ITEM 1. BUSINESS
We are a leading provider of school-related affinity products and services including yearbooks, class rings and graduation products. We also have the leading market share for school photography services in Canada and are a leading provider of jewelry products for athletic champions. Our 105-year history of manufacturing and providing quality products and superior service has enabled us to develop long-standing and extensive relationships with schools throughout the country.
Products and Services
Our complementary products and services are principally marketed through a common distribution channel and supported by a single marketing organization. All of our products and services are offered to similar customers, specifically high school and college students. We offer four principal lines of products and services: Printing & Publishing, Jewelry, Graduation Products and Photography.
Printing & Publishing
We manufacture and sell student-created yearbooks in high schools, elementary and middle schools and colleges. Our independent sales representatives and our technical support employees work closely with each school's yearbook staff (both students and faculty advisers), assisting with the planning, editing, layout, production, printing and distribution of the completed yearbooks. In addition, our independent sales representatives work with the faculty advisers to renew yearbook contracts. We also print commercial brochures, promotional materials and books.
Jewelry
We manufacture and sell class rings primarily to high school and college students. Most schools have only one school-designated supplier who sells the school's official class ring to its students each year. Class rings are sold within the schools, through bookstores, other campus stores, retail jewelry stores and the Internet. Most of our class rings are sold within the school where our independent and employee sales and customer service representatives manage the in-school process of interacting with the students through ring design, promotion and ordering.
Graduation Products
We manufacture and sell graduation announcements, accessories, diplomas and caps and gowns to students and administrators in high schools and colleges. Our independent and employee sales representatives take sales orders through in-school access, telemarketing programs, college bookstores and the Internet.
Photography
We process and sell photography products, providing class and individual school pictures to students in high schools, elementary and middle schools in Canada and the United States. Additionally, we provide high school senior portrait photography, photography for proms and special events and other photo-based products such as student ID cards. Our independent and employee sales representatives arrange the sittings at individual schools or in their own studios.
Discontinued Operations
During 2001, 2000 and 1999, we operated two major business segments: School Products and Recognition. School Products manufactures and markets school- related affinity products primarily for the high school and college markets. Recognition manufactured and supplied corporate-based affinity products that
provided organizations with programs to recognize and reward employee service and achievement. Effective December 3, 2001, our board of directors approved a plan to exit our Recognition business in order to focus our resources on our core School Products business. Prior to the end of 2001 and in connection with our exit, we sold certain assets of the Recognition business and leased our production facility to a current supplier who manufactures awards and trophies. We received cash proceeds in the amount of $2.5 million and non-cash proceeds of approximately $0.8 million in the form of a promissory note due in 2002. The results of the Recognition business are reflected as discontinued operations in our Consolidated Statement of Operations for all periods presented. Matters pertaining to the discontinued operations are discussed in Note 2 of the Notes to Consolidated Financial Statements, included in ITEM 8 in this Form 10-K and are incorporated herein by reference. As a result of discontinuing the Recognition business, we now operate one business segment and, therefore, have restated prior year information for continuing operations to include unallocated corporate expenses previously presented as "Other" in our segment information.
Seasonality
We experience seasonality concurrent with the North American school year, with about one half of full-year sales and about two thirds of full-year operating income occurring in the second quarter.
Competition
We have four primary competitors, which vary across our product lines and services. They include Herff Jones, Inc. (Herff Jones), Walsworth Publishing Company (Walsworth), Lifetouch, Inc. (Lifetouch) and American Achievement Corporation (AAC), which is the parent corporation for Taylor Publishing Company (Taylor) and Commemorative Brands, Inc. (CBI).
In the sale of yearbooks, we compete primarily with Herff Jones, Taylor, Walsworth and Lifetouch. Each competes on the basis of print quality, price, product offerings and service.
Customer service and manufacturing expertise are particularly important in the sale of class rings because of the high degree of customization and the emphasis on timely delivery. Class rings are marketed through various channels that have different quality and price points. Our primary competitors in the sale of class rings are Herff Jones and CBI. CBI markets the Balfour and ArtCarved brands. Herff Jones distributes its product only in schools, while CBI distributes its product through multiple distribution channels, including schools, independent and chain jewelers and mass merchandisers.
In the sale of graduation products, we compete primarily with Herff Jones and CBI as well as numerous local and regional competitors who offer products similar to ours. Each competes on the basis of product offerings, product quality, price and service. New products and technology are being used to develop programs to address the growing "homemade" market primarily in announcement products.
In the sale of photography products and services, we compete primarily with Lifetouch, Herff Jones and a variety of regional and locally owned and operated photographers.
Backlog
Because of the nature of our business, all orders are generally filled within a few months from the time of placement. However, we typically obtain contracts in the second quarter of one year for student yearbooks to be delivered in the second quarter of the subsequent year. Often the total revenue pertaining to a yearbook order is not established at the time of the order because the content of the book may not be final. Subject to the foregoing qualifications, we estimate the backlog of orders, primarily related to student yearbooks, was approximately $308.0 million as of the end of 2001 compared with approximately $291.0 million as of the end of 2000. We expect most of the 2001 backlog to be confirmed and filled in 2002.
Environmental
Matters pertaining to the environment are discussed in ITEM 7 and in ITEM 8, Note 14 of the Notes to Consolidated Financial Statements, included in this Form 10-K and are incorporated herein by reference.
Raw Materials
The principal raw materials that we purchase are gold and other precious metals, paper products, and precious, semiprecious and synthetic stones. Any material increase in the price of gold could adversely impact our cost of sales.
We purchase substantially all synthetic and semiprecious stones from a single supplier located in Germany, who is also a supplier to almost all of the class ring manufacturers in the United States. We believe that the loss of this supplier could adversely affect our business during the time period in which alternate sources would adapt their production capabilities to meet increased demand.
Matters pertaining to our market risks are discussed in ITEM 7A, Quantitative and Qualitative Disclosures about Market Risk, included in this Form 10-K and are incorporated herein by reference.
Intellectual Property
We have licenses, trademarks and copyrights that, in the aggregate, are an important part of our business. However, we do not regard our business as being materially dependent upon any single license, trademark or copyright. We have trademark registration applications pending and will pursue other registrations as appropriate to establish and preserve our intellectual property rights.
Employees
As of the end of February 2002, we had approximately 6,100 employees, of which approximately 300 were members of two separate unions. Because of the seasonality of our business, the number of employees tends to vary. We have never suffered an interruption of business that had a material impact on our operations as a result of a labor dispute and consider our relationship with our employees to be good.
Foreign Operations
Our foreign sales are derived primarily from operations in Canada. The accounts and operations of our foreign businesses, excluding Canada, are not significant. Local taxation, import duties, fluctuation in currency exchange rates and restrictions on exportation of currencies are among risks attendant to foreign operations, but these risks are not considered significant with respect to our business. The profit margin on foreign sales is approximately the same as the profit margin on domestic sales.
Foreign operations financial information is contained in ITEM 8, Note 13 of the Notes to Consolidated Financial Statements, included in this Form 10-K and are incorporated herein by reference.
Previous Transactions
On May 10, 2000, we were acquired by affiliates of Investcorp S.A. (Investcorp) along with other investors. The acquisition was part of a recapitalization of Jostens, which resulted in affiliates of Investcorp and the other investors acquiring approximately 92% of our post-merger common stock. The remaining 8% of our common stock was held by pre-recapitalization shareholders and five members of senior management. As a result of the transaction, our shares were de-listed from the New York Stock Exchange.
The recapitalization was funded by (a) $495.0 million of borrowings under a senior credit facility with a syndicate of banks, (b) issuance of $225.0 million in principal amount of senior subordinated notes (the
"notes") and warrants to purchase 425,060 shares of our common stock, (c) issuance of $60.0 million in principal amount of redeemable preferred stock and warrants to purchase 531,325 shares of our common stock and (d) $208.7 million of proceeds from the sale of shares of common stock to affiliates of Investcorp and the other investors.
The proceeds from these financings funded (a) the payment of approximately $823.6 million to holders of common stock representing $25.25 per share, (b) repayment of $67.6 million of outstanding indebtedness, (c) payment of approximately $10.0 million in consideration for cancellation of employee stock options, (d) payments of approximately $72.0 million of fees and expenses associated with the recapitalization and (e) a pre-payment of $7.5 million for a management and consulting services agreement for a five-year term with an affiliate of Investcorp.
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Jostens is a Minnesota corporation. Unless otherwise indicated, all references to "Jostens," "we," "our," and "us" refer to Jostens, Inc., and its subsidiaries. Our principal executive offices are located at 5501 Norman Center Drive, Minneapolis, Minnesota 55437. Our main phone number is (952) 830-3300. Our home page on the Internet is www.jostens.com. The information on our web site is not incorporated into this annual report.
ITEM 2.
ITEM 2. PROPERTIES
Our properties are summarized below:
- -------- (1) All owned properties represent collateral under the senior secured credit facility (2) Closed and currently held for sale (3) Currently leased to another business (4) Currently under sublease to another business
We also have office space that we either lease or own in 27 locations totaling 51,000 square feet.
We believe that our production facilities are suitable for their purpose and are adequate to support our businesses. The extent of utilization of individual facilities varies due to the seasonal nature of the business.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS
Matters pertaining to legal proceedings are discussed in ITEM 7 and ITEM 8, Note 14 of the Notes to the Consolidated Financial Statements and are incorporated herein by reference.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
PART II
ITEM 5.
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED SECURITY HOLDER MATTERS
As a result of the merger and recapitalization on May 10, 2000 as discussed in ITEM 1, our common shares were de-listed from the New York Stock Exchange. Currently, there is no established public trading market for our common stock. Shares of Class A common stock are not quoted but are sporadically traded over- the-counter on the so-called "pink sheets." We believe that the information we have been able to obtain may not represent a reliable market indicator for our Class A common shares. Shares of Class B, Class C and Class D common stock are not traded. Quarterly market and dividend information for pre-merger common stock for the first two quarters of fiscal 2000 up until May 10, 2000 are as follows:
We do not intend to pay dividends to any class of our common shareholders. Furthermore, our ability to pay dividends is limited by the terms of our senior secured credit facility and the senior subordinated notes (the "notes").
The numbers of shareholders of record for each class of common stock at March 15, 2002 are as follows: Class A: 245; Class B: 12; Class C: 1; Class D: 11; and Class E: None.
Recent Sales of Unregistered Securities
We have not issued or sold securities within the past three years pursuant to offerings that were not registered under the Securities Act of 1933, as amended (the "Securities Act") except on May 10, 2000 as part of the merger and recapitalization, we:
. issued shares of our common stock for an aggregate price of $208.7 million;
. issued $60.0 million in principal amount of redeemable, payment-in-kind, preferred shares with detachable warrants to purchase 531,325 shares of our common stock (at an exercise price of $0.01 per share and a term of 11 years) to DB Capital Investors for $60.0 million; and
. issued $225.0 million in principal amount of 12.75% notes with detachable warrants to purchase 425,060 shares of our common stock (at an exercise price of $0.01 per share and exercisable through 2010) to Deutsche Bank Securities Inc., UBS Warburg LLC and Goldman, Sachs & Co. for $215.9 million.
The transactions set forth above were undertaken in reliance upon exemption from the registration requirements of the Securities Act afforded by Section 4(2), Rule 144A under the Securities Act and/or Regulation D promulgated thereunder, as sales not involving a public offering. In October 2000, we consummated a registered exchange offer with respect to the 12.75% senior subordinated notes described above, pursuant to which all such privately placed securities were exchanged for registered securities.
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA
The table below sets forth summary consolidated historical data relating to Jostens. The summary historical financial information for the five fiscal years in the period ended December 29, 2001 was derived from the audited historical consolidated financial statements of Jostens.
- -------- (1) Certain Statement of Operations, common share and other data have been reclassified for all periods presented to reflect the results of discontinued operations as discussed in ITEM 7
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Our disclosure and analysis in this report may contain some "forward-looking statements." Forward-looking statements give our current expectations or forecasts of future events. Forward-looking statements generally can be identified by the use of forward-looking terminology such as "may," "will," "expect," "intend," "estimate," "anticipate," "believe," "project," or "continue," or the negative thereof or similar words. From time to time, we also may provide oral or written forward-looking statements in other materials we release to the public. Any or all of our forward-looking statements in this report and in any public statements we make may turn out to be wrong. They can be affected by inaccurate assumptions we might make or by known or unknown risks or uncertainties. Consequently, no forward-looking statement can be guaranteed. Actual results may vary materially. Investors are cautioned not to place undue reliance on any forward-looking statements. Investors should also understand that it is not possible to predict or identify all such factors and should not consider the following list to be a complete statement of all potential risks and uncertainties.
Any change in the following factors may impact the achievement of results:
. our ability to satisfy our debt obligations, including related covenants;
. the seasonality of our sales and operating income;
. our relationship with our independent sales representatives and employees;
. the fluctuating prices of raw materials, primarily gold;
. our dependence on a key supplier for our synthetic and semiprecious stones;
. fashion and demographic trends;
. litigation cases, if decided against us, may adversely affect our financial results; and
. environmental regulations that could impose substantial costs upon us and may adversely affect our financial results.
The foregoing factors are not exhaustive, and new factors may emerge or changes to the foregoing factors may occur that would impact our business.
CRITICAL ACCOUNTING POLICIES
We prepare our consolidated financial statements in conformity with accounting principles generally accepted in the United States of America. As such, we are required to make certain estimates, judgments and assumptions that we believe are reasonable based upon the information available. These estimates and assumptions affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the periods presented. The significant accounting policies which we believe are the most critical to aid in fully understanding and evaluating our reported financial results include the following:
Revenue Recognition
We recognize revenue when the earnings process is complete, evidenced by an agreement between Jostens and the customer, delivery and acceptance has occurred, collectibility is probable and pricing is fixed and determinable. Provisions for sales returns and warranty costs are recorded at the time of sale based on historical information and current trends.
Sales Returns and Allowances
We make estimates of potential future product returns related to current period product revenue. We analyze historical returns, current economic trends and changes in customer demand and acceptance of our
products when evaluating the adequacy of the sales returns and allowances. Significant management judgments and estimates must be made and used in connection with establishing the sales returns and allowances in any accounting period. Material differences could result in the amount and timing of our revenue for any period if we made different judgments or utilized different estimates.
Allowance for Doubtful Accounts and Allowance for Salespersons Overdrafts
We make estimates of potentially uncollectible customer accounts receivable and receivables arising from sales representative draws paid in excess of earned commissions. Our reserves are based on an analysis of customer and salesperson accounts and historical write-off experience. Our analysis includes the age of the receivable, customer or salesperson creditworthiness and general economic conditions. We believe the results could be materially different if historical trends do not reflect actual results or if economic conditions worsened.
RESULTS OF OPERATIONS
The following table sets forth selected information from our Consolidated Statements of Operations, expressed as a percentage of net sales.
