UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(X) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended June 29, 1996
--------------------
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 33-96680
HERFF JONES, INC.
(Exact name of registrant as specified in its charter)
INDIANA 35-1637714
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
4501 West 62nd Street, Indianapolis, Indiana 46268
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code
(317) 297-3740
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: None
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
requirements for the past 90 days. YES X NO
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. (X) (Not Applicable)
The aggregate market value of the voting stock held by non-affiliates of the
registrant is $65,000*. * Value based on most recent annual independent
valuation.
Indicate the number of shares outstanding of each of the registrant's classes of
common stock as of the latest practicable date: 9,618,996 as of September 23,
1996.
There are no documents incorporated by reference herein.
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PART I
Item 1. Business
Herff Jones, Inc. (the "Company", "Herff Jones", as the "Registrant")
is an Indiana corporation, incorporated in 1985 but founded in 1920.
Herff Jones is essentially in one line of business, the manufacture and
sale of recognition, education, achievement and motivation products for
the scholastic and commercial markets, including instructional
materials and programs for the classroom, and photographic services.
Products include high school and college rings, medals, pins, awards,
diplomas, graduation announcements and accessory items, yearbooks, caps
and gowns, senior portraits, underclass school pictures and photography
finishing for the professional photographer, classroom instructional
materials including maps, globes, anatomical models and multi-media
teaching programs, and similar jewelry and award items for the
commercial market.
The Company was publicly traded from 1945 until 1973, when the Company
was acquired by Carnation Company ("Carnation"). The Company operated
as a division of Carnation until July 1985 when Carnation sold Herff
Jones' assets to senior management in a leveraged buyout transaction.
In November 1989, the Herff Jones, Inc. Employee Stock Ownership Plan
(the "ESOP") purchased just over 30% of the common stock of the Company
from shareholders. Pursuant to a plan of recapitalization adopted by
the Company's Board of Directors in May 1995, effective as of August
22, 1995, (a) the Company's outstanding shares in three classes of
common stock were converted to a single class of Common Stock on a
share-for-share basis, (b) the ESOP purchased substantially all of the
shares of Common Stock so converted held by shareholders other than the
ESOP, (c) to fund its purchase of Common Stock, the ESOP borrowed
approximately $188.3 million from the Company (the "ESOP Loan") and (d)
the Company used the proceeds of the offering of the 11% Senior
Subordinated Notes ("Subordinated Notes"), along with borrowings under
a bank credit facility and internally generated cash from operations,
to fund the ESOP Loan and to prepay its 8.05% Senior ESOP Notes. The
foregoing transactions are sometimes referred to herein as the "ESOP
Transactions".
On April 29, 1996 Herff Jones, Inc. closed an agreement to purchase
certain assets of the Delmar Companies Division ("Delmar") of
Continental Graphics Corporation. The assets acquired consist of Notes
& Accounts Receivable, Inventories, Property, Plant & Equipment, and
Prepaid Expenses. The purchase price was determined based upon the book
value of inventories, property, plant & equipment, and prepaid expenses
plus a premium over book value of $3.257 million combined with accounts
and notes receivable at 85% of net book value The total purchase price
was approximately $15.3 million in cash plus the assumption of certain
operating liabilities. The purchase was funded from Herff Jones'
existing revolving credit facility. Delmar operates a yearbook printing
plant and a school photography processing facility at a single site in
Charlotte, North Carolina. Herff Jones intends to continue to use the
assets purchased to manufacture and sell yearbooks and process school
photography products.
Product Lines
While the Company is engaged essentially in one line of business, it
principally has five product lines based upon manufacturing, marketing
and sales control criteria.
Scholastic Product Line: The Scholastic product line is the Company's
largest, accounting for approximately 35%, 36% and 37% of sales in
fiscal 1996, 1995 and 1994 respectively. It consists of the
manufacturing and marketing of class rings and special recognition
medals and awards (collectively referred to as "Jewelry"), as well as
diplomas, graduation announcements and related accessories
(collectively referred to as "Fine Paper"). Approximately 75% of sales
of Scholastic products are made to the high school market, with the
remaining 25% made to the college and commercial markets. The
Scholastic product line has achieved modest growth in recent years,
principally as a result of increased prices.
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The large majority of Jewelry sales consists of class rings. The
Company offers a complete line of rings, with a wide choice of styles,
metals, stones and customization options. Over the past three fiscal
years, karat-quality gold rings accounted for approximately 70% of the
Company's class ring unit volume. Other non-precious metal choices,
which provide the customer with lower cost alternatives, made up the
remaining class ring unit volume. During each of the last three fiscal
years, the Company has sold class rings through approximately 2,500
high schools and approximately 1,100 universities and colleges
throughout the United States.
The class ring business is highly seasonal. Over 40% of the Company's
unit sales are made in the fall season, as students place orders at the
beginning of the school year for delivery prior to the holiday season.
A second order cycle, which accounts for approximately 50% of sales,
allows students to order rings in the winter months for delivery prior
to graduation. The remaining sales are from orders placed in the spring
for delivery at the beginning of the following school year.
Fine Paper includes a wide array of custom-designed diplomas,
graduation announcements, name cards and fine paper accessory items.
Sales of these products are also highly seasonal, with peak production
between November and May. To help smooth the seasonal production curve,
the Company offers discounts for early orders and partially
manufactures the following year's products during the summer and fall
months. All orders must be accompanied by a non-refundable deposit,
often for the full amount of the purchase. In fiscal 1995, the Company
sold Fine Paper products to approximately 4,500 high schools and 2,500
colleges.
The Company's Scholastic product line is sold through a network of
approximately 270 (in fiscal 1996) independent sales representatives.
These sales representatives solicit school administrators or student
advisors for approval as the school's authorized Scholastic product
line supplier. The sales representative then markets the Company's
Scholastic products directly to the students, although some Scholastic
products, such as awards, medals and diplomas, are sold directly to the
school or school district. Sales representatives earn commissions equal
to any premium paid over the Company's list price of the Scholastic
products.
The June 29, 1996 backlog of Scholastic product line sales related to
fiscal 1997 is approximately $15.7 million compared to a backlog of
$16.0 million at June 24, 1995 related to fiscal 1996.
Cap & Gown Product Line: The Cap & Gown product line accounted for
approximately 13% of consolidated sales for each of the past three
fiscal years. The Cap & Gown product line consists of the design,
manufacture and marketing of fine quality caps and gowns and
encompasses four principal areas: rental caps and gowns, single-use
disposable caps and gowns for sale, accessory sales (which include cap
tassels and honor stoles which are worn over robes) and apparel sales
(which include choir robes, judicial robes and academic regalia). The
Company markets these products under the trade name "Collegiate Cap &
Gown" _, which the Company believes is well-recognized among high
schools and colleges nationwide.
During each of the past three fiscal years, the Company sold or rented
Cap & Gown products to students at approximately 11,900 high schools
and colleges. Cap & Gown customers consist predominantly of schools,
but also include church choirs, judges and college faculty members.
High school and college sales or rentals are generally made through
school administrators who have authority to select the school's
graduation cap and gown supplier. This business is divided
approximately equally between rentals and sales and accounted for
approximately 64% of total Cap & Gown product line sales in fiscal
1996.
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The Company's Scholastic product line sales representatives market Cap
& Gown products to high schools and colleges. In addition, Cap and Gown
has approximately 20 sales representatives who sell exclusively caps
and gowns and apparel products, including student and faculty caps and
gowns, school and church choir robes, and judicial robes, and
approximately 75 sales representatives who sell church apparel on a
part-time basis. Sales representatives earn commissions generally based
on a prescribed percentage of the sales price or rental fee of the Cap
& Gown products.
Sales of Cap & Gown products are highly seasonal with most revenue
recognition occurring in May and June, when the majority of graduations
take place. Nevertheless, the Company attempts to keep production
levels even throughout the year.
In September 1994, the Company consolidated into a new plant the
production, warehousing and shipping of disposable caps and gowns
previously handled in part in four other facilities. Management
believes that the consolidation of disposable cap and gown production
into the new plant has allowed for production efficiencies and cost
savings which have enabled the Company to increase profit margins
earned on the Cap & Gown product line.
Yearbook Product Line: The Yearbook product line accounted for
approximately 32% of consolidated sales in fiscal 1996 and 29% in each
of fiscal 1995 and fiscal 1994.
Each school's yearbook is a unique product every year. The Company's
average yearbook contract, which is typically signed for the school by
an administrator, covers approximately 500 yearbooks. In fiscal 1996,
the Company produced approximately 3.1 million yearbooks. The June 29,
1996 backlog of Yearbook product line sales related to fiscal 1997 is
approximately $73.6 million compared to a backlog of $58.7 million at
June 24, 1995 related to fiscal 1996, with the increase for 1997 due
primarily to the Delmar acquisition.
After soliciting the order from a school administrator, typically the
yearbook student advisor, the independent sales representative will aid
the students in designing and laying out the yearbook, often meeting
periodically with a particular school's yearbook committee. In
addition, the sales representative provides each yearbook committee
with Company software to aid them in putting together the yearbook.
Yearbook shipments are made in two periods. During the past three
years, approximately three fourths of yearbooks have been delivered in
the late spring in time for graduation. Such yearbooks typically cover
activities for the first half of the school year. The remainder of
yearbooks have been delivered in the fall, which generally include
activities for the entire school year.
Yearbooks are sold approximately 12 to 18 months prior to delivery. As
such, yearbook orders collected in January to May are for yearbook
deliveries to be made the following May and June. The Company's
Yearbook product line is sold through a network of approximately 260
(in fiscal 1996) independent sales representatives, most of whom only
sell yearbooks and not other Company products. The sales
representatives earn commissions based on the Company's list price of
the yearbook plus any premium paid over the list price.
The Company has sold yearbooks to approximately 5,200 schools in each
of the past three fiscal years, of which approximately 90% are high
schools and junior high schools. The remaining 10% are predominantly
colleges. The Company also sells and produces yearbooks in Canada.
Canadian sales accounted for approximately 5%, 6% and 7% of fiscal
1996, 1995 and 1994 Yearbook product line sales, respectively.
As part of the Delmar acquisition, the Company acquired a yearbook
manufacturing facility in Charlotte, North Carolina, as well as the
related customer base. Fiscal 1996 included two months activity for the
acquisition. Relatively few problems are anticipated in integrating the
new plant's activity into Herff Jones.
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Photography Product Line: The Photography product line accounted for
approximately 12% of consolidated sales in each of fiscal 1996 and
fiscal 1995 and 11% in fiscal 1994. Photography products and services
are divided into three segments. First, individual pictures for
students in Kindergarten through 11th grade ("school portraits")
accounted for approximately 73% of fiscal 1996 Photography sales;
second, processing of senior portraits and other professional
photography processing services accounted for approximately 20% of
fiscal 1996 Photography sales; and third, sales of equipment and
supplies to professional photographers accounted for the remainder.
The Company is generally engaged to provide student photo services for
a school by the principal, administrator and/or local parent - teacher
organization. Once accepted by the school, the Company provides
students with marketing materials and order forms for them to take home
to their families. This material enables parents to purchase school
portraits of their child. The Company takes school portraits at the
school during scheduled days. The portrait business is seasonal, with
the majority of portraits taken and delivered between August and
December.
Part of the recent acquisition of Delmar was a photographic processing
lab in Charlotte, North Carolina. Included in fiscal 1996 results was
two months activity for the acquisition. The Company anticipates
relatively few problems integrating these activities with Herff Jones.
The Company employs 43 sales representatives (in fiscal 1996) to market
its Photography products. These salespersons are employees of the
Company, rather than independent sales representatives, and they are
compensated with a salary, with the potential to earn bonuses.
As mentioned above, a significant portion of the Company's Photography
revenue is generated from the processing of senior portraits and other
professional photography processing services, such as processing
wedding pictures. Many senior portraits are taken by local professional
photographers. Most local professional photographers do not develop
their own film but rather send it to photographic labs such as the
Company's for processing. The equipment sales area of the Photography
product line is an offshoot of the Company providing equipment and
supplies to professional photographers. Although it represents only a
small portion of Photography revenues, the Company believes it gains
loyalty from its professional photographer customers because of their
ability to acquire photography equipment and supplies through the
Company.
Education Product Line: The Company's Education product line differs
from its other product lines in two particular ways. First, the end
buyers of the products are not students but schools and school
districts. Second, the Education product line is not characterized by
the degree of seasonality present in the other product lines. The
Education product line accounted for 8% of fiscal 1996 sales and 10% of
sales in each of fiscal 1995 and fiscal 1994.
In 1973, the Company entered the multimedia educational products market
through the acquisition of A.J. Nystrom Company, a manufacturer of
globes, maps and other educational products originally founded in 1903.
The "Nystrom" _ name is a premier name in the market that the Company
believes is associated with quality by schools and school districts
nationwide. The Education product line consists of maps, globes,
atlases, social studies instructional programs, science instructional
programs and other educational products. The primary market for the
Education product line is schools teaching Kindergarten through 8th
grade.
The Company employs 114 sales representatives (in fiscal 1996) to
market its Education products. The majority of the sales
representatives are employees of the Company and are compensated with a
salary and bonus.
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The market for Education products is not affected as much by the
seasonality of graduations and is driven more by the demand for higher
quality education than by population shifts. The science-based
electronic multimedia programs introduced by the Company in fiscal 1994
have been discontinued and contributed significantly to the fiscal 1996
sales decline. The Company is investigating the future development of
new electronic multimedia educational programs in-house, most likely in
the social studies area. The Company believes social studies is the
area where the "Nystrom" _ name carries the greatest benefit given the
familiarity of many schools and teachers with "Nystrom" _ maps and
globes.
Competition and Industry Information
The scholastic products market in which the Company operates is highly
competitive. The Company seeks to compete on the basis of pricing,
service, product quality, product development and marketing. While each
of its product lines faces several strong competitors, Herff Jones'
principal competitor across the full breadth of its product lines is
Jostens, Inc. The following table sets forth the Company's principal
competitors.
Product Line Competitors (Parent)
Scholastic:
Jewelry Art Carved Class Rings (C.J.C. Holdings, Inc.); L.G.
Balfour Company, Inc. ("Balfour") and Gold Lance Inc.
(Town & Country Corporation); Jostens, Inc.
Fine Paper Balfour (Town & Country Corporation); Jostens, Inc.
Yearbook Jostens, Inc.; Taylor Publishing Company
(Insilco Corporation); Walsworth Publishing Company,
Inc.
Cap & Gown E. R. Moore Company; Jostens, Inc.
Photography Jostens, Inc.; Life Touch, Inc.
Education George F. Cram Company Incorporated; Rand-McNally &
Company
The scholastic, or "schoolhouse," market for recognition, education,
achievement and motivation products is a well-defined niche market
characterized by relatively stable demand and a distinctive
distribution network of primarily independent sales representatives.
