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 27, 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
(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 NO X *
* Effective January 30, 1998, registrant is no longer subject to such filing
requirements.
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 $96,000**.
** Value based on management's most recent estimated share value.
Indicate the number of shares outstanding of each of the registrant's
classes of common stock as of the latest practicable date: 9,530,156 as of
September 1, 1998.
There are no documents incorporated by reference herein.
<PAGE>
Voluntary Filing - effective January 30, 1998, Herff Jones, Inc. is not subject
to filing requirements of the Securities Exchange Act of 1934.
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 1992, 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 2.49 and 2.55 million U.S. high school
graduates in 1995 and 1996 respectively. The U.S. Department of Education
forecasts the number of high school graduates will reach 3.02 million by 2007.
ESOP
General
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". 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 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 over 15 years 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 was 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 1998 Compared to Fiscal Year 1997
General. Net sales rose 8.7% to $336.5 million in fiscal 1998 from $309.5
million in fiscal 1997. Operating profit increased 7.0% to $39.7 million in
fiscal 1998 from $37.1 million in fiscal 1997. Net income before extraordinary
item increased 29.9% to $14.0 million in fiscal 1998 from $10.8 million in
fiscal 1997. Net income increased 14.0% to $12.3 million in fiscal 1998 from
$10.8 million in fiscal 1997. Earnings per common share before extraordinary
item increased 3.9% to $5.39 in fiscal 1998 from $5.19 in fiscal 1997. Earnings
per share of common stock decreased 8.9% to $4.73 in fiscal 1998 from $5.19 in
fiscal 1997.
Net Sales. Net sales increased $27.1 million or 8.7%, to $336.5 million in
fiscal 1998 from $309.5 million in fiscal 1997, due to increased volume and
modest price increases across all product lines. Volume increases approximated
two thirds of the increase.
Cost of Sales. Cost of sales increased $6.0 million, or 4.0%, to $156.4 million
in fiscal 1998 from $150.4 million in fiscal 1997, primarily as a function of
increased sales. Cost of sales as a percentage of net sales decreased to 46.5%
in fiscal 1998 from 48.6% in fiscal 1997. This decrease was due principally to
reductions in material costs in all product lines, coupled with efficiency
improvements in the Cap & Gown and Fine Paper product lines.
Selling and Administrative Expense. Selling and administrative expense increased
$14.7 million, or 13.8%, to $121.4 million in fiscal 1998 from $106.7 million in
fiscal 1997. This increase was predominantly due to the increase in the
Company's commission expense resulting from increased net sales and increases in
certain commission rates, increased costs for the long-term management incentive
plan, increased depreciation, higher information technology consulting costs,
and normal cost increases. Selling and administrative expense increased as a
percentage of net sales to 36.1% in fiscal 1998 from 34.5% in fiscal 1997,
primarily as a result of the increased commission rates in the Jewelry and Fine
Paper product lines and the cost of the long-term management incentive plan.
ESOP Compensation. ESOP compensation increased $3.6 million, to $19.0 million in
fiscal 1998 from $15.4 million in fiscal 1997 due to an increase in the
estimated per share valuation.
Operating Profit. Operating profit increased $2.6 million, or 7.0%, to $39.7
million in fiscal 1998 from $37.1 million in fiscal 1997. This increase was
predominantly due to strong operating performance in the Jewelry, Cap & Gown and
Education product lines, partially offset by increased ESOP compensation
expense.
Interest Expense. Interest expense decreased $2.4 million, or 11.9%, to $17.6
million in fiscal 1998 from $20.0 million in fiscal 1997, due primarily to lower
levels of borrowing in fiscal 1998.
Income Taxes. Income taxes increased $1.8 million, or 28.6%, to $8.1 million in
fiscal 1998 from $6.3 million in fiscal 1997 due to the increase in income
before taxes.
Extraordinary Loss on Early Extinguishment of Debt, Net of Taxes. The Company
reported an extraordinary item in fiscal 1998 due to the repurchase of $20,815
of Senior Subordinated Notes ("Notes"). The extraordinary item is the premium
paid on the Notes, plus the write-off of previously deferred financing costs
associated with the Notes, net of the applicable tax benefit.
Net Income. Net income increased $1.5 million, or 14.0%, to $12.3 million in
fiscal 1998 from $10.8 million in fiscal 1997. Net income increased as a
percentage of net sales to 3.7% in fiscal 1998 from 3.5% in fiscal 1997. Such
increases were primarily the result of improved operating profit and lower
interest expense.
Dividends. Two $.28 per share dividends were paid during fiscal 1998, totaling
$5.3 million, a $.5 million increase from the $4.8 million ($.50 per share) of
dividends paid in fiscal 1997. Essentially all of the $5.3 million of fiscal
1998 dividends were paid to the ESOP, which used such dividend income to make
payments on the loan from the Company.
Fiscal Year 1997 Compared to Fiscal Year 1996
General. Net sales rose 9.4% to $309.5 million in fiscal 1997 from $282.9
million in fiscal 1996. Operating profit rose 20.5% to $37.1 million in fiscal
1997 from $30.8 million in fiscal 1996. Net income increased $8.8 million to
$10.8 million in fiscal 1997 from $2.0 million in fiscal 1996. Earnings per
share of common stock increased to $5.19 in fiscal 1997 from $.58 in fiscal
1996.