- -------- Percentages in this table may reflect rounding adjustments. NM = percentage not meaningful
Year Ended December 29, 2001 Compared to the Year Ended December 30, 2000
Net Sales
Net Sales increased $12.0 million, or 1.7%, to $736.6 million for 2001 from $724.6 million for 2000. The increase in net sales resulted from price increases averaging approximately 3.0% offset partially by volume/mix decreases of 1.3%. The increase in net sales from 2000 to 2001 was primarily due to:
. general price increases in most of our product lines;
. increased volume for yearbooks due to an increase in delivered copies per school;
. increased pricing for yearbooks due to higher average number of pages per book and increase in number of color pages per book;
. increased volume from commercial printing; and
. territory additions and new product development in photography.
These increases were offset by the following:
. decreased volume for yearbooks due to declines in add-on features and the number of school accounts;
. decreased volume in the high school jewelry market due to a decline in same school sales;
. volume decreases in high school graduation announcements due to decreased buy rates and dollars sold per student; and
. unfavorable foreign exchange variance on Canadian sales.
Gross Margin
Gross margin increased $5.8 million, or 1.4%, to $425.3 million for 2001 from $419.5 million for 2000. As a percentage of net sales, gross margin decreased slightly to 57.7% in 2001 from 57.9% in 2000. The slight decrease was primarily the result of unfavorable manufacturing variances associated with lower volumes for high school jewelry and high school graduation announcements combined with unfavorable foreign exchange variances for Canadian manufacturing costs. This decrease was partially offset by continued emphasis on manufacturing efficiencies.
Selling and Administrative Expenses
Selling and administrative expenses decreased $0.8 million, or 0.3%, to $300.9 million for 2001 from $301.7 million for 2000. The decrease reflects lower spending on information systems and lower commission expense primarily due to volume decreases in high school jewelry and high school graduation announcements combined with changes in the commission program for Canadian sales. These decreases were offset by:
. higher selling and marketing expenses related to programs and initiatives;
. higher customer service expenses related to additional temporary labor in order processing; and
. higher general and administrative expenses due to full year amortization of our prepaid management fee in 2001 compared to a partial year in 2000 and increased costs for legal counsel associated with the litigation described in ITEM 7 and ITEM 8, Note 14 of the Notes to Consolidated Financial Statements, included in this Form 10-K.
Special Charges
During 2001, we recorded special charges aggregating $2.5 million. In the second quarter of 2001, we entered into a separation agreement with a senior executive. The total cost of $2.1 million for severance and
related termination benefits was expensed in 2001 and included costs for the senior executive and two other management personnel. We utilized $1.9 million of the special charge in 2001. The remaining liability of approximately $0.2 million is classified in "other current liabilities" in our Consolidated Balance Sheet and will continue to be paid out over the benefit period as specified under the severance agreement. In the fourth quarter of 2001, we elected to terminate our joint venture operations in Mexico City, Mexico and took a charge of $0.4 million, primarily to write off the net investment.
Net Interest Expense
Net interest expense increased $17.9 million, or 30.3%, to $76.8 million for 2001 as compared to $58.9 million for 2000. The increase is due to the full year impact of our recapitalization financing, which occurred on May 10, 2000, offset by a lower average outstanding balance and a lower average interest rate.
Provision for Income Taxes
Our effective tax rate for continuing operations was 41.2% for 2001 compared to 289.2% for 2000, which reflected the 2000 impact of non-deductible transaction related costs of approximately $27.0 million. We anticipate a 2002 effective tax rate between 41% and 42%.
Income (Loss) From Continuing Operations
Income from continuing operations increased $37.0 million to $26.5 million for 2001 from a loss of $10.5 million for 2000 largely as a result of transaction costs of $46.4 million incurred in 2000 associated with the merger and recapitalization on May 10, 2000.
Year Ended December 30, 2000 (2000) Compared to the Year Ended January 1, 2000 (1999)
Net Sales
Net Sales increased $23.1 million, or 3.3%, to $724.6 million for 2000 from $701.5 million for 1999. The increase in net sales resulted from price increases averaging approximately 2.5% and volume/mix increases of 0.8%. The increase in net sales from 1999 to 2000 was primarily due to:
. general price increases in most of our product lines;
. volume increases in graduation announcements and caps and gowns due to winning new school accounts;
. volume increases for graduation accessories;
. volume increases for yearbooks due to increased page count and add-on features;
. fewer yearbook rebates and returns resulting from improvements with Jostens Direct Solutions ("JDS") (a direct payment program for parents of high school students); and
. increased revenue from JDS processing fees due to more schools enrolled in the program.
These increases were offset by weak sales in the high school jewelry market, the loss of a large account in the college jewelry market and delays in school presentations caused by the late release of a multi-media marketing tool.
Gross Margin
Gross margin increased $23.0 million, or 5.8%, to $419.5 million for 2000 from $396.5 million for 1999. As a percentage of net sales, gross margin increased to 57.9% in 2000 from 56.5% in 1999. The increase was primarily the result of:
. increased pricing;
. continued emphasis on manufacturing efficiencies;
. favorable raw material costs particularly for gold and stones;
. exiting the ring production facility in Nuevo Laredo, Mexico in 1999, which experienced higher than expected costs compared to production in the United States; and
. closing eleven unprofitable retail photo sites in 1999.
Selling and Administrative Expenses
Selling and administrative expenses increased $8.1 million, or 2.7%, to $301.7 million for 2000 from $293.6 million for 1999. The increase reflects higher selling and marketing expenses related to programs and initiatives intended to increase our sales and higher commission expense partially due to changes in the commission program for graduation products and partially due to the timing of those changes. In addition, we incurred higher information system expenses in 1999 to ensure year 2000 readiness, which resulted in higher depreciation expense in 2000.
These increases were offset by:
. lower labor costs and headcount realized from the special charge taken in the fourth quarter of 1999;
. lower costs as a result of exiting the college alumni direct marketing business in the fourth quarter of 1999; and
. lower amortization expenses due to the write-off of $3.0 million of goodwill as part of the 1999 special charge.
Special Charges
Special charges decreased $20.0 million for 2000 as compared to 1999. In the fourth quarter of 1999, we completed a strategic review of product lines, manufacturing operations, infrastructure projects and support functions based on performance trends. We decided to refocus our organization on sales growth versus infrastructure improvement. As a result of this review, we incurred a pre-tax special charge of $20.2 million ($13.3 million after tax) in 1999 and an additional $0.2 million charge to complete the project in 2000. The charge anticipated the elimination of 140 full-time positions in manufacturing, sales, marketing and administrative functions. The special charge consisted of employee severance costs of $5.6 million, $6.4 million to write off internal software under development, $4.6 million of impaired goodwill related to the retail class ring sales channel and $3.1 million of impaired goodwill plus $0.7 million of other costs related to exiting the college alumni direct marketing business. Headcount reductions were completed in 2000. We utilized $1.7 million, $4.5 million and $14.2 million of the special charge in 2001, 2000 and 1999, respectively.
Net Interest Expense
Net interest expense increased $51.9 million to $58.9 million for 2000 as compared to $7.0 million for 1999. The increase is due to additional interest expense resulting from the new senior secured credit facility and the issuance of the senior subordinated notes in connection with the merger and recapitalization on May 10, 2000.
Provision for Income Taxes
Our effective tax rate for continuing operations was 289.2% for 2000 compared to 41.9% for 1999. The deferred tax benefit of the cumulative effect of accounting change was $4.0 million. The 2000 provision for income taxes reflects the impact of non-deductible transaction related costs of approximately $27.0 million and a deferred tax asset valuation reserve of $2.7 million established for the $6.7 million charge for equity losses and a write- down of two Internet investments.
Income (Loss) From Continuing Operations
Income from continuing operations decreased $54.5 million to a loss of $10.5 for 2000 from income of $44.0 million for 1999. Our improved gross margin in combination with the marginal impact of increased sales were more than offset by an increase in net interest expense as a result of the recapitalization financing on May 10, 2000. Additionally, 2000 results included a $46.4 million charge for transaction costs associated with the merger and recapitalization.
DISCONTINUED OPERATIONS
The following table sets forth revenue and loss from discontinued operations. These losses represent the results of our Recognition business, which we exited in December 2001.
During 2001, the results of discontinued operations encompass the period through the December 3, 2001 measurement date.
Pre-tax loss from the results of discontinued operations increased in 2001 and 2000 due to declining sales attributed to lost customers as a result of problems encountered with a system implementation that took place in 1999. A shift to sales of lower priced programs and general merchandise also contributed to the sales decline. Furthermore, as a result of declining sales, we experienced the loss of seasoned sales representatives in 1999 and 2000. In 2001, the pre-tax loss from the results of discontinued operations included costs to hire, train and support a new sales force.
Included in the 2001 results of discontinued operations is a special charge for consolidation of three Recognition plants into one plant and implementation of a new customer service model. The consolidation project was completed in September 2001 at a total cost of $3.9 million for severance benefits to eliminate approximately 140 full-time plant and management positions, costs associated with closing two facilities and costs of moving certain production and distribution functions to our Princeton, Illinois facility. The total cost of the project was partially offset by a gain of $2.4 million, which resulted from the sale of our distribution facility in Memphis, Tennessee for $4.0 million. Also included in the 2001 results of discontinued operations is a $1.6 million charge in accordance with our current assessment of environmental remediation at our Princeton facility and reimbursement of prior remediation costs from our insurance carrier in the amount of $2.7 million, net of legal costs.
In 2001, the $27.4 million pre-tax loss on disposal of the discontinued segment includes a non-cash charge to write off certain net assets not sold in the exit from the Recognition business plus a charge for accrued costs related to exiting the Recognition business. Components of the loss on disposal and accrued liability are as follows:
Of the total accrued disposal costs, $6.2 million relates to employee termination benefits for the anticipated elimination of 150 full-time positions in the Recognition business and corporate support functions. Employee reductions began in 2001 and will be completed in the early part of 2002. Termination benefits will be paid out over the benefit period as specified under our severance plan.
As part of the loss on disposal, we accrued $4.3 million for exit costs related to the Recognition business. The charge includes $1.3 million for payroll and benefits, $0.8 million for information systems and customer service costs and $2.2 million of internal support costs expected to be incurred during the phase-out period.
We also accrued $2.8 million for transition payments of long-term sales representatives which will be paid out over the next three years. In addition, we accrued $3.0 million for customer receivable and salesperson overdraft allowances anticipated as a result of exiting the Recognition business.
With the exception of certain transition benefits, we anticipate the accrued balance will be utilized in 2002. Of the $19.0 million total in our Consolidated Balance Sheet, $14.5 million is classified as "current liabilities of discontinued operations" and $4.5 million is classified as a contra asset in "current assets of discontinued operations".
LIQUIDITY AND CAPITAL RESOURCES
Our primary cash needs are for debt service obligations, capital expenditures, working capital and general corporate purposes.
Operating Activities
Operating activities generated cash of $71.6 million in 2001 compared with $35.5 million in 2000 and $125.2 million in 1999. The increase of $36.1 million in 2001 over 2000 was due to higher net income mainly as a result of expenses incurred in 2000 of $46.4 million related to the merger and recapitalization offset by a $20.1 million increase in loss on discontinued operations in 2001. In addition, cash was favorably impacted by reduced inventories and the timing of customer deposits. Cash was unfavorably impacted by a $23.1 million increase in interest paid and other working capital decreases.
The decrease of $89.7 million in 2000 over 1999 was primarily due to lower net income as a result of expenses incurred of $46.4 million related to the merger and recapitalization and an increase in interest paid of $42.8 million. In addition, cash was unfavorably impacted by the payment of $7.5 million for a deferred management fee related to the transaction, severance payments of $3.9 million associated with the special charge taken in 1999, and the timing of other accrued liabilities all of which are included in the "Other" category on our Consolidated Statement of Cash Flows. Cash was also unfavorably impacted by the timing of
customer deposits. In 2000, cash was favorably impacted by reduced inventories and reduced accounts receivable due to improvement in the number of days sales outstanding.
Investing Activities
Capital expenditures in 2001, 2000 and 1999 were $22.7 million, $22.2 million and $27.8 million, respectively. Capital spending in 2001 was comparable to 2000 reflecting normal spending on replacement projects in both years. We anticipate capital spending in 2002 to be about $27.0 million with the increase over 2001 relating mainly to improvements to our manufacturing capabilities. The $5.6 million decrease in 2000 over 1999 was primarily due to higher spending in 1999 to replace information systems to ensure year 2000 compliance. The decrease in 2000 was partially offset by increased spending on new automation technology.
In 2001, investing activities included proceeds of $4.0 million from the sale of our distribution facility in Memphis, Tennessee and proceeds of $2.5 million from the sale of certain assets of our Recognition business. Also in connection with the sale of certain assets of our Recognition business, we received non-cash proceeds of approximately $0.8 million in the form of a promissory note due in 2002. These items are included in discontinued operations on our Consolidated Statement of Operations. In 1999, we invested $10.6 million to take minority equity positions in three privately-held Internet-based companies. In 2000, we funded an additional investment of $1.1 million for one of these investments and sold our entire ownership position in another one of these investments for $5.0 million, which resulted in no gain or loss. Also in 2000, we recorded equity losses and a write-down of the two remaining investments resulting in a non-cash charge of $6.7 million.
Financing Activities
Net cash used by financing activities in 2001, 2000 and 1999 was $39.3 million, $29.3 million and $52.1 million, respectively. Substantially all of the net cash used by financing activities in 2001 consisted of $14.9 million of mandatory and $24.0 million of voluntary principal payments on our senior secured credit facility.
The decrease in net cash used by financing activities from 1999 to 2000 was primarily due to proceeds from the new senior secured credit facility, issuance of the senior subordinated notes (the "notes"), issuance of redeemable preferred stock and issuance of common stock in connection with the transaction. These decreases were offset by payment of $25.25 for each share of common stock tendered in the transaction, the pay-off of credit facilities existing prior to the transaction and a $16.0 million voluntary pay down on our new senior secured credit facility. In addition, no dividend was paid to common shareholders in the second, third and fourth quarters of 2000.
We experience seasonality that corresponds to the North American school year. To help manage the seasonal nature of our cash flow, we entered into a $150.0 million, six-year revolving credit facility that expires on May 31, 2006. There was $5.6 million outstanding under this facility, in the form of letters of credit, as of December 29, 2001. We also have a precious metals consignment arrangement with a major financial institution whereby we have the ability to obtain up to $30.0 million in consigned inventory. At December 29, 2001, we had $14.2 million available under this arrangement.
Future mandatory principal payment obligations under term loan A are approximately $9.0 million due June 30, 2002 and approximately $10.0 million due December 31, 2002. Thereafter, semi-annual principal payments increase approximately $1.0 million per semi-annual period through December 2005, with a final payment of approximately $8.0 million due in May 2006. Future mandatory principal payment obligations under term loan B are approximately $1.0 million due semi-annually through December 2005. Semiannual payments increase on an escalating scale from approximately $24.6 million in June 2006 to approximately $108.7 million in December 2007, with a final payment of approximately $64.0 million due in May 2008. The $225.0 million in notes come due May 2010. In addition, mandatory interest payment obligations on the notes are $14.3 million semi-annually through May 2010.
