condensed Consolidated Statement of Operations, (ii) the Condensed Consolidated Balance Sheets, (iii) the Condensed Consolidated Statements of Cash Flows, and (iv) Notes to the Condensed Consolidated Financial Statements.

 

(1) Incorporated by reference to Visant Corporation’s Form S-4 (file no. 333-120386), filed on November 12, 2004.

 

(2) Incorporated by reference to Visant Holding Corp.’s Form 10-K, filed on April 1, 2005.

 

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

    VISANT CORPORATION
Date: May 15, 2012     /s/ Marc L. Reisch
    Marc L. Reisch
    President and
    Chief Executive Officer
    (principal executive officer)
Date: May 15, 2012     /s/ Paul B. Carousso
    Paul B. Carousso
    Senior Vice President, Chief Financial Officer
    (principal financial and accounting officer)