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 December 26, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Transition Period From __________ to __________
Commission File Number 33-96680
HERFF JONES, INC.
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(Exact Name of registrant as specified in its charter)
INDIANA 35-1637714
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(State or other Jurisdiction of (I.R.S. Employer Identification Number)
Incorporation or Organization)
4501 West 62nd Street, Indianapolis, Indiana 46268
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(Address of principal executive offices) (Zip Code)
(317) 297-3740
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(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes No X *
----- ------
* Effective January 30, 1998, registrant is no longer subject to such filing
requirements.
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Number of shares outstanding of the issuer's Common Stock as of February 8,
1999:
Class
Common Stock, without par value 9,525,710
<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 -
Second Quarter and Six Months Ended December 26, 1998
and December 27, 1997 3
Consolidated Balance Sheet -
As of December 26, 1998, June 27, 1998 and December 27, 1997 4
Consolidated Statement of Cash Flows -
Six Months Ended December 26, 1998 and December 27, 1997 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
<PAGE>
Part I - Financial Information
Herff Jones, Inc.
Consolidated Statement of Operations
(Amounts in thousands of dollars, except per share data)
(Unaudited)
<TABLE>
<CAPTION>
Second Quarter Ended Six Months Ended
------------------------------------- -------------------------------------
December 26, 1998 December 27, 1997 December 26, 1998 December 27, 1997
----------------- ----------------- ----------------- -----------------
<S> <C> <C> <C> <C>
Net sales $ 77,508 $ 74,574 $ 130,257 $ 124,638
Cost of sales (excludes ESOP compensation) 38,105 35,984 67,831 65,659
Selling, general, and administrative
expenses (excludes ESOP compensation) 33,463 27,586 61,973 49,715
ESOP compensation 6,010 4,502 12,931 9,557
----------- ----------- ----------- -----------
Income (loss) from operations (70) 6,502 (12,478) (293)
Interest income 5 1 83 52
Interest expense 3,781 4,621 7,573 9,091
----------- ----------- ----------- -----------
Income (loss) before income taxes
and extraordinary item (3,846) 1,882 (19,968) (9,332)
Income taxes 1,997 (686) 10,268 3,400
----------- ----------- ----------- -----------
Net income (loss) before extraordinary item (1,849) 1,196 (9,700) (5,932)
Extraordinary loss on early
extinguishment of debt, net of taxes (237) -- (685) --
----------- ----------- ----------- -----------
Net income (loss) $ (2,086) $ 1,196 $ (10,385) $ (5,932)
=========== =========== =========== ===========
Earnings per common share:
Income (loss) before extraordinary item $ (0.60) $ 0.47 $ (3.23) $ (2.41)
Extraordinary item (0.07) -- (0.23) --
----------- ----------- ----------- -----------
Net income (loss) $ (0.67) $ 0.47 $ (3.45) $ (2.41)
=========== =========== =========== ===========
Weighted average number of
common shares outstanding 3,102,872 2,560,604 3,006,270 2,464,775
=========== =========== =========== ===========
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
<PAGE>
Herff Jones, Inc.
Consolidated Balance Sheet
As of December 26, 1998, June 27, 1998, and December 27, 1997
(Amounts in thousands of dollars)
<TABLE>
<CAPTION>
(Unaudited) (Unaudited)
December 26, 1998 June 27, 1998 December 27, 1997
----------------- ------------- -----------------
<S> <C> <C> <C>
Assets:
Current Assets
Cash and cash equivalents $ 76 $ 8,964 $ 1,117
Accounts receivable 49,663 64,689 45,482
Inventories 47,926 39,526 46,241
Prepaid expense 7,562 2,321 6,875
Deferred income taxes 10,887 10,887 9,106
--------- --------- ---------
Total Current Assets 116,114 126,387 108,821
Non-Current Assets
Property, plant, and equipment 104,990 99,897 100,439
Accumulated depreciation (55,528) (51,029) (49,217)
--------- --------- ---------
Net Property, Plant, and Equipment 49,462 48,868 51,222
Deferred income taxes 1,669 1,668 --
Deferred financing cost, net and other assets 2,921 3,454 4,296
--------- --------- ---------
Total Non-Current Assets 54,052 53,990 55,518
Total Assets $ 170,166 $ 180,377 $ 164,339
========= ========= =========
Liabilities and Shareholders' Equity:
Current Liabilities
Trade accounts payable $ 6,970 $ 6,625 $ 5,546
