<PAGE>
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
Quarterly Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the quarterly period ended SEPTEMBER 30, 1995
Commission file number 0-7473
HARLYN PRODUCTS, INC.
(Exact name of registrant as specified in its charter)
California 95-2251025
(State or other jurisdiction of (I.R.S. employer I.D. No.)
Incorporation or organization)
1515 South Main Street, Los Angeles, California 90015
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (213)-746-0745
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 report), and (2) has been subject to
such filing requirements for the past 90 days.
Yes X No
Indicate number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class Outstanding at September 30, 1995
Common Stock. $.10 par value 4,753,284
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HARLYN PRODUCTS, INC.
INDEX
<TABLE>
<CAPTION>
PART I - FINANCIAL STATEMENTS: PAGE NO.
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<S> <C>
Condensed Balance Sheets
September 30, 1995 and June 30, 1995 4
Condensed Statements of Operations
Three Months Ended September 30, 1995 and 1994 5
Condensed Statements of Cash Flows
Three Months Ended September 30, 1995 and 1994 6 & 7
Notes to Condensed Financial Statements
Three Months Ended September 30, 1995 and 1994 8 & 9
Management's Discussion and Analysis of
Financial Condition and Results of Operations 9 & 10
PART II - OTHER INFORMATION AND SIGNATURES 11
</TABLE>
2
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PART I. FINANCIAL INFORMATION
ITEM I. FINANCIAL STATEMENTS
3
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HARLYN PRODUCTS, INC. AND SUBSIDIARIES
CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
SEPT. 30 JUNE 30
1995 1994
----------- -----------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 336,000 $ 265,000
Accounts reveivable, net 9,881,000 12,648,000
Inventory: Raw Materials 3,675,000 3,508,000
Work In Process 3,175,000 3,010,000
Finished 9,861,000 9,447,000
Prepaid expenses and other current assets 1,580,000 1,051,000
----------- -----------
Total current assets 28,508,000 29,929,000
Property, plant and equipment, net 5,300,000 5,451,000
Other assets 1,555,000 1,467,000
----------- -----------
Total assets $35,363,000 $36,847,000
----------- -----------
----------- -----------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Bank line of credit $10,208,000 $10,953,000
Current portion of long term debt and capital lease obligations 3,973,000 4,239,000
Accounts payable and accrued expenses 4,000,000 3,639,000
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Total current liabilities 18,181,000 18,831,000
Long term debt, net of current portion 1,296,000 1,240,000
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Total liabilities 19,477,000 20,071,000
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Shareholders' equity:
Common stock: $.10 par, authorized 10,000,000 shares;
issued 4,735,284 at September 30, 1995 and June 30, 1995 475,000 475,000
Additional paid-in capital 2,413,000 2,413,000
Retained earnings 12,998,000 13,888,000
----------- -----------
Total shareholders' equity 15,886,000 16,776,000
----------- -----------
Total liabilities and shareholders' equity $35,363,000 $36,847,000
----------- -----------
----------- -----------
</TABLE>
See accompanying notes to condensed financial statements.
4
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HARLYN PRODUCTS, INC. AND SUBSIDIARIES
CONDENSED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
THREE MONTHS
ENDED SEPT. 30,
1995 1994
---------- ----------
<S> <C> <C>
Net sales $5,061,000 $9,044,000
Cost of sales 3,191,000 5,581,000
---------- ----------
Gross profit 1,870,000 3,463,000
Selling, general and
administrative expenses 2,197,000 2,339,000
---------- ----------
(Loss) income from operations (327,000) 1,124,000
Interest expense 563,000 390,000
---------- ----------
(Loss) income before income taxes (890,000) 734,000
Provision for income taxes 205,000
---------- ----------
Net (loss) income $ (890,000) $ 529,000
---------- ----------
---------- ----------
Net (loss) income per common share ($0.19) $0.11
---------- ----------
---------- ----------
Average common and common
equivalent shares outstanding 4,783,226 4,856,520
---------- ----------
---------- ----------
</TABLE>
See accompanying notes to condensed financial statements.