The redeemable, payment-in-kind, preferred shares have an initial liquidation preference of $60.0 million and are entitled to receive dividends at 14.0% per annum, compounded quarterly, and are payable either in cash or in additional shares of the same series of preferred stock. We plan to pay dividends in additional shares of preferred stock for the foreseeable future. The redeemable preferred shares are subject to mandatory redemption by Jostens in May 2011.
The notes are not collateralized and are subordinate in right of payment to the term loans and borrowings under the revolving credit facility (collectively the "senior secured credit facility"). The senior secured credit facility is collateralized by substantially all the assets of our domestic operations and all of our capital stock (limited to 65% in the case of foreign subsidiaries). The senior secured credit facility requires that we meet certain financial covenants, ratios and tests, including a maximum leverage ratio and a minimum interest coverage ratio. In addition, we are required to pay certain fees in connection with the senior secured credit facility, including letter of credit fees, agency fees and commitment fees. Commitment fees are payable quarterly, initially at a rate per annum of 0.5% on the average daily unused portion of the revolving credit facility. The senior secured credit facility and the notes contain certain cross-default provisions whereby a violation of a covenant under one debt obligation would, consequently, violate covenants under the other debt obligations. At December 29, 2001, we were in compliance with all covenants.
Our ability to make scheduled principal payments on existing indebtedness or to refinance our indebtedness, including the notes, will depend on our future financial and operating performance, which to a certain extent is subject to general economic, financial, competitive, legislative, regulatory and other factors that are beyond our control. Based on the current anticipated level of operations, we believe that cash flow from operations and available cash, together with available borrowings under the senior secured credit facility will be adequate to meet our anticipated future requirements for working capital, budgeted capital expenditures and scheduled payments of principal and interest on our indebtedness for the next twelve months. We may, however, need to refinance all or a portion of the principal of the notes on or prior to maturity. There can be no assurance that our business will generate sufficient cash flows from operations or that future borrowings will be available under the senior secured credit facility in an amount sufficient to enable us to service our indebtedness, including the notes. In addition, there can be no assurance that we will be able to effect any refinancing on commercially reasonable terms, or at all.
Contractual Obligations
The following table shows due dates and amounts of our contractual obligations:
- -------- (1) Includes payment in kind dividends compounded quarterly through maturity in May 2011
COMMITMENTS AND CONTINGENCIES
Environmental
As part of our environmental management program, we are involved in various environmental remediation activities. As sites are identified and assessed in this program, we determine potential environmental liabilities. Factors considered in assessing liability include, but are not limited to: whether we have been designated as a potentially responsible party, the number of other potentially responsible parties designated at the site, the stage
of the proceedings and available environmental technology. As of the end of 2000, we had identified three sites requiring further investigation. During 2001, we received notification that no further investigation or remediation is required at one of the sites identified. Furthermore, we have not been designated as a potentially responsible party at either of the other sites.
In 1996, we assessed the likelihood that a loss had been incurred at one of these sites as probable based on findings included in remediation reports and from discussions with legal counsel. As of the end of 2001, we had made payments of $6.1 million for remediation, and at December 29, 2001, $2.1 million was accrued and is included in "other accrued liabilities" on our Consolidated Balance Sheet. During 2001, we received reimbursement from our insurance carrier in the amount of $2.7 million, net of legal costs. While we may have an additional right of contribution or reimbursement under insurance policies, amounts recoverable from other entities with respect to a particular site are not considered until recoveries are deemed probable. No assets for potential recoveries were established as of the end of fiscal 2001. We believe the effect on our consolidated results of operations, cash flows and financial position, if any, for the disposition of these matters will not be material.
Litigation
A federal antitrust action was served on Jostens on October 23, 1998. The complainant, Epicenter Recognition, Inc. ("Epicenter"), alleges that Jostens has attempted to monopolize the market of high school graduation products in the state of California. Epicenter is a successor to a corporation formed by four of our former sales representatives. The plaintiff is claiming damages of approximately $3.0 million to $10.0 million under various theories and differing sized relevant markets. Epicenter waived its right to a jury, so the case was tried before a judge in U.S. District Court in Orange County, California where trial concluded on April 24, 2001. We await a written decision from the Court. We believe the effect on our consolidated results of operations, cash flows and financial position, if any, for the disposition of these matters will not be material.
The long-standing dispute with Ernst & Young LLP regarding implementation of a company wide enterprise resource planning ("ERP") system was heard by a three-arbitrator panel in Minneapolis, Minnesota in December 2001. During 2002, the arbitration panel issued its award granting Ernst & Young LLP's claim for payment of its remaining unpaid consulting fees and costs of the arbitration, and denied our counterclaim. The result is not material to our consolidated results of operations, cash flows and financial position.
We are a party to other litigation arising in the normal course of business. We regularly analyze current information and, as necessary, provide accruals for probable liabilities on the eventual disposition of these matters. We believe the effect on our consolidated results of operations, cash flows and financial position, if any, for the disposition of these matters will not be material.
NEW ACCOUNTING STANDARDS
Accounting for Derivative Instruments and Hedging Activities
In June 1998, the Financial Accounting Standards Board (FASB) issued its Statement of Financial Accounting Standards No. 133 (SFAS 133), "Accounting for Derivative Instruments and Hedging Activities." Subsequently in June 2000, the FASB issued SFAS No. 138 which amended SFAS 133. These statements modify the accounting and reporting for derivative instruments and hedging activities. We adopted these new standards effective December 31, 2000, and recorded a $1.8 million, net-of-tax cumulative-effect adjustment in other comprehensive loss at the beginning of our first quarter in 2001. The adjustment primarily related to recording an additional liability on the balance sheet for the fair value of our interest rate swap which hedges our cash flow on our variable interest rate debt. This instrument is accounted for as a cash flow hedge. For the fiscal year ended December 29, 2001, the fair value of the swap changed by an additional $1.6 million, net of tax, which was recorded through other comprehensive loss. Any changes in the fair value of our interest rate
swap will be recorded through other comprehensive income (loss) until earnings are affected by the variability of cash flows of the hedged transaction. We believe that only in rare circumstances would it be determined that our interest rate swap is not effective as a hedge.
Revenue Recognition
In December 1999, the Securities and Exchange Commission issued Staff Accounting Bulletin No. 101 (SAB 101), "Revenue Recognition in Financial Statements" which, among other guidance, clarified the Staff's view on various revenue recognition and reporting matters. As a result, we changed our method of accounting for certain sales transactions. Under our previous policy, we recognized revenue upon shipment of the product from our production facility. Under the new accounting method, adopted retroactive to January 1, 2000, we now defer revenue and direct costs until the product is delivered to the end consumer. The cumulative effect of the change resulted in a non-cash charge to net income of $5.9 million (net of an income tax benefit of $4.0 million) for the first quarter in 2000.
Accounting for Business Combinations, Goodwill and Other Intangible Assets
In June 2001, the FASB issued Statement of Financial Accounting Standards No. 141 (SFAS 141), "Business Combinations," and No. 142 (SFAS 142), "Goodwill and Other Intangible Assets." SFAS 141 supercedes Accounting Principles Board Opinion No. 16 (APB 16), "Business Combinations." SFAS 141 requires all business combinations initiated after June 30, 2001 be accounted for under the purchase method of accounting. SFAS 141 also specifies criteria for the recognition of intangible assets separately from goodwill. SFAS 142 supercedes APB 17, "Intangible Assets." SFAS 142 addresses the financial accounting and reporting for acquired goodwill and other intangible assets. Under the new rules, goodwill and intangible assets with indefinite useful lives will no longer be amortized, but instead tested for impairment at least annually in accordance with the provisions of SFAS 142. We have adopted SFAS 142 as of the beginning of our new fiscal year on December 30, 2001. The impairment provisions of SFAS 142 with respect to goodwill are very complex. We are in the process of assessing any transitional impact of adopting SFAS 142 and do not believe it will have a material impact. We have no intangible assets with indefinite useful lives. Goodwill amortization related to continuing operations was $0.5 million in each of 2001 and 2000 and $1.4 million in 1999.
Accounting for Asset Retirement Obligations
In June 2001, the FASB issued Statement of Financial Accounting Standards No. 143 (SFAS 143), "Accounting for Asset Retirement Obligations." SFAS 143 establishes accounting standards for the recognition and measurement of an asset retirement obligation and its associated asset retirement cost. It also provides accounting guidance for legal obligations associated with the retirement of tangible long-lived assets. SFAS 143 is effective for fiscal years beginning after June 15, 2002, with early adoption permitted. We expect that the provisions of SFAS 143 will not have a material impact, if any, on our consolidated results of operations, cash flows and financial position upon adoption.
Accounting for Impairment of Long-Lived Assets
In August 2001, the FASB issued Statement of Financial Accounting Standards No. 144 (SFAS 144), "Accounting for Impairment of Long-Lived Assets." The new standard supercedes FASB Statement No. 121 (SFAS 121), "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of" and the provisions of Accounting Principles Board Opinion No. 30 (APB 30), "Reporting the Results of Operations--Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions." SFAS 144 establishes a single accounting model for the impairment or disposal of long-lived assets, including discontinued operations. SFAS 144 is effective for fiscal years beginning after December 15, 2001, with early adoption permitted, and in general is to be applied prospectively. We have adopted SFAS 144 as of the beginning of our new fiscal year on December 30, 2001 and the adoption did not have a material impact on our consolidated results of operations and financial position.
ITEM 7A.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market Risk
We are subject to market risk associated with changes in commodity prices, interest rates and foreign currency exchange rates. To reduce any one of these risks, we may at times use financial instruments. All hedging transactions are authorized and executed under clearly defined policies and procedures, which prohibit the use of financial instruments for trading purposes.
Commodity Price Risk
Our results of continuing operations could be significantly affected by changes in the price of gold. To manage the risk associated with gold price changes, on an annual basis we simultaneously set our pricing to customers and enter into gold forward or option contracts based upon the estimated ounces needed to satisfy a majority of our customer requirements. We prepared a sensitivity analysis as of the end of 2001 and 2000 to estimate our exposure to market risk on our open gold forward purchase contracts. The fair market value of our gold positions at the end of 2001 and 2000 was $7.9 million and $10.8 million, respectively, and was calculated by valuing each position at quoted futures prices. The market risk associated with these contracts was $0.8 million and $1.1 million as of the end of 2001 and 2000, respectively, and was estimated as the potential loss in fair value resulting from a hypothetical 10% adverse change in such prices.
Interest Rate Risk
Our earnings are affected by changes in the London Interbank Offered Rate ("LIBOR") as a result of our senior secured credit facility. If short-term interest rates or the LIBOR averaged 10% more or less in 2001 and 2000, our interest expense would have changed by approximately $3.2 million and $2.9 million, respectively. As of the end of 2001 and 2000, the fair value of our debt, excluding the senior subordinated notes (the "notes"), approximated its carrying value and is estimated based on quoted market prices for comparable instruments. The fair value of the notes was $247.5 million and $204.8 million as of the end of 2001 and 2000, respectively, and was estimated based on a quoted market price of $1,100 and $910 per unit, respectively.
Our senior secured credit facility bears a variable interest rate predominantly linked to LIBOR, as determined in three-month intervals, plus a fixed spread. To manage our exposure to changes in the variable interest rate, we entered into an interest rate swap agreement on July 7, 2000. The interest rate provided by the swap agreement is fixed at 7.0% as opposed to LIBOR. The swap agreement became effective on August 15, 2000 with a notional amount of $135.0 million, decreasing to $70.0 million quarterly over the next three years. The notional amount is used to measure the interest to be paid or received and does not represent the amount of exposure to loss. The fair value of the interest rate swap as of December 29, 2001 was a non-cash liability of $5.6 million ($3.4 million net of tax), and is recorded in "other noncurrent liabilities" in our Consolidated Balance Sheet. Prior to adopting SFAS 133, the fair value of the interest rate swap as of December 30, 2000 was a liability of $3.0 million.
Foreign Currency Risk
We may enter into foreign currency forward contracts to hedge purchases of inventory in foreign currency. The purpose of these hedging activities is to protect us from the risk that inventory purchases denominated in foreign currencies will be adversely affected by changes in foreign currency rates. Our principal currency exposures relate to the Canadian dollar and German mark. We consider our market risk in such activities to be immaterial. Our foreign operations are primarily in Canada, and substantially all transactions are denominated in the local currency.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Report of Independent Accountants
To the Shareholders and Directors of Jostens, Inc.:
In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of operations, of changes in shareholders' equity (deficit) and comprehensive income (loss) and of cash flows present fairly, in all material respects, the consolidated financial position of Jostens, Inc. and its subsidiaries at December 29, 2001 and December 30, 2000, and the consolidated results of their operations and their cash flows for the fiscal years then ended in conformity with accounting principles generally accepted in the United States of America. These financial statements are the responsibility of Jostens, Inc.'s management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these financial statements in accordance with auditing standards generally accepted in the United States of America, which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
PricewaterhouseCoopers LLP Minneapolis, Minnesota February 7, 2002
Report of Independent Auditors
To the Shareholders and Directors of Jostens, Inc.:
We have audited the accompanying consolidated statements of operations, changes in shareholders' equity (deficit) and comprehensive income (loss) and cash flows of Jostens, Inc. and subsidiaries for the fiscal year ended January 1, 2000. Our audit also included the related financial statement schedule listed in the Index at Item 14(a). These financial statements and schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and schedule based on our audit.
We conducted our audit in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated results of operations and cash flows of Jostens, Inc. and subsidiaries for the fiscal year ended January 1, 2000, in conformity with accounting principles generally accepted in the United States. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein.
Ernst & Young LLP Minneapolis, Minnesota February 2, 2000
JOSTENS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS
The accompanying notes are an integral part of the consolidated financial statements.
JOSTENS, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS December 29, 2001 and December 30, 2000
The accompanying notes are an integral part of the consolidated financial statements.
JOSTENS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS
The accompanying notes are an integral part of the consolidated financial statements.
JOSTENS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (DEFICIT) AND COMPREHENSIVE INCOME (LOSS)
The accompanying notes are an integral part of the consolidated financial statements.
JOSTENS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Summary of Significant Accounting Policies
Our Business
We are a leading provider of school-related affinity products and services including yearbooks, class rings and graduation products. We also have the leading market share for school photography services in Canada and are a leading provider of jewelry products for athletic champions.
Fiscal Year
Our fiscal year ends the Saturday closest to December 31. Fiscal years 2001, 2000 and 1999 ended on December 29, 2001, December 30, 2000 and January 1, 2000, respectively. Normally each fiscal year consists of 52 weeks, but periodically, there will be a 53-week year.
