##### Table of Contents




UNITED STATES SECURITIES AND EXCHANGE COMMISSION


Washington, D.C. 20549








FORM 10-Q








xQUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE


SECURITIES EXCHANGE ACT OF 1934





For the Quarterly Period Ended June 29, 2002





OR





 ̈ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE


SECURITIES
EXCHANGE ACT OF 1934








Commission file number 1-5064








Jostens, Inc.


(Exact name of Registrant as specified in its charter)











Minnesota

41-0343440(State or other jurisdiction of incorporation or organization)

(I.R.S. employer identification number)5501 Norman Center Drive, Minneapolis, Minnesota

55437(Address of principal executive offices)

(Zip code)








Registrants telephone number: (952)
830-3300











Indicate by check mark whether the
registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports) and (2) has
been subject to such filing requirement for the past 90 days. Yes [X]    No [    ]





On August 9,
2002 there were 8,955,741 shares of the Registrants common stock outstanding.







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##### Table of Contents




Jostens, Inc. and Subsidiaries





PagePart I Financial InformationItem 1.

Financial Statements (Unaudited)Condensed Consolidated Statements of Operations for the three and six months ended June 29, 2002 and June 30, 2001

3Condensed Consolidated Balance Sheets as of June 29, 2002, June 30, 2001 and December 29, 2001

4Condensed Consolidated Statements of Cash Flows for the six months ended June 29, 2002 and June 30, 2001

5Notes to Condensed Consolidated Financial Statements

6Item 2.

Managements Discussion and Analysis of Financial Condition and Results of Operations

12Item 3.

Quantitative and Qualitative Disclosures about Market Risk

18Part II Other InformationItem 1.

Legal Proceedings

19Item 6.

Exhibits and Reports on Form 8-K

19Signatures

20







2




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##### Table of Contents




PART I FINANCIAL INFORMATION





ITEM 1.    FINANCIAL STATEMENTS





JOSTENS, INC. AND SUBSIDIARIES


CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)





Three months ended


Six months endedIn thousands, except per-share data

June 29, 2002


June 30, 2001


June 29, 2002


June 30, 2001Net sales

$
353,720


$
337,740


$
475,043


$
454,804Cost of products sold


151,446



145,638



199,153



191,564Gross profit


202,274



192,102



275,890



263,240Selling and administrative expenses


100,480



95,433



167,491



162,548Special charges






2,138







2,138Operating income


101,794



94,531



108,399



98,554Net interest expense


17,016



19,640



34,706



40,922Income from continuing operations before income taxes


84,778



74,891



73,693



57,632Provision for income taxes


35,184



31,012



30,584



23,739Income from continuing operations


49,594



43,879



43,109



33,893Gain (loss) on discontinued operations, net of tax


940



(1,391
)


940



(3,681
)Net income


50,534



42,488



44,049



30,212Dividends and accretion on redeemable preferred shares


(2,883
)


(2,504
)


(5,666
)


(4,922
)Net income available to common shareholders

$
47,651


$
39,984


$
38,383


$
25,290Earnings per common shareBasicIncome from continuing operations

$
5.22


$
4.60


$
4.18


$
3.22Gain (loss) on discontinued operations


0.10



(0.15
)


0.10



(0.41
)Basic earnings per common share

$
5.32


$
4.45


$
4.28


$
2.81DilutedIncome from continuing operations

$
4.70


$
4.16


$
3.77


$
2.91Gain (loss) on discontinued operations


0.09



(0.14
)


0.09



(0.37
)Diluted earnings per common share

$
4.79


$
4.02


$
3.86


$
2.54Weighted average common shares outstandingBasic


8,958



8,993



8,961



8,993Diluted


9,951



9,949



9,946



9,949





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




3




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JOSTENS, INC. AND SUBSIDIARIES


CONDENSED CONSOLIDATED BALANCE SHEETS





(Unaudited)


December 29, 2001In thousands, except per-share data

June 29, 2002


June 30, 2001ASSETSCurrent assetsCash and cash equivalents

$
59,148


$
43,070


$
43,100Accounts receivable, net of allowance of $3,789, $3,550 and $3,657


80,418



94,440



56,238Inventories, net of reserve of $2,340, $3,558 and $2,089


47,167



60,728



70,514Deferred income taxes


19,964



17,995



19,964Salespersons overdrafts, net of allowance of $6,595, $5,800 and $6,897


14,913



14,177



28,037Prepaid expenses and other current assets


5,189



4,574



7,723Current assets of discontinued operations










7,029Total current assets


226,799



234,984



232,605Other assetsIntangibles, net


14,763



17,105



14,260Deferred financing costs, net


25,194



30,331



27,476Other


34,520



30,672



32,075Total other assets


74,477



78,108



73,811Property and equipment


274,431



290,061



267,255Less accumulated depreciation


(209,562
)


(216,136
)


(199,064
)Property and equipment, net


64,869



73,925



68,191$
366,145


$
387,017


$
374,607LIABILITIES AND SHAREHOLDERS DEFICITCurrent liabilitiesAccounts payable

$
8,040


$
14,569


$
18,721Accrued employee compensation and related taxes


26,519



25,855



27,392Commissions payable


41,996



43,479



18,639Customer deposits


59,662



58,516



126,400Income taxes payable


48,556



38,307



16,940Interest payable


7,667



8,876



10,567Current portion of long-term debt


22,049



20,879



20,966Other accrued liabilities


13,906



16,073



16,913Current liabilities of discontinued operations


5,939







16,511Total current liabilities


234,334



226,554



273,049Long-term debtless current maturities, net of unamortized original issue discount of $17,547, $18,700 and
$18,143


610,547



655,430



626,017Other noncurrent liabilities including deferred tax liabilities of $4,077, $5,108 and $3,472