5
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HARLYN PRODUCTS, INC. AND SUBSIDIARIES
CONDENSED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
THREE MONTHS
ENDED SEPT. 30,
1995 1994
---------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) income $ (890,000) $ 529,000
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation & amortization 387,000 361,000
Changes in operating assets & liabilities:
Accounts receivable 2,767,000 (1,447,000)
Inventories (746,000) 318,000
Prepaid expenses and other current assets (529,000) (156,000)
Accounts payable and accrued expenses 361,000 (841,000)
---------- -----------
Net cash provided by (used for) operating activities 1,350,000 (1,236,000)
---------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property, plant and equipment (236,000) (1,143,000)
Other assets (88,000) 11,000
---------- -----------
Net cash used for investing activities (324,000) (1,132,000)
---------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net (payments) borrowings under line of credit agreement (745,000) 2,347,000
Additions to long term debt 143,000
Repayments/retirements of long term debt (353,000) (645,000)
Proceeds from exercise of warrants 561,000
---------- -----------
Net cash (used for) provided by financing activities (955,000) 2,263,000
---------- -----------
NET CHANGE IN CASH & CASH EQUIVALENTS 71,000 (105,000)
CASH & CASH EQUIVALENTS-BEGINNING OR PERIOD 265,000 521,000
---------- -----------
CASH & CASH EQUIVALENTS-END OF PERIOD $ 336,000 $ 416,000
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(continued)
</TABLE>
6
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HARLYN PRODUCTS, INC. AND SUBSIDIARIES
CONDENSED STATEMENTS OF CASH FLOWS
CONCLUDED
<TABLE>
<CAPTION>
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
THREE MONTHS
ENDED SEPT. 30,
CASH PAID DURING THE PERIOD FOR 1995 1994
---------- -----------
<S> <C> <C>
Interest $525,000 $366,000
Income taxes $100,000
</TABLE>
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES:
During the three months ended September 30, 1994, the Company exchanged
inventory in the amount of $615,000 for an equivalent amount of future
benefits under a barter arrangement.
Stock warrants for 214,063 shares of common stock were exercised during the
three months ended September 30, 1994 at prices ranging from $2.04 to
$2.80. The related income tax benefit increased additional paid in capital
by $129,000.
See accompanying notes to condensed financial statements.
7
<PAGE>
HARLYN PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED FINANCIAL STATEMENTS
SEPTEMBER 30, 1995 AND 1994
1). The condensed consolidated financial statements are unaudited and
include the financial position, results of operations, and cash flows of
Harlyn Products, Inc. (USA) and its subsidiaries. All intercompany
transactions, accounts and balances have been eliminated. In the opinion of
Company management, the accompanying consolidated financial statements
contain all adjustments, consisting of only normal recurring accruals,
necessary to present fairly the financial position as of September 30, 1995,
and the results of its operations for the three months ended September 30,
1995 and 1994. The condensed consolidated financial statements should be
read in conjunction with the more detailed financial statements and related
footnotes thereto filed with Form 10-K for the year ended June 30, 1995.
The results of operations for the three months ended September 30, 1995
are not necessarily indicative of the results of operations for the full year
ending June 30, 1996. Historically, the Company's business has followed a
seasonal pattern, realizing its greatest sales and net income in the second
fiscal quarter.
2). The gold pool with Rhode Island Hospital Trust (the Lessor) was 23,000
Troy ounces at September 30, 1995, an increase from 22,000 ounces at June 30,
1995. This was due to normal operational requirements. The Company is
required to maintain gold inventory in addition to its gold pool. The Lessor
has notified the Company that its additional gold inventory has been
insufficient to meet required collateral levels. Such collateral
deficiencies are defined as Events of Default under the Company's consignment
agreement with the Lessor. Additional Events of Default were caused by
non-compliance with a cash flow covenant as of June 30, 1995 and September 30,
1995, late payments of certain consignment fees and the late delivery of audited
financial statements for the year ended June 30, 1995. Management is
involved in ongoing discussions with the gold lessor regarding continuation
of its consignment agreement and anticipates a positive outcome.
3). The Company is involved in ongoing discussions with its primary lender
regarding its borrowing agreement and non-compliance with certain financial
covenants as of June 30, 1995 and September 30, 1995. Management believes
it will be successful in extending its credit agreement with the lender.
4). The provision for income taxes is based on the effective annual tax rate
expected for the year ending June 30, 1996. A tax benefit related to losses
in the United States for the three months ended September 30, 1995 was offset
by a valuation allowance since the future benefit of the credit is not
assured. Beginning in December 1994, the Company was granted a three year
foreign tax holiday on most income earned in Thailand. The Company does not
provide for U.S. taxes on earnings in Thailand because it intends to reinvest
those earnings indefinitely.
8
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5). The Company's Thailand subsidiary is exempt from Value Added Tax (VAT)
requirements on most purchases. However, such tax must be paid initially by
the Company and subsequently refunded by the Thai Revenue Department. As of
September 30, 1995, there was $507,000 of prepaid VAT taxes included in
prepaid expenses and other current assets. The majority of these funds were
subsequently refunded to the subsidiary with the remainder due in the current
period.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
RESULTS OF OPERATIONS Consolidated net sales decreased by $3,983,000, or 44%,
for the three months ended September 30, 1995 as compared with the
corresponding period in the prior year. Sales by Harlyn's U.S. operations
decreased by $3,350,000, or 55% for the three months ended September 30,1995,
primarily due to lower sales of promotional and stock goods to mass
merchandisers and independent retailers. The Company redesigned marketing
programs and narrowed its customer focus, which reduced sales to certain less
profitable market segments. Sales by Harlyn's Thailand operation decreased
by $633,000, or 21% for the three months ended September 30, 1995 primarily
due to reduced sales to customers in Mexico as a result of the peso
devaluation. A decrease in the average price of gold for the three months
ended September 30, 1995 as compared to the prior year had no material impact
on sales.
