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Table of Contents
 
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
 
FORM 10-Q
 
 
x    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
 
For the Quarterly Period Ended September 28, 2002
 
OR
 
¨    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
 
 
Commission file number 1-5064
 
 
Jostens, Inc.
(Exact name of Registrant as specified in its charter)
 
 
Minnesota
   
41-0343440
(State or other jurisdiction of incorporation or organization
   
(I.R.S. employer identification number)
 
5501 Norman Center Drive, Minneapolis, Minnesota
   
55437
(Address of principal executive offices)
   
(Zip code)
 
 
Registrant’s telephone number: (952) 830-3300
 
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports) and (2) has been subject to such filing requirement for the past 90 days. Yes [X]    No [    ]
 
 
On November 8, 2002 there were 8,955,741 shares of the Registrant’s common stock outstanding.
 

Table of Contents
 
Jostens, Inc. and Subsidiaries
 
 
Part I    Financial Information
         
Page
Item 1.
   
Financial Statements (Unaudited)
     
       
3
       
4
       
5
       
6
Item 2.
      
12
Item 3.
      
18
Item 4.
      
18
Part II    Other Information
Item 1.
      
19
Item 6.
      
19
       
20

2

Table of Contents
PART I    FINANCIAL INFORMATION
 
ITEM 1.    FINANCIAL STATEMENTS
 
JOSTENS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
 
    
Three months ended
     
Nine months ended
  
In thousands, except per-share data
   
September 28,
2002
     
September 29,
2001
     
September 28,
2002
     
September 29,
2001
  
Net sales
   
$
96,869
 
   
$
99,548
 
   
$
571,912
 
   
$
554,352
 
Cost of products sold
   
 
49,486
 
   
 
53,818
 
   
 
248,639
 
   
 
245,382
 
    
  
  
  
Gross profit
   
 
47,383
 
   
 
45,730
 
   
 
323,273
 
   
 
308,970
 
Selling and administrative expenses
   
 
59,334
 
   
 
58,298
 
   
 
226,825
 
   
 
220,846
 
Loss on redemption of senior subordinated notes payable
   
 
1,765
 
   
 
—
 
   
 
1,765
 
   
 
—
 
Special charges
   
 
—
 
   
 
—
 
   
 
—
 
   
 
2,138
 
    
  
  
  
Operating income (loss)
   
 
(13,716
)
   
 
(12,568
)
   
 
94,683
 
   
 
85,986
 
Net interest expense
   
 
16,124
 
   
 
17,520
 
   
 
50,830
 
   
 
58,442
 
    
  
  
  
Income (loss) from continuing operations before income taxes
   
 
(29,840
)
   
 
(30,088
)
   
 
43,853
 
   
 
27,544
 
Provision for (benefit from) income taxes
   
 
(12,359
)
   
 
(12,577
)
   
 
18,225
 
   
 
11,162
 
    
  
  
  
Income (loss) from continuing operations
   
 
(17,481
)
   
 
(17,511
)
   
 
25,628
 
   
 
16,382
 
Gain (loss) on discontinued operations, net of tax
   
 
—
 
   
 
(1,859
)
   
 
940
 
   
 
(5,540
)
    
  
  
  
Net income (loss)
   
 
(17,481
)
   
 
(19,370
)
   
 
26,568
 
   
 
10,842
 
Dividends and accretion on redeemable preferred shares
   
 
(2,987
)
   
 
(2,594
)
   
 
(8,653
)
   
 
(7,516
)
    
  
  
  
Net income (loss) available to common shareholders
   
$
(20,468
)
   
$
(21,964
)
   
$
17,915
 
   
$
3,326
 
    
  
  
  
Basic net income (loss) per common share
                                    
Income (loss) from continuing operations
   
$
(2.29
)
   
$
(2.24
)
   
$
1.90
 
   
$
0.99
 
Gain (loss) on discontinued operations
   
 
—  
 
   
 
(0.21
)
   
 
0.10
 
   
 
(0.62
)
    
  
  
  
    
$
(2.29
)
   
$
(2.45
)
   
$
2.00
 
   
$
0.37
 
    
  
  
  
Diluted net income (loss) per common share
                                    
Income (loss) from continuing operations
   
$
(2.29
)
   
$
(2.24
)
   
$
1.65
 
   
$
0.86
 
Gain (loss) on discontinued operations
   
 
—
 
   
 
(0.21
)
   
 
0.09
 
   
 
(0.54
)
    
  
  
  
    
$
(2.29
)
   
$
(2.45
)
   
$
1.74
 
   
$
0.32
 
    
  
  
  
Weighted average common shares outstanding
   
 
8,956
 
   
 
8,972
 
   
 
8,960
 
   
 
8,985
 
Dilutive effect of warrants and stock options
   
 
—
 
   
 
—
 
   
 
1,348
 
   
 
1,334
 
    
  
  
  
Weighted average common shares outstanding assuming dilution
   
 
8,956
 
   
 
8,972
 
   
 
10,308
 
   
 
10,319
 
    
  
  
  
 
The accompanying notes are an integral part of the unaudited condensed consolidated financial statements.

3

Table of Contents
JOSTENS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
 
    
(Unaudited)
         
In thousands, except per-share data
   
September 28,
2002
     
September 29,
2001
     
December 29,
2001
  
ASSETS
                           
Current assets
                           
Cash and cash equivalents
   
$
19,964
 
   
$
16,944
 
   
$
43,100
 
Accounts receivable, net of allowance of $3,759, $3,442 and $3,657
   
 
51,869
 
   
 
65,451
 
   
 
56,238
 
Inventories, net of reserve of $1,890, $2,891 and $2,089
   
 
59,532
 
   
 
65,262
 
   
 
70,514
 
Deferred income taxes
   
 
19,964
 
   
 
17,995
 
   
 
19,964
 
Salespersons overdrafts, net of allowance of $7,189, $5,557 and $6,897
   
 
31,921
 
   
 
33,618
 
   
 
28,037
 
Prepaid expenses and other current assets
   
 
3,899
 
   
 
5,205
 
   
 
7,723
 
Current assets of discontinued operations
   
 
—
 
   
 
—
 
   
 
7,029
 
    
  
  
Total current assets
   
 
187,149
 
   
 
204,475
 
   
 
232,605
 
Other assets
                           
Intangibles, net
   
 
14,863
 
   
 
16,763
 
   
 
14,260
 
Deferred financing costs, net
   
 
24,407
 
   
 
29,254
 
   
 
27,476
 
Other
   
 
35,541
 
   
 
31,642
 
   
 
32,075
 
    
  
  
Total other assets
   
 
74,811
 
   
 
77,659
 
   
 
73,811
 
Property and equipment
   
 
279,933
 
   
 
289,912
 
   
 
267,255
 
Less accumulated depreciation
   
 
(212,664
)
   
 
(216,184
)
   
 
(199,064
)
    
  
  
Property and equipment, net
   
 
67,269
 
   
 
73,728
 
   
 
68,191
 
    
  
  
    
$
329,229
 
   
$
355,862
 
   
$
374,607
 
    
  