15,342



15,385



15,628Total liabilities


860,223



897,369



914,694Commitments and contingenciesRedeemable preferred shares $.01 par value (liquidation preference: $78,741;authorized: 308 shares; issued and
outstanding: June 29, 200279;June 30, 200169; December 29, 200174


64,710



53,763



59,043Preferred shares $.01 par value (authorized: 4,000 shares; issued and outstanding in the form of redeemable preferred
shares listed above: June 29, 200279; June 30, 200169: December 29, 200174; undesignated: 3,921)










Shareholders deficitCommon shares (note 8)


1,003



1,015



1,006Additional paid-in-capitalwarrants


24,733



24,733



24,733Officer notes receivable


(1,578
)


(1,775
)


(1,407
)Accumulated deficit


(572,845
)


(578,822
)


(610,959
)Accumulated other comprehensive loss


(10,101
)


(9,266
)


(12,503
)Total shareholders deficit


(558,788
)


(564,115
)


(599,130
)$
366,145


$
387,017


$
374,607





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







4




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JOSTENS, INC. AND SUBSIDIARIES


CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)





Six months endedIn thousands

June 29, 2002


June 30, 2001Operating activitiesNet income

$
44,049


$
30,212Adjustments to reconcile net income to net cash provided by operating activitiesDepreciation


11,492



12,998Amortization of debt discount and deferred financing costs


2,878



3,547Other amortization


1,099



1,634Other


(311
)


(2,319
)Changes in assets and liabilities:Accounts receivable


(24,180
)


(29,496
)Inventories


23,347



30,502Commissions payable


23,357



23,584Customer deposits


(66,738
)


(50,332
)Income taxes payable


31,616



23,152Other


(6,977
)


(13,005
)Net cash provided by operating activities


39,632



30,477Investing activitiesPurchases of property and equipment


(8,512
)


(9,045
)Other investing activities, net


56



4,077Net cash used for investing activities


(8,456
)


(4,968
)Financing activitiesPrincipal payments on long-term debt


(14,983
)


(8,991
)Other financing activities, net


(145
)


Net cash used for financing activities


(15,128
)


(8,991
)Change in cash and cash equivalents


16,048



16,518Cash and cash equivalents, beginning of period


43,100



26,552Cash and cash equivalents, end of period

$
59,148


$
43,070





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







5




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##### Table of Contents



Notes to Condensed Consolidated Financial Statements (Unaudited)


Jostens, Inc. and subsidiaries







|1. |  | Basis of Presentation
|-- |  | ---------------------




We prepared our accompanying unaudited condensed consolidated financial statements following the requirements of the Securities and Exchange (SEC) for interim reporting. As permitted under those rules, certain footnotes
or other financial information normally required by accounting principles generally accepted in the United States of America can be condensed or omitted. Therefore, we suggest that these financial statements be read in conjunction with the
consolidated financial statements and notes thereto included in our Form 10-K for the fiscal year ended December 29, 2001 (2001 Form 10-K). The condensed consolidated balance sheet data as of December 29, 2001 were derived from audited
financial statements, but do not include all disclosures required by accounting principles generally accepted in the United States of America.





Revenues, expenses, cash flows, assets and liabilities can and do vary during each quarter of the year. Therefore, the results and trends in these interim financial statements may not be the same as those for the full year.





In our opinion, the accompanying unaudited condensed consolidated financial statements include all adjustments (consisting of normal
recurring items) considered necessary to present fairly, when read in conjunction with the 2001 Form 10-K, our financial position, results of operations and cash flows for the periods presented. Certain balances have been reclassified to conform to
the 2002 presentation.





|2. |  | Earnings Per Common Share
|-- |  | -------------------------




Basic earnings per share are computed by dividing net income available to common shareholders by the weighted average number of outstanding common shares. Diluted earnings per share are computed by dividing net income available to
common shareholders by the weighted average number of outstanding common shares and common share equivalents. Common share equivalents include the dilutive effects of warrants and options.





For the three and six-month periods ended June 29, 2002 and June 30, 2001, approximately 1.0 million shares of common stock equivalents were included in the computation of diluted net
earnings per share. Options to purchase 42,250 shares of common stock were outstanding at June 29, 2002, but were excluded from the computation of common share equivalents for the six-month period ended June 29, 2002 because they were antidilutive.





|3. |  | Comprehensive Income (Loss)
|-- |  | ---------------------------




Comprehensive income and its components, net of tax, are as follows:





Three months ended

Six months endedIn thousands

June 29, 2002

June 30, 2001

June 29, 2002

June 30, 2001Net income

$
50,534

$
42,488

$
44,049

$
30,212Change in cumulative translation adjustment


1,239


784


1,249


(322
)Transition adjustment relating to adoption of SFAS 133











(1,821
)Change in fair value of interest rate swap agreement


64


202


924


(932
)Change in fair value of foreign currency hedge


229





229


1,532


986


2,402


(3,075
)Comprehensive income

$
52,066

$
43,474

$
46,451

$
27,137




6




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Notes to Condensed Consolidated Financial Statements (Unaudited)


Jostens, Inc. and subsidiaries







The following amounts were included in accumulated other comprehensive loss as of June 29,
2002:





In thousands

Foreign currency translation


Minimum pension liability


Fair value of interest rate swap


Fair value of foreign currency hedge

Accumulated other comprehensive lossBalance at December 29, 2001

$
(6,745
)

$
(2,371
)

$
(3,387
)

$


$
(12,503
)Current period change


1,249







924



229


2,402Balance at June 29, 2002

$
(5,496
)

$
(2,371
)

$
(2,463
)

$
229

$
(10,101
)





|4. |  | Derivatives and Hedging Activities
|-- |  | ----------------------------------