Net Sales. Net sales increased $26.6 million, or 9.4%, to $309.5 million in
fiscal 1997 from $282.9 million in fiscal 1996, due primarily to increased sales
at Delmar of $13.1 million reflecting a full years activity in fiscal 1997
compared to only two months activity in fiscal 1996. All product lines had
increases which were due largely to modest price increases as unit volume
remained fairly constant across most product lines, except for increases in
Jewelry and Education.
Cost of Sales. Cost of sales increased $14.8 million, or 10.9%, to $150.4
million in fiscal 1997 from $135.6 million in fiscal 1996, primarily as a
function of increased sales, coupled with a one-time charge to increase the
reserve for returned product. Cost of sales as a percentage of net sales
increased slightly to 48.6% in fiscal 1997 from 47.9 % in fiscal 1996. This
increase was due principally to higher costs related to Delmar activity and the
one-time charge to increase the reserve for returned product, partially offset
by improved operating performance in the Jewelry, Cap & Gown and Yearbook
product lines.
Selling and Administrative Expense. Selling and administrative expense increased
$9.0 million, or 9.2%, to $106.7 million in fiscal 1997 from $97.7 million in
fiscal 1996. This increase was predominantly due to the increase in the
Company's commission expense resulting from increased net sales in fiscal 1997,
coupled with a full year of expenses for Delmar and normal cost increases.
However, despite the dollar increase in selling and administrative expense
during fiscal 1997, selling and administrative expense remained at 34.5% of net
sales.
ESOP Compensation. ESOP compensation decreased $1.3 million, or 7.8%, to $15.4
million in fiscal 1997 from $16.7 million in fiscal 1996 due to the elimination
of a $4.0 million charge in fiscal 1996 for employee service in the prior year,
partially offset by the effect of an increase in the per share valuation.
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 increased $6.3 million, or 20.5%, to $37.1
million in fiscal 1997 from $30.8 million in fiscal 1996. This increase was
predominantly due to strong sales and operational performance by the Jewelry,
Cap & Gown and Yearbook product lines, coupled with the non-recurrence of the
restructuring charge taken in fiscal 1996.
Interest Income and Expense. Interest income decreased $.6 million, or 100.0%,
to $0.0 million in fiscal 1997 from $.6 million in fiscal 1996 due to the
elimination of the Company's investments in marketable securities and cash
equivalents. Interest expense increased $.5 million, or 2.8%, to $20.0 million
in fiscal 1997 from $19.5 million in fiscal 1996. This increase was the result
of a full year of borrowings associated with the recapitalization in fiscal 1997
compared to about 10 months of borrowings in fiscal 1996.
Income Taxes. Income taxes increased $2.2 million, or 53.7%, to $6.3 million in
fiscal 1997 from $4.1 million in fiscal 1996 due to the increase in income
before taxes.
Net Income. Net income increased $8.8 million, to $10.8 million in fiscal 1997
from $2.0 million in fiscal 1996. Net income increased as a percentage of net
sales to 3.5% in fiscal 1997 from .7% in fiscal 1996. Such increases were
primarily the result of improved operating profit and the non-recurrence of the
extraordinary item in 1996.
Dividends. Two $.25 per share dividends were paid during fiscal 1997, totaling
$4.8 million, a $2.0 million decrease from the $6.8 million ($.70 per share) in
dividends paid in fiscal 1996. Essentially all of the $4.8 million of fiscal
1997 dividends were paid to the ESOP which used such dividend income to make
payments on the loan from the Company.
Earnings Per Share. Earnings per share increased to $5.19 per share in fiscal
1997 from $.58 per share in fiscal 1996. Beginning in fiscal 1996, the weighted
average number of common shares outstanding was calculated using only allocated
shares and shares committed to be released.
Impact of Inflation
Although increases in demand for, or costs of, certain materials can
adversely affect 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.
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 3.0%
to 5.0% 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 1998,
approximately 22% 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 44% 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>
First Quarter Second Quarter Third Quarter Fourth Quarter
------------- -------------- ------------- --------------
Net Sales
- ---------
<S> <C> <C> <C> <C>
Fiscal 1998 $50,064 $74,574 $64,114 $147,790
Fiscal 1997 46,656 68,288 58,264 136,281
Fiscal 1996 43,543 56,275 50,239 132,884
Operating Profit
- ----------------
Fiscal 1998 $(6,795) $6,502 $(1,269) $41,252
Fiscal 1997 (7,965) 7,080 (1,203) 39,181
Fiscal 1996 (8,767) 4,665 (1,295) 36,188
</TABLE>
The Company's primary source of cash is operating profit from the sale
of its products 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 Credit Agreement, described below.
Ongoing seasonal borrowings during fiscal 1998 peaked at approximately $39.0
million and averaged approximately $20.2 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.
<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 39,000 shares for
the plan year ending December 31, 1998 and are projected to vary between
approximately 39,000 shares and 100,000 shares per year, and are estimated to
amount to 491,000 shares in the aggregate, through the plan year ended December
31, 2004. These forward-looking projections could vary materially based on
important factors, including the number and account values of employees who
become eligible for investment diversification or 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 "Credit Agreement")
pursuant to which BankBoston, N.A. and other financial institutions named
therein have provided the Company with a $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. As a result of the issuance of the Subordinated Notes and
the incurrence of additional indebtedness under the Credit Agreement to effect
the ESOP Transactions, as well as working capital borrowings, the Company has
significant interest expense and interest expense is expected to remain
significant for a number of years.
