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 March 27, 1999
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 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
- --------------------------------------------------------------------------------
(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 May 7, 1999:
Class
Common Stock, without par value 9,522,114
<PAGE>
Voluntary filing - effective January 30, 1998, Herff Jones, Inc. is not subject
to filing requirements of the Securities Exchange Act of 1934.
INDEX
Part I. - Financial Information Page No.
Consolidated Statement of Operations -
Third Quarter and Nine Months Ended March 27, 1999
and March 28, 1998 3
Consolidated Balance Sheet -
As of March 27, 1999, June 27, 1998 and March 28, 1998 4
Consolidated Statement of Cash Flows -
Nine Months Ended March 27, 1999 and March 28, 1998 5
Notes to Consolidated Financial Statements 6 - 8
Management's Discussion and Analysis of
Financial Condition and Results of Operations 9 - 13
Part II. - Other Information 14
Item 6. Exhibits and Reports on Form 8-K
2
<PAGE>
Part I - Financial Information
Herff Jones, Inc.
Consolidated Statement of Operations
(Amounts in thousands of dollars, except per share data)
(Unaudited)
<TABLE>
<CAPTION>
Third Quarter Ended Nine Months Ended
---------------------------------- ----------------------------------
March 27, 1999 March 28, 1998 March 27, 1999 March 28, 1998
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Net sales $ 68,968 $ 64,114 $ 199,225 $ 188,752
Cost of sales (excludes ESOP compensation) 30,930 29,013 98,761 94,672
Selling, general, and administrative expenses
(excludes ESOP compensation) 38,446 31,245 100,419 80,960
ESOP compensation 6,911 5,125 19,842 14,682
----------- ----------- ----------- -----------
Income (loss) from operations (7,319) (1,269) (19,797) (1,562)
Interest income 12 7 95 59
Interest expense 3,616 4,492 11,189 13,583
----------- ----------- ----------- -----------
Income (loss) before income taxes
and extraordinary item (10,923) (5,754) (30,891) (15,086)
Income taxes 5,549 2,097 15,817 5,497
----------- ----------- ----------- -----------
Net income (loss) before extraordinary item (5,374) (3,657) (15,074) (9,589)
Extraordinary loss on early extinguishment
of debt, net of taxes --- (743) (685) (743)
----------- ----------- ----------- -----------
Net income (loss) $ (5,374) $ (4,400) $ (15,759) $ (10,332)
=========== =========== =========== ===========
Earnings per common share:
Income (loss) before extraordinary item $ (1.66) $ (1.35) $ (4.90) $ (3.79)
Extraordinary item --- (0.28) (0.22) (0.28)
----------- ----------- ----------- -----------
Net income (loss) $ (1.66) $ (1.63) $ (5.12) $ (4.07)
=========== =========== =========== ===========
Weighted average number of common shares outstanding 3,242,130 2,700,878 3,077,028 2,535,606
=========== =========== =========== ===========
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
3
<PAGE>
Herff Jones, Inc.