Demand for class rings, yearbooks, graduation apparel and the Company's
other product lines is affected significantly by the population of high
school and college students. According to U. S. Department of Education
statistics, the number of high school students declined significantly
from 1980 to 1994. However, 1993 saw an increase in the number of high
school graduates for the first time since the 1970s (with the exception
of two small increases in 1987 and 1988). According to U.S. Department
of Education estimates, there were approximately 2.56 million U.S. high
school graduates in 1995. The U.S. Department of Education forecasts
the number of high school graduates will reach 3.02 million by 2006.
The scholastic industry is characterized by a unique distribution
method. Most recognition, achievement, motivation and education
products gain access to the schoolhouse through administrators or
student representatives who are involved in the selection process of
the authorized supplier for their school. Suppliers contact these
administrators through their sales forces. These sales forces are
generally comprised of independent sales representatives. Sales
representatives must be well-trained and highly motivated. Successful
companies in the scholastic market have developed their sales
organizations over an extended period of time and devote considerable
resources to maintaining and improving the quality of their sales
forces. After gaining access to a school, a sales representative must
be able to provide a high level of service to complete the sale. In
addition, the products must be of high quality and delivered in a
timely manner in order to keep the school's business the following
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year. As a result, continuous sales coverage is important and a sales
representative's relationship at a school, once established, is an
important competitive factor. A good relationship between the sales
representative and school administrator helps ensure repeat sales from
year to year. Over at least the past three fiscal years, approximately
90% of the Company's customers across its major product lines (i.e.,
Scholastic, Yearbook and Cap & Gown) have renewed their orders from the
prior year. This feature of the Company's business, and of the
scholastic industry as a whole, contributes to the relative stability
of the Company's sales, as does the traditional nature of its products,
such as class rings and caps and gowns.
The stable nature of the scholastic industry makes increasing market
share difficult. Acquisition opportunities have been limited in recent
years, although the Company was able to acquire the Delmar Companies in
fiscal 1996 and will continue to consider favorable acquisition
opportunities as they arise, to the extent it may do so in accordance
with the terms of its agreements governing its indebtedness. Other than
growing market share via consolidation within the industry, increases
or decreases of a company's market share tend to occur gradually over
time through the addition or loss of individual schools or individual
sales representatives.
Sales Network
The Company solicits orders for its products through a network of
approximately 700 primarily independent sales representatives.
Generally, each product line has an autonomous sales organization
(except that Cap & Gown products are marketed in schools through
certain Scholastic product line sales representatives) and, with the
exception of Education and Photography, sales representatives are
independent contractors. In general, a sales representative will
promote and sell products of a single product line because training
requirements, marketing techniques and sales skills vary widely between
product lines. Sales representatives are assigned a geographic
territory and their performance is monitored by area and regional sales
managers, as well as a national sales manager. Generally the Company's
sales representatives promote and sell Herff Jones products
exclusively.
Consistent with industry practice, Scholastic and Yearbook sales
representatives are paid draws in advance of commissions earned which
results in an increase in working capital until such time as
commissions earned exceed advances paid, which usually occurs during
the fourth fiscal quarter. After commissions earned exceed advances,
the procedure results in a reduction in working capital until
settlements are made with the sales representatives in August of each
year. In addition, Scholastic sales representatives are invoiced for
product ordered by students at schools they service. The invoice terms
are net 10 days; however, the sales representatives are allowed
sufficient time to make delivery of the product in the schools and
forward the payment to the Company. This process can extend payment up
to 60-90 days from invoice date and this tends to increase working
capital requirements. Furthermore, on most Yearbook orders, the Company
receives deposits equal to approximately 85% of the contract amount
prior to shipment. This has a positive impact on the Company's working
capital requirements.
Raw Materials
The Company's manufacturing and warehousing activities are conducted at
18 facilities located throughout the United States and Canada, all of
which are owned by the Company. Each facility is devoted to a single
product line, except for the Logan, Utah plant which produces yearbooks
and provides photography processing services. See Item 2. "Properties."
Each of the Company's product lines (except for Education) operates in
a niche market generally characterized by products with a high level of
customization, short production runs and pronounced seasonality. The
Education product line experiences longer production runs and less
seasonality than the Company's other product lines. Manufacturing space
is configured and production is scheduled to respond to the unique
demands of each product line's market.
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The Company has several sources of supply for all of its raw materials,
which generally are not susceptible to spoilage or obsolescence.
Hazardous waste products have not been a significant problem for the
Company historically. The Company currently believes its facilities are
in substantial compliance with applicable regulations regarding the
handling and disposal of hazardous materials.
The Company requires significant amounts of gold for the manufacture of
jewelry and minimizes its exposure to fluctuations in the price of gold
in two ways. First, it resets its ring prices every two weeks to
reflect the current price of gold. Second, it finances its gold
inventory requirements through arrangements with two suppliers whereby
it leases certain gold inventories not yet committed to manufacture.
These consignment arrangements are with Gerald Metals, Inc. and Rhode
Island Hospital Trust National Bank (collectively, the "Gold
Suppliers"). Pursuant to the agreements with the Gold Suppliers (each
of which continues in effect indefinitely until terminated by either
party upon thirty days written notice), the Company pays the Gold
Suppliers a monthly lease fee equal to approximately 2.0% to 2.5% per
annum of the market value of its average leased gold inventory. The
Company purchases the gold only after it is committed to the
manufacture of a ring. As part of the arrangement, the suppliers hold a
security interest in, and lien upon, gold inventory owned by the
Company and the Company is responsible for insuring the gold inventory
against loss or damage. The Company believes this financing arrangement
is on favorable terms and enables the Company to effectively hedge
against fluctuations in the spot price of gold. See "Note
13--Commitments and Contingencies" to the Company's audited
consolidated financial statements appearing elsewhere herein.
The Company seasonally employs up to approximately 3,900 people,
including approximately 3,400 hourly employees. Many of the Company's
hourly employees perform tasks which require a high degree of skill and
training. The Company believes these employees represent an important
resource. Approximately 200 employees at three facilities are employed
pursuant to collective bargaining agreements. All other hourly
employees are not members of unions. The Company believes its relations
with its employees are good.
The Company hires part-time and seasonal employees during periods of
peak seasonal demand for each of its product lines. Historically, the
Company has not encountered any major difficulty attracting such
employees . During peak seasons (which do not all occur
simultaneously), the number of hourly employees employed on all product
lines is approximately 3,700, compared with an annual average of
approximately 3,000.
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Item 2. Properties
The Company's properties are set forth below. Except for the Company's
headquarters, all properties are manufacturing facilities and are owned by the
Company. All properties are pledged as collateral on the new credit facility.
The Company believes that all of its properties are maintained in good
condition.
Approximate Size
Location (Square feet)
Scholastic
Jewelry
Indianapolis, Indiana 67,200
Providence, Rhode Island 47,000
Fine Paper
Indianapolis, Indiana 62,100
Scranton, Pennsylvania 50,000
Iola, Kansas 60,000
Yearbook
Montgomery, Alabama 120,000
Logan, Utah 66,000
Gettysburg, Pennsylvania 67,000
Marceline, Missouri 27,700
Mission, Kansas 92,700
Charlotte, North Carolina 129,800
Winnipeg, Manitoba 26,700
Cap & Gown
Champaign, Illinois 333,300
Arcola, Illinois 100,000
Photography
Lewiston, Minnesota (1) 79,000
Burnsville, Minnesota 24,000
Charlotte, North Carolina 89,500
Education
Chicago, Illinois 97,000
Headquarters
Indianapolis, Indiana-Exec. Building 20,400
Indianapolis, Indiana-Admin. Building 22,300
(1) Includes three separate buildings; two for manufacturing and one warehouse.
Item 3. Legal Proceedings
There are no material pending legal proceedings to which the Company is
a party or to which any of its property is subject. Herff Jones is involved in
lawsuits and environmental proceedings that periodically arise from the normal
course of business. Management believes that the ultimate outcome of these
matters will not have a material adverse impact on the Company's financial
condition.
Item 4. Submission of Matters to a Vote of Security Holders
None.
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PART II
Item 5. Market for Registrant's Common Stock and Related Stockholder Matters
There is no established public trading market for the Company's shares
of Common Stock. The Company's shares of common stock are held of record by five
persons, the Company's ESOP trust, which holds 9,616,541 shares, and four
individuals, who collectively hold 2,455 shares.
Dividends have been declared during the last two fiscal years equally
on all classes of common shares as follows:
April, 1996 $3.4 million
July, 1995 $3.4 million
January, 1995 $3.4 million
July, 1994 $3.4 million
See "Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations" below for a discussion of credit agreement restrictions
on the Company's payment of dividends.
Item 6. Selected Financial Data
HERFF JONES, INC.
FIVE YEAR FINANCIAL HIGHLIGHTS
(Amounts in Thousands of Dollars Except for Per Share Data)
<TABLE>
<CAPTION>
1992 1993 1994 1995 1996
-------- -------- -------- -------- --------
Operating Results
<S> <C> <C> <C> <C> <C>
Net Sales $234,949 $245,799 $255,233 $264,309 $282,941
Operating Profit 27,993 32,217 36,145 37,999 30,791
ESOP Compensation 3,184 3,222 3,025 5,556 16,665
Depreciation &
Amortization 4,809 5,190 4,835 5,480 5,802
Interest Expense 6,959 6,661 6,367 6,263 19,482
Net income before
extraordinary item and
cumulative effect of
change in accounting
principle 13,097 16,735 19,214 21,714 7,842
Net Income 13,097 16,735 19,214 15,474 1,958
Earnings Per Share before
extraordinary item and
cumulative effect of change in
accounting principle (1) $ 10.59 $ 13.53 $ 15.54 $ 17.56 $ 5.16
Earnings Per Share (1) $ 10.59 $ 13.53 $ 15.54 $ 12.51 $ 1.29
- ---------------------------------------------------------------------------------------------
Financial Position
Current Assets $110,937 $129,067 $149,602 $170,092 $107,659
Cash & Marketable
Securities 32,963 46,914 63,121 80,757 8,680
Current Liabilities 56,488 61,806 64,614 65,190 86,743
Working Capital 54,449 67,261 84,988 104,902 20,916
Current Ratio 1.96 2.09 2.32 2.61 1.24
Total Assets 143,703 164,120 188,235 209,640 162,303
Long-Term Debt (2) 82,207 78,395 81,876 77,426 195,889
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Per Share Valuation (3) $ 25.75 $ 28.65 $ 31.00 $21.25(4) $ 26.30
</TABLE>
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1 See Note 7 "Common Stock" regarding calculation of the weighted average
number of common shares outstanding
2 Includes both the current and long-term components
3 Based on annual independent valuation done for the ESOP as of the end
of each respective fiscal year
4 Value determined after August, 1995 recapitalization
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Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Overview
Herff Jones is one of the leading manufacturers of recognition awards,
educational products and graduation-related products for the scholastic market
in the United States. Its product lines include class rings, medals and awards,
diplomas and graduation announcements (also referred to as "fine paper"),
yearbooks, caps and gowns, school photography services and multimedia education
products. The Company historically has sold approximately 80% of its products to
the high school and elementary market and approximately 20% of its products to
the college and commercial or non-scholastic market through a network of
approximately 700 primarily independent sales representatives. The Company
believes that the Herff Jones name is widely recognized in schools and
universities nationwide.
Sales to the scholastic market tend to be highly seasonal. For example,
orders for the Company's class rings are high in the fall with a view to
delivery to students before the year-end holiday season. On the other hand,
sales of the Company's fine paper products, yearbooks and caps and gowns are
predominantly made in the spring months for delivery by graduation (i.e., May
and June). Although the Company receives advance deposits for many products, it
recognizes revenue only upon delivery of its products. Therefore, the Company's
revenues tend to be higher toward the end of the calendar year and toward the
end of the school year in late spring (the Company's second and fourth fiscal
quarters). Selling expenses tend to represent a relatively high percentage of
the Company's net sales because most of the Company's products are marketed
locally through the efforts of independent sales representatives at individual
schools and because of the highly customized nature of many of the Company's
products.
Demand for a majority of the Company's product lines is greatly
affected by the population of high school and college students. The number of
high school graduates, which declined significantly from 1980 to 1994, increased
in 1993 for the first time since the 1970s (with the exception of two small
increases in 1987 and 1988). According to U.S. Department of Education
estimates, there were approximately 2.56 million U.S. high school graduates in
1995. The U.S. Department of Education forecasts the number of high school
graduates will reach 3.02 million by 2006.
ESOP Accounting Issues
General
The Company established the ESOP in 1989. Prior to the ESOP
Transactions, the ESOP held approximately 30% of the Company's outstanding
shares of Common Stock, which it acquired with the proceeds of an initial loan
in the amount of $89 million (the "Initial Loan"). In the ESOP Transactions, the
Company loaned an additional $188.3 million to the ESOP to enable it to acquire
substantially all of the remaining outstanding shares of Common Stock from
existing shareholders (other than the ESOP) of the Company. Company shareholders
tendered substantially all of their shares of Common Stock to the ESOP in the
ESOP Transactions and thus, the ESOP now owns substantially all of the
outstanding shares of Common Stock. This loan, combined with the Initial Loan,
which was refinanced, resulted in a total new ESOP loan balance of approximately
$258.1 million (the "ESOP Loan"), due over a period of 15 years and bearing
interest at 9% per annum.
Management believes that the increased ownership of the Common Stock by
the ESOP will improve the Company's cash flow by reducing the Company's federal
tax liability. As with the Initial Loan, the ESOP will repay the ESOP Loan using
funds received from the Company in the form of ESOP contributions and dividends.
Such ESOP contributions and dividends are expected to be tax deductible to the
Company as
- 11 -
<PAGE>
compensation expense within the applicable limitations of the Code. The Code
limitations on deductibility of such contributions and dividends are effectively
tied to the extent such payments are used to pay principal of the ESOP Loan. The
ESOP is expected to repay the $258.1 million ESOP Loan to the Company with level
payments of principal and interest of approximately $32.0 million per year. The
principal portion of these payments in the first full calendar year will be
approximately $9.0 million with approximately $23.0 million in interest. In the
last full calendar year of the loan, the principal portion of ESOP Loan payments
will amount to approximately $28.4 million with $3.3 million in interest. Thus,
the proportion of the annual payments allocated to principal (and deductible by
the Company for federal income tax purposes) will gradually increase over the
15-year term of the ESOP Loan. The tax deductibility of the $258.1 million in
principal amount of the ESOP Loan over its 15-year term is expected by
management to have a significant positive effect on the Company's cash flow. If
current Code provisions allowing such deductibility were curtailed or repealed,
the Company's cash flow and its ability to make scheduled payments on its
indebtedness could be materially adversely affected.