We use a floating-to-fixed cash flow interest rate swap to modify risk from interest rate fluctuations in our underlying debt. Our senior secured credit facility bears a variable interest rate predominantly linked to LIBOR. The
interest rate provided by the swap agreement is fixed at 7.0% as opposed to LIBOR. Notional amounts outstanding as of June 29, 2002, June 30, 2001 and December 29, 2001 were $95.0 million, $120.0 million and $100.0 million, respectively.
Substantially all aspects of the swap agreement expire June 30, 2003. We expect that pre-tax costs totaling $4.1 million, which are recorded in accumulated other comprehensive loss (AOCL) at June 29, 2002, and represent the difference
between the fixed rate of the swap agreement and variable interest of the term note, will be recognized within the next twelve months as part of interest expense. The fair value of the interest rate swap is based on current settlement values and as
of June 29, 2002, June 30, 2001 and December 29, 2001 was a non-cash liability of $4.1 million ($2.5 million net of tax), $4.6 million ($2.8 million net of tax) and $5.6 million ($3.4 million net of tax), respectively, and is recorded in other
noncurrent liabilities in our Condensed Consolidated Balance Sheet. Based on the critical terms of the interest rate swap and the hedged debt, there is no ineffectiveness for this hedge.





The purpose of our foreign currency hedging activities is to protect us from the risk that inventory purchases denominated in foreign currency will be adversely affected by changes in
foreign currency rates. We enter into forward exchange contracts to hedge forecasted cash flows denominated in foreign currencies (principally euro). The effective portion of the changes in fair value for these contracts, which have been designated
as cash flow hedges, is reported in AOCL and reclassified into earnings in the same financial statement line item and in the same period or periods during which the hedged transaction affects earnings. Any ineffective portion of the change in fair
value of these instruments is immediately recognized in earnings. The amount of contracts outstanding at June 29, 2002 was $2.2 million. There were no forward exchange contracts outstanding at June 30, 2001 and December 29, 2001. These contracts
will mature over the remainder of the current fiscal year, the period in which all amounts included in AOCL will be reclassified into earnings.





|5. |  | Inventories
|-- |  | -----------




Inventories, net are comprised of the following:





In thousands

June 29, 2002

June 30, 2001

December 29, 2001Raw material and supplies

$
11,855

$
15,840

$
10,302Work-in-process


24,228


27,864


28,447Finished goods


11,084


17,024


31,765Total inventories, net

$
47,167

$
60,728

$
70,514





Net inventories as of June 30, 2001 included $7.6 million related to discontinued
operations.




7




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##### Table of Contents



Notes to Condensed Consolidated Financial Statements (Unaudited)


Jostens, Inc. and subsidiaries







|6. |  | Goodwill and Other Intangible Assets
|-- |  | ------------------------------------




On December 30, 2001, the beginning of our fiscal year, we adopted Statement of Financial Accounting Standards No. 142 (SFAS 142), Goodwill and Other Intangible Assets. SFAS 142 addresses the accounting and
financial reporting for acquired goodwill and other intangible assets. Under the new statement, goodwill and intangible assets with indefinite lives are no longer amortized, but are subject to impairment testing on at least an annual basis. Other
than goodwill, we have no intangible assets with indefinite useful lives. Adoption of this statement resulted in no goodwill impairment losses and had no impact on our financial position as of December 30, 2001. Had SFAS 142 been effective at the
beginning of 2001, the non-amortization provisions would have increased net earnings by $0.3 million and $0.5 million for the three and six months ended June 30, 2001 and would have increased income from continuing operations by $0.1 million and
$0.3 million for the same periods. As of June 29, 2002, the net carrying amount of goodwill was $14.3 million and intangible pension assets totaled $0.5 million.





|7. |  | Borrowings
|-- |  | ----------




Long-term
debt consists of the following:





In thousands

June 29, 2002

June 30, 2001

December 29, 2001Borrowings under senior secured credit facility:Term loan A, variable rate, 4.11 percent at June 29, 2002, 6.59 percent at June 30, 2001 and 4.63 percent at December
29, 2001, with semi-annual principal and interest payments through May 2006

$
94,852

$
128,956

$
108,187Term loan B, variable rate, 5.36 percent at June 29, 2002, 7.34 percent at June 30, 2001 and 5.38 percent at December
29, 2001, with semi-annual principal and interest payments through May 2008


330,291


341,053


331,939Senior subordinated notes, 12.75 percent fixed rate, net of discounts of $17,547 at June 29, 2002, $18,700 at June 30,
2001 and $18,143 at December 29, 2001, with semi-annual interest payments of $14,334, principal due and payable at maturityMay 2010


207,453


206,300


206,857632,596


676,309


646,983Less current portion


22,049


20,879


20,966$
610,547

$
655,430

$
626,017





We have a $150.0 million revolving credit facility that expires on May 31, 2006. We may
borrow funds and elect to pay interest under the alternative base rate or eurodollar interest rate provisions as defined in the agreement. The eurodollar rate is based upon the London Interbank Offered Rate
(LIBOR) and the alternative base rate is based upon the prime rate. There was $6.3 million outstanding under this facility, in the form of letters of credit, as of June 29, 2002.





|8. |  | Shareholders Deficit
|-- |  | ---------------------




Our common stock consists of Class A through Class E common stock as well as undesignated common stock. Holders of Class A common stock are entitled to one vote per share, whereas holders of Class D common stock are entitled to
306.55 votes per share. Holders of Class B common stock, Class C common stock and Class E common stock have no voting rights.