Consolidated Balance Sheet
As of March 27, 1999, June 27, 1998, and March 28, 1998
(Amounts in thousands of dollars)
<TABLE>
<CAPTION>
(Unaudited) (Unaudited)
March 27, 1999 June 27, 1998 March 28, 1998
-------------- ------------- --------------
<S> <C> <C> <C>
Assets:
Current Assets
Cash and cash equivalents $ 3,523 $ 8,964 $ 3,617
Accounts receivable 64,545 64,689 58,625
Inventories 60,206 39,526 58,484
Prepaid expense 8,673 2,321 8,378
Deferred income taxes 10,887 10,887 9,106
--------- --------- ---------
Total Current Assets 147,834 126,387 138,210
Non-Current Assets
Property, plant, and equipment 109,215 99,897 101,740
Accumulated depreciation (59,266) (51,029) (51,059)
--------- --------- ---------
Net Property, Plant, and Equipment 49,949 48,868 50,681
Deferred income taxes 1,668 1,668 --
Deferred financing cost, net and other assets 3,548 3,454 3,925
--------- --------- ---------
Total Non-Current Assets 55,165 53,990 54,606
Total Assets $ 202,999 $ 180,377 $ 192,816
========= ========= =========
Liabilities and Shareholders' Equity:
Current Liabilities
Trade accounts payable $ 8,207 $ 6,625 $ 7,186
Salaries and wages payable 6,177 5,430 5,687
Interest payable 1,288 4,190 1,712
Customer deposits 58,803 18,861 53,369
Commissions payable 14,830 22,064 12,685
Income taxes accrued (16,187) 12,199 (5,036)
Other accrued liabilities 8,965 9,201 8,675
Current portion of long term debt 46,000 19,678 38,309
--------- --------- ---------
Total Current Liabilities 128,083 98,248 122,587
Non-Current Liabilities
Other 17,919 6,232 4,679
Long term debt 101,044 122,903 137,639
Deferred income taxes -- -- 442
--------- --------- ---------
Total Non-Current Liabilities 118,963 129,135 142,760
Total Liabilities 247,046 227,383 265,347
Shareholders' Equity (Deficit)
Common stock 5,679 5,683 5,691
Retained earnings 127,909 137,885 117,034
Deferred compensation (177,542) (189,927) (194,055)
Foreign currency translation (93) (60) (29)
Excess of cost over market, net (shares committed
to be released) -- (587) (1,172)
--------- --------- ---------
Total Shareholders' Equity (Deficit) (44,047) (47,006) (72,531)
Total Liabilities and Shareholders' Equity (Deficit) $ 202,999 $ 180,377 $ 192,816
========= ========= =========
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
4
<PAGE>
Herff Jones, Inc.
Consolidated Statement of Cash Flows
(Amounts in thousands of dollars)
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
-------------------------------
March 27, 1999 March 28, 1998
-------------- --------------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $(15,759) $(10,332)
Adjustments to reconcile net income (loss) to net cash (used)
provided by operating activities:
Depreciation and amortization 6,974 5,747
Amortization and write off of financing cost 655 665
ESOP compensation (before dividend exclusion) 20,628 15,105
Tax benefit (effect) of ESOP (576) (990)
Long-term incentive plan expense 9,375 2,511
Other (33) (31)
(Gain) loss on disposal of property, plant and equipment, net 6 (1)
Increase (decrease) in cash generated by changes in assets
and liabilities
Accounts receivable 144 (2,916)
Inventories (20,680) (20,521)
Prepaid expenses (6,352) (6,562)
Trade accounts payable 1,582 1,330
Salaries and wages 747 639
Interest payable (2,902) (3,370)
Customer deposits 39,942 33,861
Commissions payable (7,234) (4,179)
Income taxes payable (28,386) (14,583)
Deferred income taxes -- (1)
Other accrued liabilities 2,076 (1,009)
Other assets (749) --
-------- --------
Total adjustments 15,217 5,695
-------- --------
Net cash (used) provided by operating activities (542) (4,637)
Cash flows from investing activities:
Proceeds from disposal of property, plant and equipment 16 2
Capital expenditures (8,077) (7,415)
-------- --------
Net cash (used) provided by investing activities (8,061) (7,413)
Cash flows from financing activities:
Redemption of common shares (4) (12)
Premium on stock redemption (345) (186)
Dividends declared (952) (570)
Increase (decrease) in revolver, net 33,635 27,269
Decrease in long term debt (29,172) (16,677)
-------- --------
Net cash (used) provided by financing activities 3,162 9,824
Cash and cash equivalents:
Net increase (decrease) (5,441) (2,226)
Beginning of period 8,964 5,843
-------- --------
End of period $ 3,523 $ 3,617
======== ========
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
5
<PAGE>
Herff Jones, Inc.
Notes to Unaudited Consolidated Financial Statements
Nine Months Ended March 27, 1999
(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 March 27, 1999, and the results of its operations
and cash flows for the three and nine month periods ended March 27, 1999.