Covenants under the indenture governing the Subordinated Notes and the
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. See Note 6 to the Company's
financial statements set forth herein under Item 8.
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 Credit Agreement and share repurchase obligations, although no assurances to
that effect can be given.
Net cash provided by operating activities was $37.2 million in fiscal
1998 down from $37.4 million in fiscal 1997 and up from $26.8 million in fiscal
1996. The decrease from fiscal 1997 was primarily the result of the decrease in
cash resulting from an increase in accounts receivable, mostly offset by an
increase in net income and depreciation. The increase in fiscal 1997 from fiscal
1996 was primarily the result of the increase in net income.
Cash flows from investing activities represented a usage of $8.8
million in fiscal 1998 compared to a usage in fiscal 1997 of $7.5 million and a
usage of $13.3 million in fiscal 1996. The increase in funds used in fiscal 1998
compared to fiscal 1997 was primarily the result of an increase in capital
expenditures. The decrease in funds used by investing activities in fiscal 1997
compared to fiscal 1996 was due to the Delmar acquisition in 1996 partially
offset by the 1996 sale of marketable securities and increased capital
expenditures in 1997. The capital expenditures in fiscal 1998 of $8.8 million
were generally for maintenance of property and equipment, and investments in
technology. The higher capital expenditures in fiscal 1997 as compared to 1996
were the result of higher spending for technology. The Company expects cash
generated from operations plus the working capital facility portion of the
Credit Agreement to be adequate to meet anticipated capital needs in future
years.
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 Credit Agreement
and on-going working capital requirements for the acquisition will also be
financed from the Credit Agreement. The acquisition is expected to contribute
significantly to sales in the Yearbook and Photography product lines over the
long-term.
Cash flows from financing activities represent a usage of $25.3
million in fiscal 1998 compared to a usage of $32.7 million in fiscal 1997. The
primary reason for the decrease in fiscal 1998 compared to fiscal 1997 was a
reduction in the payment of debt. Cash flows used by financing activities were
$32.7 million in fiscal 1997 compared to $79.4 million in fiscal 1996. The
primary reason for the decrease in fiscal 1997 from fiscal 1996 was the result
of the purchase of shares by the ESOP Trust and the prepayment of the previous
ESOP debt partially offset by new borrowings and related financing costs by the
Company. Pursuant to the Credit Agreement, a required advance payment in
addition to the scheduled amortization payments on the Term Loan of $6.0 million
was made in the first quarter of 1997. Subsequently, a 1997 amendment eliminated
the requirement for advance payments.
NEW ACCOUNTING PRONOUNCEMENTS
The Financial Accounting Standards Board issued FASB No. 130,
"Reporting Comprehensive Income," FASB No. 131, "Disclosure about Segments of an
Enterprise and Related Information," FASB No. 132, "Employers' Disclosures about
Pensions and Other Postretirement Benefits" and FASB No. 133, "Accounting for
Derivative Instruments and Hedging Activities." FASB No. 130 establishes
standards for reporting and presenting comprehensive income and its components.
FASB No. 131 establishes standards for defining operating segments and reporting
certain information regarding operating segments. FASB No. 132 refines standard
disclosure requirements for pension and other postretirement benefits. FASB Nos.
130, 131 and 132 are effective in fiscal 1999. The Company does not believe that
FASB Nos. 130, 131 and 132 will have a material impact on its financial
statements. If the Company determines that it has a reporting obligation under
the new standards, the necessary information will be disclosed as part of the
Company's financial reporting when effective. FASB No. 133, effective in fiscal
2000, establishes accounting and reporting standards for derivative instruments,
including certain derivatives embedded in contracts and for hedging activities.
The Company does not believe that FASB No. 133 will have a material impact on
its financial statements.
COMMITMENTS AND CONTINGENCIES
Herff Jones has an agreement with a national bank association (the
"Bank") 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 Bank and the Broker until Herff Jones has paid for amounts used. The amount
of consigned gold inventory with the Bank 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 Bank 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 ($6,064 at June 27, 1998 and $6,876 at June 28, 1997) for which
appropriate insurance coverage has been obtained.
Year 2000 Conversion Costs
In fiscal 1994, the Company embarked on a program to change all its
business systems to a client server platform. One of those systems was completed
in fiscal 1998, and four others are scheduled for completion in fiscal 1999. The
systems that won't be converted by the end of fiscal 1999 have been modified to
make them year 2000 compliant. The 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 and $.5 million that was expensed as incurred.
There are no material additional expenditures required to be year 2000
compliant. The year 2000 is not expected to have a material affect on Herff
Jones' operations.
The foregoing discussion contains forward-looking statements regarding
the adequacy of the Company's anticipated cash flows and capital resources. Such
statements are subject to important factors that could cause management's
projections and compliance by its information systems with year 2000 programming
issues to be materially inaccurate. Such factors include (i) the rates of
retiring and terminating ESOP participants and participants becoming entitled to
investment diversification rights whose accounts must be liquidated in whole or
in part by means of repurchase of shares by the Company from the ESOP, or (ii)
the Company's potential requirements for extraordinary capital expenditures to
fund acquisitions (should favorable opportunities arise) or improvements of
management information systems and to maintain or improve the competitiveness of
Company products.