  
LIABILITIES AND SHAREHOLDERS' DEFICIT
                           
Current liabilities
                           
Bank overdrafts
   
$
6,362
 
   
$
6,025
 
   
$
—
 
Short-term borrowings
   
 
50,200
 
   
 
42,900
 
   
 
—
 
Accounts payable
   
 
11,873
 
   
 
12,247
 
   
 
18,721
 
Accrued employee compensation and related taxes
   
 
27,060
 
   
 
24,164
 
   
 
27,392
 
Commissions payable
   
 
10,119
 
   
 
13,011
 
   
 
18,639
 
Customer deposits
   
 
39,691
 
   
 
41,963
 
   
 
126,400
 
Income taxes payable
   
 
24,457
 
   
 
23,050
 
   
 
16,940
 
Interest payable
   
 
16,791
 
   
 
16,122
 
   
 
10,567
 
Current portion of long-term debt
   
 
22,120
 
   
 
20,879
 
   
 
20,966
 
Other accrued liabilities
   
 
11,702
 
   
 
13,465
 
   
 
16,913
 
Current liabilities of discontinued operations
   
 
5,593
 
   
 
—
 
   
 
16,511
 
    
  
  
Total current liabilities
   
 
225,968
 
   
 
213,826
 
   
 
273,049
 
Long-term debt—less current maturities, net of unamortized original issue discount of $16,659, $18,428 and $18,143
   
 
603,573
 
   
 
655,702
 
   
 
626,017
 
Other noncurrent liabilities including deferred tax liabilities of $4,354, $4,369 and $3,472
   
 
14,342
 
   
 
18,736
 
   
 
15,628
 
    
  
  
Total liabilities
   
 
843,883
 
   
 
888,264
 
   
 
914,694
 
Commitments and contingencies
                           
Redeemable preferred shares $.01 par value (liquidation preference: $81,497; authorized: 308 shares; issued and outstanding: September 28, 2002—81; September 29, 2001—71; December 29, 2001—74
   
 
67,696
 
   
 
56,357
 
   
 
59,043
 
Preferred shares $.01 par value (authorized: 4,000 shares; issued and outstanding in the form of redeemable preferred shares listed above: September 28, 2002—81; September 29, 2001—71: December 29, 2001—74; undesignated: 3,919)
   
 
—
 
   
 
—
 
   
 
—
 
Shareholders' deficit
                           
Common shares (note 8)
   
 
1,003
 
   
 
1,006
 
   
 
1,006
 
Additional paid-in-capital—warrants
   
 
21,679
 
   
 
24,733
 
   
 
24,733
 
Officer notes receivable
   
 
(1,601
)
   
 
(1,407
)
   
 
(1,407
)
Accumulated deficit
   
 
(592,435
)
   
 
(601,530
)
   
 
(610,959
)
Accumulated other comprehensive loss
   
 
(10,996
)
   
 
(11,561
)
   
 
(12,503
)
    
  
  
Total shareholders' deficit
   
 
(582,350
)
   
 
(588,759
)
   
 
(599,130
)
    
  
  
    
$
329,229
 
   
$
355,862
 
   
$
374,607
 
    
  
  
 
The accompanying notes are an integral part of the consolidated financial statements.
 

4

Table of Contents
JOSTENS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
 
    
Nine months ended
  
In thousands
   
September 28,
2002
     
September 29,
2001
  
Operating activities
                  
Net income
   
$
26,568
 
   
$
10,842
 
Adjustments to reconcile net income to net cash provided by operating activities:
                  
Depreciation
   
 
17,322
 
   
 
19,630
 
Amortization of debt discount and deferred financing costs
   
 
5,128
 
   
 
4,897
 
Other amortization
   
 
1,648
 
   
 
2,453
 
Loss on redemption of senior subordinated notes payable
   
 
1,765
 
   
 
—
 
Other non-cash operating activities
   
 
(323
)
   
 
(2,327
)
Changes in assets and liabilities:
                  
Inventories
   
 
10,982
 
   
 
25,968
 
Salespersons overdrafts
   
 
(3,884
)
   
 
(6,391
)
Prepaid expenses and other current assets
   
 
3,993
 
   
 
2,949
 
Net pension assets
   
 
(4,916
)
   
 
(5,484
)
Accounts payable
   
 
(6,848
)
   
 
(12,183
)
Accrued employee compensation and related taxes
   
 
(332
)
   
 
(6,662
)
Commissions payable
   
 
(8,520
)
   
 
(6,884
)
Customer deposits
   
 
(86,709
)
   
 
(66,885
)
Income taxes payable
   
 
7,517
 
   
 
7,895
 
Interest payable
   
 
6,224
 
   
 
6,026
 
Other
   
 
(5,180
)
   
 
(11,631
)
    
  
Net cash used for operating activities
   
 
(35,565
)
   
 
(37,787
)
    
  
Investing activities
                  
Purchases of property and equipment
   
 
(16,793
)
   
 
(15,550
)
Other investing activities, net
   
 
96
 
   
 
4,180
 
    
  
Net cash used for investing activities
   
 
(16,697
)
   
 
(11,370
)
    
  
Financing activities
                  
Net increase in bank overdrafts
   
 
6,362
 
   
 
6,025
 
Net short-term borrowings
   
 
50,200
 
   
 
42,900
 
Reacquisition of warrants to purchase common stock
   
 
(2,177
)
   
 
—
 
Principal payments on long-term debt
   
 
(15,274
)
   
 
(8,991
)
Redemption of senior subordinated notes payable
   
 
(8,456
)
   
 
—
 
Other financing activities, net
   
 
(1,529
)
   
 
(385
)
    
  
Net cash provided by financing activities
   
 
29,126
 
   
 
39,549
 
    
  
Change in cash and cash equivalents
   
 
(23,136
)
   
 
(9,608
)
Cash and cash equivalents, beginning of period
   
 
43,100
 
   
 
26,552
 
    
  
Cash and cash equivalents, end of period
   
$
19,964
 
   
$
16,944
 
    
  
 
The accompanying notes are an integral part of the unaudited condensed consolidated financial statements.
 

5

Table of Contents
Notes to Condensed Consolidated Financial Statements (Unaudited)
Jostens, Inc. and subsidiaries
 
 
1.
 
Basis of Presentation
 
We prepared our accompanying unaudited condensed consolidated financial statements following the requirements of the Securities and Exchange (“SEC”) for interim reporting. As permitted under those rules, certain footnotes or other financial information normally required by accounting principles generally accepted in the United States of America can be condensed or omitted. Therefore, we suggest that these financial statements be read in conjunction with the consolidated financial statements and notes thereto included in our Form 10-K for the fiscal year ended December 29, 2001 (“2001 Form 10-K”). The condensed consolidated balance sheet data as of December 29, 2001 were derived from audited financial statements, but do not include all disclosures required by accounting principles generally accepted in the United States of America.
 
Revenues, expenses, cash flows, assets and liabilities can and do vary during each quarter of the year. Therefore, the results and trends in these interim financial statements may not be the same as those for the full year.
 
