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 26, 1998
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
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(State or other Jurisdiction of (I.R.S. Employer Identification Number)
Incorporation or Organization)
4501 West 62nd Street, Indianapolis, Indiana 46268
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(Address of principal executive offices) (Zip Code)
(317) 297-3740
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(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 NO X*
* Effective January 30, 1998, registrant is no longer subject to such filing
requirements.
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 November 2,
1998:
Class
-----
Common Stock, without par value 9,530,156
<PAGE>
INDEX
Part I. - Financial Information Page No.
--------
Consolidated Statement of Operations -
First Quarter Ended September 26, 1998 and September 27, 1997 3
Consolidated Balance Sheet -
As of September 26, 1998, June 27, 1998 and September 27, 1997 4
Consolidated Statement of Cash Flows -
First Quarter Ended September 26, 1998 and September 27, 1997 5
Notes to Consolidated Financial Statements 6 - 8
Management's Discussion and Analysis of
Financial Condition and Results of Operations 9 - 12
Part II. - Other Information 13
Item 6. Exhibits and Reports on Form 8-K
<PAGE>
Part I - Financial Information
Herff Jones, Inc.
Consolidated Statement of Operations
(Amounts in thousands of dollars, except per share data)
(Unaudited)
<TABLE>
<CAPTION>
First Quarter Ended
----------------------------------------
September 26, 1998 September 27, 1997
------------------ ------------------
<S> <C> <C>
Net sales $ 52,749 $ 50,064
Cost of sales (excludes ESOP compensation) 30,142 29,675
Selling, general, and administrative
expenses (excludes ESOP compensation) 28,094 22,129
ESOP compensation 6,921 5,055
----------- -----------
Income (loss) from operations (12,408) (6,795)
Interest income 78 51
Interest expense 3,792 4,470
----------- -----------
Income (loss) before income taxes
and extraordinary item (16,122) (11,214)
Income taxes 8,271 4,086
----------- -----------
Net income (loss) before extraordinary item (7,851) (7,128)
Extraordinary loss on early extinguishment of
debt, net of taxes (448) --
----------- -----------
Net income (loss) $ (8,299) $ (7,128)
=========== ===========
Earnings per common share:
Income (loss) before extraordinary item $ (2.68) $ (3.57)
Extraordinary item (0.15) --
----------- -----------
Net income (loss) $ (2.83) $ (3.57)
=========== ===========
Weighted average number of common shares
outstanding for earnings per share 2,933,819 1,995,464
=========== ===========
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
<PAGE>
Herff Jones, Inc.
Consolidated Balance Sheet
As of September 26, 1998, June 27, 1998 and September 27, 1997
(Amounts in thousands of dollars)
<TABLE>
<CAPTION>
(Unaudited) (Unaudited)
September 26, 1998 June 27, 1998 September 27, 1997
------------------ -------------- ------------------
Assets:
Current Assets
<S> <C> <C> <C>
Cash and cash equivalents $ 2,571 $ 8,964 $ 2,259
Accounts receivable 47,893 64,689 42,624
Inventories 45,898 39,526 42,574
Prepaid expenses 8,261 2,321 7,370
Deferred income taxes 10,887 10,887 9,106
--------- --------- ---------
Total Current Assets 115,510 126,387 103,933
Non-Current Assets
Property, plant, and equipment 102,379 99,897 98,475
Accumulated depreciation (53,236) (51,029) (47,285)
--------- --------- ---------
Net Property, Plant, and Equipment 49,143 48,868 51,190
Deferred income taxes 1,668 1,668 --
Deferred financing cost, net and other assets 3,139 3,454 4,443
--------- --------- ---------
Total Non-Current Assets 53,950 53,990 55,633
Total Assets $ 169,460 $ 180,377 $ 159,566
========= ========= =========
Liabilities and Shareholders' Equity:
Current Liabilities
Trade accounts payable $ 12,160 $ 6,625 $ 11,448
Salaries and wages payable 5,394 5,430 5,222
Interest payable 1,381 4,190 1,833
Customer deposits 12,061 18,861 13,142
Commissions payable 4,700 22,064 4,329
Income taxes accrued (8,035) 12,199 (4,090)
Current portion of long term debt 61,631 19,678 42,971
Other accrued liabilities 7,766 9,201 7,243
--------- --------- ---------
Total Current Liabilities 97,058 98,248 82,098
Non-Current Liabilities
Long-term debt 112,078 122,903 152,330
Other 9,357 6,232 3,127
--------- --------- ---------
Total Non-Current Liabilities 121,435 129,135 155,457
Total Liabilities 218,493 227,383 237,555
Shareholders' Equity (Deficit)
Common stock 5,683 5,683 5,694
Retained earnings 131,170 137,885 120,956
Deferred compensation (185,798) (189,927) (202,311)
Excess of cost over market (shares committed
to be released) -- (587) (2,326)
Foreign currency translation (88) (60) (2)
--------- --------- ---------
Total Shareholders' Equity (Deficit) (49,033) (47,006) (77,989)
Total Liabilities and Shareholders' Equity (Deficit) $ 169,460 $ 180,377 $ 159,566
========= ========= =========
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
<PAGE>
Herff Jones, Inc.