Fiscal Year 1996 Compared to Fiscal Year 1995
General. Net sales rose 7.0% to $282.9 million in fiscal 1996 from $264.3
million in fiscal 1995. Operating profit declined 19.0% to $30.8 million in
fiscal 1996 from $38.0 million in fiscal 1995. Net income declined 87.3% to $2.0
million in fiscal 1996 from $15.5 million in fiscal 1995. Earnings per share of
common stock decreased 89.7% to $1.29 in fiscal 1996 from $12.51 in fiscal 1995.
The fiscal 1995 financial statements have been restated to reflect the adoption
of SOP 93-6, as described in Note 2 to the consolidated financial statements.
Net Sales. Net sales increased $18.6 million or 7.0%, to $282.9 million in
fiscal 1996 from $264.3 million in fiscal 1995, due primarily to sales from
Delmar of $12.7 million for two months, increased volume in the Photography and
Scholastic product lines and modest price increases across all product lines,
partially offset by decreases in the Education product line from the
discontinuance of a product.
Cost of Sales. Cost of sales increased $7.3 million, or 5.7%, to $135.6 million
in fiscal 1996 from $128.3 million in fiscal 1995, primarily as a function of
increased sales. Cost of sales as a percentage of net sales decreased slightly
to 47.9% in fiscal 1996 from 48.5% in fiscal 1995. This decrease was due
principally to a reduction in worker's compensation expenses from prior year
levels, the discontinuing of the discretionary profit sharing plan contribution,
as contemplated in connection with the ESOP Transactions, and reduced costs in
the Photography and Cap & Gown product lines.
Selling and Administrative Expense. Selling and administrative expense increased
$5.2 million, or 5.7%, to $97.7 million in fiscal 1996 from $92.5 million in
fiscal 1995. This increase was predominantly due to the increase in the
Company's commission expense resulting from increased net sales in fiscal 1996
and normal cost increases. However, despite the dollar increase in selling and
administrative expense during fiscal 1996, selling and administrative expense
declined as a percentage of net sales to 34.5% in fiscal 1996 from 35.0% in
fiscal 1995, primarily as a result of discontinuing the discretionary profit
sharing plan contribution.
ESOP Compensation. ESOP compensation increased $11.1 million, to $16.7 million
in fiscal 1996 from $5.6 million in fiscal 1995 due to the ESOP Transactions
which were completed during the year. The recapitalization described above
resulted in a significant increase in the number of shares to be allocated to
employee accounts effective each December 31 from 1995 through 2009. The shares
allocated effective December 31, 1995 related to service rendered by employees
during calendar 1995. ESOP compensation expense for the year ended June 29, 1996
includes $4.0 million relating to employee service rendered in the prior fiscal
year and $12.7 million relating to employee service rendered in the current
year. The increase in the current year's expense over the prior year's expense
results primarily from the increase in the number of shares committed to be
released, offset by a reduction in the market value of the shares.
- 12 -
<PAGE>
Restructuring Charge. The Company incurred a restructuring charge of $2.1
million in the third quarter of fiscal 1996 resulting from a one time voluntary
early retirement program completed in one Scholastic plant location. The program
was offered to management and supervisory employees, of whom 17 elected to
participate in the program. All of the restructuring charges were paid in fiscal
1996.
Operating Profit. Operating profit decreased $7.2 million, or 19.0%, to $30.8
million in fiscal 1996 from $38.0 million in fiscal 1995. This decrease was
predominantly due to the increased ESOP compensation expense partially offset by
strong operating performance by the Cap & Gown and Photography product lines.
Interest Income and Expense. Interest income decreased $1.4 million, or 69.2%,
to $.6 million in fiscal 1996 from $2.0 million in fiscal 1995 due predominantly
to a decrease in the Company's investments in marketable securities and cash
equivalents. Interest expense increased $13.2 million, or 211.1%, to $19.5
million in fiscal 1996 from $6.3 million in fiscal 1995 due to the increased
interest cost associated with the recapitalization.
Income Taxes. Income taxes decreased $8.0 million, or 66.0%, to $4.1 million in
fiscal 1996 from $12.1 million in fiscal 1995 due to the decrease in income
before taxes.
Net Income. Net income decreased $13.5 million, or 87.3%, to $2.0 million in
fiscal 1996 from $15.5 million in fiscal 1995. Moreover, net income decreased as
a percentage of net sales to .7% in fiscal 1996 from 5.9% in fiscal 1995. Such
decreases were primarily the result of higher ESOP compensation and interest
expense arising from the recapitalization associated with the ESOP Transactions
and the restructuring charge.
Dividends. Two $.35 per share dividends were paid during fiscal 1996, totaling
$6.8 million, which was the same as dividends paid in fiscal 1995. Approximately
$4.4 million of the $6.8 million of fiscal 1996 dividends was paid to the ESOP
which used such dividend income to make payments on the loan from the Company.
Capital Expenditures. Capital expenditures in fiscal 1996 totaled $4.7 million,
as the Company continued to invest in its basic business.
Fiscal Year 1995 Compared to Fiscal Year 1994
General. Net sales rose 3.5% to $264.3 million in fiscal 1995 from $255.2
million in fiscal 1994. Operating profit rose 5.1% to $38.0 million in fiscal
1995 from $36.1 million in fiscal 1994. Net income declined 19.5% to $15.5
million in fiscal 1995 from $19.2 million in fiscal 1994. Earnings per share of
common stock decreased 19.5% to $12.51 in fiscal 1995 from $15.54 in fiscal
1994. The fiscal 1995 financial statements have been restated to reflect the
adoption of SOP 93-6, as described in Note 2 to the consolidated financial
statements.
Net Sales. Net sales increased $9.1 million, or 3.5%, to $264.3 million in
fiscal 1995 from $255.2 million in fiscal 1994, due primarily to increased sales
in the Cap & Gown, Yearbook, Photography and Education product lines. Such
increases were due largely to modest price increases as unit volume remained
fairly constant across most product lines.
Cost of Sales. Cost of sales increased $3.3 million, or 2.6%, to $128.3 million
in fiscal 1995 from $125.0 million in fiscal 1994, primarily as a function of
increased sales. Cost of sales as a percentage of net sales decreased slightly
to 48.5% in fiscal 1995 from 49.0% in fiscal 1994. This decrease was due
principally to greater production efficiency and lower overhead in the Cap &
Gown and Photography product lines, as well as the reduction of health care
expenses from prior year levels.
Selling and Administrative Expense. Selling and administrative expense increased
$1.4 million, or 1.5%, to $92.5 million in fiscal 1995 from $91.1 million in
fiscal 1994. This increase was predominantly due to the increase in the
Company's commission expense resulting from increased net sales in fiscal 1995
and normal
- 13 -
<PAGE>
cost increases. However, despite the dollar increase in selling and
administrative expense during fiscal 1995, selling and administrative expense
declined as a percentage of net sales to 35.0% in fiscal 1995 from 35.7% in
fiscal 1994, primarily as a result of the elimination of costs associated with
the expansion into electronic multi-media products in fiscal 1994 and a
reduction in health care expenses. Commission expense in 1995 remained constant
as a percentage of net sales compared to 1994 at 17.2%.
ESOP Compensation. ESOP compensation increased $2.5 million, or 83.7%, to $5.6
million in fiscal 1995 from $3.0 million in fiscal 1994 due to the adoption of
the AICPA's Statement of Position 93-6 "Employer's Accounting for Employee Stock
Ownership Plans", which resulted in ESOP compensation expense being based on
shares committed to be released at their estimated fair market value, net of
dividends on allocated ESOP shares for fiscal 1995, whereas prior year expense
was based on principal payments on the ESOP debt, net of dividends on all ESOP
shares.
Operating Profit. Operating profit increased $1.9 million, or 5.1%, to $38.0
million in fiscal 1995 from $36.1 million in fiscal 1994. This increase was
predominantly due to strong sales and operational performance by the Cap & Gown,
Photography and Education product lines, partially offset by an increase in ESOP
compensation expense.
Interest Income and Expense. Interest income increased $0.9 million, or 78.0%,
to $2.0 million in fiscal 1995 from $1.1 million in fiscal 1994 due
predominantly to an increase in the Company's investments in marketable
securities and cash equivalents. Interest expense decreased $0.1 million, or
1.6%, to $6.3 million in fiscal 1995 from $6.4 million in fiscal 1994 as the
interest expense component of the Senior ESOP Notes decreased. This decrease was
partially off-set by the full year cost of $7.6 million in Industrial
Development Revenue Bonds issued by the Company in the second half of 1994.
Income Taxes. Income taxes increased $.3 million, or 3.0%, to $12.0 million in
fiscal 1995 from $11.7 million in fiscal 1994 due to the increase in income
before taxes.
Net Income. Net income decreased $3.7 million, or 19.4%, to $15.5 million in
fiscal 1995 from $19.2 million in fiscal 1994. Net income decreased as a
percentage of net sales to 5.9% in fiscal 1995 from 7.5% in fiscal 1994. Such
decreases were primarily the result of higher ESOP compensation expense and the
cumulative effect of change in accounting principle.
Dividends. Two $.35 per share dividends were paid during fiscal 1995, totaling
$6.8 million, a $2.0 million increase over the $4.8 million ($.50 per share) in
dividends paid in fiscal 1994. Approximately $2.1 million of the $6.8 million of
fiscal 1995 dividends was paid to the ESOP which used such dividend income to
make payments on the loan from the Company.
Capital Expenditures. Capital expenditures in fiscal 1995 totaled $6.7 million,
as the Company continued to invest in its basic business. The largest
expenditure was for the completion of the new facility for the manufacture of
disposable caps and gowns in Arcola, Illinois. The new cap and gown
manufacturing facility consolidated the production previously handled in part in
four locations into a single, efficient, modern facility.
Impact of Inflation
Although increases in demand for, or costs of, certain materials can
adversely effect the Company's operations, the Company historically has been
able to increase its selling prices to offset increased costs. Price
competition, however, can affect the ability of the Company to increase its
selling prices to reflect such increased costs. Significant increases in the
price of gold have historically resulted, to some degree, in customers switching
their preference from precious metal rings to non-precious metal rings. In
general, the Company believes that the relatively moderate rate of inflation
over the past several years has not had a significant impact on its sales or
profitability.
- 14 -
<PAGE>
The Company requires significant amounts of gold for the manufacture of
jewelry and minimizes its exposure to fluctuations in the price of gold in two
ways. First, the Company resets its ring prices every two weeks to reflect the
current price of gold. Second, it finances its gold inventory requirements
through an arrangement with two suppliers whereby it leases certain gold
inventories not yet committed to manufacture at an effective annual rate of 2.0%
to 2.5% of the market value of the gold. The Company purchases the gold only
after it is committed to the manufacture of a ring. As part of the arrangement,
the suppliers hold a security interest in, and lien upon, gold inventory owned
by the Company. The Company believes its gold financing arrangement is on
favorable terms and enables the Company to effectively hedge against
fluctuations in the spot price of gold.
Seasonality, Liquidity and Capital Resources
The Company is engaged in a highly seasonal business. For fiscal 1996,
approximately 20% of the Company's sales occurred between October and December
(the Company's second fiscal quarter), due primarily to sales of class rings and
school photographs, while approximately 47% of sales occurred in the spring (the
Company's fourth fiscal quarter), due primarily to yearbook sales, cap and gown
sales and rentals, and sales of graduation announcements and diplomas. As such,
the Company's fourth quarter revenues are its largest due to graduation related
sales, specifically yearbooks, fine paper and caps and gowns. Second quarter
revenues are the Company's second largest due primarily to fall delivery of
school photographs and class rings prior to the holidays.
The following table sets forth the Company's net sales and operating profit for
the periods indicated (unaudited):
<TABLE>
<CAPTION>
Fiscal 1996 Fiscal 1995 Fiscal 1994
---------------------------------------- ----------------------------------------- -------------------------------------
First Second Third Fourth First Second Third Fourth First Second Third Fourth
Quarter Quarter Quarter Quarter Quarter Quarter Quarter Quarter Quarter Quarter Quarter Quarter
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net
Sales $43,543 $56,275 $50,239 $132,884 $39,837 $58,932 $46,358 $119,182 $37,843 $57,588 $46,727 $113,075
Operating
Profit (8,767) 4,665 (1,295) 36,188 (2,606) 6,827 (103) 33,881 (3,488) 7,050 2,331 30,252
</TABLE>
The Company's primary source of cash is operating profit from
the sale of its products (supplemented in 1994 by borrowings of $7.6
million) and its primary uses of cash are capital expenditures, payment
of debt and dividends for fiscal years prior to the ESOP Transactions.
The Company has historically experienced an operating loss during its
first fiscal quarter (ending in September) and its working capital
requirements tend to exceed its operating cash flows in the months of
August through October. The Company reduces its working capital needs
throughout the fiscal year with customer deposits and progress
payments. These steps notwithstanding, since the ESOP Transactions, the
Company has been required to incur working capital borrowings. These
working capital borrowings fluctuate and are generally lower in the
summer months and higher throughout the remainder of the year. These
amounts have been and are expected to continue to be financed through a
$60.0 million revolving credit facility under the New Credit Agreement,
described below. Ongoing seasonal borrowings during fiscal 1996 peaked
at approximately $39.5 million and averaged approximately $26.0
million. For both tax and accounting purposes, ESOP contributions are
non-cash expenses of the Company because funds paid to the ESOP are
then repaid to the Company pursuant to the ESOP Loan.
The Company ended fiscal 1996 with smaller cash and marketable
securities balances than fiscal 1995 due to the ESOP Transactions. Net
cash provided by operating activities was $26.8 million in fiscal 1996
down from $33.3 million in fiscal 1995 but up from $26.1 million in
fiscal 1994. The reduction from fiscal 1995 was primarily the result of
the reduction in net income partially offset by an increase in ESOP
related adjustments and a reduction in the funds required by changes in
working capital. The increase in fiscal 1995 from fiscal 1994 was the
result of an increase in the ESOP related adjustments partially offset
by lower net income.
- 15 -
<PAGE>
The Company will be required to repurchase shares: (a) from the ESOP to
provide for cash distributions to participants, or (b) from retiring
participants who receive distributions of shares from the ESOP, or (c) to
accommodate investment diversification requirements of the ESOP for participants
nearing retirement. Such repurchase obligations approximated $0.5 million for
the plan year ending December 31, 1995 and are projected to vary between
approximately $0.5 million and $6.3 million per year, and an estimated aggregate
amount of $30.8 million, through the plan year ended December 31, 2004. These
projections could vary materially based on the number and account values of
employees who become eligible for investment diversification, distributions from
the ESOP or who exercise put options following distributions of their allocated
shares.
In connection with the ESOP Transactions, the Company issued $120
million of 11% Senior Subordinated Notes, due 2005 (the "Subordinated Notes").
