**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

 

**FORM 10-Q**

 

ý  **QUARTERLY REPORT PURSUANTTO SECTION 13 OR 15(d) OF THESECURITIES EXCHANGE ACT OF 1934**

 

**For the Quarterly Period Ended July 3,2004**

 

**OR**

 

**o****  TRANSITION REPORTPURSUANT TO SECTION 13 OR 15(d) OF THESECURITIES EXCHANGE ACT OF 1934**

 

**Commission file number 333-112055**

 

**JOSTENS HOLDING CORP.**

(Exact name of Registrant asspecified in its charter)

 

| **Delaware**                                                    | ** ** | **20-0049713**                           |
|-----------------------------------------------------------------|------------|------------------------------------------|
| (State or other jurisdiction of  incorporation or organization) | ** ** | (I.R.S. employer identification  number) |
| ** **                                                      | ** ** | ** **                               |
| **5501 American Boulevard West  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 reportsrequired to be filed by Section 13 or 15(d) of the Securities Exchange Actof 1934 during the preceding 12 months (or for such shorter period that theregistrant was required to file such reports) and (2) has been subject to suchfiling requirement for the past 90 days.    Yes ý    No o

 

Indicate by check mark whether the Registrant is an accelerated filer(as defined in Rule 12b-2 of the Act).    Yes o    No ý

 

As of August 16, 2004 there were 3,229,343 shares of Common Stock,$.01 par value, outstanding.

 

 

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**JOSTENS HOLDING CORP. AND SUBSIDIARIES**

**Index to Form 10-Q**

 
| **Part  I.    FINANCIAL INFORMATION** | ** **                                                                                                                    |
|-----------------------------------------------------------|-------------------------------------------------------------------------------------------------------------------------------|
| ** **                                                | ** **                                                                                                                    | ** ** |
| Item 1.                                                   | Financial Statements (Unaudited)                                                                                              |   |
|                                                      |                                                                                                                          |   |
|                                                      | Condensed Consolidated Statements of  Operations for the three and six months ended July 3, 2004 and  June 28, 2003 |   |
|                                                      |                                                                                                                          |   |
|                                                      | Condensed Consolidated Balance Sheets as of  July 3, 2004, January 3, 2004 and June 28,  2003             |   |
|                                                      |                                                                                                                          |   |
|                                                      | Condensed Consolidated Statements of Cash  Flows for the three and six months ended July 3, 2004 and June 28,  2003 |   |
|                                                      |                                                                                                                          |   |
|                                                      | Notes to Condensed Consolidated Financial  Statements                                                                         |   |
|                                                      |                                                                                                                          |   |
| Item 2.                                                   | Management’s Discussion and Analysis of  Financial Condition and Results of Operations                                   |   |
|                                                      |                                                                                                                          |   |
| Item 3.                                                   | Quantitative and Qualitative Disclosures  about Market Risk                                                                   |   |
|                                                      |                                                                                                                          |   |
| Item 4.                                                   | Controls and Procedures                                                                                                       |   |
|                                                      |                                                                                                                          |   |
| **Part  II.    OTHER INFORMATION**    | ** **                                                                                                                    |
|                                                      |                                                                                                                          |   |
| Item 1.                                                   | Legal Proceedings                                                                                                             |   |
|                                                      |                                                                                                                          |   |
| Item 6.                                                   | Exhibits and Reports on Form 8-K                                                                                              |   |
|                                                      |                                                                                                                          |   |
| Signatures                                                |                                                                                                                          |   |

 

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**PART I.  FINANCIAL INFORMATION**

 

**ITEM1.  FINANCIAL STATEMENTS**

 

**JOSTENS HOLDING CORP. AND SUBSIDIARIES**

**CONDENSED CONSOLIDATED STATEMENTS OFOPERATIONS (UNAUDITED)**

 
| ** **                                             | ** ** | **Three months ended** | ** **  | ** **                          | **Six months ended** | ** **  |
|--------------------------------------------------------|------------|------------------------|-------------|-------------------------------------|----------------------|-------------|
| *In thousands*                                         | ** ** | **July 3, 2004**  | ** **  | **Predecessor  June 28, 2003** | ** **           | ** **  | **July 3, 2004** | ** ** | **Predecessor  June 28, 2003** | ** ** |
| **Net sales**                                          |       | **$**                  | **376,186** | ** **                          | **$**                | **374,936** | ** ** | ** ** | **$** | **519,271** | ** ** | **$** | **496,460** |   |
| Cost of products sold                                  |       | 196,867                |        | 161,005                             |                 |        | 257,647 |   | 211,750 |   |
| Gross profit                                           |       | 179,319                |        | 213,931                             |                 |        | 261,624 |   | 284,710 |   |
| Selling and administrative expenses                    |       | 116,501                |        | 108,589                             |                 |        | 204,804 |   | 180,047 |   |
| **Operating income**                                   |       | **62,818**             | ** **  | **105,342**                         | ** **           | ** **  | **56,820** | ** ** | **104,663** |   |
| Loss on redemption of debt                             |       | —                 |        | —                              |                 |        | 420 |   | — |   |
| Net interest expense                                   |       | 20,396                 |        | 13,535                              |                 |        | 40,159 |   | 27,475 |   |
| Income before income taxes                             |       | 42,422                 |        | 91,807                              |                 |        | 16,241 |   | 77,188 |   |
| Provision for income taxes                             |       | 10,181                 |        | 38,100                              |                 |        | 3,898 |   | 32,079 |   |
| **Net income**                                         |       | **32,241**             | ** **  | **53,707**                          | ** **           | ** **  | **12,343** | ** ** | **45,109** |   |
| Dividends and accretion on redeemable  preferred stock |       | —                 |        | (3,320                              | )                    |        | — |   | (6,525 | ) |
| **Net income  available to common shareholders**       |       | **$**                  | **32,241**  | ** **                          | **$**                | **50,387**  | ** ** | ** ** | **$** | **12,343** | ** ** | **$** | **38,584** |   |

 

*The accompanying notes are anintegral part of the unaudited condensed consolidated financial statements.*

 

1

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**JOSTENSHOLDING CORP. AND SUBSIDIARIES**

**CONDENSED CONSOLIDATED BALANCE SHEETS(UNAUDITED)**

 
| ** **                                                                                                  | ** ** | ** **            | ** **    | ** **               | ** ** | ** **    | **Predecessor**        | ** ** |
|-------------------------------------------------------------------------------------------------------------|------------|-----------------------|---------------|--------------------------|------------|---------------|------------------------|------------|
| *In thousands, except share  amounts*                                                                       | ** ** | **July 3, 2004** | ** **    | **January 3, 2004** | ** ** | ** **    | **June 28, 2003** | ** ** |
| **ASSETS**                                                                                                  |       |
| Cash and cash equivalents                                                                                   |       | $                     | 8,215         |                     | $          | 24,752        |                   |       | $ | 22,940 |   |
| Accounts receivable, net                                                                                    |       | 82,163                |          | 57,018                   |       |          | 87,860                 |       |
| Inventories, net                                                                                            |       | 49,693                |          | 72,523                   |       |          | 45,528                 |       |
| Salespersons overdrafts, net of allowance  of $10,510, $10,953 and $8,629                                   |       | 21,414                |          | 30,062                   |       |          | 17,701                 |       |
| Prepaid expenses and other current assets                                                                   |       | 6,433                 |          | 10,446                   |       |          | 5,398                  |       |
| Deferred income taxes                                                                                       |       | 10,698                |          | —                   |       |          | 13,718                 |       |
| **Total current  assets**                                                                                   |       | **178,616**           | ** **    | **194,801**              | ** ** | ** **    | **193,145**            |       |
|                                                                                                        |       |                  |          |                     |       |          |                   |       |
| Property and equipment                                                                                      |       | 130,187               |          | 119,506                  |       |          | 277,452                |       |
| Less accumulated depreciation                                                                               |       | (27,984               | )             | (13,913                  | )          |          | (216,757               | )          |
| Property and equipment, net                                                                                 |       | 102,203               |          | 105,593                  |       |          | 60,695                 |       |
| Goodwill                                                                                                    |       | 728,101               |          | 746,025                  |       |          | 16,095                 |       |
| Intangibles, net                                                                                            |       | 589,539               |          | 644,654                  |       |          | 3,561                  |       |
| Other assets                                                                                                |       | 37,059                |          | 40,340                   |       |          | 57,389                 |       |
|                                                                                                        |       | **$**                 | **1,635,518** | ** **               | **$**      | **1,731,413** | ** **             | ** ** | **$** | **330,885** |   |
|                                                                                                        |       |                  |          |                     |       |          |                   |       |
| **LIABILITIES AND SHAREHOLDERS’ EQUITY  (DEFICIT)**                                                    |       |
| Book overdrafts                                                                                             |       | $                     | 2,964         |                     | $          | —        |                   |       | $ | — |   |
| Short-term borrowings                                                                                       |       | 9,675                 |          | 13,013                   |       |          | 8,880                  |       |
| Accounts payable                                                                                            |       | 12,250                |          | 17,483                   |       |          | 10,792                 |       |
| Commissions payable                                                                                         |       | 44,076                |          | 16,736                   |       |          | 42,453                 |       |
| Customer deposits                                                                                           |       | 57,866                |          | 149,809                  |       |          | 58,583                 |       |
| Income taxes payable                                                                                        |       | 34,943                |          | 8,833                    |       |          | 37,241                 |       |
| Current portion of long-term debt                                                                           |       | 5,150                 |          | —                   |       |          | 18,411                 |       |
| Deferred income taxes                                                                                       |       | —                |          | 4,283                    |       |          | —                 |       |
| Other accrued liabilities                                                                                   |       | 45,629                |          | 50,199                   |       |          | 48,930                 |       |
| **Total current  liabilities**                                                                              | ** ** | **212,553**           | ** **    | **260,356**              | ** ** | ** **    | **225,290**            | ** ** |
|                                                                                                        |       |                  |          |                     |       |          |                   |       |
| Long-term debt - less current maturities                                                                    |       | 800,397               |          | 836,693                  |       |          | 554,463                |       |
| Redeemable preferred securities  (liquidation preference: $106,107 and $99,052)                             |       | 122,435               |          | 135,272                  |       |          | —                 |       |
| Deferred income taxes                                                                                       |       | 219,985               |          | 231,416                  |       |          | 10,533                 |       |
| Other noncurrent liabilities                                                                                |       | 23,344                |          | 23,359                   |       |          | 6,362                  |       |
| **Total liabilities**                                                                                       | ** ** | **1,378,714**         | ** **    | **1,487,096**            | ** ** | ** **    | **796,648**            | ** ** |
|                                                                                                        |       |                  |          |                     |       |          |                   |       |
| Commitments and contingencies                                                                               |       |                  |          |                     |       |          |                   |       |
|                                                                                                        |       |                  |          |                     |       |          |                   |       |
| Redeemable preferred stock (liquidation  preference: $90,358)                                               |       | —                |          | —                   |       |          | 77,316                 |       |
|                                                                                                        |       |                  |          |                     |       |          |                   |       |
| Common stock                                                                                                |       |                  |          |                     |       |          |                   |       |
| Class A $.01 par value; authorized: 700,000  shares; issued and outstanding: 504,584 shares                 |       |                  |          |                     |       |          |                   |       |
| Class B $.01 par value; non-voting;  authorized: 4,050,000 shares; issued and outstanding: 2,724,759 shares |       | 32                    |          | 32                       |       |          | —                 |       |
| Common stock                                                                                                |       | —                |          | —                   |       |          | 1,003                  |       |
| Additional paid-in-capital                                                                                  |       | 281,316               |          | 281,316                  |       |          | 20,964                 |       |
| Officer notes receivable                                                                                    |       | —                |          | —                   |       |          | (1,670                 | )          |
| Accumulated deficit                                                                                         |       | (24,697               | )             | (37,040                  | )          |          | (553,421               | )          |
| Accumulated other comprehensive loss                                                                        |       | 153                   |          | 9                        |       |          | (9,955                 | )          |
| **Total shareholders’  equity (deficit)**                                                              | ** ** | **256,804**           | ** **    | **244,317**              | ** ** | ** **    | **(543,079**           | **)**      |
|                                                                                                        | ** ** | **$**                 | **1,635,518** | ** **               | **$**      | **1,731,413** | ** **             | ** ** | **$** | **330,885** | ** ** |