Salaries and wages payable 5,638 5,430 5,089
Interest payable 3,648 4,190 5,096
Customer deposits 35,089 18,861 33,499
Commissions payable 6,373 22,064 6,466
Income taxes accrued (10,442) 12,199 (3,349)
Other accrued liabilities 7,570 9,201 7,031
Current portion of long term debt 43,892 19,678 24,626
--------- --------- ---------
Total Current Liabilities 98,738 98,248 84,004
Non-Current Liabilities
Other 12,482 6,232 3,129
Long term debt 104,356 122,903 149,459
Deferred income taxes -- -- 442
--------- --------- ---------
Total Non-Current Liabilities 116,838 129,135 153,030
Total Liabilities 215,576 227,383 237,034
Shareholders' Equity (Deficit)
Common stock 5,673 5,683 5,694
Retained earnings 130,697 137,885 121,583
Deferred compensation (181,670) (189,927) (198,183)
Foreign currency translation (110) (60) (40)
Excess of cost over market, net (shares committed
to be released) -- (587) (1,749)
--------- --------- ---------
Total Shareholders' Equity (Deficit) (45,410) (47,006) (72,695)
Total Liabilities and Shareholders' Equity (Deficit) $ 170,166 $ 180,377 $ 164,339
========= ========= =========
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
<PAGE>
Herff Jones, Inc.
Consolidated Statement of Cash Flows
(Amounts in thousands of dollars)
(Unaudited)
<TABLE>
<CAPTION>
Six Months Ended
-------------------------------------
December 26, 1998 December 27, 1997
----------------- -----------------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $(10,385) $ (5,932)
Adjustments to reconcile net income (loss) to net cash (used)
provided by operating activities:
Depreciation and amortization 4,625 3,915
Amortization and write off of financing cost 536 294
ESOP compensation (before dividend exclusion) 13,752 9,740
Tax benefit (effect) of ESOP (576) (330)
Long-term incentive plan expense 6,250 890
Other (50) (42)
(Gain) loss on disposal of property, plant and equipment, net (10) (1)
Increase (decrease) in cash generated by changes in assets
and liabilities
Accounts receivable 15,026 10,227
Inventories (8,400) (8,278)
Prepaid expenses (5,241) (5,059)
Trade accounts payable 345 (310)
Salaries and wages 208 41
Interest payable (542) 14
Customer deposits 16,228 13,991
Commissions payable (15,691) (10,398)
Income taxes payable (22,641) (12,896)
Deferred income taxes (1) (1)
Other accrued liabilities (1,631) (2,582)
Other assets (3) --
-------- --------
Total adjustments 2,184 (785)
-------- --------
Net cash (used) provided by operating activities (8,201) (6,717)
Cash flows from investing activities:
Proceeds from disposal of property, plant and equipment 15 2
Capital expenditures (5,224) (6,124)
-------- --------
Net cash (used) provided by investing activities (5,209) (6,122)
Cash flows from financing activities:
Redemptions of common stock (193) (46)
Dividends declared (952) (570)
Increase (decrease) in revolver, net 31,969 13,807
Decrease in long term debt (26,302) (5,078)
-------- --------
Net cash (used) provided by financing activities 4,522 8,113
Cash and cash equivalents:
Net increase (decrease) (8,888) (4,726)
Beginning of period 8,964 5,843
======== ========
End of period $ 76 $ 1,117
======== ========
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
<PAGE>
Notes to Unaudited Consolidated Financial Statements
Six Months Ended December 26, 1998
(Amounts in thousands of dollars)
Note 1 - Adjustments
The unaudited consolidated financial statements presented herein have been
prepared by the Company and contain all adjustments (consisting of only
normal recurring adjustments) necessary to present fairly the Company's
financial position as of December 26, 1998, and the results of its
operations and cash flows for the six months ended December 26, 1998. These
unaudited consolidated financial statements have been prepared in accordance
with generally accepted accounting principles for interim financial
information and with the instructions to Form 10-Q and Rule 10-01 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. These statements should be read in conjunction with
the consolidated financial statements and notes thereto included in the
Company's Form 10-K for the year ended June 27, 1998.
The Company utilizes a 52/53 week fiscal year for accounting purposes ending
on the last Saturday in June. Fiscal 1998 and fiscal 1999 each contains 52
weeks.
Because of the seasonality of the Company's business, operating results on a
quarterly basis are not indicative of operating results for the full year.