Consolidated Statement of Cash Flows
(Amounts in thousands of dollars)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
--------------------------------------
September 26, 1998 September 27, 1997
------------------ ------------------
Cash flows from operating activities:
<S> <C> <C>
Net income $ (8,299) $ (7,128)
Adjustments to reconcile net income to net cash (used)
provided by operating activities:
Depreciation and amortization 2,313 1,958
Amortization and write off of financing cost 315 147
ESOP compensation (before dividend exclusion) 6,876 5,035
Tax benefit (effect) of ESOP (576) (330)
Long-term incentive plan expense 3,125 445
Other (28) (5)
(Gain) loss on disposal of property, plant and equipment, net 4 (1)
Increase (decrease) in cash generated by changes in assets
and liabilities
Accounts receivable 16,796 13,085
Inventories (6,372) (4,611)
Prepaid expenses (5,940) (5,554)
Trade accounts payable 5,535 5,592
Salaries and wages (36) 174
Interest payable (2,809) (3,249)
Customer deposits (6,800) (6,366)
Commissions payable (17,364) (12,535)
Income taxes payable (20,234) (13,637)
Other accrued liabilities (1,435) (2,370)
-------- --------
Total adjustments (26,630) (22,222)
-------- --------
Net cash (used) provided by operating activities (34,929) (29,350)
Cash flows from investing activities:
Proceeds from disposal of property, plant and equipment 1 --
Capital expenditures (2,593) (4,133)
-------- --------
Net cash (used) provided by investing activities (2,592) (4,133)
Cash flows from financing activities:
Redemption of common shares -- (9)
Premium on stock redemption -- (37)
Increase in revolver, net 50,150 32,373
Payment of long-term debt (19,022) (2,428)
-------- --------
Net cash (used) provided by financing activities 31,128 29,899
Cash and cash equivalents:
Net increase (decrease) (6,393) (3,584)
Beginning of period 8,964 5,843
-------- --------
End of period $ 2,571 $ 2,259
======== ========
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
<PAGE>
Notes to Unaudited Consolidated Financial Statements
Three Months Ended September 26, 1998
(Amounts in thousands of dollars)
Note 1 - Adjustments
The unaudited 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 26, 1998, and the results of its
operations and cash flows for the quarter ended September 26, 1998. These
unaudited 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 27, 1998.
The Company utilizes a 52/53 week fiscal year for accounting purposes ending
on the last Saturday in June. Fiscal 1998 and fiscal 1999 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 26, 1998 June 27, 1998 September 27, 1997
------------------ ------------- ------------------
$3,767 $5,744 $4,180
Note 3 - Inventories
The components of inventory balances are summarized below:
<TABLE>
<CAPTION>
September 26, 1998 June 27, 1998 September 27, 1997
------------------ ------------- ------------------
<S> <C> <C> <C>
Raw materials and supplies (includes gold) $20,537 $17,023 $19,182
Work-in-process 16,199 14,169 13,727
Finished goods 9,162 8,334 9,665
-------- -------- --------
$45,898 $39,526 $42,574
======= ======= =======
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Note 4 - Financing
September 26, 1998 June 27, 1998 September 27, 1997
------------------ ------------- ------------------
Long-Term Debt consists of the following:
<S> <C> <C> <C>
Senior Bank Facility (Revolver) $50,150 $8,417 $32,373
Senior Bank Facility (Term) 24,729 27,379 35,328
Senior Subordinated Notes 91,230 99,185 120,000
1994 Industrial Development
Revenue Bonds Due in 2019 7,600 7,600 7,600
--------- -------- --------
173,709 142,581 195,301
Less: Current Portion (61,631) (19,678) (42,971)
---------- --------- --------
Long-Term Debt $112,078 $122,903 $152,330
======== ======== ========
</TABLE>
Note 5 - Earnings Per Share
Earnings per share have been computed by dividing income (loss) before
extraordinary item, extraordinary item, and net income (loss) by the weighted
average number of allocated and committed to be released ESOP shares outstanding
for the period.