In our opinion, the accompanying unaudited condensed consolidated financial statements include all adjustments (consisting of normal recurring items) considered necessary to present fairly, when read in conjunction with the 2001 Form 10-K, our financial position, results of operations and cash flows for the periods presented. Certain balances have been reclassified to conform to the 2002 presentation.
 
2.
 
Earnings Per Common Share
 
Basic earnings 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 and options.
 
For the quarters ended September 28, 2002 and September 29, 2001, approximately 1.3 million shares of common stock equivalents were excluded in the computation of net earnings per share since they were antidilutive due to the net loss incurred in each period. For the nine-month period ended September 28, 2002, options to purchase 42,250 shares of common stock were outstanding, but were excluded from the computation of common share equivalents because they were antidilutive.
 
Diluted earnings per share for the nine-month period ended September 29, 2001 has been adjusted to reflect a change in the calculation of common stock equivalents.
 
3.
 
Comprehensive Income (Loss)
 
Comprehensive income (loss) and its components, net of tax, are as follows:
 
    
Three months ended
     
Nine months ended
  
In thousands
   
September 28, 2002
     
September 29, 2001
     
September 28, 2002
     
September 29, 2001
  
Net income (loss)
   
$
(17,481
)
   
$
(19,370
)
   
$
26,568
 
   
$
10,842
 
Change in cumulative translation adjustment
   
 
(1,259
)
   
 
(1,166
)
   
 
(10
)
   
 
(1,488
)
Transition adjustment relating to adoption of SFAS 133
   
 
—
 
   
 
—
 
   
 
—
 
   
 
(1,821
)
Change in fair value of interest rate swap agreement
   
 
424
 
   
 
(1,129
)
   
 
1,348
 
   
 
(2,061
)
Change in fair value of foreign currency hedge
   
 
(60
)
   
 
—
 
   
 
169
 
   
 
—
 
    
  
  
  
    
 
(895
)
   
 
(2,295
)
   
 
1,507
 
   
 
(5,370
)
    
  
  
  
Comprehensive income (loss)
   
$
(18,376
)
   
$
(21,665
)
   
$
28,075
 
   
$
5,472
 
    
  
  
  

6

Table of Contents
Notes to Condensed Consolidated Financial Statements (Unaudited)
Jostens, Inc. and subsidiaries
 
 
The following amounts were included in accumulated other comprehensive loss as of September 28, 2002:
 
In thousands
   
Foreign
currency
translation
     
Minimum pension
liability
     
Fair
value
of interest rate swap
     
Fair value
of foreign
currency
hedge
   
Accumulated
other
comprehensive loss
  
Balance at December 29, 2001
   
$
(6,745
)
   
$
(2,371
)
   
$
(3,387
)
   
$
—
   
$
(12,503
)
Current period change
   
 
(10
)
   
 
—
 
   
 
1,348
 
   
 
169
   
 
1,507
 
    
  
  
  
  
Balance at September 28, 2002
   
$
(6,755
)
   
$
(2,371
)
   
$
(2,039
)
   
$
169
   
$
(10,996
)
    
  
  
  
  
 
4.
 
Derivatives and Hedging Activities
 
We use a floating-to-fixed cash flow interest rate swap to modify risk from interest rate fluctuations in our underlying debt. Our senior secured credit facility bears a variable interest rate predominantly linked to LIBOR. The interest rate provided by the swap agreement is fixed at 7.0% as opposed to LIBOR. Notional amounts outstanding as of September 28, 2002, September 29, 2001 and December 29, 2001 were $95.0 million, $120.8 million and $100.0 million, respectively. Substantially all aspects of the swap agreement expire June 30, 2003. We expect that pre-tax costs totaling $3.3 million, which are recorded in “accumulated other comprehensive loss” (AOCL) at September 28, 2002, and represent the difference in fair value between the fixed rate of the swap agreement and the variable rate of the term note, will be recognized within the next twelve months as part of interest expense. The fair value of the interest rate swap is based on current settlement values and as of September 28, 2002, September 29, 2001 and December 29, 2001 was a non-cash liability of $3.3 million ($2.0 million net of tax), $6.4 million ($3.9 million net of tax) and $5.6 million ($3.4 million net of tax), respectively, and is recorded in “other noncurrent liabilities” in our Condensed Consolidated Balance Sheet. Based on the critical terms of the interest rate swap and the hedged debt, there is no ineffectiveness for this hedge.
 
The purpose of our foreign currency hedging activities is to protect us from the risk that purchases denominated in foreign currency will be adversely affected by changes in foreign currency rates. We enter into forward exchange contracts to hedge forecasted cash flows denominated in foreign currencies (principally euro). The effective portion of the changes in fair value for these contracts, which have been designated as cash flow hedges, is reported in AOCL and reclassified into earnings in the same financial statement line item and in the same period or periods during which the hedged transaction affects earnings. Any ineffective portion of the change in fair value of these instruments is immediately recognized in earnings. The amount of contracts outstanding at September 28, 2002 was $1.8 million. There were no forward exchange contracts outstanding at September 29, 2001 and December 29, 2001. These contracts will mature over the remainder of the current fiscal year, the period in which all amounts included in AOCL will be reclassified into earnings.
 
5.
 
Inventories
 
Inventories, net are comprised of the following:
 
In thousands
   
September 28,
2002
   
September 29,
2001
   
December 29,
2001
Raw material and supplies
   
$
13,109
   
$
14,753
   
$
10,302
Work-in-process
   
 
19,107
   
 
19,495
   
 
28,447
Finished goods
   
 
27,316
   
 
31,014
   
 
31,765
    
  
  
Total inventories, net
   
$
59,532
   
$
65,262
   
$
70,514
    
  
  
 
Net inventories as of September 29, 2001 included $7.0 million related to discontinued operations.
 

7

Table of Contents
Notes to Condensed Consolidated Financial Statements (Unaudited)
Jostens, Inc. and subsidiaries
 
 
6.
 
Goodwill and Other Intangible Assets
 
On December 30, 2001, the beginning of our fiscal year, we adopted Statement of Financial Accounting Standards (SFAS) No. 142, “Goodwill and Other Intangible Assets.” SFAS 142 addresses the accounting and financial reporting for acquired goodwill and other intangible assets. Under the new statement, goodwill and intangible assets with indefinite lives are no longer amortized, but are subject to impairment testing on at least an annual basis. Other than goodwill, we have no intangible assets with indefinite useful lives. Adoption of this statement resulted in no goodwill impairment losses and had no impact on our financial position as of December 30, 2001. Had SFAS 142 been effective at the beginning of 2001, the non-amortization provisions would have increased net income (loss) by $0.3 million (or $.03 per share) and $0.8 million (or $.08 per share) for the three and nine months ended September 29, 2001 and would have increased income (loss) from continuing operations by $0.1 million (or $.01 per share) and $0.4 million (or $.04 per share) for the same periods. As of September 28, 2002, the net carrying amount of goodwill was $14.4 million and intangible pension assets totaled $0.5 million.
 
7.
 