Gross profit as a percentage of net sales was 37% for the three months ended
September 30, 1995 compared to 38% for the corresponding period of the prior
year. The decline in gross profit was primarily due to reduced sales volume
and fixed overhead costs as a higher incremental proportion of reduced sales
volume.
Selling, general and administrative expenses decreased by $142,000 for the
three months ended September 30, 1995 compared with the corresponding period
of the prior year, but increased as a percentage of net sales from 26% to
43%. The increase in interest expense of $173,000 for the three months ended
September 30, 1995, as compared to the corresponding period of the prior year
is attributed to higher interest rates on higher levels of borrowings in both
the United States and Thailand.
There was no provision for income taxes in the three months ended September
30, 1995. A tax benefit related to losses in the United States for the three
months ended September 30, 1995 was offset by a valuation allowance since the
future benefit of the credit is not assured. Beginning in December 1994, the
Company was granted a three year foreign tax holiday on most income earned in
Thailand. The Company does not provide for U.S. taxes on earnings in
Thailand because it intends to reinvest those earnings indefinitely.
9
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
Net receivables decreased by $2,767,000 from $12,648,000 on June 30, 1995 to
$9,881,000 on September 30, 1995; this decrease was primarily due to lower
sales volume in the United States and shorter credit terms on sales in
Thailand. Inventories increased by $746,000, or 5%, from a June 30, 1995
balance of $15,965,000 to $16,711,000 at September 30, 1995. This increase
was the result of returned merchandise being added to inventory as well as
inventory being held for sales orders due to be shipped early in the second
fiscal quarter.
The Company relies on its credit facilities, gold consignment program and,
internally generated funds to finance operations. Outstanding bank debt at
September 30, 1995 amounted to line of credit borrowings of $10,208,000 (at
1.5% over prime rate) against available consolidated credit lines of
$11,000,000, and $5,269,000 of long term debt (at 1.5% above prime rate) of
which $3,973,000 is current. Due to the Company's non-compliance with
certain bank covenants as of June 30, 1995 and September 30, 1995,
a U.S. term loan, in the amount of $3,667,000 as of September 30, 1995, and
nominally due within the next four years, has been reclassified as short-term
debt on the Company's condensed balance sheet as of June 30, 1995 and
September 30, 1995. The Company is involved in ongoing discussions with its
primary lender regarding the borrowing agreement and its non-compliance with
the covenants. Management believes it will be successful in extending its
credit agreement with the lender.
The Company leases substantially all of its gold and is not required to pay
for the gold until product into which the gold is incorporated is sold. The
Company has a $10,625,000 line of credit for its gold pool, and utilized
$8,832,000 or 23,000 troy ounces of this on September 30, 1995. The Company
is required to maintain gold inventory in addition to its gold pool. The
Lessor has notified the Company that its additional gold inventory has been
insufficient to meet required collateral levels. Such collateral
deficiencies are defined as Events of Default under the Company's consignment
agreement with the Lessor. Additional Events of Default were caused by
non-compliance with a cash flow covenant as of June 30, 1995 and September
30, 1995, late payments of certain consignment fees and the late delivery of
audited financial statements for the year ended June 30, 1995. Management is
involved in ongoing discussions with the gold lessor regarding continuation
of its consignment agreement and anticipates a positive outcome.
10
<PAGE>
PART II. OTHER INFORMATION
**************************
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
HARLYN PRODUCTS, INC.
(Registrant)
/s/ HAROLD WEISBROD /s/ WILLIAM HOOD
- ------------------------------ ------------------------------
Harold Weisbrod William Hood
(Chairman of the Board) (Chief Executive Officer)
/s/ EDWARD DUDZIAK /s/ RANDALL MONSON
- ------------------------------ ------------------------------
Edward Dudziak Randall Monson
(President & Chief Operating Officer) (Chief Financial Officer)
Date: November 10, 1995
11
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUN-30-1996
<PERIOD-END> SEP-30-1995
<CASH> 333,000
<SECURITIES> 3,000
<RECEIVABLES> 10,630,000
<ALLOWANCES> 749,000
<INVENTORY> 16,711,000
<CURRENT-ASSETS> 28,508,000
<PP&E> 17,327,000
<DEPRECIATION> 12,027,000
<TOTAL-ASSETS> 35,363,000
<CURRENT-LIABILITIES> 18,181,000
<BONDS> 0
<COMMON> 475,000
0
0
<OTHER-SE> 15,411,000
<TOTAL-LIABILITY-AND-EQUITY> 35,363,000
<SALES> 5,061,000
<TOTAL-REVENUES> 5,061,000
<CGS> 3,191,000
<TOTAL-COSTS> 3,191,000
<OTHER-EXPENSES> 2,173,000
<LOSS-PROVISION> 24,000
<INTEREST-EXPENSE> 563,000
<INCOME-PRETAX> (890,000)
<INCOME-TAX> 0
<INCOME-CONTINUING> (890,000)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (890,000)
<EPS-PRIMARY> (0.19)
<EPS-DILUTED> (0.19)
</TABLE>