8




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##### Table of Contents



Notes to Condensed Consolidated Financial Statements (Unaudited)


Jostens, Inc. and subsidiaries







The par value and number of authorized, issued and outstanding shares for each class of
common stock is set forth below:





In thousands, except par value data

Par Value

Authorized Shares

Issued and Outstanding SharesJune 29, 2002

June 30, 2001

December 29, 2001Class A

$.33 1/3

4,200

2,825

2,862

2,834Class B

$.01

5,300

5,300

5,300

5,300Class C

$.01

2,500

811

811

811Class D

$.01

20

20

20

20Class E

$.01

1,900





Undesignated

$.01

12,020





25,940

8,956

8,993

8,965





During the quarter ended June 29, 2002, we repurchased 9,522 actual shares of our Class A
common stock from a senior executive in accordance with his separation agreement. The senior executive repaid an outstanding promissory note of approximately $0.1 million. The promissory note had been executed by the executive as partial payment for
such shares.





|9. |  | Special Charges
|-- |  | ---------------




Accrued special charges of $0.2 million, $2.0 million and $0.2 million at June 29, 2002, June 30, 2001 and December 29, 2002, respectively, are included in other current liabilities in our Condensed Consolidated Balance
Sheets. In the second quarter of 2001, we entered into a separation agreement with a senior executive. The total cost of $2.1 million for severance and related termination benefits was expensed in 2001 and included costs for the senior executive and
two other management personnel. We utilized $1.9 million of the special charge in 2001. The remaining liability of approximately $0.2 million will continue to be paid out over the next twelve months as specified under the separation agreement.





|10. |  | Discontinued Operations
|--- |  | -----------------------




Discontinued operations represents the results of our Recognition business, which we exited on December 3, 2001 by selling certain assets and leasing our production facility to a current supplier who manufactures awards and trophies.





Revenue and loss from discontinued operations for the three and six-month periods ended June 30, 2001 were as follows:





In thousands

Three months ended June 30, 2001


Six months ended June 30, 2001Revenue from external customers

$
13,235


$
32,940Pre-tax loss from operations of discontinued operations before measurement date

$
(2,262
)

$
(5,985
)Pre-tax loss on disposal






Income tax benefit


871



2,304Net loss from discontinued operations

$
(1,391
)

$
(3,681
)





In conjunction with exiting the Recognition business, we recorded a $27.4 million pre-tax
loss on disposal for the discontinued segment in the fourth quarter of 2001. The pre-tax loss on disposal consisted of a non-cash charge of $11.1 million to write off certain net assets not sold in the exit from the Recognition business plus a $16.3
million charge for accrued costs related to exiting the Recognition business. During the three-month period ended June 29, 2002, we reversed $1.4 million of these charges plus an additional $0.2







9




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##### Table of Contents



Notes to Condensed Consolidated Financial Statements (Unaudited)


Jostens, Inc. and subsidiaries




million in other liabilities for a total pre-tax gain on discontinued operations of $1.6 million ($0.9 million, net of tax).
Components of the accrued disposal costs are as follows:





In thousands

Initial charge

Prior accrual

Net adjustments in 2002


Utilization


Balance June 29, 2002Six months ended June 29, 2002Employee separation benefits and other related costs

$
6,164

$


$
(550
)

$
(4,443
)

$
1,171Phase-out costs of exiting the Recognition business


4,255





(874
)


(2,592
)


789Salesperson transition benefits


2,855


1,236






(737
)


3,354Other costs related to exiting the Recognition business


3,018


1,434






(3,069
)


1,383$
16,292

$
2,670

$
(1,424
)

$
(10,841
)

$
6,697





The plan of disposal contemplated a workforce reduction of 150 full-time positions in the
Recognition business and corporate support functions. As of June 29, 2002, 114 employees had been terminated and the estimated workforce reduction has been revised to 130 full-time positions resulting in a $0.5 million pre-tax reduction to the
accrued costs. Termination benefits will continue to be paid out over the benefit period as specified under our severance plan.





The $4.3
million charge for phase-out costs of exiting the Recognition business included $1.3 million for payroll and benefits, $0.8 million for information systems and customer service costs and $2.2 million of internal support costs expected to be incurred
during the phase-out period. During the quarter ended June 29, 2002, we revised our estimate of phase-out costs, resulting in a $0.9 million pre-tax reduction to the accrued costs mainly due to lower information systems, customer service and
internal support costs than originally anticipated.





The charge for accrued disposal costs also included $2.8 million for future payments
of transition benefits earned by certain Recognition sales representatives. The transition benefits will be paid out over the next three years. In addition, we accrued $3.0 million for customer receivable and salesperson overdraft allowances
anticipated as a result of exiting the Recognition business.





With the exception of certain transition benefits, we anticipate the
remaining payments will occur in 2002. Of the $6.7 million in our Condensed Consolidated Balance Sheet as of June 29, 2002, $5.3 million is classified as current liabilities of discontinued operations and $1.4 million is classified as a
contra asset. Assets of discontinued operations have been reclassified in aggregate to current liabilities of discontinued operations.





Assets and liabilities of the discontinued business included in our Condensed Consolidated Balance Sheets were as follows:





In thousands

June 29, 2002

June 30, 2001

December 29, 2001AssetsAccounts receivable

$


$
10,745

$
Inventories





7,621


Salespersons overdrafts





2,013


Current assets of discontinued operations








7,029Intangibles





2,605


Property and equipment, net





2,058


Other





792


$


$
25,834

$
7,029LiabilitiesAccounts payable

$


$
3,929

$
Accrued employee compensation and related taxes





1,245


Commissions payable





2,564


Other





3,189


Current liabilities of discontinued operations


5,939





16,511$
5,939

$
10,927

$
16,511




10




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##### Table of Contents



Notes to Condensed Consolidated Financial Statements (Unaudited)


Jostens, Inc. and subsidiaries







|11. |  | New Accounting Standards
|--- |  | ------------------------




Accounting for Asset Retirement Obligations


In June 2001, the FASB issued Statement of Financial Accounting Standards No. 143 (SFAS 143),
Accounting for Asset Retirement Obligations. SFAS 143 establishes accounting standards for the recognition and measurement of an asset retirement obligation and its associated asset retirement cost. It also provides accounting
guidance for legal obligations associated with the retirement of tangible long-lived assets. SFAS 143 is effective for fiscal years beginning after June 15, 2002, with early adoption permitted. We expect that the provisions of SFAS 143 will not have
a material impact, if any, on our consolidated results of operations, cash flows and financial position.