Principles of Consolidation
Our consolidated financial statements include the accounts of our company and our wholly-owned subsidiaries. All significant intercompany accounts and transactions have been eliminated.
In addition to the reclassifications to reflect the results of the Recognition business as discontinued operations (see Note 2), certain other amounts have been reclassified to conform to the 2001 presentation. These changes had no impact on previously reported net income, shareholders' deficit or cash provided by operating activities.
Use of Estimates
The preparation of our consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires us to make estimates and assumptions that affect the amounts reported in our consolidated financial statements and accompanying notes. Actual results could differ from those estimates.
Cash and Cash Equivalents
Cash and cash equivalents include cash on hand, time deposits and commercial paper all having an original maturity of three months or less.
Salespersons Overdrafts
Salespersons overdrafts represent a receivable for sales representative draws paid in excess of earned commissions. A corresponding allowance for uncollectible amounts is established based on historical information and current trends.
Inventories
Inventories are stated at the lower of cost or market. Cost is determined by the first-in, first-out (FIFO) method for all inventories except gold and certain other precious metals, which are determined using the last-in, first- out (LIFO) method. LIFO inventories were $0.1 million as of the end of 2001 and 2000 and approximated replacement cost.
Intangibles
Intangibles primarily represent the excess of the purchase price over the fair value of the net tangible assets of acquired businesses and are amortized over various periods of up to 40 years. Accumulated
JOSTENS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
amortization of intangibles as of the end of 2001 and 2000 was $7.3 million and $15.2 million, respectively. In connection with our discontinued operations, we wrote off $11.3 million of intangibles with corresponding accumulated amortization of $8.9 million. Amortization expense related to continuing operations was $0.5 million in each of 2001 and 2000 and $1.4 million in 1999.
Property and Equipment
Property and equipment are stated at cost. Depreciation and amortization is computed for financial reporting purposes by principally using the straight- line method over the following estimated useful lives:
Impairment of Long-Lived Assets
We review long-lived assets for impairment when events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. If impairment indicators are present and the estimated future undiscounted cash flows are less than the carrying value of the assets and any related goodwill, the carrying value is reduced to the estimated fair value as measured by the future discounted cash flows.
Customer Deposits
Amounts received from customers in the form of a cash down payment to purchase goods are recorded as a liability until the goods are delivered.
Income Taxes
Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. Income tax expense represents the taxes payable for the year and the change in deferred taxes during the year.
Revenue Recognition, Sales Returns and Warranty Costs
We recognize revenue when the earnings process is complete, evidenced by an agreement between Jostens and the customer, delivery and acceptance has occurred, collectibility is probable and pricing is fixed and determinable. Provisions for sales returns and warranty costs are recorded at the time of sale based on historical information and current trends.
Shipping and Handling
All shipping and handling costs are recorded in cost of products sold.
Foreign Currency Translation
Assets and liabilities denominated in foreign currency are translated at the current exchange rate as of the balance sheet date, and income statement amounts are translated at the average monthly exchange rate.
JOSTENS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Translation adjustments resulting from fluctuations in exchange rates are recorded in comprehensive income (loss) in shareholders' equity (deficit).
Supplier Concentration
We purchase substantially all synthetic and semiprecious stones from a single supplier located in Germany, who is also the supplier to substantially all of the class ring manufacturers in the United States.
Derivatives and Hedging Activities
From time to time, we may use derivative financial instruments to manage market risks and reduce our exposure resulting from fluctuations in foreign currency and interest rates. Financial instruments are not used for trading purposes. See Note 8 for a description of our interest rate swap agreement.
We also may enter into foreign currency forward contracts to hedge purchases of inventory in foreign currency. The purpose of these hedging activities is to protect us from the risk that inventory purchases denominated in foreign currency will be adversely affected by changes in foreign currency rates. There were no foreign currency contracts outstanding as of the end of 2001. The amount of contracts outstanding at December 30, 2000 was $1.9 million.
Gains or losses on forward contracts used to purchase inventory for which we have firm purchase commitments qualify as accounting hedges and are therefore deferred and recognized in income when the inventory is sold. Counter parties expose us to credit loss in the event of nonperformance as measured by the unrealized gains on the contracts. At December 29, 2001 and December 30, 2000, there were no material unrealized gains or losses on outstanding foreign currency forward contracts or gold forward contracts.
Earnings (Loss) Per Common Share
Basic earnings (loss) per share are computed by dividing net income (loss) available to common shareholders by the weighted average number of outstanding common shares. Diluted earnings per share are computed by dividing net income (loss) available to common shareholders by the weighted average number of outstanding common shares and common share equivalents. Common share equivalents include the dilutive effects of warrants, options and restricted stock.
For 2001 and 1999, 1.0 million and 0.1 million shares of common stock equivalents were included in the computation of diluted earnings (loss) per share. For 2000, 0.7 million shares of common stock equivalents were excluded in the computation of earnings per share as their effect would have been antidilutive.
Stock-Based Compensation
We use the intrinsic value method prescribed by Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees," and related interpretations in accounting for stock options granted to employees and non employee directors.
New Accounting Standards
Accounting for Derivative Instruments and Hedging Activities -- In June 1998, the Financial Accounting Standards Board (FASB) issued its Statement of Financial Accounting Standards No. 133 (SFAS 133), "Accounting for Derivative Instruments and Hedging Activities." Subsequently in June 2000, the FASB issued SFAS No. 138 which amended SFAS 133. These statements modify the accounting and reporting for derivative
JOSTENS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
instruments and hedging activities. We adopted these new standards effective December 31, 2000, and recorded a $1.8 million, net-of-tax cumulative-effect adjustment in other comprehensive loss at the beginning of our first quarter in 2001. The adjustment primarily related to recording an additional liability on the balance sheet for the fair value of our interest rate swap which hedges our cash flow on our variable interest rate debt. This instrument is accounted for as a cash flow hedge. For the fiscal year ended December 29, 2001, the fair value of the swap changed by an additional $1.6 million, net of tax, which was recorded through other comprehensive loss. Any changes in the fair value of our interest rate swap will be recorded through other comprehensive income (loss) until earnings are affected by the variability of cash flows of the hedged transaction. We believe that only in rare circumstances would it be determined that our interest rate swap is not effective as a hedge.
Revenue Recognition -- In December 1999, the Securities and Exchange Commission issued Staff Accounting Bulletin No. 101 (SAB 101), "Revenue Recognition in Financial Statements" which, among other guidance, clarified the Staff's view on various revenue recognition and reporting matters. As a result, we changed our method of accounting for certain sales transactions. Under our previous policy, we recognized revenue upon shipment of the product from our production facility. Under the new accounting method, adopted retroactive to January 1, 2000, we now defer revenue and direct costs until the product is delivered to the end consumer. The cumulative effect of the change resulted in a non-cash charge to net income of $5.9 million (net of an income tax benefit of $4.0 million) for the first quarter in 2000.
Accounting for Business Combinations, Goodwill and Other Intangible Assets - -- In June 2001, the FASB issued Statement of Financial Accounting Standards No. 141 (SFAS 141), "Business Combinations," and No. 142 (SFAS 142), "Goodwill and Other Intangible Assets." SFAS 141 supercedes Accounting Principles Board Opinion No. 16 (APB 16), "Business Combinations." SFAS 141 requires all business combinations initiated after June 30, 2001 be accounted for under the purchase method of accounting. SFAS 141 also specifies criteria for the recognition of intangible assets separately from goodwill. SFAS 142 supercedes APB 17, "Intangible Assets." SFAS 142 addresses the financial accounting and reporting for acquired goodwill and other intangible assets. Under the new rules, goodwill and intangible assets with indefinite useful lives will no longer be amortized, but instead tested for impairment at least annually in accordance with the provisions of SFAS 142. We have adopted SFAS 142 as of the beginning of our new fiscal year on December 30, 2001. The impairment provisions of SFAS 142 with respect to goodwill are very complex. We are in the process of assessing any transitional impact of adopting SFAS 142 and do not believe it will have a material impact. We have no intangible assets with indefinite useful lives. Goodwill amortization related to continuing operations was $0.5 million in each of 2001 and 2000 and $1.4 million in 1999.
Accounting for Asset Retirement Obligations -- In June 2001, the FASB issued Statement of Financial Accounting Standards No. 143 (SFAS 143), "Accounting for Asset Retirement Obligations." SFAS 143 establishes accounting standards for the recognition and measurement of an asset retirement obligation and its associated asset retirement cost. It also provides accounting guidance for legal obligations associated with the retirement of tangible long-lived assets. SFAS 143 is effective for fiscal years beginning after June 15, 2002, with early adoption permitted. We expect that the provisions of SFAS 143 will not have a material impact, if any, on our consolidated results of operations, cash flows and financial position upon adoption.
Accounting for Impairment of Long-Lived Assets -- In August 2001, the FASB issued Statement of Financial Accounting Standards No. 144 (SFAS 144), "Accounting for Impairment of Long-Lived Assets." The new standard supercedes FASB Statement No. 121 (SFAS 121), "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of" and the provisions of Accounting Principles Board Opinion No. 30 (APB 30), "Reporting the Results of Operations--Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions." SFAS 144 establishes a single accounting model for the impairment or disposal of long-lived assets, including
JOSTENS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
discontinued operations. SFAS 144 is effective for fiscal years beginning after December 15, 2001, with early adoption permitted, and in general is to be applied prospectively. We have adopted SFAS 144 as of the beginning of our new fiscal year on December 30, 2001 and the adoption did not have a material impact on our consolidated results of operations and financial position.
2. Discontinued Operations
Effective December 3, 2001, our board of directors approved a plan to exit our Recognition business in order to focus our resources on our core School Products business. The Recognition business manufactured and supplied corporate-based affinity products that provided organizations with programs to recognize and reward employee service and achievement. Prior to the end of 2001 and in connection with our exit, we sold certain assets of the Recognition business and leased our production facility to a current supplier who manufactures awards and trophies. We received cash proceeds in the amount of $2.5 million and non-cash proceeds of approximately $0.8 million in the form of a promissory note due in 2002. The results of Recognition are reflected as discontinued operations in our Consolidated Statement of Operations for all periods presented. Certain corporate expenses that will be eliminated and previously were not allocated to the Recognition business are included in discontinued operations.
Revenue and loss from discontinued operations were as follows:
During 2001, the results of discontinued operations encompass the period through the December 3, 2001 measurement date. Included in the 2001 results of discontinued operations is a special charge for consolidation of three Recognition plants into one plant and implementation of a new customer service model. The consolidation project was completed in September 2001 at a total cost of $3.9 million for severance benefits to eliminate approximately 140 full-time plant and management positions, costs associated with closing two facilities and costs of moving certain production and distribution functions to our Princeton, Illinois facility. The total cost of the project was partially offset by a gain of $2.4 million, which resulted from the sale of our distribution facility in Memphis, Tennessee for $4.0 million. Also included in the 2001 results of discontinued operations is a $1.6 million charge in accordance with our current assessment of environmental remediation at our Princeton facility and reimbursement of prior remediation costs from our insurance carrier in the amount of $2.7 million, net of legal costs.
JOSTENS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
In 2001, the $27.4 million pre-tax loss on disposal of the discontinued segment consists of a non-cash charge to write off certain net assets not sold in the exit from the Recognition business plus a charge for accrued costs related to exiting the Recognition business. Components of the loss on disposal and accrued liability are as follows:
Of the total accrued disposal costs, $6.2 million relates to employee termination benefits for the anticipated elimination of 150 full-time positions in the Recognition business and corporate support functions. Employee reductions began in 2001 and will be completed in 2002. Termination benefits will be paid out over the benefit period as specified under our severance plan.
As part of the loss on disposal, we accrued $4.3 million for exit costs related to the Recognition business. The charge includes $1.3 million for payroll and benefits, $0.8 million for information systems and customer service costs and $2.2 million of internal support costs expected to be incurred during the phase-out period.
We also accrued $2.8 million for transition payments of long-term sales representatives which will be paid out over the next three years. In addition, we accrued $3.0 million for customer receivable and salesperson overdraft allowances anticipated as a result of exiting the Recognition business.
With the exception of certain transition benefits, we anticipate the accrued balance will be utilized in 2002. Of the $19.0 million total in our Consolidated Balance Sheet, $14.5 million is classified as "current liabilities of discontinued operations" and $4.5 million is classified as a contra asset in "current assets of discontinued operations".
The unaudited quarterly pro forma information after reclassifying the results of discontinued operations, retroactive to the beginning of 2001, is as follows:
JOSTENS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Assets and liabilities of the discontinued segment included in the Consolidated Balance Sheet as of the end of 2001 and 2000 were as follows:
Current assets and liabilities of discontinued operations as of the end of 2001 consist primarily of customer receivables and the liability for costs related to exiting the Recognition business discussed above.
3. Merger and Recapitalization
On December 27, 1999, we entered into a merger agreement with Saturn Acquisition Corporation, an entity organized for the sole purpose of effecting a merger on behalf of certain affiliates of Investcorp S.A. (Investcorp) and other investors. On May 10, 2000, Saturn Acquisition Corporation merged with and into Jostens, with Jostens as the surviving corporation. The merger was part of a recapitalization of Jostens, which resulted in affiliates of Investcorp and other investors acquiring approximately 92% of our post-merger common stock. The remaining 8% of our common stock was retained by pre- recapitalization shareholders and five members of senior management and was redesignated as shares of Class A common stock. As a result of the transaction, our shares were de-listed from the New York Stock Exchange. The remaining 8% of our common stock was retained by pre-recapitalization shareholders and five members of senior management and was redesignated as shares of Class A common stock. As a result of the transaction, our shares were de-listed from the New York Stock Exchange.
Recapitalization Financing
The recapitalization was funded by (a) $495.0 million of borrowings under a senior credit facility with a syndicate of banks, (b) issuance of $225.0 million in principal amount of senior subordinated notes (the "notes") and warrants to purchase 425,060 shares of Class E common stock, (c) issuance of $60.0 million in principal amount of redeemable preferred stock and warrants to purchase 531,325 shares of Class E common stock and (d) $208.7 million of proceeds from the sale of shares of common stock to affiliates of Investcorp and the other investors.
JOSTENS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The proceeds from these financings funded (a) the payment of approximately $823.6 million to holders of common stock representing $25.25 per share, (b) repayment of $67.6 million of outstanding indebtedness, (c) payment of approximately $10.0 million in consideration for cancellation of employee stock options, (d) payments of approximately $72.0 million of fees and expenses associated with the recapitalization, including approximately $12.7 million of advisory fees paid to an affiliate of Investcorp and (e) a pre-payment of $7.5 million for a management and consulting services agreement for a five-year term with an affiliate of Investcorp. This pre-payment is being amortized on a straight-line basis over the term of the agreement.