 

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

 

2

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**JOSTENSHOLDING CORP. AND SUBSIDIARIES**

**CONDENSED CONSOLIDATED STATEMENTS OF CASHFLOWS (UNAUDITED)**

 
| ** **                                                                        | ** ** | **Six months ended**  | ** ** |
|-----------------------------------------------------------------------------------|------------|-----------------------|------------|
| *In thousands*                                                                    | ** ** | **July 3, 2004** | ** ** | ** ** | **Predecessor  June 28, 2003** | ** ** |
| Net income                                                                        |       | $                     | 12,343     |   |   | $ | 45,109 |   |
| Adjustments to reconcile net income to net cash  provided by operating activities |       |                  |       |   |   |   |
| Depreciation                                                                      |       | 14,177                |       |   | 10,941 |   |
| Amortization included in interest expense                                         |       | 9,624                 |       |   | 2,664 |   |
| Other amortization                                                                |       | 55,539                |       |   | 1,687 |   |
| Accrued interest on redeemable preferred stock                                    |       | 7,163                 |       |   | — |   |
| Deferred income taxes                                                             |       | (25,044               | )          |   | — |   |
| Other noncash reconciling items                                                   |       | 463                   |       |   | 95 |   |
| Changes in assets and liabilities                                                 |       | (41,201               | )          |   | (28,343 | ) |
| **Net cash provided by operating  activities**                                    |       | **33,064**            | ** ** | ** ** | **32,153** |   |
| Acquisition of business, net of cash acquired                                     |       | —                |       |   | (5,008 | ) |
| Purchases of property and equipment                                               |       | (11,572               | )          |   | (5,369 | ) |
| Other investing activities, net                                                   |       | 18                    |       |   | (407 | ) |
| **Net cash used for investing  activities**                                       |       | **(11,554**           | **)**      | ** ** | **(10,784** | **)** |
| Principal payments on long-term debt                                              |       | (36,059               | )          |   | (8,218 | ) |
| Redemption of senior subordinated notes payable                                   |       | (5,800                | )          |   | — |   |
| Proceeds from issuance of long-term debt                                          |       | 4,000                 |       |   | — |   |
| Other financing activities, net                                                   |       | (126                  | )          |   | (1,420 | ) |
| **Net cash used for financing  activities**                                       |       | **(37,985**           | **)**      | ** ** | **(9,638** | **)** |
| Effect of exchange rate changes on cash and cash  equivalents                     |       | (62                   | )          |   | 271 |   |
| (Decrease) increase in cash and cash equivalents                                  |       | (16,537               | )          |   | 12,002 |   |
| Cash and cash equivalents, beginning of period                                    |       | 24,752                |       |   | 10,938 |   |
| **Cash and cash equivalents, end of  period**                                     |       | **$**                 | **8,215**  | ** ** | ** ** | **$** | **22,940** |   |
|                                                                                   |            |                       |            |  |  |  |  |  |  |

 

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

 

3

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**Notesto Condensed Consolidated Financial Statements (Unaudited)**

***Jostens HoldingCorp. and Subsidiaries***

 

**1.****              SignificantAccounting Policies**

 

***Basis of Presentation***

 

The accompanying unaudited condensed consolidated financial statementshave been prepared in accordance with accounting principles generally accepted inthe United States for interim financial information and with the instructionsto Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and footnotesrequired by accounting principles generally accepted in the United States forcomplete financial statements.  In theopinion of management, all adjustments (consisting of normal recurringadjustments) considered necessary for a fair presentation have been included.  Operating results for the interim periodspresented are not necessarily indicative of the results that may be expectedfor the full year.  For furtherinformation, refer to the consolidated financial statements and footnotesincluded in our Form 10-K for the fiscal year ended January 3, 2004.

 

The preparation of our financial statements in conformity withaccounting principles generally accepted in the United States requires us tomake estimates and assumptions that affect the amounts reported in thefinancial statements and accompanying notes. Actual results could differ from those estimates.

 

The accompanying unaudited condensed consolidated financial statements,after the elimination of intercompany accounts and transactions, include theaccounts of Jostens Holding Corp. (“Jostens Holdings”) and our wholly-ownedsubsidiary, Jostens IH Corp. (“JIHC”), and its wholly-owned subsidiary,Jostens, Inc. (“Jostens”), as of and for the three- and six-month periods endedJuly 3, 2004 (successor periods). The accounts as of and for the three- and six-month periods endedJune 28, 2003 (predecessor periods) relate to Jostens and its wholly-ownedsubsidiaries.  Our unaudited condensedconsolidated financial statements for the predecessor periods were preparedusing the historical basis of accounting for Jostens.  As a result of the 2003 merger transaction asdiscussed in Note 3, we applied purchase accounting and a new basis ofaccounting began on July 29, 2003. Jostens Holdings and JIHC had no operating activities until theacquisition of Jostens.

 

Certain amounts in our prior period financial statements and notes havebeen reclassified to conform to the current period presentation.

 

***Stock-BasedCompensation***

 

We apply the intrinsic method prescribed by Accounting Principles BoardOpinion (APB) 25, *“Accounting for StockIssued to Employees,”*and related interpretations in accounting forstock options granted to employees and non-employee directors.  Accordingly, no compensation cost has beenreflected in net income for these plans since all options are granted with exerciseprices at or above fair value of the underlying stock on the date ofgrant.  The following table illustratesthe effect on net income and earnings per share if we had applied the fairvalue recognition provisions of SFAS 123, *“Accountingfor Stock-Based Compensation”.*

 
| ** **                                                                                                                           | ** ** | **Three months ended** | ** **  | ** ** | **Six months ended**                | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------|-------------|------------|-------------------------------------|------------|
| *In thousands*                                                                                                                       | ** ** | **July 3, 2004**  | ** **  | ** ** | **Predecessor  June 28, 2003** | ** ** | ** ** | **July 3, 2004** | ** ** | ** ** | **Predecessor  June 28, 2003** | ** ** |
| **Net loss available  to common shareholders**                                                                                       |       |                   |        |       |                                |       |   |   |   |   |   |   |
| As reported                                                                                                                          |       | $                      | 32,241      |       |                                | $          | 50,387 |   |   | $ | 12,343 |   |   | $ | 38,584 |   |
| Deduct total stock-based employee  compensation expense determined under fair value-based method for all awards,  net of tax effects |       | (152                   | )           |       | (157                                | )          |   | (304 | ) |   | (313 | ) |
| Pro forma net loss available to common  shareholders                                                                                 |       | **$**                  | **32, 089** | ** ** | ** **                          | **$**      | **50,230** | ** ** | ** ** | **$** | **13,039** | ** ** | ** ** | **$** | **38,271** |   |

 

***NewAccounting Standards***

 

***FSP 106-1 –Accounting and Disclosure Requirements Related to the Medicare PrescriptionDrug Improvement and Modernization Act of 2003***

 

OnDecember 8, 2003, the Medicare Prescription Drug, Improvement andModernization Act of 2003 (the “Act”) was signed into law.  The Act will provide plan sponsors a federalsubsidy for certain qualifying prescription drug

 

4

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**Notes to Condensed Consolidated FinancialStatements (Unaudited)**

***Jostens HoldingCorp. and Subsidiaries***

 

benefitscovered under the sponsor’s postretirement health care plans.  In accordance with Financial AccountingStandards Board (FASB) Staff Position (FSP) 106-1, all amounts are presentedwithout reflecting any potential effects of the Act.   On May 19, 2004, the FASB issued FSP 106-2,which requires measures of the accumulated postretirement benefit obligationand net periodic postretirement benefit cost to reflect the effects of the Actin the first interim period beginning after June 15, 2004.  We do not expect the adoption of the Act tohave a material impact on our consolidated financial statements.

 

**2.****              Pending Transaction**

 

On July 21, 2004, Jostens Holdings (“JHC”) entered into a contributionagreement (the “Contribution Agreement”) with Fusion Acquisition LLC(“AcquisitionCo”), a newly-formed entity owned by investment funds of KohlbergKravis & Roberts Co. L.P. (“KKR”), pursuant to which JHC shall issue commonstock of JHC to AcquisitionCo and AcquisitionCo shall contribute to JHC thecapital stock of each of (i) Von Hoffmann Holdings Inc. (“Von Hoffmann”), aleading printer of educational textbooks, supplemental materials, bookcomponents and direct marketing print services, and (ii) AHC I AcquisitionCorp. (“Arcade”), a leading manufacturer of sampling products for thefragrance, cosmetics, consumer products and food and beverage industries.  AcquisitionCo will acquire each of Von Hoffmannand Arcade immediately prior to consummation of the Contribution Agreementpursuant to separate merger agreements entered into between AcquisitionCo andVon Hoffmann and Arcade, respectively. The transactions are expected to close late in the third quarter orearly in the fourth quarter of 2004.