The Company also entered into a credit agreement (the "New Credit Agreement")
pursuant to which The First National Bank of Boston and other financial
institutions named therein have provided the Company with a new $120.0 million
credit facility, which includes a $60.0 million senior secured term loan (the
"Term Loan") and a $60.0 million senior secured revolving credit facility (the
"Revolving Credit Facility"), which includes a letter of credit facility with a
$12.0 million sublimit. The Term Loan and the Revolving Credit Facility have a
final maturity of September 30, 2000.
Covenants under the indenture governing the Subordinated Notes and the
New Credit Agreement restrict the Company's ability to incur additional
indebtedness, pay dividends or make other distributions, redeem equity interests
or subordinated indebtedness, create dividend or other payment restrictions
affecting subsidiaries, make certain investments, engage in transactions with
affiliates, create liens, sell assets, or merge, consolidate or transfer
substantially all of its assets, among other things. In addition, under the New
Credit Agreement, 50% of the Company's Excess Cash Flow (as defined in the new
credit agreement ) will be applied to the senior secured Term Loan at the end of
each fiscal year. See Note 6 to the Company's financial statements set forth
herein under Item 8.
As a result of the issuance of the Subordinated Notes and the
incurrence of additional indebtedness under the New Credit Agreement to effect
the ESOP Transactions, as well as working capital borrowings, the Company's
interest expense increased significantly in fiscal 1996 and such higher interest
expense is expected to continue for a number of years. The Company is highly
leveraged and the prospective amount of ESOP contributions to amortize the ESOP
Loan is required to be set forth as a deferred compensation off-set to
shareholders' equity. As a result, the Company will have a shareholders' deficit
for a number of years. The Company has historically generated strong cash flow
from operations and has had modest capital requirements. These characteristics
are expected to continue. The Company currently believes that its operating cash
flow, together with seasonal working capital borrowings, will be sufficient to
meet the ongoing capital requirements of its business, including payments of
interest and principal on the Subordinated Notes, repayments of borrowings under
the New Credit Agreement and share repurchase obligations, although no
assurances to that effect can be given.
Cash flows from investing activities was a usage of $13.3 million in
fiscal 1996 compared to funds provided in fiscal 1995 of $9.8 million and funds
used of $14.2 million in fiscal 1994. The increase in funds used in fiscal 1996
compared to fiscal 1995 was primarily the result of the Delmar acquisition and a
reduction in the sale of marketable securities. The increase in funds provided
by in investing activities in fiscal 1995 compared to fiscal 1994 was due to an
increase in the sale of marketable securities, net of purchases. Capital
expenditures in fiscal 1996 were $4.7 million, generally for maintenance of
property and equipment, and are expected to increase modestly on an annual
basis. The Company expects cash generated from operations plus the working
capital facility portion of the New Credit Agreement to be adequate to meet
these anticipated needs. The increased capital expenditures in fiscal 1995 was
the result of spending for a new facility in the Cap & Gown product line.
As mentioned above, the Company acquired certain assets and assumed
certain liabilities of Delmar for a net purchase price of $15,332 in fiscal
1996. The Delmar acquisition was financed with funds from the New Credit
Agreement and on-going working capital requirements for the acquisition will
also be financed from the New Credit Agreement. The acquisition is expected to
contribute significantly to sales in the Yearbook and Photography product lines.
- 16 -
<PAGE>
Cash flows from financing activities was a usage of $79.4 million in
fiscal 1996 compared to a usage of $10.3 million and $1.6 million in fiscal 1995
and 1994 respectively. The primary reason for the increase in fiscal 1996 over
fiscal 1995 was the result of the purchase of shares by the ESOP Trust and the
prepayment of the previous ESOP debt partially offset by net new borrowings and
related financing costs by the Company. Net cash used by financing activities
increased in fiscal 1995 from fiscal 1994 due to the absence of the issuance of
Industrial Development Revenue Bonds in 1995.
Item 8. Financial Statements and Supplementary Data
Index to Financial Statements
Financial Statements:
Report of Independent Accountants
Consolidated Balance Sheet as of June 29, 1996
and June 24, 1995
Consolidated Statement of Income for the
years ended June 29, 1996, June 24, 1995
and June 25, 1994
Consolidated Statement of Shareholders' Equity for the years ended June
29, 1996, June 24, 1995 and June 25, 1994
Consolidated Statement of Cash Flows for the years ended June 29, 1996,
June 24, 1995 and June 25, 1994
Notes to Consolidated Financial Statements
Financial Statement Schedules for the three years
ended June 29, 1996
VIII. Valuation and Qualifying Accounts and Reserves
X. Supplemental Statement of Income Information.
All other schedules are omitted because they are not applicable or the
required information is shown in the financial statement or notes
thereto.
- 17 -
<PAGE>
(Letterhead of Price Waterhouse LLP)
August 2, 1996
Report of Independent Accountants
To the Board of Directors and
Shareholders of Herff Jones, Inc.
In our opinion, the consolidated financial statements listed in the accompanying
index present fairly, in all material respects, the financial position of Herff
Jones, Inc. and its subsidiaries at June 29, 1996 and June 24, 1995, and the
results of their operations and their cash flows for each of the three years in
the period ended June 29, 1996, in conformity with generally accepted accounting
principles. These financial statements are the responsibility of the company's
management; our responsibility is to express an opinion on these financial
statements based on our audits. We conducted our audits of these statements in
accordance with generally accepted auditing standards which require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for the opinion expressed
above.
/s/Price Waterhouse LLP
Indianapolis, Indiana
- 18 -
<PAGE>
HERFF JONES, INC.
CONSOLIDATED BALANCE SHEET
JUNE 29, 1996 AND JUNE 24, 1995
(Amounts in thousands of dollars,
except for share data)
<TABLE>
<CAPTION>
Assets 1996 1995
- ------ ----------- ----------
Current Assets:
<S> <C> <C>
Cash and cash equivalents $ 8,680 $ 74,538
Marketable securities -- 6,219
Accounts receivable, less allowances of
$4,883 (1996) and $3,019 (1995) for
returns and doubtful accounts 54,066 52,108
Inventories 36,941 33,320
Prepaid expenses 2,651 1,496
Deferred income taxes 5,321 2,411
--------- ---------
Total Current Assets 107,659 170,092
Deferred financing cost, net and other assets 5,603 965
Property, plant and equipment, net 49,041 38,583
--------- ---------
Total Assets $ 162,303 $ 209,640
========= =========
Liabilities and Shareholders' Equity
Current Liabilities:
Trade accounts payable $ 7,541 $ 4,405
Salaries and wages payable 4,068 3,839
Interest payable 5,157 1,161
Customer deposits 19,856 14,886
Commissions payable 14,857 14,682
Income taxes accrued 3,200 10,428
Other accrued liabilities 9,749 10,980
Current portion of long-term debt 22,315 4,809
--------- ---------
Total Current Liabilities 86,743 65,190
Other 2,247 1,618
Long-term debt 173,574 72,617
Deferred income taxes 81 (403)
--------- ---------
Total Liabilities 262,645 139,022
--------- ---------
Commitments and Contingencies
Shareholders' Equity (Deficit):
Common stock - No par value, shares authorized
- 16,500,000; shares issued and outstanding
- 9,618,996 (1996) and 9,640,468 (1995) 5,728 5,745
Retained earnings 119,525 121,234
Deferred compensation (222,953) (56,367)
Foreign currency translation 11 6
Excess of cost over market (shares committed
to be released) (2,653) --
--------- ---------
Total Shareholders' Equity (Deficit) (100,342) 70,618
--------- ---------
Total Liabilities & Shareholders' Equity (Deficit) $ 162,303 $ 209,640
========= =========
</TABLE>
(See Notes to Consolidated Financial Statements.)
- 19 -
<PAGE>
HERFF JONES, INC.
CONSOLIDATED STATEMENT OF INCOME
FOR THE YEARS ENDED JUNE 29, 1996, JUNE 24, 1995 AND JUNE
25, 1994 (Amounts in thousands of dollars
except for share data)
CONSOLIDATED STATEMENT OF INCOME 1996 1995 1994
------------ ----------- -----------
Net sales $ 282,941 $ 264,309 $ 255,233
Cost of sales
(excludes ESOP compensation) 135,625 128,282 124,992
Selling and administrative expenses
(excludes ESOP compensation) 97,719 92,472 91,071
ESOP compensation
Current year service 12,632 5,556 3,025
Prior year service 4,033 -- --
Restructuring charge 2,141 -- --
--------- --------- ---------
Operating profit 30,791 37,999 36,145
Interest income 627 2,034 1,143
Interest expense 19,482 6,263 6,367
--------- --------- ---------
Income before taxes 11,936 33,770 30,921
Income taxes 4,094 12,056 11,707
--------- --------- ---------
Net income before
extraordinary item
and cumulative effect
of change in
accounting principle 7,842 21,714 19,214
Extraordinary item: Prepayment fee
on the Senior ESOP notes
retirement, less
applicable tax benefit of $ 3,621 (5,884) -- --
Cumulative effect of change
in accounting for ESOP
compensation, less
applicable tax benefit
of $3,464 -- (6,240) --
--------- --------- ---------
Net income $ 1,958 $ 15,474 $ 19,214
========= ========= =========
Per common share:
Net income before extraordinary
item and cumulative effect
of change in accounting
principle $ 5.16 $ 17.56 $ 15.54
Extraordinary item (3.87) -- --
Cumulative effect of change in
accounting principle -- (5.05) --
--------- --------- ---------
Net income $ 1.29 $ 12.51 $ 15.54
========= ========= =========
Pro forma weighted average number
of common shares outstanding 1,521,263 1,236,494 1,236,494
========= ========= =========
(See Notes to Consolidated Financial Statements)
- 20 -
<PAGE>
HERFF JONES, INC.
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED JUNE 29, 1996, JUNE 24, 1995 AND JUNE 25, 1994
(Amounts in thousands of dollars except for share data)
<TABLE>
<CAPTION>
Total
Foreign Excess Shareholders'
Common Stock Retained Currency Deferred Cost Over Equity
Shares Amount Earnings Translation Compensation Market (Deficit)
------ ------ -------- ----------- ------------ ------ ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance June 26, 1993 9,665,161 $ 5,757 $ 95,982 $ 48 $(78,395) -- $ 23,392
========= ========== ========== ====== ======== ==========
Dividends declared($.50/Share) -- -- (4,833) -- -- -- (4,833)
Stock purchases (8,333) (4) (234) -- -- -- (238)
Tax benefit of ESOP dividends -- -- 396 -- -- -- 396
Foreign currency translation -- -- -- (48) -- -- (48)
Net income for the year -- -- 19,214 -- -- -- 19,214
Payment of ESOP debt -- -- -- -- 4,119 -- 4,119
--------- ---------- ---------- ------ -------- ----------
Balance June 25, 1994 9,656,828 $ 5,753 $ 110,525 $ -- $ ( 74,276) -- $ 42,002
========= ========== ========== ====== ======== ==========
Dividends declared ($.70/Share) -- -- (5,305) -- -- -- (5,305)
Stock purchases (16,360) (8) (500) -- -- -- (508)
Shares committed to be released -- -- 163 -- 5,933 -- 6,096
Fiscal 1994 shares committed to be
released in fiscal 1995 (reclass from
accrual) 183 2,967 -- 3,150
Cumulative accounting change 694 9,009 -- 9,703
Foreign currency translation -- -- -- 6 -- -- 6
Net income for the year -- -- 15,474 -- -- -- 15,474
--------- ---------- ---------- ------ -------- ----------
Balance June 24, 1995 9,640,468 $5,745 $ 121,234 $ 6 $ (56,367) -- $ 70,618
========= ========== ========== ====== ======== ==========
Dividends declared ($.70/share) -- -- (3,221) -- -- -- (3,221)
Stock purchases (21,472) (17) (446) -- -- -- (463)
Shares committed to be released -- -- -- -- 21,692 (4,389) 17,303
Tax benefit of cost over market of
ESOP shares committed to be released -- -- -- -- -- 1,736 1,736
ESOP share purchase -- -- -- -- (188,278) -- (188,278)
Foreign currency translation -- -- -- 5 -- -- 5
Net income -- -- 1,958 -- -- -- 1,958
--------- ---------- ---------- ------ -------- ------- ----------
Balance June 29, 1996 9,618,996 $ 5,728 $ 119,525 $ 11 $ (222,953) $(2,653) $ (100,342)
========= ========== ========== ====== ======== ======= ==========
</TABLE>
(See Notes to Consolidated Financial Statements.)
- 21 -
<PAGE>
HERFF JONES, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE YEARS ENDED JUNE 29, 1996, JUNE 24, 1995 AND JUNE 25,
1994 (Amounts in thousands of dollars)
<TABLE>
<CAPTION>
1996 1995 1994
--------- --------- ---------
Cash flows from operating activities:
<S> <C> <C> <C>
Net income $ 1,958 $ 15,474 $ 19,214
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization 5,802 5,480 4,835
Amortization and write off of financing cost 1,298 -- --
ESOP compensation (before dividend exclusion) 17,303 6,096 --
Cumulative effect for accounting change -- 9,704 --
Amortization of deferred compensation -- -- 4,119
Tax benefit of ESOP dividends 1,736 -- 396
Other 5 188 --
(Gain) loss on disposal of property, plant and equipment (408) (474) (18)
Increase (decrease) in cash generated by changes in assets and
liabilities, net of effects from acquisition of business:
Accounts receivable 1,595 (1,722) (3,258)
Inventories 5,115 (336) (292)
Prepaid expenses (911) 449 (147)
Other assets 298 2,440 (116)
Trade accounts payable 2,099 680 2
Salaries and wages (437) (34) 404
Customer deposits (2,122) 17 (410)
Commissions payable 175 1,564 974
Income taxes payable (7,228) 223 1,223
Deferred income taxes (2,426) (4,891) (934)
Other accrued liabilities 2,975 (1,565) 134
--------- --------- ---------
Total Adjustments 24,869 17,819 6,912
--------- --------- ---------
Net cash provided by operating activities 26,827 33,293 26,126
--------- --------- ---------
Cash flows from investing activities:
Proceeds from disposal of property, plant and equipment 503 1,338 220
Capital expenditures (4,722) (6,732) (8,501)
Acquisition of business (15,332) -- --
Purchase of marketable securities -- (900) (8,901)
Sale of marketable securities 6,219 16,063 2,982
--------- --------- ---------
Net cash provided (used) by investing activities (13,332) 9,769 (14,200)
--------- --------- ---------
Cash flows from financing activities:
Issuance of Industrial Development Revenue Bonds -- -- 7,600
Purchase of shares by the ESOP Trust (188,278) -- --
Redemptions of common stock (463) (508) (238)
Dividends declared (3,221) (5,305) (4,833)
Financing cost incurred (5,854) -- --
Decrease in long-term debt (6,750) -- --
Paydown on the revolver, net (21,607) -- --
New borrowings 216,646 -- --
Payment on ESOP debt (69,826) (4,450) (4,119)
Foreign currency translation adjustment -- -- (48)
--------- --------- ---------
Net cash used by financing activities (79,353) (10,263) (1,638)
--------- --------- ---------
Cash and Cash Equivalents:
Net increase (decrease) (65,858) 32,799 10,288
Beginning of year 74,538 41,739 31,451
--------- --------- ---------
End of year $ 8,680 $ 74,538 $ 41,739
========= ========= =========
Supplemental cash flow information: Cash paid during the year for:
Interest $ 12,907 $ 6,304 $ 6,379
Income taxes $ 8,415 $ 13,281 $ 11,022
Dividends $ 6,746 $ 6,758 $ 4,833
Acquisition of business:
Assets acquired $24,547
Liabilities assumed (9,215)
---------
Net purchase price $15,332
</TABLE>
(See Notes to Consolidated Financial Statements.)
