FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended September 27, 1997
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 Number)
4501 West 62nd Street, Indianapolis, Indiana 46268
(Address of principal executive offices) (Zip Code)
(317) 297-3740
(Registrant's telephone number, including area code)
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 the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Number of shares outstanding of the issuer's Common Stock as of October 23,
1997:
Class Common Stock, without par value 9,567,500
<PAGE>
INDEX
Part I. - Financial Information Page No.
Condensed Consolidated Statement of Operations -
First Quarter Ended September 27, 1997 and September 28, 1996 3
Condensed Consolidated Balance Sheet -
As of September 27, 1997, June 28, 1997 and September 28, 1996 4
Condensed Consolidated Statement of Cash Flows -
First Quarter Ended September 27, 1997 and September 28, 1996 5
Notes to Condensed Consolidated Financial Statements 6 - 7
Management's Discussion and Analysis of
Financial Condition and Results of Operations 8 - 10
Part II. - Other Information 11
Item 6. Exhibits and Reports on Form 8-K
<PAGE>
Part I - Financial Information
Item. 1 Financial Statements
Herff Jones, Inc.
Condensed Consolidated Statement of Operations
(Amounts in thousands of dollars, except per share data)
(Unaudited)
<TABLE>
<CAPTION>
First Quarter Ended
-------------------------------------------
September 27, 1997 September 28, 1996
------------------ ------------------
<S> <C> <C>
Net sales $ 50,064 $ 46,656
Cost of sales (excludes ESOP compensation) 29,675 30,122
Selling, general, and administrative expenses
(excludes ESOP compensation) 22,129 20,441
ESOP compensation 5,055 4,058
----------- -----------
Income (loss) from operations (6,795) (7,965)
Interest income 51 5
Interest expense 4,470 4,977
----------- -----------
Income (loss) before income taxes (11,214) (12,937)
Income taxes 4,086 4,593
----------- -----------
Net income (loss) $ (7,128) $ (8,344)
=========== ===========
Income (loss) per common share $ (3.57) $ (4.48)
=========== ===========
Weighted average number of
common shares outstanding 1,995,464 1,863,248
=========== ===========
</TABLE>
See accompanying notes to unaudited condensed consolidated financial statements.
<PAGE>
Herff Jones, Inc.
Condensed Consolidated Balance Sheet
As of September 27, 1997, June 28, 1997, and September 28, 1996
(Amounts in thousands of dollars)
<TABLE>
<CAPTION>
(Unaudited) (Unaudited)
September 27, June 28, September 28,
1997 1997 1996
--------- --------- ---------
<S> <C> <C> <C>
Assets:
Current Assets
Cash and cash equivalents $ 2,259 $ 5,843 $ 1,235
Accounts receivable 42,624 55,709 39,018
Inventories 42,574 37,963 41,127
Prepaid expense 7,370 1,816 7,585
Deferred income taxes 9,106 9,106 5,321
--------- --------- ---------
Total Current Assets 103,933 110,437 94,286
Non-Current Assets
Property, plant, and equipment 98,475 94,378 89,408
Accumulated depreciation (47,285) (45,364) (40,095)
--------- --------- ---------
Net Property, Plant, and Equipment 51,190 49,014 49,313
Deferred financing cost, net and other assets 4,443 4,590 5,363
--------- --------- ---------
Total Non-Current Assets 55,633 53,604 54,676
Total Assets $ 159,566 $ 164,041 $ 148,962
========= ========= =========
Liabilities and Shareholders' Equity:
Current Liabilities
Trade accounts payable $ 11,448 $ 5,856 $ 8,180
Salaries and wages payable 5,222 5,048 4,986
Interest payable 1,833 5,082 1,900
Customer deposits 13,142 19,508 12,175
Commissions payable 4,329 16,864 3,702
Income taxes accrued (4,090) 9,547 (4,596)
Other accrued liabilities 7,243 9,613 7,926
Current portion of long term debt 42,971 10,377 54,053
--------- --------- ---------
Total Current Liabilities 82,098 81,895 88,326
Non-Current Liabilities
Other 2,684 2,239 2,247
Long term debt 152,330 154,979 162,928
Deferred income taxes 443 443 81
--------- --------- ---------
Total Non-Current Liabilities 155,457 157,661 165,256
Total Liabilities 237,555 239,556 253,582
Shareholders' Equity (Deficit)
Common stock 5,694 5,703 5,728
Retained earnings 120,956 128,122 111,181
Deferred compensation (202,311) (206,440) (218,824)
Foreign currency translation (2) 2 12
Excess of cost over market, net
(shares committed to be released) (2,326) (2,902) (2,717)
--------- --------- ---------
Total Shareholders' Equity (Deficit) (77,989) (75,515) (104,620)
Total Liabilities and Shareholders' Equity (Deficit) $ 159,566 $ 164,041 $ 148,962
========= ========= =========
</TABLE>
See accompanying notes to unaudited condensed consolidated financial statements.