Borrowings
 
Long-term debt consists of the following:
 
In thousands
   
September 28,
2002
   
September 29,
2001
   
December 29,
2001
Borrowings under senior secured credit facility:
                     
Term loan A, variable rate, 4.06 percent at September 28, 2002, 5.09 percent at September 29, 2001 and 4.63 percent at December 29, 2001, with semi-annual principal and interest payments through May 2006
   
$
94,852
   
$
128,957
   
$
108,187
Term loan B, variable rate, 6.09 percent at September 29, 2001 and 5.38 percent at December 29, 2001
   
 
—
   
 
341,052
   
 
331,939
Term loan C, variable rate, 4.56 percent at September 28, 2002, with semi-annual principal and interest payments through December 2009
   
 
330,000
   
 
—
   
 
—
Senior subordinated notes, 12.75 percent fixed rate, net of discounts of $16,659 at September 28, 2002, $18,428 at September 29, 2001 and $18,143 at December 29, 2001, with semi-annual interest payments of $14,334, principal due and payable at maturity—May 2010
   
 
200,841
   
 
206,572
   
 
206,857
    
  
  
    
 
625,693
   
 
676,581
   
 
646,983
Less current portion
   
 
22,120
   
 
20,879
   
 
20,966
    
  
  
    
$
603,573
   
$
655,702
   
$
626,017
    
  
  
 
On July 31, 2002, we amended and restated our senior secured credit facility to provide for the replacement of Term Loan B with a new Term Loan C in the amount of $330.0 million. Term Loan C is payable in semi-annual installments of $1.0 million through June 30, 2008 followed by semi-annual installments of $106.0 million through December 31, 2009. The initial interest margin on Term Loan C is 75 basis points less than Term Loan B resulting in an estimated $2.5 million reduction of annual interest expense on a pre-tax basis. Capitalized loan fees related to Term Loan B will continue to be amortized over the life of Term Loan C. Fees of $1.3 million related directly to the amendment have been capitalized and will also be amortized over the life of Term Loan C.
 
During the quarter ended September 28, 2002, we voluntarily redeemed $7.5 million principal amount of our 12.75% senior subordinated notes due May 2010. As a result of redeeming the senior subordinated notes, we recognized a loss of $1.8 million consisting of a $0.8 million write-off of unamortized original issuance discount and deferred financing costs and a $1.0 million premium paid on redemption of the notes.
 
We have a $150.0 million 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

8

Table of Contents
Notes to Condensed Consolidated Financial Statements (Unaudited)
Jostens, Inc. and subsidiaries
 
 
alternative base rate is based upon the prime rate. As of September 28, 2002, there was $50.2 million outstanding in the form of short-term borrowings and an additional $7.8 million outstanding in the form of letters of credit leaving $92.0 million available under this facility.
 
8.
 
Shareholders’ Deficit
 
Our 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.
 
The par value and number of authorized, issued and outstanding shares for each class of common stock is set forth below:
 
                
Issued and Outstanding Shares
In thousands, except par value data
   
Par Value
   
Authorized
Shares
     
September 28,
2002
     
September 29,
2001
     
December 29,
2001
Class A
   
$.33 1/3
   
4,200
     
2,825
     
2,834
     
2,834
Class B
   
$.01
   
5,300
     
5,300
     
5,300
     
5,300
Class C
   
$.01
   
2,500
     
811
     
811
     
811
Class D
   
$.01
   
20
     
20
     
20
     
20
Class E
   
$.01
   
1,900
     
—
     
—
     
—
Undesignated
   
$.01
   
12,020
     
—
     
—
     
—
         
    
    
    
         
25,940
     
8,956
     
8,965
     
8,965
         
    
    
    
 
During the quarter ended September 28, 2002, we reacquired 64,015 warrants to purchase 120,934 actual equivalent shares of common stock for total consideration paid of $2.2 million. The detachable warrants were issued with our 12.75% senior subordinated notes due May 2010 at an aggregate price of $3.1 million. The difference of $0.9 million between the issue and reacquisition price of the warrants has been included as a component of shareholders’ deficit as of September 28, 2002.
 
9.
 
2001 Special Charges
 
Accrued special charges of $0.2 million, $0.3 million and $0.2 million at September 28, 2002, September 29, 2001 and December 29, 2001, respectively, are included in “other current liabilities” in our Condensed Consolidated Balance Sheets. 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 will continue to be paid out over the next nine months as specified under the separation agreement.
 
10.
 
Discontinued Operations
 
Discontinued operations represents the results of our Recognition business, which we exited on December 3, 2001.

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Table of Contents
Notes to Condensed Consolidated Financial Statements (Unaudited)
Jostens, Inc. and subsidiaries
 
 
Revenue and loss from discontinued operations for the three and nine-month periods ended September 29, 2001 were as follows:
 
      
Three months ended
       
Nine months ended
  
In thousands
     
September 29,
2001
       
September 29,
2001
  
Revenue from external customers
     
$
14,042
 
     
$
46,982
 
      
    
Pre-tax loss from operations of discontinued operations before measurement date
     
$
(3,023
)
     
$
(9,008
)
Income tax benefit
     
 
1,164
 
     
 
3,468
 
      
    
Net loss from discontinued operations
     
$
(1,859
)
     
$
(5,540
)
      
    
 
In conjunction with exiting the Recognition business, we recorded a $27.4 million pre-tax loss on disposal for the discontinued segment in the fourth quarter of 2001. The pre-tax loss on disposal consisted of a non-cash charge of $11.1 million to write off certain net assets of the Recognition business plus a $16.3 million charge for accrued costs related to exiting the Recognition business.
 
In the second quarter of 2002, we reversed $1.4 million of these charges based on our revised estimates for employee separation costs and phase-out costs. Of the total adjustment, $0.5 million resulted from modifying our anticipated workforce reduction from 150 to 130 full-time positions and $0.9 million resulted from lower information systems, customer service and internal support costs than originally anticipated. In addition, we reversed $0.2 million in other liabilities for a total pre-tax gain on discontinued operations of $1.6 million ($0.9 million, net of tax). Components of the accrued disposal costs are as follows:
 
                       
Utilization
         
In thousands
   
Initial
charge
   
Prior
accrual
   
Net
adjustments
in 2002
       
Nine months
ended
September 28, 2002
       
Balance
September 28, 2002
Employee separation benefits and other related costs
   
$
6,164
   
$
—
   
$
(550
)
     
$
(4,992
)
     
$
622
Phase-out costs of exiting the Recognition business
   
 
4,255
   
 
—
   
 
(874
)
     
 
(2,711
)
     
 
670
Salesperson transition benefits
   
 
2,855
   
 
1,236
   
 
—
 
     
 
(761
)
     
 
3,330
Other costs related to exiting the Recognition business
   
 
3,018
   
 
1,434
   
 
—
 
     
 
(3,477
)
     
 
975
    
  
  
    
    
    
$
16,292
   
$
2,670
   
$
(1,424
)
     
$
(11,941
)
     
$
5,597
    
  
  
    
    
 
With the exception of certain separation benefits and certain transition benefits, we anticipate the remaining payments will occur in 2002. Separation benefits will continue to be paid out over the benefit period as specified under our severance plan and transition benefits will continue to be paid through 2004.
 