Recapitalization Accounting
The transaction was accounted for as a recapitalization and, as such, the historical basis of our assets and liabilities has not been affected. Recapitalization related costs of $46.4 million consisting of investment banking fees, transaction fees, legal and accounting fees, transition bonuses, stock option payments and other miscellaneous costs were expensed in the year ended December 30, 2000. Additionally, $3.0 million of recapitalization costs incurred related to the issuance of shares of redeemable preferred stock were netted against the proceeds of $60.0 million. Finally, $36.5 million associated with the debt financing was capitalized and is being amortized as interest expense over the applicable lives of the debt for up to a maximum of ten years.
4. Special Charges
During 2001, we recorded a special charge aggregating $2.5 million. In the second quarter of 2001, we entered into a separation agreement with a senior executive. The total cost of $2.1 million for severance and related termination benefits was expensed in 2001 and included costs for the senior executive and two other management personnel. We utilized $1.9 million of the special charge in 2001. The remaining liability of approximately $0.2 million is classified in "other current liabilities" in our Consolidated Balance Sheet and will continue to be paid out over the benefit period as specified under the severance agreement. In the fourth quarter of 2001, we elected to terminate our joint venture operations in Mexico City, Mexico and took a charge of $0.4 million, primarily to write off the net investment.
In the fourth quarter of 1999, we completed a strategic review of product lines, manufacturing operations, infrastructure projects and support functions based on performance trends. We decided to refocus our organization on sales growth versus infrastructure improvement. As a result of this review, we incurred a pre-tax special charge of $20.2 million ($13.3 million after tax) in 1999 and an additional $0.2 million charge to complete the project in 2000. The charge anticipated the elimination of 140 full-time positions in manufacturing, sales, marketing and administrative functions. The special charge consisted of employee severance costs of $5.6 million, $6.4 million to write off internal software under development, $4.6 million of impaired goodwill related to the retail class ring sales channel and $3.1 million of impaired goodwill plus $0.7 million of other costs related to exiting the college alumni direct marketing business. Headcount reductions were completed in 2000. We utilized $1.7 million, $4.5 million and $14.2 million of the special charge in 2001, 2000 and 1999, respectively.
JOSTENS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
5. Comprehensive Income (Loss)
The following amounts were included in accumulated other comprehensive loss as of the end of 2001 and 2000:
6. Inventories
As of the end of 2001 and 2000, net inventories were comprised of:
Net inventories as of the end of 2000 included $9.2 million related to discontinued operations.
Precious Metals Consignment Arrangement
We have a precious metals consignment arrangement with a major financial institution whereby we have the ability to obtain up to $30.0 million in consigned inventory. We expensed consignment fees related to this facility of approximately $0.5 million in 2001 and $0.3 million in each of 2000 and 1999. Under the terms of the consignment arrangement, we do not own the consigned inventory until it is shipped in the form of a product to a customer. Accordingly, we do not include the value of consigned inventory nor the corresponding liability in our financial statements. The value of our consigned inventory as of the end of 2001 and 2000 was $15.8 million and $16.8 million, respectively.
7. Property and Equipment
As of the end of 2001 and 2000, net property and equipment consisted of:
JOSTENS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Net property and equipment as of the end of 2000 included $3.8 million related to discontinued operations. Depreciation expense related to continuing operations was $25.9 million, $25.3 million and $21.3 million in 2001, 2000 and 1999, respectively. Amortization related to capitalized software is included in depreciation expense and totaled $6.6 million, $6.5 million and $4.0 million in 2001, 2000 and 1999, respectively.
8. Borrowings
As of the end of 2001 and 2000, long-term debt consisted of the following:
Maturities of long-term debt, excluding $18.1 million of discount, as of December 29, 2001 are as follows:
In 2001 and 2000, we voluntarily paid down $13.2 million and $15.2 million, respectively, of term loan A and $10.8 million and $0.8 million, respectively, of term loan B. Future mandatory principal payment obligations under term loan A are approximately $9.0 million due June 30, 2002 and approximately $10.0 million due December 31, 2002. Thereafter, semi-annual principal payments increase approximately $1.0 million per semi-annual period through December 2005, with a final payment of approximately $8.0 million due in May 2006. Future mandatory principal payment obligations under term loan B are approximately $1.0 million due semi-annually through December 2005. Semiannual payments increase on an escalating scale from approximately $24.6 million in June 2006 to approximately $108.7 million in December 2007, with a final payment of approximately $64.0 million due in May 2008.
As of the end of 2001 and 2000, the fair value of our debt, excluding the senior subordinated notes (the "notes"), approximated its carrying value and is estimated based on quoted market prices for comparable
JOSTENS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
instruments. The fair value of the notes at December 29, 2001 and December 30, 2000 was $247.5 million and $204.8 million, respectively, and was estimated based on the quoted market price of $1,100 and $910 per unit, respectively.
In connection with the merger and recapitalization, we entered into a $150.0 million, six-year revolving credit facility that expires on May 31, 2006. We may borrow funds and elect to pay interest under the "alternative base rate" or "eurodollar" interest rate provisions as defined in the agreement. The eurodollar rate is based upon the London Interbank Offered Rate ("LIBOR") and the alternative base rate is based upon the prime rate. There was $5.6 million outstanding under this facility, in the form of letters of credit, as of December 29, 2001.
The notes are not collateralized and are subordinate in right of payment to the term loans and borrowings under the revolving credit facility (collectively the "senior secured credit facility"). The senior secured credit facility is collateralized by substantially all the assets of our domestic operations and all of our capital stock (limited to 65% in the case of foreign subsidiaries). The senior secured credit facility requires that we meet certain financial covenants, ratios and tests, including a maximum leverage ratio and a minimum interest coverage ratio. In addition, we are required to pay certain fees in connection with the senior secured credit facility, including letter of credit fees, agency fees and commitment fees. Commitment fees are payable quarterly, initially at a rate per annum of 0.5% on the average daily unused portion of the revolving credit facility. The senior secured credit facility and notes contain certain cross-default provisions whereby a violation of a covenant under one debt obligation would, consequently, violate covenants under the other debt obligations. At December 29, 2001, we were in compliance with all covenants.
Our senior secured credit facility bears a variable interest rate predominantly linked to LIBOR, as determined in three month intervals, plus a fixed spread. To manage our exposure to changes in the variable interest rate, we entered into an interest rate swap agreement on July 7, 2000. The interest rate provided by the swap agreement is fixed at 7.0% as opposed to LIBOR. The swap agreement became effective on August 15, 2000 with a notional amount of $135.0 million, decreasing to $70.0 million quarterly over the next three years. The notional amount is used to measure the interest to be paid or received and does not represent the amount of exposure to loss. The fair value of the interest rate swap as of December 29, 2001 was a non-cash liability of $5.6 million ($3.4 million net of tax), and is recorded in "other noncurrent liabilities" in the Consolidated Balance Sheet. Prior to adopting SFAS 133, the fair value of the interest rate swap as of December 30, 2000 was a liability of $3.0 million.
The notes were issued with detachable warrants and an original issuance discount, resulting in total discounts of $19.7 million. The detachable warrants were valued at $10.7 million and are exercisable through 2010. The value of the warrants has been included as a component of shareholders' deficit. If all the warrants were to be exercised, the holders would acquire shares (at a price of $0.01 per share) of our Class E common stock representing approximately 4.0% of the total number of shares (outstanding immediately after the transaction) of our common equity on a fully diluted basis. The entire discount is being amortized to interest expense through 2010 and, during 2001 and 2000, the amount of interest expense related to the amortization of debt discount was $1.1 million and $0.6 million, respectively.
In 1999, we incurred annual fees and interest on borrowings that were based on our commercial paper rating. Annual fees ranged from 0.075 to 0.15% of the commitment. The weighted average interest rate on commercial paper outstanding as of the end of 1999 was 5.9%.
JOSTENS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Redeemable Preferred Stock
In connection with the recapitalization, we issued redeemable, payment-in- kind, preferred shares, which have an initial liquidation preference of $60.0 million and are entitled to receive dividends at 14.0% per annum, compounded quarterly and payable either in cash or in additional shares of the same series of preferred stock. The redeemable preferred shares are subject to mandatory redemption by Jostens in May 2011. In connection with the redeemable preferred shares, we ascribed $14.0 million of the proceeds to detachable warrants to purchase 531,325 shares of our Class E common stock (at an exercise price of $0.01 per share), which is reflected as a component of shareholders' deficit. In addition, $3.0 million of issuance costs have been netted against the initial proceeds and are reflected as a reduction to the carrying amount of the preferred stock. The carrying value of the preferred stock is being accreted to full liquidation preference value, plus unpaid preferred stock dividends, over the eleven year period of the redeemable preferred stock through charges to the retained earnings (accumulated deficit) account.
9.Income Taxes
The following summarizes the differences between income taxes computed at the federal statutory rate and income taxes from continuing operations for financial reporting purposes:
The U.S. and foreign components of income from continuing operations before income taxes and the provision for income taxes attributable to earnings from continuing operations were as follows:
JOSTENS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of the deferred income tax liabilities and assets as of the end of 2001 and 2000 consisted of:
During 2000, we increased the deferred tax asset valuation allowance by $2.7 million because the tax benefit related to the reserves for investments may not be realized. We also have a foreign tax credit carryforward of $0.2 million that expires in 2002. The foreign tax credit of $0.2 million was fully reserved as of the end of 2001 and 2000.
10. Benefit Plans
Pension and Postretirement Benefits
We have noncontributory defined-benefit pension plans that cover nearly all employees. The benefits provided under the plans are based on years of service and/or compensation levels. We also provide health care insurance benefits for nearly all retirees. Generally, the health care plans require contributions from retirees. The measurement date for our plans is September 30 for each year.
The assumptions used for these plans consisted of:
JOSTENS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Net periodic benefit (income) or expense for 2001, 2000 and 1999 included the following components:
The following tables present a reconciliation of the benefit obligation of the plans, plan assets and funded status of the plans.
Plan assets consist primarily of corporate equity investments as well as corporate and U.S. government debt and real estate.
JOSTENS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The components in the consolidated balance sheets consist of:
Pension plans with obligations in excess of plan assets were as follows:
A one-percent change in the assumed health care cost trend rate would have the following effects:
Savings Plan
We have a retirement savings plan (401k plan), which covers nearly all nonunion employees. We provide a matching contribution on amounts, limited to 6% of compensation, contributed by employees. Our contribution was $4.4 million, $3.1 million and $2.9 million in 2001, 2000 and 1999, respectively, and this represents 50% of eligible employee contributions. In 1999, our contribution was made in the form of our common stock purchased in the open market. These shares were converted to cash at a price of $25.25 as part of the merger and recapitalization.
11. Shareholders' Equity
Common Stock
The post-merger common stock consists of Class A through Class E common stock as well as undesignated common stock. Holders of Class A common stock are entitled to one vote per share, whereas holders of Class D common stock are entitled to 306.55 votes per share. Holders of Class B common stock, Class C common stock and Class E common stock have no voting rights.
JOSTENS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The par value and number of authorized, issued and outstanding shares for each class of common stock is set forth below:
Share Repurchases
In December 1998, the Board of Directors authorized the repurchase of up to $100.0 million of our common stock in open market or negotiated transactions. During 1999, we repurchased 1.9 million shares for $39.9 million. This share repurchase program was suspended in the fourth quarter of 1999 due to the pending merger and recapitalization which occurred on May 10, 2000.
Shareholder Rights Plan
In July 1998, the Board of Directors declared a distribution to shareholders of one preferred share purchase right for each outstanding share of common stock. The dividend was payable August 19, 1998 to shareholders of record at the close of business on that date. As a result of the merger and recapitalization on May 10, 2000, the rights were redeemed for one-tenth of a cent per right as allowed under the Plan.
12. Stock Plans
Stock Options
As a result of the merger and recapitalization, outstanding options to purchase approximately 3.0 million shares of our previously existing common stock were cancelled and holders of those outstanding stock options were paid cash of $25.25 per underlying share, less the applicable option exercise price, resulting in an aggregate payment of approximately $10.0 million. Stock options with an exercise price equal to or in excess of $25.25 per share were cancelled as part of the merger for no consideration.
In connection with the merger and recapitalization, we adopted a new employee stock option plan to purchase shares of Class A common stock. The number of shares available to be awarded under the new stock option plan is 676,908. The stock option plan is administered by the Compensation Committee of the Board of Directors, which designates the amount, timing and other terms and conditions applicable to the option awards. Under the stock option plan, prior to a public offering, an optionee has certain rights to put to us, and we have certain rights to call from the optionee vested stock options. At the time of the transaction, options to purchase 502,846 of our Class A common stock were granted to five members of senior management. Subsequently, options to purchase 27,900 and 72,850 of our Class A common stock were granted on November 15, 2000 and July 13, 2001, respectively, and options to purchase 52,051 of our Class A common stock were cancelled in 2001. All options granted have an exercise price of $25.25, representing the Board's estimated fair value of our
JOSTENS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
common stock at the time of grant. Options granted in 2001 vest over three years on the anniversary of the grant date. Options granted in 2000 vest upon the seventh anniversary of the grant with the possibility of accelerated vesting in one-fifth increments upon Jostens meeting or exceeding target cumulative earnings before interest, taxes, depreciation and amortization ("EBITDA") for each of the five calendar years from the date of grant. The stock option plan also provides for vesting of certain percentages of the options in the event of an initial public offering or approved sale as defined in the stock option plan. Options issued pursuant to the plan expire on the thirtieth day following the seventh anniversary of the grant date.
We apply Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees," and related interpretations in accounting for employee and non-employee director stock options and long-term management incentive plans. Accordingly, no compensation cost has been recognized for these plans. The following table summarizes results as if we had recorded compensation expense for our stock option and long-term management incentive plans under SFAS No. 123, "Accounting for Stock-Based Compensation."
These figures reflect only the impact of grants since July 1, 1995 and reflect only part of the possible compensation expense that we would amortize over the vesting period of the grants. In future years, therefore, the effect on net income and earnings per share may differ from those shown above.
The weighted average fair value of options granted in 2001, 2000 and 1999 was $7.66, $9.04 and $6.72 per option, respectively. We estimated the fair values using the Black-Scholes option-pricing model, modified for dividends and using the following assumptions:
JOSTENS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The following table summarizes stock option activity:
The weighted average remaining contractual life of the options at December 29, 2001 was approximately 5.6 years. At December 29, 2001 and December 30, 2000 all outstanding options had an exercise price of $25.25 and 95,939 and 106,149 options, respectively, were exercisable.
In connection with the merger and recapitalization, we further provided that, in the event of either a sale of Jostens or a public offering of our securities, we may grant to certain executives options to purchase 1% of our common stock on a fully diluted basis. The ultimate terms of these options will be dependent upon certain facts and circumstances at the date of grant.