- 22 -
<PAGE>
HERFF JONES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 29, 1996, JUNE 24, 1995 AND JUNE 25, 1994
(Amounts in thousands of dollars
except for share data)
NOTE 1 - BUSINESS OF HERFF JONES, INC. (HERFF JONES)
Herff Jones is essentially in one line of business; the manufacture and sale of
recognition, education, achievement and motivation products for the scholastic
and commercial markets; including instructional materials and programs for the
classroom; and photographic services.
Products include high school and college rings, medals, pins, awards, diplomas,
graduation announcements and accessory items, yearbooks, caps and gowns; senior
portraits, underclass school pictures and photography finishing for the
professional photographer; classroom instructional materials including maps,
globes, anatomical models and multi-media teaching programs; and similar jewelry
and award items for the commercial market.
Its products are marketed to schools and businesses nationwide and in Canada and
Puerto Rico by approximately 700 sales representatives, most of whom are
independent contractors who are paid commissions.
NOTE 2 - RECAPITALIZATION
On June 15, 1995, management of the Company distributed to shareholders a proxy
statement describing a proposed transaction whereby the Company-sponsored ESOP
trust ("ESOP") would acquire substantially all the outstanding shares of Company
stock that it did not already own. This plan of recapitalization became
effective as of August 22, 1995. The transaction resulted in the ESOP obtaining
control of the Company and the Company incurring significant additional
indebtedness (approximately $135,000, including the issuance of $120,000 in
aggregate principal amount of 11% Senior Subordinated Notes due 2005 ("Notes")).
The proceeds from the transaction were loaned, along with other Company funds,
by the Company to the ESOP to enable it to effect the transaction.
The recapitalization resulted in a significant prepayment fee (approximately
$9,505) on the payoff of the Senior ESOP Notes, which was recorded as an
extraordinary charge in fiscal 1996. The recapitalization also resulted in
significant financial effects from adoption of new ESOP accounting standards
contained in the AICPA's Statement of Position, "Employers' Accounting for
Employee Stock Ownership Plans" (SOP 93-6), including: (a) restatement of the
Company's fiscal 1995 financial statements, which reflect a non-cash charge for
the cumulative effect of the change in accounting for ESOP compensation
(approximately $9,704) for ESOP shares acquired prior to the transaction; (b)
the determination of ESOP compensation expense based upon the fair value of
shares committed to be released; and (c) for earnings per share computations,
only ESOP shares committed to be released and allocated shares are considered
outstanding.
- 23 -
<PAGE>
Upon issuance of financial statements for fiscal 1996, the transition provisions
of SOP 93-6 required the Company to restate its consolidated financial
statements as of and for its year ended June 24, 1995, the most significant
effect of which was the adoption of a new methodology for the determination of
ESOP compensation expense. Beginning in fiscal 1995, compensation expense is
based upon the fair value of shares committed to be released. Further, the
dividend exclusion used to reduce compensation expense is based on only
allocated ESOP shares. The adoption of SOP 93-6 also resulted in a charge for
the cumulative effect of applying the shares allocated method of calculating
ESOP compensation expense for the years prior to fiscal 1995.
NOTE 3 - ACCOUNTING POLICIES
The major accounting policies and practices followed by Herff Jones are as
follows:
PRINCIPLES OF CONSOLIDATION - The consolidated financial statements include the
accounts of Herff Jones and its wholly-owned subsidiaries, Herff Jones Canada,
Inc. (hereafter referred to as Herff Jones Canada) and The Herff Jones Company
of Indiana, Inc. The Company utilizes a 52/53 week year for accounting purposes
ending on the last Saturday in June. Fiscal 1996 contained 53 weeks, the
additional week was included in the first quarter ended September 30, 1995. All
significant inter-company transactions and balances have been eliminated in
consolidation. Foreign operations are relatively insignificant. Certain prior
year amounts have been restated to conform with the current year's presentation.
FOREIGN CURRENCY TRANSLATION - The financial statements of Herff Jones Canada
have been translated to U.S. dollars in accordance with FASB Statement No. 52,
"Foreign Currency Translation." Accordingly, assets and liabilities are
translated at the rate in existence at the balance sheet date. Revenue and
expense items are translated at average rates prevailing during the year. Any
translation gains and losses are accumulated as a separate component of
shareholders' equity.
CASH AND CASH EQUIVALENTS - For purposes of balance sheet and statement of cash
flows classification, investments with maturities of three months or less from
date of purchase are deemed to be cash equivalents.
MARKETABLE SECURITIES - Marketable securities, primarily tax exempt government
securities, are available for sale and are stated at amortized cost, which
approximates market. All such securities were sold at a nominal loss in July,
1996. Net realized gains on the sale of marketable securities were insignificant
in 1994, 1995 and 1996.
INVENTORIES - Inventories are stated at lower of cost (first-in, first-out
basis) or market with the exception of gold inventories which are determined
under the last-in, first-out (LIFO) method.
DEFERRED FINANCING - Deferred financing costs are amortized over the term of the
related debt.
PROPERTY, PLANT AND EQUIPMENT - Property, plant and equipment are carried at
cost less accumulated depreciation.
Depreciation is provided on a straight-line basis for financial reporting and on
an accelerated basis for income tax purposes over the following estimated useful
lives of the assets:
Building and leasehold improvements 10 to 35 years
Machinery and equipment 5 to 10 years
Furniture and fixtures 3 to 10 years
Rental cap and gown stock 6 to 10 years
Maintenance and repairs are charged to expense as incurred. Cost of renewals and
betterments are capitalized and depreciated using the applicable rates.
REVENUE RECOGNITION - Revenue and related costs are recognized when the product
is shipped to the customer.
- 24 -
<PAGE>
COMMISSIONS - The Company provides advances to the sales representatives, which
are offset by commissions earned. For both tax and financial reporting purposes,
salesman advances paid in excess of commission earned, which are deemed
uncollectible, are charged to expense.
ESOP PLAN - During fiscal 1990, the Company established a leveraged employee
stock ownership plan (the "Plan") which covers substantially all U.S. non-union
employees. On November 9, 1989, the ESOP purchased just over 30% of the common
stock of the Company from shareholders using proceeds of the 1989 Senior ESOP
Notes, which were prepaid in fiscal 1996. In May 1995, the Company's Board of
Directors adopted a plan of recapitalization which resulted in the August 1995
purchase, by the ESOP, of substantially all shares of the Company's common stock
that it did not already hold (6,724,200 shares).
The Plan is non-contributory and is funded through annual Company contributions
equal to the Plan's debt service less dividends received by the Plan. All
dividends received by the Plan are used for debt service. The ESOP shares
initially were pledged as collateral for its debt. As the debt is repaid, shares
are released from collateral and allocated to active employees. For fiscal 1996
and 1995, the Company accounts for its ESOP in accordance with SOP 93-6.
Accordingly, the debt of the ESOP is not reflected in the Company's financial
statements and the shares pledged as collateral are reported as deferred
compensation in the balance sheet. As shares are released from collateral, the
Company reports ESOP compensation expense equal to the most recent estimate of
the fair value of the shares, and the shares become outstanding for
earnings-per-share (EPS) computations. Dividends on allocated ESOP shares are
recorded as a reduction of retained earnings.
For fiscal 1994, the Company accounted for its ESOP in accordance with the
AICPA's Statement of Position 76-3, "Accounting Practices for Certain Employee
Stock Ownership Plans". Accordingly, ESOP compensation cost was based on the
cost of ESOP shares and coincided with principal payments on the ESOP debt.
Dividends on all ESOP shares reduced ESOP compensation expense. For earnings per
share purposes, net ESOP shares were considered outstanding (i.e.; total ESOP
shares less shares repurchased and retired).
The number of shares allocated annually approximates the total unreleased and
committed to be released shares amortized in equal installments through
December, 2009. Shares of the Company's stock are allocated to employees'
accounts, based on compensation levels, in equal annual amounts over the life of
the ESOP debt (through December 2009). Upon retirement (at the normal retirement
age), or earlier termination (assuming the ESOP loan has been repaid), the
employee can request that the Company buy his/her shares at the latest price
determined by an annual valuation.
Since there is no market for the Company's shares, an annual valuation of the
shares is performed by an independent valuation firm. Between annual valuations,
management estimates fair value for purposes of recording ESOP compensation
expense. The latest annual valuation was $21.25 per share and was performed
after the recapitalization in August, 1995. The previous annual valuation was
$31.00 per share and was done after the close of the fiscal year ended June 25,
1994. The latest interim management estimate is $24.70 per share and was used to
record ESOP compensation expense in calendar 1996.
At June 29, 1996 and June 24, 1995, the ESOP shares were as follows:
1996 1995
---------- ----------
Allocated Shares 1,558,710 983,000
Shares committed to be released 289,800 98,300
Unreleased shares 7,824,690 1,867,700
--------- ---------
Total ESOP shares 9,673,200 2,949,000
Shares purchased and retired (56,659) (34,602)
--------- ---------
Net ESOP shares 9,616,541 2,914,398
========= =========
Approximately 36,000 shares may be put back to the Company in Fiscal 1997 in
connection with scheduled distributions. Further, an ESOP diversification
provision provides for participants who have attained the age of 55 and have 10
years of ESOP participation (from 1990) to diversify a portion of their ESOP
holdings into investments other than Herff Jones stock. In order to accommodate
this provision, participants' shares must be purchased by the Company. In Fiscal
year 2001, approximately 100,000 shares are expected to be eligible to be
purchased by the Company in accordance with the diversification provision.
- 25 -
<PAGE>
LONG-TERM INCENTIVE PLAN - The appreciation in the projected value of units in
excess of an established minimum amount is accrued by the Company and charged to
compensation expense over the five year performance period.
EARNINGS PER SHARE - Earnings per share have been computed by dividing net
income by the pro forma weighted average number of allocated and committed to be
released ESOP shares outstanding during the year.
INCOME TAXES - For its fiscal year ended June 25, 1994, the Company adopted FAS
No. 109 "Accounting for Income Taxes." This adoption had no material effect on
the Company's financial statements. Deferred income taxes are provided for the
temporary differences between financial reporting and income tax reporting of
the Company's assets and liabilities in accordance with FAS No. 109.
PENSION PLAN - Herff Jones has one defined benefit plan which covers
substantially all bargaining unit employees at the Indianapolis, Indiana Jewelry
operation (Note 10). The benefit is based on a defined benefit level multiplied
by years of service. Net periodic pension cost was determined using the
Projected Unit Credit Cost Method prescribed by FASB Statement No. 87. Plan
funding is based on the Unit Credit Cost Method in 1996 and 1995. In 1994, plan
funding was based on the Entry Age Normal Cost Method.
FAIR VALUE OF FINANCIAL INSTRUMENTS - In the normal course of business, the
Company enters into transactions involving various types of financial
instruments. These instruments have credit risk and may also be subject to risk
of loss due to interest rate fluctuations. The Company estimates the fair value
of tax exempt government securities (bonds) using quoted market prices obtained
from the Company's independent investment trustee. Management has estimated that
the fair value of cash and cash equivalents, accounts receivable, trade accounts
payable and customer deposits approximates the carrying value due to the
relatively short period of time until expected realization. Management has also
estimated the fair value of the Senior Subordinated Notes based upon the trading
price of the notes at year end (Note 6). The estimated fair value of the
Industrial Revenue Bonds and the Senior Bank Facility (revolver and term)
approximates the carrying value due to periodic interest rate adjustments to
current market rates.
USE OF ESTIMATES - The preparation of the financial statements in accordance
with generally accepted accounting principles requires the use of estimates made
by management. Actual results could differ from those estimates.
RECLASSIFICATION - Certain 1995 and 1994 amounts have been reclassified in order
to conform to the 1996 presentation.
NEW ACCOUNTING PRINCIPLES - Statement of Financial Accounting Standards No. 123
"Accounting for Stock-Based Compensation" is effective for the Company in fiscal
1997. The Company plans to only adopt the disclosure requirements of this
standard and will continue to follow APB 25 "Accounting for Stock Issued to
Employees" for expense recognition purposes. Statement of Financial Standards
No. 121 "Accounting for Impairment of Long Lived Assets and Long Lived Assets to
be Disposed Of" is effective for the Company in fiscal 1997. The Company expects
the impact to be immaterial.
NOTE 4 - INVENTORIES
Inventories consist of the following:
1996 1995
-------- -------
Raw materials and supplies
(includes gold) $16,017 $14,324
Work-in-process 13,008 11,651
Finished goods 7,916 7,345
------- -------
$36,941 $33,320
======= =======
LIFO cost of gold inventories at June 29, 1996 and June 24, 1995 are $945 and
$837, respectively, and are $125 and $148 lower than replacement cost in the
respective years.
- 26 -
<PAGE>
NOTE 5 - PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consist of the following:
1996 1995
---------- ----------
Buildings and leasehold improvements $ 22,283 $ 18,472
Machinery and equipment 47,959 40,048
Furniture and fixtures 2,612 2,127
Rental cap & gown stock 10,635 9,702
--------- ---------
83,489 70,349
Less - Accumulated depreciation (38,712) (34,151)
--------- ---------
44,777 36,198
Land 3,126 1,858
Construction in progress 1,138 527
--------- ---------
$ 49,041 $ 38,583
========= =========
NOTE 6 - FINANCING
Long-term debt consists of the following:
1996 1995
--------- ---------
1989 Senior ESOP Notes -- $ 69,826
Senior Bank Facility (Revolver) $ 15,039 --
Senior Bank Facility (Term) 53,250 --
Senior Subordinated Notes 120,000 --
1994 Industrial Development
Revenue Bonds Due in 7,600 7,600
--------- ---------
195,889 77,426
Less: Current Portion (22,315) (4,809)
--------- ---------
Long-Term Debt $ 173,574 $ 72,617
========= =========
On August 22, 1995, the Company issued $120,000 in aggregate principal 11%
Senior Subordinated Notes. The notes mature in September, 2005. Based on the
bond price at June 29, 1996, the fair value of the Senior Subordinated Notes is
$123,600. The notes are unsecured but contain certain restrictive covenants,
including limitations on indebtness, liens, leases, dividends, stock purchases
and certain investments.