<PAGE>
Herff Jones, Inc.
Condensed Consolidated Statement of Cash Flows
(Amounts in thousands of dollars)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
------------------------------
September 27, September 28,
1997 1996
------------- -------------
Cash flows from operating activities:
<S> <C> <C>
Net income $ (7,128) $ (8,344)
Adjustments to reconcile net income to net cash (used)
provided by operating activities:
Depreciation and amortization 1,958 1,697
Amortization and write off of financing cost 147 240
ESOP compensation (before dividend exclusion) 5,035 4,029
Tax benefit (effect) of ESOP (330) 36
Other (5) 1
(Gain) loss on disposal of property, plant and equipment, net (1) (1)
Increase (decrease) in cash generated by changes in assets
and liabilities
Accounts receivable 13,085 15,048
Inventories (4,611) (4,186)
Prepaid expenses (5,554) (4,934)
Trade accounts payable 5,592 639
Salaries and wages 174 918
Interest payable (3,249) (3,257)
Customer deposits (6,366) (7,681)
Commissions payable (12,535) (11,155)
Income taxes payable (13,637) (7,796)
Other accrued liabilities (1,925) (1,823)
-------- --------
Total adjustments (22,222) (18,225)
-------- --------
Net cash (used) provided by operating activities $(29,350) $(26,569)
Cash flows from investing activities:
Proceeds from disposal of property, plant and equipment -- 4
Capital expenditures (4,133) (1,972)
-------- --------
Net cash (used) provided by investing activities $ (4,133) $ (1,968)
Cash flows from financing activities:
Premium on stock redemption (37) --
Increase in revolver, net 32,373 29,299
Payment of long-term debt (2,428) (2,250)
Advance term payment -- (5,957)
-------- --------
Net cash (used) provided by financing activities $ 29,899 $ 21,092
Cash and cash equivalents:
Net increase (decrease) (3,584) (7,445)
Beginning of period 5,843 8,680
======== ========
End of period $ 2,259 $ 1,235
======== ========
</TABLE>
See accompanying notes to unaudited condensed consolidated financial statements.
<PAGE>
Notes to Unaudited Condensed Consolidated Financial Statements
Three Months Ended September 27, 1997
(Amounts in thousands of dollars)
Note 1 - Adjustments
The unaudited condensed consolidated financial statements presented herein
have been prepared by the Company and contain all adjustments (consisting of
only normal recurring adjustments) necessary to present fairly the Company's
financial position as of September 27, 1997, and the results of its
operations and cash flows for the quarter ended September 27, 1997. These
unaudited condensed consolidated financial statements have been prepared in
accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Rule 10-01
of Regulation S-X. Accordingly, they do not include all of the information
and footnotes required by generally accepted accounting principles for
complete financial statements. These statements should be read in
conjunction with the consolidated financial statements and notes thereto
included in the Company's Form 10-K for the year ended June 28, 1997.
The Company utilizes a 52/53 week fiscal year for accounting purposes ending
on the last Saturday in June. Fiscal 1997 and fiscal 1998 each contains 52
weeks.
Because of the seasonality of the Company's business, operating results on a
quarterly basis are not indicative of operating results for the full year.
Historically, the first fiscal quarter is the lowest sales quarter, while
the fourth fiscal quarter is the highest, typically including over 40% of
the year's sales.