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 27, 1998 9,530,156 $5,683 $137,885 ($60) ($189,927) ($587) ($47,006)
- ---------------------
Stock Purchases - - - - - - -
Tax effect of cost over market of
ESOP shares committed to be
released, net - - - - - (576) (576)
Foreign currency translation
adjustment - - - (28) - - (28)
Shares committed to be released - - 1,584 - 4,129 1,163 6,876
Net income for the quarter - - (8,299) - - - (8,299)
--------- ------ -------- ---- --------- ------ --------
Balance September 26, 1998 9,530,156 $5,683 $131,170 ($88) ($185,798) - ($49,033)
- --------------------------- ========= ====== ======== ===== ========== ====== ========
</TABLE>
Prior to fiscal 1998 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 exceeded cost. The excess of
market over cost has been credited to equity, net of the related tax effect, to
the extent of the previous net charges recorded. Hereafter, the excess will be
credited to retained earnings.
<PAGE>
Note 7 - Comprehensive Income
The Comprehensive income (loss) for the first quarter of 1999 and 1998 of
($8,327) and ($7,132), respectively, includes the reported net loss adjusted by
the non-cash effect of changes in the cumulative translation adjustment.
Note 8 - Extraordinary Item
During the first quarter of fiscal 1999 the Company repurchased $8.0 million of
its Senior Subordinated Notes from existing noteholders at a premium. As a
result, the Company recorded a $.4 million charge reflecting the premium cost
and the write off of previously deferred financing cots, net of the applicable
tax benefit.
Note 9 - Income Taxes
Income taxes, excluding the extraordinary item, are computed on the basis of the
anticipated effective tax rate for fiscal 1999. The significant tax rate
increase results from the effect of a rising estimated share value, and the
related effect on ESOP compensation, for reporting purposes. Estimated market
value per share is used in determining ESOP compensation. The excess of market
value over cost per share is a permanent non-deductible item for use in
computing income taxes payable. In fiscal 1999, substantially all of the
increase in the estimated effective tax rate from 36.6% to 50.8% is attributable
to this item.
<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
1998 and fiscal 1999 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 26, 1998 and September 27, 1997
General. Net sales rose 5.4% to $52.7 million in fiscal 1999 from $50.0
million in fiscal 1998. Operating losses increased to $12.4 million in fiscal
1999 from $6.8 million in fiscal 1998. Net losses increased to $8.3 million in
fiscal 1999 from $7.1 million in fiscal 1998.
Net Sales. Net sales increased $2.7 million or 5.4% to $52.7 million in
fiscal 1999 from $50.0 million in fiscal 1998. Such increases were due primarily
to increases in the Education and Jewelry product lines. Increases were due to
modest price increases and earlier unit shipping in Jewelry. The Education
increase was the result of shipping a higher beginning-of-quarter backlog of
orders than in the prior year.
Cost Of Sales. Cost of sales increased $.4 million or 1.3% to $30.1
million in fiscal 1999 from $29.7 million in fiscal 1998. Cost of sales as a
percentage of sales decreased to 57.1% in fiscal 1999 from 59.3% in fiscal 1998.
The decrease was due primarily to improved operating performance on higher
volumes in the Education and Jewelry product lines, offset somewhat by higher
manufacturing costs in the Photography product line.
<PAGE>
Selling, General And Administrative Expenses. Selling, general and
administrative expenses increased $6.0 million or 27% to $28.1 million in fiscal
1999 from $22.1 million in fiscal 1998. Such expense as a percentage of sales is
53.3% in fiscal 1999, compared to 44.2% in fiscal 1998. The increase was
predominantly attributable to an increase in the Company's general expense
resulting primarily from increases in Long-Term Management Incentive expense and
information technology consulting.
ESOP Compensation. ESOP compensation increased $1.8 million to $6.9
million in fiscal 1999 from $5.1 million in fiscal 1998. The ESOP compensation
expense increase resulted from a 36.5% increase in the estimated market value of
the shares committed to be released.
Interest Expense. Interest expense decreased $.7 million to $3.8
million in the first quarter of fiscal 1999 from $4.5 million in the
corresponding quarter of fiscal 1998 due primarily to a reduction of average
debt outstanding.
Income Tax Benefit. The first quarter income tax benefit increased to
$8.3 million in fiscal 1999 from $4.1 million in fiscal 1998, due to the
increase in the loss before income taxes and a higher fiscal 1999 effective tax
rate. The increase in the effective tax rate is a result of increases in ESOP
per share values. Rising share values increase ESOP compensation expense for
reporting purposes; however, ESOP compensation in excess of share cost is not
deductible for income tax purposes.
Extraordinary Item. During the first quarter, the Company repurchased
$8.0 million of its Senior Subordinated Notes from existing noteholders at a
premium. As a result, the Company recorded a $.4 million charge reflecting the
premium cost and the write off of previously deferred financing costs, net of
the applicable tax benefit.