 

Von Hoffmann and Arcade are each currently controlled by DLJ MerchantBanking Partners II, L.P. and certain of its affiliated funds.  DLJ Merchant Banking Partners III, L.P. andcertain of its affiliated funds (collectively, the “DLJMB III Funds”) currentlybeneficially own approximately 82.5% of JHC’s outstanding votingsecurities.  Upon the closing of thetransactions contemplated by the Contribution Agreement, KKR will be issuedequity interests representing approximately 45% of the economic interests and50% of the voting interests of JHC, and the DLJMB III Funds will own equityinterests representing approximately 45% of the economic interests andapproximately 41% of the voting interests of JHC.  Upon the closing of the ContributionAgreement, the Board of Directors of JHC is expected to consist of ninedirectors, four of whom will be appointed by KKR, four of whom will beappointed by the DLJMB III Funds and one of whom will be the Chief ExecutiveOfficer of JHC, initially Marc Reisch.

 

In connection with the transactions, Jostens IH Corp., our wholly-ownedsubsidiary, has received a commitment from Credit Suisse First Boston for newsenior secured credit facilities consisting of: (i) two senior secured term loan facilities in an aggregate principal amountof up to $1,020.0 million and (ii) a senior secured revolving credit facilityin an aggregate principal amount of $250.0 million (the “Credit Facilities”)and a $500.0 million increasing rate bridge loan facility (the “BridgeFacility”).  Jostens IH Corp. expects touse a portion of the proceeds from the Credit Facilities and the BridgeFacility (or any offering of notes that may be issued in lieu of the BridgeFacility) to fund certain tender payments due to holders of Jostens’ 12.75%Senior Subordinated Notes due 2010 who elect to tender their notes pursuant toa tender offer and consent solicitation expected to be commenced inAugust 2004 and to satisfy and discharge the indenture with respect to thenotes that are not tendered pursuant to such tender offer.  In connection with the transactions, VonHoffmann and Arcade are each expected to tender for certain of their ownexisting indebtedness and redeem such indebtedness not so tendered, or defeaseor satisfy and discharge the indentures governing such indebtedness.   Concurrently with the consummation of thetransactions contemplated by the Contribution Agreement, Jostens intends torepurchase all issued and outstanding shares of its 14% Senior Redeemable Payment-in-KindPreferred Stock.  JHC’s 10.25% SeniorDiscount Notes are expected to remain outstanding.

 

The Credit Facilities will require that we meet certain financialcovenants, ratios and tests, including a maximum leverage ratio, a maximumsenior leverage ratio and a minimum interest coverage ratio.  In addition, we will be required to paycertain fees in connection with the Credit Facilities, including letter ofcredit fees, agency fees and commitment fees on the average daily unusedportion of the revolving credit facility.

 

**3.****              2003 Merger**

 

On June 17, 2003, we entered into a merger agreement with Jostensand Ring Acquisition Corp., an entity organized by us for the sole purpose ofeffecting an acquisition of Jostens.  OnJuly 29, 2003, Ring Acquisition Corp. merged

 

5

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**Notes to Condensed Consolidated FinancialStatements (Unaudited)**

***Jostens HoldingCorp. and Subsidiaries***

 

with and into Jostens with Jostens surviving as an indirect subsidiaryof Jostens Holdings, which we refer to as the merger.

 

Jostens Holdings was capitalized in July 2003 through the issuanceof common stock to DLJ Merchant Banking Partners III, L.P. and certain of itsaffiliated funds (collectively, the “DLJMB Funds”) and members of ourmanagement, and received proceeds of $322.9 million.  Jostens Holdings, in turn, established awholly-owned subsidiary, JIHC, and capitalized it through the purchase ofcommon stock for $317.9 million.  JIHCused the $317.9 million, along with $100.0 million of proceeds from theissuance of redeemable preferred stock to the DLJMB Funds, to make a capitalcontribution of $417.9 million to Jostens. Jostens, in turn, used the proceeds from the capital contribution alongwith incremental borrowings under its senior secured credit facility to repurchaseall previously outstanding common stock and warrants.  Jostens paid $471.0 million to holders of itscommon stock and warrants representing a cash payment of $48.25 per share.

 

We accounted for the merger using the purchase method ofaccounting.  The price paid to holders ofcommon stock and warrants of $471.0 million, excluding certain capitalizedtransaction costs, was allocated to the tangible and intangible assets acquiredand liabilities assumed, based upon their relative fair values as of the dateof the merger.  As of July 3, 2004,our preliminary allocation of the purchase price was as follows:

 
| *In thousands*             | ** ** | ** ** | ** **  |
|----------------------------|------------|------------|-------------|
| Current assets             |       | $          | 165,280     |   |
| Property and equipment     |       | 101,389    |        |
| Intangible assets          |       | 660,399    |        |
| Goodwill                   |       | 709,724    |        |
| Other assets               |       | 18,622     |        |
| Current liabilities        |       | (202,635   | )           |
| Long-term debt             |       | (594,494   | )           |
| Redeemable preferred stock |       | (106,511   | )           |
| Deferred income taxes      |       | (252,209   | )           |
| Other liabilities          |       | (28,521    | )           |
| ** **                 | ** ** | **$**      | **471,044** | ** ** |

 

We have estimated the fair value of our assets and liabilities as ofthe merger date utilizing information available at the time that our condensedconsolidated financial statements were prepared.  These estimates are subject to refinementuntil all pertinent information has been obtained.  Duringthe six months ended July 3, 2004, we recorded purchase price adjustmentsthrough goodwill to reduce the fair value of Jostens’ redeemable preferredstock and our property and equipment in the amounts of $20.0 million and $0.6million, respectively, and established a $2.9 million purchase accountingliability.  The $2.9 million liability isfor severance and other personnel costs related to the involuntary terminationor relocation of employees associated with management’s plans, as of the mergerdate, to cease production at our Red Wing, MN manufacturing facility.  Production and customer service of graduationdiplomas will be transferred to facilities in Owatonna, MN, Shelbyville, TN andTopeka, KS.  The decision to close theRed Wing facility was based on improving customer service and overallefficiency of Jostens.  On June 22,2004, we formally communicated the termination of employment to approximately180 full-time and seasonal plant and administrative employees.  We anticipate that the majority of these exitcosts will be paid during 2004.

 

6

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**Notes to Condensed Consolidated FinancialStatements (Unaudited)**

***Jostens HoldingCorp. and Subsidiaries***

 

**4.****              Comprehensive Income**

 

Comprehensiveincome and its components, net of tax, are presented below:

 
| ** **                                            | ** ** | **Three months ended** | ** ** | ** ** | **Six months ended**                | ** ** |
|-------------------------------------------------------|------------|------------------------|------------|------------|-------------------------------------|------------|
| *In thousands*                                        | ** ** | **July 3, 2004**  | ** ** | ** ** | **Predecessor  June 28, 2003** | ** ** | ** ** | **July 3, 2004** | ** ** | ** ** | **Predecessor  June 28, 2003** | ** ** |
| Net income                                            |       | $                      | 32,241     |       |                                | $          | 53,707 |   |   | $ | 12,343 |   |   | $ | 45,109 |   |
| Change in cumulative translation adjustment           |       | 128                    |       |       | (175                                | )          |   | 52 |   |   | (327 | ) |
| Change in fair value of foreign currency  hedge       |       | 92                     |       |       | —                              |       |   | 92 |   |   | — |   |
| Change in fair value of interest rate swap  agreement |       | —                 |       |       | 601                                 |       |   | — |   |   | 1,189 |   |
| Comprehensive income                                  |       | $                      | 32,461     |       |                                | $          | 54,133 |   |   | $ | 12,487 |   |   | $ | 45,971 |   |

 

**5.****              Accounts Receivableand Inventories**

 

Net accounts receivable were comprised of the following:

 
| ** **                      | ** ** | ** **            | ** ** | ** ** | ** **               | ** ** | ** ** | **Predecessor**        | ** ** |
|---------------------------------|------------|-----------------------|------------|------------|--------------------------|------------|------------|------------------------|------------|
| *In thousands*                  | ** ** | **July 3, 2004** | ** ** | ** ** | **January 3, 2004** | ** ** | ** ** | **June 28, 2003** | ** ** |
| Trade receivables               |       | $                     | 94,799     |       |                     | $          | 64,993     |                   |       | $ | 100,014 |   |
| Allowance for doubtful accounts |       | (2,422                | )          |       | (2,184                   | )          |       | (2,569                 | )          |
| Allowance for sales returns     |       | (10,214               | )          |       | (5,791                   | )          |       | (9,585                 | )          |
| Accounts receivable, net        |       | $                     | 82,163     |       |                     | $          | 57,018     |                   |       | $ | 87,860 |   |

 

Net inventorieswere comprised of the following:

 
| ** **                | ** ** | ** **            | ** ** | ** **               | ** ** | ** ** | **Predecessor**        | ** ** |
|---------------------------|------------|-----------------------|------------|--------------------------|------------|------------|------------------------|------------|
| *In thousands*            | ** ** | **July 3, 2004** | ** ** | **January 3, 2004** | ** ** | ** ** | **June 28, 2003** | ** ** |
| Raw material and supplies |       | $                     | 13,687     |                     | $          | 11,416     |                   |       | $ | 11,262 |   |
| Work-in-process           |       | 22,935                |       | 28,084                   |       |       | 22,753                 |       |
| Finished goods            |       | 15,034                |       | 34,713                   |       |       | 13,511                 |       |
| Reserve for obsolescence  |       | (1,963                | )          | (1,690                   | )          |       | (1,998                 | )          |
| Inventories, net          |       | $                     | 49,693     |                     | $          | 72,523     |                   |       | $ | 45,528 |   |

 

**6.****              Goodwilland Other Intangible Assets**

 

The increase in goodwill and other intangible assetsas of July 3, 2004 compared to the period ended June 28, 2003 waspredominantly attributable to the effect of purchase accounting in connectionwith the July 29, 2003 merger.