Restricted Stock Awards
Prior to the merger and recapitalization, we had a stock incentive plan under which eligible employees were awarded restricted shares of our common stock. Awards would generally vest from three to five years, subject to continuous employment and certain other conditions. The awards were recorded at market value on the date of the grant as unearned compensation and amortized over the vesting period. In connection with the merger and recapitalization in 2000, the restricted stock awards that were outstanding became fully vested and, as a result, we incurred a compensation charge of $1.0 million which is included in transaction costs on the Consolidated Statement of Operations. Amortization of unearned compensation expense in 1999 was $629,000.
Stock Loan Program
In connection with the merger and recapitalization, we adopted a new stock loan program to loan a total of $2.0 million to five members of senior management in individual amounts to refinance up to 100% of their outstanding loans existing at the time of the transaction. The proceeds of the loans were used to purchase shares of our common stock. Loans made under the stock loan program bear interest at our cost of funds under our new senior secured credit facility and are recourse loans. The loans are due May 10, 2005 with interest rates set annually. The loans are collateralized by the shares of stock owned by such individuals, and each individual has entered into a pledge agreement and has executed a secured promissory note. During 2001, one of the loans was repaid in connection with the departure of a member of senior management. At December 29, 2001 and December 30, 2000, there were $1.4 million and $1.8 million of these loans outstanding. The outstanding balance of these loans is classified as a reduction in shareholders' equity (deficit) on our Consolidated Balance Sheet.
JOSTENS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
13. Business Segments
During 2001, 2000 and 1999, we operated two major business segments: School Products and Recognition. School Products manufactures and markets school- related affinity products primarily for the high school and college markets. Recognition manufactured and supplied corporate-based affinity products that provided organizations with programs to recognize and reward employee service and achievement. In December 2001, we exited the Recognition business and sold certain assets to a current supplier (see Note 2). The results of the Recognition business are reflected as discontinued operations in our Consolidated Statement of Operations for all periods presented. As a result of discontinuing the Recognition business, we now operate one business segment and, therefore, have restated prior year information for continuing operations to include unallocated corporate expenses previously presented as "Other" in our segment information.
Net Sales by Product and Geographical Information
14. Commitments and Contingencies
Forward Purchase Contracts
To manage the risk associated with gold price changes, on an annual basis we simultaneously set our pricing to customers and enter into gold forward contracts based upon the estimated ounces needed to satisfy customer requirements. These forward purchase contracts are considered normal purchases and sales and not subject to the requirements of SFAS 133. At December 29, 2001, we had open forward contracts of $7.9 million to purchase gold that mature at various times in 2002.
Leases
We lease buildings, equipment and vehicles under operating leases. Future minimum rental commitments under noncancellable operating leases are $3.1 million, $2.2 million, $1.2 million and $0.1 million in 2002, 2003, 2004 and 2005, respectively. Rent expense was $3.5 million, $3.4 million and $4.4 million in 2001, 2000 and 1999, respectively.
JOSTENS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Environmental
As part of our environmental management program, we are involved in various environmental remediation activities. As sites are identified and assessed in this program, we determine potential environmental liabilities. Factors considered in assessing liability include, but are not limited to: whether we have been designated as a potentially responsible party, the number of other potentially responsible parties designated at the site, the stage of the proceedings and available environmental technology. As of the end of 2000, we had identified three sites requiring further investigation. During 2001, we received notification that no further investigation or remediation is required at one of the sites identified. Furthermore, we have not been designated as a potentially responsible party at either of the other sites.
In 1996, we assessed the likelihood that a loss had been incurred at one of these sites as probable based on findings included in remediation reports and from discussions with legal counsel. As of the end of 2001, we had made payments of $6.1 million for remediation, and at December 29, 2001, $2.1 million was accrued and is included in "other accrued liabilities" on our Consolidated Balance Sheet. During 2001, we received reimbursement from our insurance carrier in the amount of $2.7 million, net of legal costs. While we may have an additional right of contribution or reimbursement under insurance policies, amounts recoverable from other entities with respect to a particular site are not considered until recoveries are deemed probable. No assets for potential recoveries were established as of the end of fiscal 2001. We believe the effect on our consolidated results of operations, cash flows and financial position, if any, for the disposition of these matters will not be material.
Litigation
A federal antitrust action was served on Jostens on October 23, 1998. The complainant, Epicenter Recognition, Inc. ("Epicenter"), alleges that Jostens has attempted to monopolize the market of high school graduation products in the state of California. Epicenter is a successor to a corporation formed by four of our former sales representatives. The plaintiff is claiming damages of approximately $3.0 million to $10.0 million under various theories and differing sized relevant markets. Epicenter waived its right to a jury, so the case was tried before a judge in U.S. District Court in Orange County, California where trial concluded on April 24, 2001. We await a written decision from the Court. We believe the effect on our consolidated results of operations, cash flows and financial position, if any, for the disposition of these matters will not be material.
The long-standing dispute with Ernst & Young LLP regarding implementation of a company wide enterprise resource planning ("ERP") system was heard by a three-arbitrator panel in Minneapolis, Minnesota in December 2001. During 2002, the arbitration panel issued its award granting Ernst & Young LLP's claim for payment of its remaining unpaid consulting fees and costs of the arbitration, and denied our counterclaim. The result is not material to our consolidated results of operations, cash flows and financial position.
We are a party to other litigation arising in the normal course of business. We regularly analyze current information and, as necessary, provide accruals for probable liabilities on the eventual disposition of these matters. We believe the effect on our consolidated results of operations, cash flows and financial position, if any, for the disposition of these matters will not be material.
15. Equity Losses and Write-down of Investments
In 2000, we recorded equity losses and a write-down to zero against our investment in two Internet companies resulting in a $6.7 million non-cash charge.
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None
PART III
ITEM 10.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Executive officers and directors of Jostens as of March 1, 2002 are as follows:
Robert C. Buhrmaster joined Jostens in December 1992 as Executive Vice President and Chief Staff Officer. He was named President and Chief Operating Officer in June 1993; was named Chief Executive Officer in March 1994; and was named Chairman in February 1998. Prior to joining Jostens, Mr. Buhrmaster worked for Corning, Inc. for 18 years, most recently as Senior Vice President. He is also a director of The Toro Company.
John A. Feenan joined Jostens in November 2001 in his current position. Prior to joining Jostens, Mr. Feenan was Vice President and Chief Financial Officer of Mannington Mills. Prior to that, Mr. Feenan was Executive Vice President and Chief Financial Officer of Foamex International from June 1998 to August 1999. From January 1995 to June 1998, Mr. Feenan was a Divisional Chief Financial Officer, and then the Chief Financial Officer of U.S. Operations for Laporte plc.
Carl H. Blowers joined Jostens in May 1996 as an independent consultant serving as Division Vice President--Manufacturing & Engineering and was hired as an employee in 1997. He was appointed to his current position in February 1998. Prior to joining Jostens, Mr. Blowers worked for Corning, Inc. for 27 years, most recently as Vice President and General Manager of Corning's Advanced Materials and Process Technologies Division.
Michael L. Bailey joined Jostens in 1978. He has held a variety of leadership positions, including director of marketing, planning manager for manpower and sales, national product sales director, division manager for Printing & Publishing, printing operations manager and Vice President--Jostens School Solutions. He was appointed to his current position in February 2000.
Gregory S. Lea joined Jostens in November 1993 as Vice President--Total Quality Management. From June 1995 to January 2000, he was Vice President and General Manager--College and Universities. He was named to his current position in February 2000. Prior to joining Jostens, Mr. Lea spent 19 years with International Business Machines Corp. in various financial, operations and quality positions.
Paula R. Johnson joined Jostens in September 2001 in her current position. Prior to joining Jostens, Ms. Johnson spent 20 years with Honeywell Inc. in a variety of positions of increasing responsibility. Ms. Johnson was named a Vice President of Honeywell in 1994, and most recently was Vice President and Associate General Counsel--Home and Building Control.
Steven A. Tighe joined Jostens in September 2000 in his current position. From January to September 2000, Mr. Tighe was Vice President of Human Resources at RealNetworks. From June 1997 to January 2000, Mr. Tighe was Senior Vice President of Human Resources, Communications & Corporate Services at Fortis Health. From June 1995 to June 1997, Mr. Tighe was Director of Human Resources at Cray Research and Sun MicroSystems. Sun MicroSystems acquired Cray Research in 1996.
Andrew W. Black joined Jostens in September 2000 in his current position. Prior to joining Jostens, Mr. Black spent 6 years with Target Corporation where his most recent position was Information Systems Director.
John L. Larsen joined Jostens in January 1998 as Director of Corporate Development. He was named to his current position in July 2001. From June 1994 to December 1997, Mr. Larsen was a director in the Corporate Finance group with Arthur Andersen LLP in Minneapolis.
James O. Egan became one of our directors upon consummation of the recapitalization. Mr. Egan has been an executive of Investcorp or one or more of its wholly owned subsidiaries since January 1999. Prior to joining Investcorp, Mr. Egan was a partner in the accounting firm of KPMG from October 1997 to December 1998. From May 1996 to September 1997, Mr. Egan was a Senior Vice President and Chief Financial Officer of Riverwood International, a paperboard, packaging and machinery company. Prior to that, Mr. Egan was a partner in the accounting firm of Coopers & Lybrand L.L.P. (now PricewaterhouseCoopers LLP). Mr. Egan is a director of CSK Auto Corporation, Harborside Healthcare Corporation, IWO Holdings, Inc., and Werner Holding Co. (DE), Inc.
Charles K. Marquis became one of our directors upon consummation of the recapitalization. Mr. Marquis has been a senior advisor to Investcorp or one or more of its wholly owned subsidiaries since January 1999. Prior to joining Investcorp, Mr. Marquis was a partner in the law firm of Gibson, Dunn & Crutcher LLP. Mr. Marquis is a director of CSK Auto Corporation, Tiffany & Co. and Werner Holding Co. (DE), Inc.
Steven G. Puccinelli became one of our directors in July 2000. Mr. Puccinelli has been an executive of Investcorp or one or more of its wholly owned subsidiaries since July 2000. Prior to joining Investcorp, Mr. Puccinelli was a Managing Director at Donaldson, Lufkin & Jenrette.
Robert G. Sharp became one of our directors upon consummation of the recapitalization. Mr. Sharp has been an executive of DB Capital Partners, Inc., the general partner of DB Capital Investors, since October 1999. Prior to joining DB Capital Partners, Mr. Sharp was an executive at Investcorp or one or more of its wholly owned subsidiaries. Mr. Sharp is a director of Displaytech, Inc., GlobalSight Corporation, NationsRent, Inc., PC On Call and Stratus Computer Systems International S.A.
David A. Tayeh became one of our directors upon consummation of the recapitalization. Mr. Tayeh has been an executive of Investcorp or one or more of its wholly owned subsidiaries since February 1999. Prior to joining Investcorp, Mr. Tayeh was a Vice President in investment banking at Donaldson, Lufkin & Jenrette.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Officers and directors of Jostens are not subject to Section 16(a) reporting requirements.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE
The following table sets forth the cash and non-cash compensation for 2001, 2000 and 1999 awarded to or earned by the Chief Executive Officer, the four other most highly compensated executive officers and one former executive officer of Jostens.
- -------- (1) Amounts in 2001 include payments under the Performance Pays bonus program as follows: Mr. Buhrmaster, not eligible; Mr. Blowers, $9,641; Mr. Bailey, $8,051; Mr. Lea, $6,294; Mr. Tighe $5,917; and Mr. Priesmeyer, not eligible. Amounts in 2000 include additional compensation approved by the Jostens board of directors for Messrs. Buhrmaster, Blowers, Bailey, Lea and Priesmeyer, for services rendered in connection with our transition to new ownership, including managing the transition process from financial reporting, public relations and sales and marketing perspectives, in an amount equal to $2.5 million in aggregate. The additional compensation was allocated as follows: Messrs. Buhrmaster, $500,000; Blowers, $400,000; Bailey, $500,000; Lea, $300,000 and Priesmeyer, $800,000. In addition, amounts in 2000 include payments under the Performance Pays bonus program as follows: Mr. Buhrmaster, not eligible; Mr. Blowers, $10,853; Mr. Bailey, $10,800; Mr. Lea, $8,344 and Mr. Priesmeyer, $11,278. Amounts in 1999 include payments under the Performance Pays bonus program as follows: Mr. Buhrmaster, not eligible; Mr. Blowers, $10,969; Mr. Bailey, $8,104; Mr. Lea, $6,762 and Mr. Priesmeyer, $9,712. (2) Amounts in 1999 include awards of restricted stock (valued as of the grant date) under the Executive Stock Purchase Program. In 2000, all restricted shares were redeemed for $25.25 per underlying share. The total number of restricted stock holdings and amounts paid to the named officers are as follows: Mr. Buhrmaster, 10,135 shares redeemed for $255,908; Mr. Blowers, 4,817 shares redeemed for $121,629; Mr. Bailey, 2,753 shares redeemed for $69,513; Mr. Lea, 1,376 shares redeemed for $34,744 and Mr. Priesmeyer, 5,673 shares redeemed for $143,243.
(3) Amounts in 2001 for Mr. Lea and Mr. Tighe include miscellaneous perquisites, including $15,946 for the use of the corporate jet for Mr. Lea and $12,608 automobile reimbursement for Mr. Tighe. Amount in 2001 for Mr. Priesmeyer includes a lump sum severance payment of $1,706,683, payment for the repurchase of his common shares in the amount of $344,347 and other miscellanous perquisites. Amounts in 2000 include the redemption of options at $25.25 per underlying share less the applicable option exercise price. The number of option share holdings and amounts paid to the named officers are as follows: Mr. Buhrmaster, 601,000 shares in the amount of $3,047,224; Mr. Blowers, 134,000 shares in the amount of $290,182; Mr. Bailey, 130,750 shares in the amount of $333,999; Mr. Lea, 113,740 shares in the amount of $379,417 and Mr. Priesmeyer, 156,000 shares in the amount of $285,337. Amounts in 2000 for Mr. Tighe include reimbursement of moving expenses in the amount of $35,567. (4) Mr. Bailey joined Jostens in 1978. He was appointed to his current position in February 2000. (5) Mr. Lea joined Jostens in 1993. He was appointed to his current position in February 2000. (6) Mr. Tighe joined Jostens in his current position in September 2000. (7) Mr. Priesmeyer resigned from Jostens in July 2001. Pursuant to a separation agreement, Mr. Priesmeyer received a lump sum payment in July 2001, and will receive certain benefits through June 2003.