Assets and liabilities of the discontinued business included in our Condensed Consolidated Balance Sheets were as follows:
 
In thousands
     
September 28,
2002
   
September 29,
2001
   
December 29,
2001
Assets
                       
Accounts receivable
     
$
—
   
$
12,176
   
$
—
Inventories
     
 
—
   
 
6,969
   
 
—
Salespersons overdrafts
     
 
—
   
 
2,421
   
 
—
Current assets of discontinued operations
     
 
—
   
 
—
   
 
7,029
Intangibles
     
 
—
   
 
2,432
   
 
—
Property and equipment, net
     
 
—
   
 
1,829
   
 
—
Other
     
 
—
   
 
547
   
 
—
      
  
  
      
$
—
   
$
26,374
   
$
7,029
      
  
  
Liabilities
                       
Accounts payable
     
$
—
   
$
1,838
   
$
—
Accrued employee compensation and related taxes
     
 
—
   
 
1,530
   
 
—
Commissions payable
     
 
—
   
 
2,623
   
 
—
Other
     
 
—
   
 
2,405
   
 
—
Current liabilities of discontinued operations
     
 
5,593
   
 
—
   
 
16,511
      
  
  
      
$
5,593
   
$
8,396
   
$
16,511
      
  
  

10

Table of Contents
 
Notes to Condensed Consolidated Financial Statements (Unaudited)
Jostens, Inc. and subsidiaries
 
 
11.
 
New Accounting Standards
 
SFAS 143—Accounting for Asset Retirement Obligations
In June 2001, the Financial Accounting Standards Board (FASB) issued SFAS 143, which 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.
 
SFAS 145—Rescission of FASB Statements No. 4, 44 and 64, Amendment of FASB Statement No. 13, and Technical Corrections
In April 2002, the FASB issued SFAS 145, which rescinds SFAS 4, “Reporting Gains and Losses from Extinguishments of Debt,” SFAS 44, “Accounting for Intangible Assets of Motor Carriers” and SFAS 64, “Extinguishments of Debt Made to Satisfy Sinking-Fund Requirements” and amends SFAS 13, “Accounting for Leases.” As a result of rescinding SFAS 4 and SFAS 64, the criteria in 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,” will be used to classify gains and losses from extinguishments of debt. SFAS 145 also amends SFAS 13 to require that certain lease modifications that have economic effects similar to sale-leaseback transactions be accounted for in the same manner as sale-leaseback transactions. During 2002, we adopted the provisions of SFAS 145. Accordingly, the $1.8 million loss on redemption of our 12.75% senior subordinated notes due May 2010 has been classified as an operating expense as it does not meet the criteria in APB 30 to be classified as an extraordinary loss.
 

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Table of Contents
ITEM 2.      MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 
Our disclosure and analysis in this report may contain some “forward-looking statements.” Forward-looking statements give our current expectations or forecasts of future events. Forward-looking statements generally can be identified by the use of forward-looking terminology such as “may,” “will,” “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;
 
 
·
 
general economic, business and market trends and events;
 
 
·
 
litigation cases, if decided against us, may adversely affect our financial results; and
 
 
·
 
environmental regulations that could impose substantial costs upon us 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.
 
Except to the extent required by law, we undertake no obligation to publicly update or revise any forward-looking statements.

12

Table of Contents
RESULTS OF OPERATIONS
 
The following table sets forth selected information from our Condensed Consolidated Statements of Operations expressed as a percentage of net sales.
 
    
Three months ended
                   
Nine months ended
                
Dollars in thousands
   
September 28,
2002
     
September 29,
2001
     
$ Change
     
% Change
     
September 28,
2002
     
September 29,
2001
     
$ Change
     
% Change
  
Net sales
   
$
96,869
 
   
$
99,548
 
   
$
(2,679
)
   
(2.7
%)
   
$
571,912
 
   
$
554,352
 
   
$
17,560
 
   
3.2
%
        % of net sales
   
 
100.0
%
   
 
100.0
%
                   
 
100.0
%
   
 
100.0
%
                
Cost of products sold
   
 
49,486
 
   
 
53,818
 
   
 
(4,332
)
   
(8.0
%)
   
 
248,639
 
   
 
245,382
 
   
 
3,257
 
   
1.3
%
        % of net sales
   
 
51.1
%
   
 
54.1
%
                   
 
43.5
%
   
 
44.3
%
                
    
  
  
  
  
  
  
  
Gross profit
   
 
47,383
 
   
 
45,730
 
   
 
1,653
 
   
3.6
%
   
 
323,273
 
   
 
308,970
 
   
 
14,303
 
   
4.6
%
        % of net sales
   
 
48.9
%
   
 
45.9
%
                   
 
56.5
%
   
 
55.7
%
                
Selling and administrative expenses
   
 
59,334
 
   
 
58,298
 
   
 
1,036
 
   
1.8
%
   
 
226,825
 
   
 
220,846
 
   
 
5,979
 
   
2.7
%
        % of net sales
   
 
61.3
%
   
 
58.6
%
                   
 
39.7
%
   
 
39.8
%
                
Loss on redemption of senior subordinated notes payable
   
 
1,765
 
   
 
—  
 
   
 
1,765
 
   
NM
 
   
 
1,765
 
   
 
—  
 
   
 
1,765
 
   
NM
 
Special charges
   
 
—  
 
   
 
—  
 
   
 
—
 
   
0.0
%
   
 
—  
 
   
 
2,138
 
   
 
(2,138
)
   
NM
 
    
  
  
  
  
  
  
  
Operating income (loss)
   
 
(13,716
)
   
 
(12,568
)
   
 
(1,148
)
   
(9.1
%)
   
 
94,683
 
   
 
85,986
 
   
 
8,697
 
   
10.1
%
        % of net sales
   
 
-14.2
%
   
 
-12.6
%
                   
 
16.6
%
   
 
15.5
%
                
Net interest expense
   
 
16,124
 
   
 
17,520
 
   
 
(1,396
)
   
(8.0
%)
   
 
50,830
 
   
 
58,442
 
   
 
(7,612
)
   
(13.0
%)
        % of net sales
   
 
16.6
%
   
 
17.6
%
                   
 
8.9
%
   
 
10.5
%
                
    
  
  
  
  
  
  
  
Income (loss) from continuing operations before income taxes
   
 
(29,840
)
   
 
(30,088
)
   
 
248
 
   
0.8
%
   
 
43,853
 
   
 
27,544
 
   
 
16,309
 
   
59.2
%
        % of net sales
   
 
-30.8
%
   
 
-30.2
%
                   
 
7.7
%
   
 
5.0
%
                
Provision for (benefit from) income taxes
   
 
(12,359
)
   
 
(12,577
)
   
 
218
 
   
1.7
%
   
 
18,225
 
   
 
11,162
 
   
 
7,063
 
   
63.3
%
        % of net sales
   
 
-12.8
%
   
 
-12.6
%
                   
 
3.2
%
   
 
2.0
%
                
    
  