Rescission of FASB
Statements No. 4, 44 and 64, Amendment of FASB Statement No. 13, and Technical Corrections


In April 2002, the FASB issued SFAS 145, which rescinds SFAS 4,
Reporting Gains and Losses from Extinguishments of Debt, SFAS 44, Accounting for Intangible Assets of Motor Carriers and SFAS 64, Extinguishments of Debt Made to Satisfy Sinking-Fund
Requirements and amends SFAS 13, Accounting for Leases. As a result of rescinding SFAS 4 and SFAS 64, the criteria in APB 30, Reporting the Results of Operations  Reporting the Effects of Disposal of a
Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions, will be used to classify gains and losses from extinguishments of debt. SFAS 145 also amends SFAS 13 to require that certain lease
modifications that have economic effects similar to sale-leaseback transactions be accounted for in the same manner as sale-leaseback transactions. SFAS 145 is effective for fiscal years beginning after May 15, 2002, with early adoption permitted.
We expect that the provisions of SFAS 145 will not have a material impact, if any, on our consolidated results of operations, cash flows and financial position.





|12. |  | Subsequent Events
|--- |  | -----------------




On
July 31, 2002 we amended and restated our senior secured credit facility to provide for the repayment of Term Loan B with the proceeds of a new Term Loan C in the amount of $330.0 million. Term Loan C is payable in semi-annual installments of $1.0
million through June 30, 2008 and $106.0 million though December 31, 2009. The initial interest margin on Term Loan C is 75 basis points less than Term Loan B resulting in an approximate $2.5 million reduction of annual interest expense. In
addition, Term Loan C provides for the repurchase of a limited amount of subordinated securities. Capitalized loan fees related to Term Loan B will continue to be amortized over the life of Term Loan C.







11




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##### Table of Contents




ITEM 2.    MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OFOPERATIONS





Our disclosure and analysis in this report may contain some forward-looking statements. Forward-looking statements give our current expectations or forecasts of future events. Forward-looking statements generally can be
identified by the use of forward-looking terminology such as may, will, expect, intend, estimate, anticipate, believe, project, or continue,
or the negative thereof or similar words. From time to time, we also may provide oral or written forward-looking statements in other materials we release to the public. Any or all of our forward-looking statements in this report and in any public
statements we make may turn out to be wrong. They can be affected by inaccurate assumptions we might make or by known or unknown risks or uncertainties. Consequently, no forward-looking statement can be guaranteed. Actual results may vary
materially. Investors are cautioned not to place undue reliance on any forward-looking statements. Investors should also understand that it is not possible to predict or identify all such factors and should not consider the following list to be a
complete statement of all potential risks and uncertainties.





Any change in the following factors may impact the achievement of results:





| | · |  | our ability to satisfy our debt obligations, including related covenants;
| | - |  | -------------------------------------------------------------------------




| | · |  | the seasonality of our sales and operating income;
| | - |  | --------------------------------------------------




| | · |  | our relationship with our independent sales representatives and employees;
| | - |  | --------------------------------------------------------------------------




| | · |  | the fluctuating prices of raw materials, primarily gold;
| | - |  | --------------------------------------------------------




| | · |  | our dependence on a key supplier for our synthetic and semiprecious stones;
| | - |  | ---------------------------------------------------------------------------




| | · |  | fashion and demographic trends;
| | - |  | -------------------------------




| | · |  | litigation cases, if decided against us, may adversely affect our financial results; and
| | - |  | ----------------------------------------------------------------------------------------




| | · |  | environmental regulations that could impose substantial costs upon us may adversely affect our financial results.
| | - |  | -----------------------------------------------------------------------------------------------------------------




The foregoing factors are not exhaustive, and new factors may emerge or changes to the foregoing factors may occur that would impact our business.





Except to the extent required by law, we undertake no obligation to publicly update or revise any forward-looking statements.




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##### Table of Contents




RESULTS OF OPERATIONS





The following table sets forth selected information from our Condensed Consolidated Statements of Operations expressed as a percentage of net sales.





Dollars in thousands

Three months ended


$ Change


% Change


Six months ended


$ Change


% ChangeJune 29, 2002


June 30, 2001




June 29, 2002


June 30, 2001Net sales

$
353,720


$
337,740


$
15,980


4.7
%

$
475,043


$
454,804


$
20,239


4.5
%% of net sales


100.0
%


100.0
%









100.0
%


100.0
%Cost of products sold


151,446



145,638



5,808


4.0
%


199,153



191,564



7,589


4.0
%% of net sales


42.8
%


43.1
%









41.9
%


42.1
%Gross profit


202,274



192,102



10,172


5.3
%


275,890



263,240



12,650


4.8
%% of net sales


57.2
%


56.9
%









58.1
%


57.9
%Selling and administrative expenses


100,480



95,433



5,047


5.3
%


167,491



162,548



4,943


3.0
%% of net sales


28.4
%


28.3
%









35.3
%


35.7
%Special charges, net






2,138



(2,138
)

NM







2,138



(2,138
)

NMOperating income


101,794



94,531



7,263


7.7
%


108,399



98,554



9,845


10.0
%% of net sales


28.8
%


28.0
%









22.8
%


21.7
%Net interest expense


17,016



19,640



(2,624
)

(13.4
%)


34,706



40,922



(6,216
)

(15.2
%)% of net sales


4.8
%


5.8
%









7.3
%


9.0
%Income from continuing operations before income taxes


84,778



74,891



9,887


13.2
%


73,693



57,632



16,061


27.9
%% of net sales


24.0
%


22.2
%









15.5
%


12.7
%Provision for income taxes


35,184



31,012



4,172


13.5
%


30,584



23,739



6,845


28.8
%% of net sales


9.9
%


9.2
%









6.4
%


5.2
%Income from continuing operations


49,594



43,879



5,715


13.0
%


43,109



33,893



9,216


27.2
%% of net sales


14.0
%


13.0
%









9.1
%


7.5
%Gain (loss) on discontinued operations, net of tax


940



(1,391
)


2,331


NM



940



(3,681
)


4,621


NM% of net sales


0.3
%


-0.4
%









0.2
%


-0.8
%Net income

$
50,534


$
42,488


$
8,046


18.9
%

$
44,049


$
30,212


$
13,837


45.8
%% of net sales


14.3
%


12.6
%









9.3
%


6.6
%


---

Percentages in this table may reflect rounding adjustments.