Option Grants in the Last Fiscal Year
In connection with the merger and recapitalization, we adopted a new employee stock option plan to purchase shares of Class A common stock. The number of shares available to be awarded under the new stock option plan is 676,908. The stock option plan is administered by the Compensation Committee of the Board of Directors, which designates the amount, timing and other terms and conditions applicable to the option awards. Under the stock option plan, prior to a public offering, an optionee has certain rights to put to us, and we have certain rights to call from the optionee vested stock options. At the time of the transaction, options to purchase 502,846 of our Class A common stock were granted to five members of senior management. Subsequently, options to purchase 27,900 and 72,850 of our Class A common stock were granted on November 15, 2000 and July 13, 2001, respectively, and options to purchase 52,051 of our Class A common stock were cancelled in 2001. All options granted have an exercise price of $25.25, representing the Board's estimated fair value of our common stock at the time of grant. Options granted in 2001 vest over three years on the anniversary of the grant date. Options granted in 2000 vest upon the seventh anniversary of the grant with the possibility of accelerated vesting in one- fifth increments upon Jostens meeting or exceeding target cumulative earnings before interest, taxes, depreciation and amortization ("EBITDA") for each of the five calendar years from the date of grant. The stock option plan also provides for vesting of certain percentages of the options in the event of an initial public offering or approved sale as defined in the stock option plan. Options issued pursuant to the plan expire on the thirtieth day following the seventh anniversary of the grant date.
The following table sets forth stock options granted to one member of senior management in 2001.
- -------- (1) Such option is exercisable annually as to one-third of the total number of shares, commencing July 13, 2002. (2) The fair value of each stock option is estimated on the date of grant using the Black-Scholes pricing model with the following weighted-average assumptions: an expected life of seven years, no dividend yield, expected volatility of 20% and a risk-free interest rate of 4.8%.
Aggregated Option Exercises in Fiscal Year 2001 and Fiscal Year End Option Values
The following table sets forth information concerning the aggregate number of exercisable and unexercisable options held as of the end of 2001. No options were exercised in 2001 by the named executive officers.
- -------- (1) Currently, there is no established public trading market for our common shares. None of these options are considered to be in-the-money for purposes of this table.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Messrs. Buhrmaster, Egan, Marquis, and Puccinelli were members of the Compensation Committee in 2001. Only Mr. Buhrmaster served as an officer of Jostens during 2001.
EMPLOYMENT AGREEMENTS AND CHANGE IN CONTROL ARRANGEMENTS
Management Bonus Arrangements
In connection with the merger and recapitalization, we established a Management Shareholder Bonus Plan providing for an annual bonus to be paid to Messrs. Buhrmaster, Bailey, Blowers and Lea. Based upon achievements of specific EBITDA targets, Mr. Buhrmaster will be entitled to a standard bonus equal to 60% of his base salary. No bonus will be paid to Mr. Buhrmaster if Jostens fails to achieve specified performance levels. Based upon achievements of specific EBITDA targets, Messrs. Bailey, Blowers and Lea will be entitled to a standard bonus as determined by the Chief Executive Officer and approved by the Board of Directors. Similarly, no bonus will be paid to them if Jostens fails to achieve specified minimum performance levels.
In connection with the merger, we further provided that, in the event of either a sale of Jostens or a public offering of our securities, we may grant to Messrs. Buhrmaster, Bailey, Blowers and Lea options to purchase 1% of our common stock on a fully diluted basis, without taking into account any shares issued following the merger, other than any shares issued upon exercise of the options granted under our stock option plan, and without taking into account any shares issued upon exercise of warrants issued to purchasers of the redeemable preferred stock. The ultimate terms of these options will be dependent upon certain facts and circumstances at the date of grant. In the event of a sale of Jostens, the options would be immediately exercisable. In the event of a public offering of our securities, the options would be exercisable for a period of two years beginning one year after the date of the public offering. In either case, the options will be exercisable only if Investcorp realizes a specified rate of return in such transaction on its investment in Jostens. In either case, we will allocate such options among Messrs. Buhrmaster, Bailey, Blowers and Lea provided that each is still employed by us at the time of such sale or offering, based upon the recommendation of our Chief Executive Officer, subject to the approval of our Board of Directors.
Executive Change in Control Severance Pay Plan
In 1999, we implemented the Jostens' Executive Change in Control Severance Pay Plan (the "Plan"). The primary purpose of the Plan is to provide severance benefits for our Chief Executive Officer and other members of management or highly compensated employees that are selected by our Chief Executive Officer, whose employment is terminated during the 24 month period following a change in control (as defined in the Plan).
Plan participants are eligible to receive severance benefits if their employment is terminated either voluntarily with "good reason" (as defined in the Plan) or involuntarily for any reason other than death or for "cause" (as defined in the Plan). The amount of severance benefits received by a particular employee is based upon the employee's position in Jostens and the employee's base salary plus the higher of the target of the current year's annual incentive or the three year average of actual payments of annual incentives. The range of severance benefits is from 15 months to 36 months of salary and would be paid in a lump sum upon termination. Plan participants are also eligible to receive an additional cash payment from us to the extent the total payments received from this Plan or any other benefit plan is treated as an "excess parachute payment" within the meaning of Section 280(G) of the Internal Revenue Code of 1986, as amended.
Termination of Employment
In June of 2001, we entered into a separation agreement with William N. Priesmeyer. The terms of the agreement provide Mr. Priesmeyer with a lump sum severance payment of $1,706,683. Additionally, the agreement provided Mr. Priesmeyer with medical/dental benefits and perquisites continuation through the earlier of the commencement of his new full time employment or June 30, 2003.
JOSTENS RETIREMENT PLANS
We maintain a non-contributory pension plan, Pension Plan D (Plan D), which provides benefits for substantially all salaried employees. Retirement income benefits are based upon a participant's highest average annual cash compensation (base salary plus annual bonus, if any) during any five consecutive calendar years, years of credited service (to a maximum of 35 years) and the Social Security-covered compensation table in effect at termination.
We also maintain an unfunded supplemental retirement plan that gives additional credit under Plan D for years of service as a Jostens' sales representative to those salespersons who were hired as employees of Jostens prior to October 1, 1991. In addition, benefits specified in Plan D may exceed the level of benefits that may be paid from a tax-qualified plan under the Internal Revenue Code of 1986, as amended. The benefits up to IRS limits are paid from Plan D and benefits in excess, to the extent they could have been earned in Plan D, are paid from the unfunded supplemental plan.
The executive officers participate in pension plans maintained by us for certain employees. The following table shows estimated annual retirement benefits payable for life at age 65 for various levels of compensation and service under these plans. The table does not take into account transition rule provisions of the plan for employees who were participants on June 30, 1988.
- -------- (1) The following individuals named in the Summary Compensation Table have the respective number of years of service under Plan D: Mr. Buhrmaster, 9.1 years; Mr. Blowers, 5.6 years; Mr. Bailey, 23.5 years including sales service of 6.5 years; Mr. Lea, 8.1 years and Mr. Tighe 1.3 years.
We also maintain a non-contributory supplemental pension plan for corporate vice presidents. Under the plan, vice presidents who retire after age 55 with at least seven full calendar years of service as a corporate vice president are eligible for a benefit equal to 1% of final base salary for each full calendar year of service, up to a maximum of 30%. Only service after age 30 is recognized in the plan. The calculation of benefits is frozen at the levels reached at age 60. If they continue in their current positions at their current levels of compensation and retire at age 60, the estimated total annual pension amounts from this plan for Messrs. Buhrmaster, Bailey, Lea and Tighe would be $84,000, $41,918, $35,342 and $22,550, respectively. Mr. Blowers waived his eligibility in this plan. Mr. Priesmeyer waived his benefits under the plan pursuant to his separation agreement.
DIRECTORS FEES
We do not pay any remuneration to our employees or to executives of Investcorp or its co-investors for serving as directors.
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
We are authorized to issue shares of six classes of common stock, each with a par value of $0.01 per share except for the Class A common stock which has a par value of $0.33 1/3 per share. The classes of common stock consist of Class A common stock, Class B common stock, Class C common stock, Class D common stock, Class E common stock and undesignated common stock. Class A common stock, Class D common stock and undesignated common stock are the only classes of common stock that have a right to vote. Holders of Class B common stock, Class C common stock and Class E common stock do not have any voting rights, except that the holders of such classes of common stock have the right to vote as a class to the extent required under the laws of the State of Minnesota. Furthermore each issued and outstanding share of Class E common stock will be convertible at the option of the holder thereof into one share of Class A common stock at any time commencing 30 days after the original date of issuance of such share of Class E common stock.
Holders of Class A common stock and undesignated common stock of the Company are entitled to one vote per share, and holders of Class D common stock are entitled to 306.55 votes per share, in each case on all matters as to which shareholders may be entitled to vote pursuant to the Minnesota Business Corporation Act.
Investcorp and its co-investors (other than DB Capital Investors and First Union Leveraged Capital) beneficially own all of the outstanding Class D common stock, constituting approximately 68 % of our voting power. DB Capital Investors, First Union Leveraged Capital, Northwestern Mutual Life Insurance Company and our pre-merger shareholders, including certain members of management, beneficially own all of the outstanding Class A common stock, constituting the remainder of our voting power. In addition, Investcorp and its co-investors, other than DB Capital Investors and First Union Leveraged Capital, own 5,300,000 shares of Class B common stock and 811,020 shares of Class C common stock.
The following table sets forth certain information regarding the beneficial ownership of our voting stock as of March 1, 2002. The table sets forth, as of that date:
. each person whom we know to be a beneficial owner of more than 5% of any class of our voting stock;
. each person who was a named executive officer of Jostens;
. all of our directors and executive officers as a group;
. other persons as required.
None of our directors or executive officers own shares of our Class D common stock. Unless otherwise indicated, we believe each of the shareholders shown in the table below has sole voting and investment power with respect to the shares beneficially owned. Except as set forth in the table, none of our executive officers beneficially owns shares of our common stock.
- -------- (1) As used in the table above, a beneficial owner of a security includes any person who, directly or indirectly, through contract, arrangement, understanding, relationship, or otherwise has or shares (i) the power to vote, or direct the voting of, such security or (ii) investment power which includes the power to dispose, or to direct the disposition of, such security. (2) Represents options exercisable within 60 days from March 1, 2002. (3) The address for DB Capital Investors, L.P. is 31 West 52nd Street, 26th Floor, New York, New York 10019. The address for First Union Leveraged Capital is One First Union Center, 5th Floor, 301 South College Street, Charlotte, North Carolina 28288. The address for Northwestern Mutual Life Insurance Company is 720 East Wisconsin Avenue, Milwaukee, Wisconsin 53202. The address of each other person listed in the table as a holder of our Class A Common Stock is c/o Jostens, Inc., 5501 Norman Center Drive, Minneapolis, Minnesota 55437. (4) This number includes shares of stock that are subject to securities exercisable or convertible within 60 days of March 1, 2002. (5) Less than 1% unless otherwise indicated. (6) Investcorp does not directly own any of our stock. The number of shares of stock shown as owned by Investcorp includes all of the shares owned by Investcorp Investment Equity Limited (see note (7) below). Investcorp owns no stock in Ballet Limited, Denary Limited, Gleam Limited, Highlands Limited, Noble Limited, Outrigger Limited, Quill Limited, Radial Limited, Shoreline Limited, Zinnia Limited, or in the
beneficial owners of these entities (see note (7) below). Investcorp may be deemed to share beneficial ownership of the shares of voting stock held by these entities because the entities have entered into revocable management services or similar agreements with an affiliate of Investcorp, pursuant to which each such entities has granted such affiliate the authority to direct the voting and deposition of Jostens' voting stock owned by such entity for so long as such agreement is in effect. Investcorp is a Luxembourg corporation with its address at 37 rue Notre-Dame, Luxembourg. (7) Investcorp Investment Equity Limited is a Cayman Islands corporation, and a wholly-owned subsidiary of Investcorp, with its address at P.O. Box 1111, West Wind Building, George Town, Grand Cayman, Cayman Islands. SIPCO Limited may be deemed to control Investcorp through its ownership of a majority of a company's stock that indirectly owns a majority of Investcorp's shares. SIPCO Limited's address is P.O. Box 1111, West Wind Building, George Town, Grand Cayman, Cayman Islands. CIP Limited ("CIP") owns no stock of Jostens. CIP indirectly owns less than 0.1% of the stock of each of Ballet Limited, Denary Limited, Gleam Limited, Highlands Limited, Noble Limited, Outrigger Limited, Quill Limited, Radial Limited, Shoreline Limited and Zinnia Limited. CIP may be deemed to share beneficial ownership of the shares of Jostens' voting stock held by such entities because CIP acts as a director of such entities and the ultimate beneficial shareholders of each of those entities have granted to CIP revocable proxies in companies that own those entities' stock. None of the ultimate beneficial owners of such entities beneficially owns individually more than 5% of Jostens' voting stock. Each of CIP Limited, Ballet Limited, Denary Limited, Gleam Limited, Highlands Limited, Noble Limited, Outrigger Limited, Quill Limited, Radial Limited, Shoreline Limited and Zinnia Limited is a Cayman Islands corporation with its address at P.O. Box 2197, West Wind Building, George Town, Grand Cayman, Cayman Islands.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Immediately prior to consummation of the recapitalization, we received approximately $208.7 million of equity capital provided by Investcorp and its co-investors. In connection with obtaining the financing for the recapitalization, we paid Investcorp International, Inc., an affiliate of Investcorp, advisory fees of approximately $12.7 million. In addition, we entered into an agreement with Investcorp International for management advisory and consulting services for a five-year term pursuant to which we prepaid Investcorp International $7.5 million at the closing of the merger.
Pursuant to the merger agreement, for six years after the closing date of the merger, we agreed to indemnify and hold harmless our present and former officers and directors for acts or omissions occurring before the completion of the merger to the extent provided under our articles of incorporation and by- laws in effect on the date of the merger agreement. In addition, all indemnification agreements with any current or former directors, officers and employees of Jostens or any subsidiary will survive the merger and terminate as provided in such agreements. For six years after the completion of the merger, Jostens will provide officers' and directors' or fiduciary liability insurance for acts or omissions occurring before the completion of the merger covering each such person currently covered by our officers' and directors' or fiduciary liability insurance policy on terms with respect to coverage and amount no less favorable than those in effect on the date of the merger agreement, provided that the cost of such insurance does not exceed 200% of the most recent annual premium paid by us.
Pursuant to the merger agreement, Messrs. Buhrmaster, Blowers, Bailey and Lea retained shares of our common stock as follows:
In addition, Mr. William Priesmeyer retained 28,034 shares of our common stock at the time of the merger. All of Mr. Priesmeyer's shares were repurchased by us at the time of Mr. Priesmeyer's termination of employment.
These shares were redesignated as Class A common stock as of the effective time of the merger, the same designation as the shares of common stock retained by other existing Jostens shareholders. All other shares held by Messrs. Buhrmaster, Priesmeyer, Blowers, Bailey and Lea were exchanged in the merger for $25.25 in cash.
We have entered into management shareholder agreements with each of Messrs. Buhrmaster, Bailey, Blowers and Lea. Each agreement allows us to repurchase shares of our common stock from the executive in the event the executive ceases to be employed by us at any time prior to a public offering of our common stock. In addition, in the event of termination of employment under specified circumstances, the executive has the right to require an affiliate of Investcorp to repurchase his shares of common stock. The management shareholder agreements grant to the executives piggyback registration rights in connection with a registration statement filed by us with respect to our common equity securities following an initial public offering of our common stock. The agreements also impose restrictions on each executive's ability to sell shares in connection with or following an initial public offering.