In connection with the ESOP Transaction, the Company entered into the Revolving
Credit and Term Loan Agreement, dated as of August 22, 1995 ("New Credit
Agreement") pursuant to which financial institutions have provided the Company
with a new $120,000 credit facility, comprised of a $60,000 Senior Secured Term
Loan and a $60,000 Senior Secured Revolving Credit Facility, which includes a
letter of credit facility with a $12,000 sublimit. The Term Loan and the
Revolving Credit Facility have a final maturity of September 30, 2000.
Amortization of the Term Loan is in quarterly installments which commenced
December 31, 1995.
All loans made under the Term Loan and the Revolving Credit Facility bear
interest either at The First National Bank of Boston Alternate Base rate (the
"Base Rate") or the Eurodollar rate (as defined below), plus, in each case, the
"Applicable Margin," which initially was 0.00% per annum with respect to the
Base Rate and 1.50% per annum with respect to the Eurodollar rate. The
Applicable Margin rises or falls depending upon the financial performance of the
Company. The Company pays a commitment fee of 0.375% per annum on the unused
portion of the Revolving Credit Facility. The commitment fee is payable
quarterly in arrears and increases or decreases depending upon the financial
performance of the Company. The Company pays the applicable Eurodollar Rate
Margin (as defined below) on the maximum amount available to be drawn under each
letter of credit (such fees rise and fall depending on the financial performance
of the Company) plus, for the account of the Agent Bank, a fee of 0.125% on the
maximum amount available to be drawn under each
- 27 -
<PAGE>
letter of credit upon issuance. The "Eurodollar Rate" for an interest period is
defined in the New Credit Agreement as the rate at which the Agent Bank is
offered U.S. dollar deposits in the interbank eurodollar market in which it
conducts currency and exchange operations two business days before such interest
period plus a margin ranging between 0.75% to 1.75% per annum (the "Eurodollar
Rate Margin"), adjusted annually depending on the ratio of the Company's senior
debt to certain cash flows for the preceding fiscal year. The base rate
revolving credit loan ($10,039) rate on June 29, 1996 was 8.25%. The Eurodollar
revolving credit loan ($5,000) rate on June 29, 1996 was 6.94%. The Eurodollar
term credit loan ($53,250) rate on June 29, 1996 was 6.94%.
The recapitalization described above significantly changed the Company's
financial condition, adding substantial indebtedness which, coupled with the
adoption of new ESOP Accounting Standards, resulted in a deficit shareholders'
equity position. The cash flow pattern and expectations of the Company's highly
seasonal business result in the classification, at June 29, 1996, of $11,815 of
the senior bank facility (revolver) as a current liability, although payment
within the next year is not necessarily required by the terms of the Company's
financing arrangements.
The obligations under the Term Loan and the Revolving Credit Facility constitute
Senior Debt and are secured by a blanket perfected first priority security
interest in substantially all tangible and intangible assets of the Company,
including a pledge of all of the stock of the Company's subsidiaries. In
addition, the obligations under the Term Loan and the Revolving Credit Facility
are guaranteed by each of the Company's subsidiaries (the "Guarantors"), and the
obligations of each of the Guarantors under such guarantee are in turn secured
by a perfected first priority security interest in all assets of each of the
Guarantors.
The New Credit Agreement and related documents contain customary financial and
other covenants that, among other things, limit the ability of the Company
(subject to customary and negotiated exceptions) to: (i) incur additional liens,
(ii) incur additional indebtedness, (iii) make certain kinds of investments,
(iv) prepay subordinated indebtedness, including the Notes, (v) make
distributions and dividend payments to its stockholders, (vi) engage in
affiliate transactions, (vii) make certain asset dispositions, (viii) make
significant acquisitions and (ix) participate in certain mergers or
consolidations.
The effective rate of interest on the 1994 Industrial Development Revenue Bonds
is re-set weekly at a rate to allow the Bonds to be priced at par. Interest is
paid quarterly and the interest rate on June 29, 1996 was 3.70%. They are
unsecured but are backed by an irrevocable Letter of Credit. The Letter of
Credit contains a restrictive covenant regarding maintenance of cash flows.
Long-term debt is scheduled to be paid in the following fiscal years:
1997 $ 22,315
1998 11,750
1999 12,750
2000 14,500
2001 6,974
2002 and thereafter 127,600
-------
$195,889
NOTE 7 - COMMON STOCK
1996 1995 1994
---------- ---------- ----------
Authorized:
Common Shares 16,500,000
Class A 5,000,000 5,000,000
Class B 6,500,000 6,500,000
Class C 5,000,000 5,000,000
---------- ---------- ----------
Total Common Stock Authorized 16,500,000 16,500,000 16,500,000
Outstanding:
Common Shares 9,618,996
Class A 3,247,970 3,247,970
Class B 3,478,100 3,478,100
Class C 2,914,398 2,930,758
---------- ---------- ----------
Total Common Stock Outstanding 9,618,996 9,640,468 9,656,828
- 28 -
<PAGE>
In connection with the August 22, 1995 recapitalization, the Company's
outstanding Class A, B and C shares were converted into a single class of common
stock on a share-for-share basis. The ESOP then purchased virtually all of the
shares of common stock so converted held by shareholders other than the ESOP.
As a consequence of the August 22, 1995 recapitalization plan, the weighted
average number of common shares outstanding was calculated on a pro forma basis
assuming the recapitalization occurred at June 25, 1995. The same weighted
average number of common shares was considered outstanding on a pro forma basis
for fiscal 1995 and 1994 to present comparable income (loss) per common share.
The number of common shares outstanding immediately after the recapitalization
took place was 1,236,494. This number has been used as the pro forma weighted
average number of common shares outstanding for all periods prior to September
1995.
In accordance with the provisions of SOP 93-6, for purposes of computing a
weighted average number of common shares outstanding, ESOP shares that have been
committed to be released are considered outstanding, ESOP shares that have not
been committed to be released are not considered outstanding for fiscal 1996 and
1995.
The actual weighted average number of common shares outstanding for the year
ended June 29, 1996, June 24, 1995 and June 25, 1994, was 3,383,379, 7,686,204
and 9,665,092, respectively. The weighted average number of common shares
outstanding for the year ending June 25, 1994 calculated in accordance with the
provisions of SOP 93-6 would have been 7,501,918. The income per common share
using the actual weighted average number of common shares outstanding for the
year ended June 29, 1996, June 24, 1995 and June 25, 1994, was $.58, $2.02 and
$1.99, respectively.
The excess of cost over market represents the cumulative difference between the
market value of shares committed to be released and the cost of those shares to
the ESOP, net of tax effects.
NOTE 8 - INCOME TAXES
Pre-tax income from operations for the years ended June 29, 1996, June 24, 1995
and June 25, 1994 was taxed under the following jurisdictions:
1996 1995 1994
-------- -------- --------
Domestic $ 11,722 $ 33,519 $ 30,912
Foreign 214 251 9
-------- -------- --------
Total $ 11,936 $ 33,770 $ 30,921
======== ======== ========
The provision for income taxes charged to income before extraordinary and
cumulative effect items was as follows:
1996 1995 1994
-------- -------- --------
Current income tax expense:
Federal $ 7,453 $ 11,110 $ 10,500
State and local 1,075 2,232 1,935
Foreign 82 -- 6
-------- -------- --------
Total current income tax expense 8,610 13,342 12,441
Deferred income tax expense:
Federal (3,497) (1,149) (646)
State and local (635) (238) --
Foreign (1) 101 (52)
-------- -------- --------
Total deferred income tax expense (4,133) (1,286) (698)
Benefit of Canadian operating
loss carryforward -- -- (36)
Benefit of State operating
loss carryforward (383) -- --
-------- -------- --------
Total tax provision
(before extraordinary and
cumulative effect items) $ 4,094 $ 12,056 $ 11,707
======== ======== ========
- 29 -
<PAGE>
The provision for income taxes differs from the amount of income tax determined
by applying the applicable U.S. statutory federal income tax rate to pre-tax
income from continuing operations as a result of the following differences:
1996 1995 1994
------ ------ ------
U.S. statutory rate 35.0% 35.0% 35.0%
State income taxes, net of federal income tax 1.5 4.3 4.1
Dividend on ESOP stock (2.5) (2.1) (0.4)
All other, net .3 (1.5) (0.8)
------ ------ ------
Financial reporting rate
(before extraordinary item or
cumulative effect) 34.3% 35.7% 37.9%
====== ====== ======
Deferred tax assets (liabilities) are comprised of the following:
1996 1995
-------- --------
Deferred Tax Assets:
Estimated Product Returns 600 $ 479
Medical Insurance 442 516
Inventory Cost Capitalization 288 466
Bad Debts 231 274
Vacation Pay 681 470
Workers Compensation 1,077 901
State Tax Loss Carryforward 383
ESOP 6,396 4,114
Other 130 136
-------- --------
Total Assets 10,228 7,356
Deferred Tax Liabilities:
Depreciation (4,511) (4,123)
Profit Sharing (177) (256)
Property Taxes (47) (66)
Other (253) (97)
-------- --------
Total Liabilities (4,988) (4,542)
-------- --------
Net Deferred Tax Asset $ 5,240 $ 2,814
======== ========
No valuation allowance was deemed necessary at June 29, 1996 and June 24, 1995.
The tax effect related to the extraordinary item and cumulative effect
approximates the statutory U.S. tax rate.
NOTE 9 - EMPLOYEE RETIREMENT PLANS
ESOP compensation expense was $16,665 (1996), $5,556 (1995) and $3,025 (1994).
The 1996 expense of $16,665, including administrative costs, was net of $865 in
dividends paid to the Plan. The 1995 figure of $5,556, including administrative
cost, was net of $605 in dividends paid to the Plan. The 1994 expense of $3,025,
including administrative cost, was net of $1,469 in dividends paid to the Plan.
For 1996 and 1995 ESOP compensation expense was based upon the fair value of
shares committed to be released, offset by dividends on allocated ESOP shares.
In 1994, ESOP compensation expense was recognized based on the cost of the
shares as the principal repayments on the ESOP notes accrue, offset by dividends
declared on the ESOP shares.
The Company has three profit sharing plans covering substantially all non-union
employees. Accrued but unpaid contributions through the end of each year are
included in Other Accrued Liabilities. Profit sharing expense for these plans
was $749 in 1996, $3,365 in 1995 and $3,288 in 1994.
- 30 -
<PAGE>
NOTE 10 - JEWELRY BARGAINING UNIT PENSION PLAN
Pre-tax pension expense of $97 for 1996 and $65 for 1995 and income of $45 for
1994 consist of the following components:
1996 1995 1994
------- ------- -------
Service cost $ 167 $ 173 $ 166
Interest cost 595 582 526
Actual return on assets (1,631) (249) (281)
Difference between assumed return
and actual return on assets 1,035 (372) (354)
Amortization of over-funded position
and unrecognized prior service (69) (69) (102)
------- ------- -------
$ 97 $ 65 $ (45)
======= ======= =======
Assumptions used in determining the net pension expense (income) for 1996 and
1994 included a discount rate of 7.5% and a rate of return on plan assets of
8.5%. Assumptions used in determining the net pension expense for 1995 included
a discount rate of 8.0%, and a rate of return on plan assets of 8.5%.
The following table sets forth the plan's funded status and amounts recognized
in the company's consolidated balance sheet at June 29, 1996 and June 24, 1995:
1996 1995
------- -------
Projected benefit obligation, including
vested benefits of $7,929 (1996)
and $7,306 (1995) $(8,314) $(7,699)
Plan assets at fair value, primarily listed
stocks and corporate obligations 8,833 7,281
------- -------
Over (under)-funded position 519 (418)
Unamortized over-funded position (830) (969)
Unrecognized (loss) on assets 313 907
Unrecognized prior service cost 531 591
------- -------
Prepaid pension expense 533 111
Additional minimum liability -- (529)
------- -------
Total pension asset (liability) $ 533 $ (418)
======= =======
The Company's pension obligation and assets were valued as of March 31, 1996 for
fiscal 1996 and as of March 31, 1995 for fiscal 1995.
NOTE 11 - LONG-TERM INCENTIVE PLAN
The Herff Jones, Inc. Long-Term Incentive Plan ("Incentive Plan") was adopted by
the Company effective July 1, 1995. Employees whose performance is expected to
contribute significantly to the long-term strategic performance and growth of
the Company are eligible to participate in the Incentive Plan. The Compensation
Committee of the Board of Directors selects employees for participation.
Participating employees are granted an award of units at the beginning of a
five-year performance cycle. The maximum numbers of units that may be issued
subject to the Incentive Plan is 1,500,000, subject to proportional adjustment
in the event of any change in Company stock outstanding by reason of any
issuance of additional shares, recapitalization, reclassification,
reorganization, combination of shares or similar transaction. Each unit is equal
in value to one share of common stock, but is not a share and carries no
shareholder rights. The value of units will correspond to the value of shares of
common stock as of the end of each Company fiscal year, as determined for the
ESOP by an independent valuation firm. The participants will be entitled to
payment of a cash incentive award after the five-year performance cycle is
completed. The award will be equal to the appreciation in value of the
participant's units in excess of a minimum amount set by the Compensation
Committee over the course of the performance cycle and will be payable in a
single lump sum in the January immediately following the end of the performance
cycle.
- 31 -
<PAGE>
In 1996, 510,000 units were granted to employees. The units had no value at June
29, 1996 and no expense was recorded in fiscal 1996 because the minimum value at
the end of the year was greater than the latest share value.
NOTE 12 - RESTRUCTURING CHARGE
The Company incurred a restructuring charge of $2,141 in the third quarter of
fiscal 1996 resulting from a one time voluntary early retirement program
completed in one Scholastic plant location. The program was offered to
management and supervisory employees, of whom 17 elected to participate in the
program. All of the restructuring charges were paid in fiscal 1996.