Historically, the second fiscal quarter is the second 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
December 26, 1998 June 27, 1998 December 27, 1997
----------------- ------------- -----------------
$3,939 $ 5,744 $4,340
Note 3 - Inventories
The components of inventory balances are summarized below:
<TABLE>
<CAPTION>
December 26, 1998 June 27, 1998 December 27, 1997
----------------- ------------- -----------------
<S> <C> <C> <C>
Raw materials and supplies (includes gold) $19,223 $17,023 $18,469
Work-in-process 17,582 14,169 16,649
Finished goods 11,121 8,334 11,123
------- ------- -------
$47,926 $39,526 $46,241
======= ======= =======
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Note 4 - Financing
December 26, 1998 June 27, 1998 December 27, 1997
----------------- ------------- -----------------
Long-Term Debt consists of the following:
<S> <C> <C> <C>
Senior Bank Facility (Revolver) $ 31,969 $ 8,417 $ 13,807
Senior Bank Facility (Term) 21,859 27,379 32,678
Senior Subordinated Notes 86,820 99,185 120,000
1994 Industrial Development
Revenue Bonds Due in 2019 7,600 7,600 7,600
--------- --------- ---------
148,248 142,581 174,085
Less: Current Portion (43,892) (19,678) (24,626)
--------- --------- ---------
Long-Term Debt $ 104,356 $ 122,903 $ 149,459
========= ========= =========
</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)
- --------------------------- ========= ====== ======== ===== ========= ====== ========
</TABLE>
Prior to fiscal 1998 the cost of ESOP shares committed to be released was
greater than the estimated fair value of such shares. The excess of cost over
market was recorded as a charge to a separate component of shareholders' equity,
net of the related tax effect. Beginning in fiscal 1998, the estimated fair
value of ESOP shares committed to be released exceeded cost. The excess of
market over cost has been credited to equity, net of the related tax effect, to
the extent of the previous net charges recorded. Hereafter, the excess will be
credited to retained earnings.
<PAGE>
Note 7 - Comprehensive Income
The Comprehensive income (loss) for the second quarter of fiscal 1999 and fiscal
1998 was ($8,321) and ($7,166), respectively and the first six months of 1999
and 1998 was ($10,435) and ($5,974), 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 six 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 cots, net of the
applicable tax benefit.
Note 9 - Income Taxes
Income taxes, excluding the extraordinary item, are computed on the basis of the
anticipated 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
second quarter and the six month period.
<PAGE>
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
HERFF JONES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
Herff Jones is one of the leading manufacturers of recognition awards,
educational products and graduation-related products for the scholastic market
in the United States. Its product lines include class rings, medals and awards,
diplomas and graduation announcements (also referred to as "fine paper"),
yearbooks, caps and gowns, school photography services and multimedia education
products. The Company historically has sold approximately 80% of its products to
the high school and elementary market and approximately 20% of its products to
the college and commercial or non-scholastic market through a network of
approximately 700 primarily independent sales representatives. The Company
believes that the Herff Jones name is widely recognized in schools and
universities nationwide.
RESULTS OF OPERATIONS
The Company utilizes a 52/53 week year for accounting purposes. Fiscal
1998 and fiscal 1999 each contains 52 weeks. The Company's business is highly
seasonal. Historically, sales in the second fiscal quarter are at the second
highest level of the year. 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 second quarter ended December 26, 1998 and December 27, 1997
General. Net sales rose 3.9% to $77.5 million in fiscal 1999 from $74.6
million in fiscal 1998. Operating profit decreased to a loss of $.1 million in
fiscal 1999 from a profit of $6.5 million in fiscal 1998. Net income decreased
to a loss of $2.1 million in fiscal 1999 from a profit of $1.2 million in fiscal
1998.
Net Sales. Net sales increased $2.9 million or 3.9% to $77.5 million in
fiscal 1999 from $74.6 million in fiscal 1998. Such increases were due primarily
to modest price increases in all product lines and unit growth in the
Photography and Jewelry product lines, offset by lower sales in the Education
product line due to earlier shipment of backlogs in the first quarter.
Cost Of Sales. Cost of sales increased $2.1 million or 5.9% to $38.1
million in fiscal 1999 from $36.0 million in fiscal 1998. Cost of sales as a
percentage of sales increased to 49.2% in fiscal 1999 from 48.3% in fiscal 1998.