Stock Loan Program
In connection with the merger and recapitalization, we adopted a new stock loan program to loan a total of $2.0 million to five members of senior management in individual amounts to refinance up to 100% of their outstanding loans existing at the time of the transaction. The proceeds of the loans were used to purchase shares of our common stock. Loans made under the stock loan program bear interest at our cost of funds under our new revolving credit facility and are recourse loans. The loans are due May 10, 2005 with interest rates set annually. The loans are collateralized by the shares of stock owned by such individuals, and each individual has entered into a pledge agreement and has executed a secured promissory note. At December 29, 2001, there were $1.4 million of these loans outstanding. The principal amounts of loans to the named executive officers are: Mr. Buhrmaster: $1,010,025; Mr. Bailey: $291,158 and Mr. Lea: $105,318. Mr. Blowers does not have a loan outstanding. Mr. Priesmeyer's loan was repaid from the proceeds of the repurchase of his shares by Jostens.
PART IV
ITEM 14.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) List of documents filed as part of this report:
(1) Financial Statements
Report of Independent Auditors
Consolidated Statements of Operations for 2001, 2000 and 1999
Consolidated Balance Sheets as of December 29, 2001 and December 30,
Consolidated Statements of Cash Flows for 2001, 2000 and 1999
Consolidated Statements of Changes in Shareholders' Equity (Deficit) and Comprehensive Income (Loss) for 2001, 2000 and 1999
Notes to Consolidated Financial Statements
(2) Financial Statement Schedules
Report of Independent Accountants
Schedule II Valuation and Qualifying Accounts
All other schedules for which provision is made in the applicable accounting regulations of the Securities and Exchange Commission have been omitted because they are not applicable or the required information is shown in the financial statements or notes thereto.
(3) Exhibits
2.1 Agreement and Plan of Merger, dated as of December 27, 1999, by and between Jostens, Inc. and Saturn Acquisition Corporation, incorporated by reference to Appendix A to the Proxy Statement/Prospectus which is a part of Jostens' registration statement on Form S-4 filed April 7, 2000.
2.2 First Amendment to the Agreement and Plan of Merger, dated as of March 31, 2000, by and between Jostens, Inc. and Saturn Acquisition Corporation, incorporated by reference to Appendix A to the Proxy Statement/Prospectus which is a part of Jostens' registration statement on Form S-4 filed April 7, 2000.
3.1 Form of Amended and Restated Articles of Incorporation of Jostens, Inc., incorporated by reference to Appendix D to the Proxy Statement/Prospectus which is a part of Jostens' registration statement on Form S-4 filed April 7, 2000.
3.2 Certificate of Designation, effective May 10, 2000, of the Powers, Preferences and Rights of the 14 % Senior Redeemable Payment-In- Kind Preferred Stock, and Qualifications, Limitations and Restrictions Thereof. Incorporated by reference to Exhibit 4.3 to Jostens' Form 8-K filed on May 25, 2000.
3.3 Bylaws of Jostens, Inc. Incorporated by reference to Exhibit 3.2 contained in Jostens' Report on Form 10-Q for the quarterly period ended July 3, 1999.
4.1 Indenture, dated as of May 10, 2000, including therein the form of Note, between Jostens, Inc. and The Bank of New York, as Trustee, providing for 12.75% Senior Subordinated Notes due 2010. Incorporated by reference to Exhibit 4.1 to Jostens' Form 8-K filed on May 25, 2000.
4.2 Registration Rights Agreement, dated as of May 10, 2000, between Jostens, Inc. and American Yearbook Company, Inc. as Issuers, and Deutsche Bank Securities Inc., UBS Warburg LLC and Goldman, Sachs & Co. as Initial Purchasers. Incorporated by reference to Exhibit 4.2 to Jostens' Form 8-K filed on May 25, 2000.
4.3 Purchase Agreement dated May 5, 2000, for 225,000 Units Consisting of $225,000,000 12.75% Senior Subordinated Notes due 2010 and Warrants to Purchase 425,060 Shares of Class E Common Stock, between Jostens, Inc. and American Yearbook Company, and Deutsche Bank Securities Inc., UBS Warburg LLC and Goldman, Sachs & Co. Incorporated by reference to Exhibit 4.6 to Jostens' Form 8-K filed on May 25, 2000.
4.4 Form of Exchange Note. Incorporated by reference to Exhibit 4.4 contained in Jostens' registration statement on Form S-4 filed April 7, 2000.
5.1 Opinion of William J. George, Esq., regarding the legality of the exchange notes issued by Jostens. Incorporated by reference to Exhibit 5.1 contained in Jostens' registration statement on Form S-4 filed April 7, 2000.
10.1 Warrant Agreement, dated May 10, 2000, including therein the form of Warrant, between Jostens, Inc. and The Bank of New York, as Warrant Agent. Incorporated by reference to Exhibit 10.2 contained in Jostens' registration statement on Form S-4 filed April 7, 2000.
10.2 Warrant Registration Rights Agreement, dated May 10, 2000, between Jostens, Inc. and Deutsche Bank Securities Inc., UBS Warburg LLC and Goldman, Sachs & Co. Incorporated by reference to Exhibit 4.5 to Jostens' Form 8-K filed on May 25, 2000.
10.3 Purchase Agreement, dated May 10, 2000, for 14 % Senior Redeemable Payment In Kind Preferred Stock with Warrants to Purchase Shares of Class E Common Stock, between Jostens, Inc. and DB Capital Investors, L.P. Incorporated by reference to Exhibit 4.6 to Jostens' Form 8-K filed on May 25, 2000.
10.4 Warrant Agreement, dated May 10, 2000, including therein the form of Warrant, between Jostens, Inc. and The Bank of New York, as Warrant Agent. Incorporated by reference to Exhibit 10.5 contained in Jostens' registration statement on Form S-4 filed April 7, 2000.
10.5 Preferred Stock Registration Rights Agreement, dated May 10, 2000, between Jostens, Inc. and DB Capital Investors, L.P. Incorporated by reference to Exhibit 4.8 to Jostens' Form 8-K filed on May 25, 2000.
10.6 Shareholder Agreement, dated May 10, 2000, between Jostens, Inc., and DB Capital Investors, L.P. and Certain Other Holders of Stock of Jostens, Inc. Incorporated by reference to Exhibit 4.9 to Jostens' Form 8-K filed on May 25, 2000.
10.7 Shareholder Agreement, dated May 10, 2000, between Jostens, Inc., and First Union Leveraged Capital, LLC and Certain Other Holders of Stock of Jostens, Inc. Incorporated by reference to Exhibit 4.10 to Jostens' Form 8-K filed on May 25, 2000.
10.8 Common Equity Registration Rights Agreement, dated May 10, 2000, between Jostens, Inc., and Certain Holders as Defined Therein. Incorporated by reference to Exhibit 4.11 to Jostens' Form 8-K filed on May 25, 2000.
10.9 Management Shareholder Agreement, dated as of May 10, 2000, between Jostens, Inc. and Robert Buhrmaster. Incorporated by reference to Exhibit 10.10 contained in Jostens' registration statement on Form S-4 filed April 7, 2000.
10.10 Management Shareholder Agreement, dated as of May 10, 2000, between Jostens, Inc. and William Priesmeyer. Incorporated by reference to Exhibit 10.11 contained in Jostens' registration statement on Form S-4 filed April 7, 2000.
10.11 Management Shareholder Agreement, dated as of May 10, 2000, between Jostens, Inc. and Carl Blowers. Incorporated by reference to Exhibit 10.12 contained in Jostens' registration statement on Form S-4 filed April 7, 2000.
10.12 Management Shareholder Agreement, dated as of May 10, 2000, between Jostens, Inc. and Michael Bailey. Incorporated by reference to Exhibit 10.13 contained in Jostens' registration statement on Form S-4 filed April 7, 2000.
10.13 Management Shareholder Agreement, dated as of May 10, 2000, between Jostens, Inc. and Gregory Lea. Incorporated by reference to Exhibit 10.14 contained in Jostens' registration statement on Form S-4 filed April 7, 2000.
10.14 Stock Option Agreement, dated as of May 10, 2000, between Jostens, Inc. and William Priesmeyer. Incorporated by reference to Exhibit 10.15 contained in Jostens' registration statement on Form S-4 filed April 7, 2000. *
10.15 Stock Option Agreement, dated as of May 10, 2000, between Jostens, Inc. and Carl Blowers. Incorporated by reference to Exhibit 10.16 contained in Jostens' registration statement on Form S-4 filed April 7, 2000. *
10.16 Stock Option Agreement, dated as of May 10, 2000, between Jostens, Inc. and Michael Bailey. Incorporated by reference to Exhibit 10.17 contained in Jostens' registration statement on Form S-4 filed April 7, 2000. *
10.17 Stock Option Agreement, dated as of May 10, 2000, between Jostens, Inc. and Gregory Lea. Incorporated by reference to Exhibit 10.18 contained in Jostens' registration statement on Form S-4 filed April 7, 2000. *
10.18 Stock Option Agreement, dated as of May 10, 2000, between Jostens, Inc. and Robert Buhrmaster. Incorporated by reference to Exhibit 10.19 contained in Jostens' registration statement on Form S-4 filed April 7, 2000. *
10.19 Loan and Pledge Agreement, dated as of May 10, 2000, between Jostens, Inc. and Robert Buhrmaster, together with form of proxy and promissory note. Incorporated by reference to Exhibit 10.20 contained in Jostens' registration statement on Form S-4 filed April 7, 2000.
10.20 Loan and Pledge Agreement, dated as of May 10, 2000, between Jostens, Inc. and William Priesmeyer, together with form of proxy and promissory note. Incorporated by reference to Exhibit 10.21 contained in Jostens' registration statement on Form S-4 filed April 7, 2000.
10.21 Loan and Pledge Agreement, dated as of May 10, 2000, between Jostens, Inc. and Michael Bailey, together with form of proxy and promissory note. Incorporated by reference to Exhibit 10.22 contained in Jostens' registration statement on Form S-4 filed April 7, 2000.
10.22 Loan and Pledge Agreement, dated as of May 10, 2000, between Jostens, Inc. and Gregory Lea, together with form of proxy and promissory note. Incorporated by reference to Exhibit 10.23 contained in Jostens' registration statement on Form S-4 filed April 7, 2000.
10.23 Management Stock Incentive Plan established by Jostens, Inc. dated as of May 10, 2000. Incorporated by reference to Exhibit 10.24 contained in Jostens' registration statement on Form S-4 filed April 7, 2000. *
10.24 Jostens, Inc. 2000 Stock Loan Plan. Incorporated by reference to Exhibit 10.25 contained in Jostens' registration statement on Form S-4 filed April 7, 2000.
10.25 Management Shareholder Bonus Plan established by Credit Agreement. Incorporated by reference to Exhibit 10.26 contained in Jostens' registration statement on Form S-4 filed April 7, 2000. *
10.26 Credit Agreement, dated as of May 10, 2000, between Jostens, Inc. and Chase Securities Inc., Deutsche Bank Securities Inc., and Goldman Sachs Credit Partners L.P., as Co-Lead Arrangers, Bankers Trust Company, as Syndication Agent, Goldman Sachs Credit Partners L.P., as Documentation Agent, and The Chase Manhattan Bank, as Administrative Agent.
Incorporated by reference to Exhibit 10.27 contained in Jostens' registration statement on Form S-4 filed April 7, 2000.
10.27 Separation Agreement, dated as of April 11, 2000, between Jostens, Inc. and Mr. Thomas W. Jans. *
10.28 Separation Agreement, dated as of April 26, 2000, between Jostens, Inc. and Mr. David J. Larkin. *
10.29 Jostens, Inc. Executive Change in Control Severance Pay Plan effective January 1, 1999. Incorporated by reference to Exhibit 10.8 contained in the Annual Report on Form 10-K for 1998. *
10.30 Jostens, Inc. Executive Change in Control Severance Pay Plan First Declaration of Amendment, effective August 1, 1999. Incorporated by reference to Jostens' Report on Form 10-Q for the quarterly period ended October 2, 1999. *
10.31 Form of Contract entered into with respect to Executive Supplemental Retirement Plan Incorporated by reference to Jostens' Registration Statement on Form 8 dated May 2, 1991. *
10.32 Separation Agreement, dated as of June 18, 2001, between Jostens, Inc. and Mr. William N. Priesmeyer. Incorporated by reference to Jostens' Report on Form 10-Q for the quarterly period ended June 30, 2001. *
12 Computation of Ratio of Earnings to Fixed Charges
21 List of Jostens' subsidiaries.
(b) Reports on Form 8-K
Press release issued by Jostens on December 4, 2001 announcing our decision to exit from the Recognition business.
- -------- * Management contract or compensatory plan or arrangement required to be filed as an exhibit to Form 10-K pursuant to Item 14 (c) of this annual report.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, on March 25, 2002.
JOSTENS, INC.
/s/ Robert C. Buhrmaster By ___________________________________ Robert C. Buhrmaster Chairman of the Board, President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on March 25, 2002 in the capacities indicated.
Signature Title
/s/ Robert C. Buhrmaster ____________________________________ Chairman of the Board, President and Robert C. Buhrmaster Chief Executive Officer
/s/ John A. Feenan ____________________________________ Senior Vice President and Chief John A. Feenan Financial Officer (Chief Accounting Officer)
/s/ James O. Egan ____________________________________ Director James O. Egan
/s/ Charles K. Marquis ____________________________________ Director Charles K. Marquis
/s/ Steven G. Puccinelli ____________________________________ Director Steven G. Puccinelli
/s/ Robert G. Sharp ____________________________________ Director Robert T. Sharp
/s/ David A. Tayeh ____________________________________ Director David A. Tayeth
Report of Independent Accountants
To the Board of Directors of Jostens, Inc.:
Our audits of the consolidated financial statements as of December 29, 2001 and December 30, 2000 and for the years then ended, referred to in our report dated February 7, 2002 appearing in the 2001 Annual Report on Form 10-K also included an audit as of December 29, 2001 and December 30, 2000, and for the years then ended, of the financial statement schedule listed in Item 14(a)(2) of this Form 10-K. In our opinion, these financial statement schedules present fairly, in all material respects, the information set forth therein as of December 29, 2001 and December 30, 2000 and for the years then ended, when read in conjunction with the related consolidated financial statements.
PricewaterhouseCoopers LLP Minneapolis, Minnesota February 7, 2002
Schedule II--Valuation and Qualifying Accounts
Jostens, Inc. and subsidiaries
- -------- (1) Effects of reclassifying Jostens Recognition business as discontinued operations. (2) Uncollectible accounts written off, net of recoveries. (3) Returns processed against reserve.