 

The changes in the net carrying amount of goodwillwere as follows:

 
| ** **                          | ** ** | ** **            | ** **  | ** ** | **Predecessor**        | ** ** |
|-------------------------------------|------------|-----------------------|-------------|------------|------------------------|------------|
| *In thousands*                      | ** ** | **July 3, 2004** | ** **  | ** ** | **June 28, 2003** | ** ** |
| Balance at beginning of year        |       | $                     | 746,025     |       |                   | $          | 14,450 |   |
| Goodwill acquired during the period |       | 15                    |        |       | 4,781                  |       |
| Purchase price adjustments          |       | (17,909               | )           |       | (3,277                 | )          |
| Currency translation                |       | (30                   | )           |       | 141                    |       |
| Balance at end of period            |       | **$**                 | **728,101** | ** ** | ** **             | **$**      | **16,095** |   |

 

7

----

 

**Notes to Condensed Consolidated FinancialStatements (Unaudited)**

***Jostens HoldingCorp. and Subsidiaries***

 

The following table presents the gross carryingamount and accumulated amortization for each major class of other intangibleassets as of the dates indicated:

 
| ** **                     | ** ** | **July 3, 2004**      | ** ** |
|--------------------------------|------------|----------------------------|------------|
| *In thousands*                 | ** ** | **Estimated  Useful Life** | ** ** | **Gross  Carrying  Amount** | ** ** | **Accumulated  Amortization** | ** ** | **Net** | ** ** |
| School relationships           |       | 10 years                   |       | $ | 330,000 |   | $ | (30,977 | ) | $ | 299,023 |   |
| Order backlog                  |       | 1.5 years                  |       | 48,700 |   | (36,610 | ) | 12,090 |   |
| Internally developed software  |       | 2 to 5 years               |       | 12,200 |   | (3,183 | ) | 9,017 |   |
| Patented/unpatented technology |       | 3 years                    |       | 11,000 |   | (3,433 | ) | 7,567 |   |
| Customer relationships         |       | 4 to 8 years               |       | 8,666 |   | (1,832 | ) | 6,834 |   |
| Other                          |       | 3 years                    |       | 24 |   | (16 | ) | 8 |   |
|                           |       |                       |       | 410,590 |   | (76,051 | ) | 334,539 |   |
| Trademarks                     |       | Indefinite                 |       | 255,000 |   | — |   | 255,000 |   |
|                           |       |                       |       | **$** | **665,590** | ** ** | **$** | **(76,051** | **)** | **$** | **589,539** |   |

 
| ** **             | ** ** | **Predecessor  June 28, 2003** |       |
|------------------------|------------|-------------------------------------|------------|
| *In thousands*         | ** ** | **Estimated  Useful Life**          | ** ** | **Gross  Carrying  Amount** | ** ** | **Accumulated  Amortization** | ** ** | **Net** |   |
| Customer relationships |       | 4 to 5 years                        |       | 4,146 |   | (601 | ) | 3,545 |   |
| Other                  |       | 3 years                             |       | 24 |   | (8 | ) | 16 |   |
|                   |       |                                |       | **$** | **4,170** | ** ** | **$** | **(609** | **)** | **$** | **3,561** |   |
|                        |            |                                     |            |  |  |  |  |  |  |  |  |  |

 

Amortization expense related to other intangibleassets was $43.7 million and $55.1 million for the three and six months endedJuly 3, 2004 compared to $0.4 million and $0.6 million for the three andsix months ended June 28, 2003.

 

**7.****              Long-term Debt**

 

Long-termdebt consists of the following:

 

8

----

 

**Notes to Condensed Consolidated FinancialStatements (Unaudited)**

***Jostens HoldingCorp. and Subsidiaries***

 
| ** **                                                                                                                                                                                                                                                                                                                                                     | ** ** | ** **            | ** **  | ** **               | ** ** | ** **  | **Predecessor**        | ** ** |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------|-------------|--------------------------|------------|-------------|------------------------|------------|
| *In thousands*                                                                                                                                                                                                                                                                                                                                                 | ** ** | **July 3, 2004** | ** **  | **January 3, 2004** | ** ** | ** **  | **June 28, 2003** | ** ** |
| Borrowings under senior secured credit  facility:                                                                                                                                                                                                                                                                                                              |       |                  |        |                     |       |        |                   |       |
| Term Loan, variable rate, 3.86 percent at  July 3, 2004 and 3.72 percent at January 3, 2004, with semi-annual  principal and interest payments through July 2010                                                                                                                                                                                |       | $                     | 417,704     |                     | $          | 453,705     |                   |       | $ | — |   |
| Term Loan A, variable rate, 3.36 percent at  June 28, 2003, paid in full July 2003                                                                                                                                                                                                                                                                   |       | —                |        | —                   |       |        | 51,359                 |       |
| Term Loan C, variable rate, 3.86 percent at  June 28, 2003, paid in full July 2003                                                                                                                                                                                                                                                                   |       | —                |        | —                   |       |        | 319,694                |       |
| Senior subordinated notes, 12.75 percent  fixed rate, including premium of $20,880 at July 3, 2004 and $22,717 at  January 3, 2004, net of discount of $15,679 at June 28, 2003, with  semi-annual interest payments of $13.3 million, principal due and payable at  maturity - May 2010                                                        |       | 224,865               |        | 231,702                  |       |        | 201,821                |       |
| Senior discount notes, 10.25 percent fixed  rate, net of discount of $88,164 at July 3, 2004 and $95,914 at  January 3, 2004, with semi-annual interest accretion of $12.7 million,  through December 1, 2008, thereafter semi-annual interest payments of  $12.7 million, accreted principal due and payable at maturity -  December 2013 |       | 159,036               |        | 151,286                  |       |        | —                 |       |
| Promissory note, 3.71 percent at  July 3, 2004, with monthly principal and interest payments through  maturity - March 2009                                                                                                                                                                                                                          |       | 3,942                 |        | —                   |       |        | —                 |       |
|                                                                                                                                                                                                                                                                                                                                                           |       | 805,547               |        | 836,693                  |       |        | 572,874                |       |
| Less current portion                                                                                                                                                                                                                                                                                                                                           |       | 5,150                 |        | —                   |       |        | 18,411                 |       |
|                                                                                                                                                                                                                                                                                                                                                           |       | **$**                 | **800,397** | ** **               | **$**      | **836,693** | ** **             | ** ** | **$** | **554,463** |   |

 

During the three months ended July 3, 2004, wevoluntarily prepaid $36.0 million on our senior secured credit facility.  In addition, during the first quarter of2004, we voluntarily redeemed $5.0 million principal amount of Jostens’ seniorsubordinated notes and recognized a loss of $0.4 million consisting of $0.8million of premium paid on redemption of the notes and a net $0.4 millioncredit resulting from the write-off of related unamortized premium, originalissuance discount and deferred financing costs.

 

As of July 3, 2004, there was $9.7 million outstanding in the formof short-term borrowings at our Canadian subsidiary, at a weighted averageinterest rate of 5.5% and an additional $10.8 million outstanding in the formof letters of credit, leaving $129.6 million available under our revolvingcredit facility.

 

The senior secured credit facility and the Jostens senior subordinatednotes contain certain cross-default and cross-acceleration provisions wherebydefault under or acceleration of one debt obligation would, consequently, causea default or acceleration under the other debt obligation.  As of July 3, 2004, we were incompliance with all covenants.

 

As of July 3, 2004, January 3, 2004 and June 28, 2003,the fair value of our debt, excluding the senior subordinated notes and thesenior discount notes, approximated its carrying value.  The fair value of the aggregate notes as ofJuly 3, 2004, January 3, 2004 and June 28, 2003 was $395.5million, $394.9 million and $256.7 million, respectively, based on the quotedmarket price.

 

**8.****              Redeemable PreferredStock**

 

On June 29, 2003, we adopted SFAS 150, *“Accounting for Certain Financial Instruments with Characteristics ofboth Liabilities and Equity”.* In accordance with SFAS 150, we reclassified Jostens’ redeemablepreferred stock to the liabilities section of our condensed consolidatedbalance sheet and began reporting the preferred dividend as interest expense inour results of operations rather than as a reduction to retained earnings.  We also recognized $4.6 million cumulative effectof a change in accounting principle.  Wedid not provide any tax benefit in connection with the cumulative effectadjustment because payment of the related preferred dividend and the discountamortization are not tax deductible.  Proforma amounts assuming the change in accounting principle had been in effectsince the beginning of 2003 are as follows:

 

9

----

 

**Notes to Condensed Consolidated FinancialStatements (Unaudited)**

***Jostens HoldingCorp. and Subsidiaries***

 
| ** **                                                                  | ** ** | **Three months ended** | ** ** | ** ** | **Six months ended**                | ** ** |
|-----------------------------------------------------------------------------|------------|------------------------|------------|------------|-------------------------------------|------------|
| *In thousands*                                                              | ** ** | **July 3, 2004**  | ** ** | ** ** | **Predecessor  June 28, 2003** | ** ** | ** ** | **July 3, 2004** | ** ** | ** ** | **Predecessor  June 28, 2003** | ** ** |
| Net income available to common shareholders                                 |       |                   |       |       |                                |       |   |   |   |   |   |   |
| As reported                                                                 |       | $                      | 32,241     |       |                                | $          | 50,387 |   |   | $ | 12,343 |   |   | $ | 38,584 |   |
| Dividends and accretion on redeemable  preferred shares previously reported |       | —                 |       |       | 3,320                               |       |   | — |   |   | 6,525 |   |
| Pro forma interest expense                                                  |       | —                 |       |       | (2,927                              | )          |   | — |   |   | (5,527 | ) |
| Pro forma net income available to common  shareholders                      |       | $                      | 32,241     |       |                                | $          | 50,780 |   |   | $ | 12,343 |   |   | $ | 39,582 |   |

 

During the first quarter of 2004, we refined our estimate of the fairvalue of Jostens’ redeemable preferred stock as of the merger date from $130.0million to $110.0 million.  The aggregate liquidation preference of theredeemable preferred stock as of July 3, 2004, January 3, 2004 andJune 28, 2003 was $106.1 million, $99.1 million and $92.5 million,respectively, including accrued dividends. Jostens has 4,000,000 shares of preferred stock, $.01 par value,authorized.  There were 103,687,  96,793 and 90,358 shares of redeemable preferredstock outstanding as of July 3, 2004, January 3, 2004 andJune 28, 2003, respectively.