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 third fiscal quarter is the third highest 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
March 27, 1999 June 27, 1998 March 28, 1998
-------------- ------------- --------------
$4,226 $ 5,744 $4,654
Note 3 - Inventories
The components of inventory balances are summarized below:
<TABLE>
<CAPTION>
March 27, 1999 June 27, 1998 March 28, 1998
-------------- ------------- --------------
<S> <C> <C> <C>
Raw materials and supplies (includes gold) $19,366 $17,023 $19,467
Work-in-process 29,010 14,169 27,446
Finished goods 11,830 8,334 11,571
------- ------- -------
$60,206 $39,526 $58,484
======= ======= =======
</TABLE>
6
<PAGE>
<TABLE>
<CAPTION>
Note 4 - Financing
March 27, 1999 June 27, 1998 March 28, 1998
-------------- ------------- --------------
Long-Term Debt consists of the following:
<S> <C> <C> <C>
Senior Bank Facility (Revolver) $ 33,635 $ 8,417 $ 27,269
Senior Bank Facility (Term) 18,989 27,379 30,029
Senior Subordinated Notes 86,820 99,185 111,050
1994 Industrial Development
Revenue Bonds Due in 2019 7,600 7,600 7,600
--------- --------- ---------
147,044 142,581 175,948
Less: Current Portion (46,000) (19,678) (38,308)
--------- --------- ---------
Long-Term Debt $ 101,044 $ 122,903 $ 137,640
========= ========= =========
</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>
Common Stock Foreign Total
------------------- 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) - ($49,033)
- --------------------------- ========= ====== ======== ===== ========== ===== ========
Stock Purchases (4,446) (2) (191) - - - (193)
Dividends declared on allocated
shares ($.35/share) - - (952) - - - (952)
Foreign currency translation
adjustment - - - (22) - - (22)
Shares committed to be released - - 2,748 - 4,128 - 6,876
Net income for the quarter - - (2,086) - - - (2,086)
--------- ------ -------- ----- ---------- ----- --------
Balance December 26, 1998 9,525,710 $5,681 $130,689 ($110) ($181,670) - ($45,410)
- -------------------------- ========= ====== ======== ====== ========== ===== ========
Stock Purchases (3,596) (2) (154) - - - (156)
Foreign currency translation
adjustment - - - 17 - - 17
Shares committed to be released - - 2,748 - 4,128 - 6,876
Net income for the quarter - - (5,374) - - - (5,374)
--------- ------ -------- ----- ---------- ----- --------
Balance March 27, 1999 9,522,114 $5,679 $127,909 ($93) ($177,542) - ($44,047)
- ----------------------- ========= ====== ======== ===== ========== ===== ========
</TABLE>
7
<PAGE>
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. Thereafter, the excess is
credited to retained earnings.
Note 7 - Comprehensive Income
The comprehensive income (loss) for the third quarter of fiscal 1999 and fiscal
1998 was ($5,357) and ($963), respectively, and for the first nine months of
1999 and 1998 was ($15,852) and ($10,396), respectively. These amounts include
the reported net loss adjusted by the non-cash effect of changes in the
cumulative translation adjustment.
Note 8 - Extraordinary Item
During the first nine months of fiscal 1999, the Company repurchased $12.4
million of its Senior Subordinated Notes from existing noteholders at a premium.
As a result, the Company recorded a $.7 million charge reflecting the premium
cost and the write off of previously deferred financing costs, net of the
applicable tax benefit of $.5 million for fiscal 1999 and $.4 million for fiscal
1998.
Note 9 - Income Taxes
Income taxes, excluding the extraordinary item, are computed on the basis of the
anticipated annual effective tax rate of 50.8% 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 financial 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. Substantially, all of the increase in
the estimated effective tax rate to slightly over 51.0% for fiscal 1999 from
slightly over 36.0% in fiscal 1998 is attributable to this item for both the
third quarter and the nine month period.
8
<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, fiscal third quarter sales are the weakest period except
for the first quarter. 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 third quarter ended March 27, 1999 and March 28, 1998
General. Net sales rose 7.6% to $69.0 million in fiscal 1999 from $64.1
million in fiscal 1998. Operating profit decreased to a loss of $7.3 million in
fiscal 1999 from a loss of $1.3 million in fiscal 1998. Net income decreased to
a loss of $5.4 million in fiscal 1999 from a loss of $4.4 million in fiscal
1998.
Net Sales. Net sales increased $4.9 million or 7.6% to $69.0 million in
fiscal 1999 from $64.1 million in fiscal 1998. Such increases were due primarily
to modest price increases in all product lines and unit growth in the Jewelry
and Fine Paper product lines, partially offset by lower unit sales in the
Education product line.