<PAGE>
Item 8. Financial Statements and Supplementary Data
-------------------------------------------
Index to Financial Statements
Financial Statements:
Report of Independent Accountants
Consolidated Balance Sheet as of June 27, 1998
and June 28, 1997
Consolidated Statement of Income for the
years ended June 27, 1998, June 28, 1997
and June 29, 1996
Consolidated Statement of Shareholders' Equity for the years ended
June 27, 1998, June 28, 1997 and June 29, 1996
Consolidated Statement of Cash Flows for the years ended June 27,
1998, June 28, 1997 and June 29, 1996
Notes to Consolidated Financial Statements
Financial Statement Schedules for the three years
ended June 27, 1998
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 statements or notes
thereto.
<PAGE>
(Letterhead of PricewaterhouseCoopers LLP)
July 31, 1998
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 27, 1998 and June 28, 1997, and the
results of their operations and their cash flows for each of the three years in
the period ended June 27, 1998, 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/PricewaterhouseCoopers LLP
-----------------------------
Indianapolis, Indiana
<PAGE>
HERFF JONES, INC.
-----------------
CONSOLIDATED BALANCE SHEET
--------------------------
JUNE 27, 1998 AND JUNE 28, 1997
-------------------------------
(Amounts in thousands of dollars,
except for share data)
<TABLE>
<CAPTION>
Assets 1998 1997
- ------ --------- ---------
Current Assets:
<S> <C> <C>
Cash and cash equivalents $ 8,964 $ 5,843
Accounts receivable, less allowances of
$5,744 (1998) and $5,754 (1997) for
returns and doubtful accounts 64,689 55,709
Inventories 39,526 37,963
Prepaid expenses 2,321 1,816
Deferred income taxes 10,887 9,106
--------- ---------
Total Current Assets 126,387 110,437
Deferred income taxes 1,668 ---
Deferred financing cost, net and other assets 3,454 4,590
Property, plant and equipment, net 48,868 49,014
--------- ---------
Total Assets $ 180,377 $ 164,041
========= =========
Liabilities and Shareholders' Equity
- ------------------------------------
Current Liabilities:
Trade accounts payable $ 6,625 $ 5,856
Salaries and wages payable 5,430 5,048
Interest payable 4,190 5,082
Customer deposits 18,861 19,508
Commissions payable 22,064 16,864
Income taxes accrued 12,199 9,547
Other accrued liabilities 9,201 9,613
Current portion of long-term debt 19,678 10,377
--------- ---------
Total Current Liabilities 98,248 81,895
Other 6,232 2,239
Long-term debt 122,903 154,979
Deferred income taxes --- 443
--------- ---------
Total Liabilities 227,383 239,556
--------- ---------
Commitments and Contingencies
Shareholders' Equity (Deficit):
Common stock - No par value, shares authorized
-16,500,000; shares issued and outstanding
-9,530,156 (1998) and 9,569,304 (1997) 5,683 5,703
Retained earnings 137,885 128,122
Deferred compensation (189,927) (206,440)
Foreign currency translation (60) 2
Excess of cost over market (shares committed
to be released) (587) (2,902)
--------- ---------
Total Shareholders' Equity (Deficit) (47,006) (75,515)
--------- ---------
Total Liabilities & Shareholders' Equity (Deficit) $ 180,377 $ 164,041
========= =========
</TABLE>
(See Notes to Consolidated Financial Statements.)
<PAGE>
HERFF JONES, INC.
-----------------
CONSOLIDATED STATEMENT OF INCOME
--------------------------------
FOR THE YEARS ENDED JUNE 27, 1998, JUNE 28, 1998 AND JUNE 29, 1996
------------------------------------------------------------------
(Amounts in thousands of dollars
except for share data)
<TABLE>
<CAPTION>
1998 1997 1996
----------- ----------- -----------
<S> <C> <C> <C>
Net sales $ 336,542 $ 309,489 $ 282,941
Cost of sales (excludes ESOP compensation) 156,441 150,373 135,625
Selling and administrative expenses 121,410 106,666 97,719
(excludes ESOP compensation)
ESOP compensation
Current year service 19,001 15,357 12,632
Prior year service --- --- 4,033
Restructuring charge --- --- 2,141
----------- ----------- -----------
Operating profit 39,690 37,093 30,791
Interest income 62 15 627
Interest expense 17,648 20,031 19,482
----------- ----------- -----------
Income before taxes 22,104 17,077 11,936
Income taxes 8,089 6,292 4,094
----------- ----------- -----------
Net income before extraordinary item 14,015 10,785 7,842
Extraordinary item: Loss on early extinguishment of debt, less
applicable tax benefit of $989 (1998) and $3,621 (1996) (1,715) --- (5,884)
----------- ----------- -----------
Net income $ 12,300 $ 10,785 $ 1,958
=========== =========== ===========
Per common share:
Net income before extraordinary item $ 5.39 $ 5.19 $ 2.32
Extraordinary item (.66) --- (1.74)
----------- ----------- -----------
Net income $ 4.73 $ 5.19 $ .58
=========== =========== ===========
Weighted average number of
common shares outstanding 2,599,635 2,076,431 3,383,379
=========== =========== ===========
</TABLE>
(See Notes to Consolidated Financial Statements.)
<PAGE>
HERFF JONES, INC.