 

**9.****              Derivative FinancialInstruments and Hedging Activities**

 

We use forward foreign currency exchangecontracts to hedge the impact of currency fluctuations primarily on inventorypurchases denominated in euros.  Theeffective portion of the change in fair value for these contracts, which havebeen designated as a cash flow hedge, is reported in “accumulated othercomprehensive loss” (AOCL) and reclassified into earnings in the same financialstatement line item and in the same period or periods during which the hedgedtransaction affects earnings.  Anyineffective portion of the change in fair value of these instruments is immediatelyrecognized in earnings.  The amount ofcontracts outstanding at July 3, 2004 was $2.7 million.  There were no forward foreign currencyexchange contracts outstanding at January 3, 2004 and June 28, 2003.  These contracts will mature over theremainder of the current fiscal year, the period in which all amounts includedin AOCL will be reclassified into earnings.

 

**10.****       Commitments**

 

We are subject to market risk associated withchanges in the price of precious metal. To mitigate our commodity price risk, we enter into forward contracts topurchase gold, platinum and silver based upon the estimated ounces needed tosatisfy projected customer demand.  Ourpurchase commitment at July 3, 2004 was $7.3 million with delivery datesoccurring throughout 2004.  These forwardpurchase contracts are considered normal purchases and therefore not subject tothe requirements of SFAS 133, *“Accountingfor Derivative Instruments and Hedging Activities”. *The fair market value of our openprecious metal forward contracts as of July 3, 2004 was $7.3 million andwas calculated by valuing each contract at quoted futures prices.

 

**11.****       Income Taxes**

 

Consistent with theprovisions of APB 28, *“Interim FinancialReporting”,* we have provided an income tax provision based on ourbest estimate of the consolidated effective tax rate applicable for the entireyear.  Based on those estimates, weprovided an income tax provision at a consolidated effective rate of 24% forthe six months ended July 3, 2004 compared to 41.6% in the comparableprior year period.  We review our taxrate estimates on a quarterly basis and make revisions as necessary.

 

Our consolidatedeffective tax rate is less than the federal statutory rate because weanticipate a consolidated tax loss for the entire year and the rate of taxbenefit is negatively impacted by the effect of nondeductible interest expenseassociated with the redeemable preferred stock of Jostens.  Furthermore, the rate of tax benefit recordedfor purchase accounting adjustments is based on the change in deferred taxliability balances attributable to net taxable temporary differences recordedin connection with the purchase price allocation of the prior year mergertransaction.

 

10

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**Notes to Condensed Consolidated FinancialStatements (Unaudited)**

***Jostens HoldingCorp. and Subsidiaries***

 

**12.****       Pension and OtherPostretirement Benefit Plans**

 

Net periodic benefit cost for our pension and other postretirementbenefit plans for the three and six months ended July 3, 2004 andJune 28, 2003 consists of the following:

 
| ** **                              | ** ** | **Pension benefits**   | ** ** |
|-----------------------------------------|------------|------------------------|------------|
| ** **                              | ** ** | **Three months ended** | ** ** | ** ** | **Six months ended** | ** ** |
| *In thousands*                          | ** ** | **July 3, 2004**  | ** ** | ** ** | **Predecessor  June 28, 2003** | ** ** | ** ** | **July 3, 2004** | ** ** | ** ** | **Predecessor  June 28, 2003** | ** ** |
| Service cost                            |       | $                      | 1,618      |   |   | $ | 1,454 |   |   | $ | 3,236 |   |   | $ | 2,908 |   |
| Interest cost                           |       | 3,068                  |       |   | 3,053 |   |   | 6,136 |   |   | 6,106 |   |
| Expected return on plan assets          |       | (4,497                 | )          |   | (5,092 | ) |   | (8,994 | ) |   | (10,184 | ) |
| Amortization of prior year service cost |       | —                 |       |   | 465 |   |   | — |   |   | 929 |   |
| Amortization of transition amount       |       | —                 |       |   | (139 | ) |   | — |   |   | (277 | ) |
| Amortization of net actuarial loss      |       | —                 |       |   | 132 |   |   | — |   |   | 264 |   |
| Net periodic benefit expense (income)   |       | **$**                  | **189**    | ** ** | ** ** | **$** | **(127** | **)** | ** ** | **$** | **378** | ** ** | ** ** | **$** | **(254** | **)** |

 
| ** **                              | ** ** | **Postretirement benefits** |       |
|-----------------------------------------|------------|-----------------------------|------------|
| ** **                              | ** ** | **Three months ended**      | ** ** | ** ** | **Six months ended** |   |
| *In thousands*                          | ** ** | **July 3, 2004**       | ** ** | ** ** | **Predecessor  June 28, 2003** | ** ** | ** ** | **July 3, 2004** | ** ** | ** ** | **Predecessor  June 28, 2003** |   |
| Service cost                            |       | $                           | 10         |   |   | $ | 19 |   |   | $ | 20 |   |   | $ | 39 |   |
| Interest cost                           |       | 93                          |       |   | 117 |   |   | 186 |   |   | 233 |   |
| Amortization of prior year service cost |       | —                      |       |   | (5 | ) |   | — |   |   | (10 | ) |
| Amortization of net actuarial loss      |       | —                      |       |   | 70 |   |   | — |   |   | 140 |   |
| Net periodic benefit expense            |       | **$**                       | **103**    | ** ** | ** ** | **$** | **201** | ** ** | ** ** | **$** | **206** | ** ** | ** ** | **$** | **402** | ** ** |

 

**13.****       Discontinued Operations**

 

In conjunction withexiting our Recognition business in December 2001, we recorded a $27.4million pre-tax loss on disposal for discontinued operations.  The pre-tax loss on disposal consisted of anon-cash charge of $11.1 million to write off certain net assets of theRecognition business plus a $16.3 million charge for accrued costs related toexiting the Recognition business. Components of the accrued exit costs are as follows:

 
| *In thousands*                                           | ** ** | **Initial  charge** | ** ** | **Prior  accrual** | ** ** | **Net  adjustments** | ** ** | **Utilization** | ** ** | **Balance  July 3, 2004** | ** ** |
|----------------------------------------------------------|------------|---------------------|------------|--------------------|------------|----------------------|------------|-----------------|------------|--------------------------------|------------|
| **Prior**                                                | ** ** | **2004**            |
| Employee separation benefits and other  related costs    |       | $                   | 6,164      |               | $          | —               |       | $               | (442       | )                              | $          | (5,265 | ) | $ | (66 | ) | $ | 391 |   |
| Phase-out costs of exiting the Recognition  business     |       | 4,255               |       | —             |       | (1,203               | )          | (2,670          | )          | 20                             |       | 402 |   |
| Salesperson transition benefits                          |       | 2,855               |       | 1,236              |       | (191                 | )          | (1,707          | )          | (219                           | )          | 1,974 |   |
| Other costs related to exiting the  Recognition business |       | 3,018               |       | 1,434              |       | (228                 | )          | (4,224          | )          | —                         |       | — |   |
|                                                     |       | **$**               | **16,292** | ** **         | **$**      | **2,670**            | ** ** | **$**           | **(2,064** | **)**                          | **$**      | **(13,866** | **)** | **$** | **(265** | **)** | **$** | **2,767** | ** ** |

 

Our obligation for separation benefits continues through 2004 over thebenefit period as specified under our severance plan, and transition benefitswill continue to be paid through the period of our contractual obligation.

 

11

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**ITEM2.**                             MANAGEMENT’SDISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

*The followingdiscussion addresses the results of operations for Jostens, Inc. for the three-and six-month periods ended June 28, 2003 and the combined results ofoperations for Jostens, Inc. and Jostens Holding Corp. for the three- andsix-month periods ended July 3, 2004. Jostens Holding Corp. is a holding company and has no significantbusiness operations.*

 

**GENERAL**

 

Jostens Holding Corp. and its subsidiaries (“we,” “our,” “us,” “JostensHoldings” or “the Company”) is a leading provider of school-related affinityproducts and services in three major product categories:  yearbooks, class rings and graduationproducts, which includes diplomas, graduation regalia such as caps and gowns,accessories and fine paper announcements. We also are a leading provider of school photography products and servicesin Canada and have a small but growing presence in the United States.

 

On June 17,2003, we entered into a merger agreement with Jostens and Ring AcquisitionCorp., an entity organized by us for the sole purpose of effecting anacquisition of Jostens.  On July 29,2003, Ring Acquisition Corp. merged with and into Jostens with Jostenssurviving as an indirect subsidiary of Jostens Holdings, which we refer to asthe merger.

 

Jostens Holdingswas capitalized in July 2003 through the issuance of common stock to DLJMerchant Banking Partners III, L.P. and certain of its affiliated funds(collectively, the “DLJMB Funds”) and members of our management, and receivedproceeds of $322.9 million.  JostensHoldings, in turn, capitalized JIHC, its wholly-owned subsidiary, through thepurchase of common stock for $317.9 million. JIHC used the $317.9 million, along with $100.0 million of proceeds fromthe issuance of redeemable preferred stock to the DLJMB Funds, to make acapital contribution of $417.9 million to Jostens.  Jostens, in turn, used the proceeds from thecapital contribution along with incremental borrowings under its senior securedcredit facility to repurchase all previously outstanding common stock andwarrants.  Jostens paid $471.0 million toholders of its common stock and warrants representing a cash payment of $48.25per share.

 

We accounted for the merger using the purchase method of accounting.  The price paid to holders of common stock andwarrants of $471.0 million, excluding certain capitalized transaction costs,was allocated to the tangible and intangible assets acquired and liabilitiesassumed, based upon their relative fair values as of the date of themerger.  As a result of the merger, theperiods ended June 28, 2003 are predecessor periods and the periods ended July3, 2004 are successor periods.