Net Loss. The first quarter net loss increased to $8.3 million from
$7.1 million in fiscal 1998. The increase was due primarily to increases in ESOP
compensation and selling, general and administrative expenses and the
extraordinary loss on the repurchase of Senior Subordinated Notes from existing
noteholders at a premium, partially offset by increased gross profit in the
Education and Jewelry product lines and the impact of the higher effective tax
rate, as discussed above.
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 26, 1998, of $50.1 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 $2.5 million and $4.1 million in the first
quarter of fiscal 1999 and 1998, respectively. The decrease from the prior year
is attributable to the timing of capital expenditures, mostly related to
information technology purchases.
Income taxes accrued are a negative $8.0 million at September 26, 1998
compared to $12.2 million payable at June 27, 1998 and a negative $4.1 million
at September 27, 1997. 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 increased tax benefit at
the end of first quarter compared to the prior year first quarter end is the
result of the higher pre-tax loss in this fiscal year, and an increase in the
effective tax rate for fiscal 1999.
For the three months ended September 26, 1998, cash and cash
equivalents declined $6.4 million to $2.6 million as compared to a decrease of
$3.6 million to $2.3 million for the three months ended September 27, 1997.
Cash used in operating activities was $34.9 million in the quarter
ended September 26, 1998, compared to $29.4 million in the quarter ended
September 27, 1997, as described below.
Accounts receivable decreased $16.8 million in the first quarter of
fiscal 1999 compared to a decrease of $13.1 million in fiscal 1998, as a result
of collecting a portion of the higher receivables balance as of the end of
fiscal 1998.
Commissions payable decreased $17.4 million for the first quarter of
fiscal 1999 compared to $13.6 million a year ago. The increase in the decline
resulted from higher commission settlements paid in fiscal 1999 compared to
fiscal 1998, due primarily to sales increases in fiscal 1998.
Income taxes accrued decreased $20.2 million in the first quarter of
fiscal 1999 compared to a decline of $13.6 million in fiscal 1998. The decline
was primarily attributable to the increased pre-tax loss of the Company in the
first quarter of fiscal 1999 compared to the pre-tax loss in fiscal 1998, and
higher tax payments in fiscal 1999 relating to the fiscal 1998 earnings
improvement over fiscal 1997.
The Company made its scheduled payment on long-term debt in the quarter
and repurchased $8.0 million of Senior Subordinated Notes with funds drawn on
its Revolving Credit Agreement.
YEAR 2000
In fiscal 1994, the Company adopted the client server platform as its
information technology strategy for the future. Development of the initial
client server business system was begun at that time and was completed in fiscal
1998. In fiscal 1996, the Company began addressing the year 2000 issue
specifically. Other business systems which required replacement in the normal
course of business or which would not be year 2000 compliant were identified.
Four business systems fell into this class and installation of replacement
systems is scheduled for completion in fiscal 1999. The implementation plan for
these four systems is slightly behind schedule, but completion within fiscal
1999 is anticipated. The company believes its most significant risk associated
with the year 2000 lies in the completion of the four business systems scheduled
for completion prior to December 31, 1999.
Information technology systems that won't be converted to client server
by the end of fiscal 1999 have either been modified to make them year 2000
compliant or have been replaced.
Non-information technology systems are under a review program by the
Resident Manager at each facility. All locations are anticipated to be year 2000
compliant by December, 1999.
<PAGE>
The Company maintains material business relationships with its
suppliers of raw materials, services and utilities. The Company has not
conducted a survey of its critical suppliers, but believes most of its raw
materials are generic enough to allow for easy substitution. However, if
alternative suppliers are also unable to meet the Company's delivery
requirements, or if its utility suppliers are unable to operate, the Company's
business or operations could be adversely affected.
The total year 2000 project cost was approximately $1.5 million, which
included $1.0 million to purchase and implement new hardware and software that
was capitalized during fiscal 1998 and $.5 million that was expensed as occurred
in fiscal 1998. Spending on the new systems scheduled for installation prior to
December 31, 1999 relates to on-going technology upgrades and is not viewed as a
response to the year 2000 issue.
There is currently no contingency plan in place which would address
business operations if the systems are not completed by January 2000. A
contingency plan would be developed at such time as it is determined that
installation of the replacement systems will lapse beyond June 30, 1999.
Regarding contingency plans for its material supplier relationships, the Company
believes the nature of its business and diversity of its supplier base minimizes
the risk to its operations.
The foregoing information regarding year 2000 preparations and
compliance are forward-looking statements subject to important factors that
could cause Management's expectations to be materially inaccurate. Such factors
include unpredictability of the timing of full implementation of year 2000
compliant systems and the year 2000 compliant status of information systems of
the Company's existing and potential alternative suppliers.
<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:
None.
(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 10, 1998