Cost Of Sales. Cost of sales increased $1.9 million or 6.6% to $30.9
million in fiscal 1999 from $29.0 million in fiscal 1998. Cost of sales as a
percentage of sales decreased to 44.8% in fiscal 1999 from 45.3% in fiscal 1998.
The decrease was due primarily to improvement in operating performance in the
Jewelry product line.
9
<PAGE>
Selling, General And Administrative Expenses. Selling, general and
administrative expenses increased $7.2 million or 23.0% to $38.4 million in
fiscal 1999 from $31.2 million in fiscal 1998. Such expense as a percentage of
sales is 55.7% in fiscal 1999, compared to 48.7% in fiscal 1998. The increase
was predominantly attributable to increases in Long-Term Management Incentive
Plan expense and information technology consulting, which accounted for
approximately 21% and 24%, respectively, of the increase, coupled with higher
commission and selling expenses resulting from increased fiscal 1999 sales.
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 $.9 million to $3.6
million in the third quarter of fiscal 1999 from $4.5 million in the
corresponding period of fiscal 1998 due primarily to a reduction of average debt
outstanding.
Income Tax Benefit. The third quarter income tax benefit was $5.5
million in fiscal 1999, compared to $2.1 million in fiscal 1998, due to the
higher fiscal 1999 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 financial reporting purposes; however, ESOP compensation in excess of share
cost is not deductible for income tax purposes.
Extraordinary Item. During the third quarter of fiscal 1998, the
Company repurchased $9.0 million of its Senior Subordinated Notes from existing
noteholders at a premium. As a result, the Company recorded a $.7 million charge
reflecting the premium cost and the write off of previously deferred financing
costs, net of the applicable tax benefit. There was no repurchase activity in
the third quarter of fiscal 1999.
Net Loss. The third quarter net loss was $5.4 million, compared to $4.4
million in fiscal 1998. The unfavorable comparison was due primarily to the
aforementioned increases in selling, general and administrative expenses and
higher ESOP compensation cost, partially offset by the impact of the higher
effective tax rate, marginal improvement in gross profit and the absence of
Senior Subordinated Note repurchases, all as discussed above.
For the nine months ended March 27, 1999 and March 28, 1998
General. Net sales rose 5.5% to $199.2 million in fiscal 1999 from
$188.8 million in fiscal 1998. Operating losses increased to $19.8 million in
fiscal 1999, compared to $1.6 million in fiscal 1998. Net losses increased to
$15.8 million in fiscal 1999 from $10.3 million in fiscal 1998.
Net sales. Net sales increased $10.4 million or 5.5% to $199.2 million
in fiscal 1999. The increase was due primarily to modest price increases in all
product lines and unit growth in the Jewelry, Cap & Gown, Fine Paper and
Photography product lines.
Cost of Sales. Cost of sales increased $4.1 million or 4.3% to $98.8
million in fiscal 1999 from $94.7 million in fiscal 1998. Cost of sales as a
percentage of sales decreased to 49.6% in fiscal 1999 from 50.2% in fiscal 1998.
The decrease was due to improvement in operating performance in the Photography,
Education and Jewelry product lines.
10
<PAGE>
Selling, General And Administrative Expenses. Selling, general and
administrative expenses increased $19.4 million or 24.0% to $100.4 million in
fiscal 1999 from $81.0 million in fiscal 1998. The increase was predominantly
attributable to increases in Long-Term Management Incentive Plan expense and
information technology consulting, which accounted for approximately 35% and
13%, respectively, of the increase, coupled with higher commission and selling
expenses resulting from increased fiscal 1999 sales.
ESOP Compensation. ESOP compensation increased $5.2 million to $19.8
million in fiscal 1999 from $14.6 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 $2.4 million to $11.2
million in fiscal 1999 from $13.6 million in fiscal 1998, due primarily to a
reduction of average debt outstanding.
Income Tax Benefit. The income tax benefit for the period is $15.8
million for fiscal 1999, compared to $5.5 million in fiscal 1998, due to the
increase in the loss before 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
financial reporting purposes; however, ESOP compensation in excess of share cost
is not deductible for income tax purposes.