 

**RESULTS OF OPERATIONS**

 

Ourunaudited condensed consolidated financial statements for the three- andsix-month predecessor periods ended June 28, 2003, were prepared using thehistorical basis of accounting for Jostens, Inc.  Although a new basis of accounting began onJuly 29, 2003, we have adjusted our operating results for the three- andsix-month successor periods ended July 3, 2004 to exclude the impact ofpurchase accounting. The adjusted operating results may not reflect the actualresults we would have achieved absent the adjustments and may not be predictiveof future results of operations.  Wepresent this information because we use it to monitor and evaluate our ongoingoperating results and trends, and believe it provides investors anunderstanding of our operating performance over comparative periods.  Except where otherwise indicated, ourdiscussion below is based on the adjusted operating results for the post-mergerperiods.

 

**Three Months Ended July 3,2004 Compared to the Three Months Ended June 28, 2003**

 

The following table setsforth selected information from our condensed consolidated statements ofoperations expressed as a percentage of net sales.  In the text below, amounts and percentageshave been rounded and are based on the financial statement amounts.

 

12

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| *Dollars in thousands*              | ** ** | **Three Months  Ended  July 3, 2004** | ** ** | **Adjusted  Three Months  Ended  July 3, 2004** | ** ** | **Predecessor  Three Months  Ended  June 28, 2003** | ** ** | **$ Change** | ** ** | **% Change** | ** ** |
|-------------------------------------|------------|--------------------------------------------|------------|------------------------------------------------------|------------|----------------------------------------------------------|------------|-------------------|------------|--------------|------------|
| Net sales                           |       | $                                          | 376,186    |                                                 | $          | 376,186                                                  |       | $                 | 374,936    |         | $          | 1,250 |   | 0.3*%* |   |
| *% of net sales*                    | * *   | *100.0%*                                   | * *   | *100.0%*                                             | * *   | *100.0%*                                                 |       |              |       |         |       |
|                                |       |                                       |       |                                                 |       |                                                     |       |              |       |         |       |
| Cost of products sold               |       | 196,867                                    |       | 161,558                                              | (1)        | 161,005                                                  |       | 553               |       | 0.3*%*       |       |
| *% of net sales*                    | * *   | *52.3%*                                    | * *   | *42.9%*                                              | * *   | *42.9%*                                                  |       |              |       |         |       |
|                                |       |                                       |       |                                                 |       |                                                     |       |              |       |         |       |
| Gross profit                        |       | 179,319                                    |       | 214,628                                              |       | 213,931                                                  |       | 697               |       | 0.3*%*       |       |
| *% of net sales*                    | * *   | *47.7%*                                    | * *   | *57.1%*                                              | * *   | *57.1%*                                                  |       |              |       |         |       |
|                                |       |                                       |       |                                                 |       |                                                     |       |              |       |         |       |
| Selling and administrative expenses |       | 116,501                                    |       | 106,131                                              | (2)        | 108,589                                                  |       | (2,458            | )          | (2.3*%*      | )          |
| *% of net sales*                    | * *   | *31.0%*                                    | * *   | *28.2%*                                              | * *   | *29.0%*                                                  |       |              |       |         |       |
|                                |       |                                       |       |                                                 |       |                                                     |       |              |       |         |       |
| Operating income                    |       | 62,818                                     |       | 108,497                                              |       | 105,342                                                  |       | 3,155             |       | 3.0*%*       |       |
| *% of net sales*                    | * *   | *16.7%*                                    | * *   | *28.8%*                                              | * *   | *28.1%*                                                  |       |              |       |         |       |
|                                |       |                                       |       |                                                 |       |                                                     |       |              |       |         |       |
| Net interest expense                |       | 20,396                                     |       | 21,517                                               | (3)        | 13,535                                                   |       | 7,982             |       | 59.0*%*      | %          |
| *% of net sales*                    | * *   | *5.4%*                                     | * *   | *5.7%*                                               | * *   | *3.6%*                                                   |       |              |       |         |       |
|                                |       |                                       |       |                                                 |       |                                                     |       |              |       |         |       |
| Income before income taxes          |       | 42,422                                     |       | 86,980                                               |       | 91,807                                                   |       | (4,827            | )          | (5.3*%*      | )          |
| *% of net sales*                    | * *   | *11.3%*                                    | * *   | *23.1%*                                              | * *   | *24.5%*                                                  |       |              |       |         |       |
|                                |       |                                       |       |                                                 |       |                                                     |       |              |       |         |       |
| Provision for income taxes          |       | 10,181                                     |       | 27,830                                               | (4)        | 38,100                                                   |       | (10,270           | )          | (27.0*%*     | )          |
| *% of net sales*                    | * *   | *2.7%*                                     | * *   | *7.4%*                                               | * *   | *10.2%*                                                  |       |              |       |         |       |
|                                |       |                                       |       |                                                 |       |                                                     |       |              |       |         |       |
| Net income                          |       | $                                          | 32,241     |                                                 | $          | 59,150                                                   |       | $                 | 53,707     |         | $          | 5,443 |   | 10.1*%* |   |
| *% of net sales*                    | * *   | *8.6%*                                     | * *   | *15.7%*                                              | * *   | *14.3%*                                                  | * *   | * *          | * *   | * *     | * *   |

 

----

(1)          Adjusted to reverse $33.3 million ofamortization expense for excess purchase price allocated to an intangible assetfor order backlog and $2.0 million of depreciation expense for excess purchaseprice allocated to property and equipment.

 

(2)          Adjusted to reverse $10.0 million ofamortization expense for excess purchase price allocated to various intangibleassets and $0.4 million of depreciation expense for excess purchase priceallocated to property and equipment.

 

(3)          Adjusted to reverse $1.1 million ofamortization for excess purchase price allocated to premiums on the seniorsubordinated notes and redeemable preferred stock.

 

(4)          Adjusted to reflect reversal of $17.6 million of income tax benefitfrom the adjusted items above.

 

***NetSales***

 

Net sales increased $1.3million, or 0.3%, to $376.2 million for the three months ended July 3,2004 from $374.9 million for the same period last year.  The results were favorably impacted by modestprice increases and improved jewelry metal mix back to historical levels.  The results were unfavorably impacted bylower overall sales volume, which was driven primarily by the timing of deliveriesbetween the first and second quarters compared to last year.  Specific factors contributing to the volumefluctuation included:

 

•                  increasedorders for yearbooks associated with modest net account growth and ouracquisition of a yearbook business in the latter part of fiscal 2003;

•                  increasedjewelry orders for professional championship rings and an emerging specialtymarket;

•                  increasedorders for graduation regalia products attributable to net account growth, anincrease in sales of accessory items and an increase in collegiate regaliaunits per school;

•                  anincrease in the number of color pages per yearbook;

•                  decreasedsales volume due to a shift in deliveries from the second quarter to the firstquarter in 2004 for graduation products, thus reflecting more characteristicdelivery patterns; and

•                  lowersame school buy rates for high school class rings.

 

13

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***GrossProfit***

 

Gross profit increased$0.7 million, or 0.3%, to $214.6 million for the three months endedJuly 3, 2004 from $213.9 million for the same prior year period.  As a percentage of net sales, gross profitmargin of 57.1% was consistent with the same period last year.

 

Gross profit in 2004 wasmainly impacted by the sales fluctuations discussed above.  Gross profit was also impacted by highercosts for precious raw materials compared to last year as well as slight shiftsin product mix.  This was partiallyoffset by the effect of prior year non-recurring costs associated with thedifficulties we encountered in connection with the ERP systemimplementation.  Our efforts to resolvethose difficulties and to continue to provide timely delivery of our productsrequired us to incur additional production costs, as well as certain sellingand administrative expenses in the prior year. Although these efforts minimized the impact to our customers, theassociated costs negatively affected our margins in 2003.

 

***Sellingand Administrative Expenses***

 

Selling andadministrative expenses decreased $2.5 million, or 2.3%, to $106.1 million forthe three months ended July 3, 2004 from $108.6 million for the same prioryear period.  As a percentage of netsales, selling and administrative expenses decreased 0.8 percentage points to28.2% for the current three-month period from 29.0% for the same period lastyear.

 

The $2.5 million decreasewas due to the impact of prior year non-recurring costs associated with thedifficulties encountered with the ERP system implementation, lower commissionexpense associated with product mix within the quarter and lower informationsystems expense due to the timing of costs associated with maintenancecontracts as well as the elimination of depreciation expense related to fullyamortized software.  The decrease waspartially offset by increased spending on marketing activities.

 

***OperatingIncome***

 

Operating income increased $3.2 million to $108.5million for the three months ended July 3, 2004 from $105.3 million forthe same prior year period driven by slightly higher net sales and reducedselling and administrative expenses.

 

***NetInterest Expense***

 

Net interest expenseincreased $8.0 million, or 59.0%, to $21.5 million for the three months endedJuly 3, 2004 as compared to $13.5 million for the same prior yearperiod.  The increase was primarily dueto $3.9 million of additional interest expense on our 10.25% senior discountnotes and reclassification of $3.5 million of dividends on Jostens’ redeemablepreferred stock in connection with the prior year change in accountingprinciple.

 

***Provisionfor Income Taxes***

 

The effective rate of taxpresented for results of operations for the 2004 three-month period is acomponent of our consolidated effective rate for the entire year.  Applying a 24% estimated annual effectiverate to our consolidated results of operations for the 2004 three-month periodproduces a lower income tax expense, as adjusted to exclude the impact ofpurchase accounting, that is not intended to be comparable with income taxexpense recorded in the same prior year period.

 

We anticipate that thecomparable tax rate for the entire fiscal year, excluding the impact ofpurchase accounting, will be between 48% and 53%.  This rate is more than the federal statutorytax rate primarily due to the effect of nondeductible interest expenseassociated with our redeemable preferred stock and the effect of state incometaxes.

 

***NetIncome***

 

As a result of theaforementioned items, net income increased $5.4 million, or 10.1%, to $59.1million for the three months ended July 3, 2004 from $53.7 million for thesame prior year period.