  
  
  
  
  
  
Income (loss) from continuing operations
   
 
(17,481
)
   
 
(17,511
)
   
 
30
 
   
0.2
%
   
 
25,628
 
   
 
16,382
 
   
 
9,246
 
   
56.4
%
        % of net sales
   
 
-18.0
%
   
 
-17.6
%
                   
 
4.5
%
   
 
3.0
%
                
Gain (loss) on discontinued operations, net of tax
   
 
—
 
   
 
(1,859
)
   
 
1,859
 
   
NM
 
   
 
940
 
   
 
(5,540
)
   
 
6,480
 
   
NM
 
        % of net sales
   
 
0.0
%
   
 
-1.9
%
                   
 
0.2
%
   
 
-1.0
%
                
    
  
  
  
  
  
  
  
Net income (loss)
   
$
(17,481
)
   
$
(19,370
)
   
$
1,889
 
   
9.8
%
   
$
26,568
 
   
$
10,842
 
   
$
15,726
 
   
145.0
%
    
  
  
  
  
  
  
  
        % of net sales
   
 
-18.0
%
   
 
-19.5
%
                   
 
4.6
%
   
 
2.0
%
                
Percentages in this table may reflect rounding adjustments.
NM = percentage not meaningful
 
We experience seasonality that corresponds to the North American school year. As a result, our third quarter normally reflects modest sales, which contribute to exaggerated fluctuations in operating activities.
 
Three Months Ended September 28, 2002 Compared to the Three Months Ended September 29, 2001
 
Net Sales
Net sales decreased $2.6 million, or 2.7%, to $96.9 million for the three months ended September 28, 2002 from $99.5 million for the same period last year. The decrease in net sales resulted from declines in volume/mix of approximately 6.1% offset by price increases averaging approximately 3.4%. The decrease in net sales was primarily due to:
 
 
·
 
decreased volume in the high school jewelry market due to timing of delivery dates compared to last year;
 
 
·
 
decreased volume in the college jewelry and graduation product lines as a result of the loss of a large customer; and
 
 
·
 
decreased volume in graduation announcements due to lower dollars spent per student.

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Table of Contents
 
These decreases were partially offset by price increases primarily in our printing and jewelry product lines and increased volume in our photography line primarily due to earlier shipments compared to last year when all major air carriers were grounded at the end of September 2001 creating processing and shipping delays at our plant in Canada .
 
Gross Margin
Gross profit increased $1.7 million, or 3.6%, to $47.4 million for the three months ended September 28, 2002 from $45.7 million for the same prior year period. As a percentage of sales, gross margin increased 3.0 percentage points to 48.9% for the current three-month period from 45.9% for the same period last year. The increase in gross margin can be attributed to:
 
 
·
 
price increases primarily in the printing and jewelry product lines;
 
 
·
 
continued improvement in company-wide plant efficiencies, particularly in printing production; and
 
 
·
 
efficiencies resulting from increased volume for the quarter in our photography line primarily due to earlier shipments compared to last year.
 
These increases were partially offset by decreased volume in the high school jewelry market mostly due to timing of delivery dates compared to last year.
 
Selling and Administrative Expenses
Selling and administrative expenses increased $1.0 million, or 1.8%, to $59.3 million for the three months ended September 28, 2002 from $58.3 million for the same prior year period. As a percentage of sales, selling and administrative expenses increased 2.7 percentage points to 61.3% for the current three-month period from 58.6% for the same period last year. The $1.0 million increase is primarily due to higher spending on information systems related to the upgrade of our transaction processing system and application development in one of our product lines.
 
Loss on Redemption of Senior Subordinated Notes Payable
During the quarter ended September 29, 2002, we voluntarily redeemed $7.5 million principal amount of our 12.75% senior subordinated notes due May 2010. As a result of redeeming the senior subordinated notes, we recognized a loss of $1.8 million consisting of a $0.8 million write-off of unamortized original issuance discount and deferred financing costs and a $1.0 million premium paid on redemption of the notes.
 
Net Interest Expense
Net interest expense decreased $1.4 million to $16.1 million for the three months ended September 28, 2002 as compared to $17.5 million for the three months ended September 29, 2001. The decrease was due to a lower average outstanding balance and a lower average interest rate.
 
Provision for Income Taxes
Our effective tax rate for continuing operations was 41.5% for the three months ended September 28, 2002 compared to 41.8% for the same period last year.
 
Loss From Continuing Operations
Loss from continuing operations remained consistent at $17.5 million for the three months ended September 28, 2002 compared to the same prior year period. In summary, the results of continuing operations were impacted by decreased net sales and slightly higher spending offset by improved gross profit and lower net interest expense.
 
Discontinued Operations
Loss from discontinued operations was $1.9 million for the three months ended September 29, 2001. This represents the results of our Recognition business, which we exited in December 2001.

14

Table of Contents
Nine Months Ended September 28, 2002 Compared to the Nine Months Ended September 29, 2001
 
Net Sales
Net sales increased $17.5 million, or 3.2%, to $571.9 million for the nine months ended September 28, 2002 from $554.4 million for the same period last year. The increase in net sales resulted from price increases averaging approximately 2.8% and slight volume/mix increases. The increase in net sales was primarily due to:
 
 
·
 
price increases in the printing, jewelry and graduation product lines;
 
 
·
 
increased volume as a result of net account growth across all product lines; and
 
 
·
 
increased volume for yearbook printing due to an increase in the number of pages published per yearbook including an increase in the number of color pages.
 
These increases were partially offset by the following:
 
 
·
 
decreased volume in the college jewelry and graduation product lines as a result of the loss of a large customer;
 
 
·
 
volume decreases in high school jewelry due to a slight decline in the number of ring units sold per school;
 
 
·
 
volume decreases in graduation announcements due to lower dollars spent per student; and
 
 
·
 
decreased volume in commercial printing.
 
Gross Margin
Gross profit increased $14.3 million, or 4.6%, to $323.3 million for the nine months ended September 28, 2002 from $309.0 million for the same prior year period. As a percentage of sales, gross margin increased 0.8 percentage points to 56.5% for the current nine-month period from 55.7% for the same period last year. The increase in gross margin can be attributed to:
 
 
·
 
price increases in the printing, jewelry and graduation product lines;
 
 
·
 
continued improvement in company-wide plant efficiencies; and
 
 
·
 
a favorable sales mix of our printing products resulting in increased higher margin yearbook volume and decreased lower margin commercial printing volume.
 
Selling and Administrative Expenses
Selling and administrative expenses increased $6.0 million, or 2.7%, to $226.8 million for the nine months ended September 28, 2002 from $220.8 million for the same prior year period. As a percentage of sales, selling and administrative expenses remained relatively flat at 39.7% for the current nine-month period compared to 39.8% for the same period last year. The $6.0 million increase is primarily due to:
 
 
·
 
higher commissions and general and administrative expenses, both as a result of increased sales and
 
 
·
 
higher spending on information systems related to the upgrade of our transaction processing system and application development in one of our product lines.
 