-----------------
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
----------------------------------------------
FOR THE YEARS ENDED JUNE 27, 1998, JUNE 28, 1997 AND JUNE 29, 1996
------------------------------------------------------------------
(Amounts in thousands of dollars
except for share data)
<TABLE>
<CAPTION>
Foreign Excess Total
Common Stock Retained Currency Deferred Cost Over Shareholders'
Shares Amount Earnings Translation Compensation Market Equity (Deficit)
------ ------ -------- ----------- ------------ ---------- -----------------
<S> <C> <C> <C> <C> <C> <C> <C>
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) $(100,342)
========= ====== ======== ======= ========= ======= =========
Dividends declared
($.50/share) --- --- (906) --- --- --- (906)
Stock purchases (49,692) (25) (1,282) --- --- --- (1,307)
Shares committed to be
released --- --- --- --- 16,513 (400) 16,113
Tax benefit of cost over
market of ESOP shares
committed to be released --- --- --- --- --- 151 151
Foreign currency
translation --- --- --- (9) --- --- (9)
Net income --- --- 10,785 --- --- 10,785
--------- ------ -------- ------- --------- ------- ---------
Balance June 28, 1997 9,569,304 $5,703 $128,122 $ 2 $(206,440) $(2,902) $ (75,515)
========= ====== ======== ======= ========= ======= =========
Dividends declared
($.56/share) --- --- (1,296) --- --- --- (1,296)
Stock purchases (39,148) (20) (1,241) --- --- --- (1,261)
Shares committed to be
released --- --- --- --- 16,513 3,635 20,148
Tax benefit of cost over
market of ESOP shares
committed to be released --- --- --- --- --- (1,320) (1,320)
Foreign currency
translation --- --- --- (62) --- --- (62)
Net income --- --- 12,300 --- --- --- 12,300
--------- ------ -------- ------- --------- ------- ---------
Balance June 27, 1998 9,530,156 $5,683 $137,885 $ (60) $(189,927) $ (587) $ (47,006)
========= ====== ======== ======= ========= ======= =========
</TABLE>
(See Notes to Consolidated Financial Statements.)
<PAGE>
HERFF JONES, INC.
-----------------
CONSOLIDATED STATEMENT OF CASH FLOWS
------------------------------------
FOR THE YEARS ENDED JUNE 27, 1998, JUNE 28, 1997 AND JUNE 29, 1996
------------------------------------------------------------------
(Amounts in thousands of dollars)
<TABLE>
<CAPTION>
1998 1997 1996
--------- --------- ---------
Cash flows from operating activities:
<S> <C> <C> <C>
Net income $ 12,300 $ 10,785 $ 1,958
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization 8,726 7,465 5,802
Amortization and write off of financing cost 1,093 991 1,298
ESOP compensation (before dividend exclusion) 20,148 16,113 17,303
Tax benefit of ESOP (1,320) 151 1,736
Long-term incentive plan expense 4,132 541 ---
Other (62) (9) 5
(Gain) loss on disposal of property, plant and equipment 188 89 (408)
Increase (decrease) in cash generated by changes in assets and
liabilities, net of effects from acquisition of business:
Accounts receivable (8,980) (1,643) 1,595
Inventories (1,563) (1,022) 5,115
Prepaid expenses (505) 835 (911)
Other assets 43 22 298
Trade accounts payable 769 (1,685) 2,099
Salaries and wages 382 980 (437)
Interest Payable (892) (75) 3,996
Customer deposits (647) (348) (2,122)
Commissions payable 5,200 2,007 175
Income taxes payable 2,652 6,347 (7,228)
Deferred income taxes (3,892) (3,423) (2,426)
Other accrued liabilities (551) (685) (1,021)
--------- --------- ---------
Total Adjustments 24,921 26,651 24,869
--------- --------- ---------
Net cash provided by operating activities 37,221 37,436 26,827
--------- --------- ---------
Cash flows from investing activities:
Proceeds from disposal of property, plant and equipment 47 29 503
Capital expenditures (8,815) (7,556) (4,722)
Acquisition of business --- --- (15,332)
Sale of marketable securities --- --- 6,219
--------- --------- ---------
Net cash used by investing activities (8,768) (7,527) (13,332)
--------- --------- ---------
Cash flows from financing activities:
Redemptions of common stock (1,261) (1,307) (463)
Dividends declared (1,296) (906) (3,221)
Decrease in long-term debt (31,192) (9,537) (6,750)
Increase (decrease) in the revolver, net 8,417 (15,039) (21,607)
Advance term loan payment --- (5,957) ---
Financing cost incurred --- --- (5,854)
New borrowings --- --- 216,646
Purchase of shares by the ESOP Trust --- --- (188,278)
Payment on ESOP debt --- --- (69,826)
--------- --------- ---------
Net cash used by financing activities (25,332) (32,746) (79,353)
--------- --------- ---------
Cash and Cash Equivalents:
Net increase (decrease) 3,121 (2,837) (65,858)
Beginning of year 5,843 8,680 74,538
--------- --------- ---------
End of year $ 8,964 $ 5,843 $ 8,680
========= ========= =========
Supplemental cash flow information:
Cash paid during the year for:
Interest $ 17,846 $ 18,570 $ 13,853
Income taxes $ 9,633 $ 3,206 $ 8,415
Dividends --- --- $ 3,374
Acquisition of business:
Assets acquired --- --- $ 24,547
Liabilities assumed --- --- (9,215)
---------
Net purchase price --- --- $ 15,332
</TABLE>
(See Notes to Consolidated Financial Statements.)