 

14

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**Six Months Ended July 3,2004 Compared to the Six Months Ended June 28, 2003**

 

The following table setsforth selected information from our condensed consolidated statements ofoperations expressed as a percentage of net sales.  In the text below, amounts and percentageshave been rounded and are based on the financial statement amounts.

 
| *Dollars in thousands*              | ** ** | **Six Months  Ended  July 3, 2004** | ** ** | **Adjusted  Six Months  Ended  July 3, 2004** | ** ** | **Predecessor  Six Months  Ended  June 28, 2003** | ** ** | **$ Change** | ** ** | **% Change** | ** ** |
|-------------------------------------|------------|------------------------------------------|------------|----------------------------------------------------|------------|--------------------------------------------------------|------------|-------------------|------------|--------------|------------|
| Net sales                           |       | $                                        | 519,271    |                                               | $          | 519,271                                                |       | $                 | 496,460    |         | $          | 22,811 |   | 4.6% |   |
| *% of net sales*                    | * *   | *100.0%*                                 | * *   | *100.0%*                                           | * *   | *100.0%*                                               |       |              |       |         |       |
|                                |       |                                     |       |                                               |       |                                                   |       |              |       |         |       |
| Cost of products sold               |       | 257,647                                  |       | 219,369                                            | (1)        | 211,750                                                |       | 7,619             |       | 3.6%         |       |
| *% of net sales*                    | * *   | *49.6%*                                  | * *   | *42.2%*                                            | * *   | *42.7%*                                                |       |              |       |         |       |
|                                |       |                                     |       |                                               |       |                                                   |       |              |       |         |       |
| Gross profit                        |       | 261,624                                  |       | 299,902                                            |       | 284,710                                                |       | 15,192            |       | 5.3%         |       |
| *% of net sales*                    | * *   | *50.4%*                                  | * *   | *57.8%*                                            | * *   | *57.3%*                                                |       |              |       |         |       |
|                                |       |                                     |       |                                               |       |                                                   |       |              |       |         |       |
| Selling and administrative expenses |       | 204,804                                  |       | 184,066                                            | (2)        | 180,047                                                |       | 4,019             |       | 2.2%         |       |
| *% of net sales*                    | * *   | *39.4%*                                  | * *   | *35.4%*                                            | * *   | *36.3%*                                                |       |              |       |         |       |
|                                |       |                                     |       |                                               |       |                                                   |       |              |       |         |       |
| Operating income                    |       | 56,820                                   |       | 115,836                                            |       | 104,663                                                |       | 11,173            |       | 10.7%        |       |
| *% of net sales*                    | * *   | *10.9%*                                  | * *   | *22.3%*                                            | * *   | *21.1%*                                                |       |              |       |         |       |
|                                |       |                                     |       |                                               |       |                                                   |       |              |       |         |       |
| Loss on redemption of debt          |       | 420                                      |       | 1,276                                              | (3)        | —                                                 |       | 1,276             |       | NM           |       |
| *% of net sales*                    | * *   | *0.1%*                                   | * *   | *0.2%*                                             | * *   | *0.0%*                                                 |       |              |       |         |       |
|                                |       |                                     |       |                                               |       |                                                   |       |              |       |         |       |
| Net interest expense                |       | 40,159                                   |       | 42,137                                             | (4)        | 27,475                                                 |       | 14,662            |       | 53.4%        |       |
| *% of net sales*                    | * *   | *7.7%*                                   | * *   | *8.1%*                                             | * *   | *5.5%*                                                 |       |              |       |         |       |
|                                |       |                                     |       |                                               |       |                                                   |       |              |       |         |       |
| Income before income taxes          |       | 16,241                                   |       | 72,423                                             |       | 77,188                                                 |       | (4,765            | )          | (6.2%        | )          |
| *% of net sales*                    | * *   | *3.1%*                                   | * *   | *13.9%*                                            | * *   | *15.5%*                                                |       |              |       |         |       |
|                                |       |                                     |       |                                               |       |                                                   |       |              |       |         |       |
| Provision for income taxes          |       | 3,898                                    |       | 26,075                                             | (5)        | 32,079                                                 |       | (6,004            | )          | (18.7%       | )          |
| *% of net sales*                    | * *   | *0.8%*                                   | * *   | *5.0%*                                             | * *   | *6.5%*                                                 |       |              |       |         |       |
|                                |       |                                     |       |                                               |       |                                                   |       |              |       |         |       |
| Net income                          |       | $                                        | 12,343     |                                               | $          | 46,348                                                 |       | $                 | 45,109     |         | $          | 1,239 |   | 2.7% |   |
| *% of net sales*                    | * *   | *2.4%*                                   | * *   | *8.9%*                                             | * *   | *9.1%*                                                 | * *   | * *          | * *   | * *     | * *   |

 

----

NM= percentage not meaningful

 

(1)          Adjusted to reverse $34.4 million ofamortization expense for excess purchase price allocated to an intangible assetfor order backlog and $3.9 million of depreciation expense for excess purchaseprice allocated to property and equipment.

 

(2)          Adjusted to reverse $20.0 million ofamortization expense for excess purchase price allocated to various intangibleassets and $0.7 million of depreciation expense for excess purchase priceallocated to property and equipment.

 

(3)          In connection with the partial redemption ofthe senior subordinated notes, adjusted to reverse $0.9 million of acceleratedamortization for excess purchase price allocated to a premium on the notes

 

(4)          Adjusted to reverse $2.0 million ofamortization for excess purchase price allocated to premiums on the seniorsubordinated notes and redeemable preferred stock.

 

(5)          Adjusted to reflect reversal of $22.2 million of income tax benefitfrom the adjusted items above.

 

***NetSales***

 

Net sales increased $22.8million, or 4.6%, to $519.3 million for the six months ended July 3, 2004from $496.5 million for the same period last year.  The results were attributable to higheroverall volume, modest price increases and improved jewelry metal mix back tohistorical levels.  Specific factorscontributing to the increase in volume included:

 

•                  increasedorders for yearbooks associated with modest net account growth and ouracquisition of a yearbook business in the latter part of fiscal 2003;

 

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•                  increasedorders for graduation regalia products attributable to net account growth, anincrease in sales of accessory items and an increase in collegiate regaliaunits per school;

•                  aslight shift in customer demand for Spring rather than Fall deliveries ofyearbooks;

•                  anincrease in the number of color pages per yearbook; and

•                  increasedjewelry orders for professional championship rings and an emerging specialtymarket.

 

These increases werepartially offset by lower commercial printing volume and lower same school buyrates for high school class rings.

 

***GrossProfit***

 

Gross profit increased$15.2 million, or 5.3%, to $299.9 million for the six months ended July 3,2004 from $284.7 million for the same prior year period.  As a percentage of net sales, gross profitmargin increased 0.5 percentage points to 57.8% for the current six-monthperiod from 57.3% for the same period last year.

 

The increase in grossprofit was attributable to the sales fluctuations discussed above as well asthe impact of prior year non-recurring costs associated with the difficultiesencountered with the ERP system implementation. Our gross profit in the current period was negatively impacted by highercosts for precious raw materials compared to last year.

 

***Sellingand Administrative Expenses***

 

Selling andadministrative expenses increased $4.0 million, or 2.2%, to $184.0 million forthe six months ended July 3, 2004 from $180.0 million for the same prioryear period.  As a percentage of netsales, selling and administrative expenses decreased 0.9 percentage points to35.4% for the current six-month period from 36.3% for the same period lastyear.

 

The $4.0 million increasewas primarily due to higher commission expense as a result of increased sales,additional investment in customer service and increased spending on marketingactivities.

 

These increases werepartially offset by the following:

 

•                  theimpact of prior year non-recurring costs associated with the difficultiesencountered with the ERP system implementation;

•                  theimpact of prior year non-recurring costs for severance, a legal settlement andacquisition related items; and

•                  lowerinformation systems expense due to the timing of costs associated withmaintenance contracts and the elimination of depreciation expense related tofully amortized software.

 

***OperatingIncome***

 

Operating income increased $11.2 million to $115.8million for the six months ended July 3, 2004 from $104.7 million for thesame prior year period driven by higher net sales, improved gross profit marginand improved cost control.

 

***Losson Redemption of Debt***

 

During the six months ended July 3, 2004, wevoluntarily redeemed $5.0 million principal amount of Jostens’ seniorsubordinated notes and recognized a loss of $0.4 million, including the impactof purchase accounting, consisting of $0.8 million of premium paid onredemption of the notes and a net $0.4 million credit resulting from thewrite-off of related unamortized premium, original issuance discount anddeferred financing costs.

 

***NetInterest Expense***

 

Net interest expenseincreased $14.7 million, or 53.4%, to $42.1 million for the six months endedJuly 3, 2004 as compared to $27.5 million for the same prior yearperiod.  The increase was primarily dueto $7.7 million of additional interest expense on our 10.25% senior discountnotes and reclassification of $7.2 million of dividends on Jostens’ redeemablepreferred stock in connection with the prior year change in accountingprinciple.

 

16

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***Provisionfor Income Taxes***

 

The effective rate of taxpresented for results of operations for the current six-month period is acomponent of our consolidated effective rate for the entire year.  Applying a 24% estimated annual effectiverate to our consolidated results of operations for the 2004 six-month periodproduces a lower income tax expense, as adjusted to exclude the impact ofpurchase accounting, that is not intended to be comparable with income taxexpense recorded in the same prior year period.

 

We anticipate that thecomparable tax rate for the entire fiscal year, excluding the impact ofpurchase accounting, will be between 48% and 53%.  This rate is more than the federal statutorytax rate primarily due to the effect of nondeductible interest expense associatedwith our redeemable preferred stock and the effect of state income taxes.

 

***NetIncome***

 

As a result of theaforementioned items, net income increased $1.2 million, or 2.7%, to $46.3million for the six months ended July 3, 2004 from $45.1 million for thesame prior year period.

 

**LIQUIDITY AND CAPITAL RESOURCES**

 

Net cash provided byoperating activities for the six months ended July 3, 2004 was $33.1million compared to $32.2 million for the same prior year period.  The cash provided by operating activities andthe proceeds from borrowings funded $11.6 million in capital expenditures.  Also during the six months ended July 3,2004, we voluntarily prepaid $36.0 million on our senior secured creditfacility and redeemed $5.0 million principal amount of the Jostens seniorsubordinated notes for total consideration paid of $5.8 million.

 

Our principal sources ofliquidity are cash flows from operating activities and borrowings under oursenior secured credit facility, which included $129.6 million available underour revolving credit facility as of July 3, 2004.  We use our cash primarily for debt serviceobligations, capital expenditures and to fund working capitalrequirements.  We believe that cashgenerated from operations and available cash, together with availableborrowings under the senior secured credit facility, will be adequate to meetour anticipated requirements for working capital, planned capital expendituresand scheduled payments of principal and interest on our indebtedness for thenext twelve months.