Loss on Redemption of Senior Subordinated Notes Payable
As a result of redeeming $7.5 million principal amount of our 12.75% senior subordinated notes due May 2010, we recognized a loss of $1.8 million consisting of a $0.8 million write-off of unamortized original issuance discount and deferred financing costs and a $1.0 million premium paid on redemption of the notes.
 
Net Interest Expense
Net interest expense decreased $7.6 million to $50.8 million for the nine months ended September 28, 2002 as compared to $58.4 million for the nine months ended September 29, 2001. Similar to the quarter activity, the decrease was due to a lower average outstanding balance and a lower average interest rate.

15

Table of Contents
 
Provision for Income Taxes
Our effective tax rate for continuing operations was 41.5% for the nine months ended September 28, 2002 compared to 40.5% for the same period last year.
 
Income From Continuing Operations
Income from continuing operations increased $9.2 million, or 56.4% to $25.6 million for the nine months ended September 28, 2002 from $16.4 million for the same prior year period as a result of increased net sales, relatively flat spending and lower net interest expense.
 
Discontinued Operations
Loss from discontinued operations was $5.5 million for the nine months ended September 29, 2001 and represents the results of our Recognition business, which we exited in December 2001. Income from discontinued operations of $0.9 million for the nine months ended September 28, 2002 represents the after-tax effect of a $1.6 million reversal of accrued disposal costs, which was recorded in the second quarter of 2002.
 
In conjunction with exiting the Recognition business, we recorded a $27.4 million pre-tax loss on disposal for the discontinued segment in the fourth quarter of 2001. The pre-tax loss on disposal consisted of a non-cash charge of $11.1 million to write off certain net assets of the Recognition business plus a $16.3 million charge for accrued costs related to exiting the Recognition business.
 
In the second quarter of 2002, we reversed $1.4 million of these charges based on our revised estimates for employee separation costs and phase-out costs. Of the total adjustment, $0.5 million resulted from modifying our anticipated workforce reduction from 150 to 130 full-time positions and $0.9 million resulted from lower information systems, customer service and internal support costs than originally anticipated. In addition, we reversed $0.2 million in other liabilities for a total pre-tax gain on discontinued operations of $1.6 million ($0.9 million, net of tax). Components of the accrued disposal costs are as follows:
 
                       
Utilization
         
In thousands
   
Initial
charge
   
Prior
accrual
   
Net
adjustments
in 2002
       
Nine months
ended
September 28, 2002
       
Balance
September 28, 2002
Employee separation benefits and other related costs
   
$
6,164
   
$
—
   
$
(550
)
     
$
(4,992
)
     
$
622
Phase-out costs of exiting the Recognition business
   
 
4,255
   
 
—
   
 
(874
)
     
 
(2,711
)
     
 
670
Salesperson transition benefits
   
 
2,855
   
 
1,236
   
 
—
 
     
 
(761
)
     
 
3,330
Other costs related to exiting the Recognition business
   
 
3,018
   
 
1,434
   
 
—
 
     
 
(3,477
)
     
 
975
    
  
  
    
    
    
$
16,292
   
$
2,670
   
$
(1,424
)
     
$
(11,941
)
     
$
5,597
    
  
  
    
    
 
With the exception of certain separation benefits and certain transition benefits, we anticipate the remaining payments will occur in 2002. Separation benefits will continue to be paid out over the benefit period as specified under our severance plan and transition benefits will continue to be paid through 2004.
 
LIQUIDITY AND CAPITAL RESOURCES
 
Our primary cash needs are for debt service obligations, capital expenditures, working capital and general corporate purposes. As of September 28, 2002, we had cash and cash equivalents of $20.0 million. Our free cash flow for the nine months ended September 29, 2002 was negative $52.3 million compared to negative $49.2 million for the same period last year. Free cash flow excludes the effects of cash flow from financing activities. During our third quarter, we typically spend a considerable amount of time on non-revenue generating activities in preparation for the upcoming school year. As a result, our third quarter normally reflects modest sales and significant cash usage.
 
Operating Activities
Operating activities used cash of $35.6 million during the nine months ended September 28, 2002 compared to $37.8 million for the same prior year period. The $2.2 million decreased use of funds is primarily due to the results of our continuing operations which generated a $9.2 million improvement in earnings offset by a

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$7.1 million decrease in operating cash flow related to changes in working capital and certain non-current assets and liabilities of which the most significant fluctuation is due to the timing of customer deposits on yearbooks. In addition operating activities were impacted by the $1.8 million loss on redemption of the senior subordinated notes offset by a $1.7 million decrease in depreciation and amortization related to continuing operations.
 
During October 2002, we agreed to certain adjustments proposed by the Internal Revenue Service in connection with its audit of our federal income tax returns filed for years 1996 through 1998. As a result of the audit, we agreed to pay additional federal taxes of $11.3 million. Combined with additional state taxes and interest charges, our estimated liability related to these adjustments is approximately $18.6 million. This amount had previously been accrued and is included in “income taxes payable” in our Condensed Consolidated Balance Sheet as of September 28, 2002. We expect to pay the total amount owed pertaining to these adjustments prior to the end of 2002. In addition, we intend to file an appeal with the Internal Revenue Service concerning a further $8.0 million proposed adjustment. The appeal process may take from twelve to twenty-four months to complete and we believe that we are adequately reserved to cover the remaining issue.
 
Investing Activities
Capital expenditures for the nine months ended September 28, 2002 were $16.8 million compared to $15.6 million for the same period last year. The increase can be attributed to expenditures incurred in connection with the expansion of our color printing capacity and the upgrade of our transaction processing system including application development in one of our major product lines.
 
Financing Activities
Net cash provided by financing activities consists primarily of short-term borrowings on our revolving credit facility offset by principal payments on our long-term debt. During the nine months ended September 28, 2002, we made scheduled principal payments of $10.3 million, voluntarily prepaid an additional $5.0 million of principal on our senior secured credit facility and voluntarily redeemed $7.5 million principal amount of our 12.75% senior subordinated notes due May 2010 for $8.5 million and other non-cash costs.
 
We have a $150.0 million revolving credit facility that expires on May 31, 2006. As of September 28, 2002, there was $50.2 million outstanding in the form of short-term borrowings and an additional $7.8 million outstanding in the form of letters of credit leaving $92.0 million available under this facility. Seasonal short-term borrowings are normally paid in full by the end of the fiscal year.
 
On July 31, 2002 we amended and restated our senior secured credit facility to provide for the replacement of Term Loan B with a new Term Loan C in the amount of $330.0 million. Term Loan C is payable in semi-annual installments of $1.0 million through June 30, 2008 followed by semi-annual installments of $106.0 million through December 31, 2009. The initial interest margin on Term Loan C is 75 basis points less than Term Loan B resulting in an estimated $2.5 million reduction of annual interest expense on a pre-tax basis. Capitalized loan fees related to Term Loan B will continue to be amortized over the life of Term Loan C. Fees of $1.3 million related directly to the amendment have been capitalized and will also be amortized over the life of Term Loan C.
 