<PAGE>
HERFF JONES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
JUNE 27, 1998, JUNE 28, 1997 AND JUNE 29, 1996
----------------------------------------------
(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 - FISCAL 1996 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 recapitalization 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 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.
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.
Fiscal 1997 and 1998 contained 52 weeks. All significant inter-company
transactions and balances have been eliminated in consolidation. Foreign
operations are immaterial.
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.
<PAGE>
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.
INVENTORIES - Inventories are stated at the lower of cost (first-in, first-out
basis) or market with the exception of gold inventories which are stated at the
lower of the last-in, first-out (LIFO) cost method or market.
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
The carrying value of property, plant and equipment is assessed when
circumstances indicate that carrying value may be impaired or not recoverable.
The Company determines such impairment by measuring undiscounted future cash
flows. If an impairment is present, the assets are reported at fair value.
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.
COMMISSIONS - The Company provides advances to 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 eligible active employees. The
Company accounts for its ESOP in accordance with AICPA SOP 93-6, "Employers'
Accounting For Employee Stock Ownership Plans." Accordingly, the cost of the
unallocated shares pledged as collateral is reported as deferred compensation in
the balance sheet. As shares are committed to be released and allocated to
employee accounts, 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.
Shares of the Company's stock are allocated to employees' accounts, based on
dividends paid and compensation levels, in essentially 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 valuations were $32.50 and $26.30 per share and were
performed after the close of the fiscal year ended June 28, 1997 and June 29,
1996, respectively. Management's estimate of the fair value of the Company's
shares as of June 27, 1998 is $39.00 per share. In accordance with the ESOP plan
requirements, the independent valuation of the June 27, 1998 share value will be
prepared and presented to the ESOP Administrative Committee in September, 1998.
<PAGE>
At June 27, 1998 and June 28, 1997, the ESOP shares were as follows:
1998 1997
--------- ----------
Allocated Shares 2,717,922 2,138,316
Shares committed to be released 289,803 289,803
Unreleased shares 6,665,475 7,245,081
--------- ---------
Total ESOP shares 9,673,200 9,673,200
Shares purchased and retired or distributed (145,555) (106,351)
--------- ---------
Net ESOP shares 9,527,645 9,566,849
========= =========
Approximately 36,000 shares may be put back to the Company in fiscal 1999 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 put to
the Company in accordance with the diversification provision.
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 periods (Note 11). FASB No.
123, "Accounting for Stock-Based Compensation" was adopted by the Company in
fiscal 1997. The Company adopted the disclosure requirements of this standard
and continued to follow APB 25, "Accounting for Stock Issued to Employees" for
expense recognition purposes.
EARNINGS PER SHARE - Earnings per share have been computed by dividing net
income by the weighted average number of allocated and committed to be released
ESOP shares outstanding during the year.
INCOME TAXES - 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 FASB No. 109, "Accounting For Income Taxes."
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, which is
periodically re-negotiated, multiplied by years of service. Net periodic pension
cost was determined using the Unit Credit Cost Method prescribed by FASB No. 87,
"Accounting For Pensions." Plan funding is based on the Projected Unit Credit
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. 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)
approximate the carrying values 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 1997 amounts have been reclassified in order to
conform to the 1998 presentation.
NEW ACCOUNTING PRONOUNCEMENTS - The Financial Accounting Standards Board issued
FASB No. 130, "Reporting Comprehensive Income," FASB No. 131, "Disclosure about
Segments of an Enterprise and Related Information," FASB No. 132, "Employers'
Disclosures about Pensions and Other Postretirement Benefits" and FASB No. 133,
"Accounting for Derivative Instruments and Hedging Activities." FASB No. 130
establishes standards for reporting and presenting comprehensive income and its
components. FASB No. 131 establishes standards for defining operating segments
and reporting certain information regarding operating segments. FASB No. 132
refines standard disclosure requirements for pension and other postretirement
benefits. FASB Nos. 130, 131 and 132 are effective in fiscal 1999. The Company
does not believe that FASB Nos. 130, 131 and 132 will have a material impact on
its financial statements. If the Company determines that it has a reporting
obligation under the new standards, the necessary information will be disclosed
as part of the Company's financial reporting when effective. FASB No. 133,
effective in fiscal 2000, establishes accounting and reporting standards for
derivative instruments, including certain derivatives embedded in contracts and
for hedging activities. The Company does not believe that FASB No. 133 will have
a material impact on its financial statements.
<PAGE>
NOTE 4 - INVENTORIES
- --------------------
Inventories consist of the following:
1998 1997
------- -------
Raw materials and supplies
(includes gold) $17,023 $16,736
Work-in-process 14,169 13,187
Finished goods 8,334 8,040
------- -------
$39,526 $37,963
======= =======
Gold inventories recorded at the lower of LIFO cost or market at June 27, 1998
and June 28, 1997 are $781 and $1,325, respectively, and approximate replacement
cost at both dates.