NOTE 13 - COMMITMENTS AND CONTINGENCIES
Herff Jones has an agreement with a national bank association (the Association)
and a precious metal broker (the Broker) under which gold inventory is shipped
on consignment to Herff Jones. Title to such gold inventory remains with the
Association and the Broker until Herff Jones has paid for amounts used. The
amount of consigned gold inventory with the Association is limited to the lesser
of 21,500 troy ounces, a fair market value of $9,000 or 95% of Herff Jones'
entire troy ounce gold inventory. The amount of consigned gold inventory with
the Broker is limited to the lesser of 10,000 troy ounces or a fair market value
of $4,500. In the event that gold held on consignment exceeds any consignment
limit, Herff Jones must transfer the excess gold to the Association or the
Broker or any of its authorized agents or pay for such excess. In addition,
Herff Jones must pay a monthly consignment fee for the use of such gold
inventory on consignment. Herff Jones bears the risk of loss, theft, damage or
destruction of such gold inventory ($6,097 at June 29, 1996 and $6,723 at June
24, 1995) for which appropriate insurance coverage has been obtained.
Herff Jones is involved in lawsuits that periodically arise from the normal
course of business. Management believes that the ultimate outcome of these
lawsuits will not have a material adverse impact on the Company's financial
condition.
NOTE 14 - ACQUISITION (UNAUDITED)
On April 29, 1996, Herff Jones purchased certain assets of the Delmar Companies
Divisions ("Delmar") of Continental Graphics Corporation. As part of the
acquisition, Herff Jones assumed certain liabilities. The acquisition has been
accounted for as a purchase, and, accordingly, the results of the operation have
been included in the consolidated Statement of Income since the acquisition
date. The purchase price of $15,332 has been allocated to the assets acquired
and liabilities assumed on the basis of their relative fair market values.
The unaudited pro forma net sales, net income before extraordinary item and
cumulative effect of change in accounting principle and net income before
extraordinary item and cumulative effect of change in accounting principle per
share of Herff Jones for the fiscal years ended June 29, 1996 and June 24, 1995,
as if the acquisition of these assets had occurred on June 25, 1994, were as
follows:
Year Ended June
-------------------------
1996 1995
-------- --------
Net Sales $297,849 $294,820
Net Income before extraordinary item
and cumulative effect of change in
accounting principle $ 6,528 $ 21,375
Net Income before extraordinary item
and cumulative effect of change in
accounting principle per common share $ 4.29 $ 17.29
Net income per share is based on the pro forma weighted average number of common
shares outstanding.
- 32 -
<PAGE>
The financial information obtained from unaudited pro forma consolidated
financial statements have been prepared based on estimates and assumptions
deemed by Herff Jones to be appropriate and do not propose to be indicative of
the financial position or results of operations which would actually have been
obtained had the acquisition occurred as presented in such statements or which
may be obtained in the future. Future results may vary significantly due to
economic factors, future activities of Herff Jones, or other matters.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
None.
PART III
Item 10. Directors and Executive Officers of The Registrant.
The directors and executive officers of the Company are as set forth
below:
<TABLE>
<CAPTION>
NAME AGE TITLE
---- --- -----
<S> <C> <C>
A.J. Hackl 70 Chairman of the Board of Directors
Andre B. Lacy 57 Director
Thomas E. Reilly, Jr. 56 Director
James W. Hubbard 61 Chief Executive Officer, President and Director
Bernard R. Crandall, Jr. 49 Vice President-Cap & Gown and Director
Robert S. Potts 53 Vice President-Yearbook and Director
Patrick T. Rogers 53 Corporate Administrative Manager and Director
Joe K. Slaughter 48 Vice President-Scholastic and Director
Lawrence F. Fehr 52 Vice President, Chief Financial Officer, Secretary and Director
Boyd P. Boynton 52 Vice President and General Manager - Photography
</TABLE>
Albert J. Hackl, Chairman of the Board of Directors, served as Herff
Jones' principal executive officer from 1968 to May 1995. Mr. Hackl served as
Chairman of the Board of Directors and Chief Executive Officer since 1985. In
May 1995, Mr. Hackl resigned as Chief Executive Officer. Mr. Hackl joined the
Company in 1968 from Worthington Corporation, where his last position was
president of the Worthington Air Conditioning Division. Mr. Hackl received a
Bachelor of Mechanical Engineering from the Georgia Institute of Technology in
1946 and served in the United States Navy during World War II and the Korean
War.
Andre B. Lacy has been a director since 1995 and is Chairman and CEO of
the managing general partner of LDI, Ltd., an investment management holding
company with a wholesale distribution group, a door and lumber mill work group
and a private investment portfolio. He is also Chairman of the Board of Finish
Master, Inc., a distributor of automotive paints and finishing supplies,
controlled by LDI, Ltd. He is a Director of the Albemarle Corporation, Richmond,
Virginia; IPALCO Enterprises, Indianapolis; Tredegar Industries, Richmond,
Virginia; Patterson Dental Company, St. Paul, Minnesota; and The National Bank
of Indianapolis. He is on the Board of Trustees of the Hudson Institute and the
Board of Managers of Rose-Hulman Institute of Technology. Past affiliations and
awards include President of Indianapolis Board of School Commissioners, and
recognition as Indiana Master Entrepreneur of the Year (1994). He is a graduate
of Denison University.
Thomas E. Reilly, Jr. has been a director since 1995 and is Chairman
and CEO, Reilly Industries, Inc., Indianapolis, Indiana, a diversified chemical
manufacturing firm. He is Director of First Chicago NBD Corp., Chemical
Manufacturers Association, Lilly Industries, Inc., American United Life
Insurance Company, and Past President, Board of Trustees, Indiana State Teachers
Retirement Fund. He is a member of the Board of Trustees, Butler University. Mr.
Reilly is a graduate of Stanford University, BS, and MBA, Harvard Business
School.
- 33 -
<PAGE>
James W. Hubbard has been with the Company for the past 24 years and
has 34 years of industry experience. Mr. Hubbard has served as a Director since
1985 and as Chief Executive Officer and President since May 1995. Other
positions Mr. Hubbard has held at the Company include: Plant Manager -
Yearbooks; General Manager - Yearbook Division; Vice President - Yearbook
Division; and Group Vice President -Photography/Yearbooks (which he held from
1985 to 1995). Mr. Hubbard received a Bachelor of Arts in Journalism from the
University of Iowa in 1957. He has served as a Major in the United States Marine
Corps Reserve.
Bernard R. Crandall, Jr. has been with Herff Jones for 23 years. He has
served as Vice President - Cap & Gown since September 1990 and as a Director
since 1993. Other positions he has held at the Company include: Department
Supervisor - Indianapolis Jewelry; Customer Service Manager - Montgomery
Yearbook Plant; Director of Marketing - Yearbook Division; Resident Manager -
Marceline Yearbook Plant; and Resident Manager - Logan Yearbook Plant. He
received a Bachelor of Science in Business Management from Indiana University in
1971.
Robert S. Potts has been with Herff Jones for 24 years and has 29 years
of industry experience. He has served as Vice President - Yearbook since July
1993 and as a Director since 1990. Other positions he has held with the Company
include: Sales Representative; Scholastic Area Sales Manager; Director of
Marketing -Yearbooks; National Sales Manager - Yearbook Division; and Vice
President -Yearbook Sales (which he held from prior to 1990 to July 1993). Mr.
Potts holds a Bachelor of Arts in Biology from Long Island University.
Patrick T. Rogers has been with Herff Jones for 22 years. Mr. Rogers
has served as Corporate Administrative Manager since June 1995 and as a Director
since 1990. Prior to his current position, Mr. Rogers was the Corporate Risk
Manager from 1987 until June 1995 and the Corporate Credit Manager from 1974 to
1987. Before joining Herff Jones, he held several positions in the credit
industry. Mr. Rogers attended Xavier University and is a member of the Board of
Directors of the Indiana Chapter of the Risk and Insurance Management Society.
Joe K. Slaughter has been with Herff Jones for 23 years. He has served
as Vice President - Scholastic since February 1995 and as a Director since May,
1995. Other positions he has held with the Company include: Sales
Representative; Area Sales Manager; National Sales Manager - College Division;
Regional Sales Manager; Vice President - Scholastic Sales (which he held from
January 1990 to October 1993); and Vice President -Scholastic Sales and
Marketing (which he held from October 1993 to February 1995). Prior to joining
Herff Jones, he was a Professor of Philosophy at Grace College in Warsaw,
Indiana. Mr. Slaughter received his Bachelor of Arts and Master of Arts from
Michigan State University in 1969 and 1971, respectively.
Lawrence F. Fehr has been with Herff Jones for the past 24 years. He
has served as Vice President since 1987 and as Corporate Secretary since 1989.
Mr. Fehr became Chief Financial Officer and a Director in 1995. Other positions
he has held at the Company include: Jewelry Division Controller; Corporate
Controller; and Vice President - Controller (which he held from prior to 1990 to
1995). Prior to Herff Jones, Mr. Fehr worked for six years in various accounting
positions with Burger Chef. He holds a Bachelor of Science in Accounting (1967)
and a Master of Business Administration (1969) from Butler University. He became
a Certified Public Accountant in 1970 and is currently a member of the Board of
Directors of the Indianapolis Chapter of the Financial Executives Institute.
Boyd P. Boynton has been with the Company for 29 years. He has served
as Vice President and General Manager - Photography since prior to 1990. Other
positions he has held at the Company include: School Photographer; Production
Manager - School Division; Assistant to the General Manager; Personnel and
Training Manager; Professional Division Manager; Operations Manager Photography
Division; and General Manager - Photography Division. Mr. Boynton holds a
Bachelor of Arts in Business Administration from the University of Minnesota,
which he received in 1966.
- 34 -
<PAGE>
Item 11. Executive Compensation
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Long Term
Compensation
Annual Securities
Compensation Underlying All Other
Name and Salary Options/SARs Compensation
Principal Position Year ($) (1) (#) (2) ($) (3)
-------------------------- ---- --------------- -------------- --------------
<S> <C> <C> <C> <C>
James W. Hubbard .............. 1996 $331,500 40,000 $ 4,500
President, Chief Executive 1995 $216,916 -- $11,119
Officer and Director
Robert S. Potts ............... 1996 $165,000 20,000 $ 4,500
Vice President and Director 1995 $158,500 -- $28,136
Joe K. Slaughter .............. 1996 $158,000 20,000 $ 4,500
Vice President and Director 1995 $139,166 -- $ 9,300
Lawrence F. Fehr .............. 1996 $137,499 20,000 $ 3,653
Vice President, Chief 1995 $109,750 -- $ 7,639
Financial Officer,
Secretary and Director
Bernard R. Crandall, Jr. ...... 1996 $117,500 15,000 $ 28,087
Vice President and Director 1995 $109,000 -- $ 19,440
</TABLE>
- ----------
(1) The named officers of the Company did not receive any
remuneration in 1996 or 1995 in addition to their annual
salary except to the extent they participated in the Company's
Profit Sharing Plan (the "401(k) Plan"), group insurance
arrangements or other benefit programs available to
substantially all non-union employees. The officers named
above, except for Mr. Crandall, are not currently ESOP
participants.
(2) Phantom units granted under the Incentive Plan as described
below.
(3) 1996 consists solely of 401(k) plan contributions by the
Company for Messrs. Hubbard, Potts, Slaughter and Fehr, and a
$3,300 contribution to the 401(k) Plan by the Company and a
$24,787 allocation to the ESOP account of Mr. Crandall. 1995
consists solely of 401(k) plan contributions by the Company
for Messrs. Hubbard, Slaughter and Fehr, and a $11,119
contribution to the 401(k) Plan by the Company and a $17,017
allocation to the ESOP account of Mr. Potts, and a $7,481
contribution to the 401(k) Plan by the Company and a $11,959
allocation to the ESOP account of Mr. Crandall.
- 35 -
<PAGE>
Employment Agreements
Each of the named executive officers owned Company shares and sold such
shares to the ESOP in the ESOP Transactions. In anticipation of the
ESOP Transactions, the Company required each employee selling shares to
enter into a three-year employment and non-competition agreement,
including Mr. Hubbard and Mr. Potts. In such employment and
non-competition agreements, each employee agreed to stay with the
Company for at least three years and the Company agreed (i) to pay each
employee a salary commensurate with the position each employee holds
determined from time to time by the Board of Directors or an authorized
officer; (ii) to allow each employee to participate in all benefit
programs, plans and fringe benefits in which the Company's salaried
employees participate generally to the extent permitted by the
respective plans and/or applicable tax regulations, and (iii) not to
terminate or demote each employee without cause for three years.
"Cause" is defined in the employment and non-competition agreements as
(a) willful or gross misconduct or willful or gross negligence in the
performance of duties for the Company; or (b) intentional or habitual
neglect of duties for the Company; or (c) theft or misappropriation of
Company funds or the conviction of a felony. Each employee also agreed
not to compete with the Company for at least three years after the ESOP
Transactions are consummated (or, if later, two years after termination
of employment) and not to disclose outside the Company any confidential
matters of the Company unless such disclosure is made as a proper part
of performing duties for the Company or is made with the express
written consent of the Company.
Incentive Plan
The Herff Jones, Inc. Long-Term Incentive Plan ("Incentive Plan") was
adopted by the Company effective July 1, 1995. The named executive
officers and other employees whose performance is expected to
contribute significantly to the long-term strategic performance and
growth of the Company are eligible to participate in the Incentive
Plan. The Compensation Committee of the Board of Directors selects
employees for participation. Participating employees are granted an
award of phantom units at the beginning of a five-year performance
cycle. The maximum numbers of phantom units that may be issued subject
to the Incentive Plan is 1,500,000, subject to proportional adjustment
in the event of any change in the outstanding Company stock by reason
of any issuance of additional shares, recapitalization,
reclassification, reorganization, combination of shares or similar
transaction. Each phantom unit is equal in value to one share of common
stock, but is not a share and carries no shareholder rights. The value
of phantom units will correspond to the value of shares of common stock
as of the end of each Company fiscal year determined for the ESOP by
its independent valuation firm. The participants will be entitled to
payment of a cash incentive award after the five-year performance cycle
is completed. The award will be equal to the appreciation in value of
the participant's phantom units in excess of a minimum amount set by
the Compensation Committee over the course of the performance cycle and
will be payable in a single lump sum in the January immediately
following the end of the performance cycle. Notwithstanding the
foregoing, the Company will not pay the incentive awards to the extent
payment would result in breach of covenants under the New Credit
Agreement or the Indenture; payment of the incentive awards will be
subordinated in full to the prior payment in cash of all amounts then
due in respect of the Notes. The Company may impose other financial
restrictions as to the payments which, if not met, would result in the
payments being deferred. Participants will also be able to voluntarily
defer payment of all or a portion of their incentive awards and elect
to have the deferred amounts accounted for as an unsecured Company debt
bearing interest at a reasonable rate. The following table summarizes
grants to the named executive officers under the Incentive Plan during
fiscal 1996.