During the quarter ended September 28, 2002, we reacquired 64,015 warrants to purchase 120,934 equivalent shares of common stock for total consideration paid of $2.2 million. The detachable warrants were issued with our 12.75% senior subordinated notes due May 2010. We may, from time to time, purchase outstanding debt and equity securities for cash in private transactions, in the market or otherwise, subject to compliance with our debt and preferred stock commitments.
 
NEW ACCOUNTING STANDARDS
 
SFAS 143—Accounting for Asset Retirement Obligations
In June 2001, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 143, which 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

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SFAS 143 will not have a material impact, if any, on our consolidated results of operations, cash flows and financial position.
 
SFAS 145—Rescission of FASB Statements No. 4, 44 and 64, Amendment of FASB Statement No. 13, and Technical Corrections
In April 2002, the FASB issued SFAS 145, which rescinds SFAS 4, “Reporting Gains and Losses from Extinguishments of Debt,” SFAS 44, “Accounting for Intangible Assets of Motor Carriers” and SFAS 64, “Extinguishments of Debt Made to Satisfy Sinking-Fund Requirements” and amends SFAS 13, “Accounting for Leases.” As a result of rescinding SFAS 4 and SFAS 64, the criteria in 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,” will be used to classify gains and losses from extinguishments of debt. SFAS 145 also amends SFAS 13 to require that certain lease modifications that have economic effects similar to sale-leaseback transactions be accounted for in the same manner as sale-leaseback transactions. During 2002, we adopted the provisions of SFAS 145. Accordingly, the $1.8 million loss on redemption of our 12.75% senior subordinated notes due May 2010 has been classified as an operating expense as it does not meet the criteria in APB 30 to be classified as an extraordinary loss.
 
ITEM 3.    QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
 
Commodity Price Risk
We are subject to market risk associated with changes in the price of gold. To mitigate our commodity price risk, we enter into gold forward contracts based upon the estimated ounces needed to satisfy projected customer requirements. We periodically prepare a sensitivity analysis to estimate our exposure to market risk on our open gold forward purchase contracts. The fair market value of our open gold forward contracts as of September 28, 2002 was $28.1 million and was calculated by valuing each contract at quoted futures prices. The market risk associated with these contracts was $2.8 million and was estimated as the potential loss in fair value resulting from a hypothetical 10% adverse change in such prices.
 
There have been no material changes in our other exposures to market risk during the nine months ended September 28, 2002. For additional information, refer to Item 7A of our 2001 Form 10-K.
 
ITEM 4.    CONTROLS AND PROCEDURES
 
Based on an evaluation of our disclosure controls and procedures conducted within 90 days of the date of filing this report on  
Form 10-Q, our Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures (as defined in Rules 13a-14(c) and 15d-14(c) promulgated under the Securities Exchange Act of 1934) are effective.
 
There were no significant changes in our internal controls or in other factors that could significantly affect these controls subsequent to the date of our most recent evaluation.

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PART II    OTHER INFORMATION
 
ITEM 1.    LEGAL PROCEEDINGS
 
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 claimed 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. On June 18, 2002, the Court found, among other things, that while Jostens’ use of rebates, contributions and value-added programs are legitimate business practices widely practiced in the industry and not violative of antitrust laws, our use of multi-year Total Service Program contracts violated Section 2 of the Sherman Act because these agreements could “exclude competition by making it difficult for a new vendor to compete against Jostens.” On July 12, 2002, the Court entered an initial order providing, among other things, that Epicenter be awarded damages of $1.00, trebled pursuant to Section 15 of the Clayton Act, and that in the state of California, Jostens was enjoined for a period of ten years from utilizing any contract, including those for Total Service Programs, for a period which extends for more than one year (the “Initial Order”). The Initial Order also provided for payment to Epicenter of reasonable attorneys fees and costs. Jostens made a motion to set aside the Initial Order. On August 23, 2002, the Court entered its ruling on the motion, and granted, in part, Josten’s motion for relief from judgment, changing the Initial Order and enjoining Jostens for only five years, and allowing Jostens to enter into multi-year agreements in the following specific circumstances: (1) when a school requests a multi-year agreement, in writing and on its own accord, or (2) in response to a competitor’s offer to enter into a multi-year agreement. On August 23, 2002, the Court entered an additional order granting Epicenter’s motion for attorneys’ fees in the amount of $1.6 million plus $0.1 million in out-of-pocket expenses for a total award of $1.7 million. On September 12, 2002, Jostens filed a Notice of Appeal to the Ninth Circuit of the United States Court of Appeals. Payment of attorneys fees and costs are stayed pending appeal. During November 2002, Jostens issued a letter of credit in the amount of $2.0 million to secure the judgment on attorneys fees and costs. Jostens continues to vigorously appeal this matter and is optimistic about the result based upon substantive and procedural grounds.
 
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.
 
ITEM 6.    EXHIBITS AND REPORTS ON FORM 8-K
 
(a)
 
Exhibits
 
 
12
 
Computation of Ratio of Earnings to Fixed Charges
 
(b)
 
Reports on Form 8-K
 
A Form 8-K dated July 31, 2002 and filed on August 8, 2002 announcing an amendment of the senior secured credit facility.

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SIGNATURES
 
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
 
 
   
JOSTENS, INC.
Date:    November 8, 2002
  
/s/    Robert C. Buhrmaster
       
Robert C. Buhrmaster
Chairman, President and Chief Executive Officer
 
 
Date:    November 8, 2002
  
/s/    John A. Feenan
       
John A. Feenan
Sr. Vice President and Chief Financial Officer

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CERTIFICATIONS
 
I, Robert C. Buhrmaster, Chairman, President and Chief Executive Officer of Jostens, Inc., certify that:
 
1.
 
I have reviewed this quarterly report on Form 10-Q of Jostens, Inc.;
 
2.
 
Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;
 
3.
 
Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;
 
4.
 
The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
 
 
a)
 
designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during this period in which the quarterly report is being prepared;
 
 
b)
 
evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the “Evaluation Date”); and
 
 
c)
 
presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;
 
5.
 
The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent function):
 
 
a)
 
all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and
 
 
b)
 
any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and
 
6.
 
The registrant’s other certifying officer and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.
 
 
Date:  November 8, 2002
  
/s/    Robert C. Buhrmaster
       
Robert C. Buhrmaster
Chairman, President and Chief Executive Officer
 

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CERTIFICATIONS
 
I, John A. Feenan, Sr. Vice President and Chief Financial Officer of Jostens, Inc., certify that:
 
1.
 
I have reviewed this quarterly report on Form 10-Q of Jostens, Inc.;
 
2.
 
Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;
 
3.
 
Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;
 
4.
 
The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
 
 
a)
 
designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during this period in which the quarterly report is being prepared;
 
 
b)
 
evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the “Evaluation Date”); and
 
 
c)
 
presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;
 
5.
 
The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent function):
 
 
a)
 
all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and
 
 
b)
 
any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and
 
6.
 
The registrant’s other certifying officer and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.
 
 
Date:  November 8, 2002
  
/s/    John A. Feenan
       
John A. Feenan
Sr. Vice President and Chief Financial Officer

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