The increase was due primarily to higher manufacturing costs in the Fine Paper
product line, offset somewhat by improved operating performance in the
Photography product line.
<PAGE>
Selling, General And Administrative Expenses. Selling, general and
administrative expenses increased $5.9 million or 21.4% to $33.5 million in
fiscal 1999 from $27.6 million in fiscal 1998. Such expense as a percentage of
sales is 43.2% in fiscal 1999, compared to 37.0% in fiscal 1998. The increase
was predominantly attributable to increases in Long-Term Management Incentive
expense and information technology consulting, coupled with higher commission
and selling expenses resulting from increased fiscal 1999 sales.
ESOP Compensation. ESOP compensation increased $1.5 million to $6.0
million in fiscal 1999 from $4.5 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 $.8 million to $3.8
million in the second quarter of fiscal 1999 from $4.6 million in the
corresponding period of fiscal 1998 due primarily to a reduction of average debt
outstanding.
Income Tax Benefit. The second quarter income tax benefit was $2.0
million in fiscal 1999, compared to an expense of $.7 million in fiscal 1998,
due to the fiscal 1999 loss before income taxes (compared to a fiscal 1998
profit) 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 second quarter, the Company repurchased
$4.4 million of its Senior Subordinated Notes from existing noteholders at a
premium. As a result, the Company recorded a $.2 million charge reflecting the
premium cost and the write off of previously deferred financing costs, net of
the applicable tax benefit.
Net Loss. The second quarter net loss was $2.1 million, compared to a
profit of $1.2 million in fiscal 1998. The unfavorable comparison was due
primarily to the aforementioned increases in selling, general and administrative
expenses, higher ESOP compensation cost and the extraordinary loss on the
repurchase of Senior Subordinated Notes from existing noteholders at a premium,
partially offset by increased gross profit in the Photography product line and
the impact of the higher effective tax rate, as discussed above.
For the six months ended December 26, 1998 and December 27, 1997
General. Net sales rose 4.6% to $130.3 million in fiscal 1999 from
$124.6 million in fiscal 1998. Operating losses increased to $12.5 million in
fiscal 1999, compared to $.3 million in fiscal 1998. Net losses increased to
$10.4 million in fiscal 1999 from $5.9 million in fiscal 1998.
Net sales. Net sales increased $5.7 million or 4.6% to $130.3 million
in fiscal 1999. The increase was due primarily to modest price increases in all
product lines and unit growth in the Photography and Jewelry product lines.
Cost of Sales. Cost of sales increased $2.1 million or 3.2% to $67.8
million in fiscal 1999 from $65.7 million in fiscal 1998. Cost of sales as a
percentage of sales decreased to 52.1% in fiscal 1999 from 52.7% in fiscal 1998.
The decrease was due to improved operating performance in the Jewelry and
Photography product lines, offset by somewhat higher manufacturing costs in the
Fine Paper product line.
Selling, General And Administrative Expenses. Selling, general and
administrative expenses increased $12.3 million or 24.7% to $62.0 million in
fiscal 1999 from $49.7 million in fiscal 1998. The increase was predominantly
attributable to increases in Long-Term Management Incentive expense and
information technology consulting, coupled with higher commission and selling
expenses resulting from increased fiscal 1999 sales.
ESOP Compensation. ESOP compensation increased $3.4 million to $12.9
million in fiscal 1999 from $9.6 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 $1.5 million to $7.5
million in fiscal 1999 from $9.1 million in fiscal 1998, due primarily to a
reduction of average debt outstanding.
Income Tax Benefit. The income tax benefit for the period is $10.3
million for fiscal 1999, compared to $3.4 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 period, 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.
Net Loss. The net loss for the period increased to $10.4 million from
$5.9 million in fiscal 1998. The increase was due primarily to the
aforementioned increases in selling, general and administrative and ESOP
compensation expense and the extraordinary loss on the repurchase of Senior
Subordinated Notes from existing noteholders at a premium, partially offset by
increased gross profit in the Photography product line and the impact of the
higher effective tax rate as discussed above.
FINANCIAL CONDITION AND LIQUIDITY
The Company's business is highly seasonal. Historically the first six
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
pre-Christmas photography and class ring activity; the payment of the Company's
income taxes from the previous fiscal year; and the settlement of commission
accounts with the Company's independent sales representatives. This is partially
offset by the reduction of accounts receivable resulting from payment for
products shipped prior to graduations in the fourth quarter of the previous
fiscal year.