NOTE 5 - PROPERTY, PLANT AND EQUIPMENT
- --------------------------------------
Property, plant and equipment consist of the following:
1998 1997
-------- -------
Buildings and leasehold improvements $22,394 $22,262
Machinery and equipment 55,190 51,577
Furniture and fixtures 4,811 3,956
Rental cap & gown stock 12,488 11,483
-------- -------
94,883 89,278
Less - Accumulated depreciation (51,029) (45,364)
-------- -------
43,854 43,914
Land 3,064 3,065
Construction in progress 1,950 2,035
-------- -------
$ 48,868 $49,014
======== =======
NOTE 6 - FINANCING
- ------------------
Long-term debt consists of the following:
1998 1997
-------- --------
Senior Bank Facility (Revolver) $ 8,417 $ ---
Senior Bank Facility (Term Loan) 27,379 37,756
Senior Subordinated Notes 99,185 120,000
1994 Industrial Development
Revenue Bonds Due in 2019 7,600 7,600
-------- --------
142,581 165,356
Less: current portion (19,678) (10,377)
-------- --------
Long-term debt $122,903 $154,979
======== ========
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 27, 1998, the fair value of the Senior Subordinated Notes is
approximately $107,000. The notes are unsecured but contain certain restrictive
covenants, including limitations on indebtness, liens, leases, dividends, stock
purchases and certain investments.
<PAGE>
Also on August 22, 1995, the Company entered into the Revolving Credit and Term
Loan Agreement, pursuant to which financial institutions have provided the
Company with a $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 of increasing amounts
which commenced December 31, 1995. The cash flow pattern and expectations of the
Company's highly seasonal business result in the classification, at June 27,
1998 of the Revolving Credit Facility as a current liability, although payment
within the next year is not required.
All loans made under the Term Loan and the Revolving Credit Facility bear
interest either at the BankBoston, N.A., Alternate Base rate or the Eurodollar
rate, plus, in each case, the "Applicable Margin," (adjusted annually depending
on the ratio of the Company's senior debt to certain cash flows for the
preceding fiscal year). 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 on the maximum amount available to be drawn under each letter of
credit plus a fee of .20% on the maximum amount available to be drawn under each
letter of credit upon issuance. The Term Loan rate on June 27, 1998 was 6.66%.
The Revolving Credit Facility rate on June 27, 1998 was 6.63%.
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 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 27, 1998 was 3.7%. They are
unsecured but are backed by an irrevocable Letter of Credit.
The Revolving Credit and Term Loan Agreement and the Letters of Credit 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 indebtedness, (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. A required advance
payment on the Term Loan of $5,957 was made in the first quarter of 1997 in
addition to the scheduled amortization payments. Subsequently, a 1997 amendment
eliminated the requirement for advanced payments.
Long-term debt is scheduled to be repaid in the following fiscal years:
1999 $ 19,678
2000 12,806
2001 3,312
2002 ---
2003 ---
Thereafter 106,785
--------
$142,581
========
NOTE 7 - COMMON STOCK
- ---------------------
As a consequence of the August 22, 1995 recapitalization plan, the number of
common shares outstanding immediately after the recapitalization took place was
1,236,494, as compared to 9,618,996 immediately preceding the recapitalization.
In accordance with the provisions of AICPA SOP 93-6, "Employers' Accounting For
Employee Stock Ownership Plans," for purposes of computing a weighted average
number of common shares outstanding, ESOP shares that have been allocated and
those that have been committed to be released are considered outstanding.
Unreleased ESOP shares are not considered outstanding.
Earnings per share for fiscal 1996 have been restated in conjunction with the
Company's fiscal 1998 adoption of FASB No. 128, "Earnings Per Share." The
restated amount was computed using the weighted average of actual shares
outstanding during the year.
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 excess of cost over market, net of the related tax
effect, to the extent of the previous net charges recorded. Thereafter, the
excess will be credited to retained earnings.
NOTE 8 - INCOME TAXES
- ---------------------
The provision for income taxes charged to income before extraordinary items was
as follows:
<TABLE>
<CAPTION>
1998 1997 1996
-------- -------- --------
Current income tax expense:
<S> <C> <C> <C>
Federal $ 10,680 $ 8,874 $ 7,535
State and local 1,471 1,167 1,075
-------- -------- --------
Total current income tax expense 12,151 10,041 8,610
Deferred income tax expense:
Federal (3,361) (3,079) (3,498)
State and local (701) (670) (635)
-------- -------- --------
Total deferred income tax expense (4,062) (3,749) (4,133)
Benefit of state operating loss carryforward --- --- (383)
-------- -------- --------
Total tax provision (before extraordinary items) $ 8,089 $ 6,292 $ 4,094
======== ======== ========
</TABLE>
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:
<TABLE>
<CAPTION>
1998 1997 1996
------ ------ ------
<S> <C> <C> <C>
U.S. statutory rate 35.0% 35.0% 35.0%
State income taxes, net of federal tax benefit 2.2 1.9 1.5
Dividend on ESOP stock (2.0) (1.9) (2.5)
All other, net 1.4 1.8 .3
----- ------ ------
Financial reporting rate (before extraordinary items) 36.6% 36.8% 34.3%
===== ====== ======
</TABLE>
<PAGE>
Deferred tax assets (liabilities) are comprised of the following:
1998 1997
-------- --------
Deferred tax assets:
Estimated product returns $ 1,132 $ 1,135
Medical insurance 596 396
Inventory cost capitalization 328 462
Bad debts 198 743
Vacation pay 825 834
Workers compensation 798 873
ESOP 11,115 8,656
Management incentive 1,851 214
Other 815 840
-------- --------
Total assets 17,658 14,153
Deferred tax liabilities:
Depreciation (4,395) (4,757)
Other (708) (733)
-------- --------
Total liabilities (5,103) (5,490)
-------- --------
Net deferred tax asset $ 12,555 $ 8,663
======== ========
No valuation allowance was deemed necessary at June 27, 1998 and June 28, 1997.