NM = percentage not meaningful





Three Months Ended June 29, 2002 Compared
to the Three Months Ended June 30, 2001





Net Sales


Net sales increased $16.0 million, or 4.7%, to $353.7 million for the three months ended June 29, 2002 from $337.7 million for the same period last year. The increase in net sales resulted from price increases averaging approximately
2.7% and volume/mix increases of approximately 2.0%. The increase in net sales was primarily due to:





| | · |  | price increases in the printing and graduation product lines;
| | - |  | -------------------------------------------------------------

| | · |  | increased volume as a result of new account growth across all product lines;
| | - |  | ----------------------------------------------------------------------------

| | · |  | increased volume for yearbook printing due to an increase in the number of color pages; and
| | - |  | -------------------------------------------------------------------------------------------






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##### Table of Contents

| | · |  | increased volume in the high school jewelry market due to timing of delivery dates compared to last year.
| | - |  | ---------------------------------------------------------------------------------------------------------




These increases were partially offset by the following:





| | · |  | decreased volume in commercial printing;
| | - |  | ----------------------------------------

| | · |  | decreased volume for graduation diplomas due to earlier deliveries than last year; and
| | - |  | --------------------------------------------------------------------------------------

| | · |  | decreased volume in graduation announcements due to lower dollars spent per student.
| | - |  | ------------------------------------------------------------------------------------




Gross Margin


Gross profit increased $10.2 million, or 5.3%, to $202.3 million for the three months
ended June 29, 2002 from $192.1 million for the same prior year period. As a percentage of sales, gross margin increased 0.3% to 57.2% for the current three-month period from 56.9% for the same period last year. The increase in gross margin can be
attributed to:





| | · |  | price increases primarily in the printing and graduation product lines;
| | - |  | -----------------------------------------------------------------------

| | · |  | continued improvement in plant efficiencies company-wide, particularly in jewelry production; and
| | - |  | -------------------------------------------------------------------------------------------------

| | · |  | a favorable sales mix of our printing products resulting in increased higher margin yearbook volume and decreased lower margin commercial printing volume.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------




These increases were partially offset by a shift in sales mix of graduation product offerings.





Selling and Administrative Expenses


Selling and administrative
expenses increased $5.0 million, or 5.3%, to $100.5 million for the three months ended June 29, 2002 from $95.4 million for the same prior year period. As a percentage of sales, selling and administrative expenses remained relatively flat at 28.4%
for the current three-month period compared to 28.3% for the same period last year. The $5.0 million increase is primarily due to higher commission expense in our printing and jewelry product lines and higher general and administrative expense, both
as a result of increased sales.





Net Interest Expense


Net interest expense decreased $2.6 million to $17.0 million for the three months ended June 29, 2002 as compared to $19.6 million for the three months ended June 30, 2001. The decrease was due to a lower average outstanding balance
and a lower average interest rate.





Provision for Income Taxes


Our effective tax rate for continuing operations was 41.5% for the three months ended June 29, 2002 compared to 41.4% for the same period last year.





Income From Continuing Operations


Income from continuing operations increased $5.7 million, or 13.0% to $49.6
million for the three months ended June 29, 2002 from $43.9 million for the same prior year period as a result of increased net sales, relatively flat spending and lower net interest expense.





Discontinued Operations


Loss from discontinued operations was $1.4 million for the three months ended
June 30, 2001. This represents the results of our Recognition business, which we exited in December 2001 by selling certain assets and leasing our production facility to a former supplier who manufactures awards and trophies. Income from
discontinued operations of $0.9 million for the three months ended June 29, 2002 represents the after-tax effect of a $1.6 million reversal of accrued disposal costs.





In conjunction with exiting the Recognition business, we recorded a $27.4 million pre-tax loss on disposal of the discontinued segment in the fourth quarter of 2001. The pre-tax loss on disposal
consisted of a non-cash charge of $11.1 million to write off certain net assets not sold in the exit from the Recognition business




14




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##### Table of Contents

plus a $16.3 million charge for accrued costs related to exiting the Recognition business. During the three-month period ended June 29, 2002, we
reversed $1.4 million of these charges plus an additional $0.2 million in other liabilities for a total pre-tax gain on discontinued operations of $1.6 million ($0.9 million, net of tax). Components of the accrued disposal costs are as follows:





UtilizationIn thousands

Initial charge

Prior accrual

Net adjustments in 2002


Six months ended June 29, 2002


Balance June 29, 2002Employee separation benefits and other related costs

$
6,164

$


$
(550
)

$
(4,443
)

$
1,171Phase-out costs of exiting the Recognition business


4,255





(874
)


(2,592
)


789Salesperson transition benefits


2,855


1,236






(737
)


3,354Other costs related to exiting the Recognition business


3,018


1,434






(3,069
)


1,383$
16,292

$
2,670

$
(1,424
)

$
(10,841
)

$
6,697





The plan of disposal contemplated a workforce reduction of 150 full-time positions in the
Recognition business and corporate support functions. As of June 29, 2002, 114 employees had been terminated and the estimated workforce reduction has been revised to 130 full-time positions resulting in a $0.5 million pre-tax reduction to the
accrued costs. Termination benefits will continue to be paid out over the benefit period as specified under our severance plan.