Note 2 - Allowance for Doubtful Accounts and Returns
September 27, 1997 June 28, 1997 September 28, 1996
------------------ ------------- ------------------
$4,180 $5,754 $3,304
Note 3 - Inventories
The components of inventory balances are summarized below:
<TABLE>
<CAPTION>
September 27, 1997 June 28, 1997 September 28, 1996
------------------ ------------- ------------------
<S> <C> <C> <C>
Raw materials and supplies (includes gold) $19,182 $16,736 $19,429
Work-in-process 13,727 13,187 13,046
Finished goods 9,665 8,040 8,652
------- ------- -------
$42,574 $37,963 $41,127
======= ======= =======
</TABLE>
<PAGE>
Note 4 - Financing
<TABLE>
<CAPTION>
September 27, 1997 June 28, 1997 September 28, 1996
------------------ ------------- ------------------
<S> <C> <C> <C>
Long-Term Debt consists of the following:
Senior Bank Facility (Revolver) $ 32,373 $ -- $ 44,338
Senior Bank Facility (Term) 35,328 37,756 45,043
Senior Subordinated Notes 120,000 120,000 120,000
1994 Industrial Development
Revenue Bonds Due in 2019 7,600 7,600 7,600
--------- --------- ---------
195,301 165,356 216,981
Less: Current Portion (42,971) (10,377) (54,053)
--------- --------- ---------
Long-Term Debt $ 152,330 $ 154,979 $ 162,928
========= ========= =========
</TABLE>
Note 5 - Common Stock
<TABLE>
<CAPTION>
September 27, 1997 June 28, 1997 September 28, 1996
------------------ ------------- ------------------
<S> <C> <C> <C>
Common Shares
Authorized 16,500,000 16,500,000 16,500,000
Outstanding 9,567,500 9,569,304 9,618,996
</TABLE>
Note 6 - Statement of Shareholders' Equity
<TABLE>
<CAPTION>
Foreign Total
Common Stock Retained Currency Deferred Excess Cost Shareholders'
Shares Amount Earnings Translation Compensation Over Market, Net Equity
--------- ------ -------- ----------- ------------ ---------------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance June 28, 1997 9,569,304 $5,703 $128,122 $ 2 ($206,440) ($2,902) ($75,515)
- ---------------------
Stock Purchases (1,804) (9) (38) - - - (47)
Tax effect of cost over market of
ESOP shares committed to be
released, net - - - - - (330) (330)
Foreign currency translation
adjustment - - - (4) - - (4)
Shares committed to be released - - - - 4,129 906 5,035
Net income for the quarter - - (7,128) - - - (7,128)
--------- ------ -------- --- --------- ------- --------
Balance September 27, 1997 9,567,500 $5,694 $120,956 ($2) ($202,311) ($2,326) ($77,989)
- --------------------------- ========= ====== ======== ==== ========== ======== ========
</TABLE>
During fiscal 1996 and 1997 the cost of ESOP shares committed to be released was
greater than the estimated fair value of such shares. The excess of cost over
market was recorded as a charge to a separate component of shareholders' equity,
net of the related tax effect. Beginning in fiscal 1998, the estimated fair
value of ESOP shares committed to be released exceeds cost. The excess of market
over cost will be credited to equity, net of the related tax effect, to the
extent of the previous net charges recorded. Thereafter, the excess will be
credited to retained earnings.
<PAGE>
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
HERFF JONES, INC.
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.
RESULTS OF OPERATIONS
The Company utilizes a 52/53 week year for accounting purposes. Fiscal
1997 and fiscal 1998 each contains 52 weeks. The Company's business is highly
seasonal. Historically, sales in the first fiscal quarter are at the lowest
level of the year and the first quarter typically produces operating losses.
However, because of the seasonality of the Company's business, operating results
on a quarterly basis are not necessarily indicative of operating results for the
full year.
For the first quarter ended September 27, 1997 and September 28, 1996.
General. Net sales rose 7.3% to $50.1 million in fiscal 1998 from $46.7
million in fiscal 1997. Operating losses decreased to $6.8 million in fiscal
1998 from $8.0 million in fiscal 1997. Net losses decreased to $7.1 million in
fiscal 1998 from $8.3 million in fiscal 1997.