NOTE 9 - EMPLOYEE RETIREMENT PLANS
- ----------------------------------
ESOP compensation expense was $19,001 (1998), $15,357 (1997), and $16,665
(1996). ESOP compensation expense is based upon the estimated fair value of
shares committed to be released plus administrative costs, offset by dividends
on allocated ESOP shares. The 1998 expense of $19,001 was net of $1,296 in
dividends paid to the Plan. The 1997 expense of $15,357 was net of $906 in
dividends paid to the Plan. The 1996 expense of $16,665 was net of $865 in
dividends paid to the Plan.
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 $2,051 in 1998, $1,875 in 1997 and $749 in 1996.
NOTE 10 - JEWELRY BARGAINING UNIT PENSION PLAN
- ----------------------------------------------
Pre-tax pension expense of $33 for 1998, $13 for 1997 and $97 for 1996 consist
of the following components:
1998 1997 1996
------- ------- -------
Service cost $ 200 $ 186 $ 167
Interest cost 654 618 595
Actual return on assets (2,911) (1,098) (1,631)
Difference between assumed return
and actual return on assets 2,139 371 1,035
Amortization of over-funded position
and unrecognized prior service (49) (64) (69)
------- ------- -------
$ 33 $ 13 $ 97
======= ======= =======
Assumptions used in determining the net pension expense for 1998, 1997 and 1996
included a discount rate of 7.5% and a rate of return on plan assets of 8.5%.
<PAGE>
The following table sets forth the plan's funded status and amounts recognized
in the company's consolidated balance sheet at June 27, 1998 and June 28, 1997:
1998 1997
-------- --------
Projected benefit obligation, including
vested benefits of $9,595 (1998)
and $8,616 (1997) $(10,007) $ (9,010)
Plan assets at fair value, primarily listed
stocks and corporate obligations 11,709 9,388
-------- --------
Over-funded position 1,702 378
Unamortized over-funded position (553) (692)
Unrecognized (gain) loss on assets (1,431) (25)
Unrecognized prior service cost 769 859
-------- --------
Total pension asset $ 487 $ 520
======== ========
The Company's pension obligation and assets were valued as of March 31, 1998 for
fiscal 1998 and as of March 31, 1997 for fiscal 1997.
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 number of units that may be outstanding
subject to the Incentive Plan is 1,500,000. 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 corresponds 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 each five-year performance cycle is completed provided they are
employees of the Company. The award will be equal to the appreciation in value
of the participant's units in excess of a minimum amount ($41.48, $33.56 and
$27.12 for the units granted in 1998, 1997 and 1996, respectively) 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
each performance cycle.
Through June 27, 1998, the Company has made grants totaling 1,510,000 units to
participating employees under three performance cycles; of which, 505,000,
493,500 and 501,500 units are outstanding for the 1996, 1997, and 1998
performance cycles, respectively. The units granted in fiscal 1996 and 1997 had
an estimated value of $11.88 and $5.44 each, respectively, while the units
granted in fiscal 1998 had no value at June 27, 1998 because the minimum value
at the end of the year was greater than the latest estimated share value.
Compensation expense under the Incentive Plan was $4,132 in 1998, $541 in 1997
and $0 in 1996.
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 "Bank") 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 Bank
and the Broker until Herff Jones has paid for amounts used. The amount of
consigned gold inventory with the Bank 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 Bank 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 ($6,064 at June 27, 1998 and $6,876 at June 28, 1997) for which
appropriate insurance coverage has been obtained.
Herff Jones is involved in legal and environmental matters 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.
NOTE 14 - ACQUISITION
- ---------------------
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.
NOTE 15 - EARLY EXTINGUISHMENT OF DEBT
- --------------------------------------
The Revolving Credit and Term Loan Agreement (Note 6) permits the Company to
repurchase limited amounts of its Senior Subordinated Notes subject to certain
performance parameters. During fiscal 1998, the Company elected to repurchase
$20,815 of such notes at a premium of $2,187. As a result, the Company recorded
a net-of-tax charge of $1,715 reflecting the premium cost and the write-off of
previously deferred financing costs.
<PAGE>
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.
(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 Officer, )
Lawrence F. Fehr Secretary and Director )
)
)
(3) A Majority of the Board )September 11, 1998
of Directors: )
)
/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. )
<PAGE>
Herff Jones, Inc. and Subsidiaries Schedule VIII
Valuation and
Qualifying Accounts and
Reserves For the Years Ended
June 27, 1998, June 28, 1997
and June 29, 1996
(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 1996 $3,019 $2,466 $602 $4,883
Fiscal Year 1997 $4,883 $1,310 $439 $5,754
Fiscal Year 1998 $5,754 $ 559 $569 $5,744
==============================================================================================================================
</TABLE>
<PAGE>
Herff Jones, Inc. and Subsidiaries Schedule X
Supplemental Statement of Income Information
For the Years Ended June 27, 1998, June 28, 1997 and June 29, 1996
(amounts in thousands)
================================================================================
Item Charged to Cost and Expenses
- --------------------------------------------------------------------------------
Maintenance and repairs
Fiscal Year 1996 $4,028
Fiscal Year 1997 $4,741
Fiscal Year 1998 $4,898
================================================================================