The $4.3
million charge for phase-out costs of exiting the Recognition business included $1.3 million for payroll and benefits, $0.8 million for information systems and customer service costs and $2.2 million of internal support costs expected to be incurred
during the phase-out period. During the quarter ended June 29, 2002, we revised our estimate of phase-out costs, resulting in a $0.9 million pre-tax reduction to the accrued costs mostly due to lower information systems, customer service and
internal support costs than originally anticipated.





The charge for accrued disposal costs also included $2.8 million for future payments
of transition benefits earned by certain Recognition sales representatives. The transition benefits will be paid out over the next three years. In addition, we accrued $3.0 million for customer receivable and salesperson overdraft allowances
anticipated as a result of exiting the Recognition business.





With the exception of certain transition benefits, we anticipate the
remaining payments will occur in 2002. Of the $6.7 million in our Condensed Consolidated Balance Sheet as of June 29, 2002, $5.3 million is classified as current liabilities of discontinued operations and $1.4 million is classified as a
contra asset. Assets of discontinued operations have been reclassified in aggregate to current liabilities of discontinued operations.





Six Months Ended June 29, 2002 Compared to the Six Months Ended June 30, 2001





Net Sales


Net sales increased $20.2 million, or 4.5%, to $475.0 million for the six months ended June 29, 2002 from $454.8 million for the same period last year. The increase in
net sales resulted from price increases averaging approximately 2.7% and volume/mix increases of approximately 1.8%. The increase in net sales was primarily due to:





| | · |  | price increases in the printing and graduation product lines;
| | - |  | -------------------------------------------------------------

| | · |  | increased volume as a result of new account growth across all product lines; and
| | - |  | --------------------------------------------------------------------------------

| | · |  | increased volume for yearbook printing due to an increase in the number of color pages.
| | - |  | ---------------------------------------------------------------------------------------




These increases were partially offset by the following:





| | · |  | decreased volume in the college jewelry and graduation product lines as a result of the loss of a significant customer;
| | - |  | -----------------------------------------------------------------------------------------------------------------------



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##### Table of Contents

| | · |  | volume decreases in graduation announcements due to lower dollars spent per student; and
| | - |  | ----------------------------------------------------------------------------------------

| | · |  | decreased volume in commercial printing.
| | - |  | ----------------------------------------




Gross Margin


Gross profit increased $12.7 million, or 4.8%, to $275.9 million for the six months ended June 29, 2002 from $263.2 million for the
same prior year period. As a percentage of sales, gross margin increased 0.2% to 58.1% for the current six-month period from 57.9% for the same period last year. The increase in gross margin can be attributed to:





| | · |  | price increases primarily in the printing and graduation product lines;
| | - |  | -----------------------------------------------------------------------

| | · |  | continued improvement in plant efficiencies company-wide, particularly in jewelry production; and
| | - |  | -------------------------------------------------------------------------------------------------

| | · |  | a favorable sales mix of our printing products resulting in increased higher margin yearbook volume and decreased lower margin commercial printing volume.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------




These increases were partially offset by a shift in sales mix of graduation product offerings.





Selling and Administrative Expenses


Selling and administrative
expenses increased $4.9 million, or 3.0%, to $167.5 million for the six months ended June 29, 2002 from $162.5 million for the same prior year period. As a percentage of sales, selling and administrative expenses decreased 0.4% to 35.3% for the
current six-month period from 35.7% for the same period last year. The $4.9 million increase is primarily due to:





| | · |  | higher commission expense as a result of increased sales;
| | - |  | ---------------------------------------------------------

| | · |  | higher spending on information systems related to the upgrade of our transaction processing system and application development in one of our product lines; and
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------

| | · |  | higher general and administrative expenses as a result of increased sales.
| | - |  | --------------------------------------------------------------------------




Net Interest Expense


Net interest expense decreased $6.2 million to $34.7 million for the six months ended June
29, 2002 as compared to $40.9 million for the six months ended June 30, 2001. Similar to the quarter activity, the decrease was due to a lower average outstanding balance and a lower average interest rate.





Provision for Income Taxes


Our effective tax rate for continuing
operations was 41.5% for the three months ended June 29, 2002 compared to 41.2% for the same period last year.





Income From
Continuing Operations


Income from continuing operations increased $9.2 million, or 27.2% to $43.1 million for the six months ended June 29, 2002 from $33.9 million for
the same prior year period as a result of increased net sales, relatively flat spending and lower net interest expense.





Discontinued Operations


Loss from discontinued operations was $3.7 million for the six months ended June 30, 2001 and represents the results of
our Recognition business, which we exited in December 2001. Income from discontinued operations of $0.9 million for the six months ended June 29, 2002 represents the after-tax effect of a $1.6 million reversal of accrued disposal costs.




16




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##### Table of Contents

LIQUIDITY AND CAPITAL RESOURCES





Our primary cash needs are for debt service obligations, capital expenditures, working capital and general corporate purposes. As of June 29, 2002, we had cash and cash equivalents of $59.1 million. Our free cash flow for the six
months ended June 29, 2002 was $31.2 million compared to $25.5 million for the same period last year. Free cash flow excludes the effects of cash flow from financing activities.





Operating Activities


Operating activities generated cash of $39.6 million during the six months ended June 29,
2002 compared to $30.5 million for the same prior year period. Principal components of the $9.1 million increase include a $9.2 million improvement in earnings from continuing operations plus a $4.6 million favorable fluctuation in the results of
discontinued operations. In addition, working capital related to continuing operations improved $6.0 million, but was offset by a $10.1 million decrease in operating cash flow associated with our discontinued operations.