- 36 -
<PAGE>
OPTION/SAR GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
% of Total
Number of Options/SARs Potential Realizable Value
Securities Granted to Exercise at Assumed Annual Rates
Underlying Employees in or Base of Stock Price Appreciation
Options/SARs Fiscal Price Expiration for Option Term
Name Granted (#) (1) Year ($/Sh) Date 5% ($) 10% ($)
- ---- --------------- ---- ------ ---- ------ -------
<S> <C> <C> <C> <C> <C> <C>
James W. Hubbard......... 40,000 8% $27.12 6/2000 - 0 - $284,000
President, Chief
Executive Officer
and Director
Robert S. Potts.......... 20,000 4% $27.12 6/2000 - 0 - $142,000
Vice President
and Director
Joe K. Slaughter......... 20,000 4% $27.12 6/2000 - 0 - $142,000
Vice President
and Director
Lawrence F. Fehr......... 20,000 4% $27.12 6/2000 - 0 - $142,000
Vice President, Chief
Financial Officer,
Secretary and Director
Bernard R. Crandall, Jr... 15,000 3% $27.12 6/2000 - 0 - $106,500
Vice President and Director
</TABLE>
(1) See the description of Incentive Plan grants above.
Director Compensation
The present Directors of the Company who are also executive officers of
the Company, receive noadditional compensation for their service as
Directors or for attendance at meetings of the Board of Directors. The
Company has three independent persons serving on the Board of
Directors. Such persons receive compensation of $15,000 per year plus
$500 per meeting for serving on the Board and its committees.
The Company has entered into a consulting agreement with Mr. Hackl
pursuant to which he will be available to the Company to provide
ongoing consultation and advice to management and, in particular,
ongoing assistance with financing, acquisitions and divestitures. He
maintains an office at the Company's principal executive offices but
works as an independent contractor, determining his own hours and
method of performance. He receives a fee of $100,000 per year and any
fees payable to non-employee directors generally. Mr. Hackl has agreed
to reduce his fee to $48,000 annually effective November 1, 1996. He
serves at the pleasure of the Board as its Chairman and as chairman of
the Executive, Finance, Compensation and Audit Committees. The
consulting agreement is terminable by either party at any time without
cause and contains a three-year non-competition covenant.
Compensation Committee Interlocks and Insider Participation
From the beginning of fiscal 1996 through November 1995, Mr. Hackl was
the sole member of the Compensation Committee of the Board of
Directors. Mr. Hackl is a former executive officer of the Company and
has a consulting arrangement with the Company as described above. Mr.
Lacy and Mr. Reilly were added to the Compensation Committee, of which
Mr. Hackl is Chairman, in November, 1995.
- 37 -
<PAGE>
Item 12. Security Ownership of Certain Beneficial Owners and Management.
The only person that beneficially owns more than 5% of the Company's
shares of Common Stock, without par value, is Bank One, Indianapolis, N.A., as
Trustee of the Herff Jones, Inc. Employee Stock Ownership Plan ("ESOP"), which
held 9,616,541 or 99.9% of the 9,618,996 shares of Common Stock outstanding as
of September 3, 1996.
Except as set forth below, none of the named executive officers or directors of
the registrant owns shares of its common stock. All of the shares shown in the
following table are held by the ESOP and allocated to the accounts of the named
officers.
NAME
NUMBER OF
ALLOCATED
SHARES % OF SHARES
------ -----------
Robert S. Potts 2,500 *
Bernard R. Crandall, Jr. 3,099 *
Patrick T. Rogers 2,124 *
Boyd P. Boynton 2,101 *
All Directors and Executive
Officers as a Group 9,824 *
- ------------------- ----- --
* Less than 1%
Item 13. Certain Relationships and Related Transactions.
None.
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K.
(a) The following documents have been filed as a part of this
report or, where noted incorporated by reference:
(1) Financial Statements (Included Under Item 8)
Report of Independent Accountants
Consolidated Balance Sheet as of June 29, 1996
and June 24, 1995
Consolidated Statement of Income for the
years ended June 29, 1996, June 24, 1995
and June 25, 1994
Consolidated Statement of Shareholders' Equity for the years
ended June 29, 1996, June 24, 1995 and June 25, 1994
Consolidated Statement of Cash Flows for the years ended June
29, 1996, June 24, 1995 and June 25, 1994
Notes to Consolidated Financial Statements
Financial Statement Schedules for the three years
ended June 29, 1996
- 38 -
<PAGE>
(2) Financial Statement Schedules (Set Forth Below)
VIII. Valuation and Qualifying Accounts and Reserves
X. Supplemental Statement of Income Information.
(3) The following exhibits are filed as a part of this Report:
Exhibit No. Description Page
- ----------- ----------- ----
2.1 Asset Purchase Agreement, dated as of March 28, 1996,
between Herff Jones, Inc. and Continental Graphics
Corporation. (Incorporated by reference to Exhibit 2.1 to
Form 8-K filed with the Commission, dated May 9, 1996.)
2.2 Amendment No. 1 to Asset Purchase Agreement. (Incorporated
by reference to Exhibit 2.2 to Form 8-K filed with
the Commission, dated May 9, 1996.)
3.1 Articles of Incorporation of Herff Jones, Inc. as amended. *
3.2 Restated Code of By-Laws of Herff Jones, Inc. *
4.1 Indenture dated as of August 22, 1995 between Herff Jones, Inc.
and Bankers Trust Company. *
4.2 Revolving Credit and Term Loan Agreement among Herff Jones,
Inc., The First National Bank of Boston and other financial
institutions. *
4.3 Agreement to furnish documents relating to other long-term debt. *
10.1 Consignment Agreement, dated February 8, 1994, between Herff
Jones, Inc. and Gerald Metals, Inc. and the related Security
Agreement, dated February 8, 1994, between Herff Jones, Inc.
and Gerald Metals, Inc. *
10.2 Amended and Restated Consignment Agreement, dated October
27, 1989, between Herff Jones, Inc. and Rhode Island Hospital
Trust National Bank and the related Amended and Restated
Security Agreement, dated October 27, 1989, between Herff
Jones, Inc. and Rhode Island Hospital Trust National Bank. *
- 39 -
<PAGE>
10.3 Nonexclusive Multimedia Distribution Agreement dated
September 25, 1993, between the Nystrom division of
Herff Jones, Inc. and Videodiscovery, Inc. *
10.4 Exempt Loan Agreement (Restated) dated as of August 22, 1995,
between Herff Jones, Inc. and Bank One, Indianapolis, NA as
Trustee of the Herff Jones, Inc. Employee Stock Ownership Plan. *
10.5 Registration Rights Agreement dated August 22, 1995 between
Herff Jones, Inc. and Donaldson, Lufkin & Jenrette Securities
Corporation. *
10.6 Purchase Agreement dated August 14, 1995 between Herff
Jones, Inc. and Donaldson, Lufkin & Jenrette Securities
Corporation. *
10.7 (a) Consulting and Non-Competition Agreement dated June 1,
1995 between Herff Jones, Inc. and A.J. Hackl. *
10.7 (b) Amendment No. 1 to Consulting Agreement with A.J. Hackl.
10.8 Employment and Non-Competition Agreement dated July 7,
1995 between Herff Jones, Inc. and James W. Hubbard. *
10.9 Employment and Non-Competition Agreement dated July 5,
1995 between Herff Jones, Inc. and Bernard R. Crandall, Jr. *
10.10 Employment and Non-Competition Agreement dated June 21,
1995 between Herff Jones, Inc. and Robert S. Potts. *
10.11 Employment and Non-Competition Agreement dated June 21,
1995 between Herff Jones, Inc. and Patrick T. Rogers. *
10.12 Employment and Non-Competition Agreement dated July 6, 1995
between Herff Jones, Inc. and Joe K. Slaughter. *
10.13 Employment and Non-Competition Agreement dated July 6, 1995
between Herff Jones, Inc. and Lawrence F. Fehr. *
10.14 Employment and Non-Competition Agreement dated July 9, 1995
between Herff Jones, Inc. and Boyd P. Boynton. *
10.15 Herff Jones, Inc. Long-Term Incentive Plan,
effective July 1, 1995. *
10.16 Amendment No. 2 to the Rhode Island Agreements.
(Incorporated by reference to Exhibit 10.1 to
Form 10-Q, filed with the Commission May 14, 1996.)
21 Subsidiaries of the Registrant *
27 Fiancial Data Schedule
- 40 -
<PAGE>
- --------------
* Incorporated by reference to the exhibit (bearing the corresponding
exhibit number) to the Company's Registration Statement on Form S-4
(Registration No. 33-96680) as amended, effective November 1, 1995.
(b) Reports on Form 8-K
The registrant filed a Form 8-K on May 9, 1996, to report the
consummation of its acquisition of the Delmar Companies. The registrant amended
such report on Form 8-KA1 to include audited financial information and pro forma
financial information for Herff Jones Inc. respecting such acquisition.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, as amended, the Registrant has duly caused this report to
be signed on its behalf by the undersigned, thereto duly authorized.
HERFF JONES, INC.
By /s/ Lawrence F. Fehr
------------------------------------------------
Lawrence F. Fehr, Vice President, Chief Financial
Officer, and Secretary
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, this report has been signed below by the following persons on behalf of
the Registrant and in the capacities and on the date indicated.
Signature Title Date
--------- ----- ----
(1) Principal Executive Officer:
/s/ James W. Hubbard Chief Executive Officer,)
---------------------------- President and Director )
James W. Hubbard )
)
(2) Principal Financial )
and Accounting Officer: )
)
/s/ Lawrence F. Fehr Vice President, )
---------------------------- Chief Financial )
Lawrence F. Fehr Officer, Secretary )
and Director )
)
(3) A Majority of the )
Board of Directors: )September 23, 1996
)
)
/s/ A.J. Hackl Director )
---------------------------- )
A. J. Hackl )
)
)
/s/ Bernard R. Crandall, Jr. Director )
---------------------------- )
Bernard R. Crandall, Jr. )
)
)
/s/ Robert S. Potts Director )
---------------------------- )
Robert S. Potts )
)
)
/s/ Patrick T. Rogers Director )
---------------------------- )
Patrick T. Rogers )
)
)
/s/ Joe K. Slaughter Director )
---------------------------- )
Joe K. Slaughter )
)
)
/s/ Andre B. Lacy Director )
---------------------------- )
Andre B. Lacy )
)
/s/ Thomas E. Reilly, Jr. Director )
---------------------------- )
Thomas E. Reilly, Jr. )
- 41 -
<PAGE>
Schedule VIII
Herff Jones, Inc. and Subsidiaries
Valuation and Qualifying Accounts
and Reserves For the Years Ended June 29,
1996, June 24, 1995 and June 25, 1994
(amounts in thousands)
<TABLE>
<CAPTION>
Balance at
beginning of Charged to costs Deductions, net of Balance at end of
Description period and expenses recoveries period
- ----------- ------ ------------ ---------- ------
Allowance for returns and
doubtful accounts
<S> <C> <C> <C> <C>
Fiscal Year 1994 $2,520 $792 $385 $2,927
Fiscal Year 1995 $2,927 $645 $553 $3,019
Fiscal Year 1996 $3,019 $2,466 $602 $4,883
</TABLE>
- 42 -
<PAGE>
Schedule X
Herff Jones, Inc. and Subsidiaries
Supplemental Statement of Income Information
For the Years Ended June 29, 1996, June 24, 1995 and
June 25, 1994 (amounts in thousands)
Item Charged to Cost and Expenses
----------------------- ----------------------------
Maintenance and repairs
Fiscal Year 1994 $3,407
Fiscal Year 1995 $3,870
Fiscal Year 1996 $4,028
- 43 -
FIRST AMENDMENT TO
CONSULTING AND NON-COMPETITION AGREEMENT
This Amendment to Consulting and Non-Competition Agreement, entered
into this ____ day of September, 1996, by and between HERFF JONES, INC., an
Indiana corporation (the "Company"), and A.J. HACKL (the "Consultant"), amends
the Consulting and Non- Competition Agreement between the Company and the
Consultant dated June 1, 1995 (the "Consulting and Non-Competition Agreement").
WITNESSETH THAT:
WHEREAS, the Company and the Consultant entered into the Consulting and
Non- Competition Agreement; and
WHEREAS, the parties hereto have concluded that it is in their mutual
best interest to modify the provisions thereof with respect to the annual
compensation of the Consultant;
NOW, THEREFORE, in consideration of these premises and of the mutual
agreements herein contained, it is agreed as follows:
1. Paragraph 5(a) of the Consulting and Non-Competition Agreement shall
be, and it hereby is, amended as follows:
(a) Consulting Fees. Beginning November 1, 1996, the Consultant shall
be paid a consulting fee during the Term of $48,000 per year (the
"Fee"), which Fee shall be paid in equal monthly installments of $4000.
The Fee shall not be subject to any deductions or withholdings, for tax
or other purposes, by the Company.
2. Except as modified by this Agreement, all of the rights, terms and
conditions in the Consulting and Non-Competition Agreement, as heretofore
amended, shall remain in full force and effect.
[signature page follows]
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Amendment to
Consulting and Non-Competition Agreement as of the date first above written.
HERFF JONES, INC.
By: /s/ James W. Hubbard
-------------------------------------
James W. Hubbard, Chief Executive
Officer & President
DATED: September 11, 1996
CONSULTANT
/s/ A.J. Hackl
------------------------------------
A.J. Hackl
DATED: September 11, 1996
-2-
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
REGISTRANT'S CONSOLIDATED FINANCIAL STATEMENTS FOR THE TWELVE MONTHS ENDED JUNE
29, 1996 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<CIK> 0001000371
<NAME> Herff Jones, Inc.
<MULTIPLIER> 1,000
<CURRENCY> U.S. Dollars
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> Jun-29-1996
<PERIOD-START> JUN-25-1995
<PERIOD-END> JUN-29-1996
<EXCHANGE-RATE> 1.000
<CASH> 8,680
<SECURITIES> 0
<RECEIVABLES> 54,066
<ALLOWANCES> 4,883
<INVENTORY> 36,941
<CURRENT-ASSETS> 107,659
<PP&E> 87,753
<DEPRECIATION> 38,712
<TOTAL-ASSETS> 162,303
<CURRENT-LIABILITIES> 86,743
<BONDS> 173,574
<COMMON> 5,728
0
0
<OTHER-SE> (106,070)
<TOTAL-LIABILITY-AND-EQUITY> 162,303
<SALES> 282,941
<TOTAL-REVENUES> 282,941
<CGS> 135,625
<TOTAL-COSTS> 135,625
<OTHER-EXPENSES> 116,525
<LOSS-PROVISION> 2,118
<INTEREST-EXPENSE> 19,482
<INCOME-PRETAX> 11,936
<INCOME-TAX> (4,094)
<INCOME-CONTINUING> 7,842
<DISCONTINUED> 0
<EXTRAORDINARY> (5,844)
<CHANGES> 0
<NET-INCOME> 1,958
<EPS-PRIMARY> 1.29
<EPS-DILUTED> 1.29
</TABLE>