 

The senior secured creditfacility and the Jostens senior subordinated notes contain certaincross-default and cross-acceleration provisions whereby default under oracceleration of one debt obligation would, consequently, cause a default or accelerationunder the other debt obligation.  As ofJuly 3, 2004, we were in compliance with all covenants.

 

**OTHERMATTERS**

 

***Facility Closure***

 

On June 22, 2004, we announced ourdecision to close our graduation diploma customer service and productionoperations at our Red Wing, MN manufacturing facility, and to relocate theseoperations to facilities in Owatonna, MN, Shelbyville, TN and Topeka, KS.  During the three months ended July 3,2004, we established a $2.9 million purchase accounting liability for severanceand other personnel costs related to the involuntary termination or relocationof employees associated with these plans. The decision to close the Red Wing facility was based on improvingcustomer service and overall efficiency of Jostens.  On June 22, 2004, we formallycommunicated the termination of employment to approximately 180 full-time andseasonal plant and administrative employees. We anticipate that the majority of these exit costs will be paid during2004.

 

In addition to the exit costs, during theremainder of 2004, we expect to incur $1.3 million of capital expendituresrelated to moving these operations as well as approximately $2.2 million ofperiod costs to transfer equipment, develop information systems and trainemployees.

 

***Pending Transaction***

 

On July 21,2004, Jostens Holdings (“JHC”) entered into a contribution agreement (the“Contribution Agreement”) with Fusion Acquisition LLC (“AcquisitionCo”), anewly-formed entity owned by investment funds of Kohlberg Kravis & RobertsCo. L.P. (“KKR”), pursuant to which JHC shall issue common stock of JHC toAcquisitionCo and AcquisitionCo shall contribute to JHC the capital stock ofeach of (i) Von Hoffmann Holdings Inc. (“Von Hoffmann”), a leading printer ofeducational textbooks, supplemental materials, book components and directmarketing print services, and (ii) AHC I Acquisition Corp. (“Arcade”), aleading manufacturer of sampling products for the fragrance, cosmetics,consumer products and food and beverage industries.  AcquisitionCo will acquire each of VonHoffmann and Arcade immediately prior to consummation of the ContributionAgreement pursuant to

 

17

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separate mergeragreements entered into between AcquisitionCo and Von Hoffmann and Arcade,respectively.  The transactions areexpected to close late in the third quarter or early in the fourth quarter of2004.

 

Von Hoffmann and Arcadeare each currently controlled by DLJ Merchant Banking Partners II, L.P. andcertain of its affiliated funds.  DLJMerchant Banking Partners III, L.P. and certain of its affiliated funds(collectively, the “DLJMB III Funds”) currently beneficially own approximately82.5% of JHC’s outstanding voting securities. Upon the closing of the transactions contemplated by the ContributionAgreement, KKR will be issued equity interests representing approximately 45%of the economic interests and 50% of the voting interests of JHC, and the DLJMBIII Funds will own equity interests representing approximately 45% of the economicinterests and approximately 41% of the voting interests of JHC.  Upon the closing of the ContributionAgreement, the Board of Directors of JHC is expected to consist of ninedirectors, four of whom will be appointed by KKR, four of whom will be appointedby the DLJMB III Funds and one of whom will be the Chief Executive Officer ofJHC, initially Marc Reisch.

 

In connection with the transactions, Jostens IH Corp., our wholly-ownedsubsidiary, has received a commitment from Credit Suisse First Boston for newsenior secured credit facilities consisting of: (i) two senior secured term loan facilities in an aggregate principalamount of up to $1,020.0 million and (ii) a senior secured revolving creditfacility in an aggregate principal amount of $250.0 million (the “CreditFacilities”) and a $500.0 million increasing rate bridge loan facility (the“Bridge Facility”).  Jostens IH Corp. expectsto use a portion of the proceeds from the Credit Facilities and the BridgeFacility (or any offering of notes that may be issued in lieu of the BridgeFacility) to fund certain tender payments due to holders of Jostens’ 12.75%Senior Subordinated Notes due 2010 who elect to tender their notes pursuant toa tender offer and consent solicitation expected to be commenced inAugust 2004 and to satisfy and discharge the indenture with respect to thenotes that are not tendered pursuant to such tender offer.  In connection with the transactions, VonHoffmann and Arcade are each expected to tender for certain of their own existingindebtedness and redeem such indebtedness not so tendered, or defease orsatisfy and discharge the indentures governing such indebtedness.   Concurrently with the consummation of thetransactions contemplated by the Contribution Agreement, Jostens intends torepurchase all issued and outstanding shares of its 14% Senior RedeemablePayment-in-Kind Preferred Stock.  JHC’s10.25% Senior Discount Notes are expected to remain outstanding.

 

The Credit Facilities will require that we meet certain financial covenants,ratios and tests, including a maximum leverage ratio, a maximum senior leverageratio and a minimum interest coverage ratio. In addition, we will be required to pay certain fees in connection withthe Credit Facilities, including letter of credit fees, agency fees andcommitment fees on the average daily unused portion of the revolving creditfacility.

 

**CRITICALACCOUNTING POLICIES**

 

The preparation ofinterim financial statements involves the use of certain estimates that differfrom those used in the preparation of the annual financial statements, the mostsignificant of which relates to income taxes. For purposes of preparing our interim financial statements, we utilizean estimated annual effective tax rate based on estimates of the componentsthat impact the tax rate.  Thosecomponents are re-evaluated each interim period and, if changes in ourestimates are significant, we modify our estimate of the annual effective taxrate and make any required adjustments in the interim period.

 

There have been nomaterial changes to our critical accounting policies and estimates as describedin Item 7 of our Form 10-K for the fiscal year ended January 3, 2004(“2003 Form 10-K”).

 

**CAUTIONARY NOTE REGARDING FORWARD-LOOKINGSTATEMENTS**

 

This report may contain“forward-looking statements.” Forward-looking statements are based on our current expectations orforecasts of future events. Forward-looking statements generally can be identified by the use offorward-looking terminology such as “may,” “will,” “expect,” “intend,”“estimate,” “anticipate,” “believe,” “project,” or “continue,” or the negativethereof or similar words.  We base theseforward-looking statements on assumptions that we believe are reasonable;however, these assumptions may prove incorrect or be affected by known orunknown risks or uncertainties.  As aresult, actual results may vary materially from those set forth in ourforward-looking statements.  Investorsare cautioned not to place undue reliance on any forward-looking statements.

 

18

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These risks anduncertainties that would cause our actual results to differ include, but arenot limited to the following: 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; thefluctuating prices of raw materials, primarily gold; our dependence on a keysupplier for our precious, semiprecious and synthetic stones; our dependence onnumerous complex information systems for operational and financial information;fashion, consumer preferences and demographic trends; the competitiveenvironment; general economic conditions; litigation cases, if decided againstus, that could adversely affect our financial results; and environmentalregulations that could impose substantial costs upon us adversely affecting ourfinancial results.

 

The foregoing factors are not exhaustive, and new factors may emerge orchanges to the foregoing factors may occur that could impact our business.  Except to the extent required by law, weundertake no obligation to publicly update or revise any forward-lookingstatements.

 

**ITEM 3.****                             QUANTITATIVEAND QUALITATIVE DISCLOSURES ABOUT MARKET RISK**

 

There have been no material changes in our exposure to market riskduring the quarter ended July 3, 2004. For additional information, refer to Item 7A of our 2003 Form 10-K.

 

**ITEM 4.****                             CONTROLSAND PROCEDURES**

 

As of the end of theperiod covered by this report, management, under the supervision of our ChiefExecutive Officer and Chief Financial Officer, evaluated the effectiveness ofthe design and operation of our disclosure controls and procedures that aredesigned to ensure that information that is required to be disclosed in ourquarterly report is recorded, processed and summarized within time periodsspecified in the Securities and Exchange Commission’s rules and regulations andthat such information is accumulated and communicated to our management, includingour Chief Executive Officer and Chief Financial Officer, as appropriate toallow timely decisions regarding required disclosures.  Based upon that evaluation, our ChiefExecutive Officer and Chief Financial Officer concluded that these disclosurecontrols and procedures are effective, in all material respects, in timelyalerting them to material information relating to Jostens Holding Corp.required to be included in our periodic reports filed under the SecuritiesExchange Act of 1934, as amended.

 

There have been nosignificant changes in our internal controls or in other factors subsequent tothe date of the evaluation that have materially affected, or are reasonablylikely to materially affect, these controls.

 

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**PART II. OTHER INFORMATION**

 

**ITEM 1.****                             LEGALPROCEEDINGS**

 

We are a party to litigation arising in the normal course ofbusiness.  We regularly analyze currentinformation and, as necessary, provide accruals for probable liabilities on theeventual disposition of these matters. We believe the effect on our consolidated results of operations, cashflows and financial position, if any, for the disposition of these matters willnot be material.

 

**ITEM 6.****                             EXHIBITSAND REPORTS ON FORM 8-K**

 

**(a)****                                 **Exhibits

 

2.1                                 Contribution Agreement dated as ofJuly 21, 2004 between Jostens Holding Corp. and Fusion Acquisition LLC

 

31.1                           Certificationof Chief Executive Officer pursuant to Section 302 of the Sarbanes-OxleyAct of 2002

 

31.2                           Certificationof Chief Financial Officer pursuant to Section 302 of the Sarbanes-OxleyAct of 2002

 

32.1                           Certificationof Chief Executive Officer and Chief Financial Officer pursuant toSection 906 of the Sarbanes-Oxley Act of 2002

 

**(b)****                                 **Reports on Form 8-K during the quarter endedJuly 3, 2004

 

A Form 8-K was filed on June 23, 2004,announcing our decision to move our graduation diploma customer service andproduction operations and close our Red Wing, MN manufacturing facility.

 

20

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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 theundersigned thereunto duly authorized.

 

 
| ** **                       | **JOSTENS HOLDING CORP.**     |
|----------------------------------|-------------------------------|
|                             |                          |
|                             |                          |
| Date:  August 16, 2004 | /s/ Michael L. Bailey         |
|                             | Michael L. Bailey             |
| * *                         | *Chief Executive Officer*     |
|                             |                          |
|                             |                          |
| Date:  August 16, 2004 | /s/ David A. Tayeh            |
|                             | David A. Tayeh                |
| * *                         | *Sr. Vice President*          |
| * *                         | *and Chief Financial Officer* |

 

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