Net Sales. Net sales increased $3.4 million or 7.3% to $50.1 million in
fiscal 1998 from $46.7 million in fiscal 1997. Such increases were due to
increases in the Jewelry, Photography, and Education product lines. Increases
were due primarily to modest price increases and some unit growth. These
increases were offset somewhat by a slight reduction in sales in the Yearbook
product line.
Cost Of Sales. Cost of sales decreased $.4 million or 1.5% to $29.7
million in fiscal 1998 from $30.1 million in fiscal 1997. Cost of sales as a
percentage of sales decreased to 59.3% in fiscal 1998 from 64.6% in fiscal 1997.
The decrease was due primarily to improved operating performance in the Jewelry,
Photography, and Education product lines, offset somewhat by new business
integration cost in the Yearbook product line.
Selling, General And Administrative Expenses. Selling, general and
administrative expense increased $1.7 million or 8.3% to $22.1 million in fiscal
1998 from $20.4 million in fiscal 1997. The increase was primarily attributable
<PAGE>
to an increase in the Company's commission expense resulting from increased net
sales in fiscal 1998. Selling, general and administrative expense as a
percentage of sales is 44.2% in fiscal 1998, compared to 43.8% in fiscal 1997.
ESOP Compensation. ESOP compensation increased $1.0 million to $5.1
million in fiscal 1998 from $4.1 million in fiscal 1997. The ESOP compensation
expense increase resulted from an increase in the estimated market value of the
shares committed to be released.
Loss from Operations. Operating losses decreased $1.2 million to a loss
of $6.8 million in fiscal 1998 from a loss of $8.0 million in fiscal 1997. The
decrease was predominantly due to increased profitability in the Jewelry,
Photography, and Education product lines.
Interest Expense. Interest expense decreased $.5 million to $4.5
million in the first quarter of fiscal 1998 from $5.0 million in the
corresponding quarter of fiscal 1997 due to a reduction of average debt
outstanding.
Income Tax Benefit. The first quarter income tax benefit decreased to
$4.1 million in fiscal 1998 from $4.6 million in fiscal 1997, due to the
decrease in the loss before income taxes, partially offset by a slightly higher
fiscal 1998 effective tax rate.
Net Loss. The first quarter net loss decreased to $7.1 million from
$8.3 million in fiscal 1997. The decreased loss was primarily attributable to
increased profitability in the Jewelry, Photography, and Education product
lines, coupled with a decrease in interest expense, partially offset by an
increase in ESOP compensation expense.
FINANCIAL CONDITION AND LIQUIDITY
The Company's business is highly seasonal. Historically the first
quarter requires the use of working capital due to losses from operations,
caused by relatively low shipping of product; the absorption of fixed costs that
are incurred evenly throughout the year; the build up of inventories for the
pre-Christmas photography and class ring activity; the payment of the Company's
income taxes from the previous fiscal year; and the settlement of commission
accounts with the Company's independent sales representatives. This is partially
offset by the reduction of accounts receivable resulting from payment for
products shipped prior to graduations in the fourth quarter of the previous
fiscal year.
The cash flow pattern and expectations of the Company's highly seasonal
business result in the classification, at September 27, 1997, of $32.4 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.
Capital expenditures were $4.1 million and $2.0 million in the first
quarter of fiscal 1998 and 1997, respectively. The increase over the prior year
is attributable to increased expenditures in the Scholastic and Yearbook product
lines, mostly related to information technology purchases.
Income taxes accrued are a negative $4.1 million at September 27, 1997
compared to $9.5 million payable at June 28, 1997 and a negative $4.6 million at
September 28, 1996. The decrease from June is the result of the payment of taxes
for the prior fiscal year, coupled with the provision for the tax benefit
associated with the seasonal losses this quarter. The decreased tax benefit at
the end of first quarter compared to the prior year first quarter end is the
result of the lower pre-tax loss in this fiscal year.
<PAGE>
For the three months ended September 27, 1997, cash and cash
equivalents declined $3.6 million to $2.3 million as compared to a decrease of
$7.4 million to $1.2 million for the three months ended September 28, 1996.