Extraordinary Item. During the nine months ended March 27, 1999, the
Company repurchased $12.4 million of its Senior Subordinated Notes from existing
noteholders at a premium, compared to a repurchase of $9.0 million during the
same period in the prior year. As a result, the Company recorded a $.7 million
charge in each year reflecting the premium cost and the write-off of previously
deferred financing costs, net of the applicable tax benefit.
Net Loss. The net loss for the period increased to $15.8 million from
$10.3 million in fiscal 1998. The increase was due primarily to the
aforementioned increases in selling, general and administrative and ESOP
compensation expenses, partially offset by the higher effective tax rate and the
impact of the marginally increased gross profit.
FINANCIAL CONDITION AND LIQUIDITY
The Company's business is highly seasonal. Historically the first nine
months require 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 spring
shipments of graduation related products; 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
and the receipt of customer deposits for products that ship in the spring.
The cash flow pattern and expectations of the Company's highly seasonal
business result in the classification, at March 27, 1999, of $33.6 million 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.
11
<PAGE>
Effective May 6, 1999, the Company restated its prior bank revolving
credit facility. The term portion of the facility, with $19.0 million remaining
outstanding, was not changed. The amount available under the revolving facility
is $60.0 million through July 1999; $90.0 million from August 1999 through July
2000; and, $110.0 million from August 2000 through May 6, 2004. The restated
revolver is expected to provide adequate liquidity for the Company's operations
at least through fiscal 2000, including funds necessary to prepay or repurchase
Subordinated Notes from time-to-time.
Capital expenditures were $8.1 million and $7.4 million in the first
nine months of fiscal 1999 and 1998, respectively. The increase from the prior
year is mostly related to information technology purchases.
Other non-current liabilities were $17.9 million at March 27, 1999,
compared to $4.7 million at March 28, 1998. The increase is primarily due to an
increase in the accrual of expenses for the Long-Term Management Incentive
Plan expense.
Income taxes accrued are a negative $16.2 million at March 27, 1999,
compared to $12.2 million payable at June 27, 1998 and a negative $5.0 million
at March 28, 1998. 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 year. The increased tax benefit at the
end of the third quarter, compared to the prior year third 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.
Cash used in operating activities was $.5 million for the nine months
ended March 27, 1999, compared to $4.6 million for the nine months ended March
28, 1998, as described below.
Net losses were $15.8 million in the nine months of fiscal 1999,
compared to $10.3 million in fiscal 1998. This was primarily attributable to
increases in Long-Term Management Incentive Plan expense, ESOP compensation
expense and information technology consulting, partially offset by increased
gross profit and an increased tax benefit.
Customer deposits increased $39.9 million in the first nine months of
fiscal 1999, compared to $33.8 million in fiscal 1998. The larger increase was
attributable to increases in deposits for spring sales in the Yearbook and Fine
Paper product lines.
Income taxes payable decreased $28.4 million in fiscal 1999, compared
to a decline of $14.6 million in fiscal 1998. The decline was primarily
attributable to the increased pre-tax loss of the Company in fiscal 1999,
compared to the pre-tax loss in fiscal 1998, the higher effective tax rate as
previously discussed, and higher tax payments in fiscal 1999 relating to the
fiscal 1998 earnings improvement over fiscal 1997.
Net cash provided by financing activities was $3.2 million in fiscal
1999, compared to $9.8 million in fiscal 1998. During the nine months of fiscal
1999, the Company made its scheduled payment on long-term debt and repurchased
$12.4 million of Senior Subordinated Notes with funds drawn on its Revolving
Credit Agreement.
12
<PAGE>
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 was scheduled for completion in fiscal 1999. The implementation plan for
these four systems is slightly behind schedule, but completion by December 31,
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 with compliant systems.
The Company maintains material business relationships with its
suppliers of raw materials, services and utilities. The Company will conduct 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 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 is approximately $1.5 million, which
includes $1.0 million to purchase and implement new hardware and software that
was capitalized during fiscal 1998 and $.5 million that was expensed as incurred
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.
The Company is currently considering contingency planning which would
address business operations if the systems are not completed by January 2000. A
contingency plan would be implemented at such time as it is determined that
installation of the replacement systems will not be completed before December
31, 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; however, all significant vendors are
being contacted regarding their preparedness for operations after December 1999.
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.
13
<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
May 11, 1999