Investing Activities


Capital expenditures for the six months ended June
29, 2002 were $8.5 million compared to $9.0 million for the same period last year. $0.3 million of the decrease relates to 2001 capital spending on our discontinued operations.





Financing Activities


Net cash used for financing activities consists primarily of principal payments on our
long-term debt. During the six months ended June 29, 2001, we made scheduled principal payments of $10.0 million and voluntarily prepaid an additional $5.0 million of principal on our senior secured credit facility. We have a $150.0 million
revolving credit facility that expires on May 31, 2006. There was no short-term borrowing activity during the first six months of 2002, however there was $6.3 million outstanding under this facility, in the form of letters of credit, as of June 29,
2002.





On July 31, 2002 we amended and restated our senior secured credit facility to provide for the repayment of Term Loan B with the
proceeds of a new Term Loan C in the amount of $330.0 million. Term Loan C is payable in semi-annual installments of $1.0 million through June 30, 2008 and $106.0 million though December 31, 2009. The initial interest margin on Term Loan C is 75
basis points less than Term Loan B resulting in an approximate $2.5 million reduction of annual interest expense. In addition, Term Loan C provides for the repurchase of a limited amount of subordinated securities. Capitalized loan fees related to
Term Loan B will continue to be amortized over the life of Term Loan C.





NEW ACCOUNTING STANDARDS





Accounting for Asset Retirement Obligations


In June 2001, the FASB issued
Statement of Financial Accounting Standards No. 143 (SFAS 143), Accounting for Asset Retirement Obligations. SFAS 143 establishes accounting standards for the recognition and measurement of an asset retirement obligation and its
associated asset retirement cost. It also provides accounting guidance for legal obligations associated with the retirement of tangible long-lived assets. SFAS 143 is effective for fiscal years beginning after June 15, 2002, with early adoption
permitted. We expect that the provisions of SFAS 143 will not have a material impact, if any, on our consolidated results of operations, cash flows and financial position.





Rescission of FASB Statements No. 4, 44 and 64, Amendment of FASB Statement No. 13, and Technical Corrections


In
April 2002, the FASB issued SFAS 145, which rescinds SFAS 4, Reporting Gains and Losses from Extinguishments of Debt, SFAS 44, Accounting for Intangible Assets of Motor Carriers and SFAS 64, Extinguishments of Debt Made
to Satisfy Sinking-Fund Requirements and amends SFAS 13, Accounting for Leases. As a result of rescinding SFAS 4 and SFAS 64, the criteria in APB 30, Reporting the Results of Operations  Reporting the Effects of
Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions, will be used to classify gains and losses from




17




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##### Table of Contents

extinguishments of debt. SFAS 145 also amends SFAS 13 to require that certain lease modifications that have economic effects similar to
sale-leaseback transactions be accounted for in the same manner as sale-leaseback transactions. SFAS 145 is effective for fiscal years beginning after May 15, 2002, with early adoption permitted. We expect that the provisions of SFAS 145 will not
have a material impact, if any, on our consolidated results of operations, cash flows and financial position.





ITEM 3.    QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK





There have been no
material changes in our market risk during the six months ended June 29, 2002. For additional information, refer to Item 7A of our 2001 Form 10-K.




18




---

##### Table of Contents

PART II    OTHER INFORMATION





ITEM 1.    LEGAL PROCEEDINGS





A federal antitrust action was served on Jostens on October 23, 1998. The complainant, Epicenter Recognition, Inc.
(Epicenter), alleges that Jostens has attempted to monopolize the market of high school graduation products in the state of California. Epicenter is a successor to a corporation formed by four of our former sales representatives. The
plaintiff claimed damages of approximately $3.0 million to $10.0 million under various theories and differing sized relevant markets. Epicenter waived its right to a jury, so the case was tried before a judge in U.S. District Court in Orange County,
California. On June 18, 2002, the Court found, among other things, that while Jostens use of rebates, contributions and value-added programs are legitimate business practices widely practiced in the industry and not violative of antitrust
laws, our use of multi-year Total Service Program contracts violated Section 2 of the Sherman Act because these agreements could exclude competition by making it difficult for a new vendor to compete against Jostens. On July 12, 2002,
the Court entered an Order providing, among other things, that Epicenter be awarded damages of $1.00, trebled pursuant to Section 15 of the Clayton Act, and that in the state of California, Jostens is enjoined for a period of ten years from
utilizing any contract, including those for Total Service Programs, for a period which extends for more than one year. The Order also provides for payment to Epicenter of reasonable attorneys fees and costs. Jostens has made a Rule 60 motion to set
aside the Order. The Court has taken it and the written arguments of the parties on attorneys fees under advisement. We expect a ruling shortly.





We are a party to other litigation arising in the normal course of business. We regularly analyze current information and, as necessary, provide accruals for probable liabilities on the eventual disposition of these matters. We
believe the effect on our consolidated results of operations, cash flows and financial position, if any, for the disposition of these matters will not be material.





ITEM 6.    EXHIBITS AND REPORTS ON FORM 8-K





|(a) |  | Exhibits
|--- |  | --------




10.1

Separation Agreement, dated as of April 1, 2002 between Jostens, Inc. and Mr. Gregory S. Lea.12

Computation of Ratio of Earnings to Fixed Charges


|
|




|(b) |  | Reports on Form 8-K
|--- |  | -------------------




| |  | A Form 8-K dated July 31, 2002 and filed on August 8, 2002 announcing an amendment of the senior secured credit facility.
| |  | -------------------------------------------------------------------------------------------------------------------------



19




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##### Table of Contents

SIGNATURES





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








JOSTENS, INC.August 9, 2002

By

/s/    Robert C. BuhrmasterRobert C. BuhrmasterChairman, President and Chief Executive OfficerAugust 9, 2002

By

/s/ John A. FeenanJohn A. FeenanSr. Vice President and Chief Financial Officer




20