Cash used in operating activities was $29.4 million in the quarter
ended September 27, 1997, compared to $26.6 million in the quarter ended
September 28, 1996, as described below.
Net losses were $7.1 million in the first quarter of fiscal 1998
compared to $8.3 million in fiscal 1997. The decreased loss was primarily
attributable to increased profitability in the Jewelry, Photography, and
Education product lines, coupled with a decrease in interest expense, partially
offset by an increase in ESOP compensation expense.
Accounts receivable decreased $13.1 million in the first quarter of
fiscal 1998 compared to a decline of $15.0 million in fiscal 1997. The reduction
in the decline was primarily the result of increased sales in fiscal 1998.
Customer deposits decreased $6.4 million in the first quarter of fiscal
1998 compared to a decline of $7.7 million in fiscal 1997. The reduction in the
decline was primarily the result of decreased Yearbook sales activity, coupled
with increased ring order receipts in the first quarter of fiscal 1998 compared
to fiscal 1997.
Income taxes accrued decreased $13.6 million in the first quarter of
fiscal 1998 compared to a decline of $7.8 million in fiscal 1997. The decline
was primarily attributable to the decreased pre-tax loss of the Company in the
first quarter of fiscal 1998 compared to the pre-tax loss in fiscal 1997 and a
higher payment of taxes related to the prior fiscal year.
Net cash used by investing activities was $4.1 million for the quarter
ended September 27, 1997 compared to $2.0 million used in the quarter ended
September 28, 1996. The increase over the prior year is attributable to the
timing of fiscal 1998 capital expenditures in the Scholastic and Yearbook
product lines.
Net cash provided by financing activities was $29.9 million in the
quarter ended September 27, 1997 compared to $21.1 million provided in the
quarter ended September 28, 1996. The Company's financing arrangements in fiscal
1997 required an additional, "advance" payment on the Term Loan of $5,957 in the
first quarter of fiscal 1997. Subsequently, a 1997 amendment to those financing
arrangements eliminated the requirement for advanced payments; therefore, there
was not a corresponding advanced payment made during the quarter ended September
27, 1997.
Deferred Compensation at September 27, 1997 decreased to $202.3 million
from $206.4 million at June 28, 1997 and $218.8 million at September 28, 1996.
The decrease is the result of recording additional ESOP shares committed to be
released.
<PAGE>
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) The following Exhibits are filed as a part of this report:
Exhibit 27 Financial Data Schedule
(b) Reports on Form 8-K;
No reports on Form 8-K were filed during the quarter for which the report
is filed.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act as of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
HERFF JONES, INC.
(Registrant)
By: / S / Lawrence F. Fehr
------------------------------
Lawrence F. Fehr
Vice President and
Chief Financial Officer
November 6, 1997
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
REGISTRANT'S CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE MONTHS ENDED
SEPTEMBER 27, 1997 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> 3-MOS
<FISCAL-YEAR-END> JUN-27-1998
<PERIOD-START> JUN-29-1997
<PERIOD-END> SEP-27-1997
<EXCHANGE-RATE> 1.000
<CASH> 2,259
<SECURITIES> 0
<RECEIVABLES> 42,624
<ALLOWANCES> 4,180
<INVENTORY> 42,574
<CURRENT-ASSETS> 103,933
<PP&E> 98,475
<DEPRECIATION> 47,285
<TOTAL-ASSETS> 159,566
<CURRENT-LIABILITIES> 82,098
<BONDS> 152,330
<COMMON> 5,694
0
0
<OTHER-SE> (83,683)
<TOTAL-LIABILITY-AND-EQUITY> 159,566
<SALES> 50,064
<TOTAL-REVENUES> 50,064
<CGS> 29,675
<TOTAL-COSTS> 29,675
<OTHER-EXPENSES> 27,184
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 4,470
<INCOME-PRETAX> (11,214)
<INCOME-TAX> 4,086
<INCOME-CONTINUING> (7,128)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (7,128)
<EPS-PRIMARY> (3.57)
<EPS-DILUTED> (3.57)
</TABLE>