The cash flow pattern and expectations of the Company's highly seasonal
business result in the classification, at December 26, 1998, of $32.0 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.
Capital expenditures were $5.2 million and $6.1 million in the first
six months of fiscal 1999 and 1998, respectively. The decrease from the prior
year is attributable to the timing of capital expenditures, mostly related to
information technology purchases.
<PAGE>
Income taxes accrued are a negative $10.4 million at December 26, 1998,
compared to $12.2 million payable at June 27, 1998 and a negative $3.3 million
at December 27, 1997. The decrease from June is the result of the payment of
taxes for the prior fiscal year, coupled with the provision for the tax benefit
associated with the seasonal losses this year. The increased tax benefit at the
end of the second quarter, compared to the prior year second quarter end is the
result of the higher pre-tax loss in this fiscal year, and an increase in the
effective tax rate for fiscal 1999.
For the six months ended December 26, 1998, cash and cash equivalents
declined $8.9 million to $.1 million as compared to a decrease of $4.7 million
to $1.1 million for the six months ended December 27, 1997.
Cash used in operating activities was $8.2 million for the six months
ended December 26, 1998, compared to $6.7 million for the six months ended
December 27, 1997, as described below.
Net losses were $10.4 million in the six months of fiscal 1999,
compared to $5.9 million in fiscal 1998. This was primarily attributable to
increases in Long-Term Management Incentive expense, ESOP compensation expense
and information technology consulting, partially offset by increased gross
profit in the Photography product line and an increased tax benefit.
Accounts receivable decreased $15.0 million in fiscal 1999, compared to
a decrease of $10.2 million in fiscal 1998, as a result of collecting a larger
portion of the higher receivables balance as of the end of fiscal 1998, coupled
with a smaller sales increase in the six months of fiscal 1999 compared to
fiscal 1998.
Customer deposits increased by $2.2 million to $16.2 million primarily
due to the timing of deposit receipts for the Yearbook product line.
Commissions payable decreased $15.7 million for fiscal 1999, compared
to $10.4 million a year ago. The increase in the decline resulted from higher
commission settlements paid in fiscal 1999, compared to fiscal 1998, due
primarily to sales increases in fiscal 1998.
Income taxes payable decreased $22.6 million in fiscal 1999, compared
to a decline of $12.9 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, and higher tax payments in fiscal
1999 relating to the fiscal 1998 earnings improvement over fiscal 1997.
Net cash used by investing activities was $5.2 million for the six
months of fiscal 1999, compared to $6.1 million for fiscal 1998. The decrease
from prior year is due to timing of capital expenditures.
Net cash provided by financing activities was $4.5 million in fiscal
1999, compared to $8.1 million in fiscal 1998. During the six 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.
<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 is scheduled for completion in fiscal 1999. The implementation plan for
these four systems is slightly behind schedule, but completion within fiscal
1999 is anticipated. The company believes its most significant risk associated
with the year 2000 lies in the completion of the four business systems scheduled
for completion prior to December 31, 1999.
Information technology systems that won't be converted to client server
by the end of fiscal 1999 have either been modified to make them year 2000
compliant or have been replaced.
Non-information technology systems are under a review program by the
Resident Manager at each facility. All locations are anticipated to be year 2000
compliant by December, 1999.
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 also unable to meet the Company's delivery requirements, or if its utility
suppliers are unable to operate, the Company's business or operations could be
adversely affected.
The total year 2000 project cost was approximately $1.5 million, which
included $1.0 million to purchase and implement new hardware and software that
was capitalized during fiscal 1998 and $.5 million that was expensed as 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.
There is currently no contingency plan in place which would address
business operations if the systems are not completed by January 2000. A
contingency plan would be developed at such time as it is determined that
installation of the replacement systems will 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.
The foregoing information regarding year 2000 preparations and
compliance are forward-looking statements subject to important factors that
could cause Management's expectations to be materially inaccurate. Such factors
include unpredictability of the timing of full implementation of year 2000
compliant systems and the year 2000 compliant status of information systems of
the Company's existing and potential alternative suppliers.
<PAGE>
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) The following Exhibits are filed as a part of this report:
None.
(b) Reports on Form 8-K;
No reports on Form 8-K were filed during the quarter for which the report
is filed.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act as of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
HERFF JONES, INC.
(Registrant)
By: /s/ Lawrence F. Fehr
--------------------------
Lawrence F. Fehr
Vice President and
Chief Financial Officer
February 9, 1999
